UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________
Commission file number 33-97090
SULLIVAN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-135968
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
225 High Ridge Road
Stamford, Connecticut 06905
(203) 977-8101
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SULLIVAN GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Sullivan Communications, Inc. has 123,889 shares outstanding of its Common
Stock, $.01 Par Value, as of May 31, 1997 (all of which are privately owned and
not traded on a public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
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INDEX
Page
Referenced
Form 10-K
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PART I
ITEM 1. BUSINESS...................................................... 2
ITEM 2. PROPERTIES.................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................... 10
ITEM 6. SELECTED FINANCIAL DATA....................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .......................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.............................. 58
ITEM 11. EXECUTIVE COMPENSATION........................................ 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................... 67
SIGNATURES.................................................... 77
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PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (the "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Act of 1934.
Discussions containing such forward-looking statements may be found in Items 1,
3 and 7 hereof, as well as within this Report generally. In addition, when used
in this Report, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the forward-looking statements
as a result of many factors outside the control of Sullivan Communications, Inc.
("Communications"), together with its wholly-owned subsidiary, Sullivan
Graphics, Inc. ("Graphics"), collectively (the "Company"), including
fluctuations in the cost of paper and other raw materials used by the Company,
changes in the advertising and printing markets, actions by the Company's
competitors, particularly with respect to pricing, the financial condition of
the Company's customers, the financial condition and liquidity of the Company,
the general condition of the United States economy, demand for the Company's
products and services and the matters set forth in this Report generally.
Consequently, such forward- looking statements should be regarded solely as the
Company's current plans, estimates and beliefs. The Company does not undertake
and specifically declines any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
ITEM 1. BUSINESS
General
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 fifteen
prepress facilities located throughout the United States. The Company operates
primarily in two business sectors of the commercial printing industry: printing
(which accounted for approximately 86% of total sales during the fiscal year
ended March 31, 1997 ("Fiscal Year 1997")) and digital imaging and prepress
services conducted through its American Color division (which accounted for
approximately 14% of total sales in Fiscal Year 1997). Partnerships affiliated
with Morgan Stanley, Dean Witter, Discover & Co. 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 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 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 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 35,000 shares were purchased by Morgan Stanley
Capital Partners III, L.P., Morgan Stanley
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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 affiliated with Morgan
Stanley, Dean Witter, Discover & Co. In addition, the other stockholders of
Shakopee were also stockholders of the Company.
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. 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. (the "Gowe Acquisition").
During March 1996, the Company completed the construction of and
start-up of a plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech is
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.
In February of Fiscal Year 1997, the Company made a strategic decision
to shut down the operations of its wholly-owned subsidiary Sullivan Media
Corporation ("SMC"). SMC's shut down has been accounted for as a discontinued
operation, and accordingly, SMC's operations are segregated in the Company's
consolidated financial statements. Sales, costs of sales and selling, general
and administrative expenses attributable to SMC for the fiscal year ended March
31, 1996 ("Fiscal Year 1996") and the fiscal year ended March 31, 1995 ("Fiscal
Year 1995") have been reclassified to discontinued operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations" and note 5 of the Company's consolidated
financial statements.
Market data used throughout this report was obtained from industry
publications and internal Company estimates. While the Company believes such
information is reliable, the accuracy of such information has not been
independently verified and cannot be guaranteed.
Printing
The Company's printing business, which accounted for approximately 86%
of the Company's sales in Fiscal Year 1997, produces retail advertising inserts,
comics (newspaper Sunday comics, comic insert advertising and comic books), and
other publications.
Retail Advertising Inserts (80% of printing sales in Fiscal Year 1997).
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. Advertising inserts are used extensively by
many retailers and are 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 generally advertise for a specific, limited sale period. The Company prints
advertising inserts for approximately 310 retailers.
Comics (14% of printing sales in Fiscal Year 1997). The Company
believes that it is one of the largest printers of comics in the United States.
The Company prints Sunday comics for approximately 330 newspapers in the United
States and Canada and prints the majority of the annual comic book requirements
of Marvel Entertainment Group, Inc. ("Marvel").
Other Publications (6% of printing sales in Fiscal Year 1997). The
Company prints local newspapers, T.V. guide listings and other publications.
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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 the majority of its printing equipment, including, at May 31, 1997, 36 web
heatset offset presses, 13 flexographic presses and 5 multi-unit web coldset
offset presses. Most of the Company's advertising inserts and all of its other
publications and comic books are printed using the offset process. Some
advertising inserts and substantially all of the Company's newspaper Sunday
comics and comic insert advertising are printed using the flexographic process.
In the offset process, images are distinguished chemically from
non-image areas of a metal plate and transferred from the plate to a rubber
blanket and then to the paper surface; furthermore, 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.
The flexographic process differs from offset printing in that it
utilizes flexible plates and rapid-drying, water-based (as opposed to
solvent-based) inks. The flexographic image area results from a raised surface
on a polymer plate which is transferred directly to the paper surface.
Flexography is used extensively in printing high quality 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 press
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. Faster set up times make the process suited to commercial customers with
shorter runs and extensive regional versioning.
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. Finally, many advertising inserts require
gluing or stitching of the product, adding cards, trimming and numbering. These
production activities generally are done in-line with the press to meet the
expedited delivery schedules and pricing required by many customers. 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 14% of the Company's sales in Fiscal Year 1997. 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 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
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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 been converted to a
telecommunications based network offering greater flexibility at a reduced cost.
This wide area network links American Color's locations with the Company's
printing operations, as well as to several 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, 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 implemented 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 18 to the Company's
consolidated financial statements.
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 web heatset offset and
flexographic web printing equipment is among the most advanced in the industry
and that the average age of its equipment is significantly less than the
majority of its regional competitors and is comparable to its major national
competitors. The Company is also committed to a comprehensive, long-term
maintenance program which not only enhances the reliability of its production
equipment, but also extends the life of the machines. 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 310 retailers and
approximately 330 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 strong customer
service 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 has reduced the variable and
fixed costs of production at its printing facilities over the last three years
and believes it is well positioned to maintain its competitive cost structure
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in the future due to economies of scale. The Company has also 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. Since the 1993 Acquisition, 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 fifteen
digital imaging and prepress facilities provide it with contingency
capabilities, increased capacity during peak periods, access to top quality
internal 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 has strengthened and expanded its
printing sales management group. 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 revised 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 and less seasonable
and to maximize the use of the Company's equipment. The Company is also
continuing expansion of 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
continue 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 per 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.
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Customers and Distribution
Customers. The Company sells its printing products and services to a
large number of customers, primarily retailers and newspapers, 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 Sunday comics
and comic books, 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 time commitments from
its customers ranging from job to job to annual allocations. 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 raw materials,
primarily paper and ink.
American Color's customers consist 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 requiring
leading edge technology. This includes an increasing amount of contractual
business related to facilities management arrangements with customers, which
contracts typically extend from three to five years in length.
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, electronic digital imaging and facilities management
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 1997,
approximately 39% of the digital imaging and prepress sector's sales were to
customers of the Company's printing sector.
No single customer accounted for sales in excess of 10% of the
Company's consolidated sales in Fiscal Year 1997. The Company's top ten
customers accounted for approximately 35% of consolidated sales in Fiscal Year
1997.
Distribution. The Company distributes its printing products primarily
by truck to customer designated locations, primarily newspapers. 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 and the Company competes with numerous national,
regional and local printers. Customer preferences for larger printers with a
greater range of services and more flexibility, capital requirements and
competitive pricing pressures have led to a trend of industry consolidation in
recent years.
The Company believes that competition in the printing business is based
primarily on quality, customer service, price and timeliness of delivery. The
advertising insert business is a large, 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. In addition, 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 Sunday
newspaper comics in the United States, there are numerous newspapers that print
their own Sunday comics. The Company's other publication business competes with
many large national and regional commercial printers.
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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 the need for capital expenditures to
keep up with such 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.
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 and throughout Fiscal Year 1997, however, the overall cost 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. 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
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, 1997, the Company had a total of approximately 2,880
employees, of which approximately 200 employees are represented by a collective
bargaining agreement that will expire on December 31, 2001. The Company
considers its relations with its employees to be excellent.
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 "Legal Proceedings -
Environmental Matters."
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ITEM 2. PROPERTIES
The Company operates in 25 locations in 15 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 has 15 production locations, 13 of which are leased by
American Color. The American Color division also operates digital imaging and
prepress facilities on the premises of several of its customers ("facilities
management"). In addition, the Company maintains one small executive and two
divisional headquarter facilities, two of which are leased and one which is
owned. The Company believes that its plants and facilities are adequately
equipped and maintained for present and planned operations.
ITEM 3. LEGAL PROCEEDINGS
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, 1997. The Company believes this amount is adequate to cover such
liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
registrant during the fourth quarter of Fiscal Year 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
There is no established public market for the common stock of either
Communications or Graphics.
Holders
There are approximately 89 shareholders of Communications' common
stock. Communications is the sole shareholder of Graphics' common stock.
Dividends
There have been no cash dividends declared on any class of common
equity for the two most recent fiscal years.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the year ended
December 31, 1992 (pre-1993 Acquisition), for and as of the three months ended
March 31, 1993 (pre-1993 Acquisition) and for and as of the fiscal years ended
March 31, 1994, 1995, 1996 and 1997 (post-1993 Acquisition). The balance sheet
data as of December 31, 1992 and March 31, 1993, 1994, 1995, 1996 and 1997 and
the statement of operations data for the year ended December 31, 1992, the three
months ended March 31, 1993, and the fiscal years ended March 31, 1994, 1995,
1996 and 1997 are derived from the audited consolidated financial statements for
such periods and at such dates. The selected financial data below also reflects
the Company's discontinued coupon free standing insert ("FSI") operation and
it's discontinued wholly-owned subsidiary, SMC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 of the Company's consolidated financial statements. As a
result of the 1993 Acquisition, the Company's consolidated financial statements
for the periods subsequent to March 31, 1993 are presented on the Company's new
basis of accounting, while the consolidated financial statements for March 31,
1993 and December 31, 1992 are presented on the Company's historical cost basis
of accounting. The consolidated results of operations of the Company for the
fiscal years ended March 31, 1994, 1995, 1996 and 1997 are not directly
comparable to the consolidated pre-1993 Acquisition results of operations due to
the effects of the 1993 Acquisition.
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.
This data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements appearing elsewhere in this annual report.
10
<PAGE>
SELECTED FINANCIAL DATA
SULLIVAN COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Post-1993 Acquisition (a) Pre-1993 Acquisition (b)
-------------------------------------- ------------------------
Three
Months
Ended Year Ended
Fiscal Year Ended March 31, March 31, December 31,
--------------------------------------
1997 1996 1995(c) 1994 1993(d) 1992
---- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (dollars in thousands)
Sales $524,551 529,523 433,198 414,673 101,601 395,420
Cost of sales 459,880 465,110 370,267 369,520 95,078 357,831
-------- ------- ------- ------- ------- -------
Gross profit 64,671 64,413 62,931 45,153 6,523 37,589
Selling, general and administrative expenses (e) 51,418 44,164 41,792 39,343 10,047 40,661
Restructuring costs and other special charges (f) 2,881 7,533 -- -- -- --
Gain from curtailment and establishment of defined
benefit pension plans, net (g) -- -- (3,311) -- -- --
-------- ------- ------- ------- ------- -------
Operating income (loss) 10,372 12,716 24,450 5,810 (3,524) (3,072)
Interest expense, net 36,132 32,425 25,334 23,737 6,862 27,021
Other expense (income) 245 1,722 985 2,369 204 3,793
Income tax expense (benefit) 2,591 4,874 2,552 2,380 (3,848) (14,601)
-------- ------- ------- ------- ------- -------
Loss from continuing operations before extraordinary
items and cumulative effect of changes in
accounting principles (28,596) (26,305) (4,421) (22,676) (6,742) (19,285)
-------- ------- ------- ------- ------- -------
Discontinued operations: (h)
Loss from operations, net of tax (1,557) (1,364) (912) (23,272) (1,897) (3,689)
Estimated (loss) on shut down and gain on
settlement, net of tax (1,550) 2,868 18,495 (38,412) -- --
Loss on early extinguishment of debt (i) -- (4,526) -- -- -- --
Cumulative effect of changes in accounting principles,
net of tax (j) -- -- -- -- 646 (4,436)
-------- ------- ------- ------- ------- -------
Net (loss) income $(31,703) (29,327) 13,162 (84,360) (7,993) (27,410)
======== ======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 4,635 8,839 7,129 2,167
Working capital (deficit) (8,598) 9,612 4,958 6,956 (17,327) (4,138)
Total assets 333,975 351,181 328,368 305,521 274,812 271,219
Long-term debt and capitalized leases, including current
installments (k) 312,309 297,617 258,201 250,439 245,382 247,362
Stockholders' deficit (76,318) (44,396) (14,970) (45,485) (85,194) (77,762)
Other Data:
Net cash provided (used) by operating activities $ 24,313 (4,187) 30,510 (27,329) 11,437 11,831
Net cash used by investing activities (10,997) (24,436) (17,580) (1,332) (4,500) (10,144)
Net cash (used) provided by financing activities (13,312) 23,982 (17,527) 23,113 (1,980) (12,939)
Capital expenditures (including lease obligations entered into) 37,767 28,022 20,415 15,722 4,888 12,029
EBITDA (l) $ 46,972 46,847 51,719 33,068 4,080 34,517
</TABLE>
11
<PAGE>
NOTES TO SELECTED 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 December 31, 1992
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) Fiscal Year 1997 selling, general and administrative expenses include $2.5
million of non-recurring employee termination expenses (including $1.9
million related to the resignation of the Company's Chief Executive
Officer--see note 20 to the Company's consolidated financial statements).
(f) In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased growth
in the business. The Company recognized $0.9 million and $4.1 million of
costs under such plan in Fiscal Year 1997 and Fiscal Year 1996,
respectively. In addition, the Company recorded $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its Print and American Color divisions in Fiscal Year 1997
and Fiscal Year 1996, respectively (see note 18 to the Company's
consolidated financial statements).
(g) 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.
(h) In February of Fiscal Year 1997, the Company made a strategic decision to
shut down the operation of its wholly-owned subsidiary SMC. SMC's shut
down has been accounted for as a discontinued operation, and accordingly,
SMC's operations are segregated in the Company's consolidated financial
statements. Sales, costs of sales and selling, general and administrative
expenses attributable to SMC for Fiscal Years 1997, 1996 and 1995 have
been reclassified to discontinued operations. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Discontinued Operations" and note 5 of the Company's
consolidated financial statements.
12
<PAGE>
On February 16, 1994, the Company assigned the coupon FSI contracts of its
subsidiary, Sullivan Marketing, Inc. ("SMI"), to News America FSI, Inc.
("News America"). In June 1994, the Company recorded income from the
settlement of a lawsuit entitled Sullivan Marketing, Inc. and Sullivan
Graphics, Inc. v. Valassis Communications, Inc., News America FSI Inc. and
David Brandon (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 a complaint
naming SMI, News America and two packaged goods companies as defendants of
(the "EPI lawsuit") 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations"
and note 5 of the Company's consolidated financial statements.
(i) As part of the Shakopee Merger and the refinancing transactions (the
"Refinancing"), collectively (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 Graphics' 15% Senior Subordinated Notes
due 2000 (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.
(j) Effective January 1, 1993, the Company changed its method of accounting
for income taxes to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("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.
(k) 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 million. The 15% Notes were redeemed in
connection with the Refinancing.
(l) EBITDA is included in the Selected 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 dated as of August 15, 1995
(the "Indenture") and the Company's Credit Agreement with BT Commercial
Corporation (the "Bank Credit Agreement") are based on EBITDA, subject to
certain adjustments.
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 20 to the
Company's consolidated financial statements).
13
<PAGE>
EBITDA includes $0.9 million and $4.1 million of restructuring costs
related to its American Color division in Fiscal Year 1997 and Fiscal Year
1996, respectively (see note 18 to the Company's consolidated financial
statements).
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 11 to the
Company's consolidated financial statements).
ITEM 7. 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.
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. 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. Gowe's results of operations are included in the
Company's consolidated financial statements subsequent to March 11, 1996.
During March 1996, the Company completed the construction and start-up
of Flexi-Tech, a new plant in Hanover, Pennsylvania. Flexi-Tech is 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.
In Fiscal Year 1997, the Company began to present certain costs of its
American Color production facilities within cost of sales rather than as
selling, general and administrative expenses. This new presentation is
consistent with the Company's presentation of the printing sector's financial
information, and the Company believes that this is a more accurate measure of
the gross margin of the business. The financial information for Fiscal Year 1996
and Fiscal Year 1995 has been reclassified to conform with this presentation.
In February of Fiscal Year 1997, the Company made a strategic decision
to shut down the operations of its wholly-owned subsidiary SMC. SMC's shut down
has been accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial statements.
Sales, cost of sales and selling, general and administrative expenses
attributable to SMC for Fiscal Year 1996 and Fiscal Year 1995 have been
reclassified to discontinued operations.
14
<PAGE>
Printing. In recent years, the Company has taken a number of steps
which have resulted in improved printing sector performance including the hiring
of several key managers in the manufacturing, purchasing, quality, technical
services, production planning and customer service departments (see "EBITDA" at
page 24). 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 operations (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. The
significant capital required to keep pace with changing technology and
competitive pricing trends has led to a trend of industry consolidation in
recent years. In addition, customers' preference for larger printers, such as
the Company, with a wider variety of services, greater distribution capabilities
and more flexibility have also contributed to consolidation within the industry.
The industry is expected to remain competitive in the near future and the
Company's sales will continue to be subject to changes in retailers' demands for
printed products.
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 high capacity utilization 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
late Fiscal Year 1996 and throughout Fiscal Year 1997, the overall cost of paper
declined. In accordance with industry practice, the Company generally passes
through increases 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 in the past, significant increases in paper prices and continuing
price competition resulted in pressure by certain customers to reduce selling
prices and to reduce sizes/pages in order to mitigate the effect of increased
paper costs during these periods. In addition, there can be no assurances that
the Company will be able to pass through future paper price increases.
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,
telecommunications, design and layout, consulting and training services.
In April 1995, the Company implemented a plan for its American Color
division which was designed to improve productivity, increase customer service
and responsiveness, and provide increased growth in this business. The cost of
this plan was 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") (see "Restructuring
Costs and Other Special Charges" below).
15
<PAGE>
The following table summarizes the Company's historical results of
continuing operations for Fiscal Year 1997, 1996 and 1995.
Fiscal Year Ended March 31,
----------------------------------
1997 1996 1995
---- ---- ----
(dollars in thousands)
Sales:
Printing $ 449,924 $ 453,381 $ 353,123
American Color 74,627 72,461 76,070
Other (a) -- 3,681 4,005
--------- --------- ---------
Total $ 524,551 $ 529,523 $ 433,198
========= ========= =========
Gross Profit:
Printing $ 49,469 $ 49,015 $ 43,212
American Color 15,133 13,687 17,936
Other (a) 69 1,711 1,783
--------- --------- ---------
Total $ 64,671 $ 64,413 $ 62,931
========= ========= =========
Gross Margin:
Printing 11.0% 10.8% 12.2%
American Color 20.3% 18.9% 23.6%
Total 12.3% 12.2% 14.5%
Operating Income (Loss):
Printing (b) $ 25,858 $ 28,239 $ 24,683
American Color (b) (c) (1,576) (3,975) 7,855
Other (a) (d) (13,910)(f) (11,548) (8,088)(e)
--------- --------- ---------
Total $ 10,372 $ 12,716 $ 24,450
========= ========= =========
- ----------
(a) Other operations in Fiscal Year 1996 and Fiscal Year 1995 include
revenues and expenses associated with the Company's 51% owned
subsidiary, NIS (sold on March 11, 1996, see note 4 to the Company's
consolidated financial statements).
(b) Printing operating income includes the impact of $0.4 million and $2
million in Fiscal Year 1997 and 1996, respectively, of other special
charges related to fixed asset write-offs and write-downs. American
Color's operating loss includes the impact of $1.5 million and $1.4
million in Fiscal Year 1997 and 1996, respectively, of other special
charges related to fixed asset write-offs and write-downs (see note 18
to the Company's consolidated financial statements).
(c) Includes the impact of restructuring costs of $0.9 million in Fiscal
Year 1997 and $4.1 million in Fiscal Year 1996 (see note 18 to the
Company's consolidated financial statements).
(d) Also includes corporate selling, general and administrative expenses,
and amortization expense.
(e) Includes the net gain of $3.3 million in Fiscal Year 1995 from the
curtailment and establishment of defined benefit pension plans (see
discussion below).
(f) Also reflects non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's Chief Executive Officer-see note 20 to the
Company's consolidated financial statements).
16
<PAGE>
Historical Results of Operations
Fiscal Year 1997 vs. Fiscal Year 1996
The Company's sales decreased 0.9% to $524.6 million in Fiscal Year
1997 from $529.5 million in Fiscal Year 1996. This decrease includes a decrease
in printing sales of $3.5 million, or 0.8%, an increase in American Color sales
of $2.2 million, or 3%, and a $3.7 million decrease in other sales. The
Company's gross profit increased to $64.7 million or 12.3% of sales in Fiscal
Year 1997 from $64.4 million or 12.2% of sales in Fiscal Year 1996. The
Company's operating income decreased to $10.4 million or 2% of sales in Fiscal
Year 1997 from $12.7 million or 2.4% of sales in Fiscal Year 1996. See the
discussion of these changes by sector below.
Printing
Sales. Printing sales decreased to $449.9 million in Fiscal Year 1997
from $453.4 million in Fiscal Year 1996. This decrease includes a decrease in
paper prices and the effect of an increase in customer supplied paper. These
decreases were partially offset by $46.2 million of incremental sales from Gowe
and Flexi-Tech and an increase in production volume of approximately 3%
(excluding Gowe and Flexi-Tech).
Gross Profit. Printing gross profit increased $0.5 million, or 0.9%, to
$49.5 million in Fiscal Year 1997 from $49 million in Fiscal Year 1996. Printing
gross margin increased to 11% in Fiscal Year 1997 from 10.8% in Fiscal Year
1996. The increase in gross profit primarily reflects incremental gross profit
from Gowe and an increase in production volume. 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 an increase in depreciation expense, a reduction
in the price of scrap paper and incremental costs related to the start-up of
Flexi-Tech. The increase in gross margin as a percentage of sales is due
primarily to the impact of the above described items and the impact of lower
paper prices on sales in Fiscal Year 1997.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses increased 23.2% to $23.1 million, or 5.1% of
printing sales, in Fiscal Year 1997 from $18.8 million, or 4.1% of printing
sales, in Fiscal Year 1996. The increase in Fiscal Year 1997 was primarily the
result of increased sales and marketing expenses and incremental selling,
general and administrative costs at Gowe and Flexi-Tech.
Operating Income. As a result of the above factors and the incurrence
of other special charges related to fixed asset write-offs and write-downs of
$0.4 million and $2 million in Fiscal Year 1997 and 1996, respectively (see
"Restructuring Costs and Other Special Charges" below), operating income from
the printing business decreased to $25.9 million in Fiscal Year 1997 from $28.2
million in Fiscal Year 1996.
American Color
Sales. American Color's sales increased 3% to $74.6 million in Fiscal
Year 1997 from $72.5 million in Fiscal Year 1996. The increase in Fiscal Year
1997 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 and increases in digital visual effects work partially offset by lower
equipment sales.
Gross Profit. American Color's gross profit increased $1.4 million to
$15.1 million in Fiscal Year 1997 from $13.7 million in Fiscal Year 1996.
American Color's gross margin was 20.3% in Fiscal Year 1997, up from 18.9% in
Fiscal Year 1996. These increases were primarily the result of increased volume
and material cost savings offset in part by increased facilities management
costs.
17
<PAGE>
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased 18% to $14.3 million or 19.2% of
American Color sales in Fiscal Year 1997 from $12.1 million or 16.7% of American
Color sales in Fiscal Year 1996, primarily as a result of the addition of sales
and marketing and administrative support personnel and related expenses,
including expenses related to its digital visual effects group.
Operating Loss. As a result of the above factors and the restructuring
costs associated with the American Color restructuring plan of $0.9 million in
Fiscal Year 1997 and $4.1 million in Fiscal Year 1996 and the incurrence of
other special charges related to fixed asset write-offs and write-downs of $1.5
million and $1.4 million in Fiscal Year 1997 and 1996, respectively (see
"Restructuring Costs and Other Special Charges" below), operating loss at
American Color decreased to $1.6 million in Fiscal Year 1997 from $4 million in
Fiscal Year 1996.
Fiscal Year 1996 vs. Fiscal Year 1995
The Company's sales increased $96.3 million to $529.5 million in Fiscal
Year 1996 from $433.2 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 $0.3 million decrease in other sales. The Company's gross profit increased to
$64.4 million or 12.2% of sales in Fiscal Year 1996 from $62.9 million or 14.5%
of sales in Fiscal Year 1995. The Company's operating income decreased to $12.7
million or 2.4% of sales in Fiscal Year 1996 from $24.5 million or 5.6% 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.
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 in Fiscal Year 1996 (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.
18
<PAGE>
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 18 to the Company's consolidated financial statements).
Gross Profit. American Color's gross profit decreased $4.2 million to
$13.7 million in Fiscal Year 1996 from $17.9 million in Fiscal Year 1995.
American Color's gross margin decreased to 18.9% in Fiscal Year 1996 from 23.6%
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 $12.1 million or 16.7% of
American Color's sales in Fiscal Year 1996 from $10.1 million or 13.3% of
American Color's sales in Fiscal Year 1995. These increases are a result of
increased sales and marketing expenses and additional 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.
Other Operations (Fiscal Year 1997 vs. Fiscal Year 1996 and Fiscal Year 1996
vs. Fiscal Year 1995)
Other operations consist primarily of revenues and expenses associated
with the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), corporate
selling, general and administrative expenses, other expenses and amortization
expense. Amortization expenses for other operations, including goodwill
amortization (see below), were $8.4 million, $8.7 million and $8.4 million in
Fiscal Year 1997, 1996 and 1995, respectively.
Operating losses from other operations increased $2.4 million to a loss
of $13.9 million in Fiscal Year 1997 from a loss of $11.5 million in Fiscal Year
1996. This increase primarily reflects non-recurring employee termination
expenses of $2.5 million in Fiscal Year 1997 (including $1.9 million related to
the resignation of the Company's Chief Executive Officer - see note 20 to the
Company's consolidated financial statements).
Operating losses from other operations increased $3.4 million to a loss
of $11.5 million in Fiscal Year 1996 from a loss of $8.1 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), and increased
amortization expenses.
Goodwill Amortization
Amortization expense associated with goodwill was $8.3 million, $8.6
million and $8.4 million for Fiscal Year 1997, 1996 and 1995, respectively.
Restructuring Costs and Other Special Charges
In April 1995, the Company implemented a plan for its American Color
division which was 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 was accounted for in
accordance with the guidance set forth in EITF 94-3. The pretax costs of $5
million which were incurred as a part of this plan represent employee
termination, goodwill write-down and other related costs that were incurred as a
direct result of the plan. Approximately $0.9 million of restructuring costs
primarily related to relocation expenses were recognized in Fiscal Year 1997. In
Fiscal Year 1996 the Company recognized $4.1 million of such restructuring
charges, which included $0.9 million of goodwill write-down, and $3.2 million
primarily for severance and other personnel related costs. 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.
19
<PAGE>
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded
special charges totaling $1.9 million and $3.4 million, respectively, for
impaired long-lived assets and to adjust the carrying values of idle, disposed
and under performing assets to estimated fair values. The provisions were based
on a review of 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"). Of
the Fiscal Year 1997 total of long-lived assets that were adjusted based on
being idle, disposed of or under performing, approximately $0.4 million and $1.5
million related to the print and American Color sectors, respectively. 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. Approximately
$2 million of the Fiscal Year 1996 total related to the print sectors long-lived
assets that were adjusted based on being idle, disposed of or under performing.
The remaining $1.4 million of the Fiscal Year 1996 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 was
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 in Fiscal Year 1996 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.
Interest Expense
Interest expense increased 11% to $36.3 million in Fiscal Year 1997
from $32.7 million in Fiscal Year 1996. This increase includes the impact of
increased average indebtedness levels including indebtedness related to the
Transactions and obligations under capital leases. 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
indebtedness related to the Shakopee Merger and indebtedness incurred to fund
the fees and expenses associated with the Refinancing (see notes 2 and 9 to the
Company's consolidated financial statements).
Nonrecurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
20
<PAGE>
Other Expense (Income) and Taxes
Other expense, net, remained relatively unchanged at $0.2 million in
both Fiscal Year 1997 and Fiscal Year 1996. 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 4 to the Company's
consolidated financial statements), offset in part by incremental expenses
associated with an employee benefit program also recorded in Fiscal Year 1996.
Income tax expense decreased to $2.6 million in Fiscal Year 1997 from
$4.9 million in Fiscal Year 1996. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions, the Shakopee Merger and the
sale of NIS, partially offset by an increase in the deferred tax valuation
allowance. During Fiscal Year 1997, the Company increased its valuation
allowance by $8.9 million to $30.1 million. The increase in the valuation
allowance during Fiscal Year 1997 resulted primarily from the loss incurred
during this period for which a tax benefit will not be recorded.
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 increase in the valuation
allowance during Fiscal Year 1996 resulted primarily from the loss incurred
during this period for which a tax benefit will not be recorded.
Discontinued Operations
Sullivan Media Corporation
The Company's net loss in Fiscal Year 1997, Fiscal Year 1996 and Fiscal
Year 1995 includes the loss from operations of its discontinued wholly-owned
subsidiary SMC of approximately $1.6 million, $1.4 million and $0.9 million,
respectively. The Company's Fiscal Year 1997 net loss also includes the
estimated net loss on shut down of approximately $1.5 million. See note 5 to the
Company's consolidated financial statements.
SMI Settlement
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.
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. 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 in Fiscal Year 1996
(see notes 2 and 9 to the Company's consolidated financial statements), 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.
21
<PAGE>
Net Income (Loss)
As a result of the factors discussed above, the Company's net loss
increased to a loss of $31.7 million in Fiscal Year 1997 from a loss of $29.3
million in Fiscal Year 1996. As discussed above, Fiscal Year 1997 includes $0.9
million of expense related to the American Color restructuring, $1.9 million of
other special charges related to fixed asset write-offs and write-downs, $2.5
million of non-recurring employee termination expenses and approximately a $3.1
million loss from discontinued operations related to SMC. 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. 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, 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 and a $1.4 million loss from discontinued operations
related to SMI and SMC, respectively. 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 and
a $0.9 million loss from discontinued operations of SMI and SMC, respectively.
Liquidity and Capital Resources
In August 1995, the Company refinanced substantially all of its
existing indebtedness (see note 9 to the Company's consolidated financial
statements). 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 12 3/4% Senior Subordinated Notes Due 2005 (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 which
matures on September 30, 2000 (the "Revolving Credit Facility") providing for a
maximum of $75 million of borrowing availability, subject to a borrowing base
requirement. As of May 31, 1997, the Company had borrowings of $38.2 million
outstanding under the Revolving Credit Facility and $12.3 million of additional
borrowing availability. On June 30, 1997, the Company entered into a $25 million
term loan facility which matures on March 31, 2001 (the "Term Loan Facility")
(see note 9 to the Company's consolidated financial statements). Net proceeds
received under this facility of $23 million were used to reduce outstanding
borrowings under the Revolving Credit Facility. Based upon activity through June
27, 1997 and after giving pro forma effect to receipt and application of the
above $23 million Term Loan Facility net proceeds, the Company had additional
borrowing availability under the Revolving Credit Facility of approximately
$25.8 million at June 27, 1997.
The Bank Credit Agreement also provides for a $60 million amortizing
term loan with a final maturity on September 30, 2000 (the "Term Loan"). At May
31, 1997, $47.1 million of the Term Loan was outstanding. Scheduled Term Loan
payments due over the upcoming fiscal year ending March 31, 1998 ("Fiscal Year
1998") approximate $10.6 million. Capital lease obligation repayments will be
approximately $6.4 million in Fiscal Year 1998.
In Fiscal Year 1997, net cash from operating activities and net
borrowings under the Revolving Credit Facility (see the consolidated statements
of cash flows) were used to pay $13.6 million in scheduled principal payments on
indebtedness (including capital lease obligations). Additionally, these cash
sources were used to fund the Company's Fiscal Year 1997 cash capital
expenditures of $10.8 million and meet additional investing and financing needs
of $1.1 million. The Company plans to continue its program of upgrading its
printing and prepress equipment and expanding production capacity and currently
anticipates that Fiscal Year 1998 cash capital expenditures will approximate
$11.1 million and equipment acquired under capital leases will approximate $14.6
million during Fiscal Year 1998. The Company had zero cash on hand at March 31,
1997 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.
22
<PAGE>
At March 31, 1997, the Company had total indebtedness outstanding of
$312.3 million, including capital lease obligations. Of the total debt
outstanding at March 31, 1997, $87.8 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.45%. Indebtedness
under the Bank Credit Agreement bears interest at floating rates, causing the
Company to be sensitive to prevailing interest rates. At March 31, 1997, the
Company had indebtedness other than obligations under the Bank Credit Agreement
of $224.5 million (including $185 million of the Notes). In connection with the
Term Loan Facility, the Company obtained amendments with respect to certain
financial covenants and an amendment that decreased the Borrowing Base through
March 31, 1998, in the Bank Credit Agreement and after giving effect to such
amendments, the Company is currently in compliance with all financial covenants
set forth in the Bank Credit Agreement, as amended. See note 9 to the Company's
consolidated financial statements.
23
<PAGE>
EBITDA
Fiscal Year Ended March 31,
-------------------------------------
1997 1996 1995
---- ---- ----
EBITDA: (dollars in thousands)
Printing $ 46,755 $ 46,597 $ 38,357
American Color(a) 5,770 2,907 12,662
Other (b) (c) (5,553)(e) (2,657) 700(d)
-------- -------- --------
Total $ 46,972 $ 46,847 $ 51,719
======== ======== ========
EBITDA Margin:
Printing 10.4% 10.3% 10.9%
American Color 7.7% 4.0% 16.6%
Total 9.0% 8.8% 11.9%
- ----------
(a) American Color EBITDA for Fiscal Year 1997 and 1996 includes the impact
of restructuring costs of $0.9 million and $4.1 million, respectively
(see note 18 to the Company's consolidated financial statements and
discussion above).
(b) Other operations in Fiscal Year 1996 and Fiscal Year 1995 include
revenues and expenses associated with the Company's 51% owned
subsidiary, NIS (sold on March 11, 1996; see note 4 to the Company's
consolidated financial statements).
(c) Also includes corporate selling, general and administrative expenses.
(d) Includes a net gain of $3.3 million in Fiscal Year 1995 from the
curtailment and establishment of defined benefit pension plans (see
discussion above).
(e) Also reflects non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 20 to
the Company's consolidated financial statements).
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 Margin" is defined as EBITDA as a percentage of net
sales. 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. As a result of the reasons previously described under
"--Printing" (excluding the increase in depreciation expense), printing EBITDA
increased to $46.8 million in Fiscal Year 1997 from $46.6 million in Fiscal Year
1996, representing an increase of $0.2 million. The Company's printing sector
EBITDA increased to $46.6 million in Fiscal Year 1996 from $38.4 million in
Fiscal Year 1995, representing an increase of $8.2 million. Printing EBITDA
Margin increased to 10.4% in Fiscal Year 1997 from 10.3% in Fiscal Year 1996 and
decreased to 10.3% in Fiscal Year 1996 from 10.9% in Fiscal Year 1995.
American Color. As a result of the reasons previously described under
"--American Color," American Color's EBITDA increased to $5.8 million in Fiscal
Year 1997 from $2.9 million in Fiscal Year 1996, representing an increase of
$2.9 million. EBITDA Margin increased to 7.7% in Fiscal Year 1997 from 4% in
Fiscal Year 1996. 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 Fiscal Year 1996 EBITDA and EBITDA Margin is $4.1
million of restructuring costs related to the American Color restructuring plan
(see discussion above).
24
<PAGE>
Other Operations. As a result of the reasons previously described under
"--Other Operations," excluding changes in amortization expense, other
operations negative EBITDA increased to negative EBITDA of $5.6 million in
Fiscal Year 1997 from negative EBITDA of $2.7 million in Fiscal Year 1996.
EBITDA from other operations decreased to a negative EBITDA of $2.7 million in
Fiscal Year 1996 from EBITDA of $0.7 million in Fiscal Year 1995. Negative
EBITDA for Fiscal Year 1997 includes the impact of non-recurring employee
termination expenses of $2.5 million (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 20 to the
Company's consolidated financial statements). EBITDA in Fiscal Year 1995
includes the net gain of $3.3 million relating to a change in the Company's
defined benefit plans (see discussion above).
Amortization of Goodwill
The goodwill is amortized on a straight-line basis by business sector.
Goodwill amortization expense will be approximately $8.4 million for Fiscal Year
1998 and approximately $2.3 million annually thereafter.
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. Throughout the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost of
paper. In late Fiscal Year 1996, however, the overall cost of paper began to
decline and that decline continued throughout Fiscal Year 1997. 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,
1997 which the Company believes to be adequate. See "Legal Proceedings -
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 in the Company's results of operations or its
financial position.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page No.
--------
The following consolidated financial statements of Sullivan Communications, Inc.
are included in this report:
<S> <C>
Report of Independent Auditors........................................................................... 27
Consolidated balance sheets - March 31, 1997 and 1996................................................... 28
For the Years Ended March 31, 1997, 1996 and 1995:
Consolidated statements of operations........................................................... 30
Consolidated statements of stockholders' deficit................................................ 31
Consolidated statements of cash flows........................................................... 32
Notes to Consolidated Financial Statements............................................................... 34
</TABLE>
The following consolidated financial statement schedules of Sullivan
Communications, Inc. are included in Part IV, Item 14:
I. Condensed Financial Information of Registrant
Condensed Consolidated Financial Statements
(parent company only) for the years ended March 31, 1997, 1996,
and 1995, and as of March 31, 1997 and 1996
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for Sullivan
Communications, Inc. have been omitted because they are either not applicable,
not required, or because the information required is included in the financial
statements or notes thereto.
26
<PAGE>
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, 1997 and 1996, 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, 1997. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 18 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."
Ernst & Young LLP
Nashville, Tennessee
May 23, 1997, except as to Note 9,
as to which the date is
June 30, 1997
27
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
---------
1997 1996
---- ----
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful
accounts of $5,879 and $4,830 at
March 31, 1997 and 1996, respectively 53,510 64,465
Other 3,252 3,588
--------- ---------
Total receivables 56,762 68,053
Inventories 9,711 13,181
Prepaid expenses and other current assets 3,604 4,285
--------- ---------
Total current assets 70,077 85,519
Property, plant and equipment:
Land and improvements 3,278 3,259
Buildings and improvements 17,837 16,346
Machinery and equipment 175,196 169,375
Furniture and fixtures 3,625 3,212
Leased assets under capital leases 35,113 8,606
Equipment installations in process 3,118 6,466
--------- ---------
238,167 207,264
Less accumulated depreciation (71,270) (51,103)
--------- ---------
Net property, plant and equipment 166,897 156,161
Excess of cost over net assets acquired,
less accumulated amortization of
$33,523 and $25,269 at March 31, 1997
and 1996, respectively 81,964 89,324
Other assets 15,037 20,177
--------- ---------
Total assets $ 333,975 351,181
========= =========
See accompanying notes to consolidated financial statements.
28
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and capitalized leases $ 18,252 11,490
Trade accounts payable 29,364 35,931
Accrued expenses 30,037 27,271
Income taxes 1,022 1,215
--------- ---------
Total current liabilities 78,675 75,907
Long-term debt and capitalized leases, excluding
current installments 294,057 286,127
Deferred income taxes 8,713 7,801
Other liabilities 28,848 25,742
--------- ---------
Total liabilities 410,293 395,577
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 (132,228) (100,525)
Cumulative translation adjustment (1,590) (1,371)
--------- ---------
Total stockholders' deficit (76,318) (44,396)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 333,975 351,181
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $ 524,551 529,523 433,198
Cost of sales 459,880 465,110 370,267
--------- --------- ---------
Gross profit 64,671 64,413 62,931
Selling, general and administrative expenses 43,164 35,533 33,406
Amortization of goodwill 8,254 8,631 8,386
Restructuring costs and other special charges 2,881 7,533 --
Gain from curtailment and establishment of
defined benefit pension plans, net -- -- (3,311)
--------- --------- ---------
Operating income 10,372 12,716 24,450
--------- --------- ---------
Other expense (income):
Interest expense 36,289 32,688 25,752
Interest income (157) (263) (418)
Nonrecurring charge related to terminated
merger -- 1,534 --
Other, net 245 188 985
--------- --------- ---------
Total other expense 36,377 34,147 26,319
--------- --------- ---------
Loss from continuing operations before income
taxes and extraordinary item (26,005) (21,431) (1,869)
Income tax expense (2,591) (4,874) (2,552)
--------- --------- ---------
Loss from continuing operations before
extraordinary item (28,596) (26,305) (4,421)
Discounted operations:
Loss from operations, net of tax (1,557) (1,364) (912)
Estimated (loss) on shut down and gain on
SMI settlement, net of tax (1,550) 2,868 18,495
--------- --------- ---------
(Loss) income before extraordinary item (31,703) (24,801) 13,162
Loss on early extinguishment of debt, net of tax -- (4,526) --
--------- --------- ---------
Net (loss) income $ (31,703) (29,327) 13,162
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
<TABLE>
<CAPTION>
Series A
and B
Voting Convertible Additional Cumulative
common preferred paid-in Accumulated translation
stock stock capital deficit adjustment Total
----- ----- ------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1994 $ 1 -- 39,999 (84,360) (1,125) (45,485)
Pooling accounting -- -- 17,500 -- -- 17,500
-------- ------- -------- -------- -------- --------
Balances, December 23, 1994 $ 1 -- 57,499 (84,360) (1,125) (27,985)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- (147) (147)
Net income -- -- -- 13,162 -- 13,162
-------- ------- -------- -------- -------- --------
Balances, March 31, 1995 $ 1 -- 57,499 (71,198) (1,272) (14,970)
Change in cumulative translation
adjustment - exchange rate
fluctuations -- -- -- -- (99) (99)
Net loss -- -- -- (29,327) -- (29,327)
-------- ------- -------- -------- -------- --------
Balances, March 31, 1996 $ 1 -- 57,499 (100,525) (1,371) (44,396)
Change in cumulative translation
adjustment - exchange rate
fluctuations -- -- -- -- (219) (219)
Net loss -- -- -- (31,703) -- (31,703)
-------- ------- -------- -------- -------- --------
Balances, March 31, 1997 $ 1 -- 57,499 (132,228) (1,590) (76,318)
======== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(31,703) (29,327) 13,162
Adjustments to reconcile net (loss) income to cash provided
(used) by operating activities:
Extraordinary item - non cash -- (1,912) --
Other special charges - non cash 1,944 4,306 --
Depreciation 25,282 21,385 18,327
Depreciation and amortization related to SMC 251 932 638
Amortization of goodwill 8,254 8,631 8,386
Amortization of other assets 1,120 680 555
Amortization of deferred financing costs and
bond premium 1,784 1,469 485
Gain on shut down of SMI, net of tax - non cash -- (1,480) --
Loss on shut down of SMC - non cash 1,550 -- --
Loss on sales and write-downs of property, plant
and equipment 6 350 72
Gain from curtailment and establishment of
defined benefit pension plans, net -- -- (3,311)
Deferred income tax expense 911 595 1,560
Changes in assets and liabilities,
net of effects of shut down of SMI and SMC
and acquisition of Gowe:
Decrease (increase) in receivables 11,262 (12,870) 11,456
Decrease (increase) in inventories 3,453 (1,744) 1,534
(Decrease) increase in trade accounts payable (6,528) 11,571 (15,026)
Increase (decrease) in accrued expenses 1,226 981 (8,489)
Decrease (increase) in current income taxes payable (193) 195 592
Other 5,694 (7,949) 569
-------- -------- --------
Total adjustments 56,016 25,140 17,348
-------- -------- --------
Net cash provided (used) by operating activities 24,313 (4,187) 30,510
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (10,810) (20,276) (19,601)
Proceeds from sales of property, plant and equipment 63 36 2,137
Gowe acquisition -- (6,682) --
Proceeds from sale of NIS -- 2,550 --
Other (250) (64) (116)
-------- -------- --------
Net cash used by investing activities (10,997) (24,436) (17,580)
-------- -------- --------
Cash flows from financing activities:
Debt:
Proceeds 1,162 280,451 --
Payments (10,374) (242,970) (16,329)
Increase in deferred financing costs (827) (12,095) (1,052)
Repayment of capital lease obligations (3,212) (591) (140)
Other (61) (813) (6)
-------- -------- --------
Net cash (used) provided by financing activities (13,312) 23,982 (17,527)
-------- -------- --------
Effect of exchange rates on cash (4) 6 1
-------- -------- --------
Decrease in cash 0 (4,635) (4,596)
Cash:
Beginning of period 0 4,635 9,231
-------- -------- --------
End of period $ 0 0 4,635
======== ======== ========
Supplemental disclosure of cash information:
Cash paid for:
Interest $ 34,284 30,581 26,416
Income taxes, net of refunds 1,863 3,964 1,904
Exchange rate adjustment to long-term debt (61) 53 (54)
Non cash investing activities:
Lease obligations $ 26,957 7,746 814
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
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. Each of the MSCP III
Entities is affiliated with Morgan Stanley, Dean Witter, Discover &
Co., the parent company of the general partner of the Company's
majority stockholder. In addition, the other stockholders of Shakopee
were also stockholders of the Company. See note 2 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, 1997, 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.
Significant accounting policies are as follows:
34
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(a) Basis of Presentation
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 ("Fiscal
Year 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) Inventories
Inventories are valued at the lower of first-in, first-out ("FIFO")
cost or market (net realizable value) (see note 6).
(d) 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.
(e) 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 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.
35
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(f) 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.
(g) 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").
(h) Foreign Currency Translation
The assets and liabilities of the Company's Canadian facility, 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 facility
are denominated in its functional currency and the interdivision
accounts are of a long-term investment nature, no transaction
adjustments are included in operations.
(i) Reclassifications
Certain prior period amounts have been reclassified to conform with the
most recent period presentation.
(j) 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.
(k) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its financial
instruments together with the related carrying amount. The Company is
not a party to any financial instruments with material
off-balance-sheet risk.
(l) 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.
36
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(m) 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.
(n) 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 has
accounted for stock-based compensation awards under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), as permitted by
SFAS 123, and intends to continue to do so.
(2) 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 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 set forth below (in thousands):
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
========
37
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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 Fiscal Year 1995 (in thousands):
<TABLE>
<CAPTION>
Sullivan
Communications
Inc. (prior to Shakopee Valley Pooling
Shakopee Merger) Printing Inc. Adjustments Combined
---------------- ------------- ----------- --------
<S> <C> <C> <C>
Sales $ 419,054 14,144 -- $ 433,198
Income (loss) from
continuing operations $ (4,445) 24 -- $ (4,421)
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.
(3) 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. Gowe's
results of operations are included in the Company's consolidated
financial statements subsequent to March 11, 1996.
The Company's pro forma unaudited results of operations for the fiscal
year ended March 31, 1996 ("Fiscal Year 1996"), assuming that the Gowe
Acquisition occurred as of April 1, 1995, were $561.6 million in sales,
a $25.9 million loss from continuing operations before extraordinary
item and a $28.9 million net loss.
The Company's pro forma unaudited results of operations for the Fiscal
Year 1995, assuming that the Refinancing, Shakopee Merger and Gowe
Acquisition occurred as of April 1, 1994, were $503.4 million in sales,
a $6.0 million loss from continuing operations before extraordinary
item and $7.5 million in net income.
(4) 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).
38
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(5) Discontinued Operations
Sullivan Media Corporation
In February 1997, the Company made a strategic decision to shut down
the operations of its wholly-owned subsidiary Sullivan Media
Corporation ("SMC"). This resulted in an estimated net loss on shut
down of approximately $1.5 million, which is net of zero income tax
benefits.
The shut down of SMC has been 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 assets of SMC and any resulting gain or
loss on the disposal of those assets, is immaterial to the results of
operations and financial position of the Company.
The condensed consolidated statements of operations relating to the
discontinued SMC operation follows:
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Sales $ 9,786 6,819 1,670
Cost and expenses 11,343 8,183 2,582
-------- -------- --------
Loss before income taxes (1,557) (1,364) (912)
Income taxes -- -- --
-------- -------- --------
Net loss $ (1,557) (1,364) (912)
======== ======== ========
SMI Settlement
On June 29, 1994, Graphics and Sullivan Marketing, Inc. ("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"). 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 Group
Limited ("EPI") complaint naming SMI, News America FSI, Inc. ("News
America") and two packaged goods companies as defendants ("EPI
Lawsuit") 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.
39
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(6) Inventories
The components of inventories are as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Paper $7,831 11,277
Ink 324 272
Equipment held for sale 60 349
Supplies and other 1,496 1,283
------ -----
Total $9,711 13,181
====== ======
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 which (1) 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) 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 sales 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 sales and increase net income.
(7) Other Assets
The components of other assets are as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Deferred financing costs, less
accumulated amortization of $2,893 in
1997 and $2,139 in 1996 $ 9,996 10,953
Spare parts inventory, net of valuation
allowance of $100 in 1997 and 1996 1,699 1,071
Flexi-Tech equipment deposits -- 2,606
Other 3,342 5,547
------- ------
Total $15,037 20,177
======= ======
40
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(8) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Compensation and related taxes $ 9,206 6,882
Employee benefits 8,353 11,204
Interest 4,445 4,435
Accrued costs related to shut down of SMC 1,046 --
Other 6,987 4,750
------- -------
Total $30,037 27,271
======= =======
(9) Notes Payable, Long-term Debt and Capitalized Leases
Long-term debt is summarized as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Bank Credit Agreement:
Term Loan $ 47,088 55,902
Revolving Credit Facility Borrowings 40,710 39,548
-------- --------
87,798 95,450
12 3/4% Senior Subordinated Note Due 2005 185,000 185,000
Capitalized leases 31,607 7,862
Other loans with varying maturities and
interest rates 7,904 9,305
-------- --------
Total long-term debt 312,309 297,617
Less current installments 18,252 11,490
-------- --------
Long-term debt and capitalized leases,
excluding current installments $294,057 286,127
======== ========
41
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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 "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%
Senior Subordinated Notes due 2000 ("the 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.
The remaining Term Loan amortizes in the following annual amounts: (i) $10.6
million in Fiscal Year 1998, (ii) $13.3 million in Fiscal Year 1999, (iii) $15.2
million in Fiscal Year 2000 and (iv) $8 million in Fiscal Year 2001.
The 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 $40.7 million at March 31,
1997. The aggregate amount of letters of credit outstanding at March 31, 1997
was $4.9 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, 1997 was 8.45%.
Graphics is required to pay a commitment fee equal to 1/2% per annum of the
unused commitment under the Revolving Credit Facility.
42
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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, as amended.
On June 30, 1997, the Company entered into a $25 million term loan facility with
Bankers Trust Company and a syndicate of lenders including a $5 million
participation by Morgan Stanley Senior Funding, Inc., a related party, which
matures on March 31, 2001 (the "Term Loan Facility"). Net proceeds of
approximately $23 million were received and used to reduce outstanding
borrowings under the existing Revolving Credit Facility. Interest under the Term
Loan Facility is floating based upon existing market rates plus agreed upon
margin levels which escalate over the initial 24 months of the facility. In
addition, the Company is required to pay certain additional cash fees on the 6,
12, 18, 24 and 30 month anniversary dates of the facility based upon the then
outstanding principal amounts. The obligations under this facility are
guaranteed on the same basis as the New Bank Credit Agreement although such
guarantees are secured by second priority security interests in the tangible and
intangible assets of the Company and such guarantors. Covenants under this
agreement are substantially similar to, but in certain respects are more
restrictive than, existing covenants under the Senior Subordinated Notes
Indenture. Morgan Stanley Senior Funding, Inc. received transaction fees of
approximately $0.3 million.
43
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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 triggering event, 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.
The amortization for total long-term debt and capitalized leases at March 31,
1997 is shown below (in thousands):
Long-Term Capitalized
Fiscal year Debt Leases
----------- ---- ------
1998 $ 12,988 $ 7,949
1999 15,350 6,691
2000 15,793 6,045
2001 49,307 5,002
2002 680 4,352
Thereafter 186,584 12,550
----------- ----------
Total $ 280,702 42,589
===========
Imputed interest (10,982)
----------
Present value of minimum
lease payments $ 31,607
==========
Capital leases have varying maturity dates and interest rates which generally
approximate 10%. The Company estimates that the carrying amounts of the
Company's debt and other financial instruments appropriate their fair values at
March 31, 1997 and 1996.
44
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(10) 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, 1997 and 1996 are as follows (in
thousands):
March 31,
---------
1997 1996
---- ----
Deferred tax liabilities:
Book over tax basis in fixed assets $31,402 $19,473
Foreign taxes 2,505 2,068
Accumulated amortization 483 --
Other, net 4,459 3,470
------- -------
Total deferred tax liabilities 38,849 25,011
------- -------
Deferred tax assets:
Bad debts 2,197 1,825
Accrued expenses and other liabilities 24,953 13,389
Accrued loss on discontinued
operations 722 79
Accumulated amortization -- 122
Net operating loss carryforwards 30,515 21,203
AMT credit carryforwards 1,262 1,262
Cumulative translation adjustment 625 540
------- -------
Total deferred tax assets 60,274 38,420
Valuation allowance for deferred tax assets 30,138 21,210
------- -------
Net deferred tax assets 30,136 17,210
------- -------
Net deferred tax liabilities $ 8,713 $ 7,801
======= =======
Management has evaluated the need for a valuation allowance for all or
a portion of the deferred tax assets. A valuation allowance of $30.1
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
$8.9 million during the current fiscal year.
45
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
The components of income tax expense are as follows (in thousands):
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Amount attributable to continuing
operations $2,591 $4,874 $2,552
Amount attributable to discontinued
operations -- 75 1,505
------ ------ ------
Total expense $2,591 $4,949 $4,057
====== ====== ======
Income tax expense attributable to loss from continuing operations
consists of (in thousands):
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Current
Federal $ -- $ 689 $ 93
State 145 618 473
Foreign 1,535 3,047 1,816
------- ------- -------
Total current 1,680 4,354 2,382
------- ------- -------
Deferred
Federal 354 513 204
State 120 7 (34)
Foreign 437 -- --
------- ------- -------
Total deferred 911 520 170
------- ------- -------
Provision for income taxes $ 2,591 $ 4,874 $ 2,552
======= ======= =======
46
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
The effective tax rates for the fiscal year ended March 31, 1997
("Fiscal Year 1997"), Fiscal Year 1996 and Fiscal Year 1995 were
(10.0%), (22.7%), and (136.5%), respectively. The difference between
these effective rates relating to continuing operations and the
statutory federal income tax rate is composed of the following items:
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less Federal tax
impact (0.7) (1.9) (15.5)
Foreign taxes, less Federal tax impact (5.0) (9.4) (64.1)
Amortization (11.9) (16.1) (165.4)
Change in valuation allowance (28.3) (26.7) 69.8
Other, net 0.9 (3.6) 3.7
----- ----- ------
Effective income tax rate (10.0)% (22.7)% (136.5)%
===== ===== ======
As of March 31, 1997, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $71.9 million which can
be used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 1998 and will be totally expired
in 2012.
As of March 31, 1997, the Company had available NOL's for federal
purposes of $78.6 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 2012.
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 $61.2 million which will begin to expire
in 2007 and will be completely expired in 2012.
(11) Pension Plans
The Company sponsors defined benefit pension plans covering full-time
salaried employees of the Company who had at least one year of service
at December 31, 1994. 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
47
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
effective January 1, 1995. As a result, a gain of $3.7 million was
recorded in the Fiscal Year 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 12).
Total net periodic pension expense and its components for these plans
during the periods indicated is as follows (in thousands):
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Service cost $ 446 318 1,737
Interest cost 3,546 3,428 3,405
Actual return on assets (4,349) (6,404) 629
Net amortization and deferral 725 3,076 (3,311)
------- ------ ------
Total pension expense $ 368 418 2,460
======= ====== ======
Funded status of the four plans sponsored by the Company is as follows
(in thousands):
March 31,
---------
1997 1996
---- ----
Actuarial present value of accumulated
benefit obligations:
Vested $ 47,756 47,404
Non-vested 829 1,488
-------- --------
$ 48,585 48,892
======== ========
Projected benefit obligations $ 48,585 48,892
Plan assets on deposit with trustees
at fair value 41,436 38,035
-------- --------
Projected benefit obligations in
excess of plan assets (7,149) (10,857)
Unrecognized:
Net gain (3,146) (881)
Prior service cost (784) (942)
-------- --------
Pension liability recognized in
consolidated balance sheets $(11,079) (12,680)
======== ========
48
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
The above pension liability balance is recorded in the consolidated
balance sheets as follows (in thousands):
March 31,
---------
1997 1996
---- ----
Accrued expenses - employee benefits $ 771 4,216
Other liabilities 10,308 8,464
---------- --------
$ 11,079 12,680
========== ========
The pension liability at March 31, 1997 and 1996 reflects the impact of
changes in certain assumptions effective during such times as follows:
March 31,
---------
1997 1996 1995
---- ---- ----
Discount rate:
Pension expense 7.50% 8.75% 8.75%
Funded status 7.75% 7.50% 8.75%
Rate of increase in compensation levels N/A N/A 6.00%
The expected long-term rate of return on plan assets was 9.25% in the
Fiscal Years 1997, 1996 and 1995.
(12) 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.
49
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Company's consolidated balance sheets at March 31, 1997 and
1996 (in thousands):
March 31,
---------
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $2,371 3,193
Active plan participants 1,022 1,071
------ ------
Total 3,393 4,264
Plan assets at fair value -- --
------ ------
Accumulated postretirement benefit obligation in
excess of plan assets 3,393 4,264
Unrecognized prior service cost 2,584 2,778
Unrecognized net gain 1,694 922
------ ------
Accrued postretirement benefit cost $7,671 7,964
====== ======
The estimated current portion of the above accrued postretirement benefit cost
is $0.3 million and is included in accrued expenses in the accompanying
consolidated balance sheet at March 31, 1997. The remaining $7.4 million is
included in other liabilities.
Net periodic postretirement benefit cost for the periods indicated included the
following components (in thousands):
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Service cost attributed to service during the period $ 40 35 254
Interest cost in accumulated postretirement benefit 250 317 512
obligation
Amortization of net gain from earlier periods (92) (67) --
Amortization of prior service cost (194) (194) (48)
----- ----- -----
Net periodic postretirement benefit cost $ 4 91 718
===== ===== =====
50
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
The significant assumptions used in determining postretirement benefit
cost and the accumulated postretirement benefit obligation were as
follows:
March 31,
---------
1997 1996 1995
---- ---- ----
Discount rate - expense 7.50% 8.75% 8.75%
Discount rate - APBO 7.75% 7.50% 8.75%
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation at March 31, 1997 was
10.55% 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, 1997 by approximately 8%, and the aggregate
of the service and interest cost components of net annual
postretirement benefit cost by approximately 7%.
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 1995.
(13) 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 $3.9 million during Fiscal Year 1997, $3.3
million during Fiscal Year 1996 and $0.7 million during the three
months ended March 31, 1995.
(14) Capital Stock
Stock Option Plan
In 1993, the Company established the Sullivan Communications, Inc.
Stock Option Plan. This plan, as amended, (the "Stock Option Plan") is
administered by a committee of the Board of Directors (the "Committee")
and provides for granting up to 20,841 shares of Communications Common
Stock ("Common Stock"). Stock options may be granted under the Stock
Option Plan to officers and other key employees of the Company (the
"Participants") at the exercise price per share of Common Stock, as
determined at the time of grant by the Committee in its sole
discretion. All options are 25% exercisable on the first anniversary
date of a grant and vest in additional 25% increments on each of the
next three anniversary dates of each grant. All options expire 10 years
from date of grant.
51
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
A summary of activity under the Stock Option Plan is as follows:
Options
-------
Outstanding at April 1, 1994 8,024
Granted 7,240
Exercised --
Canceled --
-------
Outstanding at March 31, 1995 15,264
Granted 2,497
Exercised --
Canceled (1,262)
-------
Outstanding at March 31, 1996 16,499
Granted 6,015
Exercised --
Canceled (3,108)
-------
Outstanding at March 31, 1997 19,406
=======
All options were granted with a $50 exercise price. The weighted
average fair value of options granted at the grant date was $0 for both
fiscal years ending March 31, 1997 and 1996. The weighted average
remaining contractual life of the options outstanding at March 31,
1997, 1996 and 1995, is 7.6 years, 7.9 years and 8.7 years,
respectively. Of the options outstanding; 9,004, 5,507 and 2,007 were
exercisable at March 31, 1997, 1996 and 1995, respectively. A total of
1,435 shares of Communications Common Stock were reserved for issuance,
but not granted under the Stock Option Plan at March 31, 1997.
In October 1995, the Financial Accounting Standards Board issued SFAS
123. This new standard defines a fair value based method of accounting
for employee stock options and other similar equity instruments. This
statement gives entities a choice of recognizing related compensation
expense by adopting the new fair value method or to continue to measure
compensation using the intrinsic value approach under APB 25, the
former standard. The Company has elected to follow APB 25 and related
Interpretations in accounting for its stock compensation plans because,
as discussed below, the alternative fair value accounting provided for
under SFAS 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. The effects of applying SFAS 123
for either recognizing compensation expense or providing pro forma
disclosures are not likely to be representative of the effects on
future years.
52
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for Fiscal Years
1997 and 1996, respectively: risk-free interest rates of 6.5% and 6.3%;
no annual dividend yield; volatility factors of 0; and an expected
option life of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
Because the fair value of the Company's options equals $0, there is no
pro forma disclosure for Fiscal Years 1997 and 1996.
(15) Commitments and Contingencies
The Company incurred rent expense for the Fiscal Years 1997, 1996 and
1995 of $5.4 million, $4.9 million and $4.2 million, respectively,
under various operating leases. Future minimum rental commitments under
existing operating lease arrangements at March 31, 1997 are as follows
(in thousands):
Fiscal Year
-----------
1998 $ 4,218
1999 3,612
2000 3,027
2001 2,507
2002 1,567
Thereafter 5,716
-------
Total $20,647
=======
The Company has employment agreements with one of its principal
officers and four other employees. Such agreements provide for minimum
salary levels as well as for incentive bonuses which are payable if
specified management goals are attained. The aggregate commitment for
future salaries at March 31, 1997, excluding bonuses, was approximately
$2.4 million.
53
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
On December 21, 1989, Graphics sold CPS, its ink manufacturing
operations and facilities. Graphics remains contingently liable under
$3.7 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.
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, 1997. 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.
(16) Significant Customers
No single customer represented 10% or more of total sales in the fiscal
year ended March 31, 1997. The sales of Best Buy Co. for Fiscal Year
1996 amounted to approximately 12.7% of the Company's consolidated
sales. Receivables outstanding from these sales were approximately $1.1
million and $5.9 million at March 31, 1997 and March 31, 1996,
respectively. No single customer represented 10% or more of total sales
in the fiscal year ended March 31, 1995.
54
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(17) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
(a) (b)
American SMC
Quarter as Color/SVP Discontinued Revised
Issued Reclass Operations Quarter
------ ------- ---------- -------
Fiscal Year 1997:
<S> <C> <C> <C> <C>
Quarter Ended June 30, 1996:
Net Sales $ 139,704 -- (1,603) 138,101
Gross Profit $ 15,393 -- (624) 14,769
Net Loss $ (7,604) -- -- (7,604)
Quarter Ended September 30, 1996:
Net Sales 138,495 -- (2,705) 135,790
Gross Profit 17,490 -- (1,167) 16,323
Net Loss (7,548) -- -- (7,548)
Quarter Ended December 31, 1996:
Net Sales 136,472 -- (1,153) 135,319
Gross Profit 19,719 -- (159) 19,560
Net Loss (4,339) -- -- (4,339)
Quarter Ended March 31, 1997:
Net Sales 119,666 -- (4,325) 115,341
Gross Profit 15,915 -- (1,896) 14,019
Net Loss (12,212) -- -- (12,212)
Totals:
Net Sales $ 534,337 -- (9,786) 524,551
Gross Profit $ 68,517 -- (3,846) 64,671
Net Loss $ (31,703) -- -- (31,703)
Fiscal Year 1996:
Quarter Ended June 30, 1995:
Net Sales $ 124,490 -- (258) 124,232
Gross Profit $ 19,102 (2,320) (52) 16,730
Net Loss $ (7,278) -- -- (7,278)
Quarter Ended September 30, 1995:
Net Sales 130,653 -- (1,404) 129,249
Gross Profit 19,020 (1,825) (571) 16,624
Loss before extraordinary item (4,945) -- -- (4,945)
Net Loss (9,471) -- -- (9,471)
Quarter Ended December 31, 1995:
Net Sales 153,308 -- (1,344) 151,964
Gross Profit 22,415 (2,709) (416) 19,290
Net Income 73 -- -- 73
Quarter Ended March 31, 1996:
Net Sales 127,891 -- (3,813) 124,078
Gross Profit 16,101 (2,421) (1,911) 11,769
Net Loss (12,651) -- -- (12,651)
Totals:
Net Sales $ 536,342 -- (6,819) 529,523
Gross Profit $ 76,638 (9,275) (2,950) 64,413
Loss before extraordinary item $ (24,801) -- -- (24,801)
Net Loss $ (29,327) -- -- (29,327)
</TABLE>
55
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(a) In Fiscal Year 1997, American Color began presenting certain of its
costs previously classified as selling, general and administrative
expenses as cost of sales to more closely conform with the print sector
presentation. In Fiscal Year 1997, SVP reclassed certain of its costs
between selling, general and administrative costs and cost of sales to
more closely conform with the other print plants. As a result, Fiscal
Year 1996 and Fiscal Year 1995 have been reclassified to conform with
Fiscal Year 1997 presentation.
(b) In February 1997, the Company shut down the operations of its
wholly-owned subsidiary SMC. The resulting effect of this change is a
retroactive restatement of Fiscal Year 1996 reclassing SMC's results of
operations to Discontinued Operations (see note 5).
(18) Restructuring Costs and Other Special Charges
In April 1995, the Company implemented a plan for its American Color
division which was 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 was
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)" ("EITF 94-3").
The pretax costs of $5 million which were incurred as a part of this
plan represent employee termination, goodwill write-down and other
related costs that were incurred as a direct result of the plan.
Approximately $0.9 million of restructuring costs primarily related to
relocation expenses were recognized in Fiscal Year 1997. In Fiscal Year
1996 the Company recognized $4.1 million of such restructuring charges,
which included $0.9 million of goodwill write-down, and $3.2 million
primarily for severance and other personnel related costs. 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.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded
special charges totalling $1.9 million and $3.4 million, respectively,
for impaired long-lived assets and to adjust the carrying values of
idle, disposed and under performing assets to estimated fair values.
The provisions were based on a review of long-lived assets in
connection with the adoption of FASB 121. Of the Fiscal Year 1997 total
long-lived assets that were adjusted based on being idle, disposed of
or under performing, approximately $0.4 million and $1.5 million
related to the print and American Color sectors, respectively. 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. Approximately $2 million of the Fiscal Year 1996 total
related to the print sector's long-lived assets, respectively that were
adjusted based on being idle, disposed of or under performing. The
remaining $1.4 million of the Fiscal Year 1996 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 was 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 in Fiscal Year 1996
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.
56
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(19) Non-recurring Charge Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
(20) Non-recurring Charge Related to Resignation of Chief Executive Officer
A non-recurring charge of $1.9 million relating to the resignation of
the Company's Chief Executive Officer was recorded in Fiscal Year 1997,
and is classified as a selling, general and administrative expense.
Payments under the related agreement continue through 2001, subject to
certain requirements.
(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):
March 31,
---------
Balance sheet data: 1997 1996
--------- ------
Current assets $ 70,077 85,519
Noncurrent assets 263,898 265,662
Current liabilities 78,675 75,907
Noncurrent liabilities 331,618 319,670
Year ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Statement of operations data:
Sales $ 524,551 529,523 433,198
Operating income 10,372 12,716 24,450
Net (loss) income (31,703) (29,327) 13,162
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information about each of the
current directors and executive officers of Communications and Graphics (ages as
of March 31, 1997). All directors hold office until their successors are duly
elected and qualified.
Name Age Position with Graphics and Communications
- ---- --- -----------------------------------------
Stephen M. Dyott 45 Chairman, President, Chief Executive Officer
and Director
Frank V. Sica 46 Director
Eric T. Fry 30 Director
Joseph M. Milano 44 Senior Vice President and Chief Financial
Officer
Timothy M. Davis 42 Senior Vice President-Administration,
Secretary and General Counsel
Patrick W. Kellick 39 Vice President/Controller & Assistant
Secretary
Stephen M. Dyott - Chairman and Chief Executive Officer of Graphics and
Communications since September 1996; President of Communications since February
1995; Director of Graphics and Communications since September 1994; Chief
Operating Officer of Communications from February 1995 to September 1996 and
Chief Operating Officer of Graphics from 1991 to September 1996; President 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.
Frank V. Sica - Director of Graphics and Communications since April
1993. Managing Director of Morgan Stanley & Co. Incorporated ("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 Morgan
Stanley Capital Partners III, L.P. and its related investment partnerships
("MSCP III") and Director of the general partner of the MSCP III Entities.
Director of ARM Financial Group, Inc., Consolidated Hydro, Inc., Fort Howard
Corporation, Kohl's Corporation, Ionica Group PLC, PageMart Wireless, Inc.,
and CSG Systems International, Inc.
Eric T. Fry - Director of Graphics and Communications since March 1996.
Associate of MS&Co. and an officer of the general partner of MSLEF II and of the
general partner of the general partner of the MSCP III Entities. 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 Enterprise Reinsurance Holdings Corporation, Hamilton
Services Limited, Risk Management Solutions, Inc. and LifeTrust America, L.L.C.
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.
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.
58
<PAGE>
Patrick W. Kellick - Vice President/Controller of Communications and
Graphics since 1989; Controller of Graphics since 1987, and Assistant Secretary
of Communications and Graphics since 1995.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information concerning compensation paid
for services to Communications and Graphics during the fiscal years ended March
31, 1997, 1996 and 1995 to the Chief Executive Officers and the four other most
highly compensated executive officers (the "Named Executive Officers") of
Communications and/or Graphics.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------------------
Awards Payouts
------ -------
Other Securities
Annual Restricted Underlying All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation Award(s) SAR's(#) Payouts sation
-------- ------ ------ ----- ------ -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Dyott Fiscal Year 1997 $463,462 $350,000 -- -- 1,761 -- --
President, Chief Operating Fiscal Year 1996 $450,000 $250,000 -- -- 380 -- --
Officer & Director thru Fiscal Year 1995 $350,000 $684,250 $197,004 (a) -- 859 -- --
09/96
Chairman, President and
Chief Executive Officer &
Director 09/96 forward
James T. Sullivan Fiscal Year 1997 $276,936 -- -- -- -- -- $354,991 (c)
Chairman, Chief Executive Fiscal Year 1996 $600,028 -- -- -- 380 -- $ 7,620 (b)
Officer & Director thru Fiscal Year 1995 $600,028 $600,000 $ 61,430 (a) -- 139 -- $ 7,620 (b)
09/96
Joseph M. Milano Fiscal Year 1997 $260,097 $150,000 -- -- 760 -- --
Senior Vice President & Fiscal year 1996 $228,923 $125,000 -- -- 614 -- --
Chief Financial Officer Fiscal Year 1995 $175,423 $248,000 $ 87,494 (a) -- 688 -- --
Malcolm J. Anderson Fiscal Year 1997 $230,000 $105,000 -- -- 125 -- --
Executive Vice President Fiscal Year 1996 $212,693 $ 70,000 $ 38,504 (a) -- -- -- --
Fiscal Year 1995 $200,000 $381,000 $ 87,951 (a) -- 526 -- --
Timothy M. Davis Fiscal Year 1997 $220,562 $110,000 -- -- 290 -- --
Senior Vice President- Fiscal Year 1996 $209,923 $106,000 -- -- -- -- --
Administration, Fiscal Year 1995 $190,000 $202,750 $128,325 (a) -- 535 -- --
Secretary & General
Counsel
Terrence M. Ray Fiscal Year 1997 $230,000 $ 50,000 $ 14,550 (a) -- 1,447 -- --
President/Chief Operating Fiscal Year 1996 $ 20,962 6,000 -- -- -- -- --
Officer-American Color Fiscal Year 1995 -- -- -- -- -- -- --
</TABLE>
- ----------
(a) Represents relocation expense reimbursements.
(b) Represents premiums paid by Graphics with respect to a life insurance
policy.
(c) Represents severance and premiums paid by Graphics with respect to a life
insurance policy.
59
<PAGE>
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.
Option/SAR Grants in Last Fiscal Year(a)
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------------------- ------------------------------------
% of Total
Number of Options/SAR's
Securities Granted to
Underlying Employees Exercise or
Options/SAR's in Fiscal Year Base Price Expiration
Name Granted(#) 1997 ($/sh) Date 5% ($) (b) 10% ($) (b)
- --------------------- ----------------- ---------------- --------------- -------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Dyott 1.761 29% 50 10/01/2006 55,472 140,000
Joseph M. Milano 760 13% 50 10/01/2006 23,940 60,420
Malcolm J. Anderson 125 2% 50 10/01/2006 3,938 9,938
Timothy M. Davis 290 5% 50 10/01/2006 9,135 23,055
Terrence M. Ray 1,447 24% 50 10/01/2006 45,581 115,037
</TABLE>
- ----------
(a) All options will become 25 percent exercisable on October 1, 1997 and
are scheduled to vest in additional 25 percent increments on each of
October l, 1998, October 1, 1999 and October 1, 2000.
(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>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SAR's at 3/31/97 SAR's at 3/31/97
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C>
Stephen M. Dyott............................. 2,250/3,050 (a)
James T. Sullivan............................ 3,520/0 (a)
Joseph M. Milano............................. 574/1,590 (a)
Malcolm J. Anderson.......................... 263/388 (a)
Timothy M. Davis............................. 459/621 (a)
Terrence M. Ray.............................. 0/1,447 (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, 1997 was in
each case greater than the fair market value of the underlying shares
of Communications Common Stock as of such date.
60
<PAGE>
Pension Plan
Graphics sponsors the Sullivan Graphics, Inc. Salaried Employees'
Pension Plan (the "Pension Plan"), a defined benefit pension plan covering
full-time salaried employees of Graphics who had at least one year of service as
of December 31, 1994. The basic benefit payable under the Pension Plan is a
five-year certain single life annuity equivalent to (a) 1% 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.
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 11 to the
consolidated financial statements).
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 1997 and 1996 was $125,000 and
$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 $160,000 and $150,000 for 1997 and 1996.
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.
Final Average
Compensation Years of Benefit Service
- ------------------ ----------------------------------------------------------
15 20 25 30
------- ------- ------- -------
$125,000 $27,818 $37,091 $46,364 $55,637
150,000 33,818 45,091 56,364 60,000
175,000 33,818 45,091 56,364 60,000
200,000 33,818 45,091 56,364 60,000
225,000 33,818 45,091 56,364 60,000
250,000 33,818 45,091 56,364 60,000
300,000 33,818 45,091 56,364 60,000
350,000 33,818 45,091 56,364 60,000
400,000 33,818 45,091 56,364 60,000
450,000 33,818 45,091 56,364 60,000
500,000 33,818 45,091 56,364 60,000
625,000 33,818 45,091 56,364 60,000
750,000 33,818 45,091 56,364 60,000
61
<PAGE>
At March 31, 1997, all of the Named Executive Officers with the
exception of Malcolm J. Anderson have vested in the pension plan. At March 31,
1997, the Named Executive Officers had the following amounts of credited service
(original hire date through January 1, 1995) under the Pension Plan: Stephen M.
Dyott (3 years, 3 months), James T. Sullivan (5 years, 5 months), Joseph M.
Milano (2 years, 7 months), Malcolm J. Anderson (1 year, 3 months), and Timothy
M. Davis (5 years, 5 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 a new
employment agreement with Stephen M. Dyott (the "New Employment Agreement"). The
New Employment Agreement for Mr. Dyott superseded previous employment
agreements.
The New Employment Agreement has been amended so that it has 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
Agreement 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 Agreement provides for the payment of an annual salary and an annual
bonus pursuant to a plan adopted following the 1993 Acquisition. In addition,
under the New Employment Agreement, Mr. Dyott is eligible to receive all other
employee benefits and perquisites made available to Graphics' senior executives
generally.
Under the New Employment Agreement, if the employee's employment is
terminated by Graphics "without cause" (which, as defined in the New Employment
Agreement, 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 Agreement, 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 Agreement also provides for
post-employment non-solicitation, non-competition and confidentiality covenants.
Graphics entered into an employment agreement with Terrence M. Ray on
February 19, 1996, (the "Agreement"). The Agreement has a term of three years
commencing with the date of the Agreement and that term shall be automatically
extended for one year periods absent one year's notice of an intent not to
renew. The Agreement provides for the payment of an annual salary and an annual
bonus pursuant to an executive bonus plan adopted by American Color. In
addition, under the Agreement, Mr. Ray is eligible to receive all other employee
benefits and perquisites made available to Graphics' senior executives
generally.
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.
James T. Sullivan resigned as Chairman of the Board and Chief Executive
Officer and as a director and employee of Communications effective as of
September 18, 1996 (the "Effective Date"). For the period commencing on the
62
<PAGE>
Effective Date and ending on April 8, 1999, Mr. Sullivan will hold the title of
Vice Chairman of Communications. Mr. Sullivan will receive salary continuation
payments at an annual rate of $600,000 through April 8, 1999. For two years
thereafter, Mr. Sullivan will be engaged as a consultant to Communications for
which he will be paid an annual fee of $200,000. Under the terms of his
resignation agreement, Mr. Sullivan will be entitled, through April 8, 1999, to
continue to participate in certain employee benefit plans provided by
Communications to its employees generally. Mr. Sullivan also received payment of
his full supplemental retirement benefit under the Sullivan Graphics, Inc.
Supplemental Executive Retirement Plan. Mr. Sullivan's resignation agreement
also contains certain noncompetition and other restrictive covenants.
Compensation Committee Interlocks and Insider Participation
The Company has not maintained a formal compensation committee since
the 1993 Acquisition. Mr. Dyott sets compensation in conjunction with the Board
of Directors.
Old Stock Option Plan
Pursuant to the Merger Agreement, Communications canceled, 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, Joseph M. Milano, Malcolm J. Anderson and Timothy M.
Davis 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.
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 (April 1, 1994 through March 31, 1999 for Messrs.
Dyott, Milano, Anderson and Davis and April 1, 1996 through March 31, 2001 for
Mr. Ray) 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:
Stephen M. Dyott $50,000
Joseph M. Milano $50,000
Malcolm J. Anderson $50,000
Terrence M. Ray $25,000
Timothy M. Davis $50,000
Such benefits will be paid from the Company's assets (see note 12 to
the Company's consolidated financial statements).
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 13 to the
Company's consolidated financial statements).
63
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1997,
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>
Name Shares of Shares of
- ---- Communications Percent Communications Percent
Common Stock of Class Preferred Stock of Class
------------ -------- --------------- --------
<S> <C> <C> <C> <C>
The Morgan Stanley Leveraged Equity
Fund II, L.P.
1221 Ave. of the Americas
New York, NY 10020 59,450 48.0 2,973 51.7
MSCP Entities
1221 Ave. of the Americas
New York, NY 10020 23,333 18.8 1,167 20.3
First Plaza Group Trust
c/o Mellon Bank, N.A
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 13.7 850 14.8
Leeway & Co.
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171 10,667 8.6 533 9.3
Stephen M. Dyott 500 0.4 25 0.4
Eric T. Fry -- -- -- --
Frank V. Sica -- -- -- --
All current directors and officers as a
group 500 0.4 25 0.4
</TABLE>
64
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
On the Acquisition Date, MSLEF II and the Purchasing Group invested $40
million in Communications and acquired control of Communications and Graphics.
Pursuant to the Merger Agreement, (i) MSLEF II 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 II is an investment fund affiliate with Morgan Stanley, Dean
Witter, Discover & Co. Morgan Stanley, Dean Witter, Discover & Co. is a holding
company that, through its subsidiaries, is a major international financial
services firm. In addition, two of the current directors of Communications are
employees of Morgan Stanley & Co. Incorporated, an affiliate of MSLEF II and
also a subsidiary of Morgan Stanley, Dean Witter, Discover & Co. As a result of
these relationships, Morgan Stanley, Dean Witter, Discover & Co. may be deemed
to control the management and policies of Graphics and Communications. In
addition, Morgan Stanley, Dean Witter, Discover & Co. may be deemed to control
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, certain members of the Company's management at that time, including
James T. Sullivan and Stephen M. Dyott (collectively, 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.
Stockholders' Agreement. In connection with the 1993 Acquisition,
Communications, MSLEF II, 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
65
<PAGE>
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 Notes.
Other
MS&Co. acted as placement agent in connection with the original private
placement of the 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. In addition, Morgan Stanley & Co. Incorporated has a $5 million
participation in the Term Loan Facility and received fees of approximately $0.3
million in connection therewith.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Reports of Independent Auditors
1 and 2. Financial Statements: The following Consolidated Financial
Statements of Sullivan Communications, Inc. are included in
Part II, Item 8:
Consolidated balance sheets - March 31, 1997 and 1996
For the Years Ended March 31, 1997, 1996 and 1995:
Consolidated statements of operations
Consolidated statements of stockholders' deficit
Consolidated statements of cash flows
Notes to Consolidated Financial Statements
Financial Statement Schedules: The following financial
statement schedules of Sullivan Communications, Inc. are filed
as a part of this report.
<TABLE>
<CAPTION>
Schedules Page No.
--------- --------
<S> <C> <C>
I. Condensed Financial Information of Registrant.............................................. 70
Condensed Financial Statements (parent company only)
for the years ended March 31, 1997, 1996, and 1995 and
as of March 31, 1997 and 1996
II. Valuation and qualifying accounts.......................................................... 76
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
notes thereto.
3. Exhibits: The exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this report.
Exhibit No. Description
- ----------- -----------
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*
67
<PAGE>
Exhibit No. Description
- ----------- -----------
4.1 Indenture (including the form of Note), dated as of August 15,
1995, among Graphics, Communications and NationsBank of
Georgia, National Association, as Trustee**
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+++
10.1(d) August 13, 1996, Fourth 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(e) February 27, 1997, Fifth 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 Resignation letter, dated as of September 18, 1996, 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++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of February 19, 1996, between
Graphics and Terrence M. Ray
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***
10.9 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++
68
<PAGE>
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe
Inc., dated March 12, 1996+++
21.1 List of Subsidiaries
27.0 Financial Data Schedule
- -----------
* 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 Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** 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 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 - Commission file number 33-97090.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the fourth quarter of
Fiscal Year 1997:
1. Form 8-K filed with the Securities and Exchange Commission on
January 29, 1997 under Item 5 to announce the Company's EBITDA
for the three months ended December 31, 1996.
The Company did not file any other reports on Form 8-K during the three
months ended March 31, 1997.
69
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
---------
1997 1996
---- ----
Assets
Current assets:
Receivable from subsidiary for income
taxes $128 134
---- ----
Total assets $128 134
==== ====
See accompanying notes to condensed financial statements.
70
<PAGE>
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,
---------
Liabilities and Stockholders' Deficit 1997 1996
- ------------------------------------- ---- ----
<S> <C> <C>
Current liabilities
Income taxes payable $ 128 134
--------- ---------
Total current liabilities 128 134
Liabilities of subsidiary in excess of assets 76,318 44,396
--------- ---------
Total liabilities 76,446 44,530
--------- ---------
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 (132,228) (100,525)
Cumulative translation adjustment (1,590) (1,371)
--------- ---------
Total stockholders' deficit (76,318) (44,396)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 128 134
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
71
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands)
Year Ended March 31,
--------------------
1997 1996 1995
---- ---- ----
Equity in (loss) income of subsidiary $(31,703) (29,327) 13,162
-------- ------- ------
Net (loss) income $(31,703) (29,327) 13,162
======== ======= ======
See accompanying notes to condensed financial statements.
72
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SULLIVAN COMMUNICATIONS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(In thousands)
Year Ended March 31,
----------------------------
1997 1996 1995
------- ------ ------
Cash flows from operating activities -- -- --
------- ------ ------
Cash flows from investing activities -- -- --
------- ------ ------
Cash flows from financing activities -- -- --
------- ------ ------
Net change in cash -- -- --
======= ====== ======
See accompanying notes to condensed financial statements.
73
<PAGE>
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, 1997,
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").
74
<PAGE>
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 taxes 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.
75
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SULLIVAN COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Balance
Balance at Additions at
Beginning of Charged to Other End of
Period Expense Write-offs Adjustments Period
------ ------- ---------- ----------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year ended March 31, 1997
Allowance for doubtful accounts $ 4,830 4,847 (3,798) -- 5,879
Reserve for inventory
obsolescence -
spare parts $ 100 -- -- -- 100
Reserve for inventory
obsolescence -
paper & ink $ 611 318 (45) (815) 69
Income tax valuation allowance $21,210 -- -- (a) 8,928 30,138
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 -- -- 561 611
Income tax valuation allowance $13,808 -- -- (a) 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 -- -- (b) (5,622) 13,808
</TABLE>
- ----------
(a) The increase in the valuation allowance primarily relates to current
year losses for which no tax benefit has been recorded.
(b) The decrease in the valuation allowance primarily relates to
utilization of prior year losses for which benefit was not recorded
against current year income.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
Date June 30, 1997
---- -------------
/s/ Stephen M. Dyott
-----------------------
Stephen M. Dyott
Chairman, President and Chief Executive Officer
Sullivan Communications, Inc.
Chairman, President and Chief Executive Officer
Sullivan Graphics, Inc.
Director of Sullivan Communications, Inc. and Sullivan Graphics, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph M. Milano Senior Vice President June 30, 1997
- ------------------------------- -------------
(Joseph M. Milano) Chief Financial Officer
/s/ Patrick W. Kellick Vice President June 30, 1997
- -------------------------------- -------------
(Patrick W. Kellick) Controller
Assistant Secretary
(Principal Accounting Officer)
/s/ Frank V. Sica Director June 30, 1997
- ------------------------------- -------------
(Frank V. Sica)
/s/ Eric T. Fry Director June 30, 1997
- -------------------------------- -------------
(Eric T. Fry)
77
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 1996
Index to Exhibits
Exhibit No. Description
- ----------- -----------
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 Note), dated as of August 15,
1995, among Graphics, Communications and NationsBank of
Georgia, National Association, as Trustee**
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+++
10.1(d) August 13, 1996, Fourth 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(e) February 27, 1997, Fifth 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 Resignation letter, dated as of September 18, 1996, 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++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
<PAGE>
Exhibit No. Description
- ----------- -----------
10.5 Employment Agreement, dated as of February 19, 1996, between
Graphics and Terrence M. Ray
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***
10.9 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+++
21.1 List of Subsidiaries
27.0 Financial Data Schedule
- -----------
* 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 Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** 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 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 - Commission file number 33-97090.
FIFTH AMENDMENT TO CREDIT AGREEMENT
FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated
as of February 27, 1997, among SULLIVAN COMMUNICATIONS, INC. ("Communications"),
SULLIVAN GRAPHICS, INC. (the "Borrower"), the financial institutions party to
the Credit Agreement referred to below (the "Lenders"), BT COMMERCIAL
CORPORATION, as Agent (the "Agent") for the Lenders, and BANKERS TRUST COMPANY,
as Issuing Bank (the "Issuing Bank"). All capitalized terms used herein and not
otherwise defined shall have the respective meanings provided such terms in the
Credit Agreement.
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, Communications, the Borrower, the Lenders, the Agent
and the Issuing Bank are parties to a Credit Agreement, dated as of August 15,
1995 (as amended, modified or supplemented to the date hereof, the "Credit
Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 8.9 of the Credit Agreement is hereby amended by
deleting the amount "$52,100,000" set forth opposite the date March 31, 1997
appearing in the Minimum EBITDA table in said Section and inserting in lieu
thereof the amount "46,600,000".
2. Section 8.11 of the Credit Agreement is hereby amended by
deleting the ratio "0.75:1.00" set forth opposite the date March 31, 1997
appearing in the Fixed Charge Coverage Ratio table in said Section and inserting
in lieu thereof the ratio "0.68:1.0".
3. In order to induce the Lenders to enter into this
Amendment, the Borrower hereby represents and warrants that (x) no Default or
Event of Default exists as of the Fifth Amendment Effective Date (as defined
below), both before and after giving effect to this Amendment and (y) all of the
representations and warranties contained in the Credit Agreement and the other
Credit Documents are true and correct in all material respects on the Fifth
Amendment Effective Date, both before and after giving effect to this Amendment,
with the same effect as though such representations and warranties had been made
on and as of the Fifth Amendment Effective Date (it being understood that any
representation or warranty made as of a specific date shall be true and correct
in all material respects as of such specific date).
<PAGE>
4. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
5. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
7. This Amendment shall become effective on the date (the
"Fifth Amendment Effective Date") when each of Communications, the Borrower and
the Required Lenders shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at 14 Wall Street, New York, New York 10005
Attention: Bruce Addison.
8. From and after the Fifth Amendment Effective Date, all
references in the Credit Agreement and each of the other Credit Documents to the
Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby.
* * *
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
SULLIVAN COMMUNICATIONS, INC.
Joseph Milano
By
------------------------------
Title: CFO
SULLIVAN GRAPHICS, INC.
Joseph Milano
By
------------------------------
Title: CFO
BT COMMERCIAL CORPORATION,
Individually and as Agent
Bruce W. Addison
By
------------------------------
Title: Vice President
BTM CAPITAL CORPORATION
William R. York, Jr.
By
------------------------------
Title:
BANK OF NEW YORK COMMERCIAL
CORPORATION
Stephen V. Mangiante
By
------------------------------
Title: Vice President
-3-
<PAGE>
DEUTSCHE FINANCIAL SERVICES
HOLDING CORP.
Mark Tauber
By
------------------------------
Title: Vice President
FINOVA CAPITAL CORPORATION
Marilyn Milam
By
------------------------------
Title: Vice President
GIBRALTAR CORPORATION OF
AMERICA
Harvey Friedman
By
------------------------------
Title: Executive Vice President
LASALLE NATIONAL BANK
Christopher G. Clifford
By
------------------------------
Title:
SANWA BUSINESS CREDIT
CORPORATION
By
------------------------------
Title:
-4-
<PAGE>
HELLER BUSINESS CREDIT
CORPORATION
Jeff Schumacher
By
------------------------------
Title: Assistant Vice President
-5-
EMPLOYMENT AGREEMENT dated as of February 19, 1996 (the
"Agreement"), between AMERICAN COLOR ("AC"), a division of SULLIVAN GRAPHICS,
INC., a New York corporation (the "Company") and TERRENCE M. RAY (the
"Executive").
WHEREAS, AC desires to employ Executive as its Executive Vice
President/ Director of Operations;
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT AND DUTIES
1.1. General. The Company hereby employs the Executive, and the
Executive agrees to serve, as Executive Vice President/Director of Operations of
AC, upon the terms and conditions contained herein. The Executive shall report
directly to the President of AC and shall be responsible for all pre-press
operational aspects of AC. The Executive shall perform such other duties and
services for the Company, commensurate with the Executive's position, as may be
designated from time to time by the President of AC. The Executive agrees to
serve the Company faithfully and to the best of his ability under the direction
of the President of AC.
1.2. Exclusive Services. Except as may otherwise be approved in
advance by the President of AC, and except during vacation periods and
reasonable periods of absence due to sickness, personal injury or other
disability, the Executive shall devote his full working time throughout the
Employment Term (as defined in Section 1.3) to the services required of him
hereunder. The Executive shall render his services exclusively to the Company
during the Employment Term, and shall use his best efforts, judgment and energy
to improve and advance the business and interests of the Company in a manner
consistent with the duties of his position.
1.3. Term of Employment. The Executive's employment under this
Agreement shall commence as of the date of this Agreement and shall terminate on
the earlier of (i) the third anniversary of the date of this Agreement, or (ii)
termination of the Executive's employment pursuant to this Agreement; provided,
however, that the term of the Executive's employment shall be automatically
extended without further action of either party for additional one year periods,
unless written notice of either party's intention not to extend has been given
to the other party at least one year prior to the expiration of the then
effective term. The period commencing as of the date of this Agreement and
ending on the third anniversary thereof or such later date to which the term of
the Executive's employment under this Agreement shall have been extended is
hereinafter referred to as the "Employment Term".
1.4. Reimbursement of Expenses. AC shall reimburse the Executive
for reasonable travel and other business expenses incurred by him in the
fulfillment of his duties hereunder upon presentation by the Executive of an
itemized account of such expenditures, in accordance with AC's practices
consistently applied.
<PAGE>
- 2 -
2. SALARY
2.1. Base Salary. From the date of this Agreement, the Executive
shall be entitled to receive a base salary ("Base Salary") at a rate of $218,000
per annum, payable in arrears in equal installments not less frequently than
biweekly in accordance with AC's payroll practices, with such increases as may
be provided in accordance with the terms hereof. Once increased, such higher
amount shall constitute the Executive's annual Base Salary.
2.2. Annual Review. The Executive's Base Salary shall be reviewed
by the President of AC, based upon the Executive's performance, not less often
than annually, and may be increased but not decreased. In addition to any
increases effected as a result of such review, the President of AC at any time
may in its sole discretion increase the Executive's Base Salary.
2.3. Initial Bonus. Upon the six-month anniversary of Executive's
employment hereunder, Executive shall receive an initial bonus of between
$20,000- 25,000.
2.4. Annual Bonus. After the date of this Agreement, AC shall
annually adopt a bonus plan and performance criteria upon which the bonuses of
executives of AC shall be based. During his employment under this Agreement, the
Executive shall be entitled to receive a bonus under such plan of up to 40% of
his Base Salary if the budget performance criteria are satisfied.
3. EMPLOYEE BENEFITS
3.1. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health and life
insurance, or vacation and paid holidays) which shall be established by AC for,
or made available to, its senior executives.
3.2. At such time as options are available under the Sullivan
Communications, Inc. ("SCI") Stock Option Plan, but in no event later than at
the time of an initial public offering of the common stock of SCI, Executive
shall be granted options to purchase 500 shares of the common stock of SCI at
the price determined pursuant to such Plan.
3.3. The Executive shall be entitled to participate in the
Company's Supplemental Executive Retirement Plan (the "SERP") at a benefit level
of $25,000 per annum upon retirement in accordance with the terms of the SERP.
<PAGE>
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4. TERMINATION OF EMPLOYMENT
4.1. Termination Without Cause; Resignation for Good Reason.
4.1.1. General. Subject to the provisions of Sections 4.1.2 and
4.1.3, if, prior to the expiration of the Employment Term, the Executive's
employment is terminated by the Company without Cause (as defined in Section
4.3), or if the Executive terminates his employment hereunder for Good Reason
(as defined in Section 4.4), the Company shall (x) continue to pay the Executive
the Base Salary (at the rate in effect on the date of such termination) for the
greater of (i) the remainder of the Employment Term and (ii) a period of one
year beginning as of the date of termination (such period being referred to
hereinafter as the "Severance Period"), at such intervals as the same would have
been paid had the Executive remained in the active service of AC, and (y) pay
the Executive a pro rata portion of the bonus or incentive payment to which the
Executive would have been entitled for the year of termination pursuant to
Section 2.3 and Section 2.4 had the Executive remained employed for the entire
year, which bonus shall be payable at the time payments under the applicable
bonus plan or incentive program are paid to AC's executives generally. In
addition, the Executive shall be entitled to continue to participate during the
Severance Period in all employee benefit plans (other than equity-based plans,
except to the extent otherwise provided therein, or bonus plans) that AC
provides (and continues to provide) generally to its employees, provided that
the Executive is entitled to continue to participate in such plans under the
terms thereof. The Executive shall have no further right to receive any other
compensation or benefits after such termination or resignation of employment
except as determined in accordance with the terms of the employee benefit plans
or programs of AC.
4.1.2. Conditions Applicable to the Severance Period. If, during
the Severance Period, the Executive materially breaches his obligations under
Section 7 of this Agreement, the Company may, upon written notice to the
Executive, terminate the Severance Period and cease to make any further payments
or provide any benefits described in Section 4.1.1.
4.1.3. Date of Termination. The date of termination of employment
with Cause shall be the date specified in a written notice of termination to the
Executive. The date of resignation for Good Reason shall be the date specified
in the written notice of resignation from the Executive to the Company;
provided, however, that no such written notice shall be effective unless the
cure period specified in Section 4.4 has expired without the Company having
corrected, to the reasonable satisfaction of the Executive, the event or events
subject to cure. If no date of resignation is specified in the written notice
from the Executive to the Company, the date of termination shall be the first
day following such expiration of such cure period.
4.2. Termination for Cause; Resignation Without Good Reason.
4.2.1. General. If, prior to the expiration of the Employment
Term, the Executive's employment is terminated by AC for Cause, or the Executive
resigns from his employment hereunder other than for Good Reason, the Executive
shall be entitled only to payment of his Base Salary as then in effect through
and including the date of termination or resignation. The Executive shall have
no further right to receive any other compensation or benefits after such
termination or resignation of employment, except as determined in accordance
with the terms of the employee benefit plans or programs of AC.
<PAGE>
- 4 -
4.2.2. Date of Termination. Subject to the proviso to Section
4.3, the date of termination for Cause shall be the date specified in a written
notice of termination to the Executive. The date of resignation without Good
Reason shall be the date specified in the written notice of resignation from the
Executive to the Company, or if no date is specified therein, 10 business days
after receipt by the Company of written notice of resignation from the
Executive.
4.3. Cause. Termination for "Cause" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by
Executive of any of his obligations under this Agreement;
(ii) the continued failure or refusal of the Executive to
substantially perform the duties reasonably required of him as an
employee of the Company;
(iii) any willful and material violation by the Executive of any
Federal or state law or regulation applicable to the business of the
Company or any of its affiliates, or the Executive's conviction of a
felony, or any willful perpetration by the Executive of a common law
fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company or any of its
affiliates (it being understood that the good faith performance by the
Executive of the duties required of him pursuant to Section 1.1 shall
not constitute "misconduct" for purposes of this clause (iv));
provided, however, that if any such Cause relates to the Executive's obligations
under this Agreement, the Company shall not terminate the Executive's employment
hereunder unless the Company first gives the Executive notice of its intention
to terminate and of the grounds for such termination, and the Executive has not,
within 20 business days following receipt of the notice, cured such Cause, or in
the event such Cause is not susceptible to cure within such 20 business day
period, the Executive has not taken all reasonable steps within such 20 business
day period to cure such Cause as promptly as practicable thereafter.
4.4. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any of the following (without the Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to
the Executive in connection with his employment;
(ii) a material diminution of the responsibilities or title of
the Executive with the Company;
<PAGE>
- 5 -
(iii) a material breach by the Company of any term or provision
of this Agreement; provided, however, that no event or condition
described in clauses (i) through (iii) of this Section 4.4 shall
constitute Good Reason unless (X) the Executive gives the Company
written notice of his objection to such event or condition, (Y) such
event or condition is not corrected by the Company within 20 business
days of its receipt of such notice (or in the event that such event or
condition is not susceptible to correction within such 20 business day
period, the Company has not taken all reasonable steps within such 20
business day period to correct such event or condition as promptly as
practicable thereafter) and (Z) the Executive resigns his employment
with the Company and its subsidiaries not more than 60 days following
the expiration of the 20 business day period described in the foregoing
clause (Y).
5. DEATH, DISABILITY OR RETIREMENT
In the event of termination of employment by reason of death,
Permanent Disability (as hereinafter defined) or retirement, the Executive (or
his estate, as applicable) shall be entitled to Base Salary and benefits
determined under Sections 2 and 3 hereof through the date of termination. Other
benefits shall be determined in accordance with the benefit plans maintained by
the AC, and the Company shall have no further obligation hereunder. For purposes
of this Agreement, "Permanent Disability" means a physical or mental disability
or infirmity of the Executive that prevents the normal performance of
substantially all his duties as an employee of the Company, which disability or
infirmity shall exist for any continuous period of 180 days.
6. MITIGATION OF DAMAGES
The Executive shall be required to mitigate the amount of any
payment provided for in Section 4.1 by seeking other employment, and any such
payment will be reduced in the event such other employment is obtained.
7. NON-SOLICITATION; CONFIDENTIALITY; NON-COMPETITION
7.1 Non-solicitation. For so long as the Executive is employed by
the Company and continuing for two years thereafter, the Executive shall not,
without the prior written consent of the Company, directly or indirectly, as a
sole proprietor, member of a partnership, stockholder or investor, officer or
director of a corporation, or as an employee, associate, consultant or agent of
any person, partnership, corporation or other business organization or entity
other than the Company: (x) solicit or endeavor to entice away from the Company,
SCI or any of their respective subsidiaries any person or entity who is, or,
during the then most recent 12-month period, was employed by, or had served as
an agent or key consultant of, the Company, SCI or any of their respective
subsidiaries; or (y) solicit or endeavor to entice away from the Company, SCI or
any of their respective subsidiaries any person or entity who is, or was within
the then most recent 12-month period, a customer or client (or reasonably
anticipated (to the general knowledge of the Executive or the public) to become
a customer or client) of the Company, SCI or any of their respective
subsidiaries.
<PAGE>
- 6 -
7.2 Confidentiality. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company, SCI or
any of their respective subsidiaries and affiliates. The term "confidential
information" includes information not previously disclosed to the public or to
the trade by the Company's management, or otherwise in the public domain, with
respect to the Company's, SCI's or any of their respective affiliates' or
subsidiaries', products, facilities, applications and methods, trade secrets and
other intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products), business plans, prospects or opportunities, but shall
exclude any information which (i) is or becomes available to the public or is
generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 7.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
7.3 No Competing Employment. For so long as the Executive is
employed by the Company and continuing for two years thereafter (or, if the
Executive is entitled to a continuation of his Base Salary under Section 4.1.1,
the period during which such Base Salary is continued), the Executive shall not,
directly or indirectly, as a sole proprietor, member of a partnership,
stockholder or investor (other than a stockholder or investor owning not more
than a 5% interest), officer or director of a corporation, or as an employee,
associate, consultant or agent of any person, partnership, corporation or other
business organization or entity other than the Company, SCI, or any of their
respective subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of AC,
the Company, SCI or any of their respective subsidiaries.
7.4. Exclusive Property. The Executive confirms that all
confidential information is and shall remain the exclusive property of the
Company. All business records, papers and documents kept or made by the
Executive relating to the business of the Company shall be and remain the
property of the Company, except for such papers customarily deemed to be the
personal copies of the Executive.
7.5. Injunctive Relief. Without intending to limit the remedies
available to the Company, the Executive acknowledges that a breach of any of the
covenants contained in this Section 7 may result in material and irreparable
injury to the Company, SCI or their respective affiliates or subsidiaries for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat thereof, the Company shall be entitled to seek a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Executive from engaging in activities prohibited by this Section 7 or such other
relief as may be required specifically to enforce any of the covenants in this
Section 7. If for any reason, it is held that the restrictions under this
Section 7 are not reasonable or that consideration therefor is inadequate, such
restrictions shall be interpreted or modified to include as much of the duration
and scope identified in this Section 7 as will render such restrictions valid
and enforceable.
<PAGE>
- 7 -
8. ENFORCEMENT OF AGREEMENT
In the event that legal action is undertaken by either party to
enforce any provision of this Agreement, the Company shall reimburse the
Executive for any related reasonable legal fees and out-of-pocket expenses
directly attributable to such action, provided that such legal fees are
calculated on an hourly, and not on a contingency fee, basis and provided,
further, that the Executive shall bear all such fees and out-of-pocket expenses
(and reimburse the Company for its portion of such expenses) if the relevant
trier- of-fact determines that the Executive's claim or position was frivolous
and without reasonable foundation.
9. REPRESENTATION
The Executive hereby represents that (i) he is not in possession
of any documents or materials containing information constituting Confidential
Information (as such term is defined in the employment agreement (the "Wace
Agreement") dated October 4, 1988 between Executive and Techtron Graphic Arts,
Inc. ("Wace"), (ii) he has not and will not violate the provisions of the Wace
Agreement, including without limitation, Section 13 thereof and (iii) he has
read and will comply with the provisions of Exhibit C attached hereto.
10. INDEMNIFICATION
The Company shall indemnify the Executive and hold him harmless
against any and all damages, expenses and attorney's fees relating to any Claim
(as hereinafter defined). As used herein, "Claim" means any threatened, pending
or completed action, suit, proceeding, alternative dispute resolution mechanism,
inquiry, hearing or investigation by Wace against the Executive based on an
alleged breach by the Executive of the Wace Agreement, if such alleged breach
occurred after the date hereof. Notwithstanding the foregoing, no amount shall
be payable to the Executive pursuant to the immediately preceding paragraph to
the extent that (i) the Executive is in breach of this Agreement or (ii) the
Executive enters into a settlement agreement with Wace in which he agrees to pay
Wace an amount to settle such Claim. If either (i) or (ii) of the immediately
preceding sentence is true, the Executive shall immediately reimburse the
Company for any payment it made to him pursuant to the preceding paragraph, and
the Company shall have the right to set off the amount of any such payment from
any amounts it owes the Executive.
11. MISCELLANEOUS
11.1. Notices. All notices or communications hereunder shall be
in writing, addressed as follows:
To the Company:
American Color
2340 East Polk
Phoenix, AZ 85006
Telecopier No. (602) 244-1467
Attention: James A. Caccavo, President
<PAGE>
- 8 -
with a copy to:
Sullivan Graphics, Inc.
225 High Ridge Road
Stamford, CT 06905
Telecopier No.: (203) 978-5408
Attention: Timothy M. Davis
Senior Vice President,
General Counsel and Secretary
To the Executive:
Terrence M. Ray
2 South 405 Seneca Drive
Wheaton, IL 60187
with a copy to:
Thomas P. Riordan, Esq.
Riordan, Larson, Bruckert & Moore
208 S. LaSalle Street
Suite 650
Chicago, IL 60604
Telecopier Fax: (312) 346-1168
All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy
or facsimile transmission, upon confirmation of receipt by the sender of such
transmission or (iii) if sent by registered or certified mail, on the fifth day
after the day on which such notice is mailed.
11.2. Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
11.3. Assignment. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive.
11.4. Entire Agreement. This Agreement represents the entire
agreement of the parties and shall supersede any and all previous contracts,
arrangements or understandings between the Company and the Executive. This
Agreement may be amended at any time by mutual written agreement of the parties
hereto.
<PAGE>
- 9 -
11.5. Withholding. The payment of any amount pursuant to this
Agreement shall be subject to applicable withholding and payroll taxes, and such
other deductions as may be required under the Company's employee benefit plans,
if any.
11.6. Governing Law. This Agreement shall be construed,
interpreted, and governed in accordance with the laws of New York without
reference to rules relating to conflict of law.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
duly executed and the Executive has hereunto set his hand, as of the day and
year first above written.
AMERICAN COLOR,
a Division of Sullivan Graphics, Inc.
By: /s/ James A. Caccavo
---------------------------------
James A. Caccavo
President
EXECUTIVE:
/s/ Terrence M. Ray
---------------------------------
Terrence M. Ray
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Subsidiary of Sullivan Communications, Inc.: State of Incorporation:
- -------------------------------------------- -----------------------
Sullivan Graphics, Inc. New York
Subsidiaries of Sullivan Graphics, Inc:
Sullivan Marketing, Inc. Delaware
American Images of North America, Inc. New York
Sullivan Media Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SULLIVAN COMMUNICATIONS, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE
TWELVE MONTH PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SULLIVAN COMMUNICATIONS, INC.
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<CURRENCY> U.S. DOLLARS
<S> <C>
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 56,762
<ALLOWANCES> 5,879
<INVENTORY> 9,711
<CURRENT-ASSETS> 70,077
<PP&E> 238,167
<DEPRECIATION> 71,270
<TOTAL-ASSETS> 333,975
<CURRENT-LIABILITIES> 78,675
<BONDS> 185,000
0
0
<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 333,975
<SALES> 524,551
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<INCOME-PRETAX> (26,005)
<INCOME-TAX> 2,591
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