UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996
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 33-31706-01
SULLIVAN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
- ----------------------------------- ---------------------------------------
(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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Sullivan Communications, Inc. has 123,889 shares outstanding of its Common
Stock, $.01 Par Value, as of January 31, 1997 (all of which are privately owned
and not traded on a public market).
Exhibit Index on page 26 of 27 total pages
<PAGE>
INDEX
Part I. Financial Information Page No.
- ------- --------------------- --------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1996
and March 31, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1996 and 1995 5
Condensed Consolidated Statements of Operations for the
nine months ended December 31, 1996 and 1995 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents -- --
Receivables:
Trade accounts, less allowance for
doubtful accounts of $6,279 and $4,830 at
December 31, 1996 and March 31, 1996
respectively $ 58,252 64,465
Other 2,385 3,588
--------- -------
Total receivables 60,637 68,053
Inventories 10,388 13,181
Prepaid expenses and other current assets 4,074 4,285
--------- -------
Total current assets 75,099 85,519
Property, plant and equipment 235,870 207,264
Less accumulated depreciation (66,327) (51,103)
--------- -------
Net property, plant and equipment 169,543 156,161
Excess of cost over net assets acquired, less
accumulated amortization of $31,433 and
$25,269 at December 31, 1996 and
March 31, 1996, respectively 84,054 89,324
Other assets 15,845 20,177
--------- -------
Total assets $ 344,541 351,181
========= =======
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 16,794 11,490
Trade accounts payable 30,794 35,931
Accrued expenses 33,507 27,271
Income taxes 1,829 1,215
--------- --------
Total current liabilities 82,924 75,907
Long-term debt and capitalized leases, excluding
current installments 288,065 286,127
Deferred income taxes 8,202 7,801
Other liabilities 29,286 25,742
--------- --------
Total liabilities 408,477 395,577
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 (120,016) (100,525)
Cumulative translation adjustment (1,420) (1,371)
--------- --------
Total stockholders' deficit (63,936) (44,396)
--------- --------
Commitments and contingencies
Total liabilities and stockholders'
deficit $ 344,541 351,181
========= ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended
December 31,
----------------------
1996 1995
--------- --------
Sales $ 136,472 153,308
Cost of sales 116,753 133,602
--------- -------
Gross profit 19,719 19,706
Selling, general and administrative expenses (note 8) 10,882 9,737
Amortization of goodwill 2,065 2,158
Restructuring costs and other special charges 1,171 104
--------- -------
Operating income 5,601 7,707
Other expense (income):
Interest expense 9,139 8,648
Interest income (40) (49)
Other, net 130 235
--------- -------
Total other expense 9,229 8,834
--------- -------
Loss from continuing operations before income
taxes (3,628) (1,127)
Income tax expense (711) (188)
--------- -------
Loss from continuing operations (4,339) (1,315)
Discontinued operations, net of tax -- 1,388
--------- -------
Net (loss) income $ (4,339) 73
========= =======
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
----------------------
1996 1995
--------- --------
Sales $ 414,671 408,451
Cost of sales 362,069 354,795
--------- -------
Gross profit 52,602 53,656
Selling, general and administrative expenses (note 8) 34,781 28,089
Amortization of goodwill 6,164 6,473
Restructuring costs and other special charges 1,659 2,828
--------- -------
Operating income 9,998 16,266
Other expense (income):
Interest expense 27,233 23,867
Interest income (131) (229)
Nonrecurring charge related to terminated
merger -- 1,534
Other, net 85 1,257
--------- -------
Total other expense 27,187 26,429
--------- -------
Loss from continuing operations before
income taxes and extraordinary item (17,189) (10,163)
Income tax expense (2,302) (3,375)
--------- -------
Loss from continuing operations before
extraordinary item (19,491) (13,538)
Discontinued operations, net of tax -- 1,388
Loss on early extinguishment of debt, net of tax -- (4,526)
--------- -------
Net loss $ (19,491) (16,676)
========= =======
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
----------------------
1996 1995
--------- --------
Cash flows provided (used) by operating activities:
Net loss $ (19,491) (16,676)
Adjustments to reconcile net loss to cash provided
(used) by operating activities:
Depreciation 18,477 15,709
Amortization of goodwill and other assets 7,279 7,652
Amortization of deferred financing costs and
bond premium 1,327 971
Other special charges - non-cash 1,019 --
Extraordinary non-cash credit from early
retirement of debt, net -- (1,803)
Decrease (increase) in working capital and other 17,573 (15,384)
--------- --------
Net cash provided (used) by operating activities 26,184 (9,531)
Cash flows provided (used) by investing activities:
Cash purchases of property, plant and equipment (7,123) (14,159)
Proceeds from sales of property, plant and equipment 21 15
Other (192) (78)
--------- --------
Net cash used by investing activities (7,294) (14,222)
Cash flows provided (used) by financing activities:
Proceeds from long-term borrowings -- 245,000
Repayment of long-term debt, including current
maturities (7,522) (218,682)
Net (decrease) increase in revolver borrowings (8,559) 5,901
Payments under capital lease obligations (2,169) (286)
Payment of deferred financing costs (644) (11,846)
Other, net 4 110
--------- --------
Net cash (used) provided by financing activities (18,890) 20,197
Effect of exchange rates on cash and cash equivalents -- (15)
--------- --------
Decrease in cash and cash equivalents -- (3,571)
Cash and cash equivalents:
Beginning of period -- 4,635
--------- --------
End of period $ -- 1,064
========= ========
Noncash investing activity:
Equipment purchases under capital leases $ 25,330 7,746
========= ========
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Description of the Company
Sullivan Communications, Inc. ("Communications"), and, 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 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 "Purchasers") 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.
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 Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group Trust
and Leeway & Co. The general partner of each of the MSCP III Entities is a
wholly owned subsidiary of Morgan Stanley Group Inc., 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.
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 December 31,
1996, Graphics' ability to pay dividends or lend to Communications is either
restricted or prohibited, except that Graphics may pay specified amounts to
Communications (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 New Bank Credit Agreement, as
defined below, and provided the aggregate amount of all such repurchases does
not exceed $2,000,000) 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.
8
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The two business sectors of the commercial printing industry in which the
Company operates are printing and digital imaging/prepress services conducted by
its American Color division ("American Color").
1. Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and are in accordance with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The operating results for the three and nine
month periods ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ended March 31, 1997. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the fiscal year ended March 31, 1996 and
the Company's Post-Effective Amendment No. 2 to Registration Statement No.
33-97090 on Form S-1.
Certain prior period amounts have been reclassified to conform with current
period presentation.
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 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
transaction, the Company refinanced a significant portion of its outstanding
indebtedness, including indebtedness assumed in the Shakopee Merger (the
"Refinancing"). See note 3 for a description of the Refinancing.
The Shakopee Merger has been accounted for as a combination of entities under
common control (similar to a pooling-of-interests), and accordingly, the
unaudited condensed consolidated financial statements give retroactive effect to
the Shakopee Merger and include the combined operations of Communications and
Shakopee subsequent to December 22, 1994.
9
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. The Refinancing
On August 15, 1995, the Company sold $185 million of 12 3/4% Senior Subordinated
Notes Due 2005 (the "New Notes"). In connection with the sale of the New 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")
and other financial institutions (the "New Bank Credit Agreement"), providing
Graphics with a $75 million revolving credit facility maturing in 2000 (the "New
Revolving Credit Facility") and a $60 million amortizing term loan with a final
maturity in 2000 (the "New Term Loan"); (ii) the repayment of all $126.5 million
of indebtedness outstanding under Graphics' 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 of Graphics 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 assumed in the Shakopee Merger (plus $0.1 million of accrued
interest to the date of repayment) and (v) the incurrence of approximately $11.8
million of fees and expenses related to 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 $0 taxes. This extraordinary loss
primarily consisted of the early redemption premium on the 15% Senior
Subordinated 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% Senior Subordinated Notes.
Borrowings under the New Revolving Credit Facility are subject to a borrowing
base which consists of (i) 85% of Eligible Accounts Receivable plus (ii) the
lesser of (x) $15.0 million or (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.
At December 31, 1996, the remaining New Term Loan amortizes in the following
annual amounts: (i) $2.3 million through the remainder of Fiscal Year 1997, (ii)
$10.6 million in Fiscal Year 1998, (iii) $13.3 million in Fiscal Year 1999, (iv)
$15.2 million in Fiscal Year 2000 and (v) $8.0 million in Fiscal Year 2001.
Communications has guaranteed Graphics' indebtedness under the New Bank Credit
Agreement, as amended (the "Bank Credit Agreement"), which guarantee is secured
by a pledge of all 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 and paying dividends. The Company is
currently in compliance with all financial covenants set forth in the Bank
Credit Agreement.
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.
10
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. The Gowe Acquisition
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina, Ohio
based regional printer of newspapers, T.V. books and retail advertising inserts
and catalogs ("Gowe"), for approximately $6.7 million in cash and assumption of
certain liabilities of Gowe, Inc., pursuant to an Asset Purchase Agreement,
among Graphics, Gowe, Inc. and ComCorp, Inc., the parent company of Gowe, Inc.
(the "Gowe Acquisition"). The Gowe Acquisition was accounted for under the
purchase method of accounting applying the provisions of Accounting Principles
Board Opinion No. 16 ("APB 16"). Pursuant to the requirements of APB 16, the
purchase price was allocated to the tangible assets and identifiable intangible
assets and liabilities assumed based upon their respective fair values. The
allocation of the purchase price is preliminary and may change during the
allocation period.
The Company's pro forma unaudited results of operations for the nine months
ended December 31, 1995, assuming that the Gowe Acquisition occurred as of April
1, 1995, were $434.7 million in sales and a $17.4 million net loss.
5. Disposal of 51% Interest in National Inserting Systems, Inc.
On March 11, 1996, the Company sold its 51% interest in National Inserting
Systems, Inc. ("NIS") for approximately $2.5 million in cash and a note for
approximately $0.2 million under the terms of a Stock Redemption Agreement
between NIS and Graphics. This transaction resulted in a net gain on disposal of
approximately $1.3 million, which was classified as other, net in the
consolidated statement of operations for the fiscal year ended March 31, 1996.
The proceeds from the sale were used to repay indebtedness under Graphics' Bank
Credit Agreement (as defined herein).
6. Inventories
The components of inventories are as follows (in thousands):
December 31, 1996 March 31, 1996
----------------- --------------
Paper $ 8,314 11,277
Ink 315 272
Equipment held for sale 176 349
Supplies and other 1,583 1,283
------- ------
Total $10,388 13,181
======= ======
7. Non-recurring Charge Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated merger
in the nine month period ended December 31, 1995.
8. 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 the quarter ended September
30, 1996 and is classified as a selling, general and administrative expense in
the nine months ended December 31, 1996. Payments under the related agreement
continue through 2001, subject to certain requirements.
11
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SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Restructuring Costs and Other Special Charges
In April 1995, the Company approved a plan for its American Color division which
is designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. The cost of this
plan is being accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". The estimated pretax costs
associated with this plan of $5.0 million represent employee termination,
goodwill write-down and other related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995, the Company recognized
$2.1 million of such charges, primarily for severance and other personnel
related costs. In the quarter ended September 30, 1995, the Company recognized
$0.6 million of restructuring costs primarily related to hiring and relocating
certain management personnel. In the quarter ended December 31, 1995, the
Company recognized an additional $0.1 million of restructuring costs. In the
quarter ended March 31, 1996, the Company recognized $1.3 million of
restructuring costs, which included $0.9 million of goodwill write-down and $0.4
million primarily related to certain relocation costs associated with the
restructuring. The goodwill write-down related to certain facilities that were
either shut down or relocated as part of the restructuring. In addition,
approximately $0.4 million, $0.1 million and $0.1 million of restructuring costs
primarily related to relocation costs were recognized in the quarters ended June
30, 1996, September 30, 1996 and December 31, 1996, respectively. The remaining
costs of approximately $0.3 million, principally related to additional
relocation and other transition expenses, will be recorded as incurred.
During the quarter ended December 31, 1996, the Company recorded special charges
totalling $1.0 million to adjust the carrying values of idle, disposed and
under-performing assets of the Company's American Color sector to estimated fair
values. The provision was based on a review of Company wide long-lived assets in
accordance with 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"). 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. Such special charges are classified within restructuring
costs and other special charges in the consolidated statement of operations.
12
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SULLIVAN COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Commitments and Contingencies
The Company has employment agreements with one of its principal officers and
four other employees. Such agreements provide for minimum compensation levels as
well as for incentive bonuses which are payable if specified management goals
are attained. The aggregate commitment for future compensation at December 31,
1996, excluding bonuses, was approximately $2.3 million.
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 recorded a reserve of approximately $0.1 million in
connection with this liability on its consolidated balance sheet at December 31,
1996. The Company believes this amount is adequate to cover such liability.
On December 21, 1989, Graphics sold its ink manufacturing operations and
facilities ("CPS"). 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.
The Company has been named as a defendant in several other 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.
13
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SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
General
On August 15, 1995, Shakopee Valley Printing, Inc. ("Shakopee") was merged with
and into Sullivan Graphics, Inc. ("Graphics") (the "Shakopee Merger"). The
merger has been accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the condensed consolidated
financial statements give retroactive effect to the Shakopee Merger and include
the combined operations of Sullivan Communications, Inc. ("Communications") and
Shakopee subsequent to December 22, 1994 (the date on which Shakopee became
under common control with Graphics and Communications (the "Company")).
On March 11, 1996, Graphics sold its 51% interest in National Inserting Systems
("NIS") for approximately $2.5 million in cash and a note for approximately $0.2
million under the terms of a Stock Redemption Agreement between NIS and
Graphics. The proceeds from the sale were used to repay indebtedness under the
Bank Credit Agreement (as defined herein).
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 (the
"Gowe Acquisition"). The Gowe Acquisition was accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). Pursuant to the requirements of APB 16, the purchase
price was allocated to the tangible assets and identifiable intangible assets
and liabilities assumed based upon their respective fair values. The allocation
of the purchase price is preliminary and may change during the allocation
period. Gowe's results of operations for the three months ended December 31,
1996 (the "1996 Three Month Period") and the nine months ended December 31, 1996
(the "1996 Nine Month Period") are included in the Company's Unaudited Condensed
Consolidated Financial Statements.
During March 1996, the Company completed the construction and start-up of a new
plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech will be dedicated to
the production of commercial flexi books (a form of advertising inserts) serving
various segments of the retail advertising market and the production of T.V.
listing guides serving the newspaper market.
In the 1996 Nine Month Period, the Company began to present certain fixed 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 the three months
ended December 31, 1995 (the "1995 Three Month Period") and the nine months
ended December 31, 1995 (the "1995 Nine Month Period") for the American Color
sector has been reclassified to conform with this presentation.
14
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SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table summarizes the Company's results of operations for the 1996
Three Month Period, the 1995 Three Month Period, the 1996 Nine Month Period and
the 1995 Nine Month Period.
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands)
Sales:
Printing $ 115,290 $ 131,954 $ 353,218 $ 347,585
American Color 20,029 18,864 55,992 54,854
Other (a) 1,153 2,490 5,461 6,012
--------- --------- --------- ---------
Total $ 136,472 $ 153,308 $ 414,671 $ 408,451
Gross Profit:
Printing $ 14,924 $ 15,225 $ 38,801 $ 40,924
American Color 4,639 3,518 11,779 10,422
Other (a) 156 963 2,022 2,310
--------- --------- --------- ---------
Total $ 19,719 $ 19,706 $ 52,602 $ 53,656
Gross Margin:
Printing 12.9% 11.5% 11.0% 11.8%
American Color 23.2% 18.6% 21.0% 19.0%
Total 14.4% 12.9% 12.7% 13.1%
Operating Income
(Loss):
Printing $ 9,731 $ 10,688 $ 22,737 $ 26,929
American Color (b) (364)(d) 292 (833)(d) (896)
Other (a) (c) (3,766)(e) (3,273) (11,906)(e) (9,767)
--------- --------- --------- ---------
Total $ 5,601 $ 7,707 $ 9,998 $ 16,266
(a) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), and its
wholly-owned subsidiary, Sullivan Media Corporation ("SMC").
(b) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
Month Period and in the 1995 Three Month Period, $0.6 million in the 1996
Nine Month Period and $2.8 million in the 1995 Nine Month Period.
(c) Also reflects corporate selling, general and administrative expenses, and
amortization expense.
(d) Includes the impact of $1.0 million of other special charges related to
non-cash fixed asset write-offs and write-downs (see note 9 to the Unaudited
Condensed Consolidated Financial Statements).
(e) Also reflects non-recurring employee termination expenses of $2.5 million in
the 1996 Nine Month Period (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 8 to the
Unaudited Condensed Consolidated Financial Statements) and $0.6 million in
the 1996 Three Month Period.
15
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing
Sales. Printing sales increased $5.6 million to $353.2 million in the 1996 Nine
Month Period from $347.6 million in the 1995 Nine Month Period. This increase
includes $36.9 million of sales by Gowe and Flexi-Tech and an approximate 3%
increase in production volume (excluding Gowe and Flexi-Tech). These increases
were partially offset by a decrease in paper prices and the effect of an
increase in customer supplied paper.
Printing sales decreased $16.7 million to $115.3 million in the 1996 Three Month
Period from $132.0 million in the 1995 Three Month Period. This decrease
includes a decrease in paper prices and the effect of an increase in customer
supplied paper. These decreases were partially offset by $14.1 million of sales
by Gowe and Flexi-Tech and a slight increase in production volume (excluding
Gowe and Flexi-Tech).
Gross Profit. Printing gross profit decreased $2.1 million to $38.8 million in
the 1996 Nine Month Period from $40.9 million in the 1995 Nine Month Period.
Printing gross margin decreased to 11.0% in the 1996 Nine Month Period from
11.8% in the 1995 Nine Month Period. The decrease in gross profit and gross
margin includes an increase in depreciation expense, a reduction in the price of
scrap paper, incremental costs related to the start-up of Flexi-Tech and
continued competitive pricing pressures. These decreases were partially offset
by reduced variable production and certain other manufacturing costs due to
continued cost containment programs at the printing plants, the impact of higher
volume and incremental gross margin from Gowe.
Printing gross profit decreased $0.3 million to $14.9 million in the 1996 Three
Month Period from $15.2 million in the 1995 Three Month Period. Printing gross
margin increased to 12.9% in the 1996 Three Month Period from 11.5% in the 1995
Three Month Period. The decrease in gross profit includes an increase in
depreciation expense, a reduction in the price of scrap paper, incremental costs
related to the start-up of Flexi-Tech and continued competitive pricing
pressures. These decreases were partially offset by reduced variable production
and certain other manufacturing costs due to continued cost containment programs
at the printing plants and incremental gross margin from Gowe. The increase in
gross margin as a percentage of sales is primarily attributable to the impact of
lower paper prices included in sales during the 1996 Three Month Period.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses increased to $16.1 million or 4.6% of printing sales in
the 1996 Nine Month Period from $14.0 million or 4.0% of printing sales in the
1995 Nine Month Period. This increase includes selling, general and
administrative expenses of Gowe and Flexi-Tech, and increased sales and
marketing expenses.
Printing selling, general and administrative expenses increased to $5.2 million
or 4.5% of printing sales in the 1996 Three Month Period from $4.5 million or
3.4% of printing sales in the 1995 Three Month Period. This increase includes
selling, general and administrative expenses of Gowe and Flexi-Tech, and
increases in certain employee related expenses.
Operating Income. As a result of the above factors, operating income from the
printing business decreased to $22.7 million in the 1996 Nine Month Period from
$26.9 million in the 1995 Nine Month Period and decreased to $9.7 million in the
1996 Three Month Period from $10.7 million in the 1995 Three Month Period.
16
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American Color
Sales. American Color's sales increased $1.1 million to $56.0 million in the
1996 Nine Month Period from $54.9 million in the 1995 Nine Month Period. This
increase is primarily the result of increases in digital visual effects work
partially offset by lower equipment sales.
American Color's sales increased $1.1 million to $20.0 million in the 1996 Three
Month Period from $18.9 million in the 1995 Three Month Period. This increase is
primarily the result of increases in prepress production volume and digital
visual effects work partially offset by lower equipment sales.
Gross Profit. American Color's gross profit increased $1.4 million to $11.8
million in the 1996 Nine Month Period from $10.4 million in the 1995 Nine Month
Period. American Color's gross margin increased to 21.0% in the 1996 Nine Month
Period from 19.0% in the 1995 Nine Month Period. These increases are primarily
the result of cost savings in material and other production costs offset in part
by facilities management start-up costs.
American Color's gross profit increased $1.1 million to $4.6 million in the 1996
Three Month Period from $3.5 million in the 1995 Three Month Period. American
Color's gross margin increased to 23.2% in the 1996 Three Month Period from
18.6% in the 1995 Three Month Period. These increases are primarily the result
of increased volume and cost savings in material and other production costs.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses increased to $11.0 million or 19.6% of American
Color's sales in the 1996 Nine Month Period from $8.5 million or 15.5% of
American Color's sales in the 1995 Nine Month Period. These increases are
primarily a result of increased sales and marketing expenses and the addition of
operations and administrative personnel and related expenses, including its
digital visual effects group.
American Color's selling, general and administrative expenses increased to $3.8
million or 19.1% of American Color's sales in the 1996 Three Month Period from
$3.1 million or 16.5% of American Color's sales in the 1995 Three Month Period.
These increases are primarily a result of increased sales and marketing expenses
and the addition of operations and administrative personnel and related
expenses, including its digital visual effects group.
Operating Income (Loss). Operating losses at American Color were reduced to a
loss of $0.8 million in the 1996 Nine Month Period from a loss of $0.9 million
in the 1995 Nine Month Period. This decrease includes the above factors and the
incurrence of other special charges of $1.0 million related to non-cash fixed
asset write-offs and write-downs in the 1996 Nine Month Period and restructuring
costs associated with the American Color restructuring plan of $0.6 million in
the 1996 Nine Month Period and $2.8 million in the 1995 Nine Month Period.
Operating income (loss) at American Color decreased to a loss of $0.4 million in
the 1996 Three Month Period from income of $0.3 million in the 1995 Three Month
Period. This decrease includes the above factors and the incurrence of other
special charges of $1.0 million related to non-cash fixed asset write-offs and
write-downs in the 1996 Three Month Period.
See note 9 to the Unaudited Condensed Consolidated Financial Statements and
discussion below for information regarding the American Color restructuring plan
and other special charges related to the non-cash write-off and write-down of
fixed assets.
17
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other Operations
Other operations consist primarily of revenues and expenses associated with the
Company's 51% owned subsidiary, NIS (sold March 11, 1996), and its wholly-owned
subsidiary, SMC. In addition, other operations include corporate selling,
general and administrative and other expenses and amortization expense.
Amortization expense related to other operations, including goodwill
amortization (see below), was $6.5 million, $7.2 million, $2.1 million and $2.4
million, in the 1996 Nine Month Period, the 1995 Nine Month Period, the 1996
Three Month Period and the 1995 Three Month Period, respectively.
Operating losses from other operations increased $2.1 million to a loss of $11.9
million in the 1996 Nine Month Period from a loss of $9.8 million in the 1995
Nine Month Period. This increase primarily reflects 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 8 to the
Unaudited Condensed Consolidated Financial Statements).
Operating losses from other operations increased $0.5 million to a loss of $3.8
million in the 1996 Three Month Period from a loss of $3.3 million in the 1995
Three Month Period. This increase includes the non-recurring charge of $0.6
million related to other employee termination expenses.
Goodwill Amortization
Amortization expense associated with goodwill was $6.2 million, $6.5 million,
$2.1 million and $2.2 million for the 1996 Nine Month Period, the 1995 Nine
Month Period, the 1996 Three Month Period and the 1995 Three Month Period,
respectively.
Restructuring Costs and Other Special Charges
In April 1995, the Company approved a plan for its American Color division which
is designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. The cost of this
plan is being accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". The estimated pretax costs
associated with this plan of $5.0 million represent employee termination,
goodwill write-down and other related costs that will be incurred as a direct
result of the plan. In the quarter ended June 30, 1995, the Company recognized
$2.1 million of such charges, primarily for severance and other personnel
related costs. In the quarter ended September 30, 1995, the Company recognized
$0.6 million of restructuring costs, primarily related to hiring and relocating
certain management personnel. In the quarter ended December 31, 1995, the
Company recognized an additional $0.1 million of restructuring costs. In the
quarter ended March 31, 1996, the Company recognized $1.3 million of
restructuring costs, which included $0.9 million of goodwill write-down and $0.4
million primarily related to certain relocation costs associated with the
restructuring. The goodwill write-down related to certain facilities that were
either shut down or relocated as part of the restructuring. In addition,
approximately $0.4 million, $0.1 million and $0.1 million of restructuring
charges primarily related to relocation costs were recognized in the quarters
ended June 30, 1996, September 30, 1996 and December 31, 1996, respectively. The
remaining costs of approximately $0.3 million, principally related to additional
relocation and other transition expenses, will be recorded as incurred.
During the quarter ended December 31, 1996, the Company recorded special charges
totalling $1.0 million to adjust the carrying values of idle, disposed and
under-performing assets of the Company's American Color sector
18
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
to estimated fair values. The provision was based on a review of Company-wide
long-lived assets in accordance with 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"). 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. Such special charges are
classified within restructuring costs and other special charges in the
consolidated statement of operations.
Interest Expense
Interest expense increased 14.1% to $27.2 million in the 1996 Nine Month Period
from $23.9 million in the 1995 Nine Month Period. This increase is primarily the
result of increased average indebtedness levels including indebtedness related
to the Transactions (see note 3 to the Unaudited Condensed Consolidated
Financial Statements) and obligations under capital leases.
Interest expense increased 5.7% to $9.1 million in the 1996 Three Month Period
from $8.6 million in the 1995 Three Month Period. This increase is primarily the
result of increased obligations under capital leases.
Non-recurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated merger
in the 1995 Nine Month Period.
Other Expense, Net
Other expense, net decreased to expense of $0.1 million in the 1996 Nine Month
Period from expense of $1.3 million in the 1995 Nine Month Period. This decrease
includes the impact of reduced expenses associated with an employee benefit
program.
Other expense, net decreased to expense of $0.1 million in the 1996 Three Month
Period from expense of $0.2 million in the 1995 Three Month Period.
Income Tax Expense
Income tax expense decreased to $2.3 million in the 1996 Nine Month Period from
$3.4 million in the 1995 Nine Month Period and increased to $0.7 million in the
1996 Three Month Period from $0.2 million in the 1995 Three Month Period. The
decrease for the 1996 Nine Month Period is primarily due to the Shakopee Merger,
smaller amounts of taxable income in foreign jurisdictions and the sale of NIS,
partially offset by an increase in the deferred tax valuation allowance. The
increase for the 1996 Three Month Period is related to an increase in the
deferred tax valuation allowance, which is partially offset by the elimination
of NIS taxes.
Net Loss
As a result of the factors discussed above, the Company's net loss increased to
a loss of $19.5 million in the 1996 Nine Month Period from a loss of $16.7
million in the 1995 Nine Month Period, and decreased to a loss of $4.3 million
in the 1996 Three Month Period from net income of $0.1 million in the 1995 Three
Month Period.
19
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
In August 1995, the Company refinanced substantially all of its existing
indebtedness (the "Refinancing") (see note 3 to the Unaudited Condensed
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 "New Notes").
The gross proceeds of the offering of the New Notes, together with $85.6 million
in borrowings under the amended credit agreement with BT Commercial Corporation
and other financial institutions (the "Bank Credit Agreement"), and existing
cash balances were used (i) to redeem all $100 million principal amount of the
15% Senior Subordinated 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 "New Revolving Credit Facility"), providing for a
maximum of $75 million of borrowing availability, subject to a borrowing base
requirement (see note 3 to the Unaudited Condensed Consolidated Financial
Statements). As of February 13, 1997, the Company had borrowings of $30.9
million outstanding under the New Revolving Credit Facility and $6.6 million of
additional borrowing availability. The Company expects that it will from time to
time during the remainder of fiscal year ending March 31, 1997 ("Fiscal Year
1997") use a substantial portion of its availability in the normal course of its
operations.
The Bank Credit Agreement also provides for a $60 million amortizing term loan
with a final maturity on September 30, 2000 (the "New Term Loan"). The remaining
Fiscal Year 1997 scheduled payment due under the New Term Loan is $2.3 million.
Cash from operations and net borrowings under the New Revolving Credit Facility
(see the Unaudited Condensed Consolidated Statements of Cash Flows) were used to
repay $7.5 million in scheduled principal payments on indebtedness during the
1996 Nine Month Period. Additionally, these cash sources were used to fund the
Company's cash capital expenditures during the 1996 Nine Month Period of $7.1
million and the repayment of capital lease obligations of $2.2 million. The
Company plans to continue its program of upgrading its printing and prepress
equipment and expanding production capacity and currently anticipates that full
year Fiscal Year 1997 cash capital expenditures will approximate $12 million and
repayment of capital lease obligations will approximate $3.5 million. In
addition, the Company plans to acquire equipment under capital leases of
approximately $27 million during full year Fiscal Year 1997. The Company had
zero cash and cash equivalents on hand at December 31, 1996 due to a requirement
under the Bank Credit Agreement that substantially all of the Company's daily
available funds be used to reduce borrowings under the New Revolving Credit
Facility. The Company expects that its ongoing liquidity requirements during
Fiscal Year 1997 will be met from cash from operations and amounts available
under the Bank Credit Agreement. The Company is currently in compliance with all
financial covenants set forth in the Bank Credit Agreement.
20
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At December 31, 1996, the Company had total debt outstanding of $304.9 million,
including capital lease obligations. Of the total debt outstanding at December
31, 1996, $80.4 million was outstanding under the Bank Credit Agreement at a
weighted average interest rate of 8.32%. Indebtedness under the Bank Credit
Agreement bears interest at floating rates, causing the Company to be sensitive
to prevailing interest rates. At December 31, 1996, the Company had indebtedness
other than obligations under the Bank Credit Agreement of $224.5 million
(including $185 million of New Notes).
21
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
EBITDA
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands)
EBITDA:
Printing $ 14,826 $ 14,783 $ 37,641 $ 38,995
American Color (a) 2,236 1,773 4,549 3,018
Other (b) (c) (1,671)(d) (828) (5,417)(d) (2,386)
-------- -------- -------- --------
Total $ 15,391 $ 15,728 $ 36,773 $ 39,627
EBITDA Margin:
Printing 12.9% 11.2% 10.7% 11.2%
American Color (a) 11.2% 9.4% 8.1% 5.5%
Total 11.3% 10.3% 8.9% 9.7%
(a) Includes the impact of restructuring costs of $0.1 million in the 1996 Three
Month Period and in the 1995 Three Month Period, $0.6 million in the 1996
Nine Month Period and $2.8 million in the 1995 Nine Month Period.
(b) Other operations consist primarily of revenues and expenses associated with
the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), and its
wholly-owned subsidiary SMC.
(c) Also reflects corporate selling, general and administrative expenses.
(d) Also reflects non-recurring employee termination expenses of $2.5 million in
the 1996 Nine Month Period (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 8 to the
Unaudited Condensed Consolidated Financial Statements) and $0.6 million in
the 1996 Three Month Period.
"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 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
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 New Notes and the Bank Credit Agreement are based on EBITDA,
subject to certain adjustments.
22
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing. As a result of the reasons previously described under "-Printing"
(excluding the increase in depreciation expense), Printing EBITDA decreased to
$37.6 million in the 1996 Nine Month Period from $39.0 million in the 1995 Nine
Month Period, representing a decrease of $1.4 million, and the Printing EBITDA
Margin decreased to 10.7% in the 1996 Nine Month Period from 11.2% in the 1995
Nine Month Period. Printing EBITDA was $14.8 million in both the 1996 Three
Month Period and the 1995 Three Month Period. The Printing EBITDA Margin
increased to 12.9% in the 1996 Three Month Period from 11.2% in the 1995 Three
Month Period.
American Color. As a result of the reasons previously described under "-American
Color," American Color's EBITDA increased to $4.5 million in the 1996 Nine Month
Period from $3.0 million in the 1995 Nine Month Period, representing an increase
of $1.5 million, and the American Color EBITDA Margin increased to 8.1% in the
1996 Nine Month Period from 5.5% in the 1995 Nine Month Period. These EBITDA
increases included restructuring costs of $0.6 million in the 1996 Nine Month
Period as compared with $2.8 million in the 1995 Nine Month Period. American
Color's EBITDA increased to $2.2 million in the 1996 Three Month Period from
$1.8 million in the 1995 Three Month Period, representing an increase of $0.4
million, and the American Color EBITDA Margin increased to 11.2% in the 1996
Three Month Period from 9.4% in the 1995 Three Month Period. These EBITDA
increases included Restructuring costs of $0.1 million in both the 1996 Three
Month Period and the 1995 Three Month Period.
Other. 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 $5.4 million in the 1996 Nine Month Period from
negative EBITDA of $2.4 million in the 1995 Nine Month Period. Other operations
negative EBITDA increased to negative EBITDA of $1.7 million in the 1996 Three
Month Period from negative EBITDA of $0.8 million in the 1995 Three Month
Period. EBITDA for the 1996 Nine Month Period includes the impact of a $1.9
million non-recurring charge related to the resignation of the Company's Chief
Executive Officer (see note 8 to the Unaudited Condensed Consolidated Financial
Statements) and a $0.6 million non-recurring charge related to other employee
termination expenses. EBITDA for the 1996 Three Month Period includes the impact
of a $0.6 million non-recurring charge related to other employee termination
expenses.
23
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Part II Other Information
Item 1. (a) Legal Proceedings
Reference is made to Item 3 (Legal Proceedings) disclosure in the
Company's Form 10-K filed for the fiscal year ended March 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed with the Securities and Exchange Commission on October
21, 1996 under Item 5 announcing the EBITDA for the three months ended
September 30, 1996.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Communications and Graphics have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
Date February 14, 1997 By /s/ Joseph M. Milano
----------------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date February 14, 1997 By /s/ Patrick W. Kellick
----------------------------
Patrick W. Kellick
Vice President - Corporate Controller
(Chief Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
27.0 Financial Data Schedule 27
26
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SULLIVAN
COMMUNICATIONS, INC.'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE NINE MONTH PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856710
<NAME> SULLIVAN COMMUNICATIONS, INC.
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
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<RECEIVABLES> 60,637
<ALLOWANCES> 6,279
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<PP&E> 235,870
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<TOTAL-ASSETS> 344,541
<CURRENT-LIABILITIES> 82,924
<BONDS> 185,000
0
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<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 344,541
<SALES> 414,671
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<CGS> 362,069
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<INTEREST-EXPENSE> 27,233
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