As filed with the Securities and Exchange Commission on July 9, 1997
Registration No. 33-97090
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3 to
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------------
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
(Exact name of registrants as specified in their charters)
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<S> <C> <C>
Delaware 2750 62-1395968
New York 2750 16-1003976
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification numbers)
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Sullivan Communications, Inc. Sullivan Graphics, Inc.
225 High Ridge Road 100 Winners Circle
Stamford, Connecticut 06905 Brentwood, Tennessee 37027
(203) 977-8101 (615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
TIMOTHY M. DAVIS
Senior Vice President - Administration, General Counsel and Secretary
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
225 High Ridge Road
Stamford, Connecticut 06905
(203) 977-8101
(Name, address, including zip code, and
telephone number, including area code, of
agent for service for both registrants)
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Copies to:
JERRY V. ELLIOTT
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
Approximate date of commencement of proposed exchange offer: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum
Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Note Price Registration Fee(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 3/4% Senior Subordinated Exchange Notes
Due 2005(2)(3) $185,000,000 $1,000 $185,000,000 $63,793.10
================================================================================================================================
</TABLE>
(1) Previously paid.
(2) The guarantee of principal of and interest on the Notes is also being
registered hereby.
(3) An indeterminable amount of Notes to be offered and sold in market-making
transactions are also being registered hereby.
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This Post-Effective Amendment shall become effective in accordance with
Section 8(c) of the Securities Act of 1933.
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<PAGE>
Prospectus
Sullivan Graphics, Inc.
12 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
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Unconditionally Guaranteed on a Senior Subordinated Basis by
Sullivan Communications, Inc.
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Interest on the 12 3/4% Senior Subordinated Exchange Notes Due 2005
(the "Notes") is payable semiannually on February 1 and August 1 of each year.
The Notes are redeemable at the option of Sullivan Graphics, Inc. ("Graphics"),
in whole or in part, at any time on or after August 1, 2000, initially at
106.375% of their principal amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest, on or after August 1, 2002. In
addition, at the option of Graphics, at any time or from time to time prior to
August 1, 1998, the Notes are redeemable from the proceeds of one or more Public
Equity Offerings following which there is a Public Market at 110% of their
principal amount, plus accrued interest; provided that at least $115 million
aggregate principal amount of Notes remains outstanding after each such
redemption. Upon the occurrence of a Change of Control Triggering Event (as
defined herein) each holder of Notes will have the right to require Graphics to
repurchase all or any portion of such holder's Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued interest.
The Notes are subordinated in right of payment to all existing and
future Senior Indebtedness of Graphics, including indebtedness under the Bank
Credit Agreement (as defined herein) and pari passu in right of payment with any
future senior subordinated indebtedness of Graphics and will be senior in right
of payment to any future subordinated indebtedness of Graphics. At March 31,
1997, Graphics had approximately $127.3 million of Senior Indebtedness, no
senior subordinated indebtedness other than the Notes and no subordinated
indebtedness outstanding and Graphics' subsidiaries had approximately $2.1
million of liabilities (which were effectively senior to the Notes).
The Notes are fully and unconditionally guaranteed on an unsecured
senior subordinated basis by Sullivan Communications, Inc. ("Communications").
Communications has no significant assets other than the capital stock of
Graphics, all of which is pledged to secure Senior Indebtedness of
Communications.
The Notes were issued pursuant to an exchange offer (the "Exchange
Offer") consummated by Graphics and Communications on January 3, 1996, pursuant
to which the Notes were issued for Graphics' outstanding 12 3/4% Senior
Subordinated Notes Due 2005 (the "Old Notes").
----------------
See "Risk Factors" beginning on page 13 of this Prospectus for a
discussion of certain information that should be considered in connection with
an investment in the Notes.
The Notes have received ratings from Moody's Investors Services Inc.
and Standard and Poor's Ratings Services which are below "investment grade" and
there is no required rating that must be maintained.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is to be used by Morgan Stanley & Co. Incorporated
("MS&Co."), in connection with offers and sales of the Notes in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. MS&Co. may act as principal or agent in such transactions.
Graphics will receive no portion of the proceeds of such sales and will bear the
expenses incident to the registration thereof. If MS&Co. conducts any
market-making activities, it may be required to deliver a "market-making
prospectus" when effecting offers and sales in the Notes because of the
beneficial ownership of Communications by The Morgan Stanley Leveraged Equity
Fund II, L.P. ("MSLEF") and Morgan Stanley Capital Partners III, L.P. ("MSCP")
and two other limited partnerships, all of which are affiliates of MS&Co. For so
long as a market-making prospectus is required to be delivered, the ability of
MS&Co. to make a market in the Notes may, in part, be dependent on the ability
of Graphics and Communications to maintain a current market-making prospectus.
July __, 1997
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No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by Graphics, Communications or MS&Co.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstance create any implication that the information herein is correct
as of any date subsequent to the date hereof.
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TABLE OF CONTENTS
Page
----
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 13
Use of Proceeds................................ 19
Capitalization................................. 20
Selected Historical Financial Data............. 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................... 25
Business....................................... 37
Management..................................... 44
Certain Transactions........................... 50
Page
----
Security Ownership of Certain
Beneficial Owners and Management........... 52
The Shakopee Merger........................... 53
Description of the Bank
Credit and Term Loan Agreements............ 53
Description of the Notes...................... 58
Certain Federal Income Tax
Considerations............................. 87
Plan of Distribution.......................... 89
Legal Matters ................................ 89
Experts....................................... 89
Index to Financial Statements................. F-1
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AVAILABLE INFORMATION
Graphics and Communications have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement under the Securities Act
of 1933 (the "Securities Act") with respect to the Notes offered hereby. For the
purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. In accordance with
the rules and regulations of the Commission, this Prospectus does not contain
all of the information set forth in the Registration Statement and the schedules
and exhibits thereto. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions. For further information pertaining to Graphics, Communications and
the Notes offered hereby, reference is made to such Registration Statement,
including the exhibits and schedules thereto and the financial statements, notes
and schedules filed as a part thereof. The Registration Statement (and the
exhibits and schedules thereto) may be inspected and copied at the public
reference facilities maintained by the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or
at its regional offices at Citicorp Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New York,
New York 10048. Any interested party may obtain copies of all or any portion of
the Registration Statement and the exhibits thereto at prescribed rates from the
Public Reference Section of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Indenture requires Communications and, in the circumstances
described below, Graphics to file with the Commission the annual, quarterly and
other reports required by Sections 13(a), 13(c) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regardless of whether
such Sections are applicable to Graphics or Communications. Communications or
Graphics, as the case may be, will supply without cost to each holder of Notes,
and file with the trustee under the Indenture, within fifteen days after
Communications is required to file the same with the Commission, copies of the
audited financial statements, quarterly reports and other reports which Graphics
and Communications are required to file with the Commission pursuant to Sections
13(a), 13(c) and 15(d) of the Exchange Act; provided, however, that in the event
Communications is no longer the guarantor on the Notes, Communications shall no
longer be required to file such reports and Graphics will be required to file
such reports, in each case as of the date and time that Communications is no
longer the guarantor on the Notes.
2
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information and financial statements and accompanying notes appearing elsewhere
in this Prospectus. As used in this Prospectus, unless the context otherwise
requires, the term "Company" refers to Sullivan Communications, Inc. and its
subsidiaries, including its wholly owned subsidiary, Sullivan Graphics, Inc.,
the term "Graphics" refers to Sullivan Graphics, Inc. and its subsidiaries and
the term "Communications" refers to Sullivan Communications, Inc. The term
"Fiscal Year 1997" refers to the year ended March 31, 1997, the term "Fiscal
Year 1996" refers to the year ended March 31, 1996 and the term "Fiscal Year
1995" refers to the year ended March 31, 1995.
The Company
The Company is a successor to a business that commenced operations in
1926, and is one of the largest national diversified commercial printers in
North America with ten printing plants in eight states and Canada and 15
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 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 MSLEF, certain institutional
investors and certain members of management (the "Purchasing Group") for the
purpose of acquiring a majority interest in Communications. Acquisition Corp.
acquired a substantial and controlling majority interest in Communications in
exchange for $40 million in cash. In the 1993 Acquisition, Communications
continued as the surviving corporation and the separate corporate existence of
Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the
"Shakopee Merger") with Shakopee Valley Printing Inc. ("Shakopee"). Shakopee was
formed to effect the purchase of certain assets and assumption of certain
liabilities of Shakopee Valley Printing, a division of Guy Gannett
Communications. On December 22, 1994, pursuant to an Agreement for the Purchase
of Assets between Guy Gannett Communications (the "Seller") and Shakopee (the
"Buyer"), the Seller sold certain assets and transferred certain liabilities of
Shakopee Valley Printing to the Buyer for a total purchase price of
approximately $42.6 million, primarily financed through the issuance of 35,000
shares of Common Stock and bank borrowings. The 35,000 shares were purchased by
MSCP, Morgan Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group Trust
and Leeway & Co. 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. See "-- The Transactions -- The
Shakopee Merger."
On March 11, 1996, Graphics sold its 51% interest in National Inserting
Systems, Inc. ("NIS") for approximately $2.5 million in cash and a note for
approximately $0.2 million. 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").
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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 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 Fiscal Year 1996 and 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 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus.
Market data used throughout this Prospectus 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 believed to be an important and cost effective means of
advertising for these merchants. Advertising inserts are primarily distributed
through insertion in newspapers but are also distributed by direct mail or
in-store by retailers. They 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.
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. American
Color's revenue from these traditional services is being supplemented by new
revenue sources from electronic prepress services such as digital image storage,
telecommunications, design and layout, consulting and training services,
facilities management (operating digital imaging prepress service facilities at
a customer location) and software and data management.
In April 1995, the Company 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 appearing elsewhere in this Prospectus.
4
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Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress services
businesses:
Modern Equipment. The Company believes that its heatset offset and
flexographic web printing equipment is among the most advanced 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 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 15
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
5
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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 seasonal
and to maximize the use of the Company's equipment. The Company is also
continuing to expand its printing facilities' capabilities for in-plant prepress
and postpress services. The Company's digital imaging and prepress services
business will continue to focus on high value-added new business opportunities,
particularly large-scale projects that will best utilize the breadth of services
and technologies the Company has to offer. Additionally, the Company will
continue to pursue large facilities management opportunities as well as national
and large regional customers that require more sophisticated levels of service
and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The Company
intends to further reduce its production costs at its printing facilities
through its Total Quality Management Process, an ongoing cost reduction and
continuous quality improvement process. Additionally, the Company plans to
maximize scale advantages in the purchasing, technology and engineering areas.
The Company also intends to continue to gain variable cost efficiencies in its
digital imaging and prepress services business by using its technical resources
to improve digital prepress workflows at its various facilities. It 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.
The Transactions
The Company entered into the following merger and refinancing
transactions (the "Refinancing" and, together with the Shakopee Merger, the
"Transactions") in connection with the offering of the Old Notes:
The Shakopee Merger. In December 1994, certain shareholders of
Communications and others established Shakopee to acquire a Minneapolis regional
printer for an aggregate purchase price of $42.6 million, of which $17.5 million
was contributed in the form of equity. Shakopee generated $65.7 million of sales
in Fiscal Year 1997. As part of the Transactions, Shakopee was merged with
Graphics.
The Refinancing. The offering of the Old Notes was part of a series of
transactions, including the following: (i) Graphics entered into a Credit
Agreement with BT Commercial Corporation (the "Bank Credit Agreement"),
providing for a $75 million revolving credit facility maturing in 2000 (the
"Revolving Credit Facility") and a $60 million amortizing term loan maturing in
2000 (the "Term Loan"); (ii) the repayment of all $126.5 million of indebtedness
outstanding under Graphics' old bank credit agreement (the "Old Bank Credit
Agreement") (plus $2.3 million of accrued interest to August 15, 1995, the date
of repayment); (iii) the redemption of all outstanding 15% Senior Subordinated
Notes Due 2000 of Graphics (the "15% Notes") at an aggregate redemption price of
$105.6 million (plus $1.8 million of accrued interest to September 15, 1995, the
redemption date); (iv) the repayment of all $24.6 million of indebtedness
assumed in the Shakopee Merger (plus $0.1 million of accrued interest to August
15, 1995, the date of repayment); and (v) the payment of approximately $11.8
million of fees and expenses incurred in connection with the Transactions.
On June 30, 1997, Graphics entered into a Term Loan Agreement (the
"Term Loan Agreement") with Bankers Trust Company and a syndicate of lenders
(including Morgan Stanley Senior Funding, Inc., an affiliate of the Company's
majority stockholders, which has agreed to purchase a $5 million participation
in the Term Loan Agreement) providing for a $25 million term loan maturing on
March 31, 2001 (the "Term Loan Facility").
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Summary Description of the Notes
Issuer........................ Sullivan Graphics, Inc.
Maturity Date................. August 1, 2005.
Securities.................... $185 million aggregate principal amount of 12
3/4% Senior Subordinated Exchange Notes Due
2005.
Interest Payment Dates........ Payable semiannually, in cash, on February 1
and August 1 of each year.
Ranking....................... The Notes are unsecured obligations of
Graphics, subordinated in right of payment to
all existing and future Senior Indebtedness
of Graphics, including indebtedness under the
Bank Credit Agreement. The Notes will rank
pari passu in right of payment with any
future senior subordinated indebtedness of
Graphics and will be senior in right of
payment to any future subordinated
indebtedness of Graphics. See "Description of
the Notes -- Ranking." At March 31, 1997,
Graphics had $127.3 million of Senior
Indebtedness, no senior subordinated
indebtedness other than the Notes and no
subordinated indebtedness outstanding and
Graphics' subsidiaries had approximately $2.1
million of liabilities (which were
effectively senior to the Notes). See "Risk
Factors -- High Level of Indebtedness" and
"-- Ranking of the Notes and Communications
Guaranty; Liens Securing Bank Credit
Agreement."
Guaranty...................... The payment of principal and interest on the
Notes is fully and unconditionally guaranteed
on an unsecured senior subordinated basis by
Communications. The guaranty by
Communications is subordinated to all
existing and future Senior Indebtedness of
Communications, including Communications'
guaranty of Graphics' obligations under the
Bank Credit Agreement. Communications
conducts no business other than as the sole
shareholder of Graphics and has no
significant assets other than the capital
stock of Graphics, all of which is pledged to
secure Communications' obligations under the
Bank Credit Agreement. See "Description of
the Notes -- Guaranty."
Optional Redemption........... The Notes are redeemable at the option of
Graphics, in whole or in part, at any time or
from time to time on and after August 1,
2000, initially at 106.375% of their
principal amount, plus accrued interest,
declining ratably to 100% of their principal
amount, plus accrued interest, on and after
August 1, 2002. In addition, at any time or
from time to time prior to August 1, 1998,
the Notes are redeemable at the option of
Graphics from the proceeds of one or more
Public Equity Offerings (as defined herein)
following which there is a Public Market (as
defined herein), at 110% of their principal
amount plus accrued interest to the
redemption date; provided that at least $115
million aggregate principal amount of Notes
remains outstanding. See "Description of the
Notes -- Optional Redemption."
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Change of Control
Triggering Event.............. In the event of a Change of Control
Triggering Event (as defined herein), the
holders of the Notes will have the right to
require Graphics to purchase the Notes at a
purchase price of 101% of their principal
amount plus accrued interest to the purchase
date. See "Risk Factors -- Ability of
Graphics to Repurchase Notes upon a Change of
Control Triggering Event" and "Description of
the Notes -- Repurchase of Notes upon a
Change of Control Triggering Event." The
occurrence of a Change of Control Triggering
Event will require Graphics to repay all
indebtedness then outstanding which by its
terms would prohibit Graphics from
repurchasing the Notes or obtain consents
from the holders of such indebtedness,
including indebtedness outstanding under the
Bank Credit Agreement. There can be no
assurance that Graphics would have sufficient
funds available to repurchase such
indebtedness and the Notes. See "Risk Factors
-- Ability of Graphics to Repurchase Notes
upon a Change of Control Triggering Event."
Covenants..................... The Indenture contains covenants that, among
other things, limit the ability of Graphics
and its subsidiaries to incur indebtedness,
pay dividends, redeem capital stock, make
investments and make other restricted
payments, issue capital stock of
subsidiaries, engage in transactions with
stockholders and affiliates, sell assets and
engage in mergers and consolidations.
However, these limitations are subject to a
number of important qualifications and
exceptions. See "Description of the Notes --
Covenants."
Credit Rating................. The Notes have received ratings from Moody's
Investors Services Inc. and Standard and
Poor's Ratings Group which are below
"investment grade" and there is no required
rating that must be maintained.
Settlement at DTC............. Transfers of Notes between participants in
The Depository Trust Company ("DTC") will be
effected in the ordinary way in accordance
with DTC rules and will be settled in
next-day funds.
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SUMMARY HISTORICAL FINANCIAL DATA
The summary historical consolidated financial data and other data
presented as of and for the year ended December 31, 1992 (pre-1993 Acquisition),
as of and for the three months ended March 31, 1993 (pre-1993 Acquisition) and
as of and for the fiscal years ended March 31, 1994, 1995, 1996 and 1997
(post-1993 Acquisition) were derived from the Consolidated Financial Statements
of Communications. In April 1993, Communications was acquired by MSLEF, members
of management and other investors (the 1993 Acquisition). The summary historical
financial data should be read in conjunction with "Capitalization," "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Communications appearing elsewhere in this Prospectus.
9
<PAGE>
<TABLE>
<CAPTION>
Post-1993 Acquisition (a) Pre-1993 Acquisition(b)
---------------------------------------------------- -------------------------
Fiscal Year Ended March 31,
----------------------------------------------------
Three
Months Year
Ended Ended
March 31, December 31,
1997 1996 1995(c) 1994 1993(d) 1992(d)
------ ------ ------- ------ --------- -----------
(dollars in thousands)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Sales ............................ $ 524,551 $ 529,523 $ 433,198 $ 414,673 $ 101,601 $ 395,420
Gross profit ..................... 64,671 64,413 62,931 45,153 6,523 37,589
Restructuring costs and other
special charges (e) .... .... 2,881 7,533 -- -- -- --
Gain from curtailment and
establishment of define
benefit pension plans,
net (f) ....................... -- -- (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
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)
(Loss) income from
discontinued operations
(net of tax)(g) ............... (3,107) 1,504 17,583 (61,684) (1,897) (3,689)
Loss on early extinguishment
of debt(h) .................... -- (4,526) -- -- -- --
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(i) ............... 312,309 297,617 258,201 250,439 245,382 247,362
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 .............. 37,767 28,022 20,415 15,722 4,888 12,029
Deficiency of earnings
to cover fixed charges(j) ..... (26,005) (21,431) (1,869) (20,296) (10,590) (33,886)
EBITDA(k):
Printing ...................... $ 46,755 $ 46,597 $ 38,357 $ 23,103 $ 2,404 $ 28,635
American Color ................ 5,770(l) 2,907(l) 12,662 12,656 2,571 10,072
Other ......................... (5,553) (2,657) 700(m) (2,691) (895) (4,190)
--------- --------- --------- --------- --------- ---------
Total ....................... $ 46,972 $ 46,847 $ 51,719 $ 33,068 $ 4,080 $ 34,517
========= ========= ========= ========= ========= =========
</TABLE>
(footnotes on following page)
10
<PAGE>
(a) References to "post-1993 Acquisition" refer to the successor company that
resulted from the 1993 Acquisition. The 1993 Acquisition was accounted for
as a purchase. As a result of the 1993 Acquisition, Communications'
consolidated financial statements for the periods subsequent to March 31,
1993 are presented on Communications' new basis of accounting, while the
consolidated financial statements for March 31, 1993 and prior periods are
presented on Communications' historical cost basis of accounting. The
consolidated results of operations of Communications for post-1993
Acquisition periods are not directly comparable to the consolidated pre-1993
Acquisition results of operations due to the effects of the 1993 Acquisition
and related refinancing.
(b) References to "pre-1993 Acquisition" refer to the predecessor company that
existed before the 1993 Acquisition.
(c) On August 15, 1995, Shakopee was merged with and into Graphics. The merger
has been accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the consolidated
financial statements give retroactive effect to the Shakopee Merger and
include the combined operations of Communications and Shakopee subsequent to
December 22, 1994 (the date on which Shakopee became under common control
with the Company). Shakopee's financial results are not reflected in periods
prior to December 22, 1994 as these periods were prior to common control
ownership.
(d) In connection with the 1993 Acquisition, the Company elected to change its
fiscal year end from December 31 to March 31 beginning March 31, 1993 in
order to have the Company's fiscal year more closely match the Company's
operating cycle. This change was made on the effective date of the 1993
Acquisition; accordingly, the three-month period ended March 31, 1993
constituted a transition period.
(e) In April 1995, the Company 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 appearing elsewhere in
this Prospectus.
(f) In October 1994, the Company amended its defined benefit pension plans,
which resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. The Company recognized a
curtailment gain of $3.7 million as a result of freezing such benefits. Also
in October 1994, the Board of Directors approved a new Supplemental
Executive Retirement Plan ("SERP"), which is a defined benefit plan for
certain key executives. The Company recognized a $0.4 million expense
associated with the establishment of the SERP.
(g) In February 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,
cost of sales and selling, general and administrative expenses for Fiscal
Years 1996 and 1995 have been reclassified to discontinued operations (SMC
began operations in Fiscal Year 1995). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 to the Company's consolidated financial statements
appearing elsewhere in this Prospectus.
On February 16, 1994, the Company assigned the coupon free-standing insert
("FSI") contracts of its subsidiary, Sullivan Marketing, Inc. ("SMI"), to
News America FSI, Inc. ("News America"). In June 1994, 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 the lawsuit with
EPI Group Limited ("EPI") (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 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus.
(h) As part of the Transactions, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.5 million, net of zero taxes.
This extraordinary loss primarily consisted of the early redemption premium
on the 15% Notes and the write-off of deferred financing costs related to
refinanced indebtedness partially offset by the write-off of a bond premium
associated with the 15% Notes.
(i) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes resulting from
the 1993 Acquisition. The principal amount payable at maturity of the 15%
Notes remained at $100.0 million. The 15% Notes were redeemed in connection
with the Transactions.
(footnotes continued on following page)
11
<PAGE>
(j) The deficiency of earnings to cover fixed charges is computed by subtracting
earnings before fixed charges, income taxes, the cumulative effect of
changes in accounting principles, discontinued operation and extraordinary
items from fixed charges. Fixed charges consist of interest expense and
one-third of operating lease rental expense, which is deemed to be
representative of the interest factor. The deficiency in earnings required
to cover fixed charges includes depreciation of property, plant and
equipment and amortization of goodwill and other assets and non-cash charges
which are reflected in cost of sales and selling, general and administrative
expenses, in the following amounts (in thousands):
<TABLE>
<CAPTION>
Post-1993 Acquisition Pre-1993 Acquisition
------------------------------------------- ---------------------
Three
Months Year
Ended Ended
Fiscal Year Ended March 31, March 31, December 31,
-------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Depreciation................ $25,282 $21,385 $18,327 $17,897 $6,923 $31,497
Amortization................ 9,374 9,311 8,941 9,361 681 6,092
----- ----- ------ ----- ------ -------
Total...................... $34,656 $30,696 $27,268 $27,258 $7,604 $37,589
======= ======= ======= ======= ====== =======
</TABLE>
(k) EBITDA is included in the Summary Historical Financial Data because
management believes that investors regard EBITDA as a key measure of a
leveraged company's performance and ability to meet its future debt service
requirements. EBITDA is defined as earnings before net interest expense,
income tax expense (benefit), depreciation, amortization, other special
charges related to asset write-offs and write-downs, other income (expense),
the cumulative effect of changes in accounting principles, discontinued
operations and extraordinary items. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income (or any other measure of performance
under generally accepted accounting principles) as a measure of performance
or to cash flows from operating, investing or financing activities as an
indicator of cash flows or as a measure of liquidity. Certain covenants in
the Indenture and the Bank Credit Agreement are based on EBITDA, subject to
certain adjustments.
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 appearing elsewhere in this Prospectus).
(l) American Color EBITDA for Fiscal Year 1997 and Fiscal Year 1996 includes the
impact of $0.9 million and $4.1 million, respectively, in restructuring
costs related to the American Color division. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Restructuring Costs and Other Special Charges." See note 18 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
(m) EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to a
change in the Company's defined benefit pension plans. See note 11 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus.
12
<PAGE>
RISK FACTORS
In addition to the other information and financial data set forth
elsewhere in this Prospectus, the following information should be considered
carefully by prospective investors in evaluating the Company, its business and
an investment in the Notes.
High Level of Indebtedness
The Company has had a negative net worth in each of the last seven
fiscal years. At March 31, 1997, the Company's consolidated indebtedness
including capital leases was approximately $312.3 million (including $18.3
million of current installments) and the Company's negative net worth was $76.3
million. The level of the Company's indebtedness could have important
consequences to holders of the Notes including the following: (i) the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of the principal of and interest on its
indebtedness and will not be available for other purposes; (iii) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to changes in, its business; (iv) the Company is more highly leveraged than some
of its competitors, which may place it at a competitive disadvantage; and (v)
the Company's high degree of indebtedness will make it more vulnerable in the
event of a downturn in its business. See "-- Ability to Service Debt; Deficit of
Earnings to Fixed Charges," "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Description of the Bank Credit and Term
Loan Agreements." If the Company is not able to satisfy its obligations,
including its interest payment obligations, it could default on its
indebtedness, including the Notes, which would entitle the holders of such
indebtedness to accelerate the maturity thereof. Because the Notes are
subordinated in right of payment to all Senior Indebtedness and at March 31,
1997, approximately 28% of the Company's total assets were intangible assets,
payment in full on the Notes in the event of an acceleration of the Notes may
not occur.
There can be no assurance that the Company will not need additional
financing in the future or that the Company will be able to obtain such
financing on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, the Indenture permits the Company to incur
additional indebtedness to finance the acquisition of additional assets.
Ability to Service Debt; Deficit of Earnings to Fixed Charges
The Company's earnings before fixed charges were insufficient to cover
fixed charges for the years ended December 31, 1992, Fiscal Year 1994, Fiscal
Year 1995, Fiscal Year 1996 and Fiscal Year 1997 by $33.9 million, $20.3
million, $1.9 million, $21.4 million and $26 million, respectively. See
"Selected Historical Financial Data."
There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its debt
service obligations, including its obligations on the Notes. Graphics is
obligated to make substantial principal and interest payments under the Bank
Credit Agreement during the next several years. The Term Loan requires principal
payments in quarterly installments in the following annual amounts: (i) $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. In
addition, the $25 million Term Loan Facility matures in March 2001. In the event
the Company's cash flow is inadequate to meet its debt service obligations, the
Company could face liquidity problems and might be required to dispose of
material assets or operations to meet its obligations, and there can be no
assurance as to the timing of such sales or the proceeds which the Company could
realize therefrom. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of the Bank Credit and Term Loan Agreements." In addition, most of
the Company's indebtedness (other than the Notes) bears interest at floating
rates (8.45% weighted average rate at March 31, 1997), causing the Company to be
sensitive to prevailing market interest
13
<PAGE>
rates. If interest rates rise, the Company's ability to meet its debt service
obligations, including its obligations pursuant to the Notes, may be adversely
affected.
If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on its indebtedness or, if the
Company otherwise fails to comply with the various covenants in such
indebtedness (including covenants in the Bank Credit Agreement and the Term Loan
Agreement), it would be in default under the terms thereof, which would permit
the holders of such indebtedness to accelerate the maturity of such indebtedness
and could cause defaults under other indebtedness of the Company or result in a
bankruptcy of the Company. Such defaults or any bankruptcy of the Company
resulting therefrom would result in a default on the Notes and could delay or
preclude payment of principal of, or interest on, the Notes. The ability of the
Company to meet its obligations will be dependent upon the future performance of
the Company, which will be subject to prevailing economic conditions and to
financial, business and other factors, including factors beyond the control of
the Company.
Certain Financial and Operating Restrictions
The Indenture, the Bank Credit Agreement and the Term Loan Agreement
impose significant operating and financial restrictions on the Company. Such
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company to incur additional indebtedness or
create liens on its assets, sell assets, engage in mergers or acquisitions or
make investments. These restrictions could also limit the ability of the Company
to effect future financings, make needed capital expenditures, react to future
industry trends, withstand downturns in its business or the economy or otherwise
conduct necessary corporate activities.
The Bank Credit Agreement contains covenants requiring the Company to
meet certain financial ratios. See "Description of the Bank Credit and Term Loan
Agreements." Failure to comply with any such covenant could limit the
availability of borrowings under the Bank Credit Agreement or result in a
default thereunder. There can be no assurance that the Company will be able to
comply with such covenants. As a result of the Company's recent financial
results, the Company and its banks amended certain of the financial covenants
contained in the Bank Credit Agreement on February 27, 1997 and again on June
30, 1997. A default under the Bank Credit Agreement or the Term Loan Agreement
could result in an acceleration of the Notes, in which case the holders of the
Notes may not be paid in full because under the Indenture, Senior Indebtedness
(including indebtedness under the Bank Credit Agreement) would be entitled to be
paid first. See "-- Ranking of the Notes and Communications' Guaranty; Liens
Securing the Bank Credit Agreement."
Ranking of the Notes and Communications' Guaranty; Liens Securing the Bank
Credit and Term Loan Agreements
The Notes are subordinated to all Senior Indebtedness of Graphics,
including indebtedness under the Bank Credit Agreement and the Term Loan
Agreement. Therefore, in the event of bankruptcy, liquidation or reorganization
of Graphics, the assets of Graphics will be available to pay obligations on the
Notes only after all Senior Indebtedness has been paid in full, and there may
not be sufficient assets remaining to pay amounts due on the Notes. See
"Description of the Notes -- Ranking." At March 31, 1997, Graphics had $127.3
million of Senior Indebtedness, no senior subordinated indebtedness other than
the Notes and no subordinated indebtedness outstanding and Graphics'
subsidiaries had approximately $2.1 million of liabilities (which were
effectively senior to the Notes). In addition, the indebtedness under the Bank
Credit Agreement and the Term Loan Agreement is secured by liens on
substantially all of the assets of Graphics and guaranteed by Communications,
which guarantee is secured by a pledge of all of the capital stock of Graphics.
See "Description of the Bank Credit and Term Loan Agreements." Accordingly, if
an event of default occurs under the Bank Credit Agreement, the Term Loan
Agreement and the Notes, the lenders under the Bank Credit Agreement and the
Term Loan Agreement will have a prior right to such collateral and may foreclose
thereon to the exclusion of the holders of the Notes, notwithstanding the
existence of an event of default with respect to the Notes. In such an event,
those assets constituting collateral would first be used to repay in full all
amounts
14
<PAGE>
outstanding under the Bank Credit Agreement and the Term Loan Agreement,
resulting in such assets being unavailable to satisfy the claims of holders of
the Notes.
Communications has fully and unconditionally guaranteed the Notes on an
unsecured, senior subordinated basis. Currently, Communications conducts no
business other than as sole shareholder of Graphics and has no significant
assets other than the capital stock of Graphics, all of which has been pledged
to secure Communications' obligations under the Bank Credit Agreement and the
Term Loan Agreement. Thus, currently there are no resources supporting
Communications' guarantee of the Notes that are incremental to those to which
holders of the Notes already have access as direct creditors of Graphics.
Communications' guarantee of the Notes is subordinated in right of payment to
the guarantee by Communications of Graphics' obligations under the Bank Credit
Agreement and the Term Loan Agreement. Generally, the Indenture contains no
restrictions on the activities of Communications. See "Description of the Notes
- -- Guaranty."
Ability of Graphics to Repurchase Notes upon a Change of Control Triggering
Event
The Bank Credit Agreement does not permit Graphics to repurchase Notes
upon the occurrence of a Change of Control Triggering Event. In addition, the
occurrence of a "Change of Control" under the Bank Credit Agreement, which is
defined to include a "Change of Control" under the Notes, would constitute an
event of default under the Bank Credit Agreement. See "Description of the Bank
Credit and Term Loan Agreements." Therefore, unless Graphics obtains a waiver,
upon the occurrence of a Change of Control Triggering Event, the amounts
outstanding under the Bank Credit Agreement (and any other indebtedness then
outstanding which by its terms would prohibit Graphics from repurchasing Notes)
would have to be repaid before the holders of Notes could receive any payment.
Due to the highly leveraged nature of Graphics, there can be no assurance that
sufficient funds will be available at the time of any Change of Control
Triggering Event to make any payments due under the Bank Credit Agreement or,
thereafter, to make any required repurchases of the Notes.
The obligation of Graphics to offer to repurchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Communications,
and, thus, the removal of incumbent management. Graphics could in the future
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control Triggering
Event under the Indenture, but that could increase the amount of Indebtedness
outstanding at such time or otherwise affect Graphics' capital structure or
credit ratings. Except as described under "Description of Notes -- Repurchase of
Notes upon a Change of Control Triggering Event", there are no covenants or
other provisions in the Indenture providing for a put or increased interest rate
or otherwise that would afford holders of the Notes additional protection in the
event of a recapitalization transaction, a change of control of Graphics and
Communications or a highly leveraged transaction. In the event Graphics is
required to make an offer to repurchase Notes pursuant to the "Repurchase of
Notes upon a Change of Control Triggering Event" covenant, Graphics will comply
with any tender offer rules under the Exchange Act which may then be applicable,
including Rule 14e-1. See "Description of the Notes -- Repurchase of Notes upon
a Change of Control Triggering Event."
Competitive Climate
Commercial printing in the United States is a large, 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
15
<PAGE>
(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.
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.
Technological Change
The digital imaging and prepress services business has experienced
rapid and substantial changes during the past few years primarily due to
advancements in available technology, including the evolution to electronic and
digital formats. Many smaller competitors have left the industry as a result of
their inability to keep pace with technological advances required to service
customer demands. The Company expects that further changes in technology will
affect the Company's digital imaging and prepress services business and that the
Company will need to adapt to technological advances as they occur. As
technology in this business continues to improve and evolve, the Company will
need to make capital expenditures to maintain its competitive position. If the
Company is unable to respond to future changes and advancements in digital
imaging and prepress technology, the Company's American Color business could be
adversely affected.
Sensitivity to Paper Prices
The Company's results of operations and financial condition are
affected by the cost of paper, which is determined by constantly changing market
forces of supply and demand over which the Company has no control. Beginning in
the fiscal year ended March 31, 1994 ("Fiscal Year 1994") and throughout Fiscal
Year 1995 and the majority of Fiscal Year 1996, the printing industry
experienced substantial increases in the cost of paper. In late Fiscal Year 1996
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 costs of its
printed products while decreases in costs generally result in lower prices to
customers. Although the Company has been successful in passing through paper
price increases to its customers, significant increases in paper prices and
continuing price competition can result in pressure by certain customers to
reduce selling prices in order to mitigate the effect of increased paper costs.
There can be no assurance that the Company will be able to pass through future
paper price increases. In the event the Company is unable to pass through such
increases, severe increases in paper prices could have a material adverse effect
on the Company's profits and cash flow. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition,
increases in the cost of paper, and therefore the cost of printed
advertisements, may cause some of the Company's advertising customers to reduce
their print advertising programs, which could have a material adverse effect on
the Company.
Acquisitions and Integration of Additional Businesses
As part of its long-term strategy, the Company seeks to acquire other
commercial printers, such as Shakopee and Gowe, and other digital imaging and
prepress services businesses. This strategy also provides for the integration of
new start-up ventures into the Company's operations, such as Flexi-Tech. While
the Company's management has experience acquiring companies and integrating
their operations into existing operations, there can
16
<PAGE>
be no assurance that the Company will find additional attractive acquisition
candidates or succeed at effectively managing the integration of any other
acquired business and start-up ventures, into the Company's existing business.
Environmental Regulations
The Company is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances (together,
"Environmental Laws"). The Company believes that it currently conducts its
operations, and in the past has operated its business, in substantial compliance
with applicable Environmental Laws. Noncompliance with or liability for cleanup
pursuant to Environmental Laws could have a material adverse effect on the
Company's results of operations or financial condition. See "Business --
Environmental Matters."
Risk of Fraudulent Transfer Liability
Management of the Company believes that the indebtedness of Graphics
represented by the Notes, and the indebtedness of Communications under its
guarantee of the Notes, were incurred for proper purposes and in good faith, and
that, based on present forecasts, asset valuations and other financial
information at the time of issuance of the Notes, Graphics and Communications
were and are solvent, had and will have sufficient capital for carrying on their
business and were and will be able to pay their debts as they mature.
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor-in-possession) were to find that Graphics (or
Communications) did not receive fair consideration or reasonably equivalent
value for incurring the Notes (or the guarantee) or any debt being refinanced
thereby and, at the time of the incurrence of the Notes (or the guarantee) or
such indebtedness, Graphics (or Communications) was insolvent, was rendered
insolvent by reason of such incurrence, was engaged in a business or transaction
for which its remaining assets constituted unreasonably small capital, intended
to incur, or believed that it would incur, debts beyond its ability to pay as
such debts matured, or intended to hinder, delay or defraud its creditors, such
court could avoid such indebtedness. A likely consequence of such avoidance
would be the subordination of the indebtedness represented by the Notes (or the
guarantee) to existing and future indebtedness of Graphics (or Communications).
The measure of insolvency for purposes of the foregoing will vary depending upon
the law of the relevant jurisdiction. Generally, however, a company would be
considered insolvent for purposes of the foregoing if the present fair saleable
value of the company's assets is less than the amount that will be required to
pay its probable liability on existing debts as they become absolute and
matured.
Control by Morgan Stanley, Dean Witter, Discover & Co.
MSLEF and the MSCP III Entities (collectively, the "MSCP Entities") own
a substantial majority of the outstanding shares of capital stock of
Communications. Each of the MSCP Entities is a limited partnership whose general
partner is affiliated with Morgan Stanley, Dean Witter, Discover & Co. Two of
the current directors of Communications, Messrs. Sica and Fry, are employees of
MS&Co., an affiliate of MSLEF and the MSCP Entities and also a subsidiary of
Morgan Stanley, 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 the Company, although such control is not exercised
on a day-to-day basis. In addition, Morgan Stanley, Dean Witter, Discover & Co.
may be deemed to control all matters requiring stockholder approval, including
the election of all directors, the adoption of amendments to the Company's
certificate of incorporation and the approval of mergers and sales of all or
substantially all of the Company's assets. Circumstances could arise under which
the interests of the MSCP Entities could be in conflict with the interests of
holders of the Notes. See "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
17
<PAGE>
Lack of a Public Market
There is currently no established public market for the Notes. Graphics
does not intend to list the Notes on any national securities exchange or to seek
approval for quotation through any automated quotation system. Graphics has been
advised by MS&Co. that it intends to make a market in the Notes. However, MS&Co.
is not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without notice. In addition, MS&Co. will
be required to deliver a current prospectus pursuant to Section 10(a)(3) of the
Securities Act in connection with any market making activities and may be
prohibited from engaging in market-making activities during certain
distributions of securities by the Company pursuant to Rule 10b-6 under the
Exchange Act. For so long as a market-making prospectus is required to be
delivered, the ability of MS&Co. to make a market in the Notes may, in part, be
dependent on the ability of Graphics and Communications to maintain a current
market-making prospectus. Accordingly, no assurance can be given that an active
public or other market will develop for the Notes or as to the liquidity of or
the trading market for the Notes. If a trading market does not develop or is not
maintained, holders of the Notes may experience difficulty in reselling the
Notes or may be unable to sell them at all. If a market for the Notes develops,
any such market may cease to continue at any time. If a public trading market
develops for the Notes, future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities and other factors,
including the financial condition of the Company.
18
<PAGE>
USE OF PROCEEDS
Graphics received gross proceeds of $185 million from the sale of the
Old Notes. The gross proceeds of the offering of the Old Notes, together with
borrowings under the Bank Credit Agreement, were used (i) to redeem all ($100
million principal amount) of the 15% Notes at a redemption price of $105.6
million (plus $1.8 million of accrued interest to September 15, 1995, the
redemption date) (the 15% Notes would have matured on February 1, 2000), (ii) to
repay all $126.5 million of indebtedness outstanding under the Old Bank Credit
Agreement (plus $2.3 million of accrued interest to August 15, 1995, the
repayment date) (the Old Bank Credit Agreement would have matured in 1998 and
bore interest at variable rates, 8.96% weighted average rate at June 30, 1995),
(iii) to repay all $24.6 million of indebtedness assumed in the Shakopee Merger
(plus $0.1 million of accrued interest to August 15, 1995, the repayment date)
(the Shakopee indebtedness, which would have matured in 1999 and 2000, bore
interest at variable rates, 9.02% weighted average rate at June 30, 1995) and
(iv) to pay approximately $11.8 million of fees and expenses incurred in
connection with the Transactions. See "The Shakopee Merger" and "Description of
the Bank Credit and Term Loan Agreements."
19
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of
Communications as of March 31, 1997. This table should be read in conjunction
with "Selected Historical Financial Data," "Description of the Bank Credit and
Term Loan Agreements" and the consolidated financial statements of
Communications appearing elsewhere in this Prospectus.
March 31, 1997
--------------
(dollars in thousands)
Short-term debt:
Current installments of long-term debt and capitalized leases:
Term Loan .................................................. $ 10,625
Other ...................................................... 7,627
---------
Total short-term debt ................................... $ 18,252
=========
Long-term debt(a):
Revolving Credit Facility .................................... $ 40,710
Term Loan .................................................... 36,463
Senior Subordinated Notes Due 2005 ........................... 185,000
Other ........................................................ 31,884
---------
Total long-term debt and capitalized leases,
excluding current installments ......................... 294,057
---------
Stockholders' deficit:
Common Stock, voting, $.01 par value, 5,852,223 shares
authorized, 123,889 shares issued and
outstanding .................................................. 1
Series A Convertible Preferred Stock, $.01 par value,
4,000 shares authorized, issued and outstanding
($40 million liquidation preference) ......................... --
Series B Convertible Preferred Stock, $.01 par value,
1,750 shares authorized, issued and outstanding
($17.5 million liquidation preference) ....................... --
Additional paid-in capital ...................................... 57,499
Accumulated deficit ............................................. (132,228)
Cumulative translation adjustment ............................... (1,590)
---------
Total stockholders' deficit ................................ (76,318)
---------
Total long-term debt and stockholders' deficit .......... $ 217,739
=========
- ---------
(a) On June 30, 1997, the Company entered into the $25 million Term Loan
Facility which matures on March 31, 2001. The net proceeds of $23
million received under such facility were used to reduce outstanding
borrowings under the Company's revolving credit facility. Based upon
activity through June 27, 1997 and after giving pro forma effect to the
application of such net proceeds, the Company had additional borrowing
availability under the revolving credit facility of approximately $25.8
million at June 27, 1997.
20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(dollars in thousands)
Set forth below is selected historical financial data as of and for the
year ended December 31, 1992 (pre-1993 Acquisition), as of and for the three
months ended March 31, 1993 (pre-1993 Acquisition) and as of and for the fiscal
years ended March 31, 1994, 1995, 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 historical
financial data below also reflects the Company's discontinued coupon FSI
operation and its discontinued wholly-owned subsidiary, SMC. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and consolidated financial statements of
Communications appearing elsewhere in this Prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
Post-1993 Acquisition (a) Pre-1993 Acquisition (b)
------------------------- ------------------------
Fiscal Year
Ended March 31,
--------------- Three Months Ended Year Ended
1997 1996 1995(c) 1994 March 31, 1993(d) December 31, 1992
--------- --------- --------- --------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
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 establish-
ment 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 ................. 37,767 28,022 20,415 15,722 4,888 12,029
Deficiency of earnings to
cover fixed charges (l) ............ (26,005) (21,431) (1,869) (20,296) (10,590) (33,886)
EBITDA(m) ............................ 46,972(n) 46,847(n) 51,719(o) 33,068 4,080 34,517
</TABLE>
(footnotes on following page)
22
<PAGE>
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) References to "post-1993 Acquisition" refer to the successor company
that resulted from the 1993 Acquisition. The 1993 Acquisition was
accounted for as a purchase. As a result of the 1993 Acquisition,
Communications' consolidated financial statements for the periods
subsequent to March 31, 1993 are presented on Communications' new basis
of accounting, while the consolidated financial statements for March
31, 1993 and prior periods are presented on Communications' historical
cost basis of accounting. The consolidated results of operations of
Communications for the post-1993 Acquisition periods are not directly
comparable to the consolidated pre-1993 Acquisition results of
operations due to the effects of the 1993 Acquisition and related
refinancing.
(b) References to "pre-1993 Acquisition" refer to the predecessor company
that existed before the 1993 Acquisition.
(c) On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under common
control (similar to a pooling-of-interests), and accordingly, the
consolidated financial statements give retroactive effect to the
Shakopee Merger and include the combined operations of Communications
and Shakopee subsequent to December 22, 1994 (the date on which
Shakopee became under common control with the Company). Shakopee's
financial results are not reflected in periods prior to December 22,
1994 as these periods were prior to common control ownership.
(d) In connection with the 1993 Acquisition, the Company elected to change
its fiscal year end from December 31 to March 31 beginning March 31,
1993 in order to have the Company's fiscal year more closely match the
Company's operating cycle. This change was made on the effective date
of the 1993 Acquisition; accordingly, the three-month period ended
March 31, 1993 constituted a transition period.
(e) 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 appearing elsewhere in this Prospectus).
(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 appearing elsewhere in this
Prospectus.
(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 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 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, cost of sales and selling, general and
administrative expenses attributable to SMC for Fiscal Years 1996 and
1995 have been reclassified to discontinued operations (SMC began
operations in Fiscal Year 1995). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Discontinued
Operations" and note 5 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus.
On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, SMI, to News America. In June 1994, the Company
recorded income from the SMI Settlement of $18.5 million, net of taxes,
and when coupled with settlement expenses which had previously been
accrued, the net cash proceeds resulting from this settlement were
approximately $16.7 million.
In Fiscal Year 1996, the Company recognized settlement of the EPI
lawsuit and reversed certain accruals related to the estimated loss on
shut down of SMI. 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 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus.
(i) As part of the Transactions, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.5 million, net of zero
taxes. This extraordinary loss primarily consisted of the early
redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by
the write-off of a bond premium associated with the 15% Notes.
(j) Effective January 1, 1993, the Company changed its method of accounting
for income taxes to SFAS 109. The cumulative effect of adopting SFAS
109, as of January 1, 1993, was a decrease in net loss by $0.6 million.
In 1992, the Company elected to adopt the provisions of Statement of
Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions." This resulted in a charge
to earnings net of related tax benefits of $4.4 million.
(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 $100.0 million. The 15% Notes were redeemed
in connection with the Transactions.
(l) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, the cumulative
effect of changes in accounting principles, discontinued operations and
extraordinary items from fixed charges. Fixed charges consist of
interest expense and one-third of operating lease rental expense, which
is deemed to be representative of the interest factor. The deficiency
in earnings required to cover fixed charges includes depreciation of
property, plant and equipment and amortization of goodwill and other
assets and non-cash charges which are reflected in cost of sales and
selling, general and administrative expenses, in the following amounts
(in thousands):
23
<PAGE>
<TABLE>
<CAPTION>
Post-1993 Acquisition Pre-1993 Acquisition
--------------------- --------------------
Three
Months
Fiscal Year Ended March 31, Ended Year Ended
--------------------------- March 31, December 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Depreciation................ $25,282 $21,385 $18,327 $17,897 $6,923 $31,497
Amortization................ 9,374 9,311 8,941 9,361 681 6,092
------- ------- ------- ------- ------ -------
Total.............. $34,656 $30,696 $27,268 $27,258 $7,604 $37,589
======= ======= ======= ======= ====== =======
</TABLE>
(m) EBITDA is included in the Selected Historical Financial Data because
management believes that investors regard EBITDA as a key measure of a
leveraged company's performance and ability to meet its future debt
service requirements. EBITDA is defined as earnings before net interest
expense, income tax expense (benefit), depreciation, amortization,
other special charges related to asset write-off and write-downs, other
income (expense), the cumulative effect of changes in accounting
principles, discontinued operations and extraordinary items. EBITDA is
not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to
net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash
flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Certain covenants in the
Indenture and the Bank Credit Agreement will be based on EBITDA,
subject to certain adjustments.
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 appearing elsewhere in
this Prospectus).
(n) EBITDA in Fiscal Year 1997 and Fiscal Year 1996 includes the impact of
$0.9 million and $4.1 million, respectively, in restructuring costs
related to the American Color division. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Restructuring Costs and Other Special Charges." See note 18 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus.
(o) 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 appearing elsewhere in
this Prospectus.
24
<PAGE>
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 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.
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. 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.
25
<PAGE>
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 are consistent with the Company's overall
strategy to continue to increase profitability by growing its revenues,
increasing its market share and reducing costs. See "Business--Printing."
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 "--Historical
Results of Operations-Fiscal Year 1996 vs. Fiscal Year 1995-Restructuring Costs
and Other Special Charges."
26
<PAGE>
The following table summarizes the Company's historical results of
continuing operations for Fiscal Year 1997, Fiscal Year 1996 and Fiscal Year
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 appearing elsewhere in this
Prospectus.
(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 appearing elsewhere
in this Prospectus).
(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 appearing elsewhere in this
Prospectus).
(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 appearing elsewhere in this
Prospectus).
27
<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,
operating income from the printing business decreased to $25.9 million in Fiscal
Year 1997 from $28.2 million in Fiscal Year 1996. See "--Restructuring Costs and
Other Special Charges."
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.
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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, operating
loss at American Color decreased to $1.6 million in Fiscal Year 1997 from $4
million in Fiscal Year 1996. See "--Restructuring Costs and Other Special
Charges."
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, operating income from the printing business
increased to $28.2 million in Fiscal Year 1996 from $24.7 million in Fiscal Year
1995. See "--Restructuring Costs and Other Special Charges."
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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 appearing
elsewhere in this Prospectus).
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, 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. See
"Restructuring Costs and Other Special Charges."
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 appearing elsewhere in this
Prospectus.
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.
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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.
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 appearing
elsewhere in this Prospectus.
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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 appearing elsewhere in this
Prospectus.
Nonrecurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
Other Expense (Income) and Taxes
Other expense, net, 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, offset in part by incremental
expenses associated with an employee benefit program also recorded in Fiscal
Year 1996. See note 4 to the Company's consolidated financial statements
appearing elsewhere in this Prospectus.
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 appearing elsewhere in this
Prospectus.
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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,
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. See notes 2 and 9
to the Company's consolidated financial statements appearing elsewhere in this
Prospectus.
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. The primary objectives of the Refinancing were to gain
greater financial and operating flexibility, to facilitate the merger with
Shakopee, to refinance near-term debt service requirements and to provide
further opportunity for internal growth and growth through acquisitions.
As part of the Refinancing, the Company received gross proceeds of $185
million from the sale of the Notes. The gross proceeds of the offering of the
Notes, together with $85.6 million in borrowings under the Bank Credit
Agreement, and existing cash balances were used (i) to redeem all $100 million
principal amount of the 15% Notes at a redemption price of $105.6 million (plus
$1.8 million of accrued interest to September 15, 1995, the redemption date),
(ii) to repay all $126.5 million of indebtedness outstanding under Graphics' old
bank credit agreement (plus $2.3 million of accrued interest at the repayment
date), (iii) to repay all $24.6 million of
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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 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
the $25 million Term Loan Facility which matures on March 31, 2001. 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 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 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.
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 "Risk Factors -- Certain
Financial and Operating Restrictions," "Description of the Bank Credit and Term
Loan Agreements" and note 9 to the Company's consolidated financial statements
appearing elsewhere in this Prospectus.
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EBITDA
Fiscal Year Ended March 31,
---------------------------
1997 1996 1995
---- ---- ----
(dollars in thousands)
EBITDA:
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 appearing
elsewhere in this Prospectus).
(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 appearing elsewhere in this Prospectus).
(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.
(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 appearing elsewhere in this Prospectus).
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).
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
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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 appearing elsewhere in this Prospectus. 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 "--Environmental Matters."
The Company does not anticipate receiving insurance proceeds related to this
potential settlement. Management does not expect that any identified matters,
individually or in the aggregate, will have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Accounting
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect on the Company's results of operations or its
financial position.
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BUSINESS
The Company is a successor to a business that commenced operations in
1926, and is one of the largest national diversified commercial printers in
North America with ten printing plants in eight states and Canada and 15
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 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 the Acquisition Date, pursuant to the Merger Agreement, between
Communications and Acquisition Corp., Acquisition Corp. was merged with and into
Communications. Acquisition Corp. was formed by the Purchasing Group for the
purpose of acquiring a majority interest in Communications. Acquisition Corp.
acquired a substantial and controlling majority interest in Communications in
exchange for $40 million in cash. In the 1993 Acquisition, Communications
continued as the surviving corporation and the separate corporate existence of
Acquisition Corp. was terminated. See "Certain Transactions -- The 1993
Acquisition."
On August 15, 1995, the Company completed the Shakopee Merger with
Shakopee. Shakopee was formed to effect the purchase of certain assets and
assumption of certain liabilities of Shakopee Valley Printing, a division of Guy
Gannett Communications. On December 22, 1994, pursuant to an Agreement for the
Purchase of Assets between Guy Gannett Communications (the Seller) and Shakopee
(the Buyer), the Seller sold certain assets and transferred certain liabilities
of Shakopee Valley Printing to the Buyer for a total purchase price of
approximately $42.6 million, primarily financed through the issuance of 35,000
shares of Common Stock and bank borrowings. The 35,000 shares were purchased by
the MSCP III Entities, together with First Plaza Group Trust and Leeway & Co.
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. See "The Shakopee Merger."
On March 11, 1996, Graphics sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2 million.
The proceeds from the sale were used to repay indebtedness under the Bank Credit
Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs for approximately $6.7 million in cash and assumption of
certain liabilities of Gowe, Inc.
During March 1996, the Company completed the construction of and
start-up of a 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 February 1997, the Company made a strategic decision to shut down
the operations of its wholly-owned subsidiary, SMC. SMC's shutdown 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 Year 1996 and 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 to the Company's
consolidated financial statements appearing elsewhere in this Prospectus.
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<PAGE>
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 believed to be an important and cost effective means of
advertising for these merchants. Advertising inserts are primarily distributed
through insertion in newspapers but are also distributed by direct mail or
in-store by retailers. They 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.
Other Publications (6% of printing sales in Fiscal Year 1997). The
Company prints local newspapers, T.V. guide listings and other publications.
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
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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 of its competitors and has also resulted in an expanded
customer base. In the late 1980s, the Company installed a nationwide data
communications network. This was initially accomplished via a satellite system,
but has recently been converted to a telecommunications based network offering
greater flexibility at a reduced cost. This 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 included elsewhere in this
Prospectus.
Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress services
businesses:
Modern Equipment. The Company believes that its heatset offset and
flexographic web printing equipment is among the most advanced 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
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<PAGE>
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 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 15
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 seasonal
and to maximize the use of the Company's equipment. The Company is also
continuing to expand its printing facilities' capabilities for in-plant prepress
and postpress services. The Company's digital imaging and prepress services
business will continue to focus on high value-added new business opportunities,
particularly large-scale projects that will best utilize the
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<PAGE>
breadth of services and technologies the Company has to offer. Additionally, the
Company will continue to pursue large facilities management opportunities as
well as national and large regional customers that require more sophisticated
levels of service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The Company
intends to further reduce its production costs at its printing facilities
through its Total Quality Management Process, an ongoing cost reduction and
continuous quality improvement process. Additionally, the Company plans to
maximize scale advantages in the purchasing, technology and engineering areas.
The Company also intends to continue to gain variable cost efficiencies in its
digital imaging and prepress services business by using its technical resources
to improve digital prepress workflows at its various facilities. It 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.
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.
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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.
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.
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Governmental and Environmental Regulations
The Company is subject to regulation under various federal, state and
local laws relating to employee safety and health, and to the generation,
storage, transportation, disposal and emission into the environment of hazardous
substances. The Company believes that it is in material compliance with such
laws and regulations. Although compliance with such laws and regulations in the
future is likely to entail additional capital expenditures, the Company does not
anticipate that such expenditures will be material. See "-Environmental
Matters."
Properties
The Company operates in 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.
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.
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MANAGEMENT
Directors of Communications and Graphics
The following table provides certain information about each of the
current directors and executive officers of Communications and Graphics (ages as
of March 31, 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 and 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 MS&Co. since 1988. Has been with MS&Co. since 1981,
originally in the Mergers and Acquisitions Department, and since 1988, with the
Merchant Banking Division. Vice Chairman and Director of the general partner of
the general partner of the MSCP III Entities and Director of the general partner
of MSLEF. 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 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.
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.
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Summary Compensation
The following table presents information concerning compensation paid
for services to Communications and Graphics during Fiscal Year 1997, Fiscal Year
1996 and Fiscal Year 1995 to the Chief Executive Officer and the four other most
highly compensated executive officers (the "Named Executive Officers") of
Communications and/or Graphics.
Summary Compensation Table
<TABLE>
<CAPTION>
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>
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 -- -- -- -- -- -- --
- -----------------
<FN>
(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.
</FN>
</TABLE>
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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% exercisable on October 1, 1997 and are
scheduled to vest in additional 25% 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
Value of Unexercised
Number of Securities Underlying In-the-Money
Unexercised Options/SARs at Options/SARs at
3/31/97 3/31/97
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
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)
(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.
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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 appearing elsewhere in this Prospectus.
Retirement benefits payable under qualified defined benefit plans are
subject to the annual pension limitations imposed under Section 415 of the
Internal Revenue Code of 1986, as amended (the "Code"), which limitations vary
annually. The Section 415 limitation for 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
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
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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
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
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<PAGE>
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
Timothy M. Davis $50,000
Terrence M. Ray $25,000
Such benefits will be paid from the Company's assets. See note 12 to
the Company's consolidated financial statements appearing elsewhere in this
Prospectus.
401(k) Defined Contribution Plan
Effective January 1, 1995, the Company amended its 401(k) defined
contribution plan. Eligible participants may contribute up to 15% of their
annual compensation subject to maximum amounts established by the Internal
Revenue Service and receive a matching employer contribution on amounts
contributed. The employer matching contribution is made biweekly and equals 2%
of annual compensation for all plan participants plus 50% of the first 6% of
annual compensation contributed to the plan by each employee, subject to maximum
amounts established by the Internal Revenue Service. See note 13 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus.
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<PAGE>
CERTAIN TRANSACTIONS
The 1993 Acquisition
On the Acquisition Date, MSLEF and the Purchasing Group invested $40
million in Communications and acquired control of Communications and Graphics.
Pursuant to the Merger Agreement, (i) MSLEF and the Purchasing Group
made a $40 million equity investment in Communications and acquired (a) 90% of
the outstanding Communications Common Stock and (b) all the outstanding shares
of the preferred stock of Communications (the "Communications Preferred Stock"),
with a total preference of $40 million and which, under certain circumstances,
is convertible into shares of Communications Common Stock; and (ii) GTC and its
affiliates received 4,987 shares of Communications Common Stock.
MSLEF is an investment fund affiliated 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 MS&Co., an affiliate of MSLEF 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, each of the members of the Purchasing Group, the GTC
Funds, certain other stockholders of Communications who were stockholders of
Communications immediately prior to the Merger Agreement (such stockholders,
together with the GTC Funds, being referred to as the "Existing Holders") and
GTC entered into a Stockholders' Agreement, dated as of April 8, 1993 (the
"Stockholders' Agreement"). The Stockholders' Agreement includes provisions
requiring the delivery of certain shares of Communications Common Stock from the
Purchasing Group to Communications, depending upon the return realized by the
members of the Purchasing Group on their investment, and thereafter from
Communications to the Existing Holders. Depending upon the returns realized by
the members of the Purchasing Group on their investment, their interest in the
Communications Common Stock could be reduced from 90% to 80% and the interest of
the Existing Holders could be increased from 10% to 20% of the Communications
Common Stock.
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<PAGE>
Tax Sharing Agreement
Communications and Graphics are parties to a tax sharing agreement
effective July 27, 1989. Under the terms of the agreement, Graphics (whose
income is consolidated with that of Communications for federal income tax
purposes) is liable to Communications for amounts representing federal income
taxes calculated on a "stand-alone basis". Each year Graphics pays to
Communications the lesser of (i) Graphics' federal tax liability computed on a
stand-alone basis and (ii) its allocable share of the federal tax liability of
the consolidated group. Accordingly, Communications is not currently reimbursed
for the separate tax liability of Graphics to the extent Communications' losses
reduce consolidated tax liability. Reimbursement for the use of such
Communications' losses will occur when the losses may be used to offset
Communications' income computed on a stand-alone basis. Graphics has also agreed
to reimburse Communications in the event of any adjustment (including interest
or penalties) to consolidated income tax returns based upon Graphics'
obligations with respect thereto. No reimbursement obligation currently exists
between Graphics and Communications. Also under the terms of the tax sharing
agreement, Communications has agreed to reimburse Graphics for refundable
federal income tax equal to an amount which would be refundable to Graphics had
Graphics filed separate federal income tax returns for all years under the
agreement. Graphics and Communications have also agreed to treat foreign, state
and local income and franchise taxes for which there is consolidated or combined
reporting in a manner consistent with the treatment of federal income taxes as
described above.
Shakopee Merger
In December 1994, Graphics and Shakopee entered into an agreement
pursuant to which they agreed in principle to the terms of the Shakopee Merger
and to negotiate definitive agreements with respect thereto. Prior to the
consummation of the Shakopee Merger, the MSCP III Entities owned a majority of
Shakopee's outstanding stock and the Company provided general management,
supervisory and administrative services to Shakopee, pursuant to a management
agreement entered into in December 1994, in exchange for an annual service fee
of $0.5 million. The Shakopee Merger was consummated and the management
agreement was terminated simultaneously with the consummation of the offering of
the Old Notes. See "The Shakopee Merger."
Other
MS&Co. acted as placement agent in connection with the original private
placement of the Old Notes and received a placement fee of $5.6 million in
connection therewith. MS&Co. is affiliated with entities that beneficially own a
substantial majority of the outstanding shares of capital stock of
Communications. 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.
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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.
Common % of Preferred % of
Name Stock Class Stock Class
---- ----- ----- ----- -----
The Morgan Stanley.................. 59,450 48.0 2,973 51.7
Leveraged Equity
Fund II, L.P.
1221 Ave. of the Americas
New York, NY 10020
MSCP III Entities................... 23,333 18.8 1,167 20.3
1221 Ave. of the Americas
New York, NY 10020
First Plaza Group Trust............. 17,000 13.7 850 14.8
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258
Leeway & Co......................... 10,667 8.6 533 9.3
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171
Stephen M. Dyott.................... 500 0.4 25 0.4
Eric T. Fry......................... -- -- -- --
Frank V. Sica....................... -- -- -- --
All current directors and
officers as a group............... 500 0.4 25 0.4
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THE SHAKOPEE MERGER
On August 15, 1995 concurrently with the closing of the sale of the Old
Notes, Shakopee was merged with Graphics and each outstanding share of the
common stock of Shakopee was converted into one share of the common stock of
Communications and 1/20 of one share of Series B Preferred Stock of
Communications (the "Communications Series B Preferred Stock"). Shakopee is a
Minneapolis regional printer with eight printing press lines, five heatset and
three cold offset, that can competitively run low to medium volume jobs ranging
from 20,000 impressions to eight million impressions.
Prior to the acquisition, a majority of Shakopee's outstanding common
stock was owned by the MSCP Entities, affiliates of the Company's majority
stockholder, MSLEF. In addition, the other stockholders of Shakopee were also
stockholders of Communications. Shakopee was created by MSCP to acquire certain
of the assets pertaining to the business of the Shakopee Valley Printing
Division of Guy Gannett Communications pursuant to an Agreement for the Purchase
of Assets, dated as of November 23, 1994, which acquisition was consummated in
December 1994.
The Communications Series B Preferred Stock ranks pari passu with
respect to dividends and distributions with the Communications Series A
Preferred Stock. The Communications Series B Preferred Stock issued in the
Shakopee Merger has an aggregate initial liquidation preference of $17.5 million
and ranks prior to the Communications Series A Preferred Stock with respect to
such liquidation preference.
In connection with the Shakopee Merger, the restated certificate of
incorporation of Communications was amended to authorize the issuance of the
Communications Series B Preferred Stock and the stockholders of Shakopee that
became stockholders of the Company as a result of the Shakopee Merger became
parties to the Stockholders' Agreement, which was amended to accommodate the
rights and obligations of the holders of Communications Series B Preferred
Stock.
DESCRIPTION OF THE BANK CREDIT AND TERM LOAN AGREEMENTS
The following summary of the material provisions of the Bank Credit
Agreement and the Term Loan Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Bank Credit
Agreement and the Term Loan Agreement, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus is a part. Defined terms
that are used but not defined in this section have the meanings given such terms
in the Bank Credit Agreement or the Term Loan Agreement, as the case may be.
The Bank Credit Agreement
On August 15, 1995 concurrently with the closing of the sale of the Old
Notes, Graphics and Communications entered into the Bank Credit Agreement with
BT Commercial Corporation ("BTCC") and Bankers Trust Company, as issuing bank.
The Bank Credit Agreement provides for a $75 million revolving credit
facility (the "Revolving Credit Facility") and a $60 million amortizing term
loan (the "Term Loan"). Borrowings under the Revolving Credit Facility are
subject to a borrowing base which consists of (i) 85% of Eligible Accounts
Receivable plus (ii) the lesser of (x) $15,000,000 and (y) 60% of Eligible
Inventory plus (iii) Equipment Acquisition Loans in an amount not to exceed $7.5
million outstanding at any time (each of which acquisition loan must be repaid
within six months from the date of borrowing) minus (iv) the aggregate amount of
reserves against Eligible Accounts Receivable and Eligible Inventory established
by BTCC minus (v) (A) prior to December 31, 1997, $4,000,000 and (B) from
December 31, 1997 through March 30, 1998, $3,000,000.
The Revolving Credit Facility and the Term Loan matures on September
30, 2000. The Term Loan amortizes in quarterly installments, 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.
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<PAGE>
The Bank Credit Agreement requires that 50% of Excess Cash Flow, up to
$4.0 million per year, shall be used to reduce the outstanding principal amount
of the Term Loan. The Company is also required under certain circumstances to
prepay the Term Loan in connection with certain sales of assets or issuances of
equity. Borrowings under the Revolving Credit Facility must be immediately
prepaid to the extent such borrowings exceed the borrowing base.
Borrowings under the Bank Credit Agreement bear interest, at Graphics'
option, at an annual rate equal to (i) with respect to borrowings under the
Revolving Credit Facility (A) Prime plus 1.25% per annum or (B) LIBOR plus 2.50%
per annum and (ii) with respect to borrowings under the Term Loan (A) Prime plus
1.50% per annum or (B) LIBOR plus 2.75% per annum; provided, however, that under
certain circumstances, such interest rates will (so long as Graphics is not in
default) be subject to certain stepdowns based upon Graphics' Interest Coverage
Ratio, tested at the end of each fiscal quarter on a rolling four-quarter basis.
The Bank Credit Agreement contains a number of covenants, including,
among others, covenants restricting Communications, Graphics and their
respective Subsidiaries with respect to the incurrence of indebtedness
(including contingent obligations), the creation of liens, the making of certain
investments and loans, engaging in businesses unrelated to the Related
Businesses, transactions with affiliates, the consummation of certain
transactions such as sales of substantial assets, mergers or consolidations and
other transactions, the making of capital expenditures, the establishment of new
bank accounts, the maintenance of excess cash, the designation of any
Indebtedness as Designated Senior Indebtedness under, and as defined in, the
Indenture and the creation of new subsidiaries. In addition, the Bank Credit
Agreement contains covenants restricting Graphics and its subsidiaries from
issuing or disposing of shares of their respective common stock and from
creating new subsidiaries. The Bank Credit Agreement also restricts the ability
of Communications, Graphics and their respective subsidiaries to make restricted
payments in the nature of, among other things (i) paying dividends and making
other restricted payments and purchasing, redeeming or retiring shares of the
capital stock of Communications, Graphics and their respective subsidiaries;
(ii) making certain voluntary or optional payments, prepayments or redemptions
and purchasing, redeeming or acquiring for value any Notes or the indebtedness
represented thereby; (iii) amending or modifying the Indenture or the Notes; or
(iv) issuing any preferred or preference stock. In addition, the Bank Credit
Agreement contains affirmative covenants by Communications, Graphics and their
respective Subsidiaries, including, among others, compliance with laws,
preservation of corporate existence, maintenance of insurance, payment of taxes
and debt, maintenance of properties, environmental compliance and delivery of
financial and other information to the bank lenders.
Graphics and its subsidiaries are also required to comply with certain
financial tests and maintain certain financial ratios. Certain of the financial
covenants contained in the Bank Credit Agreement are set forth below.
Minimum EBITDA
Graphics may not permit its EBITDA for any period of four consecutive
fiscal quarters, in each case taken as one accounting period, ended on a date
set forth below, to be less than the amount specified opposite such date below:
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Fiscal Quarter Ended Minimum EBITDA
-------------------- --------------
June 30, 1997 $45,700,000
September 30, 1997 $43,500,000
December 31, 1997 $41,500,000
March 31, 1998 $44,200,000
June 30, 1998 $50,100,000
September 30, 1998 $62,000,000
December 31, 1998 $63,000,000
March 31, 1999 $65,000,000
June 30, 1999 $65,000,000
September 30, 1999 $66,000,000
December 31, 1999 $67,000,000
Each fiscal quarter
ended thereafter $68,000,000
"EBITDA" means, for any period, Consolidated Net Income (calculated to exclude
extraordinary items which would otherwise be reflected therein and calculated
before provision for increases or decreases to Graphics' LIFO reserve for such
period), (i) plus the amount of all Interest Expense, income tax expense,
depreciation and amortization expense, including amortization of any goodwill or
other intangibles for such period (to the extent such expenses reduced
Consolidated Net Income for such period), (ii) less gains and plus losses
attributable to sales of assets other than inventory sold in the ordinary course
of business (to the extent such gains or losses were reflected in Consolidated
Net Income for such period) and (iii) plus or minus (as the case may be) any
other non-cash charges which have been subtracted or added, as the case may be,
in calculating Consolidated Net Income for such period, all determined in
accordance with GAAP.
Current Ratio
Graphics may not permit its Current Ratio, as measured on the last day
of any fiscal quarter, to be less than 1.1:1.0, except fiscal quarters ended
June 30, 1997, December 31, 1997 and June 30, 1998 wherein the Current Ratio may
not be less than 1.05:1.00. "Current Ratio" means the ratio of Current Assets to
Current Liabilities; provided that for purposes of calculating the Current
Ratio, Current Liabilities excludes (i) the full outstanding principal balance
of loans made under the Revolving Credit Facility and (ii) the current portion
of long-term Indebtedness.
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<PAGE>
Fixed Charge Coverage Ratio
Graphics may not permit the Fixed Charge Coverage Ratio for any period
of four consecutive fiscal quarters, in each case taken as one accounting
period, ended on a date set forth below to be less than the ratio set forth
opposite such date:
Fiscal Quarter Ended Ratio
-------------------- -----
June 30, 1997 0.60:1.0
September 30, 1997 0.60:1.0
December 31, 1997 0.60:1.0
March 31, 1998 0.67:1.0
June 30, 1998 0.72:1.0
Each fiscal quarter ended thereafter 0.80:1.0
"Fixed Charge Coverage Ratio" for any period means the ratio of (i) EBITDA less
the amount of Cash Capital Expenditures for such period to (ii) Fixed Charges
for such period. "Fixed Charges" for any period means the sum of, without
duplication, (a) Cash Interest Expense, (b) all scheduled (as determined at the
beginning of the respective period) mandatory principal payments of Indebtedness
(including payments with respect to all Capitalized Lease Obligations) made by
Graphics or its subsidiaries during such period and (c) all cash payments of
income taxes made by Graphics and its subsidiaries during such period, including
any payments with respect to the Tax Sharing Agreement or otherwise made
pursuant to Section 8.6(c)(ii) of the Bank Credit Agreement; provided that the
amount of cash payments of income taxes pursuant to preceding clause (c) shall
be calculated by excluding the income tax effects of all extraordinary items
excluded from Consolidated Net Income in calculating EBITDA.
The failure to satisfy any of the covenants will, after giving effect
to any grace period therefor, constitute an Event of Default under the Bank
Credit Agreement, notwithstanding the ability of Graphics to meet its debt
service obligations. The Bank Credit Agreement includes other customary events
of default, including cross defaults to other indebtedness, change of control
provisions and certain events including bankruptcy, reorganization and
insolvency. An Event of Default under the Bank Credit Agreement would allow the
lenders thereunder to accelerate or, in certain cases, would automatically cause
the acceleration of, the maturity of the indebtedness under the Bank Credit
Agreement and would restrict the ability of Graphics to meet its obligations on
the Notes.
Graphics' obligations under the Bank Credit Agreement are secured by
substantially all of the assets of Graphics, including real and personal
property, accounts receivable, inventory and the general intangibles relating
thereto.
The payment of principal and interest on indebtedness under the Bank
Credit Agreement is guaranteed on a senior basis by Communications and each of
Graphics' existing and future, direct and indirect, wholly owned subsidiaries.
The guarantee of Communications and each of Graphics' wholly owned subsidiaries
is secured by substantially all of the assets of Communications and such
subsidiary, as the case may be.
Term Loan Agreement
On June 30, 1997, Graphics and Communications entered into the Term
Loan Agreement with Bankers Trust Company, as administrative agent. The Term
Loan Agreement provides for a $25 Million term loan which matures on March 31,
2001.
The Term Loan Agreement requires that the Term Loan Facility be repaid
in the event of a Change of Control. The Company is also required in certain
circumstances to prepay the Term Loan Facility in connection with certain sales
of assets or issuances of equity.
Borrowings on the Term Loan Facility bear interest, at Graphics'
option, at an annual rate equal to LIBOR plus a margin ranging from 4% to 7.5%
or Prime plus a margin ranging from 3% to 6.5%, with such margins increasing
over the initial 24 months of the facility. In addition, on the six, nine, 12,
18, 24 and 30 month anniversary dates of the Term Loan Facility, the Company is
required to pay certain additional cash fees of 1/2% to 1% of the then
outstanding principal amount of the facility.
The covenants under the Term Loan Agreement are substantially similar
to, but in certain respects are more restrictive than, the existing covenants
under the Indenture. The covenants restrict Communications, Graphics and their
Restricted Subsidiaries with respect to the incurrence of indebtedness, the
making of certain restricted payments and mergers, consolidations and other
transactions, and restrict Graphics and its Restricted Subsidiaries with respect
to sales of certain assets and subsidiary stock, transactions with affiliates
and issuances and dispositions of preferred stock of Restricted Subsidiaries. In
addition, the Term Loan Agreement contains affirmative covenants similar to
those under the Bank Credit Agreement.
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The failure to satisfy any of the covenants will, after giving effect
to any grace period therefor, constitute an Event of Default under the Term Loan
Agreement, notwithstanding the ability of Graphics to meet its debt service
obligations. The Term Loan Agreement includes other customary events of default,
including cross defaults to other indebtedness and certain events including
bankruptcy, reorganization and insolvency. An Event of Default under the Term
Loan Agreement would allow the lenders thereunder to accelerate or, in certain
cases, would automatically cause the acceleration of, the maturity of the
indebtedness under the Term Loan Agreement and would restrict the ability of
Graphics to meet its obligations on the Notes.
Graphics' obligations under the Term Loan Agreement are secured by
substantially all of the assets of Graphics, including real and personal
property, accounts receivable, inventory and the general intangibles relating
thereto, provided that such security interests are second in priority to the
security interests provided under the Bank Credit Agreement.
The obligations under the Term Loan Facility are guaranteed on the same
basis as the 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.
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DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of August 15, 1995
(the "Indenture"), among Graphics, Communications and NationsBank of Georgia,
National Association, as trustee (the "Trustee"). The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), as
in effect on the date of the Indenture. The Notes are subject to all such terms
and reference is made to the Indenture and the Trust Indenture Act for a
statement thereof. A copy of the Indenture is filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary, which describes certain provisions of the Indenture and the
Notes, does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Indenture and the Notes, including the
definitions therein of terms not defined herein and those terms made a part
thereof by the Trust Indenture Act.
General
The Notes are unsecured senior subordinated obligations of Graphics,
limited to $185 million aggregate principal amount, and will mature on August 1,
2005. Interest will accrue on the Notes from the most recent date to which
interest has been paid or provided for, and will be payable in cash semiannually
in arrears at the rate of 12 3/4% per annum on the principal amount of the Notes
on each February 1 and August 1 to holders of record thereof at the close of
business on the January 15 or July 15 immediately preceding such interest
payment date.
Interest on overdue principal and (to the extent permitted by law) on
overdue installments of interest will accrue at the rate per annum borne by the
Notes. Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months.
Optional Redemption
Except as set forth below, the Notes may not be redeemed prior to
August 1, 2000. On or after such date, the Notes may be redeemed at the option
of Graphics, at any time as a whole, or from time to time in part, on not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of the principal amount) set forth below, plus accrued interest to
the date of redemption (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing August 1:
Year Redemption Price
---- ----------------
2000............................................. 106.375%
2001............................................. 103.188
2002 and thereafter.............................. 100.000
In addition, at any time and from time to time prior to August 1, 1998,
Graphics may redeem the Notes with the proceeds actually received by Graphics
(including proceeds received by Communications and contributed to Graphics) from
one or more Public Equity Offerings following which there is a Public Market, at
a redemption price (expressed as a percentage of principal amount) of 110% plus
accrued interest to the redemption date; provided, however, that at least $115
million aggregate principal amount of Notes remains outstanding after each such
redemption.
Sinking Fund
There will be no mandatory sinking fund payments for the Notes.
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Ranking
The Indebtedness evidenced by the Notes is subordinated in right of
payment, as set forth in the Indenture, to the payment when due of all existing
and future Senior Indebtedness of Graphics, rank pari passu with all existing
and future Senior Subordinated Indebtedness of Graphics and rank senior in right
of payment to all future Subordinated Obligations of Graphics. At March 31,
1997, Graphics had $127.3 million of Senior Indebtedness, no senior subordinated
indebtedness other than the Notes and no subordinated indebtedness outstanding
and Graphics' subsidiaries had approximately $2.1 million of liabilities (which
were effectively senior to the Notes). Notwithstanding the foregoing, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "Defeasance" below will not be contractually
subordinated in right of payment to any Senior Indebtedness or subject to the
restrictions described herein.
Graphics may not make any payment with respect to any Senior
Subordinated Obligations if at such time there exists a default in the payment
of any Senior Indebtedness unless (x) the default has been cured or waived and
any acceleration of such Indebtedness has been rescinded or (y) such Senior
Indebtedness has been paid in full in cash or cash equivalents. However,
Graphics may make any payment with respect to the Notes without regard to the
foregoing if Graphics and the Trustee receive written notice approving such
payment from the Representative of such Senior Indebtedness. During the
continuance of any default (other than a payment default described in the second
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
after the expiration of any applicable grace periods, Graphics may not make any
payment with respect to the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by Graphics and the Trustee of written notice of
such default from the Representative of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period (a "Payment Blockage
Notice") and ending 179 days thereafter (or earlier (i) if such Payment Blockage
Period is terminated by written notice to the Trustee and Graphics from the
Person who gave such Payment Blockage Notice, (ii) by repayment in full of the
Designated Senior Indebtedness on behalf of which the Payment Blockage Notice
was given or (iii) if no default permitting acceleration of any Designated
Senior Indebtedness is continuing). Notwithstanding the provisions described in
the immediately preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders shall have accelerated the
maturity of such Designated Senior Indebtedness, Graphics may, subject to the
provisions contained in the first sentence of this paragraph, resume payments on
the Notes after such Payment Blockage Period. The Notes will not be subject to
more than one Payment Blockage Notice in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period; provided, however, that if any Payment Blockage
Notice within such 360-day period is given by or on behalf of any holders of
Designated Senior Indebtedness (other than by the Bank Agent in respect of the
Bank Credit Agreement), the Bank Agent may give another Payment Blockage Notice
in relation to the Bank Credit Agreement within such period; provided further,
however, that in no event may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any 360 consecutive day period. For purposes of the subordination provisions
described hereunder, no default or event of default (excluding defaults and
events of default arising under financial covenants) which existed or was
continuing (it being acknowledged that any subsequent action that would give
rise to an event of default pursuant to any provision under which an event of
default previously existed or was continuing shall constitute a new event of
default for this purpose) on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or be made, the basis of the commencement
of a subsequent Payment Blockage Period by the Representative of such Designated
Senior Indebtedness, even if not within a period of 360 consecutive days, unless
such default or event of default shall have been cured or waived for a period of
not less than 90 consecutive days.
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Upon any payment or distribution of assets or securities of Graphics of
any kind or character, whether in cash, property or securities, upon a total or
partial liquidation or a total or partial dissolution of Graphics or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Graphics or its property, the holders of Senior Indebtedness shall
be entitled to receive payment in full of all Senior Indebtedness in cash or
cash equivalents before holders of the Notes shall be entitled to receive any
payment or distribution in respect of any Senior Subordinated Obligations.
If payment of the Notes is accelerated because of an Event of Default,
Graphics or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness (or their Representative) of the acceleration. If any Designated
Senior Indebtedness is outstanding, Graphics may not make any payment in respect
of Senior Subordinated Obligations until five Business Days after such notice is
received and, thereafter, may pay the Senior Subordinated Obligations only if
the subordination provisions of the Indenture otherwise permit the payment at
that time.
By reason of the subordination provisions contained in the Indenture,
in the event of insolvency, creditors of Graphics who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the Notes, and
creditors of Graphics who are not holders of Senior Indebtedness or the Notes
may recover less, ratably, than holders of Senior Indebtedness and may recover
more, ratably, than the holders of the Notes.
Guaranty
Communications, as primary obligor and not merely as surety, has
irrevocably, fully and unconditionally guaranteed on an unsecured senior
subordinated basis, the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all obligations of Graphics under the Indenture
and the Notes, whether for principal of or interest on the Notes, expenses,
indemnification or otherwise (all such obligations guaranteed by Communications
being herein called the "Guaranteed Obligations"). Communications agreed to pay,
on a senior subordinated basis and in addition to the amount stated above, any
and all expenses (including reasonable counsel fees and expenses) incurred by
the Trustee or the Holders in enforcing any rights under the Guaranty with
respect to Communications.
The obligations of Communications under the Guaranty are unsecured
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by Communications pursuant to the Guaranty will be subordinated in right
of payment to the rights of holders of Senior Indebtedness of Communications. At
March 31, 1997, Communications had outstanding $127.3 million of Senior
Indebtedness, including its obligations under the Bank Credit Agreement. The
Indenture does not limit the incurrence of Indebtedness by Communications.
The Guaranty is a continuing guarantee and shall (a) remain in full
force and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon Communications and (c) enure to the benefit of and be enforceable
by the Trustee, the Holders and their successors, transferees and assigns.
Pursuant to the Indenture, Communications may consolidate with, merge
with or into, or transfer all or substantially all its assets to any other
Person to the same extent Graphics may consolidate with, merge with or into, or
transfer all or substantially all its assets to, any other Person; provided,
however, that if such other Person is not Graphics, Communications' obligations
under the Indenture must be expressly assumed by such other Person. See
"Successor Company."
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Certain Definitions
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Graphics or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Adjusted Consolidated Assets" means at any time the total amount of
assets of Graphics and its consolidated Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of Graphics and its consolidated Restricted
Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of Graphics and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Limitation on Restricted Payments,"
"--Limitation on Sales of Assets and Subsidiary Stock" and "--Limitation on
Affiliate Transactions," "Affiliate" shall also mean any beneficial owner of
shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of Graphics or of rights or warrants to purchase such
stock (whether or not currently exercisable) and any Person who would be an
Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
Graphics or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the purposes
of this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (ii) any
assets of Graphics or any Restricted Subsidiary outside the ordinary course of
business of Graphics or such Restricted Subsidiary (other than (y) a disposition
by a Restricted Subsidiary to Graphics or by Graphics or a Subsidiary to a
Wholly Owned Subsidiary and (z) for purposes of the covenant described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
a Restricted Payment permitted by the covenant described under "Certain
Covenants -- Limitation on Restricted Payments"); provided, however, that for
purposes of the covenant described under "Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock" only, the term "Asset Disposition" shall
not include any disposition of assets if such disposition is governed by the
provisions of the Indenture described under "Successor Company."
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such payment by (ii) the sum of all such payments.
"Bank Agent" is defined to mean BT Commercial Corporation, as agent for
the Banks pursuant to the Bank Credit Agreement, and any successor or successors
thereto.
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"Bank Credit Agreement" is defined to mean the Credit Agreement, dated
as of August 15, 1995, among Communications, Graphics, the Banks party thereto
and the Bank Agent, together with the related documents thereto (including,
without limitation, any Guarantees and security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented, replaced or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing or otherwise restructuring
(including, but not limited to, the inclusion of additional borrowers or
guarantors thereunder that are Subsidiaries of Communications or Graphics and
whose obligations are guaranteed by Communications or Graphics thereunder) all
or a portion of the Indebtedness under such agreement or any successor
agreement.
"Banks" is defined to mean the lenders who are from time to time
parties to the Bank Credit Agreement.
"Board of Directors" means the Board of Directors of Graphics or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Expenditures" means expenditures (whether paid in cash or
accrued as liabilities and including Capital Lease Obligations) of Graphics and
its Restricted Subsidiaries relating to the acquisition of equipment used or
useful in the business of Graphics or any Restricted Subsidiary or in a Related
Business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent of any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than
the Permitted Holders and their respective Affiliates, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than (A) forty
percent (40%) of the total voting power of the then outstanding Voting Stock of
Graphics or Communications and (B) the total voting power of the then
outstanding Voting Stock of Graphics or Communications, as the case may be,
beneficially owned by the Permitted Holders and their respective Affiliates,
treating the Permitted Holders and their respective Affiliates as a "group"; or
(ii) during any period of two consecutive calendar years, individuals who at the
beginning of such period constituted the Board of Directors of (A) Graphics
(together with any new directors whose election by Graphics's Board of Directors
or whose nomination for election by Graphics's Board of Directors or whose
nomination for election by Graphics's shareholders was approved by a vote of at
least two-thirds of the directors then still in office who either were directors
at the beginning of such period or whose election or nomination for election was
previously so approved) or (B) Communications (together with any new directors
whose election by Communications' Board of Directors or whose nomination for
election by Communications' shareholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of such period or whose election or nomination for election was
previously so approved), in either case, cease for any reason to constitute a
majority of the directors of Graphics or Communications, as the case may be,
then in office; or (iii) (A) Graphics or Communications consolidates with or
merges into any other Person or conveys, transfers or leases all or
substantially all its assets to any Person or (B) any Person merges into
Graphics or Communications, in either event pursuant to a transaction in which
any Voting Stock of Graphics or Communications, as the case may be, outstanding
immediately prior to
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the effectiveness thereof is reclassified or changed into or exchanged for cash,
securities or other property; provided, however, that any consolidation,
conveyance, transfer or lease (x) between Graphics and any of its Subsidiaries,
between Communications and any Communications Subsidiaries, between Subsidiaries
of Graphics or between Communications Subsidiaries (including the
reincorporation of Graphics or Communications in another jurisdiction) or (y)
for the purpose of creating a public holding company for Graphics or
Communications in another jurisdiction or (z) for the purpose of creating a
public holding company for Graphics or Communications in which all holders of
the capital stock of Graphics or Communications, as the case may be, would be
entitled to receive (other than cash in lieu of fractional shares) solely
capital stock of the holding company in amounts proportionate to their holdings
of such capital stock of Graphics or Communications immediately prior to such
transaction, shall be excluded from the operation of this clause (iii).
"Change of Control Triggering Event" means the occurrence of both a
Change of Control and a Rating Decline.
"Code" means the Internal Revenue Code of 1986, as amended.
"Communications Subsidiary" means a corporation a majority of the
equity ownership or the Voting Stock of which is at the time owned, directly or
indirectly, by Communications or by one or more other Subsidiaries of
Communications, or by Communications and one or more other Subsidiaries of
Communications.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if Graphics or any Restricted Subsidiary
has Incurred any Indebtedness since the beginning of such period that remains
outstanding (other than Indebtedness Incurred under a revolving credit or
similar arrangement Incurred after the end of such four consecutive fiscal
quarters to the extent of the commitment thereunder) or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving effect on a pro forma basis to
such Indebtedness as if such Indebtedness had been Incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (2) if Graphics
or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise
discharged any Indebtedness (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid) since the beginning of such period or if any Indebtedness is
to be repaid, repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio, EBITDA and Consolidated Interest Expense for such period shall be
calculated on a pro forma basis as if such discharge had occurred on the first
day of such period (except for Consolidated Interest Expense accrued (as
adjusted pursuant to clause (1)) since the end of such period under a revolving
credit or similar arrangement to the extent of the commitment thereunder in
effect on the date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio) and as if Graphics or such Restricted Subsidiary
has not earned the interest income actually earned during such period in respect
of cash or Temporary Cash Investments used to repay, repurchase, defease or
otherwise discharge such Indebtedness, (3) if since the beginning of such period
Graphics or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to the EBITDA
(if negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
Graphics or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to Graphics and its continuing Restricted Subsidiaries
in connection with such Asset Dispositions for such period (or, if the Capital
Stock of any
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Restricted Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary to the
extent Graphics and its continuing Restricted Subsidiaries are no longer liable
for such Indebtedness after such sale), (4) if since the beginning of such
period Graphics or any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Subsidiary (or any Person which becomes a Restricted
Subsidiary) or any acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Investment or
acquisition occurred on the first day of such period, excluding, in the case of
an acquisition of assets or Capital Stock, any operating expense or cost
reduction of such Person or the Person to be acquired which, in the good faith
estimate of a responsible financial or accounting officer of such Person, will
be eliminated or realized, as the case may be, during the 12 month period
following the date of determination, as a result of such acquisition as if such
elimination of such operating expense or the realization of such cost reductions
were achieved on the first day of such period, and (5) if since the beginning of
such period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into Graphics or any Restricted Subsidiary since the beginning of
such period) shall have made any Asset Disposition, Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by Graphics or a Restricted Subsidiary during such period, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition of assets occurred on the first day of such period and excluding any
operating expenses or cost reductions as provided in clause (4). For purposes of
this definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto, and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of Graphics. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Protection Agreement applicable to
such Indebtedness if such Interest Rate Protection Agreement has a remaining
term in excess of 12 months or, if shorter, the remaining term of the
Indebtedness to which it relates).
"Consolidated Interest Expense" means, for any period, the total
interest expense of Graphics and its consolidated Restricted Subsidiaries, plus,
to the extent not included in such total interest expense, and to the extent
incurred by Graphics or any Restricted Subsidiary, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and premium
and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest
expense, (v) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing, (vi) net costs under
Interest Rate Protection Agreements (including amortization of fees), (vii)
Preferred Stock dividends paid in respect of all Preferred Stock of Graphics or
a Restricted Subsidiary held by Persons other than Graphics or a Restricted
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations and (ix) interest actually paid by Graphics or any
consolidated Restricted Subsidiary under any Guarantee of Indebtedness of any
Person; excluding, however, (A) any amount of such interest expense of any
Restricted Subsidiary if the net income (or loss) of such Restricted Subsidiary
is excluded in the calculation of Consolidated Net Income pursuant to clause
(iii) of the definition thereof (but only in the same proportion as the net
income (or loss) of such Restricted Subsidiary is excluded from the calculation
of Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (B) any premiums, fees and expenses (and any amortization thereof) payable
in connection with the Transactions, all as determined on a consolidated basis
in conformity with GAAP.
"Consolidated Net Income" means, for any period, the net income (or
loss) of Graphics and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(i) any net income or loss of any Person if such Person is not
a Restricted Subsidiary, except that subject to the limitations
contained in clause (iv) below, Graphics' equity in the net income
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or loss of any such Person for such period shall be included in such
Consolidated Net Income up to, in the case of net income, the aggregate
amount of cash actually distributed by such Person during such period
to Graphics or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(iii) below) and, in the case of a net loss, the aggregate amount of
cash actually contributed by Graphics or a Restricted Subsidiary to
such Person during such period;
(ii) solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph (a) of the
covenant described under "Certain Covenants -- Limitation on Restricted
Payments" (and in such case, except to the extent includable pursuant
to the foregoing clause (i) above), any net income (or loss) of any
Person acquired by Graphics or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition;
(iii) any net income or loss of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to Graphics,
except that subject to the limitations contained in clause (iv) below,
Graphics' equity in the net income or loss of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to, in the case of net income, the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period
to Graphics or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in
this clause) and, in the case of a net loss, the aggregate amount of
cash actually contributed by Graphics or another Restricted Subsidiary
to such Restricted Subsidiary during such period;
(iv) any gain or loss realized upon the sale or other
disposition of any assets of Graphics or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles;
provided, however, that solely for the purposes of calculating the Consolidated
Coverage Ratio (and in such case, except to the extent it is already included
pursuant to clause (i) above), "Consolidated Net Income" shall include the
amount of all cash dividends received by Graphics or any Restricted Subsidiary
from an Unrestricted Subsidiary (subject, in the case of a dividend paid to a
Restricted Subsidiary, to the limitation contained in clause (iii) above);
provided further, however, that solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph (a) of the covenant
described under "-- Certain Covenants --Limitation on Restricted Payments", any
amortization, depreciation or other non-cash charge relating to the Transactions
or any acquisitions subsequent to the Issue Date, including good-will,
non-compete agreements, the stepped-up basis on assets acquired and deferred
financing costs, to the extent such items reduced Consolidated Net Income, shall
not be included.
"Consolidated Net Tangible Assets" as of any date of determination,
means the total amount of assets (less accumulated depreciation or amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
Graphics and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom all current liabilities of Graphics and
its consolidated Restricted Subsidiaries as well as, to the extent otherwise
included, the amounts of (without duplication): (i) minority interests in
consolidated Restricted Subsidiaries held by Persons other than Graphics or
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a Restricted Subsidiary; (ii) excess of cost over fair value of assets of
businesses acquired, as determined in good faith, by the Board of Directors;
(iii) any revaluation or other write-up in book value of assets subsequent to
the Issue Date as a result of a change in the method of valuation in accordance
with GAAP consistently applied; (iv) unamortized debt discount and expenses and
other unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, licenses, organization or developmental expenses
and other intangible items; and (v) treasury stock.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Graphics and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP (excluding the
effects of foreign currency exchange adjustments under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 52), as of the
end of the most recent fiscal quarter of Graphics ending at least 45 days prior
to the taking of any action for the purpose of which the determination is being
made, as (i) the par or stated value of all outstanding Capital Stock of
Graphics plus (ii) paid-in capital or capital surplus relating to such Capital
Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Indebtedness" is defined to mean (i) Indebtedness
under the Bank Credit Agreement and (ii) any other Indebtedness constituting
Senior Indebtedness that, at any date of determination, has an aggregate
principal amount of at least $25 million and is specifically designated by
Graphics in the instrument creating or evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms or upon the happening of any event (i) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii)
is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii)
is redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of
any "asset sale" or "change of control" occurring prior to the first anniversary
of the Stated Maturity of the Notes shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable to the holders of such Capital Stock than the
provisions contained in the covenants described under "Certain Covenants --
Limitation on Sales of Assets and Subsidiary Stock" and "-- Change of Control
Triggering Event" and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such Capital Stock pursuant to such provision
prior to such Person's repurchase of such Notes as are required to be
repurchased pursuant to the covenants described under "Certain Covenants --
Limitation on Sales of Assets and Subsidiary Stock" and "--Change of Control
Triggering Event."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense, plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense, (b)
depreciation expense, (c) amortization expense and (d) all other non-cash
charges, less all non-cash items increasing Consolidated Net Income, in each
case for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a
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significant segment of the accounting profession. All ratios and computations
based on GAAP contained in the Indenture shall be computed in conformity with
GAAP applied on a consistent basis, except that calculations made for purposes
of determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Transactions and
(ii) except as otherwise expressly provided, the amortization of any amount
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 in
connection with the 1993 Acquisition, the Transactions or any acquisitions after
the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other financial
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other
financial obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other financial
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any Indebtedness or financial obligation.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. The term "Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" of any Person means, without duplication:
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable (other than
Interest Rate Protection Agreements);
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto, all conditional sale obligations of
such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third Business Day following receipt by
such Person of a demand for reimbursement following payment on the
letter of credit);
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(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock, and in respect of a Restricted Subsidiary, all obligations of
such Subsidiary with respect to the redemption, repayment or other
repurchase of any Preferred Stock (but excluding, in each case, any
accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise, including
by means of any Guarantee; and
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets (as determined by the
Board of Directors) or the amount of the obligation so secured.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided, however,
(i) that the amount outstanding at any time of any Indebtedness Incurred with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include (A) any liability for Federal, state, local or
other taxes, (B) any obligations under Interest Rate Protection Agreements or
Raw Material Hedge Agreements or (C) any liability arising from the honoring by
a bank or other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business.
"Interest Rate Protection Agreement" means any interest rate or
currency swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect Graphics or any Restricted
Subsidiary against fluctuations in interest rates or currency values.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable) or other extension of credit (including by way
of Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services of the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment," and the covenant described under "Certain Covenants --
Limitation on Restricted Payments," (i) "Investment" shall include the portion
(proportionate to Graphics' equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of Graphics at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
Graphics shall be deemed to continue to have a permanent "Investment" in such
Subsidiary at the time of such redesignation equal to the amount (if positive)
equal to (x) Graphics' "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to Graphics' equity interest
in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Investment Grade" means (i) BBB- (or its equivalent) or higher by S&P
or (ii) Baa3 (or its equivalent) or higher by Moody's or (iii) the equivalent of
such rating by a substitute Rating Agency.
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"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"MSCP Entities" means, collectively, Morgan Stanley Capital Partners
III, L.P., a Delaware limited partnership, Morgan Stanley Capital Investors,
L.P., a Delaware limited partnership, and MSCP III 892 Investors, L.P., a
Delaware limited partnership.
"MSLEF" means The Morgan Stanley Leveraged Equity Fund II, L.P., a
Delaware limited partnership.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal (but not interest) pursuant to a note or installment
receivable or otherwise, including upon release to Graphics or a Restricted
Subsidiary from any reserve established by Graphics or such Restricted
Subsidiary against any liabilities associated with such Asset Disposition, but
only as and when received, but excluding any other consideration received in the
form of assumption by the acquiring person of Indebtedness or other obligations
relating to such properties or assets or received in any other noncash form) in
each case net of all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial, foreign
and local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition (without regard to the consolidated
results of operations of Graphics and its Subsidiaries, taken as whole), and in
each case net of all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, and, until released to Graphics or a Restricted Subsidiary,
net of appropriate amounts to be provided by Graphics or any Restricted
Subsidiary of Graphics as a reserve against any liabilities associated with such
Asset Disposition, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Disposition, all as
determined in accordance with GAAP, and net of all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means, collectively, MSLEF, the MSCP Entities and
the other investors, including the officers and directors of Graphics or
Communications, who beneficially own Voting Stock of Communications on the Issue
Date after giving effect to the Transactions, or, upon the death of such an
individual investor, such person's executors, administrators, testamentary
trustees, heirs, legatees or beneficiaries.
"Permitted Investment" means (i) an Investment in Graphics or in a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the primary
business of such Restricted Subsidiary or such Person is a Related Business;
(ii) an Investment by Graphics or any Restricted Subsidiary in another Person if
as a result of such Investment such other Person is merged or consolidated with
or into, or transfers or conveys all or substantially all its assets to,
Graphics or a Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iii) a
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Temporary Cash Investment; (iv) receivables owing to Graphics or any Restricted
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as
Graphics or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business in
accordance with past practices of Graphics or of its Restricted Subsidiaries;
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to Graphics or any Restricted
Subsidiary or in satisfaction of judgments, (viii) Interest Rate Protection
Agreements and Raw Material Hedge Agreements and (ix) Investments at any time
not exceeding $12 million (valued at the fair market value at the time any such
Investment was made).
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering
of common stock of Graphics or Communications pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has
been consummated and (y) at least 15% of the total issued and outstanding common
stock of Graphics or Communications has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Rating Agencies" means S&P and Moody's; provided, however, that if S&P
or Moody's or both shall not make a rating of the Notes publicly available, the
term Rating Agencies shall refer to a nationally recognized securities rating
agency or agencies, as the case may be, selected by Graphics to substitute for
S&P or Moody's or both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D (or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by a substitute Rating Agency. In determining
whether the rating of the Notes has decreased by one or more gradations,
gradations within Rating Categories (+ and - for S&P; 1, 2 and 3 for Moody's; or
the equivalent gradations for another Rating Agency) shall be taken into account
(e.g., with respect to S&P, a decline in rating from BB+ to BB, as well as from
BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date that is 90 days prior to the earlier of
(i) a Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by Graphics or Communications to effect a Change of
Control.
"Rating Decline" means the occurrence of the following on, or within 90
days after, the date of public notice of the occurrence of a Change of Control
or of the intention by Graphics to effect a Change of Control
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(which period shall be extended so long as the rating of the Notes is under
publicly announced consideration for possible downgrade by any Rating Agency):
(a) in the event the Notes are rated by any Rating Agency on the Rating Date as
Investment Grade, the rating of such Notes by both Rating Agencies shall be
below Investment Grade, or (b) in the event the Notes are rated below Investment
Grade by both Rating Agencies on the Rating Date, the rating of the Notes by
either Rating Agency shall be decreased by one or more gradations.
"Raw Material Hedge Agreement" means an agreement designed to hedge
against fluctuations in the cost of raw materials entered into by Graphics or
its Restricted Subsidiaries in the ordinary course of business in connection
with their business operations.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
Indebtedness in exchange, substitution or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Graphics or any Restricted Subsidiary existing on the Issue Date
or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees, accrued interest and expenses, including
any premium and defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of
Graphics.
"Registration Agreement" means the Registration Agreement dated August
10, 1995, among Graphics, Communications and Morgan Stanley & Co. Incorporated.
"Related Business" means as of any date the businesses of Graphics and
its Restricted Subsidiaries on such date and any business related, ancillary or
complementary thereto.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than Disqualified
Stock) and dividends or distributions payable solely to Graphics or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary of Graphics that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of Graphics held
by any Person or of any Capital Stock of a Subsidiary of Graphics held by any
Affiliate of Graphics (other than a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of Graphics that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment, other than a Permitted Investment, in any Person; provided,
however, that the purchase or redemption of Subordinated Obligations (or
dividends to Communications for the purchase or
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redemption of Indebtedness of Communications) upon the occurrence of an "asset
sale" or "change of control" shall not constitute a "Restricted Payment" if,
prior to such purchase or redemption (or dividend), Graphics shall have
purchased all Notes tendered pursuant to an Excess Proceeds Offer or an offer to
purchase the Notes upon the occurrence of a Change of Control Triggering Event
with respect to such "asset sale" or "change of control."
"Restricted Subsidiary" means any Subsidiary of Graphics that is not an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Graphics secured by a
Lien.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" of any Person means the following obligations of
such Person, whether outstanding on the Issue Date or thereafter Incurred (i)
all Indebtedness and other monetary obligations of such Person under (A) the
Bank Credit Agreement and all fees, expenses and indemnities payable in
connection therewith, (B) any Interest Rate Agreement which the Company has
determined in good faith at the time of the Incurrence thereof is related to
indebtedness under the Bank Credit Agreement (which determination shall be
conclusive) and all fees, expenses and indemnities payable in connection
therewith or (C) any Guarantee of Indebtedness or monetary obligations described
in clauses (A) and (B), and (ii) all other Indebtedness of such Person (other
than the Notes), unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such obligations
are not superior in right of payment to the Notes or the Guaranty, as the case
may be; provided, however, that Senior Indebtedness of such Person shall not
include (1) any obligation of such Person to any Subsidiary of such Person, (2)
any liability for Federal, state, local or other taxes owned or owing by such
Person, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness of such Person (and any
accrued and unpaid interest in respect thereof) which is expressly subordinated
in right of payment to any other Indebtedness or other obligation of such Person
or (5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture. Senior Indebtedness will also include
interest accruing subsequent to events of bankruptcy of Graphics, Communications
and their respective Subsidiaries at the rate provided for in the documentation
governing such Senior Indebtedness, whether or not such interest is an allowed
claim enforceable against the debtor in a bankruptcy case under relevant
bankruptcy law.
"Senior Subordinated Indebtedness" means (i) with respect to Graphics,
the Notes and any other Indebtedness of Graphics that specifically provides that
such Indebtedness is to rank pari passu with the Notes in right of payment and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of Graphics which is not Senior Indebtedness of Graphics and
(ii) with respect to Communications, the Guaranty and any other Indebtedness of
Communications that specifically provides that such Indebtedness is to rank pari
passu with the Guaranty in right of payment and is not subordinated by its terms
in right of payment to any Indebtedness or other obligation of Communications
which is not Senior Indebtedness of Communications.
"Senior Subordinated Obligations" means any principal, premium, if any,
and interest on the Notes payable pursuant to the terms of the Notes or upon
acceleration, including any amounts received on the exercise of rights of
rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase price of the Notes or amounts
corresponding to such principal, premium, if any, or interest on the Notes.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of Graphics within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
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"S&P" means Standard & Poor's Ratings Group and its successors.
"Stated Maturity" means with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of Graphics (whether
outstanding on the Issue Date or thereafter incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of Graphics) organized and in existence under the laws of the United States of
America or any foreign country recognized by the United States of America with a
rating at the time as of which any investment therein is made of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P, and (v)
investments in securities with maturities of six months or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or "A" by Moody's.
"Unrestricted Subsidiary" means (i) any Subsidiary of Graphics that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) of Graphics to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, Graphics or any
Restricted Subsidiary of Graphics that is not a Subsidiary of the Subsidiary to
be so designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) Graphics could Incur $1.00 of additional
Indebtedness under the first paragraph of the covenant described under "--
Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Graphics or
one or more Wholly Owned Subsidiaries.
Certain Covenants
Set forth below are certain covenants contained in the Indenture:
Limitation on Indebtedness
(a) Graphics shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that Graphics may
Incur Indebtedness if on the date of such Incurrence the Consolidated Coverage
Ratio would be greater than 1.75 to 1.0, on or prior to August 1, 1998, and 2.0
to 1.0, thereafter.
(b) Notwithstanding the foregoing paragraph (a), Graphics and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to one or more credit
facilities (including related Guarantees and security agreements) in an
aggregate principal amount outstanding at any time not to exceed the
greater of (a) the sum of (x) 90% of the consolidated book value of the
accounts receivable of Graphics and its Restricted Subsidiaries and (y)
60% of the consolidated book value of the inventory of Graphics and its
Restricted Subsidiaries, in each case as determined at the time of the
respective Incurrence in accordance with GAAP and (b) $75,000,000;
provided, however, that no Restricted Subsidiary shall Incur
Indebtedness pursuant to this clause (1) in an aggregate principal
amount outstanding at any time which exceeds the sum of (a) 90% of the
book value of its accounts receivable on a stand-alone basis and (b)
60% of the book value of its inventory on a stand-alone basis, in each
case as determined in accordance with GAAP;
(2) Indebtedness of Graphics (and any Guarantee or Liens with
respect thereto) originally Incurred pursuant to the term loan
provisions of the Bank Credit Agreement and any refinancing thereof in
an aggregate principal amount outstanding at any time not to exceed (i)
$60,000,000 less (ii) the aggregate sum of all principal payments
actually made from time to time under the Bank Credit Agreement or such
refinancing as a result of the application of Net Available Cash
pursuant to the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock;"
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(3) Indebtedness owed to and held by Graphics or a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to Graphics or another Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness;
(4) the Notes;
(5) Indebtedness outstanding on the Issue Date after giving
effect to the Transactions (other than Indebtedness described in clause
(1), (2), (3) or (4) of the covenant described hereunder);
(6) Guarantees by Graphics or a Restricted Subsidiary of
Indebtedness of a Restricted Subsidiary otherwise permitted to be
Incurred by the Restricted Subsidiary (other than Indebtedness
permitted by clause (10) below) or Guarantees by a Restricted
Subsidiary of Senior Indebtedness of Graphics permitted to be Incurred
by Graphics under the Indenture;
(7) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) of the covenant described hereunder
or pursuant to clause (4) or (5) above or clause (9) or (10) below;
provided, however, that Refinancing Indebtedness the proceeds of which
are used to Refinance the Notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (7) if (A) in case the Notes are Refinanced
in part or the Indebtedness to be Refinanced is pari passu with the
Notes, such Refinancing Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such Refinancing
Indebtedness is Incurred or is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes
and (B) in case the Indebtedness to be Refinanced is subordinated in
right of payment to the Notes, such Refinancing Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such Refinancing Indebtedness is Incurred or is outstanding, is
expressly made subordinate in right of payment to the Notes at least to
the extent that the Indebtedness to be Refinanced is subordinated to
the Notes; provided further, however, that Refinancing Indebtedness the
proceeds of which are used to Refinance Indebtedness Incurred pursuant
to clause (10) below shall only be permitted under this clause (7) if
such Refinancing Indebtedness is Incurred by Graphics or the Restricted
Subsidiary that originally Incurred the Indebtedness pursuant to clause
(10) below;
(8) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business or (B) arising
from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of Graphics
or any of its Restricted Subsidiaries pursuant to such agreements, in
any case Incurred in connection with the acquisition or disposition of
any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness or other obligations Incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary for
the purpose of financing such acquisition), in a principal amount not
to exceed the gross proceeds actually received by Graphics or any
Restricted Subsidiary in connection with such disposition;
(9) Indebtedness, in an aggregate principal amount outstanding
at any time not to exceed $5 million, Incurred by Graphics in
connection with the purchase, redemption, acquisition, cancellation or
other retirement for value of shares of Capital Stock of Graphics, any
of its Subsidiaries or Communications, options on any such shares or
related stock appreciation rights or similar securities (including
phantom equity rights) held by employees, former employees, directors
or former directors of Communications, Graphics or its Subsidiaries (or
their estates or beneficiaries under their estates), upon death,
disability, retirement, termination of employment or pursuant to any
agreement under which such shares of stock or related rights were
issued; provided, however, that (A) such
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Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is Incurred, is
expressly made subordinate in right of payment to the Notes and (B)
such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is Incurred, provides
that no payments of principal of such Indebtedness, including by way of
sinking fund, mandatory redemption or otherwise (including defeasance),
may be made by Graphics at any time while any of the Notes are
outstanding;
(10) Indebtedness of any Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary
was acquired by Graphics (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary or was acquired by Graphics);
(11) Capital Lease Obligations;
(12) Indebtedness constituting purchase money obligations for
property acquired in the ordinary course of business or other similar
financing transactions;
(13) Indebtedness Incurred to finance Capital Expenditures or
the acquisition of Additional Assets in any fiscal year in an aggregate
principal amount not to exceed 6% of Graphics' consolidated net sales
for the immediately preceding fiscal year and Refinancing Indebtedness
in respect thereof; and
(14) Indebtedness (which may, but need not, be incurred under
the Bank Credit Agreement), in addition to that described in clauses
(1) through (13), in an aggregate principal amount outstanding at any
time not in excess of the greater of (A) $25 million and (B) 10% of the
Consolidated Net Worth of Graphics as of the end of the most recent
fiscal quarter ending at least 45 days prior to the date of the
incurrence of such Indebtedness.
(c) Graphics shall not Incur any Indebtedness pursuant to paragraph (a)
or (b) above if such Indebtedness is subordinate in right of payment to any
Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness
or is expressly subordinated in right of payment to Senior Subordinated
Indebtedness. In addition, Graphics shall not Incur any Secured Indebtedness
which is not Senior Indebtedness unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments
(a) Graphics shall not, and shall not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time Graphics or
such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would
result therefrom); or
(2) Graphics is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the sum of:
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(a) 50% of the Consolidated Net Income accrued during
the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which the Old Notes were issued to the
end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit);
(b) the aggregate Net Cash Proceeds received by
Graphics as a capital contribution or from the issuance or
sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of Graphics and other than an issuance or sale
to an employee stock ownership plan or other trust established
by Graphics or any of its Subsidiaries for the benefit of
their employees to the extent the purchase by such plan or
trust is financed by Indebtedness of such plan or trust and
for which Graphics is liable as Guarantor or otherwise);
(c) the amount by which Indebtedness of Graphics is
reduced on Graphics' balance sheet upon the conversion or
exchange (other than by a Subsidiary of Graphics) subsequent
to the Issue Date, of any Indebtedness for Capital Stock
(other than Disqualified Stock) of Graphics (less the amount
of any cash, or other property, distributed by Graphics upon
such conversion or exchange);
(d) an amount equal to the net reduction in
Investments in any Person resulting from dividends, repayments
of loans or advances, or other transfers of assets, in each
case to Graphics or any Restricted Subsidiary from such
Person, or for the sale of such Investment by Graphics or a
Restricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed the amount of
Investments previously made by Graphics or any Restricted
Subsidiary in such Person, which amount was treated as a
Restricted Payment; and
(e) $5 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of Capital Stock or
Subordinated Obligations of Graphics made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital Stock of
Graphics (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of Graphics or an employee stock
ownership plan or similar trust established by Graphics or any of its
Subsidiaries for the benefit of their employees to the extent the
purchase by such plan or trust is financed by Indebtedness of such plan
or trust and for which Graphics is liable as Guarantor or otherwise);
provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale (to the extent used for such
purchase or redemption) shall be excluded from the calculation of
amounts under clause (3)(b) of paragraph (a) above;
(ii) any purchase or redemption of Subordinated Obligations
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of Graphics which is permitted to be
Incurred pursuant to the covenant described under "-- Limitation on
Indebtedness;" provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted
Payments;
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(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
the payment of such dividend shall be included in the calculation of
the amount of Restricted Payments;
(iv) the repurchase (or dividends to Communications for the
repurchase) of shares of, or options to purchase shares of, Capital
Stock of Graphics or any of its Subsidiaries or of Communications from
employees, former employees, directors or former directors of
Communications, Graphics or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such persons purchase or sell or are
granted the option to purchase or sell, shares of such stock; provided,
however, that the aggregate amount of such repurchases or dividends
shall not exceed $2 million in cash consideration in any calendar year
or $12 million in cash consideration in the aggregate (unless such
repurchases or dividends are made with the proceeds of insurance
policies and the shares of Capital Stock are repurchased from the
executors, administrators, testamentary trustees, heirs, legatees or
beneficiaries) plus the aggregate Net Cash Proceeds from any reissuance
during such calendar year of Capital Stock to employees, officers or
directors of Graphics or its Subsidiaries (which Net Cash Proceeds
shall be excluded from the calculation of amounts under clause (3)(B)
of paragraph (a) above, and that any consideration in excess of such
amounts is in the form of Indebtedness that would be permitted to be
Incurred under clause (8) of paragraph (b) of the covenant described
under "--Limitation on Indebtedness," provided that to the extent less
than $2 million in cash consideration (plus the aggregate Net Cash
Proceeds from any such reissuance during such calendar year, as
described above) is paid in any single calendar year pursuant to this
clause (iv), the unused portion may be carried forward and paid in any
subsequent calendar year; provided further, however, that such cash
repurchases or dividends, except to the extent made with the proceeds
of insurance policies, shall be included in the calculation of the
amount of Restricted Payments;
(v) the payment of dividends on the Capital Stock of Graphics
or Communications following any Public Equity Offering, of up to 6% per
annum of the net proceeds received by Graphics in such Public Equity
Offering (including proceeds received by Graphics as a capital
contribution from Communications from the net proceeds received by
Communications in such Public Equity Offering); provided, however, that
any such dividends shall be included in the calculation of the amount
of Restricted Payments;
(vi) payments or distributions pursuant to appraisal rights
required by law in connection with a consolidation, merger or transfer
of assets that complies with the provisions of the Indenture described
under "Successor Company" below; provided, however, that any such
payments or distributions shall be included in the calculation of the
amount of Restricted Payments;
(vii) any payments pursuant to any tax-sharing agreement
between Graphics and any other Person with which Graphics is required
or permitted to file a consolidated tax return or with which Graphics
is or could be part of a consolidated group for tax purposes; provided,
however, that any such payment shall be excluded in the calculation of
the amount of Restricted Payments;
(viii) payments to Communications necessary for Communications
to pay corporate overhead expenses, not to exceed $250,000 in any
fiscal year; provided, however, that any such payments shall be
excluded in the calculation of the amount of Restricted Payments;
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(ix) payments to Communications sufficient to permit
Communications to pay for the registration of its securities with the
SEC (including all reasonable professional fees and expenses);
provided, however, that any such payments shall be excluded in the
calculation of the amount of Restricted Payments; and
(x) Investments in Unrestricted Subsidiaries made either in
exchange for Capital Stock (other than Disqualified Stock) of Graphics
or with the Net Cash Proceeds of the sale (other than to a Restricted
Subsidiary) of Capital Stock (other than Disqualified Stock) of
Graphics received by Graphics not more than 12 months prior to the date
of such Investment (provided that such Net Cash Proceeds shall be
excluded from the calculation of amounts of clause (3)(B) of paragraph
(a) above); provided, however, that any such Investments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries
Graphics shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary (i) to
pay dividends or make any other distributions on its Capital Stock owned by, or
pay any Indebtedness owed to, Graphics, (ii) to make any loans or advances to
Graphics or (iii) transfer any of its property or assets to Graphics, except:
(1) any encumbrance or restriction pursuant to the Bank Credit
Agreement or any other agreement in effect at or entered into on the
date of the Indenture and any extensions, refinancings, renewals or
replacements of any such agreement; provided, however, that the
encumbrances and restrictions in any such extension, refinancing,
renewal or replacement are no less favorable in any material respect to
the Noteholders than those encumbrances or restrictions being extended,
refinanced, renewed or replaced;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by Graphics
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by Graphics) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (2) of this covenant or contained in
any amendment to an agreement referred to in clause (2) of this
covenant; provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable in any
material respect to the Noteholders than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in the agreements
referred to in clause (2) of this covenant;
(4) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder.
(5) in the case of clause (iii) above, restrictions contained
in security agreements or mortgages securing Indebtedness of a
Restricted Subsidiary to the extent such restrictions restrict the
transfer of the property subject to such security agreements or
mortgages;
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(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition;
(7) encumbrances and restrictions contained in any
Indebtedness or any agreement relating to any Indebtedness of Graphics
or a Restricted Subsidiary permitted pursuant to the covenant described
under "Limitation on Indebtedness"; provided, however, that either (i)
such encumbrances and restrictions are no more restrictive than the
encumbrances and restrictions imposed by the Bank Credit Agreement or
(ii) each Restricted Subsidiary subject to any such encumbrances or
restrictions after the Issue Date shall Guarantee the Notes on a senior
subordinated basis; and
(8) any encumbrance or restriction existing under or by reason
of applicable law.
Nothing contained in the covenant described hereunder shall prevent
Graphics or any Restricted Subsidiary from restricting the sale or other
disposition of property or assets of Graphics or any Restricted Subsidiary that
secure Indebtedness of Graphics or any of its Restricted Subsidiaries.
Limitation on Sales of Assets and Subsidiary Stock
In the event and to the extent that the Net Available Cash received by
Graphics or any Restricted Subsidiary from one or more Asset Dispositions
occurring on or after the Issue Date in any period of 12 consecutive months
exceeds 10% of Adjusted Consolidated Assets as of the beginning of such 12-month
period, then Graphics shall (i) within 12 months after the date such Net
Available Cash so received exceeds such 10% of Adjusted Consolidated Assets and
to the extent Graphics elects (or is required by the terms of any Indebtedness)
(A) apply an amount equal to or less than such excess Net Available Cash (1) to
repay, or permanently reduce commitments to make loans or advances resulting in,
Senior Indebtedness of Graphics or Indebtedness of any Restricted Subsidiary, or
(2) to acquire the Notes and any other Senior Subordinated Indebtedness of
Graphics (provided that the percentage of such Senior Subordinated Indebtedness
of Graphics acquired (as a percent of the aggregate principal amount thereof at
such time) shall be no greater than the percentage of the Notes so acquired (as
a percent of the aggregate principal amount of the Notes at such time) in each
case owing to or held by a Person other than Graphics or any Affiliate of
Graphics or (B) invest an amount, equal to or less than the difference between
such excess Net Available Cash and the amount so applied pursuant to clause (A)
(or enter into a definitive agreement committing to so invest within 12 months
after the date of such agreement), in Additional Assets and (ii) apply an amount
equal to the difference between such excess Net Available Cash and the amount
applied pursuant to clause (i) as provided in the following paragraphs of this
covenant. The amount of such excess Net Available Cash required to be applied
pursuant to clause (ii) of the preceding sentence shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, Graphics must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase Notes from the Holders in accordance with the Indenture at a purchase
price equal to 100% of the principal amount of such Notes plus accrued interest
to the date of purchase (the "Excess Proceeds Payment").
Graphics will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations thereunder in the event that such Excess Proceeds are received by
Graphics under this covenant and Graphics is required to repurchase Notes as
described above. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
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Limitation on Affiliate Transactions
Graphics shall not, and shall not permit any Restricted Subsidiary to,
enter into, renew or extend any transaction (including the purchase, sale, lease
or exchange of any property or the rendering of any service) with any Affiliate
of Graphics (an "Affiliate Transaction") unless the terms thereof (1) are no
less favorable to Graphics or such Restricted Subsidiary (or, in the case of an
Affiliate Transaction between Graphics and a Restricted Subsidiary, are no less
favorable to Graphics or are, in the good faith determination of the Board of
Directors, in the best interests of Graphics) than those which could be obtained
at the time of such transaction in arm's-length dealings with a Person who is
not such an Affiliate and (2) if such Affiliate Transaction involves an amount
in excess of $2.5 million, the terms thereof are set forth in writing and either
(A) have been approved by a majority of the disinterested members of the Board
of Directors or (B) for which Graphics or such Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to Graphics or such Restricted Subsidiary
from a financial point of view.
The provisions of the preceding paragraph shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"-- Limitation on Restricted Payments," (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors, (iii) the grant of stock options or
similar rights to employees and directors of Graphics pursuant to plans approved
by the Board of Directors, (iv) loans or advances to employees in the ordinary
course of business in accordance with the past practices of Graphics or its
Restricted Subsidiaries; (v) the payment of reasonable fees to directors of
Graphics and its Restricted Subsidiaries who are not employees of Graphics or
its Restricted Subsidiaries; (vi) any payments or other transactions pursuant to
any tax-sharing agreement between Graphics and any other Person with which
Graphics is required or permitted to file a consolidated tax return or with
which Graphics is or could be part of a consolidated group for tax purposes;
(vii) any Affiliate Transaction between Graphics and a Wholly Owned Subsidiary
or between Wholly Owned Subsidiaries; (viii) the Transactions; (ix) any
employment or other agreement providing for compensation between Graphics or any
of its Restricted Subsidiaries and James T. Sullivan or Stephen M. Dyott that is
approved, in good faith, by the Board of Directors; (x) the payment of fees to
Morgan Stanley & Co. Incorporated or its Affiliates for financial, advisory,
consulting or investment banking services that the Board of Directors of
Graphics deems to be advisable or appropriate for Graphics or any Subsidiary to
obtain (and including the payment to Morgan Stanley & Co. Incorporated or its
Affiliates of any underwriting discounts or commissions or placement agency fees
in connection with the issuance and sale of any securities by Graphics or any
Subsidiary of Graphics); or (xi) sales of Capital Stock of Communications or
Graphics to Morgan Stanley & Co. Incorporated or its Affiliates.
Change of Control Triggering Event
Upon the occurrence of a Change of Control Triggering Event, each
holder of Notes will have the right to require Graphics to repurchase all or any
part of such holder's Notes at a repurchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date) in accordance with
the terms described below. The Indenture will provide that, prior to the mailing
of the notice referred to below, but in any event within 30 days following any
Change of Control Triggering Event, Graphics covenants to (i) repay in full all
Indebtedness under the Bank Credit Agreement (and terminate all commitments
thereunder) or offer to repay in full all Indebtedness under the Bank Credit
Agreement (and terminate all commitments thereunder) and to repay the
Indebtedness owed to (and terminate the commitments of) each lender which has
accepted such offer or (ii) obtain the requisite consents under the Bank Credit
Agreement to permit the repurchase of the Notes as provided below. Graphics
shall first comply with the covenant in the immediately preceding sentence
before it shall be required to repurchase Notes pursuant to the provisions
described below. Graphics' failure to comply with the covenant described in the
second preceding sentence
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resulting in a failure to mail the notice referred to below shall constitute an
Event of Default under clause (iv) and not in clause (ii) under "Defaults"
below.
Within 30 days following any Change of Triggering Event, Graphics will
mail a notice to each holder stating
(i) that a Change of Control Triggering Event has occurred and
that such holder has the right to require Graphics to repurchase all or
any part of such holder's Notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued and unpaid interest
to the date of repurchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant
interest payment date);
(ii) the circumstances and relevant facts regarding such
Change of Control Triggering Event (including, to the extent available,
information with respect to pro forma historical income, cash flow and
capitalization of Graphics after giving effect to such Change of
Control Triggering Event);
(iii) the repurchase date (which will be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(iv) the instructions, determined by Graphics consistent with
the Indenture, that a holder must follow in order to have its Notes
repurchased.
The obligation of Graphics to offer to purchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Communications,
and, thus, the removal of incumbent management. Subject to the limitations
discussed below, Graphics could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Indenture, but that could increase the
amount of Indebtedness outstanding at such time or otherwise affect Graphics'
capital structure or credit ratings.
Graphics' ability to pay cash to the Holders of Notes upon a repurchase
may be limited by Graphics' then existing financial resources.
Graphics will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any offer
required to be made by Graphics to repurchase the Notes as a result of a Change
of Control Triggering Event. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, Graphics shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
covenant described hereunder by virtue thereof.
The provisions relative to Graphics' obligation to make an offer to
repurchase the Notes as a result of a Change of Control Triggering Event may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
Limitation on the Issuance of Preferred Stock of Restricted
Subsidiaries
Graphics shall not sell or otherwise dispose of any shares of Preferred
Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue, sell or otherwise dispose of any
shares of its Preferred Stock, except, in each case, (i) to Graphics or a Wholly
Owned Subsidiary or (ii) if, immediately after giving effect to such issuance,
sale or other disposition, such Restricted Subsidiary would no longer constitute
a Restricted Subsidiary.
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SEC Reports
Notwithstanding that Graphics may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, Graphics shall file
with the Commission and provide the Trustee and Noteholders with such annual
reports and such information, documents and other reports which are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a Person subject to
such Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections; provided, however, that, so long as
Communications is the Guarantor of the Notes, the reports, information and other
documents required to be filed and provided as described hereunder shall be
those of Communications rather than Graphics.
Except for the limitations on dividends and redemptions of capital
stock and the limitations on the Incurrence of Indebtedness, the Indenture will
not contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
Successor Company
Neither Communications nor Graphics may consolidate with or merge with
or into, or convey, transfer or lease all or substantially all its assets to,
any Person (other than Graphics or Communications, respectively, or a Wholly
Owned Subsidiary with a positive net worth immediately prior to such
consolidation, merger or transfer of assets; provided, however, that in
connection with any such consolidation, merger or transfer, no consideration
(other than Capital Stock (excluding Disqualified Stock) of the surviving
Person, Communications or Graphics) shall be issued or distributed to the
stockholders of Graphics) unless: (i) the resulting, surviving or transferee
Person (the "Successor Company") is organized and existing under the laws of the
United States of America or any State thereof or the District of Columbia and
such entity (if not the Company) expressly assumes by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of Communications or Graphics, as the case may be, under the
Indenture and the Notes; (ii) immediately prior to and after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
the Successor Company or any Subsidiary of the Successor Company as a result of
such transaction as having been Incurred by the Successor Company or such
Subsidiary at the time of such transaction), no Default has happened and is
continuing; (iii) in the case of a transaction involving Graphics, immediately
after giving effect to such transaction, the Consolidated Coverage Ratio of the
Successor Company is at least 1:1; provided, however, that, if the Consolidated
Coverage Ratio of Graphics before giving effect to such transaction is within
the range set forth in column (A) below, then the Consolidated Coverage Ratio of
the Successor Company shall be at least equal to the lesser of (1) the ratio
determined by multiplying the percentage set forth in column (B) below by the
Consolidated Coverage Ratio of Graphics prior to such transaction and (2) the
ratio set forth in column (C) below:
(A) (B) (C)
--- --- ---
1.11:1 to 1.99:1................................ 90% 1.50:1
2.00:1 to 2.99:1................................ 80% 2.10:1
3.00:1 to 3.99:1................................ 70% 2.40:1
4.00:1 or more.................................. 60% 2.50:1
(iv) in the case of a transaction involving Graphics, immediately after giving
effect to such transaction, the Successor Company has Consolidated Net Worth in
an amount which is not less than the Consolidated Net Worth of Graphics prior to
such transaction and (v) Communications or Graphics, as the case may be,
delivers to the Trustee an officers' certificate and an opinion of counsel, each
stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. The Successor Company will be the
successor to Communications or Graphics, as the case may be, and shall succeed
to, and be substituted for, and may exercise every right and power of,
Communications or Graphics, as the case may be, under the
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Indenture but the predecessor company, in the case of a lease, shall not be
released from the obligation to pay the principal of and interest on the Notes.
Defaults
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by Graphics to comply with its obligations under "Successor
Company" above, (iv) the failure by Graphics to comply for 30 days after notice
with any of its obligations under the covenants described above in "Certain
Covenants" under "Limitation on Indebtedness", "Limitation on Restricted
Payments", "Limitation on Restrictions on Distributions from Subsidiaries",
"Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to
repurchase Notes), "Limitation on Affiliate Transactions", "Change of Control
Triggering Event" (other than a failure to repurchase Notes), or "SEC Reports",
(v) the failure by Communications or Graphics to comply for 60 days after notice
with its other agreements contained in the Indenture, (vi) Indebtedness of
Communications, Graphics or any Significant Subsidiary is not paid within any
applicable grace period after final maturity thereof or becomes, or is declared
by the holders thereof to be, immediately and unconditionally due and payable
because of a default and the total amount of such Indebtedness unpaid or
becoming or declared to be due and payable exceeds $10 million and such failure
continues (or such payment shall not have been waived or extended or such
Indebtedness shall continue to be due and payable) for 30 days after notice (the
"cross acceleration provision"), (vii) certain events of bankruptcy, insolvency
or reorganization of Communications, Graphics or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million (provided that the amount of such money judgment or
decree shall be calculated net of any insurance coverage that the Company has
determined in good faith is available in whole or in part with respect to such
money judgment or decree) is rendered against Communications, Graphics or a
Significant Subsidiary, remains outstanding for a period of 60 days following
such judgment and is not discharged, waived or stayed within 10 days after
notice (the "judgment default provision") or (ix) the Guaranty ceases to be in
full force and effect (other than in accordance with the terms of such Guaranty)
or Communications denies or disaffirms its obligations under the Guaranty.
However, a default under clause (iv), (v), (vi) and (viii) will not constitute
an Event of Default until the Trustee or the holders of 25% in principal amount
of the outstanding Notes notify Graphics of the default and Graphics does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% of principal amount of the outstanding Notes may declare
the principal amount of and accrued but unpaid interest on all the Notes as of
the date of such declaration to be due and payable. Upon such a declaration,
such amounts shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of
Graphics occurs and is continuing, the principal amount of and any accrued but
unpaid interest on all the Notes will ipso facto become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any holders of the Notes. Under certain circumstances, the holders of a majority
in principal amount of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee
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reasonable security or indemnity against any loss, liability or expense, (iv)
the Trustee has not complied with such request within 60 days after the receipt
thereof and the offer of security or indemnity and (v) the holders of a majority
in principal amount of the outstanding Notes have not given the Trustee a
direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the holders of a majority in principal amount of the
outstanding Notes are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is in the interest of the holders of the Notes. In
addition, Graphics is required to deliver to the Trustee, within 120 days after
the end of the fiscal year, a certificate indicating whether the signers thereof
know of any Default that occurred during the previous year. Graphics also is
required to deliver to the Trustee, within 30 days after the occurrence thereof,
written notice of any events which would constitute certain Defaults, their
status and what action Graphics is taking or proposes to take in respect
thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note, no amendment may, among other things, (i)
reduce the amount of Notes whose holders must consent to an amendment, (ii)
reduce the rate of or extend the time for payment of interest on any Note, (iii)
reduce the principal of or extend the Stated Maturity of any Note or reduce the
principal amount of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under "Optional Redemption" above, (v) make any Note payable in money
other than that stated in the Note, (vi) impair the right of any holder of the
Notes to receive payment of principal of and interest on such holder's Notes on
or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Notes, (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions, (viii) make any change to the subordination provisions of the
Indenture that would adversely affect the Noteholders or (ix) make any change in
the Guaranty that would adversely affect the Noteholders.
Without the consent of any holder of the Notes, Graphics and the
Trustee may amend or supplement the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of Graphics under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add additional guarantees
with respect to the Notes, to secure the Notes, to add to the covenants of
Graphics or Communications for the benefit of the holders of the Notes or to
surrender any right or power conferred upon Graphics or Communications, to
provide for the issuance of the Notes, to make any change that does not
adversely affect the rights of any holder of the Notes or to comply with any
requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act. However, no amendment may be made to
the subordination provisions of the Indenture that adversely affects the rights
of any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consents to such change.
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The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, Graphics is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
Defeasance
Graphics at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. Graphics at any time may terminate its obligations under the covenants
described under "Certain Covenants", the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "Defaults" above and the
limitations contained in clauses (iii) and (iv) under "Successor Company" above
("covenant defeasance").
Graphics may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Graphics exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If Graphics exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "Defaults" above or because of the
failure of Graphics to comply with clause (iii) or (iv) under "Successor
Company" above. If Graphics exercises its legal defeasance option or its
covenant defeasance option, Communications will be released from all its
obligations with respect to the Guaranty.
In order to exercise either defeasance option, Graphics must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an opinion of
counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
Concerning the Trustee
On December 4, 1995, The Bank of New York purchased the corporate trust
business of NationsBank of Georgia, National Association, and became the Trustee
under the Indenture and the Registrar and Paying Agent with regard to the Notes.
Governing Law
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts executed and to be performed entirely in such State.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which represents the opinion of Shearman &
Sterling, counsel to the Company, describes the material United States federal
income tax consequences of the acquisition, ownership and disposition of the
Notes. This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion assumes that all of the Notes will be held as
capital assets (i.e., generally assets that are held for investment), within the
meaning of Section 1221 of the Code, and will not be part of a straddle, a hedge
or a conversion transaction, within the meaning of Section 1258 of the Code. The
discussion is for general information only, and does not address all of the tax
consequences that may be relevant to particular purchasers in light of their
personal circumstances, or to certain types of purchasers (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or foreign persons). Persons considering the purchase of Notes should
consult their tax advisors with regard to the applications of the United States
federal income tax laws to their particular situations, as well as any tax
consequences arising under the laws of any state, local, or foreign taxing
jurisdictions.
The Notes
Stated Interest. Each holder of Notes must include as ordinary interest
income the interest attributable to such Notes at the time it accrues or is
received, in accordance with the holder's accounting method for United States
federal income tax purposes.
The Notes were not issued with original issue discount ("OID"), unless
the existence of Graphics' obligation to offer to repurchase such Notes upon a
Change of Control Triggering Event affects the yield or maturity date of the
Notes. In the event of a Change of Control Triggering Event, Graphics will be
required to offer to repurchase the Notes. Based on the applicable regulations,
the right of holders of the Notes to require repurchase upon the occurrence of a
Change of Control Triggering Event will not affect the yield or maturity date of
the Notes unless, based on all the facts and circumstances as of the issue date,
it is more likely than not that such an event giving rise to the repurchase will
occur. Graphics has not treated the Change of Control Triggering Event
provisions as affecting the computation of the yield to maturity. If the Change
of Control Triggering Event provisions were to affect the computation of the
yield to maturity, the Notes could be treated as having been issued with OID in
the amount of the premium payable upon exercise of the holder's rights under
such provisions.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of
a Note, a holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (reduced, in the
case of a cash basis taxpayer, by an amount attributable to accrued stated
interest, which is taxable as such) and such holder's adjusted tax basis in such
Note. A holder's adjusted tax basis in a Note will generally equal the cost of
such Note to such holder, increased by any accrued interest and market discount
previously included in taxable income by the holder, and reduced by any
amortized bond premium and any payments received by the holder, all with respect
to such Note.
Subject to the exception discussed below for market discount, gain or
loss recognized on the sale, exchange or retirement of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if at the time
of sale, exchange or retirement such Note has been held for more than one year.
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Amortizable Bond Premium and Market Discount. If a holder purchased a
Note for an amount that is greater than the amount payable at maturity, such
holder will be considered to have purchased such Note with "bond premium." The
amount of bond premium is the excess of (i) the holder's tax basis in such Note,
over (ii) the amount payable at maturity (or on an earlier call date if it
results in a smaller amortizable bond premium). Such holder may elect (in
accordance with applicable Code provisions) to amortize such premium using a
constant yield method over the remaining term of such Note (or until an earlier
call date if it resulted in a smaller amount of bond premium) and to offset
interest otherwise required to be included in income in respect of such Note
during any taxable year by the amortized amount of such excess for such taxable
year. Such election, once made, is irrevocable (unless permission is received
from the Internal Revenue Service (the "IRS")) and applies to all taxable bonds
held during the taxable year for which the election is made or subsequently
acquired. A holder who has elected to amortize premium using the constant yield
method may also elect to compute interest accruals by treating the purchase as a
purchase at original issuance and applying the constant yield method.
If a holder purchased a Note for an amount that is less than the stated
redemption price at maturity, such holder will generally be considered to have
purchased such Note with "market discount." For this purpose, the stated
redemption price at maturity of a Note will equal its principal amount. Market
discount with respect to a Note is the excess of the stated redemption price at
maturity over the amount paid by the holder for such Note. However, the amount
of market discount will be considered zero if it would otherwise be less than
1/4 of 1 percent of the stated redemption price of such Note at maturity
multiplied by the number of complete years to maturity (after the holder
acquired such Note). If a Note is subject to the market discount rules, a holder
will generally be required to (i) treat any gain realized with respect to such
Note as ordinary income to the extent market discount accrued during the period
such holder held the Note, (ii) possibly treat any payment on such Note (other
than stated interest) as ordinary income to the extent market discount accrued
during the period such holder held such Note and (iii) defer the deduction of
all or a portion of the interest expense on any indebtedness incurred or
maintained by such holder to purchase or carry such Note. If such Note is
disposed of in a nontaxable transaction (other than a nonrecognition transaction
described in Section 1276(c) of the Code), accrued market discount will be
includable as ordinary income to the holder as if such holder had sold such Note
at its then fair market value. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
such Note, unless the holder irrevocably elects (on an instrument-by-instrument
basis) to accrue market discount on the basis of a constant interest rate. A
holder may elect to include market discount in income currently as it accrues
(on either a ratable or constant yield basis), in which case the rule described
above regarding deferral of interest deductions will not apply. An election to
include market discount currently, once made, will apply to all market discount
obligations acquired by the holder on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the IRS. In the case of a holder who has made both of the elections
described above with respect to such Note, such a holder may elect to compute
interest accruals by treating the purchase as a purchase at original issuance
and applying the constant yield method.
Because of the complexity of the rules relating to bond premium and
market discount, holders should consult their tax advisors as to the application
of these rules to their particular circumstances and as to the merit of making
any elections in connection therewith.
Backup Withholding and Information Reporting
The information reporting requirements of the Code and Treasury
Regulations apply to certain payments of principal, premium, if any, and
interest (including OID) on a Note, and to proceeds of the sale or redemption of
a Note. Certain holders may also be subject to backup withholding at a rate of
31% on any payments made with respect to, and proceeds of disposition of, the
Notes. Backup withholding will apply to such payments if the holder fails to
furnish a correct taxpayer identification number (social security number or
employer identification number). Backup withholding may also apply to payments
of interest to a holder if such
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holder has failed to report interest or dividend income to the IRS and the IRS
has so notified the payor or, in certain circumstances, if a holder has failed
to certify that such holder is not subject to such backup withholding, or failed
to otherwise comply with the applicable requirements of the backup withholding
rules. Any amount withheld under these backup withholding rules will be
creditable against the holder's federal income tax liability provided that the
required information is furnished to the IRS. Certain holders (including, among
others, corporations) are not subject to the backup withholding requirements.
The procedures described above for withholding tax on interest
payments, and some of the associated backup withholding and information
reporting rules, are currently the subject of new proposed regulations, which
are proposed to be effective for payments made after December 31, 1997, subject
to certain transition rules.
PLAN OF DISTRIBUTION
This Prospectus is to be used by MS&Co. in connection with offers and
sales in market-making transactions at negotiated prices relating to prevailing
market prices at the time of sale. MS&Co. may act as principal or agent in such
transactions. MS&Co. has no obligation to make a market in the Notes and may
discontinue its market-making activities at any time without notice, at its sole
discretion.
There is currently no established public market for the Notes. Graphics
does not currently intend to apply for listing of the Notes on any securities
exchange or approval for quotation through any automated quotation system.
Therefore, any trading that does develop will occur on the over-the-counter
market. The Company has been advised by MS&Co. that it intends to make a market
in the Notes but it has no obligation to do so and any market-making may be
discontinued at any time without notice. No assurance can be given that an
active public market for the Notes will develop.
MS&Co. acted as placement agent in connection with the original private
placement of the Old Notes and received a placement fee of $5.6 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.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby were
passed on for Graphics and Communications by Shearman & Sterling, New York, New
York. Shearman & Sterling has performed, and will continue to perform, legal
services for MSLEF and the MSCP Entities, companies controlled by MSLEF and the
MSCP Entities and MS&Co.
EXPERTS
The consolidated financial statements and schedules of Sullivan
Communications, Inc. at March 31, 1997 and 1996, and for each of the three
fiscal years in the period ended March 31, 1997, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon (which contain an explanatory
paragraph with respect to an accounting change mentioned in note 18 to the
consolidated financial statements) appearing elsewhere herein, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
Sullivan Communications, Inc.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Page
----
Report of Independent Auditors....................................... F-2
Consolidated Balance Sheets--March 31, 1997 and 1996................. F-3
For the Years Ended March 31, 1997, 1996 and 1995:
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Deficit............ F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements........................... F-9
F-1
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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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sullivan Communications, Inc. at March 31, 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.
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
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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:
F-9
<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.
F-10
<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.
F-11
<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
========
F-12
<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.
F-13
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(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).
(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.
F-14
<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
======= ======
F-15
<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
======== ========
F-16
<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.
F-17
<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.
F-18
<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.
(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
------- -------
F-19
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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.
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
====== ====== ======
F-20
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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
======= ======= =======
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:
F-21
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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
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
F-22
<PAGE>
SULLIVAN COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
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)
======== ========
F-23
<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.
F-24
<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
obligation 250 317 512
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
===== ===== =====
F-25
<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.
F-26
<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.
F-27
<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.
F-28
<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.
F-29
<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>
F-30
<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.
F-31
<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
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Indemnification of Directors and Officers.
Graphics
The Business Corporation Law of the State of New York (the "New York
Law") permits indemnification of directors, employees and agents of corporations
under certain conditions and subject to certain limitations. Pursuant to the New
York Law, Graphics has included in its Certificate of Incorporation and bylaws a
provision to eliminate the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care to the fullest extent
permitted by the New York Law and to provide that Graphics shall indemnify its
directors and officers to the fullest extent permitted by the New York Law.
Communications
The General Corporation Law of the State of Delaware (the "Delaware
Law") permits indemnification of directors, employees and agents of corporations
under certain conditions and subject to certain limitations. Pursuant to the
Delaware Law, Communications has included in its Restated Certificate of
Incorporation and bylaws a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their duty of
care to the fullest extent permitted by the Delaware Law and to provide that
Communications shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law.
Each party to the Stockholders' Agreement has agreed that no past,
current or future director or officer of Communications shall have any liability
(whether direct or indirect, in contract, tort or otherwise) to such party
arising out of or relating to any action or omission of such director or officer
in his or her capacity as a director or officer of Communications, except to the
extent that any loss, claim, damage or liability is found in a final judgment of
a court to have resulted from such director's or officer's bad faith, willful
misconduct or gross negligence. Furthermore, each party to the Stockholders'
Agreement will discharge and release each such director and officer from, and
waive and relinquish any and all rights to, any and all claims, demands, rights
of action or causes of action arising out of or relating to any action or
omission of such director or officer in his or her capacity as a director or
officer of Communications, except to the extent that any loss, claim, damage or
liability is found in a final judgment of a court to have resulted from such
director's or officer's bad faith, willful misconduct or gross negligence.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3+ Restated Certificate of Incorporation of Communications, as
amended to date
3.4 By-laws of Communications, as amended to date*
4.1+ Indenture (including the form of New Note), dated as of August
15, 1995, among Graphics, Communications and NationsBank of
Georgia, National Association, as Trustee
4.2+ Registration Agreement, dated as of August 10, 1995, among
Graphics, Communications and MS&Co.
II-1
<PAGE>
5.1+ Opinion of Shearman & Sterling regarding the legality of the
securities being registered
8.1+ Opinion of Shearman & Sterling regarding tax matters
10.1+ Credit Agreement, dated as of August 15, 1995, among
Communications, Graphics, BT Commercial Corporation, as Agent,
Bankers Trust Company, as Issuing Bank, and the parties
signatory thereto
10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated
as of August 15, 1995, among Communications, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto****
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto****
10.1(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******
10.1(f) June 30, 1997, Sixth 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(g) Term Loan Agreement, dated as of June 30, 1997, among
Communications, Graphics, Bankers Trust Company, as
Administrative Agent, 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
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe Inc.,
dated March 12, 1996****
12.1 Statements re computation of ratio of earnings to fixed charges
II-2
<PAGE>
21.1 List of Subsidiaries of Communications******
23.1 Consent of Ernst & Young LLP
23.4+ Consent of Shearman & Sterling (included in its opinion filed as
Exhibit 5.1)
24.1+ Powers of Attorney
25.1+ Statement of Eligibility of NationsBank of Georgia, National
Association on Form T-1 (bound separately)
---------
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1995 - Commission file number 33-31706-01.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number
33-31706-01.
**** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
***** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number
33-97090.
****** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.
+ Previously filed.
(b) Financial Statement Schedules.
The following Financial Statement Schedules are included as part of the
Registration Statement:
Schedule I: Condensed financial information of Registrant
Schedule II: Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required, are inapplicable or have been disclosed in the notes to the
consolidated financial statements and therefore have been omitted.
Item 17. Undertakings.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement;
II-3
<PAGE>
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the provisions described under Item 20
"Indemnification of Directors and Officers", above, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the paying by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Sullivan Graphics,
Inc. has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut, on July 9, 1997.
SULLIVAN GRAPHICS, INC.
By: /s/ Joseph M. Milano
-------------------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 9, 1997.
Signature Title
--------- -----
* Chairman, Chief Executive Officer, President and
- -------------------------- Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano Senior Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer)
Joseph M. Milano
* Vice President/Controller
- -------------------------- (Principal Accounting Officer)
Patrick W. Kellick
* Director
- --------------------------
Frank V. Sica
/s/ Eric T. Fry Director
- --------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano Attorney-in-fact
---------------------
Joseph M. Milano
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Sullivan
Communications, Inc. has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on July 9, 1997.
SULLIVAN COMMUNICATIONS, INC.
By: /s/ Joseph M. Milano
-------------------------------
Joseph M. Milano
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 9, 1997.
Signature Title
--------- -----
* Chairman, Chief Executive Officer, President and
- -------------------------- Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano Senior Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer)
Joseph M. Milano
* Vice President/Controller
- -------------------------- (Principal Accounting Officer)
Patrick W. Kellick
* Director
- --------------------------
Frank V. Sica
/s/ Eric T. Fry Director
- --------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano Attorney-in-fact
---------------------
Joseph M. Milano
II-6
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE I: Condensed Financial Information of Registrant S-2
SCHEDULE II: Valuation and Qualifying Accounts S-8
S-1
<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.
S-2
<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.
S-3
<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.
S-4
<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.
S-5
<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").
S-6
<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.
S-7
<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.
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C>
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3+ Restated Certificate of Incorporation of Communications, as
amended to date
3.4 By-laws of Communications, as amended to date*
4.1+ Indenture (including the form of New Note), dated as of August
15, 1995, among Graphics, Communications and NationsBank of
Georgia, National Association, as Trustee
4.2+ Registration Agreement, dated as of August 10, 1995, among
Graphics, Communications and MS&Co.
5.1+ Opinion of Shearman & Sterling regarding the legality of the
securities being registered
8.1+ Opinion of Shearman & Sterling regarding tax matters
10.1+ Credit Agreement, dated as of August 15, 1995, among
Communications, Graphics, BT Commercial Corporation, as Agent,
Bankers Trust Company, as Issuing Bank, and the parties signatory
thereto
10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated as
of August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto****
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Communications, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
and the parties signatory thereto****
10.1(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******
10.1(f) June 30, 1997, Sixth 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(g) Term Loan Agreement, dated as of June 30, 1997, among
Communications, Graphics, Bankers Trust Company, as
Administrative Agent, 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
</TABLE>
<PAGE>
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
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe Inc.,
dated March 12, 1996****
12.1 Statements re computation of ratio of earnings to fixed charges
21.1 List of Subsidiaries of Communications******
23.1 Consent of Ernst & Young LLP
23.4+ Consent of Shearman & Sterling (included in its opinion filed as
Exhibit 5.1)
24.1+ Powers of Attorney
25.1+ Statement of Eligibility of NationsBank of Georgia, National
Association on Form T-1 (bound separately)
-----
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1995 - Commission file number 33-31706-01.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number
33-31706-01.
**** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
***** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number
33-97090.
****** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.
+ Previously filed.
SIXTH AMENDMENT TO CREDIT AGREEMENT
SIXTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated
as of June 30, 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. The definition of "Borrowing Base" contained in Section 1.1
of the Credit Agreement is hereby amended by (i) deleting the period at the end
of clause (D) thereof and inserting in lieu thereof the phrase ", minus" and
(ii) inserting at the end of said definition the following new clause:
"(E) an amount equal to (i) on any date prior to December 31,
1997, $4,000,000, (ii) on any date from and including December 31 to
and including March 30, 1998, $3,000,000 and (iii) on any date
thereafter, 0.".
2. Section 1.1 of the Credit Agreement is hereby amended by
inserting in the appropriate alphabetical order the following new definitions:
"New Term Loan Agreement" shall mean a term loan agreement to
be entered into among Communications, the Borrower, the financial
institutions a party thereto and Bankers Trust Company, as
Administrative Agent thereunder, providing for the making of up
$25,000,0000 aggregate principal amount of term loans to the Borrower,
as same may be amended, modified or supplemented from time to time. It
is understood that the new Term Loan Agreement shall be on terms and
conditions substantially in accordance with the provisions attached as
Exhibit A to the Sixth Amendment, with such changes as would be
permitted pursuant to Permitted New Term Loan Amendments.
-1-
<PAGE>
"New Term Loan Documents" shall mean the New Term Loan
Agreement and all guaranties, security documents and other documents
(including, without limitation, all Credit Documents as defined in the
New Term Loan Agreement) delivered pursuant to the requirements of the
New Term Loan Agreement.
"Permitted New Term Loan Amendments" shall mean any amendment,
modification or waiver to the New Term Loan Agreement and/or any other
New Term Loan Documents (x) which makes such document or documents less
restrictive or waives any provision contained therein or (y) which
makes the covenants, defaults or other provisions contained in the New
Term Loan Agreement more restrictive, provided that any such Permitted
New Term Facility Amendment pursuant to clause (y) of this definition
(i) is deemed necessary or desirable in connection with the syndication
of the New Term Loan Agreement by the lenders thereunder and (ii) does
not make the covenants, defaults or other provisions contained therein
more restrictive than those contained in this Credit Agreement.
"Sixth Amendment" shall mean the Sixth Amendment to this
Credit Agreement, dated as of June 30, 1997, among Communications, the
Borrower, various of the Lenders, the Agent and the Issuing Bank.
3. Section 2.6(f) of the Credit Agreement is hereby Amended by
inserting at the end thereof the following new sentence:
"Notwithstanding anything to the contrary contained above, with respect
to mandatory repayments pursuant to this Section 2.6(f) only as a
result of equity issuances by Communications, at the time of each event
giving rise to a mandatory repayment pursuant to such Section, to the
extent the amount otherwise required to be applied pursuant to the
terms of said Section is used to permanently repay Indebtedness under
the New Term Loan Agreement, the amount so applied shall apply to
reduce the amount of the mandatory repayment otherwise required
pursuant to this Section 2.6(f)."
4. Section 7.1(a) of the Credit Agreement is hereby amended by
inserting the parenthetical "(or, in the case of fiscal year 1997 only, 120
days)" immediately following the phrase "90 days" contained in the first
sentence of said Section.
5. Section 7.1(b) of the Credit Agreement is hereby amended by
inserting immediately following the phrase "in any event within 45 days"
appearing in the first sentence thereof the parenthetical "and in any event not
later than July 20, 1998 in the case of the fiscal quarter ending on, or closest
to, June 30, 1998)".
6. Section 8.2 (c) of the Credit Agreement is hereby amended
by inserting the following parenthetical immediately after the phrase "other
Credit Documents" appearing therein:
-2-
<PAGE>
"(it being understood and agreed that, from and after the date of any
extension of loans pursuant to Section 8.3(l), all such loans and
obligations relating thereto may be secured pursuant to the Credit
Documents, on a second-priority basis to the Obligations, in accordance
with the amendments to the various Collateral Documents authorized
pursuant to the Sixth Amendment, and any Collateral Documents
thereafter entered into may likewise secure such Indebtedness and
related obligations pursuant to 8.3(l) on substantially the same
basis)".
7. Section 8.3 of the Credit Agreement is hereby amended by
(i) deleting the period at the end of clause (l) of said Section and inserting a
semicolon in lieu thereof, (ii) redesignating clause (m) of said Section as
clause (n), (iii) deleting the text "(l)" appearing in redesignated clause (n)
of said Section and inserting in lieu thereof the text "(m)" and (iv) inserting
the following new clause (m) immediately after clause (l) of said Section:
"(m) Indebtedness of the Borrower in an aggregate principal
amount not to exceed $25,000,000 (less any payments of principal
thereon) in respect of loans made pursuant to the New Term Loan
Agreement and guarantees thereof by the Guarantors; provided that the
cash proceeds of the loans under the New Term Loan Agreement (net of
any costs, fees and expenses payable in connection therewith) are used
by the Borrower to repay outstanding Revolving Loans hereunder
(although no reduction to the Total Revolving Loan Commitment shall be
required in connection therewith); and".
8. Section 8.9 of the Credit Agreement is hereby amended by
deleting in its entirety the table appearing in said Section and inserting in
lieu thereof the following new table:
"Fiscal Quarter Ended Minimum EBITDA
--------------------- --------------
March 31, 1997 $46,600,000
June 30, 1997 $45,700,000
September 30, 1997 $43,500,000
December 31, 1997 $41,500,000
March 31, 1998 $44,200,000
June 30, 1998 $50,100,000
September 30, 1998 $62,000,000
December 31, 1998 $63,000,000
March 31, 1999 $65,000,000
June 30, 1999 $65,000,000
September 30, 1999 $66,000,000
December 31, 1999 $67,000,000
Each fiscal quarter
ended thereafter $68,000,000
-3-
<PAGE>
; provided, that should the Borrower fail to deliver the financial statements
and accompanying information for the fiscal quarter ended June 30, 1998 by July
20, 1998 as required by to Section 7.1(b), EBITDA of the Borrower required to be
achieved (x) for the period ending June 30, 1998 shall be $61,000,000 and (y)
for each period ending after June 30, 1998 shall be respective amount as
provided in the Credit Agreement before giving effect to the Sixth Amendment, in
each case rather than the amount set forth for such period in the table above."
9. Section 8.10 of the Credit Agreement is hereby amended by
inserting immediately prior to the period at the end thereof the following
parenthetical:
"(or, for the three fiscal quarters ended June 30, 1997, December 31,
1997 and June 30, 1998, 1.05:1.0, provided that should the Borrower
fail to deliver the financial statements and accompanying information
for the fiscal quarter ended June 30, 1998 by July 20, 1998 as required
by Section 7.1(b), the minimum Current Ratio for the fiscal quarter
ended June 30, 1998 shall be 1.1:1.0 rather than 1.05:1.0)".
10. Section 8.11 of the Credit Agreement is hereby amended by
deleting the table appearing in said Section in its entirety and inserting in
lieu thereof the following new table:
"Fiscal Quarter Ended Minimum Fixed Charge Ratio
--------------------- --------------------------
March 31, 1997 0.68:1.0
June 30, 1997 0.60:1.0
September 30, 1997 0.60:1.0
December 31, 1997 0.60:1.0
March 31, 1998 0.67:1.0
June 30, 1998 0.72:1.0
Each fiscal quarter
ended thereafter 0.80:1.0
; provided that should the Borrower fail to deliver the financial statements and
accompanying information for the fiscal quarter ended June 30, 1998 by July 20,
1998 as required by to Section 7.1(b), the Minimum Fixed Charge Ratio required
to be achieved (x) for the period ending June 30, 1998 shall be 0.80:1.0 and (y)
for each period ending after June 30, 1998 shall be respective amount as
provided in the Credit Agreement before giving effect to the Sixth Amendment, in
each case rather than the ratio set forth for such period in the table above."
11. Section 8.12 of the Credit Agreement is hereby amended by
(i) deleting the word "or" at the end of clause (iii) of said Section and
inserting in lieu thereof a comma and (ii) inserting immediately prior to the
period at the end of said Section the following new clauses:
-4-
<PAGE>
", (v) after any incurrence of Indebtedness pursuant to Section 8.3(l),
make (or give any notice in respect of) any voluntary or optional
payment or prepayment of principal on or voluntary or optional
redemption of or acquisition for value of, exchange or purchase, redeem
or acquire for value (whether as a result of a Change of Control, the
consummation of asset sales or otherwise) any of the Indebtedness
outstanding pursuant to the New Term Loan Agreement except payments or
prepayments with proceeds of sales or issuances of equity of
Communications or (vi) amend or modify, or permit the amendment or
modification of, any provision of the New Term Loan Agreement or the
other New Term Loan Documents other than (a) Permitted New Term
Facility Amendments and (b) modifications to the Collateral Documents
made in accordance with the respective terms and provisions thereof".
12. Section 9.1(c)(i) of the Credit Agreement is hereby
amended by inserting the phrase "or fail to deliver, by July 20, 1998, financial
statements and accompanying information for the fiscal quarter ended June 30,
1998 as required by Section 9.1(b)" immediately prior to the comma at the end
thereof.
13. The Banks hereby agree that if and when the New Term Loan
Agreement is entered into by the parties thereto and loans are made thereunder,
then Communications, the Borrower, the Subsidiary Guarantors and the Collateral
Agent shall be permitted (and are hereby authorized) (i) to enter into
amendments to the Pledge Agreement substantially in the form of Exhibit H-2
hereto, (ii) to enter into amendments to the Security Agreement substantially in
the form of Exhibit I-2 hereto, (iii) to enter into such amendments to the
Mortgages, the Canadian Debenture and the Canadian Pledge Agreement as they may
deem necessary and desirable in light of the New Term Loan Agreement so long as
any such amendments are consistent with the amendments described in clauses (i)
and (ii) of this Section 13, (iv) to enter into revised Lockbox Agreements,
Blocked Account Agreements and Concentration Account Agreements substantially in
the forms of Exhibits D-1, D-2 and D-3 hereto, respectively, and (v) to obtain
new Collateral Access Agreements in the form of Exhibit N hereto. Furthermore,
from and after the date of the occurrences described above in this Section 13,
and on a prospective basis, all Collateral Assignments of Equipment Purchase
Contracts shall be in the form of Exhibit B hereto, and any new Lockbox
Agreement, Blocked Account Agreement, Concentration Account Agreement or
Collateral Access Agreement shall be entered into in the forms of Exhibits B,
D-1, D-2, D-3 or N hereto, respectively, rather than in the forms originally
annexed as said Exhibits pursuant to the Credit Agreement.
14. 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 Sixth 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 Sixth
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 Sixth Amendment Effective Date (it being understood that any
-5-
<PAGE>
representation or warranty made as of a specific date shall be true and correct
in all material respects as of such specific date).
15. The Borrower hereby agrees to pay to the Agent for the
account of each Non-Defaulting Lender which has approved, executed and delivered
a copy of this Amendment as set forth in Section 20 hereof a fee equal to 1/5 of
1% of (x) such Lender's Revolving Loan Commitment in effect at the time of such
payment and (y) the principal amount of the Term Loans made by such Lender that
are outstanding at the time of such payment.
16. 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.
17. 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.
18. 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.
19. This Amendment shall become effective on the date (the
"Sixth Amendment Effective Date") when each of Communications, the Borrower,
each Subsidiary Guarantor 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.
20. From and after the Sixth 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.
* * *
-6-
<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.
By /s/ Joseph Milano
-----------------------------
Title: Chief Financial Officer
SULLIVAN GRAPHICS, INC.
By /s/ Joseph Milano
-----------------------------
Title: Chief Financial Officer
BT COMMERCIAL CORPORATION,
Individually and as Agent
By /s/ Bruce Addison
-----------------------------
Title: Vice President
BTM CAPITAL CORPORATION
By /s/ Bruce Addison
-----------------------------
Title: Vice President
BNY FINANCIAL CORPORATION
(successor by merger to THE BANK
OF NEW YORK COMMERCIAL
CORPORATION)
By /s/
-----------------------------
Title:
<PAGE>
DEUTSCHE FINANCIAL SERVICES
HOLDING CORP.
By /s/
----------------------------
Title:
FINOVA CAPITAL CORPORATION
By /s/
----------------------------
Title:
GIBRALTAR CORPORATION OF
AMERICA
By /s/
----------------------------
Title:
LASALLE NATIONAL BANK
By /s/
----------------------------
Title:
SANWA BUSINESS CREDIT
CORPORATION
By /s/
----------------------------
Title:
HELLER BUSINESS CREDIT
CORPORATION
By /s/
----------------------------
Title:
<PAGE>
Each of the undersigned, each being a Subsidiary Guarantor pursuant to the
Credit Agreement referenced in the foregoing Amendment and a party to various
Collateral Documents, hereby acknowledges and agrees to the foregoing provisions
of the Amendment.
Acknowledged and
Agreed this _______ day
of _______, 1997.
AMERICAN IMAGES OF NORTH
AMERICA, INC.
By /s/
--------------------------
Name:
Title:
SULLIVAN MARKETING, INC.
By /s/
--------------------------
Name:
Title:
SULLIVAN MEDIA CORPORATION
By /s/
--------------------------
Name:
Title:
<PAGE>
EXHIBIT A
SUMMARY OF CERTAIN TERMS
AND CONDITIONS
Borrower: Sullivan Graphics, Inc.
Agent: BTCo.
Collateral Agent: BTCC
Lenders: A syndicate of lenders (the "Lenders")formed by BTCo.
Term Loan Facility: Term loan facility in an aggregate principal amount
of $25 million (the "Term Loan Facility").
Maturity: The Term Loan Facility will mature on March 31, 2001
(the "Term Loan Maturity Date").
Use of Proceeds: The loans under the Term Loan Facility (the "Term
Loans") shall only be utilized to prepay outstandings
under the revolving loan facility pursuant to the
Existing Credit Agreement described below.
Availability: The Term Loans may only be incurred on the Term Loan
Borrowing Date. No amount of Term Loans once repaid
may be reborrowed.
Guaranties: The Term Loan Facility shall be guaranteed on the
same basis (although such guarantees shall be secured
by second priority security interests as described
under the heading "Security" below) as the Credit
Agreement, dated as of August 15, 1995, among
Communications, the Borrower, various financial
institutions (the "Existing Banks"), BT Commercial
Corporation, as Administrative Agent, and BTCo, as
such agreement is in effect on the date of the
Commitment Letter (the "Existing Credit Agreement"),
with each entity which guaranties the Term Loan
Facility herein called a "Guarantor".
-1-
<PAGE>
Security: The obligations of the Borrower and each Guarantor
shall be secured by a second priority perfected
security interest in all tangible and intangible
assets (including, without limitation, receivables,
contracts, contract rights, securities, intellectual
property, inventory, equipment and real estate) of
the Borrower and the Guarantors, which security
interests shall be junior to the security interests
of the lenders under the Existing Credit Agreement.
It is understood that, so long as there are any
outstandings pursuant to the Existing Credit
Agreement, that the lenders thereunder shall
generally control decisions with respect to the
collateral described above and the enforcement of
remedies with respect thereto.
All documentation evidencing the security required
pursuant to the immediately preceding paragraph shall
be in form and substance satisfactory to BTCo, and
shall effectively create second priority security
interests in the property purported to be covered
thereby.
Interest Rates: At the option of the Borrower, Term Loans may be
maintained from time to time as (x) Base Rate Loans
which shall bear interest at the Applicable Margin in
excess of the Base Rate in effect from time to time
or (y) Reserve Adjusted Eurodollar Loans which shall
bear interest at the Applicable Margin in excess of
the Eurodollar Rate (adjusted for maximum reserves)
as determined by BTCo for the respective interest
period, provided that Reserve Adjusted --------
Eurodollar Loans may not be incurred until the
earlier to occur of (x) the 60th day following the
Initial Borrowing Date and (y) that date upon which
BTCo has determined (and notifies the Borrower) that
the primary syndication of the Term Loan Facility
(and the resultant addition of institutions as
Lenders) has been completed; provided further that at
no time shall the per annum interest rate applicable
to any Term Loan exceed 18%.
"Base Rate" shall mean the higher of (x) 1/2 of 1% in
excess of the Federal Reserve reported certificate of
deposit rate and (y) the rate that BTCo announces
from time to time as its prime lending rate, as in
effect from time to time.
"Applicable Margin" shall mean a percentage per annum
which shall initially equal (x) in the case of
Reserve Adjusted Eurodollar Loans, 4.0% and (y) in
the case of Base Rate Loans, 3.0%; provided that the
Applicable Margins for each type of loan shall
increase on each
-2-
<PAGE>
three-month anniversary of the Term Loan Borrowing
Date in accordance with the table set forth below:
Applicable
Margin for
Reserve
Adjusted Applicable
Month Eurodollar Margin for
Anniversary Rate Loans Base Rate Loans
----------- ---------- ---------------
0 4.0% 3.0%
3 4.25% 3.25%
6 4.5% 3.5%
9 5.0% 4.0%
12 5.5% 4.5%
15 6.0% 5.0%
18 6.5% 5.5%
21 7.0% 6.0%
24 7.5% 6.5%
Interest periods of 1, 2, 3 or 6 months shall be
available in the case of Reserve Adjusted Eurodollar
Loans.
The Term Loan Facility shall include customary
protective provisions for such matters as defaulting
banks, capital adequacy, increased costs, actual
reserves, funding losses, illegality and withholding
taxes.
Interest in respect of Base Rate Loans shall be
payable quarterly in arrears on the last business day
of each fiscal quarter. Interest in respect of
Reserve Adjusted Eurodollar Loans shall be payable in
arrears at the end of the applicable interest period
and every three months in the case of interest
periods in excess of three months. Interest will also
be payable at the time of repayment of any Term Loans
and at maturity. All calculations of interest on Term
Loans and commitment fees shall be based on a 360-day
year and actual days elapsed.
Default Interest: Overdue principal, interest and other amounts shall
bear interest at a rate per annum equal to the
greater of (i) the rate which is 2% in excess of the
rate otherwise applicable to Base Rate Loans from
time to time and (ii) the rate which is 2% in excess
of the rate then
-3-
<PAGE>
borne by such borrowings. Such interest shall be
payable on demand.
Outstandings Fees: In addition to the amounts payable as described
above, if any Term Loans remain outstanding on either
the 12 or 30 month anniversary of the Term Loan
Borrowing Date, then on each such date an additional
cash fee shall be paid to BTCo (and retained by it or
distributed to the Lenders as agreed by them) in an
amount equal to 1.0% of the aggregate principal
amount of Term Loans then outstanding, and if any
Term Loans remain outstanding on either the 6, 9, 18
or 24 month anniversary of the Term Loan Borrowing
Date, then additional cash fees in an amount equal to
1/2 of 1% of the aggregate principal amount of Term
Loans then outstanding shall be paid on such date to
BTCo (and retained by it or distributed to the
Lenders as agreed by them).
Additional Fees: In addition to the foregoing, BTCo shall receive such
fees as have been separately agreed upon.
Mandatory
Prepayments: To be determined.
Documentation: The Lenders' commitments will be subject to the
negotiation, execution and delivery of definitive
financing agreements (and related security
documentation, guaranties, etc.) in connection with
the Term Loan Facility (the "Credit Documents")
reasonably con- sistent with the terms of the
Commitment Letter and this Summary of Terms, in each
case prepared by White & Case, counsel to BTCo.
Conditions
Precedent: In addition to conditions precedent typical for these
types of facilities and any other conditions
appropriate in the context of the proposed
transaction, the following conditions shall apply:
A. To the Initial Loans
(i) The Credit Documents shall have been executed and
delivered reflecting the terms and conditions set
forth in this Summary of Terms and shall otherwise be
in form and substance satisfactory to BTCo and the
Lenders, and all conditions to the making of the Term
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<PAGE>
Loans set forth therein shall have been satisfied or
waived on or prior to the Term Loan Borrowing Date.
(ii) All necessary governmental (domestic and foreign) and
third party approvals in connection with the
Transaction shall have been obtained and remain in
effect (including, without limitation, the requisite
consents of the lenders under the Existing Credit
Agreement). Additionally, there shall not exist any
judgment, order, injunction or other restraint
prohibiting or imposing materially adverse conditions
upon, or making economically unfeasible, the
consummation of the Transaction.
(iii) Nothing shall have occurred (and the Lenders shall
have become aware of no facts or conditions not
previously known) which BTCo or the Lenders shall
reasonably determine could have a material ad- verse
effect on the rights or remedies of the Lenders or
BTCo, or on the ability of the Borrower to perform
its obligations to the Lenders or which could have a
materially adverse effect on the busi- ness,
property, assets, nature of assets, liabilities,
condition (finan- cial or otherwise) or prospects of
Communications, the Borrower or Communications and
its subsidiaries taken as a whole.
(iv) No litigation by any entity (private or governmental)
shall be pending or threatened with respect to the
Transaction, the Term Loan Facility or any
documentation executed in connection therewith or
which BTCo or the Lenders shall reasonably determine
could have a materially adverse effect on the
business, property, assets, nature of assets,
liabilities, condition (financial or otherwise) or
prospects of Communications, the Borrower or
Communications and its subsidiaries taken as a whole
after giving effect to the Transaction.
(v) All Loans and other financing to the Borrower shall
be in full compliance with all requirements of
Regulations G, T, U and X of the Board of Governors
of the Federal Reserve System.
(vi) BTCo and the Lenders shall have received legal
opinions from counsel, and in form and substance and
covering matters, acceptable to BTCo and the Lenders,
including, without limitation, opinions from counsel
to the Borrower as to no conflicts with laws or
material agreements, the enforceability of the Credit
Documents and the matters described in clauses (vii)
and (ix) below.
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<PAGE>
(vii) The guarantees and security agreements required as
described under the headings "Guarantees" and
"Security" above shall have been executed and
delivered in form, scope and substance reasonably
satisfactory to BTCo, and the Lenders shall have
second priority perfected security interest in all
assets as are required above.
(viii) A satisfactory intercreditor agreement shall have
been entered into, or satisfactory intercreditor
provisions shall have been agreed to, by the Lenders
party to the Existing Credit Agreement.
(ix) All Indebtedness under the Term Loan Facility shall
constitute "Senior Indebtedness" for all purposes
under the Senior Subordinated Note Indenture.
(x) There shall have been no material adverse change
after the date hereof to the syndication market for
credit facilities similar in nature to the Term Loan
Facility contemplated herein and there shall not have
occurred and be continuing a material disruption of
or material adverse change in financial, banking or
capital markets that would have a material adverse
effect on the syndication, in each case as determined
by BTCo in its sole discretion. The Borrower and
Communications and their respective advisors shall
have fully cooperated in the syndication efforts,
including, without limitation, by promptly providing
BTCo with all information deemed necessary by it to
successfully complete the syndication.
(xi) All costs, fees, expenses (including, without
limitation, legal fees and expenses) and other
compensation contemplated hereby or any letter
executed in connection herewith and payable to the
Lenders or BTCo (or their respective affiliates)
shall have been paid to the extent due.
(xii) Absence of default or unmatured default under the
Term Loan Facility, accuracy of representations and
warranties and receipt of such documentation as shall
be required by the Agent.
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<PAGE>
Representations
and Warranties: The Term Loan Facility and related documentation
shall contain representations and warranties typical
for these types of facilities, as well as any
additional ones appropriate in the context of the
proposed transaction.
Covenants: Although the covenants have not yet been specifically
determined, we anticipate that, subject to such
deviations therefrom as are described in Annex I
hereto, the covenants shall be substantially similar
as those contained in the Senior Subordinated Note
Indenture, and in any event, will not be more
restrictive than those contained in the Existing
Credit Agreement (and related documentation). BTCo
reserves the right to further modify the covenants,
provided that no such modifications will result in
any covenant contained in the Credit Documents being
more restrictive than those contained in the Existing
Credit Agreement (and related documentation).
Events of Default: Those typical for these types of facilities
including, without limitation, payment, material
misrepresentations, covenant defaults, bankruptcy and
a change of control of Communications or the
Borrower.
Assignments and
Participations: The Borrower may not assign its rights or obligations
under the Term Loan Facility without the prior
written consent of the Agent and the Lenders. Any
Lender may assign, and may sell parti- cipations in,
its rights and obligations under the Term Loan
Facility, subject (x) in the case of participations,
to customary restrictions on the voting rights of the
participants and (y) in the case of assignments, to a
minimum assignment requirement of $2,000,000 (or to
the extent the amount held by such Lender is less
than $2,000,000, such lesser amount) and such other
limitations as may be established by the Agent (which
in any event shall require the consent of the Agent,
not to be unreasonably withheld, to assignments). The
Term Loan Facility shall provide for a mechanism
which will allow for each assignee to become a direct
signatory to the Term Loan Facility and will relieve
the assigning Lender of its obligations with respect
to the assigned portion of its commitment.
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<PAGE>
Governing Law: The rights and obligations of the parties under the
Credit Documents shall be construed in accordance
with and governed by the law of the State of New
York.
Required Lenders: Majority; provided that until the first date on or
after the Term Loan Borrowing Date upon which BTCo
and its affiliates own less than a majority of the
outstanding Term Loans, the Required Lenders shall be
required to include (if there are any Lenders other
than BTCo and its affiliates) at least one lender
which is not BTCo or an affiliate thereof.
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<PAGE>
ANNEX I TO SUMMARY OF TERMS
COVENANTS
The covenants applicable to the Term Loan Facility will in no event be more
restrictive than those contained in the Existing Credit Agreement. Although the
covenants have not yet been specifically determined, BTCo anticipates that,
subject to the deviations set forth below, the covenants shall be substantially
similar to those contained in the Senior Subordinated Note Indenture as defined
in the Existing Credit Agreement. Subject to the first sentence above, BTCo
reserves the right to further modify the covenants applicable to the Term Loan
Facility. In describing the covenants below, references are to Post-Effective
Amendment No. 2 to Form S-1, as filed by Sullivan Communications, Inc. and
Sullivan Graphics, Inc. with the SEC on July 12, 1996.
1. Limitation on Indebtedness -
i) clause (a) to be deleted.
ii) sub-clause (a)(x) in clause (b)(1) to be deleted.
iii) dollar limits to be established for Indebtedness incurred
pursuant to clauses (b)(11), (12) and (13).
iv) the $25 million basket amount provided in clause (b)(14)
to be allocated to Term Loan Facility.
2. Limitation on Restricted Payments - All payments with respect to
subordinated debt to constitute Restricted Payments. Restricted Payments will be
strictly limited, with the precise terms of the covenant to be agreed.
3. Limitation on Sales of Assets and Subsidiary Stock - The covenant
would be modified to require that the Term Loan Facility be repaid in full
before any amounts are applied to repay Senior Subordinated Notes or any other
Subordinated Indebtedness.
4. Change of Control Triggering Event - The Covenant would be modified
to delete the requirement of a Rating Decline in connection with a Change of
Control Triggering Event. As a result, upon a Change of Control, whether or not
a Rating Decline has occurred, the covenant would apply in accordance with its
terms. Additionally, at the option of BTCo, the covenant shall be structured as
a mandatory repayment, rather than an offer to purchase.
<PAGE>
ANNEX I TO SUMMARY OF TERMS
Page 2
5. Successor Company - Transactions of the type described in this
covenant shall be strictly limited, with the precise terms of the covenant to be
agreed.
================================================================================
TERM LOAN AGREEMENT
among
SULLIVAN COMMUNICATIONS, INC.,
SULLIVAN GRAPHICS, INC.,
VARIOUS FINANCIAL INSTITUTIONS
and
BANKERS TRUST COMPANY,
as ADMINISTRATIVE AGENT
----------------------------------
Dated as of June 30, 1997
----------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Amount and Terms of Credit................................... 1
1.01 The Commitments.............................................. 1
1.02 Notice of Borrowing.......................................... 1
1.03 Disbursement of Funds........................................ 2
1.04 Notes ..................................................... 3
1.05 Pro Rata Borrowings.......................................... 3
1.06 Interest..................................................... 3
1.07 Interest Periods............................................. 4
1.08 Increased Costs, Illegality, etc. ........................... 5
1.09 Compensation................................................. 8
1.10 Change of Applicable Lending Office.......................... 8
1.11 Replacement of Banks......................................... 8
1.12 Conversions.................................................. 9
SECTION 2. Fees; Reductions of Commitment............................... 9
2.01 Fees ..................................................... 9
SECTION 3. Prepayments; Payments; Taxes................................. 10
3.01 Mandatory and Voluntary Payment; Mandatory and Voluntary
Reduction of Commitments............................. 10
3.02 Method and Place of Payment.................................. 11
3.03 Net Payments................................................. 11
SECTION 4. Conditions Precedent......................................... 15
4.01 Execution of Agreement; Notes................................ 15
4.02 No Default; Representations and Warranties................... 15
4.03 Opinions of Counsel.......................................... 16
4.04 Corporate Documents; Proceedings; etc. ...................... 16
4.05 Adverse Change, etc. ........................................ 16
4.06 Litigation................................................... 17
4.07 Subsidiaries Guaranty........................................ 17
4.08 Existing Pledge Agreement Amendment.......................... 17
4.09 Existing Security Agreement Amendment........................ 18
4.10 Mortgage Amendments; etc..................................... 18
(i)
<PAGE>
Page
4.11 Canadian Debenture and Pledge Agreement...................... 18
4.12 Form of Collateral Assignments of Rights..................... 18
4.13 Lockbox, Blocked Account and Concentration Account
Agreements........................................... 19
4.14 Collateral Access Agreements................................. 19
4.15 Amendment to the Existing Credit Agreement................... 19
4.16 Solvency Certificate......................................... 19
4.17 Notice of Borrowing.......................................... 19
4.18 Fees, etc. .................................................. 19
SECTION 5. Representations, Warranties and Agreements.................... 19
5.01 Corporate Status............................................. 20
5.02 Corporate Power and Authority................................ 20
5.03 No Violation................................................. 20
5.04 Litigation................................................... 21
5.05 Use of Proceeds.............................................. 21
5.06 Governmental Approvals....................................... 21
5.07 Investment Company Act....................................... 21
5.08 Public Utility Holding Company Act........................... 21
5.09 True and Complete Disclosure................................. 21
5.10 Financial Condition; Financial Statements.................... 22
5.11 Locations of Offices, Records and Inventory.................. 22
5.12 Fictitious Business Names.................................... 23
5.13 Security Interests........................................... 23
5.14 Tax Returns and Payments..................................... 23
5.15 Compliance with ERISA........................................ 24
5.16 Subsidiaries................................................. 25
5.17 Patents, etc. ............................................... 25
5.18 Compliance with Statutes, etc. .............................. 26
5.19 Properties................................................... 27
5.20 Labor Relations; Collective Bargaining Agreements............ 27
5.21 Restrictions on Restricted Subsidiaries...................... 28
5.22 Material Contracts........................................... 28
5.23 Senior Indebtedness, etc. ................................... 28
5.24 Existing Collateral Documents................................ 28
SECTION 6. Affirmative Covenants......................................... 29
6.01 Financial Information........................................ 29
6.02 Corporate Franchises......................................... 30
(ii)
<PAGE>
Page
6.03 Compliance with Statutes, etc. .............................. 31
6.04 ERISA ..................................................... 31
6.05 Good Repair.................................................. 33
6.06 Additional Security; Further Assurances; etc. ............... 33
6.07 Insurance.................................................... 34
6.08 Taxes ..................................................... 34
6.09 Corporate Separateness....................................... 34
6.10 New Wholly-Owned Restricted Subsidiaries..................... 35
SECTION 7. Negative Covenants........................................... 35
7.01 Limitation on Indebtedness................................... 36
7.02 Limitation on Restricted Payments............................ 39
7.03 Limitation on Restrictions on Distributions from Restricted
Subsidiaries......................................... 40
7.04 Limitation on Sales of Assets and Subsidiary Stock........... 42
7.05 Limitation on Affiliate Transactions......................... 43
7.06 Change of Control............................................ 44
7.07 Limitation on the Issuance of Preferred Stock of Restricted
Subsidiaries......................................... 44
7.08 When Communications or Borrower May Merge or Transfer
Assets............................................... 44
7.09 Ownership of Restricted Subsidiaries......................... 45
7.09 Further Instruments and Acts................................. 45
SECTION 8. Events of Default............................................ 45
8.01 Events of Default Defined.................................... 45
8.02 Acceleration................................................. 47
8.03 Other Remedies............................................... 48
SECTION 9. Definitions.................................................. 48
9.01 General Definitions.......................................... 48
9.02 Accounting Terms and Determinations.......................... 79
9.03 Other Defined Terms.......................................... 80
SECTION 10. The Agent................................................... 80
10.01 Appointment................................................. 80
10.02 Nature of Duties of Agent................................... 81
10.03 Lack of Reliance on Agent................................... 81
10.04 Certain Rights of the Agent................................. 82
(iii)
<PAGE>
Page
10.05 Reliance by Agent........................................... 82
10.06 Indemnification of Agent.................................... 82
10.07 The Agent in Its Individual Capacity........................ 83
10.08 Holders of Notes............................................ 83
10.09 Successor Agent............................................. 83
10.10 Collateral Matters.......................................... 84
10.11 Actions with Respect to Defaults............................ 86
10.12 Delivery of Information..................................... 86
SECTION 11. Special Provisions Providing Lien Priorities; etc. .......... 86
11.01 Priorities With Respect to Collateral....................... 87
11.02 Priority on Distribution of Proceeds of Collateral.......... 88
11.03 Certain Dispositions of Collateral.......................... 89
11.04 Waiver of Set-Off........................................... 89
11.05 Right to Contest............................................ 90
11.06 Payment Invalidated......................................... 90
11.07 Right to Amend, etc. ....................................... 90
11.08 Creation of Future Obligations.............................. 91
11.09 Waiver of Liability For Actions Taken With Respect To
Second Priority Secured Obligations and Collateral... 91
11.10 Financing Issues............................................ 92
11.11 Effectiveness............................................... 92
11.12 Further Assurances.......................................... 92
11.13 Nature of the Obligations................................... 93
11.14 Benefits of this Section 11................................. 93
SECTION 12. Miscellaneous............................................... 93
12.01 Payment of Expenses; Indemnification; etc................... 93
12.02 Right of Setoff............................................. 94
12.03 Notices..................................................... 95
12.04 Benefit of Agreement; Assignments; Participations........... 95
12.05 No Waiver; Remedies Cumulative.............................. 98
12.06 Payments Pro Rata........................................... 99
12.07 Computations................................................ 99
12.08 GOVERNING LAW; SUBMISSION TO JURISDICTION;
VENUE; WAIVER OF JURY TRIAL.......................... 99
12.09 Counterparts................................................101
12.10 Effectiveness...............................................101
12.11 Headings Descriptive........................................101
(iv)
<PAGE>
12.12 Amendment or Waiver; etc. ..................................101
12.13 Survival....................................................102
12.14 Domicile of Loans...........................................103
12.15 Register....................................................103
12.16 Confidentiality.............................................103
12.17 Designated Senior Indebtedness..............................104
12.18 Limitation on Additional Amounts, etc. .....................104
12.19 Maximum Rate................................................105
12.20 Post Closing Actions........................................106
SECTION 13. Parent Guaranty.............................................107
13.01 The Parent Guaranty.........................................107
13.02 Bankruptcy..................................................108
13.03 Nature of Liability.........................................108
13.04 Independent Obligation......................................108
13.05 Authorization...............................................108
13.06 Reliance....................................................109
13.07 Subordination...............................................110
13.08 Waiver .....................................................110
13.09 Limitation on Enforcement...................................111
SCHEDULE I List of Banks
SCHEDULE II Governmental Approvals
SCHEDULE III Chief Executive Offices, Records Locations and Inventory
and Equipment Locations
SCHEDULE IV Fictitious Business Names
SCHEDULE V Tax Matters
SCHEDULE VI Subsidiaries
SCHEDULE VII Real Properties
SCHEDULE VIII Collective Bargaining Agreements
SCHEDULE IX Insurance
SCHEDULE X Existing Indebtedness
EXHIBIT A Form of Notice of Borrowing
EXHIBIT B Form of Note
EXHIBIT C Form of Section 3.03(e) Certificate
EXHIBIT D-1 Form of Opinion of Shearman & Sterling, special counsel to
the Credit Parties
(v)
<PAGE>
EXHIBIT D-2 Form of Opinion of Timothy M. Davis, Esq., General
Counsel to Communications and the Borrower
EXHIBIT E Form of Officer's Certificate
EXHIBIT F Form of Solvency Certificate
EXHIBIT G Form of Subsidiaries Guaranty
EXHIBIT H-1 Existing Pledge Agreement
EXHIBIT H-2 Form of Existing Pledge Agreement Amendment
EXHIBIT I-1 Existing Security Agreement
EXHIBIT I-2 Form of Existing Security Agreement Amendment
EXHIBIT K-1 Existing Canadian Debenture
EXHIBIT K-2 Form of Existing Canadian Pledge Agreement
EXHIBIT K-3 Existing Canadian Debenture Amendment
EXHIBIT K-4 Form of Existing Canadian Pledge Agreement Amendment
EXHIBIT L Form of Collateral Assignment of Rights
EXHIBIT M-1 Form of Lockbox Agreement
EXHIBIT M-2 Form of Blocked Account Agreement
EXHIBIT M-3 Form of Concentration Account Agreement
EXHIBIT N Form of Collateral Access Agreement
EXHIBIT O Form of Compliance Certificate
EXHIBIT P Form of Assignment and Assumption Agreement
(vi)
<PAGE>
TERM LOAN AGREEMENT, dated as of June 30, 1997, among SULLIVAN
COMMUNICATIONS, INC., a Delaware corporation ("Communications" or the "Parent
Guarantor"), SULLIVAN GRAPHICS, INC., a New York Corporation (the "Borrower"),
the financial institutions party hereto from time to time (the "Banks"), and
BANKERS TRUST COMPANY, as Administrative Agent (all capitalized terms used
herein and defined in Section 9 are used herein as therein defined).
W I T N E S S E T H :
WHEREAS, the Borrower wishes to obtain a term loan facility to
prepay outstandings under the revolving credit facility pursuant to the Existing
Credit Agreement and thereby improve its liquidity; and
WHEREAS, subject to and upon the terms and conditions set
forth herein, the Banks are willing to make available to the Borrower the credit
facility provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. Amount and Terms of Credit.
1.01 The Commitments. Subject to and upon the terms and
conditions set forth herein, each Bank severally agrees to make, on the Closing
Date, a term loan or term loans (each, a "Loan" and, collectively, the "Loans")
to the Borrower, which Loans shall (i) be denominated in Dollars, (ii) at any
time prior to the Syndication Date, be incurred and maintained as a single
Borrowing of Base Rate Loans (subject to mandatory conversion in whole into a
single Borrowing of Eurodollar Loans pursuant to Section 1.12), (iii) at any
time on and after the Syndication Date, be maintained as and/or converted into a
single Borrowing of Eurodollar Loans (subject to conversion, in whole or in
part, into Base Rate Loans pursuant to Section 1.08 or as provided in last
sentence of Section 1.07) and (iv) be made by each such Bank in that initial
aggregate principal amount as is equal to the Commitment of such Bank on the
Closing Date (before giving effect to any reductions thereto on such date
pursuant to Section 3.01(b)). Once repaid, Loans incurred hereunder may not be
reborrowed.
1.02 Notice of Borrowing. (a) When the Borrower desires to
incur the Loans hereunder, it shall give the Administrative Agent at its Notice
Office at least one Business Day's (or same day notice if acceptable to the
Administrative Agent) prior
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<PAGE>
written notice (or telephonic notice promptly confirmed in writing) of the Loans
to be made hereunder, provided that any such notice shall be deemed to have been
given on a certain day only if given before 11:00 A.M. (New York time) on such
day. Such written notice or written confirmation of telephonic notice (the
"Notice of Borrowing"), except as otherwise expressly provided in Section 1.08,
shall be irrevocable and shall be given by the Borrower in the form of Exhibit
A, appropriately completed to specify (i) the aggregate principal amount of the
Loans to be incurred pursuant to such Borrowing and (ii) the date of such
Borrowing (which shall be a Business Day). The Administrative Agent shall
promptly give each Bank notice of such proposed Borrowing, of such Bank's
proportionate share thereof and of the other matters required by the immediately
preceding sentence to be specified in the Notice of Borrowing.
(b) Without in any way limiting the obligation of the Borrower
to confirm in writing any telephonic notice permitted to be given hereunder, the
Administrative Agent may act without liability upon the basis of such telephonic
notice, believed by the Administrative Agent in good faith to be from an
Authorized Officer of the Borrower prior to receipt of written confirmation. In
each such case, the Borrower hereby waives the right to dispute the
Administrative Agent's record of the terms of such telephonic notice.
1.03 Disbursement of Funds. No later than 12:00 Noon (New York
time) on the Closing Date, each Bank will make available its pro rata portion
(determined in accordance with Section 1.05) of the Loans to be made on such
date. All such amounts will be made available in Dollars and in immediately
available funds at the Payment Office of the Administrative Agent, and the
Administrative Agent will make available to the Borrower by depositing to its
account at the Payment Office the aggregate of the amounts so made available by
the Banks in the type of funds received. Unless the Administrative Agent shall
have been notified by any Bank prior to the Closing Date that such Bank does not
intend to make available to the Administrative Agent such Bank's portion of the
Loans to be made on such date, the Administrative Agent may assume that such
Bank has made such amount available to the Administrative Agent on the Closing
Date and the Administrative Agent may, in reliance upon such assumption, make
available to the Borrower a corresponding amount. If such corresponding amount
is not in fact made available to the Administrative Agent by such Bank, the
Administrative Agent shall be entitled to recover such corresponding amount on
demand from such Bank. If such Bank does not pay such corresponding amount
forthwith upon the Administrative Agent's demand therefor, the Administrative
Agent shall promptly notify the Borrower and the Borrower shall immediately pay
such corresponding amount to the Administrative Agent. The Administrative Agent
shall also be entitled to recover on demand from such Bank or the Borrower, as
the case may be, interest on such corresponding amount in respect of each day
from the date such corre-
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<PAGE>
sponding amount was made available by the Administrative Agent to the Borrower
until the date such corresponding amount is recovered by the Administrative
Agent, at a rate per annum equal to (i) if recovered from such Bank, at the
overnight Federal Funds Rate and (ii) if recovered from the Borrower, the rate
of interest applicable to the Loans, as determined pursuant to Section 1.08.
Nothing in this Section 1.04 shall be deemed to relieve any Bank from its
obligation to make Loans hereunder or to prejudice any rights which the Borrower
may have against any Bank as a result of any failure by such Bank to make Loans
hereunder.
1.04 Notes. (a) The Borrower's obligation to pay the principal
of, and interest on, the Loans made by each Bank shall be evidenced by a
promissory note duly executed and delivered by the Borrower substantially in the
form of Exhibit B, with blanks appropriately completed in conformity herewith
(each, a "Note" and, collectively, the "Notes"). The Note issued to each Bank
shall (i) be executed by the Borrower, (ii) be payable to the order of such Bank
and be dated the Closing Date (or if issued thereafter, the date of issuance),
(iii) be in a stated principal amount equal to the principal amount of the Loans
made by such Bank and be payable in Dollars in the outstanding principal amount
of Loans evidenced thereby, (iv) mature on the Final Maturity Date, (v) bear
interest as provided in the appropriate clause of Section 1.06 in respect of the
Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby,
(vi) be subject to voluntary and mandatory prepayment as provided in Section
3.01 and (vii) be entitled to the benefits of this Agreement and the other
Credit Documents.
(b) Each Bank will note on its internal records the amount of
each Loan made by it and each payment in respect thereof and will prior to any
transfer of any of its Notes endorse on the reverse side thereof the outstanding
principal amount of Loans evidenced thereby. Failure to make any such notation
or any error in such notation shall not affect the Borrower's obligations in
respect of such Loans.
1.05 Pro Rata Borrowings. All Loans made under this Agreement
shall be incurred from the Banks pro rata on the basis of their Commitments. It
is understood that no Bank shall be responsible for any default by any other
Bank of its obligation to make Loans hereunder and that each Bank shall be
obligated to make the Loans provided to be made by it hereunder, regardless of
the failure of any other Bank to make its Loans hereunder.
1.06 Interest. (a) The Borrower agrees to pay interest in
respect of the unpaid principal amount of each Base Rate Loan from the date the
proceeds thereof are made available to the Borrower until the maturity thereof
(whether by acceleration
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<PAGE>
or otherwise) at a rate per annum which shall be equal to the sum of the
Applicable Margin plus the Base Rate, each as in effect from time to time.
(b) The Borrower agrees to pay interest in respect of the
unpaid principal amount of each Eurodollar Loan from the date the proceeds
thereof are made available to the Borrower until the maturity thereof (whether
by acceleration or otherwise) at a rate per annum which shall, during each
Interest Period applicable thereto, be equal to the sum of the Applicable Margin
(as in effect from time to time) plus the Eurodollar Rate for such Interest
Period.
(c) Overdue principal and, to the extent permitted by law,
overdue interest in respect of each Loan and any other overdue amount payable
hereunder shall, in each case, bear interest at a rate per annum equal to the
greater of (x) 2% per annum in excess of the rate otherwise applicable to Base
Rate Loans from time to time and (y) the rate which is 2% in excess of the rate
borne by such Loans at the time of the payment default, in each case with such
interest to be payable on demand.
(d) Accrued (and theretofore unpaid) interest shall be payable
(i) in respect of each Base Rate Loan, quarterly in arrears on each Quarterly
Payment Date, (ii) in respect of each Eurodollar Loan, on the last day of each
Interest Period applicable thereto and (iii) in respect of each Loan, on any
repayment or prepayment (on the amount repaid or prepaid), at maturity (whether
by acceleration or otherwise) and, after such maturity, on demand.
(e) Upon each Interest Determination Date, the Administrative
Agent shall determine the Eurodollar Rate for the respective Interest Period or
Interest Periods to be applicable to Eurodollar Loans and shall promptly notify
the Borrower and the Banks thereof. Each such determination shall, absent
manifest error, be final and conclusive and binding on all parties hereto.
1.07 Interest Periods. All Eurodollar Loans outstanding
hereunder at any time shall have a single interest period applicable thereto at
such time of three (3) months duration (each, an "Interest Period"), provided
that:
(i) the initial Interest Period for the Eurodollar Loans
shall commence on the Syndication Date and each Interest Period
occurring thereafter in respect of such Eurodollar Loans shall commence
(x) on the day on which the next preceding Interest Period applicable
thereto expires or (y) only in the circumstances provided in Section
1.08(d)(y) (where all Eurodollar Loans have theretofore been converted
into Base Rate Loans), on the Business Day specified in Section
1.08(d)(y);
-4-
<PAGE>
(ii) if any Interest Period for a Eurodollar Loan begins on a
day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period, such Interest Period shall
end on the last Business Day of such calendar month;
(iii) if any Interest Period for a Eurodollar Loan would
otherwise expire on a day which is not a Business Day, such Interest
Period shall expire on the next succeeding Business Day; provided,
however, that if any Interest Period for a Eurodollar Loan would
otherwise expire on a day which is not a Business Day but is a day of
the month after which no further Business Day occurs in such month,
such Interest Period shall expire on the next preceding Business Day;
and
(iv) no Interest Period shall be selected which extends
beyond the Final Maturity Date.
If upon the expiration of an Interest Period, the Borrower is
not permitted by virtue of the application of clause (iv) above to elect a new
Interest Period to be applicable to a Borrowing of Eurodollar Loans as provided
above, the Borrower shall be deemed to have elected to convert such Borrowing
into a Borrowing of Base Rate Loans effective as of the expiration date of such
current Interest Period.
1.08 Increased Costs, Illegality, etc. (a) In the event that
any Bank shall have determined in good faith (which determination shall, absent
manifest error, be final and conclusive and binding upon all parties hereto but,
with respect to clause (i) below, may be made only by the Administrative Agent):
(i) on any Interest Determination Date that, by reason of
any changes arising after the date of this Agreement affecting the
interbank Eurodollar market, adequate and fair means do not exist for
ascertaining the applicable interest rate on the basis provided for in
the definition of Eurodollar Rate; or
(ii) at any time, that such Bank shall incur increased costs
or reductions in the amounts received or receivable hereunder with
respect to any Eurodollar Loan because of (x) any change arising after
the date of this Agreement in any applicable law or governmental rule,
regulation, order, guideline or request (whether or not having the
force of law) or in the interpretation or administration thereof and
including the introduction of any new law or governmental rule,
regulation, order, guideline or request, such as, for example, but not
limited to: (A) a change in the basis of taxation of payment to any
Bank of the principal of or interest on the Notes or any other amounts
payable
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hereunder (except for changes in the rate of tax on, or determined by
reference to, the net income or profits or franchise taxes based on net
income of such Bank pursuant to the laws of the jurisdiction in which
it is organized or in which its principal office or applicable lending
office is located or any subdivision hereof or therein) or (B) a change
in official reserve requirements (except to the extent included in the
computation of the Eurodollar Rate) or any special deposit, assessment
or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its applicable lending
office) and/or (y) other circumstances since the date of this Agreement
affecting such Bank or the interbank Eurodollar market or the position
of such Bank in such market; or
(iii) at any time after the date of this Agreement, that the
making or continuance of any Eurodollar Loan has been made (x) unlawful
by any law or governmental rule, regulation or order, (y) impossible by
compliance by any Bank in good faith with any governmental request
(whether or not having force of law) or (z) impracticable as a result
of a contingency occurring after the date of this Agreement which
materially and adversely affects the applicable interbank market;
then, and in any such event, such Bank (or the Administrative Agent, in the case
of clause (i) above) shall promptly give notice (by telephone promptly confirmed
in writing) to the Borrower and, except in the case of clause (i) above, to the
Administrative Agent of such determination (which notice the Administrative
Agent shall promptly transmit to each of the other Banks). Thereafter (x) in the
case of clause (i) above, on the last day of the then current Interest Period,
all Loans shall be automatically converted to Base Rate Loans, until such time
as the circumstances described in clause (i) shall no longer be applicable, in
which event Section 1.08(d) shall apply, (y) in the case of clause (ii) above,
the Borrower shall, subject to the provisions of Section 12.18 (to the extent
applicable), pay to such Bank, upon its written request therefor, such
additional amounts (in the form of an increased rate of, or a different method
of calculating, interest or otherwise as such Bank in its sole discretion shall
determine) as shall be required to compensate such Bank for such increased costs
or reductions in amounts received or receivable hereunder (a written notice as
to the additional amounts owed to such Bank, showing in reasonable detail the
basis for the calculation thereof, submitted to the Borrower by such Bank shall,
absent manifest error, be final and conclusive and binding on all the parties
hereto) and (z) in the case of clause (iii) above, the Borrower shall take one
of the actions specified in Section 1.08(b) as promptly as possible and, in any
event, within the time period required by law.
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(b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.08(a)(ii) or (iii), the Borrower may (and
in the case of a Eurodollar Loan affected by the circumstances described in
Section 1.08(a)(iii) shall), upon at least three Business Days' written notice
to the Administrative Agent, require the affected Bank to convert such
Eurodollar Loan into a Base Rate Loan, until such time as the circumstances
described in Section 1.08(a)(ii) or (iii) shall no longer be applicable in which
event clause (d) below shall apply, provided that, if more than one Bank is
affected at any time, then all affected Banks must be treated the same pursuant
to this Section 1.08(b).
(c) If at any time after the date of this Agreement any Bank
determines that the introduction of or any change (which introduction or change
shall have occurred after the date of this Agreement) in any applicable law or
governmental rule, regulation, order, guideline, directive or request (whether
or not having the force of law) concerning capital adequacy, or any change in
interpretation or administration thereof by any governmental authority, central
bank or comparable agency, will have the effect of increasing the amount of
capital required or expected to be maintained by such Bank or any corporation
controlling such Bank based on the existence of such Bank's Commitments
hereunder or its obligations hereunder, then the Borrower agrees to pay, subject
to the provisions of Section 12.18 (to the extent applicable), to such Bank,
upon its written demand therefor, such additional amounts as shall be required
to compensate such Bank or such other corporation for the increased cost to such
Bank or such other corporation or the reduction in the rate of return to such
Bank or such other corporation as a result of such increase of capital. In
determining such additional amounts, each Bank will act reasonably and in good
faith and will use averaging and attribution methods which are reasonable,
provided that such Bank's determination of compensation owing under this Section
1.08(c) shall, absent manifest error, be final and conclusive and binding on all
the parties hereto. Each Bank, upon determining that any additional amounts will
be payable pursuant to this Section 1.08(c), will give prompt written notice
thereof to the Borrower, which notice shall show in reasonable detail the basis
for calculation of such additional amounts.
(d) In the event that any Base Rate Loan is outstanding at any
time and the relevant circumstances described in Section 1.08(a)(i), (ii) and/or
(iii), as the case may be, cease to be applicable, the respective Bank(s) or the
Administrative Agent (as applicable) shall give prompt notice thereof to the
Borrower and the Administrative Agent (as applicable) and (x) if a Borrowing of
Eurodollar Loans is outstanding at such time (from one or more Banks which were
not affected by such circumstances or as a result of the application of
following clause (y)), then on the last day of the Interest Period then
applicable thereto the Base Rate Loans of the respective affected Bank or Banks
to which the circumstances described above have ceased to be applicable shall
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be converted back into (and thereafter shall form a part of) the respective
Borrowing of Eurodollar Loans (until such time, if any, as Section 1.08(a) and
(b) shall thereafter become applicable) and (y) if no Eurodollar Loans remain
outstanding at such time, then on the third Business Day thereafter the Base
Rate Loans of the respective Bank or Banks to which the circumstances described
above shall cease to be applicable shall be converted into a Borrowing of
Eurodollar Loans (with an Interest Period of three months beginning on said
third Business Day).
1.09 Compensation. The Borrower shall compensate each Bank,
upon its written request (which request shall set forth in reasonable detail the
basis for requesting such compensation), for all reasonable losses, expenses and
liabilities (including, without limitation, any loss, expense or liability
incurred by reason of the liquidation or reemployment of deposits or other funds
required by such Bank to fund its Eurodollar Loans, but excluding loss of
anticipated profits) which such Bank may sustain: (i) if any repayment
(including any repayment made pursuant to Section 3.01 or as a result of an
acceleration of the Loans pursuant to Section 8) occurs on a date which is not
the last day of an Interest Period with respect thereto; (ii) if any pre-payment
of any of its Eurodollar Loans is not made on any date specified in a notice of
prepayment given by such Borrower; or (iii) as a consequence of (x) any other
default by such Borrower to repay its Loans when required by the terms of this
Agreement or any Note held by such Bank or (y) any election made pursuant to
Section 1.08(b).
1.10 Change of Applicable Lending Office. Each Bank agrees
that on the occurrence of any event giving rise to the operation of Section
1.08(a)(ii) or (iii), Section 1.08(c) or Section 3.03 with respect to such Bank,
it will, if requested by the Borrower, use reasonable efforts (subject to
overall policy considerations of such Bank) to designate another lending office
for any Loans affected by such event, provided that such designation is made on
such terms that such Bank and its lending office suffer no economic, legal or
regulatory disadvantage, with the object of avoiding the consequence of the
event giving rise to the operation of such Section. Nothing in this Section 1.10
shall affect or postpone any of the obligations of the Borrower or the right of
any Bank provided in Sections 1.08 and 3.03.
1.11 Replacement of Banks. (x) Upon the occurrence of an event
giving rise to the operation of Section 1.08(a)(ii) or (iii), Section 1.08(c) or
Section 3.03 with respect to any Bank which results in such Bank charging to the
Borrower increased costs in excess of those being generally charged by the other
Banks or (y) in the case of certain refusals by a Bank to consent to certain
proposed changes, waivers, discharges or terminations with respect to this
Agreement which have been approved by the Required Banks as (and to the extent)
provided in Section 12.12(b), the
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Borrower shall have the right, if no Default under Section 8.01(1), (6) or (7)
and no Event of Default then exists (or, in the case of preceding clause (y), no
Default under Section 8.01(1), (6) or (7) and no Event of Default will exist
immediately after giving effect to such replacement), to replace such Bank (the
"Replaced Bank") with one or more other Eligible Transferees (collectively, the
"Replacement Bank") and each of whom shall be required to be reasonably
acceptable to the Administrative Agent, provided that (i) at the time of any
replacement pursuant to this Section 1.11, the Replacement Bank shall enter into
one or more Assignment and Assumption Agreements pursuant to Section 12.04(b)
(and with all fees payable pursuant to said Section 12.04(b) to be paid by the
Replacement Bank) pursuant to which the Replacement Bank shall acquire all of
the outstanding Loans of the Replaced Bank and, in connection therewith, shall
pay to the Replaced Bank in respect thereof an amount equal to the principal of,
and all accrued interest on, all outstanding Loans of the Replaced Bank and (ii)
all obligations of the Borrower due and owing to the Replaced Bank at such time
(other than those specifically described in clause (i) above in respect of which
the assignment purchase price has been, or is concurrently being, paid) shall be
paid in full to such Replaced Bank concurrently with such replacement. Upon the
execution of the respective Assignment and Assumption Agreements, the payment of
amounts referred to in clauses (i) and (ii) above, recordation of the assignment
on the Register by the Administrative Agent pursuant to Section 12.15 and, if so
requested by the Replacement Bank, delivery to the Replacement Bank of the
appropriate Note or Notes executed by the Borrower, the Replacement Bank shall
become a Bank hereunder and the Replaced Bank shall cease to constitute a Bank
hereunder, except with respect to indemnification provisions under this
Agreement (including, without limitation, Sections 1.08, 1.09, 3.03, 10.06 and
12.01), which shall survive as to such Replaced Bank. It is understood and
agreed that replacements pursuant to this Section 1.11 shall be effected by
means of assignments which otherwise meet the applicable requirements of Section
12.04(b).
1.12 Conversions. On the Syndication Date, the entire
outstanding principal amount of Loans made to the Borrower and then outstanding
shall be automatically converted into a single Borrowing of Eurodollar Loans
(with the first Interest Period applicable thereto to begin on the Syndication
Date).
SECTION 2. Fees; Reductions of Commitment.
2.01 Fees. (a) The Borrower shall pay to the Administrative
Agent, for its own account, such fees as have been previously agreed to in
writing by the Borrower and the Administrative Agent.
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(b) In addition to any other fees payable pursuant to this
Agreement or any other agreement, if any Loans remain outstanding on either of
the 12 or 30 month anniversaries of the Closing Date, then on each such date an
additional cash fee shall be paid to each Bank (and retained by it for its own
account) in an amount equal to 1.0% of the aggregate principal amount of the
Loans of such Bank outstanding on the respective such date, and if any Loans
remain outstanding on any of the 6, 9, 18 or 24 month anniversaries of the
Closing Date, then additional cash fees shall be paid to each Bank on each such
date in an amount equal to 1/2 of 1% of the aggregate principal amount of the
Loans of such Bank outstanding on the respective such date (which fees shall be
retained by each Bank for its own account).
SECTION 3. Prepayments; Payments; Taxes.
3.01 Mandatory and Voluntary Payment; Mandatory and Voluntary
Reduction of Commitments. (a) The Total Commitment (and the Commitment of each
Bank) shall terminate in its entirety on July 30, 1997 unless the Closing Date
has occurred on or before such date.
(b) In addition to any other mandatory commitment reductions
pursuant to this Section 3.01, the Total Commitment (and the commitment of each
Bank) shall terminate in its entirety on the Closing Date (after giving effect
to the making of Loans on such date).
(c) The Borrower shall have the right to prepay the Loans,
without premium or penalty, in whole or in part at any time and from time to
time on the following terms and conditions: (i) the Borrower shall give the
Administrative Agent prior to 12:00 Noon (New York City time) at least three
Business Days' prior written notice (or telephonic notice promptly confirmed in
writing) of its intent to prepay Loans and the amount of such prepayment, which
notice the Administrative Agent shall promptly transmit to each of the Banks;
(ii) each partial prepayment shall be in an aggregate principal amount of at
least $1,000,000; (iii) if any partial prepayment of then outstanding Loans
shall reduce the aggregate principal amount of outstanding Loans to an amount
less than $1,000,000, then all then outstanding Loans shall be required to be
repaid in full at such time; (iv) prepayments of Eurodollar Loans made pursuant
to this Section 3.01(c) on any date which is not the last day of an Interest
Period applicable thereto shall be accompanied by the payment of all breakage
and similar costs required to be paid as a result thereof pursuant to Section
1.09; and (v) each prepayment in respect of any Loans shall be applied pro rata
among the Banks (based on the respective outstanding principal amounts of their
outstanding Loans).
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(d) In addition to any other mandatory repayments or
commitment reductions pursuant to this Section 3.01, on each date after the
Closing Date upon which Communications receives any proceeds from any sale or
issuance of its equity, an amount equal to 50% of the cash proceeds of the
respective sale or issuance (net of all reasonable costs associated therewith,
including, without limitation, all due diligence costs and expenses paid for, or
reimbursed by, Communications, underwriting or similar fees discounts and
commissions, attorneys' fees and expenses paid for, or reimbursed by,
Communications and other direct costs associated therewith) shall be applied as
a mandatory repayment of principal of outstanding Loans in accordance with the
requirements of Section 3.01(e).
(e) Each mandatory repayment of Loans required by this Section
3.01 shall be applied pro rata to the then outstanding principal amount of the
Loans of the various Banks.
(f) In addition to the repayments specified above, (i) Excess
Proceeds Repayments shall be required to be made in accordance with, and to the
extent required by, Section 7.04 and (ii) repayments following the occurrence of
a Change of Control shall be required in accordance with the provisions of
Section 7.06. All repayments pursuant to this clause (i) shall, except to the
extent otherwise expressly provided in the second sentence of Section 7.06, be
applied in accordance with the provisions of Section 3.01(e).
3.02 Method and Place of Payment. Except as otherwise
specifically provided herein, all payments under this Agreement or any Note
shall be made to the Administrative Agent for the account of the Bank or Banks
entitled thereto not later than 12:00 Noon (New York time) on the date when due
and shall be made in Dollars in immediately available funds at the Payment
Office of the Administrative Agent. The Administrative Agent will thereafter
cause to be distributed on the same day (if payment was actually received by the
Administrative Agent prior to 12:00 Noon (New York time) on such day) like funds
relating to the payment of principal, interest or fees ratably to the Banks
entitled thereto. Any payments under this Agreement which are made later than
12:00 Noon (New York time) shall be deemed to have been made on the next
succeeding Business Day. Whenever any payment to be made hereunder or under any
Note shall be stated to be due on a day which is not a Business Day, the due
date thereof shall be extended to the next succeeding Business Day and, with
respect to payments of principal, interest shall be payable at the applicable
rate during such extension.
3.03 Net Payments. (a) Except as provided in Section 3.03(e),
any and all payments by the Borrower (or any other Credit Party on its behalf)
hereunder, under
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the Loans or under the Guaranties to or for the benefit of any Bank or the
Administrative Agent shall be made free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings and penalties, interests and all other liabilities with respect
thereto ("Taxes"), excluding, (i) in the case of each such Bank or the
Administrative Agent, taxes imposed on its net income (including, without
limitation, any taxes imposed on branch profits) and franchise taxes (that are
imposed on or computed by reference to net income) imposed on it by the
jurisdiction under the laws of which such Bank or the Administrative Agent (as
the case may be) is organized or any political subdivision thereof, and (ii) in
the case of each Bank, taxes imposed on its net income (including, without
limitation, any taxes imposed on branch profits), and franchise taxes imposed on
it, by the jurisdiction of such Bank's Applicable Lending Office or any
political subdivision thereof (all such nonexcluded Taxes being hereinafter
referred to as "Covered Taxes"). Except as provided in Section 3.03(e), if the
Borrower or any Credit Party shall be required by law to deduct any Covered
Taxes from or in respect of any sum payable hereunder, under any Loan or under
the Guaranties to or for the benefit of any Bank or the Administrative Agent,
(A) the sum payable shall be increased as may be necessary so that after making
all required deductions of Covered Taxes (including deductions of Covered Taxes
applicable to additional sums payable under this Section 3.03) such Bank or the
Administrative Agent, as the case may be, receives an amount equal to the sum it
would have received had no such deductions been made, (B) the Borrower shall
make such deductions and (C) the Borrower shall pay the full amount so deducted
to the relevant taxation authority or other authority in accordance with
applicable law. If any amounts are payable in respect of Taxes pursuant to the
preceding sentence, the Borrower agrees to reimburse any Bank, or the
Administrative Agent, within thirty days of the date of the written request of
such Bank or the Administrative Agent, as the case may be, for taxes imposed on
or measured by the net income or profits of such Bank or the Administrative
Agent pursuant to the laws of the jurisdiction in which the principal office or
Applicable Lending Office of such Bank or the Administrative Agent is located or
under the laws of any political subdivision or taxing authority of any such
jurisdiction in which the principal office or Applicable Lending Office of such
Bank or the Administrative Agent is located and for any withholding of income or
similar taxes imposed by the United States as such Bank or the Administrative
Agent shall determine are payable by, or withheld from, such Bank or the
Administrative Agent in respect of such amounts so paid to or on behalf of such
Bank or the Administrative Agent pursuant to the preceding sentence and in
respect of any amounts paid to or on behalf of such Bank or the Administrative
Agent pursuant to this sentence ("Second Tier Taxes"). The written request
referred to in the preceding sentence shall certify and set forth in reasonable
detail the calculation of the payment and specify the type of such Taxes. Any
such certificate submitted in good faith to the Borrower shall, absent manifest
error, be final, conclusive and binding on all parties; provided, however, that
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notwithstanding any of the foregoing with respect to the above-referenced
calculations, none of the Banks or the Administrative Agent shall be obligated
to provide any information with respect to its assets, income or operations
other than assets, income or operations solely attributable to this Agreement,
any Loan or any Guaranty.
(b) In addition, the Borrower agrees to pay any present or
future stamp, documentary, excise, privilege, intangible or similar levies that
arise at any time or from time to time (i) from any payment made under any and
all Credit Documents, (ii) from the transfer of the rights of any Bank (other
than a Defaulting Bank) under any Credit Documents to any transferee pursuant to
Section 1.11, or (iii) from the execution or delivery by the Borrower of, or
from the filing or recording or maintenance of, or otherwise with respect to the
exercise by the Administrative Agent or the Banks of their rights (subject to
the provisions of Section 3.03(a), excluding transfers pursuant to Section
12.04) under, any and all Credit Documents (hereinafter referred to as "Other
Taxes").
(c) Except as provided in Section 3.03(e), the Borrower shall
indemnify, to the extent not previously withheld and paid to the relevant
taxation authority or other authority in accordance with applicable law, each
Bank and the Administrative Agent for the full amount of (i) Covered Taxes
imposed on or with respect to amounts payable hereunder, (ii) Other Taxes, and
(iii) any Second Tier Taxes (other than Covered Taxes imposed by any
jurisdiction on amounts payable under this Section 3.03) paid by such Bank or
the Administrative Agent, as the case may be, and any liability (including
penalties, interest and expenses) arising solely therefrom or with respect
thereto. Payment of this indemnification shall be made within 30 days from the
date such Bank or the Administrative Agent certifies and sets forth in
reasonable detail the calculation thereof as to the amount and type of such
Taxes. Any such certificate submitted by the Bank or Administrative Agent in
good faith to the Borrower shall, absent manifest error, be final, conclusive
and binding on all parties; provided, however, that notwithstanding any of the
foregoing with respect to the above-referenced calculations, none of the Banks
or the Administrative Agent shall be obligated to provide any information with
respect to its assets, income or operations other than assets, income or
operations solely attributable to this Agreement, any Loan or any Guaranty.
(d) Within 30 days after having received a receipt of Covered
Taxes or Other Taxes, the Borrower will furnish to the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof.
(e) Each Foreign Bank agrees to deliver to each of the
Borrower and the Administrative Agent on or prior to the Closing Date, or in the
case of a Foreign Bank that is an assignee or transferee of an interest under
this Agreement pursuant to Section
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1.11 or 12.04 (unless the respective Foreign Bank was already a Bank hereunder
immediately prior to such assignment or transfer), on or prior to the date of
such assignment or transfer to such Foreign Bank, (i) two accurate and complete
original signed copies of Internal Revenue Service Form 4224 or 1001 (or
successor forms) certifying to such Foreign Bank's entitlement to a complete
exemption from United States withholding tax with respect to payments to be made
under any and all Credit Documents or (ii) if the Foreign Bank is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either
Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above with
respect to any payments of interest, (x) a certificate substantially in the form
of Exhibit C (any such certificate, a "Section 3.03(e) Certificate") and (y) two
accurate and complete original signed copies of Internal Revenue Service Form
W-8 (or successor form) certifying to such Foreign Bank's entitlement to a
complete exemption from United States withholding tax with respect to payments
of interest to be made under any and all Credit Documents. In addition, each
Foreign Bank agrees that from time to time after the Closing Date, when a lapse
in time or change in circumstances renders the previous certification obsolete
or inaccurate in any material respect, it will deliver to the Borrower and the
Administrative Agent two new accurate and complete original signed copies of
Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.03(e)
Certificate, as the case may be, and such other forms and statements as may be
required in order to confirm or establish the entitlement of such Foreign Bank
to a continued exemption from or reduction in United States withholding tax with
respect to payments under any and all Credit Documents or it shall immediately
notify the Borrower and the Administrative Agent of its inability to deliver any
such Form or Certificate, in which case such Foreign Bank shall not be required
to deliver any such Form or Certificate pursuant to this Section 3.03(e).
Notwithstanding anything to the contrary contained in Section 3.03(a) and (c),
but subject to the immediately succeeding sentence, (x) the Borrower shall be
entitled, to the extent it is required to do so by law, to deduct or withhold
income or similar taxes imposed by the United States (or any political
subdivision or taxing authority thereof or therein) from interest, fees or other
amounts payable hereunder for the account of any Foreign Bank for U.S. Federal
income tax purposes to the extent that such Foreign Bank has not provided to the
Borrower Internal Revenue Service Forms that establish a complete exemption from
such deduction or withholding and (y) the Borrower shall not be obligated
pursuant to Section 3.03(a) and (c) hereof to indemnify or to gross-up payments
to be made to a Foreign Bank in respect of income or similar taxes imposed by
the United States if (I) such Foreign Bank has not provided to the Borrower the
forms or statements required to be provided to the Borrower pursuant to this
Section 3.03(e) or (II) in the case of a payment, other than interest, to a
Foreign Bank described in clause (ii) above, to the extent that such forms or
statements do not establish a complete exemption from withholding of such taxes.
Notwithstanding anything to the contrary contained in the preceding sentence or
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elsewhere in this Section 3.03 and except as set forth in Section 12.04(b), the
Borrower agrees to pay additional amounts and to indemnify each Bank or the
Administrative Agent in the manner set forth in Section 3.03(a) and (c) (without
regard to the identity of the jurisdiction requiring the deduction or
withholding) in respect of any amounts deducted or withheld by it as described
in the immediately preceding sentence as a result of any changes after the
Closing Date in any applicable law, treaty, governmental rule, regulation,
guideline or order, or in the interpretation thereof, relating to the deducting
or withholding of income or similar Taxes.
(f) If any Taxes for which the Borrower would be required to
make payment under this Section 3.03 are imposed, the Bank or the Administrative
Agent, as the case may be, shall use its reasonable best efforts to avoid or
reduce such Taxes by taking any appropriate action (including, without
limitation, assigning its rights hereunder to a related entity or a different
office) which would not in the sole opinion of such Bank or Administrative Agent
be otherwise disadvantageous to such Bank or Administrative Agent, as the case
may be.
(g) Without prejudice to the survival of any other agreement
of the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 3.03 shall survive the payment in full of the
Obligations.
(h) If the Borrower pays any additional amount under this
Section 3.03 to a Bank and such Bank determines in its sole discretion that it
has actually received or realized in connection therewith any refund or any
reduction of, or credit against, its liabilities with respect to Taxes in or
with respect to the taxable year in which the additional amount is paid, such
Bank shall pay to the Borrower an amount that the Bank shall, in its sole
discretion, determine is equal to the net benefit, after tax, which was obtained
by the Bank in such year as a consequence of such refund, reduction or credit.
(i) Notwithstanding any provision of this Agreement to the
contrary, Section 3.03 is the only provision of this Agreement that requires the
Borrower (or any Credit Party) to make any payment to a Bank, the Administrative
Agent or any of their successors and assigns, by reason of any Tax imposed upon
a Bank, the Administrative Agent or any of their successors and assigns.
SECTION 4. Conditions Precedent. The obligation of each Bank
to make Loans on the Closing Date, is subject to the satisfaction of the
following conditions:
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4.01 Execution of Agreement; Notes. On or prior to the Closing
Date (i) the Effective Date shall have occurred and (ii) there shall have been
delivered to the Administrative Agent for the account of each of the Banks the
appropriate Note executed by the Borrower, in each case in the amount, maturity
and as otherwise provided herein.
4.02 No Default; Representations and Warranties. On the
Closing Date and after giving effect to the Loans made on such date, (i) there
shall exist no Default or Event of Default and (ii) all representations and
warranties contained herein and in the other Credit Documents shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on the Closing Date (it being
understood and agreed that any representation or warranty which by its terms is
made as of a specified date shall be required to be true and correct in all
material respects only as of such specified date).
4.03 Opinions of Counsel. On the Closing Date, the
Administrative Agent shall have received (i) from Shearman & Sterling, special
counsel to the Credit Parties, an opinion addressed to the Administrative Agent,
the Collateral Agent and each of the Banks and dated the Closing Date in the
form set forth as Exhibit D-1 and (ii) from Timothy M. Davis, Esq., General
Counsel to Communications and the Borrower, an opinion addressed to the
Administrative Agent, the Collateral Agent and each of the Banks and dated the
Closing Date in the form set forth as Exhibit D-2. Without limiting the
foregoing, Shearman & Sterling's opinion as required pursuant to the immediately
preceding sentence shall contain an unqualified opinion, in form satisfactory to
the Administrative Agent, to the effect that all Loans and related Obligations
constitute "Senior Indebtedness" under, and as defined in, the Senior
Subordinated Notes Indenture.
4.04 Corporate Documents; Proceedings; etc. (a) On the Closing
Date, the Administrative Agent shall have received a certificate of each Credit
Party, dated the Closing Date, signed by an Authorized Officer of such Credit
Party, and attested to by the Secretary or any Assistant Secretary of such
Credit Party, in the form of Exhibit E with appropriate insertions, together
with copies of the certificate of incorporation (or equivalent organizational
document) and by-laws of such Credit Party and the resolutions of such Credit
Party referred to in such certificate, and the foregoing shall be reasonably
acceptable to the Administrative Agent.
(b) All corporate and legal proceedings and all instruments
and agreements in connection with the transactions contemplated by this
Agreement and the other Documents shall be reasonably satisfactory in form and
substance to the Administrative Agent and the Required Banks, and the
Administrative Agent shall have received all in-
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formation and copies of all documents and papers, including records of corporate
proceedings, governmental approvals, good standing certificates and bring-down
telegrams or facsimiles, if any, which the Administrative Agent reasonably may
have requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate or governmental authorities.
4.05 Adverse Change, etc. (a) On or prior to the Closing Date,
nothing shall have occurred (and neither the Administrative Agent nor the Banks
shall have become aware of any facts, conditions or other information not
previously known) which the Administrative Agent or the Required Banks shall
determine could reasonably be expected to have a material adverse effect on the
rights or remedies of the Administrative Agent or the Banks, or on the ability
of any Credit Party to perform its obligations to the Administrative Agent and
the Banks or which could reasonably be expected to have a Material Adverse
Effect.
(b) All necessary governmental (domestic and foreign) and
third party approvals and/or consents in connection with the making of the Loans
and the Transaction, the other transactions contemplated by the Documents and
otherwise referred to herein or therein shall have been obtained and remain in
effect, and all applicable waiting periods shall have expired without any action
being taken by any competent authority which restrains, prevents, or imposes
materially adverse conditions upon, the consummation of the Transaction or the
other transactions contemplated by the Documents or otherwise referred to herein
or therein. Additionally, there shall not exist any judgment, order, injunction
or other restraint issued or filed or a hearing seeking injunctive relief or
other restraint pending or notified prohibiting or imposing materially adverse
conditions upon the Transaction or the other transactions contemplated by the
Documents.
4.06 Litigation. On the Closing Date, no litigation by any
entity (private or governmental) shall be pending or threatened with respect to
this Agreement, any other Document or any documentation executed in connection
herewith or therewith or the transactions contemplated hereby or thereby, or
which the Administrative Agent or the Required Banks shall determine could
reasonably be expected to have a Material Adverse Effect.
4.07 Subsidiaries Guaranty. On the Closing Date, each of the
Wholly-Owned Restricted Subsidiaries of the Borrower, as well as any other
Restricted Subsidiary of the Borrower which has guaranteed outstandings pursuant
to the Existing Credit Agreement, shall have duly authorized, executed and
delivered a Subsidiaries Guaranty in the form of Exhibit G (as modified, amended
or supplemented from time
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to time in accordance with the terms thereof and hereof, the "Subsidiaries
Guaranty"), and the Subsidiaries Guaranty shall be in full force and effect.
4.08 Existing Pledge Agreement Amendment. On the Closing Date,
the parties to the Existing Pledge Agreement shall have duly authorized,
executed and delivered an amendment thereto in the form of Exhibit H-2 (the
"Existing Pledge Agreement Amendment"), which amendment shall be in full force
and effect. Without limiting the foregoing, the consent of the requisite lenders
pursuant to the Existing Credit Agreement shall have been obtained to the
amendment of the Existing Pledge Agreement as required above.
4.09 Existing Security Agreement Amendment. On the Closing
Date, the parties thereto shall have duly authorized, executed and delivered an
amendment to the Existing Security Agreement in the form of Exhibit I-2 (the
"Existing Security Agreement Amendment"), which amendment shall be in full force
and effect. Without limiting the foregoing, the consent of the requisite lenders
pursuant to the Existing Credit Agreement shall have been obtained to the
amendment of the Existing Security Agreement as required above.
4.10 Mortgage Amendments; etc. On or prior to the Closing
Date, the Collateral Agent shall have received:
(i) fully executed counterparts of amendments (the "Mortgage
Amendments"), in form and substance satisfactory to the
Administrative Agent and the Required Banks, to each of the
Existing Mortgages, together with evidence that counterparts
of each of the Mortgage Amendments have been delivered to the
title company insuring the Lien of the Existing Mortgages for
recording in all places to the extent necessary or desirable,
in the judgment of the Collateral Agent, effectively to
maintain a valid and enforceable first priority mortgage lien
(subject to Permitted Encumbrances relating thereto) on the
Existing Mortgaged Properties in favor of the Collateral Agent
(or such other trustee as may be required or desired under
local law) for the benefit of the Secured Creditors; and
(ii) endorsements reasonably satisfactory to the Collateral
Agent to each Existing Mortgage Policy assuring the Collateral
Agent that each Existing Mortgage is a valid and enforceable
first priority mortgage lien on the respective Existing
Mortgaged Properties, free and clear of all defects and
encumbrances except Permitted Encumbrances.
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4.11 Canadian Debenture and Pledge Agreement. On the Closing
Date, the parties thereto shall have entered into amendments, in the form of
Exhibits K-3 and K-4 hereto, respectively, to the Existing Canadian Debenture
(the "Existing Canadian Debenture Amendment") and the Existing Canadian Pledge
Agreement (the "Existing Canadian Pledge Agreement Amendment"), and shall have
taken such actions in connection therewith (including making any required
filings under the PPSA of the relevant jurisdictions or otherwise) as may be
determined by the Collateral Agent to be necessary or desirable in connection
therewith.
4.12 Form of Collateral Assignments of Rights. On the Closing
Date, the form of the Collateral Assignment of Rights pursuant to the Existing
Credit Agreement shall be amended, so that all such Collateral Assignments of
Rights executed and delivered after the Closing Date shall be in the form of
Exhibit L hereto.
4.13 Lockbox, Blocked Account and Concentration Account
Agreements. On the Closing Date, all Lockbox Agreements, Blocked Account
Agreements and Concentration Account Agreements previously entered into with
respect to the Existing Credit Agreement (and which remain in effect on the
Closing Date) shall be modified so that same are in the forms of Exhibits M-1,
M-2 and M-3, respectively, hereto.
4.14 Collateral Access Agreements. On the Closing Date, the
Borrower shall have caused all Existing Credit Agreement Collateral Access
Agreements to be replaced with Collateral Access Agreements in the form of
Exhibit N hereto.
4.15 Amendment to the Existing Credit Agreement. On or prior
to the Closing Date, the Existing Credit Agreement shall have been amended
pursuant to an amendment in form and substance satisfactory to the
Administrative Agent and the Required Banks. Without limiting the foregoing,
such amendment shall authorize the modifications to the Collateral Documents
previously delivered pursuant to the Existing Credit Agreement, as required by
preceding Section 4.08 through 4.14, inclusive.
4.16 Solvency Certificate. On the Closing Date, there shall
have been delivered to the Administrative Agent a solvency certificate in the
form of Exhibit F from the chief financial officer of the Borrower and dated the
Closing Date.
4.17 Notice of Borrowing. Prior to the making of any Loan on
the Closing Date, the Administrative Agent shall have received a Notice of
Borrowing meeting the requirements of Section 1.02(a).
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4.18 Fees, etc. On the Closing Date, the Borrower shall have
paid to the Administrative Agent and each Bank all costs, fees and expenses
(including, without limitation, reasonable legal fees and expenses) payable to
the Administrative Agent and such Bank to the extent then due.
SECTION 5. Representations, Warranties and Agreements. To
induce the Banks to enter into this Agreement and to make Loans provided for
herein, each of Communications and the Borrower makes the following
representations, warranties and agreements, as to itself and as to each of its
Restricted Subsidiaries, with the Banks, all of which shall survive the
execution and delivery of this Agreement and the making of the Loans:
5.01 Corporate Status. Each Credit Party (i) is a duly
organized and validly existing corporation in good standing under the laws of
the jurisdiction of its organization and has the corporate power and authority
to own its property and assets and to transact the business in which it is
engaged and presently proposes to engage and (ii) has duly qualified and is
authorized to do business and is in good standing in all jurisdictions where it
is required to be so qualified except where the failure to be so qualified, when
aggregated with all other such failures, would not reasonably be expected to
have a Material Adverse Effect.
5.02 Corporate Power and Authority. Each Credit Party has the
corporate power and authority to execute, deliver and carry out the terms and
provisions of the Credit Documents to which it is a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Credit Documents to which it is a party. Each Credit Party has duly
executed and delivered each Credit Document to which it is a party and each such
Credit Document constitutes the legal, valid and binding obligation of such
Credit Party enforceable in accordance with its terms, except that such
enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting the rights and remedies of creditors, (ii) federal securities or
other laws or regulations or public policy insofar as they may restrict the
enforceability of rights to indemnification and (iii) general principles of
equity (regardless of whether enforcement is sought in equity or at law).
5.03 No Violation. Neither the execution, delivery and
performance by any Credit Party of the Credit Documents to which it is a party
nor compliance with the terms and provisions thereof, nor the consummation of
the transactions contemplated therein (i) will contravene any applicable
provision of any law, statute, rule, regulation, order, writ, injunction or
decree of any court or governmental instrumentality, (ii) will, after giving
effect to any waivers, conflict or be inconsistent with
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<PAGE>
or result in any breach of any of the terms, covenants, conditions or provisions
of, or constitute a default under, or (other than pursuant to the Collateral
Documents) result in the creation or imposition of (or the obligation to create
or impose) any Lien upon any of the property or assets of such Credit Party or
any of its Restricted Subsidiaries pursuant to the terms of any indenture,
mortgage, deed of trust, agreement or other instrument to which such Credit
Party or any of its Restricted Subsidiaries is a party or by which it or any of
its property or assets are bound or to which it may be subject (including
without limitation the Existing Credit Agreement and the Senior Subordinated
Notes Indenture) or (iii) will violate any provision of the charter or By-Laws
of Communications, the Borrower or any of the Borrower's Restricted
Subsidiaries, except, in the case of clauses (i) and (ii) any immaterial
contravention, conflict, inconsistency, breach or default (but not under the
Existing Credit Agreement or the Senior Subordinated Notes Indenture) which is
not reasonably likely to adversely affect any Bank or have a Material Adverse
Effect.
5.04 Litigation. There are no actions, suits or proceedings
pending or, to the best knowledge of the Borrower, threatened with respect to
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries
that, after giving effect to expected insurance proceeds and indemnity payments,
are reasonably likely to have a Material Adverse Effect.
5.05 Use of Proceeds. (a) The proceeds of the Loans shall be
utilized (i) to pay certain fees and expenses owing in relation to this
Agreement and the extensions of credit hereunder and (ii) to repay outstanding
Revolving Loans under, and as defined in, the Existing Credit Agreement.
(b) No part of the proceeds of any Loan will be used to
purchase or carry any Margin Stock or to extend credit for the purpose of
purchasing or carrying any Margin Stock.
5.06 Governmental Approvals. Except as set forth on Schedule
II hereto and except for the filing of the Mortgage Amendments and the filing of
continuation statements as required under the Collateral Documents, no order,
consent, approval, license, authorization, or validation of, or filing,
recording or registration with, or exemption by, any foreign or domestic
governmental or public body or authority, or any subdivision thereof, is
required to authorize or is required in connection with (i) the execution,
delivery and performance by each Credit Party of any Credit Document or (ii) the
legality, validity, binding effect or enforceability of any Credit Document as
against each Credit Party thereto.
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<PAGE>
5.07 Investment Company Act. None of Communications, the
Borrower or any of the Borrower's Restricted Subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
5.08 Public Utility Holding Company Act. None of
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries is
a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
5.09 True and Complete Disclosure. As of the Closing Date,
there is no fact known to any Credit Party (other than matters of general
economic, political or social nature) which materially and adversely affects the
business, property, assets, liabilities, financial condition or prospects of the
Borrower and its Restricted Subsidiaries taken as a whole which has not been
disclosed herein or in such other documents, certificates and statements
furnished to the Banks for use in connection with the transactions contemplated
hereby.
5.10 Financial Condition; Financial Statements. (a) On and as
of the Closing Date on a pro forma basis after giving effect to the Transaction
and all Indebtedness incurred, and to be incurred, and Liens created and to be
created, by each Credit Party in connection with this Agreement, (w) the value
of the assets the Borrower, and of the Borrower and its Restricted Subsidiaries
on a consolidated basis, at a fair valuation, would exceed the debts and
liabilities, subordinated, contingent or otherwise, of the Borrower, and of the
Borrower and its Restricted Subsidiaries on a consolidated basis, (x) the fair
salable value of the property of the Borrower, and of the Borrower and its
Restricted Subsidiaries on a consolidated basis, will be greater than the amount
that will be required to pay the probable liability of the Borrower, and of the
Borrower and its Restricted Subsidiaries on a consolidated basis, on their debts
and other liabilities, subordinated, contingent or otherwise, as such debts and
other liabilities become absolute and matured, (y) the Borrower, and the
Borrower and its Restricted Subsidiaries on a consolidated basis, will be able
to pay their debts and liabilities, subordinated, contingent or otherwise, as
such debts and liabilities become absolute and matured, and (z) the Borrower,
and the Borrower and its Restricted Subsidiaries on a consolidated basis, will
not have unreasonably small capital with which to conduct the businesses in
which they are engaged as such businesses are now conducted and are proposed to
be conducted following the Closing Date.
(b) Communications has furnished to the Banks the following
financial statements, which have been prepared in accordance with GAAP
consistently applied throughout the periods involved: (i) Communications'
consolidated balance sheet as of,
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and consolidated statements of operations, shareholders' equity and cash flows
for the fiscal years ended, March 31, 1996 and March 31, 1997, in each case,
audited by the Auditors, and accompanied by an unqualified opinion thereof.
After giving effect to the Transaction, since March 31, 1997, there has occurred
no Material Adverse Effect, and nothing has occurred which is reasonably likely
to result in a Material Adverse Effect.
5.11 Locations of Offices, Records and Inventory. The address
of the principal place of business and chief executive office of Communications
and the Borrower as of the date hereof and as of the Closing Date is set forth
on Schedule III. The books and records of the Borrower, and all of its chattel
paper and records of Accounts, are maintained exclusively at the locations
listed on Schedule III. As of the date hereof and as of the Closing Date, there
is no jurisdiction in which the Borrower has any chattel paper, records of
Account and Inventory (except for Inventory in transit) other than those
jurisdictions identified on Schedule III. Schedule III also contains a complete
list of the legal names and addresses of each facility or warehouse at which
Inventory is stored as of the date hereof and as of the Closing Date. None of
the receipts received by the Borrower from any warehouseman states that the
goods covered thereby are to be delivered to bearer or to the order of a named
person other than the Borrower or its Restricted Subsidiaries or to a named
person and such named person's assigns.
5.12 Fictitious Business Names. Except as set forth in
Schedule IV, no Credit Party has used any corporate or fictitious name since
August 1, 1990, other than the corporate name shown on its Governing Documents.
5.13 Security Interests. On and after the Closing Date, each
of the Collateral Documents create, as security for the Obligations, a valid and
enforceable perfected security interest in and Lien on all of the Collateral,
superior to and prior to the rights of all third persons and subject to no other
Liens, other than Liens Permitted by this Agreement and under the Collateral
Documents. At all times on or after the Closing Date, the respective grantor
under each Collateral Document shall have good and marketable title to all the
Collateral subject thereto free and clear of all Liens other than Liens
permitted under this Agreement. No filings or recordings are required in order
to perfect the security interests created under any Collateral Document except
for filings or recordings made as required in connection with any such
Collateral Document.
5.14 Tax Returns and Payments. Each of Communications, the
Borrower and each of their respective Subsidiaries has timely filed or caused to
be timely filed with the appropriate taxing authority, all material returns and
other material
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statements, forms and reports for taxes required to be filed by or with respect
to the income, properties or operations of Communications, the Borrower and/or
any of their respective Subsidiaries. Such returns accurately reflect all
liability for material taxes of Communications, the Borrower and their
respective Subsidiaries for the periods covered thereby. Each of Communications,
the Borrower and their respective Subsidiaries has paid all material taxes
payable by it other than taxes which are not yet due and payable, and other than
those contested in good faith and for which adequate reserves have been
established in accordance with generally accepted accounting principles. Except
as provided in Schedule V, there is no material action, suit, proceeding,
investigation, audit, or claim now pending or, to the knowledge of
Communications or the Borrower, threatened by any authority regarding any taxes
relating to Communications, the Borrower or any of their respective
Subsidiaries. Except as provided in Schedule V, as of the Closing Date, none of
Communications, the Borrower or any of their respective Subsidiaries has entered
into an agreement or waiver or been requested to enter into an agreement or
waiver extending any statute of limitations relating to the payment or
collection of material taxes of Communications, the Borrower or any of their
respective Subsidiaries, or is aware of any circumstances that would cause the
taxable years or other taxable periods of Communications, the Borrower or any of
their respective Subsidiaries not to be subject to the normally applicable
statute of limitations. None of Communications, the Borrower or any of their
respective Subsidiaries have provided, with respect to themselves or property
held by them, any consent under Section 341 of the Code. None of Communications,
the Borrower or any of their respective Subsidiaries has incurred, or will
incur, any material tax liability with respect to the Transaction and the other
transactions contemplated hereby.
5.15 Compliance with ERISA. Except to the extent that all
events and obligations described in the following clauses of this Section 5.15
and then in existence would not, in the aggregate, be reasonably likely to have
a Material Adverse Effect; (i) each Plan (other than a Multiemployer Plan) is in
substantial compliance with ERISA and the Code; to the knowledge of
Communications, the Borrower, any Subsidiary of Communications, or any ERISA
Affiliate, each Multiemployer Plan is in substantial compliance with ERISA and
the Code; no Reportable Event has occurred with respect to a Plan (other than a
Multiemployer Plan); no Multiemployer Plan is insolvent (as defined in Section
4245 of ERISA) or in reorganization (as defined in Section 4241 of ERISA); no
Plan (other than a Multiemployer Plan) has an Unfunded Current Liability; no
Plan (other than a Multiemployer Plan) has an accumulated or waived funding
deficiency or has applied for an extension of any amortization period within the
meaning of Section 412 of the Code or Section 302 of ERISA; all contributions
required to be made with respect to a Plan and a Foreign Pension Plan have been
timely made; neither Communications nor the Borrower nor any Subsidiary of
Communica-
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tions nor any ERISA Affiliate has incurred any liability which as of the date
hereof has not been fully satisfied, to or on account of a Plan pursuant to
Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of
ERISA or Section 401(a)(29), 4971, 4975 or 4980 of the Code or expects to incur
any liability under any of the foregoing Sections with respect to any Plan; no
proceedings have been instituted to terminate or appoint a trustee to administer
any Plan; no condition exists which presents a material risk to Communications,
the Borrower or any Subsidiary of Communications or any ERISA Affiliate of
incurring a liability to or on account of a Plan pursuant to the foregoing
provisions of ERISA and the Code; using actuarial assumptions and computation
methods consistent with Part 1 of subtitle E of Title IV of ERISA, there would
be no liabilities of Communications, the Borrower, any Subsidiaries and any
ERISA Affiliates to all Plans which are multiemployer plans (as defined in
Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as
of the close of the most recent fiscal year of each such Plan ended prior to the
Closing Date, which would result in a Material Adverse Effect; no lien imposed
under the Code or ERISA on the assets of Communications or any Subsidiary of
Communications or any ERISA Affiliate exists or is likely to arise on account of
any Plan; and Communications and its Subsidiaries do not maintain or contribute
to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which
provides benefits to retired employees or other former employees (other than as
required by Section 601 of ERISA) or any employee pension benefit plan (as
defined in Section 3(2) of ERISA) the obligations with respect to which could
reasonably be expected to have a Material Adverse Effect. With respect to Plans
that are Multiemployer Plans the representations and warranties in this Section
5.15, other than any made with respect to liability under Section 4201 or 4204
of ERISA, are made to the knowledge of the Borrower.
(ii) Each Foreign Pension Plan has been maintained in
substantial compliance with its terms and with the requirements of any and all
applicable laws, statutes, rules, regulations and orders and has been
maintained, where required, in good standing with applicable regulatory
authorities. Neither Communications, nor the Borrower nor any of their
Subsidiaries has incurred any obligation in connection with the termination of
or withdrawal from any Foreign Pension Plan. No Foreign Pension Plan has any
unfunded liabilities, either on a "going concern" or on a "winding up" basis and
determined in accordance with all applicable laws and actuarial practices and
using actuarial assumptions and methods that are reasonable in the
circumstances. No event has occurred or will occur and no condition exists or
will exist with respect to any Foreign Pension Plan that has resulted or could
reasonably be expected to result in any Foreign Pension Plan having its
registration revoked or being wound up (in whole or in part) or refused for the
purposes of any applicable pension benefits or tax laws or being placed under
the administration of any relevant pension benefits regulatory
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authority or being required to pay any taxes or penalties under any applicable
pension benefits or tax laws.
5.16 Subsidiaries. Schedule VI hereto lists each Subsidiary of
the Borrower, and the direct and indirect ownership interest of the Borrower
therein, in each case existing on the Closing Date. Communications is the record
and beneficial owner of 100% of the capital stock of the Borrower. On the
Closing Date, the only material asset of Communications is the capital stock of
the Borrower owned by it, and on such date Communications owns no other capital
stock of any other Person.
5.17 Patents, etc. Communications and each of its Restricted
Subsidiaries have obtained all material patents, trademarks, servicemarks, trade
names, copyrights, licenses and other rights, free from burdensome restrictions,
that are necessary for the operation of their respective businesses as presently
conducted and as proposed to be conducted except where a failure to do so could
not reasonably be expected to have a Material Adverse Effect.
5.18 Compliance with Statutes, etc. (a) Each of
Communications, the Borrower and the Borrower's Restricted Subsidiaries is in
compliance with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property, except such noncompliances as are not likely to, in the aggregate,
have a Material Adverse Effect.
(b) Except as set forth in the Offering Memorandum, each of
Communications, the Borrower and the Borrower's Restricted Subsidiaries is in
compliance with all applicable Environmental Laws governing its business for
which failure to comply is likely to have a Material Adverse Effect, and none of
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries is
liable for any material penalties, fines or forfeitures for failure to comply
with any of the foregoing in the manner set forth above. All licenses, permits,
registrations or approvals required for the business of Communications, the
Borrower and each of the Borrower's Restricted Subsidiaries, as conducted as of
the Closing Date, under any Environmental Law have been secured and each of
Communications, the Borrower and the Borrower's Restricted Subsidiaries is in
material compliance therewith, except such licenses, permits, registrations or
approvals the failure to secure or to comply therewith is not likely to have a
Material Adverse Effect. None of Communications, the Borrower or any of the
Borrower's Restricted Subsidiaries is in any respect in noncompliance with,
breach of or default under any applicable writ, order, judgment, injunction, or
decree to which any of Communications, the Borrower or such Restricted
Subsidiary is a party or which would affect the ability of Communications, the
Borrower or such Restricted Subsidiary to
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operate its business or other Real Property and no event has occurred and is
continuing which, with the passage of time or the giving of notice or both,
would be reasonably likely to constitute noncompliance, breach of or default
thereunder, except in each such case, such noncompliances, breaches or defaults
as are not likely to, in the aggregate, have a Material Adverse Effect. Except
as set forth in the Offering Memorandum delivered to the Administrative Agent,
there are as of the Closing Date no Environmental Claims pending or, to the best
knowledge of the Borrower, threatened, which (a) question the validity, term or
entitlement of Communications, the Borrower or any of the Borrower's Restricted
Subsidiaries for any permit, license, order or registration required for the
operation of any facility which Communications, the Borrower or any of the
Borrower's Restricted Subsidiaries currently operates and (b) wherein an
unfavorable decision, ruling or finding would be reasonably likely to have a
Material Adverse Effect. To the best knowledge of the Borrower, there are no
facts, circumstances, conditions or occurrences on any Real Property of
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries or
on any property adjoining or adjacent to any such Real Property, that are
reasonably expected (i) to form the basis of an Environmental Claim against
Communications, the Borrower any of the Borrower's Restricted Subsidiaries or
any Real Property of Communications, the Borrower or any of the Borrower's
Restricted Subsidiaries, or (ii) to cause such Real Property to be subject to
any restrictions on the ownership, occupancy, use or transferability of such
Real Property under any Environmental Law, except in each such case, such
Environmental Claims or restrictions that individually or in the aggregate are
not likely to have a Material Adverse Effect.
(c) Except as set forth in the Offering Memorandum, Hazardous
Materials have not at any time been (i) generated, used, treated or stored on,
or transported to or from, by Communications, the Borrower or any of the
Borrower's Restricted Subsidiaries, any Real Property of Communications, the
Borrower or any of the Borrower's Restricted Subsidiaries, except Hazardous
Materials generated, used, treated or stored on, or transported to or from, any
Real Property of Communications, the Borrower or any of the Borrower's
Restricted Subsidiaries in the ordinary course of business and in compliance
with Environmental Laws ("Permitted Materials") or (ii) released or disposed of
(not including the sale of Inventory) on any such Real Property in violation of
any Environmental Laws or in any quantity or amount which would require any
clean-up, removal, treatment or remediation, in each case where such occurrence
or event is likely to have a Material Adverse Effect.
5.19 Properties. Communications and each of its Restricted
Subsidiaries has good title to all material properties owned by it free and
clear of all Liens, other than as permitted by this Agreement. Schedule VII
contains a true and complete list of each Real Property owned, if any, and each
Real Property leased by
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Communications, the Borrower or any of the Borrower's Restricted Subsidiaries on
the Closing Date and the type of interest therein held by Communications, the
Borrower or the respective such Restricted Subsidiary.
5.20 Labor Relations; Collective Bargaining Agreements. (a)
Set forth on Schedule VIII hereto is a list (including dates of termination) of
all collective bargaining or similar agreements between or applicable to the
Borrower or any of its Restricted Subsidiaries and any union, labor organization
or other bargaining agent in respect of the employees of the Borrower and/or any
of its Restricted Subsidiaries on the Closing Date.
(b) Neither the Borrower nor any of its Restricted
Subsidiaries is engaged in any unfair labor practice that is reasonably likely
to have a Material Adverse Effect. There is (i) no significant unfair labor
practice complaint pending against Communications, the Borrower or any of the
Borrower's Restricted Subsidiaries or, to the best knowledge of the Borrower,
threatened against any of them, before the National Labor Relations Board, and
no significant grievance or significant arbitration proceeding arising out of or
under any collective bargaining agreement is pending on the Closing Date against
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries
or, to the best knowledge of the Borrower, threatened against any of them, (ii)
no significant strike, labor dispute, slowdown or stoppage is pending against
Communications, the Borrower or any of the Borrower's Restricted Subsidiaries
or, to the best knowledge of the Borrower, threatened against Communications,
the Borrower or any of the Borrower's Restricted Subsidiaries, except (with
respect to any matter specified in clause (i) and (ii) above, either
individually or in the aggregate) such as is not reasonably likely to have a
Material Adverse Effect.
5.21 Restrictions on Restricted Subsidiaries. Except for
restrictions contained in the Credit Documents, the Existing Credit Agreement
Documents, the Senior Subordinated Note Documents and in agreements with respect
to the Existing Indebtedness, as of the Closing Date there are no contractual or
consensual restrictions on the Borrower or any of its Wholly-Owned Restricted
Subsidiaries which prohibit or otherwise restrict (i) the transfer of cash or
other assets (x) between the Borrower and any of its Wholly-Owned Restricted
Subsidiaries or (y) between any Restricted Subsidiaries of the Borrower or (ii)
the ability of the Borrower or any of its Wholly-Owned Restricted Subsidiaries
to grant security interests to the Banks in the Collateral.
5.22 Material Contracts. Neither the Borrower nor any of its
Restricted Subsidiaries is in breach of or in default under any Material
Contract.
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5.23 Senior Indebtedness, etc. All Obligations pursuant to
this Agreement constitute "Senior Indebtedness" under, and as defined in, and
for all purposes of, the Senior Subordinated Notes Indenture. The Borrower and
its Restricted Subsidiaries have not more than $1.0 million of outstanding
Indebtedness under Section 4.03(b)(xiv) of the Senior Subordinated Notes
Indenture (other than Indebtedness pursuant to this Agreement). $24.0 million of
Indebtedness pursuant to this Agreement is permitted under Section 4.03(b)(xiv)
of the Senior Subordinated Notes Indenture and $1.0 million of Indebtedness
pursuant to this Agreement is permitted under Section 4.03(b)(i) of the Senior
Subordinated Notes Indenture.
5.24 Existing Collateral Documents. True and correct copies,
as same are in effect on the Closing Date but before giving effect to the
amendments thereto required pursuant to Section 4 hereof, of each of (i) the
Existing Pledge Agreement is set forth as Exhibit H-1, (ii) the Existing
Security Agreement is set forth as Exhibit I-1, (iii) the Existing Canadian
Debenture is set forth as Exhibit K-1 and (iv) the Existing Canadian Pledge
Agreement is set forth as Exhibit K-2.
SECTION 6. Affirmative Covenants. Communications and the
Borrower hereby covenant and agree that on the Closing Date and thereafter, for
so long as this Agreement is in effect and until the Total Commitments have
terminated, no Notes are outstanding and the Loans, together with interest,
Fees, Expenses and all other Obligations (other than any indemnities described
in Section 12.01 hereof which are not then due and payable) incurred hereunder,
are paid in full:
6.01 Financial Information. Communications and the Borrower
shall furnish to, or cause to be furnished to, the Banks the following
information within the following time periods:
(a) as soon as available and in any event within 90 days after
the end of each fiscal year of Communications or the Borrower, as the
case may be, (i) audited Financial Statements as of the close of the
fiscal year and for the fiscal year, together with a comparison to the
Financial Statements for the prior year, in each case accompanied by
(A) report thereon of the Auditors unqualified as to scope, which
report shall state that such consolidated financial statements fairly
present the consolidated financial position of Communications or the
Borrower, as the case may be, and each of its consolidated Subsidiaries
as at the date indicated and the results of their operations and cash
flow for the periods indicated in conformity with GAAP (except as
otherwise stated therein) and that the examination by the Auditors has
been made in accordance with generally accepted auditing standards and
(B) a written statement signed by the Auditors
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stating that in the course of the regular audit of the business of
Communications and the Borrower, which audit was conducted by the
Auditors in accordance with generally accepted auditing standards, the
Auditors have not obtained any knowledge of the existence of any
Default or Event of Default under any provision of Sections 7.01 and
7.02 of this Agreement, or, if such Auditors shall have obtained from
such examination any such knowledge, they shall disclose in such
written statement the existence of the Default or Event of Default and
the nature thereof, it being understood that such Auditors shall not be
required hereunder to perform any special audit procedures and shall
have no liability, directly or indirectly, to anyone for failure to
obtain knowledge of any such Default or Event of Default and (ii) a
compliance certificate substantially in the form of Exhibit O along
with a schedule in form reasonably satisfactory to the Administrative
Agent of the calculations used in determining, as of the end of such
fiscal year, whether the Borrower was in compliance with the covenants
set forth in Section 7 of this Agreement for such year. To the extent
that Communications' or the Borrower's, as the case may be, annual
report on Form 10-K contains any of the foregoing items, the Banks will
accept such Form 10-K in lieu of such items required to be furnished by
Communications or the Borrower, as the case may be;
(b) as soon as available and in any event within 45 days after
the end of each fiscal quarter of Communications or the Borrower, as
the case may be, (except the last fiscal quarter of any fiscal year),
(i) Financial Statements as at the end of such period and for the
fiscal year to date, together with a comparison to the Financial
Statements for the same periods in the prior year, all in reasonable
detail and duly certified (subject to the addition of footnotes and
audit and normal year-end adjustments) by the chief executive officer,
chief financial officer or vice president - corporate controller of
Communications or the Borrower, as the case may be, as having been
prepared substantially in accordance with GAAP and (ii) a compliance
certificate substantially in the form of Exhibit O along with a
schedule in form reasonably satisfactory to the Administrative Agent of
the calculations used in determining, as of the end of such fiscal
quarter, whether the Borrower was in compliance with the covenants set
forth in Section 7 of this Agreement for such quarter. To the extent
that Communications' or the Borrower's, as the case may be, quarterly
report on Form 10-Q contains any of the foregoing items, the Banks will
accept such Form 10-Q in lieu of such items required to be furnished by
Communications or the Borrower, as the case may be;
(c) promptly and in any event within five Business Days after
becoming aware of the occurrence of a Default or Event of Default, a
certificate of the
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chief executive officer or chief financial officer of the Borrower
specifying the nature thereof and the Borrower's proposed response
thereto, each in reasonable detail; and
(d) promptly upon the earlier of the mailing or filing
thereof, copies of all 10-Ks, 10-Qs, 8-Ks, proxy statements, annual
reports, quarterly reports, registration statements and any other
filings or other communications made by the either of the Borrower or
Communications to holders of its publicly traded securities, to the
holders of its Senior Subordinated Notes or the Securities Exchange
Commission from time to time pursuant to the Securities Exchange Act of
1934, as amended, or the Securities Act of 1933, as amended.
6.02 Corporate Franchises. Communications will, and will cause
each of its Restricted Subsidiaries to, do or cause to be done, all things
necessary to preserve and keep in full force and effect its existence, material
rights and authority to do business, provided that any transaction permitted by
Section 7 will not constitute a breach of this Section 6.02 and provided further
that Communications shall not be required to preserve, with respect to itself,
any material right or authority to do business and with respect to any of its
Restricted Subsidiaries, any such existence, material right or authority to do
business if Communications shall reasonably determine that such preservation is
no longer desirable in the ordinary course of business, and the loss thereof
shall not be reasonably likely to have a Material Adverse Effect.
6.03 Compliance with Statutes, etc. Communications and the
Borrower will, and will cause each of their respective Restricted Subsidiaries
to, comply with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property (including applicable Environmental Laws) other than those the
non-compliance with which (individually or in the aggregate) would not have a
Material Adverse Effect. Neither Communications nor any of its Restricted
Subsidiaries will generate, use, treat, store, release or dispose of, or permit
the generation, use, treatment, storage, release or disposal of Hazardous
Materials on any of its Real Property, or transport or permit the transportation
of Hazardous Materials to or from any such Real Property, except for quantities
used or stored at such Real Properties in material compliance with all
applicable Environmental Laws and required in connection with the normal
operation, use and maintenance of such Real Property or the operation of the
business of the Borrower and its Restricted Subsidiaries. If required to do so
under any applicable Environmental Law, the Borrower agrees to undertake, and
agrees to cause each of its Restricted Subsidiaries to undertake, any cleanup,
removal, remedial or other action necessary to remove and clean up any Hazardous
Materials from any Real Property in accordance with the requirements of
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all such applicable Environmental Laws and in accordance with orders and
directives of all governmental authorities; provided that neither Communications
nor any of its Restricted Subsidiaries shall be required to take any such action
where same is being contested by appropriate legal proceedings in good faith by
Communications or such Restricted Subsidiary.
6.04 ERISA. As soon as possible and, in any event, within
fifteen (15) days after Communications, the Borrower or any of the Borrower's
Subsidiaries or any ERISA Affiliate knows or has reason to know of the
occurrence of any of the following events relating to a Plan, the Borrower will
deliver to each of the Banks a certificate of the chief financial officer of the
Borrower setting forth details as to such occurrence and the action, if any,
that Communications, the Borrower, such Subsidiary or such ERISA Affiliate is
required or proposes to take, together with any notices required to be given to
or filed with or by Communications, the Borrower, such Subsidiary, the ERISA
Affiliate, the PBGC, a Plan participant or the Plan administrator with respect
thereto: that a Reportable Event has occurred (other than with respect to a Plan
which is a Multiemployer Plan) which could reasonably be expected to result in
material liability of Communications, the Borrower, any of the Borrower's
Subsidiaries or any ERISA Affiliate; that, with respect to a Plan, an
accumulated funding deficiency has been incurred or an application will be or
has been made to the Secretary of the Treasury for a waiver or modification of
the minimum funding standard (including any required installment payments) or an
extension of any amortization period under Section 412 of the Code or Section
302 of ERISA with respect to a Plan; that a contribution required to be made to
a Plan or Foreign Pension Plan by Communications, the Borrower, any of the
Borrower's Subsidiaries or any ERISA Affiliate has not been timely made; that a
Plan has been or is reasonably expected to be terminated; that a Plan that is a
Multiemployer Plan has been or is reasonably expected to be reorganized,
partitioned or declared insolvent under Title IV of ERISA; that a Plan, which is
not a Multiemployer Plan, has an Unfunded Current Liability giving rise to a
lien under ERISA or the Code; that proceedings may be or have been instituted to
terminate a Plan; that a proceeding has been instituted pursuant to Section 515
of ERISA to collect a delinquent contribution of Communications, the Borrower,
any of the Borrower's Subsidiaries or any ERISA Affiliate to a Plan; or that
Communications, the Borrower, any Subsidiary or any ERISA Affiliate will or is
reasonably expected to incur any material liability (including any contingent or
secondary liability) to or on account of the termination of or withdrawal from a
Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with
respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or
Section 409 or 502(i) or 502(l) of ERISA; or that Communications, the Borrower
or any Subsidiary may incur any material liability pursuant to any employee
welfare benefit plan (as defined in Section 3(1) of ERISA)
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that provides benefits to retired employees or other former employees (other
than as required by Section 601 of ERISA) or any employee pension benefit plan
(as defined in Section 3(2) of ERISA) as a result of the adoption or amendment
of any such plan. Upon the request of the Administrative Agent, Communications
will deliver to each of the Banks a complete copy of the annual report (Form
5500) of each Plan required to be filed with the Internal Revenue Service. In
addition to any certificates or notices delivered to the Banks pursuant to the
first sentence hereof, copies of any material notices received by
Communications, the Borrower, any Subsidiary of Communications or the Borrower
or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be
delivered to the Banks no later than 15 Business Days after the date such notice
has been received by Communications, the Borrower or such Subsidiary or the
ERISA Affiliate, as applicable.
6.05 Good Repair. The Borrower will, and will cause each of
its Restricted Subsidiaries to, ensure that its material properties and
equipment used or useful in its business in whomsoever's possession they may be,
are kept in good repair, working order and condition, normal wear and tear
excepted, provided that violations of the foregoing provisions of this Section
6.05 shall not constitute a breach of this covenant unless such violations,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
6.06 Additional Security; Further Assurances; etc. (a) If at
any time Communications, the Borrower or any of their respective Restricted
Subsidiaries grant a security interest in any of their assets or properties to
support extensions of credit pursuant to the Existing Credit Agreement (as same
is in effect from time to time), then Communications and the Borrower will, or
will cause the respective Restricted Subsidiary to, provide for the granting of
a security interest in such assets or properties to secure the Obligations
pursuant to this Agreement, on substantially the same basis as is provided in
the Collateral Documents as in effect on the Closing Date (after giving effect
to the amendments required pursuant to Section 4). All such security interests
shall be granted pursuant to documentation (the "Additional Security Documents")
in a form which secures the Obligations under this Agreement on a
second-priority basis in accordance with the provisions of Section 11 hereof.
(b) Communications and the Borrower shall, and shall cause
each of their respective Restricted Subsidiaries to, defend the Collateral
against all claims and demands of all Persons (other than the Secured Creditors)
at any time claiming the same or any interest therein. Communications and the
Borrower shall, and shall cause their respective Restricted Subsidiaries to,
comply with the requirements of all state and federal laws in order to grant to
the Secured Creditors valid and perfected first priority security interests in
the Collateral, subject only to Liens permitted by this Agreement
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and the priorities contained in Section 11 hereof and in the Security Documents.
The Collateral Agent is hereby authorized by Communications and the Borrower to
file any UCC financing statements covering the Collateral whether or not the
signature of Communications or the Borrower appears thereon. Communications and
the Borrower shall do whatever the Collateral Agent may reasonably request, from
time to time, to effect the purposes of this Agreement and the other Credit
Documents, including without limitation, filing notices of liens, UCC financing
statements and amendments, renewals and continuations thereof; cooperating with
the Collateral Agent's representatives; keeping stock records; obtaining waivers
from landlords and mortgagees and from warehousemen and their landlords and
mortgagees (provided that Communications or the Borrower, as the case may be,
shall not be required to pay any consideration (other than de minimis amounts)
or incur any material obligation or relinquish any material right in connection
with any such waiver); and, paying claims which might, if unpaid, become a Lien
on the Collateral other than a Permitted Lien. Furthermore, the Borrower shall
cause to be delivered to the Collateral Agent such opinions of counsel, title
insurance and other related documents as may be reasonably requested by the
Collateral Agent to assure itself that this Section 6.08 has been complied with.
(c) Each of Communications and the Borrower agrees that each
action required by this Section 6.06 shall be completed as soon as possible, but
in no event later than 60 days after such action is requested to be taken by the
Collateral Agent.
6.07 Insurance. Schedule IX hereto sets forth a true and
complete listing of all insurance maintained by the Borrower and each of its
Restricted Subsidiaries as of the Closing Date. The Borrower agrees to maintain,
and to cause each of its Restricted Subsidiaries to maintain, public liability
insurance, third party property damage insurance and replacement value (or such
higher coverage as the Borrower may obtain) insurance on the Collateral under
such policies of insurance, with such insurance companies, in such amounts,
covering such risks and with such deductibles or self-insured retentions as are
in accordance with normal industry practice for similarly situated businesses.
6.08 Taxes. Communications and the Borrower will, and will
cause each of their respective Subsidiaries to, pay and discharge all material
income and other material taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits, or upon any properties belonging
to it, or payable by it pursuant to the Tax Sharing Agreements, prior to the
date on which penalties or interest attach thereto; provided, that neither
Communications nor any of its Subsidiaries shall be required to pay any such
tax, assessment, charge or levy which is being contested in good faith and by
proper proceedings if it has maintained adequate reserves (in the good
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faith judgment of the management of such Person) with respect thereto in
accordance with GAAP. In no event shall the Borrower and its Subsidiaries make
payments with respect to Federal income taxes computed on a consolidated,
combined or unitary basis which exceed the relevant amounts required to be paid
by them pursuant to the Tax Sharing Agreement as furnished to the Administrative
Agent prior to the Closing Date.
6.09 Corporate Separateness. Communications shall take, and
shall cause each of its Restricted Subsidiaries and Unrestricted Subsidiaries to
take, all actions as are necessary to keep the operations of Communications, the
Borrower and the Borrower's Restricted Subsidiaries separate and apart from
those of any Unrestricted Subsidiaries, including, without limitation, ensuring
that all customary formalities regarding their respective corporate existence,
including holding regular board of directors' and shareholders' meetings and
maintenance of corporate offices and records, are followed. None of
Communications, the Borrower nor any of the Borrower's Restricted Subsidiaries
shall make any payment to a creditor of any Unrestricted Subsidiary in respect
of any liability of any Unrestricted Subsidiary. All financial statements
provided to creditors shall clearly evidence the corporate separateness of
Communications, the Borrower and the Borrower's Restricted Subsidiaries from any
Unrestricted Subsidiaries, and Communications, the Borrower and the Borrower's
Restricted Subsidiaries shall maintain their own respective payroll (if any) and
separate books of account and bank accounts from Unrestricted Subsidiaries. Each
Unrestricted Subsidiary shall pay its respective liabilities, including all
administrative expenses, from its own separate assets, and assets of
Communications, the Borrower and the Borrower's Restricted Subsidiaries shall at
all times be separately identified and segregated from the assets of
Unrestricted Subsidiaries. Finally, none of Communications, the Borrower nor any
of the Borrower's Restricted Subsidiaries nor any Unrestricted Subsidiaries
shall take any action, or conduct its affairs in a manner which is likely to
result in the corporate existence of any Unrestricted Subsidiary being ignored,
or in the assets and liabilities of any Unrestricted Subsidiary being
substantively consolidated with those of Communications, the Borrower or any of
the Borrower's Restricted Subsidiaries in a bankruptcy, reorganization or other
insolvency proceeding.
6.10 New Wholly-Owned Restricted Subsidiaries; Additional
Subsidiary Guarantors. To the extent (x) the Borrower creates or acquires any
Wholly- Owned Restricted Subsidiary after the Effective Date in accordance with
the other provisions of this Agreement or (y) any Restricted Subsidiary of
Communications or the Borrower directly or indirectly guarantees any extensions
of credit pursuant to the Existing Credit Agreement, then in either such case,
each such Restricted Subsidiary shall be required to become a party to the
Subsidiaries Guaranty by executing a counterpart thereof or enter into an
amendment thereto satisfactory to the
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Administrative Agent and, if requested by the Administrative Agent or the
Required Banks, shall be required to enter into the Collateral Documents entered
into by the entities which were Subsidiary Guarantors on the Closing Date, in
each case by entering into counterparts thereof or amendments thereto, in form
and substance reasonably satisfactory to the extent requested by the
Administrative Agent and the Collateral Agent. In connection with the foregoing
to the extent requested by the Administrative Agent or the Collateral Agent, the
Company shall be required to cause to be delivered such relevant documentation
(including opinions of counsel) of the type described in Section 4 as the
respective Restricted Subsidiary would have had delivered if it were a Credit
Party on the Closing Date.
SECTION 7. Negative Covenants. Communications and the Borrower
hereby covenant and agree that, as of the Closing Date, and thereafter, for so
long as this Agreement is in effect and until the Total Commitments have
terminated, no notes are outstanding and the Loans, together with interest,
Fees, Expenses and all other Obligations (other than any indemnities described
in Section 12.01 hereof which are not then due and payable) incurred hereunder
are paid in full:
7.01 Limitation on Indebtedness. (a) Communications and the
Borrower shall not, and shall not permit any of their Restricted Subsidiaries
to, Incur any Indebtedness.
(b) Notwithstanding Section 7.01(a), the Borrower and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(i) Indebtedness of the Borrower Incurred pursuant to the
Existing Credit Agreement (including related Guarantees and security
agreements; provided that such security agreements shall only be
permitted if all Obligations pursuant to this Agreement are secured
thereby on substantially the same basis provided in the Collateral
Documents as in effect on the Closing Date after giving effect to the
amendments required pursuant to Section 4) in an aggregate principal
amount outstanding at any time not to exceed the greater of (x) the sum
of (i) 90% of the consolidated book value of the accounts receivable of
the Borrower and its Restricted Subsidiaries and (ii) 60% of the
consolidated book value of the inventory of the Borrower and its
Restricted Subsidiaries, in each case as determined at the time of the
respective Incurrence in accordance with GAAP and (y) $75,000,000, in
each case less the sum of (x) any amount of Indebtedness outstanding
pursuant to this Section 7.01(b)(i) permanently repaid as described in
Section 7.04 hereof and (y) the amount of any Indebtedness (other than
pursuant to this Agreement) outstanding on the Closing Date pursuant to
Section 4.03(b)(xiv) of the Senior Subordinated Notes Indenture, to
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the extent the Indebtedness described in this clause (y) remains
outstanding on the date of any determination pursuant to this
clause (i);
(ii) Indebtedness of the Borrower (and any Guarantee or Liens
with respect thereto; provided that such Liens shall only be permitted
if all Obligations pursuant to this Agreement are secured thereby on
substantially the same basis provided in the Collateral Documents as in
effect on the Closing Date after giving effect to the amendments
required pursuant to Section 4) originally Incurred pursuant to the
term loan provisions of the Existing Credit Agreement in an aggregate
principal amount outstanding at any time not to exceed (A) $44,800,000
less (B) the aggregate sum of all principal payments actually made from
time to time after the Closing Date under the Existing Credit Agreement
and any amount of Indebtedness outstanding pursuant to this Section
7.01(b)(ii) permanently repaid as described in Section 7.04 hereof;
(iii) Indebtedness owed to and held by the Borrower or a
Wholly- Owned Restricted Subsidiary of the Borrower; provided, however,
that any subsequent issuance or transfer of any Capital Stock which
results in any such Wholly-Owned Restricted Subsidiary of the Borrower
ceasing to be a Wholly- Owned Restricted Subsidiary of the Borrower or
any subsequent transfer of such Indebtedness (other than to the
Borrower or another Wholly-Owned Restricted Subsidiary of the Borrower)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness;
(iv) the Senior Subordinated Notes may remain outstanding in
an aggregate principal amount not to exceed $185,000,000;
(v) Indebtedness outstanding on the Closing Date after giving
effect to the Transaction (other than Indebtedness outstanding pursuant
to the Existing Credit Agreement or otherwise described in clause (i),
(ii), (iii) or (iv) above);
(vi) Guarantees by the Borrower or a Subsidiary Guarantor of
Indebtedness of a Subsidiary Guarantor otherwise permitted to be
Incurred by the Subsidiary Guarantor (other than Indebtedness permitted
by clause (x) below) or Guarantees by a Subsidiary Guarantor of Senior
Indebtedness of the Borrower permitted to be Incurred by the Borrower
under this Indenture;
(vii) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to clause (iv) or (v) above (excluding Indebtedness
outstanding on the Closing Date pursuant to Section 4.03(b)(xiv) of the
Senior Subordinated Notes Indenture) or clause (ix) and (x) below;
provided, however, that Refinancing
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Indebtedness the proceeds of which are used to Refinance the Senior
Subordinated Notes or any other Indebtedness that is subordinated in
right of payment to Obligations pursuant to this Agreement shall only
be permitted under this clause (vii) if such Refinancing Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to
which such Refinancing Indebtedness is Incurred or is outstanding, is
expressly made subordinate in right of payment to the Obligations
pursuant to this Agreement at least to the extent that the Indebtedness
to be Refinanced is subordinated to such Obligations; provided further,
however, that Refinancing Indebtedness the proceeds of which are used
to Refinance Indebtedness Incurred pursuant to clause (x) below shall
only be permitted under this clause (vii) if such Refinancing
Indebtedness is Incurred by the Borrower or the Restricted Subsidiary
that originally Incurred the Indebtedness pursuant to clause (x) below;
(viii) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business or (B) arising
from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of the
Borrower or any of its Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the acquisition or
disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness or other obligations Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by the Borrower or any Restricted Subsidiary in connection
with such disposition;
(ix) Indebtedness, in an aggregate principal amount
outstanding at any time not to exceed $2.0 million, Incurred by the
Borrower in connection with the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock
of the Borrower, any of its Restricted Subsidiaries or Communications,
options on any such shares or related stock appreciation rights or
similar securities (including phantom equity rights) held by employees,
former employees, directors or former directors of Communications, the
Borrower or its Restricted Subsidiaries (or their estates or
beneficiaries under their estates), upon death, disability, retirement,
termination of employment or pursuant to any agreement under which such
shares of stock or related rights were issued; provided, however, that
(A) such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is Incurred, is
expressly made subordinate in right of payment
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to all Obligations under this Agreement and (B) such Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to
which such Indebtedness is Incurred, provides that no payments of
principal of such Indebtedness, including by way of sinking fund,
mandatory redemption or otherwise (including defeasance), may be made
by the Borrower at any time while any of the Loans are outstanding;
(x) Indebtedness of any Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary
was acquired by the Borrower (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by the Borrower), so
long as the aggregate principal amount of all Indebtedness Incurred in
any fiscal year pursuant to clauses (x), (xi), (xii) and (xiii) of this
Section 7.01 does not exceed $25,000,000;
(xi) Capital Lease Obligations, so long as the aggregate
principal amount of all Indebtedness Incurred in any fiscal year
pursuant to clauses (x), (xi), (xii) and (xiii) of this Section 7.01
does not exceed $25,000,000;
(xii) Indebtedness constituting purchase money obligations
for property acquired in the ordinary course of business or other
similar financing transactions, so long as the aggregate principal
amount of all Indebtedness Incurred in any fiscal year pursuant to
clauses (x), (xi), (xii) and (xiii) of this Section 7.01 does not
exceed $25,000,000;
(xiii) Indebtedness Incurred to finance Capital Expenditures
or the acquisition of Additional Assets in any fiscal year in an
aggregate principal amount not to exceed 6% of the Borrower's
consolidated net sales for the immediately preceding fiscal year and
Refinancing Indebtedness in respect thereof, so long as the aggregate
principal amount of all Indebtedness Incurred in any fiscal year
pursuant to clauses (x), (xi), (xii) and (xiii) of this Section 7.01
does not exceed $25,000,000; and
(xiv) Indebtedness Incurred pursuant to this Agreement.
(c) The Borrower shall not Incur any Indebtedness pursuant to
Section 7.01(b) if such Indebtedness is subordinate in right of payment to any
Senior Indebtedness unless such Indebtedness is expressly subordinated (at least
to the same extent) in right of payment to all Obligations pursuant to this
Agreement. In addition,
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the Borrower shall not Incur any Secured Indebtedness pursuant to Sections 7.01
(b)(i) and (ii) unless contemporaneously therewith effective provision is made
to secure the Obligations pursuant to this Agreement equally and ratably with
such Secured Indebtedness for so long as such Secured Indebtedness is secured by
a Lien; provided that, to the extent Indebtedness pursuant to the Existing
Credit Agreement or any obligations pursuant to Interest Rate Agreements (as
defined in the Collateral Documents) are secured by Liens, the Obligations
pursuant to this Agreement shall be secured on the basis provided in Section 11
hereof and in accordance with the priorities (as to Collateral) established
pursuant to the amendments to the Collateral Documents entered into in
accordance with the requirements of Section 4.
(d) On and after the Closing Date, the Borrower and its
Restricted Subsidiaries shall not Incur any Indebtedness under Section
4.03(b)(xiv) of the Senior Subordinated Notes Indenture (other than (x)
Indebtedness Incurred pursuant to this Agreement and (y) at any time after the
repayment of Loans hereunder, such other Indebtedness in an aggregate principal
amount not to exceed at any time outstanding the aggregate principal amount of
all such repayments made since the Closing Date).
7.02 Limitation on Restricted Payments. (a) Communications and
the Borrower shall not, and shall not permit any of their Restricted
Subsidiaries to, directly or indirectly, to make any Restricted Payment.
(b) The provisions of Section 7.02(a) shall not prohibit:
(i) any purchase or redemption of Subordinated Obligations
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, indebtedness of the Borrower which is permitted to
be Incurred pursuant to Section 7.01(b)(vii);
(ii) the repurchase (or dividends to Communications for the
repurchase) of shares of, or options to purchase shares of, Capital
Stock of the Borrower or any of its Restricted Subsidiaries or of
Communications from employees, former employees, directors or former
directors of Communications, the Borrower or any of its Restricted
Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such persons
purchase or sell, or are granted the option to purchase or sell, shares
of such stock; provided, however, that the aggregate amount of all such
repurchases or dividends after the Closing Date shall not exceed $2.0
million;
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(iii) any payments pursuant to any tax-sharing agreement
between the Borrower and any other Person with which the Borrower is
required or permitted to file a consolidated tax return or with which
the Borrower is or could be part of a consolidated group for tax
purposes;
(iv) payments to Communications necessary for Communications
to pay corporate overhead expenses, not to exceed $250,000 in any
fiscal year;
(v) payments to Communications sufficient to permit
Communications to pay for the registration of its securities with the
SEC (including all reasonable professional fees and expenses); and
(vi) Investments in Unrestricted Subsidiaries made in exchange
for Capital Stock (other than Disqualified Stock) of Communications.
7.03 Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Borrower shall not, and shall not permit any of its
Restricted Subsidiaries to, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary of the Borrower (a) to pay dividends or make any other
distributions on its Capital Stock owned by, or pay any Indebtedness owed to,
the Borrower, (b) to make any loans or advances to the Borrower or (c) transfer
any of its property or assets to the Borrower, except:
(i) any encumbrance or restriction pursuant to the Existing
Credit Agreement or any other agreement in effect at or entered into on
the date of this Agreement and any extensions, refinancings, renewals
or replacements of any such agreement; provided, however, that the
encumbrances and restrictions in any such extension, refinancing,
renewal or replacement are no less favorable in any material respect to
the Banks than those encumbrances or restrictions being extended,
refinanced, renewed or replaced;
(ii) any encumbrance or restriction with respect to a
Restricted Subsidiary of the Borrower pursuant to an agreement relating
to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by the
Borrower (other than Indebtedness Incurred as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary of,
or was acquired by, the Borrower) and outstanding on such date;
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(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (ii) above or contained in any
amendment to an agreement referred to in clause (ii) above; provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable in any material respect to the Banks
than encumbrances and restrictions with respect to such Restricted
Subsidiary contained in the agreements referred to in clause (ii)
above;
(iv) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder;
(v) in the case of clause (c) above, restrictions contained
in security agreements or mortgages securing Indebtedness of a
Restricted Subsidiary of the Borrower to the extent such restrictions
restrict the transfer of the property subject to such security
agreements or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary
of the Borrower imposed pursuant to an agreement entered into for the
sale or disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale
or disposition;
(vii) encumbrances and restrictions contained in any
Indebtedness or any agreement relating to any Indebtedness of the
Borrower or a Restricted Subsidiary of the Borrower permitted pursuant
to Section 7.01; provided, however, that either (A) such encumbrances
and restrictions are no more restrictive than the encumbrances and
restrictions imposed by the Existing Credit Agreement or (B) each
Restricted Subsidiary subject to any such encumbrances or restrictions
after the Closing Date shall Guarantee the Loans on a senior basis;
pursuant to the Subsidiaries Guaranty; and
(viii) any encumbrance or restriction existing under or by
reason of applicable law.
Nothing contained in this Section 7.03 shall prevent the
Borrower or any Restricted Subsidiary of the Borrower from restricting the sale
or other disposition of property or assets of the Borrower or any Restricted
Subsidiary of the Borrower that secure Indebtedness of the Borrower or any of
its Restricted Subsidiaries.
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7.04 Limitation on Sales of Assets and Subsidiary Stock. (a)
In addition to any mandatory repayments required pursuant to Section 3.01, in
the event and to the extent that the Net Available Cash received by the Borrower
or any of its Restricted Subsidiaries from one or more Asset Dispositions
occurring on or after the Issue Date in any period of 12 consecutive months
ended after the Closing Date exceeds 10% of Adjusted Consolidated Assets as of
the beginning of such 12-month period, then the Borrower shall (i) within 12
months after the date such Net Available Cash so received exceeds such 10% of
Adjusted Consolidated Assets and to the extent the Borrower elects (or is
required by the terms of any Indebtedness) (A) apply an amount equal to or less
than such excess Net Available Cash to permanently repay (and in the case of any
repayment of revolving loans or similar obligations, to permanently reduce the
correlating commitments) Senior Indebtedness of the Borrower or (B) invest an
amount, equal to or less than the difference between such excess Net Available
Cash and the amount so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date of
such agreement), in Additional Assets and (ii) apply an amount equal to the
difference between such excess Net Available Cash and the amount applied
pursuant to clause (i) as provided in the following paragraphs of this Section
7.06. The amount of such excess Net Available Cash required to be applied
pursuant to clause (ii) of the preceding sentence shall constitute "Excess
Proceeds."
(b) If, as of the first day of any calendar month, the
aggregate amount of Excess Proceeds totals at least $5 million, the Borrower
must, not later than the fifteenth Business Day of such month, apply an amount
equal to such Excess Proceeds to prepay principal of outstanding Loans (the
"Excess Proceeds Repayment"). Each repayment pursuant to the preceding sentence
shall be accompanied by the payment of all accrued but unpaid interest on the
principal amount of Loans so repaid.
7.05 Limitation on Affiliate Transactions. (a) The Borrower
shall not, and shall not permit any of its Restricted Subsidiaries to, enter
into, renew or extend any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate of
the Borrower (an "Affiliate Transaction") unless the terms thereof (1) are no
less favorable to the Borrower or such Restricted Subsidiary (or, in the case of
an Affiliate Transaction between the Borrower and a Restricted Subsidiary, are
no less favorable to the Borrower or are, in the good faith determination of the
Board of Directors, in the best interests of the Borrower) than those which
could be obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate and (2) if such Affiliate Transaction
involves an amount in excess of $2.5 million, the terms thereof are set forth in
writing and either (A) have been approved by a majority of the disinterested
members of the Board of Directors or (B) for which the Borrower or such
Restricted Subsidiary delivers to the
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Administrative Agent a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Borrower or such
Restricted Subsidiary from a financial point of view.
(b) The provisions of Section 7.05(a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to Section 7.02, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Borrower pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Borrower or its Restricted Subsidiaries; (v) the payment
of reasonable fees to directors of the Borrower and its Restricted Subsidiaries
who are not employees of the Borrower or its Restricted Subsidiaries; (vi) any
payments or other transactions pursuant to any tax-sharing agreement between the
Borrower and any other Person with which the Borrower is required or permitted
to file a consolidated tax return or with which the Borrower is or could be part
of a consolidated group for tax purposes; (vii) any Affiliate Transaction
between the Borrower and a Wholly-Owned Restricted Subsidiary or between Wholly-
Owned Restricted Subsidiaries; (viii) the Transaction; (ix) any employment or
other agreement providing for compensation between the Borrower or any of its
Restricted Subsidiaries and James T. Sullivan or Stephen M. Dyott that is
approved, in good faith, by the Board of Directors; (x) the payment of fees to
Morgan Stanley & Co. Incorporated or its Affiliates for financial, advisory,
consulting or investment banking services that the Board of Directors of the
Borrower deems to be advisable or appropriate for the Borrower or any Restricted
Subsidiary to obtain (and including the payment to Morgan Stanley & Co.
Incorporated or its Affiliates of any underwriting discounts or commissions or
placement agency fees in connection with the issuance and sale of any securities
by the Borrower or any Restricted Subsidiary of the Borrower), so long as the
amount of such fees is no greater than the amount of fees which would be payable
for such services in arm's-length dealings with a Person who is not an
Affiliate; or (xi) sales of Capital Stock of Communications or the Borrower to
Morgan Stanley & Co. Incorporated or its Affiliates.
7.06 Change of Control. On the 15th day following the
occurrence of any Change of Control, the Borrower shall repay in full 100% of
the outstanding principal amount of all Loans, together with all accrued and
unpaid interest thereon to the date of such repayment. Notwithstanding anything
to the contrary contained in the immediately preceding sentence, the Borrower
shall not be required to repay the outstanding Loans of any Bank which agrees in
writing, prior to the 15th day following the occurrence of the respective Change
of Control, that such Bank waives its right to
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receive such repayment. It is understood and agreed that no Bank shall be
obligated to grant any such waiver under any circumstances, and the granting
thereof shall be in the sole discretion of the respective Bank.
7.07 Limitation on the Issuance of Preferred Stock of
Restricted Subsidiaries. The Borrower shall not sell or otherwise dispose of any
shares of Preferred Stock of any Restricted Subsidiary of the Borrower, and
shall not permit any Restricted Subsidiary of the Borrower, directly or
indirectly, to issue, sell or otherwise dispose of any shares of its Preferred
Stock, except, in each case, (i) to the Borrower or a Wholly-Owned Restricted
Subsidiary of the Borrower or (ii) if, immediately after giving effect to such
issuance, sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary of the Borrower (and none of Communications,
the Borrower nor any of their respective Subsidiaries shall retain any equity
interest therein).
7.08 When Communications or Borrower May Merge or Transfer
Assets. After the Closing Date, neither Communications nor the Borrower shall
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all its assets to, any Person.
7.09 Ownership of Restricted Subsidiaries. Communications will
not at any time directly own equity interests in any Subsidiary other than the
Borrower.
7.09 Further Instruments and Acts. Upon request of the
Administrative Agent, Communications and the Borrower will execute and deliver
such further instruments and do such further acts as may be reasonably necessary
or proper to carry out more effectively the purpose of this Agreement and the
other Credit Documents.
SECTION 8. Events of Default. An "Event of Default" occurs
if:
8.01 Events of Default Defined.
(1) the Borrower defaults in any payment of interest on any
Loan, or any other amount (other than principal of Loans owing pursuant
to this Agreement or any other Credit Document, when the same becomes
due and payable, and such default continues for a period of 30 days;
(2) the Borrower defaults in the payment of the principal of
any Loan or Note when the same becomes due and payable at its Stated
Maturity, as a result of any mandatory repayment under Section 3.01,
7.04 or 7.06, upon declaration or otherwise;
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(3) the Borrower fails to comply with Section 7.08;
(4) the Borrower fails to comply with Section 7.01, 7.02,
7.03, 7.05, 7.06 and 7.07 and such failure continues for 30 days after
the notice specified below;
(5) Communications or the Borrower fails to comply with any of
its agreements in this Agreement or any other Credit Document (other
than those referred to in (1), (2), (3) or (4) above) and such failure
continues for 60 days after the notice specified below;
(6) Indebtedness of Communications, the Borrower or any
Significant Subsidiary is not paid within any applicable grace period
after final maturity thereof or becomes, or is declared by the holders
thereof to be, immediately and unconditionally due and payable because
of a default, the total amount of such Indebtedness unpaid or becoming
or declared to be due and payable exceeds $10,000,000 or its foreign
currency equivalent and such failure continues (or such payment shall
not have been waived or extended or such Indebtedness shall continue to
be due and payable) for 30 days after the notice specified below;
(7) Communications, the Borrower or any Significant Subsidiary
pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against Communications, the
Borrower or any Significant Subsidiary in an involuntary case;
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(B) appoints a Custodian of Communications, the
Borrower or any Significant Subsidiary or for any substantial
part of its property; or
(C) orders the winding up or liquidation of
Communications, the Borrower or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess of
$10,000,000 (provided that the amount of such money judgment or decree
shall be calculated net of any insurance coverage that the Borrower has
determined in good faith is available in whole or in part with respect
to such money judgment or decree) is entered against Communications,
the Borrower or any Significant Subsidiary and is not discharged and
there is a period of 60 days following the entry of such judgment or
decree during which such judgment or decree is not discharged, waived
or the execution thereof stayed and, in each case, such default
continues for 10 days after the notice specified below;
(10) any Collateral Document shall cease to be in full force and
effect, or shall cease to give the Collateral Agent on behalf of the
Secured Creditors the Liens, rights, powers and privileges purported to
be created thereby in favor of the Collateral Agent, or any Credit
Party shall default in any material respect in the due performance or
observance of any term, covenant or agreement on its part to be
performed or observed pursuant to any such Collateral Document and such
failure shall continue for 30 days after the notice specified below; or
(11) any Guaranty or provision thereof shall cease to be in full
force or effect as to the relevant Guarantor, or any Guarantor or
Person acting by or on behalf of such Guarantor shall deny or disaffirm
such Guarantor's obligations under the relevant Guaranty, or any
Guarantor shall default in the due performance or observance of any
material term, covenant or agreement on its part to be performed or
observed pursuant to any Guaranty.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
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A Default under clause (4), (5), (6), (9) or (10) of this
Section is not an Event of Default until the Administrative Agent or Banks
holding at least 25% in principal amount of the outstanding Loans notify the
Borrower of the Default and the Borrower does not cure such Default within the
time specified after receipt of such Notice. Such Notice must specify the
Default, demand that it be remedied and state that such notice is a "Notice of
Default".
The Borrower shall deliver to the Administrative Agent, within
5 Business Days after the occurrence thereof, written notice in the form of an
Officers' Certificate of any event which with the giving of notice and the lapse
of time would become an Event of Default under clause (4), (5), (6), (9) or (10)
of this Section, its status and what action the Borrower is taking or proposes
to take with respect thereto.
8.02 Acceleration. If an Event of Default (other than an Event
of Default specified in Section 8.01(7) or (8) with respect to the Borrower)
occurs and is continuing, the Administrative Agent shall, upon the written
request of the holders of at least a majority of the outstanding principal
amount of Loans, by written notice to the Borrower, declare the principal amount
of and accrued interest on all the Loans as of the date of such declaration to
be due and payable. Upon such a declaration, such principal and interest shall
be due and payable immediately. If an Event of Default specified in Section
8.01(7) or (8) with respect to the Borrower occurs, the principal of and
interest on all the Loans shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Administrative
Agent or any Bank. The holders of a majority in principal amount of the
outstanding Loans by notice to the Administrative Agent may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due solely
because of acceleration. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
8.03 Other Remedies. If an Event of Default occurs and is
continuing, the Administrative Agent and the Banks may, subject to the
provisions of Section 11, pursue any available remedy to collect the payment of
principal of or interest on the Loans or to enforce the performance of any
provision of the Notes, this Agreement or any other Credit Document.
The Administrative Agent may maintain a proceeding even if it
does not possess any of the Notes or does not produce any of them in the
proceeding. A delay or omission by the Administrative Agent or any Bank in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a
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waiver of or acquiescence in the Event of Default. No remedy is exclusive of any
other remedy. All available remedies are cumulative.
SECTION 9. Definitions.
9.01 General Definitions. As used herein, the following terms
shall have the meanings herein specified (to be equally applicable to both the
singular and plural forms of the terms defined):
"Accounts" of any Person shall mean all of such Person's
rights to payment for goods sold or leased or services performed by such Person,
whether presently existing or hereafter arising, including, without limitation,
rights evidenced by accounts, instruments, notes, drafts, documents, chattel
paper, and all other forms of obligations owing to such Person arising out of
the sale of goods or the rendition of services by such Person, whether or not
earned by performance, and any and all credit insurance, letters of credit,
guaranties and other security therefor, as well as all merchandise returned to
or reclaimed by such Person, and such Person's books and records (except minute
books) relating to any of the foregoing.
"Additional Security Documents" shall have the meaning
provided in Section 6.06(a).
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary of the Borrower; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Adjusted Certificate of Deposit Rate" shall mean, on any day,
the sum (rounded to the nearest 1/100 of 1%) of (1) the rate obtained by
dividing (x) the most recent weekly average dealer offering rate for negotiable
certificates of deposit with a three-month maturity in the secondary market as
published in the most recent Federal Reserve System publication entitled "Select
Interest Rates," published weekly on Form H.15 as of the date hereof, or if such
publication or a substitute containing the foregoing rate information shall not
be published by the Federal Reserve System for any week, the weekly average
offering rate determined by the Administrative Agent on the basis of quotations
for such certificates received by it from three certificate of deposit dealers
in New York of recognized standing or, if such quotations are unavailable, then
on the basis of other sources reasonably selected by the Administrative Agent,
by (y) a percentage equal to 100% minus the stated maximum rate of all reserve
requirements as specified in Regulation D
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applicable on such day to a three-month certificate of deposit of a member bank
of the Federal Reserve System in excess of $100,000 (including, without
limitation, any marginal, emergency, supplemental, special or other reserves),
plus (2) the then daily net annual assessment rate as estimated by the
Administrative Agent for determining the current annual assessment payable by
the Administrative Agent to the Federal Deposit Insurance Corporation for
insuring three-month certificates of deposit.
"Adjusted Consolidated Assets" means at any time the total
amount of assets of the Borrower and its consolidated Restricted Subsidiaries
(less applicable depreciation, amortization and other valuation reserves), after
deducting therefrom all current liabilities of the Borrower and its consolidated
Restricted Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of the Borrower and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Administrative Agent" shall mean Bankers Trust Company in its
capacity as Administrative Agent for the Banks hereunder, and shall include any
successor thereto as Administrative Agent, appointed as such pursuant to Section
10.09.
"Affiliate", of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control", when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Section 7, "Affiliate", shall also mean any beneficial owner of
shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of Communications or the Borrower or of rights or
warrants to purchase such stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Affiliate Transaction" shall have the meaning provided in
Section 7.05.
"Agreement" shall mean this Term Loan Agreement as same may be
supplemented, modified or amended from time to time in accordance with the
provisions hereof.
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"Applicable Lending Office" shall mean, with respect to each
Bank, such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate
Loan, and such Bank's Domestic Lending Office in the case of a Base Rate Loan.
"Applicable Margin" shall mean a percentage per annum which
shall initially equal (x) in the case of Eurodollar Loans, 4.0% and (y) in the
case of Base Rate Loans, 3.0%, provided that the Applicable Margins for each
type of loan shall increase on each three-month anniversary of the Closing Date
in accordance with the table set forth below:
Applicable Margin Applicable Margin for
Month Anniversary for Eurodollar Loans Base Rate Loans
- ----------------- -------------------- ---------------
0 4.0% 3.0%
3 4.25% 3.25%
6 4.5% 3.5%
9 5.0% 4.0%
12 5.5% 4.5%
15 6.0% 5.0%
18 6.5% 5.5%
21 7.0% 6.0%
24 7.5% 6.5%
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Borrower or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares) or
(ii) any assets of the Borrower or any Restricted Subsidiary outside the
ordinary course of business of the Borrower or such Restricted Subsidiary (other
than (y) a disposition by a Restricted Subsidiary to the Borrower or by the
Borrower or a Restricted Subsidiary to a Wholly-Owned Restricted Subsidiary and
(z) for purposes of Section 7.04 only, a Restricted Payment permitted by Section
7.02); provided, however, that for purposes of Section 7.04 only, the term
"Asset Disposition" shall not include any disposition of assets if such
disposition is governed by Section 7.08.
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"Assignment and Assumption Agreement" shall mean an assignment
and assumption agreement entered into by an assigning Bank and an assignee Bank
in accordance with Section 12.04, substantially in the form of Exhibit P.
"Auditors" shall mean a nationally-recognized firm of
independent public accountants selected by Communications or the Borrower and
reasonably satisfactory to the Administrative Agent. For purposes of this
Agreement, Communications' current firm of independent public accountants, Ernst
& Young, shall be deemed to be satisfactory to the Administrative Agent.
"Authorized Officer" of any Credit Party shall mean any of the
President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
any Vice-President, the Secretary or any Assistant Secretary of such Credit
Party or any other officer of such Credit Party which is designated in writing
to the Administrative Agent by any of the foregoing officers of such Credit
Party as being authorized to give such notices under this Agreement.
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of numbers of years from the date of determination to the dates of
each successive scheduled principal payment of such Indebtedness multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bankruptcy Law" shall mean Title 11, United States Code, or
any similar Federal or state law for the relief of debtors.
"Banks" is defined to mean the lenders who are from time to
time parties to this Agreement.
"Base Rate" shall mean the higher of (x) 1/2 of 1% in excess
of the Federal Reserve reported certificate of deposit rate and (y) the rate
that BTCo announces from time to time as its prime lending rate, as in effect
from time to time.
"Base Rate" at any time shall mean the highest of (i) 1/2 of
1% in excess of the Adjusted Certificate of Deposit Rate, (ii) 1/2 of 1% in
excess of the overnight Federal Funds Rate and (iii) the Prime Lending Rate.
"Base Rate Loan" shall mean each Loan converted into such
pursuant to Section 1.08, until such time (if any) as converted back into a
Eurodollar Loan in accordance with the requirements of Section 1.08(d).
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"Blocked Account Agreements" shall mean all blocked account
agreements executed and delivered pursuant to the Existing Credit Agreement,
until such time as same are replaced by blocked account agreements in the form
of Exhibit M-2 hereto, and any blocked account agreements at any time entered
into in the form of Exhibit M-2 hereto.
"Board of Directors" means the Board of Directors of the
Borrower or any committee thereof duly authorized to act on behalf of such
Board.
"Borrower" shall have the meaning provided in the first
paragraph of this Agreement.
"BTCC" shall mean BT Commercial Corporation, in its individual
capacity.
"BTCo" shall mean Bankers Trust Company in its individual
capacity.
"Business Day" shall mean (i) for all purposes other than as
covered by clause (ii) below, any day except Saturday, Sunday and any day which
shall be in New York City a legal holiday or a day on which banking institutions
are authorized or required by law or other government action to close and (ii)
with respect to all notices and determinations in connection with, and payments
of principal and interest on, Eurodollar Loans, any day which is a Business Day
described in clause (i) above and which is also a day for trading by and between
banks in Dollars in the New York interbank Eurodollar market.
"Canadian Debenture" shall mean the Existing Canadian
Debenture, as same may be modified, amended or supplemented from time to time in
accordance with the terms thereof and hereof, including pursuant to the Existing
Canadian Debenture Amendment.
"Canadian Pledge Agreement" shall mean the Existing Canadian
Pledge Agreement, as same may be modified, amended or supplemented from time to
time in accordance with the terms thereof and hereof, including pursuant to the
Existing Canadian Pledge Agreement Amendment.
"Capital Expenditures" means expenditures (whether paid in
cash or accrued as liabilities and including Capital Lease Obligations) of the
Borrower and its Restricted Subsidiaries relating to the acquisition of
equipment used or useful in the business of the Borrower or any Restricted
Subsidiary or in a Related Business.
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"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capitalized lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent of any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Change of Control" means such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act),
other than the Permitted Holders and their respective Affiliates, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of (A) more
than forty percent (40%) of the total voting power of the then outstanding
Voting Stock of the Borrower or Communications and (B) more than the total
voting power of the then outstanding Voting Stock of the Borrower or
Communications, as the case may be, beneficially owned by the Permitted Holders
and their respective Affiliates, treating the Permitted Holders and their
respective Affiliates as a "group"; or (ii) during any period of two consecutive
calendar years, individuals who at the beginning of such period constituted the
Board of Directors of (A) the Borrower (together with any new directors whose
election by the Borrower's Board of Directors or whose nomination for election
by the Borrower's Board of Directors or whose nomination for election by the
Borrower's shareholders was approved by a vote of at least two thirds of the
directors then still in office who either were directors at the beginning of
such period or whose election or nomination for election was previously so
approved) or (B) Communications (together with any new directors whose election
by Communications' Board of Directors or whose nomination for election by
Communications' shareholders was approved by a vote of at least two-thirds of
the directors then still in office who either were directors at the beginning of
such period or whose election or nomination for election was previously so
approved), in either case, cease for any reason to constitute a majority of the
directors of the Borrower or Communications, as the case may be, then in office;
or (iii) (A) the Borrower or Communications consolidates with or merges into any
other Person or conveys, transfers or leases all or substantially all its assets
to any Person or (B) any Person mergers into the Borrower or Communications, in
either event pursuant to a transaction in which any Voting Stock of the Borrower
or Communications, as the
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case may be, outstanding immediately prior to the effectiveness thereof is
reclassified or changed into or exchanged for cash, securities or other
property; provided, however, that any consolidation, conveyance, transfer or
lease (x) between the Borrower and any of its Restricted Subsidiaries, between
Communications and the Borrower or between Restricted Subsidiaries of the
Borrower (including the reincorporation of the Borrower or Communications in
another jurisdiction) or (y) for the purpose of creating a public holding
company for the Borrower or Communications in another jurisdiction or (z) for
the purpose of creating a public holding company for the Borrower or
Communications in which all holders of the capital stock of the Borrower or
Communications, as the case may be, would be entitled to receive (other than
cash in lieu of fractional shares) solely capital stock of the holding company
in amounts proportionate to their holdings of such capital stock of the Borrower
or Communications immediately prior to such transaction, shall be excluded from
the operation of this clause (iii) or (iv) Communications shall at any time
cease to own 100% of the capital stock of the Borrower.
"Closing Date" shall mean the date of the extension of Loans
hereunder, which shall occur on or after the Effective Date and on or prior to
July 31, 1997.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"Collateral" shall mean all of the Collateral as defined in
each of the Collateral Documents.
"Collateral Access Agreements" shall mean any landlord
waivers, mortgagee waivers, bailee letters or any similar acknowledgement
agreements of any warehousemen or processor in possession of Inventory, in each
case substantially in the form of Exhibit N hereto (or prior to obtaining any
such agreement, in the form previously attached as Exhibit N to the Existing
Credit Agreement), in each case with such changes thereto as are reasonably
acceptable to the Administrative Agent.
"Collateral Agent" shall mean BTCC acting as collateral agent
pursuant to the Collateral Documents.
"Collateral Assignments of Rights" shall mean each collateral
assignment of rights executed and delivered in substantially the form of Exhibit
L hereto (or, if executed and delivered prior to the Closing Date, in the form
of Exhibit L to the Existing Credit Agreement).
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"Collateral Documents" shall mean all contracts, instruments
and other documents now or hereafter executed and delivered in connection with
this Agreement, pursuant to which liens and security interests were or are
granted to the Collateral Agent in the Collateral for the benefit of the Secured
Creditors (including the Banks), including, without limitation, the Pledge
Agreement, the Security Agreement, each Mortgage, the Canadian Debenture, the
Canadian Pledge Agreement and, after the execution and delivery thereof, each
Additional Security Document.
"Commitment" shall mean, for each Bank, the amount set forth
opposite such Bank's name in Schedule I, as the same may be (x) reduced from
time to time pursuant to Section 3.01 or (y) adjusted from time to time as a
result of assignments to or from such Bank pursuant to Section 1.11 or 12.04(b).
"Communications" means Sullivan Communications, Inc., a
Delaware corporation, and its successors.
"Concentration Account Agreements" shall mean each
concentration account agreement executed and delivered pursuant to the Existing
Credit Agreement, until such time as same are replaced by concentration account
agreements in the form of Exhibit M-3 hereto, and any concentration account
agreement at any time entered into in the form of Exhibit M-3 hereto.
"Covered Taxes" shall have the meaning provided such term in
Section 3.03(a).
"Credit Documents" shall mean, collectively, this Agreement,
the Notes, the Subsidiaries Guaranty and each of the Collateral Documents, as
the same may be modified, amended, extended, restated or supplemented from time
to time.
"Credit Parties" shall mean, collectively, Communications, the
Borrower and the Subsidiary Guarantors.
"Custodian" shall mean any receiver, trustee, assignee,
liquidator, custodian or similar official under any Bankruptcy Law.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
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"Disposition" means the sale, assignment, transfer, lease,
conveyance or other disposition by Communications, the Borrower or their
respective Restricted Subsidiaries of any Collateral, including, without
limitation an involuntary disposition as a result of a casualty or condemnation.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Senior Subordinated Notes (as in effect on the Closing Date); provided, however,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of any "asset sale"
or "change of control", occurring prior to the first anniversary of the Stated
Maturity of the Senior Subordinated Notes (as in effect on the Closing Date)
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in Section 4.06
and Section 4.08 of the Senior Subordinated Notes Indenture (as in effect on the
Closing Date) and such Capital Stock specifically provides that such Person will
not repurchase or redeem any such Capital Stock pursuant to such provision prior
to such Person's repayment of all Loans as are required to be repaid pursuant to
Section 7.04 and Section 7.06.
"Documents" shall mean all Credit Documents and all Existing
Credit Agreement Documents.
"Dollars" and the sign "$" shall each mean freely transferable
lawful money of the United States.
"Domestic Lending Office" shall mean, with respect to any
Bank, the office of such Bank specified as its "Domestic Lending Office"
opposite its name on Schedule I, as such Schedule may be amended from time to
time.
"Effective Date" shall have the meaning provided in Section
12.10.
"Eligible Transferee" shall mean and include a commercial
bank, financial institution, any fund that invests in bank loans and any other
"accredited investor" (as defined in Regulation D of the Securities Act).
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"Environmental Law" shall mean any applicable Federal, state,
provincial, foreign or local statute, law, rule, regulation, ordinance, code,
guide, policy and rule of common law now or hereafter in effect and in each case
as amended, and any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent decree or judgment, relating to
the environment, health, safety or Hazardous Materials, including, without
limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, as amended,
33 U.S.C. SS. 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. SS. 2601
et seq.; the Clean Air Act, 42 U.S.C. SS. 7401 et seq.; the Safe Drinking Water
Act, 42 U.S.C. ss. 300F et seq.; the Oil Pollution Act of 1990, 33 U.S.C SS.
2701 et seq. and any applicable state, provincial and local or foreign
counterparts, or equivalents or similar statutes.
"Environmental Claims" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigations (other than internal
reports prepared by the Borrower or any of its Restricted Subsidiaries solely in
the ordinary course of such Person's business or as required in connection with
a financing transaction and not in response to any third party action or request
of any kind) or proceedings relating in any way to any Environmental Law or any
permit issued, or any approval given, under any such Environmental Law
(hereafter, "Claims"), including, without limitation, (a) any and all Claims by
governmental or regulatory authorities for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any Environmental
Law, and (b) any and all Claims by any third party seeking damages,
contribution, indemnification, cost recovery, compensation, specific performance
or injunctive relief resulting from Hazardous Materials arising from alleged
injury or threat of injury to health, safety or the environment.
"Equipment" means all of the Borrower's present and hereafter
acquired machinery, equipment, furniture, furnishings, fixtures, motor vehicles,
tools, parts, dies, jigs, goods, and any and all attachments, accessories,
accessions, replacements, substitutions, additions, and improvements thereto,
wherever located (but shall exclude any such attachment, accessories,
accessions, replacements, substitutions, additions and improvements which accrue
to lessors with respect to any equipment leased by the Borrower or subject to a
prior lien as permitted hereunder).
"Equipment Acquisition Loans" shall mean all Equipment
Acquisition Loans under, and as defined in, the Existing Credit Agreement.
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"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder. Section references to ERISA are to ERISA, as in
effect at the date of this Agreement and any subsequent provisions of ERISA,
amendatory thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean each person (as defined in
Section 3(9) of ERISA) which together with Communications, the Borrower or any
Restricted Subsidiary of Communications or the Borrower would be deemed to be a
"single employer" within the meaning of Section 414(b) or (c) of the Code, and
for the purpose of any specific provision of this Agreement which expressly
refers to Section 302 of ERISA or Section 412, 4971 or 4977 of the Code, within
the meaning of Section 414(b), (c), (m) or (o) of the Code.
"Eurodollar Lending Office" shall mean, with respect to any
Bank, the office of such Bank specified as its "Eurodollar Lending Office"
opposite its name on Schedule I, as such Schedule may be amended from time to
time (or, if no such office is specified, its Domestic Lending Office), or such
other office or Affiliate of such Bank as such Bank may from time to time
specify to the Borrower and the Administrative Agent.
"Eurodollar Loan" shall mean each Loan outstanding at any time
hereunder, except during such time (and then only to the extent) as the
respective such Loan is required to be maintained as a Base Rate Loan in
accordance with the provisions of Section 1.08.
"Eurodollar Rate" shall mean (a) the offered quotation to
first-class banks in the New York interbank Eurodollar market by BTCo for Dollar
deposits of amounts in immediately available funds comparable to the outstanding
principal amount of the Eurodollar Loan of BTCo with maturities comparable to
the Interest Period applicable to such Eurodollar Loan commencing two Business
Days thereafter as of 10:00 A.M. (New York time) on the date which is two
Business Days prior to the commencement of such Interest Period, divided (and
rounded off to the nearest 1/16 of 1%) by (b) a percentage equal to 100% minus
the then stated maximum rate of all reserve requirements (including, without
limitation, any marginal, emergency, supplemental, special or other reserves
required by applicable law) applicable to any member bank of the Federal Reserve
System in respect of Eurocurrency funding or liabilities as defined in
Regulation D (or any successor category of liabilities under Regulation D).
"Event of Default" has the meaning provided in Section 8.
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"Excess Proceeds" shall have the meaning provided in Section
7.04.
"Excess Proceeds Repayment" shall have the meaning provided in
Section 7.04.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Existing Canadian Debenture" shall mean the Canadian
Debenture under, and as defined in, the Existing Credit Agreement, as same is in
effect immediately prior to the occurrence of the Closing Date and immediately
before giving effect to the Existing Canadian Debenture Amendment.
"Existing Canadian Debenture Amendment" shall have the meaning
provided in Section 4.11.
"Existing Canadian Pledge Agreement" shall mean the Canadian
Pledge Agreement under, and as defined in, the Existing Credit Agreement, as
same is in effect immediately prior to the occurrence of the Closing Date and
immediately before giving effect to the Existing Canadian Pledge Agreement
Amendment.
"Existing Canadian Pledge Agreement Amendment" shall have the
meaning provided in Section 4.11.
"Existing Credit Agreement" is defined to mean the Credit
Agreement, dated as of August 15, 1995, among Communications, the Borrower, the
lenders party thereto and the Existing Credit Agreement Agent, together with the
related documents thereto (including any Guarantees and security documents), in
each case as such agreements may be amended (including any amendment and
restatement thereof), supplemented, replaced or otherwise modified from time to
time, including any agreement extending the maturity of, refinancing or
otherwise restructuring (including, but not limited to, the inclusion of
additional borrowers or guarantors thereunder that are Restricted Subsidiaries
of Communications or the Borrower and whose obligations are guaranteed by
Communications or the Borrower thereunder) all or a portion of the Indebtedness
under such agreement or any successor agreement.
"Existing Credit Agreement Agent" shall mean BTCC, as Agent
pursuant to the Existing Credit Agreement, and any successor thereto.
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"Existing Credit Agreement Collateral Access Agreements" shall
mean all Collateral Access Agreements entered into pursuant to, and as required
by, the Existing Credit Agreement.
"Existing Credit Agreement Credit Parties" shall mean each of
the Credit Parties under, and as defined in, the Existing Credit Agreement.
"Existing Credit Agreement Documents" shall mean all Credit
Documents under, and as defined in, the Existing Credit Agreement.
"Existing Credit Agreement Obligations" shall mean all
Obligations under, and as defined, in the Existing Credit Agreement (in any
event including all principal of, and interest on, all loans pursuant to the
Existing Credit Agreement, all amounts owing in respect of unpaid drawings under
letters of credit issued thereunder, and all interest, fees and other amounts
owing pursuant to the Existing Credit Agreement).
"Existing Credit Agreement Required Lenders" shall mean the
Required Lenders under, and as defined in, the Existing Credit Agreement.
"Existing Credit Agreement Termination Date" shall mean that
date upon which all commitments pursuant to the Existing Credit Agreement have
terminated, no letter of credit or promissory note remains outstanding
thereunder and all loans and letter of credit obligations, together with
interest, fees, expenses and other obligations pursuant to the Existing Credit
Agreement (other than any indemnities described therein which are not then due
and payable) are paid in full.
"Existing Indebtedness" shall mean all Indebtedness of the
Borrower and its Restricted Subsidiaries outstanding prior to, and to remain
outstanding on and after, the Closing Date, and set forth on Schedule X, without
giving effect to extensions or renewals thereto, except as expressly provided
therein.
"Existing Mortgage Policies" shall mean each mortgage
insurance policy issued with respect to an Existing Mortgage under the Existing
Credit Agreement.
"Existing Mortgaged Property" shall mean all Real Property of
the Borrower and its Restricted Subsidiaries listed as such on Schedule VII
(which shall include all Real Property subject to any Existing Mortgage).
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"Existing Mortgages" shall mean all Mortgages under, and as
defined in, the Existing Credit Agreement, granted by the Existing Credit
Agreement Credit Parties pursuant to the Existing Credit Agreement and which
have not been released by the lenders thereunder prior to the Closing Date.
"Existing Pledge Agreement" shall mean the Pledge Agreement
under, and as defined in, the Existing Credit Agreement, as same is in effect
immediately prior to the occurrence of the Closing Date and immediately before
giving effect to the Existing Pledge Agreement Amendment.
"Existing Pledge Agreement Amendment" shall have the meaning
provided in Section 4.08.
"Existing Security Agreement" shall mean the Security
Agreement under, and as defined in, the Existing Credit Agreement, as same is in
effect immediately prior to the occurrence of the Closing Date and immediately
before giving effect to the Existing Security Agreement Amendment.
"Existing Security Agreement Amendment" shall have the meaning
provided in Section 4.09.
"Expenses" shall mean all present and future expenses incurred
by or on behalf of the Administrative Agent in connection with this Agreement,
any other Credit Document or otherwise in its capacity as Administrative Agent
under this Agreement, whether incurred heretofore or hereafter.
"Federal Funds Rate" shall mean for any period, a fluctuating
interest rate equal for each day during such period to the weighted average of
the rates on overnight Federal Funds transactions with members of the Federal
Reserve System arranged by Federal Funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by the Administrative Agent from three Federal Funds
brokers of recognized standing selected by the Administrative Agent.
"Fees" shall mean all fees payable pursuant to, or referenced
in, Section 2.01.
"Final Maturity Date" shall mean March 31, 2001.
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"Financial Statements" shall mean the consolidated and, if
requested by the Administrative Agent, consolidating balance sheet and statement
of operations and statement of cash flows and statements of changes in
shareholders' equity of each of (x) Communications and (y) the Borrower, for the
period specified prepared in accordance with GAAP and consistent with prior
practices; provided however, that so long as Communications owns all the capital
stock of the Borrower, owns no other significant assets and owns no capital
stock of any other Subsidiary, separate financial statements for the Borrower
shall not be required to be furnished pursuant to Sections 6.01(a) and (b).
"First Priority Secured Obligations" shall mean all Existing
Credit Agreement Obligations and all Secured Interest Rate Protection
Obligations, in each case secured pursuant to the Collateral Documents.
"Foreign Bank" shall mean any Bank organized under the laws of
a jurisdiction outside of the United States.
"Foreign Pension Plan" means any plan, fund (including,
without limitation, any superannuation fund) or other similar program or
arrangement established or maintained outside the United States of America by
Communications, the Borrower or any one or more of their Restricted Subsidiaries
primarily for the benefit of employees of Communications, the Borrower or such
Restricted Subsidiaries residing outside the United States of America, which
plan, fund or other similar program provides, or results in, retirement income,
a deferral of income in contemplation of retirement or payments to be made upon
any termination of employment, and which plan is not subject to ERISA or the
Code.
"GAAP" shall mean generally accepted accounting principles in
the United States as in effect from time to time subject to Section 9.02.
"Governing Documents" shall mean, as to any Person, the
certificate or articles of incorporation and by-laws or other organizational or
governing documents of such Person.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
financial
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obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other
financial obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other financial
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any Indebtedness or financial obligation.
"Guaranty" shall mean the Parent Guaranty and the Subsidiaries
Guaranty.
"Hazardous Materials" shall mean (a) any petroleum or
petroleum products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, transformers or other
equipment that contained dielectric fluid containing levels of polychlorinated
biphenyls, and radon gas; (b) any chemicals, materials or substances defined as
or included in the definition of "hazardous substances," "hazardous waste,"
"hazardous materials," "extremely hazardous waste," "restricted hazardous
waste," "toxic substances," "toxic pollutants," "contaminants," or "pollutants,"
or words of similar import, under any Environmental Law; and (c) any other
chemical, material or substance, exposure to which is prohibited, limited or
regulated by any governmental authority.
"Highest Lawful Rate" shall mean, at any given time during
which any Obligations shall be outstanding hereunder, the maximum nonusurious
interest rate, if any, that at any time or from time to time may be contracted
for, taken, reserved, charged or received on the Obligations owing under this
Agreement, under the laws of the State of New York (or the law of any other
jurisdiction whose laws may be mandatorily applicable notwithstanding other
provisions of this Agreement and the other Credit Documents), or under
applicable federal laws which may presently or hereafter be in effect and which
allow a higher maximum nonusurious interest rate than under New York (or such
other jurisdiction's) law, in any case after taking into account, to the extent
permitted by applicable law, any and all relevant payments or charges under this
Agreement and any other Credit Documents executed in connection herewith, and
any available exemptions, exceptions and exclusions.
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"Holder" means the Person in whose name a Security is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Restricted Subsidiary of the
Borrower (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to be Incurred by such Restricted Subsidiary at the time it becomes a
Restricted Subsidiary. The term "Incurrence" when used as a noun shall have a
correlative meaning.
"Indebtedness" of any Person means, without duplication:
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable (other than
Interest Rate Protection Agreements);
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto, all conditional sale obligations of
such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the third Business Day following receipt by such Person of a
demand for reimbursement following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified
Stock, and in respect of a Restricted Subsidiary, all obligations of
such Restricted
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Subsidiary with respect to the redemption, repayment or other
repurchase of any Preferred Stock (but excluding, in each case, any
accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise, including
by means of any Guarantee; and
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets (as determined by the
Board of Directors) or the amount of the obligation so secured.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided, however,
(i) that the amount outstanding at any time of any Indebtedness Incurred with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include (A) any liability for Federal, state, local or
other taxes, (B) any obligations under Interest Rate Protection Agreements or
Raw Material Hedge Agreements or (C) any liability arising from the honoring by
a bank or other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business.
"Interest Determination Date" shall mean, with respect to any
Eurodollar Loan, the second Business Day prior to the commencement of any
Interest Period relating to such Eurodollar Loan.
"Interest Period" shall have the meaning provided in Section
1.07.
"Interest Rate Protection Agreement" means any interest rate
or currency swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect the Borrower or any Restricted
Subsidiary against fluctuations in interest rates or currency values.
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"Inventory" of any Person shall mean all of the inventory
owned by such Person, including without limitation: (i) all raw materials, work
in process, parts, components, assemblies, supplies and materials used or
consumed in such Person's business; (ii) all goods, wares and merchandise,
finished or unfinished, held for sale or lease or leased or furnished or to be
furnished under contracts of service; and (iii) all goods returned or
repossessed by such Person.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts receivable) or other extension of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services of the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment," and Section 7.02 (i) "Investment" shall
include the portion (proportionate to the Borrower's equity interest in such
Subsidiary) of the fair market value of the net assets of any Restricted
Subsidiary of the Borrower at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Borrower shall
be deemed to continue to have a permanent "Investment" in such Subsidiary at the
time of such redesignation equal to the amount (if positive) equal to (x) the
Borrower's "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to the Borrower's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at the
time of such redesignation; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors.
"Issue Date" means the date on which the Senior Subordinated
Notes were originally issued.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Loan" shall have the meaning provided in Section 1.01.
"Lockbox Agreements" shall mean all lockbox agreements
executed and delivered pursuant to the Existing Credit Agreement, until such
time as same
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are replaced by lockbox agreements in the form of Exhibit M-1 hereto, and any
lockbox agreements at any time entered into in the form of Exhibit M-1 hereto.
"Margin Stock" shall have the meaning provided in Regulation
U.
"Material Adverse Effect" shall mean a material adverse effect
on (i) the business, prospects, operations, results of operations, assets,
liabilities or financial condition of the Borrower or of Communications and its
Restricted Subsidiaries taken as a whole, (ii) any Credit Party's ability to
perform its material obligations under the Credit Documents to which it is a
party, or (iii) the material rights and remedies of the Administrative Agent,
the Collateral Agent or the Banks under any Credit Document.
"Material Contract" shall mean any contract or other
arrangement (other than the Credit Documents), whether written or oral, to which
the Borrower or its Restricted Subsidiaries is a party as to which the breach,
nonperformance, cancellation or failure to renew by any party thereto may be
reasonably expected to have a Material Adverse Effect.
"Moody's" means Moody's Investors Service, Inc. and its
successors.
"Mortgage Amendments" shall have the meaning provided in
Section 4.10.
"Mortgages" shall mean all Existing Mortgages, as modified by
the Mortgage Amendments or as same may be further modified, amended or
supplemented from time to time in the future in accordance with the terms
thereof and hereof, as well as any additional mortgages granted by any of the
Credit Parties after the Closing Date.
"MSCP Entities" means, collectively, Morgan Stanley Capital
Partners III, L.P., a Delaware limited partnership, Morgan Stanley Capital
Investors, L.P., a Delaware limited partnership, and MSCP III 892 Investors,
L.P., a Delaware limited partnership.
"MSLEF" means The Morgan Stanley Leveraged Equity Fund II,
L.P., a Delaware limited partnership.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA.
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"Net Available Cash" from an Asset Disposition means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal (but not interest) pursuant to a note or
installment receivable or otherwise including upon release to the Borrower or a
Restricted Subsidiary from any reserve established by the Borrower or such
Restricted Subsidiary against any liabilities associated with such Asset
Disposition, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring person of
Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form) in each case net of all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition (without
regard to the consolidated results of operations of the Borrower and its
Restricted Subsidiaries, taken as whole), and in each case net of all payments
made on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition, and,
until released to the Borrower or a Restricted Subsidiary, net of appropriate
amounts to be provided by the Borrower or any Restricted Subsidiary of the
Borrower as a reserve against any liabilities associated with such Asset
Disposition, including pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Disposition, all as
determined in accordance with GAAP, and net of all distributions and other
payments required to be made to minority interest holders in Restricted
Subsidiaries or joint ventures as a result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Note" shall have the meaning provided in Section 1.04(a).
"Notice of Borrowing" shall have the meaning provided in
Section 1.02(a).
"Notice Office" shall mean the office of the Administrative
Agent located at 14 Wall Street, New York, New York 10005, Attention: Bruce
Addison,
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or such other office as the Administrative Agent may hereafter designate in
writing as such to the other parties hereto.
"Obligations" shall mean, without duplication, the unpaid
principal of and interest on (including interest accruing on or after the filing
of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Communications, the Borrower or
any Restricted Subsidiary of the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding) the Notes,
the Fees, the Expenses and all other obligations and liabilities of
Communications, the Borrower or any Restricted Subsidiary of the Borrower to the
Administrative Agent, the Collateral Agent or the Banks, whether direct or
indirect, absolute or contingent, due or to become due, whether now existing or
hereafter incurred, which may arise under, out of, or in connection with, this
Agreement, the Notes, any other Credit Document or any other document made,
delivered or given in connection herewith or therewith.
"Offering Memorandum" shall mean the Offering Memorandum,
dated August 10, 1995, issued in connection with the private placement of the
Senior Subordinated Notes.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Borrower.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Administrative Agent. The counsel may be an
employee of or counsel to the Borrower or the Administrative Agent.
"Other Taxes" shall have the meaning given such term in
Section 3.03(b).
"Parent Guarantor" shall have the meaning provided in the
first paragraph of this Agreement.
"Parent Guaranty" shall mean the Guaranty provided by
Communications pursuant to Section 13.
"Payment Office" shall mean the office of the Administrative
Agent located at 14 Wall Street, New York, New York 10005, ABA Number:
021001033, Account Name: BTCo Investor Cash A/C, Account Number: 000355784,
Reference:
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Sullivan Graphics, Inc., Attention: Bharathi Baliga, or such other office as the
Administrative Agent may hereafter designate in writing as such to the other
parties hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Section 4002 of ERISA and any Person succeeding to the
functions thereof.
"Permitted Encumbrances" shall mean, with respect to any
Mortgage, the Permitted Encumbrances related thereto as described in the
respective Mortgage Policy relating thereto.
"Permitted Holders" means, collectively, MSLEF and the MSCP
Entities.
"Permitted Investment" means (i) an Investment in the Borrower
or in a Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the primary
business of such Restricted Subsidiary or such Person is a Related Business;
(ii) an Investment by the Borrower or any Restricted Subsidiary in another
Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Borrower or a Restricted Subsidiary; provided, however, that such
Person's primary business is a Related Business; (iii) a Temporary Cash
Investment; (iv) receivables owing to the Borrower or any Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Borrower or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business in accordance with
past practices of the Borrower or of its Restricted Subsidiaries; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Borrower or any Restricted
Subsidiary or in satisfaction of judgments, (viii) Interest Rate Protection
Agreements and Raw Material Hedge Agreements and (ix) Investments at any time
not exceeding $2 million (valued at the fair market value at the time any such
Investment was made).
"Permitted Materials" shall have the meaning given to such
term in Section 5.18.
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"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Plan" shall mean any multiemployer or single-employer plan as
defined in Section 4001 of ERISA, which (i) is maintained or contributed to by
(or to which there is an obligation to contribute of), or (ii) at any time
during the five year period preceding (A) in the case of any Loan, the date of
the making of such Loan or (B) in the case of any event or condition described
in Section 6.04, the date thereof, was maintained or contributed to by (or to
which there is or was an obligation to contribute to), Communications, the
Borrower, a Restricted Subsidiary of Communications or the Borrower or an ERISA
Affiliate.
"Pledge Agreement" shall mean the Existing Pledge Agreement,
as same may be modified, amended or supplemented from time to time in accordance
with the terms thereof and hereof, including pursuant to the Existing Pledge
Agreement Amendment.
"PPSA" shall mean the Personal Property Security Act
(Ontario).
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Prime Lending Rate" shall mean the rate which BTCo announces
from time to time as its prime lending rate, the Prime Lending Rate to change
when and as such prime lending rate changes. The Prime Lending Rate is a
reference rate and does not necessarily represent the lowest or best rate
actually charged to any customer. BTCo may make commercial loans or other loans
at rates of interest at, above or below the Prime Lending Rate.
"Proceeds" shall mean all proceeds of any Collateral.
"Quarterly Payment Date" shall mean the last Business Day of
each January, April, July and October occurring after the Closing Date.
"Raw Material Hedge Agreement" means an agreement designed to
hedge against fluctuations in the cost of raw materials entered into by the
Borrower
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or its Subsidiaries in the ordinary course of business in connection with their
business operations.
"Real Property" of any Person shall mean all of the right,
title and interest of such Person in and to land, improvements and fixtures,
including leaseholds.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue Indebtedness in exchange, substitution or replacement for, such
Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Borrower or any Restricted Subsidiary of the Borrower
existing on the Closing Date or Incurred in compliance with this Agreement,
including Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) such
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees, accrued interest and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include Indebtedness of a Restricted Subsidiary of the Borrower that Refinances
Indebtedness of the Borrower.
"Register" shall have the meaning provided in Section 12.15.
"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System as from time to time in effect and any
successor to all or a portion thereof establishing reserve requirements.
"Regulation U" shall mean Regulation U of the Board of
Governors of the Federal Reserve System as from time to time in effect and any
successor thereto.
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"Related Business" means as of any date the businesses of the
Borrower and its Subsidiaries as conducted on the Closing Date and any business
related, ancillary or complementary thereto.
"Remedial Actions" means any claim, proceeding or action to
foreclose upon, take possession or control of, sell, lease or otherwise dispose
of, or in any other manner realize, take steps to realize or seek to realize
upon, the whole or any part of any Collateral, whether pursuant to the UCC, by
foreclosure, by setoff, by self-help repossession, by notification to account
debtors, by deed in lieu of foreclosure, by exercise of power of sale, by
judicial action or otherwise, or the exercise of any other remedies with respect
to any Collateral available under any of the Collateral Documents, or under
applicable law.
"Replaced Bank" shall have the meaning provided in Section
1.11.
"Replacement Bank" shall have the meaning provided in Section
1.11.
"Reportable Event" shall mean any of the events described in
Section 4043 of ERISA with respect to a Plan as to which the 30-day notice
requirement has not been waived by the PBGC.
"Required Banks" shall mean, collectively, Banks the sum of
whose outstanding Loans (or, if prior to the Closing Date, Commitments)
represent an amount greater than 50% of the sum of all outstanding Loans (or, if
prior to the Closing Date, the Commitments); provided that until the first date
on or after the Closing Date upon which BTCo and its Affiliates own less than a
majority of the outstanding principal amount of Loans, the Required Banks shall
be required to include (if there are any Banks other than BTCo and its
Affiliates) at least one Bank which is not BTCo or an Affiliate thereof.
"Required Secured Creditors" shall mean, with respect to any
Collateral Document, the Required Lenders as defined therein.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than Disqualified
Stock) and dividends or distributions payable solely to the Borrower or a
Restricted Subsidiary, and other
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than pro rata dividends or other distributions made by a Subsidiary of the
Borrower that is not a Wholly-Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Borrower held by any Person
or of any Capital Stock of a Subsidiary of the Borrower held by any Affiliate of
the Borrower (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Borrower that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment, other than a Permitted Investment, in any Person.
"Restricted Subsidiary" means any Subsidiary of the Borrower
that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group and its
successors.
"SEC" means the Securities and Exchange Commission.
"Section 3.03(e) Certificate" shall have the meaning provided
in Section 3.03(e).
"Second Priority Secured Obligations" shall mean all
Obligations under, or with respect to, this Agreement.
"Second Tier Taxes" shall have the meaning provided in Section
3.03(a).
"Secured Creditors" shall have the meaning provided in the
various Collateral Documents (after giving effect to the amendments thereto
required pursuant to Section 4), and in any event shall include (x) the lenders
from time to time party to the Existing Credit Agreement, (y) various lenders
entering into Interest Rate Agreements as more fully provided in the various
Collateral Documents and (z) the Banks pursuant to this Agreement.
"Secured Indebtedness" means any Indebtedness of the Borrower
or any of its Restricted Subsidiaries secured by a Lien.
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"Secured Interest Rate Protection Obligations" shall mean all
obligations relating to Interest Rate Protection Agreements secured pursuant to
the Collateral Documents in accordance with the terms thereof.
"Secured Obligations" shall mean all obligations secured in
accordance with the provisions of the various Collateral Documents, in any event
including all Existing Credit Agreement Obligations, all Obligations pursuant to
this Agreement and all Secured Interest Rate Protection Obligations.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" shall mean the Existing Security
Agreement, as same may be modified, amended or supplemented from time to time in
accordance with the terms thereof and hereof, including pursuant to the Existing
Security Agreement Amendment.
"Senior Indebtedness" of any Person means all obligations of
such Person which would constitute Senior Indebtedness under, and as defined in,
the Senior Subordinated Notes Indenture as in effect on the Closing Date, or
which constitutes Senior Indebtedness under, and as defined in, the
documentation governing any Indebtedness which Refinances (or successively
Refinances) such Indebtedness and is incurred pursuant to the provisions of
Section 7.01(b)(vii).
"Senior Subordinated Note Documents" shall mean and include
each of the documents and other agreements entered into (including, without
limitation, the Senior Subordinated Notes and the Senior Subordinated Notes
Indenture) relating to the issuance by the Borrower of the Senior Subordinated
Notes, as in effect on the Closing Date and as the same may be entered into,
modified, supplemented or amended from time to time to the extent permitted
pursuant to the terms hereof and thereof.
"Senior Subordinated Notes Indenture" shall mean the
Indenture, dated as of August 15, 1995, entered into by and between the Borrower
and NationsBank of Georgia, National Association, as trustee thereunder, as in
effect on the Closing Date and as the same may be modified, amended or
supplemented from time to time to the extent permitted in accordance with the
terms hereof and thereof.
"Senior Subordinated Notes" shall mean the Borrower's 12-3/4%
Senior Subordinated Notes due 2005, as in effect on the Closing Date and as the
same may be modified, supplemented or amended from time to time to the extent
permitted pursuant to the terms hereof and thereof.
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"Shareholders' Agreement" shall have the meaning assigned that
term in the Existing Credit Agreement, as same is in effect on the Closing Date.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Borrower within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any Indebtedness, the
date specified in such security or other relevant documentation as the fixed
date on which the final payment of principal of such Indebtedness is due and
payable, including pursuant to any mandatory redemption provision (but excluding
any provision providing for the repurchase of such security at the option of the
holder thereof upon the happening of any contingency unless such contingency has
occurred).
"Subordinated Obligation" means the Senior Subordinated Notes,
any Indebtedness which Refinances same, and any other Indebtedness of the
Borrower (whether outstanding on the Issue Date or thereafter incurred) which is
subordinate or junior in right of payment to the Loans pursuant to a written
agreement to that effect.
"Subsidiaries Guaranty" shall have the meaning provided in
Section 4.07.
"Subsidiary" shall mean as to any Person, a corporation,
partnership or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified, all
references to a "Subsidiary" or to "Subsidiaries" in this Credit Agreement shall
refer to a Subsidiary or Subsidiaries of Communications or the Borrower, as
appropriate.
"Subsidiary Guarantor" shall mean, at any time, any Restricted
Subsidiary of the Borrower which has theretofore executed and delivered the
Subsidiaries Guaranty or a counterpart thereof.
"Syndication Date" shall mean the earlier of (x) the date
which is 30 days after the Closing Date and (y) the date occurring three
Business Days after the date upon which the Administrative Agent determined in
its sole discretion (and
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notifies the Borrower) that the primary syndication (and the resulting addition
of institutions as Banks pursuant to Section 12.04) has been completed, notice
of which shall be promptly given to the Borrower.
"Tax Sharing Agreements" shall have the meaning assigned that
term in the Existing Credit Agreement, as same is in effect on the Closing Date.
"Taxes" shall have the meaning provided in Section 3.03.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000 (or
the foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Borrower) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's or "A-1" (or higher) according to S&P, and (v)
investments in securities with maturities of six months or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or "A" by Moody's.
"Total Commitments" shall mean, at any time, the sum of the
Commitments of each of the Banks at such time.
"Transaction" shall mean the entering into of this Agreement
and the incurrence of Loans hereunder, the utilization of the proceeds hereof as
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contemplated by Section 5.05 and the taking of the other actions specified in
Section 4 of this Agreement.
"Unfunded Current Liability" of any Plan shall mean the
amount, if any, by which the actuarial present value of the accumulated plan
benefits under the Plan as of the close of its most recent plan year, exceeds
the fair market value of the assets allocable thereto, each determined in
accordance with Statement of Financial Accounting Standards No. 35, based upon
the actuarial assumptions used by the Plan's actuary in the most recent annual
valuation of the Plan.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Borrower that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary (including any newly acquired or newly formed Subsidiary) of the
Borrower to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Borrower or any Restricted Subsidiary of the Borrower that is not a Subsidiary
of the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
as a Permitted Investment pursuant to clause (ix) of the definition thereof. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Borrower could Incur $1.00 of additional Indebtedness under
Section 4.03(a) of the Senior Subordinated Notes Indenture as same is in effect
on the Closing Date (and without giving effect to any modifications, supplements
or amendments thereto, or terminations or waivers thereof) and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced by the Borrower to the Administrative
Agent by promptly filing with the Administrative Agent a copy of the board
resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
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"Wholly-Owned Restricted Subsidiary" shall mean, as to any
Person, (i) any corporation 100% of whose capital stock (other than director's
qualifying shares) is at the time owned by such Person and/or one or more
Wholly-Owned Restricted Subsidiaries of such Person and (ii) any partnership,
association, joint venture or other entity in which such Person and/or one or
more Wholly-Owned Restricted Subsidiaries of such Person has a 100% equity
interest at such time. Unless the context otherwise requires, each reference to
a Wholly-Owned Restricted Subsidiary shall be to a Wholly-Owned Restricted
Subsidiary of the Borrower.
9.02 Accounting Terms and Determinations. Unless otherwise
defined or specified herein all accounting terms used in this Agreement shall be
construed in accordance with GAAP, applied on a basis consistent in all material
respects with the Financial Statements delivered to the Administrative Agent on
or before the Closing Date. All accounting determinations for purposes of
determining compliance with the covenants contained in Section 7, and all
defined terms as used in said Section 7, shall be made consistent with practices
in effect as of the Closing Date and, if applicable, in accordance with GAAP as
in effect on the Closing Date (or, if the Administrative Agent shall have given
its prior written approval thereto, such determinations may be made by the
Borrower in accordance with GAAP as in effect on the date for which the
determinations of such compliance shall be made), and applied on a basis
consistent in all material respects with the audited Financial Statements
delivered to the Administrative Agent on or before the Closing Date, except as
otherwise previously disclosed to the Administrative Agent. The Financial
Statements required to be delivered hereunder from and after the Closing Date,
and all financial records, shall be maintained in accordance with GAAP. If GAAP
shall change from the basis used in preparing the audited Financial Statements
delivered to the Administrative Agent on or before the Closing Date, the
certificates required to be delivered pursuant to Section 6.01 demonstrating
compliance with the covenants contained herein shall include (except as
otherwise provided above) at the election of the Borrower or upon the request of
the Required Banks, calculations setting forth the adjustments necessary to
demonstrate how the Borrower is in compliance with the financial covenants based
upon GAAP as in effect on the Closing Date.
9.03 Other Defined Terms. Terms not otherwise defined herein
which are defined in the UCC as in effect in the State of New York shall have
the meanings given them in such UCC. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and references to Article, Section, Schedule, Exhibit and like
references are references to this Agreement unless otherwise specified.
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SECTION 10. The Agent.
10.01 Appointment. (a) Each Bank hereby designates (x) BTCo as
Administrative Agent and (y) BTCC as Collateral Agent (for purposes of this
Section 10, the term "Agent" shall include BTCo as Administrative Agent pursuant
to this Agreement and BTCC as Collateral Agent under the Collateral Documents)
to act as herein specified. Each Bank hereby irrevocably authorizes, and each
holder of any Note shall be deemed irrevocably to authorize, the Agent to take
such action on its behalf under the provisions of this Agreement and the Notes
and any other instruments and agreements referred to herein and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of the Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto. Subject to the provisions of
Section 11, the Collateral Agent shall hold all Collateral and the
Administrative Agent shall hold all payments of principal, interest, Fees,
charges and Expenses received pursuant to this Agreement or any other Credit
Document for the benefit of the Banks to be distributed as provided herein. The
Agent may perform any of its duties hereunder by or through its agents or
employees.
(b) The provisions of this Section 10 are solely for the
benefit of the Agent and the Banks, and neither Communications nor any of its
Subsidiaries shall have any rights as a third party beneficiary of any of the
provisions hereof (other than Sections 10.09 and 10.10(c)). In performing its
functions and duties under this Agreement, the Agent shall act solely as agent
of the Banks and does not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for Communications
or any of its Subsidiaries.
10.02 Nature of Duties of Agent. The Agent shall have no
duties or responsibilities except those expressly set forth in this Agreement
and the other Credit Documents. Neither the Agent nor any of its officers,
directors, employees or agents shall be liable for any action taken or omitted
by it as such hereunder or in connection herewith, unless caused by its or their
gross negligence or willful misconduct. The duties of the Agent shall be
mechanical and administrative in nature; the Agent shall not have by reason of
this Agreement or the other Credit Documents a fiduciary relationship in respect
of any Bank; and nothing in this Agreement or the other Credit Documents,
expressed or implied, is intended to or shall be so construed as to impose upon
the Agent any obligations in respect of this Agreement or the other Credit
Documents except as expressly set forth herein or therein.
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10.03 Lack of Reliance on Agent. (a) Independently and without
reliance upon the Agent, each Bank, to the extent it deems appropriate, has made
and shall continue to make (i) its own independent investigation of the
financial or other condition and affairs of the Borrower and its Subsidiaries in
connection with the taking or not taking of any action in connection herewith
and (ii) its own appraisal of the creditworthiness of the Borrower and its
Subsidiaries, and, except as expressly provided in this Agreement, the Agent
shall not have any duty or responsibility, either initially or on a continuing
basis, to provide any Bank with any credit or other information with respect
thereto, whether coming into its possession before the making of the Loans or at
any time or times thereafter.
(b) The Agent shall not be responsible to any Bank for any
recitals, statements, information, representations or warranties herein or in
any document, certificate or other writing delivered in connection herewith or
for the execution, effectiveness, genuineness, validity, enforceability,
collectibility, priority or sufficiency of this Agreement or the Notes or the
financial or other condition of the Borrower or any of its Subsidiaries. The
Agent shall not be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions of this
Agreement or the Notes, or the financial condition of the Borrower or any of its
Subsidiaries, or the existence or possible existence of any Default or Event of
Default.
10.04 Certain Rights of the Agent. The Agent shall have the
right to request instructions from the Required Banks at any time. If the Agent
requests instructions from the Required Banks with respect to any act or action
(including the failure to act) in connection with this Agreement, the Agent
shall be entitled to refrain from such act or taking such action unless and
until the Agent shall have received instructions from the Required Banks, and
the Agent shall not incur liability to any Person by reason of so refraining.
Without limiting the foregoing, no Bank shall have any right of action
whatsoever against the Agent as a result of the Agent acting or refraining from
acting hereunder in accordance with the instructions of the Required Banks.
10.05 Reliance by Agent. The Agent shall be entitled to rely,
and shall be fully protected in relying, upon any note, writing, resolution,
notice, statement, certificate, telex, teletype or telecopier message,
cablegram, radiogram, order or other documentary, teletransmission or telephone
message believed by it to be genuine and correct and to have been signed, sent
or made by the proper person. The Agent may consult with legal counsel
(including counsel for the Borrower with respect to matters concerning the
Borrower and its Subsidiaries), independent public accountants and other experts
selected by it and shall not be liable for any action
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taken or omitted to be taken by it in good faith in accordance with the advice
of such counsel, accountants or experts.
10.06 Indemnification of Agent. To the extent the Agent is not
reimbursed and indemnified by the Borrower or, in the case of the Collateral
Agent, the other Secured Creditors, each Bank will reimburse and indemnify the
Agent, in proportion to the Banks' respective "percentages" as used in
determining the Required Banks, for and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses (including counsel fees and disbursements) or disbursements of any kind
or nature whatsoever (including all Expenses) which may be imposed on, incurred
by or asserted against the Agent in performing its duties hereunder, in any way
relating to or arising out of this Agreement or the other Credit Documents;
provided that no Bank shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the Agent's gross negligence or willful
misconduct. The agreements contained in this Section shall survive any
termination of this Agreement and the other Credit Documents and the payment in
full of the Obligations.
10.07 The Agent in Its Individual Capacity. With respect to
its obligation to lend under this Agreement, the Loans made by it and the Notes
issued to it, the Agent shall have the same rights and powers hereunder as any
other Bank or holder of a Note or participation interests and may exercise the
same as though it was not performing the duties specified herein; and the terms
"Banks," "Required Banks," "holders of Notes," or any similar terms shall,
unless the context clearly otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, acquire
equity interests in, and generally engage in any kind of banking, trust,
financial advisory or other business with Communications or any Affiliate of
Communications as if it were not performing the duties specified herein, and may
accept fees and other consideration from Communications for services in
connection with this Agreement and otherwise without having to account for the
same to the Banks. Without limiting the foregoing, the Banks acknowledge that
BTCC is the agent pursuant to the Existing Credit Agreement.
10.08 Holders of Notes. The Agent may deem and treat the payee
of any Note as the owner thereof for all purposes hereof unless and until a
written notice of the assignment or transfer thereof shall have been filed with
the Agent. Any request, authority or consent of any Person who, at the time of
making such request or giving such authority or consent, is the holder of any
Note, shall be
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conclusive and binding on any subsequent holder, transferee or assignee of such
Note or of any Note or Notes issued in exchange therefor.
10.09 Successor Agent. (a) The Agent may, upon five (5)
Business Days' notice to the Banks and the Borrower, resign at any time
(effective upon the appointment of a successor Agent (including the Banks acting
as such pursuant to following clause (c)) pursuant to the provisions of this
Section 10.09) by giving written notice thereof to the Banks and the Borrower.
Upon any such resignation, the Required Banks shall have the right, upon five
(5) days' notice and approval by the Borrower (which approval shall not be
unreasonably withheld), to appoint a successor Agent. If no successor Agent (i)
shall have been so appointed by the Required Banks, and (ii) shall have accepted
such appointment, within fifteen (15) days after the retiring Agent's giving of
notice of resignation, then, upon five (5) days' notice, the retiring Agent may,
on behalf of the Banks, appoint a successor Agent.
(b) Upon the acceptance of any appointment as Agent hereunder
by a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article 10 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.
(c) In the event that no successor Agent is appointed pursuant
to clause (a) above, the Agent's resignation shall become effective forty days
after notice of such resignation is given to the Borrower and the Banks, and the
Required Banks shall perform the duties of the Agent until a successor Agent is
appointed as provided herein.
10.10 Collateral Matters. (a) Each Bank authorizes and directs
the Collateral Agent to enter into the Collateral Documents for the benefit of
the Banks. Each Bank hereby agrees, and each holder of any Note by the
acceptance thereof will be deemed to agree, that, except as otherwise set forth
herein, any action taken by the Required Banks in accordance with the provisions
of this Agreement, or by the Required Secured Creditors under the Collateral
Documents, and the exercise by the Required Banks or Required Secured Creditors,
as the case may be, of the powers set forth herein or therein, together with
such other powers as are reasonably incidental thereto, shall be authorized and
binding upon all of the Banks. The Collateral Agent is hereby authorized on
behalf of all of the Banks, without the necessity of any notice to or further
consent from any Bank, to take any action with
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respect to any Collateral or Collateral Documents which may be necessary to
perfect and maintain perfected the security interest in and liens upon the
Collateral granted pursuant to the Collateral Documents.
(b) The Banks hereby authorize the Collateral Agent, at its
option and in its discretion, upon the direction of the Agent to release any
Lien granted to or held by the Collateral Agent upon any Collateral (i) upon
termination of the Commitments and payment and satisfaction of all of the
Obligations at any time arising under or in respect of this Agreement or the
Credit Documents or the transactions contemplated hereby or thereby, (ii)
constituting property being sold or disposed of upon receipt of the proceeds of
such sale by the Collateral Agent if the Borrower certifies to the Collateral
Agent that the sale or disposition is made in compliance with this Agreement and
the Existing Credit Agreement (and the Agent may rely conclusively on any such
certificate, without further inquiry) or (iii) if approved, authorized or
ratified in writing by the Required Banks or Required Secured Creditors, as the
case may be, unless such release is required to be approved by all of the Banks
hereunder. Upon request by the Agent at any time, the Banks will confirm in
writing the Collateral Agent's authority to release particular types or items of
Collateral pursuant to this Section 10.10.
(c) Upon any sale and transfer of Collateral which is
expressly permitted pursuant to the terms of this Agreement and the Existing
Credit Agreement, or consented to in writing by the Required Banks or Required
Secured Creditors, as the case may be, or all of the Banks, as applicable, and
upon at least five (5) Business Days' prior written request by the Borrower, the
Collateral Agent shall (and is hereby irrevocably authorized by the Banks to)
execute such documents as may be necessary to evidence the release of the Liens
granted to the Collateral Agent for the benefit of the Banks herein or pursuant
hereto upon the Collateral that was sold or transferred; provided that (i) the
Collateral Agent shall not be required to execute any such document on terms
which, in the Collateral Agent's opinion, would expose the Collateral Agent to
liability or create any obligation or entail any consequence other than the
release of such Liens without recourse, representation or warranty and (ii) such
release shall not in any manner discharge, affect or impair the Obligations or
any Liens upon (or obligations of the Borrower or any of its Subsidiaries in
respect of) all interests retained by the Borrower or any of its Subsidiaries,
including, without limitation, the proceeds of the sale, all of which shall
continue to constitute part of the Collateral. In the event of any sale or
transfer of Collateral, or any foreclosure with respect to any of the
Collateral, the Collateral Agent shall be authorized to deduct all of the
Expenses reasonably incurred by the Collateral Agent from the proceeds of any
such sale, transfer or foreclosure.
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(d) The Collateral Agent shall have no obligation whatsoever
to the Banks or to any other Person to assure that the Collateral exists or is
owned by the Borrower or any of its Subsidiaries or is cared for, protected or
insured or that the Liens granted to the Collateral Agent herein or pursuant
hereto have been properly or sufficiently or lawfully created, perfected,
protected or enforced or are entitled to any particular priority, or to exercise
or to continue exercising at all or in any manner or under any duty of care,
disclosure or fidelity any of the rights, authorities and powers granted or
available to the Collateral Agent in this Section 10.10 or in any of the
Collateral Documents, it being understood and agreed that in respect of the
Collateral, or any act, omission or event related thereto, the Collateral Agent
may act in any manner it may deem appropriate, in its sole discretion, given the
Collateral Agent's own interest in the Collateral as one of the Banks and that
the Collateral Agent shall have no duty or liability whatsoever to the Banks,
except for its gross negligence or willful misconduct.
(e) It is acknowledged and agreed by all the Banks that (i)
the priorities with respect to the Collateral are as set forth in the Collateral
Documents and are expressly subject to the provisions of Section 11 hereof and
(ii) to the extent the provisions of the Collateral Documents are inconsistent
with any of the provisions of this Section 10, the provisions of the respective
Collateral Document shall prevail.
10.11 Actions with Respect to Defaults. In addition to the
Agent's right to take actions on its own accord as permitted under this
Agreement, the Agent may take such action with respect to an Event of Default as
shall be directed by the Required Banks or, in the case of any Collateral
Document, the Required Secured Creditors; provided that until the Agent shall
have received such directions, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such Event
of Default as it shall deem advisable and in the best interests of the Banks or,
in the case of Collateral Documents, the Secured Creditors (or the lenders
pursuant to the Existing Credit Agreement).
10.12 Delivery of Information. The Agent shall not be required
to deliver to any Bank originals or copies of any documents, instruments,
notices, communications or other information received by the Agent from
Communications, the Borrower, any Subsidiary, the Required Banks, any Bank or
any other Person under or in connection with this Agreement or any other Credit
Document except (i) as specifically provided in this Agreement or any other
Credit Document and (ii) as specifically requested from time to time in writing
by any Bank with respect to a specific document, instrument, notice or other
written communication received by
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and in the possession of such Agent at the time of receipt of such request and
then only in accordance with such specific request.
SECTION 11. Special Provisions Providing Lien Priorities; etc.
To induce the lenders pursuant to the Existing Credit Agreement to enter into
the amendments thereto and to the related Collateral Documents as required by
Section 4 hereof, and thereby permit the extensions of credit pursuant to this
Agreement and the securing of the Obligations pursuant to this Agreement
pursuant to the Collateral Documents (on a second priority basis as more fully
provided below), the following agreements are made by the Banks (and their
successors and assigns) for the benefit of the other Secured Creditors
(including without limitation the lenders pursuant to the Existing Credit
Agreement) under, and as defined in, the various Collateral Documents.
11.01 Priorities With Respect to Collateral. The Banks
acknowledge and agree that all Secured Obligations shall be secured pursuant to
the Collateral Documents in accordance with the terms thereof; provided that,
notwithstanding anything to the contrary contained in this Agreement or any
other Credit Document, as between the First Priority Secured Obligations and
Second Priority Secured Obligations, the following priorities with respect to
the Collateral shall apply:
(i) the First Priority Secured Obligations shall be
entitled to a first priority security interest in all
Collateral, superior and prior to the rights of the holders of
the Second Priority Secured Obligations with respect thereto,
which rights of the holders of Second Priority Obligations to
any and all Collateral shall be subject to the prior interests
of the holders of the First Priority Secured Obligations under
the Collateral Documents; and
(ii) the holders of the Second Priority Secured
Obligations, for themselves and their successors and assigns,
hereby acknowledge and agree for the benefit of the First
Priority Secured Creditors that they shall not be entitled to
receive, in respect of the Second Priority Secured Obligations
held by them, any of the proceeds of any Collateral following
the occurrence of an Event of Default or received as a result
of the enforcement of rights pursuant to the Collateral
Documents until all First Priority Secured Obligations have
been indefeasibly paid in full in cash or cash equivalents.
The Banks (for themselves and their successors and assigns)
hereby agree that, unless the Credit Agreement Termination
Date (as defined in the Security
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Agreement as amended on the Closing Date pursuant to Section
4) has occurred and no First Priority Secured Obligations are
outstanding, they shall have no rights to institute
foreclosure or other enforcement rights under the Collateral
Documents or any other Credit Document or otherwise, but shall
only be entitled to share in the proceeds of the Collateral as
realized and following the indefeasible payment in full in
cash or cash equivalents of all First Priority Secured
Obligations. The foregoing provisions shall not affect, or
impair, the right of the Banks to accelerate the maturity of
any Loans pursuant to Section 8 hereof or to institute legal
proceedings (not including enforcement actions with respect to
the Collateral) to collect amounts due pursuant to this
Agreement.
(iii) Until all First Priority Secured Obligations
have been indefeasibly paid in full in cash or cash
equivalents, each holder of the Second Priority Secured
Obligations hereby agrees (x) not to exercise, with respect to
the Second Priority Secured Obligations, any right of setoff
or counterclaim with respect to the Collateral or any Proceeds
thereof, (y) that all Proceeds of Collateral shall be paid to
the Collateral Agent for application to the First Priority
Secured Obligations and (z) that any Proceeds of Collateral
received by any holder of the Second Priority Secured
Obligations in its capacity as such shall be segregated and
held in trust and paid over to the Collateral Agent for the
benefit of the holders of all Secured Obligations (in
accordance with the priorities set forth above) in the same
form as received, with any necessary endorsements.
(iv) The holders of the Second Priority Secured
Obligations acknowledge and agree that Collateral (or Liens
thereon pursuant to the Collateral Documents) may be released
from the security interests created pursuant to the Collateral
Documents in accordance with the requirements of the
respective Collateral Documents and, except as expressly
required thereby, no consent of the holders of the Second
Priority Secured Obligations shall be required in connection
therewith.
The foregoing provisions shall be effective at all times
during the term of this Agreement, and notwithstanding (without
limitation): (i) the initiation of any bankruptcy, moratorium,
reorganization or other insolvency proceeding with respect to
Communications, the Borrower or any of their Subsidiaries; (ii) the
priorities which would otherwise result under the terms of the
respective Collateral Documents or under applicable law; (iii) the
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taking of possession of any Collateral by any Bank; or (iv) any other
matter whatsoever; and shall continue in full force and effect until
all Secured Obligations have been repaid in full.
11.02 Priority on Distribution of Proceeds of Collateral. In
the event of:
(a) any distribution of any Collateral upon any
bankruptcy, arrangement, receivership, assignment for the
benefit of creditors or any other action or proceeding
involving the readjustment of the obligations and indebtedness
of Communications, the Borrower or any of their Subsidiaries,
or the application of any Collateral to the payment thereof;
(b) any distribution of the Collateral upon the
liquidation or dissolution of Communications, the Borrower or
any of their Subsidiaries, or the winding up of the assets or
business of Communications, the Borrower or any of their
Subsidiaries;
(c) any realization by any of the Secured Creditors
or the Collateral Agent with respect to the Liens pursuant to
the Credit Documents whether through a Remedial Action or
otherwise; or
(d) any Disposition of any Collateral, to the extent
that any part of the proceeds of such disposition are required
to be applied to any of the Secured Obligations or held by the
Collateral Agent in accordance with the provisions of any of
the Collateral Documents;
then, in any such event, as between the Secured Creditors all of the
Collateral and any Proceeds thereof so distributed, applied or realized
upon shall be distributed or paid to (or retained by) the Collateral
Agent for application first, to the Collateral Agent to pay the
Collateral Agent's fees, expenses and indemnities provided for in this
Agreement, the Existing Credit Agreement and in the Collateral
Documents, second, to the First Priority Secured Obligations and third,
after the indefeasible payment in full in cash or cash equivalents of
all First Priority Secured Obligations, the remaining amount of such
Proceeds shall be distributed or paid to (or retained by) the
Collateral Agent for application to the Second Priority Secured
Obligations then due and payable.
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11.03 Certain Dispositions of Collateral. Notwithstanding
anything to the contrary contained above, to the extent Collateral is sold in
accordance with the requirements of Section 8.1 of the Existing Credit Agreement
and relevant provisions of this Agreement (and is not sold as a result of any
Remedial Action pursuant to a Security Document) at a time when no Default or
Event of Default exists pursuant to Section 8.01(7) and (8), the proceeds
thereof shall be applied in accordance with the requirements of this Agreement
and the Existing Credit Agreement.
11.04 Waiver of Set-Off. Notwithstanding anything to the
contrary contained elsewhere in this Agreement or any other Credit Document, at
all times prior to the Existing Credit Agreement Termination Date, and unless
the Existing Credit Agreement Required Lenders otherwise expressly consent, the
Banks shall have no right and hereby waive any right to set-off (whether
pursuant to Section 12.02, applicable law or otherwise) any amounts owed to it
by Communications, the Borrower or any Guarantor against or on account of any of
the Obligations.
11.05 Right to Contest. Each holder of Obligations and each
Bank agrees for itself, and its successors and assigns, not to contest or
support any other Person in contesting, in any proceeding, including without
limitation, any bankruptcy, insolvency or liquidation proceeding, the priority,
validity or enforceability of the Liens held by the Collateral Agent or the
Secured Creditors in the Collateral or the priority, validity or enforceability
of the Secured Obligations, or the provisions of this Section 11.
Notwithstanding anything to the contrary contained in the immediately preceding
sentence, the Banks shall be entitled to assert the provisions of the Collateral
Documents (subject to the provisions of this Section 11) in accordance with the
terms thereof.
11.06 Payment Invalidated. In the event that any of the First
Priority Secured Obligations shall be paid in full and subsequently, for
whatever reason (including, but not limited to, an order or judgment for
disgorgement of a preference under Title 11 of the United Stated Code, or any
similar law, or the settlement of any claim in respect thereof), formerly paid
or satisfied First Priority Secured Obligations become unpaid or unsatisfied,
the terms and conditions of this Section 11 shall be fully applicable thereto
until all such First Priority Secured Obligations are again paid in full.
11.07 Right to Amend, etc. As between the Banks and the other
Secured Creditors, it is agreed that the Secured Creditors (excluding the Banks
in their capacities as such) may at any time and from time to time, in their
sole discretion, and without any obligation to give any notice or receive any
consent from
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any Bank in its capacity as such, change the manner, place or terms of payment,
or change or extend the time of payment of, or renew, alter, refinance, increase
or add to the First Priority Secured Obligations (subject, in the case of an
increase in outstanding Indebtedness constituting Secured Obligations, to
compliance to the relevant provisions of Section 7.01 hereof), or obtain,
release, or dispose of any Collateral therefor, or amend or supplement in any
manner the Existing Credit Agreement, the Collateral Documents or any other
agreements or instruments evidencing, securing or relating to the First Priority
Secured Obligations, and the provisions of this Section 11 shall continue in
full force and effect with respect to all such First Priority Secured
Obligations; provided, however, that the actions of the Secured Creditors in
effecting any amendments, waivers or modifications of the Collateral Documents
shall be required to be taken in compliance with the relevant provisions
regarding amendments contained in the respective Collateral Document.
11.08 Creation of Future Obligations. All of the First
Priority Secured Obligations shall be deemed to have been funded by the Secured
Creditors in reliance upon the agreements contained in this Section 11, and each
Bank expressly waives notice of acceptance of the agreements set forth herein,
notice of reliance thereon and any other agreements and notice of the creation
of any First Priority Secured Obligations after the date hereof, and agrees that
the Secured Creditors shall be entitled to rely upon the agreements set forth
herein at all times in creating First Priority Secured Obligations. It is
expressly agreed that, subject to the provisions of Section 7.01, additional
extensions of credit may be made pursuant to the Existing Credit Agreement or
Interest Rate Protection Agreements (including but not limited to refinancings
permitted pursuant to Section 7.01), and that such additional obligations may be
designated as First Priority Secured Obligations (and shall be entitled to the
priorities with respect to the Collateral as are provided in this Section 11),
and that, except to the extent the Incurrence of any Indebtedness would violate
Section 7.01, no further consent of the Banks shall be required in connection
therewith and that the provisions of this Section 11 shall be fully applicable
to the obligations so created in the future. The Banks hereby authorize the
Collateral Agent to amend the Security Documents as necessary or desirable to
effect the foregoing agreements.
11.09 Waiver of Liability For Actions Taken With Respect To
Second Priority Secured Obligations and Collateral. (a) Neither the
Administrative Agent, the Existing Credit Agent, the Collateral Agent nor any
Secured Creditor shall have any liability to the holder of any Second Priority
Secured Obligations (in its capacity as such), and each Bank (in its capacity as
such), on behalf of itself and its successors and assigns, hereby waives to the
extent permitted by applicable law any claim, right, action or cause of action
which it may now or hereafter have
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against the Administrative Agent, the Existing Credit Agreement Agent, the
Collateral Agent or any other Secured Creditor (including, without limitation,
any and all claims, rights, actions or causes of action that any Bank may
otherwise have against the Administrative Agent, the Collateral Agent or any
other Secured Creditor under Section 9-207, 9-504 and 9-507 of the UCC) arising
out of, any and all actions which the Administrative Agent, the Collateral Agent
or any other Secured Creditor, in good faith, takes or omits to take with
respect to the Secured Obligations, any obligor with respect to the Secured
Obligations or any Collateral, including, without limitation, actions with
respect to: the creation, perfection or continuation of Liens with respect to
any Collateral; any Remedial Action or Disposition of any Collateral; the
release of any Collateral; the custody, valuation, protection, preservation, use
or depreciation of any Collateral; the realizing upon or failure to realize upon
any Collateral; or the collection of the Obligations. To the extent that any of
the foregoing waivers is not permitted by applicable law, it is agreed that the
applicable standard by which any non-waivable rights, duties or claims are to be
measured shall be that neither the Administrative Agent, the Existing Credit
Agreement Agent, the Collateral Agent nor any other Secured Creditor shall have
any liability or responsibility to any holder of any Second Priority Secured
Obligations, for any actions or omissions other than actions or omissions
constituting gross negligence or wilful misconduct as finally determined by a
court of competent jurisdiction.
11.10 Financing Issues. If Communications, the Borrower or any
of their Restricted Subsidiaries shall be subject to a bankruptcy, insolvency,
liquidation or similar proceeding (including as a result of the commencement of
a case under the Bankruptcy Code) and the Administrative Agent, the Existing
Credit Agreement Agent, the Collateral Agent, the Secured Creditors or any of
them shall desire to permit the usage of cash collateral or to provide financing
to Communications, the Borrower or any of their respective Restricted
Subsidiaries under Section 363 or Section 364 of the Bankruptcy Code, then: each
of the holders of the Second Priority Secured Obligations agrees that (i) notice
received two Business Days' prior to the entry of an order approving such usage
of cash collateral and five Business Days' prior to the entry of an order
approving such financing shall be adequate notice; and (ii) provided it receives
a Lien in any property arising or acquired after the commencement of such
proceeding which may be substituted for the Collateral subject to such usage
under Section 363 of the Bankruptcy Code or which secures such financing under
Section 364 of the Bankruptcy Code (which Lien shall be subordinated to any Lien
in such property held by the Administrative Agent, the Collateral Agent, or the
Secured Creditors, as the case may be, on terms substantially the same as the
terms set forth in this Section 11), it will raise no
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objection to such usage or financing on the grounds that its junior Lien
position with respect to any Collateral is not adequately protected.
11.11 Effectiveness. The provisions in this Section 11 shall
be effective both before and after the commencement of a bankruptcy, insolvency,
liquidation or similar proceeding. All references in this Agreement to
Communications, the Borrower or any of their respective Subsidiaries shall
include such entity as debtor in possession or any receiver or trustee for such
entity.
11.12 Further Assurances. Each of the holders of the
Obligations agrees to take such further action and shall execute and deliver to
the Administrative Agent, the Existing Credit Agreement Agent, the Collateral
Agent and the Secured Creditors such additional documents and instruments (in
recordable form, if requested) as the Administrative Agent, the Existing Credit
Agreement Agent, the Collateral Agent or the Secured Creditors may reasonably
request to effectuate the terms of and agreements contemplated by this Section
11.
11.13 Obligations as Designated Senior Indebtedness under
Senior Subordinated Notes Indenture. (a) The parties hereto expressly
acknowledge and agree that the Obligations constitute Indebtedness (as defined
in the Senior Subordinated Notes Indenture) of (and with full recourse, as a
general claim, to and against) the Borrower and the various Guarantors (by
virtue of the Guaranties), which (i) is senior and superior in right of payment
to the respective obligations of the Borrower and the Guarantors under the
Senior Subordinated Notes, the Guaranties thereof contained in the Senior
Subordianted Note Documents and the Senior Subordinated Note Documents, (ii) is
not subordinate in right of payment to any other Indebtedness (as defined in the
Senior Subordinated Notes Indenture) of the Borrower or any Guarantor and (iii)
is, therefore "Senior Indebtedness" (as defined in the Senior Subordinated Notes
Indenture) of the Borrower and such Guarantors, respectively. The parties hereto
further acknowledge and agree that, at any time when all Indebtedness under the
Existing Credit Agreement has been repaid in full, the Obligations constitute
Designated Senior Indebtedness (as defined in the Senior Subordinated Notes
Indenture) of the Borrower and the Guarantors.
(b) The parties hereto further acknowledge and agree that,
without limiting the effect of the preceding sentence (including, without
limitation, the seniority and superiority of the Obligations in right of
payment), the priorities with respect to the Collateral and the Proceeds thereof
shall be governed by the provisions of this Section 11, and the provisions of
Section 11.13(a) shall in no event limit or modify the agreements contained in
Sections 11.01 through 11.12, or the provisions of the Collateral Documents.
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11.14 Benefits of this Section 11. It is acknowledged and
agreed that the provisions of this Section 11 are agreed to in order to induce
the Existing Credit Agreement Required Lenders to enter into the amendments to
the Existing Credit Agreement and Collateral Documents as contemplated by
Section 4, and that the provisions of this Section 11 may be directly enforced
by the various Secured Creditors and the Collateral Agent or Existing Credit
Agreement Agent on their behalf. In no event shall any of the provisions of this
Section 11 be supplemented, modified or waived except in a written agreement
executed by the Existing Credit Agreement Agent (with the prior written consent
of the Existing Credit Agreement Required Lenders).
SECTION 12. Miscellaneous.
12.01 Payment of Expenses; Indemnification; etc. The Borrower
agrees that it shall: (i) whether or not the transactions herein contemplated
are consummated, pay all reasonable out-of-pocket costs and expenses of the
Administrative Agent (including, without limitation, the reasonable fees and
disbursements of White & Case and the Administrative Agent's local counsel and
consultants) in connection with the preparation, execution and delivery of this
Agreement and the other Credit Documents and the documents and instruments
referred to herein and therein and any amendment, waiver or consent relating
hereto or thereto, of the Administrative Agent in connection with its
syndication efforts with respect to this Agreement and of the Administrative
Agent and, after the occurrence of an Event of Default, each of the Banks in
connection with the enforcement of this Agreement and the other Credit Documents
and the documents and instruments referred to herein and therein (including,
without limitation, the fees and disbursements of counsel for the Administrative
Agent); (ii) pay and hold each of the Banks harmless from and against any and
all present and future stamp, excise and other similar documentary taxes with
respect to the foregoing matters and save each of the Banks harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Bank) to pay such taxes;
and (iii) indemnify the Administrative Agent and each Bank, and each of their
respective officers, directors, employees, representatives and agents from and
hold each of them harmless against any and all liabilities, obligations
(including removal or remedial actions), losses, damages, penalties, claims,
actions, judgments, suits, costs, expenses and disbursements (including
reasonable attorneys' and consultants' fees and disbursements) incurred by,
imposed on or assessed against any of them as a result of, or arising out of, or
in any way related to, or by reason of, (a) any investigation, litigation or
other proceeding (whether or not the Administrative Agent or any Bank is a party
thereto) related to the entering into and/or performance of this Agreement or
any other Credit
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Document or the use of the proceeds of any Loans hereunder or the consummation
of any transactions contemplated herein or in any other Credit Document or the
exercise of any of their rights or remedies provided herein or in the other
Credit Documents, or (b) the actual or alleged presence of Hazardous Materials
in the air, surface water or groundwater or on the surface or subsurface of any
Real Property owned or at any time operated by the Borrower or any of its
Subsidiaries, the generation, storage, transportation, handling or disposal of
Hazardous Materials at any location, whether or not owned or operated by the
Borrower or any of its Subsidiaries, the non-compliance of any Real Property
with foreign, federal, state and local laws, regulations, and ordinances
(including applicable permits thereunder) applicable to any Real Property, or
any Environmental Claim asserted against the Borrower, any of its Subsidiaries
or any Real Property owned or at any time operated by the Borrower or any of its
Subsidiaries, including, in each case, without limitation, the reasonable fees
and disbursements of counsel and other consultants incurred in connection with
any such investigation, litigation or other proceeding (but excluding any
losses, liabilities, claims, damages or expenses to the extent incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified). To the extent that the undertaking to indemnify, pay or hold
harmless the Administrative Agent or any Bank set forth in the preceding
sentence may be unenforceable because it is violative of any law or public
policy, the Borrower shall make the maximum contribution to the payment and
satisfaction of each of the indemnified liabilities which is permissible under
applicable law.
12.02 Right of Setoff. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence of an Event of Default, each
Bank is hereby authorized (to the extent not prohibited by applicable law) at
any time or from time to time, without presentment, demand, protest or other
notice of any kind to the Borrower or to any other Person, any such notice being
hereby expressly waived, to set off and to appropriate and apply any and all
deposits (general or special) and any other Indebtedness at any time held or
owing by such Bank (including, without limitation, by branches and agencies of
such Bank wherever located) to or for the credit or the account of any Credit
Party against and on account of the Obligations and liabilities of such Credit
Party to such Bank under this Agreement or under any of the other Credit
Documents, including, without limitation, all interests in Obligations purchased
by such Bank pursuant to Section 12.06(b), and all other claims of any nature or
description arising out of or connected with this Agreement or any other Credit
Document, irrespective of whether or not such Bank shall have made any demand
hereunder and although said Obligations, liabilities or claims, or any of them,
shall be contingent or unmatured.
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12.03 Notices. Except as otherwise expressly provided herein,
all notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered: if to any Credit Party,
at the address specified opposite its signature below or in the other relevant
Credit Documents; if to any Bank, at its address specified on Schedule II; and
if to the Administrative Agent, at its Notice Office; or, as to any Credit Party
or the Administrative Agent, at such other address as shall be designated by
such party in a written notice to the other parties hereto and, as to each Bank,
at such other address as shall be designated by such Bank in a written notice to
the Borrower and the Administrative Agent. All such notices and communications
shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by
overnight courier, be effective (x) three Business Days after deposited in the
mails, (y) one Business Day after delivered to the telegraph company, cable
company or a recognized overnight courier, as the case may be, or (z) when sent
by telex or telecopier, except that notices and communications to the
Administrative Agent shall not be effective until received by the Administrative
Agent.
12.04 Benefit of Agreement; Assignments; Participations. (a)
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto;
provided, however, the Borrower may not assign or transfer any of its rights,
obligations or interest hereunder or under any other Credit Document without the
prior written consent of the Banks and, provided further, that, although any
Bank may transfer, assign or grant participations in its rights hereunder, such
Bank shall remain a "Bank" for all purposes hereunder (and may not transfer or
assign all or any portion of its obligations hereunder except as provided in
Sections 1.11 and 12.04(b)) and the transferee, assignee or participant, as the
case may be, shall not constitute a "Bank" hereunder and, provided further, that
no Bank shall transfer or grant any participation under which the participant
shall have rights to approve any amendment to or waiver of this Agreement or any
other Credit Document except to the extent such amendment or waiver would (i)
extend the final scheduled maturity of any Loan or Note in which such
participant is participating, or reduce the rate or extend the time of payment
of interest or Fees thereon (except in connection with a waiver of applicability
of any post-default increase in interest rates) or reduce the principal amount
thereof, or increase the amount of the participant's participation over the
amount thereof then in effect (it being understood that a waiver of any Default
or Event of Default or of a mandatory repayment of Loans shall not constitute a
change in the terms of such participation, (ii) consent to the assignment or
transfer by the Borrower of any of its rights and obligations under this
Agreement or (iii) release all or substantially all of the Collateral under all
of the Collateral Documents (except as
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expressly provided in the Credit Documents) supporting the Loans hereunder in
which such participant is participating. In the case of any such participation,
the participant shall (x) not have any rights under this Agreement or any of the
other Credit Documents (the participant's rights against such Bank in respect of
such participation to be those set forth in the agreement executed by such Bank
in favor of the participant relating thereto) and all amounts payable by the
Borrower hereunder shall be determined as if such Bank had not sold such
participation and (y) if such participant is not a bank, represent that either
(i) no part of its acquisition of its participation is made out of assets of any
employee benefit plan, or (ii) after consultation, in good faith, with the
Borrower and provision by the Borrower of such information as may be reasonably
requested by the participant, the acquisition and holding of such participation
does not constitute a non-exempt prohibited transaction under Section 406 of
ERISA and Section 4975 of the Code, or (iii) such participation is an "insurance
company general account," as such term is defined in the Department of Labor
Prohibited Transaction Class Exemption 95-60 (issued July 12, 1995) ("PTCE
95-60"), and, as of the date of the transfer there is no "employee benefit plan"
with respect to which the aggregate amount of such general account's reserves
and liabilities for the contracts held by or on behalf of such "employee benefit
plan" and all other "employee benefit plans" maintained by the same employer
(and affiliates thereof as defined in Section V(a)(1) of PTCE 95-60) or by the
same employee organization (in each case determined in accordance with the
provisions of PTCE 95-60) exceeds 10% of the total reserves and liabilities of
such general account (as determined under PTCE 95-60) (exclusive of separate
account liabilities) plus surplus as set forth in the National Association of
Insurance Commissioners Annual Statement filed with the state of domicile of the
participant. As used in this Section 12.04(a), the term "employee benefit plan"
shall have the meaning assigned to it in Title I of ERISA and shall also include
a "plan" as defined in Section 4975(e)(1) of the Code.
(b) Notwithstanding the foregoing, any Bank (or any Bank
together with one or more other Banks) may (x) assign all or a portion of its
outstanding Obligations hereunder to (i) its parent company and/or any affiliate
of such Bank which is at least 50% owned by such Bank or its parent company or
to one or more Banks or (ii) in the case of any Bank that is a fund that invests
in bank loans, any other fund that invests in bank loans and is managed by the
same investment advisor of such Bank or by an Affiliate of such investment
advisor or (y) assign all, or if less than all, a portion equal to at least
$2,000,000 in the aggregate for the assigning Bank or assigning Banks, of such
outstanding Obligations hereunder to one or more Eligible Transferees, each of
which assignees shall become a party to this Agreement as a Bank by execution of
an Assignment and Assumption Agreement; provided that (i) at such time Schedule
I shall be deemed modified to reflect the
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outstanding Loans of such new Bank and of the existing Banks, (ii) new Notes
will be issued, at the Borrower's expense, to such new Bank and to the assigning
Bank upon the request of such new Bank or assigning Bank, such new Notes to be
in conformity with the requirements of Section 1.04 (with appropriate
modifications) to the extent needed to reflect the revised outstanding Loans,
(iii) the Administrative Agent shall receive at the time of each such
assignment, from the assigning or assignee Bank, the payment of a non-refundable
assignment fee of $3,500 and (iv) if such Eligible Transferee is not a bank,
represent that either (i) no part of its acquisition of its Loans is made out of
assets of any employee benefit plan, or (ii) after consultation, in good faith,
with the Borrower and provision by the Borrower of such information as may be
reasonably requested by such Eligible Transferee, the acquisition and holding of
such Loans does not constitute a non-exempt prohibited transaction under Section
406 of ERISA and Section 4975 of the Code, or (iii) such assignment is an
"insurance company general account," as such term is defined in the Department
of Labor Prohibited Transaction Class Exemption 95-60 (issued July 12, 1995)
("PTCE 95-60"), and, as of the date of the assignment, there is no "employee
benefit plan" with respect to which the aggregate amount of such general
account's reserves and liabilities for the contracts held by or on behalf of
such "employee benefit plan" and all other "employee benefit plans" maintained
by the same employer (and affiliates thereof as defined in Section V(a)(1) of
PTCE 95-60) or by the same employee organization (in each case determined in
accordance with the provisions of PTCE 95-60) exceeds 10% of the total reserves
and liabilities of such general account (as determined under PTCE 95-60)
(exclusive of separate account liabilities) plus surplus as set forth in the
National Association of Insurance Commissioners Annual Statement filed with the
state of domicile of such Eligible Transferee; provided further, that such
transfer or assignment will not be effective until recorded by the
Administrative Agent on the Register pursuant to Section 12.15. As used in this
Section 12.04(b), the term "employee benefit plan" shall have the meaning
assigned to it in Title I of ERISA and shall also include a "plan" as defined in
Section 4975(e)(1) of the Code. To the extent of any assignment pursuant to this
Section 12.04(b), the assigning Bank shall be relieved of its obligations
hereunder with respect to its assigned Loans. At the time of each assignment
pursuant to this Section 12.04 (b) to a Person which is not already a Bank
hereunder and which is not a United States person (as such term is defined in
Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective
assignee Bank shall, to the extent legally entitled to do so, provide to the
Borrower the forms described in Section 3.03(e). To the extent that an
assignment of all or any portion of a Bank's outstanding Obligations pursuant to
Section 1.11 or this Section 12.04(b) would, at the time of such assignment,
result in increased costs (including, without limitation, amounts described in
Section 3.03) from those being charged by the respective assigning Bank prior to
such assignment, then the
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Borrower shall not be obligated to pay such increased costs (although the
Borrower shall be obligated to pay any other increased costs of the type
described above resulting from changes after the date of the respective
assignment).
(c) Nothing in this Agreement shall prevent or prohibit any
Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in
support of borrowings made by such Bank from such Federal Reserve Bank and, with
the consent of the Administrative Agent, any Bank which is a fund may pledge all
or any portion of its Notes or Loans to its trustee in support of its
obligations to its trustee. No pledge pursuant to this clause (c) shall release
the transferor Bank from any of its obligations hereunder.
12.05 No Waiver; Remedies Cumulative. No failure or delay on
the part of the Administrative Agent, the Collateral Agent or any Bank in
exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Borrower or any other Credit Party
and the Administrative Agent, the Collateral Agent or any Bank shall operate as
a waiver thereof; nor shall any single or partial exercise of any right, power
or privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights, powers and remedies herein or in any other
Credit Document expressly provided are cumulative and not exclusive of any
rights, powers or remedies which the Administrative Agent, the Collateral Agent
or any Bank would otherwise have. No notice to or demand on any Credit Party in
any case shall entitle any Credit Party to any other or further notice or demand
in similar or other circumstances or constitute a waiver of the rights of the
Administrative Agent, the Collateral Agent or any Bank to any other or further
action in any circumstances without notice or demand.
12.06 Payments Pro Rata. (a) Except as otherwise provided in
this Agreement, the Administrative Agent agrees that promptly after its receipt
of each payment from or on behalf of the Borrower in respect of any Obligations
hereunder, it shall distribute such payment to the Banks (other than any Bank
that has consented in writing to waive its pro rata share of any such payment)
pro rata based upon their respective shares, if any, of the Obligations with
respect to which such payment was received.
(b) Each of the Banks agrees that, if it should receive any
amount hereunder (whether by voluntary payment, by realization upon security, by
the exercise of the right of setoff or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Credit Documents, or
otherwise), which is
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applicable to the payment of the principal of, or interest on, the Loans, of a
sum which with respect to the related sum or sums received by other Banks is in
a greater proportion than the total of such Obligation then owed and due to such
Bank bears to the total of such Obligation then owed and due to all of the Banks
immediately prior to such receipt, then such Bank receiving such excess payment
shall purchase for cash without recourse or warranty from the other Banks an
interest in the Obligations of the respective Credit Party to such Banks in such
amount as shall result in a proportional participation by all the Banks in such
amount; provided that if all or any portion of such excess amount is thereafter
recovered from such Bank, such purchase shall be rescinded and the purchase
price restored to the extent of such recovery, but without interest.
12.07 Computations. All computations of interest and Fees
hereunder shall be made on the basis of a year of 360 days for the actual number
of days (including the first day but excluding the last day) occurring in the
period for which such interest or Fees are payable.
12.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER
OF JURY TRIAL. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS (EXCEPT, IN THE
CASE OF OTHER CREDIT DOCUMENTS, AS SPECIFICALLY OTHERWISE PROVIDED THEREIN) AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW
YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE
UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY
CLAIM THAT ANY SUCH COURTS LACK PERSONAL JURISDICTION OVER THE BORROWER, AND
AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENTS BROUGHT IN ANY OF THE
AFOREMENTIONED COURTS, THAT SUCH COURTS LACK PERSONAL JURISDICTION OVER THE
BORROWER. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
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PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE
BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. THE BORROWER
HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER
IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING
COMMENCED HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS
WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE ADMINISTRATIVE AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION.
(b) THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID
ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR
ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE
AND HEREBY FURTHER IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
12.09 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Administrative Agent.
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12.10 Effectiveness. This Agreement shall become effective on
the date (the "Effective Date") on which the Borrower, the Administrative Agent
and each of the Banks shall have signed a counterpart hereof (whether the same
or different counterparts) and shall have delivered the same to the
Administrative Agent at its Notice Office or, in the case of the Banks, shall
have given to the Administrative Agent telephonic (confirmed in writing),
written or telex notice (actually received) at such office that the same has
been signed and mailed to it. The Administrative Agent shall give the Borrower
and each Bank prompt written notice of the occurrence of the Effective Date.
12.11 Headings Descriptive. The headings of the several
sections and subsections of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement.
12.12 Amendment or Waiver; etc. (a) Neither this Agreement nor
any other Credit Document nor any terms hereof or thereof may be changed,
waived, discharged or terminated unless such change, waiver, discharge or
termination is in writing signed by the respective Credit Parties party thereto
and the Required Banks, provided that (A) the various Collateral Documents may
be amended in accordance with the relevant provisions thereof governing
amendments (which shall be consistent with the Collateral Documents as amended
pursuant to the amendments required pursuant to Section 4 hereof) and (B) except
as provided in proceeding clause (A), no such change, waiver, discharge or
termination shall, without the consent of each Bank (other than a Defaulting
Bank) with Obligations being directly modified, (i) extend the final scheduled
maturity of any Loan or Note, or reduce the rate or extend the time of payment
of interest or Fees thereon, or reduce the principal amount thereof (except to
the extent repaid in cash), (ii) release all or substantially all of the
Collateral (except as expressly provided in the Collateral Documents) under all
the Collateral Documents, (iii) amend, modify or waive any provision of this
Section 12.12 (except for technical amendments with respect to additional
extensions of credit pursuant to this Agreement which afford the protections set
forth in the proviso below to such additional extensions of credit), (iv) reduce
the percentage specified in the definition of Required Banks (it being
understood that, with the consent of the Required Banks, additional extensions
of credit pursuant to this Agreement may be included in the determination of the
Required Banks on substantially the same basis as the extensions of Loans are
included on the Effective Date) or (vi) consent to the assignment or transfer by
the Borrower of any of its rights and obligations under this Agreement; provided
further, that no such change, waiver, discharge or termination shall (x)
increase the Commitment of any Bank over the amount thereof then in effect
without the consent of such Bank (it being understood that waivers or
modifications of conditions
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precedent, covenants, Defaults or Events of Default shall not constitute an
increase of the Commitment of any Bank), (y) without the consent of the
Administrative Agent, amend, modify or waive any provision of Section 10 or any
other provision as same relates to the rights or obligations of the
Administrative Agent, (x) without the consent of the Collateral Agent, amend,
modify or waive any provision relating to the rights or obligations of the
Collateral Agent.
(b) If, in connection with any proposed change, waiver,
discharge or termination to any of the provisions of this Agreement as
contemplated by clauses (i) through (vi), inclusive, of the first proviso to
Section 12.12(a), the consent of the Required Banks is obtained but the consent
of one or more of such other Banks whose consent is required is not obtained,
then the Borrower shall have the right, so long as all non-consenting Banks
whose individual consent is required are treated as described below, to replace
each such non-consenting Bank or Banks with one or more Replacement Banks
pursuant to Section 1.11 so long as at the time of such replacement, each such
Replacement Bank consents to the proposed change, waiver, discharge or
termination, provided further, that in any event the Borrower shall not have the
right to replace a Bank, or repay its Loans solely as a result of the exercise
of such Bank's rights (and the withholding of any required consent by such Bank)
pursuant to the second proviso to Section 12.12(a).
12.13 Survival. All indemnities set forth herein including,
without limitation, in Sections 1.08, 3.03, 10.06 and 12.01 shall survive the
execution, delivery and termination of this Agreement and the Notes and the
making and repayment of the Obligations.
12.14 Domicile of Loans. Each Bank may transfer and carry its
Loans at, to or for the account of any office, Subsidiary or Affiliate of such
Bank. Notwithstanding anything to the contrary contained herein, to the extent
that a transfer of Loans pursuant to this Section 12.14 would, at the time of
such transfer, result in increased costs under Section 1.08, 1.09 or 3.03 in
excess of those being charged by the respective Bank prior to such transfer,
then the Borrower shall not be obligated to pay such excess increased costs
(although the Borrower, in accordance with and pursuant to the other provisions
of this Agreement, shall be obligated to pay the costs which would apply in the
absence of such designation and any subsequent increased costs of the type
described above resulting from changes after the date of the respective
transfer).
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12.15 Register. The Borrower hereby designates the
Administrative Agent to serve as the Borrower's agent, solely for purposes of
this Section 12.15, to maintain a register (the "Register") on which it will
record the Loans made by each of the Banks and each repayment in respect of the
principal amount of the Loans of each Bank. Failure to make any such
recordation, or any error in such recordation shall not affect the Borrower's
obligations in respect of such Loans. With respect to any Bank, the transfer of
the rights to the principal of, and interest on, any Loan shall not be effective
until such transfer is recorded on the Register maintained by the Administrative
Agent with respect to ownership of such Loans and prior to such recordation all
amounts owing to the transferor with respect to such Loans shall remain owing to
the transferor. The registration of assignment or transfer of all or part of any
Loans shall be recorded by the Administrative Agent on the Register only upon
the acceptance by the Administrative Agent of a properly executed and delivered
Assignment and Assumption Agreement pursuant to Section 12.04(b). Coincident
with the delivery of such an Assignment and Assumption Agreement to the
Administrative Agent for acceptance and registration of assignment or transfer
of all or part of a Loan, or as soon thereafter as practicable, the assigning or
transferor Bank shall surrender the Note evidencing such Loan, and thereupon one
or more new Notes in the same aggregate principal amount shall be issued to the
assigning or transferor Bank and/or the new Bank. The Borrower agrees to
indemnify the Administrative Agent from and against any and all losses, claims,
damages and liabilities of whatsoever nature which may be imposed on, asserted
against or incurred by the Administrative Agent in performing its duties under
this Section 12.15.
12.16 Confidentiality. (a) Subject to the provisions of clause
(b) of this Section 12.16, each Bank agrees that it will use its reasonable
efforts not to disclose without the prior consent of the Borrower (other than to
its employees, auditors, advisors or counsel or to another Bank if the Bank or
such Bank's holding or parent company in its sole discretion determines that any
such party should have access to such information, provided such Persons shall
be subject to the provisions of this Section 12.16 to the same extent as such
Bank) any information with respect to Communications, the Borrower or any of
their respective Subsidiaries which is now or in the future furnished pursuant
to this Agreement or any other Credit Document and which is designated by the
Borrower to the Banks in writing as confidential, provided that any Bank may
disclose any such information (a) as has become generally available to the
public, (b) as may be required or appropriate in any report, statement or
testimony submitted to any municipal, state or Federal regulatory body having or
claiming to have jurisdiction over such Bank or to the Federal Reserve Board or
the Federal Deposit Insurance Corporation or similar organizations (whether in
the United States or elsewhere) or their successors, (c) as may be required or
appropriate in respect to any summons or subpoena or in connection with any
litigation, (d) in order to comply with any law, order, regula-
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tion or ruling applicable to such Bank, (e) to the Administrative Agent or the
Collateral Agent or any other Bank or Secured Creditor and (f) to any
prospective or actual transferee or participant in connection with any
contemplated transfer or participation of any of the Notes or Loans or any
interest therein by such Bank, provided, that such prospective transferee shall
be subject to the provisions of this Section 12.16(a).
(b) The Borrower hereby acknowledges and agrees that each Bank
may share with any of its affiliates any information related to Communications,
the Borrower or any of their respective Restricted Subsidiaries (including,
without limitation, any nonpublic customer information regarding the
creditworthiness of Communications, the Borrower and their respective Restricted
Subsidiaries, provided such Persons shall be subject to the provisions of this
Section 12.16 to the same extent as such Bank).
12.17 Designated Senior Indebtedness. The Borrower hereby
irrevocably agrees that, at any time when all Indebtedness under the Existing
Credit Agreement has been repaid in full, the Indebtedness outstanding hereunder
shall constitute Designated Senior Indebtedness under, and as defined in, the
Senior Subordinated Notes Indenture at all times when the principal amount of
outstanding Loans are at least equal to $25 million.
12.18 Limitation on Additional Amounts, etc. Notwithstanding
anything to the contrary contained in Section 1.08 or 1.09 of this Agreement,
unless a Bank gives notice to the respective Borrower that it is obligated to
pay an amount under the respective Section within one year after the later of
(x) the date the Bank incurs the respective increased costs, loss, expense or
liability, reduction in amounts received or receivable or reduction in return on
capital or (y) the date such Bank has actual knowledge of its incurrence of the
respective increased costs, loss, expense or liability, reductions in amounts
received or receivable or reduction in return on capital, then such Bank shall
only be entitled to be compensated for such amount by such Borrower pursuant to
said Section 1.08 or 1.09, as the case may be, to the extent the costs, loss,
expense or liability, reduction in amounts received or receivable or reduction
in return on capital are incurred or suffered on or after the date which occurs
one year prior to such Bank giving notice to such Borrower that it is obligated
to pay the respective amounts pursuant to said Section 1.08 and 1.09, as the
case may be. This Section 12.18 shall have no applicability to any Section of
this Agreement other than said Sections 1.08 and 1.09.
12.19 Maximum Rate. Notwithstanding anything to the contrary
contained elsewhere in this Agreement or in any other Credit Document, the
Borrower, the Administrative Agent and the Banks hereby agree that all
agreements among them under this Agreement and the other Credit Documents,
whether now
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existing or hereafter arising and whether written or oral, are expressly limited
so that in no contingency or event whatsoever shall the amount paid, or agreed
to be paid, to the Administrative Agent or any Bank for the use, forbearance, or
detention of the money loaned to the Borrower and evidenced hereby or thereby or
for the performance or payment of any covenant or obligation contained herein or
therein, exceed the Highest Lawful Rate. If due to any circumstance whatsoever,
fulfillment of any provisions of this Agreement or any of the other Credit
Documents at the time performance of such provision shall be due shall exceed
the Highest Lawful Rate, then, automatically, the obligation to be fulfilled
shall be modified or reduced to the extent necessary to limit such interest to
the Highest Lawful Rate, and if from any such circumstance any Bank should ever
receive anything of value deemed interest by applicable law which would exceed
the Highest Lawful Rate, such excessive interest shall be applied to the
reduction of the principal amount then outstanding hereunder or on account of
any other then outstanding Obligations and not to the payment of interest, or if
such excessive interest exceeds the principal unpaid balance then outstanding
hereunder and such other then outstanding Obligations, such excess shall be
refunded to the Borrower. All sums paid or agreed to be paid to the
Administrative Agent or any Bank for the use, forbearance, or detention of the
Obligations and other Indebtedness of the Borrower to the Administrative Agent
or any Bank shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of such Indebtedness
until payment in full so that the actual rate of interest on account of all such
Indebtedness does not exceed the Highest Lawful Rate throughout the entire term
of such Indebtedness. The terms and provisions of this Section 12.19 shall
control every other provision of this Agreement and all agreements among the
Borrower, the Administrative Agent and the Banks.
12.20 Post-Closing Actions. Notwithstanding anything to the
contrary contained in this Agreement or the other Credit Documents, the parties
hereto acknowledge and agree that:
(a) The Borrower was not required to satisfy the conditions
precedent set forth in Section 4.13 (other than with respect to Concentration
Account Agreements, which shall be delivered on the Closing Date) and 4.14 on
the Closing Date. Not later than the 90th day after the Closing Date, the
Borrower shall have:
(i) delivered fully executed amendments to all existing Lockbox
Agreements as otherwise required by Section 4.13, it being understood
that if the Borrower is unable to obtain any such amendment to an
existing Lockbox Agreement, the Borrower shall, by such 90th day, have
entered into a new Lockbox Agreement with a financial institution
satisfactory to the Collateral Agent in the form of Exhibit M-1 hereto;
and
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<PAGE>
(ii) used its best efforts to replace all Existing Credit
Agreement Collateral Access Agreements with Collateral Access
Agreements in accordance with the provisions of Section 4.14, it being
understood and agreed that if the Borrower is unable to replace any
such Existing Credit Agreement Collateral Access Agreement with a
Collateral Access Agreement after using its best efforts to do so, no
Default or Event of Default shall arise under this Agreement as a
result of any such failure.
In connection with the foregoing, the Borrower shall (i) to the extent requested
by the Collateral Agent on the Closing Date, deliver to the Collateral Agent
local counsel opinions in form and substance satisfactory to the Collateral
Agent prior to the 90th day following the Closing Date and (ii) deliver to the
Administrative Agent within 5 days following the Closing Date Annexes II through
X, inclusive, to this Agreement, which Annexes shall be reasonably satisfactory
to the Administrative Agent and the Required Banks.
All provisions of this Credit Agreement and the other Credit
Documents (including, without limitation, all conditions precedent,
representations, warranties, covenants and other agreements herein and therein)
shall be deemed modified to the extent necessary to effect the foregoing (and to
permit the taking of the actions described above within the time periods,
required above, rather than as otherwise provided in the Credit Documents);
provided, that (x) to the extent any representation and warranty would not be
true because the foregoing actions were not taken on the Closing Date, the
respective representation and warranty shall be required to be true and correct
in all material respects at the time the respective action is taken (or was
required to be taken) in accordance with the foregoing provisions of Section
12.20 and (y) all representations and warranties relating to the Collateral
Documents shall be required to be true immediately after the actions required to
be taken by Section 12.20 have been taken (or were required to be taken). The
acceptance of the benefits of the Loans shall constitute a representation,
warranty and covenant by the Borrower to each of the Banks that the actions
required pursuant to this Section 12.20 will be, or have been, taken within the
relevant time periods referred to in this Section 12.20 and that, at such time,
all representations and warranties contained in this Credit Agreement and the
other Credit Documents shall then be true and correct without any modification
pursuant to this Section 12.20, the parties hereto acknowledge and agree that
the failure to take any of the actions required above, within the relevant time
periods required above, shall give rise to an immediate Event of Default
pursuant to this Agreement.
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SECTION 13. Parent Guaranty.
13.01 The Parent Guaranty. In order to induce the Banks to
enter into this Agreement and to extend credit hereunder and in recognition of
the direct benefits to be received by the Parent Guarantor from the proceeds of
the Loans and the issuance of the Letters of Credit, the Parent Guarantor hereby
agrees with the Banks as follows: the Parent Guarantor hereby unconditionally
and irrevocably guarantees as primary obligor and not merely as surety the full
and prompt payment when due, whether upon maturity, by acceleration or
otherwise, of any and all indebtedness of the Borrower to the Banks hereunder.
If any or all of the indebtedness of the Borrower to the Banks becomes due and
payable hereunder, the Parent Guarantor unconditionally promises to pay such
indebtedness to the Banks, or order, on demand, together with any and all
reasonable expenses which may be incurred by (x) the Administrative Agent in
connection with the preparation, execution and delivery of this Agreement and
the other Credit Documents and the documents and instruments referred to herein
and therein and any amendment, waiver or consent relating hereto or thereto, in
connection with its syndication efforts with respect to this Agreement, or (y)
the Administrative Agent or the Banks in collecting any of the indebtedness. The
word "indebtedness" is used in this Section 13 in its most comprehensive sense
and means any and all advances, debts, obligations and liabilities of the
Borrower arising in connection with this Agreement, in each case, heretofore,
now, or hereafter made, incurred or created, whether voluntarily or
involuntarily, absolute or contingent, liquidated or unliquidated, determined or
undetermined, whether or not such indebtedness is from time to time reduced, or
extinguished and thereafter increased or incurred, whether the Borrower may be
liable individually or jointly with others, whether or not recovery upon such
indebtedness may be or hereafter become barred by any statute of limitations,
and whether or not such indebtedness may be or hereafter become otherwise
unenforceable.
13.02 Bankruptcy. Additionally, the Parent Guarantor
unconditionally and irrevocably guarantees the payment of any and all
indebtedness of the Borrower to the Banks whether or not due or payable by the
Borrower upon the occurrence in respect of the Borrower of any of the events
specified in Section 8.01(7) or (8), and unconditionally and irrevocably
promises to pay such indebtedness to the Banks, or order, on demand, in lawful
money of the United States.
13.03 Nature of Liability. The liability of the Parent
Guarantor hereunder is exclusive and independent of any security for or other
guaranty of the indebtedness of the Borrower whether executed by the Parent
Guarantor, any other guarantor or by any other party, and the liability of the
Parent Guarantor hereunder shall not be affected or impaired by (a) any
direction as to application of payment by
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the Borrower or by any other party, or (b) any other continuing or other
guaranty, undertaking or maximum liability of a guarantor or of any other party
as to the indebtedness of the Borrower, or (c) any payment on or in reduction of
any such other guaranty or undertaking, or (d) any dissolution, termination or
increase, decrease or change in personnel by the Borrower, or (e) any payment
made to the Administrative Agent or the Banks on the indebtedness which such
Administrative Agent or such Bank repays the Borrower pursuant to court order in
any bankruptcy, reorganization, arrangement, moratorium or other debtor relief
proceeding, and the Parent Guarantor waives any right to the deferral or
modification of its obligations hereunder by reason of any such proceeding.
13.04 Independent Obligation. The obligations of the Parent
Guarantor hereunder are independent of the obligations of any other guarantor or
the Borrower, and a separate action or actions may be brought and prosecuted
against the Parent Guarantor whether or not action is brought against any other
guarantor or the Borrower and whether or not any other guarantor or the Borrower
be joined in any such action or actions. The Parent Guarantor waives, to the
fullest extent permitted by law, the benefit of any statute of limitations
affecting its liability hereunder or the enforcement thereof. Any payment by the
Borrower or other circumstance which operates to toll any statute of limitations
as to the Borrower shall, to the fullest extent permitted by law, operate to
toll the statute of limitations as to the Parent Guarantor.
13.05 Authorization. The Parent Guarantor authorizes the
Administrative Agent and the Banks without notice or demand (except as shall be
required by applicable statute and cannot be waived), and without affecting or
impairing its liability hereunder, from time to time to:
(a) subject to the agreement of the Borrower, change the
manner, place or terms of payment of, and/or change or extend the time
of payment of, renew, increase, accelerate or alter, any of the
indebtedness (including any increase or decrease in the rate of
interest thereon), any security therefor, or any liability incurred
directly or indirectly in respect thereof, and the Parent Guaranty
herein made shall apply to the indebtedness as so changed, extended,
renewed or altered;
(b) take and hold security for the payment of the indebtedness
and sell, exchange, release, surrender, realize upon or otherwise deal
with in any manner and in any order any property by whomsoever at any
time pledged or mortgaged to secure, or howsoever securing, the
indebtedness or any liabilities (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and/or
any offset thereagainst;
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(c) exercise or refrain from exercising any rights against the
Borrower or others or otherwise act or refrain from acting;
(d) release or substitute any one or more endorsers,
guarantors, the Borrower or other obligors;
(e) settle or compromise any of the indebtedness, any security
therefor or any liability (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the payment of
any liability (whether due or not) of the Borrower to its creditors
other than the Banks;
(f) apply any sums by whomsoever paid or howsoever realized to
any liability or liabilities of the Borrower to the Banks regardless of
what liability or liabilities of the Parent Guarantor or the Borrower
remain unpaid; and/or
(g) consent to or waive any breach of, or any act, omission or
default under, this Agreement or any of the instruments or agreements
referred to herein, or otherwise, with the agreement of the Borrower,
amend, modify or supplement this Agreement or any of such other
instruments or agreements.
13.06 Reliance. It is not necessary for the Administrative
Agent or the Banks to inquire into the capacity or powers of the Borrower or its
Subsidiaries or the officers, directors, partners or agent acting or purporting
to act on its behalf, and any indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed hereunder.
13.07 Subordination. Any indebtedness of the Borrower now or
hereafter owing to the Parent Guarantor is hereby subordinated in right of
payment to the indebtedness of the Borrower owing to the Administrative Agent
and the Banks; provided that payment may be made by the Borrower on any such
indebtedness owing to the Parent Guarantor so long as the same is not prohibited
by this Agreement; and provided further, that if the Administrative Agent so
requests at a time when an Event of Default exists, all such indebtedness of the
Borrower to the Parent Guarantor shall be collected, enforced and received by
the Parent Guarantor as trustee for the Banks and be paid over to the Banks on
account of the indebtedness of the Borrower to the Banks, but without affecting
or impairing in any manner the liability of the Parent Guarantor under the other
provisions of this Parent Guaranty. Prior to the transfer by the Parent
Guarantor of any note or negotiable instrument evidencing any indebtedness of
the Borrower to the Parent Guarantor, the Parent Guarantor shall mark such note
or negotiable instrument with a legend that the same is subject to this
subordination.
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13.08 Waiver. (a) The Parent Guarantor waives any right
(except as shall be required by applicable statute and cannot be waived) to
require the Administrative Agent or the Banks to (i) proceed against the
Borrower, any other guarantor or any other party, (ii) proceed against or
exhaust any security held from the Borrower, any other guarantor or any other
party or (iii) pursue any other remedy in the Administrative Agent's or the
Banks' power whatsoever. The Parent Guarantor waives any defense based on or
arising out of any defense of the Borrower, any other guarantor or any other
party other than payment in full of the indebtedness, including, without
limitation, any defense based on or arising out of the disability of the
Borrower, any other guarantor or any other party, or the unenforceability of the
indebtedness or any part thereof from any cause, or the cessation from any cause
of the liability of the Borrower other than payment in full of the indebtedness.
The Administrative Agent and the Banks may, at their election, foreclose on any
security held by the Administrative Agent, the Collateral Agent or the Banks by
one or more judicial or nonjudicial sales, whether or not every aspect of any
such sale is commercially reasonable (to the extent such sale is permitted by
applicable law), or exercise any other right or remedy the Administrative Agent
and the Banks may have against the Borrower or any other party, or any security,
without affecting or impairing in any way the liability of the Parent Guarantor
hereunder except to the extent the indebtedness has been paid. The Parent
Guarantor waives, to the fullest extent permitted by law, any defense arising
out of any such election by the Administrative Agent and the Banks, even though
such election operates to impair or extinguish any right of reimbursement or
subrogation or other right or remedy of the Parent Guarantor against any
Borrower or any other party or any security.
(b) The Parent Guarantor waives all presentments, demands for
performance, protests and notices, including without limitation notices of
nonperformance, notices of protest, notices of dishonor, notices of acceptance
of this Parent Guaranty, and notices of the existence, creation or incurring of
new or additional indebtedness. The Parent Guarantor assumes all responsibility
for being and keeping itself informed of the Borrower's financial condition and
assets, and of all other circumstances bearing upon the risk of nonpayment of
the indebtedness and the nature, scope and extent of the risks which the Parent
Guarantor assumes and incurs hereunder, and agrees that the Administrative Agent
and the Banks shall have no duty to advise the Parent Guarantor of information
known to them regarding such circumstances or risks.
13.09 Limitation on Enforcement. The Banks agree that this
Parent Guaranty may be enforced only by the action of the Administrative Agent
or the Collateral Agent, in each case acting upon the instructions of the
Required Banks and that no Bank shall have any right individually to seek to
enforce or to enforce this Parent Guaranty, it being understood and agreed that
such rights and remedies
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may be exercised by the Administrative Agent for the benefit of the Banks upon
the terms of this Agreement. The Banks further agree that this Parent Guaranty
may not be enforced against any Affiliate, director, officer, employee or
stockholder of the Parent Guarantor.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above.
SULLIVAN COMMUNICATIONS, INC.,
a Delaware corporation
By /s/ Joseph Milano
------------------------------
Title: Chief Financial Officer
SULLIVAN GRAPHICS, INC.,
a New York corporation
By /s/ Joseph Milano
------------------------------
Title: Chief Financial Officer
ADMINISTRATIVE AGENT:
BANKERS TRUST COMPANY, as
Administrative Agent
By /s/ Bruce Addison
------------------------------
Title: Vice President
COLLATERAL AGENT:
BT COMMERCIAL CORPORATION,
As Collateral Agent
By /s/ Bruce Addison
------------------------------
Title: Vice President
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STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1
<TABLE>
<CAPTION>
Three
Year Year Year Year Months Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, December 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated pretax income (loss)
from continuing operations $(26,005) (21,431) (1,869) (20,296) (10,590) (33,886)
Net amortization of debt issuance
expenses $ 1,784 2,139 2,174 1,837 462 1,784
Interest expense $ 34,505 30,549 23,578 22,212 6,485 25,730
Interest portion of rental expense $ 1,799 1,618 1,392 1,229 287 1,161
-------- -------- -------- -------- -------- --------
Earnings $ 12,083 12,875 25,275 4,982 (3,356) (5,211)
======== ======== ======== ======== ======== ========
Interest expense $ 34,505 30,549 23,578 22,212 6,485 25,730
Net amortization of debt issuance
expense $ 1,784 2,139 2,174 1,837 462 1,784
Interest portion of rental expense $ 1,799 1,618 1,392 1,229 287 1,161
-------- -------- -------- -------- -------- --------
Fixed Charges $ 38,088 34,306 27,144 25,278 7,234 28,675
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges --(a) --(a) --(a) --(a) --(a) --(a)
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(a) The deficiency in earnings required to cover fixed charges in the fiscal
years ended March 31, 1997, 1996, 1995 and 1994, for the three months ended
March 31, 1993 and for the year ended December 31, 1992 was $26,005,
$21,431, $1,869, $20,296, $10,590 and $33,886, respectively.
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 23, 1997, except as to Note 9, as to which the date
is June 30, 1997, in Post-Effective Amendment No. 3 to the Registration
Statement (Form S-1, No. 33-97090) and related Prospectus of Sullivan
Communications, Inc. for the Registration of $185,000,000 of its 12 3/4% Senior
Subordinated Exchange Notes Due 2005.
Our audits also included the financial statement schedules of Sullivan
Communications, Inc. listed in item 16(b) of this Registration Statement. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein. The report of Ernst & Young LLP contains an
explanatory paragraph with respect to a change in accounting in fiscal 1996 for
the adoption of the provisions for accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
/s/ Ernst & Young LLP
Nashville, Tennessee
July 7, 1997
