UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]      Annual  report  pursuant  to  Section  13 or  15(d)  of the  Securities
         Exchange Act of 1934 For the fiscal year ended March 31, 1997

                                       or

[ ]      Transition   report  pursuant  to Section 13 or 15(d) of the Securities
         Exchange  Act of 1934 For the  transition  period  from  __________  to
         __________

         Commission file number 33-97090

                          SULLIVAN COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                   62-135968
(State or other jurisdiction of         (I.R.S. employer identification number)
 incorporation or organization)                  


                               225 High Ridge Road
                           Stamford, Connecticut 06905
                                 (203) 977-8101

(Address,  including zip code,  and telephone  number,  including  area code, of
registrant's principal executive offices)

                             SULLIVAN GRAPHICS, INC.
             (Exact name of registrant as specified in its charter)


             New York                                  16-1003976
 (State or other jurisdiction of        (I.R.S. employer identification number)
  incorporation or organization)


                               100 Winners Circle
                           Brentwood, Tennessee 37027
                                 (615) 377-0377

(Address,  including zip code,  and telephone  number,  including  area code, of
registrant's principal executive offices)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrants'  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    X

Sullivan  Communications,  Inc.  has 123,889  shares  outstanding  of its Common
Stock,  $.01 Par Value, as of May 31, 1997 (all of which are privately owned and
not traded on a public market).

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


<PAGE>



                                      INDEX


                                                                         Page
                                                                      Referenced
                                                                       Form 10-K
                                                                       ---------

                                     PART I
ITEM 1.    BUSINESS......................................................  2
ITEM 2.    PROPERTIES....................................................  9
ITEM 3.    LEGAL PROCEEDINGS.............................................  9
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........  9

                                     PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS........................................... 10
ITEM 6.    SELECTED FINANCIAL DATA....................................... 10
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS .......................... 14
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 26
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE........................... 58

                                    PART III
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS.............................. 58
ITEM 11.   EXECUTIVE COMPENSATION........................................ 59
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT.................................................... 64
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 65

                                     PART IV
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K...................................................... 67

           SIGNATURES.................................................... 77




<PAGE>



                                     PART I

Special Note Regarding Forward Looking Statements

         This Annual Report on Form 10-K (the "Report") contains forward-looking
statements  within the  meaning of Section  21E of the  Securities  Act of 1934.
Discussions containing such forward-looking  statements may be found in Items 1,
3 and 7 hereof, as well as within this Report generally.  In addition, when used
in this  Report,  the words  "believes,"  "anticipates,"  "expects"  and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the  forward-looking  statements
as a result of many factors outside the control of Sullivan Communications, Inc.
("Communications"),   together  with  its  wholly-owned   subsidiary,   Sullivan
Graphics,   Inc.   ("Graphics"),   collectively   (the   "Company"),   including
fluctuations  in the cost of paper and other raw materials  used by the Company,
changes in the  advertising  and  printing  markets,  actions  by the  Company's
competitors,  particularly with respect to pricing,  the financial  condition of
the Company's  customers,  the financial condition and liquidity of the Company,
the general  condition of the United  States  economy,  demand for the Company's
products  and  services  and the  matters  set forth in this  Report  generally.
Consequently,  such forward- looking statements should be regarded solely as the
Company's current plans,  estimates and beliefs.  The Company does not undertake
and specifically  declines any obligation to publicly release the results of any
revisions to these  forward-looking  statements  that may be made to reflect any
future events or  circumstances  after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.

ITEM 1.           BUSINESS

General

         The Company is a successor to a business that  commenced  operations in
1926,  and is one of the largest  national  diversified  commercial  printers in
North  America with ten  printing  plants in eight states and Canada and fifteen
prepress  facilities  located throughout the United States. The Company operates
primarily in two business sectors of the commercial printing industry:  printing
(which  accounted  for  approximately  86% of total sales during the fiscal year
ended March 31, 1997  ("Fiscal  Year  1997")) and digital  imaging and  prepress
services  conducted  through its American  Color division  (which  accounted for
approximately 14% of total sales in Fiscal Year 1997).  Partnerships  affiliated
with Morgan  Stanley,  Dean Witter,  Discover & Co.  currently  own 66.8% of the
outstanding  common  stock  and  72%  of  the  outstanding  preferred  stock  of
Communications.

         On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger  dated  March 12,  1993,  as amended  (the  "Merger  Agreement"),
between   Communications  and  SGI  Acquisition  Corp.   ("Acquisition  Corp."),
Acquisition   Corp.  was  merged  with  and  into   Communications   (the  "1993
Acquisition").  Acquisition  Corp.  was formed by The Morgan  Stanley  Leveraged
Equity Fund II, L.P.,  certain  institutional  investors and certain  members of
management  (the  "Purchasing  Group") for the  purpose of  acquiring a majority
interest  in  Communications.  Acquisition  Corp.  acquired  a  substantial  and
controlling  majority  interest in Communications in exchange for $40 million in
cash.  In the  1993  Acquisition,  Communications  continued  as  the  surviving
corporation  and the separate  corporate  existence  of  Acquisition  Corp.  was
terminated.

         On August 15, 1995,  the Company  completed a merger  transaction  (the
"Shakopee Merger") with Shakopee Valley Printing Inc. ("Shakopee"). Shakopee was
formed to effect the  purchase  of  certain  assets  and  assumption  of certain
liabilities   of   Shakopee   Valley   Printing,   a  division  of  Guy  Gannett
Communications.  On December 22, 1994, pursuant to an Agreement for the Purchase
of Assets  between Guy Gannett  Communications  (the "Seller") and Shakopee (the
"Buyer"),  the Seller  agreed to sell  (effective  at the close of  business  on
December 22, 1994) certain assets and transfer  certain  liabilities of Shakopee
Valley Printing to the Buyer for a total purchase price of  approximately  $42.6
million,  primarily  financed  through the  issuance of 35,000  shares of common
stock and bank  borrowings.  The 35,000 shares were  purchased by Morgan Stanley
Capital Partners III, L.P., Morgan Stanley

                                        2

<PAGE>



Capital  Investors,  L.P. and MSCP III 892 Investors,  L.P.  (collectively,  the
"MSCP III Entities"), together with First Plaza Group Trust and Leeway & Co. The
general  partner of each of the MSCP III  Entities  is  affiliated  with  Morgan
Stanley,  Dean Witter,  Discover & Co.  In addition,  the other  stockholders of
Shakopee were also stockholders of the Company.

         On March 11, 1996, Graphics sold its 51% interest in National Inserting
Systems,  Inc.  ("NIS") for  approximately  $2.5  million in cash and a note for
approximately  $0.2  million.  The  proceeds  from the sale  were  used to repay
indebtedness under the Bank Credit Agreement (as defined below).

         On March 12,  1996,  Graphics  acquired  the  assets of Gowe,  Inc.,  a
Medina,  Ohio regional printer of newspapers,  T.V. books and retail advertising
inserts  and  catalogs  ("Gowe")  for  approximately  $6.7  million  in cash and
assumption of certain liabilities of Gowe, Inc. (the "Gowe Acquisition").

         During  March  1996,  the Company  completed  the  construction  of and
start-up  of a plant in  Hanover,  Pennsylvania  ("Flexi-Tech").  Flexi-Tech  is
dedicated to the  production  of commercial  flexi books (a form of  advertising
inserts)  serving  various  segments  of the retail  advertising  market and the
production of T.V. listing guides serving the newspaper market.

         In February of Fiscal Year 1997, the Company made a strategic  decision
to shut  down the  operations  of its  wholly-owned  subsidiary  Sullivan  Media
Corporation  ("SMC").  SMC's shut down has been  accounted for as a discontinued
operation,  and  accordingly,  SMC's  operations are segregated in the Company's
consolidated  financial statements.  Sales, costs of sales and selling,  general
and administrative  expenses attributable to SMC for the fiscal year ended March
31, 1996  ("Fiscal Year 1996") and the fiscal year ended March 31, 1995 ("Fiscal
Year 1995") have been reclassified to discontinued operations. See "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Discontinued  Operations"  and note 5 of the Company's  consolidated
financial statements.

         Market data used  throughout  this report was  obtained  from  industry
publications  and internal  Company  estimates.  While the Company believes such
information  is  reliable,  the  accuracy  of  such  information  has  not  been
independently verified and cannot be guaranteed.

Printing

         The Company's printing business,  which accounted for approximately 86%
of the Company's sales in Fiscal Year 1997, produces retail advertising inserts,
comics (newspaper Sunday comics,  comic insert advertising and comic books), and
other publications.

         Retail Advertising Inserts (80% of printing sales in Fiscal Year 1997).
The  Company  believes  that  it is  one  of  the  largest  printers  of  retail
advertising  inserts  in the  United  States.  Retail  advertising  inserts  are
preprinted  advertisements,  generally in color, that display products sold by a
particular retailer or manufacturer. Advertising inserts are used extensively by
many retailers and are an important and cost effective  means of advertising for
these merchants. Advertising inserts are primarily distributed through insertion
in newspapers but are also  distributed by direct mail or in-store by retailers.
They generally advertise for a specific, limited sale period. The Company prints
advertising inserts for approximately 310 retailers.

         Comics  (14% of  printing  sales in  Fiscal  Year  1997).  The  Company
believes that it is one of the largest  printers of comics in the United States.
The Company prints Sunday comics for  approximately 330 newspapers in the United
States and Canada and prints the majority of the annual comic book  requirements
of Marvel Entertainment Group, Inc. ("Marvel").

         Other  Publications  (6% of printing  sales in Fiscal  Year 1997).  The
Company prints local newspapers, T.V. guide listings and other publications.


                                        3

<PAGE>



Printing Production

         There  are  three  printing  processes  that  may be  used  to  produce
advertising inserts and newspaper  supplements:  offset lithography (heatset and
cold), rotogravure and flexography.  The Company principally uses heatset offset
and flexographic web printing  equipment in its printing  business.  The Company
owns the majority of its printing equipment,  including, at May 31, 1997, 36 web
heatset offset  presses,  13  flexographic  presses and 5 multi-unit web coldset
offset presses.  Most of the Company's  advertising inserts and all of its other
publications  and  comic  books  are  printed  using the  offset  process.  Some
advertising  inserts and  substantially  all of the Company's  newspaper  Sunday
comics and comic insert advertising are printed using the flexographic process.

         In  the  offset  process,  images  are  distinguished  chemically  from
non-image  areas of a metal  plate  and  transferred  from the plate to a rubber
blanket  and then to the  paper  surface;  furthermore,  in the  heatset  offset
process,  the printed web goes through an oven which dries the solvents from the
ink,  thereby setting the ink on the paper. In the cold offset process,  the ink
solvents are absorbed into the paper.  Because  heatset offset presses can print
on a wide  variety of papers and  produce  sharper  reproductions,  the  heatset
offset process provides a more colorful and attractive  product than cold offset
presses.

         The  flexographic  process  differs  from  offset  printing  in that it
utilizes   flexible  plates  and   rapid-drying,   water-based  (as  opposed  to
solvent-based)  inks. The flexographic  image area results from a raised surface
on a  polymer  plate  which  is  transferred  directly  to  the  paper  surface.
Flexography  is  used  extensively  in  printing  high  quality  consumer  goods
packaging.  The Company's flexographic printing generally provides vibrant color
reproduction  at lower cost than  heatset  offset  printing.  The  strengths  of
flexography  compared with the rotogravure and offset processes are faster press
set up times,  brighter  colors,  reduced  paper waste,  reduced  energy use and
maintenance  costs, and  environmental  advantages due to the use of water-based
inks.  Faster set up times make the process suited to commercial  customers with
shorter runs and extensive regional versioning.

         In  addition  to  advertising   insert  capacity,   certain   equipment
parameters are critical to competing in the advertising insert market, including
cut-off length,  folding  capabilities and in-line finishing.  Cut-off length is
one of the  determinants of the size of the printed page.  Folding  capabilities
for advertising  inserts must include a wide variety of page sizes,  page counts
and special paper folding effects.  Finally,  many  advertising  inserts require
gluing or stitching of the product, adding cards, trimming and numbering.  These
production  activities  generally  are done  in-line  with the press to meet the
expedited delivery schedules and pricing required by many customers. The Company
believes that its mix and configuration of presses and press services allows for
efficient tailoring of printing services to customers' product needs.

American Color

         The  Company's  digital  imaging  and  prepress  services  business  is
conducted by its American Color division,  which the Company  believes is one of
the  largest  full-service  providers  of digital  imaging,  prepress  and color
separation  services  in the  United  States and a  technological  leader in its
industry.  American  Color  commenced  operations  in  1975  and  accounted  for
approximately  14% of the Company's  sales in Fiscal Year 1997.  American  Color
assists  its   customers  in  the  capture,   manipulation,   transmission   and
distribution  of images.  The  majority of its work leads to the  production  of
four-color  separations in a format  appropriate for use by printers.  In recent
years,  technological  advances have made it possible to replace  largely manual
and photography-based  production methods with computer-based,  electronic means
for producing  four-color films faster and at lower costs.  American Color makes
page  changes,   including   typesetting,   and  combines  digital  page  layout
information with electronically  scanned and color- corrected four-color images.
From these digital files;  proofs,  final corrections and,  finally,  four-color
films or digital output are produced for each advertising or editorial page. The
final  four-color  films or digital output enable printers to prepare plates for
each color resulting in the appearance of full color in the printed image.

         American   Color   has  been  a  leader  in   implementing   these  new
technologies,  which  has  enabled  American  Color to  reduce  unit  costs  and
effectively  service the  increasingly  complex  demands of its  customers  more
quickly  than  many 

                                        4

<PAGE>



of its  competitors  and has also resulted in an expanded  customer base. In the
late 1980s, the Company installed a nationwide data communications network. This
was initially  accomplished via a satellite system,  but has been converted to a
telecommunications based network offering greater flexibility at a reduced cost.
This wide area network  links  American  Color's  locations  with the  Company's
printing  operations,  as well as to several  customer sites. The system reduces
communication  time and enables  American Color to better serve those  customers
with time-sensitive  production  requirements.  This system also allows American
Color to  utilize  its  offices  in  different  locations  to  service  business
generated in other areas,  thereby improving  customer service and response time
while increasing capacity utilization among its various facilities. In addition,
American Color has been one of the leaders in the integration of electronic page
make-up, microcomputer-based design and layout and digital cameras into prepress
production.  The Company has capitalized on these technological  changes and has
added additional revenue sources from digital image storage, telecommunications,
design and layout,  consulting  and  training  services,  facilities  management
(operating  digital  imaging  and  prepress  service  facilities  at a  customer
location), and software and data management.

         The  digital   imaging  and  prepress   services   industry  is  highly
fragmented,  primarily consisting of smaller local and regional companies,  with
only a few national  full-service digital imaging and prepress companies such as
American Color,  none of which has a significant  nationwide  market share. Many
smaller digital imaging and prepress  companies have left the industry in recent
years due to their  inability  to keep pace with  technological  advances in the
industry.

         In April 1995,  the Company  implemented a plan for its American  Color
division  designed  to  improve  productivity,  increase  customer  service  and
responsiveness, and provide increased growth in this business. See "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Restructuring  Costs and Other  Special  Charges"  and note 18 to the  Company's
consolidated financial statements.

Competitive Advantages and Strategy

         Competitive Advantages.  The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress services
businesses:

         Modern Equipment.  The Company believes that its web heatset offset and
flexographic  web printing  equipment is among the most advanced in the industry
and that  the  average  age of its  equipment  is  significantly  less  than the
majority of its regional  competitors  and is comparable  to its major  national
competitors.  The  Company  is  also  committed  to a  comprehensive,  long-term
maintenance  program which not only enhances the  reliability  of its production
equipment,  but also extends the life of the machines. It also believes that its
digital imaging and prepress  equipment is significantly more advanced than many
of its smaller regional competitors,  many of whom have not incorporated digital
prepress  technologies  to the same extent as the  Company,  nor adopted an open
systems   environment  which  allows  greater  flexibility  and  more  efficient
maintenance.

         Strong  Customer  Base.  The Company  provides  printing  services to a
diverse  base  of   customers,   including   approximately   310  retailers  and
approximately 330 newspapers in the United States and Canada.  The customer base
includes  a  significant  number  of the major  national  retailers  and  larger
newspaper chains as well as numerous smaller regional  retailers.  The Company's
consistent focus on providing high quality printing products and strong customer
service at competitive prices has resulted in long-term  relationships with many
of  these   customers.   American  Color's  customer  base  includes  large  and
medium-sized customers in the retail, publishing and catalog businesses, many of
whom have long-term relationships with the Company. Although the digital imaging
and prepress  services  business has  generally  been on a spot bid basis in the
past,  the Company has been  successful  in  increasing  the  proportion  of its
business under long-term contracts.

         Competitive  Cost  Structure.  The Company has reduced the variable and
fixed costs of production at its printing  facilities  over the last three years
and believes it is well positioned to maintain its competitive cost structure 

                                        5

<PAGE>



in the future due to economies of scale. The Company has also reduced both labor
and material  costs (the  principal  variable  production  costs) in its digital
imaging and prepress  services  business over the past several years,  primarily
through the adoption of new digital prepress production methodologies.

         Strong  Management  Team. Since the 1993  Acquisition,  the Company has
strengthened its printing management group by hiring experienced managers with a
clear focus on growth and  continued  cost  reduction,  resulting in an improved
cost structure and a  well-defined  strategy for future  expansion.  The Company
also has  strengthened  its management group in its digital imaging and prepress
services  business,  filling a number of senior,  regional and plant  management
positions  with  individuals  who the Company  believes  will manage the digital
imaging and prepress  services  business for growth and  profitability  and will
continue to upgrade its capabilities.

         National  Presence.  The Company's  nine printing  plants in the United
States  and  one  plant  in  Canada   provide  the  Company  with   distribution
efficiencies,  strong customer service,  flexibility and short turnaround times,
all of which are  instrumental in the Company's  continued  success in servicing
its large national and regional retail  accounts.  The Company's  expanded sales
and marketing  groups provide  greater  customer  coverage and enable it to more
successfully  penetrate regional markets.  The Company believes that its fifteen
digital   imaging  and   prepress   facilities   provide  it  with   contingency
capabilities,  increased  capacity  during peak  periods,  access to top quality
internal technical personnel  throughout the country,  short turnaround time and
other customer service advantages.

         Strategy.  The  Company's  objective  is to increase  profitability  by
growing its  revenues,  increasing  its market  share and  reducing  costs.  The
Company's strategy to achieve this objective is as follows:

         Grow Unit  Volume.  Management  believes  that the  Company's  level of
national sales coverage,  when coupled with its significant  industry experience
and  customer-focused  sales force,  will result in unit growth. In an effort to
stimulate  unit volume  growth,  the Company has  strengthened  and expanded its
printing sales management  group.  Unit volume growth is also expected to result
from  continued  capital  expansion  and  selective  printing  acquisitions.  In
addition, in its digital imaging and prepress services business, the Company has
expanded  its sales  force,  strengthened  training,  more  closely  focused its
marketing  efforts on new, larger customers and implemented a revised  incentive
program.

         Continue to Improve  Product Mix.  The Company  intends to increase its
share of the retail advertising insert market. In addition,  the Company expects
to continue to adjust the mix of its  customers  and products  within the retail
advertising  insert market to those that are more profitable and less seasonable
and to  maximize  the  use of the  Company's  equipment.  The  Company  is  also
continuing  expansion  of its  printing  facilities'  capabilities  for in-plant
prepress and  postpress  services.  The Company's  digital  imaging and prepress
services  business  will  continue  to focus on high  value-added  new  business
opportunities,  particularly  large-scale  projects  that will best  utilize the
breadth of services and technologies the Company has to offer. Additionally, the
Company will continue to pursue large  facilities  management  opportunities  as
well as national and large regional  customers  that require more  sophisticated
levels of service and technologies.

         Continue to Reduce Manufacturing Costs and Improve Quality. The Company
intends  to further  reduce  its  production  costs at its  printing  facilities
through its Total  Quality  Management  Process,  an ongoing cost  reduction and
continuous  quality  improvement  process.  Additionally,  the Company  plans to
continue  to  maximize  scale  advantages  in  the  purchasing,  technology  and
engineering  areas.  The Company also intends to continue to gain  variable cost
efficiencies in its digital imaging and prepress  services business by using its
technical  resources  to  improve  digital  prepress  workflows  at its  various
facilities.  The  Company  also  believes it will be able to reduce its per unit
technical,  sales and  management  costs as its sales  volumes  increase in this
business.

         Continue to Make  Opportunistic  Acquisitions.  An integral part of the
Company's  long-term growth strategy  includes a plan to selectively  assess and
acquire other printing and digital imaging and prepress services  companies that
the Company believes will enhance its leadership position in these industries.


                                        6

<PAGE>



Customers and Distribution

         Customers.  The Company  sells its printing  products and services to a
large number of customers,  primarily  retailers and newspapers,  and all of the
products are produced in accordance  with customer  specifications.  The Company
performs a portion of its printing work, primarily the printing of Sunday comics
and comic books,  under  long-term  contracts with its customers.  The contracts
vary in  length  and many of the  contracts  automatically  extend  for one year
unless  there has been notice to the  contrary  from  either of the  contracting
parties  within a certain  number of days  before  the end of any term.  For the
balance of its printing work, the Company obtains varying time  commitments from
its customers ranging from job to job to annual allocations. Printing prices are
generally fixed during such commitments;  however,  the Company's standard terms
of trade call for the pass  through  of  changes  in the cost of raw  materials,
primarily paper and ink.

         American Color's customers consist of retailers,  magazine  publishers,
newspaper  publishers,   printers,  catalog  sales  organizations,   advertising
agencies and direct mail  advertisers.  Its customers  typically have a need for
high levels of technical expertise, short turnaround times and customer service.
In  addition  to its  historical  regional  customer  base,  American  Color  is
increasingly  focused on larger,  national accounts that have a need for a broad
range of fully  integrated  services and  communication  capabilities  requiring
leading edge  technology.  This  includes an  increasing  amount of  contractual
business related to facilities  management  arrangements  with customers,  which
contracts typically extend from three to five years in length.

         The printing and American Color divisions have historically had certain
common  customers and their ability to cross-market is an increasingly  valuable
tool as desktop publishing, electronic digital imaging and facilities management
become more  important to their  customers.  This enables the Company to provide
more  comprehensive  solutions to  customers'  digital  imaging and prepress and
printing needs. New customers of either the printing or American Color divisions
often  become   customers  of  both   businesses.   During   Fiscal  Year  1997,
approximately  39% of the digital  imaging and prepress  sector's  sales were to
customers of the Company's printing sector.

         No  single  customer  accounted  for  sales  in  excess  of  10% of the
Company's  consolidated  sales  in  Fiscal  Year  1997.  The  Company's  top ten
customers  accounted for approximately 35% of consolidated  sales in Fiscal Year
1997.

         Distribution.  The Company  distributes its printing products primarily
by  truck to  customer  designated  locations,  primarily  newspapers.  Costs of
distribution are generally paid by the customers, and most shipping is by common
carrier.  American  Color  generally  distributes  its  products  by  courier or
overnight  express,   or  other  methods  of  personal  delivery  or  electronic
transmission.

Competition

         Commercial printing in the United States is a large, highly fragmented,
capital-intensive  industry and the Company  competes  with  numerous  national,
regional and local  printers.  Customer  preferences  for larger printers with a
greater  range  of  services  and more  flexibility,  capital  requirements  and
competitive  pricing pressures have led to a trend of industry  consolidation in
recent years.

         The Company believes that competition in the printing business is based
primarily on quality,  customer service,  price and timeliness of delivery.  The
advertising insert business is a large, fragmented industry in which the Company
competes for national accounts with several large national printers,  several of
whom are  larger and better  capitalized  than the  Company.  In  addition,  the
Company  also  competes  with  numerous  regional  printers  for the printing of
advertising inserts. Although the Company faces competition principally from one
other  company  (Big  Flower  Press  Holdings,  Inc.) in the  printing of Sunday
newspaper comics in the United States,  there are numerous newspapers that print
their own Sunday comics. The Company's other publication  business competes with
many large national and regional commercial printers.


                                        7

<PAGE>



         American  Color  competes  with numerous  digital  imaging and prepress
service  firms on both a national  and  regional  basis.  The industry is highly
fragmented,  primarily consisting of smaller local and regional companies,  with
only a few national  full-service digital imaging and prepress companies such as
American Color,  none of which has a significant  nationwide  market share. Many
smaller digital imaging and prepress  companies have left the industry in recent
years due to their inability to keep pace with  technological  advances required
to service  increasingly complex customer demands. The Company believes that the
digital imaging and prepress services sector will continue to be subject to high
levels of ongoing  technological change and the need for capital expenditures to
keep up with such change.

Raw Materials

         The primary raw materials used in the Company's  printing  business are
paper and ink. The Company  purchases  substantially  all of its ink and related
products under a long-term ink supply contract between the Company and CPS Corp.
Throughout  Fiscal Year 1995 and the majority of Fiscal Year 1996,  the printing
industry experienced  substantial increases in the cost of paper. In late Fiscal
Year 1996 and throughout  Fiscal Year 1997,  however,  the overall cost of paper
declined.   Management  expects  that  as  a  result  of  the  Company's  strong
relationship with key suppliers that its material costs will remain  competitive
within the industry. In accordance with industry practice, the Company generally
passes  through  increases in the cost of paper to its  customers in the cost of
its printed  products while decreases in costs generally  result in lower prices
to customers.  The primary  inputs in prepress  services  processes are film and
proofing materials.

         In both of the Company's business sectors,  there is an adequate supply
of the necessary materials  available from multiple vendors.  The Company is not
dependent on any single supplier and has had no significant problems in the past
obtaining necessary materials.

Backlog

         Because the Company's  printing,  digital imaging and prepress services
products  are  required to be  delivered  soon after final  customer  orders are
received,  the Company  does not  experience  any  backlog of unfilled  customer
orders.

Employees

         As of April 30, 1997,  the Company had a total of  approximately  2,880
employees,  of which approximately 200 employees are represented by a collective
bargaining  agreement  that will  expire  on  December  31,  2001.  The  Company
considers its relations with its employees to be excellent.

Governmental and Environmental Regulations

         The Company is subject to regulation under various  federal,  state and
local laws  relating  to  employee  safety and  health,  and to the  generation,
storage, transportation, disposal and emission into the environment of hazardous
substances.  The Company  believes that it is in material  compliance  with such
laws and regulations.  Although compliance with such laws and regulations in the
future is likely to entail additional capital expenditures, the Company does not
anticipate that such  expenditures  will be material.  See "Legal  Proceedings -
Environmental Matters."


                                        8

<PAGE>



ITEM 2.  PROPERTIES

         The Company  operates  in 25  locations  in 15 states and  Canada.  The
Company owns seven  printing  plants in the United  States and one in Canada and
leases two printing  plants in California and  Pennsylvania.  The American Color
division of the Company has 15 production  locations,  13 of which are leased by
American  Color.  The American Color division also operates  digital imaging and
prepress  facilities  on the premises of several of its  customers  ("facilities
management").  In addition,  the Company  maintains one small  executive and two
divisional  headquarter  facilities,  two of which are  leased  and one which is
owned.  The  Company  believes  that its plants and  facilities  are  adequately
equipped and maintained for present and planned operations.

ITEM 3.  LEGAL PROCEEDINGS

         The  Company  has been named as a defendant  in several  legal  actions
arising from its normal business activities.  In the opinion of management,  any
liability  that may arise from such  actions  will not have a  material  adverse
effect on the financial condition of the Company.

Environmental Matters

         Graphics,  together with over 300 other persons, has been designated by
the U.S. Environmental  Protection Agency as a potentially  responsible party (a
"PRP") under the Comprehensive Environmental Response Compensation and Liability
Act  ("CERCLA,"  also known as  "Superfund")  at one  Superfund  site.  Although
liability  under  CERCLA  may be imposed  on a joint and  several  basis and the
Company's ultimate liability is not precisely determinable, the PRPs have agreed
that  Graphics'  share of removal  costs is  approximately  0.46% and  therefore
Graphics  believes that its share of the anticipated  remediation  costs at such
site will not be material to its business or financial condition.  Based upon an
analysis of Graphics'  volumetric share of waste contributed to the site and the
agreement  among the PRPs,  the  Company  has a reserve  of  approximately  $0.1
million in connection with this liability on its  consolidated  balance sheet at
March 31,  1997.  The  Company  believes  this  amount is adequate to cover such
liability.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No  matters  were  submitted  to a  vote  of  security  holders  of the
registrant during the fourth quarter of Fiscal Year 1997.



                                        9

<PAGE>



                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

         Market Information

         There is no  established  public  market for the common stock of either
Communications or Graphics.

         Holders

         There are  approximately  89  shareholders  of  Communications'  common
stock. Communications is the sole shareholder of Graphics' common stock.

         Dividends

         There  have  been no cash  dividends  declared  on any  class of common
equity for the two most recent fiscal years.

ITEM 6.  SELECTED FINANCIAL DATA

         Set forth below is selected financial data for and as of the year ended
December 31, 1992 (pre-1993  Acquisition),  for and as of the three months ended
March 31, 1993 (pre-1993  Acquisition)  and for and as of the fiscal years ended
March 31, 1994, 1995, 1996 and 1997 (post-1993  Acquisition).  The balance sheet
data as of December 31, 1992 and March 31, 1993,  1994,  1995, 1996 and 1997 and
the statement of operations data for the year ended December 31, 1992, the three
months  ended March 31, 1993,  and the fiscal years ended March 31, 1994,  1995,
1996 and 1997 are derived from the audited consolidated financial statements for
such periods and at such dates. The selected  financial data below also reflects
the Company's  discontinued  coupon free standing  insert ("FSI")  operation and
it's discontinued wholly-owned subsidiary, SMC. See "Management's Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  --  Discontinued
Operations" and note 5 of the Company's consolidated financial statements.  As a
result of the 1993 Acquisition,  the Company's consolidated financial statements
for the periods  subsequent to March 31, 1993 are presented on the Company's new
basis of accounting,  while the consolidated  financial statements for March 31,
1993 and December 31, 1992 are presented on the Company's  historical cost basis
of  accounting.  The  consolidated  results of operations of the Company for the
fiscal  years  ended  March  31,  1994,  1995,  1996 and  1997 are not  directly
comparable to the consolidated pre-1993 Acquisition results of operations due to
the effects of the 1993 Acquisition.

         In connection with the 1993 Acquisition,  the Company elected to change
its fiscal  year end from  December 31 to March 31  beginning  March 31, 1993 in
order to have the  Company's  fiscal  year  more  closely  match  the  Company's
operating  cycle.  This  change  was  made on the  effective  date  of the  1993
Acquisition;   accordingly,   the  three-month   period  ended  March  31,  1993
constituted a transition period.

         This data should be read in conjunction with  "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements appearing elsewhere in this annual report.



                                       10

<PAGE>



                             SELECTED FINANCIAL DATA
                          SULLIVAN COMMUNICATIONS, INC.
<TABLE>
<CAPTION>


                                                                          Post-1993 Acquisition (a)         Pre-1993 Acquisition (b)
                                                                    --------------------------------------  ------------------------
                                                                                                               Three
                                                                                                               Months
                                                                                                               Ended     Year Ended
                                                                         Fiscal Year Ended March 31,          March 31, December 31,
                                                                    --------------------------------------
                                                                    1997      1996       1995(c)      1994      1993(d)       1992
                                                                    ----      ----       -------      ----      -------       ----
<S>                                                               <C>        <C>         <C>         <C>        <C>         <C>    
Statement of Operations Data:                                                           (dollars in thousands)
Sales                                                             $524,551   529,523     433,198     414,673    101,601     395,420
Cost of sales                                                      459,880   465,110     370,267     369,520     95,078     357,831
                                                                  --------   -------     -------     -------    -------     -------
  Gross profit                                                      64,671    64,413      62,931      45,153      6,523      37,589
Selling, general and administrative expenses (e)                    51,418    44,164      41,792      39,343     10,047      40,661
Restructuring costs and other special charges (f)                    2,881     7,533          --          --         --          --
Gain from curtailment and establishment of defined                                                     
  benefit pension plans, net (g)                                        --        --      (3,311)         --         --          --
                                                                  --------   -------     -------     -------    -------     -------
  Operating income (loss)                                           10,372    12,716      24,450       5,810     (3,524)     (3,072)
Interest expense, net                                               36,132    32,425      25,334      23,737      6,862      27,021
Other expense (income)                                                 245     1,722         985       2,369        204       3,793
Income tax expense (benefit)                                         2,591     4,874       2,552       2,380     (3,848)    (14,601)
                                                                  --------   -------     -------     -------    -------     -------
  Loss from continuing operations before extraordinary 
    items and cumulative effect of changes in 
    accounting principles                                          (28,596)  (26,305)     (4,421)    (22,676)    (6,742)    (19,285)
                                                                  --------   -------     -------     -------    -------     -------
Discontinued operations: (h)
  Loss from operations, net of tax                                  (1,557)   (1,364)       (912)    (23,272)    (1,897)     (3,689)
  Estimated (loss) on shut down and gain on
    settlement, net of tax                                          (1,550)    2,868      18,495     (38,412)        --          --
Loss on early extinguishment of debt (i)                                --    (4,526)         --          --         --          --
Cumulative effect of changes in accounting principles, 
   net of tax (j)                                                       --        --          --          --        646      (4,436)
                                                                  --------   -------     -------     -------    -------     -------
Net (loss) income                                                 $(31,703)  (29,327)     13,162     (84,360)    (7,993)    (27,410)
                                                                  ========   =======     =======     =======    =======     =======
Balance Sheet Data (at end of period):
Cash and cash equivalents                                         $      0         0       4,635       8,839      7,129       2,167
Working capital (deficit)                                           (8,598)    9,612       4,958       6,956    (17,327)     (4,138)
Total assets                                                       333,975   351,181     328,368     305,521    274,812     271,219
Long-term debt and capitalized leases, including current 
  installments (k)                                                 312,309   297,617     258,201     250,439    245,382     247,362
Stockholders' deficit                                              (76,318)  (44,396)    (14,970)    (45,485)   (85,194)    (77,762)
Other Data:
Net cash provided (used) by operating activities                  $ 24,313    (4,187)     30,510     (27,329)    11,437      11,831
Net cash used by investing activities                              (10,997)  (24,436)    (17,580)     (1,332)    (4,500)    (10,144)
Net cash (used) provided by financing activities                   (13,312)   23,982     (17,527)     23,113     (1,980)    (12,939)
Capital expenditures (including lease obligations entered into)     37,767    28,022      20,415      15,722      4,888      12,029
EBITDA (l)                                                        $ 46,972    46,847      51,719      33,068      4,080      34,517
</TABLE>



                                       11

<PAGE>



NOTES TO SELECTED FINANCIAL DATA

(a)   References to "post-1993  Acquisition" refer to the successor company that
      resulted from the 1993 Acquisition. The 1993 Acquisition was accounted for
      as a  purchase.  As a  result  of the  1993  Acquisition,  Communications'
      consolidated  financial statements for the periods subsequent to March 31,
      1993 are presented on Communications'  new basis of accounting,  while the
      consolidated financial statements for March 31, 1993 and December 31, 1992
      are presented on Communications'  historical cost basis of accounting. The
      consolidated  results of  operations of  Communications  for the post-1993
      Acquisition  periods  are  not  directly  comparable  to the  consolidated
      pre-1993  Acquisition results of operations due to the effects of the 1993
      Acquisition and related refinancing.

(b)   References to "pre-1993 Acquisition" refer to the predecessor company that
      existed before the 1993 Acquisition.

(c)   On August 15, 1995, Shakopee was merged with and into Graphics. The merger
      has been  accounted for as a combination  of entities under common control
      (similar to a  pooling-of-interests),  and  accordingly,  the consolidated
      financial  statements give  retroactive  effect to the Shakopee Merger and
      include the combined  operations of Communications and Shakopee subsequent
      to  December  22, 1994 (the date on which  Shakopee  became  under  common
      control with the Company).  Shakopee's financial results are not reflected
      in periods  prior to  December  22,  1994 as these  periods  were prior to
      common control ownership.

(d)   In connection with the 1993 Acquisition, the Company elected to change its
      fiscal year end from  December 31 to March 31 beginning  March 31, 1993 in
      order to have the  Company's  fiscal year more closely match the Company's
      operating  cycle.  This change was made on the effective  date of the 1993
      Acquisition;  accordingly,  the  three-month  period  ended March  31,1993
      constituted a transition period.

(e)   Fiscal Year 1997 selling, general and administrative expenses include $2.5
      million of non-recurring  employee  termination  expenses  (including $1.9
      million  related  to the  resignation  of the  Company's  Chief  Executive
      Officer--see note 20 to the Company's consolidated financial statements).

(f)   In April  1995,  the  Company  implemented  a  restructuring  plan for its
      American  Color  division  which was  designed  to  improve  productivity,
      increase customer service and responsiveness, and provide increased growth
      in the business.  The Company  recognized $0.9 million and $4.1 million of
      costs  under  such  plan  in  Fiscal  Year  1997  and  Fiscal  Year  1996,
      respectively.  In  addition,  the Company  recorded  $1.9 million and $3.4
      million  of  other  special  charges  related  to  asset   write-offs  and
      write-downs in its Print and American Color  divisions in Fiscal Year 1997
      and  Fiscal  Year  1996,  respectively  (see  note  18  to  the  Company's
      consolidated financial statements).

(g)   In October 1994, the Company  amended its defined  benefit  pension plans,
      which resulted in the freezing of additional  defined  benefits for future
      services under the plans effective January 1, 1995. The Company recognized
      a curtailment  gain of $3.7 million as a result of freezing such benefits.
      Also in October 1994, the Board of Directors  approved a new  Supplemental
      Executive  Retirement Plan ("SERP"),  which is a defined benefit plan, for
      certain key  executives.  The Company  recognized a $0.4  million  expense
      associated with the establishment of the SERP.

(h)   In February of Fiscal Year 1997, the Company made a strategic  decision to
      shut down the operation of its  wholly-owned  subsidiary  SMC.  SMC's shut
      down has been accounted for as a discontinued operation,  and accordingly,
      SMC's  operations are segregated in the Company's  consolidated  financial
      statements.  Sales, costs of sales and selling, general and administrative
      expenses  attributable  to SMC for Fiscal  Years 1997,  1996 and 1995 have
      been reclassified to discontinued operations. See "Management's Discussion
      and     Analysis    of    Financial     Condition     and    Results    of
      Operations--Discontinued   Operations"   and  note  5  of  the   Company's
      consolidated financial statements.

                                       12

<PAGE>




      On February 16, 1994, the Company assigned the coupon FSI contracts of its
      subsidiary,  Sullivan  Marketing,  Inc. ("SMI"), to News America FSI, Inc.
      ("News  America").  In June 1994,  the  Company  recorded  income from the
      settlement of a lawsuit  entitled  Sullivan  Marketing,  Inc. and Sullivan
      Graphics, Inc. v. Valassis Communications, Inc., News America FSI Inc. and
      David Brandon (the "SMI  Settlement") of $18.5 million,  net of taxes, and
      when coupled with  settlement  expenses which had previously been accrued,
      the net cash proceeds  resulting from this settlement  were  approximately
      $16.7 million.

      In Fiscal Year 1996,  the  Company  recognized  settlement  of a complaint
      naming SMI, News America and two packaged goods companies as defendants of
      (the "EPI lawsuit") and reversed certain accruals related to the estimated
      loss on shut down of SMI.  The  resulting  effect  reflected in the Fiscal
      Year 1996 consolidated  statement of operations was $2.9 million income in
      discontinued  operations.  See  "Management's  Discussion  and Analysis of
      Financial  Condition and Results of  Operations--Discontinued  Operations"
      and note 5 of the Company's consolidated financial statements.

(i)   As part of the  Shakopee  Merger  and the  refinancing  transactions  (the
      "Refinancing"), collectively (the "Transactions"), the Company recorded an
      extraordinary  loss  related  to  early  extinguishment  of  debt  of $4.5
      million, net of zero taxes. This extraordinary loss primarily consisted of
      the early redemption  premium on Graphics' 15% Senior  Subordinated  Notes
      due 2000 (the "15% Notes") and the write-off of deferred  financing  costs
      related to refinanced  indebtedness partially offset by the write-off of a
      bond premium associated with the 15% Notes.

(j)   Effective  January 1, 1993,  the Company  changed its method of accounting
      for income taxes to Statement of Financial  Accounting  Standards No. 109,
      "Accounting  for Income  Taxes"  ("SFAS 109").  The  cumulative  effect of
      adopting  SFAS 109,  as of January  1, 1993 was a decrease  in net loss by
      $0.6  million.  In 1992,  the Company  elected to adopt the  provisions of
      Statement of Financial Accounting Standards No. 106, "Employers Accounting
      for  Postretirement  Benefits  Other Than  Pensions."  This  resulted in a
      charge to earnings net of related tax benefits of $4.4 million.

(k)   The  balance of  long-term  debt  outstanding  at March 31,  1995 and 1994
      includes  an  additional  $9.7  million and $11.3  million,  respectively,
      relating to a purchase  accounting  adjustment to the 15% Notes  resulting
      from the 1993 Acquisition. The principal amount payable at maturity of the
      15% Notes  remained  at $100  million.  The 15%  Notes  were  redeemed  in
      connection with the Refinancing.

(l)   EBITDA is included  in the  Selected  Financial  Data  because  management
      believes  that  investors  regard  EBITDA as a key  measure of a leveraged
      company's  performance  and  ability  to  meet  its  future  debt  service
      requirements.  EBITDA is defined as earnings before net interest  expense,
      income tax expense (benefit),  depreciation,  amortization,  other special
      charges  related  to  asset  write-offs  and  write-downs,   other  income
      (expense),  the  cumulative  effect of changes in  accounting  principles,
      discontinued  operations and extraordinary  items. EBITDA is not a measure
      of financial  performance under generally accepted  accounting  principles
      and should not be  considered an  alternative  to net income (or any other
      measure of performance under generally accepted accounting  principles) as
      a measure of  performance  or to cash flows from  operating,  investing or
      financing  activities  as an  indicator  of cash  flows or as a measure of
      liquidity.  Certain covenants in the Indenture dated as of August 15, 1995
      (the  "Indenture")  and the Company's  Credit Agreement with BT Commercial
      Corporation (the "Bank Credit Agreement") are based on EBITDA,  subject to
      certain adjustments.


      EBITDA  includes  non-recurring  employee  termination  expenses  of  $2.5
      million  in Fiscal  Year  1997  (including  $1.9  million  related  to the
      resignation of the Company's Chief Executive  Officer - see note 20 to the
      Company's consolidated financial statements).


                                       13

<PAGE>



      EBITDA  includes  $0.9  million and $4.1  million of  restructuring  costs
      related to its American Color division in Fiscal Year 1997 and Fiscal Year
      1996,  respectively (see note 18 to the Company's  consolidated  financial
      statements).

      EBITDA in Fiscal Year 1995  includes a $3.3  million net gain related to a
      change in the Company's  defined benefit pension plans (see note 11 to the
      Company's consolidated financial statements).


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

Overview

         On August 15,  1995,  Shakopee was merged with and into  Graphics.  The
merger has been  accounted for as a combination of entities under common control
(similar to a pooling-of-interests), and accordingly, the consolidated financial
statements  give  retroactive  effect to the  Shakopee  Merger and  include  the
combined  operations of Communications  and Shakopee  subsequent to December 22,
1994 (the date on which Shakopee  became under common control with the Company).
Shakopee's  financial results are not reflected in periods prior to December 22,
1994 as these periods were prior to common control  ownership.  This affects the
comparability of the financial results after the date of common control with the
financial results prior to common control.

         On  March  11,  1996,  the  Company  sold its 51%  interest  in NIS for
approximately  $2.5 million in cash and a note for  approximately  $0.2 million.
This  transaction  resulted  in a net gain on  disposal  of  approximately  $1.3
million,  which is classified  as other,  net in the  consolidated  statement of
operations.  The proceeds of the sale were used to repay  indebtedness under the
Bank Credit Agreement.

         On March 12,  1996,  Graphics  acquired  the  assets of Gowe,  Inc.,  a
Medina,  Ohio  based  regional  printer  of  newspapers,  T.V.  books and retail
advertising  inserts and  catalogs  for  approximately  $6.7 million in cash and
assumption  of  certain  liabilities  of Gowe,  Inc.  The Gowe  Acquisition  was
accounted for under the purchase method of accounting applying the provisions of
Accounting  Principles  Board  Opinion  No.  16  ("APB  16").  Pursuant  to  the
requirements  of APB 16, the purchase price was allocated to the tangible assets
and  identifiable  intangible  assets and  liabilities  assumed based upon their
respective  fair  values.  Gowe's  results of  operations  are  included  in the
Company's consolidated financial statements subsequent to March 11, 1996.

         During March 1996, the Company  completed the construction and start-up
of Flexi-Tech, a new plant in Hanover, Pennsylvania.  Flexi-Tech is dedicated to
the production of commercial flexi books (a form of advertising inserts) serving
various  segments of the retail  advertising  market and the  production of T.V.
listing guides serving the newspaper market.

         In Fiscal Year 1997, the Company began to present  certain costs of its
American  Color  production  facilities  within  cost of  sales  rather  than as
selling,   general  and  administrative   expenses.  This  new  presentation  is
consistent with the Company's  presentation of the printing  sector's  financial
information,  and the Company  believes that this is a more accurate  measure of
the gross margin of the business. The financial information for Fiscal Year 1996
and Fiscal Year 1995 has been reclassified to conform with this presentation.

         In February of Fiscal Year 1997, the Company made a strategic  decision
to shut down the operations of its wholly-owned  subsidiary SMC. SMC's shut down
has been  accounted for as a  discontinued  operation,  and  accordingly,  SMC's
operations are segregated in the Company's  consolidated  financial  statements.
Sales,  cost  of  sales  and  selling,   general  and  administrative   expenses
attributable  to SMC for  Fiscal  Year  1996 and  Fiscal  Year  1995  have  been
reclassified to discontinued operations.


                                       14

<PAGE>



         Printing.  In recent  years,  the  Company  has taken a number of steps
which have resulted in improved printing sector performance including the hiring
of several key managers in the  manufacturing,  purchasing,  quality,  technical
services,  production planning and customer service departments (see "EBITDA" at
page 24).  Comprehensive  quality  improvement and cost reduction  programs have
also been implemented for all the Company's printing  processes.  As a result of
these measures,  the Company has been  successful in lowering its  manufacturing
costs within the printing sector, while improving product quality.

         Additionally,  in order to grow sales and improve  gross  margins,  the
Company increased the size, and geographic and industry scope of its sales force
and shifted the mix of its business  toward  retail  customers and away from the
printing  of certain  lower  margin  publications.  The  Shakopee  Merger,  Gowe
Acquisition and Flexi-Tech operations (see "Business - Printing") are consistent
with the Company's  overall  strategy to continue to increase  profitability  by
growing its revenues, increasing its market share and reducing costs.

         Commercial  Printing in the United  States is highly  competitive.  The
significant   capital  required  to  keep  pace  with  changing  technology  and
competitive  pricing  trends  has led to a trend of  industry  consolidation  in
recent years. In addition,  customers'  preference for larger printers,  such as
the Company, with a wider variety of services, greater distribution capabilities
and more flexibility have also contributed to consolidation within the industry.
The  industry  is  expected  to remain  competitive  in the near  future and the
Company's sales will continue to be subject to changes in retailers' demands for
printed products.

         The  cost of paper  is a  principal  factor  in the  Company's  overall
pricing to its customers. The level of paper costs also has a significant impact
on the Company's  reported  sales.  Beginning in Fiscal Year 1994 and throughout
Fiscal  Year 1995 and the  majority  of Fiscal  Year  1996,  the paper  industry
experienced  increased demand and high capacity utilization in various grades of
paper. This led to a global tightening of the paper supply, and as a result, the
printing  industry  experienced  substantial  increases in the cost of paper. In
late Fiscal Year 1996 and throughout Fiscal Year 1997, the overall cost of paper
declined.  In accordance with industry  practice,  the Company  generally passes
through  increases to its  customers in the cost of its printed  products  while
decreases in costs generally  result in lower prices to customers.  Although the
Company has been  successful  in passing  through  paper price  increases to its
customers in the past,  significant  increases  in paper  prices and  continuing
price  competition  resulted in pressure by certain  customers to reduce selling
prices and to reduce  sizes/pages  in order to mitigate  the effect of increased
paper costs during these periods.  In addition,  there can be no assurances that
the Company will be able to pass through future paper price increases.

         American Color. The digital imaging and prepress  services industry has
experienced  significant  technological  advances as electronic digital prepress
systems have replaced the largely manual and photography-based  methods utilized
in the past. This shift in technology  (which improved process  efficiencies and
decreased processing costs) produced increased unit growth for American Color as
the demand for color pages  increased.  However,  American Color's selling price
levels per page have declined  because of greater  efficiencies  resulting  from
increased use of technology.  American Color's revenue from traditional services
are now supplemented by new revenue sources from electronic  digital imaging and
prepress  services  such  as  digital  image  storage,   facilities  management,
telecommunications, design and layout, consulting and training services.

         In April 1995,  the Company  implemented a plan for its American  Color
division which was designed to improve  productivity,  increase customer service
and responsiveness,  and provide increased growth in this business.  The cost of
this plan was  accounted  for in  accordance  with the  guidelines  set forth in
Emerging  Issues  Task  Force  Issue 94-3  "Liability  Recognition  for  Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain Costs Incurred in a  Restructuring)"  ("EITF 94-3") (see  "Restructuring
Costs and Other Special Charges" below).

                                       15

<PAGE>



         The following  table  summarizes  the Company's  historical  results of
continuing operations for Fiscal Year 1997, 1996 and 1995.

                                            Fiscal Year Ended March 31,
                                        ----------------------------------
                                        1997           1996           1995
                                        ----           ----           ----
                                              (dollars in thousands)
Sales:
        Printing                     $ 449,924       $ 453,381     $ 353,123
        American Color                  74,627          72,461        76,070
        Other (a)                         --             3,681         4,005
                                     ---------       ---------     ---------
           Total                     $ 524,551       $ 529,523     $ 433,198
                                     =========       =========     =========

Gross Profit:
        Printing                     $  49,469       $  49,015     $  43,212
        American Color                  15,133          13,687        17,936
        Other (a)                           69           1,711         1,783
                                     ---------       ---------     ---------
           Total                     $  64,671       $  64,413     $  62,931
                                     =========       =========     =========

Gross Margin:
        Printing                          11.0%           10.8%         12.2%
        American Color                    20.3%           18.9%         23.6%
           Total                          12.3%           12.2%         14.5%

Operating Income (Loss):
        Printing (b)                 $  25,858       $  28,239     $  24,683
        American Color (b) (c)          (1,576)         (3,975)        7,855
        Other (a) (d)                  (13,910)(f)     (11,548)       (8,088)(e)
                                     ---------       ---------     ---------
           Total                     $  10,372       $  12,716     $  24,450
                                     =========       =========     =========

----------
(a)     Other  operations  in Fiscal  Year  1996 and  Fiscal  Year 1995  include
        revenues  and  expenses   associated   with  the   Company's  51%  owned
        subsidiary,  NIS (sold on March 11,  1996,  see note 4 to the  Company's
        consolidated financial statements).
(b)     Printing  operating  income  includes  the impact of $0.4 million and $2
        million in Fiscal  Year 1997 and 1996,  respectively,  of other  special
        charges  related to fixed asset  write-offs  and  write-downs.  American
        Color's  operating  loss  includes  the impact of $1.5  million and $1.4
        million in Fiscal  Year 1997 and 1996,  respectively,  of other  special
        charges related to fixed asset  write-offs and write-downs  (see note 18
        to the Company's consolidated financial statements).
(c)     Includes  the impact of  restructuring  costs of $0.9  million in Fiscal
        Year  1997 and $4.1  million  in  Fiscal  Year  1996 (see note 18 to the
        Company's consolidated financial statements).
(d)     Also includes  corporate selling,  general and administrative  expenses,
        and amortization expense.
(e)     Includes  the net gain of $3.3  million  in  Fiscal  Year  1995 from the
        curtailment  and  establishment  of defined  benefit  pension plans (see
        discussion below).
(f)     Also  reflects  non-recurring  employee  termination  expenses  of  $2.5
        million  in Fiscal  Year 1997  (including  $1.9  million  related to the
        resignation of the Company's Chief Executive  Officer-see note 20 to the
        Company's consolidated financial statements).


                                       16

<PAGE>



Historical Results of Operations

                      Fiscal Year 1997 vs. Fiscal Year 1996

         The Company's  sales  decreased  0.9% to $524.6  million in Fiscal Year
1997 from $529.5 million in Fiscal Year 1996. This decrease  includes a decrease
in printing sales of $3.5 million,  or 0.8%, an increase in American Color sales
of $2.2  million,  or 3%,  and a $3.7  million  decrease  in  other  sales.  The
Company's  gross profit  increased to $64.7  million or 12.3% of sales in Fiscal
Year  1997  from  $64.4  million  or 12.2% of sales in  Fiscal  Year  1996.  The
Company's  operating  income decreased to $10.4 million or 2% of sales in Fiscal
Year 1997 from  $12.7  million  or 2.4% of sales in Fiscal  Year  1996.  See the
discussion of these changes by sector below.

Printing

         Sales.  Printing sales  decreased to $449.9 million in Fiscal Year 1997
from $453.4  million in Fiscal Year 1996.  This decrease  includes a decrease in
paper  prices and the effect of an increase in customer  supplied  paper.  These
decreases were partially offset by $46.2 million of incremental  sales from Gowe
and  Flexi-Tech  and an  increase  in  production  volume  of  approximately  3%
(excluding Gowe and Flexi-Tech).

         Gross Profit. Printing gross profit increased $0.5 million, or 0.9%, to
$49.5 million in Fiscal Year 1997 from $49 million in Fiscal Year 1996. Printing
gross  margin  increased  to 11% in Fiscal  Year 1997 from 10.8% in Fiscal  Year
1996. The increase in gross profit primarily  reflects  incremental gross profit
from Gowe and an increase in production  volume.  In addition,  the gross profit
improvement includes reduced variable production and certain other manufacturing
costs due to continued cost containment  programs at the printing plants.  These
gains were partially offset by an increase in depreciation  expense, a reduction
in the price of scrap paper and  incremental  costs  related to the  start-up of
Flexi-Tech.  The  increase  in  gross  margin  as a  percentage  of sales is due
primarily  to the  impact of the above  described  items and the impact of lower
paper prices on sales in Fiscal Year 1997.

         Selling, General and Administrative Expenses. Printing selling, general
and  administrative  expenses  increased  23.2%  to  $23.1  million,  or 5.1% of
printing  sales,  in Fiscal  Year 1997 from $18.8  million,  or 4.1% of printing
sales,  in Fiscal Year 1996.  The increase in Fiscal Year 1997 was primarily the
result of  increased  sales and  marketing  expenses  and  incremental  selling,
general and administrative costs at Gowe and Flexi-Tech.

         Operating  Income.  As a result of the above factors and the incurrence
of other special  charges  related to fixed asset  write-offs and write-downs of
$0.4  million  and $2 million in Fiscal  Year 1997 and 1996,  respectively  (see
"Restructuring  Costs and Other Special Charges"  below),  operating income from
the printing business  decreased to $25.9 million in Fiscal Year 1997 from $28.2
million in Fiscal Year 1996.

American Color

         Sales.  American  Color's sales increased 3% to $74.6 million in Fiscal
Year 1997 from $72.5  million in Fiscal Year 1996.  The  increase in Fiscal Year
1997 was primarily the result of higher digital imaging and prepress  production
volume  due to  American  Color's  implementation  of various  digital  prepress
technologies,  including facilities management and software and image management
services and increases in digital visual effects work partially  offset by lower
equipment sales.

         Gross Profit.  American  Color's gross profit increased $1.4 million to
$15.1  million  in Fiscal  Year 1997 from  $13.7  million  in Fiscal  Year 1996.
American  Color's  gross margin was 20.3% in Fiscal Year 1997,  up from 18.9% in
Fiscal Year 1996.  These increases were primarily the result of increased volume
and material  cost savings  offset in part by  increased  facilities  management
costs.


                                       17

<PAGE>



         Selling, General and Administrative Expenses. American Color's selling,
general and  administrative  expenses increased 18% to $14.3 million or 19.2% of
American Color sales in Fiscal Year 1997 from $12.1 million or 16.7% of American
Color sales in Fiscal Year 1996,  primarily as a result of the addition of sales
and  marketing  and  administrative  support  personnel  and  related  expenses,
including expenses related to its digital visual effects group.

         Operating Loss. As a result of the above factors and the  restructuring
costs associated with the American Color  restructuring  plan of $0.9 million in
Fiscal  Year 1997 and $4.1  million in Fiscal  Year 1996 and the  incurrence  of
other special charges related to fixed asset  write-offs and write-downs of $1.5
million  and $1.4  million  in  Fiscal  Year 1997 and  1996,  respectively  (see
"Restructuring  Costs and  Other  Special  Charges"  below),  operating  loss at
American Color  decreased to $1.6 million in Fiscal Year 1997 from $4 million in
Fiscal Year 1996.

                      Fiscal Year 1996 vs. Fiscal Year 1995

         The Company's sales increased $96.3 million to $529.5 million in Fiscal
Year 1996 from $433.2  million in Fiscal Year 1995,  reflecting a $100.3 million
increase in printing sales, a $3.6 million  decrease in American Color sales and
a $0.3 million  decrease in other sales. The Company's gross profit increased to
$64.4  million or 12.2% of sales in Fiscal Year 1996 from $62.9 million or 14.5%
of sales in Fiscal Year 1995. The Company's  operating income decreased to $12.7
million or 2.4% of sales in Fiscal Year 1996 from $24.5 million or 5.6% of sales
in Fiscal Year 1995. See the discussion of these changes by sector below.

Printing

         Sales.  Printing  sales  increased  $100.3 million to $453.4 million in
Fiscal Year 1996 from $353.1 million in Fiscal Year 1995. This increase includes
$53.8 million of increased sales by Shakopee. In addition, the increase in sales
includes the impact of increased  paper prices and a slight  increase in overall
production volume (excluding Shakopee). These increases were partially offset by
an increase in sales to customers  that supply their own paper and the impact of
continued competitive pricing pressure. Production volume is primarily dependent
on economic  activity in general and the level of  advertising  by  retailers in
particular.  In the last  quarter of Fiscal Year 1996,  the Company  experienced
lower than expected  production  volume and a higher level of price  competition
than anticipated as a result of a weak retail environment in the last quarter of
calendar year 1995.

         Gross  Profit.  Printing  gross  profit  increased  $5.8 million to $49
million in Fiscal  Year 1996 from $43.2  million in Fiscal  Year 1995.  Printing
gross  margin  decreased  to 10.8% in Fiscal Year 1996 from 12.2% in Fiscal Year
1995. The increase in gross profit primarily  reflects  incremental gross profit
from  Shakopee.  In addition,  the gross  profit  improvement  includes  reduced
variable  production and certain other manufacturing costs due to continued cost
containment  programs at the printing plants.  These gains were partially offset
by continued  competitive  pricing  pressure.  The decrease in gross margin as a
percentage of sales is due primarily to the impact of increased paper prices.

         Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses increased to $18.8 million or 4.1% of printing sales
in Fiscal Year 1996 from $18.5 million or 5.2% of printing  sales in Fiscal Year
1995.  This  increase  includes  incremental  Shakopee  expenses and  additional
administrative  support  expenses  offset  in part  by a  reduction  in  certain
employee related costs.

         Operating Income.  As a result of these factors,  and the incurrence of
other special  charges  related to fixed asset  write-offs and write-downs of $2
million in Fiscal Year 1996 (see "Restructuring Costs and Other Special Charges"
below),  operating income from the printing business  increased to $28.2 million
in Fiscal Year 1996 from $24.7 million in Fiscal Year 1995.



                                       18

<PAGE>



American Color

         Sales.  American  Color's sales decreased $3.6 million to $72.5 million
in Fiscal  Year 1996 from $76.1  million in Fiscal  Year 1995.  The  decrease is
primarily the result of decreased  selling prices and lower prepress  production
volume due in part to American Color's  restructuring efforts during Fiscal Year
1996 (see note 18 to the Company's consolidated financial statements).

         Gross Profit.  American  Color's gross profit decreased $4.2 million to
$13.7  million  in Fiscal  Year 1996 from  $17.9  million  in Fiscal  Year 1995.
American  Color's gross margin decreased to 18.9% in Fiscal Year 1996 from 23.6%
in Fiscal  Year 1995.  These  decreases  in Fiscal Year 1996 are  primarily  the
result of decreases in both prepress  production  volume and selling prices,  as
well as increased depreciation expense.

         Selling, General and Administrative Expenses. American Color's selling,
general  and  administrative  expenses  increased  to $12.1  million or 16.7% of
American  Color's  sales in  Fiscal  Year 1996 from  $10.1  million  or 13.3% of
American  Color's  sales in Fiscal Year 1995.  These  increases  are a result of
increased  sales and marketing  expenses and additional  administrative  support
personnel.

         Operating  Income  (Loss).  As  a  result  of  these  factors  and  the
incurrence of $4.1 million of restructuring  costs related primarily to employee
termination and other expenses  associated with the American Color restructuring
plan and other  special  charges  related  to fixed  asset  write-downs  of $1.4
million (see "Restructuring  Costs and Other Special Charges" below),  operating
income at American  Color  decreased to a loss of $4 million in Fiscal Year 1996
from income of $7.9 million in Fiscal Year 1995.

Other Operations (Fiscal Year 1997 vs. Fiscal Year 1996 and Fiscal Year 1996
                 vs. Fiscal Year 1995)

         Other operations consist primarily of revenues and expenses  associated
with the Company's 51% owned subsidiary, NIS (sold on March 11, 1996), corporate
selling,  general and administrative  expenses,  other expenses and amortization
expense.   Amortization  expenses  for  other  operations,   including  goodwill
amortization  (see below),  were $8.4 million,  $8.7 million and $8.4 million in
Fiscal Year 1997, 1996 and 1995, respectively.

         Operating losses from other operations increased $2.4 million to a loss
of $13.9 million in Fiscal Year 1997 from a loss of $11.5 million in Fiscal Year
1996.  This  increase  primarily  reflects  non-recurring  employee  termination
expenses of $2.5 million in Fiscal Year 1997  (including $1.9 million related to
the resignation of the Company's  Chief  Executive  Officer - see note 20 to the
Company's consolidated financial statements).

         Operating losses from other operations increased $3.4 million to a loss
of $11.5  million in Fiscal Year 1996 from a loss of $8.1 million in Fiscal Year
1995. The primary  reasons for this change include the recognition of a net gain
of $3.3  million  recorded  in Fiscal Year 1995  resulting  from a change in the
Company's  defined benefit pension plans (see discussion  below),  and increased
amortization expenses.

Goodwill Amortization

         Amortization  expense  associated with goodwill was $8.3 million,  $8.6
million and $8.4 million for Fiscal Year 1997, 1996 and 1995, respectively.

Restructuring Costs and Other Special Charges

         In April 1995,  the Company  implemented a plan for its American  Color
division which was designed to improve  productivity,  increase customer service
and  responsiveness,  and provide  increased  growth in the digital  imaging and
prepress  services  business.  The  cost  of  this  plan  was  accounted  for in
accordance  with the  guidance  set forth in EITF 94-3.  The pretax  costs of $5
million  which  were  incurred  as  a  part  of  this  plan  represent  employee
termination, goodwill write-down and other related costs that were incurred as a
direct result of the plan.  Approximately  $0.9 million of  restructuring  costs
primarily related to relocation expenses were recognized in Fiscal Year 1997. In
Fiscal  Year 1996 the  Company  recognized  $4.1  million of such  restructuring
charges,  which included $0.9 million of goodwill  write-down,  and $3.2 million
primarily for severance and other personnel  related costs. The goodwill written
down was the portion related to certain facilities that were either shut down or
relocated in conjunction with the American Color restructuring.

                                       19

<PAGE>



         During  Fiscal  Year 1997 and Fiscal Year 1996,  the  Company  recorded
special  charges  totaling  $1.9  million and $3.4  million,  respectively,  for
impaired  long-lived assets and to adjust the carrying values of idle,  disposed
and under performing assets to estimated fair values.  The provisions were based
on a review of long-lived  assets in  connection  with the adoption of Financial
Accounting  Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived  Assets and for Long-Lived Assets to be Disposed Of" ("FASB 121"). Of
the Fiscal  Year 1997 total of  long-lived  assets that were  adjusted  based on
being idle, disposed of or under performing, approximately $0.4 million and $1.5
million  related to the print and American  Color  sectors,  respectively.  Fair
value was based on the Company's estimate of held and used and idle assets based
on current market conditions using the best information available. Approximately
$2 million of the Fiscal Year 1996 total related to the print sectors long-lived
assets that were adjusted based on being idle,  disposed of or under performing.
The remaining $1.4 million of the Fiscal Year 1996 total related to the American
Color  sector.  The estimated  undiscounted  future cash flows  attributable  to
certain American Color division identifiable long-lived assets held and used was
less than their carrying value principally as a result of high levels of ongoing
technological  change.  The methodology used to assess the recoverability of the
American  Color sector  long-lived  assets  involved  projecting  aggregate cash
flows. Based on this evaluation, the Company determined in Fiscal Year 1996 that
long-lived assets with a carrying amount of $2.2 million were impaired and wrote
them down by $1.4  million to their fair value.  Fair value was based on Company
estimates and appraisals.  Such special charges are classified as  restructuring
costs and other special charges in the consolidated statement of operations.

Changes in Defined Benefit Pension Plans, Net

         In October  1994,  the Board of Directors  approved an amendment to the
Company's  defined  benefit  pension  plans which  resulted  in the  freezing of
additional  defined  benefits  for  future  services  under the plans  effective
January 1, 1995. The Company  recognized a curtailment gain of $3.7 million as a
result of freezing such benefits.

         Also in October 1994, the Board of Directors approved a new SERP, which
is a defined benefit plan, for certain key executives.  The Company recognized a
$0.4 million expense associated with the establishment of the SERP.

         The net effect of the above,  a $3.3 million  gain, is reflected in the
Company's consolidated statement of operations for Fiscal Year 1995.

Interest Expense

         Interest  expense  increased  11% to $36.3  million in Fiscal Year 1997
from $32.7  million in Fiscal Year 1996.  This  increase  includes the impact of
increased  average  indebtedness  levels including  indebtedness  related to the
Transactions and obligations  under capital leases.  Interest expense  increased
26.9% to $32.7  million in Fiscal  Year 1996 from $25.8  million in Fiscal  Year
1995.  This increase  includes the impact of increased  indebtedness  levels and
increases in prevailing  market  interest  rates  associated  with the Company's
floating  rate  debt.  The  increased   indebtedness   includes  the  additional
indebtedness  related to the Shakopee Merger and  indebtedness  incurred to fund
the fees and expenses  associated with the Refinancing (see notes 2 and 9 to the
Company's consolidated financial statements).

Nonrecurring Charges Related to Terminated Merger

         The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.


                                       20

<PAGE>



Other Expense (Income) and Taxes

         Other expense,  net, remained  relatively  unchanged at $0.2 million in
both Fiscal Year 1997 and Fiscal Year 1996.  Other  expense,  net,  decreased to
$0.2  million  in Fiscal  Year 1996 from $1 million  in Fiscal  Year 1995.  This
decrease  includes a $1.3  million  net gain  realized  on the  disposal  of the
Company's  51% interest in NIS in Fiscal Year 1996 (see note 4 to the  Company's
consolidated  financial  statements),  offset  in part by  incremental  expenses
associated with an employee benefit program also recorded in Fiscal Year 1996.

         Income tax expense  decreased  to $2.6 million in Fiscal Year 1997 from
$4.9  million  in Fiscal  Year 1996.  This  change is  primarily  due to smaller
amounts of taxable income in foreign jurisdictions,  the Shakopee Merger and the
sale of NIS,  partially  offset by an increase  in the  deferred  tax  valuation
allowance.  During  Fiscal  Year  1997,  the  Company  increased  its  valuation
allowance  by $8.9  million to $30.1  million.  The  increase  in the  valuation
allowance  during  Fiscal Year 1997  resulted  primarily  from the loss incurred
during this period for which a tax benefit will not be recorded.

         Income tax expense  increased  to $4.9 million in Fiscal Year 1996 from
$2.6 million in Fiscal Year 1995. This change is primarily due to larger amounts
of taxable  income in foreign  jurisdictions  and the  inclusion  of Shakopee in
Fiscal Year 1996.  During Fiscal Year 1996, the Company  increased its valuation
allowance  by $7.4  million to $21.2  million.  The  increase  in the  valuation
allowance  during  Fiscal Year 1996  resulted  primarily  from the loss incurred
during this period for which a tax benefit will not be recorded.

Discontinued Operations

Sullivan Media Corporation

         The Company's net loss in Fiscal Year 1997, Fiscal Year 1996 and Fiscal
Year 1995  includes the loss from  operations of its  discontinued  wholly-owned
subsidiary  SMC of  approximately  $1.6 million,  $1.4 million and $0.9 million,
respectively.  The  Company's  Fiscal  Year  1997 net  loss  also  includes  the
estimated net loss on shut down of approximately $1.5 million. See note 5 to the
Company's consolidated financial statements.

SMI Settlement

         On June 29, 1994,  Graphics and SMI settled the lawsuit they  initiated
in federal court against Valassis  Communications,  Inc., News America and David
Brandon.  The Company  recorded  income from the SMI Settlement of $18.5 million
net of taxes in Fiscal Year 1995 and when coupled with settlement expenses which
had  previously  been  accrued,  the  net  cash  proceeds  resulting  from  this
settlement were  approximately  $16.7 million.  Proceeds received were primarily
used in July  1994 to reduce  borrowings  under the  Company's  old bank  credit
agreement which primarily related to SMI losses prior to the shut down.

         In Fiscal  Year 1996,  the  Company  recognized  settlement  of the EPI
lawsuit and reversed certain accruals related to the estimated loss on shut down
of SMI. The  resulting  effect  reflected  in the Fiscal Year 1996  consolidated
statement of operations was $2.9 million income in discontinued operations.

Loss on Early Extinguishment of Debt, Net of Tax

         As part of the Shakopee  Merger and the Refinancing in Fiscal Year 1996
(see notes 2 and 9 to the  Company's  consolidated  financial  statements),  the
Company recorded an extraordinary  loss related to early  extinguishment of debt
of $4.5 million,  net of zero taxes. This extraordinary loss primarily consisted
of the early  redemption  premium on the 15% Notes and the write-off of deferred
financing  costs  related to  refinanced  indebtedness  partially  offset by the
write-off of a bond premium associated with the 15% Notes.




                                       21

<PAGE>



Net Income (Loss)

         As a result of the factors  discussed  above,  the  Company's  net loss
increased  to a loss of $31.7  million in Fiscal  Year 1997 from a loss of $29.3
million in Fiscal Year 1996. As discussed above,  Fiscal Year 1997 includes $0.9
million of expense related to the American Color restructuring,  $1.9 million of
other special charges related to fixed asset  write-offs and  write-downs,  $2.5
million of non-recurring  employee termination expenses and approximately a $3.1
million loss from discontinued operations related to SMC. The Company's net loss
was $29.3  million in Fiscal  Year 1996 and its net income was $13.2  million in
Fiscal Year 1995. As discussed above,  Fiscal Year 1996 includes $4.1 million of
expense  related to the  American  Color  restructuring,  $3.4  million of other
special  charges  related to fixed  asset  write-offs  and  write-downs,  a $1.5
million  non-recurring  expense  associated  with a  terminated  merger,  a $4.5
million  extraordinary  loss on early  extinguishment  of debt and approximately
$2.9  million of income and a $1.4  million  loss from  discontinued  operations
related to SMI and SMC,  respectively.  The Company's net income for Fiscal Year
1995  includes a $3.3 million gain from the  curtailment  and  establishment  of
defined benefit pension plans, net and approximately $18.5 million of income and
a $0.9 million loss from discontinued operations of SMI and SMC, respectively.

Liquidity and Capital Resources

         In  August  1995,  the  Company  refinanced  substantially  all  of its
existing  indebtedness  (see  note 9 to  the  Company's  consolidated  financial
statements).  The primary  objectives  of the  Refinancing  were to gain greater
financial and operating flexibility,  to facilitate the merger with Shakopee, to
refinance near-term debt service requirements and to provide further opportunity
for internal growth and growth through acquisitions.

         As part of the Refinancing, the Company received gross proceeds of $185
million  from the  sale of 12 3/4%  Senior  Subordinated  Notes  Due  2005  (the
"Notes").  The gross proceeds of the offering of the Notes,  together with $85.6
million  in  borrowings  under the Bank  Credit  Agreement,  and  existing  cash
balances  were used (i) to redeem all $100 million  principal  amount of the 15%
Notes at a  redemption  price of $105.6  million  (plus $1.8  million of accrued
interest to September 15, 1995, the redemption  date),  (ii) to repay all $126.5
million of indebtedness  outstanding  under Graphics' old bank credit  agreement
(plus $2.3 million of accrued  interest at the repayment  date),  (iii) to repay
all $24.6  million of  indebtedness  assumed in the  Shakopee  Merger (plus $0.1
million  of  accrued   interest  at  the  repayment   date)  and  (iv)  to  fund
approximately $11.8 million of fees and expenses incurred in connection with the
Transactions.

         The Bank Credit  Agreement  includes a revolving  credit facility which
matures on September 30, 2000 (the "Revolving Credit Facility")  providing for a
maximum of $75 million of borrowing  availability,  subject to a borrowing  base
requirement.  As of May 31, 1997,  the Company had  borrowings  of $38.2 million
outstanding  under the Revolving Credit Facility and $12.3 million of additional
borrowing availability. On June 30, 1997, the Company entered into a $25 million
term loan facility  which  matures on March 31, 2001 (the "Term Loan  Facility")
(see note 9 to the Company's consolidated  financial  statements).  Net proceeds
received  under this  facility  of $23 million  were used to reduce  outstanding
borrowings under the Revolving Credit Facility. Based upon activity through June
27, 1997 and after  giving pro forma  effect to receipt and  application  of the
above $23 million Term Loan  Facility net proceeds,  the Company had  additional
borrowing  availability  under the Revolving  Credit Facility  of  approximately
$25.8 million at June 27, 1997.

         The Bank Credit  Agreement  also provides for a $60 million  amortizing
term loan with a final maturity on September 30, 2000 (the "Term Loan").  At May
31, 1997,  $47.1 million of the Term Loan was  outstanding.  Scheduled Term Loan
payments due over the upcoming  fiscal year ending March 31, 1998  ("Fiscal Year
1998")  approximate $10.6 million.  Capital lease obligation  repayments will be
approximately $6.4 million in Fiscal Year 1998.

         In  Fiscal  Year  1997,  net cash  from  operating  activities  and net
borrowings under the Revolving Credit Facility (see the consolidated  statements
of cash flows) were used to pay $13.6 million in scheduled principal payments on
indebtedness  (including capital lease  obligations).  Additionally,  these cash
sources  were  used  to  fund  the  Company's  Fiscal  Year  1997  cash  capital
expenditures of $10.8 million and meet additional  investing and financing needs
of $1.1  million.  The Company  plans to continue its program of  upgrading  its
printing and prepress equipment and expanding  production capacity and currently
anticipates  that Fiscal Year 1998 cash capital  expenditures  will  approximate
$11.1 million and equipment acquired under capital leases will approximate $14.6
million  during Fiscal Year 1998. The Company had zero cash on hand at March 31,
1997 due to a  requirement  under the Bank Credit  Agreement  that the Company's
daily available funds be used to reduce  borrowings  under the Revolving  Credit
Facility.

                                       22

<PAGE>



         At March 31, 1997,  the Company had total  indebtedness  outstanding of
$312.3  million,  including  capital  lease  obligations.   Of  the  total  debt
outstanding  at March 31, 1997,  $87.8  million was  outstanding  under the Bank
Credit  Agreement at a weighted  average  interest  rate of 8.45%.  Indebtedness
under the Bank Credit  Agreement bears interest at floating  rates,  causing the
Company to be sensitive to prevailing  interest  rates.  At March 31, 1997,  the
Company had indebtedness  other than obligations under the Bank Credit Agreement
of $224.5 million  (including $185 million of the Notes). In connection with the
Term Loan  Facility,  the Company  obtained  amendments  with respect to certain
financial  covenants and an amendment  that decreased the Borrowing Base through
March 31, 1998,  in the Bank Credit  Agreement  and after giving  effect to such
amendments,  the Company is currently in compliance with all financial covenants
set forth in the Bank Credit Agreement,  as amended. See note 9 to the Company's
consolidated financial statements.




                                       23

<PAGE>



EBITDA
                                            Fiscal Year Ended March 31,
                                     -------------------------------------
                                     1997              1996           1995
                                     ----              ----           ----
EBITDA:                                       (dollars in thousands)

Printing                           $ 46,755          $ 46,597        $ 38,357
American Color(a)                     5,770             2,907          12,662
Other (b) (c)                        (5,553)(e)        (2,657)            700(d)
                                   --------          --------        --------
     Total                         $ 46,972          $ 46,847        $ 51,719
                                   ========          ========        ========

EBITDA Margin:
Printing                               10.4%             10.3%           10.9%
American Color                          7.7%              4.0%           16.6%
     Total                              9.0%              8.8%           11.9%


----------
(a)      American Color EBITDA for Fiscal Year 1997 and 1996 includes the impact
         of restructuring  costs of $0.9 million and $4.1 million,  respectively
         (see note 18 to the Company's  consolidated  financial  statements  and
         discussion above).
(b)      Other  operations  in Fiscal  Year 1996 and  Fiscal  Year 1995  include
         revenues  and  expenses   associated   with  the  Company's  51%  owned
         subsidiary,  NIS (sold on March 11, 1996;  see note 4 to the  Company's
         consolidated financial statements).
(c)      Also includes corporate selling, general and administrative expenses.
(d)      Includes  a net gain of $3.3  million  in  Fiscal  Year  1995  from the
         curtailment  and  establishment  of defined  benefit pension plans (see
         discussion above).
(e)      Also  reflects  non-recurring  employee  termination  expenses  of $2.5
         million in Fiscal  Year 1997  (including  $1.9  million  related to the
         resignation of the Company's Chief  Executive  Officer - see note 20 to
         the Company's consolidated financial statements).

         EBITDA is presented  and  discussed  because  management  believes that
investors  regard EBITDA as a key measure of a leveraged  company's  performance
and ability to meet its future debt service  requirements.  EBITDA is defined as
earnings   before  net   interest   expense,   income  tax  expense   (benefit),
depreciation,  amortization,  other special charges related to asset  write-offs
and   write-downs,   other  income   (expense),   discontinued   operations  and
extraordinary items. "EBITDA Margin" is defined as EBITDA as a percentage of net
sales. EBITDA is not a measure of financial performance under generally accepted
accounting  principles and should not be considered an alternative to net income
(or any  other  measure  of  performance  under  generally  accepted  accounting
principles)  as a  measure  of  performance  or to cash  flows  from  operating,
investing or financing  activities as an indicator of cash flows or as a measure
of liquidity.  Certain  covenants in the Indenture and the Bank Credit Agreement
are based on EBITDA, subject to certain adjustments.

         Printing.  As a  result  of  the  reasons  previously  described  under
"--Printing"  (excluding the increase in depreciation expense),  printing EBITDA
increased to $46.8 million in Fiscal Year 1997 from $46.6 million in Fiscal Year
1996,  representing an increase of $0.2 million.  The Company's  printing sector
EBITDA  increased  to $46.6  million in Fiscal  Year 1996 from $38.4  million in
Fiscal Year 1995,  representing  an increase of $8.2  million.  Printing  EBITDA
Margin increased to 10.4% in Fiscal Year 1997 from 10.3% in Fiscal Year 1996 and
decreased to 10.3% in Fiscal Year 1996 from 10.9% in Fiscal Year 1995.

         American Color. As a result of the reasons  previously  described under
"--American  Color," American Color's EBITDA increased to $5.8 million in Fiscal
Year 1997 from $2.9  million in Fiscal  Year 1996,  representing  an increase of
$2.9  million.  EBITDA  Margin  increased to 7.7% in Fiscal Year 1997 from 4% in
Fiscal Year 1996. American Color EBITDA decreased to $2.9 million in Fiscal Year
1996 from $12.7  million in Fiscal Year 1995,  representing  a reduction of $9.8
million.  EBITDA Margin decreased to 4% in Fiscal Year 1996 from 16.6% in Fiscal
Year 1995.  Included in the Fiscal  Year 1996  EBITDA and EBITDA  Margin is $4.1
million of restructuring  costs related to the American Color restructuring plan
(see discussion above).


                                       24

<PAGE>



         Other Operations. As a result of the reasons previously described under
"--Other  Operations,"   excluding  changes  in  amortization   expense,   other
operations  negative  EBITDA  increased  to negative  EBITDA of $5.6  million in
Fiscal  Year 1997 from  negative  EBITDA of $2.7  million  in Fiscal  Year 1996.
EBITDA from other  operations  decreased to a negative EBITDA of $2.7 million in
Fiscal  Year 1996 from  EBITDA of $0.7  million in Fiscal  Year  1995.  Negative
EBITDA for  Fiscal  Year 1997  includes  the  impact of  non-recurring  employee
termination  expenses of $2.5 million  (including  $1.9  million  related to the
resignation  of the  Company's  Chief  Executive  Officer  - see  note 20 to the
Company's  consolidated  financial  statements).  EBITDA  in  Fiscal  Year  1995
includes  the net gain of $3.3  million  relating  to a change in the  Company's
defined benefit plans (see discussion above).

Amortization of Goodwill

         The goodwill is amortized on a straight-line  basis by business sector.
Goodwill amortization expense will be approximately $8.4 million for Fiscal Year
1998 and approximately $2.3 million annually thereafter.

Impact of Inflation

         Generally,  the  Company  believes  it has  been  able  to  pass  along
increases  in its  costs to its  customers  (primarily  paper  and ink)  through
increased prices of its printed products. Throughout the majority of Fiscal Year
1996, the printing  industry  experienced  substantial  increases in the cost of
paper.  In late Fiscal Year 1996,  however,  the overall  cost of paper began to
decline and that  decline  continued  throughout  Fiscal  Year 1997.  Management
expects that as a result of the Company's strong relationship with key suppliers
that its material costs will remain competitive within the industry.

Seasonality

         Some  of the  Company's  printing  and  digital  imaging  and  prepress
services  business is seasonal in nature,  particularly  those revenues  derived
from  advertising  inserts.  Generally,  the  Company's  sales from  advertising
inserts are highest during periods prior to the following  advertising  periods:
Spring  advertising  season  (March 15 -- May 15);  Back-to-  School (July 15 --
August 15); and  Thanksgiving/Christmas  (October 15 -- December 15). One of the
reasons the Company chose to enter the comic book printing  market is that it is
not subject to  significant  seasonal  fluctuations.  Sales of Sunday comics and
magazine products are also not subject to significant seasonal fluctuations. The
Company's  strategy  has been and will  continue  to be to try to  mitigate  the
seasonality  of its printing  business by increasing  its sales to food and drug
companies whose own sales are less seasonal.

Environmental

         Environmental  expenditures  that  relate  to  current  operations  are
expensed or capitalized as appropriate.  Expenditures that relate to an existing
condition  caused by past  operations  and which do not contribute to current or
future period revenue  generation are expensed.  Environmental  liabilities  are
recorded when  assessments  and/or remedial efforts are probable and the related
costs can be reasonably estimated.

         The Company believes that environmental  liabilities,  currently and in
the prior periods discussed herein,  are not material.  The Company has recorded
an  environmental  reserve of  approximately  $0.1 million in connection  with a
Superfund site in its consolidated  statement of financial position at March 31,
1997  which the  Company  believes  to be  adequate.  See "Legal  Proceedings  -
Environmental  Matters."  The Company does not  anticipate  receiving  insurance
proceeds related to this potential  settlement.  Management does not expect that
any identified matters,  individually or in the aggregate,  will have a material
adverse effect on the consolidated  financial  position or results of operations
of the Company.

Accounting

         There are no pending accounting  pronouncements that, when adopted, are
expected to have a material effect in the Company's results of operations or its
financial position.


                                       25

<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

                                                                                                      Page No.
                                                                                                      --------

The following consolidated financial statements of Sullivan Communications, Inc.
are included in this report:

<S>                                                                                                       <C>
Report of Independent Auditors........................................................................... 27
Consolidated balance sheets - March 31, 1997 and  1996................................................... 28
For the Years Ended March 31, 1997, 1996 and 1995:
         Consolidated statements of operations........................................................... 30
         Consolidated statements of stockholders' deficit................................................ 31
         Consolidated statements of cash flows........................................................... 32
Notes to Consolidated Financial Statements............................................................... 34
</TABLE>

         The following  consolidated  financial  statement schedules of Sullivan
Communications, Inc. are included in Part IV, Item 14:

          I.     Condensed Financial Information of Registrant
                 Condensed Consolidated Financial Statements
                 (parent company only) for the years ended March 31, 1997, 1996,
                 and 1995, and as of March 31, 1997 and 1996

         II.      Valuation and qualifying accounts

         All  other  schedules  specified  under  Regulation  S-X  for  Sullivan
Communications,  Inc. have been omitted  because they are either not applicable,
not required,  or because the information  required is included in the financial
statements or notes thereto.


                                       26

<PAGE>





                         Report of Independent Auditors


The Board of Directors
Sullivan Communications, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Sullivan
Communications, Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of operations,  stockholders' deficit, and cash flows for each of the
three fiscal years in the period ended March 31, 1997.  Our audits also included
the  financial  statement  schedules  listed in the Index at Item  14(a).  These
financial  statements  and  schedules  are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedules based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Sullivan  Communications,  Inc. at March 31, 1997 and 1996, and the consolidated
results of their  operations  and their cash flows for each of the three  fiscal
years in the period ended March 31, 1997, in conformity with generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedules,  when considered in relation to the basic financial  statements taken
as a whole,  present fairly in all material  respects the  information set forth
therein.

As discussed in Note 18 to the consolidated financial statements, in fiscal year
1996 the Company  adopted the provisions of the Financial  Accounting  Standards
Board's  Statement of Financial  Accounting  Standards No. 121,  "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."

                                                      Ernst & Young LLP


Nashville,  Tennessee 
May 23, 1997, except as to Note 9, 
as to which the date is
June 30, 1997

                                       27

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                           Consolidated Balance Sheets
                    (Dollars in thousands, except par values)

                                                               March 31,
                                                               ---------
                                                            1997        1996
                                                            ----        ----
Assets
Current assets:
     Cash                                                $       0            0
     Receivables:
        Trade accounts, less allowance for doubtful
           accounts of $5,879 and $4,830 at
           March 31, 1997 and 1996, respectively            53,510       64,465
     Other                                                   3,252        3,588
                                                         ---------    ---------
           Total receivables                                56,762       68,053

     Inventories                                             9,711       13,181
     Prepaid expenses and other current assets               3,604        4,285
                                                         ---------    ---------
           Total current assets                             70,077       85,519

Property, plant and equipment:
     Land and improvements                                   3,278        3,259
     Buildings and improvements                             17,837       16,346
     Machinery and equipment                               175,196      169,375
     Furniture and fixtures                                  3,625        3,212
     Leased assets under capital leases                     35,113        8,606
     Equipment installations in process                      3,118        6,466
                                                         ---------    ---------
                                                           238,167      207,264
     Less accumulated depreciation                         (71,270)     (51,103)
                                                         ---------    ---------
           Net property, plant and equipment               166,897      156,161

Excess of cost over net assets acquired,
     less accumulated  amortization of
     $33,523 and $25,269 at March 31, 1997
     and 1996, respectively                                 81,964       89,324
Other assets                                                15,037       20,177
                                                         ---------    ---------
           Total assets                                  $ 333,975      351,181
                                                         =========    =========



See accompanying notes to consolidated financial statements.


                                       28

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                           Consolidated Balance Sheets
                    (Dollars in thousands, except par values)
<TABLE>
<CAPTION>

                                                                            March 31,
                                                                            ---------
                                                                        1997         1996
                                                                        ----         ----
<S>                                                                 <C>          <C>      
Liabilities and Stockholders' Deficit
Current liabilities:
     Current installments of long-term debt and capitalized leases  $  18,252       11,490
     Trade accounts payable                                            29,364       35,931
     Accrued expenses                                                  30,037       27,271
     Income taxes                                                       1,022        1,215
                                                                    ---------    ---------
        Total current liabilities                                      78,675       75,907

Long-term debt and capitalized leases, excluding
     current installments                                             294,057      286,127
Deferred income taxes                                                   8,713        7,801
Other liabilities                                                      28,848       25,742
                                                                    ---------    ---------
        Total liabilities                                             410,293      395,577

Stockholders' deficit:
     Common stock, voting, $.01 par value, 5,852,223 shares
        authorized, 123,889 shares issued and outstanding                   1            1

     Series  A  convertible  preferred  stock, $.01 par value,
        4,000 shares authorized, issued and outstanding, 
        $40,000,000 liquidation preference                                 --           --

     Series  B  convertible  preferred  stock, $.01 par value,
        1,750 shares authorized, issued and outstanding,
        $17,500,000 liquidation preference                                 --           --

     Additional paid-in capital                                        57,499       57,499
     Accumulated deficit                                             (132,228)    (100,525)
     Cumulative translation adjustment                                 (1,590)      (1,371)
                                                                    ---------    ---------
        Total stockholders' deficit                                   (76,318)     (44,396)
                                                                    ---------    ---------
Commitments and contingencies
        Total liabilities and stockholders' deficit                 $ 333,975      351,181
                                                                    =========    =========
</TABLE>



See accompanying notes to consolidated financial statements.


                                       29

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                      Consolidated Statements of Operations
                                 (In thousands)

<TABLE>
<CAPTION>
                                                            Year ended March 31,
                                                            --------------------
                                                       1997         1996         1995
                                                       ----         ----         ----

<S>                                                 <C>            <C>          <C>    
Sales                                               $ 524,551      529,523      433,198
Cost of sales                                         459,880      465,110      370,267
                                                    ---------    ---------    ---------
    Gross profit                                       64,671       64,413       62,931

Selling, general and administrative expenses           43,164       35,533       33,406
Amortization of goodwill                                8,254        8,631        8,386
Restructuring costs and other special charges           2,881        7,533         --
Gain from curtailment and establishment of
defined benefit pension plans, net                       --           --         (3,311)
                                                    ---------    ---------    ---------
    Operating income                                   10,372       12,716       24,450
                                                    ---------    ---------    ---------
Other expense (income):
    Interest expense                                   36,289       32,688       25,752
    Interest income                                      (157)        (263)        (418)
    Nonrecurring charge related to terminated
       merger                                            --          1,534         --
    Other, net                                            245          188          985
                                                    ---------    ---------    ---------
       Total other expense                             36,377       34,147       26,319
                                                    ---------    ---------    ---------

    Loss from continuing operations before income
       taxes and extraordinary item                   (26,005)     (21,431)      (1,869)
Income tax expense                                     (2,591)      (4,874)      (2,552)
                                                    ---------    ---------    ---------
    Loss from continuing operations before
       extraordinary item                             (28,596)     (26,305)      (4,421)
Discounted operations:
    Loss from operations, net of tax                   (1,557)      (1,364)        (912)
    Estimated (loss) on shut down and gain on
       SMI settlement, net of tax                      (1,550)       2,868       18,495
                                                    ---------    ---------    ---------

    (Loss) income before extraordinary item           (31,703)     (24,801)      13,162
Loss on early extinguishment of debt, net of tax         --         (4,526)        --
                                                    ---------    ---------    ---------
    Net (loss) income                               $ (31,703)     (29,327)      13,162
                                                    =========    =========    =========
</TABLE>



See accompanying notes to consolidated financial statements.

                                       30

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                Consolidated Statements of Stockholders' Deficit
                                 (In thousands)

<TABLE>
<CAPTION>
                                                  Series A
                                                    and B
                                      Voting    Convertible   Additional                  Cumulative
                                      common     preferred      paid-in   Accumulated    translation
                                       stock       stock        capital      deficit      adjustment     Total
                                       -----       -----        -------      -------      ----------     -----

<S>                                  <C>          <C>           <C>         <C>            <C>          <C>     
Balances, March 31, 1994             $      1          --       39,999      (84,360)       (1,125)      (45,485)
Pooling accounting                         --          --       17,500           --            --        17,500
                                     --------     -------     --------     --------      --------      --------
Balances, December 23, 1994          $      1          --       57,499      (84,360)       (1,125)      (27,985)
Change in cumulative
    translation adjustment -
    exchange rate fluctuations             --          --           --           --          (147)         (147)
Net income                                 --          --           --       13,162            --        13,162
                                     --------     -------     --------     --------      --------      --------
Balances, March 31, 1995             $      1          --       57,499      (71,198)       (1,272)      (14,970)
Change in cumulative translation
    adjustment - exchange rate
    fluctuations                           --          --           --           --           (99)          (99)
Net loss                                   --          --           --      (29,327)           --       (29,327)
                                     --------     -------     --------     --------      --------      --------
Balances, March 31, 1996             $      1          --       57,499     (100,525)       (1,371)      (44,396)
Change in cumulative translation
    adjustment - exchange rate
    fluctuations                           --          --           --           --          (219)         (219)
Net loss                                   --          --           --      (31,703)           --       (31,703)
                                     --------     -------     --------     --------      --------      --------
Balances, March 31, 1997             $      1          --       57,499     (132,228)       (1,590)      (76,318)
                                     ========     =======     ========     ========      ========      ========

</TABLE>





See accompanying notes to consolidated financial statements.

                                       31

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                     Year ended March 31,
                                                                     --------------------
                                                                1997        1996        1995
                                                                ----        ----        ----

<S>                                                           <C>          <C>          <C>   
Cash flows from operating activities:

        Net (loss) income                                     $(31,703)    (29,327)     13,162

Adjustments to reconcile net (loss) income to cash provided
       (used) by operating activities:

Extraordinary item - non cash                                       --      (1,912)         --

Other special charges - non cash                                 1,944       4,306          --

Depreciation                                                    25,282      21,385      18,327

Depreciation and amortization related to SMC                       251         932         638

Amortization of goodwill                                         8,254       8,631       8,386

Amortization of other assets                                     1,120         680         555

Amortization of deferred financing costs and
        bond premium                                             1,784       1,469         485

Gain on shut down of SMI, net of tax - non cash                     --      (1,480)         --

Loss on shut down of SMC - non cash                              1,550          --          --

Loss on sales and write-downs of property, plant
        and equipment                                                6         350          72

Gain from curtailment and establishment of
        defined benefit pension plans, net                          --          --      (3,311)

Deferred income tax expense                                        911         595       1,560

Changes in assets  and  liabilities,
        net of effects of shut down of SMI and SMC
        and acquisition of Gowe:

        Decrease (increase) in receivables                      11,262     (12,870)     11,456

        Decrease (increase) in inventories                       3,453      (1,744)      1,534

        (Decrease) increase in trade accounts payable           (6,528)     11,571     (15,026)

        Increase (decrease) in accrued expenses                  1,226         981      (8,489)

        Decrease (increase) in current income taxes payable       (193)        195         592

        Other                                                    5,694      (7,949)        569
                                                              --------    --------    --------

               Total adjustments                                56,016      25,140      17,348
                                                              --------    --------    --------

Net cash provided (used) by operating activities                24,313      (4,187)     30,510
                                                              --------    --------    --------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       32

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                      Year ended March 31
                                                                      -------------------
                                                                 1997        1996        1995
                                                                 ----        ----        ----

<S>                                                            <C>         <C>         <C>     
Cash flows from investing activities:

    Purchases of property, plant and equipment                 (10,810)    (20,276)    (19,601)

    Proceeds from sales of property, plant and equipment            63          36       2,137

    Gowe acquisition                                                --      (6,682)         --

    Proceeds from sale of NIS                                       --       2,550          --

    Other                                                         (250)        (64)       (116)
                                                              --------    --------    --------

           Net cash used by investing activities               (10,997)    (24,436)    (17,580)
                                                              --------    --------    --------

Cash flows from financing activities:

    Debt:

        Proceeds                                                 1,162     280,451          --

        Payments                                               (10,374)   (242,970)    (16,329)

        Increase in deferred financing costs                      (827)    (12,095)     (1,052)

        Repayment of capital lease obligations                  (3,212)       (591)       (140)

        Other                                                      (61)       (813)         (6)
                                                              --------    --------    --------

           Net cash (used) provided by financing activities    (13,312)     23,982     (17,527)
                                                              --------    --------    --------

Effect of exchange rates on cash                                    (4)          6           1
                                                              --------    --------    --------

Decrease in cash                                                     0      (4,635)     (4,596)

Cash:

    Beginning of period                                              0       4,635       9,231
                                                              --------    --------    --------

    End of period                                             $      0           0       4,635
                                                              ========    ========    ========


Supplemental disclosure of cash information:

    Cash paid for:

        Interest                                              $ 34,284      30,581      26,416

        Income taxes, net of refunds                             1,863       3,964       1,904

    Exchange rate adjustment to long-term debt                     (61)         53         (54)

    Non cash investing activities:

        Lease obligations                                     $ 26,957       7,746         814

</TABLE>

See accompanying notes to consolidated financial statements.

                                       33

<PAGE>



                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(1)      Summary of Significant Accounting Policies

         Sullivan  Communications,  Inc.  ("Communications"),  together with its
         wholly-owned   subsidiary,   Sullivan  Graphics,   Inc.   ("Graphics"),
         collectively the  ("Company"),  was formed in April 1989 under the name
         GBP  Holdings,  Inc. to effect the purchase of all the capital stock of
         GBP  Industries,  Inc.  from its  stockholders  in a  leveraged  buyout
         transaction.  In October 1989, GBP Holdings,  Inc.  changed its name to
         Sullivan  Holdings,  Inc. and GBP Industries,  Inc. changed its name to
         Sullivan Graphics,  Inc. Effective June 1993,  Sullivan Holdings,  Inc.
         changed its name to Sullivan Communications, Inc.

         On August 15, 1995,  the Company  completed a merger  transaction  with
         Shakopee Valley  Printing Inc.  ("Shakopee")  (the "Shakopee  Merger").
         Shakopee  was  formed to effect  the  purchase  of  certain  assets and
         assumption of certain  liabilities of Shakopee Valley  Printing,  a Guy
         Gannett  Communications  division. On December 22, 1994, Morgan Stanley
         Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P., and
         MSCP III 892 Investors,  L.P.  (collectively  the "MSCP III Entities"),
         together with First Plaza Group Trust and Leeway & Co. purchased 35,000
         shares of common stock of Shakopee.  On December 22, 1994,  pursuant to
         an  Agreement   for  the   Purchase  of  Assets   between  Guy  Gannett
         Communications  (the "Seller") and Shakopee (the  "Buyer"),  the Seller
         agreed to sell  (effective  at the close of business  on  December  22,
         1994)  certain  assets and  transfer  certain  liabilities  of Shakopee
         Valley   Printing  to  the  Buyer  for  a  total   purchase   price  of
         approximately $42.6 million, primarily financed through the issuance of
         35,000 shares of Common Stock and bank borrowings. Each of the MSCP III
         Entities is affiliated  with Morgan  Stanley,  Dean Witter,  Discover &
         Co.,  the  parent  company  of the  general  partner  of the  Company's
         majority stockholder.  In addition,  the other stockholders of Shakopee
         were also stockholders of the Company.  See note 2 for a description of
         the specific terms of the Shakopee Merger.

         Communications  has no operations or significant  assets other than its
         investment in Graphics.  Communications is dependent upon distributions
         from  Graphics  to fund its  obligations.  Under  the terms of its debt
         agreements  at March 31, 1997,  Graphics'  ability to pay  dividends or
         lend to Communications was either restricted or prohibited, except that
         Graphics may pay  specified  amounts to  Communications  (i) to pay the
         repurchase  price payable to any officer or employee (or their estates)
         of Communications,  Graphics or any of their respective subsidiaries in
         respect of their stock or options to purchase  stock in  Communications
         upon  the  death,  disability  or  termination  of  employment  of such
         officers and employees (so long as no default,  or event of default, as
         defined, has occurred under the terms of the Bank Credit Agreement,  as
         defined  below,   and  provided  the  aggregate   amount  of  all  such
         repurchases does not exceed $2 million) and (ii) to fund the payment of
         Communications'  operating  expenses incurred in the ordinary course of
         business,  other corporate  overhead costs and expenses (so long as the
         aggregate  amount of such  payments  does not  exceed  $250,000  in any
         fiscal year) and Communications'  obligations pursuant to a tax sharing
         agreement  with  Graphics.  Substantially  all of  Graphics'  long-term
         obligations   have  been  fully  and   unconditionally   guaranteed  by
         Communications.

         The two business sectors of the commercial  printing  industry in which
         the Company  operates  are  printing  and digital  imaging and prepress
         services conducted by its American Color division.

         Significant accounting policies are as follows:


                                       34

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(a)      Basis of Presentation

         The  consolidated   financial   statements   include  the  accounts  of
         Communications  and all greater than 50% owned  subsidiaries  which are
         consolidated under generally accepted accounting principles.

         All  significant  intercompany  transactions  and  balances  have  been
         eliminated in consolidation.

         The Shakopee Merger has been accounted for as a combination of entities
         under  common  control   (similar  to  a   pooling-of-interests).   The
         consolidated financial statements give retroactive effect to the merger
         of the Company and Shakopee and include the combined  operations of the
         Company and Shakopee for the fiscal year ended March 31, 1995  ("Fiscal
         Year 1995").  Shakopee was not under common  control until December 22,
         1994, and, accordingly,  the consolidated  financial statements reflect
         Shakopee as under common control subsequent to such date.

         Earnings  per share data has not been  provided  since  Communications'
         common stock is closely held.

(b)      Revenue Recognition

         In accordance with trade practices of the printing  industry,  printing
         revenues are recognized upon the completion of production.  Shipment of
         printed  material  generally  occurs upon completion of this production
         process.  Materials are printed to unique customer  specifications  and
         are not returnable.  Credits  relating to  specification  variances and
         other customer adjustments are not significant.

(c)      Inventories

         Inventories  are valued at the lower of  first-in,  first-out  ("FIFO")
         cost or market (net realizable value) (see note 6).

(d)      Property, Plant and Equipment

         Property,  plant and equipment is stated at cost.  Depreciation,  which
         includes  amortization of assets under capital leases,  is based on the
         straight-line  method over the estimated  useful lives of the assets or
         the remaining terms of the leases.

(e)      Excess of Cost Over Net Assets Acquired

         The  excess  of cost  over  net  assets  acquired  (or  "goodwill")  is
         amortized  on a  straight-line  basis over a range of 5 to 40 years for
         each of its principal business sectors.  The carrying value of goodwill
         is reviewed if facts and circumstances suggest that it may be impaired.
         If this review  indicates  that  goodwill will not be  recoverable,  as
         determined based on the estimated undiscounted future cash flows of the
         assets  acquired,  the  Company's  carrying  amount of the  goodwill is
         reduced by the estimated shortfall of such cash flows. In addition, the
         Company  assesses  long-lived  assets for  impairment  under  Financial
         Accounting  Standards  Board  Statement  No. 121,  "Accounting  for the
         Impairment  of  Long-Lived  Assets  and for  Long-  Lived  Assets to be
         Disposed Of" ("FASB 121"). Under these rules,  goodwill associated with
         assets  acquired  in a purchase  business  combination  is  included in
         impairment evaluations when assets or circumstances exist that indicate
         the carrying amount of these assets may not be recoverable.


                                       35

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(f)      Other Assets

         Financing  costs  related  to the Bank  Credit  Agreement  (as  defined
         herein) are deferred and amortized  over the term of the five-year loan
         agreement.  Costs related to the Notes (as defined herein) are deferred
         and amortized over the ten-year term of the Notes.

         The covenants not to compete are amortized over the three and five year
         terms of the respective underlying agreements.

(g)      Income Taxes

         Income  taxes  have  been  provided  using  the  liability   method  in
         accordance  with Statement of Financial  Accounting  Standards No. 109,
         "Accounting for Income Taxes" ("SFAS 109").

(h)      Foreign Currency Translation

         The assets and liabilities of the Company's  Canadian  facility,  which
         include  interdivisional  balances, are translated at year-end rates of
         exchange  while  revenue and expense  items are  translated  at average
         rates for the year.

         Translation  adjustments  are  recorded  as  a  separate  component  of
         stockholders'  deficit. Since the transactions of the Canadian facility
         are  denominated  in its  functional  currency  and  the  interdivision
         accounts  are  of  a  long-term   investment   nature,  no  transaction
         adjustments are included in operations.

(i)      Reclassifications

         Certain prior period amounts have been reclassified to conform with the
         most recent period presentation.

(j)      Environmental

         Environmental  expenditures  that  relate  to  current  operations  are
         expensed or capitalized as appropriate.  Expenditures that relate to an
         existing  condition  caused  by  past  operations,  and  which  do  not
         contribute  to  current  or  future  period  revenue  generation,   are
         expensed.  Environmental  liabilities  are  provided  when  assessments
         and/or  remedial  efforts are probable  and the related  amounts can be
         reasonably estimated.

(k)      Fair Value of Financial Instruments

         The  Company  discloses  the  estimated  fair  values of its  financial
         instruments  together with the related carrying amount.  The Company is
         not   a   party   to   any   financial    instruments   with   material
         off-balance-sheet risk.

(l)      Concentration of Credit Risk

         Financial  instruments which subject the Company to credit risk consist
         primarily of trade accounts  receivable.  Concentration  of credit risk
         with respect to trade accounts receivable are generally diversified due
         to the large number of entities  comprising the Company's customer base
         and their  geographic  dispersion.  The Company performs ongoing credit
         evaluations  of its  customers and maintains an allowance for potential
         credit losses.

                                       36

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements


(m)      Use of Estimates

         The  preparation  of  the  financial   statements  in  conformity  with
         generally accepted  accounting  principles  requires management to make
         estimates  and  assumptions  that  affect the  amounts  reported in the
         financial  statements  and  accompanying  notes.  Actual  results could
         differ from those estimates.

(n)      Stock Based Compensation

         In October 1995,  the FASB issued  Statement No. 123,  "Accounting  for
         Stock-Based  Compensation" ("SFAS 123"). SFAS 123 establishes financial
         accounting   and   reporting   standards   for   stock-based   employee
         compensation plans. SFAS 123 is effective for transactions entered into
         in fiscal years  beginning  after  December  15, 1995.  The Company has
         accounted for stock-based  compensation  awards under the provisions of
         Accounting  Principles Board Opinion No. 25 ("APB 25"), as permitted by
         SFAS 123, and intends to continue to do so.

(2)      The Shakopee Merger

         On August  15,  1995,  the  Shakopee  Merger was  consummated  and each
         outstanding  share of the Common Stock of Shakopee was  converted  into
         one share of the New Common  Stock of the Company and 1/20 of one share
         of Series B Preferred  Stock of the  Company.  Also on August 15, 1995,
         concurrent with the Shakopee  Merger,  the Company sold $185 million of
         12 3/4% Senior  Subordinated  Notes Due 2005.  Also on August 15, 1995,
         the Company  repaid all amounts  outstanding  under the Old Bank Credit
         Agreement (as defined herein) which included the Series A Term Loan and
         Revolving  Credit  Facility  Borrowings  and all amounts due on the 15%
         Senior Subordinated Notes Due 2000 (the  "Refinancing").  Additionally,
         on August 15, 1995,  the Company  entered into a $75 million  revolving
         credit facility maturing in 2000 and a $60 million amortizing term loan
         with a final maturity in 2000.

         The Shakopee  Merger was  accounted  for under the  purchase  method of
         accounting  applying the  provisions  of  Accounting  Principles  Board
         Opinion No. 16 ("APB 16").  Pursuant to the requirements of APB 16, the
         purchase  price was allocated to the tangible  assets and  identifiable
         intangible  assets and liabilities  assumed based upon their respective
         fair values.

         The allocation of the purchase price is set forth below (in thousands):

           Total purchase price                                  $  42,631

           Allocation of the purchase price:
            Current assets acquired                                (10,007)
            Property, plant, and equipment acquired                (24,960)
            Other long-term assets                                    (686)
            Current liabilities assumed                              5,050
            Other adjustments related to the acquisition               187
                                                                  --------
            Excess of cost over net assets acquired               $ 12,215
                                                                  ========



                                       37

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         The Shakopee Merger has been accounted for as a combination of entities
         under  common  control   (similar  to  a   pooling-of-interests),   and
         accordingly,  the  consolidated  financial  statements give retroactive
         effect to the Shakopee  Merger and include the combined  operations  of
         Communications  and  Shakopee  subsequent  to December  22,  1994.  The
         following  is a summary of the results of  operations  of the  separate
         entities for Fiscal Year 1995 (in thousands):

<TABLE>
<CAPTION>

                             Sullivan
                          Communications
                          Inc. (prior to      Shakopee Valley        Pooling
                         Shakopee Merger)       Printing Inc.       Adjustments       Combined
                         ----------------       -------------       -----------       --------
<S>                        <C>                     <C>                              <C>        
Sales                      $  419,054              14,144               --          $   433,198
Income (loss) from
 continuing operations     $   (4,445)                 24               --          $    (4,421)
Net income                 $   13,138                  24               --          $    13,162

</TABLE>

         Pooling adjustments have been recorded to eliminate income and expenses
         associated with a management  agreement  between Graphics and Shakopee.
         In addition,  $0.8 million of costs  reflected in  Shakopee's  selling,
         general and  administrative  expenses has been  reclassified to cost of
         sales in conformity with the Company's reporting policies.

(3)      The Gowe Acquisition

         On March 12,  1996,  Graphics  acquired  the  assets of Gowe,  Inc.,  a
         Medina,  Ohio based  regional  printer of  newspapers,  T.V.  books and
         retail  advertising  inserts and catalogs  ("Gowe"),  for approximately
         $6.7 million in cash and  assumption  of certain  liabilities  of Gowe,
         Inc.,  pursuant to an Asset Purchase Agreement,  among Graphics,  Gowe,
         Inc. and ComCorp,  Inc.,  the parent  company of Gowe,  Inc. (the "Gowe
         Acquisition").  The  Gowe  Acquisition  was  accounted  for  under  the
         purchase  method  of  accounting  applying  the  provisions  of APB 16.
         Pursuant  to the  requirements  of  APB  16,  the  purchase  price  was
         allocated to the tangible assets and identifiable intangible assets and
         liabilities  assumed based upon their  respective  fair values.  Gowe's
         results  of  operations  are  included  in the  Company's  consolidated
         financial statements subsequent to March 11, 1996.

         The Company's pro forma unaudited  results of operations for the fiscal
         year ended March 31, 1996 ("Fiscal Year 1996"),  assuming that the Gowe
         Acquisition occurred as of April 1, 1995, were $561.6 million in sales,
         a $25.9 million loss from continuing  operations  before  extraordinary
         item and a $28.9 million net loss.

         The Company's pro forma unaudited  results of operations for the Fiscal
         Year 1995,  assuming  that the  Refinancing,  Shakopee  Merger and Gowe
         Acquisition occurred as of April 1, 1994, were $503.4 million in sales,
         a $6.0 million loss from  continuing  operations  before  extraordinary
         item and $7.5 million in net income.

(4)      Disposal of 51% Interest in National Inserting Systems, Inc.

         On March 11,  1996,  the  Company  sold its 51%  interest  in  National
         Inserting Systems,  Inc. ("NIS") for approximately $2.5 million in cash
         and a note for  approximately  $0.2 million  under the terms of a Stock
         Redemption  Agreement  between  NIS  and  Graphics.   This  transaction
         resulted in a net gain on disposal of approximately $1.3 million, which
         is  classified  as  other,  net  in  the   consolidated   statement  of
         operations.  The  proceeds of the sale were used to repay  indebtedness
         under Graphics' Bank Credit Agreement (as defined herein).


                                       38

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(5)      Discontinued Operations

         Sullivan Media Corporation

         In February  1997,  the Company made a strategic  decision to shut down
         the   operations  of  its   wholly-owned   subsidiary   Sullivan  Media
         Corporation  ("SMC").  This  resulted in an estimated  net loss on shut
         down of  approximately  $1.5  million,  which is net of zero income tax
         benefits.

         The  shut  down  of  SMC  has  been  accounted  for  as a  discontinued
         operation,  and accordingly,  its operating  results are segregated and
         reported as a discontinued  operation in the accompanying  consolidated
         statements of  operations.  The assets of SMC and any resulting gain or
         loss on the disposal of those  assets,  is immaterial to the results of
         operations and financial position of the Company.

         The condensed  consolidated  statements  of operations  relating to the
         discontinued SMC operation follows:

                                                Year Ended March 31,
                                                --------------------
                                            1997        1996        1995
                                            ----        ----        ----
               Sales                      $  9,786       6,819       1,670
               Cost and expenses            11,343       8,183       2,582
                                          --------    --------    --------
               Loss before income taxes     (1,557)     (1,364)       (912)
               Income taxes                     --          --          --
                                          --------    --------    --------
               Net loss                   $ (1,557)     (1,364)       (912)
                                          ========    ========    ========


         SMI Settlement

         On June 29, 1994, Graphics and Sullivan Marketing, Inc. ("SMI") settled
         the  lawsuit  pending  in the  United  States  District  Court  for the
         Southern  District of New York entitled  Sullivan  Marketing,  Inc. and
         Sullivan Graphics, Inc. v. Valassis Communications,  Inc., News America
         FSI,  Inc.  and David  Brandon (the "SMI  Settlement").  All claims and
         counterclaims  in such litigation were dismissed.  The Company recorded
         income from the SMI Settlement of $18.5 million, net of $1.5 million in
         taxes in Fiscal Year 1995,  and when coupled with  settlement  expenses
         which had previously been accrued, the net cash proceeds resulting from
         this settlement were  approximately  $16.7 million.  Proceeds  received
         were  principally  used in July  1994 to  reduce  borrowings  under the
         Revolving   Credit  Facility   (defined  herein)  which  were  incurred
         primarily to fund SMI losses prior to the shut down.

         In Fiscal Year 1996, the Company recognized settlement of the EPI Group
         Limited  ("EPI")  complaint  naming SMI, News America FSI, Inc.  ("News
         America")  and  two  packaged  goods  companies  as  defendants   ("EPI
         Lawsuit") and reversed  certain  accruals related to the estimated loss
         on shut down of SMI. The resulting  effect reflected in the Fiscal Year
         1996  consolidated  statement of operations  was $2.9 million income in
         discontinued operations.


                                       39

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(6)      Inventories

         The components of inventories are as follows (in thousands):

                                                  March 31,
                                                  ---------
                                              1997        1996
                                              ----        ----
               Paper                         $7,831       11,277
               Ink                              324          272
               Equipment held for sale           60          349
               Supplies and other             1,496        1,283
                                             ------        -----
                            Total            $9,711       13,181
                                             ======       ======
                          

         In the third  quarter of Fiscal Year 1996,  the Company  changed to the
         FIFO method of accounting from the last-in,  first-out  ("LIFO") method
         of accounting as the principal  method of accounting  for  inventories.
         The change results in a balance sheet which (1) reflects inventories at
         a value that more closely  represents  current  costs which the Company
         believes are the primary  concern of its  constituents  (bank  lenders,
         financial markets,  customers,  trade creditors, etc.) and (2) enhances
         the comparability of the Company's financial  statements by changing to
         the  predominant  method  used  by  key  competitors  in  the  printing
         industry. The effect (approximately $0.8 million) of the change for the
         six  months  ended  September  30,  1995  resulted  in the  retroactive
         restatement  of the first and second  quarters  of Fiscal  Year 1996 of
         approximately  $0.5  million  and  $0.3  million,  respectively,  as  a
         decrease of cost of sales and a decrease to net loss. In addition,  the
         change resulted in the restatement of Fiscal Year 1995 by approximately
         $1.1 million to decrease cost of sales and increase net income.

(7)      Other Assets

         The components of other assets are as follows (in thousands):

                                                             March 31,
                                                             ---------
                                                        1997          1996
                                                        ----          ----
          Deferred financing costs, less
            accumulated amortization of $2,893 in
            1997 and $2,139 in 1996                    $ 9,996       10,953
          Spare parts inventory, net of valuation
            allowance of $100 in 1997 and 1996           1,699        1,071
          Flexi-Tech equipment deposits                     --        2,606
          Other                                          3,342        5,547
                                                       -------       ------
                        Total                          $15,037       20,177
                                                       =======       ======
          


                                       40

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(8)      Accrued Expenses

         The components of accrued expenses are as follows (in thousands):

                                                             March 31,
                                                             ---------
                                                         1997          1996
                                                         ----          ----

         Compensation and related taxes                 $ 9,206        6,882

         Employee benefits                                8,353       11,204

         Interest                                         4,445        4,435

         Accrued costs related to shut down of SMC        1,046           --

         Other                                            6,987        4,750
                                                        -------      -------

                            Total                       $30,037       27,271
                                                        =======      =======



(9)      Notes Payable, Long-term Debt and Capitalized Leases

         Long-term debt is summarized as follows (in thousands):

                                                                March 31,
                                                                ---------
                                                           1997           1996
                                                           ----           ----

         Bank Credit Agreement:
         
             Term Loan                                   $ 47,088        55,902
         
             Revolving Credit Facility Borrowings          40,710        39,548
                                                         --------      --------
         
                                                           87,798        95,450
         
         12 3/4% Senior Subordinated Note Due 2005        185,000       185,000
         
         Capitalized leases                                31,607         7,862
         
         Other loans with varying maturities and
           interest rates                                   7,904         9,305
                                                         --------      --------
         
             Total long-term debt                         312,309       297,617
         
         Less current installments                         18,252        11,490
                                                         --------      --------
         
             Long-term debt and capitalized leases,             
              excluding current installments             $294,057       286,127
                                                         ========      ========



                                       41

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

The Refinancing

On August 15, 1995 the Company sold $185 million of 12 3/4% Senior  Subordinated
Notes Due 2005 (the "Notes").  Concurrently  with the closing of the sale of the
Notes,  the Company entered into a series of transactions,  (the  "Refinancing,"
and  together  with the  Shakopee  Merger,  the  "Transactions")  including  the
following:  (i) the Company  entered into a Credit  Agreement with BT Commercial
Corporation  ("BTCC")  (the "New Bank Credit  Agreement"),  providing  for a $75
million  revolving  credit  facility  maturing  in 2000 (the  "Revolving  Credit
Facility") and a $60 million  amortizing term loan with a final maturity in 2000
(the "Term  Loan");  (ii) the  repayment of all $126.5  million of  indebtedness
outstanding  under the Old Bank Credit  Agreement  (plus $2.3 million of accrued
interest to the date of repayment);  (iii) the redemption of all outstanding 15%
Senior Subordinated Notes due 2000 ("the 15% Notes") at an aggregate  redemption
price of $105.6 million (plus $1.8 million of accrued interest to the redemption
date);  (iv) the repayment of all $24.6 million of  indebtedness,  including the
Shakopee  Bank  Credit  Agreement,  assumed in the  Shakopee  Merger  (plus $0.1
million of accrued  interest  to the date of  repayment)  and (v) the payment of
approximately $11.8 million of fees and expenses incurred in connection with the
Transactions.  As  a  result  of  the  Transactions,  the  Company  recorded  an
extraordinary loss related to early  extinguishment of debt of $4.5 million, net
of  zero  taxes.  This  extraordinary  loss  primarily  consisted  of the  early
redemption  premium on the 15% Notes and the  write-off  of  deferred  financing
costs related to refinanced  indebtedness partially offset by the write-off of a
bond premium associated with the 15% Notes.

Borrowings  under the Revolving  Credit Facility are subject to a borrowing base
which consists of (i) 85% of Eligible  Accounts  Receivable plus (ii) the lesser
of (x) $15  million  and (y) 60% of  Eligible  Inventory  plus  (iii)  Equipment
Acquisition  Loans in an amount not to exceed $7.5  million  outstanding  at any
time,  each of which must be repaid within six months from the date of borrowing
minus (iv) the aggregate amount of reserves against Eligible Accounts Receivable
and Eligible Inventory established by BTCC.

The remaining Term Loan  amortizes in the following  annual  amounts:  (i) $10.6
million in Fiscal Year 1998, (ii) $13.3 million in Fiscal Year 1999, (iii) $15.2
million in Fiscal Year 2000 and (iv) $8 million in Fiscal Year 2001.

The New Bank Credit Agreement as amended (the "Bank Credit Agreement"), requires
the Company to meet certain financial  covenants  including,  but not limited to
(1) Minimum EBITDA,  (2) Current Ratio,  (3) Fixed Charge Ratio and (4) Net Sale
Proceeds.   The  Bank  Credit   Agreement   requires   prepayments   in  certain
circumstances  including:  excess cash flows,  proceeds from asset  dispositions
totaling  prescribed  levels,  and changes in ownership.  Graphics may also make
voluntary prepayments of the amounts borrowed under the Bank Credit Agreement at
any time,  without  premium or  penalty,  subject to certain  notice and minimum
amount restrictions. Each voluntary prepayment of Term Loans shall be applied to
reduce the then  remaining  scheduled  repayments  in direct  order of maturity.
Amounts paid pursuant to repayments and  prepayments of the Term Loan (including
reductions in the face amounts of letters of credit) may not be  reborrowed  or,
in the case of letters of credit,  reutilized.  Subject to the  requirements set
forth above and to certain  requirements set forth in the Bank Credit Agreement,
amounts  borrowed  under the  Revolving  Credit  Facility  may not  exceed in an
aggregate principal amount at any time outstanding,  when added to the aggregate
amount of Letter of Credit  Obligations  then  outstanding,  its Revolving  Loan
Percentage of the lesser of (x) the Total  Revolving  Loan  Commitments  then in
effect and (y) the  Borrowing  Base then in  effect.  Graphics  had  outstanding
borrowings  under the  Revolving  Credit  Facility of $40.7 million at March 31,
1997.  The aggregate  amount of letters of credit  outstanding at March 31, 1997
was $4.9 million.

Interest under the Bank Credit Agreement is floating based on prevailing  market
rates and is computed  using  various rate options over periods of 30, 60, 90 or
180 days as selected by the Company.  The weighted  average rate on  outstanding
indebtedness  under  the Bank  Credit  Agreement  at March 31,  1997 was  8.45%.
Graphics  is  required  to pay a  commitment  fee equal to 1/2% per annum of the
unused commitment under the Revolving Credit Facility.


                                       42

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

Communications  has  guaranteed  Graphics'  indebtedness  under the Bank  Credit
Agreement,  which  guarantee is secured by a pledge of all of Graphics'  and its
subsidiaries' stock. In addition, borrowings under the Bank Credit Agreement are
secured  by  substantially  all of the  assets of  Graphics.  Communications  is
restricted  under its guarantee of the Bank Credit  Agreement from,  among other
things,  entering  into mergers,  acquisitions,  incurring  additional  debt, or
paying cash dividends. In the event of a default under the Bank Credit Agreement
the Banks have various rights and  obligations  under such agreement which could
have an adverse impact on the Company.  Should the Banks exercise their right to
accelerate  principal  repayment as a result of an event of default, an event of
default would occur under the terms of the  Indenture.  The Company is currently
in  compliance  with all  financial  covenants  set  forth  in the  Bank  Credit
Agreement, as amended.

On June 30, 1997, the Company entered into a $25 million term loan facility with
Bankers  Trust  Company  and a  syndicate  of  lenders  including  a $5  million
participation  by Morgan Stanley Senior  Funding,  Inc., a related party,  which
matures  on  March  31,  2001  (the  "Term  Loan  Facility").  Net  proceeds  of
approximately  $23  million  were  received  and  used  to  reduce   outstanding
borrowings under the existing Revolving Credit Facility. Interest under the Term
Loan  Facility is floating  based upon  existing  market  rates plus agreed upon
margin  levels which  escalate  over the initial 24 months of the  facility.  In
addition,  the Company is required to pay certain additional cash fees on the 6,
12, 18, 24 and 30 month  anniversary  dates of the facility  based upon the then
outstanding   principal  amounts.   The  obligations  under  this  facility  are
guaranteed  on the same basis as the New Bank  Credit  Agreement  although  such
guarantees are secured by second priority security interests in the tangible and
intangible  assets of the  Company  and such  guarantors.  Covenants  under this
agreement  are  substantially  similar  to,  but in  certain  respects  are more
restrictive  than,  existing  covenants  under  the  Senior  Subordinated  Notes
Indenture.  Morgan Stanley Senior Funding,  Inc.  received  transaction  fees of
approximately $0.3 million.



                                       43

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

The Notes bear interest at 12 3/4% and mature February 1, 2005.  Interest on the
Notes is  payable  semi-annually  on  February  1 and  August  1. The  Notes are
redeemable at the option of Graphics in whole or in part after August 1, 2000 at
106.375% of the principal  amount,  declining to 100% of the  principal  amount,
plus accrued  interest,  on or after August 1, 2002.  Upon the  occurrence  of a
change of control triggering event, as defined,  each holder of a Note will have
the right to require  Graphics to repurchase all or any portion of such holder's
Note at 101% of the principal amount thereof,  plus accrued interest.  The Notes
are subordinate to all existing and future senior  indebtedness,  as defined, of
Graphics, and are guaranteed on a senior subordinated basis by Communications.

The  amortization  for total long-term debt and capitalized  leases at March 31,
1997 is shown below (in thousands):

                                       Long-Term              Capitalized
     Fiscal year                          Debt                   Leases
     -----------                          ----                   ------
     1998                           $    12,988               $    7,949
     1999                                15,350                    6,691
     2000                                15,793                    6,045
     2001                                49,307                    5,002
     2002                                   680                    4,352
     Thereafter                         186,584                   12,550
                                    -----------               ----------
        Total                       $   280,702                   42,589
                                    ===========              
     Imputed interest                                            (10,982)
                                                              ----------
        Present value of minimum
         lease payments                                       $   31,607
                                                              ==========


Capital leases have varying  maturity  dates and interest rates which  generally
approximate  10%.  The  Company  estimates  that  the  carrying  amounts  of the
Company's debt and other financial instruments  appropriate their fair values at
March 31, 1997 and 1996.



                                       44

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(10)     Income Taxes

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
         differences  between the carrying amounts of assets and liabilities for
         financial  reporting  purposes  and the amounts as measured by tax laws
         and regulations.  Significant  components of the Company's deferred tax
         liabilities and assets as of March 31, 1997 and 1996 are as follows (in
         thousands):

                                                                March 31,
                                                                ---------
                                                           1997            1996
                                                           ----            ----
          
          Deferred tax liabilities:
          
             Book over tax basis in fixed assets          $31,402        $19,473
          
             Foreign taxes                                  2,505          2,068
          
             Accumulated amortization                         483             --
          
             Other, net                                     4,459          3,470
                                                          -------        -------
          
             Total deferred tax liabilities                38,849         25,011
                                                          -------        -------
          
          
          
          Deferred tax assets:
          
             Bad debts                                      2,197          1,825
          
             Accrued expenses and other liabilities        24,953         13,389
          
             Accrued loss on discontinued
                operations                                    722             79
          
             Accumulated amortization                          --            122
          
             Net operating loss carryforwards              30,515         21,203
          
             AMT credit carryforwards                       1,262          1,262
          
             Cumulative translation adjustment                625            540
                                                          -------        -------
          
          
          
             Total deferred tax assets                     60,274         38,420
          
             Valuation allowance for deferred tax assets   30,138         21,210
                                                          -------        -------
          
             Net deferred tax assets                       30,136         17,210
                                                          -------        -------
          
          Net deferred tax liabilities                    $ 8,713        $ 7,801
                                                          =======        =======


         Management has evaluated the need for a valuation  allowance for all or
         a portion of the  deferred tax assets.  A valuation  allowance of $30.1
         million  has  been  recorded  for  the  excess  of net  operating  loss
         carryforwards and future deductible  temporary  differences over future
         taxable temporary differences. The valuation allowance was increased by
         $8.9 million during the current fiscal year.



                                       45

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         The components of income tax expense are as follows (in thousands):


                                                       Year ended March 31,
                                                       --------------------
                                                  1997         1996        1995
                                                  ----         ----        ----

Amount attributable to continuing
     operations                                   $2,591      $4,874      $2,552

Amount attributable to discontinued
     operations                                       --          75       1,505
                                                  ------      ------      ------

         Total expense                            $2,591      $4,949      $4,057
                                                  ======      ======      ======



         Income tax  expense  attributable  to loss from  continuing  operations
         consists of (in thousands):


                                                   Year ended March 31,
                                                   --------------------
                                           1997           1996           1995
                                           ----           ----           ----

Current

     Federal                              $    --        $   689        $    93

     State                                    145            618            473

     Foreign                                1,535          3,047          1,816
                                          -------        -------        -------

     Total current                          1,680          4,354          2,382
                                          -------        -------        -------

Deferred

     Federal                                  354            513            204

     State                                    120              7            (34)

     Foreign                                  437             --             --
                                          -------        -------        -------

     Total deferred                           911            520            170
                                          -------        -------        -------


Provision for income taxes                $ 2,591        $ 4,874        $ 2,552
                                          =======        =======        =======



                                       46

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         The  effective  tax rates for the  fiscal  year  ended  March 31,  1997
         ("Fiscal  Year  1997"),  Fiscal  Year  1996 and  Fiscal  Year 1995 were
         (10.0%),  (22.7%), and (136.5%),  respectively.  The difference between
         these  effective  rates  relating  to  continuing  operations  and  the
         statutory federal income tax rate is composed of the following items:



                                                         Year ended March 31,
                                                         --------------------
                                                     1997       1996      1995
                                                     ----       ----      ----

          Statutory tax rate                         35.0%      35.0%     35.0%
          
          State income taxes, less Federal tax       
            impact                                   (0.7)      (1.9)    (15.5)
          
          Foreign taxes, less Federal tax impact     (5.0)      (9.4)    (64.1)
          
          Amortization                              (11.9)     (16.1)   (165.4)
          
          Change in valuation allowance             (28.3)     (26.7)     69.8
          
          Other, net                                  0.9       (3.6)      3.7
                                                    -----      -----    ------
          
          Effective income tax rate                 (10.0)%    (22.7)%  (136.5)%
                                                    =====      =====    ======
          

         As of March 31, 1997,  the Company had  available  net  operating  loss
         carryforwards  ("NOL's") for state  purposes of $71.9 million which can
         be used to offset future state taxable  income.  If these NOL's are not
         utilized, they will begin to expire in 1998 and will be totally expired
         in 2012.

         As of March 31,  1997,  the  Company  had  available  NOL's for federal
         purposes of $78.6 million  which can be used to offset  future  federal
         taxable  income.  If these NOL's are not  utilized,  they will begin to
         expire in 2006 and will be totally expired in 2012.

         The  Company  also had  available  an  alternative  minimum  tax credit
         carryforward  of $1.3 million  which can be used to offset future taxes
         in years in which the  alternative  minimum  tax does not  apply.  This
         credit can be carried forward indefinitely.

         The  Company  has   alternative   minimum   tax  net   operating   loss
         carryforwards in the amount of $61.2 million which will begin to expire
         in 2007 and will be completely expired in 2012.

(11)     Pension Plans

         The Company sponsors  defined benefit pension plans covering  full-time
         salaried  employees of the Company who had at least one year of service
         at December 31, 1994.  Benefits  under these plans  generally are based
         upon the  employee's  years of  service  and,  in the case of  salaried
         employees,   compensation   during  the  years  immediately   preceding
         retirement.  The  Company's  general  funding  policy is to  contribute
         amounts within the annually  calculated  actuarial range allowable as a
         deduction  for  federal  income tax  purposes.  The  plans'  assets are
         maintained  by trustees in  separately  managed  portfolios  consisting
         primarily  of  equity  securities,   bonds  and  guaranteed  investment
         contracts.

         In October  1994,  the Board of Directors  approved an amendment to the
         Company's  defined benefit pension plans which resulted in the freezing
         of additional defined benefits for future services under the plans

                                       47

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         effective  January 1, 1995.  As a result,  a gain of $3.7  million  was
         recorded in the Fiscal Year 1995  pursuant to  Statement  of  Financial
         Accounting Standards No. 88, "Employers' Accounting for Settlements and
         Curtailments  of  Defined  Benefit  Pension  Plans and for  Termination
         Benefits." This curtailment gain is shown in the consolidated statement
         of  operations  net  of  a  $0.4  million   expense   associated   with
         establishing a supplemental executive retirement plan (see note 12).

         Total net periodic  pension  expense and its components for these plans
         during the periods indicated is as follows (in thousands):


                                                 Year Ended March 31,
                                                 --------------------
                                           1997       1996        1995
                                           ----       ----        ----

          Service cost                    $   446        318      1,737

          Interest cost                     3,546      3,428      3,405

          Actual return on assets          (4,349)    (6,404)       629

          Net amortization and deferral       725      3,076     (3,311)
                                          -------     ------     ------ 

          Total pension expense           $   368        418      2,460
                                          =======     ======     ======


         Funded status of the four plans  sponsored by the Company is as follows
         (in thousands):


                                                              March 31,
                                                              ---------
                                                          1997           1996
                                                          ----           ----

        Actuarial present value of accumulated
          benefit obligations:

           Vested                                       $ 47,756         47,404

           Non-vested                                        829          1,488
                                                        --------       --------

                                                        $ 48,585         48,892
                                                        ========       ========

           Projected benefit obligations                $ 48,585         48,892

           Plan assets on deposit with trustees
             at fair value                                41,436         38,035
                                                        --------       --------

           Projected benefit obligations in
             excess of plan assets                        (7,149)       (10,857)

           Unrecognized:

                Net gain                                  (3,146)          (881)

                Prior service cost                          (784)          (942)
                                                        --------       --------

           Pension liability recognized in
               consolidated balance sheets              $(11,079)       (12,680)
                                                        ========       ========



                                       48

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         The above  pension  liability  balance is recorded in the  consolidated
         balance sheets as follows (in thousands):

                                                           March 31,
                                                           ---------
                                                     1997           1996
                                                     ----           ----

          Accrued expenses - employee benefits    $      771          4,216

          Other liabilities                           10,308          8,464
                                                  ----------       --------

                                                  $   11,079         12,680
                                                  ==========       ========


         The pension liability at March 31, 1997 and 1996 reflects the impact of
         changes in certain assumptions effective during such times as follows:


                                                            March 31,
                                                            ---------
                                                     1997      1996    1995
                                                     ----      ----    ----

         Discount rate:

           Pension expense                           7.50%     8.75%    8.75%

           Funded status                             7.75%     7.50%    8.75%

         Rate of increase in compensation levels      N/A       N/A     6.00%


         The expected  long-term  rate of return on plan assets was 9.25% in the
         Fiscal Years 1997, 1996 and 1995.

(12)     Other Postretirement Benefits

         The  Company  provides  certain  other   postretirement   benefits  for
         employees, primarily life and health insurance. Full-time employees who
         have  attained  age 55 and have at least  five  years  of  service  are
         entitled to  postretirement  health care and life  insurance  coverage.
         Postretirement  life  insurance  coverage  is  provided  at no  cost to
         eligible  retirees.  Special cost sharing  arrangements for health care
         coverage are available to employees  whose age plus years of service at
         the date of  retirement  equals  or  exceeds  85  ("Rule  of 85").  Any
         eligible  retiree  not  meeting  the  Rule of 85 must  pay  100% of the
         required health care insurance premium.

         Effective  January 1, 1995,  the  Company  amended the health care plan
         changing the health care benefit for all employees retiring on or after
         January  1,  2000.  This  amendment  had the  effect  of  reducing  the
         accumulated  postretirement  benefit  obligation  by  approximately  $3
         million. This reduction is reflected as unrecognized prior service cost
         and is being  amortized on a straight  line basis over 15.6 years,  the
         average  remaining years of service to full  eligibility of active plan
         participants at the date of the amendment.



                                       49

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

The following table sets forth the plan's funded status, reconciled with amounts
recognized in the Company's  consolidated  balance  sheets at March 31, 1997 and
1996 (in thousands):



                                                                    March 31,
                                                                    ---------
                                                                1997       1996
                                                                ----       ----

Accumulated postretirement benefit obligation:

         Retirees                                              $2,371      3,193
                                                               
         Active plan participants                               1,022      1,071
                                                               ------     ------
                                                               
         Total                                                  3,393      4,264
                                                               
Plan assets at fair value                                          --         --
                                                               ------     ------

Accumulated postretirement benefit obligation in
         excess of plan assets                                  3,393      4,264

Unrecognized prior service cost                                 2,584      2,778

Unrecognized net gain                                           1,694        922
                                                               ------     ------

Accrued postretirement benefit cost                            $7,671      7,964
                                                               ======     ======



The estimated current portion of the above accrued  postretirement  benefit cost
is  $0.3  million  and is  included  in  accrued  expenses  in the  accompanying
consolidated  balance  sheet at March 31, 1997.  The  remaining  $7.4 million is
included in other liabilities.

Net periodic  postretirement benefit cost for the periods indicated included the
following components (in thousands):


                                                          Year ended March 31,
                                                          --------------------
                                                       1997      1996     1995
                                                       ----      ----     ----

Service cost attributed to service during the period   $  40       35      254

Interest cost in accumulated postretirement benefit      250      317      512
 obligation

Amortization of net gain from earlier periods            (92)     (67)      --

Amortization of prior service cost                      (194)    (194)     (48)
                                                       -----    -----    -----

Net periodic postretirement benefit cost               $   4       91      718
                                                       =====    =====    =====





                                       50

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         The significant assumptions used in determining  postretirement benefit
         cost and the  accumulated  postretirement  benefit  obligation  were as
         follows:


                                                    March 31,
                                                    ---------
                                        1997          1996          1995
                                        ----          ----          ----

           Discount rate - expense      7.50%         8.75%         8.75%

           Discount rate - APBO         7.75%         7.50%         8.75%



         The  assumed  health  care  cost  trend  rate  used  in  measuring  the
         accumulated  postretirement  benefit  obligation  at March 31, 1997 was
         10.55% gradually  declining to 5.75% in the year 2005 and forward.  The
         effect of a one  percentage  point  increase in the assumed health care
         cost trend rate would increase the accumulated  postretirement  benefit
         obligation as of March 31, 1997 by approximately  8%, and the aggregate
         of  the   service  and   interest   cost   components   of  net  annual
         postretirement benefit cost by approximately 7%.

         Supplemental Executive Retirement Plan

         In October  1994,  the Board of Directors  approved a new  Supplemental
         Executive  Retirement  Plan ("SERP"),  which is a defined benefit plan,
         for  certain  key  executives.  Such  benefits  will be paid  from  the
         Company's assets.  The unfunded  accumulated  benefit  obligation under
         this plan is approximately $1.2 million.  The Company recognized a $0.4
         million  expense  associated with the  establishment  of the SERP. This
         expense  was shown  netted  with the gain from  curtailment  of defined
         benefit pension plans in the  consolidated  statement of operations for
         the Fiscal Year 1995.

(13)     401(k) Defined Contribution Plan

         Effective  January 1, 1995,  the  Company  amended  its 401(k)  defined
         contribution  plan.  Eligible  participants may contribute up to 15% of
         their annual compensation subject to maximum amounts established by the
         Internal Revenue Service and receive a matching  employer  contribution
         on amounts  contributed.  The employer  matching  contribution  is made
         bi-weekly   and  equals  2%  of  annual   compensation   for  all  plan
         participants   plus  50%  of  the  first  6%  of  annual   compensation
         contributed  to the plan by each employee,  subject to maximum  amounts
         established by the Internal Revenue Service. The Company's contribution
         under this Plan amounted to $3.9 million during Fiscal Year 1997,  $3.3
         million  during  Fiscal  Year 1996 and $0.7  million  during  the three
         months ended March 31, 1995.

(14)     Capital Stock

         Stock Option Plan

         In 1993,  the Company  established  the Sullivan  Communications,  Inc.
         Stock Option Plan. This plan, as amended,  (the "Stock Option Plan") is
         administered by a committee of the Board of Directors (the "Committee")
         and provides for granting up to 20,841 shares of Communications  Common
         Stock  ("Common  Stock").  Stock options may be granted under the Stock
         Option Plan to officers  and other key  employees  of the Company  (the
         "Participants")  at the exercise  price per share of Common  Stock,  as
         determined  at  the  time  of  grant  by  the  Committee  in  its  sole
         discretion.  All options are 25%  exercisable on the first  anniversary
         date of a grant and vest in  additional  25%  increments on each of the
         next three anniversary dates of each grant. All options expire 10 years
         from date of grant.


                                       51

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         A summary of activity under the Stock Option Plan is as follows:


                                                              Options
                                                              -------

          Outstanding at April 1, 1994                          8,024

          Granted                                               7,240

          Exercised                                                --

          Canceled                                                 --
                                                              -------
          Outstanding at March 31, 1995                        15,264

          Granted                                               2,497

          Exercised                                                --

          Canceled                                             (1,262)
                                                              -------
          Outstanding at March 31, 1996                        16,499

          Granted                                               6,015

          Exercised                                                --

          Canceled                                             (3,108)
                                                              -------
          Outstanding at March 31, 1997                        19,406
                                                              =======



         All options  were  granted  with a $50  exercise  price.  The  weighted
         average fair value of options granted at the grant date was $0 for both
         fiscal  years  ending  March 31, 1997 and 1996.  The  weighted  average
         remaining  contractual  life of the  options  outstanding  at March 31,
         1997,  1996  and  1995,  is  7.6  years,   7.9  years  and  8.7  years,
         respectively.  Of the options outstanding;  9,004, 5,507 and 2,007 were
         exercisable at March 31, 1997, 1996 and 1995, respectively.  A total of
         1,435 shares of Communications Common Stock were reserved for issuance,
         but not granted under the Stock Option Plan at March 31, 1997.

         In October 1995, the Financial  Accounting  Standards Board issued SFAS
         123. This new standard  defines a fair value based method of accounting
         for employee stock options and other similar equity  instruments.  This
         statement gives entities a choice of recognizing  related  compensation
         expense by adopting the new fair value method or to continue to measure
         compensation  using the  intrinsic  value  approach  under APB 25,  the
         former  standard.  The Company has elected to follow APB 25 and related
         Interpretations in accounting for its stock compensation plans because,
         as discussed below, the alternative fair value accounting  provided for
         under SFAS 123  requires use of option  valuation  models that were not
         developed  for use in valuing  employee  stock  options.  Under APB 25,
         because the exercise  price of the  Company's  employee  stock  options
         equals the market price of the  underlying  stock on the date of grant,
         no compensation expense is recognized. The effects of applying SFAS 123
         for either  recognizing  compensation  expense or  providing  pro forma
         disclosures  are not  likely to be  representative  of the  effects  on
         future years.


                                       52

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

         Pro forma  information  regarding  net income and earnings per share is
         required  by SFAS 123,  which also  requires  that the  information  be
         determined  as if the  Company has  accounted  for its  employee  stock
         options  granted  subsequent  to December 31, 1994 under the fair value
         method  of that  Statement.  The  fair  value  for  these  options  was
         estimated  at the date of grant using a  Black-Scholes  option  pricing
         model with the following weighted-average  assumptions for Fiscal Years
         1997 and 1996, respectively: risk-free interest rates of 6.5% and 6.3%;
         no annual  dividend  yield;  volatility  factors of 0; and an  expected
         option life of 5 years.

         The  Black-Scholes  option  valuation  model was  developed  for use in
         estimating  the fair  value of traded  options  which  have no  vesting
         restrictions and are fully transferable.  In addition, option valuation
         models require the input of highly subjective assumptions including the
         expected stock price volatility.  Because the Company's  employee stock
         options  have  characteristics  significantly  different  from those of
         traded options, and because changes in the subjective input assumptions
         can materially affect the fair value estimate, in management's opinion,
         the  existing  models  do not  necessarily  provide a  reliable  single
         measure of the fair value of its employee stock options.

         For the purposes of pro forma disclosures,  the estimated fair value of
         the options is amortized to expense over the options'  vesting  period.
         Because the fair value of the Company's  options equals $0, there is no
         pro forma disclosure for Fiscal Years 1997 and 1996.

(15)     Commitments and Contingencies

         The Company  incurred rent expense for the Fiscal Years 1997,  1996 and
         1995 of $5.4  million,  $4.9  million and $4.2  million,  respectively,
         under various operating leases. Future minimum rental commitments under
         existing  operating lease arrangements at March 31, 1997 are as follows
         (in thousands):


               Fiscal Year
               -----------

               1998                               $ 4,218

               1999                                 3,612

               2000                                 3,027

               2001                                 2,507

               2002                                 1,567

               Thereafter                           5,716
                                                  -------
                         Total                    $20,647
                                                  =======


         The  Company  has  employment  agreements  with  one of  its  principal
         officers and four other employees.  Such agreements provide for minimum
         salary  levels as well as for  incentive  bonuses  which are payable if
         specified  management goals are attained.  The aggregate commitment for
         future salaries at March 31, 1997, excluding bonuses, was approximately
         $2.4 million.

                                       53

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements


         On  December  21,  1989,  Graphics  sold  CPS,  its  ink  manufacturing
         operations and facilities.  Graphics remains  contingently liable under
         $3.7 million of industrial revenue bonds assumed by the purchaser ("CPS
         Buyer")  in  this  transaction.  The  CPS  Buyer  which  assumed  these
         liabilities  has  agreed  to  indemnify   Graphics  for  any  resulting
         obligation  and has also  provided an  irrevocable  letter of credit in
         favor of the holders of such bonds.  Accordingly,  management  believes
         that any obligation of Graphics under this contingency is unlikely.

         Concurrent  with the CPS sale,  Graphics  entered into a long-term  ink
         supply  contract  with the CPS  Buyer.  The  supply  contract  requires
         Graphics to purchase substantially all of its ink requirements,  within
         certain limitations and minimums, from the CPS Buyer. Graphics believes
         that prices for products under this contract  approximate market prices
         at the time of purchase of such products.

         Graphics,  together with over 300 other persons, has been designated by
         the U.S. Environmental  Protection Agency as a potentially  responsible
         party  (a  "PRP")  under  the  Comprehensive   Environmental   Response
         Compensation and Liability Act ("CERCLA," also known as "Superfund") at
         one Superfund site. Although liability under CERCLA may be imposed on a
         joint and several  basis and the  Company's  ultimate  liability is not
         precisely  determinable,  the PRPs have agreed that Graphics'  share of
         removal costs is 0.46% and therefore  Graphics  believes that its share
         of the anticipated  remediation costs at such site will not be material
         to its  business  or  financial  condition.  Based upon an  analysis of
         Graphics'  volumetric  share of waste  contributed  to the site and the
         agreement  among the PRPs,  the Company has a reserve of  approximately
         $0.1 million in  connection  with this  liability  on its  consolidated
         balance  sheet at March 31, 1997.  The Company  believes this amount is
         adequate to cover such liability.

         The  Company  has been named as a defendant  in several  legal  actions
         arising  from  its  normal  business  activities.  In  the  opinion  of
         management,  any  liability  that may arise from such  actions will not
         have a material adverse effect on the consolidated financial statements
         of the Company.

(16)     Significant Customers

         No single customer represented 10% or more of total sales in the fiscal
         year ended  March 31,  1997.  The sales of Best Buy Co. for Fiscal Year
         1996  amounted to  approximately  12.7% of the  Company's  consolidated
         sales. Receivables outstanding from these sales were approximately $1.1
         million  and  $5.9  million  at March  31,  1997 and  March  31,  1996,
         respectively. No single customer represented 10% or more of total sales
         in the fiscal year ended March 31, 1995.



                                       54

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(17)     Interim Financial Information (Unaudited)

         Quarterly financial information follows (in thousands):

<TABLE>
<CAPTION>

                                                          (a)           (b)
                                                       American         SMC
                                      Quarter as       Color/SVP   Discontinued  Revised
                                        Issued          Reclass     Operations   Quarter
                                        ------          -------     ----------   -------

Fiscal Year 1997:

<S>                                     <C>                 <C>      <C>         <C>    
    Quarter Ended June 30, 1996:
      Net Sales                         $ 139,704           --       (1,603)     138,101
      Gross Profit                      $  15,393           --         (624)      14,769
      Net Loss                          $  (7,604)          --           --       (7,604)

    Quarter Ended September 30, 1996:
      Net Sales                           138,495           --       (2,705)     135,790
      Gross Profit                         17,490           --       (1,167)      16,323
      Net Loss                             (7,548)          --           --       (7,548)

    Quarter Ended December 31, 1996:
      Net Sales                           136,472           --       (1,153)     135,319
      Gross Profit                         19,719           --         (159)      19,560
      Net Loss                             (4,339)          --           --       (4,339)

    Quarter Ended March 31, 1997:
      Net Sales                           119,666           --       (4,325)     115,341
      Gross Profit                         15,915           --       (1,896)      14,019
      Net Loss                            (12,212)          --           --      (12,212)

Totals:
    Net Sales                           $ 534,337           --       (9,786)     524,551
    Gross Profit                        $  68,517           --       (3,846)      64,671
    Net Loss                            $ (31,703)          --           --      (31,703)

Fiscal Year 1996:

    Quarter Ended June 30, 1995:
      Net Sales                         $ 124,490           --         (258)     124,232
      Gross Profit                      $  19,102       (2,320)         (52)      16,730
      Net Loss                          $  (7,278)          --           --       (7,278)

    Quarter Ended September 30, 1995:
      Net Sales                           130,653           --       (1,404)     129,249
      Gross Profit                         19,020       (1,825)        (571)      16,624
      Loss before extraordinary item       (4,945)          --           --       (4,945)
      Net Loss                             (9,471)          --           --       (9,471)

    Quarter Ended December 31, 1995:
      Net Sales                           153,308           --       (1,344)     151,964
      Gross Profit                         22,415       (2,709)        (416)      19,290
      Net Income                               73           --           --           73

    Quarter Ended March 31, 1996:
      Net Sales                           127,891           --       (3,813)     124,078
      Gross Profit                         16,101       (2,421)      (1,911)      11,769
      Net Loss                            (12,651)          --           --      (12,651)

Totals:
    Net Sales                           $ 536,342           --       (6,819)     529,523
    Gross Profit                        $  76,638       (9,275)      (2,950)      64,413
    Loss before extraordinary item      $ (24,801)          --           --      (24,801)
    Net Loss                            $ (29,327)          --           --      (29,327)



</TABLE>
                                       55

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements



(a)      In Fiscal Year 1997,  American  Color began  presenting  certain of its
         costs  previously  classified  as selling,  general and  administrative
         expenses as cost of sales to more closely conform with the print sector
         presentation.  In Fiscal Year 1997, SVP reclassed  certain of its costs
         between selling,  general and administrative costs and cost of sales to
         more closely conform with the other print plants.  As a result,  Fiscal
         Year 1996 and Fiscal Year 1995 have been  reclassified  to conform with
         Fiscal Year 1997 presentation.

(b)      In  February  1997,  the  Company  shut  down  the  operations  of  its
         wholly-owned  subsidiary SMC. The resulting  effect of this change is a
         retroactive restatement of Fiscal Year 1996 reclassing SMC's results of
         operations to Discontinued Operations (see note 5).

(18)     Restructuring Costs and Other Special Charges

         In April 1995,  the Company  implemented a plan for its American  Color
         division which was designed to improve productivity,  increase customer
         service and responsiveness, and provide increased growth in the digital
         imaging  and  prepress  services  business.  The cost of this  plan was
         accounted  for in  accordance  with the  guidance set forth in Emerging
         Issues  Task  Force  Issue  94-3  "Liability  Recognition  for  Certain
         Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
         (Including  Certain Costs Incurred in a Restructuring)"  ("EITF 94-3").
         The pretax  costs of $5 million  which were  incurred as a part of this
         plan  represent  employee  termination,  goodwill  write-down and other
         related  costs  that  were  incurred  as a direct  result  of the plan.
         Approximately $0.9 million of restructuring  costs primarily related to
         relocation expenses were recognized in Fiscal Year 1997. In Fiscal Year
         1996 the Company recognized $4.1 million of such restructuring charges,
         which  included $0.9 million of goodwill  write-down,  and $3.2 million
         primarily for severance and other personnel related costs. The goodwill
         written down was the portion  related to certain  facilities  that were
         either shut down or relocated in  conjunction  with the American  Color
         restructuring.

         During  Fiscal  Year 1997 and Fiscal Year 1996,  the  Company  recorded
         special charges totalling $1.9 million and $3.4 million,  respectively,
         for impaired  long-lived  assets and to adjust the  carrying  values of
         idle,  disposed and under  performing  assets to estimated fair values.
         The  provisions  were  based  on  a  review  of  long-lived  assets  in
         connection with the adoption of FASB 121. Of the Fiscal Year 1997 total
         long-lived  assets that were adjusted based on being idle,  disposed of
         or under  performing,  approximately  $0.4  million  and  $1.5  million
         related to the print and American  Color  sectors,  respectively.  Fair
         value was  based on the  Company's  estimate  of held and used and idle
         assets based on current market  conditions  using the best  information
         available.  Approximately  $2  million  of the  Fiscal  Year 1996 total
         related to the print sector's long-lived assets, respectively that were
         adjusted  based on being  idle,  disposed of or under  performing.  The
         remaining  $1.4  million of the Fiscal  Year 1996 total  related to the
         American  Color sector.  The estimated  undiscounted  future cash flows
         attributable to certain American Color division identifiable long-lived
         assets held and used was less than their carrying value  principally as
         a  result  of  high  levels  of  ongoing   technological   change.  The
         methodology  used to assess the  recoverability  of the American  Color
         sector  long-lived  assets  involved  projecting  aggregate cash flows.
         Based on this  evaluation,  the Company  determined in Fiscal Year 1996
         that  long-lived  assets with a carrying  amount of $2.2  million  were
         impaired and wrote them down by $1.4 million to their fair value.  Fair
         value was based on  Company  estimates  and  appraisals.  Such  special
         charges are classified as restructuring costs and other special charges
         in the consolidated statement of operations.


                                       56

<PAGE>


                          SULLIVAN COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

(19)     Non-recurring Charge Related to Terminated Merger

         The Company recognized $1.5 million of expenses related to a terminated
         merger in Fiscal Year 1996.

(20)     Non-recurring Charge Related to Resignation of Chief Executive Officer

         A non-recurring  charge of $1.9 million  relating to the resignation of
         the Company's Chief Executive Officer was recorded in Fiscal Year 1997,
         and is classified  as a selling,  general and  administrative  expense.
         Payments under the related agreement  continue through 2001, subject to
         certain requirements.

(21)     Summarized Financial Information of Sullivan Graphics, Inc.

         Summary   financial   information  for   Communications'   wholly-owned
         subsidiary,   Sullivan   Graphics,   Inc.,   which   is  the   same  as
         Communications is as follows (in thousands):


                                                              March 31,
                                                              ---------
Balance sheet data:                                    1997               1996
                                                     ---------           ------
Current assets                                       $ 70,077             85,519

Noncurrent assets                                     263,898            265,662

Current liabilities                                    78,675             75,907

Noncurrent liabilities                                331,618            319,670




                                                 Year ended March 31,
                                                 --------------------
                                        1997             1996              1995
                                        ----             ----              ----

Statement of operations data:

Sales                                $ 524,551          529,523          433,198

Operating income                        10,372           12,716           24,450

Net (loss) income                      (31,703)         (29,327)          13,162




                                       57

<PAGE>


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS

         The following  table  provides  certain  information  about each of the
current directors and executive officers of Communications and Graphics (ages as
of March 31, 1997).  All directors  hold office until their  successors are duly
elected and qualified.

Name                       Age     Position with Graphics and Communications
----                       ---     -----------------------------------------

Stephen M. Dyott           45      Chairman, President, Chief Executive Officer 
                                   and Director
Frank V.  Sica             46      Director
Eric T.  Fry               30      Director
Joseph M.  Milano          44      Senior Vice President and Chief Financial 
                                   Officer
Timothy M.  Davis          42      Senior Vice President-Administration, 
                                   Secretary and General Counsel
Patrick W.  Kellick        39      Vice President/Controller & Assistant 
                                   Secretary

         Stephen M. Dyott - Chairman and Chief Executive Officer of Graphics and
Communications  since September 1996; President of Communications since February
1995;  Director of Graphics  and  Communications  since  September  1994;  Chief
Operating  Officer of  Communications  from February 1995 to September  1996 and
Chief Operating  Officer of Graphics from 1991 to September  1996;  President of
Graphics since 1991;  Vice President and General  Manager - Flexible  Packaging,
American  National Can Company  ("ANCC") from 1988 to 1991;  Vice  President and
General Manager - Tube Packaging, ANCC from 1985 to 1987.

         Frank V. Sica - Director of  Graphics  and  Communications  since April
1993.  Managing Director of Morgan Stanley & Co.  Incorporated  ("MS&Co.") since
1988.  Has  been  with  MS&Co.  since  1981,   originally  in  the  Mergers  and
Acquisitions  Department,  and since 1988, with the Merchant  Banking  Division.
Vice Chairman and Director of the general  partner of the general partner Morgan
Stanley  Capital  Partners  III,  L.P. and its related  investment  partnerships
("MSCP  III") and  Director  of the  general  partner of the MSCP III  Entities.
Director of ARM Financial Group,  Inc.,  Consolidated  Hydro,  Inc., Fort Howard
Corporation,  Kohl's  Corporation,  Ionica Group PLC, PageMart  Wireless,  Inc.,
and CSG Systems International, Inc.

         Eric T. Fry - Director of Graphics and Communications since March 1996.
Associate of MS&Co. and an officer of the general partner of MSLEF II and of the
general partner of the general  partner of the MSCP III Entities.  Joined MS&Co.
in 1989,  initially in the Mergers and Acquisitions  Department and from 1991 to
1992 in the  Merchant  Banking  Division.  From  1992 to 1994  attended  Harvard
Business School and received an MBA. Rejoined MS&Co.'s Merchant Banking Division
in 1994.  Director of  Enterprise  Reinsurance  Holdings  Corporation,  Hamilton
Services Limited, Risk Management Solutions, Inc. and LifeTrust America, L.L.C.

         Joseph M. Milano - Senior Vice President and Chief Financial Officer of
Communications  and  Graphics  since  May 1994;  Vice  President  -  Finance  of
Communications  and Graphics  from 1992 to May 1994;  Vice  President  and Chief
Financial Officer,  Farrel  Corporation,  1989 to 1992; Vice President and Chief
Financial Officer, Electronic Mail Corporation of America from 1984 to 1988.

         Timothy M. Davis - Senior Vice  President -  Administration,  Secretary
and General Counsel of  Communications  and Graphics since 1989; Vice President,
Secretary and General  Counsel of NHI, NCI and their  subsidiaries  from 1989 to
1992; Assistant General Counsel of MacMillan,  Inc. and counsel to affiliates of
Maxwell  Communication  Corporation  North  America,  January 1989 to June 1989.
Attorney in private practice from 1984 to 1989.


                                       58

<PAGE>



         Patrick W. Kellick - Vice  President/Controller  of Communications  and
Graphics since 1989;  Controller of Graphics since 1987, and Assistant Secretary
of Communications and Graphics since 1995.


ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

         The following table presents information  concerning  compensation paid
for services to Communications  and Graphics during the fiscal years ended March
31, 1997, 1996 and 1995 to the Chief Executive  Officers and the four other most
highly  compensated  executive  officers  (the "Named  Executive  Officers")  of
Communications and/or Graphics.

<TABLE>
<CAPTION>
                                                     Summary Compensation Table


                                                       Annual Compensation                 Long-Term Compensation
                                               ---------------------------------   -------------------------------------
                                                                                                  Awards      Payouts
                                                                                                  ------      -------
                                                                          Other                 Securities
                                                                         Annual    Restricted   Underlying               All Other
   Name and Principal                                                    Compen-      Stock      Options/       LTIP      Compen-
        Position               Period          Salary        Bonus       sation      Award(s)    SAR's(#)      Payouts    sation
        --------               ------          ------        -----       ------      --------    --------      -------    ------

<S>                         <C>                 <C>        <C>         <C>              <C>         <C>           <C>  <C>         
Stephen M.  Dyott           Fiscal Year 1997    $463,462   $350,000          --         --          1,761         --        --
President, Chief Operating  Fiscal Year 1996    $450,000   $250,000          --         --            380         --        --
Officer & Director thru     Fiscal Year 1995    $350,000   $684,250    $197,004 (a)     --            859         --        --
09/96                                                                                               
Chairman, President and                                                                             
Chief Executive Officer &                                                                           
Director 09/96 forward                                                                              
                                                                                                    
James T.  Sullivan          Fiscal Year 1997    $276,936         --          --         --             --         --   $354,991 (c)
Chairman, Chief Executive   Fiscal Year 1996    $600,028         --          --         --            380         --   $  7,620 (b)
Officer & Director thru     Fiscal Year 1995    $600,028   $600,000    $ 61,430 (a)     --            139         --   $  7,620 (b)
09/96                                                                                               
                                                                                                    
Joseph M.  Milano           Fiscal Year 1997    $260,097   $150,000          --         --            760         --        --
Senior Vice President &     Fiscal year 1996    $228,923   $125,000          --         --            614         --        --
Chief Financial Officer     Fiscal Year 1995    $175,423   $248,000    $ 87,494 (a)     --            688         --        --
                                                                                                    
Malcolm J.  Anderson        Fiscal Year 1997    $230,000   $105,000          --         --            125         --        --
Executive Vice President    Fiscal Year 1996    $212,693   $ 70,000    $ 38,504 (a)     --             --         --        --
                            Fiscal Year 1995    $200,000   $381,000    $ 87,951 (a)     --            526         --        --
                                                                                                    
Timothy M.  Davis           Fiscal Year 1997    $220,562   $110,000          --         --            290         --        --
Senior Vice President-      Fiscal Year 1996    $209,923   $106,000          --         --             --         --        --
Administration,             Fiscal Year 1995    $190,000   $202,750    $128,325 (a)     --            535         --        --
Secretary & General                                                                                 
Counsel                                                                                         

Terrence M. Ray             Fiscal Year 1997    $230,000   $ 50,000    $ 14,550 (a)     --          1,447         --        --
President/Chief Operating   Fiscal Year 1996    $ 20,962      6,000          --         --             --         --        --
Officer-American Color      Fiscal Year 1995       --            --          --         --             --         --        --

</TABLE>



----------
(a) Represents relocation expense reimbursements.
(b) Represents premiums paid by Graphics with respect to a life insurance 
    policy.
(c) Represents severance and premiums paid by Graphics with respect to a life 
    insurance policy.



                                       59

<PAGE>



         The following table presents information concerning the options granted
to the Named  Executive  Officers  during the last fiscal year. All  outstanding
options issued prior to April 8, 1993 were cancelled in connection with the 1993
Acquisition.

                    Option/SAR Grants in Last Fiscal Year(a)

<TABLE>
<CAPTION>
                                                                                                             Potential
                                                                                                          Realizable Value
                                                                                                         at Assumed Annual
                                                                                                           Rates of Stock
                                                                                                         Price Appreciation
                                         Individual Grants                                                 for Option Term
----------------------------------------------------------------------------------------------- ------------------------------------
                                             % of Total
                           Number of        Options/SAR's
                          Securities         Granted to
                          Underlying          Employees      Exercise or
                         Options/SAR's     in Fiscal Year    Base Price         Expiration
        Name              Granted(#)            1997           ($/sh)              Date             5% ($) (b)         10% ($) (b)
---------------------  -----------------  ---------------- --------------- -------------------- ------------------- ----------------
<S>                           <C>                 <C>            <C>            <C>                     <C>               <C>    
Stephen M. Dyott              1.761               29%            50             10/01/2006              55,472            140,000
Joseph M. Milano                760               13%            50             10/01/2006              23,940             60,420
Malcolm J. Anderson             125                2%            50             10/01/2006               3,938              9,938
Timothy M. Davis                290                5%            50             10/01/2006               9,135             23,055
Terrence M. Ray               1,447               24%            50             10/01/2006              45,581            115,037

</TABLE>

----------
(a)      All options will become 25 percent  exercisable  on October 1, 1997 and
         are scheduled to vest in  additional  25 percent  increments on each of
         October l, 1998, October 1, 1999 and October 1, 2000.

(b)      The  potential  realizable  value  shown  in  the  table  is  based  on
         hypothetical increases in the estimated fair market value of the common
         stock of Communications  ("Communications Common Stock") over the terms
         of the options,  assuming 5% and 10% growth in such fair market  value.
         These  estimates  of  potential  realizable  value  have been  prepared
         pursuant  to the  rules  of the  Commission  and  are  not  necessarily
         indicative of the amount that would have been utilized upon exercise of
         the options had such options remained outstanding.

         The following table presents information concerning the fiscal year-end
value of  unexercised  stock options held by the Named  Executive  Officers.  No
stock options were  exercised by the Named  Executive  Officers  during the last
fiscal year.

               Aggregated Option/SAR Exercises in Last Fiscal Year
                      and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>

                                                   Number of Securities            Value of Unexercised
                                                  Underlying Unexercised           In-the-Money Options/
                                                 Options/SAR's at 3/31/97            SAR's at 3/31/97
                                                 Exercisable/Unexercisable       Exercisable/Unexercisable
                                                 -------------------------       -------------------------
<S>                                                     <C>                                 <C>                              
Stephen M. Dyott.............................           2,250/3,050                         (a)
James T. Sullivan............................           3,520/0                             (a)
Joseph M. Milano.............................             574/1,590                         (a)
Malcolm J. Anderson..........................             263/388                           (a)
Timothy M. Davis.............................             459/621                           (a)
Terrence M. Ray..............................               0/1,447                         (a)
</TABLE>

----------
(a)      Communications  Common Stock has not been registered or publicly traded
         and,  therefore,  a public market price of the stock is not  available.
         While a formal  valuation  of the  Communications  Common Stock has not
         been undertaken, Communications believes that the exercise price of the
         options held by the Named  Executive  Officers at March 31, 1997 was in
         each case greater than the fair market value of the  underlying  shares
         of Communications Common Stock as of such date.

                                       60

<PAGE>



Pension Plan

         Graphics  sponsors  the Sullivan  Graphics,  Inc.  Salaried  Employees'
Pension Plan (the  "Pension  Plan"),  a defined  benefit  pension plan  covering
full-time salaried employees of Graphics who had at least one year of service as
of December  31, 1994.  The basic  benefit  payable  under the Pension Plan is a
five-year  certain single life annuity  equivalent to (a) 1% of a  participant's
"final average monthly  compensation"  plus (b) 0.6% of a  participant's  "final
average  monthly  compensation"  in excess of 40% of the monthly  maximum Social
Security  wage base in the year of  retirement  multiplied  by years of credited
service (not to exceed 30 years of service).  For purposes of the Pension  Plan,
"final  average  compensation"  (which,  for the Named  Executive  Officers,  is
reflected  in the salary and bonus  columns of the Summary  Compensation  Table)
means the average of a participant's five highest consecutive  calendar years of
total earnings (which includes  bonuses) from the last 10 years of service.  The
maximum monthly benefit payable from the Pension Plan is $5,000.

         The basic benefit under the Pension Plan is payable upon  completion of
five years of vesting  service  and  retirement  on or after  attaining  age 65.
Participants  may elect early  retirement under the Pension Plan upon completion
of five years of vesting  service and the  attainment of age 55, and receive the
basic  benefit  reduced by 0.4167% for each month that the benefit  commencement
date precedes the  attainment of age 65. A deferred  vested benefit is available
to those participants who separate from service before retirement,  provided the
participant has at least five years of vesting service.

         In October  1994,  the Board of Directors  approved an amendment to the
Pension Plan which resulted in the freezing of additional  defined  benefits for
future  services under such plan  effective  January 1, 1995 (see note 11 to the
consolidated financial statements).

         Retirement  benefits payable under qualified  defined benefit plans are
subject to the annual  pension  limitations  imposed  under  Section  415 of the
Internal Revenue Code of 1986, as amended (the "Code"),  which  limitations vary
annually.  The  Section  415  limitation  for 1997 and  1996  was  $125,000  and
$120,000. In addition, Section 401(a)(17) of the Code specifies a maximum amount
of annual compensation, also adjusted annually that may be taken into account in
computing   benefits  under  a  qualified  defined  benefit  plan.  The  Section
401(a)(17) limitation was $160,000 and $150,000 for 1997 and 1996.

         The following table shows the estimated annual pension benefits payable
at retirement at age 65 under the Pension Plan in the final average compensation
and years of service classifications indicated.

  Final Average
  Compensation                        Years of Benefit Service
------------------   ----------------------------------------------------------
                       15                20               25              30
                     -------           -------          -------         -------
$125,000             $27,818           $37,091          $46,364         $55,637
 150,000              33,818            45,091           56,364          60,000
 175,000              33,818            45,091           56,364          60,000
 200,000              33,818            45,091           56,364          60,000
 225,000              33,818            45,091           56,364          60,000
 250,000              33,818            45,091           56,364          60,000
 300,000              33,818            45,091           56,364          60,000
 350,000              33,818            45,091           56,364          60,000
 400,000              33,818            45,091           56,364          60,000
 450,000              33,818            45,091           56,364          60,000
 500,000              33,818            45,091           56,364          60,000
 625,000              33,818            45,091           56,364          60,000
 750,000              33,818            45,091           56,364          60,000
 


                                       61

<PAGE>




         At  March  31,  1997,  all of the  Named  Executive  Officers  with the
exception of Malcolm J.  Anderson  have vested in the pension plan. At March 31,
1997, the Named Executive Officers had the following amounts of credited service
(original hire date through January 1, 1995) under the Pension Plan:  Stephen M.
Dyott (3 years,  3 months),  James T.  Sullivan (5 years,  5 months),  Joseph M.
Milano (2 years, 7 months),  Malcolm J. Anderson (1 year, 3 months), and Timothy
M. Davis (5 years, 5 months).

Compensation of Directors

         Directors of Communications  and Graphics do not receive a salary or an
annual retainer for their services but are reimbursed for expenses incurred with
respect to such services.

Employment Agreements

         In connection with the 1993  Acquisition,  Graphics  entered into a new
employment agreement with Stephen M. Dyott (the "New Employment Agreement"). The
New  Employment   Agreement  for  Mr.  Dyott  superseded   previous   employment
agreements.

         The New Employment  Agreement has been amended so that it has a term of
four years commencing as of the effective time Acquisition Corp. merged with and
into  Communications  (the "Effective  Time"). The term under the New Employment
Agreement  is  automatically  extended at the end of the then  current  term for
one-year  periods  absent two year's  notice of an intent not to renew.  The New
Employment  Agreement provides for the payment of an annual salary and an annual
bonus pursuant to a plan adopted  following the 1993  Acquisition.  In addition,
under the New Employment  Agreement,  Mr. Dyott is eligible to receive all other
employee  benefits and perquisites made available to Graphics' senior executives
generally.

         Under the New Employment  Agreement,  if the  employee's  employment is
terminated by Graphics  "without cause" (which, as defined in the New Employment
Agreement,  means a material breach by the employee of his obligations under the
New  Employment  Agreement;  continued  failure or refusal  of the  employee  to
substantially  perform his duties to Graphics;  a willful and material violation
of Federal or state law applicable to Graphics or the employee's conviction of a
felony or perpetration  of a common law fraud; or other willful  misconduct that
is  injurious to Graphics)  or by the  employee  for "good  reason"  (which,  as
defined  in the New  Employment  Agreement,  means a  decrease  in base pay or a
failure by Graphics to pay material  compensation  due and  payable;  a material
diminution of the employee's responsibilities or title; a material change in the
employee's principal employment location;  or a material breach by Graphics of a
material term of the New Employment Agreement), the employee will be entitled to
salary continuation payments (and certain other benefits) through the greater of
the remainder of the scheduled  term and a period of two years  beginning on the
date  of   termination.   The  New   Employment   Agreement  also  provides  for
post-employment non-solicitation, non-competition and confidentiality covenants.

         Graphics  entered into an employment  agreement with Terrence M. Ray on
February 19, 1996,  (the  "Agreement").  The Agreement has a term of three years
commencing  with the date of the Agreement and that term shall be  automatically
extended  for one year  periods  absent  one  year's  notice of an intent not to
renew. The Agreement  provides for the payment of an annual salary and an annual
bonus  pursuant  to an  executive  bonus plan  adopted  by  American  Color.  In
addition, under the Agreement, Mr. Ray is eligible to receive all other employee
benefits  and  perquisites  made  available  to  Graphics'   senior   executives
generally.

         In addition, Graphics has entered into severance agreements with Joseph
M. Milano and Timothy M. Davis.  These agreements provide that if the employee's
employment is terminated by Graphics  "without  cause",  as defined above, or by
the employee for "good reason",  as defined above, the employee will be entitled
to salary continuation payments (and certain other benefits) for up to two years
beginning on the date of termination.

         James T. Sullivan resigned as Chairman of the Board and Chief Executive
Officer  and as a  director  and  employee  of  Communications  effective  as of
September 18, 1996 (the "Effective Date"). For the period commencing on the

                                       62

<PAGE>



Effective Date and ending on April 8, 1999, Mr.  Sullivan will hold the title of
Vice Chairman of Communications.  Mr. Sullivan will receive salary  continuation
payments  at an annual  rate of $600,000  through  April 8, 1999.  For two years
thereafter,  Mr. Sullivan will be engaged as a consultant to Communications  for
which  he will be paid  an  annual  fee of  $200,000.  Under  the  terms  of his
resignation agreement, Mr. Sullivan will be entitled,  through April 8, 1999, to
continue  to  participate  in  certain   employee   benefit  plans  provided  by
Communications to its employees generally. Mr. Sullivan also received payment of
his full  supplemental  retirement  benefit  under the Sullivan  Graphics,  Inc.
Supplemental  Executive  Retirement Plan. Mr. Sullivan's  resignation  agreement
also contains certain noncompetition and other restrictive covenants.

Compensation Committee Interlocks and Insider Participation

         The Company has not maintained a formal  compensation  committee  since
the 1993 Acquisition.  Mr. Dyott sets compensation in conjunction with the Board
of Directors.

Old Stock Option Plan

         Pursuant to the Merger Agreement,  Communications  canceled,  as of the
Effective  Time  and  without  consideration,  each of the  then  unexpired  and
unexercised employee options to purchase shares of Communications Class A Common
Stock and terminated the former Communications stock option plan.

Key Executive Supplemental Bonus Plans

         As of May 5, 1994,  Communications  and Graphics  adopted  Supplemental
Bonus Plans for certain key corporate and divisional  executives.  As such plans
provided, Stephen M. Dyott, Joseph M. Milano, Malcolm J. Anderson and Timothy M.
Davis  received,  at the end of the  Fiscal  Year  1995,  a  payment  equal to a
specified  percentage  of the  excess  of the  EBITDA of  Communications  or the
Printing divisions of Graphics over their respective budgeted EBITDA.

Supplemental Executive Retirement Plan

         In October 1994, the Board of Directors approved a new SERP, which is a
defined  benefit plan,  for the Named  Executive  Officers and other certain key
executives. The plan provides for a basic annual benefit payable upon completion
of five years vesting  service (April 1, 1994 through March 31, 1999 for Messrs.
Dyott,  Milano,  Anderson and Davis and April 1, 1996 through March 31, 2001 for
Mr. Ray) and  retirement  on or after  attaining  age 65 or the present value of
such benefit at an earlier date under  certain  circumstances,  if elected.  The
Named  Executive  Officers have the following basic annual benefit payable under
this plan at age 65:

         Stephen M. Dyott                   $50,000
         Joseph M. Milano                   $50,000
         Malcolm J. Anderson                $50,000
         Terrence M. Ray                    $25,000
         Timothy M. Davis                   $50,000

         Such benefits  will be paid from the  Company's  assets (see note 12 to
the Company's consolidated financial statements).

401(k) Defined Contribution Plan

         Effective  January 1, 1995,  the  Company  amended  its 401(k)  defined
contribution  plan.  Eligible  participants  may  contribute  up to 15% of their
annual  compensation  subject to maximum  amounts  established  by the  Internal
Revenue  Service  and  receive  a  matching  employer  contribution  on  amounts
contributed.  The employer matching  contribution is made biweekly and equals 2%
of annual  compensation  for all plan  participants  plus 50% of the first 6% of
annual compensation contributed to the plan by each employee, subject to maximum
amounts  established  by  the  Internal  Revenue  Service  (see  note  13 to the
Company's consolidated financial statements).

                                       63

<PAGE>




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets  forth  information,  as of March 31,  1997,
concerning the persons having beneficial  ownership of more than five percent of
the capital stock of  Communications  and the ownership thereof by each director
of Communications and by all current officers of Communications as a group.

<TABLE>
<CAPTION>
Name                                           Shares of                       Shares of
----                                         Communications      Percent    Communications     Percent
                                              Common Stock      of Class    Preferred Stock    of Class
                                              ------------      --------    ---------------    --------
<S>                                              <C>               <C>          <C>              <C> 
The Morgan Stanley Leveraged Equity
Fund II, L.P.
1221 Ave. of the Americas
New York, NY 10020                               59,450            48.0         2,973            51.7

MSCP Entities
1221 Ave. of the Americas
New York, NY 10020                               23,333            18.8         1,167            20.3

First Plaza Group Trust
c/o Mellon Bank, N.A
1 Mellon Bank Center
Pittsburgh, PA 15258                             17,000            13.7           850            14.8

Leeway & Co. 
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171                           10,667             8.6           533             9.3

Stephen M. Dyott                                    500             0.4            25             0.4

Eric T. Fry                                          --              --            --              --

Frank V. Sica                                        --              --            --              --

All current directors and officers as a
      group                                         500             0.4            25             0.4
</TABLE>




                                       64

<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The 1993 Acquisition

         On the Acquisition Date, MSLEF II and the Purchasing Group invested $40
million in Communications and acquired control of Communications and Graphics.

         Pursuant to the Merger Agreement, (i) MSLEF II and the Purchasing Group
made a $40 million equity investment in  Communications  and acquired (a) 90% of
the outstanding  Communications  Common Stock and (b) all the outstanding shares
of the preferred stock of Communications (the "Communications Preferred Stock"),
with a total preference of $40 million and which,  under certain  circumstances,
is convertible into shares of Communications  Common Stock; and (ii) GTC and its
affiliates received 4,987 shares of Communications Common Stock.

         MSLEF II is an investment  fund  affiliate  with Morgan  Stanley,  Dean
Witter,  Discover & Co. Morgan Stanley, Dean Witter, Discover & Co. is a holding
company  that,  through its  subsidiaries,  is a major  international  financial
services firm. In addition,  two of the current directors of Communications  are
employees  of Morgan  Stanley & Co.  Incorporated,  an affiliate of MSLEF II and
also a subsidiary of Morgan Stanley, Dean Witter,  Discover & Co. As a result of
these relationships,  Morgan Stanley, Dean Witter,  Discover & Co. may be deemed
to control  the  management  and  policies of Graphics  and  Communications.  In
addition,  Morgan Stanley, Dean Witter,  Discover & Co. may be deemed to control
matters  requiring  shareholders'  approval,   including  the  election  of  all
directors,  the adoption of amendments to the  Certificates of  Incorporation of
Communications  and  Graphics  and the  approval  of mergers and sales of all or
substantially all of Graphics' and Communications' assets.

         Management   Equity   Participation.   In  connection   with  the  1993
Acquisition, certain members of the Company's management at that time, including
James  T.  Sullivan  and  Stephen  M.  Dyott   (collectively,   the  "Management
Investors"),   invested  an   aggregate   of   approximately   $2.3  million  in
Communications  and  received an  aggregate  of 3,700  shares of  Communications
Common Stock and 185 shares of Communications Preferred Stock.

         Each  Management   Investor  also  entered  into  a  Management  Equity
Agreement,  dated as of April 8, 1993, with  Communications  (collectively,  the
"Management  Agreements"),   pursuant  to  which,  if  a  Management  Investor's
employment with the Company  terminates for any reason,  Communications  has the
right to  repurchase  any of the  shares  of  Communications  Common  Stock  and
Communications  Preferred Stock held by such Management  Investor at a price per
share  equal to the  "Threshold  Amount" (as  defined in section  4.2(d)(ix)  of
Communications  Certificate of Incorporation)  applicable to such shares of such
time  divided  by  the  number  of  shares  of  Communications  Preferred  Stock
outstanding at such time. In the case of shares of  Communications  Common Stock
held by such  Management  Investor,  the repurchase  price will be equal to fair
market  value.  The  payment  of the  repurchase  price  may be  deferred  (with
interest) if the making of such payment  would cause  Communications  to violate
any debt covenant or provision of  applicable  law, or if the Board of Directors
of Communications  determines that  Communications is not financially capable of
making such payment.

         Stockholders'  Agreement.  In  connection  with the  1993  Acquisition,
Communications,  MSLEF II, each of the members of the Purchasing  Group, the GTC
Funds,  certain other  stockholders of  Communications  who were stockholders of
Communications  immediately  prior to the Merger  Agreement (such  stockholders,
together with the GTC Funds,  being  referred to as the "Existing  Holders") and
GTC  entered  into a  Stockholders'  Agreement,  dated as of April 8,  1993 (the
"Stockholders'  Agreement").  The Stockholders'  Agreement  includes  provisions
requiring the delivery of certain shares of Communications Common Stock from the
Purchasing  Group to  Communications,  depending upon the return realized by the
members  of the  Purchasing  Group  on their  investment,  and  thereafter  from
Communications to the Existing  Holders.  Depending upon the returns realized by
the members of the Purchasing Group on their  investment,  their interest in the
Communications Common Stock could be reduced from

                                       65

<PAGE>



90% to 80% and the interest of the Existing  Holders could be increased from 10%
to 20% of the Communications Common Stock.

Tax Sharing Agreement

         Communications  and  Graphics  are parties to a tax  sharing  agreement
effective  July 27,  1989.  Under the terms of the  agreement,  Graphics  (whose
income is  consolidated  with that of  Communications  for  federal  income  tax
purposes) is liable to Communications  for amounts  representing  federal income
taxes  calculated  on  a  "stand-alone   basis".  Each  year  Graphics  pays  to
Communications  the lesser of (i) Graphics' federal tax liability  computed on a
stand-alone  basis and (ii) its allocable  share of the federal tax liability of
the consolidated group. Accordingly,  Communications is not currently reimbursed
for the separate tax liability of Graphics to the extent  Communications' losses
reduce   consolidated  tax  liability.   Reimbursement   for  the  use  of  such
Communications'  losses  will  occur  when  the  losses  may be used  to  offset
Communications' income computed on a stand-alone basis. Graphics has also agreed
to reimburse  Communications in the event of any adjustment  (including interest
or  penalties)  to   consolidated   income  tax  returns  based  upon  Graphics'
obligations with respect thereto. No reimbursement  obligation  currently exists
between  Graphics  and  Communications.  Also under the terms of the tax sharing
agreement,  Communications  has  agreed to  reimburse  Graphics  for  refundable
federal  income tax equal to an amount which would be refundable to Graphics had
Graphics  filed  separate  federal  income tax  returns  for all years under the
agreement.  Graphics and Communications have also agreed to treat foreign, state
and local income and franchise taxes for which there is consolidated or combined
reporting in a manner  consistent  with the treatment of federal income taxes as
described above.

Shakopee Merger

         In December  1994,  Graphics  and  Shakopee  entered  into an agreement
pursuant to which they agreed in principle  to the terms of the Shakopee  Merger
and to  negotiate  definitive  agreements  with  respect  thereto.  Prior to the
consummation of the Shakopee  Merger,  the MSCP III Entities owned a majority of
Shakopee's  outstanding  stock  and the  Company  provided  general  management,
supervisory and  administrative  services to Shakopee,  pursuant to a management
agreement  entered into in December  1994, in exchange for an annual service fee
of $0.5  million.  The  Shakopee  Merger  was  consummated  and  the  management
agreement was terminated simultaneously with the consummation of the offering of
the Notes.

Other

         MS&Co. acted as placement agent in connection with the original private
placement  of the  Notes  and  received  a  placement  fee of  $5.6  million  in
connection therewith. MS&Co. is affiliated with entities that beneficially own a
substantial   majority   of  the   outstanding   shares  of  capital   stock  of
Communications.  In addition, Morgan Stanley & Co. Incorporated has a $5 million
participation in the Term Loan Facility and received fees of approximately  $0.3
million in connection therewith.




                                       66

<PAGE>



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      The following documents are filed as a part of this report:

         Reports of Independent Auditors

         1 and 2. Financial Statements: The following Consolidated Financial 
                  Statements of Sullivan Communications, Inc. are included in 
                  Part II, Item 8:

                  Consolidated balance sheets - March 31, 1997 and 1996

                  For the Years Ended March 31, 1997, 1996 and 1995:

                           Consolidated statements of operations
                           Consolidated statements of stockholders' deficit
                           Consolidated statements of cash flows

                           Notes to Consolidated Financial Statements

                  Financial Statement Schedules: The following financial 
                  statement schedules of Sullivan Communications, Inc. are filed
                  as a part of this report.

<TABLE>
<CAPTION>
                  Schedules                                                                                Page No.
                  ---------                                                                                --------
         <S>      <C>                                                                                         <C>
          I.      Condensed Financial Information of Registrant.............................................. 70
                  Condensed Financial Statements (parent company only)
                           for the years ended March 31, 1997, 1996, and 1995 and
                           as of March 31, 1997 and 1996

         II.      Valuation and qualifying accounts.......................................................... 76

</TABLE>
         Schedules  not listed  above  have been  omitted  because  they are not
         applicable  or are not required or the  information  required to be set
         forth therein is included in the Consolidated  Financial  Statements or
         notes thereto.

3.       Exhibits:  The exhibits  listed on the  accompanying  Index to Exhibits
         immediately  following the financial  statement  schedules are filed as
         part of, or incorporated by reference into, this report.

Exhibit No.      Description
-----------      -----------

         3.1     Certificate of Incorporation of Graphics, as amended to date*
         3.2     By-laws of Graphics, as amended to date*
         3.3     Restated Certificate of Incorporation of Communications, as 
                 amended to date**
         3.4     By-laws of Communications, as amended to date*


                                       67

<PAGE>



Exhibit No.      Description
-----------      -----------

         4.1     Indenture  (including the form of Note), dated as of August 15,
                 1995,  among  Graphics,   Communications   and  NationsBank  of
                 Georgia, National Association, as Trustee**

         10.1    Credit   Agreement,   dated  as  of  August  15,  1995,   among
                 Communications,  Graphics, BT Commercial Corporation, as Agent,
                 Bankers  Trust  Company,  as  Issuing  Bank,  and  the  parties
                 signatory thereto**

         10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated as
                 of  August  15,  1995,  among   Communications,   Graphics,  BT
                 Commercial  Corporation,  as Agent,  Bankers Trust Company,  as
                 Issuing Bank, and the parties signatory thereto***

         10.1(b) March 6, 1996, Second Amendment to Credit  Agreement,  dated as
                 of  August  15,  1995,  among   Communications,   Graphics,  BT
                 Commercial  Corporation,  as Agent,  Bankers Trust Company,  as
                 Issuing Bank, and the parties signatory thereto+++

         10.1(c) June 6, 1996, Third Amendment to Credit Agreement,  dated as of
                 August 15, 1995, among Communications,  Graphics, BT Commercial
                 Corporation,  as Agent, Bankers Trust Company, as Issuing Bank,
                 and the parties signatory thereto+++

         10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as
                 of  August  15,  1995,  among   Communications,   Graphics,  BT
                 Commercial  Corporation,  as Agent,  Bankers Trust Company,  as
                 Issuing Bank, and the parties signatory thereto****

         10.1(e) February 27, 1997, Fifth Amendment to Credit  Agreement,  dated
                 as of August  15,  1995,  among  Communications,  Graphics,  BT
                 Commercial  Corporation,  as Agent,  Bankers Trust Company,  as
                 Issuing Bank, and the parties signatory thereto

         10.2    Agreement  and Plan of  Merger,  dated as of August  14,  1995,
                 among Communications, Graphics and Shakopee**

         10.3    Resignation  letter,  dated as of September  18, 1996,  between
                 Graphics and James T. Sullivan****

         10.4(a) Employment  Agreement,  dated  as of  April  8,  1993,  between
                 Graphics and Stephen M. Dyott*

         10.4(b) Amendment  to  Employment  Agreement,  dated  December 1, 1994,
                 between Graphics and Stephen M. Dyott++

         10.4(c) Amendment to  Employment  Agreement,  dated  February 15, 1995,
                 between Graphics and Stephen M. Dyott++

         10.4(d) Amendment to Employment  Agreement,  dated  September 18, 1996,
                 between Graphics and Stephen M. Dyott****

         10.5    Employment  Agreement,  dated as of February 19, 1996,  between
                 Graphics and Terrence M. Ray

         10.6    Severance  Letter,  dated April 8, 1993,  between  Graphics and
                 Joseph M. Milano+

         10.6(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
                 1993, between Graphics and Joseph M. Milano***

         10.7    Severance  Letter,  dated April 8, 1993,  between  Graphics and
                 Timothy M. Davis+

         10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
                 1993, between Graphics and Timothy M. Davis***

         10.9    Amended  and  Restated  Stockholders'  Agreement,  dated  as of
                 August 14,  1995,  among  Communications,  the  Morgan  Stanley
                 Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners
                 III, L.P. and the additional parties named therein**

         10.10   Purchase  Agreement  between  Guy  Gannett  Communications  and
                 Shakopee, dated November 23, 1994+

         10.11   First  Amendment  Agreement,  dated as of  December  22,  1994,
                 between Guy Gannett, Communications and Shakopee**

         10.12   Second Amendment Agreement, dated as of March 27, 1995, between
                 Guy Gannett, Communications and Shakopee**

         10.13   Stock Option Plan of Communications++

                                       68

<PAGE>



         10.14   Purchase  Agreement  between ComCorp,  Inc.,  Graphics and Gowe
                 Inc., dated March 12, 1996+++

         21.1    List of Subsidiaries

         27.0    Financial Data Schedule

-----------
*      Incorporated  by  reference  from  Amendment  No. 2 to Form S-1  filed on
       October 4, 1993 - Registration number 33-65702.

+      Incorporated  by reference from the Annual Report on Form 10-K for fiscal
       year ended March 31, 1995 - Commission file number 33-31706-01.

**     Incorporated  by reference  from Form S-4 filed on  September  19, 1995 -
       Registration number 33-97090.

++     Incorporated  by  reference  from  Amendment  No. 2 to Form S-4  filed on
       November 22, 1995 - Registration number 33-97090.

***    Incorporated by reference from the Quarterly  Report on Form 10-Q for the
       quarter ended December 31, 1995 - Commission file number 33-31706-01.

+++    Incorporated  by reference from the Annual Report on Form 10-K for fiscal
       year ended March 31, 1996 - Commission file number 33-97090.

****   Incorporated by reference from the Quarterly  Report on Form 10-Q for the
       quarter ended September 30, 1996 - Commission file number 33-97090.

(b)    Reports on Form 8-K:

       The following  report on Form 8-K was filed during the fourth  quarter of
Fiscal Year 1997:

       1.       Form 8-K filed with the  Securities  and Exchange  Commission on
                January 29, 1997 under Item 5 to announce the  Company's  EBITDA
                for the three months ended December 31, 1996.

       The Company  did not file any other  reports on Form 8-K during the three
months ended March 31, 1997.




                                       69

<PAGE>




           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                            Condensed Balance Sheets
                    (Dollars in thousands, except par values)







                                                                  March 31,
                                                                  ---------
                                                             1997           1996
                                                             ----           ----
Assets
Current assets:
Receivable from subsidiary for income
taxes                                                         $128           134
                                                              ----          ----
         Total assets                                         $128           134
                                                              ====          ====





















See accompanying notes to condensed financial statements.





                                       70

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                            Condensed Balance Sheets
                    (Dollars in thousands, except par values)


<TABLE>
<CAPTION>


                                                                             March 31,
                                                                             ---------

Liabilities and Stockholders' Deficit                                  1997           1996
-------------------------------------                                  ----           ----
<S>                                                                 <C>            <C>      
Current liabilities
    Income taxes payable                                            $     128            134
                                                                    ---------      ---------
    Total current liabilities                                             128            134
Liabilities of subsidiary in excess of assets                          76,318         44,396
                                                                    ---------      ---------
    Total liabilities                                                  76,446         44,530
                                                                    ---------      ---------
Stockholders' deficit:
    Common stock, voting, $.01 par value, 5,852,223 shares
      authorized, 123,889 shares issued and outstanding                     1              1
    Series A convertible preferred stock, $.01 par value, 4,000
      shares authorized, issued and outstanding, $40,000,000               --             --
      liquidation preference
    Series B convertible preferred stock, $.01 par value, 1,750
      shares authorized, issued and outstanding, $17,500,000               --             --
      liquidation preference
    Additional paid-in capital                                         57,499         57,499
    Accumulated deficit                                              (132,228)      (100,525)
    Cumulative translation adjustment                                  (1,590)        (1,371)
                                                                    ---------      ---------
    Total stockholders' deficit                                       (76,318)       (44,396)
                                                                    ---------      ---------
Commitments and contingencies
    Total liabilities and stockholders' deficit                     $     128            134
                                                                    =========      =========

</TABLE>













See accompanying notes to condensed financial statements.




                                       71

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                       Condensed Statements of Operations
                                 (In thousands)



                                                     Year Ended March 31,
                                                     --------------------
                                             1997          1996           1995
                                             ----          ----           ----

Equity in (loss) income of subsidiary       $(31,703)      (29,327)       13,162
                                            --------       -------        ------

Net (loss) income                           $(31,703)      (29,327)       13,162
                                            ========       =======        ======































See accompanying notes to condensed financial statements.



                                       72

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                       Condensed Statements of Cash Flows
                                 (In thousands)






                                                          Year Ended March 31,
                                                    ----------------------------

                                                       1997      1996      1995
                                                     -------    ------    ------
Cash flows from operating activities                      --        --        --
                                                     -------    ------    ------

Cash flows from investing activities                      --        --        --
                                                     -------    ------    ------

Cash flows from financing activities                      --        --        --
                                                     -------    ------    ------

              Net change in cash                          --        --        --
                                                     =======    ======    ======


























See accompanying notes to condensed financial statements.


                                       73

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                     Notes to Condensed Financial Statements


Description of Sullivan Communications, Inc.

Sullivan Communications, Inc. ("Communications"), together with its wholly-owned
subsidiary, Sullivan Graphics, Inc. ("Graphics"),  collectively the ("Company"),
was  formed  in April  1989  under the name GBP  Holdings,  Inc.  to effect  the
purchase of all the capital stock of GBP Industries,  Inc. from its stockholders
in a leveraged buyout transaction.  In October 1989, GBP Holdings,  Inc. changed
its name to Sullivan Holdings, Inc. and GBP Industries, Inc. changed its name to
Sullivan Graphics, Inc. Effective June 1993, Sullivan Holdings, Inc. changed its
name to Sullivan Communications, Inc.

Communications has no operations or significant assets other than its investment
in Graphics.  Communications  is dependent upon  distributions  from Graphics to
fund its obligations.  Under the terms of its debt agreements at March 31, 1997,
Graphics'  ability  to  pay  dividends  or  lend  to  Communications  is  either
restricted or  prohibited,  except that  Graphics may pay  specified  amounts to
Communications to fund the payment of Communications'  obligations pursuant to a
tax sharing agreement (see note 4).

On April 8, 1993 (the "Acquisition Date"),  pursuant to an Agreement and Plan of
Merger dated as of March 12, 1993, as amended (the "Merger Agreement"),  between
Communications  and SGI Acquisition  Corp.  ("Acquisition  Corp."),  Acquisition
Corp. was merged with and into Communications (the  "Acquisition").  Acquisition
Corp. was formed by The Morgan Stanley  Leveraged Equity Fund II, L.P.,  certain
institutional  investors  and certain  members of  management  (the  "Purchasing
Group") for the  purpose of  acquiring  a majority  interest in  Communications.
Acquisition  Corp.  acquired a substantial and controlling  majority interest in
Communications  in  exchange  for  $40  million  in  cash.  In the  Acquisition,
Communications continued as the surviving corporation and the separate corporate
existence of Acquisition Corp. was terminated.

In connection with the Acquisition,  the existing consulting  agreement with the
managing general partner of Communications'  majority stockholder was terminated
and the related  liabilities  of  Communications  were  canceled.  The agreement
required  Communications  to make  minimum  annual  payments  of $1 million  for
management   advisory   services   subject  to  limitations  in  Graphics'  debt
agreements. No amounts were paid during the periods presented in these condensed
financial statements.

         1.       Basis of Presentation

                  The  accompanying   condensed  financial   statements  (parent
                  company only) include the accounts of  Communications  and its
                  investments in Graphics  accounted for in accordance  with the
                  equity method, and do not present the financial  statements of
                  Communications  and its  subsidiary on a  consolidated  basis.
                  These parent company only financial  statements should be read
                  in  conjunction  with  the  Company's  consolidated  financial
                  statements.  The  Acquisition  was  accounted  for  under  the
                  purchase  method of  accounting  applying  the  provisions  on
                  Accounting Principles Boards Opinion No. 16 ("APB 16").


                                       74

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          SULLIVAN COMMUNICATIONS, INC.
                               Parent Company Only
                     Notes to Condensed Financial Statements

         2.       Guarantees

                  As  set  forth  in  the   Company's   consolidated   financial
                  statements,   substantially   all   of   Graphics'   long-term
                  obligations have been guaranteed by Communications.

                  Communications has guaranteed Graphics' indebtedness under the
                  Bank Credit Agreement,  which guarantee is secured by a pledge
                  of all of Graphics'  stock.  Borrowings  under the Bank Credit
                  Agreement are secured by substantially all assets of Graphics.
                  Communications  is restricted  under its guarantee of the Bank
                  Credit  Agreement  from,  among other  things,  entering  into
                  mergers,  acquisitions,  incurring  additional debt, or paying
                  cash dividends.

                  On August 15,  1995,  Graphics  issued $185  million of Senior
                  Subordinated  Notes (the "Notes")  bearing interest at 12 3/4%
                  and maturing  August 1, 2005.  The Notes are  guaranteed  on a
                  senior   subordinated   basis   by   Communications   and  are
                  subordinate to all existing and future senior indebtedness, as
                  defined, of Graphics.

         3.       Dividends from Subsidiaries and Investees

                  No  cash  dividends  were  paid  to  Communications  from  any
                  consolidated  subsidiaries,   unconsolidated  subsidiaries  or
                  investees  accounted  for  by the  equity  method  during  the
                  periods reflected in these condensed financial statements.

         4.       Tax Sharing Agreement

                  Communications  and  Graphics  are  parties  to a tax  sharing
                  agreement  effective  July 27,  1989.  Under  the terms of the
                  agreement, Graphics (whose income is consolidated with that of
                  Communications  for federal  income tax purposes) is liable to
                  Communications for amounts  representing  federal income taxes
                  calculated on a "stand-alone  basis".  Each year Graphics pays
                  to  Communications  the lesser of (i)  Graphics'  federal  tax
                  liability  computed  on  a  stand-alone  basis  and  (ii)  its
                  allocable   share  of  the  federal  tax   liability   of  the
                  consolidated   group.   Accordingly,   Communications  is  not
                  currently   reimbursed  for  the  separate  tax  liability  of
                  Graphics   to  the  extent   Communications'   losses   reduce
                  consolidated tax liability.  Reimbursement for the use of such
                  Communications'  losses will occur when the losses may be used
                  to offset  Communications'  income  computed on a  stand-alone
                  basis. Graphics has also agreed to reimburse Communications in
                  the event of any adjustment  (including interest or penalties)
                  to  consolidated  income  tax  returns  based  upon  Graphics'
                  obligations with respect thereto. Also, under the terms of the
                  tax sharing agreement,  Communications has agreed to reimburse
                  Graphics  for  refundable  federal  income  taxes  equal to an
                  amount  which would be  refundable  to Graphics  had  Graphics
                  filed separate  federal income tax returns for all years under
                  the agreement. Graphics and Communications have also agreed to
                  treat foreign,  state and local income and franchise taxes for
                  which there is consolidated or combined  reporting in a manner
                  consistent  with the  treatment  of  federal  income  taxes as
                  described above.



                                       75

<PAGE>



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                          SULLIVAN COMMUNICATIONS, INC.

<TABLE>
<CAPTION>



                                                                                           Balance
                                      Balance at     Additions                               at
                                     Beginning of    Charged to                 Other      End of
                                        Period         Expense   Write-offs   Adjustments  Period
                                        ------         -------   ----------   -----------  ------
                                                                 (in thousands)
<S>                                      <C>            <C>       <C>           <C>         <C>    
Fiscal Year ended March 31, 1997
     Allowance for doubtful accounts     $ 4,830        4,847     (3,798)          --        5,879
     Reserve for inventory
     obsolescence -
       spare parts                       $   100          --          --           --          100
     Reserve for inventory
     obsolescence -
       paper & ink                       $   611         318         (45)        (815)          69
     Income tax valuation allowance      $21,210          --          -- (a)    8,928       30,138

Fiscal Year ended March 31, 1996
     Allowance for doubtful accounts     $ 3,174       3,619      (1,963)          --        4,830
     Reserve for inventory
     obsolescence -
       spare parts                       $   100          --          --           --          100
     Reserve for inventory
     obsolescence -
       paper & ink                       $    50          --          --          561          611
     Income tax valuation allowance      $13,808          --          -- (a)    7,402       21,210

Fiscal Year ended March 31, 1995
     Allowance for doubtful accounts     $ 2,828         879      (1,402)         869        3,174
     Reserve for inventory
     obsolescence -
       spare parts                       $   100          --          --           --          100
     Reserve for inventory
     obsolescence -
       paper & ink                       $    50          --          --           --           50

     Income tax valuation allowance      $19,430          --          -- (b)   (5,622)      13,808

</TABLE>

----------
(a)      The increase in the valuation  allowance  primarily  relates to current
         year losses for which no tax benefit has been recorded.

(b)      The  decrease  in  the  valuation   allowance   primarily   relates  to
         utilization  of prior year losses for which  benefit  was not  recorded
         against current year income.



                                       76

<PAGE>





                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrants  have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.

                          Sullivan Communications, Inc.

                             Sullivan Graphics, Inc.

                                                       Date June 30, 1997
                                                       ---- -------------


                           /s/    Stephen M. Dyott
                           -----------------------
                                Stephen M. Dyott
                 Chairman, President and Chief Executive Officer
                          Sullivan Communications, Inc.
                 Chairman, President and Chief Executive Officer
                             Sullivan Graphics, Inc.
      Director of Sullivan Communications, Inc. and Sullivan Graphics, Inc.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.


           Signature                         Title                   Date
           ---------                         -----                   ----


 /s/ Joseph M.  Milano               Senior Vice President       June 30, 1997
-------------------------------                                  -------------
      (Joseph M.  Milano)           Chief Financial Officer



 /s/ Patrick W.  Kellick                Vice President           June 30, 1997
--------------------------------                                 -------------
     (Patrick W.  Kellick)                Controller
                                      Assistant Secretary
                                (Principal Accounting Officer)


 /s/ Frank V.  Sica                        Director              June 30, 1997
-------------------------------                                  -------------
       (Frank V.  Sica)


 /s/ Eric T.  Fry                          Director              June 30, 1997
--------------------------------                                 -------------
        (Eric T.  Fry)

                                       77

<PAGE>





                         SULLIVAN COMMUNICATIONS, INC.

                           Annual Report on Form 10-K

                        Fiscal Year Ended March 31, 1996

                                Index to Exhibits

Exhibit No.       Description
-----------       -----------

      3.1         Certificate of Incorporation of Graphics, as amended to date*

      3.2         By-laws of Graphics, as amended to date*

      3.3         Restated  Certificate of Incorporation of  Communications,  as
                  amended to date**

      3.4         By-laws of Communications, as amended to date*

      4.1         Indenture (including the form of Note), dated as of August 15,
                  1995,  among  Graphics,   Communications  and  NationsBank  of
                  Georgia, National Association, as Trustee**

      10.1        Credit   Agreement,   dated  as  of  August  15,  1995,  among
                  Communications, Graphics, BT Commercial Corporation, as Agent,
                  Bankers  Trust  Company,  as  Issuing  Bank,  and the  parties
                  signatory thereto**

      10.1(a)     January 10, 1996, First Amendment to Credit  Agreement,  dated
                  as of August 15,  1995,  among  Communications,  Graphics,  BT
                  Commercial  Corporation,  as Agent,  Bankers Trust Company, as
                  Issuing Bank, and the parties signatory thereto***

      10.1(b)     March 6, 1996, Second Amendment to Credit Agreement,  dated as
                  of  August  15,  1995,  among  Communications,   Graphics,  BT
                  Commercial  Corporation,  as Agent,  Bankers Trust Company, as
                  Issuing Bank, and the parties signatory thereto+++

      10.1(c)     June 6, 1996, Third Amendment to Credit Agreement, dated as of
                  August 15, 1995, among Communications, Graphics, BT Commercial
                  Corporation, as Agent, Bankers Trust Company, as Issuing Bank,
                  and the parties signatory thereto+++

      10.1(d)     August 13, 1996, Fourth Amendment to Credit  Agreement,  dated
                  as of August 15,  1995,  among  Communications,  Graphics,  BT
                  Commercial  Corporation,  as Agent,  Bankers Trust Company, as
                  Issuing Bank, and the parties signatory thereto****

      10.1(e)     February 27, 1997, Fifth Amendment to Credit Agreement,  dated
                  as of August 15,  1995,  among  Communications,  Graphics,  BT
                  Commercial  Corporation,  as Agent,  Bankers Trust Company, as
                  Issuing Bank, and the parties signatory thereto

      10.2        Agreement  and Plan of Merger,  dated as of August  14,  1995,
                  among Communications, Graphics and Shakopee**

      10.3        Resignation  letter,  dated as of September 18, 1996,  between
                  Graphics and James T. Sullivan ****

      10.4(a)     Employment  Agreement,  dated  as of April  8,  1993,  between
                  Graphics and Stephen M. Dyott*

      10.4(b)     Amendment to  Employment  Agreement,  dated  December 1, 1994,
                  between Graphics and Stephen M. Dyott++

      10.4(c)     Amendment to Employment  Agreement,  dated  February 15, 1995,
                  between Graphics and Stephen M. Dyott++

      10.4(d)     Amendment to Employment  Agreement,  dated September 18, 1996,
                  between Graphics and Stephen M. Dyott****


                                       

<PAGE>



Exhibit No.       Description
-----------       -----------

      10.5        Employment  Agreement,  dated as of February 19, 1996, between
                  Graphics and Terrence M. Ray

      10.6        Severance  Letter,  dated April 8, 1993,  between Graphics and
                  Joseph M. Milano+

      10.6(a)     October 12, 1995,  Amendment to Severance Letter,  dated April
                  8, 1993, between Graphics and Joseph M. Milano***

      10.7        Severance  Letter,  dated April 8, 1993,  between Graphics and
                  Timothy M. Davis+

      10.7(a)     October 12, 1995,  Amendment to Severance Letter,  dated April
                  8, 1993, between Graphics and Timothy M. Davis***

      10.9        Amended  and  Restated  Stockholders'  Agreement,  dated as of
                  August 14,  1995,  among  Communications,  the Morgan  Stanley
                  Leveraged  Equity  Fund  II,  L.P.,   Morgan  Stanley  Capital
                  Partners III, L.P. and the additional parties named therein**

      10.10       Purchase  Agreement  between  Guy Gannett  Communications  and
                  Shakopee, dated November 23, 1994+

      10.11       First  Amendment  Agreement,  dated as of December  22,  1994,
                  between Guy Gannett Communications and Shakopee**

      10.12       Second  Amendment  Agreement,  dated  as of  March  27,  1995,
                  between Guy Gannett Communications and Shakopee**

      10.13       Stock Option Plan of Communications++

      10.14       Purchase  Agreement between ComCorp,  Inc.,  Graphics and Gowe
                  Inc., dated March 12, 1996+++

      21.1        List of Subsidiaries

      27.0        Financial Data Schedule

-----------

*     Incorporated  by  reference  from  Amendment  No. 2 to Form  S-1  filed on
      October 4, 1993 - Registration number 33-65702.

+     Incorporated  by reference  from the Annual Report on Form 10-K for fiscal
      year  ended  March  31,  1995 - Commission  file  number 33-31706-01.

**    Incorporated  by  reference  from Form S-4 filed on  September  19, 1995 -
      Registration number 33-97090.

++    Incorporated  by  reference  from  Amendment  No. 2 to Form  S-4  filed on
      November 22, 1995 - Registration number 33-97090.

***   Incorporated  by reference from the Quarterly  Report on Form 10-Q for the
      quarter ended December 31, 1995 - Commission file number 33-31706-01.

+++   Incorporated  by reference  from the Annual Report on Form 10-K for fiscal
      year ended March 31, 1996 - Commission file number 33-97090.

****  Incorporated  by reference from the Quarterly  Report on Form 10-Q for the
      quarter ended September 30, 1996 - Commission file number 33-97090.