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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 33-97090
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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SULLIVAN COMMUNICATIONS, INC.
SULLIVAN GRAPHICS, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
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DELAWARE 2750 62-1395968
NEW YORK 2750 16-1003976
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification numbers)
SULLIVAN COMMUNICATIONS, INC. SULLIVAN GRAPHICS, INC.
225 HIGH RIDGE ROAD 100 WINNERS CIRCLE
STAMFORD, CONNECTICUT 06905 BRENTWOOD, TENNESSEE 37027
(203) 977-8101 (615) 377-0377
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
TIMOTHY M. DAVIS
SENIOR VICE PRESIDENT - ADMINISTRATION, GENERAL COUNSEL AND SECRETARY
SULLIVAN COMMUNICATIONS, INC.
SULLIVAN GRAPHICS, INC.
225 HIGH RIDGE ROAD
STAMFORD, CONNECTICUT 06905
(203) 977-8101
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE FOR BOTH REGISTRANTS)
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COPIES TO:
JERRY V. ELLIOTT
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
(212) 848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Amount to be Offering Price Aggregate Offering Registration
12 3/4% Senior Subordinated Exchange Registered Per Note Price Fee(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes Due 2005(2)(3) $185,000,000 $1,000 $185,000,000 $63,793.10
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(1) Previously paid.
(2) The guarantee of principal of and interest on the Notes is also being
registered hereby.
(3) An indeterminable amount of Notes to be offered and sold in market-making
transactions are also being registered hereby.
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This Post-Effective Amendment shall become effective in accordance with
Section 8(c) of the Securities Act of 1933.
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SULLIVAN GRAPHICS, INC.
SULLIVAN COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING THE LOCATION
OF INFORMATION REQUIRED BY PART I OF FORM S-1
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ITEM NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS
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<S> <C> <C>
Item 1 Forepart of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
Item 2 Inside Front and Outside Back Cover Pages Inside Front Cover Page; Back Cover Page;
of Prospectus Available Information
Item 3 Summary Information, Risk Factors and Prospectus Summary; Risk Factors; Selected
Ratio of Earnings to Fixed Charges Historical Financial Data
Item 4 Use of Proceeds Prospectus Summary; Use of Proceeds
Item 5 Determination of Offering Price Not Applicable
Item 6 Dilution Not Applicable
Item 7 Selling Security Holders Not Applicable
Item 8 Plan of Distribution Plan of Distribution
Item 9 Description of Securities to be Registered Description of the Notes
Item 10 Interests of Named Experts and Counsel Legal Matters; Experts
Item 11 Information with respect to the Prospectus Summary; Risk Factors; Selected
Registrant Historical Financial Data; Unaudited Pro
Forma Condensed Consolidated Financial
Statements; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions; Security
Ownership of Certain Beneficial Owners;
The Shakopee Acquisition; Description of
the Bank Credit Agreement; Description of
the New Notes; Consolidated Financial
Statements
Item 12 Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
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<PAGE> 3
PROSPECTUS
SULLIVAN GRAPHICS, INC.
SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
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Unconditionally Guaranteed on a Senior Subordinated Basis by
Sullivan Communications, Inc.
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Interest on the 12 3/4% Senior Subordinated Exchange Notes Due 2005
(the "Notes") is payable semiannually on February 1 and August 1 of each year.
The Notes are redeemable at the option of Sullivan Graphics, Inc. ("Graphics"),
in whole or in part, at any time on or after August 1, 2000, initially at
106.375% of their principal amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest, on or after August 1, 2002. In
addition, at the option of Graphics, at any time or from time to time prior to
August 1, 1998, the Notes are redeemable from the proceeds of one or more
Public Equity Offerings following which there is a Public Market at 110% of
their principal amount, plus accrued interest; provided that at least $115
million aggregate principal amount of Notes remains outstanding after each such
redemption. Upon the occurrence of a Change of Control Triggering Event (as
defined herein) each holder of Notes will have the right to require Graphics to
repurchase all or any portion of such holder's Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued interest.
The Notes are subordinated in right of payment to all existing and
future Senior Indebtedness of Graphics, including indebtedness under the Bank
Credit Agreement (as defined herein) and pari passu in right of payment with
any future senior subordinated indebtedness of Graphics and will be senior in
right of payment to any future subordinated indebtedness of Graphics. At March
31, 1996, Graphics had approximately $112.6 million of Senior Indebtedness, no
senior subordinated indebtedness other than the Notes and no subordinated
indebtedness outstanding and Graphics' subsidiaries had approximately $2.2
million of liabilities (which were effectively senior to the Notes).
The Notes are fully and unconditionally guaranteed on an unsecured
senior subordinated basis by Sullivan Communications, Inc. ("Communications").
Communications has no significant assets other than the capital stock of
Graphics, all of which is pledged to secure Senior Indebtedness of
Communications.
The Notes were issued pursuant to an exchange offer (the "Exchange
Offer") consummated by Graphics and Communications on January 3, 1996, pursuant
to which the Notes were issued for Graphics' outstanding 12 3/4% Senior
Subordinated Notes Due 2005 (the "Old Notes").
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE NOTES.
THE NOTES HAVE RECEIVED RATINGS FROM MOODY'S INVESTORS SERVICES INC. AND
STANDARD AND POOR'S RATINGS GROUP WHICH ARE BELOW "INVESTMENT GRADE" AND THERE
IS NO REQUIRED RATING THAT MUST BE MAINTAINED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus is to be used by Morgan Stanley & Co. Incorporated
("MS&Co."), in connection with offers and sales of the Notes in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. MS&Co. may act as principal or agent in such transactions.
Graphics will receive no portion of the proceeds of such sales and will bear
the expenses incident to the registration thereof. If MS&Co. conducts any
market-making activities, it may be required to deliver a "market-making
prospectus" when effecting offers and sales in the Notes because of the
beneficial ownership of Communications by The Morgan Stanley Leveraged Equity
Fund II, L.P. ("MSLEF") and Morgan Stanley Capital Partners III, L.P. ("MSCP")
and two other limited partnerships, all of which are affiliates of MS&Co. For
so long as a market-making prospectus is required to be delivered, the ability
of MS&Co. to make a market in the Notes may, in part, be dependent on the
ability of Graphics and Communications to maintain a current market-making
prospectus.
JULY __, 1996
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GRAPHICS, COMMUNICATIONS OR MS&CO.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
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Page Page
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Available Information . . . . . . . . . . . 2 Certain Transactions . . . . . . . . . . 55
Prospectus Summary . . . . . . . . . . . . 3 Security Ownership of Certain
Risk Factors . . . . . . . . . . . . . . . 13 Beneficial Owners . . . . . . . . . . 57
Use of Proceeds . . . . . . . . . . . . . . 19 The Shakopee Merger . . . . . . . . . . . 58
Capitalization . . . . . . . . . . . . . . 20 Description of the Bank
Selected Historical Financial Data . . . . 21 Credit Agreement . . . . . . . . . . . 58
Unaudited Pro Forma Condensed Description of the Notes . . . . . . . . 62
Consolidated Financial Statements . . . 25 Certain Federal Income Tax
Management's Discussion and Considerations . . . . . . . . . . . . 90
Analysis of Financial Condition Plan of Distribution . . . . . . . . . . 92
and Results of Operations . . . . . . . 29 Legal Matters . . . . . . . . . . . . . . 92
Business . . . . . . . . . . . . . . . . . 42 Experts . . . . . . . . . . . . . . . . . 92
Management . . . . . . . . . . . . . . . . 49 Index to Financial Statements . . . . . . F-1
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AVAILABLE INFORMATION
Graphics and Communications have filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement under the
Securities Act of 1933 (the "Securities Act") with respect to the Notes offered
hereby. For the purposes hereof, the term "Registration Statement" means the
original Registration Statement and any and all amendments thereto. In
accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the schedules and exhibits thereto. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information pertaining to Graphics,
Communications and the Notes offered hereby, reference is made to such
Registration Statement, including the exhibits and schedules thereto and the
financial statements, notes and schedules filed as a part thereof. The
Registration Statement (and the exhibits and schedules thereto) may be
inspected and copied at the public reference facilities maintained by the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, or at its regional offices at Citicorp
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661 and at
Seven World Trade Center, 13th Floor, New York, New York 10048. Any interested
party may obtain copies of all or any portion of the Registration Statement and
the exhibits thereto at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549.
The Indenture requires Communications and, in the circumstances
described below, Graphics to file with the Commission the annual, quarterly and
other reports required by Sections 13(a), 13(c) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regardless of whether
such Sections are applicable to Graphics or Communications. Communications or
Graphics, as the case may be, will supply without cost to each holder of Notes,
and file with the trustee under the Indenture, within fifteen days after
Communications is required to file the same with the Commission, copies of the
audited financial statements, quarterly reports and other reports which
Graphics and Communications are required to file with the Commission pursuant
to Sections 13(a), 13(c) and 15(d) of the Exchange Act; provided, however, that
in the event Communications is no longer the guarantor on the Notes,
Communications shall no longer be required to file such reports and Graphics
will be required to file such reports, in each case as of the date and time
that Communications is no longer the guarantor on the Notes.
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information and financial statements and accompanying notes appearing elsewhere
in this Prospectus. As used in this Prospectus, unless the context otherwise
requires, the term "Company" refers to Sullivan Communications, Inc. and its
subsidiaries, including its wholly owned subsidiary, Sullivan Graphics, Inc.,
the term "Graphics" refers to Sullivan Graphics, Inc. and its subsidiaries and
the term "Communications" refers to Sullivan Communications, Inc. The term
"Fiscal Year 1996" refers to the year ended March 31, 1996 and the term "Fiscal
Year 1995" refers to the year ended March 31, 1995. The term "Pro Forma Fiscal
Year 1996" refers to Fiscal Year 1996 after giving pro forma effect to the Gowe
Acquisition (as defined below).
THE COMPANY
The Company is a successor to a business that commenced operations in
1926, and is one of the largest national diversified commercial printers in
North America with ten printing plants in eight states and Canada and 17
prepress facilities located throughout the United States. The Company operates
primarily in two business sectors of the commercial printing industry:
printing (approximately 85% of total sales during Fiscal Year 1996) and digital
imaging and prepress services conducted through its American Color division
(approximately 13% of total sales in Fiscal Year 1996). Partnerships
controlled by Morgan Stanley Group Inc. currently own 66.8% of the outstanding
common stock and 72% of the outstanding preferred stock of Communications.
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement
and Plan of Merger dated March 12, 1993, as amended (the "Merger Agreement"),
between Communications and SGI Acquisition Corp. ("Acquisition Corp."),
Acquisition Corp. was merged with and into Communications (the "1993
Acquisition"). Acquisition Corp. was formed by MSLEF, certain institutional
investors and certain members of management (the "Purchasing Group") for the
purpose of acquiring a majority interest in Communications. Acquisition Corp.
acquired a substantial and controlling majority interest in Communications in
exchange for $40 million in cash. In the 1993 Acquisition, Communications
continued as the surviving corporation and the separate corporate existence of
Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the
"Shakopee Merger") with Shakopee Valley Printing Inc. ("Shakopee"). Shakopee
was formed to effect the purchase of certain assets and assumption of certain
liabilities of Shakopee Valley Printing, a division of Guy Gannett
Communications. On December 22, 1994, pursuant to an Agreement for the
Purchase of Assets between Guy Gannett Communications (the "Seller") and
Shakopee (the "Buyer"), the Seller sold certain assets and transferred certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase price
of approximately $42.6 million, primarily financed through the issuance of
35,000 shares of Common Stock and bank borrowings. The 35,000 shares were
purchased by MSCP, Morgan Stanley Capital Investors, L.P. and MSCP III 892
Investors, L.P. (collectively, the "MSCP III Entities"), together with First
Plaza Group Trust and Leeway & Co. The general partner of each of the MSCP III
Entities is a wholly owned subsidiary of Morgan Stanley Group Inc. In
addition, the other stockholders of Shakopee were also stockholders of the
Company. See "-- The Transactions -- The Shakopee Merger."
On March 11, 1996, Graphics sold its 51% interest in National
Inserting Systems, Inc. ("NIS") for approximately $2.5 million in cash and a
note for approximately $0.2 million under the terms of a Stock Redemption
Agreement between NIS and Graphics. The proceeds from the sale were used to
repay indebtedness under the Bank Credit Agreement (as defined below).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs ("Gowe") for approximately $6.7 million in cash and
assumption of certain liabilities of Gowe, Inc., pursuant to an Asset Purchase
Agreement among Graphics, Gowe, Inc. and ComCorp, Inc., the parent company of
Gowe, Inc. (the "Gowe Acquisition").
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During March 1996, the Company completed the construction of and
start-up of a new plant in Hanover, Pennsylvania ("Flexi-Tech"). Flex-Tech
will be dedicated to the production of commercial flexi books (a form of
advertising inserts) serving various segments of the retail advertising market
and the production of T.V. listing guides serving the newspaper market.
PRINTING. The Company's printing business, which accounted for
approximately 85% of the Company's sales in Fiscal Year 1996, produces retail
advertising inserts, comics (newspaper comic inserts and comic books), Sunday
newspaper magazines and other publications.
Retail Advertising Inserts (75% of printing sales in Fiscal Year
1996). The Company believes that it is one of the largest printers of retail
advertising inserts in the United States. Retail advertising inserts are
preprinted advertisements, generally in color, that display products sold by a
particular retailer or manufacturer. The Company prints advertising inserts for
approximately 200 retailers.
Advertising inserts are used extensively by many different retailers
and are believed to be an important and cost effective means of advertising for
these merchants. Advertising inserts are primarily distributed through
insertion in newspapers but are also distributed by direct mail or in-store by
retailers. They are generally advertising for a specific, limited sale period.
Comics (16% of printing sales in Fiscal Year 1996). The Company
believes that it is one of the largest printers of comics in the United States.
The Company prints Sunday comics for approximately 325 newspapers in the United
States and Canada and prints a significant portion of the annual comic book
requirements of Marvel Entertainment Group, Inc. ("Marvel").
Sunday Newspaper Magazines and Other Publications (9% of printing
sales in Fiscal Year 1996). The Company prints various Sunday edition newspaper
magazines, local newspapers, T.V. guide listings and other publications and
acts as the exclusive printer of The Sporting News.
AMERICAN COLOR. The Company's digital imaging and prepress services
business is conducted by its American Color division, which the Company
believes is one of the largest full-service providers of digital imaging,
prepress and color separation services in the United States and a technological
leader in its industry. American Color commenced operations in 1975 and
accounted for approximately 13% of the Company's sales in Fiscal Year 1996.
American Color assists its customers in the capture, manipulation, transmission
and distribution of images. The majority of its work leads to the production of
four-color separations in a format appropriate for use by printers in
four-color printing. American Color's revenue from these traditional services
is being supplemented by new revenue sources from electronic prepress services
such as digital image storage, telecommunications, design and layout, equipment
sales, consulting and training services, facilities management (operating
digital imaging prepress service facilities at a customer location) and
software and data management.
In April 1995, the Company approved a plan for its American Color
division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Restructuring Costs and Other Special Charges" and note 19 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus.
COMPETITIVE ADVANTAGES AND STRATEGY
COMPETITIVE ADVANTAGES. The Company believes that it has the
following competitive advantages in its printing and digital imaging and
prepress services businesses:
Modern Equipment. The Company believes that its heatset offset and
flexographic web printing equipment is among the most advanced available and
that the average age of its equipment is comparable to its major national
competitors and significantly less than the majority of its regional
competitors. It also believes that its digital imaging and prepress equipment
is significantly more advanced than many of its smaller regional competitors,
many of whom have not incorporated digital prepress technologies to the same
extent as the
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Company, nor adopted an open systems environment which allows greater
flexibility and more efficient maintenance.
Strong Customer Base. The Company provides printing services to a
diverse base of customers, including approximately 200 retailers and
approximately 325 newspapers in the United States and Canada. The customer base
includes a significant number of the major national retailers and larger
newspaper chains as well as numerous smaller regional retailers. The Company's
consistent focus on providing high quality printing products and services at
competitive prices has resulted in long-term relationships with many of these
customers. American Color's customer base includes large and medium-sized
customers in the retail, publishing and catalog businesses, many of whom have
long-term relationships with the Company. Although the digital imaging and
prepress services business has generally been on a spot bid basis in the past,
the Company has been successful in increasing the proportion of its business
under long-term contracts.
Competitive Cost Structure. The Company significantly reduced the
variable and fixed cost of production at its printing facilities over the last
two years and believes it is well positioned to further reduce its
manufacturing costs in the future due to economies of scale. The Company has
significantly reduced both labor and material costs (the principal variable
production costs) in its digital imaging and prepress services business over
the past several years, primarily through the adoption of new digital prepress
production methodologies.
Strong Management Team. Over the last three years, the Company has
strengthened its printing management group by hiring experienced managers with
a clear focus on growth and continued cost reduction, resulting in an improved
cost structure and a well-defined strategy for future expansion. The Company
also has strengthened its management group in its digital imaging and prepress
services business, filling a number of senior, regional and plant management
positions with individuals who the Company believes will manage the digital
imaging and prepress services business for growth and profitability and will
continue to upgrade its capabilities.
National Presence. The Company's nine printing plants in the United
States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround times,
all of which are instrumental in the Company's continuing success in servicing
its large national and regional retail accounts. The Company's expanded sales
and marketing groups provide greater customer coverage and enable it to more
successfully penetrate regional markets. The Company believes that its
seventeen digital imaging and prepress facilities provide it with contingency
capabilities, increased capacity during peak periods, access to top quality
technical personnel throughout the country, short turnaround time and other
customer service advantages.
STRATEGY. The Company's objective is to increase profitability by
growing its revenues, increasing its market share and reducing costs. The
Company's strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that the Company's level of
national sales coverage, when coupled with its significant industry experience
and customer-focused sales force, will result in unit growth. In an effort to
stimulate unit volume growth, the Company significantly expanded its printing
sales force and divided its regional sales structure into specialized newspaper
and retail sales groups. Unit volume growth is also expected to result from
continued capital expansion and selective printing acquisitions. In addition,
in its digital imaging and prepress services business, the Company has expanded
its sales force, strengthened training, more closely focused its marketing
efforts on new, larger customers and implemented a new incentive program.
Continue to Improve Product Mix. The Company intends to increase its
share of the retail advertising insert market. In addition, the Company expects
to continue to adjust the mix of its customers and products within the retail
advertising insert market to those that are more profitable, less seasonal and
maximize the use of the Company's equipment. The Company also expects to expand
its printing facilities' capabilities for in-plant prepress and postpress
services. The Company's digital imaging and prepress services business will
continue to focus on high value-added new business opportunities, particularly
large-scale projects that will best utilize the breadth of services and
technologies the Company has to offer. Additionally, the Company will continue
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to pursue large facilities management opportunities as well as national and
large regional customers that require more sophisticated levels of services and
technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The
Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the Company
plans to maximize scale advantages in the purchasing, technology and
engineering areas. The Company also intends to continue to gain variable cost
efficiencies in its digital imaging and prepress services business by using its
technical resources to improve digital prepress workflows at its various
facilities. It also believes it will be able to reduce its unit technical,
sales and management costs as its sales volumes increase in this business.
Continue to Make Opportunistic Acquisitions. An integral part of the
Company's long-term growth strategy includes a plan to selectively assess and
acquire other printing and digital imaging and prepress services companies that
the Company believes will enhance its leadership position in these industries.
THE TRANSACTIONS
The Company entered into the following merger and refinancing
transactions (the "Refinancing" and, together with the Shakopee Merger, the
"Transactions") in connection with the offering of the Old Notes:
THE SHAKOPEE MERGER. In December 1994, certain shareholders of
Communications and others established Shakopee to acquire a Minneapolis
regional printer for an aggregate purchase price of $42.6 million, of which
$17.5 million was contributed in the form of equity. Shakopee generated $67.9
million of sales in Fiscal Year 1996. As part of the Transactions, Shakopee
was merged with Graphics.
THE REFINANCING. The offering of the Old Notes was part of a series
of transactions, including the following: (i) Graphics entered into a Credit
Agreement with BT Commercial Corporation (the "Bank Credit Agreement"),
providing for a $75 million revolving credit facility maturing in 2000 (the
"Revolving Credit Facility") and a $60 million amortizing term loan maturing in
2000 (the "Term Loan"); (ii) the repayment of all $126.5 million of
indebtedness outstanding under Graphics' old bank credit agreement (the "Old
Bank Credit Agreement") (plus $2.3 million of accrued interest to August 15,
1995, the date of repayment); (iii) the redemption of all outstanding 15%
Senior Subordinated Notes Due 2000 of Graphics (the "15% Notes") at an
aggregate redemption price of $105.6 million (plus $1.8 million of accrued
interest to September 15, 1995, the redemption date); (iv) the repayment of all
$24.6 million of indebtedness assumed in the Shakopee Merger (plus $.1 million
of accrued interest to August 15, 1995, the date of repayment); and (v) the
payment of approximately $11.8 million of fees and expenses incurred in
connection with the Transactions.
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SUMMARY DESCRIPTION OF THE NOTES
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Issuer . . . . . . . . . . . . . . . . Sullivan Graphics, Inc.
Maturity Date . . . . . . . . . . . . . August 1, 2005.
Securities . . . . . . . . . . . . . . $185 million aggregate principal amount of 12 3/4% Senior Subordinated Exchange Notes
Due 2005.
Interest Payment Dates . . . . . . . . Payable semiannually, in cash, on February 1 and August 1 of each year.
Ranking . . . . . . . . . . . . . . . . The Notes are unsecured obligations of Graphics, subordinated in right of payment to
all existing and future Senior Indebtedness of Graphics, including indebtedness under
the Bank Credit Agreement. The Notes will rank pari passu in right of payment with any
future senior subordinated indebtedness of Graphics and will be senior in right of
payment to any future subordinated indebtedness of Graphics. See "Description of the
Notes -- Ranking." At March 31, 1996, Graphics had $112.6 million of Senior
Indebtedness, no senior subordinated indebtedness other than the Notes and no
subordinated indebtedness outstanding and Graphics' subsidiaries had approximately $2.2
million of liabilities (which were effectively senior to the Notes). See "Risk Factors
-- High Level of Indebtedness" and "-- Ranking of the Notes and Communications
Guaranty; Liens Securing Bank Credit Agreement."
Guaranty . . . . . . . . . . . . . . . The payment of principal and interest on the Notes is fully and unconditionally
guaranteed on an unsecured senior subordinated basis by Communications. The guaranty
by Communications is subordinated to all existing and future Senior Indebtedness of
Communications, including Communications' guaranty of Graphics' obligations under the
Bank Credit Agreement. Communications conducts no business other than as the sole
shareholder of Graphics and has no significant assets other than the capital stock of
Graphics, all of which is pledged to secure Communications' obligations under the Bank
Credit Agreement. See "Description of the Notes -- Guaranty."
Optional Redemption . . . . . . . . . . The Notes are redeemable at the option of Graphics, in whole or in part, at any time or
from time to time on and after August 1, 2000, initially at 106.375% of their principal
amount, plus accrued interest, declining ratably to 100% of their principal amount,
plus accrued interest, on and after August 1, 2002. In addition, at any time or from
time to time prior to August 1, 1998, the Notes are redeemable at the option of
Graphics from the proceeds of one or more Public Equity Offerings (as defined herein)
following which there is a Public Market (as defined herein), at 110% of their
principal amount plus accrued interest to the redemption date; provided that at least
$115 million aggregate principal amount of Notes remains outstanding. See
"Description of the Notes -- Optional Redemption."
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C>
Change of Control Triggering
Event . . . . . . . . . . . . . . . . . In the event of a Change of Control Triggering Event (as defined herein), the holders
of the Notes will have the right to require Graphics to purchase the Notes at a
purchase price of 101% of their principal amount plus accrued interest to the purchase
date. See "Risk Factors -- Ability of Graphics to Repurchase Notes upon a Change of
Control Triggering Event" and "Description of the Notes -- Repurchase of Notes upon a
Change of Control Triggering Event." The occurrence of a Change of Control
Triggering Event will require Graphics to repay all indebtedness then outstanding which
by its terms would prohibit Graphics from repurchasing the Notes or obtain consents
from the holders of such indebtedness, including indebtedness outstanding under the
Bank Credit Agreement. There can be no assurance that Graphics would have
sufficient funds available to repurchase such indebtedness and the Notes. See "Risk
Factors -- Ability of Graphics to Repurchase Notes upon a Change of Control Triggering
Event."
Covenants . . . . . . . . . . . . . . . The Indenture contains covenants that, among other things, limit the ability of
Graphics and its subsidiaries to incur indebtedness, pay dividends, redeem capital
stock, make investments and make other restricted payments, issue capital stock of
subsidiaries, engage in transactions with stockholders and affiliates, sell assets and
engage in mergers and consolidations. However, these limitations are subject to a
number of important qualifications and exceptions. See "Description of the Notes --
Covenants."
Credit Rating . . . . . . . . . . . . . The Notes have received ratings from Moody's Investors Services Inc. and Standard and
Poor's Ratings Group which are below "investment grade" and there is no required rating
that must be maintained.
Settlement at DTC . . . . . . . . . . . Transfers of Notes between participants in The Depository Trust Company ("DTC") will be
effected in the ordinary way in accordance with DTC rules and will be settled in
next-day funds.
</TABLE>
8
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical consolidated financial data and other data
presented as of and for the years ended December 31, 1991 and 1992 (pre-1993
Acquisition), as of and for the three months ended March 31, 1993 (pre-1993
Acquisition) and as of and for the fiscal years ended March 31, 1994, 1995 and
1996 (post-1993 Acquisition) were derived from the Consolidated Financial
Statements of Communications. In April 1993, Communications was acquired by
MSLEF, members of management and other investors (the 1993 Acquisition). The
summary pro forma consolidated statement of operations data and the pro forma
other data give pro forma effect to the Gowe Acquisition as if it had occurred
on April 1, 1995. The unaudited pro forma financial information does not
purport to represent what Communications' consolidated results of operations
would actually have been had the Gowe Acquisition in fact occurred on such
date. The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable under the
circumstances. The summary historical and pro forma financial data should be
read in conjunction with "Capitalization," "Selected Historical Financial
Data," "Unaudited Pro Forma Condensed Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Communications
appearing elsewhere in this Prospectus.
9
<PAGE> 12
<TABLE>
<CAPTION>
POST-1993 ACQUISITION (a) PRE-1993 ACQUISITION (b)
------------------------------------------------------ ---------------------------------------------
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------
THREE
MONTHS YEARS ENDED
PRO ENDED DECEMBER 31,
FORMA MARCH 31, ------------------------------
1996 1996 1995(c) 1994 1993(d) 1992 1991
--------- --------- ----------- ---------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales. . . . . . . . . . . $568,371 $536,342 $434,868 $414,673 $101,601 $395,420 $423,264
Gross profit . . . . . . . 79,931 76,638 72,067 52,704 6,523 37,589 39,614
Restructuring costs and
other
special charges (e). . . 7,533 7,533 -- -- -- -- --
Gain from curtailment and
establishment of
defined benefit pension
plans,
net (f). . . . . . . . . -- -- (3,311) -- -- -- --
Operating income
(loss) . . . . . . . . . 12,644 11,352 23,538 5,810 (3,524) (3,072) (1,714)
Interest expense,
net. . . . . . . . . . . 33,274 32,425 25,334 23,737 6,862 27,021 30,183
(Loss) from continuing
operations before
extraordinary items and
cumulative effect of
changes in accounting
principles . . . . . . . (27,224) (27,669) (5,333) (22,676) (6,742) (19,285) (23,064)
Income (loss) from
discontinued operations
(net of tax)(g). . . . . 2,868 18,495 (61,684) (1,897) (3,689) --
Loss on early
extinguishment of
debt(h). . . . . . . . . (4,526) -- -- -- -- --
Net income (loss). . . . . (29,327) 13,162 (84,360) (7,993) (27,410) (23,064)
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash equivalents $ 0 $ 4,635 $ 8,839 $ 7,129 $ 2,167 $ 13,444
Working capital (deficit) 9,612 4,958 6,956 (17,327) (4,138) 27,735
Total assets . . . . . . . 351,181 328,368 305,521 274,812 271,219 310,108
Long-term debt and
capitalized leases,
including current
installments(i). . . . . 297,617 258,201 250,439 245,382 247,362 260,674
OTHER DATA:
Net cash (used)
provided by operating
activities . . . . . . . $ (4,187) $ 30,510 $(27,329) $ 11,437 $ 11,831 $ 18,978
Net cash (used)
provided by investing
activities . . . . . . . (24,436) (18,394) (1,332) (4,500) (10,144) (7,178)
Net cash (used)
provided by financing
activities . . . . . . . 23,982 (16,713) 23,113 (1,980) (12,939) (10,543)
Capital expenditures . . . $ 20,276 $ 20,415 $ 15,722 $ 4,888 $ 12,029 $ 11,177
Deficiency of earnings
to cover fixed
charges(j) . . . . . . . (22,347) (22,795) (2,781) (20,296) (10,590) (33,886) (30,807)
EBITDA(k):
Printing . . . . . . . . $ 46,597 $ 38,357 $ 23,103 $ 2,404 $ 28,635 $34,963
American Color . . . . . 2,907 (l) 12,662 12,656 2,571 10,072 8,628
Other. . . . . . . . . . (3,089) 426 (m) (2,691) (895) (4,190) (2,118)
--------- -------- -------- -------- -------- --------
Total. . . . . . . . . $ 46,415 $ 51,445 $ 33,068 $ 4,080 $ 34,517 $ 41,473
======== ======== ======== ======== ======== ========
</TABLE>
(footnotes on following page)
10
<PAGE> 13
(a) References to "post-1993 Acquisition" refer to the successor company that
resulted from the 1993 Acquisition. The 1993 Acquisition was accounted for
as a purchase. As a result of the 1993 Acquisition, Communications'
consolidated financial statements for the periods subsequent to March 31,
1993 are presented on Communications' new basis of accounting, while the
consolidated financial statements for March 31, 1993 and prior periods are
presented on Communications' historical cost basis of accounting. The
consolidated results of operations of Communications for post-1993
Acquisition periods are not directly comparable to the consolidated
pre-1993 Acquisition results of operations due to the effects of the 1993
Acquisition and related refinancing.
(b) References to "pre-1993 Acquisition" refer to the predecessor company that
existed before the 1993 Acquisition.
(c) On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under common
control (similar to a pooling-of-interests), and accordingly, the
consolidated financial statements give retroactive effect to the Shakopee
Merger and include the combined operations of Communications and Shakopee
subsequent to December 22, 1994 (the date on which Shakopee became under
common control with the Company). Shakopee's financial results are not
reflected in periods prior to December 22, 1994 as these periods were
prior to common control ownership.
(d) In connection with the 1993 Acquisition, the Company elected to change its
fiscal year end from December 31 to March 31 beginning March 31, 1993 in
order to have the Company's fiscal year more closely match the Company's
operating cycle. This change was made on the effective date of the 1993
Acquisition; accordingly, the three-month period ended March 31, 1993
constituted a transition period.
(e) In April 1995, the Company approved a restructuring plan for its American
Color division which is designed to improve productivity, increase
customer service and responsiveness, and provide increased growth in the
business. The Company recognized $4.1 million of costs under such plan in
Fiscal Year 1996. In addition, the Company recorded $3.4 million of other
special charges related to asset write-offs and write-downs in its Print
and American Color divisions in the fourth quarter of Fiscal Year 1996
(see note 19 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus).
(f) In October 1994, the Company amended its defined benefit pension plans,
which resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. The Company recognized
a curtailment gain of $3.7 million as a result of freezing such benefits.
Also in October 1994, the Board of Directors approved a new Supplemental
Executive Retirement Plan ("SERP"), which is a defined benefit plan for
certain key executives. The Company recognized a $0.4 million expense
associated with the establishment of the SERP.
(g) On February 16, 1994, the Company assigned the coupon free-standing insert
("FSI") contracts of its subsidiary, Sullivan Marketing, Inc. ("SMI"), to
News America FSI, Inc. ("News America"). In June 1994, Graphics and SMI
settled the lawsuit they initiated in federal court against Valassis
Communications, Inc., News America and David Brandon (the "SMI
Settlement"). The Company recorded income from the SMI Settlement of $18.5
million, net of taxes, and when coupled with settlement expenses which had
previously been accrued, the net cash proceeds resulting from this
settlement were approximately $16.7 million. In Fiscal Year 1996, the
Company recognized settlement of the lawsuit with EPI Group Limited
("EPI") (the "EPI lawsuit") and reversed certain accruals related to the
estimated loss on shut down of SMI (see note 16 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus).
The resulting effect reflected in the Fiscal Year 1996 consolidated
statement of operations was $2.9 million income in discontinued
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Coupon FSI Operation
and SMI Settlement" and note 6 of the consolidated financial statements of
Communications appearing elsewhere in this Prospectus.
(h) As part of the Transactions, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.5 million, net of zero
taxes. This extraordinary loss primarily consisted of the early
redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by the
write-off of a bond premium associated with the 15% Notes.
(i) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes resulting
from the 1993 Acquisition. The principal amount payable at maturity of the
15% Notes remained at $100.0 million. The 15% Notes were redeemed in
connection with the Transactions.
(footnotes continued on following page)
11
<PAGE> 14
(j) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, the cumulative
effect of changes in accounting principles, discontinued operation and
extraordinary items from fixed charges. Fixed charges consist of
interest expense and one-third of operating lease rental expense, which
is deemed to be representative of the interest factor. The deficiency in
earnings required to cover fixed charges includes depreciation of
property, plant and equipment and amortization of goodwill and other
assets and non-cash charges which are reflected in cost of sales and
selling, general and administrative expenses, in the following amounts
(in thousands):
<TABLE>
<CAPTION>
POST-1993 ACQUISITION PRE-1993 ACQUISITION
------------------------------ ----------------------------------
THREE
MONTHS
FISCAL YEAR ENDED YEARS
ENDED MARCH 31, MARCH 31, ENDED DECEMBER 31,
------------------------------ --------- --------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Depreciation... . $21,391 $18,330 $17,897 $6,923 $31,497 $35,051
Amortization... . 10,237 9,576 9,361 681 6,092 8,136
------- ------- ------- ------ ------- -------
Total. . . . $31,628 $27,906 $27,258 $7,604 $37,589 $43,187
======= ======= ======= ====== ======= =======
</TABLE>
(k) EBITDA is included in the summary financial data because management
believes that investors regard EBITDA as a key measure of a leveraged
company's performance and ability to meet its future debt service
requirements. EBITDA is defined as earnings before net interest
expense, income tax expense (benefit), depreciation, amortization,
other special charges related to asset write-offs and write-downs,
other income (expense), the cumulative effect of changes in
accounting principles, discontinued operations and extraordinary
items. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
an alternative to net income (or any other measure of performance
under generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of
liquidity. Certain covenants in the Indenture and the Bank Credit
Agreement are based on EBITDA, subject to certain adjustments.
(l) American Color EBITDA for Fiscal Year 1996 includes the impact of
$4.1 million in restructuring costs related to the American Color
division. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Restructuring Costs and Other
Special Charges." (See note 19 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus.)
(m) EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related
to a change in the Company's defined benefit pension plans (see note
12 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus).
12
<PAGE> 15
RISK FACTORS
In addition to the other information and financial data set forth
elsewhere in this Prospectus, the following information should be considered
carefully by prospective investors in evaluating the Company, its business and
an investment in the Notes.
HIGH LEVEL OF INDEBTEDNESS
The Company has had a negative net worth in each of the last six
fiscal years. At March 31, 1996, the Company's consolidated indebtedness
including capital leases was approximately $297.6 million (including $11.5
million of current installments) and the Company's negative net worth was $44.4
million. The level of the Company's indebtedness could have important
consequences to holders of the Notes including the following: (i) the ability
of the Company to obtain any necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes may
be limited; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of the principal of and interest on
its indebtedness and will not be available for other purposes; (iii) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to changes in, its business; (iv) the Company is more highly leveraged
than some of its competitors, which may place it at a competitive disadvantage;
and (v) the Company's high degree of indebtedness will make it more vulnerable
in the event of a downturn in its business. See "-- Ability to Service Debt;
Deficit of Earnings to Fixed Charges," "Selected Historical Financial Data,"
"Unaudited Pro Forma Condensed Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Bank
Credit Agreement." If the Company is not able to satisfy its obligations,
including its interest payment obligations, it could default on its
indebtedness, including the Notes, which would entitle the holders of such
indebtedness to accelerate the maturity thereof. Because the Notes are
subordinated in right of payment to all Senior Indebtedness and at March 31,
1996, approximately 29% of the Company's total assets were intangible assets,
payment in full on the Notes in the event of an acceleration of the Notes may
not occur.
There can be no assurance that the Company will not need additional
financing in the future or that the Company will be able to obtain such
financing on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, the Indenture permits the Company to incur
additional indebtedness to finance the acquisition of additional assets.
ABILITY TO SERVICE DEBT; DEFICIT OF EARNINGS TO FIXED CHARGES
The Company's earnings before fixed charges were insufficient to cover
fixed charges for the years ended December 31, 1991 and 1992, Fiscal Year 1994,
Fiscal Year 1995 and Fiscal Year 1996 by $30.8 million, $33.9 million, $20.3
million, $2.8 million and $22.8 million, respectively. See "Selected Historical
Financial Data." In addition, after giving pro forma effect to the Gowe
Acquisition, the Company's earnings would have been insufficient to cover its
fixed charges by $22.3 million for Pro Forma Fiscal Year 1996. See "Unaudited
Pro Forma Condensed Consolidated Financial Statements."
There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its debt
service obligations, including its obligations on the Notes. Graphics is
obligated to make substantial principal and interest payments under the Bank
Credit Agreement during the next several years. The Term Loan requires
principal payments in quarterly installments in the following annual amounts:
(i) $8.8 million in Fiscal Year 1997, (ii) $10.6 million in Fiscal Year 1998,
(iii) $13.3 million in Fiscal Year 1999, (iv) $15.2 million in Fiscal Year 2000
and (v) $8.0 million in Fiscal Year 2001. In the event the Company's cash flow
is inadequate to meet its debt service obligations, the Company could face
liquidity problems and might be required to dispose of material assets or
operations to meet its obligations, and there can be no assurance as to the
timing of such sales or the proceeds which the Company could realize therefrom.
See
13
<PAGE> 16
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Bank
Credit Agreement." In addition, most of the Company's indebtedness (other than
the Notes) bears interest at floating rates (8.21% weighted average rate at
March 31, 1996), causing the Company to be sensitive to prevailing market
interest rates. If interest rates rise, the Company's ability to meet its debt
service obligations, including its obligations pursuant to the Notes, may be
adversely affected.
If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on its indebtedness or, if the
Company otherwise fails to comply with the various covenants in such
indebtedness (including covenants in the Bank Credit Agreement), it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company or result in a bankruptcy of
the Company. Such defaults or any bankruptcy of the Company resulting therefrom
would result in a default on the Notes and could delay or preclude payment of
principal of, or interest on, the Notes. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company, which
will be subject to prevailing economic conditions and to financial, business
and other factors, including factors beyond the control of the Company.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Indenture and the Bank Credit Agreement impose significant
operating and financial restrictions on the Company. Such restrictions affect,
and in certain cases significantly limit or prohibit, among other things, the
ability of the Company to incur additional indebtedness or create liens on its
assets, sell assets, engage in mergers or acquisitions or make investments.
These restrictions could also limit the ability of the Company to effect future
financings, make needed capital expenditures, react to future industry trends,
withstand downturns in its business or the economy or otherwise conduct
necessary corporate activities.
The Bank Credit Agreement contains covenants requiring the Company to
meet certain financial ratios. See "Description of the Bank Credit Agreement."
Failure to comply with any such covenant could limit the availability of
borrowings under the Bank Credit Agreement or result in a default thereunder.
There can be no assurance that the Company will be able to comply with such
covenants. As a result of the impact of a weak retail environment and American
Color's restructuring efforts on the Company's recent financial results, the
Company and its banks on June 6, 1996 revised certain of the financial
covenants contained in the Bank Credit Agreement. A default under the Bank
Credit Agreement could result in an acceleration of the Notes, in which case
the holders of the Notes may not be paid in full because under the Indenture,
Senior Indebtedness (including indebtedness under the Bank Credit Agreement)
would be entitled to be paid first. See "-- Ranking of the Notes and
Communications' Guaranty; Liens Securing the Bank Credit Agreement."
RANKING OF THE NOTES AND COMMUNICATIONS' GUARANTY; LIENS SECURING THE BANK
CREDIT AGREEMENT
The Notes are subordinated to all Senior Indebtedness of Graphics,
including indebtedness under the Bank Credit Agreement. Therefore, in the
event of bankruptcy, liquidation or reorganization of Graphics, the assets of
Graphics will be available to pay obligations on the Notes only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on the Notes. See "Description of the Notes
- -- Ranking." At March 31, 1996, Graphics had $112.6 million of Senior
Indebtedness, no senior subordinated indebtedness other than the Notes and no
subordinated indebtedness outstanding and Graphics' subsidiaries had
approximately $2.2 million of liabilities (which were effectively senior to the
Notes). In addition, the indebtedness under the Bank Credit Agreement is
secured by liens on substantially all of the assets of Graphics and guaranteed
by Communications, which guarantee is secured by a pledge of all of the capital
stock of Graphics. See "Description of the Bank Credit Agreement." Accordingly,
if an event of default occurs under the Bank Credit Agreement and the Notes,
the lenders under the Bank Credit Agreement will have a prior right to such
collateral and may foreclose thereon to the exclusion of the holders of the
Notes, notwithstanding the existence of an event of default with respect
14
<PAGE> 17
to the Notes. In such an event, those assets constituting collateral would
first be used to repay in full all amounts outstanding under the Bank Credit
Agreement, resulting in such assets being unavailable to satisfy the claims of
holders of the Notes.
Communications has fully and unconditionally guaranteed the Notes on
an unsecured, senior subordinated basis. Currently, Communications conducts no
business other than as sole shareholder of Graphics and has no significant
assets other than the capital stock of Graphics, all of which has been pledged
to secure Communications' obligations under the Bank Credit Agreement. Thus,
currently there are no resources supporting Communications' guarantee of the
Notes that are incremental to those to which holders of the Notes already have
access as direct creditors of Graphics. Communications' guarantee of the Notes
is subordinated in right of payment to the guarantee by Communications of
Graphics' obligations under the Bank Credit Agreement. Generally, the Indenture
contains no restrictions on the activities of Communications. See "Description
of the Notes -- Guaranty."
ABILITY OF GRAPHICS TO REPURCHASE NOTES UPON A CHANGE OF CONTROL TRIGGERING
EVENT
The Bank Credit Agreement does not permit Graphics to repurchase Notes
upon the occurrence of a Change of Control Triggering Event. In addition, the
occurrence of a "Change of Control" under the Bank Credit Agreement, which is
defined to include a "Change of Control" under the Notes, would constitute an
event of default under the Bank Credit Agreement. See "Description of the Bank
Credit Agreement." Therefore, unless Graphics obtains a waiver, upon the
occurrence of a Change of Control Triggering Event, the amounts outstanding
under the Bank Credit Agreement (and any other indebtedness then outstanding
which by its terms would prohibit Graphics from repurchasing Notes) would have
to be repaid before the holders of Notes could receive any payment. Due to the
highly leveraged nature of Graphics, there can be no assurance that sufficient
funds will be available at the time of any Change of Control Triggering Event
to make any payments due under the Bank Credit Agreement or, thereafter, to
make any required repurchases of the Notes.
The obligation of Graphics to offer to repurchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Communications,
and, thus, the removal of incumbent management. Graphics could in the future
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control Triggering
Event under the Indenture, but that could increase the amount of Indebtedness
outstanding at such time or otherwise affect Graphics' capital structure or
credit ratings. Except as described under "Description of Notes -- Repurchase
of Notes upon a Change of Control Triggering Event", there are no covenants or
other provisions in the Indenture providing for a put or increased interest
rate or otherwise that would afford holders of the Notes additional protection
in the event of a recapitalization transaction, a change of control of Graphics
and Communications or a highly leveraged transaction. In the event Graphics is
required to make an offer to repurchase Notes pursuant to the "Repurchase of
Notes upon a Change of Control Triggering Event" covenant, Graphics will comply
with any tender offer rules under the Exchange Act which may then be
applicable, including Rule 14e-1. See "Description of the Notes -- Repurchase
of Notes upon a Change of Control Triggering Event."
COMPETITIVE CLIMATE
Commercial printing in the United States is a large, capital-intensive
industry comprised of several thousand commercial printers, most of which are
small businesses that provide service primarily to a local clientele. Although
the commercial printing industry remains highly fragmented, continued capital
requirements and competitive pricing trends have increased industry
consolidation in recent years.
Commercial printing in the United States is highly competitive. A
significant increase in the amount and capacity of printing equipment in
service in recent years has resulted in excess capacity and lower prices. In
addition to the impact of consolidation and capacity within the industry, sales
and pricing are also influenced by the level of print advertising demand by
retailers. In the fourth quarter of Fiscal Year 1996, the Company experienced
15
<PAGE> 18
lower production volume and a higher level of price competition than
anticipated as a result of the sluggish results experienced by the retail
industry in the last quarter of calendar year 1995. Although no significant
capacity is currently being added in the industry and consolidation among
printers continues, the industry is expected to continue to experience
competitive pricing pressures in the near future. In addition, the Company's
sales will continue to be subject to changes in retailers' demand for printing
products.
The Company believes that competition in the printing business is
based primarily on price, quality, timeliness of delivery and customer service.
The advertising insert business is a large, highly fragmented industry in which
the Company competes for national accounts with several large national
printers, several of whom are larger and better capitalized than the Company.
The Company also competes with numerous regional printers for the printing of
advertising inserts. Although the Company faces competition principally from
one other competitor (Big Flower Press Holdings, Inc.) in the printing of
newspaper comic inserts in the United States, there are numerous newspapers
that print their own Sunday comics. The Company's Sunday newspaper magazine and
other publications business compete with many large national and regional
commercial printers.
American Color competes with numerous digital imaging and prepress
service firms on both a national and regional basis. The industry is highly
fragmented, primarily consisting of smaller local and regional companies, with
only a few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share. Many
smaller digital imaging and prepress companies have left the industry in recent
years due to their inability to keep pace with technological advances required
to service increasingly complex customer demands. The Company believes that the
digital imaging and prepress services sector will continue to be subject to
high levels of ongoing technological change and, as technology continues to
improve, certain customers will continue to increase their in-house
capabilities. See "Risk Factors -- Technological Change."
TECHNOLOGICAL CHANGE
The digital imaging and prepress services business has experienced
rapid and substantial changes during the past few years primarily due to
advancements in available technology, including the evolution to electronic and
digital formats. Many smaller competitors have left the industry as a result of
their inability to keep pace with technological advances required to service
customer demands. The Company expects that further changes in technology will
affect the Company's digital imaging and prepress services business and that
the Company will need to adapt to technological advances as they occur. As
technology in this business continues to improve and evolve, the Company will
need to make capital expenditures to maintain its competitive position. If the
Company is unable to respond to future changes and advancements in digital
imaging and prepress technology, the Company's American Color business could be
adversely affected.
SENSITIVITY TO PAPER PRICES
The Company's results of operations and financial condition are
affected by the cost of paper, which is determined by constantly changing
market forces of supply and demand over which the Company has no control.
Beginning in the fiscal year ended March 31, 1994 ("Fiscal Year 1994") and
throughout Fiscal Year 1995 and the majority of Fiscal Year 1996, the printing
industry experienced substantial increases in the cost of paper. In late
Fiscal Year 1996, however, the cost of certain grades of paper declined.
Management expects that as a result of the Company's strong relationship with
key suppliers that its material costs will remain competitive within the
industry. In accordance with industry practice, the Company generally passes
through increases in the cost of paper to its customers in the costs of its
printed products while decreases in costs generally result in lower prices to
customers. Although the Company has been successful in passing through paper
price increases to its customers, significant increases in paper prices and
continuing price competition can result in pressure by certain customers to
reduce selling prices in order to mitigate the effect of increased paper costs.
There can be no assurance that the Company will be able to pass through future
paper price increases. In the event the Company is unable to pass through such
increases, severe increases in paper prices could have a material adverse
effect on the Company's
16
<PAGE> 19
profits and cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, increases in the cost of
paper, and therefore the cost of printed advertisements, may cause some of the
Company's advertising customers to reduce their print advertising programs,
which could have a material adverse effect on the Company.
ACQUISITIONS AND INTEGRATION OF ADDITIONAL BUSINESSES
As part of its long-term strategy, the Company seeks to acquire other
commercial printers, such as Shakopee and Gowe, and other digital imaging and
prepress services businesses. This strategy also provides for the integration
of new start-up ventures into the Company's operations, such as Flexi-Tech.
While the Company's management has experience acquiring companies and
integrating their operations into existing operations, there can be no
assurance that the Company will find additional attractive acquisition
candidates or succeed at effectively managing the integration of any other
acquired business and start-up ventures, into the Company's existing business.
ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances (together,
"Environmental Laws"). The Company believes that it currently conducts its
operations, and in the past has operated its business, in substantial
compliance with applicable Environmental Laws. Noncompliance with or liability
for cleanup pursuant to Environmental Laws could have a material adverse effect
on the Company's results of operations or financial condition. See "Business --
Environmental Matters."
RISK OF FRAUDULENT TRANSFER LIABILITY
Management of the Company believes that the indebtedness of Graphics
represented by the Notes, and the indebtedness of Communications under its
guarantee of the Notes, were incurred for proper purposes and in good faith,
and that, based on present forecasts, asset valuations and other financial
information at the time of issuance of the Notes, Graphics and Communications
were and are solvent, had and will have sufficient capital for carrying on
their business and were and will be able to pay their debts as they mature.
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor-in-possession) were to find that Graphics (or
Communications) did not receive fair consideration or reasonably equivalent
value for incurring the Notes (or the guarantee) or any debt being refinanced
thereby and, at the time of the incurrence of the Notes (or the guarantee) or
such indebtedness, Graphics (or Communications) was insolvent, was rendered
insolvent by reason of such incurrence, was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured, or intended to hinder, delay or defraud
its creditors, such court could avoid such indebtedness. A likely consequence
of such avoidance would be the subordination of the indebtedness represented by
the Notes (or the guarantee) to existing and future indebtedness of Graphics
(or Communications). The measure of insolvency for purposes of the foregoing
will vary depending upon the law of the relevant jurisdiction. Generally,
however, a company would be considered insolvent for purposes of the foregoing
if the present fair saleable value of the company's assets is less than the
amount that will be required to pay its probable liability on existing debts as
they become absolute and matured.
CONTROL BY MORGAN STANLEY GROUP INC.
MSLEF and the MSCP III Entities (collectively, the "MSCP Entities")
own a substantial majority of the outstanding shares of capital stock of
Communications. The general partner of each of the MSCP Entities is a limited
partnership whose general partner is also a wholly owned subsidiary of Morgan
Stanley Group Inc. Two
17
<PAGE> 20
of the current directors of Communications, Messrs. Sica and Fry, are employees
of MS&Co., an affiliate of MSLEF and the MSCP Entities and also a subsidiary of
Morgan Stanley Group Inc. As a result of these relationships, Morgan Stanley
Group Inc. has effective control over the management and policies of the
Company, although such control is not exercised on a day-to-day basis. In
addition, Morgan Stanley Group Inc. has effective control over all matters
requiring stockholder approval, including the election of all directors, the
adoption of amendments to the Company's certificate of incorporation and the
approval of mergers and sales of all or substantially all of the Company's
assets. Circumstances could arise under which the interests of MSLEF and the
MSCP Entities could be in conflict with the interests of holders of the Notes.
See "Certain Transactions" and "Security Ownership of Certain Beneficial
Owners."
LACK OF A PUBLIC MARKET
There is currently no established public market for the Notes.
Graphics does not intend to list the Notes on any national securities exchange
or to seek approval for quotation through any automated quotation system.
Graphics has been advised by MS&Co. that it intends to make a market in the
Notes. However, MS&Co. is not obligated to do so and any market-making
activities with respect to the Notes may be discontinued at any time without
notice. In addition, MS&Co. will be required to deliver a current prospectus
pursuant to Section 10(a)(3) of the Securities Act in connection with any
market making activities and may be prohibited from engaging in market-making
activities during certain distributions of securities by the Company pursuant
to Rule 10b-6 under the Exchange Act. For so long as a market-making
prospectus is required to be delivered, the ability of MS&Co. to make a market
in the Notes may, in part, be dependent on the ability of Graphics and
Communications to maintain a current market-making prospectus. Accordingly, no
assurance can be given that an active public or other market will develop for
the Notes or as to the liquidity of or the trading market for the Notes. If a
trading market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a market for the Notes develops, any such market may cease to continue
at any time. If a public trading market develops for the Notes, future trading
prices of the Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities and other factors, including the financial condition of
the Company.
18
<PAGE> 21
USE OF PROCEEDS
Graphics received gross proceeds of $185 million from the sale of the
Old Notes. The gross proceeds of the offering of the Old Notes, together with
borrowings under the Bank Credit Agreement, were used (i) to redeem all ($100
million principal amount) of the 15% Notes at a redemption price of $105.6
million (plus $1.8 million of accrued interest to September 15, 1995, the
redemption date) (the 15% Notes would have matured on February 1, 2000), (ii)
to repay all $126.5 million of indebtedness outstanding under the Old Bank
Credit Agreement (plus $2.3 million of accrued interest to August 15, 1995, the
repayment date) (the Old Bank Credit Agreement would have matured in 1998 and
bore interest at variable rates, 8.96% weighted average rate at June 30, 1995),
(iii) to repay all $24.6 million of indebtedness assumed in the Shakopee Merger
(plus $.1 million of accrued interest to August 15, 1995, the repayment date)
(the Shakopee indebtedness, which would have matured in 1999 and 2000, bore
interest at variable rates, 9.02% weighted average rate at June 30, 1995) and
(iv) to pay approximately $11.8 million of fees and expenses incurred in
connection with the Transactions. See "The Shakopee Merger" and "Description
of the Bank Credit Agreement."
19
<PAGE> 22
CAPITALIZATION
The following table sets forth the consolidated capitalization of
Communications as of March 31, 1996. This table should be read in conjunction
with "Selected Historical Financial Data," "Unaudited Pro Forma Condensed
Consolidated Financial Statements," "Description of the Bank Credit Agreement"
and the Consolidated Financial Statements of Communications appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SHORT-TERM DEBT:
Current installments of long-term debt and capitalized leases:
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,814
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,676
---------
Total short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,490
=========
LONG-TERM DEBT:
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,548
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,088
Senior Subordinated Notes Due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000(a)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,491
---------
Total long-term debt and capitalized leases,
excluding current installments . . . . . . . . . . . . . . . . . . . . . . . . . 286,127
---------
STOCKHOLDERS' DEFICIT:
Common Stock, voting, $.01 par value, 5,852,223 shares
authorized, 123,889 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series A Convertible Preferred Stock, $.01 par value,
4,000 shares authorized, issued and outstanding
($40 million liquidation preference) . . . . . . . . . . . . . . . . . . . . . . . . . --
Series B Convertible Preferred Stock, $.01 par value,
1,750 shares authorized, issued and outstanding
($17.5 million liquidation preference). . . . . . . . . . . . . . . . . . . . . . . . . --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,499
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,525)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,371)
---------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,396)
---------
Total long-term debt and stockholders' deficit . . . . . . . . . . . . . . . . . . $ 241,731
=========
</TABLE>
- ----------
(a) Old Notes surrendered in exchange for Notes were retired and
cancelled; accordingly, issuance of the Notes did not result in a
change in the consolidated indebtedness of Communications.
20
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Set forth below is selected historical financial data as of and for
the years ended December 31, 1991 and 1992 (pre-1993 Acquisition), as of and
for the three months ended March 31, 1993 (pre-1993 Acquisition) and as of and
for the fiscal years ended March 31, 1994, 1995 and 1996 (post-1993
Acquisition). The balance sheet data as of December 31, 1991, 1992 and March
31, 1993, 1994, 1995 and 1996, and the statement of operations data for the
years ended December 31, 1991, 1992, the three months ended March 31, 1993, and
the fiscal years ended March 31, 1994, 1995 and 1996 are derived from the
audited consolidated financial statements for such periods and at such dates.
The selected historical financial data below also reflects the Company's
discontinued coupon FSI operation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discontinued Coupon FSI
Operation and SMI Settlement." This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Consolidated Financial Statements of Communications appearing
elsewhere in this Prospectus.
21
<PAGE> 24
<TABLE>
<CAPTION>
POST-1993 ACQUISITION (a) PRE-1993 ACQUISITION (b)
------------------------------------------- -----------------------------------
FISCAL YEAR THREE MONTHS YEARS ENDED
ENDED MARCH 31, ENDED MARCH 31, DECEMBER 31,
--------------- --------------- ---------------------
1996 1995(c) 1994 1993(d) 1992 1991
---- ------- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales. . . . . . ... . . . . . . . . $536,342 $434,868 $414,673 $101,601 $395,420 $423,264
Cost of Sales. . . . . . . . . . . . 459,704 362,801 361,969 95,078 357,831 383,650
-------- -------- -------- -------- -------- --------
Gross Profit . . . . . . . . . . . 76,638 72,067 52,704 6,523 37,589 39,614
Selling, general and administrative
expenses . . . . . . . . . . . . . 57,753 51,840 46,894 10,047 40,661 41,328
Restructuring costs and other
special charges (e). . . . . . . . 7,533 -- -- -- -- --
Gain from curtailment and establish-
ment of defined benefit pension
plans, net (f). . . . . . . . . . -- (3,311) -- -- -- --
-------- -------- -------- -------- -------- --------
Operating income (loss). . . . . . 11,352 23,538 5,810 (3,524) (3,072) (1,714)
Interest expense, net. . . . . . . . 32,425 25,334 23,737 6,862 27,021 30,183
Other expense (income) . . . . . . . 1,722 985 2,369 204 3,793 (1,090)
Income tax expense (benefit) . . . . 4,874 2,552 2,380 (3,848) (14,601) (7,743)
-------- -------- -------- -------- -------- --------
Loss from continuing
operations before extraordinary
items and cumulative effect of
changes in accounting
principles . . . . . . . . . . . (27,669) (5,333) (22,676) (6,742) (19,285) (23,064)
-------- -------- -------- -------- -------- --------
Discontinued operations (g)
Loss from operations, net of
tax. . . . . . . . . . . . . . . -- -- (23,272) (1,897) (3,689) --
Estimated loss on shut down,
and gain on settlement, net
of tax . . . . . . . . . . . . . 2,868 18,495 (38,412) -- -- --
Loss on early extinguishment
of debt (h). . . . . . . . . . . (4,526) -- -- -- -- --
Cumulative effect of changes in
accounting principles, net of
tax (i). . . . . . . . . . . . . . -- -- -- 646 (4,436) --
-------- -------- -------- --------- -------- ---------
Net income (loss). . . . . . . . $(29,327) $ 13,162 $(84,360) $ (7,993) $(27,410) $(23,064)
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (at end of
period):
Cash and cash equivalents. . . . . . $ 0 $ 4,635 $ 8,839 $ 7,129 $ 2,167 $ 13,444
Working capital (deficit). . . . . . 9,612 4,958 6,956 (17,327) (4,138) 27,735
Total assets . . . . . . . . . . . . 351,181 328,368 305,521 274,812 271,219 310,108
Long-term debt and capitalized
leases, including current
installments (j) . . . . . . . . . 297,617 258,201 250,439 245,382 247,362 260,674
Stockholders' (deficit). . . . . . . (44,396) (14,970) (45,485) (85,194) (77,762) (47,838)
OTHER DATA:
Net cash (used) provided by
operating activities . . . . . . . $ (4,187) $ 30,510 $(27,329) $ 11,437 $ 11,831 $ 18,978
Net cash (used) provided by
investing activities . . . . . . . (24,436) (18,394) (1,332) (4,500) (10,144) (7,178)
Net cash (used) provided by
financing activities . . . . . . . 23,982 (16,713) 23,113 (1,980) (12,939) (10,543)
Capital expenditures . . . . . . . . 20,276 20,415 15,722 4,888 12,029 11,177
Deficiency of earnings to
cover fixed charges (k). . . . . . (22,795) (2,781) (20,296) (10,590) (33,886) (30,807)
EBITDA(l). . . . . . . . . . . . . . $ 46,415 (m) $ 51,445 (n) $ 33,068 $ 4,080 $ 34,517 $ 41,473
</TABLE>
(footnotes on following page)
22
<PAGE> 25
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) References to "post-1993 Acquisition" refer to the successor company
that resulted from the 1993 Acquisition. The 1993 Acquisition was
accounted for as a purchase. As a result of the 1993 Acquisition,
Communications' consolidated financial statements for the periods
subsequent to March 31, 1993 are presented on Communications' new
basis of accounting, while the consolidated financial statements for
March 31, 1993 and prior periods are presented on Communications'
historical cost basis of accounting. The consolidated results of
operations of Communications for the post-1993 Acquisition periods are
not directly comparable to the consolidated pre-1993 Acquisition
results of operations due to the effects of the 1993 Acquisition and
related refinancing.
(b) References to "pre-1993 Acquisition" refer to the predecessor company
that existed before the 1993 Acquisition.
(c) On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under
common control (similar to a pooling-of-interests), and accordingly,
the consolidated financial statements give retroactive effect to the
Shakopee Merger and include the combined operations of Communications
and Shakopee subsequent to December 22, 1994 (the date on which
Shakopee became under common control with the Company). Shakopee's
financial results are not reflected in periods prior to December 22,
1994 as these periods were prior to common control ownership.
(d) In connection with the 1993 Acquisition, the Company elected to change
its fiscal year end from December 31 to March 31 beginning March 31,
1993 in order to have the Company's fiscal year more closely match the
Company's operating cycle. This change was made on the effective date
of the 1993 Acquisition; accordingly, the three-month period ended
March 31, 1993 constituted a transition period.
(e) In April 1995, the Company approved a restructuring plan for its
American Color division which is designed to improve productivity,
increase customer service and responsiveness, and provide increased
growth in the business. The Company recognized $4.1 million of costs
under such plan in Fiscal Year 1996. In addition, the Company
recorded $3.4 million of other special charges related to asset
write-offs and write downs in its Print and American Color divisions
in the fourth quarter of Fiscal Year 1996 (see note 19 to the
Company's consolidated financial statements appearing elsewhere in
this Prospectus).
(f) In October 1994, the Company amended its defined benefit pension
plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995. The
Company recognized a curtailment gain of $3.7 million as a result of
freezing such benefits. Also in October 1994, the Board of Directors
approved a new SERP, which is a defined benefit plan for certain key
executives. The Company recognized a $0.4 million expense associated
with the establishment of the SERP.
(g) On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, SMI, to News America. The Company recorded income from
the SMI Settlement of $18.5 million, net of taxes, and when coupled
with settlement expenses which had previously been accrued, the net
cash proceeds resulting from this settlement were approximately $16.7
million. In Fiscal Year 1996, the Company recognized settlement of
the EPI lawsuit and reversed certain accruals related to the estimated
loss on shut down of SMI (see note 16 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus). The
resulting effect reflected in the Fiscal Year 1996 consolidated
statement of operations was $2.9 million of income in discontinued
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Coupon FSI
Operation and SMI Settlement" and note 6 of the consolidated financial
statements of Communications appearing elsewhere in this Prospectus.
(h) As part of the Transactions, the Company recorded an extraordinary
loss related to early extinguishment of debt of $4.5 million, net of
zero taxes. This extraordinary loss primarily consisted of the early
redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by
the write-off of a bond premium associated with the 15% Notes.
(i) Effective January 1, 1993, the Company changed its method of
accounting for income taxes to SFAS 109. The cumulative effect of
adopting SFAS 109, as of January 1, 1993, was a decrease in net loss
by $0.6 million. In 1992, the Company elected to adopt the provisions
of Statement of Financial Accounting Standards No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions." This
resulted in a charge to earnings net of related tax benefits of $4.4
million.
(j) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes
resulting from the 1993 Acquisition. The principal amount payable at
maturity of the 15% Notes remained at $100.0 million. The 15% Notes
were redeemed in connection with the Transactions.
(k) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, the
cumulative effect of changes in accounting principles, discontinued
operations and extraordinary items from fixed charges. Fixed charges
consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor.
The deficiency in earnings required to cover fixed charges includes
depreciation of property, plant and equipment and amortization of
goodwill and other assets and non-cash charges which are reflected in
cost of sales and selling, general and administrative expenses, in the
following amounts (in thousands):
<TABLE>
<CAPTION>
POST-1993 ACQUISITION PRE-1993 ACQUISITION
------------------------------- -----------------------------------------
THREE
MONTHS YEARS ENDED
ENDED ---------------------
FISCAL YEAR ENDED MARCH 31, MARCH 31, DECEMBER 31,
------------------------------- ---------- ---------------------
1996 1995 1994 1993 1992 1991
------- -------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Depreciation. . . . . . . . $21,391 $18,330 $17,897 $6,923 $31,497 $35,051
Amortization. . . . . . . . 10,237 9,576 9,361 681 6,092 8,136
------- ------- ------- ------ ------- -------
Total . . . . . . $31,628 $27,906 $27,258 $7,604 $37,589 $43,187
======= ======= ======= ====== ======= =======
</TABLE>
(footnotes continued on following page)
23
<PAGE> 26
(l) EBITDA is included in the selected historical financial data because
management believes that investors regard EBITDA as a key measure of
a leveraged company's performance and ability to meet its future debt
service requirements. EBITDA is defined as earnings before net
interest expense, income tax expense (benefit), depreciation,
amortization, other special charges related to asset write-off and
write-downs, other income (expense), the cumulative effect of changes
in accounting principles, discontinued operations and extraordinary
items. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
an alternative to net income (or any other measure of performance
under generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of
liquidity. Certain covenants in the Indenture and the Bank Credit
Agreement will be based on EBITDA, subject to certain adjustments.
(m) EBITDA in Fiscal Year 1996 includes the impact of $4.1 million in
restructuring costs related to the American Color division. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Restructuring Costs and Other Special
Charges." (See note 19 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus.)
(n) EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related
to a change in the Company's defined benefit pension plans (see note
12 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus).
24
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated statement of operations
for the year ended March 31, 1996 is set forth on the following page. This
unaudited pro forma condensed consolidated financial statement gives effect to
the Gowe Acquisition. The pro forma information has been prepared utilizing
the historical consolidated financial statements of Communications and Gowe.
The Gowe Acquisition has been accounted for as a purchase, applying
the provisions of Accounting Principles Board Opinion No. 16. The total
purchase price will be allocated to the Company's tangible and identifiable
intangible assets acquired and liabilities assumed at fair value based on
appraisals and other methods. The pro forma condensed consolidated statement of
operations gives pro forma effect to the Gowe Acquisition as if it had occurred
on April 1, 1995. As the Gowe Acquisition is already reflected in
Communications' consolidated balance sheet at March 31, 1996, a pro forma
condensed consolidated balance sheet is not presented herein.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable under the
circumstances. The unaudited pro forma condensed consolidated financial
statement does not purport to represent what the Company's consolidated results
of operations would actually have been had the Gowe Acquisition in fact
occurred on such date or to project the Company's consolidated results of
operations for any future period or date.
The unaudited pro forma condensed consolidated financial statement
should be read in conjunction with Communications' historical financial
statements appearing elsewhere in this Prospectus.
25
<PAGE> 28
SULLIVAN COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNICATIONS GOWE
(HISTORICAL) (HISTORICAL) ADJUSTMENTS(a) PRO FORMA
---------------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . $536,342 $32,029 -- $568,371
Cost of Sales . . . . . . 459,704 29,458 $(722)(b) 488,440
---------- --------- --------- --------
Gross Profit . . . . . 76,638 2,571 722 79,931
Selling, general and
administrative
expenses . . . . . . . 65,286 1,982 19 (b) 67,287
---------- --------- --------- --------
Operating income . . . 11,352 589 703 12,644
Other expense (income):
Interest expense, net . 32,425 481 368 (c) 33,274
Other, net . . . . . . 1,722 (5) -- 1,717
---------- --------- --------- --------
Total other expense
(income) . . . . . . . 34,147 476 368 34,991
---------- --------- --------- --------
Income (loss) before
income taxes,
discontinued operations
and extraordinary
items . . . . . . . (22,795) 113 335 (22,347)
Income tax (expense)
benefit . . . . . . . . (4,874) (3) -- (4,877)
---------- --------- --------- --------
Net income (loss) before
discontinued operations
and extraordinary
items . . . . . . . $(27,669) $ 110 $ 335 $(27,224)
========== ========= ========= ========
Deficiency of earnings to
cover fixed charges(d) (22,795) (22,347)
</TABLE>
26
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) The Gowe Acquisition will be accounted as a purchase, applying the
provisions of Accounting Principles Board Opinion No. 16. The total
purchase price will be allocated to the Company's tangible and
identifiable intangible assets acquired and liabilities assumed at
fair value based on appraisals and other methods.
The purchase price (calculated as if the acquisition occurred on April
1, 1995) and the allocation of the excess of cost over the net book
value of assets acquired is as follows:
<TABLE>
<S> <C>
Pro forma purchase price $6,541
Equity eliminated (5,797)
Payment of transaction costs 222
Accrual of transaction costs 443
Accrual of contingent liabilities 250
Increase to fair value of property, plant and equipment, net (2,248)
Record covenant not to compete (100)
Record inventories at replacement cost 439
Record receivables at net realizable value 250
------
Remaining unallocated excess of purchase cost over net
assets acquired $ 0
======
</TABLE>
The allocation is based on management's preliminary estimates. The
actual allocations will be based on further studies and valuations as
of the date the acquisition is consummated and may change during the
allocation period.
(b) The cost of sales adjustment reflects the decrease of depreciation
attributable to both the adjustment of property, plant and equipment
carrying values to estimated fair value and the establishment of new
useful lives for the assets. These new useful lives generally are in
excess of the prior historical lives. The selling, general and
administrative adjustment reflects amortization of a non-compete
agreement over a period of five years.
(c) Reflects additional interest expense, net related primarily to
borrowings to finance the acquisition.
(d) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, the
cumulative effect of changes in accounting principles, discontinued
operations and extraordinary items from fixed charges. Fixed charges
consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor.
27
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--CONTINUED
The following non-cash charges are included in the Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the period presented
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
-------------------------
<S> <C>
Depreciation of property, plant
and equipment . . . . . . . . . . . . . . . . . . . . . . . $22,292
Amortization of goodwill and other assets. . . . . . . . . . . 10,256
-------
$32,548
=======
</TABLE>
Depreciation of property, plant and equipment and amortization of
goodwill and other assets are reflected in cost of sales and selling,
general and administrative expenses.
28
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the consolidated
financial statements give retroactive effect to the Shakopee Merger and include
the combined operations of Communications and Shakopee subsequent to December
22, 1994 (the date on which Shakopee became under common control with the
Company). Shakopee's financial results are not reflected in periods prior to
December 22, 1994 as these periods were prior to common control ownership.
This affects the comparability of the financial results after the date of
common control with the financial results prior to common control.
On March 11, 1996, the Company sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2 million
under the terms of a Stock Redemption Agreement between NIS and Graphics. This
transaction resulted in a net gain on disposal of approximately $1.3 million,
which is classified as other, net in the consolidated statement of operations.
The proceeds of the sale were used to repay indebtedness under the Bank Credit
Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio based regional printer of newspapers, T.V. books and retail
advertising inserts and catalogs for approximately $6.7 million in cash and
assumption of certain liabilities of Gowe, Inc., pursuant to an Asset Purchase
Agreement. The Gowe Acquisition was accounted for under the purchase method of
accounting applying the provisions of Accounting Principles Board Opinion No.
16 ("APB 16"). Pursuant to the requirements of APB 16, the purchase price was
allocated to the tangible assets and identifiable intangible assets and
liabilities assumed based upon their respective fair values. The allocation of
the purchase price is preliminary and may change during the allocation period.
Gowe's results of operations for the period March 12, 1996 to March 31, 1996
are included in the Company's consolidated financial statements appearing
elsewhere in this Prospectus.
Printing. Management has taken a number of steps over the last three
years which have resulted in an improvement in the printing sector operating
performance. Fiscal Year 1994 was impacted by a sluggish retail environment
and significant production and start-up inefficiencies at the Company's Alabama
facility resulting from the rapid expansion undertaken due to the Company's
entry into the comic book printing business. In response, the Company replaced
many of the managers at the Alabama facility and achieved significant
improvements in press speeds, paper waste, bindery output and overall operating
costs at this facility. In addition, over the last three years, the Company
has also hired new senior managers in the printing sector manufacturing,
purchasing, quality, technical services, production planning and customer
service departments. Comprehensive quality improvement and cost reduction
programs have also been implemented for all the Company's printing processes.
As a result of these measures, the Company has been successful in lowering its
manufacturing costs within the printing sector, while improving product
quality.
Additionally, in order to grow sales and improve gross margins, the
Company increased the size and geographic and industry scope of its sales force
and shifted the mix of its business toward retail customers and away from the
printing of certain lower margin publications. The Shakopee Merger, Gowe
Acquisition and Flexi-Tech start-up (see "Business -- Printing") are consistent
with the Company's overall strategy to continue to increase profitability by
growing its revenues, increasing its market share and reducing costs.
Commercial printing in the United States is highly competitive. An
increase in the amount and capacity of printing equipment in service in recent
years has resulted in excess capacity and lower prices. In the fourth quarter
of Fiscal Year 1996, the Company experienced lower production volume and a
higher level of price competition than anticipated as a result of the sluggish
results experienced by the retail industry in the last quarter of calendar year
1995. Although no significant capacity is currently being added in the
industry and consolidation among printers continues, the industry is expected
to continue to experience competitive pricing pressures in the near future. In
addition, the Company's sales will continue to be subject to changes in
retailers' demands for printing products.
29
<PAGE> 32
The cost of paper is a principal factor in the Company's overall
pricing to its customers. The level of paper costs also has a significant
impact on the Company's reported sales. Beginning in Fiscal Year 1994 and
throughout Fiscal Year 1995 and the majority of Fiscal Year 1996, the paper
industry experienced increased demand and fixed capacity in various grades of
paper. This led to a global tightening of the paper supply, and as a result,
the printing industry experienced substantial increases in the cost of paper.
In accordance with industry practice, the Company generally passes through
increases in the cost of paper to its customers in the cost of its printed
products while decreases in costs generally result in lower prices to
customers. Although the Company has been successful in passing through paper
price increases to its customers over this period, significant increases in
paper prices and continuing price competition resulted in pressure by certain
customers to reduce selling prices in order to mitigate the effect of increased
paper costs. In addition, there can be no assurances that the Company will be
able to pass through future paper price increases. In late Fiscal Year 1996,
the costs of certain grades of paper declined.
American Color. The digital imaging and prepress services industry
has experienced significant technological advances as electronic digital
prepress systems have replaced the largely manual and photography-based methods
utilized in the past. This shift in technology (which improved process
efficiencies and decreased processing costs) produced increased unit growth for
American Color as the demand for color pages increased. However, American
Color's selling price levels per page have declined because of greater
efficiencies resulting from increased use of technology. American Color's
revenue from traditional services are now supplemented by new revenue sources
from electronic digital imaging and prepress services such as digital image
storage, facilities management (operating digital imaging and prepress service
facilities at a customer location), telecommunications, design and layout
equipment sales and consulting and training services.
In April 1995, the Company approved a plan for its American Color
division which is designed to improve productivity, increase customer service
and responsiveness, and provide increased growth in this business. The cost of
this plan is being accounted for in accordance with the guidelines set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The estimated
pretax costs associated with this plan of $4.8 million represent employee
termination, goodwill write-down and other related costs that will be incurred
as a direct result of the plan. In the quarter ended June 30, 1995, the
Company recognized $2.1 million of such restructuring charges, primarily for
severance and other personnel related costs. In the quarter ended September
30, 1995, the Company recognized $0.6 million of restructuring costs, related
primarily to hiring and relocating certain management personnel. In the
quarter ended December 31, 1995, the Company recognized an additional $0.1
million of restructuring costs. In the quarter ended March 31, 1996, the
Company recognized $1.3 million of restructuring costs, which included $0.9
million of goodwill write-down and $0.4 million primarily related to certain
relocation costs associated with the restructuring. The remaining costs of
approximately $0.7 million, principally related to additional relocation and
other transition expenses, will be recorded as incurred.
30
<PAGE> 33
The following table summarizes the Company's historical results of
continuing operations for Fiscal Year 1996, Fiscal Year 1995 and Fiscal Year
1994.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1996(a) 1995(a) 1994(a)
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SALES:
Printing. . . . . . . . . . . . . . . . . . . . $453,381 $353,123 $338,129
American Color. . . . . . . . . . . . . . . . . 72,461 76,070 74,194
Other(b). . . . . . . . . . . . . . . . . . . . 10,500 5,675 2,350
-------- -------- ---------
Total . . . . . . . . . . . . . . . . . $536,342 $434,868 $414,673
======== ======== ========
GROSS PROFIT:
Printing. . . . . . . . . . . . . . . . . . . . $ 49,015 $ 43,212 $ 27,307
American Color. . . . . . . . . . . . . . . . . 22,962 26,326 23,828
Other(b). . . . . . . . . . . . . . . . . . . . 4,661 2,529 1,569
-------- -------- --------
Total . . . . . . . . . . . . . . . . . $ 76,638 $ 72,067 $ 52,704
======== ======== ========
GROSS MARGIN:
Printing. . . . . . . . . . . . . . . . . . . . 10.8% 12.2% 8.1%
American Color. . . . . . . . . . . . . . . . . 31.7 34.6 32.1
Total . . . . . . . . . . . . . . . . . 14.3 16.6 12.7
OPERATING INCOME (LOSS):
Printing. . . . . . . . . . . . . . . . . . . . $ 28,239(c) $ 24,683 $ 10,778
American Color. . . . . . . . . . . . . . . . . (3,975)(c) 7,855 7,118
Other(b)(d) . . . . . . . . . . . . . . . . . . (12,912) (9,000)(e) (12,086)
---------- -------- --------
Total . . . . . . . . . . . . . . . . . $ 11,352 $ 23,538 $ 5,810
========== ======== ========
</TABLE>
- ----------
(a) The above table excludes the results of the Company's FSI business, SMI,
which was shut down in February 1994. SMI's results of operations are
included in discontinued operations in the Company's consolidated
statements of operations. See note 6 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus.
(b) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS, which was sold on March 11, 1996
(see note 5 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus), and its wholly-owned subsidiary, Sullivan
Media Corporation ("SMC").
(c) Printing operating income for Fiscal Year 1996 includes the impact of $2
million of other special charges related to fixed asset write-offs and
write-downs. American Color's operating (loss) for Fiscal Year 1996
includes the impact of $4.1 million in restructuring costs and $1.4 million
of other special charges related to fixed asset write-downs. See note 19
to the Company's consolidated financial statements appearing elsewhere in
this Prospectus.
(d) Also includes corporate selling, general and administrative expenses, and
amortization expense.
(e) Includes a net gain of $3.3 million in Fiscal Year 1995 from the
curtailment and establishment of defined benefit pension plans.
31
<PAGE> 34
HISTORICAL RESULTS OF OPERATIONS
FISCAL YEAR 1996 VS. FISCAL YEAR 1995
The Company's sales increased $101.4 million to $536.3 million in
Fiscal Year 1996 from $434.9 million in Fiscal Year 1995, reflecting a $100.3
million increase in printing sales, a $3.6 million decrease in American Color
sales and a $4.8 million increase in other sales. The Company's gross profit
increased to $76.6 million or 14.3% of sales in Fiscal Year 1996 from $72.1
million or 16.6% of sales in Fiscal Year 1995. Consolidated selling, general
and administrative expenses (excluding goodwill amortization, restructuring
costs and other special charges related to fixed asset write-offs and
write-downs) increased to $49.1 million or 9.2% of sales in Fiscal Year 1996
from $43.5 million or 10% of sales in Fiscal Year 1995. Amortization of
goodwill increased to $8.6 million in Fiscal Year 1996 from $8.4 million in
Fiscal Year 1995. As a result of these changes, the incurrence of $4.1 million
of restructuring costs in Fiscal Year 1996 related primarily to employee
termination and other expenses associated with the American Color restructuring
plan and the incurrence of $3.4 million of special charges related to fixed
asset write-offs and write-downs in Fiscal Year 1996 (see "Restructuring Costs
and Other Special Charges" below), and a $3.3 million net gain from curtailment
and establishment of defined benefit pension plans in Fiscal Year 1995, (see
"Changes in Defined Benefit Pension Plans, Net" below), the Company's operating
income decreased to $11.4 million or 2.1% of sales in Fiscal Year 1996 from
$23.5 million or 5.4% of sales in Fiscal Year 1995. See the discussion of
these changes by sector below.
PRINTING
Sales. Printing sales increased $100.3 million to $453.4 million in
Fiscal Year 1996 from $353.1 million in Fiscal Year 1995. This increase
includes $53.8 million of increased sales by Shakopee. In addition, the
increase in sales includes the impact of increased paper prices and a slight
increase in overall production volume (excluding Shakopee). These increases
were partially offset by an increase in sales to customers that supply their
own paper and the impact of continued competitive pricing pressure. Production
volume is primarily dependent on economic activity in general and the level of
advertising by retailers in particular. In the last quarter of Fiscal Year
1996, the Company experienced lower than expected production volume and a
higher level of price competition than anticipated as a result of a weak retail
environment in the last quarter of calendar year 1995 (see "Business --
Competition").
Gross Profit. Printing gross profit increased $5.8 million to $49
million in Fiscal Year 1996 from $43.2 million in Fiscal Year 1995. Printing
gross margin decreased to 10.8% in Fiscal Year 1996 from 12.2% in Fiscal Year
1995. The increase in gross profit primarily reflects incremental gross profit
from Shakopee. In addition, the gross profit improvement includes reduced
variable production and certain other manufacturing costs due to continued cost
containment programs at the printing plants. These gains were partially offset
by continued competitive pricing pressure. The decrease in gross margin as a
percentage of sales is due primarily to the impact of increased paper prices.
Selling, General and Administrative Expenses. Printing selling,
general and administrative expenses increased to $18.8 million or 4.1% of
printing sales in Fiscal Year 1996 from $18.5 million or 5.2% of printing sales
in Fiscal Year 1995. This increase includes incremental Shakopee expenses and
additional administrative support expenses offset in part by a reduction in
certain employee related costs.
Operating Income. As a result of these factors and the incurrence of
other special charges related to fixed asset write-offs and write-downs of $2
million (see "Restructuring Costs and Other Special Charges" below), operating
income from the printing business increased to $28.2 million in Fiscal Year
1996 from $24.7 million in Fiscal Year 1995.
32
<PAGE> 35
AMERICAN COLOR
Sales. American Color's sales decreased $3.6 million to $72.5
million in Fiscal Year 1996 from $76.1 million in Fiscal Year 1995. The
decrease is primarily the result of decreased selling prices and lower prepress
production volume due in part to American Color's restructuring efforts during
Fiscal Year 1996 (see note 19 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus).
Gross Profit. American Color's gross profit decreased $3.3 million to
$23 million in Fiscal Year 1996 from $26.3 million in Fiscal Year 1995.
American Color's gross margin decreased to 31.7% in Fiscal Year 1996 from 34.6%
in Fiscal Year 1995. These decreases in Fiscal Year 1996 are primarily the
result of decreases in both prepress production volume and selling prices, as
well as increased depreciation expense.
Selling, General and Administrative Expenses. American Color's
selling, general and administrative expenses increased to $21.4 million or
29.5% of American Color's sales in Fiscal Year 1996 from $18.5 million or 24.3%
of American Color's sales in Fiscal Year 1995. These increases are a result of
increased sales and marketing expenses and additional technical and
administrative support personnel.
Operating Income (Loss). As a result of these factors and the
incurrence of $4.1 million of restructuring costs related primarily to employee
termination and other expenses associated with the American Color restructuring
plan and other special charges related to fixed asset write-downs of $1.4
million (see "Restructuring Costs and Other Special Charges" below), operating
income at American Color decreased to a loss of $4 million in Fiscal Year 1996
from income of $7.9 million in Fiscal Year 1995.
FISCAL YEAR 1995 VS. FISCAL YEAR 1994
The Company's sales increased 4.9% to $434.9 million in Fiscal Year
1995 from $414.7 million in Fiscal Year 1994. This increase includes an
increase in printing sales of $15 million, or 4.4%, an increase in American
Color sales of $1.9 million or 2.5% and a $3.3 million increase in other sales.
The Company's gross profit increased to $72.1 million or 16.6% of sales in
Fiscal Year 1995 from $52.7 million or 12.7% of sales in Fiscal Year 1994.
Consolidated selling, general and administrative expenses (excluding goodwill
amortization) increased to $43.5 million or 10% of sales in Fiscal Year 1995
from $38.6 million or 9.3% of sales in Fiscal Year 1994. The Company's
operating income increased to $23.5 million or 5.4% of sales in Fiscal Year
1995 from $5.8 million or 1.4% of sales in Fiscal Year 1994. See the
discussion of these changes by sector below.
PRINTING
Sales. Printing sales increased to $353.1 million in Fiscal Year 1995
from $338.1 million in Fiscal Year 1994. This increase includes $14.1 million
of sales by Shakopee. In addition, this increase includes the impact of
increased paper prices, a 2% increase in production volume (excluding Shakopee)
and a shift by the Company toward higher margin commercial flexographic
products, offset partially by continued competitive pricing pressures, an
increase in sales to customers that supply their own paper and a decrease in
sales generated from work subcontracted to other printers.
Gross Profit. Printing gross profit increased $15.9 million, or
58.2%, to $43.2 million in Fiscal Year 1995 from $27.3 million in Fiscal Year
1994. Printing gross margin increased to 12.2% in Fiscal Year 1995 from 8.1%
in Fiscal Year 1994. These increases are primarily attributable to reduced
manufacturing costs as a result of continued cost containment programs at the
printing plants, purchasing efficiencies resulting from an upgraded and
expanded purchasing department, continued productivity improvements and cost
reductions at the Alabama facility.
Selling, General and Administrative Expenses. Printing selling,
general and administrative expenses increased 12.1% to $18.5 million, or 5.2%
of printing sales, in Fiscal Year 1995 from $16.5 million, or 4.9% of
33
<PAGE> 36
printing sales, in Fiscal Year 1994. The increase in Fiscal Year 1995 was
primarily the result of increases in certain employee related costs of $1.8
million.
Operating Income. As a result of these factors, operating income from
the printing business more than doubled to $24.7 million, or 7% of printing
sales, in Fiscal Year 1995 from $10.8 million, or 3.2% of printing sales, in
Fiscal Year 1994.
AMERICAN COLOR
Sales. American Color's sales increased 2.5% to $76.1 million in
Fiscal Year 1995 from $74.2 million in Fiscal Year 1994. The increase in
Fiscal Year 1995 was primarily the result of higher digital imaging and
prepress production volume due to American Color's implementation of various
digital prepress technologies, including facilities management and software and
image management services.
Gross Profit. American Color's gross profit increased $2.5 million to
$26.3 million in Fiscal Year 1995 from $23.8 million in Fiscal Year 1994.
American Color's gross margin was 34.6% in Fiscal Year 1995, up from 32.1% in
Fiscal Year 1994. These increases were primarily the result of increased sales
and material cost savings of $0.9 million.
Selling, General and Administrative Expenses. American Color's
selling, general and administrative expenses increased 10.5% to $18.5 million
or 24.3% of American Color sales in Fiscal Year 1995 from $16.7 million or
22.5% of American Color sales in Fiscal Year 1994, primarily as a result of a
$1.6 million increase from the addition of technical, sales and administrative
support personnel and related expenses.
Operating Income. Operating income at American Color increased to
$7.9 million or 10.3% of American Color sales in Fiscal Year 1995 from $7.1
million, or 9.6% of American Color sales, in Fiscal Year 1994. This increase
is primarily a result of increased sales coupled with the material cost savings
offset in part by increased selling, general and administrative expenses
discussed above.
OTHER OPERATIONS
Other operations consist primarily of revenues and expenses associated
with the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), its
wholly-owned subsidiary, SMC, corporate selling, general and administrative
expenses, other expenses and amortization expense. Amortization expenses for
other operations, including goodwill amortization (see below), were $9.6
million, $9 million and $8.8 million in Fiscal Year 1996, 1995 and 1994,
respectively.
Operating losses from other operations increased $3.9 million to a
loss of $12.9 million in Fiscal Year 1996 from a loss of $9 million in Fiscal
Year 1995. The primary reasons for this change include the recognition of a
net gain of $3.3 million recorded in Fiscal Year 1995 resulting from a change
in the Company's defined benefit pension plans (see discussion below),
increased amortization expenses and increased SMC operating losses.
Operating losses from other operations decreased $3.1 million to a
loss of $9 million in Fiscal Year 1995 from a loss of $12.1 million in Fiscal
Year 1994. The primary reason for this change was the net gain of $3.3 million
recorded in Fiscal Year 1995 resulting from a change in the Company's defined
benefit pension plans (see discussion below).
GOODWILL AMORTIZATION
Amortization expense associated with goodwill was $8.6 million, $8.4
million and $8.3 million for Fiscal Year 1996, 1995 and 1994, respectively.
34
<PAGE> 37
RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
In April 1995, the Company approved a plan for its American Color
division which is designed to improve productivity, increase customer service
and responsiveness, and provide increased growth in the digital imaging and
prepress services business. The cost of this plan is being accounted for in
accordance with the guidance set forth in EITF 94-3. The estimated pretax
costs of $4.8 million associated with this plan represent employee termination,
goodwill write-down and other related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995, the Company recognized
$2.1 million of such restructuring charges, primarily for severance and other
personnel related costs. In the quarter ended September 30, 1995, the Company
recognized $0.6 million of restructuring costs, related primarily to hiring and
relocating certain management personnel. In the quarter ended December 31,
1995, the Company recognized an additional $0.1 million of restructuring costs.
In the quarter ended March 31, 1996, the Company recognized $1.3 million of
restructuring costs, which included $0.9 million of goodwill write-down and
$0.4 million primarily related to certain relocation costs associated with the
restructuring. The goodwill written down was the portion related to certain
facilities that were either shut down or relocated in conjunction with the
American Color restructuring. The remaining costs of approximately $0.7
million, principally related to relocation and other transition expenses, will
be recorded as incurred.
During the fourth quarter of Fiscal Year 1996, the Company recorded
special charges totalling $3.4 million for impaired long-lived assets and to
adjust the carrying values of idle, disposed and underperforming assets to
estimated fair values. The provision was based on a review of Company wide
long-lived assets in connection with the adoption of Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FASB 121").
Approximately $2 million of the total related to the print sector long-lived
assets that were adjusted based on being idle, disposed of or underperforming.
Fair value was based on the Company's estimate of held and used and idle assets
based on current market conditions using the best information available. The
remaining $1.4 million of the total related to the American Color sector. The
estimated undiscounted future cash flows attributable to certain American Color
division identifiable long-lived assets held and used is less than their
carrying value principally as a result of high levels of ongoing technological
change. The methodology used to assess the recoverability of the American
Color sector long-lived assets involved projecting aggregate cash flows. Based
on this evaluation, the Company determined that long-lived assets with a
carrying amount of $2.2 million were impaired and wrote them down by $1.4
million to their fair value. Fair value was based on Company estimates and
appraisals. Such special charges are classified as restructuring costs and
other special charges in the consolidated statement of operations.
CHANGES IN DEFINED BENEFIT PENSION PLANS, NET
In October 1994, the Board of Directors approved an amendment to the
Company's defined benefit pension plans which resulted in the freezing of
additional defined benefits for future services under the plans effective
January 1, 1995. The Company recognized a curtailment gain of $3.7 million as
a result of freezing such benefits.
Also in October 1994, the Board of Directors approved a new SERP,
which is a defined benefit plan, for certain key executives. The Company
recognized a $0.4 million expense associated with the establishment of the
SERP.
The net effect of the above, a $3.3 million gain, is reflected in the
Company's consolidated statement of operations for Fiscal Year 1995 appearing
elsewhere in this Prospectus.
INTEREST EXPENSE
Interest expense increased 26.9% to $32.7 million in Fiscal Year 1996
from $25.8 million in Fiscal Year 1995. This increase includes the impact of
increased indebtedness levels and increases in prevailing market interest rates
associated with the Company's floating rate debt. The increased indebtedness
includes the additional
35
<PAGE> 38
indebtedness related to the Shakopee Merger and indebtedness incurred to fund
the fees and expenses associated with the Refinancing (see notes 3 and 10 to
the Company's consolidated financial statements appearing elsewhere in this
Prospectus). Interest expense in Fiscal Year 1995 increased by 7.1% or $1.7
million versus Fiscal Year 1994 due to higher interest rates offset in part by
reduced indebtedness. The increase in interest expense in Fiscal Year 1995
also includes the impact of $0.8 million in interest costs recorded by
Shakopee.
NONRECURRING CHARGES RELATED TO TERMINATED MERGER
The Company recognized $1.5 million of expenses related to a
terminated merger in Fiscal Year 1996.
OTHER EXPENSE (INCOME) AND TAXES
Other expense, net, decreased to $0.2 million in Fiscal Year 1996 from
$1 million in Fiscal Year 1995. This decrease includes a $1.3 million net gain
realized on the disposal of the Company's 51% interest in NIS in Fiscal Year
1996 (see note 5 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus), offset in part by incremental expenses
associated with an employee benefit program also recorded in Fiscal Year 1996.
Other expense, net decreased to $1 million in Fiscal Year 1995 from $2.4
million in Fiscal Year 1994. Other expense, net in Fiscal Year 1994 included
$1.3 million of costs and fees associated with a terminated private placement.
Income tax expense increased to $4.9 million in Fiscal Year 1996 from
$2.6 million in Fiscal Year 1995. This change is primarily due to larger
amounts of taxable income in foreign jurisdictions and the inclusion of
Shakopee in Fiscal Year 1996. During Fiscal Year 1996, the Company increased
its valuation allowance by $7.4 million to $21.2 million. The valuation
allowance reflects the excess of deferred tax assets (the tax effect of future
deductible temporary differences) over deferred tax liabilities (the tax effect
of future taxable temporary differences). The increase in the valuation
allowance during Fiscal Year 1996 resulted primarily from the current period
tax loss for which tax benefit will not be recorded.
Income tax expense increased to $2.6 million in Fiscal Year 1995 from
$2.4 million in Fiscal Year 1994. This change is primarily due to lower losses
from continuing operations and larger amounts of taxable income in foreign
jurisdictions. During Fiscal Year 1995, the Company reduced its valuation
allowance by $5.6 million to $13.8 million, resulting primarily from
utilization of prior period losses for which tax benefit had not been
previously recorded. This reduction partially offsets tax expense related to
the income from the SMI Settlement reflected in discontinued operations.
DISCONTINUED COUPON FSI OPERATION AND SMI SETTLEMENT
The Company's net loss in Fiscal Year 1994 includes the loss from
operations of its discontinued coupon FSI business of approximately $23.3
million and the estimated net loss on shut down of approximately $38.4 million
that includes a $42.1 million write-off of goodwill. On February 16, 1994, the
Company assigned the coupon FSI contracts of its subsidiary, SMI, to News
America for net cash proceeds of $13.4 million, effectively terminating the
Company's involvement in the FSI business. See note 6 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
On June 29, 1994, Graphics and SMI settled the lawsuit they initiated
in federal court against Valassis Communications, Inc., News America and David
Brandon. The Company recorded income from the SMI Settlement of $18.5 million
net of taxes in Fiscal Year 1995 and when coupled with settlement expenses
which had previously been accrued, the net cash proceeds resulting from this
settlement were approximately $16.7 million. Proceeds received were primarily
used in July 1994 to reduce borrowings under the Company's old bank credit
agreement which primarily related to SMI losses prior to the shut down.
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In Fiscal Year 1996, the Company recognized settlement of the EPI
lawsuit (see note 16 to the Company's consolidated financial statements
appearing elsewhere in this Prospectus) and reversed certain accruals related
to the estimated loss on shut down of SMI. The resulting effect reflected in
the Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations.
LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF TAX
As part of the Shakopee Merger and the Refinancing (see notes 3 and 10
to the Company's consolidated financial statements appearing elsewhere in this
Prospectus), the Company recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of zero taxes. This extraordinary
loss primarily consisted of the early redemption premium on the 15% Notes and
the write-off of deferred financing costs related to refinanced indebtedness
partially offset by the write-off of a bond premium associated with the 15%
Notes.
NET INCOME (LOSS)
As a result of the factors discussed above, the Company's net loss was
$29.3 million in Fiscal Year 1996 and its net income was $13.2 million in
Fiscal Year 1995. In Fiscal Year 1994, the Company's net loss was $84.4
million. As discussed above, Fiscal Year 1996 includes $4.1 million of expense
related to the American Color restructuring, $3.4 million of other special
charges related to fixed asset write-offs and write-downs (see note 19 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus), a $1.5 million non-recurring expense associated with a terminated
merger, a $4.5 million extraordinary loss on early extinguishment of debt and
approximately $2.9 million of income from discontinued operations. The
Company's net income for Fiscal Year 1995 includes a $3.3 million gain from the
curtailment and establishment of defined benefit pension plans, net and
approximately $18.5 million of income net of tax from the SMI Settlement. The
Company's net loss in Fiscal Year 1994 includes the loss from operations of SMI
of approximately $23.3 million and loss on shut down of approximately $38.4
million.
LIQUIDITY AND CAPITAL RESOURCES
In August 1995, the Company refinanced substantially all of its
existing indebtedness (see note 10 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus). The primary objectives of
the Refinancing were to gain greater financial and operating flexibility, to
facilitate the merger with Shakopee, to refinance near-term debt service
requirements and to provide further opportunity for internal growth and growth
through acquisitions.
As part of the Refinancing, the Company received gross proceeds of
$185 million from the sale of the Notes. The gross proceeds of the offering of
the Notes, together with $85.6 million in borrowings under the Bank Credit
Agreement, and existing cash balances were used (i) to redeem all $100 million
principal amount of the 15% Notes at a redemption price of $105.6 million (plus
$1.8 million of accrued interest to September 15, 1995, the redemption date),
(ii) to repay all $126.5 million of indebtedness outstanding under Graphics'
old bank credit agreement (plus $2.3 million of accrued interest at the
repayment date), (iii) to repay all $24.6 million of indebtedness assumed in
the Shakopee Merger (plus $0.1 million of accrued interest at the repayment
date) and (iv) to fund approximately $11.8 million of fees and expenses
incurred in connection with the Transactions.
The Bank Credit Agreement includes a Revolving Credit Facility
providing for a maximum of $75 million of borrowing availability, subject to a
borrowing base requirement. This facility significantly improves the Company's
liquidity position. As of May 31, 1996, the Company had borrowings of $32.3
million outstanding under the Revolving Credit Facility and $19.4 million of
additional borrowing availability.
The Bank Credit Agreement also provides for the Term Loan. Proceeds
from the March 11, 1996 sale of the Company's 51% interest in NIS of $2 million
and $0.5 million were used to reduce indebtedness under the
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Term Loan and Revolving Credit Facility, respectively. In addition, the
Company paid the first scheduled quarterly Term Loan payment of $2.1 million on
March 31, 1996. Scheduled Term Loan payments due over the upcoming fiscal year
ending March 31, 1997 ("Fiscal Year 1997") approximate $8.8 million.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc. for
approximately $6.7 million in cash and assumption of certain liabilities of
Gowe, Inc., pursuant to an Asset Purchase Agreement among Graphics, Gowe, Inc.
and ComCorp, Inc., the parent company of Gowe, Inc.
The Company's cash balance of $4.6 million at March 31, 1995 plus cash
from operations and proceeds from the Notes, Term Loan and net borrowings under
the revolving credit facilities were used to repay $6.4 million in scheduled
principal payments on indebtedness (including capital lease obligations), to
repay the 15% Notes including the redemption premium and accrued interest, to
repay the Company's old term loan, revolving credit borrowings and Shakopee
indebtedness plus accrued interest, and to pay fees and expenses associated
with the Transactions. Additionally, these cash sources were used to fund
increases in working capital, to fund the Company's cash capital expenditures
for Fiscal Year 1996 of $20.3 million, to acquire the assets of Gowe, to fund
the start-up of Flexi-Tech and to fund the Company's interest payments. The
Company plans to continue its program of upgrading its printing and prepress
equipment and expanding production capacity and currently anticipates that
Fiscal Year 1997 cash capital expenditures will approximate $11.7 million and
repayment of capital lease obligations will approximate $3.2 million. In
addition, the Company plans to acquire equipment under capital leases of
approximately $31 million during Fiscal Year 1997. The Company had zero cash
and cash equivalents on hand at March 31, 1996 due to a requirement under the
Bank Credit Agreement that the Company's daily available funds be used to
reduce borrowings under the Revolving Credit Facility.
At March 31, 1996, the Company had total indebtedness outstanding of
$297.6 million, including capital lease obligations. Of the total debt
outstanding at March 31, 1996, $95.5 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.21%. A significant
portion of the Company's indebtedness (other than the Notes) bears interest at
floating rates, causing the Company to be sensitive to prevailing market
interest rates. At March 31, 1996, the Company had indebtedness other than
obligations under the Bank Credit Agreement of $202.1 million (including $185
million of the Notes). The Company expects that its ongoing liquidity
requirements will be met from cash from operations and amounts available under
the Bank Credit Agreement. The Company is currently in compliance with all
financial covenants set forth in the Bank Credit Agreement.
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EBITDA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------------------------------------
1996(a) 1995(a) 1994(a)
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
EBITDA:
Printing . . . . . . . . . . . . . . $ 46,597 $ 38,357 $ 23,103
American Color . . . . . . . . . . . . 2,907(b) 12,662 12,656
Other(c)(d) . . . . . . . . . . . . . (3,089) 426(e) (2,691)
-------- -------- --------
Total . . . . . . . . . . . . $ 46,415 $ 51,445 $ 33,068
======== ======== ========
EBITDA MARGIN:
Printing . . . . . . . . . . . . . . 10.3% 10.9% 6.8%
American Color . . . . . . . . . . . . 4.0 16.6 17.1
Total . . . . . . . . . . . . 8.7 11.8 8.0
</TABLE>
- ----------
(a) The above table excludes the results of the Company's coupon FSI business,
SMI, which was shut down in February 1994. SMI's results of operations are
included in discontinued operations in the Company's consolidated
statements of operations. See note 6 to the consolidated financial
statements of Communications appearing elsewhere in this Prospectus.
(b) American Color EBITDA for Fiscal Year 1996 includes the impact of $4.1
million in restructuring costs. See note 19 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus.
(c) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS, which was sold on March 11, 1996
(see note 5 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus), and its wholly-owned subsidiary, SMC.
(d) Also includes corporate selling, general and administrative expenses.
(e) Includes a net gain of $3.3 million in Fiscal Year 1995 from the
curtailment and establishment of defined benefit pension plans.
EBITDA is presented and discussed because management believes that
investors regard EBITDA as a key measure of a leveraged company's performance
and ability to meet its future debt service requirements. EBITDA is defined as
earnings before net interest expense, income tax expense (benefit),
depreciation, amortization, other special charges related to asset write-offs
and write-downs, other income (expense), discontinued operations and
extraordinary items. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash flows
from operating, investing or financing activities as an indicator of cash flows
or as a measure of liquidity. Certain covenants in the Indenture and the Bank
Credit Agreement are based on EBITDA, subject to certain adjustments.
Printing. The Company's printing sector EBITDA increased 21.5% to
$46.6 million in Fiscal Year 1996 from $38.4 million in Fiscal Year 1995.
Included in this increase was incremental EBITDA from Shakopee. The Company's
printing sector EBITDA increased 66% to $38.4 million in Fiscal Year 1995 from
$23.1 million in Fiscal Year 1994. The printing sector EBITDA as a percentage
of sales in the printing sector ("EBITDA Margin") decreased to 10.3% in Fiscal
Year 1996 from 10.9% in Fiscal Year 1995, and increased to 10.9% in Fiscal Year
1995 from 6.8% in Fiscal Year 1994. The increases in EBITDA are primarily the
result of reduced manufacturing costs, purchasing efficiencies, continued
productivity improvements and cost reductions at the Company's Alabama
facility. The decrease in the EBITDA Margin in Fiscal Year 1996 is due
primarily to the effect significant increases in paper prices had on sales
during Fiscal Year 1996.
American Color. American Color EBITDA decreased to $2.9 million in
Fiscal Year 1996 from $12.7 million in Fiscal Year 1995, representing a
reduction of $9.8 million. EBITDA Margin decreased to 4% in Fiscal Year 1996
from 16.6% in Fiscal Year 1995. Included in the EBITDA and EBITDA Margin
reduction during this period is $4.1 million of restructuring costs related to
the American Color restructuring plan (see discussion above), reduced gross
profit due to decreases in both prepress production volume and selling prices,
due in part to American Color's restructuring efforts during Fiscal Year 1996,
and $2.9 million of increased selling, general and administrative expenses due
to increased sales and marketing expenses and additional technical and
administrative support personnel. American Color EBITDA was $12.7 million in
both Fiscal Year 1995 and in Fiscal Year 1994. American Color EBITDA Margin
declined to 16.6% in Fiscal Year 1995 from 17.1% in Fiscal Year 1994. The
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<PAGE> 42
decrease in EBITDA Margin is primarily the result of an increase in selling,
general and administrative expenses, including increases in sales, technical
and administrative support personnel to support and grow American Color's new
revenue sources.
Other Operations. For the reasons discussed above under "--Other
Operations," exclusive of the increased amortization expense, negative EBITDA
from other operations increased $3.5 million to negative EBITDA of $3.1 million
in Fiscal Year 1996 from EBITDA of $0.4 million in Fiscal Year 1995. EBITDA
from other operations increased $3.1 million to $0.4 million in Fiscal Year
1995 from negative EBITDA from other operations of $2.7 million in Fiscal Year
1994. The primary factor for the change in the periods above was the net gain
of $3.3 million recorded in Fiscal Year 1995 relating to a change in the
Company's defined benefit plans (see discussion above).
CHANGE IN INVENTORY VALUATION METHOD
During the quarter ended December 31, 1995, the Company changed to the
first-in, first-out ("FIFO") method of accounting from the last-in, first-out
("LIFO") method of accounting as the principal method of accounting for
inventories. The change results in a balance sheet (1) which reflects
inventories at a value that more closely represents the current costs which the
Company believes is the primary concern of its constituents (bank lenders,
financial markets, customers, trade creditors, etc.) and (2) that enhances the
comparability of the Company's financial statements by changing to the
predominant method used by key competitors in the printing industry. See note
7 to the Company's consolidated financial statements appearing elsewhere in
this Prospectus.
AMORTIZATION OF GOODWILL
After the 1993 Acquisition, the Company initially concluded that a
40-year useful life for goodwill was reasonable. This estimate was based on
the Company's evaluation of the recoverability of goodwill from consolidated
operations of its commercial printing business. In this regard, the Company
focused principally on its core printing business sector which has operated
since 1926. In addition, at the time of the 1993 Acquisition, the Company
projected sales growth and profitability in its other two business sectors,
digital imaging and prepress services and coupon FSI, and believed that 40
years was the most appropriate estimate of the useful life of the consolidated
balance of goodwill at that time.
The Company substantially completed the allocation of goodwill to its
business sectors in the latter part of December 1993. The Company concluded
that the digital imaging and prepress services sector was subject to high
levels of ongoing technological change. Advances in microcomputer software
have allowed some customers to perform certain digital imaging and prepress
services functions in-house. Given the likelihood of significant and ongoing
technological change, the Company revised the useful life of goodwill related
to the digital imaging and prepress services sector to five years. The
revision in the amortization period was made retroactive to the date of the
1993 Acquisition. See note 2 of the Company's consolidated financial
statements appearing elsewhere in this Prospectus.
The goodwill resulting from the 1993 Acquisition will continue to be
amortized on a straight-line basis by business sector. The revised
amortization period will result in goodwill amortization expense relating to
the 1993 Acquisition in future periods of approximately $7.8 million annually
through the fourth quarter of fiscal year ending March 31, 1998 and
approximately $1.8 million annually thereafter. Goodwill amortization expense
relating to the Shakopee Merger will approximate $0.3 million per year.
IMPACT OF INFLATION
Generally, the Company believes it has been able to pass along
increases in its costs to its customers (primarily paper and ink) through
increased prices of its printed products. In recent years, however,
competitive constraints have restricted the ability of the Company to recover
increased manufacturing costs in certain cases. See "Risk Factors --
Sensitivity to Paper Prices." During Fiscal Year 1995 and the majority of
Fiscal Year 1996, the printing industry experienced substantial increases in
the cost of paper. In late Fiscal Year 1996, however, the
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<PAGE> 43
costs of certain grades of paper declined. Management expects that as a result
of the Company's strong relationship with key suppliers that its material costs
will remain competitive within the industry.
SEASONALITY
Some of the Company's printing and digital imaging and prepress
services business is seasonal in nature, particularly those revenues derived
from advertising inserts. Generally, the Company's sales from advertising
inserts are highest during periods prior to the following advertising periods:
Spring advertising season (March 15 -- May 15); Back-to-School (July 15 --
August 15); and Thanksgiving/Christmas (October 15 -- December 15). One of the
reasons the Company chose to enter the comic book printing market is that it is
not subject to significant seasonal fluctuations. Sales of Sunday comics and
magazine products are also not subject to significant seasonal fluctuations.
The Company's strategy has been and will continue to be to try to mitigate the
seasonality of its printing business by increasing its sales to food and drug
companies whose own sales are less seasonal.
ENVIRONMENTAL
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and which do not contribute to current or
future period revenue generation are expensed. Environmental liabilities are
recorded when assessments and/or remedial efforts are probable and the related
costs can be reasonably estimated.
The Company believes that environmental liabilities, currently and in
the prior periods discussed herein, are not material. The Company has recorded
an environmental reserve of approximately $0.1 million in connection with a
Superfund site in its consolidated statement of financial position at March
31, 1996 which the Company believes to be adequate. See "Business --
Environmental Matters." The Company does not anticipate receiving insurance
proceeds related to this potential settlement. Management does not expect that
any identified matters, individually or in the aggregate, will have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
ACCOUNTING
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect on the Company's results of operations or
its financial position.
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BUSINESS
The Company is a successor to a business that commenced operations in
1926, and is one of the largest national diversified commercial printers in
North America with ten printing plants in eight states and Canada and seventeen
prepress facilities located throughout the United States. The Company operates
primarily in two business sectors of the commercial printing industry:
printing (approximately 85% of total sales during Fiscal Year 1996) and digital
imaging and prepress services conducted through its American Color division
(approximately 13% of total sales in Fiscal Year 1996). Partnerships
controlled by Morgan Stanley Group Inc. currently own 66.8% of the outstanding
common stock and 72% of the outstanding preferred stock of Communications.
On the Acquisition Date, pursuant to the Merger Agreement, between
Communications and Acquisition Corp., Acquisition Corp. was merged with and
into Communications. Acquisition Corp. was formed by the Purchasing Group for
the purpose of acquiring a majority interest in Communications. Acquisition
Corp. acquired a substantial and controlling majority interest in
Communications in exchange for $40 million in cash. In the 1993 Acquisition,
Communications continued as the surviving corporation and the separate
corporate existence of Acquisition Corp. was terminated. See "Certain
Transactions -- The 1993 Acquisition."
On August 15, 1995, the Company completed the Shakopee Merger with
Shakopee. Shakopee was formed to effect the purchase of certain assets and
assumption of certain liabilities of Shakopee Valley Printing, a division of
Guy Gannett Communications. On December 22, 1994, pursuant to an Agreement for
the Purchase of Assets between Guy Gannett Communications (the Seller) and
Shakopee (the Buyer), the Seller sold certain assets and transferred certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase price
of approximately $42.6 million, primarily financed through the issuance of
35,000 shares of Common Stock and bank borrowings. The 35,000 shares were
purchased by the MSCP III Entities, together with First Plaza Group Trust and
Leeway & Co. The general partner of each of the MSCP III Entities is a wholly
owned subsidiary of Morgan Stanley Group Inc. In addition, the other
stockholders of Shakopee were also stockholders of the Company. See "The
Shakopee Merger."
On March 11, 1996, Graphics sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2 million
under the terms of a Stock Redemption Agreement between NIS and Graphics. The
proceeds from the sale were used to repay indebtedness under the Bank Credit
Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs for approximately $6.7 million in cash and assumption of
certain liabilities of Gowe, Inc., pursuant to an Asset Purchase Agreement
among Graphics, Gowe, Inc. and ComCorp, Inc., the parent company of Gowe, Inc.
During March 1996, the Company completed the construction of and
start-up of a new plant in Hanover, Pennsylvania, Flexi-Tech. Flexi-Tech will
be dedicated to the production of commercial flexi books (a form of advertising
inserts) serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
PRINTING
The Company's printing business, which accounted for approximately 85%
of the Company's sales in Fiscal Year 1996, produces retail advertising
inserts, comics (newspaper comic inserts and comic books), Sunday newspaper
magazines and other publications.
Retail Advertising Inserts (75% of printing sales in Fiscal Year
1996). The Company believes that it is one of the largest printers of retail
advertising inserts in the United States. Retail advertising inserts are
preprinted advertisements, generally in color, that display products sold by a
particular retailer or manufacturer. The Company prints advertising inserts
for approximately 200 retailers.
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Advertising inserts are used extensively by many different retailers
and are believed to be an important and cost effective means of advertising for
these merchants. Advertising inserts are primarily distributed through
insertion in newspapers but are also distributed by direct mail or in-store by
retailers. They are generally advertisements for a specific, limited sale
period.
Comics (16% of printing sales in Fiscal Year 1996). The Company
believes that it is one of the largest printers of comics in the United States.
The Company prints Sunday comics for approximately 325 newspapers in the United
States and Canada and prints a significant portion of the annual comic book
requirements of Marvel.
Sunday Newspaper Magazines and Other Publications (9% of printing
sales in Fiscal Year 1996). The Company prints various Sunday edition
newspaper magazines, local newspapers, T.V. guide listings and other
publications and acts as the exclusive printer of The Sporting News.
PRINTING PRODUCTION
There are three printing processes that may be used to produce
advertising inserts and newspaper supplements: offset lithography (heatset and
cold), rotogravure and flexography. The Company principally uses heatset
offset and flexographic web printing equipment in its printing business. The
Company owns substantially all of its printing equipment, including, at May 31,
1996, 34 heatset offset presses, 13 flexographic presses and 5 coldset offset
presses. Most of the Company's advertising inserts and all of its newspaper
magazines and comic books are printed using the offset process. Some
advertising inserts and substantially all of the Company's newspaper comic
inserts are printed using the flexographic process.
In the heatset offset process, the printed web goes through an oven
which dries the solvents from the ink, thereby setting the ink on the paper.
In the cold offset process, the ink solvents are absorbed into the paper.
Because heatset offset presses can print on a wide variety of papers and
produce sharper reproductions, the heatset offset process provides a more
colorful and attractive product than cold offset presses, but at a higher cost.
The flexographic process differs from offset printing in that it is
direct rotary printing utilizing flexible plates and rapid-drying, water-based
(as opposed to solvent-based) inks. Flexography is used extensively in
printing for consumer goods packaging. The Company's flexographic printing
generally provides vibrant color reproduction at lower cost than heatset offset
printing. The strengths of flexography compared with the rotogravure and
offset processes are faster set up times, brighter colors, reduced paper waste,
reduced energy use and maintenance costs, and environmental advantages due to
the use of water-based inks.
In addition to advertising insert capacity, certain equipment
parameters are critical to competing in the advertising insert market,
including cut-off length, folding capabilities and in-line finishing. Cut-off
length is one of the determinants of the size of the printed page. Folding
capabilities for advertising inserts must include a wide variety of page sizes,
page counts and special paper folding effects. A folder designed to produce
publication products is not suitable to meet the varied folding requirements of
advertising inserts. Finally, many advertising inserts require gluing or
stitching of the product, adding cards, trimming and numbering. These
production activities must be done in-line with the press to meet the expedited
delivery schedules and pricing required by many customers. Printing plants
equipped to accommodate these processes off-line are often not able to meet
such requirements. The Company believes that its mix and configuration of
presses and press services allows for efficient tailoring of printing services
to customers' product needs.
AMERICAN COLOR
The Company's digital imaging and prepress services business is
conducted by its American Color division, which the Company believes is one of
the largest full-service providers of digital imaging, prepress and color
separation services in the United States and a technological leader in its
industry. American Color commenced operations in 1975 and accounted for
approximately 13% of the Company's sales in Fiscal Year 1996. American Color
assists its customers in the capture, manipulation, transmission and
distribution of images. The majority of its work leads to the production of
four-color separations in a format appropriate for use by printers in
four-color
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printing. In recent years, technological advances have made it possible to
replace largely manual and photography-based production methods with
computer-based, electronic means for producing four-color films faster and at
lower costs. American Color makes page changes, including typesetting, and
combines digital page layout information with electronically scanned and
color-corrected four-color images. From these digital files, proofs, final
corrections and, finally, four-color films or digital output are produced for
each advertising or editorial page. The final four-color films or digital
output enable printers to prepare plates for each color resulting in the
appearance of full color in the printed image.
American Color has been a leader in implementing these new
technologies, which has enabled American Color to reduce unit costs and
effectively service the increasingly complex demands of its customers more
quickly than many of its competitors and has also resulted in an expanded
customer base. In the late 1980s, the Company installed a nationwide data
communications network. This was initially accomplished via a satellite
system, but has recently been converted to a telecommunications based network
offering greater flexibility at a reduced cost. This network links American
Color's locations with the Company's printing operations, as well as to many
customer sites. The system reduces communication time and enables American
Color to better serve those customers with time-sensitive production
requirements. This system also allows American Color to utilize its offices in
different locations to service business generated in other areas, thereby
improving customer service and response time while increasing capacity
utilization among its various facilities. In addition, American Color has been
one of the leaders in the integration of electronic page make-up,
microcomputer-based design and layout and digital cameras into prepress
production. The Company has capitalized on these technological changes and has
added additional revenue sources from digital image storage,
telecommunications, design and layout, equipment sales, consulting and training
services, facilities management (operating digital imaging and prepress service
facilities at a customer location), and software and data management.
The digital imaging and prepress services industry is highly
fragmented, primarily consisting of smaller local and regional companies, with
only a few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share. Many
smaller digital imaging and prepress companies have left the industry in recent
years due to their inability to keep pace with technological advances in the
industry.
In April 1995, the Company approved a plan for its American Color
division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Restructuring Costs and Other Special Charges" and note 19 to the
Company's consolidated financial statements included elsewhere in this
Prospectus.
COMPETITIVE ADVANTAGES AND STRATEGY
COMPETITIVE ADVANTAGES. The Company believes that it has the
following competitive advantages in its printing and digital imaging and
prepress services businesses:
Modern Equipment. The Company believes that its heatset offset and
flexographic web printing equipment is among the most advanced available and
that the average age of its equipment is comparable to its major national
competitors and significantly less than the majority of its regional
competitors. It also believes that its digital imaging and prepress equipment
is significantly more advanced than many of its smaller regional competitors,
many of whom have not incorporated digital prepress technologies to the same
extent as the Company, nor adopted an open systems environment which allows
greater flexibility and more efficient maintenance.
Strong Customer Base. The Company provides printing services to a
diverse base of customers, including approximately 200 retailers and
approximately 325 newspapers in the United States and Canada. The customer
base includes a significant number of the major national retailers and larger
newspaper chains as well as numerous smaller regional retailers. The Company's
consistent focus on providing high quality printing products and services at
competitive prices has resulted in long-term relationships with many of these
customers. American Color's customer base includes large and medium-sized
customers in the retail, publishing and catalog businesses, many of
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whom have long-term relationships with the Company. Although the digital
imaging and prepress services business has generally been on a spot bid basis
in the past, the Company has been successful in increasing the proportion of
its business under long-term contracts.
Competitive Cost Structure. The Company significantly reduced the
variable and fixed costs of production at its printing facilities over the last
two years and believes it is well positioned to further reduce its
manufacturing costs in the future due to economies of scale. The Company has
significantly reduced both labor and material costs (the principal variable
production costs) in its digital imaging and prepress services business over
the past several years, primarily through the adoption of new digital prepress
production methodologies.
Strong Management Team. Over the last three years, the Company has
strengthened its printing management group by hiring experienced managers with
a clear focus on growth and continued cost reduction, resulting in an improved
cost structure and a well-defined strategy for future expansion. The Company
also has strengthened its management group in its digital imaging and prepress
services business, filling a number of senior, regional and plant management
positions with individuals who the Company believes will manage the digital
imaging and prepress services business for growth and profitability and will
continue to upgrade its capabilities.
National Presence. The Company's nine printing plants in the United
States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround times,
all of which are instrumental in the Company's continued success in servicing
its large national and regional retail accounts. The Company's expanded sales
and marketing groups provide greater customer coverage and enable it to more
successfully penetrate regional markets. The Company believes that its
seventeen digital imaging and prepress facilities provide it with contingency
capabilities, increased capacity during peak periods, access to top quality
technical personnel throughout the country, short turnaround time and other
customer service advantages.
STRATEGY. The Company's objective is to increase profitability by
growing its revenues, increasing its market share and reducing costs. The
Company's strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that the Company's level of
national sales coverage, when coupled with its significant industry experience
and customer-focused sales force, will result in unit growth. In an effort to
stimulate unit volume growth, the Company significantly expanded its printing
sales force and divided its regional sales structure into specialized newspaper
and retail sales groups. Unit volume growth is also expected to result from
continued capital expansion and selective printing acquisitions. In addition,
in its digital imaging and prepress services business, the Company has expanded
its sales force, strengthened training, more closely focused its marketing
efforts on new, larger customers and implemented a new incentive program.
Continue to Improve Product Mix. The Company intends to increase its
share of the retail advertising insert market. In addition, the Company
expects to continue to adjust the mix of its customers and products within the
retail advertising insert market to those that are more profitable, less
seasonal and maximize the use of the Company's equipment. The Company also
expects to expand its printing facilities' capabilities for in-plant prepress
and postpress services. The Company's digital imaging and prepress services
business will continue to focus on high value-added new business opportunities,
particularly large-scale projects that will best utilize the breadth of
services and technologies the Company has to offer. Additionally, the Company
will continue to pursue large facilities management opportunities as well as
national and large regional customers that require more sophisticated levels of
service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The
Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the
Company plans to maximize scale advantages in the purchasing, technology and
engineering areas. The Company also intends to continue to gain variable cost
efficiencies in its digital imaging and prepress services business by using its
technical resources to improve digital prepress workflows at its various
facilities. The Company also believes it will be able to reduce its unit
technical, sales and management costs as its sales volumes increase in this
business.
45
<PAGE> 48
Continue to Make Opportunistic Acquisitions. An integral part of the
Company's long-term growth strategy includes a plan to selectively assess and
acquire other printing and digital imaging and prepress services companies that
the Company believes will enhance its leadership position in these industries.
CUSTOMERS AND DISTRIBUTION
Customers. The Company sells its printing products and services to a
large number of customers, and all of the products are produced in accordance
with customer specifications. The Company performs a portion of its printing
work, primarily the printing of comic books and Sunday comics, under long-term
contracts with its customers. The contracts vary in length and many of the
contracts automatically extend for one year unless there has been notice to the
contrary from either of the contracting parties within a certain number of days
before the end of any term. For the balance of its printing work, the Company
obtains varying commitments from its customers ranging from job to job, one
month, semi-annual and annual. Printing prices are generally fixed during such
commitments; however, the Company's standard terms of trade call for the pass
through of changes in the cost of paper and ink.
American Color's customers consist of a diverse group of retailers,
magazine publishers, newspaper publishers, printers, catalog sales
organizations, advertising agencies and direct mail advertisers. Its customers
typically have a need for high levels of technical expertise, short turnaround
times and customer service. In addition to its historical regional customer
base, American Color is increasingly focused on larger, national accounts that
have a need for a broad range of fully integrated services and communication
capabilities.
The printing and American Color divisions have historically had
certain common customers and their ability to cross-market is an increasingly
valuable tool as desktop publishing and electronic digital imaging and prepress
become more important to their customers. This enables the Company to provide
more comprehensive solutions to customers' digital imaging and prepress and
printing needs. New customers of either the printing or American Color
divisions often become customers of both businesses. During Fiscal Year 1996,
approximately 32% of the digital imaging and prepress sector's sales were to
customers of the Company's printing sector.
The Company's sales to Best Buy Co. for Fiscal Year 1996 amounted to
approximately 12.5% of the Company's consolidated sales during this period. No
other single customer accounted for sales in excess of 10% of the Company's
consolidated sales in Fiscal Year 1996. The Company's top ten customers
accounted for approximately 40% of consolidated sales in Fiscal Year 1996.
Distribution. The Company distributes its printing products primarily
by truck to customer designated locations. Costs of distribution are generally
paid by the customers, and most shipping is by common carrier. American Color
generally distributes its products by courier or overnight express, or other
methods of personal delivery or electronic transmission.
COMPETITION
Commercial printing in the United States is a large, highly
fragmented, capital-intensive industry comprised of several thousand commercial
printers, most of which are small businesses that provide service primarily to
a local clientele.
Commercial printing in the United States is highly competitive. An
increase in the amount and capacity of printing equipment in service over
recent years has resulted in excess capacity and lower prices. In addition to
the impact of consolidation and capacity within the industry, sales and pricing
are also influenced by the level of print advertising demand by retailers. In
the fourth quarter of Fiscal Year 1996, the Company experienced lower
production volume and a higher level of price competition than anticipated as a
result of the sluggish results experienced by the retail industry in the last
quarter of calendar year 1995. Although no significant capacity is currently
being added in the industry and consolidation among printers continues, the
industry is expected to continue to experience competitive pricing pressures in
the near future.
46
<PAGE> 49
Although the commercial printing industry remains highly fragmented,
continued capital requirements necessary to keep pace with changing technology
and competitive pricing trends have increased industry consolidation in recent
years. The industry's trend toward increased consolidation is also a response
to the preference of printing customers for larger printers with the resources
and distribution networks to offer a broad range of specialized services and
more sophisticated distribution capabilities.
The Company believes that competition in the printing business is
based primarily on price, quality, timeliness of delivery and customer service.
The advertising insert business is a large, highly fragmented industry in which
the Company competes for national accounts with several large national
printers, several of whom are larger and better capitalized than the Company.
The Company also competes with numerous regional printers for the printing of
advertising inserts. Although the Company faces competition principally from
one other company (Big Flower Press Holdings, Inc.) in the printing of
newspaper comic inserts in the United States, there are numerous newspapers
that print their own Sunday comics. The Company's Sunday newspaper magazine
and other publications business compete with many large national and regional
commercial printers.
American Color competes with numerous digital imaging and prepress
service firms on both a national and regional basis. The industry is highly
fragmented, primarily consisting of smaller local and regional companies, with
only a few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share. Many
smaller digital imaging and prepress companies have left the industry in recent
years due to their inability to keep pace with technological advances required
to service increasingly complex customer demands. The Company believes that
the digital imaging and prepress services sector will continue to be subject to
high levels of ongoing technological change and, as technology continues to
improve, certain customers will continue to increase their in-house
capabilities. See "Risk Factors -- Technological Change."
RAW MATERIALS
The primary raw materials used in the Company's printing business are
paper and ink. The Company purchases substantially all of its ink and related
products under a long-term ink supply contract between the Company and CPS
Corp. Beginning in Fiscal Year 1994 and throughout Fiscal Year 1995 and the
majority of Fiscal Year 1996, the printing industry experienced substantial
increases in the cost of paper. In late Fiscal Year 1996, however, the cost of
certain grades of paper declined. Management expects that as a result of the
Company's strong relationship with key suppliers that its material costs will
remain competitive within the industry. In accordance with industry practice,
the Company generally passes through increases in the cost of paper to its
customers in the cost of its printed products while decreases in costs
generally result in lower prices to customers. See "Risk Factors -- Sensitivity
to Paper Prices." The primary inputs in prepress services processes are film
and proofing materials.
In both of the Company's business sectors, there is an adequate supply
of the necessary materials available from multiple vendors. The Company is not
dependent on any single supplier and has had no significant problems in the
past in obtaining necessary materials.
BACKLOG
Because the Company's printing, digital imaging and prepress services
products are required to be delivered soon after final customer orders are
received, the Company does not experience any backlog of unfilled customer
orders.
EMPLOYEES
As of April 30, 1996, the Company had a total of approximately 2,893
employees, of which approximately 205 employees are represented by a collective
bargaining agreement that will expire on December 31, 1996. The Company
considers its relations with its employees to be satisfactory.
47
<PAGE> 50
GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS
The Company is subject to regulation under various federal, state and
local laws relating to employee safety and health, and to the generation,
storage, transportation, disposal and emission into the environment of
hazardous substances. The Company believes that it is in material compliance
with such laws and regulations. Although compliance with such laws and
regulations in the future is likely to entail additional capital expenditures,
the Company does not anticipate that such expenditures will be material. See
"-- Environmental Matters."
PROPERTIES
The Company operates in 30 locations in 17 states and Canada. The
Company owns seven printing plants in the United States and one in Canada and
leases two printing plants in California and Pennsylvania. The American Color
division of the Company operates in 17 locations (including its headquarters),
14 of which are leased by American Color. The Company believes that its plants
and facilities are adequately equipped and maintained for present and planned
operations.
The address of Communications' principal executive offices is 225 High
Ridge Road, Stamford, Connecticut 06905 and the telephone number is (203)
977-8101. Graphics' principal executive office is 100 Winners Circle,
Brentwood, Tennessee 37027, and the telephone number is (615) 377-0377.
LEGAL PROCEEDINGS
On August 25, 1994, EPI filed a complaint naming SMI, News America and
two packaged goods companies as defendants. EPI sought (i) damages of
approximately $0.7 million from SMI for alleged breach of contract; (ii) to
recover profits earned by SMI and other defendants in a purported aggregate
amount of $1.5 million in respect of alleged infringing use of a trademark,
together with punitive damages; (iii) to recover profits earned by SMI and
other defendants in a purported aggregate amount of $1.5 million in respect of
alleged unfair competition, together with punitive damages; (iv) damages in
excess of $3.5 million from SMI and another defendant for alleged breach of
contract in respect of future years; and (v) unspecified damages against SMI
and the other defendants for alleged deceptive trade practices. On October 16,
1995, the parties settled this lawsuit. The settlement did not have a material
adverse effect on the Company.
The Company has been named as a defendant in several legal actions
arising from its normal business activities. In the opinion of management, any
liability that may arise from such actions will not have a material adverse
effect on the financial condition of the Company.
ENVIRONMENTAL MATTERS
Graphics, together with over 300 other persons, has been designated by
the U.S. Environmental Protection Agency as a potentially responsible party (a
"PRP") under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA," also known as "Superfund") at one Superfund site.
Although liability under CERCLA may be imposed on a joint and several basis and
the Company's ultimate liability is not precisely determinable, the PRPs have
agreed that Graphics' share of removal costs is approximately 0.46% and
therefore Graphics believes that its share of the anticipated remediation costs
at such site will not be material to its business or financial condition.
Based upon an analysis of Graphics' volumetric share of waste contributed to
the site and the agreement among the PRPs, the Company has a reserve of
approximately $0.1 million in connection with this liability on its
consolidated balance sheet at March 31, 1996. The Company believes this amount
is adequate to cover such liability.
48
<PAGE> 51
MANAGEMENT
DIRECTORS OF COMMUNICATIONS AND GRAPHICS
The following table provides certain information about each of the
current directors and executive officers of Communications and Graphics (ages
as of March 31, 1996). All directors hold office until their successors are
duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GRAPHICS AND COMMUNICATIONS
---- --- -----------------------------------------
<S> <C> <C>
James T. Sullivan. . . . . . . . . . . 57 Chairman, Chief Executive Officer and Director
Frank V. Sica. . . . . . . . . . . . . 45 Director
Eric T. Fry. . . . . . . . . . . . . . 29 Director
Stephen M. Dyott . . . . . . . . . . . 44 President, Chief Operating Officer and Director
Timothy M. Davis . . . . . . . . . . . 41 Senior Vice President-Administration, Secretary and General Counsel
Joseph M. Milano . . . . . . . . . . . 43 Senior Vice President and Chief Financial Officer
Patrick W. Kellick . . . . . . . . . . 38 Vice President/Corporate Controller and Assistant Secretary
</TABLE>
JAMES T. SULLIVAN - President and Chief Executive Officer of
Communications since 1989; Chief Executive Officer of Graphics since 1989;
Chairman of the Board of Communications since 1993; Chairman of the Board of
Graphics from 1989 to 1993; Director of Graphics from 1989 to 1993; Executive
Vice Chairman of Maxwell Communication Corp., PLC, President and Chief
Executive Officer of Maxwell Communication Corporation North America from 1986
to 1988. From 1983 to 1986, Mr. Sullivan served as President of the Magazine
Group of R.R. Donnelley & Sons, Inc. Mr. Sullivan joined R.R. Donnelley in
1969 and served in several positions, including as President of the Book Group
from 1979 to 1983.
FRANK V. SICA - Managing Director of MS&Co. since 1988. Has been with
MS&Co. since 1981, originally in the Mergers and Acquisitions Department, and
since 1988, with the Merchant Banking Division. Vice Chairman and director of
the general partner of the general partner of MSCP and director of the general
partner of MSLEF. Director of ARM Financial Group, Inc., Consolidated Hydro,
Inc., Fort Howard Corporation, Kohl's Corporation, PageMart Wireless, Inc.,
Southern Pacific Rail Corporation, and CSG Systems International, Inc.
ERIC T. FRY - Associate of MS&Co. and an officer of the general
partner of MSLEF and of the general partner of the general partner of MSCP.
Joined MS&Co. in 1989, initially in the Mergers and Acquisitions Department and
from 1991 to 1992 in the Merchant Banking Division. From 1992 to 1994 attended
Harvard Business School and received an MBA. Rejoined MS&Co.'s Merchant
Banking Division in 1994. Director of Hamilton Services Limited and Risk
Management Solutions, Inc.
STEPHEN M. DYOTT - President and Chief Operating Officer of
Communications since February 1995; President and Chief Operating Officer of
Graphics since 1991; Vice President and General Manager - Flexible Packaging,
American National Can Company ("ANCC") from 1988 to 1991; Vice President and
General Manager -Tube Packaging, ANCC from 1985 to 1987.
TIMOTHY M. DAVIS - Senior Vice President - Administration, Secretary
and General Counsel of Communications and Graphics since 1989; Vice President,
Secretary and General Counsel of NHI, NCI and their subsidiaries from 1989 to
1992; Assistant General Counsel of MacMillan, Inc. and counsel to affiliates of
Maxwell Communication Corporation North America, January 1989 to June 1989.
Attorney in private practice from 1984 to 1989.
JOSEPH M. MILANO - Senior Vice President and Chief Financial Officer
of Communications and Graphics since May 1994; Vice President - Finance of
Communications and Graphics from 1992 to May 1994; Vice President and Chief
Financial Officer, Farrel Corporation, 1989 to 1992; Vice President and Chief
Financial Officer, Electronic Mail Corporation of America from 1984 to 1988.
49
<PAGE> 52
PATRICK W. KELLICK - Vice President/Corporate Controller of
Communications and Graphics since 1989; Corporate Controller of Graphics since
1987, and Assistant Secretary of Communications and Graphics since 1995.
SUMMARY COMPENSATION
The following table presents information concerning compensation paid
for services to Communications and Graphics during Fiscal Year 1996, Fiscal
Year 1995 and Fiscal Year 1994 to the Chief Executive Officer and the four
other most highly compensated executive officers (the "Named Executive
Officers") of Communications and Graphics.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION COMPENSATION
--------------------------------- ---------------
NAME AND OTHER ANNUAL NUMBER OF ALL OTHER
PRINCIPAL POSITION PERIOD SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
------------------ ------ ------ ----- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
James T. Sullivan. . . Fiscal Year 1996 $600,028 -- -- 380 $7,620(b)
Chairman & Chief Fiscal Year 1995 600,028 $600,000 $61,430(a) 139 7,620(b)
Executive Officer & Fiscal Year 1994 600,028 -- 192,348(a) 4,600 --
Director
Stephen M. Dyott . . . Fiscal Year 1996 $450,000 $250,000 -- 380 --
President & Chief Fiscal Year 1995 350,000 684,250 $197,004(a) 859 --
Operating Fiscal Year 1994 350,000 -- -- 2,300 --
Officer & Director
Timothy M. Davis . . . Fiscal Year 1996 $209,923 $106,000 -- -- --
Senior Vice President -- Fiscal Year 1995 190,000 202,750 $128,325(a) 535 --
Administration, Secretary Fiscal Year 1994 175,000 -- 60,607(a) 255 --
& General Counsel
Joseph M. Milano . . . Fiscal Year 1996 $228,923 $125,000 -- 614 --
Senior Vice President & Fiscal Year 1995 175,423 248,000 $87,494(a) 688 --
Chief Financial Officer Fiscal Year 1994 139,750 25,000 -- 102 --
Patrick W. Kellick . . Fiscal Year 1996 $121,462 $60,000 -- -- --
Vice President, Corporate Fiscal Year 1995 105,250 50,000 -- 105 --
Controller & Assistant Fiscal Year 1994 98,423 35,000 -- -- --
Secretary
</TABLE>
- --------------------------
(a) Represents relocation expense reimbursements.
(b) Represents premiums paid by Graphics with respect to a life insurance
policy.
The following table presents information concerning the options
granted to the Named Executive Officers during the last fiscal year. All
outstanding options issued prior to April 8, 1993 were cancelled in connection
with the 1993 Acquisition.
50
<PAGE> 53
OPTION/SAR GRANTS IN LAST FISCAL YEAR(a)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES OF STOCK
OPTION/SARS PRICE APPRECIATION
OPTIONS/ GRANTED TO FOR OPTION TERM
SARS EMPLOYEES EXERCISE EXPIRATION -------------------
NAME GRANTED(#) IN FISCAL YEAR PRICE($) DATE 5%($)(b) 10%($)(b)
---- ---------- -------------- -------- ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
James T. Sullivan. . . . . . 380 15% 50 10/01/2005 11,900 30,300
Stephen M. Dyott . . . . . . 380 15% 50 10/01/2005 11,900 30,300
Joseph M. Milano . . . . . . 614 25% 50 10/01/2005 19,300 48,900
</TABLE>
- --------------------------
(a) All options became 25% exercisable on October 1, 1996 and are scheduled to
vest in additional 25% increments on each of October 1, 1997, October 1,
1998 and October 1, 1999.
(b) The potential realizable value shown in the table is based on hypothetical
increases in the estimated fair market value of the common stock of
Communications ("Communications Common Stock") over the terms of the
options, assuming 5% and 10% growth in such fair market value. These
estimates of potential realizable value have been prepared pursuant to the
rules of the Commission and are not necessarily indicative of the amount
that would have been utilized upon exercise of the options had such
options remained outstanding.
The following table presents information concerning the fiscal
year-end value of unexercised stock options held by the Named Executive
Officers. No stock options were exercised by the Named Executive Officers
during the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
3/31/96 3/31/96
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
James T. Sullivan. . . . . . . . . . . . . . . . . . . 2,335/2,784 (a)
Stephen M. Dyott . . . . . . . . . . . . . . . . . . . 1,365/2,174 (a)
Timothy M. Davis . . . . . . . . . . . . . . . . . . . 261/529 (a)
Joseph M. Milano . . . . . . . . . . . . . . . . . . . 223/1,181 (a)
Patrick W. Kellick . . . . . . . . . . . . . . . . . . 26/79 (a)
</TABLE>
- --------------------------
(a) Communications Common Stock has not been registered or publicly traded
and, therefore, a public market price of the stock is not available.
While a formal valuation of the Communications Common Stock has not been
undertaken, Communications believes that the exercise price of the options
held by the Named Executive Officers at March 31, 1996 was in each case
greater than the fair market value of the underlying shares of
Communications Common Stock as of such date.
PENSION PLAN
Graphics sponsors the Sullivan Graphics, Inc. Salaried Employees'
Pension Plan (the "Pension Plan"), a defined benefit pension plan covering most
regular full-time salaried employees of Graphics with at least one year of
service. The basic benefit payable under the Pension Plan is a five-year
certain single life annuity equivalent to (a) 1.0% of a participant's "final
average monthly compensation" plus (b) 0.6% of a participant's "final average
monthly compensation" in excess of 40% of the monthly maximum Social Security
wage base in the year of retirement multiplied by years of credited service
(not to exceed 30 years of service). For purposes of the Pension Plan, "final
average compensation" (which, for the Named Executive officers, is reflected in
the salary and bonus columns of the Summary Compensation Table) means the
average of a participant's five highest consecutive calendar years of total
earnings (which includes bonuses) from the last 10 years of service. The
maximum monthly benefit payable from the Pension Plan is $5,000.
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<PAGE> 54
The basic benefit under the Pension Plan is payable upon completion of
five years of vesting service and retirement on or after attaining age 65.
Participants may elect early retirement under the Pension Plan upon completion
of five years of vesting service and the attainment of age 55, and receive the
basic benefit reduced by 0.4167% for each month that the benefit commencement
date precedes the attainment of age 65. A deferred vested benefit is available
to those participants who separate from service before retirement, provided the
participant has at least five years of vesting service.
In October 1994, the Board of Directors approved an amendment to the
Pension Plan which resulted in the freezing of additional defined benefits for
future services under such plan effective January 1, 1995 (see note 10 of the
consolidated financial statements appearing elsewhere in this Prospectus).
Retirement benefits payable under qualified defined benefit plans are
subject to the annual pension limitations imposed under Section 415 of the
Internal Revenue Code of 1986, as amended (the "Code"), which limitations vary
annually. The Section 415 limitation for 1996 and 1995 was $120,000. In
addition, Section 401(a)(17) of the Code specifies a maximum amount of annual
compensation, also adjusted annually that may be taken into account in
computing benefits under a qualified defined benefit plan. The Section
401(a)(17) limitation was $150,000 for 1996 and 1995.
The following table shows the estimated annual pension benefits
payable at retirement at age 65 under the Pension Plan in the final average
compensation and years of service classifications indicated.
<TABLE>
<CAPTION>
FINAL YEARS OF BENEFIT SERVICE
AVERAGE -------------------------------------------------------------
COMPENSATION 15 20 25 30
------------ --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$125,000 . . . . . . . . . . . . . . . . . . . $27,927 $37,236 $46,545 $55,854
150,000 . . . . . . . . . . . . . . . . . . . 33,926 45,235 56,544 60,000
175,000 . . . . . . . . . . . . . . . . . . . 39,926 53,234 60,000 60,000
200,000 . . . . . . . . . . . . . . . . . . . 45,927 60,000 60,000 60,000
225,000 . . . . . . . . . . . . . . . . . . . 51,926 60,000 60,000 60,000
250,000 . . . . . . . . . . . . . . . . . . . 57,926 60,000 60,000 60,000
300,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
350,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
400,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
450,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
500,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
625,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
750,000 . . . . . . . . . . . . . . . . . . . 60,000 60,000 60,000 60,000
</TABLE>
At March 31, 1996, all of the Named Executive Officers with the
exception of Stephen M. Dyott and Joseph M. Milano have vested in the pension
plan. At March 31, 1996, the Named Executive Officers had the following
amounts of credited service (original hire date through January 1, 1995) under
the Pension Plan: James T. Sullivan (5 years, 5 months), Stephen M. Dyott (3
years, 3 months), Timothy M. Davis (5 years, 5 months), Joseph M. Milano (2
years, 7 months), and Patrick W. Kellick (7 years, 4 months).
COMPENSATION OF DIRECTORS
Directors of Communications and Graphics do not receive a salary or an
annual retainer for their services but are reimbursed for expenses incurred
with respect to such services.
EMPLOYMENT AGREEMENTS
In connection with the 1993 Acquisition, Graphics entered into new
employment agreements with each of James T. Sullivan and Stephen M. Dyott (the
"New Employment Agreements"). The New Employment Agreements for Messrs.
Sullivan and Dyott superseded previous employment agreements.
52
<PAGE> 55
The New Employment Agreements each have been amended so that they have
a term of four years commencing as of the effective time Acquisition Corp.
merged with and into Communications (the "Effective Time"). The term under the
New Employment Agreements is automatically extended at the end of the then
current term for one-year periods absent two year's notice of an intent not to
renew. The New Employment Agreements provide for the payment of annual
salaries and annual bonuses pursuant to a plan adopted following the 1993
Acquisition. In addition, under the New Employment Agreements, Messrs.
Sullivan and Dyott are eligible to receive all other employee benefits and
perquisites made available to Graphics' senior executives generally.
Furthermore, Mr. Sullivan will continue to receive certain benefits set forth
in his prior employment agreement.
Under the New Employment Agreements, if the employee's employment is
terminated by Graphics "without cause" (which, as defined in the New Employment
Agreements, means a material breach by the employee of his obligations under
the New Employment Agreement; continued failure or refusal of the employee to
substantially perform his duties to Graphics; a willful and material violation
of Federal or state law applicable to Graphics or the employee's conviction of
a felony or perpetration of a common law fraud; or other willful misconduct
that is injurious to Graphics) or by the employee for "good reason" (which, as
defined in the New Employment Agreements, means a decrease in base pay or a
failure by Graphics to pay material compensation due and payable; a material
diminution of the employee's responsibilities or title; a material change in
the employee's principal employment location; or a material breach by Graphics
of a material term of the new Employment Agreement), the employee will be
entitled to salary continuation payments (and certain other benefits) through
the greater of the remainder of the scheduled term and a period of two years
beginning on the date of termination. The New Employment Agreements also
provide for post-employment nonsolicitation, noncompetition and confidentiality
covenants.
In addition, Graphics has entered into severance agreements with
Joseph M. Milano and Timothy M. Davis. These agreements provide that if the
employee's employment is terminated by Graphics "without cause", as defined
above, or by the employee for "good reason", as defined above, the employee
will be entitled to salary continuation payments (and certain other benefits)
for up to two years beginning on the date of termination. Furthermore, Patrick
W. Kellick has a severance letter from the Company that provides for salary
continuation up to one year beginning on the date of termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has not maintained a formal compensation committee since
the 1993 Acquisition. Mr. Sullivan sets compensation in conjunction with Mr.
Dyott and with the Board of Directors.
OLD STOCK OPTION PLAN
Pursuant to the 1993 Merger Agreement, Communications cancelled, as of
the Effective Time and without consideration, each of the then unexpired and
unexercised employee options to purchase shares of Communications Class A
Common Stock and terminated the former Communications stock option plan.
KEY EXECUTIVE SUPPLEMENTAL BONUS PLANS
As of May 5, 1994, Communications and Graphics adopted Supplemental
Bonus Plans for certain key corporate and divisional executives. As such plans
provided, Stephen M. Dyott, Timothy M. Davis and Joseph M. Milano received, at
the end of the Fiscal Year 1995, a payment equal to a specified percentage of
the excess, of the EBITDA of Communications or the Printing divisions of
Graphics over their respective budgeted EBITDA.
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<PAGE> 56
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In October 1994, the Board of Directors approved a new SERP, which is
a defined benefit plan, for the Named Executive Officers and other certain key
executives. The plan provides for a basic annual benefit payable upon
completion of five years vesting service for the period April 1, 1994 through
March 31, 1999 and retirement on or after attaining age 65 or the present value
of such benefit at an earlier date under certain circumstances, if elected.
The Named Executive Officers have the following basic annual benefit payable
under this plan at age 65:
<TABLE>
<S> <C>
James T. Sullivan . . . . . . . . $50,000
Stephen M. Dyott . . . . . . . . 50,000
Joseph M. Milano . . . . . . . . 50,000
Timothy M. Davis . . . . . . . . 50,000
Patrick W. Kellick . . . . . . . 25,000
</TABLE>
Such benefits will be paid from the Company's assets. See note 13 of
the consolidated financial statements of Communications appearing elsewhere in
this Prospectus.
401(k) DEFINED CONTRIBUTION PLAN
Effective January 1, 1995, the Company amended its 401(k) defined
contribution plan. Eligible participants may contribute up to 15% of their
annual compensation subject to maximum amounts established by the Internal
Revenue Service and receive a matching employer contribution on amounts
contributed. The employer matching contribution is made biweekly and equals 2%
of annual compensation for all plan participants plus 50% of the first 6% of
annual compensation contributed to the plan by each employee, subject to
maximum amounts established by the Internal Revenue Service. See note 14 of
the consolidated financial statements of Communications appearing elsewhere in
this Prospectus.
54
<PAGE> 57
CERTAIN TRANSACTIONS
THE 1989 ACQUISITION
Communications was formed in 1989 by Golder, Thoma & Cressey, an
Illinois limited partnership ("GTC"), and James T. Sullivan, the Chairman and
Chief Executive Officer of Communications (collectively, the Purchasing Group),
to effect the acquisition of Graphics (the "1989 Acquisition"). The
acquisition price included the purchase of common stock for $238.3 million and
the assumption of substantially all of the predecessor company liabilities
which approximated $137.7 million at July 26, 1989. Funds for the 1989
Acquisition, including the refinancing of certain indebtedness of Graphics, the
payment of costs and expenses associated with the 1989 Acquisition, and for
working capital purposes, were provided by $209 million of secured bank
financing, a $105 million senior subordinated bridge loan that was repaid from
the proceeds of the sale of the Senior Subordinated Notes, and the sale of
Class A Common Stock and Class B Common Stock of Communications for $40
million.
THE 1993 ACQUISITION
On the Acquisition Date, MSLEF and the Purchasing Group invested $40
million in Communications and acquired control of Communications and Graphics.
Pursuant to the Merger Agreement, (i) MSLEF and the Purchasing Group
made a $40 million equity investment in Communications and acquired (a) 90% of
the outstanding Communications Common Stock and (b) all the outstanding shares
of the preferred stock of Communications (the "Communications Preferred
Stock"), with a total preference of $40 million and which, under certain
circumstances, is convertible into shares of Communications Common Stock; and
(ii) GTC and its affiliates received 4,987 shares of Communications Common
Stock.
MSLEF is an investment fund formed by Morgan Stanley Group Inc. to
finance investments in industrial and other companies. Morgan Stanley Group
Inc. is a holding company that, through its subsidiaries, is a major
international securities firm. The general partner of MSLEF is a wholly owned
subsidiary of Morgan Stanley Group Inc. In addition, two of the current
directors of Communications are employees of MS&Co., an affiliate of MSLEF and
also a subsidiary of Morgan Stanley Group Inc. As a result of these
relationships, Morgan Stanley Group Inc. has effective control over the
management and policies of Graphics and Communications. In addition, Morgan
Stanley Group Inc. has control over all matters requiring shareholders'
approval, including the election of all directors, the adoption of amendments
to the Certificates of Incorporation of Communications and Graphics and the
approval of mergers and sales of all or substantially all of Graphics' and
Communications' assets.
Management Equity Participation. In connection with the 1993
Acquisition, the Management Investors invested an aggregate of approximately
$2.3 million in Communications and received an aggregate of 3,700 shares of
Communications Common Stock and 185 shares of Communications Preferred Stock.
Each Management Investor also entered into a Management Equity
Agreement, dated as of April 8, 1993, with Communications (collectively, the
"Management Agreements"), pursuant to which, if a Management Investor's
employment with the Company terminates for any reason, Communications has the
right to repurchase any of the shares of Communications Common Stock and
Communications Preferred Stock held by such Management Investor at a price per
share equal to the "Threshold Amount" (as defined in section 4.2(d)(ix) of
Communications Certificate of Incorporation) applicable to such shares of such
time divided by the number of shares of Communications Preferred Stock
outstanding at such time. In the case of shares of Communications Common Stock
held by such Management Investor, the repurchase price will be equal to fair
market value. The payment of the repurchase price may be deferred (with
interest) if the making of such payment would cause Communications to violate
any debt covenant or provision of applicable law, or if the Board of Directors
of Communications determines that Communications is not financially capable of
making such payment.
55
<PAGE> 58
Stockholders' Agreement. In connection with the 1993 Acquisition,
Communications, MSLEF, each of the members of the Purchasing Group, the GTC
Funds, certain other stockholders of Communications who were stockholders of
Communications immediately prior to the Merger Agreement (such stockholders,
together with the GTC Funds, being referred to as the "Existing Holders") and
GTC entered into a Stockholders' Agreement, dated as of April 8, 1993 (the
"Stockholders' Agreement"). The Stockholders' Agreement includes provisions
requiring the delivery of certain shares of Communications Common Stock from
the Purchasing Group to Communications, depending upon the return realized by
the members of the Purchasing Group on their investment, and thereafter from
Communications to the Existing Holders. Depending upon the returns realized by
the members of the Purchasing Group on their investment, their interest in the
Communications Common Stock could be reduced from 90% to 80% and the interest
of the Existing Holders could be increased from 10% to 20% of the
Communications Common Stock.
TAX SHARING AGREEMENT
Communications and Graphics are parties to a tax sharing agreement
effective July 27, 1989. Under the terms of the agreement, Graphics (whose
income is consolidated with that of Communications for federal income tax
purposes) is liable to Communications for amounts representing federal income
taxes calculated on a "stand-alone basis". Each year Graphics pays to
Communications the lesser of (i) Graphics' federal tax liability computed on a
stand-alone basis and (ii) its allocable share of the federal tax liability of
the consolidated group. Accordingly, Communications is not currently
reimbursed for the separate tax liability of Graphics to the extent
Communications' losses reduce consolidated tax liability. Reimbursement for
the use of such Communications' losses will occur when the losses may be used
to offset Communications' income computed on a stand-alone basis. Graphics has
also agreed to reimburse Communications in the event of any adjustment
(including interest or penalties) to consolidated income tax returns based upon
Graphics' obligations with respect thereto. No reimbursement obligation
currently exists between Graphics and Communications. Also under the terms of
the tax sharing agreement, Communications has agreed to reimburse Graphics for
refundable federal income tax equal to an amount which would be refundable to
Graphics had Graphics filed separate federal income tax returns for all years
under the agreement. Graphics and Communications have also agreed to treat
foreign, state and local income and franchise taxes for which there is
consolidated or combined reporting in a manner consistent with the treatment of
federal income taxes as described above.
SHAKOPEE MERGER
In December 1994, Graphics and Shakopee entered into an agreement
pursuant to which they agreed in principle to the terms of the Shakopee Merger
and to negotiate definitive agreements with respect thereto. Prior to the
consummation of the Shakopee Merger, the MSCP III Entities owned a majority of
Shakopee's outstanding stock and the Company provided general management,
supervisory and administrative services to Shakopee, pursuant to a management
agreement entered into in December 1994, in exchange for an annual service fee
of $0.5 million. The Shakopee Merger was consummated and the management
agreement was terminated simultaneously with the consummation of the offering
of the Old Notes. See "The Shakopee Merger."
OTHER
MS&Co. acted as placement agent in connection with the original
private placement of the Old Notes and received a placement fee of $5.6 million
in connection therewith. MS&Co. is affiliated with entities that beneficially
own a substantial majority of the outstanding shares of capital stock of
Communications.
56
<PAGE> 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of March 31, 1996,
concerning the persons having beneficial ownership of more than five percent of
the capital stock of Communications and the ownership thereof by each director
of Communications and by all current officers of Communications as a group.
<TABLE>
<CAPTION>
COMMON % OF PREFERRED % OF
NAME STOCK CLASS STOCK CLASS
------------------------------------------------------- ---------- --------- ----------- ------
<S> <C> <C> <C> <C>
The Morgan Stanley . . . . . . . . . . . . . . . . . 59,450 48.0 2,973 51.7
Leveraged Equity
Fund II, L.P.(a)
1221 Ave. of the Americas
New York, NY 10020
MSCP III Entities (b). . . . . . . . . . . . . . . . 23,333 18.8 1,167 20.3
1221 Ave. of the Americas
New York, NY 10020
First Plaza Group Trust. . . . . . . . . . . . . . . 17,000 13.7 850 14.8
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258
Leeway & Co . . . . . . . . . . . . . . . . . . . . 10,667 8.6 533 9.3
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171
Stephen M. Dyott . . . . . . . . . . . . . . . . . . 500 0.4 25 0.4
James T. Sullivan. . . . . . . . . . . . . . . . . . 388 0.3 94 1.6
Eric T. Fry . . . . . . . . . . . . . . . . . . . . -- -- -- --
Frank V. Sica. . . . . . . . . . . . . . . . . . . . -- -- -- --
All current directors and
officers as a group. . . . . . . . . . . . . . . . 888 0.7 119 2.0
</TABLE>
- --------------------------
(a) The general partner of MSLEF is a wholly owned subsidiary of Morgan
Stanley Group Inc.
(b) The MSCP III Entities consist of Morgan Stanley Capital Partners III,
L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital Investors,
L.P.; the general partner of each MSCP Entity is a wholly owned subsidiary
of Morgan Stanley Group Inc.
57
<PAGE> 60
THE SHAKOPEE MERGER
On August 15, 1995 concurrently with the closing of the sale of the
Old Notes, Shakopee was merged with Graphics and each outstanding share of the
common stock of Shakopee was converted into one share of the common stock of
Communications and 1/20 of one share of Series B Preferred Stock of
Communications (the "Communications Series B Preferred Stock"). Shakopee is a
Minneapolis regional printer with eight printing press lines, five heatset and
three cold offset, that can competitively run low to medium volume jobs ranging
from 20,000 impressions to eight million impressions.
Prior to the acquisition, a majority of Shakopee's outstanding common
stock was owned by the MSCP Entities, affiliates of the Company's majority
stockholder, MSLEF. In addition, the other stockholders of Shakopee were also
stockholders of Communications. Shakopee was created by MSCP to acquire
certain of the assets pertaining to the business of the Shakopee Valley
Printing Division of Guy Gannett Communications pursuant to an Agreement for
the Purchase of Assets, dated as of November 23, 1994, which acquisition was
consummated in December 1994.
The Communications Series B Preferred Stock ranks pari passu with
respect to dividends and distributions with the Communications Series A
Preferred Stock. The Communications Series B Preferred Stock issued in the
Shakopee Merger has an aggregate initial liquidation preference of $17.5
million and ranks prior to the Communications Series A Preferred Stock with
respect to such liquidation preference.
In connection with the Shakopee Merger, the restated certificate of
incorporation of Communications was amended to authorize the issuance of the
Communications Series B Preferred Stock and the stockholders of Shakopee that
became stockholders of the Company as a result of the Shakopee Merger became
parties to the Stockholders' Agreement, which was amended to accommodate the
rights and obligations of the holders of Communications Series B Preferred
Stock.
DESCRIPTION OF THE BANK CREDIT AGREEMENT
On August 15, 1995 concurrently with the closing of the sale of the
Old Notes, Graphics and Communications entered into the Bank Credit Agreement
with BT Commercial Corporation ("BTCC") and Bankers Trust Company, as issuing
bank. The following summary of the material provisions of the Bank Credit
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Bank Credit Agreement, a copy of which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Defined terms that are used but not defined in this section have the
meanings given such terms in the Bank Credit Agreement.
The Bank Credit Agreement provides for a $75 million revolving credit
facility (the "Revolving Credit Facility") and a $60 million amortizing term
loan (the "Term Loan"). Borrowings under the Revolving Credit Facility are
subject to a borrowing base which consists of (i) 85% of Eligible Accounts
Receivable plus (ii) the lesser of (x) $15,000,000 and (y) 60% of Eligible
Inventory plus (iii) Equipment Acquisition Loans in an amount not to exceed
$7.5 million outstanding at any time (each of which acquisition loan must be
repaid within six months from the date of borrowing) minus (iv) the aggregate
amount of reserves against Eligible Accounts Receivable and Eligible Inventory
established by BTCC.
The Revolving Credit Facility and the Term Loan matures, and the New
Term Loan has a final maturity, on September 30, 2000. The Term Loan amortizes
in quarterly installments, beginning on March 31, 1996, in the following annual
amounts: (i) $8.8 million in Fiscal Year 1997, (ii) $10.6 million in Fiscal
Year 1998, (iii) $13.3 million in Fiscal Year 1999, (iv) $15.2 million in
Fiscal year 2000 and (v) $8.0 million in Fiscal Year 2001.
58
<PAGE> 61
The Bank Credit Agreement requires that 50% of Excess Cash Flow, up to
$4.0 million per year, shall be used to reduce the outstanding principal amount
of the Term Loan. The Company is also required under certain circumstances to
prepay the Term Loan in connection with certain sales of assets or issuances of
equity. Borrowings under the Revolving Credit Facility must be immediately
prepaid to the extent such borrowings exceed the borrowing base.
Borrowings under the Bank Credit Agreement bear interest, at Graphics'
option, at an annual rate equal to (i) with respect to borrowings under the
Revolving Credit Facility (A) Prime plus 1.25% per annum or (B) LIBOR plus
2.50% per annum and (ii) with respect to borrowings under the Term Loan (A)
Prime plus 1.50% per annum or (B) LIBOR plus 2.75% per annum; provided,
however, that under certain circumstances, such interest rates will (so long as
Graphics is not in default) be subject to certain stepdowns based upon
Graphics' Interest Coverage Ratio, tested at the end of each fiscal quarter on
a rolling four-quarter basis.
The Bank Credit Agreement contains a number of covenants, including,
among others, covenants restricting Communications, Graphics and their
respective Subsidiaries with respect to the incurrence of indebtedness
(including contingent obligations), the creation of liens, the making of
certain investments and loans, engaging in businesses unrelated to the Related
Businesses, transactions with affiliates, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations and
other transactions, the making of capital expenditures, the establishment of
new bank accounts, the maintenance of excess cash, the designation of any
Indebtedness as Designated Senior Indebtedness under, and as defined in, the
Indenture and the creation of new subsidiaries. In addition, the Bank Credit
Agreement contains covenants restricting Graphics and its subsidiaries from
issuing or disposing of shares of their respective common stock and from
creating new subsidiaries. The Bank Credit Agreement also restricts the
ability of Communications, Graphics and their respective subsidiaries to make
restricted payments in the nature of, among other things (i) paying dividends
and making other restricted payments and purchasing, redeeming or retiring
shares of the capital stock of Communications, Graphics and their respective
subsidiaries; (ii) making certain voluntary or optional payments, prepayments
or redemptions and purchasing, redeeming or acquiring for value any Notes or
the indebtedness represented thereby; (iii) amending or modifying the Indenture
or the Notes; or (iv) issuing any preferred or preference stock. In addition,
the Bank Credit Agreement contains affirmative covenants by Communications,
Graphics and their respective Subsidiaries, including, among others, compliance
with laws, preservation of corporate existence, maintenance of insurance,
payment of taxes and debt, maintenance of properties, environmental compliance
and delivery of financial and other information to the bank lenders.
Graphics and its subsidiaries are also required to comply with certain
financial tests and maintain certain financial ratios. Certain of the
financial covenants contained in the Bank Credit Agreement are set forth below.
Minimum EBITDA
Graphics may not permit its EBITDA for any period of four consecutive
fiscal quarters (or, if shorter, the period beginning on October 1, 1995 and
ending on the last day of the fiscal quarter of Graphics specified below), in
each case taken as one accounting period, ended on a date set forth below, to
be less than the amount specified opposite such date below:
59
<PAGE> 62
<TABLE>
<CAPTION>
Fiscal Quarter Ended Minimum EBITDA
-------------------- --------------
<S> <C>
December 31, 1995 $13,500,000
March 31, 1996 $24,000,000
June 30, 1996 $34,700,000
September 30, 1996 $45,400,000
December 31, 1996 $46,600,000
March 31, 1997 $52,100,000
June 30, 1997 $54,800,000
September 30, 1997 $57,000,000
December 31, 1997 $58,000,000
March 31, 1998 $60,000,000
June 30, 1998 $61,000,000
September 30, 1998 $62,000,000
December 31, 1998 $63,000,000
March 31, 1999 $65,000,000
June 30, 1999 $65,000,000
September 30, 1999 $66,000,000
December 31, 1999 $67,000,000
Each fiscal quarter
ended thereafter $68,000,000
</TABLE>
; provided that the EBITDA of Graphics required to be achieved for the period
of four consecutive fiscal quarters ended June 30, 1997 as set forth above will
be increased by an amount (if positive) equal to the remainder of (x)
$35,700,000 less (y) its actual EBITDA for the period of three consecutive
fiscal quarters ended June 30, 1996. "EBITDA" means, for any period,
Consolidated Net Income (calculated to exclude extraordinary items which would
otherwise be reflected therein and calculated before provision for increases or
decreases to Graphics' LIFO reserve for such period), (i) plus the amount of
all Interest Expense, income tax expense, depreciation and amortization
expense, including amortization of any goodwill or other intangibles for such
period (to the extent such expenses reduced Consolidated Net Income for such
period), (ii) less gains and plus losses attributable to sales of assets other
than inventory sold in the ordinary course of business (to the extent such
gains or losses were reflected in Consolidated Net Income for such period) and
(iii) plus or minus (as the case may be) any other non-cash charges which have
been subtracted or added, as the case may be, in calculating Consolidated Net
Income for such period, all determined in accordance with GAAP.
Current Ratio
Graphics may not permit its Current Ratio, as measured on the last day
of any fiscal quarter ended after August 15, 1995, to be less than 1.1:1.0.
"Current Ratio" means the ratio of Current Assets to Current Liabilities;
provided that for purposes of calculating the Current Ratio, Current
Liabilities excludes (i) the full outstanding principal balance of loans made
under the Revolving Credit Facility and (ii) the current portion of long-term
Indebtedness.
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<PAGE> 63
Fixed Charge Coverage Ratio
Graphics may not permit the Fixed Charge Coverage Ratio for any period
of four consecutive fiscal quarters (or, if shorter, the period beginning on
October 1, 1995 and ending on the last day of the fiscal quarter of Graphics
specified below), in each case taken as one accounting period, ended on a date
set forth below to be less than the ratio set forth opposite such date:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Ratio
-------------------- -----
<S> <C>
December 31, 1995 0.75:1.0
March 31, 1996 0.75:1.0
June 30, 1996 0.75:1.0
September 30, 1996 0.71:1.0
December 31, 1996 0.63:1.0
March 31, 1997 0.75:1.0
June 30, 1997 0.75:1.0
September 30, 1997 0.75:1.0
Each fiscal quarter ended thereafter 0.80:1.0
</TABLE>
"Fixed Charge Coverage Ratio" for any period means the ratio of (i) EBITDA less
the amount of Cash Capital Expenditures for such period to (ii) Fixed Charges
for such period. "Fixed Charges" for any period means the sum of, without
duplication, (a) Cash Interest Expense, (b) all scheduled (as determined at the
beginning of the respective period) mandatory principal payments of
Indebtedness (including payments with respect to all Capitalized Lease
Obligations) made by Graphics or its subsidiaries during such period and (c)
all cash payments of income taxes made by Graphics and its subsidiaries during
such period, including any payments with respect to the Tax Sharing Agreement
or otherwise made pursuant to Section 8.6(c)(ii) of the Bank Credit Agreement;
provided that the amount of cash payments of income taxes pursuant to preceding
clause (c) shall be calculated by excluding the income tax effects of all
extraordinary items excluded from Consolidated Net Income in calculating
EBITDA.
The failure to satisfy any of the covenants will, after giving effect
to any grace period therefor, constitute an Event of Default under the Bank
Credit Agreement, notwithstanding the ability of Graphics to meet its debt
service obligations. The Bank Credit Agreement includes other customary events
of default, including cross defaults to other indebtedness, change of control
provisions and certain events including bankruptcy, reorganization and
insolvency. An Event of Default under the Bank Credit Agreement would allow
the lenders thereunder to accelerate or, in certain cases, would automatically
cause the acceleration of, the maturity of the indebtedness under the Bank
Credit Agreement and would restrict the ability of Graphics to meet its
obligations on the Notes.
Graphics' obligations under the Bank Credit Agreement are secured by
substantially all of the assets of Graphics, including real and personal
property, accounts receivable, inventory and the general intangibles relating
thereto.
The payment of principal and interest on indebtedness under the Bank
Credit Agreement is guaranteed on a senior basis by Communications and each of
Graphics' existing and future, direct and indirect, wholly owned subsidiaries.
The guarantee of Communications and each of Graphics' wholly owned subsidiaries
is secured by substantially all of the assets of Communications and such
subsidiary, as the case may be.
61
<PAGE> 64
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of August 15, 1995
(the "Indenture"), among Graphics, Communications and NationsBank of Georgia,
National Association, as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), as in effect on the date of the Indenture. The Notes are subject to all
such terms and reference is made to the Indenture and the Trust Indenture Act
for a statement thereof. A copy of the Indenture is filed with the Commission
as an exhibit to the Registration Statement of which this Prospectus is a part.
The following summary, which describes certain provisions of the Indenture and
the Notes, does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Indenture and the Notes, including the
definitions therein of terms not defined herein and those terms made a part
thereof by the Trust Indenture Act.
GENERAL
The Notes are unsecured senior subordinated obligations of Graphics,
limited to $185 million aggregate principal amount, and will mature on August
1, 2005. Interest will accrue on the Notes from August 15, 1995, or from the
most recent date to which interest has been paid or provided for, and will be
payable in cash semiannually in arrears at the rate of 12 3/4% per annum on the
principal amount of the Notes on each February 1 and August 1, commencing
February 1, 1996, to holders of record thereof at the close of business on the
January 15 or July 15 immediately preceding such interest payment date.
Interest on overdue principal and (to the extent permitted by law) on
overdue installments of interest will accrue at the rate per annum borne by the
Notes. Interest on the Notes will be computed on the basis of a 360-day year
of twelve 30-day months.
OPTIONAL REDEMPTION
Except as set forth below, the Notes may not be redeemed prior to
August 1, 2000. On or after such date, the Notes may be redeemed at the option
of Graphics, at any time as a whole, or from time to time in part, on not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of the principal amount) set forth below, plus accrued interest to
the date of redemption (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing August 1:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . 106.375%
2001 . . . . . . . . . . . . . . . . . . . . . . . 103.188
2002 and thereafter. . . . . . . . . . . . . . . . 100.000
</TABLE>
In addition, at any time and from time to time prior to August 1,
1998, Graphics may redeem the Notes with the proceeds actually received by
Graphics (including proceeds received by Communications and contributed to
Graphics) from one or more Public Equity Offerings following which there is a
Public Market, at a redemption price (expressed as a percentage of principal
amount) of 110% plus accrued interest to the redemption date; provided,
however, that at least $115 million aggregate principal amount of Notes remains
outstanding after each such redemption.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
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<PAGE> 65
RANKING
The Indebtedness evidenced by the Notes is subordinated in right of
payment, as set forth in the Indenture, to the payment when due of all existing
and future Senior Indebtedness of Graphics, rank pari passu with all existing
and future Senior Subordinated Indebtedness of Graphics and rank senior in
right of payment to all future Subordinated Obligations of Graphics. At March
31, 1996, Graphics had $112.6 million of Senior Indebtedness, no senior
subordinated indebtedness other than the Notes and no subordinated indebtedness
outstanding and Graphics' subsidiaries had approximately $2.2 million of
liabilities (which were effectively senior to the Notes). Notwithstanding the
foregoing, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "Defeasance" below
will not be contractually subordinated in right of payment to any Senior
Indebtedness or subject to the restrictions described herein.
Graphics may not make any payment with respect to any Senior
Subordinated Obligations if at such time there exists a default in the payment
of any Senior Indebtedness unless (x) the default has been cured or waived and
any acceleration of such Indebtedness has been rescinded or (y) such Senior
Indebtedness has been paid in full in cash or cash equivalents. However,
Graphics may make any payment with respect to the Notes without regard to the
foregoing if Graphics and the Trustee receive written notice approving such
payment from the Representative of such Senior Indebtedness. During the
continuance of any default (other than a payment default described in the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or after the expiration of any applicable grace periods, Graphics
may not make any payment with respect to the Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by Graphics and the Trustee of
written notice of such default from the Representative of such Designated
Senior Indebtedness specifying an election to effect a Payment Blockage Period
(a "Payment Blockage Notice") and ending 179 days thereafter (or earlier (i) if
such Payment Blockage Period is terminated by written notice to the Trustee and
Graphics from the Person who gave such Payment Blockage Notice, (ii) by
repayment in full of the Designated Senior Indebtedness on behalf of which the
Payment Blockage Notice was given or (iii) if no default permitting
acceleration of any Designated Senior Indebtedness is continuing).
Notwithstanding the provisions described in the immediately preceding sentence,
unless the holders of such Designated Senior Indebtedness or the Representative
of such holders shall have accelerated the maturity of such Designated Senior
Indebtedness, Graphics may, subject to the provisions contained in the first
sentence of this paragraph, resume payments on the Notes after such Payment
Blockage Period. The Notes will not be subject to more than one Payment
Blockage Notice in any consecutive 360-day period, irrespective of the number
of defaults with respect to Designated Senior Indebtedness during such period;
provided, however, that if any Payment Blockage Notice within such 360-day
period is given by or on behalf of any holders of Designated Senior
Indebtedness (other than by the Bank Agent in respect of the Bank Credit
Agreement), the Bank Agent may give another Payment Blockage Notice in relation
to the Bank Credit Agreement within such period; provided further, however,
that in no event may the total number of days during which any Payment Blockage
Period or Periods is in effect exceed 179 days in the aggregate during any 360
consecutive day period. For purposes of the subordination provisions described
hereunder, no default or event of default (excluding defaults and events of
default arising under financial covenants) which existed or was continuing (it
being acknowledged that any subsequent action that would give rise to an event
of default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or be made, the basis of the commencement of a subsequent
Payment Blockage Period by the Representative of such Designated Senior
Indebtedness, even if not within a period of 360 consecutive days, unless such
default or event of default shall have been cured or waived for a period of not
less than 90 consecutive days.
Upon any payment or distribution of assets or securities of Graphics
of any kind or character, whether in cash, property or securities, upon a total
or partial liquidation or a total or partial dissolution of Graphics or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Graphics or its property, the
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holders of Senior Indebtedness shall be entitled to receive payment in full of
all Senior Indebtedness in cash or cash equivalents before holders of the Notes
shall be entitled to receive any payment or distribution in respect of any
Senior Subordinated Obligations.
If payment of the Notes is accelerated because of an Event of Default,
Graphics or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness (or their Representative) of the acceleration. If any Designated
Senior Indebtedness is outstanding, Graphics may not make any payment in
respect of Senior Subordinated Obligations until five Business Days after such
notice is received and, thereafter, may pay the Senior Subordinated Obligations
only if the subordination provisions of the Indenture otherwise permit the
payment at that time.
By reason of the subordination provisions contained in the Indenture,
in the event of insolvency, creditors of Graphics who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the Notes, and
creditors of Graphics who are not holders of Senior Indebtedness or the Notes
may recover less, ratably, than holders of Senior Indebtedness and may recover
more, ratably, than the holders of the Notes.
GUARANTY
Communications, as primary obligor and not merely as surety, has
irrevocably, fully and unconditionally guaranteed on an unsecured senior
subordinated basis, the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all obligations of Graphics under the
Indenture and the Notes, whether for principal of or interest on the Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by
Communications being herein called the "Guaranteed Obligations").
Communications agreed to pay, on a senior subordinated basis and in addition to
the amount stated above, any and all expenses (including reasonable counsel
fees and expenses) incurred by the Trustee or the Holders in enforcing any
rights under the Guaranty with respect to Communications.
The obligations of Communications under the Guaranty are unsecured
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by Communications pursuant to the Guaranty will be subordinated in
right of payment to the rights of holders of Senior Indebtedness of
Communications. At March 31, 1996, Communications had outstanding $112.6
million of Senior Indebtedness, including its obligations under the Bank Credit
Agreement. The Indenture does not limit the incurrence of Indebtedness by
Communications.
The Guaranty is a continuing guarantee and shall (a) remain in full
force and effect until payment in full of all the Guaranteed Obligations, (b)
be binding upon Communications and (c) enure to the benefit of and be
enforceable by the Trustee, the Holders and their successors, transferees and
assigns.
Pursuant to the Indenture, Communications may consolidate with, merge
with or into, or transfer all or substantially all its assets to any other
Person to the same extent Graphics may consolidate with, merge with or into, or
transfer all or substantially all its assets to, any other Person; provided,
however, that if such other Person is not Graphics, Communications' obligations
under the Indenture must be expressly assumed by such other Person. See
"Successor Company."
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by Graphics or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
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"Adjusted Consolidated Assets" means at any time the total amount of
assets of Graphics and its consolidated Restricted Subsidiaries (less
applicable depreciation, amortization and other valuation reserves), after
deducting therefrom all current liabilities of Graphics and its consolidated
Restricted Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of Graphics and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Limitation on Restricted
Payments," "--Limitation on Sales of Assets and Subsidiary Stock" and
"--Limitation on Affiliate Transactions," "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power
of the Voting Stock (on a fully diluted basis) of Graphics or of rights or
warrants to purchase such stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
Graphics or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the purposes
of this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (ii) any
assets of Graphics or any Restricted Subsidiary outside the ordinary course of
business of Graphics or such Restricted Subsidiary (other than (y) a
disposition by a Restricted Subsidiary to Graphics or by Graphics or a
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of the covenant
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, a Restricted Payment permitted by the covenant
described under "Certain Covenants -- Limitation on Restricted Payments");
provided, however, that for purposes of the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, the term
"Asset Disposition" shall not include any disposition of assets if such
disposition is governed by the provisions of the Indenture described under
"Successor Company."
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such payment by (ii) the sum of all such payments.
"Bank Agent" is defined to mean BT Commercial Corporation, as agent
for the Banks pursuant to the Bank Credit Agreement, and any successor or
successors thereto.
"Bank Credit Agreement" is defined to mean the Credit Agreement, dated
as of August 15, 1995, among Communications, Graphics, the Banks party thereto
and the Bank Agent, together with the related documents thereto (including,
without limitation, any Guarantees and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented, replaced or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing or otherwise
restructuring (including, but not limited to, the inclusion of additional
borrowers or guarantors thereunder that are Subsidiaries of Communications or
Graphics and whose obligations are guaranteed by Communications or Graphics
thereunder) all or a portion of the Indebtedness under such agreement or any
successor agreement.
"Banks" is defined to mean the lenders who are from time to time
parties to the Bank Credit Agreement.
"Board of Directors" means the Board of Directors of Graphics or any
committee thereof duly authorized to act on behalf of such Board.
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"Capital Expenditures" means expenditures (whether paid in cash or
accrued as liabilities and including Capital Lease Obligations) of Graphics and
its Restricted Subsidiaries relating to the acquisition of equipment used or
useful in the business of Graphics or any Restricted Subsidiary or in a Related
Business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent of any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of
or interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other
than the Permitted Holders and their respective Affiliates, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than (A) forty percent (40%) of the total voting power of the then outstanding
Voting Stock of Graphics or Communications and (B) the total voting power of
the then outstanding Voting Stock of Graphics or Communications, as the case
may be, beneficially owned by the Permitted Holders and their respective
Affiliates, treating the Permitted Holders and their respective Affiliates as a
"group"; or (ii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Board of
Directors of (A) Graphics (together with any new directors whose election by
Graphics's Board of Directors or whose nomination for election by Graphics's
Board of Directors or whose nomination for election by Graphics's shareholders
was approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved) or (B)
Communications (together with any new directors whose election by
Communications' Board of Directors or whose nomination for election by
Communications' shareholders was approved by a vote of at least two-thirds of
the directors then still in office who either were directors at the beginning
of such period or whose election or nomination for election was previously so
approved), in either case, cease for any reason to constitute a majority of the
directors of Graphics or Communications, as the case may be, then in office; or
(iii) (A) Graphics or Communications consolidates with or merges into any other
Person or conveys, transfers or leases all or substantially all its assets to
any Person or (B) any Person merges into Graphics or Communications, in either
event pursuant to a transaction in which any Voting Stock of Graphics or
Communications, as the case may be, outstanding immediately prior to the
effectiveness thereof is reclassified or changed into or exchanged for cash,
securities or other property; provided, however, that any consolidation,
conveyance, transfer or lease (x) between Graphics and any of its Subsidiaries,
between Communications and any Communications Subsidiaries, between
Subsidiaries of Graphics or between Communications Subsidiaries (including the
reincorporation of Graphics or Communications in another jurisdiction) or (y)
for the purpose of creating a public holding company for Graphics or
Communications in another jurisdiction or (z) for the purpose of creating a
public holding company for Graphics or Communications in which all holders of
the capital stock of Graphics or Communications, as the case may be, would be
entitled to receive (other than cash in lieu of fractional shares) solely
capital stock of the holding company in amounts proportionate to their holdings
of such capital stock of Graphics or Communications immediately prior to such
transaction, shall be excluded from the operation of this clause (iii).
"Change of Control Triggering Event" means the occurrence of both a
Change of Control and a Rating Decline.
"Code" means the Internal Revenue Code of 1986, as amended.
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"Communications Subsidiary" means a corporation a majority of the
equity ownership or the Voting Stock of which is at the time owned, directly or
indirectly, by Communications or by one or more other Subsidiaries of
Communications, or by Communications and one or more other Subsidiaries of
Communications.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if Graphics or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period
that remains outstanding (other than Indebtedness Incurred under a revolving
credit or similar arrangement Incurred after the end of such four consecutive
fiscal quarters to the extent of the commitment thereunder) or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if Graphics or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness (other than Indebtedness
under a revolving credit or similar arrangement unless such revolving credit
Indebtedness has been permanently repaid) since the beginning of such period or
if any Indebtedness is to be repaid, repurchased, defeased or otherwise
discharged on the date of the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge had
occurred on the first day of such period (except for Consolidated Interest
Expense accrued (as adjusted pursuant to clause (1)) since the end of such
period under a revolving credit or similar arrangement to the extent of the
commitment thereunder in effect on the date of the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio) and as if Graphics or
such Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if
since the beginning of such period Graphics or any Restricted Subsidiary shall
have made any Asset Disposition, the EBITDA for such period shall be reduced by
an amount equal to the EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or increased
by an amount equal to the EBITDA (if negative), directly attributable thereto
for such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of Graphics or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to Graphics
and its continuing Restricted Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
Graphics and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale), (4) if since the beginning of such period
Graphics or any Restricted Subsidiary (by merger or otherwise) shall have made
an Investment in any Subsidiary (or any Person which becomes a Restricted
Subsidiary) or any acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Investment or
acquisition occurred on the first day of such period, excluding, in the case of
an acquisition of assets or Capital Stock, any operating expense or cost
reduction of such Person or the Person to be acquired which, in the good faith
estimate of a responsible financial or accounting officer of such Person, will
be eliminated or realized, as the case may be, during the 12 month period
following the date of determination, as a result of such acquisition as if such
elimination of such operating expense or the realization of such cost
reductions were achieved on the first day of such period, and (5) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into Graphics or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Disposition,
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (3) or (4) above if made by Graphics or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition of assets occurred on the
first day of
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such period and excluding any operating expenses or cost reductions as provided
in clause (4). For purposes of this definition, whenever pro forma effect is
to be given to an acquisition of assets, the amount of income or earnings
relating thereto, and the amount of Consolidated Interest Expense associated
with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of Graphics. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest of such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any
Interest Rate Protection Agreement applicable to such Indebtedness if such
Interest Rate Protection Agreement has a remaining term in excess of 12 months
or, if shorter, the remaining term of the Indebtedness to which it relates).
"Consolidated Interest Expense" means, for any period, the total
interest expense of Graphics and its consolidated Restricted Subsidiaries,
plus, to the extent not included in such total interest expense, and to the
extent incurred by Graphics or any Restricted Subsidiary, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and premium
and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest
expense, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) net costs
under Interest Rate Protection Agreements (including amortization of fees),
(vii) Preferred Stock dividends paid in respect of all Preferred Stock of
Graphics or a Restricted Subsidiary held by Persons other than Graphics or a
Restricted Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations and (ix) interest actually paid by Graphics or any
consolidated Restricted Subsidiary under any Guarantee of Indebtedness of any
Person; excluding, however, (A) any amount of such interest expense of any
Restricted Subsidiary if the net income (or loss) of such Restricted Subsidiary
is excluded in the calculation of Consolidated Net Income pursuant to clause
(iii) of the definition thereof (but only in the same proportion as the net
income (or loss) of such Restricted Subsidiary is excluded from the calculation
of Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (B) any premiums, fees and expenses (and any amortization thereof) payable
in connection with the Transactions, all as determined on a consolidated basis
in conformity with GAAP.
"Consolidated Net Income" means, for any period, the net income (or
loss) of Graphics and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(i) any net income or loss of any Person if such Person
is not a Restricted Subsidiary, except that subject to the limitations
contained in clause (iv) below, Graphics' equity in the net income or
loss of any such Person for such period shall be included in such
Consolidated Net Income up to, in the case of net income, the
aggregate amount of cash actually distributed by such Person during
such period to Graphics or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below) and, in the case of a net loss, the
aggregate amount of cash actually contributed by Graphics or a
Restricted Subsidiary to such Person during such period;
(ii) solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph (a) of the
covenant described under "Certain Covenants -- Limitation on
Restricted Payments" (and in such case, except to the extent
includable pursuant to the foregoing clause (i) above), any net income
(or loss) of any Person acquired by Graphics or a Subsidiary in a
pooling of interests transaction for any period prior to the date of
such acquisition;
(iii) any net income or loss of any Restricted Subsidiary
if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to Graphics,
except that subject to the limitations contained in clause (iv) below,
Graphics' equity in the net income or loss of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to, in the case of net income, the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period
to Graphics or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
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distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause) and, in the case of a net loss, the
aggregate amount of cash actually contributed by Graphics or another
Restricted Subsidiary to such Restricted Subsidiary during such
period;
(iv) any gain or loss realized upon the sale or other
disposition of any assets of Graphics or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business
and any gain or loss realized upon the sale or other disposition of
any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles;
provided, however, that solely for the purposes of calculating the Consolidated
Coverage Ratio (and in such case, except to the extent it is already included
pursuant to clause (i) above), "Consolidated Net Income" shall include the
amount of all cash dividends received by Graphics or any Restricted Subsidiary
from an Unrestricted Subsidiary (subject, in the case of a dividend paid to a
Restricted Subsidiary, to the limitation contained in clause (iii) above);
provided further, however, that solely for purposes of calculating the amount
of Restricted Payments that may be made pursuant to paragraph (a) of the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments", any amortization, depreciation or other non-cash charge relating to
the Transactions or any acquisitions subsequent to the Issue Date, including
good-will, non-compete agreements, the stepped-up basis on assets acquired and
deferred financing costs, to the extent such items reduced Consolidated Net
Income, shall not be included.
"Consolidated Net Tangible Assets" as of any date of determination,
means the total amount of assets (less accumulated depreciation or
amortization, allowances for doubtful receivables, other applicable reserves
and other properly deductible items) which would appear on a consolidated
balance sheet of Graphics and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, and after giving
effect to purchase accounting and after deducting therefrom all current
liabilities of Graphics and its consolidated Restricted Subsidiaries as well
as, to the extent otherwise included, the amounts of (without duplication): (i)
minority interests in consolidated Restricted Subsidiaries held by Persons
other than Graphics or a Restricted Subsidiary; (ii) excess of cost over fair
value of assets of businesses acquired, as determined in good faith, by the
Board of Directors; (iii) any revaluation or other write-up in book value of
assets subsequent to the Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied; (iv) unamortized debt
discount and expenses and other unamortized deferred charges, goodwill,
patents, trademarks, service marks, trade names, copyrights, licenses,
organization or developmental expenses and other intangible items; and (v)
treasury stock.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Graphics and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP (excluding the
effects of foreign currency exchange adjustments under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 52), as of the
end of the most recent fiscal quarter of Graphics ending at least 45 days prior
to the taking of any action for the purpose of which the determination is being
made, as (i) the par or stated value of all outstanding Capital Stock of
Graphics plus (ii) paid-in capital or capital surplus relating to such Capital
Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
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"Designated Senior Indebtedness" is defined to mean (i) Indebtedness
under the Bank Credit Agreement and (ii) any other Indebtedness constituting
Senior Indebtedness that, at any date of determination, has an aggregate
principal amount of at least $25 million and is specifically designated by
Graphics in the instrument creating or evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms or upon the happening of any event (i) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii)
is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii)
is redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes;
provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of any "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in the covenants described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Change of Control Triggering Event" and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such Capital Stock
pursuant to such provision prior to such Person's repurchase of such Notes as
are required to be repurchased pursuant to the covenants described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Change of Control Triggering Event."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense, plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense, (b)
depreciation expense, (c) amortization expense and (d) all other non-cash
charges, less all non-cash items increasing Consolidated Net Income, in each
case for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance
with the terms of the covenants and with other provisions of the Indenture
shall be made without giving effect to (i) the amortization of any expenses
incurred in connection with the Transactions and (ii) except as otherwise
expressly provided, the amortization of any amount required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17 in connection with the 1993
Acquisition, the Transactions or any acquisitions after the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other financial
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other
financial obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other
financial obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any Indebtedness or financial obligation.
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"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. The term "Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" of any Person means, without duplication:
(i) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or
liable (other than Interest Rate Protection Agreements);
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as
the deferred purchase price of property which purchase price is due
more than six months after the date of placing such property in
service or taking delivery and title thereto, all conditional sale
obligations of such Person and all obligations of such Person under
any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course
of business of such Person to the extent such letters of credit are
not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third Business Day following receipt by
such Person of a demand for reimbursement following payment on the
letter of credit);
(v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Disqualified Stock, and in respect of a Restricted Subsidiary, all
obligations of such Subsidiary with respect to the redemption,
repayment or other repurchase of any Preferred Stock (but excluding,
in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses
(i) through (v) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible
or liable, directly or indirectly, as obligor, Guarantor or otherwise,
including by means of any Guarantee; and
(vii) all obligations of the type referred to in clauses
(i) through (vi) of other Persons secured by any Lien on any property
or asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the
lesser of the fair market value of such property or assets (as
determined by the Board of Directors) or the amount of the obligation
so secured.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided, however,
(i) that the amount outstanding at any time of any Indebtedness Incurred with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include (A) any liability for Federal, state, local or
other taxes, (B) any obligations under Interest Rate Protection Agreements or
Raw Material Hedge Agreements or
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(C) any liability arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business.
"Interest Rate Protection Agreement" means any interest rate or
currency swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect Graphics or any Restricted
Subsidiary against fluctuations in interest rates or currency values.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable) or other extension of credit (including by way
of Guarantee or similar arrangement) or capital contribution to (by means of
any transfer of cash or other property to others or any payment for property or
services of the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment," and the covenant described under "Certain Covenants --
Limitation on Restricted Payments," (i) "Investment" shall include the portion
(proportionate to Graphics' equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of Graphics at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
Graphics shall be deemed to continue to have a permanent "Investment" in such
Subsidiary at the time of such redesignation equal to the amount (if positive)
equal to (x) Graphics' "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to Graphics' equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Investment Grade" means (i) BBB- (or its equivalent) or higher by S&P
or (ii) Baa3 (or its equivalent) or higher by Moody's or (iii) the equivalent
of such rating by a substitute Rating Agency.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"MSCP Entities" means, collectively, Morgan Stanley Capital Partners
III, L.P., a Delaware limited partnership, Morgan Stanley Capital Investors,
L.P., a Delaware limited partnership, and MSCP III 892 Investors, L.P., a
Delaware limited partnership.
"MSLEF" means The Morgan Stanley Leveraged Equity Fund II, L.P., a
Delaware limited partnership.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal (but not interest) pursuant to a note or installment
receivable or otherwise, including upon release to Graphics or a Restricted
Subsidiary from any reserve established by Graphics or such Restricted
Subsidiary against any liabilities associated with such Asset Disposition, but
only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such Asset Disposition (without regard to the
consolidated results of operations of Graphics and its Subsidiaries, taken as
whole), and in each case net of all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security
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agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition, and,
until released to Graphics or a Restricted Subsidiary, net of appropriate
amounts to be provided by Graphics or any Restricted Subsidiary of Graphics as
a reserve against any liabilities associated with such Asset Disposition,
including pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Disposition, all as determined in
accordance with GAAP, and net of all distributions and other payments required
to be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means, collectively, MSLEF, the MSCP Entities and
the other investors, including the officers and directors of Graphics or
Communications, who beneficially own Voting Stock of Communications on the
Issue Date after giving effect to the Transactions, or, upon the death of such
an individual investor, such person's executors, administrators, testamentary
trustees, heirs, legatees or beneficiaries.
"Permitted Investment" means (i) an Investment in Graphics or in a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the primary
business of such Restricted Subsidiary or such Person is a Related Business;
(ii) an Investment by Graphics or any Restricted Subsidiary in another Person
if as a result of such Investment such other Person is merged or consolidated
with or into, or transfers or conveys all or substantially all its assets to,
Graphics or a Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iii) a Temporary Cash Investment; (iv)
receivables owing to Graphics or any Restricted Subsidiary, if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade terms
may include such concessionary trade terms as Graphics or any such Restricted
Subsidiary deems reasonable under the circumstances; (v) payroll, travel and
similar advances to cover matters that are expected at the time of such
advances ultimately to be treated as expenses for accounting purposes and that
are made in the ordinary course of business; (vi) loans or advances to
employees made in the ordinary course of business in accordance with past
practices of Graphics or of its Restricted Subsidiaries; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Graphics or any Restricted Subsidiary
or in satisfaction of judgments, (viii) Interest Rate Protection Agreements and
Raw Material Hedge Agreements and (ix) Investments at any time not exceeding
$12 million (valued at the fair market value at the time any such Investment
was made).
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become
due at the relevant time.
"Public Equity Offering" means an underwritten primary public offering
of common stock of Graphics or Communications pursuant to an effective
registration statement under the Securities Act.
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"Public Market" means any time after (x) a Public Equity Offering has
been consummated and (y) at least 15% of the total issued and outstanding
common stock of Graphics or Communications has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Rating Agencies" means S&P and Moody's; provided, however, that if
S&P or Moody's or both shall not make a rating of the Notes publicly available,
the term Rating Agencies shall refer to a nationally recognized securities
rating agency or agencies, as the case may be, selected by Graphics to
substitute for S&P or Moody's or both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D (or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by a substitute Rating Agency. In determining
whether the rating of the Notes has decreased by one or more gradations,
gradations within Rating Categories (+ and - for S&P; 1, 2 and 3 for Moody's;
or the equivalent gradations for another Rating Agency) shall be taken into
account (e.g., with respect to S&P, a decline in rating from BB+ to BB, as well
as from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date that is 90 days prior to the earlier of
(i) a Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by Graphics or Communications to effect a Change of
Control.
"Rating Decline" means the occurrence of the following on, or within
90 days after, the date of public notice of the occurrence of a Change of
Control or of the intention by Graphics to effect a Change of Control (which
period shall be extended so long as the rating of the Notes is under publicly
announced consideration for possible downgrade by any Rating Agency): (a) in
the event the Notes are rated by any Rating Agency on the Rating Date as
Investment Grade, the rating of such Notes by both Rating Agencies shall be
below Investment Grade, or (b) in the event the Notes are rated below
Investment Grade by both Rating Agencies on the Rating Date, the rating of the
Notes by either Rating Agency shall be decreased by one or more gradations.
"Raw Material Hedge Agreement" means an agreement designed to hedge
against fluctuations in the cost of raw materials entered into by Graphics or
its Restricted Subsidiaries in the ordinary course of business in connection
with their business operations.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
Indebtedness in exchange, substitution or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Graphics or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees, accrued interest and expenses, including
any premium and defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of
Graphics.
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"Registration Agreement" means the Registration Agreement dated August
10, 1995, among Graphics, Communications and Morgan Stanley & Co. Incorporated.
"Related Business" means as of any date the businesses of Graphics and
its Restricted Subsidiaries on such date and any business related, ancillary or
complementary thereto.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than Disqualified
Stock) and dividends or distributions payable solely to Graphics or a
Restricted Subsidiary, and other than pro rata dividends or other distributions
made by a Subsidiary of Graphics that is not a Wholly Owned Subsidiary to
minority stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation)), (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock of
Graphics held by any Person or of any Capital Stock of a Subsidiary of Graphics
held by any Affiliate of Graphics (other than a Restricted Subsidiary),
including the exercise of any option to exchange any Capital Stock (other than
into Capital Stock of Graphics that is not Disqualified Stock), (iii) the
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment of any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition) or
(iv) the making of any Investment, other than a Permitted Investment, in any
Person; provided, however, that the purchase or redemption of Subordinated
Obligations (or dividends to Communications for the purchase or redemption of
Indebtedness of Communications) upon the occurrence of an "asset sale" or
"change of control" shall not constitute a "Restricted Payment" if, prior to
such purchase or redemption (or dividend), Graphics shall have purchased all
Notes tendered pursuant to an Excess Proceeds Offer or an offer to purchase the
Notes upon the occurrence of a Change of Control Triggering Event with respect
to such "asset sale" or "change of control."
"Restricted Subsidiary" means any Subsidiary of Graphics that is not
an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Graphics secured by a
Lien.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" of any Person means the following obligations of
such Person, whether outstanding on the Issue Date or thereafter Incurred (i)
all Indebtedness and other monetary obligations of such Person under (A) the
Bank Credit Agreement and all fees, expenses and indemnities payable in
connection therewith, (B) any Interest Rate Agreement which the Company has
determined in good faith at the time of the Incurrence thereof is related to
indebtedness under the Bank Credit Agreement (which determination shall be
conclusive) and all fees, expenses and indemnities payable in connection
therewith or (C) any Guarantee of Indebtedness or monetary obligations
described in clauses (A) and (B), and (ii) all other Indebtedness of such
Person (other than the Notes), unless, in the instrument creating or evidencing
the same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Notes or the Guaranty,
as the case may be; provided, however, that Senior Indebtedness of such Person
shall not include (1) any obligation of such Person to any Subsidiary of such
Person, (2) any liability for Federal, state, local or other taxes owned or
owing by such Person, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness of
such Person (and any accrued and unpaid interest in respect thereof) which is
expressly subordinated in right of payment to any other
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Indebtedness or other obligation of such Person or (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in violation of the
Indenture. Senior Indebtedness will also include interest accruing subsequent
to events of bankruptcy of Graphics, Communications and their respective
Subsidiaries at the rate provided for in the documentation governing such
Senior Indebtedness, whether or not such interest is an allowed claim
enforceable against the debtor in a bankruptcy case under relevant bankruptcy
law.
"Senior Subordinated Indebtedness" means (i) with respect to Graphics,
the Notes and any other Indebtedness of Graphics that specifically provides
that such Indebtedness is to rank pari passu with the Notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of Graphics which is not Senior Indebtedness of Graphics and
(ii) with respect to Communications, the Guaranty and any other Indebtedness of
Communications that specifically provides that such Indebtedness is to rank
pari passu with the Guaranty in right of payment and is not subordinated by its
terms in right of payment to any Indebtedness or other obligation of
Communications which is not Senior Indebtedness of Communications.
"Senior Subordinated Obligations" means any principal, premium, if
any, and interest on the Notes payable pursuant to the terms of the Notes or
upon acceleration, including any amounts received on the exercise of rights of
rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase price of the Notes or amounts
corresponding to such principal, premium, if any, or interest on the Notes.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of Graphics within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group and its successors.
"Stated Maturity" means with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of Graphics (whether
outstanding on the Issue Date or thereafter incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 90 days after the date of acquisition, issued by a corporation (other than
an Affiliate of Graphics) organized and in existence under the laws of the
United States of America or any
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foreign country recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P, and (v) investments in
securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or "A" by Moody's.
"Unrestricted Subsidiary" means (i) any Subsidiary of Graphics that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) of Graphics to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, Graphics or any
Restricted Subsidiary of Graphics that is not a Subsidiary of the Subsidiary to
be so designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Graphics could Incur $1.00 of additional
Indebtedness under the first paragraph of the covenant described under "--
Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares) is owned by
Graphics or one or more Wholly Owned Subsidiaries.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
(a) Graphics shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that Graphics may
Incur Indebtedness if on the date of such Incurrence the Consolidated Coverage
Ratio would be greater than 1.75 to 1.0, on or prior to August 1, 1998, and 2.0
to 1.0, thereafter.
(b) Notwithstanding the foregoing paragraph (a), Graphics and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to one or more credit
facilities (including related Guarantees and security agreements) in
an aggregate principal amount outstanding at any time not to exceed
the greater of (a) the sum of (x) 90% of the consolidated book value
of the accounts receivable of Graphics
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and its Restricted Subsidiaries and (y) 60% of the consolidated book
value of the inventory of Graphics and its Restricted Subsidiaries, in
each case as determined at the time of the respective Incurrence in
accordance with GAAP and (b) $75,000,000; provided, however, that no
Restricted Subsidiary shall Incur Indebtedness pursuant to this clause
(1) in an aggregate principal amount outstanding at any time which
exceeds the sum of (a) 90% of the book value of its accounts
receivable on a stand-alone basis and (b) 60% of the book value of its
inventory on a stand-alone basis, in each case as determined in
accordance with GAAP;
(2) Indebtedness of Graphics (and any Guarantee or Liens
with respect thereto) originally Incurred pursuant to the term loan
provisions of the Bank Credit Agreement and any refinancing thereof in
an aggregate principal amount outstanding at any time not to exceed
(i) $60,000,000 less (ii) the aggregate sum of all principal payments
actually made from time to time under the Bank Credit Agreement or
such refinancing as a result of the application of Net Available Cash
pursuant to the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock;"
(3) Indebtedness owed to and held by Graphics or a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to Graphics or another
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness;
(4) the Notes;
(5) Indebtedness outstanding on the Issue Date after
giving effect to the Transactions (other than Indebtedness described
in clause (1), (2), (3) or (4) of the covenant described hereunder);
(6) Guarantees by Graphics or a Restricted Subsidiary of
Indebtedness of a Restricted Subsidiary otherwise permitted to be
Incurred by the Restricted Subsidiary (other than Indebtedness
permitted by clause (10) below) or Guarantees by a Restricted
Subsidiary of Senior Indebtedness of Graphics permitted to be Incurred
by Graphics under the Indenture;
(7) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) of the covenant described hereunder
or pursuant to clause (4) or (5) above or clause (9) or (10) below;
provided, however, that Refinancing Indebtedness the proceeds of which
are used to Refinance the Notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (7) if (A) in case the Notes are
Refinanced in part or the Indebtedness to be Refinanced is pari passu
with the Notes, such Refinancing Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Refinancing Indebtedness is Incurred or is outstanding, is expressly
made pari passu with, or subordinate in right of payment to, the
remaining Notes and (B) in case the Indebtedness to be Refinanced is
subordinated in right of payment to the Notes, such Refinancing
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Refinancing Indebtedness is Incurred
or is outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be
Refinanced is subordinated to the Notes; provided further, however,
that Refinancing Indebtedness the proceeds of which are used to
Refinance Indebtedness Incurred pursuant to clause (10) below shall
only be permitted under this clause (7) if such Refinancing
Indebtedness is Incurred by Graphics or the Restricted Subsidiary that
originally Incurred the Indebtedness pursuant to clause (10) below;
(8) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business or (B)
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations
of Graphics or any of its Restricted Subsidiaries pursuant to such
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agreements, in any case Incurred in connection with the acquisition or
disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness or other obligations Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by Graphics or any Restricted Subsidiary in connection with
such disposition;
(9) Indebtedness, in an aggregate principal amount
outstanding at any time not to exceed $5 million, Incurred by Graphics
in connection with the purchase, redemption, acquisition, cancellation
or other retirement for value of shares of Capital Stock of Graphics,
any of its Subsidiaries or Communications, options on any such shares
or related stock appreciation rights or similar securities (including
phantom equity rights) held by employees, former employees, directors
or former directors of Communications, Graphics or its Subsidiaries
(or their estates or beneficiaries under their estates), upon death,
disability, retirement, termination of employment or pursuant to any
agreement under which such shares of stock or related rights were
issued; provided, however, that (A) such Indebtedness, by its terms or
by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, is expressly made subordinate in right of
payment to the Notes and (B) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, provides that no payments of principal of
such Indebtedness, including by way of sinking fund, mandatory
redemption or otherwise (including defeasance), may be made by
Graphics at any time while any of the Notes are outstanding;
(10) Indebtedness of any Restricted Subsidiary Incurred
and outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by Graphics (other than Indebtedness Incurred
as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary or was acquired by Graphics);
(11) Capital Lease Obligations;
(12) Indebtedness constituting purchase money obligations
for property acquired in the ordinary course of business or other
similar financing transactions;
(13) Indebtedness Incurred to finance Capital Expenditures
or the acquisition of Additional Assets in any fiscal year in an
aggregate principal amount not to exceed 6% of Graphics' consolidated
net sales for the immediately preceding fiscal year and Refinancing
Indebtedness in respect thereof; and
(14) Indebtedness (which may, but need not, be incurred
under the Bank Credit Agreement), in addition to that described in
clauses (1) through (13), in an aggregate principal amount outstanding
at any time not in excess of the greater of (A) $25 million and (B)
10% of the Consolidated Net Worth of Graphics as of the end of the
most recent fiscal quarter ending at least 45 days prior to the date
of the incurrence of such Indebtedness.
(c) Graphics shall not Incur any Indebtedness pursuant to
paragraph (a) or (b) above if such Indebtedness is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. In addition, Graphics shall not Incur any
Secured Indebtedness which is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the Notes equally and ratably
with such Secured Indebtedness for so long as such Secured Indebtedness is
secured by a Lien.
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Limitation on Restricted Payments
(a) Graphics shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
Graphics or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or
would result therefrom); or
(2) Graphics is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and
all other Restricted Payments since the Issue Date would exceed the
sum of:
(a) 50% of the Consolidated Net Income accrued
during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which the Old Notes were issued to the
end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit);
(b) the aggregate Net Cash Proceeds received by
Graphics as a capital contribution or from the issuance or
sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of Graphics and other than an issuance or sale
to an employee stock ownership plan or other trust established
by Graphics or any of its Subsidiaries for the benefit of
their employees to the extent the purchase by such plan or
trust is financed by Indebtedness of such plan or trust and
for which Graphics is liable as Guarantor or otherwise);
(c) the amount by which Indebtedness of Graphics
is reduced on Graphics' balance sheet upon the conversion or
exchange (other than by a Subsidiary of Graphics) subsequent
to the Issue Date, of any Indebtedness for Capital Stock
(other than Disqualified Stock) of Graphics (less the amount
of any cash, or other property, distributed by Graphics upon
such conversion or exchange);
(d) an amount equal to the net reduction in
Investments in any Person resulting from dividends, repayments
of loans or advances, or other transfers of assets, in each
case to Graphics or any Restricted Subsidiary from such
Person, or for the sale of such Investment by Graphics or a
Restricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed the amount of
Investments previously made by Graphics or any Restricted
Subsidiary in such Person, which amount was treated as a
Restricted Payment; and
(e) $5 million.
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(b) The provisions of the foregoing paragraph (a) shall not
prohibit:
(i) any purchase or redemption of Capital Stock or
Subordinated Obligations of Graphics made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital Stock of
Graphics (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of Graphics or an employee stock
ownership plan or similar trust established by Graphics or any of its
Subsidiaries for the benefit of their employees to the extent the
purchase by such plan or trust is financed by Indebtedness of such
plan or trust and for which Graphics is liable as Guarantor or
otherwise); provided, however, that (A) such purchase or redemption
shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale (to the extent
used for such purchase or redemption) shall be excluded from the
calculation of amounts under clause (3)(b) of paragraph (a) above;
(ii) any purchase or redemption of Subordinated
Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness of Graphics which is
permitted to be Incurred pursuant to the covenant described under "--
Limitation on Indebtedness;" provided, however, that such purchase or
redemption shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
the payment of such dividend shall be included in the calculation of
the amount of Restricted Payments;
(iv) the repurchase (or dividends to Communications for
the repurchase) of shares of, or options to purchase shares of,
Capital Stock of Graphics or any of its Subsidiaries or of
Communications from employees, former employees, directors or former
directors of Communications, Graphics or any of its Subsidiaries (or
permitted transferees of such employees, former employees, directors
or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such persons purchase
or sell or are granted the option to purchase or sell, shares of such
stock; provided, however, that the aggregate amount of such
repurchases or dividends shall not exceed $2 million in cash
consideration in any calendar year or $12 million in cash
consideration in the aggregate (unless such repurchases or dividends
are made with the proceeds of insurance policies and the shares of
Capital Stock are repurchased from the executors, administrators,
testamentary trustees, heirs, legatees or beneficiaries) plus the
aggregate Net Cash Proceeds from any reissuance during such calendar
year of Capital Stock to employees, officers or directors of Graphics
or its Subsidiaries (which Net Cash Proceeds shall be excluded from
the calculation of amounts under clause (3)(B) of paragraph (a) above,
and that any consideration in excess of such amounts is in the form of
Indebtedness that would be permitted to be Incurred under clause (8)
of paragraph (b) of the covenant described under "-- Limitation on
Indebtedness," provided that to the extent less than $2 million in
cash consideration (plus the aggregate Net Cash Proceeds from any such
reissuance during such calendar year, as described above) is paid in
any single calendar year pursuant to this clause (iv), the unused
portion may be carried forward and paid in any subsequent calendar
year; provided further, however, that such cash repurchases or
dividends, except to the extent made with the proceeds of insurance
policies, shall be included in the calculation of the amount of
Restricted Payments;
(v) the payment of dividends on the Capital Stock of
Graphics or Communications following any Public Equity Offering, of up
to 6% per annum of the net proceeds received by Graphics in such
Public Equity Offering (including proceeds received by Graphics as a
capital contribution from Communications from the net proceeds
received by Communications in such Public Equity Offering);
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provided, however, that any such dividends shall be included in the
calculation of the amount of Restricted Payments;
(vi) payments or distributions pursuant to appraisal
rights required by law in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
described under "Successor Company" below; provided, however, that any
such payments or distributions shall be included in the calculation of
the amount of Restricted Payments;
(vii) any payments pursuant to any tax-sharing agreement
between Graphics and any other Person with which Graphics is required
or permitted to file a consolidated tax return or with which Graphics
is or could be part of a consolidated group for tax purposes;
provided, however, that any such payment shall be excluded in the
calculation of the amount of Restricted Payments;
(viii) payments to Communications necessary for
Communications to pay corporate overhead expenses, not to exceed
$250,000 in any fiscal year; provided, however, that any such payments
shall be excluded in the calculation of the amount of Restricted
Payments;
(ix) payments to Communications sufficient to permit
Communications to pay for the registration of its securities with the
SEC (including all reasonable professional fees and expenses);
provided, however, that any such payments shall be excluded in the
calculation of the amount of Restricted Payments; and
(x) Investments in Unrestricted Subsidiaries made either
in exchange for Capital Stock (other than Disqualified Stock) of
Graphics or with the Net Cash Proceeds of the sale (other than to a
Restricted Subsidiary) of Capital Stock (other than Disqualified
Stock) of Graphics received by Graphics not more than 12 months prior
to the date of such Investment (provided that such Net Cash Proceeds
shall be excluded from the calculation of amounts of clause (3)(B) of
paragraph (a) above); provided, however, that any such Investments
shall be excluded in the calculation of the amount of Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
Graphics shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary (i) to
pay dividends or make any other distributions on its Capital Stock owned by, or
pay any Indebtedness owed to, Graphics, (ii) to make any loans or advances to
Graphics or (iii) transfer any of its property or assets to Graphics, except:
(1) any encumbrance or restriction pursuant to the Bank
Credit Agreement or any other agreement in effect at or entered into
on the date of the Indenture and any extensions, refinancings,
renewals or replacements of any such agreement; provided, however,
that the encumbrances and restrictions in any such extension,
refinancing, renewal or replacement are no less favorable in any
material respect to the Noteholders than those encumbrances or
restrictions being extended, refinanced, renewed or replaced;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by Graphics
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by Graphics) and outstanding on such date;
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(3) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred pursuant to
an agreement referred to in clause (2) of this covenant or contained
in any amendment to an agreement referred to in clause (2) of this
covenant; provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable in any
material respect to the Noteholders than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in the agreements
referred to in clause (2) of this covenant;
(4) any encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder.
(5) in the case of clause (iii) above, restrictions
contained in security agreements or mortgages securing Indebtedness of
a Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements or
mortgages;
(6) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all the Capital Stock or assets
of such Restricted Subsidiary pending the closing of such sale or
disposition;
(7) encumbrances and restrictions contained in any
Indebtedness or any agreement relating to any Indebtedness of Graphics
or a Restricted Subsidiary permitted pursuant to the covenant
described under "Limitation on Indebtedness"; provided, however, that
either (i) such encumbrances and restrictions are no more restrictive
than the encumbrances and restrictions imposed by the Bank Credit
Agreement or (ii) each Restricted Subsidiary subject to any such
encumbrances or restrictions after the Issue Date shall Guarantee the
Notes on a senior subordinated basis; and
(8) any encumbrance or restriction existing under or by
reason of applicable law.
Nothing contained in the covenant described hereunder shall prevent
Graphics or any Restricted Subsidiary from restricting the sale or other
disposition of property or assets of Graphics or any Restricted Subsidiary that
secure Indebtedness of Graphics or any of its Restricted Subsidiaries.
Limitation on Sales of Assets and Subsidiary Stock
In the event and to the extent that the Net Available Cash received by
Graphics or any Restricted Subsidiary from one or more Asset Dispositions
occurring on or after the Issue Date in any period of 12 consecutive months
exceeds 10% of Adjusted Consolidated Assets as of the beginning of such
12-month period, then Graphics shall (i) within 12 months after the date such
Net Available Cash so received exceeds such 10% of Adjusted Consolidated Assets
and to the extent Graphics elects (or is required by the terms of any
Indebtedness) (A) apply an amount equal to or less than such excess Net
Available Cash (1) to repay, or permanently reduce commitments to make loans or
advances resulting in, Senior Indebtedness of Graphics or Indebtedness of any
Restricted Subsidiary, or (2) to acquire the Notes and any other Senior
Subordinated Indebtedness of Graphics (provided that the percentage of such
Senior Subordinated Indebtedness of Graphics acquired (as a percent of the
aggregate principal amount thereof at such time) shall be no greater than the
percentage of the Notes so acquired (as a percent of the aggregate principal
amount of the Notes at such time) in each case owing to or held by a Person
other than Graphics or any Affiliate of Graphics or (B) invest an amount, equal
to or less than the difference between such excess Net Available Cash and the
amount so applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within 12 months after the date of such agreement), in
Additional Assets and (ii) apply an amount equal to the difference between such
excess Net Available Cash and the amount applied pursuant to clause (i) as
provided in the following
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<PAGE> 86
paragraphs of this covenant. The amount of such excess Net Available Cash
required to be applied pursuant to clause (ii) of the preceding sentence shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, Graphics must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase Notes from the Holders in accordance with the Indenture at a purchase
price equal to 100% of the principal amount of such Notes plus accrued interest
to the date of purchase (the "Excess Proceeds Payment").
Graphics will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations thereunder in the event that such Excess Proceeds are received by
Graphics under this covenant and Graphics is required to repurchase Notes as
described above. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
Limitation on Affiliate Transactions
Graphics shall not, and shall not permit any Restricted Subsidiary to,
enter into, renew or extend any transaction (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of Graphics (an "Affiliate Transaction") unless the terms thereof (1)
are no less favorable to Graphics or such Restricted Subsidiary (or, in the
case of an Affiliate Transaction between Graphics and a Restricted Subsidiary,
are no less favorable to Graphics or are, in the good faith determination of
the Board of Directors, in the best interests of Graphics) than those which
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate and (2) if such Affiliate Transaction
involves an amount in excess of $2.5 million, the terms thereof are set forth
in writing and either (A) have been approved by a majority of the disinterested
members of the Board of Directors or (B) for which Graphics or such Restricted
Subsidiary delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to Graphics or
such Restricted Subsidiary from a financial point of view.
The provisions of the preceding paragraph shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of Graphics pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees
in the ordinary course of business in accordance with the past practices of
Graphics or its Restricted Subsidiaries; (v) the payment of reasonable fees to
directors of Graphics and its Restricted Subsidiaries who are not employees of
Graphics or its Restricted Subsidiaries; (vi) any payments or other
transactions pursuant to any tax-sharing agreement between Graphics and any
other Person with which Graphics is required or permitted to file a
consolidated tax return or with which Graphics is or could be part of a
consolidated group for tax purposes; (vii) any Affiliate Transaction between
Graphics and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries;
(viii) the Transactions; (ix) any employment or other agreement providing for
compensation between Graphics or any of its Restricted Subsidiaries and James
T. Sullivan or Stephen M. Dyott that is approved, in good faith, by the Board
of Directors; (x) the payment of fees to Morgan Stanley & Co. Incorporated or
its Affiliates for financial, advisory, consulting or investment banking
services that the Board of Directors of Graphics deems to be advisable or
appropriate for Graphics or any Subsidiary to obtain (and including the payment
to Morgan Stanley & Co. Incorporated or its Affiliates of any underwriting
discounts or commissions or placement agency fees in connection with the
issuance and sale of any securities by Graphics or any Subsidiary of Graphics);
or (xi) sales of Capital Stock of Communications or Graphics to Morgan Stanley
& Co. Incorporated or its Affiliates.
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Change of Control Triggering Event
Upon the occurrence of a Change of Control Triggering Event, each
holder of Notes will have the right to require Graphics to repurchase all or
any part of such holder's Notes at a repurchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date) in
accordance with the terms described below. The Indenture will provide that,
prior to the mailing of the notice referred to below, but in any event within
30 days following any Change of Control Triggering Event, Graphics covenants to
(i) repay in full all Indebtedness under the Bank Credit Agreement (and
terminate all commitments thereunder) or offer to repay in full all
Indebtedness under the Bank Credit Agreement (and terminate all commitments
thereunder) and to repay the Indebtedness owed to (and terminate the
commitments of) each lender which has accepted such offer or (ii) obtain the
requisite consents under the Bank Credit Agreement to permit the repurchase of
the Notes as provided below. Graphics shall first comply with the covenant in
the immediately preceding sentence before it shall be required to repurchase
Notes pursuant to the provisions described below. Graphics' failure to comply
with the covenant described in the second preceding sentence resulting in a
failure to mail the notice referred to below shall constitute an Event of
Default under clause (iv) and not in clause (ii) under "Defaults" below.
Within 30 days following any Change of Triggering Event, Graphics will
mail a notice to each holder stating
(i) that a Change of Control Triggering Event has
occurred and that such holder has the right to require Graphics to
repurchase all or any part of such holder's Notes at a repurchase
price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase (subject to the
right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date);
(ii) the circumstances and relevant facts regarding such
Change of Control Triggering Event (including, to the extent
available, information with respect to pro forma historical income,
cash flow and capitalization of Graphics after giving effect to such
Change of Control Triggering Event);
(iii) the repurchase date (which will be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(iv) the instructions, determined by Graphics consistent
with the Indenture, that a holder must follow in order to have its
Notes repurchased.
The obligation of Graphics to offer to purchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Communications,
and, thus, the removal of incumbent management. Subject to the limitations
discussed below, Graphics could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of Indebtedness outstanding at such time or otherwise
affect Graphics' capital structure or credit ratings.
Graphics' ability to pay cash to the Holders of Notes upon a
repurchase may be limited by Graphics' then existing financial resources.
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Graphics will comply with any tender offer rules under the Exchange
Act which may then be applicable, including Rule 14e-1, in connection with any
offer required to be made by Graphics to repurchase the Notes as a result of a
Change of Control Triggering Event. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, Graphics shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the covenant described hereunder by virtue thereof.
The provisions relative to Graphics' obligation to make an offer to
repurchase the Notes as a result of a Change of Control Triggering Event may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
Limitation on the Issuance of Preferred Stock of Restricted
Subsidiaries
Graphics shall not sell or otherwise dispose of any shares of
Preferred Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue, sell or otherwise dispose of any
shares of its Preferred Stock, except, in each case, (i) to Graphics or a
Wholly Owned Subsidiary or (ii) if, immediately after giving effect to such
issuance, sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary.
SEC Reports
Notwithstanding that Graphics may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, Graphics shall file
with the Commission and provide the Trustee and Noteholders with such annual
reports and such information, documents and other reports which are specified
in Sections 13 and 15(d) of the Exchange Act and applicable to a Person subject
to such Sections, such information, documents and other reports to be so filed
and provided at the times specified for the filing of such information,
documents and reports under such Sections; provided, however, that, so long as
Communications is the Guarantor of the Notes, the reports, information and
other documents required to be filed and provided as described hereunder shall
be those of Communications rather than Graphics.
Except for the limitations on dividends and redemptions of capital
stock and the limitations on the Incurrence of Indebtedness, the Indenture will
not contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
SUCCESSOR COMPANY
Neither Communications nor Graphics may consolidate with or merge with
or into, or convey, transfer or lease all or substantially all its assets to,
any Person (other than Graphics or Communications, respectively, or a Wholly
Owned Subsidiary with a positive net worth immediately prior to such
consolidation, merger or transfer of assets; provided, however, that in
connection with any such consolidation, merger or transfer, no consideration
(other than Capital Stock (excluding Disqualified Stock) of the surviving
Person, Communications or Graphics) shall be issued or distributed to the
stockholders of Graphics) unless: (i) the resulting, surviving or transferee
Person (the "Successor Company") is organized and existing under the laws of
the United States of America or any State thereof or the District of Columbia
and such entity (if not the Company) expressly assumes by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Communications or Graphics, as the case may be,
under the Indenture and the Notes; (ii) immediately prior to and after giving
effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary of the Successor Company
as a result of such transaction as having been Incurred by the Successor
Company or such Subsidiary at the time of such transaction), no Default has
happened and is continuing; (iii) in the case of a transaction involving
Graphics, immediately after giving effect to such transaction, the Consolidated
Coverage Ratio of the Successor Company is at least 1:1; provided, however,
that, if the Consolidated Coverage
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Ratio of Graphics before giving effect to such transaction is within the range
set forth in column (A) below, then the Consolidated Coverage Ratio of the
Successor Company shall be at least equal to the lesser of (1) the ratio
determined by multiplying the percentage set forth in column (B) below by the
Consolidated Coverage Ratio of Graphics prior to such transaction and (2) the
ratio set forth in column (C) below:
<TABLE>
<CAPTION>
(A) (B) (C)
--- --- ---
<S> <C> <C>
1.11:1 to 1.99:1 . . . . . . . . . . . . . . . . . . . 90% 1.50:1
2.00:1 to 2.99:1 . . . . . . . . . . . . . . . . . . . 80% 2.10:1
3.00:1 to 3.99:1 . . . . . . . . . . . . . . . . . . . 70% 2.40:1
4.00:1 or more . . . . . . . . . . . . . . . . . . . 60% 2.50:1
</TABLE>
(iv) in the case of a transaction involving Graphics, immediately after giving
effect to such transaction, the Successor Company has Consolidated Net Worth in
an amount which is not less than the Consolidated Net Worth of Graphics prior
to such transaction and (v) Communications or Graphics, as the case may be,
delivers to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. The Successor Company will be
the successor to Communications or Graphics, as the case may be, and shall
succeed to, and be substituted for, and may exercise every right and power of,
Communications or Graphics, as the case may be, under the Indenture but the
predecessor company, in the case of a lease, shall not be released from the
obligation to pay the principal of and interest on the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in
the payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by Graphics to comply with its obligations
under "Successor Company" above, (iv) the failure by Graphics to comply for 30
days after notice with any of its obligations under the covenants described
above in "Certain Covenants" under "Limitation on Indebtedness", "Limitation on
Restricted Payments", "Limitation on Restrictions on Distributions from
Subsidiaries", "Limitation on Sales of Assets and Subsidiary Stock" (other than
a failure to repurchase Notes), "Limitation on Affiliate Transactions", "Change
of Control Triggering Event" (other than a failure to repurchase Notes), or
"SEC Reports", (v) the failure by Communications or Graphics to comply for 60
days after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of Communications, Graphics or any Significant Subsidiary is not
paid within any applicable grace period after final maturity thereof or
becomes, or is declared by the holders thereof to be, immediately and
unconditionally due and payable because of a default and the total amount of
such Indebtedness unpaid or becoming or declared to be due and payable exceeds
$10 million and such failure continues (or such payment shall not have been
waived or extended or such Indebtedness shall continue to be due and payable)
for 30 days after notice (the "cross acceleration provision"), (vii) certain
events of bankruptcy, insolvency or reorganization of Communications, Graphics
or a Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment
or decree for the payment of money in excess of $10 million (provided that the
amount of such money judgment or decree shall be calculated net of any
insurance coverage that the Company has determined in good faith is available
in whole or in part with respect to such money judgment or decree) is rendered
against Communications, Graphics or a Significant Subsidiary, remains
outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days after notice (the "judgment default
provision") or (ix) the Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Guaranty) or Communications denies or
disaffirms its obligations under the Guaranty. However, a default under clause
(iv), (v), (vi) and (viii) will not constitute an Event of Default until the
Trustee or the holders of 25% in principal amount of the outstanding Notes
notify Graphics of the default and Graphics does not cure such default within
the time specified after receipt of such notice.
87
<PAGE> 90
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% of principal amount of the outstanding Notes may
declare the principal amount of and accrued but unpaid interest on all the
Notes as of the date of such declaration to be due and payable. Upon such a
declaration, such amounts shall be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of Graphics occurs and is continuing, the principal amount of and any accrued
but unpaid interest on all the Notes will ipso facto become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holders of the Notes. Under certain circumstances, the holders of a
majority in principal amount of the outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a
Note may pursue any remedy with respect to the Indenture or the Notes unless
(i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period. Subject to certain restrictions, the holders of a majority
in principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other holder of a Note or that would involve the Trustee in
personal liability.
The Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is in the interest of the holders of the Notes. In
addition, Graphics is required to deliver to the Trustee, within 120 days after
the end of the fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. Graphics
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any events which would constitute certain Defaults,
their status and what action Graphics is taking or proposes to take in respect
thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent
of each holder of an outstanding Note, no amendment may, among other things,
(i) reduce the amount of Notes whose holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note,
(iii) reduce the principal of or extend the Stated Maturity of any Note or
reduce the principal amount of any Note, (iv) reduce the premium payable upon
the redemption of any Note or change the time at which any Note may be redeemed
as described under "Optional Redemption" above, (v) make any Note payable in
money other than that stated in the Note, (vi) impair the right of any holder
of the Notes to receive payment of principal of and interest on such holder's
Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Notes, (vii)
make any
88
<PAGE> 91
change in the amendment provisions which require each holder's consent or in
the waiver provisions, (viii) make any change to the subordination provisions
of the Indenture that would adversely affect the Noteholders or (ix) make any
change in the Guaranty that would adversely affect the Noteholders.
Without the consent of any holder of the Notes, Graphics and the
Trustee may amend or supplement the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of Graphics under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add additional
guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of Graphics or Communications for the benefit of the holders of the
Notes or to surrender any right or power conferred upon Graphics or
Communications, to provide for the issuance of the Notes, to make any change
that does not adversely affect the rights of any holder of the Notes or to
comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act. However, no
amendment may be made to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness (or their
Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, Graphics is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
DEFEASANCE
Graphics at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. Graphics at any time may terminate its obligations under the covenants
described under "Certain Covenants", the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "Defaults" above and the
limitations contained in clauses (iii) and (iv) under "Successor Company" above
("covenant defeasance").
Graphics may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Graphics exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If Graphics exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "Defaults" above or because of the
failure of Graphics to comply with clause (iii) or (iv) under "Successor
Company" above. If Graphics exercises its legal defeasance option or its
covenant defeasance option, Communications will be released from all its
obligations with respect to the Guaranty.
In order to exercise either defeasance option, Graphics must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an opinion of
counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
89
<PAGE> 92
CONCERNING THE TRUSTEE
On December 4, 1995, The Bank of New York purchased the corporate
trust business of NationsBank of Georgia, National Association, and became the
Trustee under the Indenture and the Registrar and Paying Agent with regard to
the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts executed and to be performed entirely in such State.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which represents the opinion of Shearman &
Sterling, counsel to the Company, describes the material United States federal
income tax consequences of the acquisition, ownership and disposition of the
Notes. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. This discussion assumes that all of the Notes will
be held as capital assets (i.e., generally assets that are held for
investment), within the meaning of Section 1221 of the Code, and will not be
part of a straddle, a hedge or a conversion transaction, within the meaning of
Section 1258 of the Code. The discussion is for general information only, and
does not address all of the tax consequences that may be relevant to particular
purchasers in light of their personal circumstances, or to certain types of
purchasers (such as certain financial institutions, insurance companies,
tax-exempt entities, dealers in securities or foreign persons). Persons
considering the purchase of Notes should consult their tax advisors with regard
to the applications of the United States federal income tax laws to their
particular situations, as well as any tax consequences arising under the laws
of any state, local, or foreign taxing jurisdictions.
THE NOTES
Stated Interest. Each holder of Notes must include as ordinary
interest income the interest attributable to such Notes at the time it accrues
or is received, in accordance with the holder's accounting method for United
States federal income tax purposes.
The Notes were not issued with original issue discount ("OID"), unless
the existence of Graphics' obligation to offer to repurchase such Notes upon a
Change of Control Triggering Event affects the yield or maturity date of the
Notes. In the event of a Change of Control Triggering Event, Graphics will be
required to offer to repurchase the Notes. Based on the applicable
regulations, the right of holders of the Notes to require repurchase upon the
occurrence of a Change of Control Triggering Event will not affect the yield or
maturity date of the Notes unless, based on all the facts and circumstances as
of the issue date, it is more likely than not that such an event giving rise to
the repurchase will occur. Graphics has not treated the Change of Control
Triggering Event provisions as affecting the computation of the yield to
maturity. If the Change of Control Triggering Event provisions were to affect
the computation of the yield to maturity, the Notes could be treated as having
been issued with OID in the amount of the premium payable upon exercise of the
holder's rights under such provisions.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement
of a Note, a holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (reduced, in
the case of a cash basis taxpayer, by an amount attributable to accrued stated
interest, which is taxable as such) and such holder's adjusted tax basis in
such Note. A holder's adjusted tax basis in a Note will generally equal the
cost of such Note to such holder, increased by any accrued interest and market
discount previously
90
<PAGE> 93
included in taxable income by the holder, and reduced by any amortized bond
premium and any payments received by the holder, all with respect to such Note.
Subject to the exception discussed below for market discount, gain or
loss recognized on the sale, exchange or retirement of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if at the time
of sale, exchange or retirement such Note has been held for more than one year.
Amortizable Bond Premium and Market Discount. If a holder purchased a
Note for an amount that is greater than the amount payable at maturity, such
holder will be considered to have purchased such Note with "bond premium." The
amount of bond premium is the excess of (i) the holder's tax basis in such
Note, over (ii) the amount payable at maturity (or on an earlier call date if
it results in a smaller amortizable bond premium). Such holder may elect (in
accordance with applicable Code provisions) to amortize such premium using a
constant yield method over the remaining term of such Note (or until an earlier
call date if it resulted in a smaller amount of bond premium) and to offset
interest otherwise required to be included in income in respect of such Note
during any taxable year by the amortized amount of such excess for such taxable
year. Such election, once made, is irrevocable (unless permission is received
from the Internal Revenue Service (the "IRS")) and applies to all taxable bonds
held during the taxable year for which the election is made or subsequently
acquired. A holder who has elected to amortize premium using the constant
yield method may also elect to compute interest accruals by treating the
purchase as a purchase at original issuance and applying the constant yield
method.
If a holder purchased a Note for an amount that is less than the
stated redemption price at maturity, such holder will generally be considered
to have purchased such Note with "market discount." For this purpose, the
stated redemption price at maturity of a Note will equal its principal amount.
Market discount with respect to a Note is the excess of the stated redemption
price at maturity over the amount paid by the holder for such Note. However,
the amount of market discount will be considered zero if it would otherwise be
less than 1/4 of 1 percent of the stated redemption price of such Note at
maturity multiplied by the number of complete years to maturity (after the
holder acquired such Note). If a Note is subject to the market discount rules,
a holder will generally be required to (i) treat any gain realized with respect
to such Note as ordinary income to the extent market discount accrued during
the period such holder held the Note, (ii) possibly treat any payment on such
Note (other than stated interest) as ordinary income to the extent market
discount accrued during the period such holder held such Note and (iii) defer
the deduction of all or a portion of the interest expense on any indebtedness
incurred or maintained by such holder to purchase or carry such Note. If such
Note is disposed of in a nontaxable transaction (other than a nonrecognition
transaction described in Section 1276(c) of the Code), accrued market discount
will be includable as ordinary income to the holder as if such holder had sold
such Note at its then fair market value. Market discount will be considered to
accrue ratably during the period from the date of acquisition to the maturity
date of such Note, unless the holder irrevocably elects (on an
instrument-by-instrument basis) to accrue market discount on the basis of a
constant interest rate. A holder may elect to include market discount in
income currently as it accrues (on either a ratable or constant yield basis),
in which case the rule described above regarding deferral of interest
deductions will not apply. An election to include market discount currently,
once made, will apply to all market discount obligations acquired by the holder
on or after the first day of the first taxable year to which the election
applies, and may not be revoked without the consent of the IRS. In the case of
a holder who has made both of the elections described above with respect to
such Note, such a holder may elect to compute interest accruals by treating the
purchase as a purchase at original issuance and applying the constant yield
method.
Because of the complexity of the rules relating to bond premium and
market discount, holders should consult their tax advisors as to the
application of these rules to their particular circumstances and as to the
merit of making any elections in connection therewith.
91
<PAGE> 94
BACKUP WITHHOLDING AND INFORMATION REPORTING
The information reporting requirements of the Code and Treasury
Regulations apply to certain payments of principal, premium, if any, and
interest (including OID) on a Note, and to proceeds of the sale or redemption
of a Note. Certain holders may also be subject to backup withholding at a rate
of 31% on any payments made with respect to, and proceeds of disposition of,
the Notes. Backup withholding will apply to such payments if the holder fails
to furnish a correct taxpayer identification number (social security number or
employer identification number). Backup withholding may also apply to payments
of interest to a holder if such holder has failed to report interest or
dividend income to the IRS and the IRS has so notified the payor or, in certain
circumstances, if a holder has failed to certify that such holder is not
subject to such backup withholding, or failed to otherwise comply with the
applicable requirements of the backup withholding rules. Any amount withheld
under these backup withholding rules will be creditable against the holder's
federal income tax liability provided that the required information is
furnished to the IRS. Certain holders (including, among others, corporations)
are not subject to the backup withholding requirements.
PLAN OF DISTRIBUTION
This Prospectus is to be used by MS&Co. in connection with offers and
sales in market-making transactions at negotiated prices relating to prevailing
market prices at the time of sale. MS&Co. may act as principal or agent in
such transactions. MS&Co. has no obligation to make a market in the Notes and
may discontinue its market-making activities at any time without notice, at its
sole discretion.
There is currently no established public market for the Notes.
Graphics does not currently intend to apply for listing of the Notes on any
securities exchange or approval for quotation through any automated quotation
system. Therefore, any trading that does develop will occur on the
over-the-counter market. The Company has been advised by MS&Co. that it
intends to make a market in the Notes but it has no obligation to do so and any
market-making may be discontinued at any time without notice. No assurance can
be given that an active public market for the Notes will develop.
MS&Co. acted as placement agent in connection with the original
private placement of the Old Notes and received a placement fee of $5,550,000
in connection therewith. MS&Co. is affiliated with entities that beneficially
own a substantial majority of the outstanding shares of capital stock of
Communications.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby were
passed on for Graphics and Communications by Shearman & Sterling, New York, New
York. Shearman & Sterling has performed, and will continue to perform, legal
services for MSLEF and the MSCP Entities, companies controlled by MSLEF and the
MSCP Entities and MS&Co.
EXPERTS
The consolidated financial statements and schedules of Sullivan
Communications, Inc. at March 31, 1996 and 1995, and for each of the three
fiscal years in the period ended March 31, 1996, appearing in this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon (which contain an explanatory
paragraph with respect to accounting changes mentioned in notes 7 and 19 to the
consolidated financial statements) appearing elsewhere herein, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
92
<PAGE> 95
The financial statements of Gowe Printing Company at January 1, 1995
and January 2, 1994, and for each of the two years in the period ended January
1, 1995, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
93
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SULLIVAN COMMUNICATIONS, INC.
AUDITED FINANCIAL STATEMENTS: Page
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets--March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
For the Years Ended March 31, 1996, 1995 and 1994:
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
GOWE PRINTING COMPANY
AUDITED FINANCIAL STATEMENTS:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
Balance Sheets as of January 1, 1995 and January 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-38
For the Years Ended January 1, 1995 and January 2, 1994:
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-39
Statements of Net Investment by Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-41
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-42
UNAUDITED FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-46
For the Year Ended December 31, 1995 and January 1, 1995:
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-47
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-48
Notes to Unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-49
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sullivan Communications, Inc.
We have audited the accompanying consolidated balance sheets of Sullivan
Communications, Inc. as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for each of the three fiscal years in the period ended March 31, 1996. 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 in accordance with generally accepted auditing
standards. 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sullivan Communications, Inc. at March 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 19 to the consolidated financial statements, in fiscal
year 1996 the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. Also, as discussed in Note 7 to the consolidated financial
statements, the Company changed its method of accounting for inventory.
Ernst & Young LLP
Nashville, Tennesse
June 7, 1996
F-2
<PAGE> 98
SULLIVAN COMMUNICATIONS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 0 4,635
Receivables:
Trade accounts, less allowance for doubtful accounts of
$4,830 and $3,174 at March 31, 1996 and 1995, respectively 61,825 46,499
Other 3,588 3,767
----------- -------
Total receivables 65,413 50,266
Inventories 15,821 10,935
Prepaid expenses and other current assets 4,285 4,286
----------- -------
Total current assets 85,519 70,122
Property, plant and equipment:
Land and improvements 3,259 3,548
Buildings and improvements 16,346 17,148
Machinery and equipment 169,375 147,410
Furniture and fixtures 3,212 1,968
Leased assets under capital leases 8,606 809
Equipment installations in process 6,466 10,169
----------- -------
207,264 181,052
Less accumulated depreciation (51,103) (35,019)
----------- -------
Net property, plant and equipment 156,161 146,033
Excess of cost over net assets acquired, less accumulated
amortization of $25,269 and $16,638 at March 31, 1996 and 1995,
respectively 89,324 98,706
Other assets 20,177 13,507
----------- -------
Total assets $351,181 328,368
=========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 99
SULLIVAN COMMUNICATIONS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
-------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current installments of long-term debt and capitalized leases $ 11,490 15,640
Trade accounts payable 35,931 22,898
Accrued expenses 27,271 25,606
Income taxes 1,215 1,020
-------- -------
Total current liabilities 75,907 65,164
Long-term debt and capitalized leases, excluding current installments 286,127 242,561
Deferred income taxes 7,801 7,099
Other liabilities 25,742 28,514
-------- -------
Total liabilities 395,577 343,338
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
123,889 shares issued and outstanding 1 1
Series A convertible preferred stock, $.01 par value, 4,000 shares
authorized, issued and outstanding, $40,000,000 liquidation
preference -- --
Series B convertible preferred stock, $.01 par value, 1,750 shares
authorized, issued and outstanding, $17,500,000 liquidation
preference -- --
Additional paid-in capital 57,499 57,499
Accumulated deficit (100,525) (71,198)
Cumulative translation adjustment (1,371) (1,272)
-------- -------
Total stockholders' deficit (44,396) (14,970)
-------- -------
Commitments and contingencies
Total liabilities and stockholders' deficit $351,181 328,368
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 100
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1996 1995 1994
---------------- ------------- -----------
<S> <C> <C> <C>
Sales $ 536,342 434,868 414,673
Cost of sales 459,704 362,801 361,969
--------------- ------------- -----------
Gross profit 76,638 72,067 52,704
Selling, general and administrative expenses 49,122 43,454 38,642
Amortization of goodwill 8,631 8,386 8,252
Restructuring costs and other special charges 7,533 -- --
Gain from curtailment and establishment of
defined benefit pension plans, net -- (3,311) --
--------------- ------------- -----------
Operating income 11,352 23,538 5,810
--------------- ------------- -----------
Other expense (income):
Interest expense 32,688 25,752 24,049
Interest income (263) (418) (312)
Nonrecurring charge
related to terminated
merger 1,534 -- --
Other, net 188 985 2,369
--------------- ------------- -----------
Total other expense 34,147 26,319 26,106
--------------- ------------- -----------
Loss from continuing
operations before
income taxes and
extraordinary item (22,795) (2,781) (20,296)
(4,874) (2,552) (2,380)
Income tax expense
--------------- ------------- -----------
Loss from continuing
operations before
extraordinary item (27,669) (5,333) (22,676)
Discontinued operations
Loss from operations, net
of tax -- -- (23,272)
Estimated (loss) on shut
down and gain on
settlement, net of tax 2,868 18,495 (38,412)
--------------- ------------- -----------
(Loss) income before
extraordinary item (24,801) 13,162 (84,360)
Loss on early
extinguishment of debt,
net of tax (4,526) -- --
--------------- ------------- -----------
Net (loss) income $ (29,327) 13,162 (84,360)
=============== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 101
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
<TABLE>
<CAPTION>
SERIES A AND B UNFUND-
VOTING CONVERTIBLE ADDITIONAL ACCUMU- CUMULATIVE ED
COMMON PREFERRED PAID-IN LATED TRANSLATION PENSION
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT LIABILITY
------------- --------------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1993 $ 1 -- 39,999 -- -- --
------------- --------------- ---------- --------- ------------ ----------
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- -- -- -- (1,125) --
Net loss -- -- -- (84,360) -- --
------------- --------------- ---------- --------- ------------ ----------
Balances, March 31, 1994 $ 1 -- 39,999 (84,360) (1,125) --
------------- --------------- ---------- --------- ------------ ----------
Pooling accounting -- -- 17,500 -- -- --
------------- --------------- ---------- --------- ------------ ----------
Balances, December 23,
1994 $ 1 -- 57,499 (84,360) (1,125) --
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- -- -- -- (147) --
Net income -- -- -- 13,162 -- --
------------- --------------- ---------- --------- ------------ ----------
Balances, March 31, 1995 $ 1 -- 57,499 (71,198) (1,272) --
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- -- -- -- (99) --
Net loss -- -- -- (29,327) -- --
------------- --------------- ---------- --------- ------------ ----------
Balances, March 31, 1996 $ 1 -- 57,499 (100,525) (1,371) --
============= =============== ========== ========= ============ ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
-------- --------
<S> <C> <C>
Balances, April 1, 1993 -- 40,000
-------- ---------
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- (1,125)
Net loss -- (84,360)
-------- ---------
Balances, March 31, 1994 -- (45,485)
-------- ---------
Pooling accounting -- 17,500
-------- ---------
Balances, December 23,
1994 -- (27,985)
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- (147)
Net income -- 13,162
-------- ---------
Balances, March 31, 1995 $ -- (14,970)
Change in cumulative
translation adjustment -
exchange rate
fluctuations -- (99)
Net loss -- (29,327)
-------- ---------
Balances, March 31, 1996 -- (44,396)
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 102
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------
1996 1995 1994
--------------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (29,327) 13,162 (84,360)
Adjustments to reconcile net (loss) income to cash (used)
provided by operating activities:
Extraordinary item - non cash (1,912) -- --
Other special charges - non cash 4,306 -- --
Depreciation 21,391 18,330 17,897
Depreciation and amortization related to SMI -- -- 4,535
Amortization of goodwill 8,631 8,386 8,252
Amortization of other assets 1,606 1,190 1,109
Amortization of deferred financing costs and bond premium 1,469 485 423
(Gain) loss on shut down of SMI, net of tax - non cash (1,480) -- 38,412
Loss (gain) on sales and write-downs of property, plant and
equipment 350 72 (533)
Gain from curtailment and establishment of defined benefit
pension plans, net -- (3,311) --
Deferred income tax expense 595 1,560 695
Changes in assets and liabilities, net of effects of shut down of
SMI and acquisition of Gowe:
(Increase) decrease in receivables (11,766) 11,456 (3,158)
(Increase) decrease in inventories (2,848) 1,534 6,950
Increase (decrease) in trade accounts payable 11,571 (15,026) (3,258)
Increase (decrease) in accrued expenses 981 (8,489) (16,676)
Increase in current income taxes payable 195 592 1,570
Other (7,949) 569 813
--------------- ------------- -----------
Total adjustments 25,140 17,348 57,031
--------------- ------------- -----------
Net cash (used) provided by operating activities (4,187) 30,510 (27,329)
--------------- ------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 103
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1996 1995 1994
----------- --------------- ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (20,276) (20,415) (15,722)
Proceeds from sales of property, plant
and equipment 36 2,137 1,334
Gowe acquisition (6,682) -- --
Proceeds from shut down of SMI -- -- 13,400
Proceeds from sale of NIS 2,550 -- --
Other (64) (116) (344)
----------- --------------- ------------
Net cash used by investing activities (24,436) (18,394) (1,332)
----------- --------------- ------------
Cash flows from financing activities:
Debt:
Proceeds 280,451 -- 37,000
Payments (242,515) (16,329) (12,610)
Increase in deferred financing costs (12,095) (1,052) (1,225)
Repayment of capital lease
obligations (591) (140) --
Other (1,268) 808 (52)
----------- --------------- ------------
Net cash provided (used) by financing
activities 23,982 (16,713) 23,113
----------- --------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 104
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1996 1995 1994
-------------- -------------- ---------
<S> <C> <C> <C>
Effect of exchange rates on cash and 6 1 17
cash equivalents
-------------- -------------- ---------
Decrease in cash and cash equivalents (4,635) (4,596) (5,531)
Cash and cash equivalents:
Beginning of period 4,635 9,231 14,370
-------------- -------------- ---------
End of period $ 0 4,635 8,839
============== ============== =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 30,581 26,416 30,315
Income taxes, net of refunds 3,964 1,904 112
Exchange rate adjustment to long-term debt 0 54 374
Non cash investing activities:
Lease obligations $ 7,746 814 --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE> 105
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sullivan Communications, Inc. ("Communications"), together
with its wholly owned subsidiary, Sullivan Graphics, Inc.
("Graphics"), collectively the ("Company"), was formed in April 1989
under the name GBP Holdings, Inc. to effect the purchase of all the
capital stock of GBP Industries, Inc. from its stockholders in a
leveraged buyout transaction. In October 1989, GBP Holdings, Inc.
changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc.
changed its name to Sullivan Graphics, Inc. Effective June 1993,
Sullivan Holdings, Inc. changed its name to Sullivan Communications,
Inc.
On August 15, 1995, the Company completed a merger transaction
with Shakopee Valley Printing Inc. ("Shakopee") (the "Shakopee
Merger"). Shakopee was formed to effect the purchase of certain
assets and assumption of certain liabilities of Shakopee Valley
Printing, a Guy Gannett Communications division. On December 22,
1994, Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(collectively the "MSCP III Entities"), together with First Plaza
Group Trust and Leeway & Co. purchased 35,000 shares of Common Stock
of Shakopee. On December 22, 1994, pursuant to an Agreement for the
Purchase of Assets between Guy Gannett Communications (the "Seller")
and Shakopee (the "Buyer"), the Seller agreed to sell (effective at
the close of business on December 22, 1994) certain assets and
transfer certain liabilities of Shakopee Valley Printing to the Buyer
for a total purchase price of approximately $42.6 million, primarily
financed through the issuance of 35,000 shares of Common Stock and
bank borrowings. The general partner of each of the MSCP III
Entities is a wholly owned subsidiary of Morgan Stanley Group Inc.,
the parent company of the general partner of the Company's majority
stockholder. In addition, the other stockholders of Shakopee are also
stockholders of the Company. See note 3 for a description of the
specific terms of the Shakopee Merger.
Communications has no operations or significant assets other
than its investment in Graphics. Communications is dependent upon
distributions from Graphics to fund its obligations. Under the terms
of its debt agreements at March 31, 1996, Graphics' ability to pay
dividends or lend to Communications was either restricted or
prohibited, except that Graphics may pay specified amounts to
Communications (i) to pay the repurchase price payable to any officer
or employee (or their estates) of Communications, Graphics or any of
their respective subsidiaries in respect of their stock or options to
purchase stock in Communications upon the death, disability or
termination of employment of such officers and employees (so long as
no default, or event of default, as defined, has occurred under the
terms of the Bank Credit Agreement, as defined below, and provided the
aggregate amount of all such repurchases does not exceed $2 million)
and (ii) to fund the payment of Communications' operating expenses
incurred in the ordinary course of business, other corporate overhead
costs and expenses (so long as the aggregate amount of such payments
does not exceed $250,000 in any fiscal year) and Communications'
obligations pursuant to a tax sharing agreement with Graphics.
Substantially all of Graphics' long-term obligations have been fully
and unconditionally guaranteed by Communications.
The two business sectors of the commercial printing industry
in which the Company operates are printing and digital imaging and
prepress services conducted by its American Color division. The
Company entered the coupon free standing insert ("FSI") market in 1992
by organizing Sullivan Marketing, Inc. ("SMI") and subsequently
terminated its involvement in this market in February 1994 (see note
6).
F-10
<PAGE> 106
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
Significant accounting policies are as follows:
(a) BASIS OF PRESENTATION (SEE NOTE 2)
The consolidated financial statements include the
accounts of Communications and all greater than 50% owned
subsidiaries which are consolidated under generally accepted
accounting principles.
All significant intercompany transactions and
balances have been eliminated in consolidation.
The Shakopee Merger has been accounted for as a
combination of entities under common control (similar to a
pooling-of-interests). The consolidated financial statements
give retroactive effect to the merger of the Company and
Shakopee and include the combined operations of the Company
and Shakopee for the fiscal year ended March 31, 1995.
Shakopee was not under common control until December 22, 1994,
and, accordingly, the consolidated financial statements
reflect Shakopee as under common control subsequent to such
date.
Earnings per share data has not been provided since
Communications' common stock is closely held.
(b) REVENUE RECOGNITION
In accordance with trade practices of the printing
industry, printing revenues are recognized upon the completion
of production. Shipment of printed material generally occurs
upon completion of this production process. Materials are
printed to unique customer specifications and are not
returnable. Credits relating to specification variances and
other customer adjustments are not significant.
(c) CASH EQUIVALENTS
The Company considers all highly liquid investments
with a maturity at the date of purchase of three months or
less to be cash equivalents.
(d) INVENTORIES
Inventories are valued at the lower of first-in,
first-out ("FIFO") cost or market (net realizable value) (see
note 7).
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost.
Depreciation, which includes amortization of assets under
capital leases, is based on the straight-line method over the
estimated useful lives of the assets or the remaining terms of
the leases.
(f) EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over net assets acquired (or
"goodwill") is amortized on a straight-line basis over a range
of 5 to 40 years for each of its principal business sectors.
The carrying value of goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this review
F-11
<PAGE> 107
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
indicates that goodwill will not be recoverable, as determined
based on the estimated undiscounted future cash flows of the
assets acquired, the Company's carrying amount of the goodwill
is reduced by the estimated shortfall of such cash flows. In
addition, the Company assesses long-lived assets for
impairment under Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FASB 121"). Under these rules, goodwill associated with
assets acquired in a purchase business combination is included
in impairment evaluations when assets or circumstances exist
that indicate the carrying amount of these assets may not be
recoverable.
(g) OTHER ASSETS
Financing costs related to the Bank Credit Agreement
(as defined herein) are deferred and amortized over the term
of the five-year loan agreement. Costs related to the Notes
(as defined herein) are deferred and amortized over the
ten-year term of the Notes.
The covenants not to compete are amortized over the
three and five year terms of the respective underlying
agreements.
(h) INCOME TAXES
Income taxes have been provided using the liability
method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
(i) FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian
division, which include interdivisional balances, are
translated at year-end rates of exchange while revenue and
expense items are translated at average rates for the year.
Translation adjustments are recorded as a separate
component of stockholders' deficit. Since the transactions of
the Canadian division are denominated in its functional
currency and the interdivision accounts are of a long-term
investment nature, no transaction adjustments are included in
operations.
(j) RECLASSIFICATIONS
Certain prior period amounts have been reclassified
to conform with the most recent period presentation.
(k) ENVIRONMENTAL
Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or
future period revenue generation, are expensed. Environmental
liabilities are provided when assessments and/or remedial
efforts are probable and the related amounts can be reasonably
estimated.
F-12
<PAGE> 108
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the estimated fair values of
its financial instruments together with the related carrying
amount. The Company entered into interest rate cap and swap
agreements beginning April 1994 (see note 10). However, the
Company is not a party to any financial instruments with
material off-balance-sheet risk.
(m) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to
credit risk consist primarily of trade accounts receivable.
Concentration of credit risk with respect to trade accounts
receivable are generally diversified due to the large number
of entities comprising the Company's customer base and their
geographic dispersion. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for
potential credit losses.
(n) USE OF ESTIMATES
The preparation of the financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
(o) STOCK BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards
for stock-based employee compensation plans. SFAS 123 is
effective for transactions entered into in fiscal years
beginning after December 15, 1995. The Company will account
for stock-based compensation awards under the provisions of
Accounting Principles Board Opinion No. 25, as permitted by
SFAS 123, and intends to continue to do so.
(2) THE 1993 ACQUISITION
On April 8, 1993 (the "Acquisition Date"), pursuant to an
Agreement and Plan of Merger dated as of March 12, 1993, as amended
(the "Merger Agreement"), between Communications and SGI Acquisition
Corp. ("Acquisition Corp."), Acquisition Corp. was merged with and
into Communications (the "Acquisition"). Acquisition Corp. was
formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain
institutional investors and certain members of management (the
"Purchasing Group") for the purpose of acquiring a majority interest
in Communications. Acquisition Corp. acquired a substantial and
controlling majority interest in Communications in exchange for $40
million in cash. In the Acquisition, Communications continued as the
surviving corporation and the separate corporate existence of
Acquisition Corp. was terminated.
Pursuant to the Acquisition, the Purchasing Group acquired
shares representing 90% of the outstanding shares of Common Stock of
Communications ("New Common Stock") and the shareholders of
Communications immediately prior to the Acquisition ("Existing
Holders") received shares representing 10% of the New Common Stock, in
each case before dilution of certain options to be granted to
management and conversion of the Series A Preferred Stock of
Communications ("Preferred Stock") issued in the Acquisition. In
addition, the Purchasing Group acquired all of the Preferred Stock
with a total
F-13
<PAGE> 109
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
preference of $40 million which, under certain circumstances, is
convertible into shares of New Common Stock.
The Purchasing Group, the Company and certain of the Existing
Holders have entered into a Stockholders' Agreement that provides for
certain other rights and obligations of the parties thereto,
including, among other things, restrictions on transfers of
Communications stock, the designation of a member of the Board of
Directors by the Existing Holders, and restrictions on transactions
that Communications may undertake with affiliates.
The Acquisition was accounted for under the purchase method of
accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). The consolidated financial statements of
the Company contained herein have been prepared as if the Acquisition
occurred on April 1, 1993.
The sources and uses of funds resulting from the Acquisition
are set forth below (in thousands):
<TABLE>
<S> <C>
Proceeds from purchase of stock $40,000
===========
Uses:
Prepayment of Old Bank Credit Agreement 21,629
Repayment of Old Revolving Credit Agreement 9,000
Payment of deferred financing costs associated with the
Acquisition and the amendment and restatement of the Old 1,529
Bank Credit Agreement
Payment of transaction costs 5,471
Proceeds for working capital 2,371
-----------
$40,000
===========
</TABLE>
The allocation of the purchase price and determination of the excess
of cost over net assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Elimination of stockholders' deficit acquired $85,194
Elimination of Class C Common Stock (4,772)
Reduction of property, plant and equipment 14,441
Revaluation of debt to fair value 12,763
Revaluation of pension liability 10,328
Adjustment of tax liabilities (3,762)
Elimination of liability with former majority stockholder (2,667)
Elimination of existing goodwill 27,870
Elimination of a portion of deferred financing costs on 1,904
existing debt
Revaluation of postretirement employee benefits liability (1,097)
Other adjustments related to the Acquisition 3,509
Transaction costs incurred 5,471
-------------
Excess of cost over net assets acquired $149,182
=============
</TABLE>
F-14
<PAGE> 110
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
Transaction costs include approximately $0.7 million paid to the
parent company of the majority stockholder for services rendered in
connection with the completion of the Acquisition.
At the time of the Acquisition, the Company initially
concluded that a 40-year useful life for goodwill was reasonable.
This estimate was based on the Company's evaluation of the
recoverability of goodwill from consolidated operations of its
commercial printing business. In this regard, the Company focused
principally on its core printing business sector which has operated
since 1926. In addition, at the time of the Acquisition, the Company
projected sales growth and profitability in its other two business
sectors, prepress services and coupon FSI, and believed that 40 years
was the most appropriate estimate of the useful life of the
consolidated balance of goodwill at that time.
The Company substantially completed the allocation of goodwill
to its business sectors in the latter part of December 1993. This
analysis considered the adverse developments in the coupon FSI
business sector subsequent to the Acquisition that led to a
significant deterioration in the projected operating results and cash
flows of the FSI business. After the Acquisition, prices in the FSI
business fell to levels that were below the levels anticipated when
the Company entered the market and below what the Company believed
would be sustainable for this business over an extended period of
time. The developments in the FSI business sector also caused the
Company to reassess its assumptions and expectations related to its
prepress services sector and technological developments within that
industry.
In completing its purchase price accounting, the Company
separately evaluated the recoverability of the goodwill allocated to
its primary business sectors. With regard to the printing business
sector, the Company concluded that the fundamental business sector and
economic factors had not changed since the Acquisition and that an
estimated useful life of 40 years for goodwill continued to be
appropriate.
However, the Company concluded that the FSI business sector
would continue to be subject to significantly higher levels of price
competition in an oligopolistic market than had previously been
foreseen. These expectations led the Company to revise its
projections of advertising pages for the first three months of
calendar 1994 and its projections of operating earnings for all of
calendar 1994 for the coupon FSI sector significantly downward and to
conclude that the estimated useful life of the related goodwill more
appropriately approximated five years.
Further, the Company concluded that the digital imaging and
prepress services sector was subject to high levels of ongoing
technological change. Advances in microcomputer software have allowed
some customers to perform certain digital imaging and prepress
services functions in-house. Given the likelihood of significant and
continuing technological change, the Company estimated the useful life
of goodwill related to the digital imaging and prepress services
sector to be five years.
As a result of these factors, the Company allocated goodwill
during December 1993 based on a methodology of relative fair values of
each sector determined using ten-year estimates of cash flows,
adjusted for estimated terminal value, and discounted with a different
discount rate for each sector, commensurate with the risk involved as
of the Acquisition Date. This methodology resulted in an allocation
of goodwill of approximately $70.3 million to printing, $32.4 million
to prepress services and $46.5 million to FSI at the Acquisition Date.
The revision in the amortization periods was accounted for as
a change in accounting estimate, on a prospective basis, in the period
that the estimates were revised (the quarter ended December 31, 1993).
The unamortized cost at the beginning of that period (October 1, 1993)
was allocated to the reduced number of remaining periods (four and
one-half years for the prepress services and coupon FSI sectors).
However, the Company has changed its application of the revision in
the amortization period for the digital
F-15
<PAGE> 111
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
imaging and prepress services sector retroactive to the Acquisition
Date. The effect of the change resulted in the following impact on
the Company's consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994
------------
<S> <C>
Loss from continuing operations $20,152
Adjustment 2,524
------------
Restated loss from continuing operations $22,676
============
Net loss $81,836
Adjustment 2,524
------------
Restated net loss $84,360
============
</TABLE>
The goodwill resulting from the Acquisition will continue to
be amortized on a straight-line basis by business sector. The revised
amortization periods will result in goodwill amortization expense in
future periods relating to the Acquisition of approximately $7.8
million annually through the fourth quarter of Fiscal Year 1998 and
approximately $1.8 million annually thereafter.
(3) THE SHAKOPEE MERGER
On August 15, 1995, the Shakopee Merger was consummated and
each outstanding share of the Common Stock of Shakopee was converted
into one share of the New Common Stock of the Company and 1/20 of one
share of Series B Preferred Stock of the Company. Also on August 15,
1995, concurrent with the Shakopee Merger, the Company sold $185
million of 12 3/4% Senior Subordinated Notes Due 2005. Also on August
15, 1995, the Company repaid all amounts outstanding under the Old
Bank Credit Agreement (as defined herein) which included the Series A
Term Loan and Revolving Credit Facility Borrowings and all amounts due
on the 15% Senior Subordinated Notes Due 2000 (the "Refinancing").
Additionally, on August 15, 1995, the Company entered into a $75
million revolving credit facility maturing in 2000 and a $60 million
amortizing term loan with a final maturity in 2000.
The Shakopee Merger was accounted for under the purchase
method of accounting applying the provisions of APB 16. Pursuant to
the requirements of APB 16, the purchase price was allocated to the
tangible assets and identifiable intangible assets and liabilities
assumed based upon their respective fair values. The allocation of
the purchase price is preliminary and may change during the allocation
period.
F-16
<PAGE> 112
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The allocation of the purchase price is set forth below (in
thousands):
<TABLE>
<S> <C>
Total purchase price $ 42,631
Allocation of the purchase price:
Current assets acquired (10,007)
Property, plant, and equipment acquired (24,960)
Other long-term assets (686)
Current liabilities assumed 5,050
Other adjustments related to the acquisition 187
---------
Excess of cost over net assets acquired $ 12,215
=========
</TABLE>
The Shakopee Merger has been accounted for as a combination of
entities under common control (similar to a pooling-of-interests), and
accordingly, the consolidated financial statements give retroactive
effect to the Shakopee Merger and include the combined operations of
Communications and Shakopee subsequent to December 22, 1994. The
following is a summary of the results of operations of the separate
entities for the fiscal year ended March 31, 1995 (in thousands):
<TABLE>
<CAPTION>
SULLIVAN
COMMUNI-
CATIONS, INC. SHAKOPEE POOLING
(PRIOR TO VALLEY ADJUSTMENTS COMBINED
SHAKOPEE PRINTING
MERGER) INC.
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 420,724 $ 14,144 -- $ 434,868
Income (loss) from continuing
operations $ (5,357) $ 24 -- $ (5,333)
Net income $ 13,138 $ 24 -- $ 13,162
</TABLE>
Pooling adjustments have been recorded to eliminate income and
expenses associated with a management agreement between Graphics and
Shakopee. In addition, $0.8 million of costs reflected in Shakopee's
selling, general and administrative expenses has been reclassified to
cost of sales in conformity with the Company's reporting policies.
(4) THE GOWE ACQUISITION
On March 12, 1996, Graphics acquired the assets of Gowe, Inc.,
a Medina, Ohio based regional printer of newspapers, T.V. books and
retail advertising inserts and catalogs ("Gowe"), for approximately
$6.7 million in cash and assumption of certain liabilities of Gowe,
Inc., pursuant to an Asset Purchase Agreement, among Graphics, Gowe,
Inc. and ComCorp, Inc., the parent company of Gowe, Inc. (the "Gowe
Acquisition"). The Gowe Acquisition was accounted for under the
purchase method of accounting applying the provisions of APB 16.
Pursuant to the requirements of APB 16, the purchase price was
allocated to the tangible assets and identifiable intangible assets
and liabilities assumed based upon their respective fair values. The
allocation of the purchase price is preliminary and may change during
the allocation period. Gowe's results of operations for the period
March 12, 1996 to March 31, 1996 are included in the Company's
consolidated financial statements.
The Company's pro forma unaudited results of operations for
the fiscal year ended March 31, 1996, assuming that the Gowe
Acquisition occurred as of April 1, 1995, were $568.4 million in
sales, a $27.2 million loss from continuing operations before
extraordinary item and a $28.9 million net loss.
F-17
<PAGE> 113
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The Company's pro forma unaudited results of operations for
the fiscal year ended March 31, 1995, assuming that the Refinancing,
Shakopee Merger and Gowe Acquisition occurred as of April 1, 1994,
were $505 million in sales, a $6.9 million loss from continuing
operations before extraordinary item and $7.5 million in net income.
(5) DISPOSAL OF 51% INTEREST IN NATIONAL INSERTING SYSTEMS, INC.
On March 11, 1996, the Company sold its 51% interest in
National Inserting Systems, Inc. ("NIS") for approximately $2.5
million in cash and a note for approximately $0.2 million under the
terms of a Stock Redemption Agreement between NIS and Graphics. This
transaction resulted in a net gain on disposal of approximately $1.3
million, which is classified as other, net in the consolidated
statement of operations. The proceeds of the sale were used to repay
indebtedness under Graphics' Bank Credit Agreement (as defined
herein).
(6) DISCONTINUED COUPON FSI OPERATION AND SMI SETTLEMENT
On February 16, 1994, the Company assigned the coupon FSI
space purchase contracts of its subsidiary, SMI, to News America FSI,
Inc. ("News America") for proceeds of $13.4 million in cash
effectively terminating the Company's involvement in the coupon FSI
business. This transaction resulted in an estimated net loss on shut
down of $38.4 million, which is net of zero income tax benefits, and
includes cash consideration and customer cash advances of $1.5 million
retained by SMI less $42.1 million related to the write-off of
goodwill, $7.4 million in expenses and charges directly related to the
transaction and $3.8 million in other net write-offs and charges
related to consummation of the transaction.
The shut down of SMI was accounted for as a discontinued
operation, and accordingly, its operating results are segregated and
reported as a discontinued operation in the accompanying consolidated
statements of operations.
The Condensed Consolidated Statement of Operations relating to
the discontinued coupon FSI operation follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1994
---------------
<S> <C>
Sales $91,892
Costs and expenses 115,164
---------------
Loss before income taxes (23,272)
Income taxes --
---------------
Net loss $(23,272)
===============
</TABLE>
On June 29, 1994, Graphics and SMI settled the lawsuit pending
in the United States District Court for the Southern District of New
York entitled Sullivan Marketing, Inc. and Sullivan Graphics, Inc. v.
Valassis Communications, Inc., News America FSI, Inc. and David
Brandon (the "SMI Settlement").
F-18
<PAGE> 114
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
All claims and counterclaims in such litigation were dismissed. The
Company recorded income from the SMI Settlement of $18.5 million, net
of $1.5 million in taxes in Fiscal Year 1995, and when coupled with
settlement expenses which had previously been accrued, the net cash
proceeds resulting from this settlement were approximately $16.7
million. Proceeds received were principally used in July 1994 to
reduce borrowings under the Revolving Credit Facility (defined herein)
which were incurred primarily to fund SMI losses prior to the shut
down.
In Fiscal Year 1996 the Company recognized settlement of the
EPI lawsuit (see note 16) and reversed certain accruals related to the
estimated loss on shut down of SMI. The resulting effect reflected in
the Fiscal Year 1996 consolidated statement of operations was $2.9
million income in discontinued operations.
(7) INVENTORIES
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Paper $ 11,937 6,335
Ink 272 773
Equipment held for sale 349 556
Supplies and other 3,263 3,271
----------- -----------
Total $ 15,821 10,935
=========== ===========
</TABLE>
In the third quarter of Fiscal Year 1996, the Company changed to the
FIFO method of accounting from the last-in, first-out ("LIFO")
method of accounting as the principal method of accounting for
inventories. The change results in a balance sheet (1) which
reflects inventories at a value that more closely represents current
costs which the Company believes are the primary concern of its
constituents (bank lenders, financial markets, customers, trade
creditors, etc.) and (2) that enhances the comparability of the
Company's financial statements by changing to the predominant method
used by key competitors in the printing industry. The effect
(approximately $0.8 million) of the change for the six months ended
September 30, 1995 resulted in the retroactive restatement of the
first and second quarters of Fiscal Year 1996 of approximately $0.5
million and $0.3 million, respectively, as a decrease of cost of
goods sold and a decrease to net loss. In addition, the change
resulted in the restatement of Fiscal Year 1995 by approximately
$1.1 million to decrease cost of goods sold and increase net income.
F-19
<PAGE> 115
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(8) OTHER ASSETS
The components of other assets are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1995
---------- ---------
<S> <C> <C>
Deferred financing costs, less accumulated
amortization of $2,139 in 1996 and
$4,010 in 1995 $10,953 8,186
Spare parts inventory, net of valuation allowance
of $100 in 1996 and 1995 1,071 884
Flexi-Tech equipment deposits 2,606 --
Other 5,547 4,437
---------- ---------
Total $20,177 13,507
========== =========
</TABLE>
(9) ACCRUED EXPENSES
The components of accrued expenses are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1996 1995
------------- ----------
<S> <C> <C>
Compensation and related taxes $ 6,882 8,310
Employee benefits 11,204 7,620
Interest 4,435 2,682
Accrued costs related to shut down of SMI -- 1,183
Other 4,750 5,811
------------- ----------
Total $ 27,271 25,606
============= ==========
</TABLE>
F-20
<PAGE> 116
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(10) NOTES PAYABLE, LONG-TERM DEBT AND CAPITALIZED LEASES
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Bank Credit Agreement:
New Term Loan $ 55,902 --
Revolving Credit Facility Borrowings 39,548 24,000
Series A Term Loan -- 93,515
------------ ------------
95,450 117,515
12 3/4% Senior Subordinated Notes Due 2005 185,000 --
Shakopee Bank Credit Agreement -- 25,000
15% Senior Subordinated Notes Due 2000 (includes a
non cash purchase accounting adjustment of $9,661
at March 31, 1995) -- 109,661
Other loans and capitalized leases with varying
maturities and interest rates 17,167 6,025
------------ ------------
Total long-term debt 297,617 258,201
Less current installments 11,490 15,640
------------ ------------
Long-term debt and capitalized leases, excluding
current installments $ 286,127 242,561
============ ============
</TABLE>
OLD BANK CREDIT AGREEMENT
Graphics entered into a bank credit agreement with certain
signatory banks (the "Banks") on July 27, 1989 (the "Original Bank
Credit Agreement"). Effective on the Acquisition Date, the Company
and the Banks amended and restated the Original Bank Credit Agreement
(the Original Bank Credit Agreement, as amended and restated, the "Old
Bank Credit Agreement"). As a result of the amendment, a new Series A
Term Loan was established in the amount of $108.5 million after
consideration of a prepayment totaling $21.6 million from the $40
million received by Communications in the Acquisition. Additionally,
the revolving credit facility was amended whereby a maximum of $45
million may be utilized and outstanding at any time, inclusive of
available letters of credit liabilities of up to $15 million, subject
to certain limitations (the "Old Revolving Credit Facility"). The Old
Revolving Credit Facility was set to expire in March 1998. After
reviewing projected start-up losses for its coupon FSI business as
well as its other business sectors, the Company entered into a first
amendment to the Old Bank Credit Agreement on July 2, 1993. The
Company, in exchange for a fee and prepayment of $12 million of the
Series A Term Loan made primarily from borrowings from the Old
Revolving Credit Facility, agreed with the Banks to revise cash flow
definitions used in certain covenant tests for the period beginning on
the date of the amendment through December 31, 1993. The prepayment
was applied in equal amounts against the calendar 1995 and 1996
scheduled principal payments. Amounts owed under the Old Bank Credit
Agreement were repaid as part of the Refinancing (defined herein).
Graphics entered into interest rate cap/swap arrangements that
effectively limited for the period from April 26, 1994 to April 26,
1996, the maximum rate on the Series A Term Loan of interest payable
on an aggregate notional amount of $60 million of Eurodollar Loans to
5% for the first year and 6% for the second year (based on a
three-month LIBOR index), plus the applicable margin set forth in the
Old Bank Credit Agreement.
F-21
<PAGE> 117
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
SENIOR SUBORDINATED NOTES DUE 2000
On February 15, 1990, Graphics issued $100 million of Senior
Subordinated Notes (the "15% Notes") bearing interest at 15% and
maturing February 1, 2000. Interest on the Notes was payable
semi-annually on February 1 and August 1. The Notes were redeemable
at the option of Graphics in whole or in part after February 1, 1995
at 105.625% of the principal amount, declining ratably to 100% of the
principal amount at February 1, 1998. Mandatory sinking fund payments
in the amount of $20 million on February 1, 1998 and 1999 were
calculated to retire 40% of the Notes prior to maturity. Upon the
occurrence of a change of control, as defined, each holder of a Note
would have the right to require Graphics to repurchase such holder's
Note at 101% of the principal amount thereof. The Notes were
subordinate to all existing and future senior indebtedness, as
defined, of Graphics, and were guaranteed on a senior subordinated
basis by Communications. The Notes were redeemed as part of the
Refinancing (defined herein).
SHAKOPEE BANK CREDIT AGREEMENT
Shakopee entered into a loan agreement in connection with the
acquisition of Shakopee Valley Printing from Guy Gannett
Communications on December 22, 1994 (the "Shakopee Bank Credit
Agreement"). This agreement provided a $30 million senior secured
credit facility including term loans of $25 million and a $5 million
revolving credit facility, which had a maturity date of December 31,
1999. Amounts owed under the term loans were repaid as part of the
Refinancing (defined herein).
THE REFINANCING
On August 15, 1995 the Company sold $185 million of 12 3/4%
Senior Subordinated Notes Due 2005 (the "Notes"). Concurrently with
the closing of the sale of the Notes, the Company entered into a
series of transactions, (the "Refinancing," and together with the
Shakopee Merger, the "Transactions") including the following: (i) the
Company entered into a Credit Agreement with BT Commercial Corporation
("BTCC") (the "Original New Bank Credit Agreement"), providing for a
$75 million revolving credit facility maturing in 2000 (the "Revolving
Credit Facility") and a $60 million amortizing term loan with a final
maturity in 2000 (the "Term Loan"); (ii) the repayment of all $126.5
million of indebtedness outstanding under the Old Bank Credit
Agreement (plus $2.3 million of accrued interest to the date of
repayment); (iii) the redemption of all outstanding 15% Notes at an
aggregate redemption price of $105.6 million (plus $1.8 million of
accrued interest to the redemption date); (iv) the repayment of all
$24.6 million of indebtedness, including the Shakopee Bank Credit
Agreement, assumed in the Shakopee Merger (plus $0.1 million of
accrued interest to the date of repayment) and (v) the payment of
approximately $11.8 million of fees and expenses incurred in
connection with the Transactions. As a result of the Transactions,
the Company recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of zero taxes. This
extraordinary loss primarily consisted of the early redemption premium
on the 15% Notes and the write-off of deferred financing costs related
to refinanced indebtedness partially offset by the write-off of a bond
premium associated with the 15% Notes.
Borrowings under the Revolving Credit Facility are subject to
a borrowing base which consists of (i) 85% of Eligible Accounts
Receivable plus (ii) the lesser of (x) $15 million and (y) 60% of
Eligible Inventory plus (iii) Equipment Acquisition Loans in an amount
not to exceed $7.5 million outstanding at any time, each of which must
be repaid within six months from the date of borrowing minus (iv) the
aggregate amount of reserves against Eligible Accounts Receivable and
Eligible Inventory established by BTCC.
F-22
<PAGE> 118
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The remaining Term Loan amortizes in the following annual
amounts: (i) $8.8 million in Fiscal Year 1997, (ii) $10.6 million in
Fiscal Year 1998, (iii) $13.3 million in Fiscal Year 1999, (iv) $15.2
million in Fiscal Year 2000 and (v) $8 million in Fiscal Year 2001.
The Original New Bank Credit Agreement as amended (the "Bank
Credit Agreement"), requires the Company to meet certain financial
covenants including, but not limited to (1) Minimum EBITDA, (2)
Current Ratio, (3) Fixed Charge Ratio and (4) Net Sale Proceeds. The
Bank Credit Agreement requires prepayments in certain circumstances
including: excess cash flows, proceeds from asset dispositions
totaling prescribed levels, and changes in ownership. Graphics may
also make voluntary prepayments of the amounts borrowed under the Bank
Credit Agreement at any time, without premium or penalty, subject to
certain notice and minimum amount restrictions. Each voluntary
prepayment of Term Loans shall be applied to reduce the then remaining
scheduled repayments in direct order of maturity. Amounts paid
pursuant to repayments and prepayments of the Term Loan (including
reductions in the face amounts of letters of credit) may not be
reborrowed or, in the case of letters of credit, reutilized. Subject
to the requirements set forth above and to certain requirements set
forth in the Bank Credit Agreement, amounts borrowed under the
Revolving Credit Facility may not exceed in an aggregate principal
amount at any time outstanding, when added to the aggregate amount of
Letter of Credit Obligations then outstanding, its Revolving Loan
Percentage of the lesser of (x) the Total Revolving Loan Commitments
then in effect and (y) the Borrowing Base then in effect. Graphics
had outstanding borrowings under the Revolving Credit Facility of
$39.5 million at March 31, 1996. The aggregate amount of letters of
credit outstanding at March 31, 1996 was $3.6 million.
Interest under the Bank Credit Agreement is floating based on
prevailing market rates and is computed using various rate options
over periods of 30, 60, 90 or 180 days as selected by the Company.
The weighted average rate on outstanding indebtedness under the Bank
Credit Agreement at March 31, 1996 was 8.21%. Graphics is required to
pay a commitment fee equal to 1/2% per annum of the unused commitment
under the Revolving Credit Facility.
Communications has guaranteed Graphics' indebtedness under the
Bank Credit Agreement, which guarantee is secured by a pledge of all
of Graphics' and its subsidiaries' stock. In addition, borrowings
under the Bank Credit Agreement are secured by substantially all of
the assets of Graphics. Communications is restricted under its
guarantee of the Bank Credit Agreement from, among other things,
entering into mergers, acquisitions, incurring additional debt, or
paying cash dividends. In the event of a default under the Bank
Credit Agreement the Banks have various rights and obligations under
such agreement which could have an adverse impact on the Company.
Should the Banks exercise their right to accelerate principal
repayment as a result of an event of default, an event of default
would occur under the terms of the Indenture. The Company is
currently in compliance with all financial covenants set forth in the
Bank Credit Agreement.
The Notes bear interest at 12 3/4% and mature February 1,
2005. Interest on the Notes is payable semi-annually on February 1
and August 1. The Notes are redeemable at the option of Graphics in
whole or in part after August 1, 2000 at 106.375% of the principal
amount, declining to 100% of the principal amount, plus accrued
interest, on or after August 1, 2002. Upon the occurrence of a change
of control, as defined, each holder of a Note will have the right to
require Graphics to repurchase all or any portion of such holder's
Note at 101% of the principal amount thereof, plus accrued interest.
The Notes are subordinate to all existing and future senior
indebtedness, as defined, of Graphics, and are guaranteed on a senior
subordinated basis by Communications.
F-23
<PAGE> 119
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The amortization for total long-term debt and capitalized leases at
March 31, 1996 is shown below (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITALIZED
FISCAL YEAR DEBT LEASES
-------------- -------------- ---------------
<S> <C> <C>
1997 $ 10,389 $ 1,746
1998 13,013 1,634
1999 15,150 1,574
2000 55,341 1,384
2001 8,597 1,145
Thereafter 187,265 2,956
-------------- ---------------
Total $ 289,755 10,439
==============
Imputed interest (2,577)
---------------
Present value of minimum
lease payments $ 7,862
===============
</TABLE>
The Company estimates that the carrying amounts of the Company's debt
and other financial instruments appropriate their fair values at March
31, 1996 and 1995, except the Company estimated that the fair value of
the 15% Notes was $105.6 million at March 31, 1995 based upon existing
market values at that time.
F-24
<PAGE> 120
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(11) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts as measured by tax laws
and regulations. Significant components of the Company's deferred tax
liabilities and assets as of March 31, 1996 and 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis in fixed assets $ 19,473 19,938
Foreign taxes 2,068 2,068
Other, net 3,470 5,225
------------ ------------
Total deferred liabilities 25,011 27,231
------------ ------------
Deferred tax assets:
Bad debts 1,825 632
Accrued expenses and other liabilities 13,389 13,354
Accrued loss on discontinued operations 79 1,581
Accumulated amortization 122 5,168
Net operating loss carryforwards 21,203 11,843
AMT credit carryforwards 1,262 879
Cumulative translation adjustment 540 483
------------ ------------
Total deferred assets 38,420 33,940
Valuation allowance for deferred tax assets 21,210 13,808
------------ ------------
Net deferred tax assets 17,210 20,132
------------ ------------
Net deferred tax liabilities $ 7,801 7,099
============ ============
</TABLE>
Management has evaluated the need for a valuation allowance for
all or a portion of the deferred tax assets. A valuation allowance of
$21.2 million has been recorded for the excess of net operating loss
carryforwards and future deductible temporary differences over future
taxable temporary differences. The valuation allowance was increased
by $7.4 million during the current year.
The components of income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------
1996 1995 1994
--------------- -------------- ----------------
<S> <C> <C> <C>
Amount attributable to continuing $ 4,874 2,552 2,380
operations
Amount attributable to discontinued 75 1,505 --
operations
--------------- -------------- ----------------
Total expense $ 4,949 4,057 2,380
=============== ============== ================
</TABLE>
F-25
<PAGE> 121
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
Income tax expense attributable to loss from continuing operations
consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1996 1995 1994
--------------- -------------- ---------------
<S> <C> <C> <C>
Current
Federal $ 689 93 463
State 618 473 340
Foreign 3,047 1,816 882
-------------- --------------- ---------------
Total current 4,354 2,382 1,685
-------------- --------------- ---------------
Deferred
Federal 513 204 733
State 7 (34) (38)
-------------- --------------- ---------------
Total deferred 520 170 695
-------------- --------------- ---------------
Provision for income taxes $ 4,874 2,552 2,380
============== =============== ===============
</TABLE>
The effective tax rates for the years ended March 31, 1996, 1995 and
1994 were (21.4%), (65.5%), and (11.7%), respectively. The difference
between these effective rates relating to continuing operations and the
statutory Federal income tax rate is composed of the following items:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
Federal tax impact (1.8) (7.3) (1.0)
Foreign taxes, less Federal
tax impact (8.8) (30.5) (2.9)
Amortization (15.2) (78.6) (15.1)
Change in valuation
allowance (27.1) 25.3 (24.3)
Other, net (3.5) (9.4) (3.4)
------------ ------------ -----------
Effective income tax rate (21.4)% (65.5)% (11.7)%
============ ============ ===========
</TABLE>
As of March 31, 1996, the Company had available net operating
loss carryforwards ("NOL's") for state purposes of $61.1 million which
can be used to offset future state taxable income. If these NOL's are
not utilized, they will begin to expire in 1997 and will be totally
expired in 2011.
F-26
<PAGE> 122
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
As of March 31, 1996, the Company had available net operating
loss carryforwards for federal purposes of $52.8 million which can be
used to offset future federal taxable income. If these NOL's are not
utilized, they will begin to expire in 2006 and will be totally
expired in 2011.
The Company also had available an alternative minimum tax
credit carryforward of $1.3 million which can be used to offset future
taxes in years in which the alternative minimum tax does not apply.
This credit can be carried forward indefinitely.
The Company has alternative minimum tax net operating loss
carryforwards in the amount of $35.1 million which will begin to
expire in 2009 and will be completely expired in 2011.
(12) PENSION PLANS
The Company sponsors defined benefit pension and retirement
plans which cover substantially all employees. Benefits under these
plans generally are based upon the employee's years of service and, in
the case of salaried employees, compensation during the years
immediately preceding retirement. The Company's general funding
policy is to contribute amounts within the annually calculated
actuarial range allowable as a deduction for Federal income tax
purposes. The plans' assets are maintained by trustees in separately
managed portfolios consisting primarily of equity securities, bonds
and guaranteed investment contracts.
In October 1994, the Board of Directors approved an amendment
to the Company's defined benefit pension plans which resulted in the
freezing of additional defined benefits for future services under the
plans effective January 1, 1995. As a result, a gain of $3.7 million
was recorded in fiscal 1995 pursuant to Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits." This curtailment gain is shown in the consolidated
statement of operations net of a $0.4 million expense associated with
establishing a supplemental executive retirement plan (see note 13).
Total net periodic pension expense and its components for
these plans during the periods indicated is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1996 1995 1994
--------------- ---------------- -----------------
<S> <C> <C> <C>
Service cost $ 318 1,737 1,852
Interest cost 3,428 3,405 3,308
Actual return on assets (6,404) 629 (3,577)
Net amortization and deferral 3,076 (3,311) 1,254
--------------- ---------------- -----------------
Total pension expense $ 418 2,460 2,837
=============== ================ =================
</TABLE>
F-27
<PAGE> 123
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
Funded status of the four plans sponsored by the Company is as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 47,404 39,787
Non-vested 1,488 834
--------------- ---------------
$ 48,892 40,621
=============== ===============
Projected benefit obligations $ 48,892 40,621
Plan assets on deposit with trustees at fair value 38,035 32,755
--------------- ---------------
Projected benefit obligations in excess of plan assets (10,857) (7,866)
Unrecognized:
Net gain (881) (5,889)
Prior service cost (942) --
--------------- ---------------
Pension liability recognized in consolidated balance sheets $ (12,680) (13,755)
=============== ===============
</TABLE>
F-28
<PAGE> 124
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The above pension liability balance is recorded in the
Consolidated Balance Sheets as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Accrued expenses - employee benefits $ 4,216 1,543
Other liabilities 8,464 12,212
--------------- ---------------
$ 12,680 13,755
=============== ===============
</TABLE>
The pension liability at March 31, 1996 and 1995 reflects the
impact of changes in certain assumptions effective during such times
as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Discount rate:
Pension expense 8.75% 8.75% 7.50%
Funded status 7.50% 8.75% 7.25%
Rate of increase in compensation levels N/A 6.00% 5.00%
</TABLE>
The expected long-term rate of return on plan assets was 9.25%
in fiscal 1996 and fiscal 1995, and 8.00% in fiscal 1994.
(13) OTHER POSTRETIREMENT BENEFITS
The Company provides certain other postretirement benefits for
employees, primarily life and health insurance. Full-time employees
who have attained age 55 and have at least five years of service are
entitled to postretirement health care and life insurance coverage.
Postretirement life insurance coverage is provided at no cost to
eligible retirees. Special cost sharing arrangements for health care
coverage are available to employees whose age plus years of service at
the date of retirement equals or exceeds 85 ("Rule of 85"). Any
eligible retiree not meeting the Rule of 85 must pay 100% of the
required health care insurance premium.
Effective January 1, 1995, the Company amended the health care
plan changing the health care benefit for all employees retiring on or
after January 1, 2000. This amendment had the effect of reducing the
accumulated postretirement benefit obligation by approximately $3
million. This reduction is reflected as unrecognized prior service
cost and is being amortized on a straight line basis over 15.6 years,
the average remaining years of service to full eligibility of active
plan participants at the date of the amendment.
F-29
<PAGE> 125
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the plan's funded status,
reconciled with amounts recognized in the Company's Consolidated
Balance Sheets at March 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 3,193 3,463
Active plan participants 1,071 1,237
-------------- -------------
Total 4,264 4,700
Plan assets at fair value -- --
-------------- -------------
Accumulated postretirement benefit obligation in
excess of plan assets 4,264 4,700
Unrecognized prior service cost 2,778 2,972
Unrecognized net gain 922 491
-------------- -------------
Accrued postretirement benefit cost $ 7,964 8,163
=============== =============
</TABLE>
The estimated current portion of the above accrued
postretirement benefit cost is $0.3 million and is included in accrued
expenses on the accompanying Consolidated Balance Sheet at March 31,
1996. The remaining $7.7 million is included in other liabilities.
Net periodic postretirement benefit cost for the periods
indicated included the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1996 1995 1994
-------------- --------------- ------------
<S> <C> <C> <C>
Service cost attributed to service during the period $ 35 254 257
Interest cost in accumulated postretirement benefit
obligation 317 512 544
Amortization of net gain from earlier periods (67) -- --
Amortization of prior service cost (194) (48) --
------------ ------------- ------------
Net periodic postretirement benefit cost $ 91 718 801
============ ============= ============
</TABLE>
F-30
<PAGE> 126
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
The significant assumptions used in determining postretirement
benefit cost and the accumulated postretirement benefit obligation
were as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Discount rate - expense 8.75% 8.75% 7.50%
Discount rate - APBO 7.50% 8.75% 7.25%
</TABLE>
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation at March 31, 1996 was
11.15% in 1996 gradually declining to 5.75% in the year 2005 and
forward. The effect of a one percentage point increase in the assumed
health care cost trend rate would increase the accumulated
postretirement benefit obligation as of March 31, 1996 by
approximately 9%, and the aggregate of the service and interest cost
components of net annual postretirement benefit cost by approximately
8%.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new
Supplemental Executive Retirement Plan ("SERP"), which is a defined
benefit plan, for certain key executives. Such benefits will be paid
from the Company's assets. The unfunded accumulated benefit
obligation under this plan is approximately $1.2 million. The Company
recognized a $0.4 million expense associated with the establishment of
the SERP. This expense was shown netted with the gain from
curtailment of defined benefit pension plans in the consolidated
statement of operations for the fiscal year ended March 31, 1995.
(14) 401(k) DEFINED CONTRIBUTION PLAN
Effective January 1, 1995, the Company amended its 401(k)
defined contribution plan. Eligible participants may contribute up to
15% of their annual compensation subject to maximum amounts
established by the Internal Revenue Service and receive a matching
employer contribution on amounts contributed. The employer matching
contribution is made bi-weekly and equals 2% of annual compensation
for all plan participants plus 50% of the first 6% of annual
compensation contributed to the plan by each employee, subject to
maximum amounts established by the Internal Revenue Service. The
Company's contribution under this Plan amounted to $2.9 million during
Fiscal Year 1996 and $0.7 million during the three months ended March
31, 1995.
(15) CAPITAL STOCK
New Stock Option Plan
Pursuant to the Merger Agreement, as of the Acquisition Date,
each of the holders of unexpired and unexercised options to purchase
shares of Communications Class A Common Stock and each of the holders
of unexpired and unexercised options to purchase shares of SMI Common
Stock pursuant to the respective employee stock option plans (the "Old
Option Plans") surrendered their stock option agreements and waived
their rights under the Old Option Plans. The Old Option Plans were
terminated concurrently with the 1993 Acquisition.
F-31
<PAGE> 127
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
Communications has established a new stock option plan (the
"New Option Plan"). Under the New Option Plan, 16,499 shares of
Communications Common Stock have been reserved for issuance.
Officers and other key employees of the Company (the "Participants")
are eligible to participate in the New Option Plan. As of the
Acquisition Date, 8,024 options to purchase shares of Communications
Common Stock at an exercise price of $50 were granted to certain
officers of the Company. On September 1, 1994, an additional 7,240
options to purchase shares of Communications Common Stock were granted
at an exercise price of $50 to certain members of the Company's
management group (1,053 of these shares have a grant date retroactive
to the Acquisition Date). Subsequently, two members of management
left the Company and their 1,262 options reverted to being reserved
for issuance. On October 1, 1995, 2,497 options were granted at an
exercise price of $50 to certain members of the Company's management
group. There are no options reserved for issuance but not granted at
March 31, 1996.
The following summarizes the stock option transactions under
the New Option Plan:
<TABLE>
<S> <C>
Options outstanding at March 31, 1995 15,264
Options granted during Fiscal Year 1996 2,497
Options exercised --
Options canceled/lapsed (1,262)
-------------
Options outstanding at March 31, 1996 16,499
=============
</TABLE>
SMI Phantom Share Plan
Effective as of the Acquisition Date, SMI instituted a phantom
share plan, under which awards equivalent to 1.2 million shares of SMI
common stock were granted. Upon the shut down of SMI on February 16,
1994 (see note 6), the performance period under this plan ended.
(16) COMMITMENTS AND CONTINGENCIES
The Company incurred rent expense for years ended March 31,
1996, 1995 and 1994 of $4.9 million, $4.2 million and $3.7 million,
respectively, under various operating leases. Future minimum rental
commitments under existing operating lease arrangements at March 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997 $ 3,209
1998 2,880
1999 2,662
2000 2,239
2001 1,616
Thereafter 2,764
-------------
Total $ 15,370
=============
</TABLE>
The Company has employment agreements with two of its
principal officers and four other employees. Such agreements provide
for minimum salary levels as well as for incentive bonuses which
F-32
<PAGE> 128
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
are payable if specified management goals are attained. The aggregate
commitment for future salaries at March 31, 1996, excluding bonuses,
was approximately $3.4 million.
On December 21, 1989, Graphics sold CPS, its ink manufacturing
operations and facilities. Graphics remains contingently liable under
$4.7 million of industrial revenue bonds assumed by the purchaser
("CPS Buyer") in this transaction. The CPS Buyer which assumed these
liabilities has agreed to indemnify Graphics for any resulting
obligation and has also provided an irrevocable letter of credit in
favor of the holders of such bonds. Accordingly, management believes
that any obligation of Graphics under this contingency is unlikely.
Concurrent with the CPS sale, Graphics entered into a
long-term ink supply contract with the CPS Buyer. The supply contract
requires Graphics to purchase substantially all of its ink
requirements, within certain limitations and minimums, from the CPS
Buyer. Graphics believes that prices for products under this contract
approximate market prices at the time of purchase of such products.
On September 10, 1992, a suit was filed against Mail & Media,
Inc. ("MMI"), a wholly owned subsidiary of Graphics, seeking
approximately $2.2 million for enforcement of employment and
non-compete agreements. On April 13, 1994, the Georgia Court of
Appeals affirmed the trial court's June 29, 1993 order and judgment
against MMI of approximately $1.2 million with accrued interest. In
addition, the Georgia Court of Appeals ruled that an additional
payment of $1 million for non-compete agreements was due from MMI on
August 2, 1993. On January 3, 1995, MMI paid the Plaintiff $1.4
million (including accrued interest of $0.3 million) to satisfy the
amount previously reduced to judgment and paid $1.2 million on
February 15, 1995 to settle the remaining issues. These amounts had
previously been accrued by the Company.
On August 25, 1994, EPI Group Limited ("EPI") filed a
complaint naming SMI, News America and two packaged goods companies as
defendants. EPI sought (i) damages of approximately $0.7 million from
SMI for alleged breach of contract; (ii) to recover profits earned by
SMI and other defendants in a purported aggregate amount of $1.5
million in respect of alleged infringing use of a trademark, together
with punitive damages; (iii) to recover profits earned by SMI and
other defendants in a purported aggregate amount of $1.5 million in
respect of alleged unfair competition, together with punitive damages;
(iv) damages in excess of $3.5 million from SMI and another defendant
for alleged breach of contract in respect of future years; and (v)
unspecified damages against SMI and the other defendants for alleged
deceptive trade practices. On October 16, 1995, the parties settled
this lawsuit. The settlement did not have a material adverse affect
on the financial condition of the Company.
Graphics, together with over 300 other persons, has been
designated by the U.S. Environmental Protection Agency as a
potentially responsible party (a "PRP") under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA," also
known as "Superfund") at one Superfund site. Although liability under
CERCLA may be imposed on a joint and several basis and the Company's
ultimate liability is not precisely determinable, the PRPs have agreed
that Graphics' share of removal costs is 0.46% and therefore Graphics
believes that its share of the anticipated remediation costs at such
site will not be material to its business or financial condition.
Based upon an analysis of Graphics' volumetric share of waste
contributed to the site and the agreement among the PRPs, the Company
has a reserve of approximately $0.1 million in connection with this
liability on its consolidated balance sheet at March 31, 1996. The
Company believes this amount is adequate to cover such liability.
The Company has been named as a defendant in several legal
actions arising from its normal business activities. In the opinion
of management, any liability that may arise from such actions will not
have a material adverse effect on the consolidated financial
statements of the Company.
F-33
<PAGE> 129
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(17) SIGNIFICANT CUSTOMERS
The sales to Best Buy Co. for Fiscal Year 1996 amounted to
approximately 12.5% of the Company's consolidated sales. Receivables
outstanding from these sales were approximately $5.9 million at March
31, 1996.
No single customer represented 10% or more of total sales in
the fiscal years ended March 31, 1995 and 1994.
(18) INTERIM FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
GROSS NET INCOME
NET SALES PROFIT (LOSS)
----------------- ----------------- ----------------
<S> <C> <C> <C>
Fiscal Year 1996
----------------
Quarter ended:
June 30 $ 124,490 19,102 (7,278)
September 30 130,653 19,020 (9,471)
December 31 153,308 22,415 73
March 31 127,891 16,101 (12,651)
--------------- ------------- ----------------
Total $ 536,342 76,638 (29,327)
=============== ============= ================
Fiscal Year 1995
----------------
Quarter ended:
June 30 $ 105,675 16,898 16,589
September 30 106,926 19,312 (1,447)
December 31 111,735 19,277 3,207
March 31 110,532 16,580 (5,187)
--------------- ------------- ----------------
Total $ 434,868 72,067 13,162
=============== ============= ================
</TABLE>
In the third quarter of Fiscal Year 1996, the Company changed to the
FIFO method of accounting from the LIFO method of accounting as the
principal method of accounting for inventories (see note 7). The
effect (approximately $0.8 million) of the change for the six months
ended September 30, 1995 resulted in the retroactive restatement of
the first and second quarters of Fiscal Year 1996 of approximately
$0.5 million and $0.3 million, respectively, as a decrease of cost of
goods sold and a decrease to net loss. In addition, the change
resulted in the restatement of Fiscal Year 1995 by approximately $1.1
million to decrease cost of goods sold and increase net income.
F-34
<PAGE> 130
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(19) RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES
In April 1995, the Company approved a plan for its American
Color division which is designed to improve productivity, increase
customer service and responsiveness, and provide increased growth in
this business. The cost of this plan is being accounted for in
accordance with the guidance set forth in Emerging Issues Task Force
Issue 94-3 "Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." The estimated pretax costs associated
with this plan of $4.8 million represent employee termination,
goodwill write-down and other related costs that will be incurred as a
direct result of the plan. In the quarter ended June 30, 1995, the
Company recognized $2.1 million of such charges, primarily for
severance and other personnel related costs. In the quarter ended
September 30, 1995, the Company recognized $0.6 million of
restructuring costs, related primarily to hiring and relocating
certain management personnel. In the quarter ended December 31, 1995,
the Company recognized $0.1 million of restructuring costs. In the
quarter ended March 31, 1996, the Company recognized $1.3 million of
restructuring costs, which included $0.9 million of goodwill
write-down and $0.4 million primarily related to certain relocation
costs associated with the restructuring. The goodwill written down
was the portion related to certain facilities that were either shut
down or relocated in conjunction with the American Color
restructuring. The remaining costs of approximately $0.7 million,
principally related to relocation and other expenses, will be recorded
as incurred.
During the fourth quarter of Fiscal Year 1996, the Company
recorded special charges totalling $3.4 million for impaired
long-lived assets and to adjust the carrying values of idle, disposed
and underperforming assets to estimated fair values. The provision
was based on a review of Company wide long-lived assets in connection
with the adoption of FASB 121. Approximately $2 million of the total
related to the print sector long-lived assets that were adjusted based
on being idle, disposed of or underperforming. Fair value was based
on the Company's estimate of held and used and idle assets based on
current market conditions using the best information available. The
remaining $1.4 million of the total related to the American Color
sector. The estimated undiscounted future cash flows attributable to
certain American Color division identifiable long-lived assets held
and used is less than their carrying value principally as a result of
high levels of ongoing technological change. The methodology used to
assess the recoverability of the American Color sector long-lived
assets involved projecting aggregate cash flows. Based on this
evaluation, the Company determined that long-lived assets with a
carrying amount of $2.2 million were impaired and wrote them down by
$1.4 million to their fair value. Fair value was based on Company
estimates and appraisals. Such special charges are classified as
restructuring costs and other special charges in the consolidated
statement of operations.
(20) NONRECURRING CHARGE RELATED TO TERMINATED MERGER
The Company recognized $1.5 million of expenses related to a
terminated merger in Fiscal Year 1996.
F-35
<PAGE> 131
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements (Continued)
(21) SUMMARIZED FINANCIAL INFORMATION OF SULLIVAN GRAPHICS, INC.
Summary financial information for Communications' wholly owned
subsidiary, Sullivan Graphics, Inc., which is the same as
Communications is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets $ 85,519 70,122
Noncurrent assets 265,662 258,246
Current liabilities 75,907 65,164
Noncurrent liabilities 319,670 278,174
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1996 1995 1994
--------------- ---------------- ----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $ 536,342 434,868 414,673
Operating income 11,352 23,538 5,810
Net (loss) income (29,327) 13,162 (84,360)
</TABLE>
F-36
<PAGE> 132
Report of Independent Auditors
Board of Directors and Stockholders
SunMedia, Corp.
We have audited the accompanying balance sheets of Gowe Printing Company (an
indirectly owned division of SunMedia, Corp.) as of January 1, 1995 and January
2, 1994 and the related statements of operations, net investment by parent, and
cash flows for each of the years then ended. These financial statements are
the responsibility of the SunMedia, Corp. management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As an indirectly owned division of SunMedia, Corp., Gowe Printing Company has
no separate legal status or existence and, therefore, no separate capital
structure; accordingly, Gowe is dependent upon SunMedia, Corp. for financial
support. Transactions with SunMedia, Corp. and other affiliates are described
in Notes A and F.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gowe Printing Company at
January 1, 1995 and January 2, 1994 and the results of its operations and its
cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Cleveland, Ohio
March 3, 1995
F-37
<PAGE> 133
Gowe Printing Company
Balance Sheets
<TABLE>
<CAPTION>
January 1, January 2,
1995 1994
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 350 $ 350
Trade receivables 2,720,407 2,886,290
Inventories --Note B 1,765,925 930,166
Prepaid expenses and other current assets 55,651 72,799
-------------------------------------
Total current assets 4,542,333 3,889,605
Property, plant and equipment, less
accumulated depreciation--Note B 8,829,142 10,162,602
Other assets 34,058 35,808
-------------------------------------
$ 13,405,533 $ 14,088,015
=====================================
LIABILITIES AND NET INVESTMENT BY PARENT
Current liabilities:
Accounts payable $ 1,969,057 $ 903,494
Accounts payable to affiliates--net 18,968 16,815
Accrued expenses:
Payroll 504,529 493,625
Taxes 112,944 140,567
Other 17,252 2,555
Current portion of long-term debt--Note C 653,197 589,232
-------------------------------------
Total current liabilities 3,275,947 2,146,288
Long-term debt--Note C 5,031,481 5,684,678
Net investment by parent 5,098,105 6,257,049
-------------------------------------
$ 13,405,533 $ 14,088,015
=====================================
</TABLE>
See notes to financial statements.
F-38
<PAGE> 134
Gowe Printing Company
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
January 1, January 2,
1995 1994
------------------------------------
<S> <C> <C>
Net revenue--Note F $29,222,113 $31,552,245
Operating costs and expenses:
Operating expenses 24,710,589 26,648,019
Selling and administrative expenses 2,261,286 2,708,405
------------------------------------
26,971,875 29,356,424
------------------------------------
2,250,238 2,195,821
Depreciation 1,814,482 1,764,561
Amortization of intangible and other assets 551,877
Write-off of intangible assets--Note A 1,903,731
------------------------------------
1,814,482 4,220,169
------------------------------------
Income (loss) from operations 435,756 (2,024,348)
Other income (expense):
Interest expense (647,148) (713,227)
Gain (loss) on sale of assets and other 56,180 (9,116)
Corporate fees--Note F (1,027,739) (1,697,579)
------------------------------------
(1,618,707) (2,419,922)
------------------------------------
NET LOSS $(1,182,951) $(4,444,270)
====================================
</TABLE>
See notes to financial statements.
F-39
<PAGE> 135
Gowe Printing Company
Statements of Net Investment by Parent
<TABLE>
<CAPTION>
Net Investment
by Parent
--------------------
<S> <C>
Balance, January 3, 1993 $ 8,296,164
Net intercompany transactions with parent 2,405,155
Net loss (4,444,270)
--------------------
Balance, January 2, 1994 6,257,049
Net intercompany transactions with parent 24,007
Net loss (1,182,951)
--------------------
Balance, January 1, 1995 $ 5,098,105
====================
</TABLE>
See notes to financial statements.
F-40
<PAGE> 136
Gowe Printing Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
------------------------------------
JANUARY 1, JANUARY 2,
1995 1994
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,182,951) $(4,444,270)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,814,482 2,316,438
Write-off of intangible assets 1,903,731
(Gain) loss on sale of property, plant and (68,423) 5,342
equipment
Change in assets and liabilities:
Accounts receivable 165,883 338,835
Inventory (835,759) 632,983
Prepaid expenses and other current 17,148 22,706
assets
Other assets 1,750 (1,750)
Accounts payable and accrued expenses 1,063,541 (1,795,482)
------------------------------------
Total adjustments 2,158,622 3,422,803
------------------------------------
Net cash provided by (used in) operating activities 975,671 (1,021,467)
INVESTING ACTIVITIES
Proceeds from sale of tangible property 196,343 10,183
Capital expenditures (608,942) (549,320)
------------------------------------
Net cash used in investing activities (412,599) (539,137)
FINANCING ACTIVITIES
Principal payments under capital lease obligations (16,760) (14,389)
Principal payments on long-term debt (572,472) (514,370)
Payables to affiliates 2,153 (315,692)
Net intercompany transactions with parent 24,007 2,405,155
------------------------------------
Net cash (used in) provided by financing activities (563,072) 1,560,704
------------------------------------
Net increase in cash 0 100
Cash at beginning of period 350 250
------------------------------------
CASH AT END OF PERIOD $ 350 $ 350
====================================
</TABLE>
See notes to financial statements.
F-41
<PAGE> 137
Gowe Printing Company
Notes to Financial Statements
January 1, 1995 and January 2, 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Gowe Printing Company ("Gowe") is an indirectly owned division of
SunMedia, Corp. ("SunMedia"). The financial statements have been prepared on a
going concern basis.
Under the terms of a refinancing agreement between SunMedia and its
lenders, SunMedia has committed to the disposition of Gowe. In connection with
the decision to dispose of Gowe, Gowe recorded an adjustment to write-off its
intangible assets with a net book value of $1,903,731 in the year ended January
2, 1994. No other adjustments have been made to these financial statements to
reflect the effect, if any, of this disposition.
FISCAL YEAR
SunMedia elected a 52-53 week fiscal year ending on the Sunday nearest
December 31.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
calculated using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
-----------
<S> <C>
Buildings and building improvements 19-32
Leasehold improvements 16
Machinery and equipment 5-7
Furniture and fixtures 5-7
Leased assets under capital lease 5
</TABLE>
INVENTORIES
Inventories are valued at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method.
FEDERAL INCOME TAXES
Federal income taxes are not provided on a divisional basis as Gowe is
not a taxable entity.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
current year reporting presentations.
F-42
<PAGE> 138
Gowe Printing Company
Notes to Financial Statements--Continued
B. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1995 1994
---------------------------------------
<S> <C> <C>
Newsprint, commercial grade paper, plates,
film, ink and supplies $1,420,522 $746,343
Work-in-process 345,403 183,823
---------------------------------------
$1,765,925 $930,166
=======================================
<CAPTION>
Property, plant and equipment consist of the following:
JANUARY 1, JANUARY 2,
1995 1994
---------------------------------------
<S> <C> <C>
Land $ 96,462 $ 96,462
Buildings and building improvements 914,974 914,974
Leasehold improvements 840,590 865,186
Machinery and equipment 15,358,983 15,119,521
Furniture and fixtures 327,794 345,666
Leased assets under capital lease 71,784 71,784
---------------------------------------
17,610,587 17,413,593
Less accumulated depreciation 8,781,445 7,250,991
---------------------------------------
$ 8,829,142 $10,162,602
=======================================
</TABLE>
C. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
1995 1994
---------------------------------------
<S> <C> <C>
Loan payable, secured by equipment $5,668,618 $6,241,090
Obligations under capital leases 16,060 32,820
---------------------------------------
5,684,678 6,273,910
Less current portion 653,197 589,232
---------------------------------------
$5,031,481 $5,684,678
=======================================
</TABLE>
The loan payable relates to a purchase of certain machinery and bears
interest at 10.75%. Principal and interest payments of $101,310 are due
monthly through June 2001.
F-43
<PAGE> 139
Gowe Printing Company
Notes to Financial Statements--Continued
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1995 $ 653,197
1996 709,107
1997 789,206
1998 878,353
1999 977,570
2000 and thereafter 1,677,245
----------------
$5,684,678
================
</TABLE>
Interest paid on long-term debt during the years ended January 1, 1995 and
January 2, 1994 was $647,148 and $707,621, respectively.
D. PROFIT SHARING AND PENSION PLAN
SunMedia has a defined contribution plan (Plan) covering all eligible
employees of Gowe with more than one year of continuous service. Participants
may elect to contribute up to 14% of compensation to the Plan. In addition to
a basic contribution of 1% of compensation for all eligible employees, SunMedia
will match 50% of participant contributions up to 4% of compensation. Expenses
for the years ended January 1, 1995 and January 2, 1994 were approximately
$141,000 and $139,000, respectively.
E. LEASE OBLIGATIONS AND COMMITMENTS
Gowe has several operating leases involving a building and equipment.
The future minimum operating lease payments for leases having initial or
remaining noncancelable lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1995 $157,917
1996 87,385
1997 43,245
1998 and thereafter 11,271
-----------------
$299,818
=================
</TABLE>
Total rental expense for all operating leases was $191,539 and $235,447 for the
years ended January 1, 1995 and January 2, 1994, respectively.
F. RELATED PARTY TRANSACTIONS
Gowe is the exclusive printer for SunNewspapers, an affiliate of
SunMedia. During the years ended January 1, 1995 and January 2, 1994, net
revenues from SunNewspapers were approximately $3,782,000 and $3,868,000,
respectively.
Purchases of services from Great Lakes Mailing, an affiliate of
SunMedia, during the years ended January 1, 1995 and January 2, 1994 were
approximately $162,000 and $182,000, respectively.
F-44
<PAGE> 140
Gowe Printing Company
Notes to Financial Statements--Continued
All cash is transferred to the corporate office on a daily basis.
Cash flow needs of Gowe are funded by the corporate office with the effect of
net cash receipts/disbursements transferred being reflected in the equity
accounts of Gowe.
Corporate fees include certain allocated charges by SunMedia to Gowe
for corporate interest, management and office expenses, professional fees and
benefit costs. These charges are recorded in Gowe's accounts payable to parent
account which is a component of the net investment by parent.
F-45
<PAGE> 141
GOWE PRINTING COMPANY
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
(UNAUDITED)
------------------
<S> <C>
ASSETS
Cash and cash equivalents $ 350
Receivables 3,387,348
Inventories - note 2 2,619,385
Prepaid expenses and other current assets 80,450
------------------
Total current assets 6,087,533
------------------
Property, plant and equipment 18,020,408
Less accumulated depreciation 10,623,977
------------------
Net property, plant and equipment 7,396,431
Other assets 57
------------------
Total assets $ 13,484,021
==================
Liabilities and net investment by parent
Accounts payable $ 1,953,783
Accounts payable to affiliates-net 10,500
Accrued expenses:
Payroll 525,776
Taxes 143,628
Other 32,685
Current installments of long-term debt 709,107
------------------
Total current liabilities 3,375,479
------------------
Long-term debt and capitalized leases,
excluding current installments 4,322,375
------------------
Total liabilities 7,697,854
Net investment by parent 5,786,167
------------------
Total liabilities and net investment by parent $ 13,484,021
==================
</TABLE>
See accompanying notes to unaudited financial statements.
F-46
<PAGE> 142
GOWE PRINTING COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 31, JANUARY 1,
1995 1995
(UNAUDITED)
------------------- -----------------
<S> <C> <C>
Net revenue $ 34,498,532 $ 29,222,113
Operating costs and expenses:
Operating expenses 29,801,957 24,710,589
Selling and administrative expenses 2,220,955 2,261,286
------------------ -----------------
32,022,912 26,971,875
------------------ -----------------
2,475,620 2,250,238
Depreciation 1,850,134 1,814,482
------------------ -----------------
Income from operations 625,486 435,756
Other income (expense):
Interest expense (579,742) (647,148)
Gain (loss) on sale of assets and other 3,379 56,180
Corporate fees 0 (1,027,739)
------------------ -----------------
(576,363) (1,618,707)
------------------ -----------------
Net income (loss) $ 49,123 $ (1,182,951)
================== =================
</TABLE>
See accompanying notes to unaudited financial statements.
F-47
<PAGE> 143
GOWE PRINTING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, JANUARY 1,
1995 1995
(UNAUDITED)
------------------ ----------------
<S> <C> <C>
Net cash provided by operating activities $ 434,063 $ 975,671
Investing Activities:
Proceeds form sale of tangible property 6,550 196,343
Capital expenditures (417,890) (608,942)
------------------ ----------------
Net cash used in investing activities (411,340) (412,599)
Financing Activities:
Principal payments on long-term debt (637,137) (572,472)
Net intercompany transactions with parent 579,526 24,007
Other 34,888 (14,607)
------------------ ----------------
Net cash used in financing activities (22,723) (563,072)
Net change in cash 0 0
Cash at beginning of period 350 350
------------------ ----------------
Cash at end of period $ 350 $ 350
=================== ================
</TABLE>
See accompanying notes to unaudited financial statements.
F-48
<PAGE> 144
GOWE PRINTING COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JANUARY 1, 1995
1. BASIS OF PRESENTATION
Gowe Printing Company is an indirectly owned division of SunMedia,
Corp. The financial statements have been prepared on a going concern basis.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for financial information and are in accordance with instructions to pro forma
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessaary
for a fair presentation have been included.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Newsprint, commercial grade paper, plates,
ink and supplies $ 2,327,988
Work-in-process 291,397
------------
$ 2,619,385
============
</TABLE>
F-49
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Graphics
The Business Corporation Law of the State of New York (the "New York
Law") permits indemnification of directors, employees and agents of
corporations under certain conditions and subject to certain limitations.
Pursuant to the New York Law, Graphics has included in its Certificate of
Incorporation and bylaws a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their duty of
care to the fullest extent permitted by the New York Law and to provide that
Graphics shall indemnify its directors and officers to the fullest extent
permitted by the New York Law.
Communications
The General Corporation Law of the State of Delaware (the "Delaware
Law") permits indemnification of directors, employees and agents of
corporations under certain conditions and subject to certain limitations.
Pursuant to the Delaware Law, Communications has included in its Restated
Certificate of Incorporation and bylaws a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their duty of care to the fullest extent permitted by the Delaware Law and to
provide that Communications shall indemnify its directors and officers to the
fullest extent permitted by the Delaware Law.
Each party to the Stockholders' Agreement has agreed that no past,
current or future director or officer of Communications shall have any
liability (whether direct or indirect, in contract, tort or otherwise) to such
party arising out of or relating to any action or omission of such director or
officer in his or her capacity as a director or officer of Communications,
except to the extent that any loss, claim, damage or liability is found in a
final judgment of a court to have resulted from such director's or officer's
bad faith, willful misconduct or gross negligence. Furthermore, each party to
the Stockholders' Agreement will discharge and release each such director and
officer from, and waive and relinquish any and all rights to, any and all
claims, demands, rights of action or causes of action arising out of or
relating to any action or omission of such director or officer in his or her
capacity as a director or officer of Communications, except to the extent that
any loss, claim, damage or liability is found in a final judgment of a court to
have resulted from such director's or officer's bad faith, willful misconduct
or gross negligence.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
(a) EXHIBITS.
3.1 Certificate of Incorporation of Graphics, as amended to date(*)
3.2 By-laws of Graphics, as amended to date(*)
3.3(+) Restated Certificate of Incorporation of Communications, as amended to date
3.4 By-laws of Communications, as amended to date(*)
4.1(+) Indenture (including the form of New Note), dated as of August 15, 1995, among Graphics, Communications and
</TABLE>
II-1
<PAGE> 146
<TABLE>
<S> <C>
NationsBank of Georgia, National Association, as Trustee
4.2(+) Registration Agreement, dated as of August 10, 1995, among Graphics, Communications and MS&Co.
5.1(+) Opinion of Shearman & Sterling regarding the legality of the securities being registered
8.1(+) Opinion of Shearman & Sterling regarding tax matters
10.1(+) Credit Agreement, dated as of August 15, 1995, among Communications, Graphics, BT Commercial Corporation, as
Agent, Bankers Trust Company, as Issuing Bank, and the parties signatory thereto
10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated as of August 15, 1995, among Communications,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company,
as Issuing Bank, and the parties signatory thereto(***)
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of August 15, 1995, among Communications,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and the parties signatory
thereto(****)
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of August 15, 1995, among
Communications, Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company,
as Issuing Bank, and the parties signatory thereto(****)
10.2(+) Agreement and Plan of Merger, dated as of August 14, 1995, among Communications, Graphics and Shakopee
10.3(a) Employment Agreement, dated as of April 8, 1993, between Graphics and James T. Sullivan(*)
10.3(b)(+) Amendment to Employment Agreement, dated December 1, 1994, between Graphics and James T. Sullivan
10.4(a) Employment Agreement, dated as of April 8, 1993, between Graphics and Stephen M. Dyott(*)
10.4(b)(+) Amendment to Employment Agreement, dated December 1, 1994, between Graphics and Stephen M. Dyott
10.4(c)(+) Amendment to Employment Agreement, dated February 15, 1995, between Graphics and Stephen M. Dyott
10.5 Severance Letter, dated May 6, 1994, between Graphics and Bryan D. Richardson(**)
10.6 Severance Letter, dated April 8, 1993, between Graphics and Joseph M. Milano(**)
10.6(a) October 12, 1995, Amendment to Severance Letter, dated April 8, 1993, between Graphics
and Joseph M. Milano(***)
10.7 Severance Letter, dated April 8, 1993, between Graphics and Timothy M. Davis(**)
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8, 1993, between Graphics
and Timothy M. Davis(***)
10.8 Severance Letter, dated July 1, 1994, between Graphics and Patrick W. Kellick(**)
10.8(a) November 20, 1995, Amendment to Severance Letter, dated July 1, 1994, between Graphics
and Patrick W. Kellick(***)
10.9(+) Amended and Restated Stockholders' Agreement, dated as of August 14, 1995, among Communications, the Morgan
Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the additional parties
named therein
10.10 Purchase Agreement between Guy Gannett Communications and Shakopee, dated November 23, 1994(**)
10.11(+) First Amendment Agreement, dated as of December 22, 1994, between Guy Gannett Communications and Shakopee
10.12(+) Second Amendment Agreement, dated as of March 27, 1995, between Guy Gannett
Communications and Shakopee
10.13(+) Stock Option Plan of Communications
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe Inc., dated
March 12, 1996(****)
12.1 Statements re computation of ratio of earnings to fixed charges
21.1 List of Subsidiaries of Communications(****)
23.1 Consent of Ernst & Young LLP (Nashville, Tennessee)
23.2 Consent of Ernst & Young LLP (Cleveland, Ohio)
</TABLE>
II-2
<PAGE> 147
<TABLE>
<S> <C>
23.4(+) Consent of Shearman & Sterling (included in its opinion filed as Exhibit 5.1)
24.1(+) Powers of Attorney
25.1(+) Statement of Eligibility of NationsBank of Georgia, National Association on Form T-1 (bound separately)
</TABLE>
- -----------
(*) Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
(**) Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
(***) Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995 - Commission file number 33-31706-01.
(****) Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1996 - Commission file number 33-31706-01.
(+) Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
The following Financial Statement Schedules are included as part of the
Registration Statement:
Schedule I: Condensed financial information of Registrant
Schedule II: Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required, are inapplicable or have been disclosed in the notes to the
consolidated financial statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 148
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the provisions described under Item 20
"Indemnification of Directors and Officers", above, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the paying by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act, Sullivan Graphics,
Inc. has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut, on July 3, 1996.
SULLIVAN GRAPHICS, INC.
By: /s/ Joseph M. Milano
-------------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 3, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
* Chairman, Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
James T. Sullivan
* President and Director
- --------------------------------------
Stephen M. Dyott
/s/ Joseph M. Milano Senior Vice President and Chief Financial Officer
- -------------------------------------- (Principal Financial Officer)
Joseph M. Milano
* Vice President/Corporate Controller
- -------------------------------------- (Principal Accounting Officer)
Patrick W. Kellick
* Director
- --------------------------------------
Frank V. Sica
Director
- --------------------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano Attorney-in-fact
---------------------------------
Joseph M. Milano
</TABLE>
II-5
<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities Act, Sullivan
Communications, Inc. has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on July 3, 1996.
SULLIVAN COMMUNICATIONS, INC.
By: /s/ Joseph M. Milano
-------------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 3, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman, Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
James T. Sullivan
* President and Director
- --------------------------------------
Stephen M. Dyott
/s/ Joseph M. Milano Senior Vice President and Chief Financial Officer
- -------------------------------------- (Principal Financial Officer)
Joseph M. Milano
* Vice President/Corporate Controller
- -------------------------------------- (Principal Accounting Officer)
Patrick W. Kellick
* Director
- --------------------------------------
Frank V. Sica
Director
- --------------------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano Attorney-in-fact
---------------------------------
Joseph M. Milano
</TABLE>
II-6
<PAGE> 151
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C> <C>
Schedule I: Condensed Financial Information of Registrant . . . . . . . . S-2
Schedule II: Valuation and Qualifying Accounts . . . . . . . . . . . . . . S-8
</TABLE>
S-1
<PAGE> 152
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Receivable from subsidiary for income taxes $134 223
------------ -----------
Total assets $134 223
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE> 153
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1996 1995
---------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Income taxes payable $ 134 223
---------- --------
Total current liabilities -- 223
Liabilities to subsidiary in excess of assets 44,396 14,970
---------- --------
Total liabilities 44,530 15,193
---------- --------
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 123,889 shares issued and outstanding 1 1
Series A convertible preferred stock, $.01 par value, 4,000
shares authorized, issued and outstanding, $40,000,000
liquidation preference -- --
Series B convertible preferred stock, $.01 par value, 1,750
shares authorized, issued and outstanding, $17,500,000
liquidation preference -- --
Additional paid-in capital 57,499 57,499
Accumulated deficit (100,525) (71,198)
Cumulative translation adjustment (1,371) (1,272)
---------- --------
Total stockholders' deficit (44,396) (14,970)
---------- --------
Commitments and contingencies
Total liabilities and stockholders' deficit $134 223
========== ========
</TABLE>
See accompanying notes to condensed financial statements.
S-3
<PAGE> 154
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1996 1995 1994
-------------- ----------- -----------
<S> <C> <C> <C>
Expenses - management advisory fees to a related
party $ -- -- --
-------------- ----------- -----------
Loss before income taxes and equity in loss of -- -- --
subsidiary
Increase in consolidated Federal income tax
benefit arising from parent company taxable loss -- -- --
-------------- ----------- -----------
Loss before equity in loss of subsidiary -- -- --
Equity in (income) loss of subsidiary 29,327 (13,162) 84,360
-------------- ----------- -----------
Net income (loss) $ (29,327) 13,162 (84,360)
============== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
S-4
<PAGE> 155
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities -- -- --
--------- ---------- -----------
Cash flows from investing activities -- -- --
Cash flows from financing activities -- -- --
--------- ---------- -----------
Net change in cash -- -- --
========= ========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
S-5
<PAGE> 156
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Notes to Condensed Financial Statements
DESCRIPTION OF SULLIVAN COMMUNICATIONS, INC.
Sullivan Communications, Inc. ("Communications"), together with its wholly
owned subsidiary, Sullivan Graphics, Inc. ("Graphics"), collectively the
("Company"), was formed in April 1989 under the name GBP Holdings, Inc. to
effect the purchase of all the capital stock of GBP Industries, Inc. from its
stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings,
Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc.
changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan
Holdings, Inc. changed its name to Sullivan Communications, Inc.
Communications has no operations or significant assets other than its
investment in Graphics. Communications is dependent upon distributions from
Graphics to fund its obligations. Under the terms of its debt agreements at
March 31, 1996, Graphics' ability to pay dividends or lend to Communications is
either restricted or prohibited, except that Graphics may pay specified amounts
to Communications to fund the payment of Communications' obligations pursuant
to a tax sharing agreement (see note 4).
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of
Merger dated as of March 12, 1993, as amended (the "Merger Agreement"), between
Communications and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition
Corp. was merged with and into Communications (the "Acquisition"). Acquisition
Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain
institutional investors and certain members of management (the "Purchasing
Group") for the purpose of acquiring a majority interest in Communications.
Acquisition Corp. acquired a substantial and controlling majority interest in
Communications in exchange for $40 million in cash. In the Acquisition,
Communications continued as the surviving corporation and the separate
corporate existence of Acquisition Corp. was terminated.
In connection with the Acquisition, the existing consulting agreement with the
managing general partner of Communications' majority stockholder was terminated
and the related liabilities of Communications were canceled. The agreement
required Communications to make minimum annual payments of $1 million for
management advisory services subject to limitations in Graphics' debt
agreements. No amounts were paid during the periods presented in these
condensed financial statements.
1. BASIS OF PRESENTATION
The accompanying condensed financial statements (parent company only)
include the accounts of Communications and its investments in Graphics
accounted for in accordance with the equity method, and do not present
the financial statements of Communications and its subsidiary on a
consolidated basis. These parent company only financial statements
should be read in conjunction with the Company's consolidated
financial statements. The Acquisition was accounted for under the
purchase method of accounting applying the provisions on Accounting
Principles Boards Opinion No. 16 ("APB 16"). The consolidated
financial statements of the Company contained herein have been
prepared as if the Acquisition occurred on April 1, 1993.
S-6
<PAGE> 157
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Notes to Condensed Financial Statements
2. GUARANTEES
As set forth in the Company's consolidated financial statements,
substantially all of Graphics' long-term obligations have been
guaranteed by Communications.
Communications has guaranteed Graphics' indebtedness under the Bank
Credit Agreement, which guarantee is secured by a pledge of all of
Graphics' stock. Borrowings under the Bank Credit Agreement are
secured by substantially all assets of Graphics. Communications is
restricted under its guarantee of the Bank Credit Agreement from,
among other things, entering into mergers, acquisitions, incurring
additional debt, or paying cash dividends.
On August 15, 1995, Graphics issued $185 million of Senior
Subordinated Notes (the "Notes") bearing interest at 12 3/4% and
maturing August 1, 2005. The Notes are guaranteed on a senior
subordinated basis by Communications and are subordinate to all
existing and future senior indebtedness, as defined, of Graphics.
3. DIVIDENDS FROM SUBSIDIARIES AND INVESTEES
No cash dividends were paid to Communications from any consolidated
subsidiaries, unconsolidated subsidiaries or investees accounted for
by the equity method during the periods reflected in these condensed
financial statements.
4. TAX SHARING AGREEMENT
Communications and Graphics are parties to a tax sharing agreement
effective July 27, 1989. Under the terms of the agreement, Graphics
(whose income is consolidated with that of Communications for federal
income tax purposes) is liable to Communications for amounts
representing federal income taxes calculated on a "stand-alone basis".
Each year Graphics pays to Communications the lesser of (i) Graphics'
federal tax liability computed on a stand-alone basis and (ii) its
allocable share of the federal tax liability of the consolidated
group. Accordingly, Communications is not currently reimbursed for
the separate tax liability of Graphics to the extent Communications'
losses reduce consolidated tax liability. Reimbursement for the use
of such Communications' losses will occur when the losses may be used
to offset Communications' income computed on a stand-alone basis.
Graphics has also agreed to reimburse Communications in the event of
any adjustment (including interest or penalties) to consolidated
income tax returns based upon Graphics' obligations with respect
thereto. Also under the terms of the tax sharing agreement,
Communications has agreed to reimburse Graphics for refundable federal
income tax equal to an amount which would be refundable to Graphics
had Graphics filed separate federal income tax returns for all years
under the agreement. Graphics and Communications have also agreed to
treat foreign, state and local income and franchise taxes for which
there is consolidated or combined reporting in a manner consistent
with the treatment of federal income taxes as described above.
S-7
<PAGE> 158
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SULLIVAN COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Balance Additions Balance
at Charged at
Beginning to Other End of
of Period Expense Write-offs Adjustments Period
---------- --------- ---------- ----------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year ended March 31, 1996
Allowance for doubtful accounts $3,174 3,619 (1,963) -- $4,830
Reserve for inventory
obsolescence -
spare parts $100 -- -- -- $100
Reserve for inventory
obsolescence -
paper & ink $50 122 -- -- $172
Income tax valuation allowance $13,808 -- -- 7,402 $21,210
Fiscal Year ended March 31, 1995
Allowance for doubtful accounts $2,828 879 (1,402) 869 $3,174
Reserve for inventory
obsolescence -
spare parts $100 - - - $100
Reserve for inventory
obsolescence -
paper & ink $50 - - - $50
Income tax valuation allowance $19,430 - - (5,622) $13,808
Fiscal Year ended March 31, 1994
Allowance for doubtful accounts $1,850 1,586 (608) - $2,828
Reserve for inventory
obsolescence -
spare parts - 100 - - $100
Reserve for inventory
obsolescence - - 50 - - $50
paper & ink
Income tax valuation allowance $8,708 10,722 - - $19,430
</TABLE>
S-8
<PAGE> 159
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- ---------- ----------- --------------
<S> <C>
3.1 Certificate of Incorporation of Graphics, as amended to date(*)
3.2 By-laws of Graphics, as amended to date(*)
3.3(+) Restated Certificate of Incorporation of Communications, as amended to date
3.4 By-laws of Communications, as amended to date(*)
4.1(+) Indenture (including the form of New Note), dated as of August 15, 1995,
among Graphics, Communications and NationsBank of Georgia, National
Association, as Trustee
4.2(+) Registration Agreement, dated as of August 10, 1995, among Graphics,
Communications and MS&Co.
5.1(+) Opinion of Shearman & Sterling regarding the legality of the securities
being registered
8.1(+) Opinion of Shearman & Sterling regarding tax matters
10.1(+) Credit Agreement, dated as of August 15, 1995, among Communications,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company,
as Issuing Bank, and the parties signatory thereto
10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto(***)
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto(****)
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto(****)
10.2(+) Agreement and Plan of Merger, dated as of August 14, 1995, among
Communications, Graphics and Shakopee
10.3(a) Employment Agreement, dated as of April 8, 1993, between Graphics
and James T. Sullivan(*)
10.3(b)(+) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and James T. Sullivan
10.4(a) Employment Agreement, dated as of April 8, 1993, between Graphics
and Stephen M. Dyott(*)
10.4(b)(+) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott
10.4(c)(+) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott
10.5 Severance Letter, dated May 6, 1994, between Graphics and Bryan D.
Richardson(**)
10.6 Severance Letter, dated April 8, 1993, between Graphics and Joseph
M. Milano(**)
10.6(a) October 12, 1995, Amendment to Severance Letter, dated April 8, 1993,
between Graphics and Joseph M. Milano(***)
</TABLE>
<PAGE> 160
<TABLE>
<S> <C>
10.7 Severance Letter, dated April 8, 1993, between Graphics and Timothy
M. Davis(**)
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8, 1993,
between Graphics and Timothy M. Davis(***)
10.8 Severance Letter, dated July 1, 1994, between Graphics and Patrick
W. Kellick(**)
10.8(a) November 20, 1995, Amendment to Severance Letter, dated July 1, 1994,
between Graphics and Patrick W. Kellick(***)
10.9(+) Amended and Restated Stockholders' Agreement, dated as of August 14,
1995, among Communications, the Morgan Stanley Leveraged Equity
Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein
10.10 Purchase Agreement between Guy Gannett Communications and Shakopee,
dated November 23, 1994(**)
10.11(+) First Amendment Agreement, dated as of December 22, 1994, between Guy
Gannett Communications and Shakopee
10.12(+) Second Amendment Agreement, dated as of March 27, 1995, between Guy
Gannett Communications and Shakopee
10.13(+) Stock Option Plan of Communications
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe Inc.,
dated March 12, 1996(****)
12.1 Statements re computation of ratio of earnings to fixed charges
21.1 List of Subsidiaries of Communications(****)
23.1 Consent of Ernst & Young LLP (Nashville, Tennessee)
23.2 Consent of Ernst & Young LLP (Cleveland, Ohio)
23.4(+) Consent of Shearman & Sterling (included in its opinion filed as Exhibit 5.1)
24.1(+) Powers of Attorney
25.1(+) Statement of Eligibility of NationsBank of Georgia, National Association
on Form T-1 (bound separately)
</TABLE>
- ---------------
(*) Incorporated by reference from Amendment No. 2 to Form S-1
filed on October 4, 1993 - Registration number 33-65702.
(**) Incorporated by reference from the Annual Report on Form 10-K
for fiscal year ended March 31, 1995 - Commission file number
33-31706-01.
(***) Incorporated by reference from the Quarterly Report on Form
10-Q for the quarter ended December 31, 1995 - Commission file
number 33-31706-01.
(****) Incorporated by reference from the Annual Report on Form 10-K
for fiscal year ended March 31, 1996 - Commission file number
33-31706-01.
(+) Previously filed.
<PAGE> 1
Exhibit 12.1 STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Year Ended Ended
March 31 March 31 March 31, March 31,
1996 1995 1994 1993
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Consolidated pretax income(loss)
from continuing operations (22,795) (2,781) (20,296) (10,590)
Net amortization of debt
issuance expense 2,139 2,174 1,837 462
Interest expense 30,549 23,578 22,212 6,485
Interest portion of rental
expense 1,618 1,392 1,229 287
----------- ------------ ------------- -------------
Earnings 11,511 24,363 4,982 (3,356)
=========== ============ ============= =============
Interest expense 30,549 23,578 22,212 6,485
Net amortization of debt
issuance expense 2,139 2,174 1,837 462
Interest portion of rental
expense 1,618 1,392 1,229 287
----------- ------------ ------------- -------------
Fixed Charges 34,306 27,144 25,278 7,234
=========== ============ ============= =============
Ratio of Earnings to
Fixed Charges (a) (a) (a) (a)
=========== ============ ============= =============
<CAPTION>
Pro forma
Twelve Months
---------- Years Ended ------------- Ended
December 31, March 31,
1992 1991 1990 1996
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Consolidated pretax income(loss)
from continuing operations (33,886) (30,807) (23,403) (22,347)
Net amortization of debt
issuance expense 1,784 1,805 1,860 2,139
Interest expense 25,730 29,198 34,144 31,398
Interest portion of rental
expense 1,161 1,103 1,063 1,682
------------- ------------- ------------- ---------------
Earnings (5,211) 1,299 13,664 12,872
============= ============= ============= ===============
Interest expense 25,730 29,198 34,144 31,398
Net amortization of debt
issuance expense 1,784 1,805 1,860 2,139
Interest portion of rental
expense 1,161 1,103 1,063 1,682
------------- ------------- ------------- ---------------
Fixed Charges 28,675 32,106 37,067 35,219
============= ============= ============= ===============
Ratio of Earnings to
Fixed Charges (a) (a) (a) (a)
============= ============= ============= ===============
</TABLE>
(a) The deficiency in earnings required to cover fixed charges in the fiscal
years ended March 31, 1996, 1995 and 1994 was $22,795, $2,781 and
$20,296, respectively. The deficiency in earnings required to cover fixed
charges for the three months ended March 31, 1993 was $10,590. For the
years ended December 31, 1992, 1991 and 1990, the deficiency in earnings
required to cover fixed charges was $33,886, $30,807 and $23,403,
respectively. On a pro forma basis, the deficiency in earnings required
to cover fixed charges for the fiscal year ended March 31, 1996 was
$22,347.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 7, 1996, in Post-Effective Amendment No. 1 to the
Registration Statement (Form S-1, No. 33-97090) and related Prospectus of
Sullivan Communications, Inc. for the registration of $185,000,000 of its 12
3/4% Senior Subordinated Exchange Notes Due 2005.
Our audits also included the financial statement schedules of Sullivan
Communications, Inc. listed in item 16(b). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein. The report of Ernst & Young LLP contains an
explanatory paragraph with respect to a change in accounting for inventory and
the adoption of the provisions for accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
/s/ Ernst & Young LLP
Nashville, Tennessee
June 27, 1996
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 3, 1995, with respect to the financial statements
of Gowe Printing Company included in the Post-Effective Amendment No. 1 to the
Registration Statement (Form S-1, No. 33-97090) and related Prospectus of
Sullivan Communications, Inc. for the registration of $185,000,000 of its 12
3/4% Senior Subordinated Exchange Notes Due 2005.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 27, 1996
