<PAGE> 1
As filed with the Securities and Exchange Commission on July 11, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934)
(Amendment No. )
Disc Graphics, Inc.
(Name of Issuer)
Disc Graphics, Inc.
(Name of Person(s) Filing Statement)
Class A Redeemable Common Stock Purchase Warrants
(Title of Class of Securities)
254590110
(CUSIP Number of Class of Securities)
Nancy D. Lieberman
Blau, Kramer, Wactlar & Lieberman, P.C.
100 Jericho Quadrangle
Suite 225
Jericho, New York 11753
(516) 822-4820
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
July 11, 1997
(Date Tender First Published,
Sent or Given to Security Holders)
CALCULATION OF FILING FEE
Transaction Valuation: $1,131,617.44(a) Amount of Filing Fee: $226.32(b)
(a)Calculated as the value of 317,647 shares of Common Stock, the maximum number
of shares of Common Stock which may be issued in the exchange offer, at the
market price of the Common Stock on July 7, 1997.
(b)Calculated as 1/50 of 1% of the Transaction Valuation.
[ ] Check box if any part of the fee is offset as provided by Rule 0-1 l(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number or the Form or
Schedule and the date of its filing.
Amount Previously Paid: ______________________________________________
Form, or Registration No.:____________________________________________
Filing Party:_________________________________________________________
Date Filed:____________________________________________________________
Exhibit Index
Located on Page 6
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ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Disc Graphics, Inc., a Delaware corporation
(the "Issuer"). The principal executive offices of the Issuer are located at 10
Gilpin Avenue, Hauppauge, New York, 11788.
(b) The title of the securities being sought is Class A Redeemable Common
Stock Purchase Warrants ("Class A Warrants"). As of June 26, 1997, there were
approximately 2,700,000 Class A Warrants issued and outstanding.
The Issuer is seeking to exchange one share of its Common Stock,
$.01 par value for each eight and one-half Class A Warrants, upon the terms and
subject to the conditions set forth in the Exchange Offer dated July 11, 1997
(the "Exchange Offer") and the related Letter of Transmittal (which together
constitute the "Offer"). A copy of each of the Exchange Offer and the Letter of
Transmittal is attached hereto as Exhibit (a)(1) and Exhibit (a)(2),
respectively. Reference is hereby made to the Cover Page, "Summary" and Section
1 "Exchange Terms" of the Exchange Offer, which are incorporated herein by
reference. No directors, officers or affiliates of the Issuer own or intend to
tender any Class A Warrants.
(c) Reference is made to Section 8 "Price Range of the Issuer's
Securities" of the Exchange Offer, which is incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) Reference is hereby made to Section 6 "Purpose and Effects of the
Exchange Offer" of the Exchange Offer, which is incorporated herein by
reference.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
Reference is hereby made to Section 1 "Exchange Terms" and Section 6
"Purpose and Effects of the Exchange Offer" of the Exchange Offer, which are
incorporated herein by reference. Except as set forth therein, the Issuer has no
plans or proposals which relate to or would result in (a) the acquisition by any
Person of additional securities of the Issuer or the disposition of securities
of the Issuer; (b) all extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Issuer or any of its subsidiaries;
(c) a sale or transfer of a material amount of assets of the Issuer or any of
its subsidiaries; (d) any change in the present Board of Directors or management
of the Issuer, including, but not limited to, any plans or proposals to
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change the number or the term of Directors, or to fill any existing vacancy on
the Board of Directors or to change any material term of the employment contract
of any executive officer of the Issuer; (e) any material change in the present
dividend rate or policy, or indebtedness or capitalization of the Issuer; (f)
any other material change in the Issuer's structure or business; (g) any changes
in the Issuer's certificate of incorporation, bylaws or instruments
corresponding thereto or other actions which may impede the acquisition of
control of the Issuer by any person; (h) a class of equity securities of the
Issuer being delisted from a national securities exchange or ceasing to be
authorized to be quoted on an inter-dealer quotation system of a registered
national securities association; (i) a class of equity security of the Issuer
becoming eligible for termination of registration pursuant to Section 12(g) of
the Securities Exchange Act of 1934; or the suspension of the Issuer's
obligation to file reports pursuant to Section 15(d) of the Securities Exchange
Act of 1934.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
As of July 3, 1997, the directors and executive officers of the Issuer as
a group beneficially owned no Class A Warrants. Based upon information provided
to the Issuer by its directors, executive officers and affiliates (as such term
is used in the Exchange Act) neither the Issuer, nor to the best of the Issuer's
knowledge, any of the Issuer's directors or executive officers, nor any person
controlling the Issuer, any executive officer or director of any corporation
ultimately in control of the Issuer or by any associate or subsidiary of any of
the foregoing, including any executive officer or director of any such
subsidiary, has effected any transactions in Class A Warrants during the forty
business day period prior to the date hereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
Reference is hereby made to Section 10 "Action of Board of
Directors; Interest of Directors and Executive Officers; Transactions and
Arrangements Concerning the Class A Warrants" of the Exchange Offer, which are
incorporated herein by reference. Except as set forth therein, the Issuer does
not know of any contract, arrangement, understanding or relationship relating,
directly or indirectly, to the Exchange Offer (whether or not legally
enforceable) between the Issuer, any of the Issuer's executive officers or
directors, any person controlling the Issuer or any officer or director of any
corporation ultimately in control of the Issuer and any person with respect to
any securities of the Issuer (including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint ventures, loan or option arrangements, puts or
calls, guarantees of loans, guarantees against loss, or the giving or
withholding of proxies, consents or authorizations).
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
No persons have been employed, retained or are to be compensated by
or on behalf
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of the Issuer to make solicitations or recommendations in connection with the
Offer.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) Reference is hereby made to the consolidated financial
statements and pro forma consolidated financial statements included in the
Exchange Offer.
ITEM 8. ADDITIONAL INFORMATION.
(a)-(d) Not applicable.
(e) The Exchange Offer, attached hereto as Exhibit (a)(1), is incorporated
herein by reference in its entirety.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1)(i) Exchange Offer dated July 11, 1997.
(a)(1)(ii) Form of Letter to Holders of Class A Warrants.
(a)(2) Form of Letter of Transmittal (including Guidelines for
Certification of Taxpayer Identification Number).
(a)(3) Notice of Guaranteed Delivery.
(a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees.
(a)(5) Form of Letter to Clients from Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees.
(a)(6) Annual Report on Form 10-K for the Year ended December 31,
1996.
(a)(7) Quarterly Report on Form 10-Q for the Quarter ended March 31,
1997.
(c)(1) Exchange Agent Agreement between the Issuer and American Stock
Transfer & Trust Company dated as of July 1, 1997.
(c)(2) Warrant Agreement between RCL Capital Corp. and American Stock
Transfer & Trust Company dated as of November 10, 1993.
(c)(3) 1995 Incentive Stock Option Plan.
(d)-(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief I certify
that the information set forth in this statement is true, complete and correct.
Dated: July 9, 1997
Disc Graphics, Inc.
By: /s/ Donald Sinkin
-------------------
Donald Sinkin
President and Chief Executive
Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
(a)(1)(i) Exchange Offer dated July 11, 1997......................
(a)(1)(ii) Form of Letter to Holders of Class A Warrants...........
(a)(2) Form of Letter of Transmittal (including
Guidelines for Certification of Tax
Identification Number)..................................
(a)(3) Notice of Guaranteed Delivery...........................
(a)(4) Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees......................
(a)(5) Form of Letter to Clients from Brokers, Dealers,
Commercial Banks, Trust Companies and Other
Nominees................................................
(a)(6) Annual Report on Form 10-K for the Year ended
December 31, 1996.......................................
(a)(7) Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1997....................................
(c)(1) Exchange Agent Agreement dated as of July 1, 1997 between
the Issuer and American Stock Transfer & Trust
Company ................................................
(c)(2) Warrant Agreement between RCL Capital Corp. and
American Stock Transfer and Trust Company dated
as of November 10, 1993................................
(c)(3) 1995 Incentive Stock Option Plan........................
(d)-(f) Not applicable.
</TABLE>
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EXCHANGE OFFER
TO THE HOLDERS OF
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
DISC GRAPHICS, INC.
THIS EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 4:00 P.M.,
NEW YORK CITY TIME, ON FRIDAY, AUGUST 22, 1997,
UNLESS THIS EXCHANGE OFFER IS EXTENDED.
Disc Graphics, Inc., a Delaware corporation (the "Issuer") hereby offers to
all holders of its Class A Redeemable Common Stock Purchase Warrants (the "Class
A Warrants"), to exchange for Class A Warrants validly tendered and accepted:
1 share of Common Stock, $.01 par value
for each 8.5 Class A Warrants
The Offer will expire on August 22, 1997 (the "Initial Expiration Date"),
unless extended (the Initial Expiration Date or the later date to which Offer is
extended, the "Expiration Date"), upon the terms and conditions set forth in
this Exchange Offer and the related Letter of Transmittal (which together
constitute the "Offer"). The Class A Warrants are currently traded on the
National Association of Securities Dealers, Inc. SmallCap Market. See Section 8.
THIS OFFER IS BEING MADE TO ALL HOLDERS
OF CLASS A WARRANTS.
THIS OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE SECTION 5.
THIS EXCHANGE IS BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION
WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES AND
EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF ANY SECURITIES, THE
FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
IMPORTANT
If you desire to tender Class A Warrants, you may tender all or any portion
of your Class A Warrants (i) by completing and signing the Letter of Transmittal
(or a facsimile thereof) and mailing or delivering it, together with any Class A
Warrants, to the Exchange Agent or tendering such Class A Warrants pursuant to
the procedures set forth herein for book-entry transfer (See Section 2) or (ii)
by requesting a broker, dealer, commercial bank, trust company or other nominee
to effect the tender. If you own Class A Warrants registered in the name of a
broker, dealer, commercial bank, trust company or other nominee you must contact
such broker, dealer, commercial bank, trust company or other nominee to tender
such Class A Warrants and any other required documents to American Stock
Transfer and Trust Company (the"Exchange Agent"). If you desire to tender Class
A Warrants and your Class A Warrants are not available or you cannot comply with
the procedures for book-entry transfer on a timely basis, you may tender your
Class A Warrants by following the procedures for guaranteed delivery set forth
herein. See Section 2.
NEITHER THE ISSUER NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATIONS TO
ANY HOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH
HOLDERS CLASS A WARRANTS. HOLDERS ARE URGED TO EVALUATE CAREFULLY ALL
INFORMATION IN THE EXCHANGE OFFER, CONSULT THEIR OWN INVESTMENT AND TAX THEIR
OWN DECISIONS WHETHER TO TENDER WARRANTS AND, IF SO, HOW MANY CLASS A WARRANTS
TO TENDER.
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NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
ISSUER AS TO WHETHER HOLDERS SHOULD TENDER CLASS A WARRANTS PURSUANT TO THE
EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE
CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH
RECOMMENDATION AND SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE ISSUER.
Questions and requests for assistance and requests for additional copies of
this Exchange Offer and the Letter of Transmittal should be directed to the
Exchange Agent at American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York 10005, telephone (718) 921-8200.
July 11, 1997
2
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<TABLE>
<C> <S> <C>
SUMMARY.................................................................................. 4
1. EXCHANGE TERMS..................................................................... 7
2. PROCEDURE FOR TENDERING CLASS A WARRANTS........................................... 7
3. WITHDRAWAL RIGHTS.................................................................. 9
4. ACCEPTANCE OF CLASS A WARRANTS..................................................... 10
5. CERTAIN CONDITIONS OF THE EXCHANGE OFFER........................................... 10
6. PURPOSE AND EFFECTS OF THE EXCHANGE OFFER.......................................... 11
7. FAIRNESS OF THE TRANSACTION........................................................ 11
8. PRICE RANGE OF THE ISSUER'S SECURITIES............................................. 12
9. COMPARISON OF SECURITIES........................................................... 13
10. ACTION OF BOARD OF DIRECTORS, INTEREST OF DIRECTORS AND EXECUTIVE OFFICERS;
TRANSACTIONS AND ARRANGEMENTS CONCERNING THE CLASS A WARRANTS...................... 14
11. THE ISSUER......................................................................... 15
12. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUE...................................... 19
13. ADDITIONAL INFORMATION............................................................. 19
14. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO TENDERING HOLDERS....................... 20
15. FEDERAL INCOME TAX CONSEQUENCES TO THE ISSUER...................................... 20
16. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS................................ 20
17. INCORPORATION OF DOCUMENTS BY REFERENCE............................................ 21
18. MISCELLANEOUS...................................................................... 21
19. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DISC GRAPHICS, INC........... 22
</TABLE>
3
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SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information which may be
in the remainder of this Exchange Offer. Each Warrantholder is urged to read the
Exchange Offer in its entirety.
THE ISSUER
BACKGROUND
RCL Capital Corp. ("RCL") was incorporated in August 1992 to serve as a
vehicle to effect a business combination with an operating business. On November
18, 1993, RCL completed a public offering of units ("Units"), each Unit
consisting of one share of the RCL's Common Stock and two redeemable warrants.
Net proceeds of the public offering after the payment of certain additional
expenses yielded approximately $6,400,000, which was put into escrow pending the
acquisition of an operating business.
On October 30, 1995 pursuant to the Agreement and Plan of Merger dated as
of May 8, 1995 (the "Merger Agreement") between RCL and Disc Graphics, Inc., a
New York corporation ("Old Disc"), Old Disc merged with and into RCL (the
"Merger"). Following the Merger, RCL changed its name to Disc Graphics, Inc.
(the "Issuer"). Net Proceeds of the Merger after the payment for the redemption
of approximately 185,000 shares of Common Stock at $5.15 per share, in
accordance with the terms of the original RCL offering, yielded proceeds to the
Issuer of approximately $5,000,000. These proceeds were used primarily to reduce
certain indebtedness of the Issuer and for working capital purposes.
GENERAL
The Issuer, located in Hauppauge, New York, is a diversified manufacturer
and printer of specialty packaging focused on the home video, pharmaceutical,
music, entertainment software, publishing and cosmetics markets. Products
include: pre-recorded video, CD-ROM and audio cassette packaging; folding
cartons for pharmaceuticals and cosmetics; book jackets, posters, pressure
sensitive labels and general commercial printing. Customers include software,
CD-ROM and video distributors; vitamin, cosmetic and fragrance companies; major
book publishers; and Fortune 500 companies.
The Issuer's primary business strategies are: (1) to increase the Issuer's
share of print and packaging sales within its primary markets, including music,
home video, pharmaceutical, cosmetic, publishing and general consumer products;
(2) to acquire other strategically-located specialty packaging and printing
companies that serve geographic markets and industries near existing customers,
as well as serve markets that will permit the Issuer to offer a service and cost
advantage over its competitors; and (3) to develop innovative packaging designs
and techniques for new and existing markets.
The Issuer is actively involved in investigating additional printing and
packaging related business opportunities, including potential acquisitions
similar to the acquisition of Pointille, Inc., a packaging printer, in May 1996.
The Issuer has entered into two letters of intent regarding its acquisition of
substantially all of the assets and certain of the liabilities of two printing
businesses. However, the Issuer has not entered into any definitive agreement
with respect to these or any other acquisitions. In addition, there can be no
assurance that the Issuer will consummate any potential acquisition, or if
completed, that any such acquisition will be profitable for the Issuer.
Historically, the Issuer has grown primarily through the development of new
customers through its superior service and response capabilities and increases
in orders from existing customers. In 1992, the Issuer acquired Four Seasons
Litho, Inc., a commercial printer with revenues of approximately $3 million per
year, and in 1996, the Issuer acquired substantially all of the assets and
certain liabilities of Pointille, and has since integrated their manufacturing
facilities and sales/marketing programs into the Issuer's. The Issuer intends to
continue and enhance its historic growth by acquiring strategically-located
folding carton and printing companies, opening new facilities to serve regional
U.S. markets, expand the Issuer's product line and continue ongoing internal
expansion.
4
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The Issuer's principal executive offices and principal manufacturing
operations are located at 10 Gilpin Avenue, Hauppauge, New York 11788. Its
telephone number is (516) 234-1400.
THE EXCHANGE OFFER
Expiration................. The Exchange Offer expires at 4:00 p.m., New York
City time, on August 22, 1997, unless extended
(the "Expiration Date").
Terms of Exchange.......... One share of Common Stock for each eight and
one-half Class A Warrants tendered.
Fractional Shares.......... No fractional shares of Common Stock will be
issued.
Number of Class A
Warrants................... The Issuer will accept all Class A Warrants validly
tendered and not withdrawn prior to the
Expiration Date.
Market for the Common
Stock...................... The shares of Common Stock are quoted on the Nasdaq
SmallCap Market under the symbol "DSGR".
Tender Procedures.......... Any Warrantholder wishing to accept the Exchange
Offer should complete the accompanying Letter of
Transmittal. If a Warrantholder holds Class A
Warrants in book-entry form, such Warrantholder
may participate in the Exchange Offer by
complying with the procedures for book-entry
transfer set forth in Section 2 of the Exchange
Offer. A Warrantholder may also request his
broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for him.
A Warrantholder having shares registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee must contact that
broker, dealer, commercial bank, trust company or
other nominee if he tenders shares.
Warrantholders whose certificates are not
immediately available or who cannot deliver the
Letter of Transmittal or other documents required
to be delivered to the Exchange Agent prior to
the expiration of the Exchange Offer may
nevertheless tender Class A Warrants in
accordance with the guaranteed delivery
procedures described herein. See Section 2.
Tax Consequences........... Warrantholders are urged to consult their own tax
advisors as to the specific tax consequences to
them of the Exchange Offer. See Section 14.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 4:00
p.m., New York City time, on the Expiration Date
and unless theretofore accepted for exchange by
the Issuer, may also be withdrawn after 9:00
a.m., New York City time, on September 9, 1997.
To be effective, a written, telegraphic or
facsimile notice of withdrawal must be received
in a timely manner by the Exchange Agent. See
Section 3.
Exchange Agent............. American Stock Transfer & Trust Company is the
exchange agent (the "Exchange Agent") for the
Exchange Offer.
Failure to Participate in
Exchange Offer........... The reduced amount of outstanding Class A Warrants
as a result of the Exchange Offer is likely to
limit the trading market for the Class A
Warrants, adversely effect their liquidity and
market price and terminate their continued
listing on the Nasdaq SmallCap Market. Holders of
the Class A Warrants who do not exchange their
Class A Warrants for shares of Common Stock in
the Exchange Offer will be entitled to
5
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receive shares of Common Stock upon exercise of
the Issuer's Class A Warrants upon the same terms
and conditions as are contained in the Class A
Warrants. See Section 6.
NEITHER THE ISSUER NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION THAT
WARRANTHOLDERS TENDER OR REFRAIN FROM TENDERING THEIR CLASS A WARRANTS, AND NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION ON BEHALF OF THE ISSUER.
THIS IS A MATTER FOR EACH WARRANTHOLDER TO DETERMINE AFTER CONSULTATION WITH HIS
ADVISORS, INCLUDING TAX COUNSEL, ON THE BASIS OF HIS OWN FINANCIAL POSITION AND
REQUIREMENTS. SEE SECTION 14.
6
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THE EXCHANGE OFFER
1. EXCHANGE TERMS. The Issuer hereby offers to all holders of its Class A
Warrants the right to exchange eight and one-half (8.5) Class A Warrants which
are properly tendered (and not withdrawn in accordance with Section 3) prior to
4:00 P.M., New York City time, on August 22, 1997 (such time and date being
hereinafter called the "Initial Expiration Date") for one (1) share of Common
Stock $.01 par value. The Issuer reserves the right to extend the Exchange
Offer. See Section 16. The later of the Initial Expiration Date or the latest
time and date to which the Exchange Offer is extended is hereinafter called the
"Expiration Date."
On June 26, 1997, there were approximately 2,700,000 Class A Warrants
issued and outstanding and there were approximately 7 holders of record of such
Class A Warrants. The Issuer has been advised that, no directors, officers or
affiliates of the Issuer own or intend to tender any Class A Warrants.
No fractional shares of Common Stock will be issued as a result of the
Exchange Offer. Each holder of a fractional interest in shares of the Company's
Common Stock will be entitled to receive a cash payment in lieu of such
fractional amount based on the current market price of a share of Common Stock.
The current market price will be determined as follows: (i) if the shares of the
Company's Common Stock are listed on a national securities exchange or admitted
to unlisted trading privileges on such exchange or listed for trading on the
Nasdaq SmallCap Market, the current market price shall be the last reported sale
price of the shares of the Company's Common Stock on the last business day prior
to the date of exchange or, if no such sale is made on such day, the average of
the closing bid and asked prices for such day; or (ii) if not so listed or
admitted for trading, the current market price, if the shares of Common Stock
are not so listed or admitted to trading and bid and asked prices are not so
reported, the current value shall be an amount determined in a reasonable manner
by the Board of Directors of the Company.
As soon as practicable after the determination of the amount of cash, if
any, to be paid to the holder of shares of Common Stock with respect to any
fractional share interests, the Exchange Agent shall distribute in cash the
amount payable to such fractional holder.
The Issuer reserves the right, in its sole discretion, at any time or from
time to time, to extend the period of time during which the Exchange Offer is
open by giving oral or written notice of such extension to the Exchange Agent
and mailing a public announcement thereof. See Section 16. There can be no
assurance, however, that the Issuer will exercise its right to extend the
Exchange Offer. If the Issuer decides, in its sole discretion, to decrease the
number of Class A Warrants being sought and, at the time that notice of such
decrease is first published, sent or given to holders of such Class A Warrants
in the manner specified below, the Exchange Offer is scheduled to expire at any
time earlier than the tenth business day from the date that such notice is first
so published, sent or given, the Exchange Offer will be extended at least until
the end of such ten business day period.
2. PROCEDURE FOR TENDERING CLASS A WARRANTS. Proper Tender of Class A
Warrants. For Class A Warrants to be properly tendered pursuant to the Exchange
Offer, a properly completed and duly executed Letter of Transmittal (or manually
signed facsimile thereof) with any required signature guarantees, any
certificates for such Class A Warrants, and any other documents required by the
Letter of Transmittal, must be received on or before the Expiration Date by the
Exchange Agent at its address set forth on the back cover of this Exchange
Offer. In addition, either (i) Class A Warrants must be received by the Exchange
Agent along with the Letter of Transmittal or Class A Warrants must be tendered
pursuant to the procedure for book-entry transfer described below and
confirmation of the book-entry transfer of Class A Warrants into the Exchange
Agent's account at a Book-Entry Transfer Facility (as defined below) (a
"Book-Entry Confirmation") for tendered Class A Warrants must be received by the
Exchange Agent, in each such case prior to the Expiration Date, or (ii) the
tendering stockholder must comply with the guaranteed delivery procedure set
forth below.
The Exchange Agent will make a request to establish an account with respect
to the Class A Warrants at each of the Depositary Trust Company, Midwest
Securities Trust Company and Philadelphia Exchange Agent Trust Company
(collectively, the "Book-Entry Transfer Facilities") for purposes of the
Exchange Offer
7
<PAGE> 8
within two business days after the date of this Exchange Offer, and any
financial institution that is a participant in any of the Book-Entry Transfer
Facilities systems may make Book-Entry delivery of Class A Warrants by causing a
Book-Entry Transfer Facility to transfer such Class A Warrants into the Exchange
Agent's account at a Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedure for such transfer. However, although
delivery of Class A Warrants may be effected through book-entry transfer into
the Exchange Agent's account at a Book-Entry Transfer Facility, the Letter of
Transmittal (or manually signed facsimile thereof), with any required signature
guarantees and any other required documents, must be transmitted to and received
by the Exchange Agent at its address set forth on the back cover of this
Exchange Offer prior to the Expiration Date, or the tendering stockholder must
comply with the guaranteed delivery procedure described below. Delivery of
documents to a Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedures does not constitute delivery to the Exchange
Agent.
It is a violation of Section 10(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Rule 14e-4 promulgated thereunder, for a
person to tender Class A Warrants for such person's own account unless the
person so tendering owns such Class A Warrants or owns other securities
convertible into or exchangeable for such Class A Warrants or owns an option,
warrant or right to purchase such Class A Warrants and intends to acquire Class
A Warrants for tender by conversion, exchange or exercise of such option,
warrant or right. Section 10(b) and Rule 10b-4 provide a similar restriction
applicable to the tender or guarantee of a tender on behalf of another person.
The acceptance of Class A Warrants by the Issuer for exchange will
constitute a binding agreement between the tendering shareholder and the Issuer
upon the terms and subject to the conditions of the Exchange Offer, including
the tendering holders's representation that (i) such holder owns the Class A
Warrants being tendered within the meaning of Rule 10b-4 promulgated under the
Exchange Act and (ii) the tender of such Class A Warrants complies with Rule
10b-4.
Signature Guarantees and Method of Delivery. No signature guarantee is
required on the Letter of Transmittal if (i) the Letter of Transmittal is signed
by the registered holder of the Class A Warrants tendered therewith and payment
for tendered Class A Warrants is not to be sent to a payee other than the
registered owner of such Class A Warrants and/or to an address other than the
registered address of the registered owner of such Class A Warrants or (ii) such
Class A Warrants are tendered for the account of a firm that is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an institution otherwise acceptable to the
Exchange Agent (an "Eligible Guarantor"). In all other instances, all signatures
on the Letter of Transmittal must be guaranteed by an Eligible Guarantor
(shareholders should contact the Exchange Agent for a determination as to
whether a particular institution is such an Eligible Guarantor). If Class A
Warrants are registered in the name of a person or persons other than the signer
of the Letter of Transmittal or if unaccepted Class A Warrants are to be
registered in the name of, or any certificates for unaccepted Class A Warrants
are to be returned to, any person other than the registered owner, then the
Letter of Transmittal and, if applicable, the tendered certificates must be
endorsed or accompanied by appropriate stock powers, in either case signed
exactly as such name or names appear on the registration of the Class A Warrants
with the signatures on the certificates or stock powers guaranteed by an
Eligible Guarantor, as described above. See Instructions 1 and 4 of the Letter
of Transmittal.
If a holder desires to tender Class A Warrants pursuant to the Exchange
Offer and such holder's Class A Warrants are not immediately available or the
procedure for book-entry transfer cannot be completed on a timely basis or time
will not permit all required documents to reach the Exchange Agent prior to the
Expiration Date, such Class A Warrants may nevertheless be tendered if all the
following conditions are met:
(i) the tender is made by or through an Eligible Guarantor;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Issuer, is received by
the Exchange Agent as provided below prior to the Expiration Date; and
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<PAGE> 9
(iii) the certificates for all tendered Class A Warrants in proper
form for transfer or a Book-Entry Confirmation, together with a properly
completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof), with any required signature guarantee and any other
required documents, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery. Stockholders may not extend the forgoing time
period for delivery of Class A Warrants to the Exchange Agent by providing
a second Notice of Guaranteed Delivery with respect to such Class A
Warrants.
The Notice of Guaranteed Delivery may be delivered by hand to the Exchange
Agent or transmitted by telegram, facsimile or mail to the Exchange Agent and
must include a guarantee by an Eligible Guarantor in the form set forth in the
Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, the issuance of Common Stock
for Class A Warrants tendered and accepted for exchange pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of
certificates for such Class A Warrants or a timely Book-Entry Confirmation for
such Class A Warrants, a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof) and any other documents
required by the Letter of Transmittal.
THE METHOD OF DELIVERY OF ANY DOCUMENTS, INCLUDING CERTIFICATES FOR CLASS A
WARRANTS, IS AT THE ELECTION AND RISK OF THE PARTY TENDERING SUCH CLASS A
WARRANTS. IF DOCUMENTS ARE SENT BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of tenders will be
determined by the Issuer, in its sole discretion, whose determination shall be
final and binding. The Issuer reserves the absolute right to reject any or all
tenders determined by it not to be in appropriate form or the acceptance of or
exchange for which may in the opinion of the Issuer's counsel, be unlawful. The
Issuer also reserves the absolute right to waive any of the conditions of the
Exchange Offer or any defect in any tender with respect to any particular Class
A Warrants or any particular holder, and the Issuer's interpretations of the
terms and conditions of the Exchange Offer will be final and binding. Unless
waived, any defects or irregularities in connection with tenders must be cured
within such times as the Issuer shall determine. Tendered Class A Warrants will
not be accepted for exchange unless the defects or irregularities have been
cured within such time or waived. Neither the Issuer, the Exchange Agent nor any
other person shall be obligated to give notice of any defects or irregularities
in tenders, nor shall any of them incur any liability for failure to give such
notice.
3. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section 3,
tenders of Class A Warrants made pursuant to the Exchange Offer will be
irrevocable. You may withdraw Class A Warrants tendered at any time prior to the
Expiration Date and, if the Class A Warrants have not yet been accepted for
exchange by the Issuer, at any time after 9:00 A.M., New York City time, on
September 9, 1997.
To be effective, a written or facsimile transmission notice of withdrawal
must be timely received by the Exchange Agent at the address or the facsimile
number set forth on the back cover of this Exchange Offer. Any notice of
withdrawal must specify the name of the person having tendered the Class A
Warrants to be withdrawn, the number of Class A Warrants to be withdrawn, and,
if certificates representing such Class A Warrants have been delivered or
otherwise identified to the Exchange Agent, the name of the registered holder(s)
of such Class A Warrants as set forth in such certificates if different from the
name of the person tendering such Class A Warrants. If Class A Warrants have
been delivered to the Exchange Agent, then, prior to the release of such Class A
Warrants, you must also submit the warrant numbers shown on the particular
certificates evidencing such Class A Warrants and the signature on the notice of
withdrawal must be guaranteed by an Eligible Guarantor.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Issuer in its sole discretion,
whose determination shall be final and binding. Neither the Issuer nor any other
person is or will be obligated to give any notice of any defects or withdrawal,
and none of them will incur any liability for failure to give any such notice.
Class A Warrants properly withdrawn shall not
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<PAGE> 10
thereafter be deemed to be tendered for purposes of the Exchange Offer. However,
withdrawn Class A Warrants may be tendered by following the procedures described
in Section 2 prior to the Expiration Date.
4. ACCEPTANCE OF CLASS A WARRANTS. For purposes of the Exchange Offer,
the Issuer will be deemed to have accepted for exchange Class A Warrants which
are tendered and not withdrawn when, as and if it gives oral or written notice
to the Exchange Agent of its acceptance of such Class A Warrants for exchange
pursuant to the Exchange Offer. Upon the Issuer's acceptance for exchange of
Class A Warrants, the Issuer will acquire title to, and beneficial ownership of,
the Class A Warrants. Upon the terms and subject to the conditions of the
Exchange Offer, the Issuer will, promptly after the Expiration Date, accept for
exchange Class A Warrants properly tendered prior to the Expiration Date.
The Exchange Agent will act as agent for tendering shareholders for the
purpose of effecting the exchange to the tendering holders. In all cases,
issuance of Common Stock in exchange for Class A Warrants accepted pursuant to
the Exchange Offer will be made only after timely receipt by the Exchange Agent,
as required pursuant to the Exchange Offer, of a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof), any
certificates representing such Class A Warrants, if issued, and any other
required documents. Certificates for Class A Warrants not exchanged (see Section
5), or for Class A Warrants not tendered included in certificates forwarded to
the Exchange Agent will be returned promptly following the termination,
expiration or withdrawal of the Exchange Offer, without expense to the tendering
shareholder.
5. CERTAIN CONDITIONS OF THE EXCHANGE OFFER. Notwithstanding any other
provisions of the Exchange Offer, the Issuer shall not be required to accept for
exchange, or to issue the Common Stock in exchange for, any Class A Warrants and
may terminate or amend the Exchange Offer if, any time before the acceptance of
the Class A Warrants for exchange or the exchange of the Common Stock for the
Class A Warrants, any of the following events shall occur, which occurrence, in
the sole judgment of the Issuer and regardless of the circumstances (including
any action by the Issuer) giving rise to any such events, makes it inadvisable
to proceed with the Exchange Offer:
(i) there shall be threatened, instituted, or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (a) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (b) resulting in a material delay in the
ability of the Issuer to accept for exchange some or all of the Class A
Warrants pursuant to the Exchange Offer, or any statute, rule, regulation,
order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any domestic or foreign
government or governmental authority that, in the reasonable judgment of
the Issuer, might directly or indirectly result in any of the consequences
referred to in clauses (a) or (b) above, or would otherwise in the
reasonable judgment of the Issuer make it inadvisable to proceed with the
Exchange Offer; provided, however, that the Issuer will use reasonable
efforts to modify or amend the Exchange Offer or to take such other
reasonable steps as to make the provisions of this section inapplicable;
(ii) there shall have occurred (a) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or any limitation by any governmental agency or authority which
adversely affects the extension of credit or (b) a commencement of war,
armed hostilities or other similar international calamity directly or
indirectly involving the United States, or, in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer, a
material acceleration or worsening thereof;
(iii) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operation or
prospects of the Issuer that, in the reasonable judgment of the Issuer, is
or may be adverse to the Issuer, or the Issuer shall have become aware of
facts that, in the sole judgment of the Issuer, have or
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<PAGE> 11
may have adverse significance with respect to the value of the Class A
Warrants or the Common Stock; or
(iv) any governmental approval has not been obtained, which approval
the Issuer shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Issuer determines in its sole discretion that any of the conditions
are not satisfied, the Issuer may (i) refuse to accept any Class A Warrants and
return all tendered Class A Warrants to the tendering holders, (ii) extend the
Exchange Offer and retain all Class A Warrants tendered prior to the Expiration
Date, subject, however, to the rights of holders to withdraw such Class A
Warrants (see Section 3), or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all validly tendered Class A Warrants
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Issuer will promptly disclose such waiver by means of an
Exchange Offer supplement that will be distributed to the registered
Warrantholders, and the Issuer will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered Warrantholders, if the Exchange Offer
would otherwise expire during such five to ten business day period.
The Issuer expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Issuer and may be asserted
by the Issuer regardless of the circumstances giving rise to any such condition
or may be waived by the Issuer in whole or in part at any time and from time to
time in its reasonable discretion. The failure by the Issuer at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Issuer concerning
the events described above will be final and binding upon all parties.
If the Issuer determines to terminate or amend the Exchange Offer or to
postpone the acceptance for exchange of or the exchange for shares tendered, it
will, to the extent necessary, extend the period of time during which the
Exchange Offer is open as provided in Section 16. Moreover, in the event any of
the foregoing conditions are modified or waived in whole or in part at any time,
the Issuer will promptly make a public announcement of such waiver and may,
depending on the materiality of the modification or waiver, extend the Exchange
Offer period as provided in Section 16.
6. PURPOSE AND EFFECTS OF THE EXCHANGE OFFER. The Exchange Offer is
intended to extinguish the Class A Warrants through the issuance of Common Stock
to reduce the future potential dilutive impact on the Issuer's earnings per
share of Common Stock that would be caused by exercise of the Class A Warrants.
In the absence of the Exchange Offer, 2,700,000 shares of Common Stock could be
issued if all of the currently outstanding Class A Warrants held by the
Warrantholders were exercised. Assuming 100% participation in the Exchange
Offer, 317,647 shares of Common Stock will be issued upon consummation of the
Exchange Offer. The Issuer intends to retire any Class A Warrants tendered for
exchange.
Upon acceptance of the tendered Class A Warrants by the Issuer, the
Warrantholders will receive one share of Common Stock for each eight and
one-half Class A Warrants tendered. Warrantholders who do not participate in the
Exchange Offer will retain the right to purchase one share of Common Stock at an
exercise price of $5.50 per Warrant, which price will remain subject to the
adjustment provisions of the Warrant Agreement. The Class A Warrants are subject
to redemption by the Issuer under certain circumstances. See Section 9. To the
extent Warrantholders participate in the Exchange Offer, the trading market for,
and liquidity of, the Class A Warrants which remain outstanding, if any, could
be reduced. In addition, the Issuer intends to delist the Class A Warrants from
trading on the Nasdaq SmallCap Market and deregister the Class A Warrants under
the Exchange Act since it has determined that the Class A Warrants are held of
record by fewer than 300 persons.
7. FAIRNESS OF THE TRANSACTION. The Issuer believes that the Exchange
Offer is fair to the holders of Class A Warrants, based on the following
factors: (i) the closing price of the Class A Warrants of $0.625 per share on
June 24, 1997; (ii) the historical market price of the Class A Warrants for the
past two years (see Section 8); (iii) the exercise price of the Class A Warrants
compared to the market price of the Common Stock (see Section 8); (iv) the
transaction is an exchange offer which, by its terms, is a voluntary transaction
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<PAGE> 12
enabling unaffiliated security holders to elect not to tender their Class A
Warrants; and (vii) all of the non-employee directors of the Issuer have
approved the Offer (see Section 10).
In addition, although the holders of Class A Warrants have no voting rights
with respect to such Class A Warrants and therefore are not entitled to vote to
approve the Exchange Offer, if an unaffiliated holder does not approve of the
Exchange Offer, such holder can elect not to tender Class A Warrants pursuant to
the terms of the Exchange Offer.
FOLLOWING THE EXCHANGE BY THE ISSUER OF COMMON STOCK FOR CLASS A WARRANTS,
THE ISSUER INTENDS TO CAUSE THE CLASS A WARRANTS TO BE DELISTED FROM THE NASDAQ
SMALLCAP MARKET, WHICH WILL RESULT IN THERE BEING NO PUBLIC MARKET FOR THE CLASS
A WARRANTS. IN ADDITION, EVEN IF THE ISSUER DETERMINES NOT TO DELIST THE CLASS A
WARRANTS FROM THE SMALLCAP MARKET, THE REDUCTION IN THE NUMBER OF CLASS A
WARRANTS WHICH ARE ISSUED AND OUTSTANDING MAY ADVERSELY EFFECT THE LIQUIDITY OF
THE TRADING MARKET FOR SUCH CLASS A WARRANTS.
The Issuer has not obtained any reports, opinions or appraisals form any
outside party materially related to the fairness of the Exchange Offer, and
therefore the Issuer has not considered any such reports, opinions and
appraisals in reaching their conclusion that the Exchange Offer is fair to the
holders of Class A Warrants. A majority of the non-employee directors of the
Issuer have not retained an unaffiliated representative to act solely on behalf
of unaffiliated security holders to negotiate the terms of the Exchange Offer or
prepare a report concerning the fairness thereof.
THE ISSUER DOES NOT INTEND TO OFFER TO EXCHANGE ITS CLASS A WARRANTS OTHER
THAN PURSUANT TO THE EXCHANGE OFFER.
8. PRICE RANGE OF THE ISSUER'S SECURITIES. Since May 28, 1996, the
Issuer's Common Stock has been authorized for trading on the National
Association of Securities Dealers, Inc. SmallCap Market under the symbol DSGR.
From October 31, 1995 to May 28, 1996, the Issuer's Common Stock was listed on
the American Stock Exchange under the symbol DGI. Prior to October 31, 1995, the
Common Stock was quoted on the OTC Bulletin Board under the symbol RCLC. The
table set forth below contains the range of the high and low closing bid prices
on the National Association of Securities Dealers, Inc. SmallCap Market for the
quarters ended September 30, 1996, December 31, 1996, March 31, 1997 and June
30, 1997. The prices for the quarters ended March 31, 1996 and June 30, 1996 are
the high and low closing sales prices on the American Stock Exchange. The prices
for the quarters ended March 31, 1995, June 30, 1995, September 30, 1995 and
December 31, 1995 are the high and low bid quotations on the OTC Bulletin Board.
The OTC Bulletin Board quotations represent prices between dealers and do not
include retail mark up, mark down or commission. They do not necessarily
represent actual transactions.
The Issuer's Class A Warrants are currently authorized for trading on the
National Association of Securities Dealers, Inc. SmallCap Market under the
symbol DSGRW. From October 31, 1995 to May 28, 1996 the Class A Warrants were
quoted and traded on the OTC Bulletin Board under the symbol DSGRW. Prior to
October 31, 1995, the Class A Warrants were quoted and traded on the OTC
Bulletin Board under the symbol RCLCW. The table set forth below contains the
range of the high and low closing bid prices on the National Association of
Securities Dealers, Inc. SmallCap Market for the quarters ended September 30,
1996, December 31, 1996, March 31, 1997 and June 30, 1997. The prices for the
quarters ended March 31, 1995, June 30, 1995, September 30, 1995, December 31,
1995, March 31, 1996 and June 30, 1996 are the high and low bid quotations on
the OTC Bulletin Board . The OTC Bulletin Board quotations represent prices
between dealers and do not include retail mark up, mark down or commission. They
do not necessarily represent actual transactions.
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<PAGE> 13
<TABLE>
<CAPTION>
COMMON STOCK CLASS A WARRANTS UNITS
------------------ ----------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
-------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED
March 31, 1995.......................... $4.625 $3.75 $0.50 $0.125 $5.875 $4.50
June 30, 1995........................... 4.9375 4.50 0.75 0.375 5.75 5.00
September 30, 1995...................... 4.88 4.50 0.8125 0.4375 6.00 5.375
December 31, 1995....................... 5.15625 2.875 0.8125 0.4375 6.00 3.00
March 31, 1996.......................... 4.25 3.3125 0.8125 0.4375 * *
June 30, 1996........................... 3.9375 2.625 0.75 0.375 * *
September 30, 1996...................... 2.9375 1.6875 0.375 0.125 * *
December 31, 1996....................... 2.75 2.125 0.25 0.125 * *
March 31, 1997.......................... 3.50 2.1875 0.4375 0.1406 * *
June 30, 1997 (through June 24, 1997)... 3.8125 2.625 0.875 0.3125 * *
</TABLE>
- ---------------
* On October 31, 1995, the Units were eliminated upon the Merger of RCL and Old
Disc.
On June 24, 1997, the closing bid prices for the Common Stock and the Class
A Warrants were $3.375 and $0.625, respectively. As of June 26, 1997, there were
54 holders of record of the Common Stock and 7 holders of record of Class A
Warrants.
9. COMPARISON OF SECURITIES.
Description of Common Stock.
The authorized Common Stock of the Issuer consists of 20,000,000 shares,
$.01 par value.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock registered in his or her name on the books of the Issuer. The
shares of Common Stock do not have cumulative voting rights, which means that
the holders of more than fifty (50%) percent of the voting power of the shares
voting for the election of a class of directors can elect all of the directors
of such class and in such event the holders of the remaining shares will not be
able to elect any of such directors. The Issuer's Board of Directors consists of
three classes, each of which serves for a term of three years. At each annual
meeting of the stockholders the directors in only one class will be elected.
Holders of Common Stock do not have subscription, redemption, conversion or
preemptive rights. Each share of Common Stock is entitled to participate pro
rata in distribution upon liquidation, subject to the rights of holders of
preferred stock. The holders of Common Stock may receive cash dividends as
declared by the Board of Directors out of funds legally available therefor,
subject to the rights of any holders of preferred stock. There are no shares of
preferred stock issued and outstanding.
Description of Class A Warrants.
The Class A Warrants were issued in registered form pursuant to an
agreement, dated as of November 10, 1993 (the "Warrant Agreement"), between the
Issuer and American Stock Transfer & Trust Company (the "Warrant Agent"). The
following discussion of certain terms and provisions of the Class A Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to this Exchange
Offer.
One Warrant represents the right of the registered Warrantholder to
purchase one share of Common Stock at an exercise price of $5.50 per share,
subject to adjustment (the "Exercise Price") until November 10, 1999 (the
"Warrant Expiration Date"). The Exercise Price and the number of shares of
Common Stock issuable upon the exercise of the Class A Warrants are subject to
adjustment in certain circumstances, including a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
At any time prior to the close of business on the Warrant Expiration Date
(on which date the Class A Warrants become wholly void and of no value), the
Class A Warrants, unless previously redeemed, or
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<PAGE> 14
exchanged pursuant to the Exchange Offer, may be exercised at the office of the
Warrant Agent. No holder of Class A Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose whatsoever until such Class A Warrants have been duly exercised and the
Exercise Price has been paid in full or exchanged pursuant to the Exchange
Offer.
Under the provisions of the Warrant Agreement, the Issuer has the right at
any time, to redeem the Class A Warrants in whole but not in part at a price of
$.05 each, by written notice mailed not less than 30 days prior to the
redemption date to each Warrantholder at his address as it appears on the books
of the Warrant Agent; provided that the reported closing bid price of the Common
Stock equals or exceeds $9.50 per share for the 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. If the Class A Warrants are called for redemption,
they must be exercised prior to the close of business on the date of any such
redemption or the right to purchase the applicable shares of Common Stock is
forfeited.
10. ACTION OF BOARD OF DIRECTORS; INTEREST OF DIRECTORS AND EXECUTIVE
OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE CLASS A WARRANTS. No
director of the Issuer dissented to or abstained from voting on the Offer.
As of July 3, 1997, the directors and executive officers of the Issuer as a
group beneficially owned no Class A Warrants.
Except as set forth in this Section 10, based upon information provided to
the Issuer by its directors, executive officers and affiliates (as such term is
used in the Exchange Act) neither the Issuer, nor to the best of the Issuer's
knowledge, any of the Issuer's directors or executive officers, nor any
associates of any of the foregoing, has effected any transactions in Class A
Warrants during the forty business day period prior to the date hereof.
THE ISSUER DOES NOT INTEND TO OFFER TO EXCHANGE ITS CLASS A WARRANTS OTHER
THAN PURSUANT TO THE EXCHANGE OFFER.
The Issuer and the Exchange Agent have entered into an Exchange Agent
agreement pursuant to which the Exchange Agent will perform services for the
Issuer in connection with the tender and withdrawal of shares pursuant to the
Exchange Offer.
The Exchange Agent will receive reasonable and customary compensation for
their services in connection with the Exchange Offer, will be reimbursed for
their reasonable out of pocket expenses and may be indemnified against certain
liabilities and expenses in connection with the Exchange Offer.
In connection with the Issuer's initial public offering, the Issuer sold to
the underwriters thereof, RAS Securities Corp. and Rodman & Renshaw, Inc., as
the representatives of the underwriters (collectively, the "IPO
Representatives"), for nominal consideration, certain common stock purchase
warrants (the "Underwriters' Warrants"). The Underwriters' Warrants entitle the
Underwriters, at an exercise price of $9.00 per unit, to (a) two Class A
Warrants and (b) one share of Common Stock, are exercisable for a period of four
years ending November 10, 1999. The exercise price for the Warrant contained in
the Unit is $5.50. The Underwriters' Warrants contain anti-dilution provisions
providing for adjustment of the number of Class A Warrants and exercise price
upon the occurrence of certain events, including the issuance of shares of
Common Stock at a price per share less than the exercise price or the market
price of the Common Stock, or in the event of any recapitalization,
reclassification, stock dividend, stock split, stock combination, or similar
transaction. As the result of these anti-dilution provisions, the IPO
Representative presently are entitled to acquire 270,000 Class A Warrants and
135,000 shares of Common Stock. The Underwriters' Warrants grant to the IPO
Representatives certain "piggyback" and demand rights with respect to the
registration under the Securities Act of the securities directly or indirectly
issuable upon exercise of the Underwriters' Warrants. The IPO Representatives
have agreed in principle to amend the portion of the Underwriters' Warrants
representing the right to purchase 270,000 Class A Warrants, each exercisable to
purchase one share of Common Stock. The IPO Representatives have not agreed to
exercise the Underwriters' Warrants to actually purchase shares of Common Stock.
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<PAGE> 15
Except as set forth in this Exchange Offer, neither the Issuer, any of the
Issuer's directors or executive officers nor any affiliates of the foregoing is
a party to any contract, arrangement, understanding or relationship with any
other person relating, directly or indirectly, to the Exchange Offer with
respect to any securities of the Issuer (including, but not limited to, any
contract, arrangement, understanding or relationship concerning the transfer or
the voting of any such securities, joint ventures, loan or option arrangements,
puts or calls, guaranties of loans, guaranties against loss or the giving or
withholding of proxies, consents or authorizations).
11. THE ISSUER.
Background. RCL Capital Corp. ("RCL") was incorporated in August 1992 to
serve as a vehicle to effect a business combination with an operating business.
On November 18, 1993, RCL completed a public offering of units ("Units"), each
Unit consisting of one share of the RCL's Common Stock and two redeemable
warrants. Net proceeds of the public offering after the payment of certain
additional expenses yielded approximately $6,400,000, which was put into escrow
pending the acquisition of an operating business.
On October 30, 1995 Old Disc merged with and into RCL. Following the
merger, RCL changed its name to Disc Graphics, Inc. Net Proceeds of the merger
after the payment for the redemption of approximately 185,000 shares of Common
Stock at $5.15 per share, in accordance with the terms of the original RCL
offering, yielded proceeds to the Issuer of approximately $5,000,000. These
proceeds were used primarily to reduce certain indebtedness of the Issuer and
for working capital purposes.
The merger has been treated for accounting and financial reporting purposes
as a reverse merger of RCL into Old Disc. Accordingly, the Issuer's results of
operations prior to October 30, 1995 are those of Old Disc. In addition, in
connection with the merger, the Issuer adopted a December 31 fiscal year.
General. The Issuer, located in Hauppauge, New York, is a diversified
manufacturer and printer of specialty packaging focused on the home video,
pharmaceutical, music, entertainment software, publishing and cosmetics markets.
Products include: pre-recorded video, CD-ROM and audio cassette packaging;
folding cartons for pharmaceuticals and cosmetics; book jackets, posters,
pressure sensitive labels and general commercial printing. Customers include
software, CD-ROM and video distributors; vitamin, cosmetic and fragrance
companies; major book publishers; and Fortune 500 companies.
The Issuer's primary business strategies are: (1) to increase the Issuer's
share of print and packaging sales within its primary markets, including music,
home video, pharmaceutical, cosmetic, publishing and general consumer products;
(2) to acquire other strategically-located specialty packaging and printing
companies that serve geographic markets and industries near existing customers,
as well as serve markets that will permit the Issuer to offer a service and cost
advantage over its competitors; and (3) to develop innovative packaging designs
and techniques for new and existing markets.
The Issuer is actively involved in investigating additional printing and
packaging related business opportunities, including potential acquisitions
similar to the acquisition of Pointille, Inc., a packaging printer, in May 1996.
The Issuer has entered into two letters of intent regarding its acquisition of
substantially all of the assets and certain of the liabilities of two printing
businesses. However, the Issuer has not entered into any definitive agreement
with respect to these or any other acquisitions. In addition, there can be no
assurance that the Issuer will consummate any potential acquisition, or if
completed, that any such acquisition will be profitable for the Issuer.
Historically, the Issuer has grown primarily through the development of new
customers through its superior service and response capabilities and increases
in orders from existing customers. In 1992, the Issuer acquired Four Seasons
Litho, Inc., a commercial printer with revenues of approximately $3 million per
year, and in 1996, the Issuer acquired substantially all of the assets and
certain liabilities of Pointille, and has since integrated their manufacturing
facilities and sales/marketing programs into the Issuer's. The Issuer intends to
continue and enhance its historic growth by acquiring strategically-located
folding carton and printing companies, opening new facilities to serve regional
U.S. markets, expand the Issuer's product line and continue ongoing internal
expansion.
15
<PAGE> 16
The Issuer's principal executive offices and principal manufacturing
operations are located at 10 Gilpin Avenue, Hauppauge, New York 11788. Its
telephone number is (516) 234-1400.
Packaging/Printing Industry. Approximately 70% of the Issuer's revenue in
1996 was derived from the manufacture and sale of paperboard folding cartons. An
industry trade publication has estimated that in 1996 there were 300 companies
operating 495 folding carton manufacturing plants in the United States and that
total revenues from the sale of folding cartons was approximately $5.4 billion,
reflecting a 2.6% increase over 1995.
Folding carton manufacturers are divided into three main segments:
integrated manufacturers (those owned by or affiliated with a paperboard mill),
non-integrated or independent manufacturers and, in-plant or "captive"
manufacturers which are owned directly by the end user. The Issuer generally
competes with independent manufacturers. The Issuer focuses on those markets
that use the folding carton as part of a product's marketing. The promotional
function of the carton may employ multiple colors, coatings, several printing
techniques, stamping and other graphic design considerations. The Issuer has
concentrated in markets, such as the home video, software, cosmetics, music and
pharmaceutical packaging markets, which utilize those techniques to a
significant extent. The Issuer has devoted substantial resources toward
developing the specialized processes required in such markets.
The Issuer's business includes commercial printing, book component printing
and labels. Industry trade sources have estimated that the total United States
commercial printing market in 1996 was approximately $74 billion. The industry
is fragmented with many small printing companies serving regional markets. For
example, within the New York City Metropolitan area, there are nearly 3,500
printing establishments with 76% having fewer than ten employees. The Issuer is
listed in the top 200 printers in the United States, based on revenues. Based on
1995 revenues, the Issuer was ranked 183 in the top 500 printing companies in
the United States by an industry trade publication.
Products.
VIDEO/ENTERTAINMENT SOFTWARE PACKAGING
The Issuer manufactures video packaging, including bottom load video
sleeves, multi-packs and specialty items. The Issuer has historically
concentrated on the catalogue and special interest video/software markets. The
Issuer's catalogue customers typically have licensed or purchased products from
major movie production studios. Special interest continues to be a growing
segment of the video market. Packaging for these videos is often sold to
independent distributors and video tape duplicators. Through these distributors
and duplicators the Issuer has produced packaging for many Fortune 500
companies. In addition, the acquisition of Pointille has provided the Issuer
with a facility in close proximity to major film and video studios. Through this
facility, the Issuer produces video packaging for studios such as The Walt
Disney Company and Time Warner, Inc.
Software packaging has been a growing market for the Issuer, with CD-ROM
packaging as the principal product. Many of the Issuer's existing video,
publishing and music customers are marketing software through their existing
distribution channels and are purchasing software packaging from the Issuer.
MUSIC/AUDIO PACKAGING
The Issuer manufactures pre-recorded cassette packaging, such as insert or
"J" cards, cassingles (cassettes with only one or a few songs), compact disc
packaging, including tray cards and booklets, as well as audio book packaging
and other printed materials for the music/audio industry.
The music industry customers often require that packaging be produced
quickly, often within days of placing an order. As an established and accepted
music industry printer, the Issuer has assembled a combination of skilled
workers, advanced equipment, and production systems to meet these requirements.
The Issuer has long standing customer relationships with many of the major
record companies in the United States and also manufactures packaging for major
duplicators in the United States. Additionally, the Issuer manufactures
packaging for special interests and secondary markets. The acquisition of
Pointille has
16
<PAGE> 17
bolstered the Issuer's presence in the West Coast market and management believes
this will greatly enhance future growth.
The other major segment of this market is audio publishing packaging. The
Issuer believes that it has a significant share of this market. The Issuer's
principal customers include two of the largest publishers in this market. The
Issuer also manufactures packaging for self-help and specialty cassettes which
are a growing portion of this market.
PHARMACEUTICAL/VITAMIN PACKAGING
Pharmaceuticals fall into two main categories: over-the-counter ("OTC") and
prescription. Each category places specific requirements upon the graphics for
the folding cartons and labels used. The Issuer has emphasized the OTC side of
the market, which requires the use of multi-color graphics to convey product
identity and brand recognition. A large part of the Issuer's revenues for
OTC-style cartons is for "private label" products, such as for large food and
drug store chains which have their own house brands and other private label
pharmaceutical manufacturers.
Vitamin and nutritional supplements packaging is the other major portion of
the Issuer's OTC carton business. Color graphics are also emphasized for vitamin
packaging as the product lines have distinct vibrant colors. Sales of these
cartons are made directly to several major vitamin manufacturers.
CONSUMER PRODUCT PACKAGING
The Issuer manufactures cartons and packaging for fragrances, skin lotions,
pet products, food and other specialty packaging for this market. Those
packagings may be the actual product carton or special point-of-purchase
promotions for the major cosmetic companies or educational packages for
pharmaceutical companies. The Issuer sells packaging for this market both
directly and through brokers representing national brands and private label
companies.
COMMERCIAL PRINTING
In the area of commercial printing, the Issuer prints brochures, posters,
sell sheets and other promotional material. The Issuer prints book jackets and
covers, as well as children's books and "cut labels" for vitamin and food
packaging.
LABELS
The Issuer prints labels on pressure sensitive stock that are die cut to a
customer's specifications. The primary markets for labels are pharmaceuticals,
vitamins, video packages (face and spine labels), pet products and specialty
items. Labels are sold primarily to existing customers for packaging. Many video
and folding carton orders include an order for the corresponding labels.
Marketing and Sales. The Issuer's revenues are derived from several
markets. The largest market, as a percentage of total 1996 net sales, was
video/entertainment software which accounted for approximately 29%; followed by
consumer product packaging, which accounted for approximately 27%; next was
music/audio packaging, which accounted for 18%; then pharmaceutical/vitamin
packaging, which accounted for approximately 10%; then commercial printing,
which accounted for approximately 9%; and labels which accounted for
approximately 7%.
The Issuer's sales are primarily the result of direct solicitation by its
executive officers and full-time sales people. The Issuer's package engineering
staff assists customers with new package design and development. Because the
Issuer has a short cycle time, it has a small order backlog, with most orders
processed and delivered in one to four weeks.
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<PAGE> 18
Seasonality. Historically, the Issuer's revenues have been seasonal. In
the last two quarters of 1996 and 1995, the Issuer's revenues were approximately
56% and 53% of annual sales, respectively. This seasonality is primarily the
result of certain markets which the Issuer services, such as music/audio
packaging, video/entertainment software packaging and consumer product
packaging, which require that products be produced and shipped between August
and October for sale during the Christmas holiday season. As these three
categories account for approximately 70.8% of the Issuer's sales in 1996, the
revenues of the Issuer are typically greater in the last six months of the
calendar year versus the first six months.
Competition. The Issuer competes with a small number of printed paperboard
packaging companies within each of its markets. In the music, video and software
industries, the Issuer has five major competitors, the largest of which is
Shorewood Packaging Corporation. These industries require high quality packaging
with rapid turnaround time at competitive pricing. Those competitive factors are
also evident in the Issuer's other markets. The Issuer believes that its ability
to perform all aspects of the manufacturing process in-house is an important
factor in maintaining and improving its competitive position.
While the Issuer believes its present competitive position is strong, there
can be no assurance that this will not change. Several of the Issuer's
competitors have financial resources that are greater than the Issuer's. In
addition, because the Issuer supplies packaging to consumer industries, it is
also subject to the competitive forces affecting its customers.
Employees. As of March 15, 1997, the Issuer had approximately 372
employees. 274 of these employees are located in the Issuer's Hauppauge, New
York facility, with 227 serving in manufacturing capacities and 47 serving in
selling and administrative capacities. 75 employees are located in the Issuer's
Burbank, California facility, with 69 serving in manufacturing capacities and 6
serving in selling and administrative capacities. 23 employees are located in
the Issuer's Rockaway, New Jersey facility, with 21 serving in manufacturing
capacities and 2 serving in selling and administrative capacities. A majority of
the manufacturing employees located in the Burbank, California facility are
represented by a labor union. The Issuer considers its relationship with its
employees to be satisfactory.
Materials. The Issuer uses a variety of raw materials. The most
significant types of raw material utilized are paperboard, paper, label paper,
ink, coating, films and plates. These materials are purchased from a variety of
suppliers with several alternate sources for each. Although the supply of paper
and paperboard over the past several years has been limited, resulting in
industry wide shortages and price increases, the Issuer has been successful in
obtaining adequate materials to satisfy all sales orders, and does not
anticipate any significant difficulties in obtaining supplies of such materials
in the future. There are no assurances, however, that the Issuer will not
encounter difficulty in obtaining supplies of such material to fulfill its
requirements.
Equipment. The Issuer owns or leases various manufacturing, computer and
other equipment used in the manufacture of its products and for its
administrative support.
Regulation. The Issuer's activities are subject to various environmental,
health and employee safety laws. The Issuer has expended resources, both
financial and managerial, to comply with applicable environmental, health and
worker safety laws in its operations and at its facilities and anticipates that
it will continue to do so in the future. Compliance with environmental laws has
not historically had a material effect on the Issuer's capital expenditures,
earnings or competitive position, and the Issuer does not anticipate that such
compliance will have a material effect on the Issuer in the future. Although the
Issuer believes that it is generally in compliance with all applicable
environmental, health and worker safety laws, there can be no assurance that
additional costs for compliance will not be incurred in the future or that such
costs will not be material.
Properties. The Issuer's executive offices, primary manufacturing facility
and its warehouse are located in Hauppauge, New York. The executive offices and
manufacturing plant are part of a leased 55,000 square foot facility. The
monthly lease payment for such executive office and manufacturing space is
$29,000 and the lease terminates on December 31, 2007. The facility is owned by
certain principals of the Issuer through a limited partnership and the Issuer
believes that the lease terms were and are at least as favorable to the Issuer
as the lease terms which could have been obtained from unaffiliated third
parties for similar office,
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<PAGE> 19
manufacturing and warehouse space. The Issuer's warehouse facility is a building
adjacent to its executive offices of which 40,000 square feet is occupied by the
Issuer. The monthly lease payment for the warehouse is $11,267 and the lease
terminates on August 31, 1997. The Issuer also maintains an 8,400 square foot
printing facility in Rockaway, New Jersey. The monthly lease payment for the New
Jersey facility is $3,325 and the lease terminates on June 13, 1998. The Issuer
leases a 30,000 square foot manufacturing facility in Burbank, California. The
monthly lease payment for the California facility is $17,400 and the lease
terminates on May 18, 1998. Management of the Issuer believes that the
facilities are adequate to meet current operational needs.
Legal Proceedings. From time to time, the Issuer is a party to certain
lawsuits that arise in the conduct of its business. While the outcome of these
lawsuits and proceedings cannot be predicted with certainty, management believes
that, if adversely determined, the lawsuits and proceedings, either singularly
or in the aggregate, would not have a material adverse effect on the financial
condition or results of operations of the Issuer.
12. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER.
Donald Sinkin (49 years of age) has been President, Chief Executive Officer
and Chairman of the Board of the Issuer and its predecessor since 1986.
Stephen Frey (43) has been Vice President of Operations and a Director of
the Issuer and its predecessor since 1986.
John Rebecchi (42) has been the Issuer's Vice President of Sales and a
Director since October 1995 and was Chief Financial Officer from October 1995 to
January 1996. Prior to October 1995, Mr. Rebecchi was Vice President of
Marketing and Chief Financial Officer of the Issuer's predecessor since 1988.
Daniel Levinson (36) has been a Director of the Issuer and its predecessor
since October 1991. Mr. Levinson has been a member of Holding Capital Group
since 1988 and has sponsored acquisitions of and investments in several small to
mid-cap companies. Mr. Levinson currently is a director of several private
companies.
Seymour W. Zises (43) has been a Director of the Issuer since August 1992
and was a Vice President and Treasurer from August 1992 until October 1995. He
is currently President and Chief Executive Officer of Family Management
Corporation, a registered investment advisory firm in New York City which he
established in 1989. Mr. Zises also serves as President and Chief Executive
Officer of Forest Hill Capital Corporation, a merchant banking concern. Mr.
Zises is also a Director of Specialty Retail Group, Inc., a publicly traded
retailer. Prior to his founding Family Management Corporation and Forest Hill
Capital Corporation, he was an independent financial services representative
licensed with Integrated Resources Equity Corporation, a broker dealer. Mr.
Zises is one of several individual general partners or an officer or shareholder
of a general partner of six (6) real estate limited partnerships which filed
petitions for bankruptcy under Chapter 11 of the United States Bankruptcy Code
between 1990 and February 1993. Mr. Zises serves on the Board of Trustees of
Beth Israel Medical Center in New York City.
Mark L. Friedman (49) has been a Director of the Issuer since April 1996
and was a Vice President, Secretary and a Director of the Issuer from August
1992 until October 1995. He has been counsel to the law firm of Baer Marks &
Upham since February 1995. From January 1993 through January 1995 he was counsel
to the law firm of Proskauer Rose Goetz & Mendelsohn. From 1982 through 1992 he
was (individually or through a professional corporation) a partner of the law
firm of Shea & Gould. Mr. Friedman is a director of Universal Gym Equipment,
Inc., a fitness equipment company, and is a partner of Gulfstream Capital
Partners.
Margaret Krumholz (37) has been Chief Financial Officer of the Issuer since
January 1996. From October 1994 through December 1995, Mrs. Krumholz served as
Controller of the Issuer. Prior to joining the Issuer, from October 1987 to
October 1994, Mrs. Krumholz was employed in various financial and accounting
positions, including Corporate Finance Manager, for General Foods Baking
Company.
13. ADDITIONAL INFORMATION. The Issuer has filed a statement on Schedule
13E-4 with the Securities and Exchange Commission (the "Commission") which
includes certain additional information relating to the
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<PAGE> 20
Exchange Offer. Such material may be inspected and copied at prescribed rates at
the Commission's public reference facilities at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 10549 and 75 Park Place, New York, New York
10007. Copies of such material may also be obtained by mail at prescribed rates
from the Public Reference Branch of the Commission at 450 Fifth Street, N.W,
Washington, D.C. 20549.
14. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO TENDERING HOLDERS. THE
FOLLOWING DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER AND DOES NOT CONSIDER
ALL POTENTIAL TAX EFFECTS OF THE EXCHANGE OFFER OR THE TAX CONSEQUENCES TO A
PARTICULAR WARRANTHOLDER IN LIGHT OF SUCH WARRANTHOLDER'S PERSONAL
CIRCUMSTANCES. THIS DISCUSSION ALSO DOES NOT ADDRESS THE U.S. FEDERAL INCOME TAX
CONSEQUENCES TO WARRANTHOLDERS (AND UNDERLYING COMMON STOCK) NOT HELD AS CAPITAL
ASSETS OR TO WARRANTHOLDERS SUBJECT TO SPECIAL TREATMENT, SUCH AS NON-U.S.
PERSONS, DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT
ORGANIZATIONS, WARRANTHOLDERS OWNING AT LEAST 10% OF THE VOTING POWER OF THE
ISSUER AND WARRANTHOLDERS WHO ACQUIRED THEIR INTERESTS PURSUANT TO THE EXERCISE
OF OPTIONS OR SIMILAR DERIVATIVE SECURITIES OR OTHERWISE AS COMPENSATION, NOR
PROVIDE AN ANALYSIS OF ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCALITY, OR FOREIGN JURISDICTION. THIS DISCUSSION IS BASED ON CURRENT
PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
CURRENT AND PROPOSED TREASURY REGULATIONS PROMULGATED THEREUNDER, AND
ADMINISTRATIVE AND JUDICIAL DECISIONS AS OF THE DATE HEREOF, ALL OF WHICH ARE
SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. ACCORDINGLY, WARRANTHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE EXCHANGE OFFER TO
THEM.
The exchange of Class A Warrants for shares of Common Stock will result in
the following federal income tax consequences to participating Warrantholders:
1. A participating Warrantholder will recognize gain or loss equal to
the excess of (a) the sum of the fair market value of the shares of Common
Stock received in the Exchange Offer and any cash received in lieu of a
fractional share of Common Stock over (b) the participating Warrantholder's
tax basis in the Class A Warrants exchanged therefor;
2. Such gain or loss will be capital gain or loss if the Class A
Warrants were capital assets in the hands of a participating Warrantholder;
3. The tax basis of the shares of Common Stock received in the
Exchange Offer will be equal to the fair market value of such shares of
Common Stock received in the Exchange Offer; and
4. The holding period for the shares of Common Stock received in the
Exchange Offer will commence on the day following the consummation of the
Exchange Offer if the shares of Common Stock are capital assets in the
hands of a participating Warrantholder.
15. FEDERAL INCOME TAX CONSEQUENCES TO THE ISSUER. The Issuer will not
recognize income or loss as a result of the acquisition of Class A Warrants
pursuant to the Exchange Offer.
16. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENTS. The Issuer
reserves the right, at anytime and from time to time, to extend the period of
time during which the Exchange Offer is pending by making a public announcement
thereof. During any such extension, all Class A Warrants previously tendered and
not purchased or withdrawn will remain subject to the Exchange Offer. The Issuer
also reserves the right, at any time and from time to time up to and including
the Expiration Date, to (a) terminate the Exchange Offer and not to exchange any
Class A Warrants or, subject to applicable law, postpone the exchange of Class A
Warrants upon the occurrence of any of the conditions specified in Section 5 and
(b) amend the Exchange Offer in any respect by making a public announcement
thereof. Such public announcement will be issued no
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<PAGE> 21
later then 9:00 A.M., New York City time on the next business day after the
previously scheduled Expiration Date and will disclose the approximate number of
Class A Warrants tendered as of that date. Without limiting the manner in which
the Issuer may choose to make a public announcement of extension, termination or
amendment, except as provided by applicable law (including Rule 13e-4(e)(2)),
the Issuer shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by malting a release to the
Dow Jones News Service.
If the Issuer materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer, or if it waives a material condition
of the Exchange Offer, the Issuer will extend the Exchange Offer to the extent
required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange
Act. These rules require that the minimum period during which an Exchange Offer
must remain open following material changes in the terms of the Exchange Offer
or information concerning the Exchange Offer (other than a change in price or a
change in percentage of securities sought) will depend on the facts and
circumstances, including the relative materiality of such terms or information.
If (i) the Issuer changes the ratio of shares of Common Stock to be issued in
exchange for Class A Warrants, or the Issuer decreases the number of Class A
Warrants being sought and (ii) the Exchange Offer is scheduled to expire at any
time earlier than the expiration of a period ending on the tenth business day
from, and including, the date that notice of such increase or decrease is first
published, sent or given, the Exchange Offer will be extended at least until the
expiration of such period of ten business days.
17. INCORPORATION OF DOCUMENTS BY REFERENCE. This Exchange Offer
incorporates by reference the financial statements and supplemental financial
information included in the Issuer's Annual Report on Form 10-K for the year
ended December 31, 1996 and its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997. A copy of such financial statements is being provided,
simultaneously herewith, to each holder of Class A Warrants.
The statements contained in a document incorporated by reference in this
Exchange Offer will be deemed to be modified or superseded for purposes of this
Exchange Offer to the extent that a statement contained in this Exchange Offer
or in any other subsequently filed document which is also incorporated by
reference in this Exchange Offer modifies or supersedes such statement. Any
statement so modified or superseded will not be deemed, except as modified or
superseded, to constitute a part of this Exchange Offer.
The Issuer will provide, without charge, to each person to whom this
Exchange Offer is delivered, upon written or verbal request of such person, by
first class mail or other equally prompt means within one business day of
receipt of such request, a copy of any and all information that has been
incorporated by reference in the Exchange Offer (not including the exhibits to
the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference to the information that this Exchange
Offer incorporates. Written requests should be addressed to:
Corporate Secretary
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, New York, 11788
18. MISCELLANEOUS. The Exchange Offer is being made to all holders of
Class A Warrants. The Issuer is not aware of any jurisdiction in which the
making of the Exchange Offer or the tender of Class A Warrants would not be in
compliance with the laws of such jurisdiction. However, the Exchange Offer is
not being made to, nor will the Issuer accept tenders from, owners of Class A
Warrants in any jurisdiction in which the Exchange Offer or its acceptance would
not comply with the securities or Blue Sky laws of such jurisdiction and the
Issuer reserves the right to exclude holders in any jurisdiction in which it is
asserted that the Exchange Offer cannot lawfully be made. So long as the Issuer
makes a good-faith effort to comply with any state law deemed applicable to the
Exchange Offer, the Issuer believes that the exclusions of holders residing in
such jurisdiction is permitted under Rule 13e-4(f)(9) promulgated under the
Exchange Act.
Disc Graphics, Inc.
July 11, 1997
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19. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DISC GRAPHICS,
INC.
The following pro forma consolidated financial statements give effect to
the Exchange Offer by the Issuer to the Warrantholders pursuant to the exchange
offer statement dated as of July 11, 1997.
These pro forma consolidated financial statements are based on estimates
and assumptions set forth below and in the notes to such statements which
include pro forma adjustments. The pro forma consolidated financial statements
were prepared utilizing the financial statements of the Issuer and should be
read in conjunction with the Issuer's Form 10-K for the period ended December
31, 1996 which was filed with the Commission on March 31, 1997 and the Issuer's
Quarterly Report on Form 10-Q for the first quarter of 1997 which was filed with
the Commission on May 15, 1997. The pro forma adjustments are based upon
available information as well as assumptions that management believes are
reasonable.
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<PAGE> 23
DISC GRAPHICS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
The following pro forma consolidated balance sheet gives effect to the
redemption of all outstanding Class A Warrants. The pro forma consolidated
information is not necessarily indicative of the actual or future financial
position that would have occurred or will occur as a result of the Exchange
Offer.
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 30,638 $ 30,638
Accounts receivable, net of allowance for
doubtful accounts of $819,000.................... 8,962,907 8,962,907
Inventory.......................................... 1,875,590 1,875,590
Prepaid expenses and other current assets.......... 779,242 779,242
Current maturities of notes receivable............. 57,005 57,005
Deferred income taxes.............................. 700,000 700,000
----------- -------- -----------
Total current assets..................... 12,405,382 12,405,382
Plant and equipment, net........................... 8,851,244 8,851,244
Goodwill, net of amortization of $58,891........... 1,055,115 1,055,115
Security deposits and other assets................. 305,531 305,531
----------- -------- -----------
Total assets............................. $22,617,272 $22,617,272
=========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of equipment notes payable.... $ 538,126 $ 538,126
Current portion, long-term debt.................. 98,720 40,000(a) 138,720
Current maturities of capitalized lease
obligations payable........................... 555,840 555,840
Accounts payable and accrued expenses............ 5,366,381 5,366,381
Income taxes payable............................. 164,891 164,891
----------- -------- -----------
Total current liabilities................ 6,723,958 40,000 6,763,958
Long term debt..................................... 1,628,373 1,628,373
Equipment notes payable, less current maturities... 1,738,319 1,738,319
Capitalized lease obligations payable, less current
maturities....................................... 2,074,953 2,074,953
Deferred income taxes.............................. 988,000 988,000
----------- -------- -----------
Total liabilities........................ 13,153,603 40,000 13,193,603
Stockholders' equity:
Preferred stock:
$.01 par value; authorized 5,000 shares;
no shares issued and outstanding
Common stock:
$.01 par value; authorized 20,000,000 shares;
issued 5,378,518............................ 53,786 3,176(b) 56,962
Additional paid in capital......................... 5,051,555 (43,176)(a/b) 5,008,379
Retained earnings.................................. 4,387,671 4,387,671
----------- -------- -----------
9,493,012 (40,000) 9,453,012
Less: Treasury stock at cost, 10,160 shares at
March 31, 1997................................... (29,342) (29,342)
----------- -------- -----------
Total stockholders' equity............... 9,463,670 (40,000) 9,423,670
Total liabilities and stockholders'
equity................................. $22,617,272 0 $22,617,272
=========== ======== ===========
</TABLE>
See notes to pro forma consolidated financial statements
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<PAGE> 24
DISC GRAPHICS, INC.
PRO FORMA CONSOLIDATED INCOME STATEMENT
AS OF MARCH 31, 1997
The following pro forma consolidated income statement gives effect to the
redemption of all the Class A warrants. For purposes of the pro forma, the
redemption is assumed to have occurred at the beginning of the period presented.
The pro forma consolidated information is not necessarily indicative of the
actual or future financial position that would have occurred or will occur as a
result of the Exchange Offer.
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $11,197,838 $11,197,838
Cost of Sales....................................... 8,214,806 8,214,806
----------- -----------
Gross Profit.............................. 2,983,032 2,983,032
Operating expenses:
Selling and shipping.............................. 950,073 950,073
General and administrative........................ 1,043,086 1,043,086
----------- -----------
Operating income.......................... 989,873 989,873
Interest expense, net............................... 149,367 149,367
----------- -----------
Income before provision for income taxes............ 840,506 840,506
----------- -----------
Provision for income taxes.......................... 336,203 336,203
----------- -----------
Net income.......................................... $ 504,303 $ 504,303
=========== ===========
Net income per share................................ $ 0.09 (c) $ 0.09
=========== ===========
Weighted average number of shares outstanding....... 5,380,369 5,698,016
=========== ===========
</TABLE>
See notes to pro forma consolidated financial statements
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<PAGE> 25
DISC GRAPHICS, INC.
PRO FORMA CONSOLIDATED INCOME STATEMENT
AS OF DECEMBER 31, 1996
The following pro forma consolidated income statement gives effect to the
redemption of all the Class A warrants. For purposes of the pro forma, the
redemption is assumed to have occurred at the beginning of the period presented.
The pro forma consolidated information is not necessarily indicative of the
actual or future financial position that would have occurred or will occur as a
result of the Exchange Offer.
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................................ $42,575,120 $42,575,120
Cost of Sales........................................ 31,663,934 31,663,934
----------- -----------
Gross Profit............................... 10,911,186 10,911,186
Operating expenses:
Selling and shipping............................... 3,682,886 3,682,886
General and administrative......................... 3,929,521 3,929,521
----------- -----------
Operating income........................... 3,298,779 3,298,779
Interest expense, net................................ 763,793 763,793
----------- -----------
Income before provision for income taxes............. 2,534,986 2,534,986
----------- -----------
Provision for income taxes........................... 1,081,000 1,081,000
----------- -----------
Net income........................................... $ 1,453,986 $ 1,453,986
=========== ===========
Net income per share................................. $ 0.29 (d) $ 0.27
=========== ===========
Weighted average number of shares outstanding........ 5,093,732 5,411,379
=========== ===========
</TABLE>
See notes to pro forma consolidated financial statements
25
<PAGE> 26
DISC GRAPHICS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated financial statements of Disc Graphics, Inc. give
effect to the following pro forma adjustments and assumptions:
Adjustment for Pro Forma Consolidated Balances Sheet dated March 31, 1997:
(a) This adjustment reflects the exchange of one (1) share of Common stock
for each eight and one-half (8 1/2) Class A Warrants. For purposes of
the preceding pro forma consolidated financial statements, the Issuer
assumed all outstanding Class A Warrants will be redeemed.
<TABLE>
<S> <C>
Common Stock:................................. $.01 par value
317,647 shares................................ 3,176
Additional paid in capital.................... (3,176)
</TABLE>
(b) This adjustment reflects the payment of related transaction costs
(printing, mailing, legal and accounting expenses) related to the
Exchange Offer. The Issuer will obtain the cash proceeds to pay the
related transaction costs from funds available under its financing
agreement.
Adjustment for Pro Forma Consolidated Income Statement for the three month
period ended March 31, 1997:
(c) This adjustment reflects the effect on reported earnings per share due
to the increase in weighted average number of shares outstanding.
<TABLE>
<S> <C>
Weighted average shares outstanding as reported........... 5,380,369
Conversion of 2,700,000 Class A Warrants (8 1/2 warrants
per share)........................................... 317,647
---------
5,698,016
=========
</TABLE>
Adjustment for Pro Forma Consolidated Income Statement for the year ended
December 31, 1996:
(d) This adjustment reflects the effect on reported earnings per share due
to the increase in weighted average number of shares outstanding.
<TABLE>
<S> <C>
Weighted average shares outstanding as reported........... 5,093,732
Conversion of 2,700,000 Class A Warrants (8 1/2 warrants
per share)........................................... 317,647
5,411,379
</TABLE>
26
<PAGE> 27
EXCHANGE AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail or Hand Delivery:
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
Facsimile Transmission No: 718-234-5001
For Information Call: 718-921-8200
<PAGE> 1
DISC GRAPHICS, INC.
Dear Holder of Class A Redeemable Common Stock Purchase Warrants:
Enclosed is a copy of an Exchange Offer by Disc Graphics, Inc. (the
"Company") with respect to its Class A Redeemable Common Stock Purchase Warrants
("Class A Warrants") and the related Letter of Transmittal (which together
constitute the "Offer"). The Offer is to exchange one share of the Company's
Common Stock, par value $.01 per share for each 8.5 Class A Warrants tendered.
The expiration date is 4:00 P.M. New York City time on August 22, 1997, unless
extended as stated in the Offer. Please read carefully the enclosed documents,
which include the Company's most recent financial statements.
If after reviewing the information set forth in the Offer, you wish to
tender Class A Warrants for exchange, please follow the instructions contained
in the Exchange Offer and Letter of Transmittal.
Neither the Company nor its Board of Directors is making any
recommendations to any holder of Class A Warrants as to whether to tender Class
A Warrants. Each shareholder is urged to consult his or her investment and tax
advisers before deciding whether to tender any Class A Warrants.
Sincerely,
DISC GRAPHICS, INC.
<PAGE> 1
LETTER OF TRANSMITTAL
TO ACCOMPANY CERTIFICATES REPRESENTING CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
OF
DISC GRAPHICS, INC.
BY MAIL OR HAND DELIVERY TO:
EXCHANGE AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL STREET, 46TH FLOOR
NEW YORK, NEW YORK 10005
ATTENTION: REORGANIZATION DEPARTMENT
IF YOU REQUIRE ADDITIONAL INFORMATION, PLEASE CALL AMERICAN
STOCK TRANSFER & TRUST COMPANY (THE "REDEMPTION AGENT")
AT (718) 921-8200.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
BOX A
- ------------------------------------------------------------------------------------------
CLASS A WARRANTS DELIVERED
- ------------------------------------------------------------------------------------------
NAME AND ADDRESS OF CERTIFICATE NUMBER OF CLASS A
REGISTERED HOLDER(S) NUMBERS(S) WARRANTS DELIVERED*
- ------------------------------------------------------------------------------------------
<S> <C> <C>
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
Total Class A Warrants:
- ------------------------------------------------------------------------------------------
*To be completed whether or not Class
A Warrants are evidenced by certificates
- ------------------------------------------------------------------------------------------
</TABLE>
This Letter of Transmittal can be used only if (a) certificates for Class
A Warrants (as defined below) are to be delivered with it (or such certificates
will be delivered pursuant to a Notice of Guaranteed Delivery previously sent to
the Exchange Agent) or (b) Preferred Shares are being delivered concurrently by
book-entry transfer to the account maintained by the Exchange Agent at The
Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company
("PHILADEP", and together with DTC, the "Book-Entry Transfer Facilities").
Warrantholders who cannot deliver the certificates for their Class A
Warrants to the Exchange Agent on or prior to August 22, 1997, the expiration
date of the Issuer's Exchange Offer (the "Expiration Date"), or who cannot
complete the procedure for book-entry transfer on a timely basis must in any
such case deliver their Class A Warrants pursuant to the guaranteed delivery
procedures set forth below. See Instruction 1. Delivery of this Letter of
Transmittal and any other required documents to one of the Book-Entry Transfer
Facilities does not constitute delivery to the Exchange Agent.
<PAGE> 2
[ ] CHECK HERE IF CLASS A WARRANTS ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT ONE OF THE BOOK-ENTRY
TRANSFER FACILITIES AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:______________________________________
Check Box of Book-Entry Transfer Facility:
[ ] DTC [ ] PHILADEP
Account No. _________________________________________________________
Transaction Code No. ________________________________________________
[ ] CHECK HERE IF TENDERED CLASS A WARRANTS ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITORY
AND COMPLETE THE FOLLOWING:
Name(s) of Tendering Warrantholder(s) ________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________
Name of Institution which Guaranteed Delivery ________________________
If delivery is by book-entry transfer:
Name of Tendering Institution ________________________________________
Check Box of Book-Entry Transfer Facility:
[ ] DTC [ ] PHILADEP
Account No. __________________________________________________________
Transaction Code No. _________________________________________________
All holders of Class A Warrants must complete Boxes A, B and D and enclose
their stock certificates. Box A need not be completed by holders delivering
Class A Warrants by book-entry transfer.
To: American Stock Transfer & Trust Company
Ladies and Gentlemen:
The undersigned hereby tenders to Disc Graphics, Inc. (the "Issuer"), the
above-decribed number of Class A Redeemable Common Stock Purchase Warrants
("Class A Warrants")in accordance with the Issuer's offer to exchange one share
of Common Stock, par value $.01 per share for each 8.5 Class A Warrants
tendered, upon the terms and subject to the conditions set forth in the Exchange
Offer dated July 11, 1997 (the "Exchange Offer") and in this Letter of
Transmittal (which, together with this Letter of Transmittal constitute the
"Offer"), receipt of which is hereby acknowledged.
On the terms and subject to the conditions of the Offer, subject to, and
effective upon, acceptance for exchange of the Class A Warrants tendered
herewith in accordance with the terms of the Offer, the undersigned the
undersigned hereby exchanges, assigns and transfers to, or upon the order of,
the Company all right, title and interest in and to all such Class A Warrants as
are being tendered hereby and that are accepted for exchange pursuant to the
Exchange Offer, and irrevocably constitutes and appoints the Exchange Agent as
its agent and attorney-in-fact to cause the Class A Warrants to be assigned,
transferred and exchanged to the Issuer. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent
also acts as the agent of the Issuer) with respect to the Class A Warrants
tendered hereby and accepted for exchange pursuant to the Exchange Offer, with
full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), to (a) deliver the Class A Warrants
tendered hereby or transfer ownership of such shares on the account books
maintained by a Book-Entry Transfer Facility together, in either case, with all
accompanying evidences of transfer and authenticity to the Exchange Agent for
the account of the Issuer, (b) tender Class A Warrants in the Exchange Offer and
(c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Class A Warrants in the Exchange Offer, all in accordance with
the terms and subject to the conditions of the Exchange Offer.
The name(s) and address(es) of the registered holder(s) should be printed
above under "Class A Warrants Delivered", if not already printed thereunder,
exactly as they appear on the Class A Warrants tendered hereby. The certificate
number(s) and the number of Class A Warrants to which this Letter of Transmittal
relates, together with the number of Class A Warrants that the undersigned
wishes
<PAGE> 3
to tender, should be indicated in the appropriate boxes above under "Class A
Warrants Delivered".
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Class A
Warrants tendered hereby and to acquire the Common Stock issuable upon exchange
of such tendered Class A Warrants in accordance with the terms of the Exchange
Offer, and that, when the same are accepted for exchange by the Issuer, the
Issuer will acquire good and marketable title thereto, free and clear of all
liens, restrictions, charges and encumbrances and that such Class A Warrants are
not subject to any adverse claim. The undersigned, upon request, will execute
and deliver any additional documents deemed by the Exchange Agent or the Issuer
to be necessary or desirable to complete the exchange, assignment and transfer
of the Class a Warrants.
All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death, bankruptcy or incapacity of the
undersigned, and any obligation of the undersigned hereunder shall be binding
upon the heirs, executors, administrators, legal representatives, successors and
assigns of the undersigned. Except as stated in the Exchange Offer, this tender
is irrevocable.
The undersigned understands that the tender of the Class A Warrants and
acceptance for exchange of such Class A Warrants pursuant to one of the
procedures described in the Exchange Offer in "Procedure for Tendering Class A
Warrants" and in the instructions hereto will constitute a binding agreement
between the undersigned and the Issuer, upon the terms and subject to the
conditions of the Exchange Offer, including the tendering holder's
representations and warranty that (a) such holder owns the Class A Warrants
being tendered within the meaning of Rule 14e-4 promulgated under the Securities
Exchange Act of 1934, as amended, and (b) the tender of such Class A Warrants
complies with Rule 14e-4, only when either (i) a duly executed and properly
completed copy of this Letter of Transmittal accompanied by certificates or, in
the case of a book-entry transfer, a Book-Entry Confirmation is received by the
Exchange Agent, or (ii)(A) a tender is made by or through an Eligible
Institution (as defined in the Exchange Offer); (B) a properly completed and
duly executed Notice of Guaranteed Delivery, substantially in the form provided
by the Issuer herewith, is received prior to the Expiration Date by the Exchange
Agent; and (C) the certificates for all tendered Class A Warrants, in proper
form for transfer, together with a properly completed and duly executed Letter
of Transmittal, are received by the Exchange Agent within three New York Stock
Exchange trading days of the date of such Notice of Guaranteed Delivery, all as
provided under "Procedure for Tendering Class A Warrants" in the Exchange Offer.
Unless otherwise indicated herein under "Special Issuance/Payment
Instructions" below, please cause shares of Common Stock and payment for any
fractional shares of Common Stock (and, if applicable, the certificate for any
Class A Warrants not exchanged) to be issued in the name of the undersigned
(and, in the case of Class A Warrants tendered by book-entry transfer, by credit
to the applicable account at a Book-Entry Transfer Facility). Similarly, unless
otherwise indicated under "Special Delivery Instructions" below, please send
shares of Common Stock (and, if applicable, Class A Warrants not exchanged) to
the undersigned at the address shown below the signature of the undersigned. The
undersigned recognizes that the Issuer has no obligation pursuant to the
"Special Issuance Instructions" to transfer any Class A Warrants from the name
of the registered holder thereof if the Issuer exchanges none of the Class A
Warrants represented by such certificates.
For tenders of Class A Warrants to be deemed to have been made as of the
time of delivery of the Notice of Guaranteed Delivery, the number of Class A
Warrants specified as tendered in this Letter of Transmittal must be identical
to that number of specified in the Notice of Guaranteed Delivery. If no number
is specified in this Letter of Transmittal or facsimile thereof, specifications
herein shall be deemed to be identical to specifications in the Notice of
Guaranteed Delivery. If specifications in the Notice of Guaranteed Delivery and
Letter of Transmittal are not identical, tenders shall be deemed to have been
made as of the date of delivery of the Letter of Transmittal (and any other
required documents) and specifications in the Letter of Transmittal shall
control.
<PAGE> 4
BOX B
HOLDERS SIGN HERE
(TO BE COMPLETED BY ALL PERSON(S) SURRENDERING
CLASS A WARRANTS.
SEE INSTRUCTIONS 2 AND 4)
________________________________________________________________________________
________________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S))
Dated: _________________________________________________________________________
Names: _________________________________________________________________________
________________________________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
(INCLUDING ZIP CODE)
[ ] Check box if change of address
Phone: _________________________________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on
warrant certificate(s) or by person(s) authorized to become registered holder(s)
by documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or in any
other fiduciary or representative capacity, please set forth full title. (See
Instruction 5).
Title: _________________________________________________________________________
(OTHER THAN SIGNATURE(S), PLEASE PRINT OR TYPE)
BOX C
SIGNATURE GUARANTEE
(SEE INSTRUCTION 4)
COMPLETE ONLY IF REQUIRED BY INSTRUCTION 4.
The undersigned hereby guarantees the signature(s) which appear(s) in
Box B.
________________________________________________________________________________
(Name of firm issuing guarantee)
________________________________________________________________________________
(Signature of officer)
________________________________________________________________________________
(Title of officer signing guarantee)
________________________________________________________________________________
________________________________________________________________________________
(Address of guaranteeing firm)
________________________________________________________________________________
(Date)
(OTHER THAN SIGNATURE, PLEASE PRINT OR TYPE)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THEREIN THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO DO SO MAY SUBJECT YOU TO 31% FEDERAL INCOME TAX
WITHHOLDING FROM YOUR PAYMENT CHECKS.
<PAGE> 5
BOX D
PAYOR'S NAME: DISC GRAPHICS, INC.
SUBSTITUTE
FORM W-9
Department of the
Treasury
Internal Revenue Service
PAYOR'S REQUEST
FOR TAXPAYER
IDENTIFICATION NUMBER
("TIN")
AND CERTIFICATION
PART I -- Please provide the Taxpayer Identification Number ("TIN") of the
person submitting this Letter of Transmittal in the box to the right.
___________________________________
Social Security Number or Employer
Identification Number
PART II -- The undersigned is an Exempt Payee [ ] (check here)
Certification -- Under penalties of perjury, the undersigned hereby certifies
the following:
(1) The TIN shown in Part I above is the correct TIN of the person who is
submitting this Letter of Transmittal and who is required by law to provide such
TIN; and
(2) The person who is submitting this Letter of Transmittal and who is required
by law to provide such TIN is not subject to backup withholding because such
person has not been notified by the Internal Revenue Service ("IRS") that such
person is subject to backup withholding, or because the IRS has notified such
person that he or she is no longer subject to backup withholding, or because
such person is an exempt payee.
NOTE: You must cross out item (2) above if you have been notified by the IRS
that you are subject to backup withholding unless you have been notified by the
IRS that you are no longer subject to backup withholding.
Signature: ______________________________________________ Date:____________
<PAGE> 6
SPECIAL ISSUANCE/PAYMENT AND DELIVERY INSTRUCTIONS
The undersigned understands that the Common Stock or the Payment Checks to
be issued with respect to the Class A Warrants surrendered will be issued in the
same name(s) as the certificate(s) surrendered and will be mailed to the address
of the registered holder(s) indicated above, unless otherwise indicated in Box E
or Box F below. If Box E is completed, the signature of the undersigned in Box B
must be guaranteed as set forth in Instruction 4.
BOX E
SPECIAL ISSUANCE/PAYMENT INSTRUCTIONS
(SEE INSTRUCTION 4)
TO BE COMPLETED ONLY if the certificate representing Common Stock is to be
registered in the name(s) of, or Payment Checks are to be payable to, someone
other than the registered holder(s) set forth above.
ISSUE TO:
Name: __________________________________________________________________________
(PLEASE PRINT OR TYPE)
Address: _______________________________________________________________________
(STREET AND NUMBER)
________________________________________________________________________________
(CITY, STATE AND ZIP CODE)
________________________________________________________________________________
(EMPLOYER IDENTIFICATION OR SOCIAL SECURITY NUMBER)
(PLEASE PRINT OR TYPE)
BOX F
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 6)
TO BE COMPLETED ONLY if the certificate representing Common Stock or the Payment
Checks are to be delivered to the registered holder(s) or someone other than the
registered holder(s) at an address other than that shown above.
MAIL TO:
Name: __________________________________________________________________________
(PLEASE PRINT OR TYPE)
Address: _______________________________________________________________________
(STREET AND NUMBER)
________________________________________________________________________________
(CITY, STATE AND ZIP CODE)
(PLEASE PRINT OR TYPE)
<PAGE> 7
INSTRUCTIONS
1. EXECUTION AND DELIVERY OF LETTER OF TRANSMITTAL; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed by all stockholders.
This Letter of Transmittal should be completed, dated, signed and mailed or hand
delivered to the Exchange Agent, American Stock Transfer & Trust Company, 40
Wall Street, 46th Floor, New York, NY 10005. PLEASE DO NOT SEND CERTIFICATES
DIRECTLY TO THE ISSUER. Certificates for all physically tendered Class A
Warrants, or confirmation of book-entry transfer of tendered Class A Warrants
into the Exchange Agent's account at DTC or PHILADEP ("Book-Entry
Confirmation"), as the case may be, as well as a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile hereof) and any
documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein on or prior to the Exchange Date.
Stockholders whose certificates are not immediately available or who are unable
to deliver all other required documents to the Exchange Agent on or prior to the
Exchange Date or who cannot complete the procedure for book-entry transfer on a
timely basis, may tender their Class A Warrants by properly completing and duly
executing the separate Notice of Guaranteed Delivery pursuant to the guaranteed
delivery procedures set forth below. Pursuant to such procedure (i) such tender
must be made by or through an Eligible Guarantor (as defined below), (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form provided by the Issuer, must be received by the
Exchange Agent prior to the Exchange Date, and (iii) the certificates for all
tendered Class A Warrants in proper form for transfer or Book-Entry
Confirmation, as the case may be, together with a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile hereof) and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery. THE METHOD OF TRANSMITTING
OR DELIVERING SUCH CERTIFICATE(S) IS AT YOUR OPTION, RISK AND ELECTION, BUT IF
YOU SEND THE CERTIFICATE(S) BY MAIL, IT IS RECOMMENDED THAT THEY BE SENT BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED AND THAT THEY BE PROPERLY
INSURED FOR THEIR REPLACEMENT VALUE SINCE TITLE TO THE CERTIFICATE(S) SHALL PASS
ONLY UPON DELIVERY TO THE EXCHANGE AGENT. An addressed envelope is enclosed for
your convenience. Delivery will be deemed effective only when actually received
by the Exchange Agent.
2. SIGNATURES. The Letter of Transmittal must be signed by or on behalf of
the registered holder(s) of the certificate(s) transmitted. If the Class A
Warrants covered by such certificate(s) are registered in the names of two or
more owners, all such owners must sign. The signature(s) on the Letter of
Transmittal should correspond exactly to the name(s) written on the face of the
warrant certificate(s) transmitted unless the Class A Warrants described on the
Letter of Transmittal have been assigned by the former holder(s), in which event
the Letter of Transmittal should be signed in exactly the same form as the name
of the last transferee in the transfers attached to or endorsed on the
certificate(s). See Instructions 4(a) and 4(b). If the Class A Warrants to be
surrendered are registered in different certificates, it will be necessary to
complete, sign and submit as many separate Letters of Transmittal as there are
different certificates.
3. ISSUANCE OF NEW CERTIFICATE IN SAME NAME. If the certificate
representing Common Stock or the Payment Checks are to be issued in the name of
the registered holder(s) as inscribed on the surrendered certificate(s), the
surrendered certificate(s) need not be endorsed and no guarantee of the
signature on the Letter of Transmittal is required. For corrections in name and
changes in name not involving changes in ownership, see Instruction 4(c).
4. ISSUANCE OF NEW CERTIFICATE IN DIFFERENT NAMES; GUARANTEE OF
SIGNATURES. If the certificate representing Common Stock or the Payment Checks
are to be issued in the name of someone other than the registered holder(s) of
the surrendered certificate(s), you must follow the guidelines below. Note that
in each circumstance listed below, shareholder(s) must have signature(s)
guaranteed in Box C and must complete Box E.
(a) Endorsement and Guarantee. The certificate(s) surrendered must be
properly endorsed (or accompanied by appropriate stock powers properly executed)
by the registered holder(s) of such certificate(s) to the person who is to
receive the Common Stock or the Payment Checks. The signature(s) of the
registered holder(s) on the endorsement or stock powers must correspond with the
name(s) written upon the face of the certificate(s) in every particular and must
be guaranteed by an eligible guarantor institution as defined below.
<PAGE> 8
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally, an eligible guarantor institution, as defined in Section
240.17Ad-15 of the Securities and Exchange Commission regulations, means:
1) Banks as defined in Section 3(a) of the Federal Deposit Insurance
Act.
2) Brokers, dealers, municipal securities dealers, municipal securities
brokers, government securities dealers and government securities
brokers, as those terms are defined under the Securities Exchange
Act of 1934.
3) Credit unions, as that term is defined in Section 19(b)(1)(A) of the
Federal Reserve Act.
4) National securities exchanges, registered securities associations
and clearing agencies, as those terms are used under the Securities
Exchange Act of 1934.
5) Savings associations, as that term is defined in Section 3(b) of the
Federal Deposit Insurance Act.
(b) Transferor's Signature. The Letter of Transmittal must be signed by
the transferor or assignor or his agent, and should not be signed by the
transferee or assignee. See Box B entitled "Stockholders Sign Here." The
signature of such transferor or assignor must be guaranteed by an eligible
guarantor institution as provided in Instruction 4(a).
(c) Correction of or Change in Name. For a correction of name or for a
change in name which does not involve a change in ownership, proceed as follows:
For a change in name by marriage, etc., the Letter of Transmittal should be
signed, e.g., "Mary Doe, now by marriage Mary Jones." For a correction in name,
the Letter of Transmittal should be signed, e.g., "James E. Brown, incorrectly
inscribed as J. E. Brown." The signature in each case should be guaranteed in
the manner described in Instruction 4(a) above and Box E should be completed.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO ANY POSSIBLE TAX
CONSEQUENCES RESULTING FROM THE ISSUANCE OF COMMON STOCK CERTIFICATE(S) AND
PAYMENT CHECKS IN A NAME DIFFERENT FROM THAT OF THE REGISTERED HOLDER(S) OF THE
SURRENDERED CERTIFICATE(S).
5. SUPPORTING EVIDENCE. In case any Letter of Transmittal, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or any person in any other fiduciary or
representative capacity, or by an officer of a corporation on behalf of the
corporation, there must be submitted (with the Letter of Transmittal,
surrendered certificate(s), and/or stock powers) documentary evidence of
appointment and authority to act in such capacity (including court orders and
corporate resolutions where necessary), as well as evidence of the authority of
the person making such execution to assign, sell or transfer the certificates.
Such documentary evidence of authority must be in a form satisfactory to the
Exchange Agent.
6. SPECIAL INSTRUCTIONS FOR DELIVERY BY THE EXCHANGE AGENT. The
certificate(s) representing Common Stock or the Payment Checks will be mailed to
the address of the registered holder(s) as indicated under Box A entitled "Class
A Warrants Delivered," unless instructions to the contrary are given in Box F
entitled "Special Delivery Instructions."
7. IMPROPER SURRENDER. The Exchange Agent and the Issuer reserve the
absolute right to reject any or all surrenders that are defective or irregular
and may request from persons making such surrenders such additional documents as
the Exchange Agent and the Issuer deem appropriate to correct such defects or
irregularities. However, the Exchange Agent and the Issuer reserve their rights
at their discretion to waive any defect or irregularity in any surrender as
provided for herein, and upon such waiver they may treat and receive any such
defective or irregular surrenders as if no such defect or irregularity had been
present. Surrenders will not be deemed to have been made until all defects or
irregularities, which have not been waived, have been cured.
<PAGE> 9
8. LOST CERTIFICATES. In the event that the shareholder is unable to
deliver to the Exchange Agent the certificate(s) for his or her Class A Warrants
due to the loss or destruction of such certificate(s), such fact should be
indicated on the face of this Letter of Transmittal. In such event, the Exchange
Agent will forward additional documentation which the shareholder must complete
in order to effectively surrender such lost or destroyed certificate(s). See
Instruction 1.
9. FEDERAL TAX INFORMATION. Under federal income tax law, a person
submitting this Letter of Transmittal must provide the Exchange Agent and the
Issuer with his or her correct taxpayer identification number ("TIN") and
certify that such TIN is true, correct, and complete on Substitute Form W-9,
which is part of this Letter of Transmittal (Box D). If the TIN is not provided,
a penalty of $50.00 may be imposed by the Internal Revenue Service ("IRS") and
the Payment Checks will generally be subject to backup withholding of 31%. The
TIN that must be provided is that of the person submitting this Letter of
Transmittal. The TIN for an individual is his or her social security number.
Exempt persons (including, among others, all corporations) are not subject
to backup withholding and should indicate their exempt status on Substitute Form
W-9 by entering their correct TIN, marking the box in Part II and signing and
dating the Substitute Form W-9 in the space provided. A foreign individual may
qualify as an exempt person by submitting a Form W-8 or a Substitute Form W-8,
signed under penalty of perjury, certifying such individual's foreign status.
Such forms can be obtained from the Exchange Agent.
The signature and data provided on Substitute Form W-9 will serve to
certify that the TIN and withholding information provided in this Letter of
Transmittal are true, correct and complete. Please consult your tax advisor for
further guidance in completing the Substitute Form W-9.
10. WITHHOLDING ON FOREIGN STOCKHOLDERS. The Exchange Agent will withhold
federal income taxes equal to 30% of the gross payments payable to a foreign
stockholder or his agent unless the Exchange Agent determines that a reduced
rate of withholding or an exemption from withholding is applicable. (Exemption
from backup withholding does not exempt a foreign stockholder from the 30%
withholding.) For this purpose, a foreign stockholder is any stockholder that is
not (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is subject to United States federal income taxation
regardless of the source of such income. The Exchange Agent will determine a
stockholder's status as a foreign stockholder and eligibility for a reduced rate
of, or an exemption from, withholding by reference to the stockholder's address
and to any outstanding certificates or statements concerning eligibility for a
reduced rate of, or exemption from, withholding unless facts and circumstances
indicate that reliance is not warranted. In order to obtain an exemption from
withholding on the grounds that the gross proceeds paid pursuant to the exchange
of Class A Warrants are effectively connected with the conduct of a trade or
business within the United States, a foreign stockholder must deliver to the
Exchange Agent a properly executed Form 4224. Such form can be obtained from the
Exchange Agent. A foreign stockholder who has not previously submitted the
appropriate certificates or statements with respect to a reduced rate of, or
exemption from, withholding for which such stockholder may be eligible should
consider doing so in order to avoid overwithholding. A foreign stockholder may
be eligible to obtain a refund of tax withheld if such stockholder meets one of
the three tests for capital gain or loss treatment or is otherwise able to
establish that no tax or reduced amount of tax was due. Foreign stockholders are
urged to consult their tax advisors regarding the application of federal income
tax withholding, including eligibility for a withholding tax reduction or
exemption and the refund procedures.
11. INQUIRIES. If you have any questions or need assistance relating to
the Letter of Transmittal, please contact the Exchange Agent at (718) 921-8200.
Additional copies of the Letter of Transmittal may be obtained from the Exchange
Agent.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY
TO
DELIVER CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
DISC GRAPHICS, INC.
Provided the conditions set forth in Instruction 1 of the Letter of
Transmittal are fulfilled, this form or one substantially equivalent may be used
to deliver certificates for Class A Redeemable Common Stock Purchase Warrants
(Class A Warrants") of Disc Graphics, Inc. if certificates for Class A Warrants
are not immediately available, or if the procedure for book-entry transfer
cannot be completed on a timely basis, or time will not permit all required
documents to reach American Stock Transfer & Trust Company (the "Exchange
Agent") on or prior to August 22, 1997. Such form, including in all cases the
execution of a guarantee in substantially the form set forth below, may be
delivered by hand or sent by telegram, facsimile transmission or letter to the
Exchange Agent. The method of delivery is at the option and risk of the
delivering stockholder.
TO THE EXCHANGE AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail or Hand Delivery:
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
Facsimile Transmission No: 718-234-5001
For Information Call: 718-921-8200
Delivery of this instrument to an address, or transmission of instructions
via a facsimile to a number, other than as set forth above does not constitute a
valid delivery.
To: American Stock Transfer & Trust Company
Ladies and Gentlemen:
The undersigned hereby surrenders to Disc Graphics, Inc., Class A
Redeemable Common Stock Purchase Warrants of Disc Graphics, Inc. pursuant to the
guaranteed delivery procedure set forth in Instruction 1 of the Letter of
Transmittal.
Signature(s)
- --------------------------------------------------------------------------------
Name(s):
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Area Code and Telephone Number:
-------------------------------------------------------------------------
Certificate Nos. (if available):
-------------------------------------------------------------------------------
If Class A Warrants are to be delivered by book-entry transfer, check applicable
box:
[ ] The Depositary Trust Company
[ ] Philadelphia Depository Trust Company
Account Number(s)
- --------------------------------------------------------------------------------
<PAGE> 2
GUARANTEE
(not to be used for signature guarantee)
The undersigned, a member of a registered national securities exchange in
the United States or of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or correspondent in the
United States, guarantees (a) that the above-named person(s) "own(s)" the Class
A Warrants tendered hereby within the meaning of Rule 10b-4 under the Securities
Exchange Act of 1934, (b) that such tender of Class A Warrants complies with
Rule 10b-4, and (c) delivery to the Exchange Agent of certificates representing
the Class A Warrants tendered hereby, in proper form for transfer or
confirmation of book-entry transfer of such Class A Warrants into the Exchange
Agent's account at The Depository Trust Company and/or Philadelphia Depository
Trust Company, together with a properly completed Letter of Transmittal and any
other required documents, within three (3) New York Stock Exchange trading days
of the date hereof.
(PLEASE PRINT)
--------------------------------------
(FIRM)
--------------------------------------
(AUTHORIZED SIGNATURE WITH TITLE)
--------------------------------------
(ADDRESS, WITH ZIP CODE)
--------------------------------------
(AREA CODE AND TELEPHONE NUMBER)
Date: , 199
NOTE: DO NOT SEND CERTIFICATES FOR CLASS A WARRANTS WITH THIS NOTICE.
CERTIFICATES FOR CLASS A WARRANTS SHOULD BE SENT WITH THE LETTER OF
TRANSMITTAL.
<PAGE> 1
EXCHANGE OFFER
TO HOLDERS OF
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
DISC GRAPHICS, INC.
1 SHARE OF COMMON STOCK , $.01 PAR VALUE FOR EACH 8.5 CLASS A WARRANTS
July 11, 1997
THE OFFER AND WITHDRAWAL RIGHTS FOR THE CLASS A
WARRANTS WILL EXPIRE AT 4:00 P.M., NEW YORK CITY TIME,
ON AUGUST 22, 1997, UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
We are asking you to contact your clients for whom you hold Class A
Redeemable Common Stock Purchase Warrants ("Class A Warrants") of Disc Graphics,
Inc., a Delaware corporation (the "Issuer"), registered in your name or who hold
securities in their own names. Please bring to their attention as promptly as
possible the offer being made by the Issuer to exchange 1 share of the Issuer's
Common Stock, par value $.01 per share for each 8.5 Class A Warrants tendered
upon the terms and subject to the conditions set forth in the Exchange Offer
dated July 11, 1997 (the "Exchange Offer") and the related Letter of Transmittal
(which together constitute the "Offer"). Please furnish copies of the enclosed
materials to those of your clients for whom you hold Class A Warrants registered
in your name.
Enclosed for your information and use are copies of the following
documents:
1. Exchange Offer dated July 11, 1997;
2. The Letter of Transmittal to be used by holders of Class A Warrants in
accepting the Offer. Facsimile copies of the Letter of Transmittal may
be used to tender Class A Warrants in accepting the Offer.
3. A letter which may be sent to your clients for whose account you hold
Class A Warrants in your name or the name of a nominee, with space
provided for obtaining such clients' instructions with regard to the
Offer;
4. A Notice of Guaranteed Delivery to be used to accept the Offer if
certificates for Class A Warrants are not immediately available;
5. Guidelines of the Internal Revenue Service for certification of Taxpayer
Identification Number; and
6. A supply of return envelopes addressed to American Stock Transfer and
Trust Company (the "Exchange Agent").
WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE OFFER
EXPIRES AT 4:00 P.M., NEW YORK CITY TIME, ON AUGUST 22, 1997, UNLESS EXTENDED.
The Issuer will not pay any fees or commissions to any broker, dealer or
other parson in connection with the solicitation of tenders of Class A Warrants
pursuant to the Offer. However, the Issuer will, upon request, reimburse you for
customary mailing and handling expenses incurred by you in forwarding this
material to your clients.
<PAGE> 2
In all cases, the issuance of Common Stock for Class A Warrants tendered
pursuant to the Offer will be made only after timely receipt by the Exchange
Agent of certificates therefor (or timely confirmation of a book-entry transfer
of such Class A Warrants into the Exchange Agent's account at a Book-Entry
Transfer Facility as described in the Offer), a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) and any other documents
required by the Letter of Transmittal.
If holders of Class A Warrants wish to tender Class A Warrants, but it is
impracticable for them to forward their certificates prior to the desired date
of tender and prior to the "Expiration Date" (as that term is used in the Offer
to Purchase), a tender may be effected by following the guaranteed delivery
procedures specified in Section 2 of the Offer to Purchase and in Instruction 1
of the Letter of Transmittal.
Any inquiries you may have with respect to the Offer should be addressed to
the Exchange Agent at American Stock Transfer and Trust Company, 40 Wall Street,
New York, NY 10005, telephone (718) 921-8200. Additional copies of the enclosed
material may be obtained from the Exchange Agent at such address.
Very truly yours.
DISC GRAPHICS, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
THE AGENT OF DISC GRAPHICS, INC. OR THE EXCHANGE AGENT, OR AUTHORIZE YOU TO MAKE
ANY STATEMENTS OR UTILIZE ANY DOCUMENTS IN CONNECTION WITH THE OFFER OTHER THAN
THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE> 1
EXCHANGE OFFER
TO HOLDERS OF
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
DISC GRAPHICS, INC.
1 SHARE OF COMMON STOCK, $.01 PAR VALUE FOR EACH 8.5 CLASS A WARRANTS
July 11, 1997
THE OFFER AND WITHDRAWAL RIGHTS FOR THE CLASS A
WARRANTS WILL EXPIRE AT 4:00 P.M., NEW YORK CITY TIME,
ON AUGUST 22, 1997, UNLESS EXTENDED.
To Our Clients:
Enclosed for your consideration is an Exchange Offer dated July 11, 1997 by
Disc Graphics, Inc. (the "Issuer") to exchange one share of the Issuer's Common
Stock, $.01 par value ("Common Stock") for each 8.5 Class A Redeemable Common
Stock Purchase Warrants ("Class A Warrants"), together with a related Letter of
Transmittal. This material is being forwarded to you as the beneficial owner of
Class A Warrants carried by us in your account but not registered in your name.
A tender of such Class A Warrants may only be made by us as the holder of record
and pursuant to your instructions.
Accordingly, we request instructions as to whether you wish us to tender
any or all such Class A Warrants held by us for your account pursuant to the
terms and conditions set forth in the Exchange Offer and the enclosed Letter of
Transmittal (which together constitute the "Offer").
Your attention is invited to the following:
1. The exchange ratio for Class A Warrants is one share of Common Stock
for each 8.5 Class A Warrants.
2. Holders who tender Class A Warrants will not be obligated to pay
brokerage fees or commissions. Any transfer taxes incident to the
transfer of Class A Warrants from the holder to the Issuer will be paid
by the Issuer, except as otherwise provided in the Letter of
Transmittal.
3. The Offer and Withdrawal Rights for the Class A Warrants will expire at
4:00 P.M., New York City time, on August 22, 1997, unless extended.
If you wish to have us tender any or all of your Class A Warrants, please
instruct us by completing, executing, detaching and returning to us the attached
instruction form. The Letter of Transmittal is furnished to you for information
only and may not be used to tender Class A Warrants. If you authorize tender of
your Class A Warrants, all such Class A Warrants will be tendered unless
otherwise specified.
<PAGE> 2
INSTRUCTIONS
WITH RESPECT TO THE EXCHANGE OFFER FOR
ALL OUTSTANDING CLASS A WARRANTS
OF
DISC GRAPHICS, INC.
The undersigned acknowledge(s) receipt of your letter enclosing the
Exchange Offer of Disc Graphics, Inc. dated July 11, 1997, and the related
Letter of Transmittal. This will instruct you to tender for exchange the Class A
Warrants indicated below held by you for the account of the undersigned pursuant
to the terms and conditions set forth in the Offer and in the related Letter of
Transmittal and the instructions thereto.
SIGN HERE
<TABLE>
<S> <C>
- ------------------------------------------ -----------------------------------------------
- ------------------------------------------ -----------------------------------------------
- ------------------------------------------ -----------------------------------------------
(Signature(s)) (Please print name(s) and address(es) here)
Area Code and Telephone No.
-----------------------
Taxpayer Identification or
Social Security No.
-----------------------------------
==========================================
Number of Class A Warrants
to be tendered
________________ Class A Warrants*
==========================================
</TABLE>
Date: ________________ , 1997
- ---------------
* I (We) understand that if I (we) sign this instruction form without indicating
a lesser number of Class A Warrants in the space above, all Class A Warrants
held by you for my (our) account will be tendered.
<PAGE> 1
- -------------------------------------------------------------------------------
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 December 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
_____ to _____
Commission file number 0-22696
DISC GRAPHICS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 13-3678012
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10 Gilpin Avenue, Hauppauge, New York 11788
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
-------------- ------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Class A Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the issuer (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 Registrant's 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]
At March 24, 1997, the aggregate market value of the voting stock held by
non-affiliates of Registrant was approximately $8,337,000 based on the closing
price of the Common Stock on the Nasdaq Stock Market on that date.
At March 24, 1997, the Registrant had outstanding 5,369,658 shares of Common
Stock, $.01 par value per share.
Documents Incorporated by Reference: Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Exchange Act.
------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. Description of Business
Background
RCL Capital Corp. ("RCL") was incorporated in August 1992 to serve as a
vehicle to effect a business combination with an operating business. On November
18, 1993, RCL completed a public offering of units ("Units"), each Unit
consisting of one share of the RCL's Common Stock and two redeemable warrants.
Net proceeds of the public offering after the payment of certain additional
expenses yielded approximately $6,400,000, which was put into escrow pending the
acquisition of an operating business.
On October 30, 1995, Disc Graphics, Inc., a New York corporation ("Old Disc"),
merged with and into RCL. Following the merger, RCL changed its name to Disc
Graphics, Inc. ("DGI" or the "Company"). Net Proceeds of the merger after the
payment for the redemption of approximately 185,000 shares of Common Stock at
$5.15 per share, in accordance with the terms of the original RCL offering,
yielded proceeds to the Company of approximately $5,000,000. These proceeds were
used primarily to reduce certain indebtedness of the Company and for working
capital purposes.
The merger has been treated for accounting and financial reporting purposes as
a reverse merger of RCL into Old Disc. Accordingly, the Company's results of
operations prior to October 30, 1995 are those of Old Disc. In addition, in
connection with the merger, DGI adopted a December 31 fiscal year.
General
DGI, located in Hauppauge, New York, is a diversified manufacturer and printer
of specialty packaging focused on the home video, pharmaceutical, music,
entertainment software, publishing and cosmetics markets. Products include:
pre-recorded video, CD-ROM and audio cassette packaging; folding cartons for
pharmaceuticals and cosmetics; book jackets, posters, pressure sensitive labels
and general commercial printing. Customers include software, CD-ROM and video
distributors; vitamin, cosmetic and fragrance companies; major book publishers;
and Fortune 500 companies.
DGI's primary business strategies are: (1) to increase the Company's share of
print and packaging sales within its primary markets, including music, home
video, pharmaceutical, cosmetic, publishing and general consumer products; (2)
to acquire other strategically-located specialty packaging and printing
companies that serve geographic markets and industries near existing customers,
as well as serve markets that will permit DGI to offer a service and cost
advantage over its competitors; and (3) to develop innovative packaging designs
and techniques for new and existing markets.
DGI is actively involved in investigating additional printing and packaging
related business opportunities, including potential acquisitions similar to the
acquisition of Pointille, Inc., a packaging printer in May 1996. However, DGI
has not entered into any definitive agreement with respect to any potential
acquisition. In addition, there can be no assurance that DGI will consummate any
such acquisition, or if completed, that any such acquisition will be profitable
for DGI.
<PAGE> 3
Historically, DGI has grown primarily through the development of new
customers through its superior service and response capabilities and increases
in orders from existing customers. In 1992, DGI acquired Four Seasons Litho,
Inc., a commercial printer with revenues of approximately $3 million per year,
and in 1996, DGI acquired substantially all of the assets and certain
liabilities of Pointille and has since integrated their manufacturing facilities
and sales/marketing programs into DGI's. DGI intends to continue and enhance its
historic growth by acquiring strategically-located folding carton and printing
companies, opening new facilities to serve regional U.S. markets, expand DGI's
product line and continue ongoing internal expansion.
DGI's principal executive offices and principal manufacturing operations are
located at 10 Gilpin Avenue, Hauppauge, New York 11788. Its telephone number is
(516) 234-1400.
Packaging/Printing Industry
Approximately 70% of DGI's revenue in 1996 was derived from the manufacture
and sale of paperboard folding cartons. An industry trade publication has
estimated that in 1996 there were 300 companies operating 495 folding carton
manufacturing plants in the United States and that total revenues from the sale
of folding cartons was approximately $5.4 billion, reflecting a 2.6% increase
over 1995.
Folding carton manufacturers are divided into three main segments: integrated
manufacturers (those owned by or affiliated with a paperboard mill),
non-integrated or independent manufacturers and, in-plant or "captive"
manufacturers which are owned directly by the end user. DGI generally competes
with independent manufacturers. DGI focuses on those markets that use the
folding carton as part of a product's marketing. The promotional function of the
carton may employ multiple colors, coatings, several printing techniques,
stamping and other graphic design considerations. DGI has concentrated in
markets, such as the home video, software, cosmetics, music and pharmaceutical
packaging markets, which utilize those techniques to a significant extent. DGI
has devoted substantial resources toward developing the specialized processes
required in such markets.
DGI's business includes commercial printing, book component printing and
labels. Industry trade sources have estimated that the total United States
commercial printing market in 1996 was approximately $74 billion. The industry
is fragmented with many small printing companies serving regional markets. For
example, within the New York City Metropolitan area, there are nearly 3,500
printing establishments with 76% having fewer than ten employees. DGI is listed
in the top 200 printers in the United States, based on revenues. Based on 1995
revenues, DGI was ranked 183 in the top 500 printing companies in the United
States by an industry trade publication.
Products
Video/Entertainment Software Packaging
DGI manufactures video packaging, including bottom load video sleeves,
multi-packs and specialty items. DGI has historically concentrated on the
catalogue and special interest video/software markets. DGI's catalogue customers
typically have licensed or purchased products from major movie production
studios. Special interest continues to be a growing segment of the video market.
Packaging for these videos is often sold to independent distributors and video
tape duplicators. Through these distributors and duplicators DGI has produced
packaging for many Fortune 500 companies. In addition, the acquisition of
Pointille has provided DGI with a facility in close proximity to major film and
video studios. Through this facility, DGI produces video packaging for studios
such as The Walt Disney Company and Time Warner, Inc.
<PAGE> 4
Software packaging has been a growing market for DGI, with CD-ROM packaging as
the principal product. Many of DGI's existing video, publishing and music
customers are marketing software through their existing distribution channels
and are purchasing software packaging from DGI.
Music/Audio Packaging
DGI manufactures pre-recorded cassette packaging, such as insert or "J" cards,
cassingles (cassettes with only one or a few songs), compact disc packaging,
including tray cards and booklets, as well as audio book packaging and other
printed materials for the music/audio industry.
The music industry customers often require that packaging be produced quickly,
often within days of placing an order. As an established and accepted music
industry printer, DGI has assembled a combination of skilled workers, advanced
equipment, and production systems to meet these requirements.
DGI has long standing customer relationships with many of the major record
companies in the United States and also manufactures packaging for major
duplicators in the United States. Additionally, DGI manufactures packaging for
special interests and secondary markets. The acquisition of Pointille has
bolstered DGI's presence in the West Coast market and management believes this
will greatly enhance future growth.
The other major segment of this market is audio publishing packaging. DGI
believes that it has a significant share of this market. DGI's principal
customers include two of the largest publishers in this market. DGI also
manufactures packaging for self-help and specialty cassettes which are a growing
portion of this market.
Pharmaceutical/Vitamin Packaging
Pharmaceuticals fall into two main categories: over-the-counter ("OTC") and
prescription. Each category places specific requirements upon the graphics for
the folding cartons and labels used. DGI has emphasized the OTC side of the
market, which requires the use of multi-color graphics to convey product
identity and brand recognition. A large part of DGI's revenues for OTC-style
cartons is for "private label" products, such as for large food and drug store
chains which have their own house brands and other private label pharmaceutical
manufacturers.
Vitamin and nutritional supplements packaging is the other major portion of
DGI's OTC carton business. Color graphics are also emphasized for vitamin
packaging as the product lines have distinct vibrant colors. Sales of these
cartons are made directly to several major vitamin manufacturers.
Consumer Product Packaging
DGI manufactures cartons and packaging for fragrances, skin lotions, pet
products, food and other specialty packaging for this market. Those
packagings may be the actual product carton or special point-of-purchase
<PAGE> 5
promotions for the major cosmetic companies or educational packages for
pharmaceutical companies. DGI sells packaging for this market both directly and
through brokers representing national brands and private label companies.
Commercial Printing
In the area of commercial printing, DGI prints brochures, posters, sell sheets
and other promotional material. DGI prints book jackets and covers, as well as
children's books and "cut labels" for vitamin and food packaging.
Labels
DGI prints labels on pressure sensitive stock that are die cut to a customer's
specifications. The primary markets for labels are pharmaceuticals, vitamins,
video packages (face and spine labels), pet products and specialty items. Labels
are sold primarily to existing customers for packaging. Many video and folding
carton orders include an order for the corresponding labels.
Marketing and Sales
DGI's revenues are derived from several markets. The largest market, as a
percentage of total 1996 net sales, was video/entertainment software which
accounted for approximately 29%; followed by consumer product packaging, which
accounted for approximately 27%; next was music/audio packaging , which
accounted for 18%; then pharmaceutical/vitamin packaging, which accounted for
approximately 10%; then commercial printing, which accounted for approximately
9%; and labels which accounted for approximately 7%.
DGI's sales are primarily the result of direct solicitation by its executive
officers and full-time sales people. DGI's package engineering staff assists
customers with new package design and development. Because DGI has a short cycle
time, it has a small order backlog, with most orders processed and delivered in
one to four weeks. For additional information concerning the Company's customers
and its lines of business, see the Consolidated Financial Statements and the
Notes thereto located elsewhere in this Annual Report.
Seasonality
Historically, DGI's revenues have been seasonal. In the last two quarters of
1996 and 1995, DGI's revenues were approximately 56% and 53% of annual sales,
respectively. This seasonality is primarily the result of certain markets which
DGI services, such as music/audio packaging, video/entertainment software
packaging and consumer product packaging, which require that products be
produced and shipped between August and October for sale during the Christmas
holiday season. As these three categories account for approximately 70.8% of
DGI's sales in 1996, business, the revenues of DGI are typically greater in the
last six months of the calendar year versus the first six months.
Competition
DGI competes with a small number of printed paperboard packaging companies
within each of its markets. In the music, video and software industries, DGI has
five major competitors, the largest of which is Shorewood Packaging Corporation.
These industries require high quality packaging with rapid turnaround time at
competitive pricing. Those competitive factors are also evident in the Company's
other markets. DGI believes that its ability to perform all aspects of the
manufacturing process in-house is an important factor in maintaining and
improving its competitive position.
<PAGE> 6
While DGI believes its present competitive position is strong, there can be no
assurance that this will not change. Several of DGI's competitors have financial
resources that are greater than DGI's. In addition, because DGI supplies
packaging to consumer industries, it is also subject to the competitive forces
affecting its customers.
Employees
As of March 15, 1997, DGI had approximately 372 employees. 274 of these
employees are located in the Company's Hauppauge, New York facility, with 227
serving in manufacturing capacities and 47 serving in selling and administrative
capacites. 75 employees are located in the Company's Burbank, California
facility, with 69 serving in manufacturing capacities and 6 serving in selling
and administrative capacites. 23 employees are located in the Company's
Rockaway, New Jersey facility, with 21 serving in manufacturing capacities and 2
serving in selling and administrative capacites. A majority of the manufacturing
employees located in the Burbank, California facility are represented by a labor
union. DGI considers its relationship with its employees to be satisfactory.
Materials
DGI uses a variety of raw materials. The most significant types of raw
material utilized are paperboard, paper, label paper, ink coating, films and
plates. These materials are purchased from a variety of suppliers with several
alternate sources for each. Although the supply of paper and paperboard over the
past several years has been limited, resulting in industry wide shortages and
price increases, DGI has been successful in obtaining adequate materials to
satisfy all sales orders, and does not anticipate any significant difficulties
in obtaining supplies of such materials in the future. There are no assurances,
however, that DGI will not encounter difficulty in obtaining supplies of such
material to fulfill its requirements.
Equipment
DGI owns or leases various manufacturing, computer and other equipment used in
the manufacture of its products and for its administrative support.
Regulation
DGI's activities are subject to various environmental, health and employee
safety laws. DGI has expended resources, both financial and managerial, to
comply with applicable environmental, health and worker safety laws in its
operations and at its facilities and anticipates that it will continue to do so
in the future. Compliance with environmental laws has not historically had a
material effect on DGI's capital expenditures, earnings or competitive position,
and DGI does not anticipate that such compliance will have a material effect on
DGI in the future. Although DGI believes that it is generally in compliance with
all applicable environmental, health and worker safety laws, there can be no
assurance that additional costs for compliance will not be incurred in the
future or that such costs will not be material.
<PAGE> 7
Current Directors and Executive Officers of the Company
Donald Sinkin is Chairman of the Board, Chief Executive Officer and President
of the Company.
Stephen Frey is a Director and Vice President of Operations of the Company.
John Rebecchi is a Director and Vice President of Sales & Marketing of the
Company.
Daniel Levinson is a Director of the Company and is a member of Holding
Capital Group. Mr.Levinson is a director of several private companies.
Seymour W. Zises is a Director of the Company and is President and Chief
Executive Officer of Family Management Corporation and President and Chief
Executive Officer of Forest Hill Capital Corporation. Mr. Zises is also a
director of several companies.
Mark L. Friedman is a Director of the Company, counsel to the law firm of
Baer, Marks & Upham, and is Vice Chairman of the Board of Directors of Universal
Gym Equipment, Inc., a fitness equipment company.
Margaret Krumholz is Chief Financial Officer of the Company.
ITEM 2. Properties
DGI's executive offices, primary manufacturing facility and its warehouse
are located in Hauppauge, New York. The executive offices and manufacturing
plant are part of a leased 55,000 square foot facility. The monthly lease
payment for such executive office and manufacturing space is $29,000 and the
lease terminates on December 31, 2007. The facility is owned by certain
principals of DGI through a limited partnership and DGI believes that the lease
terms were and are at least as favorable to DGI as the lease terms which could
have been obtained from unaffiliated third parties for similar office,
manufacturing and warehouse space. DGI's warehouse facility is a building
adjacent to its executive offices of which 40,000 square feet is occupied by
DGI. The monthly lease payment for the warehouse is $11,267 and the lease
terminates on August 31, 1997. DGI also maintains an 8,400 square foot printing
facility in Rockaway, New Jersey. The monthly lease payment for the New Jersey
facility is $3,325 and the lease terminates on June 13, 1998. DGI leases a
30,000 square foot manufacturing facility in Burbank, California. The monthly
lease payment for the California facility is $17,400 and the lease terminates on
May 18, 1998. Management of DGI believes that the facilities are adequate to
meet current operational needs.
ITEM 3. Legal Proceedings
From time to time, DGI is a party to certain lawsuits that arise in the
conduct of its business. While the outcome of these lawsuits and proceedings
cannot be predicted with certainty, management believes that, if adversely
determined, the lawsuits and proceedings, either singularly or in the aggregate,
would not have a material adverse effect on the financial condition or results
of operations of DGI.
<PAGE> 8
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1996, there
were no matters submitted to a vote of the DGI security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Price Range of Common Stock
Since May 28, 1996, the Company's Common Stock, par value $.01 per share (the
"Common Stock"), has been authorized for trading on the National Association of
Securities Dealers, Inc. SmallCap Market under the symbol DSGR. From October 31,
1995 to May 28, 1996, DGI's Common Stock was listed on the American Stock
Exchange under the symbol DGI. Prior to October 31, 1995, the Common Stock was
quoted on the OTC Bulletin Board under the symbol RCLC. The table set forth
below contains the range of the high and low closing bid prices on the National
Association of Securities Dealers, Inc. SmallCap Market for the quarters ended
September 30, 1996 and December 31, 1996. The prices for the quarters ended
March 31, 1996 and June 30, 1996 are the high and low closing sales prices on
the American Stock Exchange.The prices for the quarters ended March 31, 1995,
June 30, 1995, September 30, 1995 and December 31, 1995 are the high and low bid
quotations on the OTC Bulletin Board. The OTC Bulletin Board quotations
represent prices between dealers and do not include retail mark up, mark down or
commission. They do not necessarily represent actual transactions.
The Company's Class A Warrants are currently authorized for trading on the
National Association of Securities Dealers, Inc. SmallCap Market under the
symbol DSGRW. From October 31, 1995 to May 28, 1996 the Class A Warrants were
quoted and traded on the OTC Bulletin Board under the symbol DSGRW. Prior to
October 31, 1995, the Class A Warrants were quoted and traded on the OTC
Bulletin Board under the symbol RCLCW. The table set forth below contains the
range of the high and low closing bid prices on the National Association of
Securities Dealers, Inc. SmallCap Market for the quarters ended September 30,
1996 and December 31, 1996. The prices for the quarters ended March 31, 1995,
June 30, 1995, September 30, 1995, December 31, 1995, March 31, 1996 and June
30, 1996 are the high and low bid quotations on the OTC Bulletin Board . The OTC
Bulletin Board quotations represent prices between dealers and do not include
retail mark up, mark down or commission. They do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Common Stock Class A Warrants Units
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended
March 31, 1995 $4.625 $3.75 $0.50 $0.125 $5.875 $4.50
June 30, 1995 4.9375 4.50 0.75 0.375 5.75 5.00
September 30, 1995 4.88 4.50 0.8125 0.4375 6.00 5.375
December 31, 1995 5.15625 2.875 0.8125 0.4375 6.00 3.00
March 31, 1996 4.25 3.3125 0.8125 0.4375 * *
June 30, 1996 3.9375 2.625 0.75 0.375 * *
September 30, 1996 2.9375 1.6875 0.375 0.125 * *
December 31, 1996 2.75 2.125 0.25 0.125 * *
</TABLE>
<PAGE> 9
On March 24, 1997, the closing bid prices for the Common Stock and the
Class A Warrants were $2.75 and $0.3125, respectively.
* On October 31, 1995, the Units were eliminated upon the merger of RCL and
Old Disc.
(b) Holders of Common Stock.
As of March 24, 1997, there were 55 holders of record of the Common Stock
and 27 holders of record of Class A Warrants.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock since its
inception. The payment of dividends in the future will be contingent upon DGI's
revenues and earnings, capital requirements and general financial condition and
any other factors deemed relevant by the DGI Board of Directors. DGI presently
intends to retain all earnings for use in DGI's business operations and to
further the growth of DGI's business. Accordingly, the DGI Board of Directors
does not anticipate declaring any dividends in the foreseeable future.
<PAGE> 10
ITEM 6. Selected Financial Data
The following table sets forth selected data regarding the Company's
operating results and financial position. The data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto, all of
which are contained in this Annual Report on Form 10-K. Cash dividends were not
paid on the Company's Common Stock in any of the periods indicated below.
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales $42,575 $36,149 $30,550 $26,651 $21,233
Gross profit 10,911 7,481 6,797 5,819 4,641
Operating expenses 7,612 5,733 5,020 4,559 3,883
Income from operations 3,299 1,748 1,777 1,260 758
Interest expense 764 838 837 697 548
Net income 1,454 501 502 215 103
Net income per common share 0.29 0.18 0.22 0.10 --
Cash dividends per share -- -- -- -- --
Weighted average number of
shares outstanding 5,094 2,714 2,247 2,247 --
As at December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets $22,046 $18,604 $14,048 $12,831 $11,229
Current liabilities 7,483 3,934 4,835 4,257 7,325
Total liabilities 5,598 7,243 6,933 6,796 2,378
Stockholders' equity 8,964 7,427 2,280 1,778 1,526
</TABLE>
<PAGE> 11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three year period ended December
31, 1996. The discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in this Annual
Report.
Introduction
Disc Graphics, Inc. was incorporated in August 1992 under the name RCL
Capital Corp. ("RCL") to serve as a vehicle to effect a business combination
with an operating business. On November 18, 1993, RCL completed the public
offering of Units, each Unit consisting of one share of RCL's Common Stock and
two redeemable warrants. Net proceeds of the public offering after the payment
of certain additional expenses yielded approximately $6,400,000, which was put
into escrow pending the acquisition of an operating business.
Merger
On October 30, 1995, RCL consummated the merger (the "Merger") pursuant to
the Agreement and Plan of Merger dated as of May 8, 1995 (the "Merger
Agreement") between RCL and Old Disc. The merger was subject to, among other
things, approval by RCL's stockholders, which approval was obtained at a special
meeting of stockholders held on October 27, 1995. Pursuant to the Merger
Agreement (i) Old Disc merged with and into RCL, (ii) RCL's name was changed to
Disc Graphics, Inc. and (iii) all of the outstanding shares of Class A Common
Stock, no par value, and the Class B Common Stock, no par value, of Old Disc
were converted into (a) an aggregate of 3,100,000 shares of Common Stock of RCL
and (b) and an aggregate of 1,000,000 warrants to purchase an aggregate of
1,000,000 shares of Common Stock of RCL, one-quarter of which are exercisable at
a price of each of $7.00, $8.00, $9.00 and $10.00.
Potential Future Issuance's of Shares of Common Stock by the Company
Pursuant to the Merger Agreement as modified by a certain Agreement as of
October 30, 1995 by and among certain stockholders of RCL (the "RCL
Stockholders") and the former shareholders of Old Disc (the "Old Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine from
time to time until up to five years after October 30, 1995 (the "Effective
Time") that, as of the Effective Time, either (i) RCL did not have cash or
marketable securities with a fair market value as of the Effective Time of not
less than $6,000,000 (the actual amount of cash and marketable securities held
by RCL as of the Effective Time, the "First Amount") or (ii) the cash and
marketable securities of RCL did not exceed all the liabilities of RCL of any
kind or nature (whether fixed or contingent, matured or unmatured) (including,
without limitation, all liabilities based upon, relating to or arising from any
actions taken by or on behalf of RCL or the failure of RCL to take any actions
prior to the Effective Time or any facts or circumstances existing prior to the
Effective Time, which in any such case result in any liabilities, obligations or
claims against the Company after the Effective Time) (all such liabilities
collectively, the "RCL Liabilities") by not less than $6,000,000 (the actual
amount of cash and marketable securities held by RCL as of the Effective Time
less such liabilities, the "Second Amount"), then promptly upon notice of such
determination by the Old Disc Shareholders to the Company, the Company shall
issue to such Old Disc Shareholders, on a pro rata basis based on the number of
shares of Old Disc Common Stock held by such shareholders immediately prior to
the Effective Time, the number of shares of the Company's Common Stock (the "RCL
Designated Shares") sufficient (without duplication) to increase the percentage
of ownership of the Company by all of such shareholders that such shareholders
have had immediately after the Effective Time (excluding any RCL Indemnity
Shares (as defined below) issued after the Effective Time) from 60.23% to a
percentage determined by a formula defined in the Merger Agreement. Although the
formula in the Merger Agreement allows for the Old Disc Shareholders to receive
as much as three times the number of RCL Designated Shares, the Old Disc
Shareholders agreed to limit the calculation to two times the number of RCL
Designated Shares.
<PAGE> 12
Notwithstanding the provision of the Merger Agreement described in the
immediately preceding paragraph, the RCL Stockholders and the Old Disc
Shareholders have entered into an agreement pursuant to which the RCL
Stockholders will transfer to the Old Disc Shareholders shares of DGI Common
Stock owned by the RCL Stockholders instead of the Company issuing certain
shares of DGI Common Stock to the Old Disc Shareholders, but only if and to the
extent that Net Assets are between $4,900,000 and $5,304,750. "Net Assets" means
RCL's cash and marketable securities at the Effective Time less the RCL
Liabilities.
Pursuant to the Merger Agreement, the Old Disc Shareholders were issued
342,256 shares of Company Common Stock on December 3, 1996. The RCL Stockholders
also transferred 60,000 shares of Common Stock to the Old Disc Shareholders.
Proceeds of the Merger
Net proceeds of the merger after the payment for the redemption of
approximately 185,000 shares of Common Stock at $5.15 per share, in accordance
with the terms of the original RCL offering, yielded proceeds to the Company of
approximately $5,000,000. These proceeds were used primarily to reduce certain
indebtedness of the Company and for working capital purposes.
The Merger has been treated for accounting and financial reporting purposes
as a reverse merger of RCL into Old Disc. Accordingly, the Company's results of
operations prior to October 30, 1995 are those of Old Disc. In addition, in
connection with the merger, DGI adopted a December 31 fiscal year.
Pointille Acquisition
On May 18, 1996, the Company, acquired ("the California Acquisition")
substantially all of the assets and certain liabilities of Pointille, Inc., a
California corporation ("Pointille") pursuant to an asset purchase agreement
dated as of May 17, 1996, by and among the Company, Pointille and the sole
shareholder of Pointille (the "Asset Purchase Agreement"). The purchase price
consisted of $662,545 in cash, 74,074 shares of the Company's Common Stock, a
promissory note in the amount of $330,000, payable in 36 equal monthly
installments of principal and interest beginning on June 16, 1996, and
transaction costs. The California Acquisition was recorded using the purchase
method of accounting and accordingly, the results of Pointille's operations are
included in the Company's results of operation from May 18, 1996. The goodwill
related to Pointille was approximately $1,069,363 million at December 31, 1996.
<PAGE> 13
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales
Net sales for the year ended December 31, 1996 were $42,575,000 compared to
$36,149,000 for the same period the prior year, representing an increase of
$6,426,000 or 18%. This increase was primarily due to the California
Acquisition, which accounted for net sales of approximately $4,542,000. The
categories of the business which experienced significant growth were
video/software packaging, which increased $2,947,000 or 32%, and consumer
product packaging, which increased $2,089,000 or 22%. Approximately half of the
growth in video/software packaging was a result of an increase in CD-ROM
packaging sales. Management believes that the California Acquisition positions
DGI to compete more aggressively in the west coast markets and that this should
be most beneficial as it relates to the entertainment segment (i.e. video/
software and music/audio packaging) and CD-ROM packaging segment of DGI's
business.
Sales of music/audio packaging, commercial printing and labels also
increased by 10%, 24% and 6%, respectively over sales for the prior period. The
negative effect on the Company from the recent downturn in the music industry's
cassette segment was greatly offset by the strong cassette segment sales in
the newly acquired California facility. Pharmaceutical/vitamin packaging
sales experienced a slight decrease of $219,000 or 5%, compared with the
comparable period of the prior year. This is a result of a change in the
Company's focus to growing earnings, thereby concentrating on more profitable
segments within this business category.
Gross Profit
Gross profit for the year ended December 31, 1996 was $10,911,000
(a 26% profit margin) compared to $7,481,000 (a 21% profit margin) for the prior
year, representing an increase of $3,431,000. The increase was due primarily to
the reduction in costs of goods sold as a percentage of revenue, increased sales
volume and the California Acquisition. The California Acquisition resulted in an
increase in gross profit of $640,000. The decrease in cost of goods sold was a
result of manufacturing efficiencies attributable to improved processes and
equipment. The investment and focus on more efficient equipment and improved
processes resulted in a five percentage point decrease in cost of goods sold as
a percentage of sales for the twelve months. The Company continues to focus on
opportunities within manufacturing to reduce costs.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the twelve months
ended December 31, 1996 were $7,612,000 (17.9% of revenue) compared to
$5,733,000 (15.9% of revenue) for the prior year, an increase of $1,879,000, or
33%. This increase was due primarily to revenue related expenses (such as
freight to customers and commissions), professional fees, the cost of insurance
related to the Company's public status and costs associated with operation of
the newly acquired California facility.
In the fourth quarter of 1996, the Company instituted a program to reduce
SG&A expenses by integrating the California Acquisition and renegotiating
professional fees. The continuing focus will be to leverage the Company's
current fixed cost base with future growth in the business.
<PAGE> 14
Interest Expense
Interest expense for the year ended December 31, 1996 was $764,000,
compared to $838,000 for the prior year. Interest expense includes interest on
notes payable to the Company's former bank lender in addition to capital lease
obligations on equipment. The decline in interest expense is related to the
decrease in indebtedness from the utilization of the Merger proceeds.
Income Taxes
The provision for income taxes for the year ended December 31, 1996
increased primarily due to the increase in pretax income of $1,666,000 and a
slight increase in the effective tax rate from 42.4% in 1995 to 42.6% in
1996.
Net Income
Net income for the twelve months ended December 31, 1996 was $1,454,000,
compared to $501,000 for the prior year, an increase of $953,000, or 190%. This
increase was a result of an increase in net sales of approximately 18% along
with the management of manufacturing costs resulting in cost of goods sold
declining as a percentage of net sales from 79.3% in 1995 to 74.4% in 1996.
Although the California Acquisition resulted in a positive impact in net sales
there was only a break-even effect on net income. Management believes that the
Company's strategy of focusing on cost reductions, margin improvement and
earnings along with the historical growth in revenue resulted in significant
improvement in the income in 1996 compared to 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales
Net sales for the twelve months ended December 31, 1995 were $36,149,000
compared to $30,550,000 for the prior year, representing an increase of
$5,599,000, or 18%. Unit volume for the twelve months ended December 31, 1995,
compared to the same period of the prior year increased 7%. The categories of
the business which experienced significant growth were video/software packaging,
which increased $2,886,000, or 46%, and consumer product packaging, which
increased $2,139,000, or 29%. Approximately half of the growth in sales of
video/software packaging was a result of an increase in CD-ROM packaging. Sales
of music/audio packaging and labels also increased by 11% and 24%, respectively.
The increase in music/audio packaging sales was substantially greater in the
first six months of 1995 than in the last six months, due to the general
downturn in the music industry.
There was a slight downturn in sales of both pharmaceutical/vitamin
packaging and commercial printing of 8% and 7%, respectively. Pharmaceutical
packaging sales has been adversely impacted as it related to reorders, due to
the consolidation of several pharmaceutical manufacturers. The Company believes
that it is well positioned with the surviving manufacturers to continue to grow
pharmaceutical sales in the future. Commercial sales were impacted by a soft
economy and a competitive market place. Within this segment, sales of package
paper labels grew 40%, or $113,000, however, this gain was offset by declines in
book components and other general commercial categories.
<PAGE> 15
Gross Profit
Gross profit for the twelve months ended December 31, 1995 was $7,481,000
(a 21% profit margin), compared to $6,797,000 (a 22% profit margin) for the same
period of the prior year, representing an increase of $684,000, or 10%. The
increase was due primarily to the increase in sales partially offset by
increases in paper and paperboard costs. In addition, the Company experienced
both manufacturing inefficiencies and additional costs related to the increased
need to outsource work during the installation of a new press. Upon completion
of the press installation in September of 1995, costs for outsourcing declined.
This press has enhanced production capacity and efficiency resulting in a
reduction of costs. The Company also started a new facility for label
manufacturing in New Jersey, incurring one-time costs related to indirect labor
at the facility.
Selling, General and Administrative Expenses
SG&A expenses for the twelve months ended December 31, 1995 were
$5,734,000, compared to $5,020,000 for the same period of the prior year,
representing an increase of $714,000, or 14%. This increase was due primarily to
increases in wages, benefits, overhead and revenue related increases in expenses
such as freight for shipments to customers and commissions/bonuses. Subsequent
to the merger, the Company has incurred additional legal and accounting fees
relating to reporting and compliance requirements which have to do with the
public status of the Company. Despite these added costs, the Company's focus on
managing fixed costs in relation to growth in revenues has resulted in a decline
in SG&A as a percentage of revenue.
SG&A as a percent of net sales for the twelve months ended December 31,
1995 was 15.9%, versus 16.5% for the same period of the prior year.
Interest Expense
Interest expense for the twelve months ended December 31, 1995 was
$838,000, compared to $837,000 for the same period of the prior year,
representing an increase of $1,000. Interest expense included interest on notes
payable to the Company's former bank lender and capital lease obligations on
equipment. The increase in interest expense was partially due to debt incurred
related to capital expenditures and was partially offset by the use of proceeds
resulting from the merger with RCL which were utilized to reduce debt.
Income Taxes
The provision for income taxes for the twelve months ended December 31,
1995 was $368,000, compared to $439,000 for the same period of the prior year, a
decline of $71,000, or 16%. This decline is due in part to the decline in both
the pretax income and the effective tax rate from 46.7% in 1994 to 42.4% in
1995. The effective tax rate changed due to the settlement in a prior year of
IRS audit.
Net Income
Net income for the twelve months ended December 31, 1995 was $501,000,
compared to $502,000 for the same period of the prior year. Although revenue
increased by 18%, there was substantially no change in net income. This was due
to the Company's investments in equipment and production in the New Jersey label
facility which, in management's opinion, strategically positioned the Company
for growth, and legal and accounting fees related to the Company's public status
which were incurred post-merger.
<PAGE> 16
Liquidity and Capital Resources
The primary sources of cash for DGI's business activities have been cash
provided from operations, borrowings under the financing agreement with its
former bank lender (the "Financing Agreement") and in 1995, proceeds from the
merger between RCL and Old Disc. As of December 31, 1996, DGI had working
capital of $5,002,000 compared to $7,537,000 as of December 31, 1995. This
decline was due primarily to cash paid for the California Acquisition, the
increase in accounts payable, accrued expenses and income taxes payable offset
by the increase in accounts receivable.
Net cash provided by operating activities for the year ended December 31,
1996 was $5,309,000, an increase of $5,207,000 from the prior year. The Company
continues to have a strong focus on cash management. Cash used in investing
activities included the California Acquisition and capital expenditures. Cash
used for the California Acquisition was $663,000.
Capital expenditures have been primarily for the purchase of a new computer
system, manufacturing equipment, effecting building improvements, and the
purchase of furniture and fixtures. Capital expenditures in 1996 were $782,000,
as compared to $3,485,000 in 1995. In 1995, the Company invested approximately
$2,000,000 in a new six color printing press which is technologically advanced
and has the ability to do waterless printing.
On February 26, 1997, the Company entered into a new revolving credit
agreement (the "Credit Agreement") with a different bank lender which allows for
borrowings equal to 85% of eligible accounts receivable plus up to 70% of
eligible inventory, not to exceed $10,000,000. The credit agreement is secured
by substantially all of the unencumbered assets of the Company. The borrowing
rate under this agreement is either (i) LIBOR plus 125 to 175 basis points
depending on the Debt Coverage Ratio or (ii) the Bank's Base Rate. The Credit
Agreement also provides for a borrowing sublimit for acquisitions in an amount
equal to the lesser of $3,000,000 or 25% of the Company's tangible net worth.
The utilization of this sublimit must be in compliance with the Credit Agreement
as a whole.
DGI's prior Financing Agreement allowed for borrowing an amount equal to
85% of eligible accounts receivable plus 70% of the value of rolled paper
inventory, not to exceed $8,500,000. Amounts outstanding under the Financing
Agreement accrued interest at 1% over the bank's prime rate (9.25% per annum at
December 31, 1996). The Financing Agreement contained certain covenants which
restricted certain activities by DGI and required DGI to satisfy certain
performance criteria, including the maintenance of minimum net worth levels and
debt service ratios. At December 31, 1996, DGI was not in compliance with one
covenant, which had limited the amount of annual capital expenditures to
$650,000. DGI had spent $782,374 in 1996. As of December 31, 1996, DGI had
approximately $5,500,000 available for borrowing under the Financing Agreement.
DGI has used the proceeds from the merger with RCL (net cash of approximately
$5,000,000), less expenses of DGI incurred in connection with the merger,
primarily to pay down certain existing indebtedness of DGI and for working
capital purposes.
<PAGE> 17
Inflation and Seasonality
The Company has experienced increases in variable and fixed costs. The
Company has managed to reduce the impact of these cost increases by obtaining
certain volume discounts through the purchase of larger quantities of raw
material and investment in equipment to cut rolled paper into sheets,
eliminating the need to purchase more costly sheeted paperboard.
In addition, despite inflationary increases in direct labor, the Company
has managed through more efficient equipment to reduce the cost of labor as a
percentage of revenues by 5 percentage points. The Company, like its
competitors, has whenever possible passed on increased costs by way of increased
pricing in various markets.
Historically, a portion of DGI's business has been seasonal. The
requirements of the home video, music and cosmetic markets for products to be
delivered for the Christmas holiday season generally causes an increase in sales
from August through October.
New Accounting Standard
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, on January 1, 1996. Adoption of this
Statement did not have a material impact on the Company's financial position,
results of operation, or liquidity.
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No.25, Accounting for Stock Issued to Employees, and related interpretations.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
ITEM 8. Financial Statements and Supplementary Data
Page
----
Consolidated Financial Statements - Disc Graphics and Subsidiaries
Independent Auditor's Report . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of December 31, 1996 and 1995 . 20
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994. . . . . . . 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . 24
<PAGE> 18
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996 and 1995
(with Independent Auditors' Report Thereon)
<PAGE> 19
Independent Auditors' Report
The Board of Directors
and Stockholders
Disc Graphics, Inc.:
We have audited the accompanying consolidated balance sheets of Disc Graphics,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 financial position of Disc
Graphics, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
February 27, 1997
<PAGE> 20
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,859 1,309,677
Accounts receivable, net of allowance for
doubtful accounts of $844,000 and
$494,000, respectively 9,055,995 7,200,428
Inventories 2,013,333 1,812,137
Prepaid expenses and other current assets 599,927 571,394
Current maturities of notes receivable 85,014 82,777
Deferred income taxes 700,000 493,594
----------- -----------
Total current assets 12,485,128 11,470,007
Plant and equipment, net 8,254,920 6,776,378
Notes receivable, less current maturities - 59,937
Goodwill, net of amortization of $46,493 1,069,363 -
Security deposits and other assets 236,271 297,191
----------- -----------
Total assets $ 22,045,682 18,603,513
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable 456,651 386,787
Current portion, long-term debt 97,167 -
Current maturities of capitalized lease obligations payable 692,852 584,635
Accounts payable 2,088,473 1,740,544
Accrued liabilities 3,194,098 1,116,511
Income taxes payable 954,088 105,084
----------- -----------
Total current liabilities 7,483,329 3,933,561
Long-term debt 515,234 3,000,000
Equipment notes payable, less current maturities 1,902,838 2,418,881
Capitalized lease obligations payable, less
current maturities 2,192,235 963,950
Deferred income taxes 988,000 860,000
----------- -----------
Total liabilities 13,081,636 11,176,392
Commitments and contingencies
Stockholders' equity:
Preferred stock:
$.01 par value; authorized 5,000 shares;
no shares issued and outstanding
Common stock:
$.01 par value; authorized 20,000,000 shares;
issued 5,378,518 in 1996 and 4,962,188 in 1995 53,786 49,622
Additional paid-in capital 5,051,555 4,948,119
Retained earnings 3,883,366 2,429,380
----------- -----------
8,988,707 7,427,121
Less:
Treasury stock, 8,710 shares at cost (24,661) -
----------- -----------
Total stockholders' equity 8,964,046 7,427,121
----------- -----------
Total liabilities and stockholders' equity $22,045,682 18,603,513
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 21
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ---
<S> <C> <C> <C>
Sales $42,575,120 36,149,096 30,550,359
Cost of sales 31,663,934 28,668,506 23,753,057
----------- ----------- -----------
Gross profit 10,911,186 7,480,590 6,797,302
Operating expenses:
Selling and shipping expenses 3,682,886 2,775,768 2,484,775
General and administrative expenses 3,929,521 2,957,253 2,535,571
----------- ----------- -----------
Operating income 3,298,779 1,747,569 1,776,956
Interest expense, net 763,793 838,263 836,610
(Loss) gain on disposal of equipment - (40,777) 450
----------- ----------- -----------
Income before provision for
income taxes 2,534,986 868,529 940,796
Provision for income taxes 1,081,000 368,000 439,000
----------- ----------- -----------
Net income $ 1,453,986 500,529 501,796
=========== =========== ===========
Net income per share $ .29 .18 .22
=========== =========== ===========
Weighted average number of shares
outstanding 5,093,732 2,714,229 2,247,120
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 22
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Preferred stock Common stock paid in Retained Treasury
Shares Amount Shares Amount capital earnings stock Total
------- ------- ------- ------- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 - $ - 2,247,120 $22,471 328,304 1,432,055 - 1,782,830
Loss on treasury stock - - - - - (5,000) - (5,000)
Net income - - - - - 501,796 - 501,796
------- ------- --------- -------- -------- --------- -------- ---------
Balance, December 31, 1994 - - 2,247,120 22,471 328,304 1,928,851 - 2,279,626
Shares issued in connection with
Disc/RCL Merger - - 2,715,068 27,151 4,619,815 - - 4,646,966
Net income - - - - - 500,529 - 500,529
------- ------- --------- -------- --------- --------- -------- ---------
Balance, December 31, 1995 - - 4,962,188 49,622 4,948,119 2,429,380 - 7,427,121
Additional expenses in connection
with Disc/RCL Merger - - - - (35,000) - - (35,000)
Shares issued in connection with
an acquisition - - 74,074 741 174,259 - - 175,000
Purchase of treasury stock - - - - - - (24,661) (24,661)
Purchase of warrants - - - - (32,400) - - (32,400)
Additional common shares
issued in connection
with Disc/RCL Merger - - 342,256 3,423 (3,423) - - -
Net income - - - - - 1,453,986 - 1,453,986
------- ------- --------- -------- --------- --------- -------- ---------
Balance, December 31, 1996 - $ - 5,378,518 $53,786 5,051,555 3,883,366 (24,661) 8,964,046
------- ------- --------- -------- --------- --------- -------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 23
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,453,986 500,529 501,796
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,529,246 1,062,873 952,563
Deferred income taxes 78,406 168,000 72,000
Allowance for doubtful accounts 496,662 197,624 145,000
Loss on disposition of assets - 40,777 -
Change in assets and liabilities,
net of acquisition of business:
Increase in accounts receivable (637,390) (231,563) (1,423,374)
Decrease (increase) in inventories 42,407 (196,656) (660,130)
Decrease (increase) in prepaid expenses
and other current assets (156,577) (353,523) 46,478
Increase (decrease) in accounts payable
and accrued liabilities 1,765,149 (970,315) 498,792
Increase (decrease) in income taxes
payable 691,862 (76,547) 42,402
Decrease (increase) in security
deposits and other assets 45,135 (38,892) 18,930
---------- ---------- ----------
Net cash provided by operating
activities 5,308,886 102,307 194,457
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (782,374) (3,485,023) (426,797)
Purchase of Pointille (662,545) - -
---------- ---------- ----------
Net cash used in investing
activities (1,444,919) (3,485,023) (426,797)
---------- ---------- ----------
Cash flows from financing activities:
Net short-term borrowings, net of repayments (3,820,459) (2,035,268) 838,113
Payments of notes receivable 57,700 247,774 121,497
Borrowings under long-term debt 79,688 2,700,292 -
Payments of long-term debt (1,367,653) (872,193) (735,204)
Net proceeds from issuance of common stock - 4,646,966 -
Expenses in connection with merger (35,000) - -
Purchase of warrants (32,400) - -
Purchase of treasury stock (24,661) - -
---------- ---------- ----------
Net cash (used in) provided by
financing activities (5,142,785) 4,687,571 224,406
Net increase (decrease) in cash (1,278,818) 1,304,855 (7,934)
Cash, beginning of year 1,309,677 4,822 12,756
---------- ---------- ----------
Cash, end of year $ 30,859 1,309,677 4,822
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 24
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Description of Business
Disc Graphics, Inc. and subsidiaries (the Company) are engaged in the
printing and manufacturing of paperboard packaging for music, home video,
pharmaceutical and general consumer products. The Company's business has been
seasonal. This seasonality is primarily the result of the music and home video
products which are sold between August and October for the holiday season.
On October 30, 1995, Disc Graphics, Inc., a New York corporation (Old Disc)
merged with and into RCL Capital Corp. (RCL). All of the outstanding common
stock of Old Disc was converted into the right to receive common stock and
warrants to purchase common stock of RCL. RCL simultaneously changed its name to
Disc Graphics, Inc. and adopted Disc's year end of December 31. For accounting
purposes, the acquisition has been treated as a recapitalization of Disc with
Disc as the acquiror (reverse acquisition). The historical financial statements
prior to October 30, 1995 are those of Disc. Historical stockholders' equity
prior to the merger has been adjusted for the equivalent number of shares
received in the merger after giving effect to the new par value with an offset
to additional paid in capital. Earnings per share for periods prior to the
merger reflect the number of equivalent shares received by Disc.
Prior to October 30, 1995, RCL was a publicly held, development stage entity
with assets consisting primarily of cash (a public shell). The Company has
recorded the merger in a manner similar to the issuance of stock for cash. Terms
of the merger required the issuance of approximately 3,100,000 shares of common
stock and warrants to purchase an additional 1,000,000 shares of common stock to
the Old Disc shareholders in exchange for their interest. In connection with the
merger, certain RCL stockholders were required to contribute to RCL, for no
separate consideration, 200,000 shares of RCL common stock. In addition,
electing RCL stockholders redeemed 184,935 shares of common stock concurrently
with the merger. As a result, net proceeds to the Company aggregated $4,646,966
for the issuance of 2,715,068 shares of common stock.
Pursuant to the Merger Agreement, as modified by a certain Agreement dated
October 30, 1995, and based upon RCL not meeting certain prescribed cash and
marketable securities amounts as of October 30, 1995, the Company would be
required to issue to the Old Disc shareholders, upon proper notification,
additional common shares of the Company for no additional consideration. The
number of additional shares that would be issued to the Old Disc shareholders
was based on a formula in the Merger Agreement, as modified by a certain
Agreement. In the fourth quarter of 1996, 342,256 additional shares were issued
to the Old Disc shareholders.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its two wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. In 1995, cash equivalents consisted of Eurobonds.
There were no cash equivalents in 1996.
(Continued)
<PAGE> 25
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(e) Revenue Recognition
Revenues are recognized when merchandise is shipped.
(f) Plant and Equipment
Plant and equipment are recorded at cost. Depreciation and amortization are
charged to operations using the straight-line method over the following
estimated useful lives:
Machinery and equipment 3 to 11 years
Furniture and fixtures 5 to 7 years
Automobiles and trucks 3 to 5 years
Leasehold improvements 2 to 10 years
Capitalized values of assets under leases are amortized over the lesser of term
of the lease or the estimated life of the asset, depending upon the provisions
of the lease.
(g) Covenant Not to Compete
The covenant not to compete was fully amortized in fiscal 1996. The covenant had
an original life of four years and was amortized using the straight-line method.
(h) Net Income Per Share
For all years presented, net income per share is computed under the treasury
stock method which assumes the exercise of all outstanding options and warrants
which are dilutive. The computation of weighted average shares outstanding for
1994, 1995 and 1996 does not include incremental shares relating to outstanding
warrants since the exercise price of the warrants exceeds the market price. The
computation of weighted average shares outstanding for 1995 does not include
incremental shares relating to outstanding options as the exercise price of the
options exceeds the market price.
Net income per share was based on 5,093,732, 2,714,229 and 2,247,120 weighted
average shares outstanding for 1996, 1995 and 1994, respectively.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
<PAGE> 26
(j) Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over a period of 15
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
upon projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(l) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense generally would be recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(m) Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(Continued)
<PAGE> 27
(n) Reclassifications
Reclassifications are made whenever necessary to conform with the current
year's presentation.
(2) Acquisition
On May 17, 1996, the Company acquired substantially all of the assets and
certain liabilities of Pointille, Inc., a California based printing company
("Pointille"), for $662,545 in cash, the issuance of 74,074 shares of the
Company's common stock, and the issuance of a promissory note in the amount of
$330,000 (principal and interest), payable in 36 equal monthly installments of
principal and interest beginning on June 17, 1996 (the "Acquisition"). The
Company recorded the value of the 74,074 shares of the Company's common stock
issued at the estimated fair value at the date of the Acquisition. The
Acquisition was accounted for using the purchase method of accounting in
accordance with generally accepted accounting principles. The Company has not
yet determined the final purchase price of Pointille, therefore, an estimate of
the amount owed from the former owner is included in prepaid and other current
assets.
The allocation of the purchase price of Pointille was as follows:
<TABLE>
<S> <C>
Purchase price:
Cash $ 662,545
Promissory note (present value) 299,708
Receivable from former owner (175,633)
Common stock 175,000
Transaction costs 154,236
-----------
Pointille's net asset value 1,115,856
-
-----------
Goodwill $ 1,115,856
===========
</TABLE>
The following unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments such as (i) additional
amortization expense due to goodwill resulting from the acquisition and (ii) an
increased interest expense due to cash borrowed under the Company's financing
agreement with Fleet Bank for the payment of the purchase price and the
repayment of Pointille's bank line of credit and notes payable (which was
partially offset by the payment of Pointille's bank line of credit and notes
payable). These unaudited pro forma results do not purport to be indicative of
the results of operations which actually would have resulted had the purchase
been effected on January 1, 1995, nor of future results of operations of the
consolidated entities. For purposes of pro forma and interim reporting, the
financial information of Pointille, which was on a February 28 fiscal year, was
adjusted to conform with the Company's reporting periods.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Pointille as if the Acquisition had
occurred January 1, 1995.
<PAGE> 28
<TABLE>
<CAPTION>
1996 1995
---- ----
(thousands except per
share amounts)
<S> <C> <C>
Net sales $45,401 44,203
Net income 1,487 575
Earnings per common share .29 .21
</TABLE>
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated statement
of cash flows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $812,747 816,763 886,610
Income taxes 460,071 274,606 174,818
</TABLE>
Other non-cash transactions include common stock issued in connection with the
acquisition valued at $175,000 (see note 2) and assets under capital lease
assumed $2,077,388 (see note 13).
(4) Covenant Not to Compete
In 1992, the Company entered into a non-competition agreement in connection with
the acquisition of a company. Under the non-competition agreement, the Company
was obligated to pay $185,000 over four years in equal bi-monthly installments.
The present value of the liability, discounted at 7.5%, was recorded in the
accompanying financial statements. As of December 31, 1996, the covenant is
fully amortized. Amortization of the intangible asset amounted to $11,544,
$34,632, and $34,632 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(5) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $1,425,230 1,327,496
Work-in-process 248,210 265,873
Finished goods 339,893 218,768
---------- ---------
$2,013,333 1,812,137
========== =========
</TABLE>
(Continued)
<PAGE> 29
(6) Plant and Equipment
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $11,664,480 9,042,833
Furniture and fixtures 973,251 901,774
Leasehold improvements 1,052,678 896,218
Automobiles and trucks 149,546 84,359
----------- -----------
13,839,955 10,925,184
Less accumulated depreciation
and amortization 5,585,035 4,148,806
----------- -----------
$ 8,254,920 6,776,378
=========== ===========
</TABLE>
Depreciation and amortization expense of plant and equipment amounted to
$1,446,633, $1,022,601 and $912,291 for the years ended December 31, 1996, 1995
and 1994, respectively.
(7) Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued payroll and other employee benefits $2,723,754 835,937
Accrued commissions 253,751 172,217
Accrued other 216,593 108,357
---------- ----------
$3,194,098 1,116,511
========== ==========
</TABLE>
(8) Long-Term Debt
(a) On February 26, 1997, the Company entered into a new financing agreement
with a lending institution. The seven year Revolving Credit - Term Loan facility
provides the Company the option to convert the outstanding balance at February
26, 2000 to a fixed term loan to be repaid over four years. The revolving credit
portion of the loan provides financing of up to 85% of eligible accounts
receivable and 70% of eligible inventory, as defined, not to exceed $10,000,000.
The financing agreement bears interest at the lower of LIBOR plus 1.25% to 1.75%
based on the debt coverage ratio or the bank's base rate. The financing
agreement is secured by the Company's accounts receivable, inventory and a
portion of property, plant, and equipment. In addition, the financing agreement
contains various covenants including the maintenance of certain financial ratios
including consolidated net worth, working capital and debt service, the
maintenance of net income and limitations to future borrowings to be used for
acquisitions.
(b) The Company's previous financing agreement was with a bank which provided
for loans in amounts of up to 85% of eligible accounts receivable and inventory,
as defined, with the maximum borrowings not to exceed $8,500,000. Such loans
bear interest, payable monthly, at 1% over the
(Continued)
<PAGE> 30
bank's prime rate (9.25% and 9.50% at December 31, 1996 and 1995,
respectively). The previous financing agreement provided the lender with a
security interest in the Company's accounts receivable, as defined, inventory
and personal property. In addition, the agreement contained various covenants
including the maintenance of a specified level of indebtedness to tangible net
worth, as defined. At December 31, 1995, the Company was not in compliance with
certain of these covenants. All such instances of noncompliance were waived or
amended by the bank. The Company was not in compliance with the financing
agreement at December 31, 1996. This debt was repaid on February 26, 1997 with
the proceeds from the new financing agreement. The Company's president and two
vice presidents personally guaranteed the amounts borrowed under this agreement.
At December 31, 1996 and 1995, the Company's outstanding borrowings under this
financing agreement aggregated $366,591 and $3,000,000, respectively. The
weighted average interest rate during the years ended December 31, 1996 and 1995
was 9.3% and 9.1%, respectively.
(c) In connection with the Acquisition described in note 2, the Company issued a
promissory note in the amount of $330,000 (principal and interest) payable in 36
equal monthly installments of principal and interest that began in June 1996.
The outstanding balance of the promissory note at December 31, 1996 is $245,810
of which $97,167 is currently payable on such date.
(9) Equipment Notes Payable
Notes payable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Various secured equipment financing notes,
payable in monthly installments
aggregating $51,111 including interest
at 8.2% maturing from October 1999
through June 2003 secured by equipment
with a net book value of $2,236,856
at December 31, 1996 $2,271,241 2,640,996
Secured equipment financing note payable to
a bank payable in monthly installments
of $2,416 with interest at 7.9%
through October 1997 49,295 73,302
Other 38,953 91,370
---------- ----------
2,359,489 2,805,668
Less current maturities 456,651 386,787
---------- ----------
$1,902,838 2,418,881
========== ==========
</TABLE>
Notes payable aggregating $77,866 at December 31, 1996 are personally guaranteed
by the president and two vice presidents.
The aggregate maturities of equipment notes payable for each of the five
years subsequent to December 31, 1996 are as follows: 1997: $456,651; 1998:
$454,980; 1999: $406,299; 2000: $335,678 and 2001: $282,352.
(Continued)
<PAGE> 31
(10) Leases
The Company is obligated under various capital leases for furniture and fixtures
and certain machinery and equipment that expire at various dates during the next
five years. At December 31, 1996 and 1995, the gross amount of plant and
equipment and related accumulated amortization recorded under capital leases
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $4,917,515 3,728,535
Furniture and fixtures - 40,615
---------- ----------
4,917,515 3,769,150
Less accumulated amortization 1,850,842 2,220,566
---------- ----------
$3,066,673 1,548,584
========== ==========
</TABLE>
The Company occupies its premises pursuant to a lease with a related party
expiring December 31, 2007, with a five year renewal option (see note 14). The
lease provides for annual rentals, as defined, payable monthly, as well as
payments for a share of maintenance, insurance, and real estate taxes. The
Company is also obligated under various noncancelable equipment leases.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $673,188,
$451,729 and $429,250, respectively.
Future minimum lease payments under noncancelable operating leases (with initial
remaining lease terms in excess of one year) and the present value of future
minimum capital lease payments as of December 31, 1996 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
1997 $ 922,605 886,297
1998 785,514 660,907
1999 759,482 514,440
2000 517,605 483,606
2001 220,460 443,949
2002 and thereafter 280,759 2,195,442
--------- ---------
Total minimum lease payments 3,486,425 $5,184,641
==========
Less amount representing interest (at
rates ranging from 8.1% to 20.9%) 601,338
---------
Net principal portion 2,885,087
Less portion due within one year 692,852
---------
Long-term portion $ 2,192,235
===========
</TABLE>
(Continued)
<PAGE> 32
Liabilities under certain capital leases are personally guaranteed by the
president and two vice-presidents.
(11) Stockholders' Equity
(a) Stock Option
Concurrent with the merger with RCL, the Company's stockholders approved the
adoption of the 1995 Incentive Stock Option Plan (the "Plan"). An aggregate of
500,000 shares of the Company's common stock are reserved for issuance upon the
exercise of options pursuant to the Plan. Officers, key employees, directors and
certain consultants and advisors to the Company are eligible to participate in
the Plan. The Plan may issue incentive stock options and nonqualified stock
options. Options are granted at the market price on the date of grant and expire
in ten years. After six months from the grant date, options become vested and
fully exercisable. At December 31, 1996, there were 376,500 additional shares
available for grant under the Plan.
Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
Weighted Weighted
average Shares average Shares
exercise subject exercise subject
price to option price to option
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Beginning of year $4.125 62,500 $ - 62,500
Options granted 2.89 61,000 4.125 75,000
End of year 3.51 123,500 4.125 62,500
Exercisable at year end - 88,500 - -
</TABLE>
The options outstanding as of December 31, 1996 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
Range of Weighted Number of Weighted
exercise average options average
price exercise price outstanding remaining life
---------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
$ 2.00 2.00 35,000 9-3/4 years
$ 3.25 3.25 1,000 9 years
$ 4.125 4.125 87,500 8-3/4 years
-------
123,500
=======
</TABLE>
The per share weighted average fair value of stock options granted during 1996
and 1995 was $1.43 and $1.90, respectively, on the date of the grant using the
Black Scholes option-pricing model with the following weighted average
assumptions: 1995 and 1996 - expected dividend yield of 0%, risk free interest
rate of 6.5%, expected stock volatility of 26%-35% and an expected option life
of 7.5 years.
(Continued)
<PAGE> 33
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net earnings:
As reported $1,453,986 500,529
Pro forma 1,368,329 478,350
Net earnings per share:
As reported: $.29 .18
Pro forma .27 .18
</TABLE>
Pro forma net earnings reflect only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No.123 is not reflected in the pro forma net earnings amounts presented above
because compensation cost is reflected over the options' vesting period.
(b) Warrants
The Company has 2,700,000 Class A warrants outstanding that were originally
issued in connection with RCL's initial public offering (IPO). The warrants are
separable and tradable and each warrant entitles the holder to purchase one
share of the Company's common stock at $5.50 per share prior to November 9,
1999. The warrants may be redeemed, at the Company's option, at a price of $.05
per warrant provided the closing bid price equals or exceeds $9.50 per share for
the 20 trading days within a period of 30 consecutive trading days prior to the
notice of redemption.
In connection with the merger with RCL, warrants to purchase 1,000,000 shares of
common stock were issued at exercise prices ranging from $7.00 to $10.00. The
warrants expire on November 9, 2002.
In connection with RCL's IPO, warrants to purchase 135,000 units were issued to
the underwriter (Underwriters' Warrants). The Underwriters' Warrants are
exercisable at a price of $9.00 per unit consisting of one share of the
Company's common stock and two Class A warrants (Units) and expire on November
9, 1998. The exercise price of the Class A warrants contained in the Units is
$5.50 per share.
During 1996, 168,000 warrants were repurchased for $32,400.
(12) Notes Receivable-Stockholders
In December 1991, the president and two vice presidents were advanced $536,360
in exchange for notes receivable. These notes were unsecured and provided for
interest at 9%. The balance of the notes at December 31, 1996 and 1995 was
$49,676 and $99,352. The above amounts are included with notes receivable in the
accompanying balance sheets.
(Continued)
<PAGE> 34
(13) Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 1996,
1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
Federal $931,400 150,000 278,000
State 228,000 50,000 89,000
--------- --------- --------
1,159,400 200,000 367,000
--------- --------- --------
Deferred:
Federal (66,640) 126,000 54,400
State (11,760) 42,000 17,600
--------- --------- --------
(78,400) 168,000 72,000
--------- --------- --------
$1,081,000 368,000 439,000
========= ========= ========
</TABLE>
A reconciliation between the Company's effective tax rate and the statutory tax
rate is as follows, at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit 8.5 7.0 7.6
Other .1 1.4 5.1
----- ----- -----
42.6% 42.4% 46.7%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant portion
of the net deferred tax liability at December 31, 1996 and 1995 is as follows:
<PAGE> 35
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory valuation $ 66,000 29,000
Allowance for doubtful accounts 333,000 229,000
Uniform cost capitalization for inventory 25,000 29,000
Accrued vacation 143,000 169,000
Accrued salaries and commissions 57,000 37,594
Sales return allowance 66,000 -
State net operating loss carryforward 32,000 31,000
Investment tax credit carryforwards 681,000 681,000
---------- ---------
Total deferred tax assets 1,403,000 1,205,594
---------- ---------
Less valuation allowance (703,000) (712,000)
---------- ---------
Net deferred tax assets 700,000 493,594
---------- ---------
Deferred tax liability:
Accelerated depreciation for tax purposes 988,000 860,000
---------- ---------
988,000 860,000
---------- ---------
Net deferred tax liability $ 288,000 366,406
========== =========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 and 1996
was $712,000 and $703,000, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 was a decrease of $9,000. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes that
it is more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at December 31,
1996. The amount of the deferred tax asset considered realizable, however, could
be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
At December 31, 1996, the Company has available New York State investment
tax credit carryforwards aggregating approximately $681,000 expiring through
2006. The Company has New York and New Jersey state net operating loss
carryforwards of $320,000 expiring through 2011.
(14) Related Party Transactions
The Company leases one of its operating facilities from an entity which is owned
by several officers, directors and stockholders of the Company. The lease is for
a fifteen year term expiring in 2007 and requires minimum annual rental payments
of $348,000. Rentals paid to the entity were $348,000 in each of the years ended
December 31, 1996, 1995 and 1994, and a security deposit of $115,000 paid on the
lease is included in security deposits and other assets at December 31, 1996 and
1995, respectively.
(Continued)
<PAGE> 36
On January 1, 1996, the Company assumed three leases with a net
capitalizable value of $2,077,388 from the officer-owned entity. The leases were
assumed without material modification as to the terms. The lease obligations and
related assets were recorded at the net present value of the minimum lease
payments in accordance with SFAS No. 13. The underlying assets are being
depreciated over the bases' remaining lives.
(15) Commitments and Contingencies
In 1991, the Company entered into a consulting contract with its former Chairman
which expired on August 31, 1996. Consulting fees of $53,600, $80,400 and
$80,400 were paid pursuant to the contract in 1996, 1995 and 1994, respectively.
In 1992, the Company entered into consulting agreements with three of its
shareholders. Each agreement was originally for a seven-year term, and provided
for a minimum fee of $25,000 per year. Each of these agreements was revised
effective March 1, 1995, to provide for an expiration date of August 31, 2001
and to increase the minimum annual fee to $37,333. The aggregate expense under
these agreements was $132,412, $117,500 and $87,500 for 1996, 1995 and 1994,
respectively.
In 1992, the Company entered into an employment, commission and consulting
agreement with the former owner of a commercial printing entity acquired in
1992. The agreement provided for the payment of an annual base salary plus
commissions through April 1994. The agreement also provided for the payment of
deferred commissions through April 1995 and of consulting fees through April
1996. Expenses related to the agreement approximated $196,000, $160,000 and
$258,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or liquidity.
(16) Benefit Plans
The Company maintains an Employee 401(k) Savings Plan. The plan is a defined
contribution plan which is administered by the Company. All employees are
eligible for voluntary participation upon completing three consecutive months of
service. The plan provides for growth in savings through contributions and
income from investments. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA), as amended. Plan participants
are allowed to contribute a specified percentage of their base salary. The
Company matches the participants' contributions up to a maximum of 2% of
compensation. The costs related to the plan approximated $117,700, $116,500
and $73,300 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(17) Fair Value of Financial Instruments
FASB Statement No.107, "Disclosures about Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of all financial instruments classified as a current asset or
current liability are deemed to approximate fair value because of the short
maturity of these investments. In the opinion of management, the fair values of
equipment notes payable, long-term debt and capital leases are not materially
different from the carrying value.
(Continued)
<PAGE> 37
(18) Business and Credit Concentrations
Most of the Company's customers are located in the northeastern United
States. Three customers individually accounted for 21%, 23% and 27% of the
Company's sales for 1996, 1995 and 1994, respectively. Accounts receivable from
two and three customers comprised approximately 15% and 21% of total accounts
receivable at December 31, 1996 and 1995, respectively.
The Company generally grants credit based upon analysis of the customer's
financial position and previously established buying and selling patterns.
(19) Unaudited Quarterly Financial Information
The following is a summary of quarterly operating results for fiscal 1996 and
1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996
----
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $8,304 10,152 12,773 11,346
Gross profit 1,732 2,407 3,538 3,234
Net income 17 231 671 535
Net income per share .00 .05 .13 .10
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1995
----
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $8,513 8,552 10,395 8,689
Gross profit 1,806 1,720 2,084 1,870
Net income 109 46 190 155
Net income per share .04 .02 .08 .04
====== ====== ====== ======
</TABLE>
Earnings per share calculations for each of the quarters are based on weighted
average numbers of shares outstanding in each period, therefore, the sum of the
quarters does not necessarily equal the years' earnings per share.
<PAGE> 38
ITEM 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On November 10, 1995, the Board of Directors voted to terminate Price
Waterhouse LLP as regular auditors for the Company and to retain KPMG Peat
Marwick LLP as the regular auditors for the Company. KPMG Peat Marwick LLP had
been the regular auditors for Old Disc prior to the Merger and the Board cited
their experience and knowledge of Old Disc in deciding to retain them.
The reports of Price Waterhouse LLP on the financial statements for years
ended March 31, 1994 and 1995 did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the years ended March 31, 1994 and 1995, and the
period ended November 10, 1995, there were no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Price Waterhouse LLP, would have caused it
to make reference to the subject matter of the disagreement in connection with
this report.
PART III
In connection with the 1997 Annual Meeting of Stockholders of the
Registrant, the Registrant intends to furnish Stockholders with proxy materials
which set forth the information required by Items 10, 11, 12 and 13 of this Part
III. Copies of such material will be duly filed with the Securities and Exchange
Commission pursuant to Rule 14a-(6)(c) promulgated under the Securities Exchange
Act of 1934, as amended, not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
<PAGE> 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
(1) See Index to Consolidated Financial Statements on page 17.
(2) The following financial statement schedule for the years ended
December 31, 1994, 1995 and 1996 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
inapplicable, or the information is included in the Consolidated
Financial Statements or the Notes thereto.
(3) Exhibits:
See Exhibit Index for list of exhibits filed with this report.
(b) Reports on Form 8-K:
None
<PAGE> 40
SCHEDULE
DISC GRAPHICS, INC.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Charged to Balance at
Beginning Cost and End of
Classification of Period Expense Deductions Other Period
-------------- ----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1994:
Allowance for
doubtful accounts
(deducted from
accounts
receivable) 434,000 145,000 117,000 462,000
For the year ended
December 31, 1995:
Allowance for
doubtful accounts
(deducted from
accounts receivable) 462,000 197,000 165,000 494,000
For the year ended
December 31, 1996:
Allowance for
doubtful accounts
(deducted from
accounts receivable) 494,000 497,000 147,000 844,000
- ------------
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
</TABLE>
<PAGE> 41
EXHIBIT INDEX
Exhibit Description
2 Agreement and Plan of Merger dated as of May 8, 1995 between the
Registrant and Disc Graphics, Inc. (filed as Exhibit 2.1 to
the Form S-4 Registration Statement, Amendment No. 1 dated August
31, 1995 [File No. 33-94068] and incorporated herein by reference).
3.a Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 4.a to the Current Report on Form 8-K dated October 27, 1995,
as amended by the Form 8-K/A Amendment No. 1 thereto).
3.b Amended and Restated By-Laws of the Registrant.
4.a Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 4.1 to the Current Report on Form 8-K dated October 27, 1995,
as amended by the Form 8-K/A Amendment No. 1 thereto).
4.b Voting and Registration Rights Agreement dated October 30, 1995 among
the Registrant and its shareholders listed in Exhibit 1 thereto (filed
as Exhibit 4.b to the Current Report on Form 8-K dated October 27,
1995, as amended by the Form 8-K/A Amendment No. 1 thereto).
4.e Redeemable Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company, as warrant agent, including the form of
Certificates representing the Class A Warrants (filed as Exhibit 4.3
to the Form S-1 Registration Statement, declared effective November 9,
1993 [File No. 33-62980] and incorporated herein by reference).
4.f Form of 60 Merger Warrants with Schedule indicating particular terms
of each individual warrant (filed as Exhibit 4.f to the Current Report
on Form 8-K dated October 27, 1995, as amended by the Form 8-K/A
Amendment No. 1 thereto).
4.g 1995 Incentive Stock Option Plan (filed as Exhibit 4.5 to the Form
S-4 Registration Statement, Amendment No. 1 dated August 31, 1995
[File No. 33-94068] and incorporated herein by reference).
4.h Agreement dated as of October 27, 1995 between certain stockholders of
the Registrant and certain stockholders of Disc Graphics, Inc., a New
York corporation (filed as Exhibit 4.h to the Current Report on Form
8-K dated October 27, 1995, as amended by the Form 8-K/A Amendment No.
1 thereto).
4.i Form of certificate evidencing shares of Common Stock (filed as an
Exhibit to the Registration Statement on Form S-1, File No. 33-62980,
declared effective on November 9, 1993).
10.a Credit Agreement dated February 26, 1997 between the Registrant and
KeyBank National Association.
10.b Security Agreement dated February 26, 1997 between the Registrant and
KeyBank National Association.
<PAGE> 42
10.c Asset Purchase Agreement dated as of May 17, 1996, by and among
Disc Graphics, Inc., Pointille, Inc. and the shareholders of
Pointille (filed as Exhibit 2 to the Current Report on Form 8-K
dated May 18, 1996.)
10.d Form of Indemnification Agreement between RCL and the directors and
officers of the Registrant (filed as an Exhibit to the Registration
Statement on Form S-1, File No. 33-62980, declared effective on
November 9, 1993).
10.e Management Agreement between RCL and RCL Capital Partners, Inc.,
formerly RCL Management Corp., dated October 1, 1992 (filed as an
Exhibit to the Registration Statement on Form S-1, File No. 33-62980,
declared effective on November 9, 1993).
10.f Agreement of Lease, dated as of December 1, 1992 between Disc and
Horizon Equity Partners, LP (filed as an Exhibit to the Registration
Statement on Form S-4, File No. 33-94068 declared effective on
October 30, 1995).
10.g Agreement of Lease, dated as of September 15, 1993 between Disc and
and Everis Realty Corp. (filed as an Exhibit to the Registration
Statement on Form S-4, File No. 33-94068 declared effective on
October 30, 1995).
10.h Agreement of Lease, dated as of June 14, 1995 between Disc Graphics
Label Group, Inc. and Kertzner Associates, Ltd. (filed as an Exhibit
to the Registration Statement on Form S-4, File No. 33-94068
declared effective on October 30, 1995).
10.i Form of Consulting Agreement, dated as of December 12, 1991, between
Disc and Timothy F. Healey & Co., Inc.(filed as an Exhibit
to the Registration Statement on Form S-4, File No. 33-94068
declared effective on October 30, 1995).
10.j Form of Consulting Agreement, dated as of December 12, 1991, between
Disc and Holding Services Corp.(filed as an Exhibit to the
Registration Statement on Form S-4, File No. 33-94068 declared
effective on October 30, 1995).
10.k Form of Consulting Agreement, dated as of December 12, 1991, between
Disc and Investment Services Corp.(filed as an Exhibit
to the Registration Statement on Form S-4, File No. 33-94068
declared effective on October 30, 1995).
10.l Form of Employment Agreement, dated June 28, 1995, between Disc and
Donald Sinkin (filed as an Exhibit to the Registration Statement on
Form S-4, File No. 33-94068 declared effective on October 30, 1995).
10.m Form of Employment Agreement, dated June 28, 1995, between Disc and
John A. Rebecchi (filed as an Exhibit to the Registration Statement on
Form S-4, File No. 33-94068 declared effective on October 30, 1995).
10.n Form of Employment Agreement, dated June 28, 1995, between Disc and
Steven Frey (filed as an Exhibit to the Registration Statement on
Form S-4, File No. 33-94068 declared effective on October 30, 1995).
10.o Form of Purchase Agreement, dated as of March 20, 1995, between Disc
and KBA-Planeta North America, Inc. (filed as an Exhibit to the
Registration Statement on Form S-4, File No. 33-94068 declared
effective on October 30, 1995).
21 The following lists the Company's significant subsidiaries, all of
which are wholly-owned by the Company:
State of
Name of Subsidiary Incorporation
------------------ -------------
Disc Graphics Label Group, Inc. Delaware
Four Seasons Litho, Inc. New York
27 Financial Data Schedule
<PAGE> 43
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 26th day of
March, 1997.
DISC GRAPHICS, INC.
By:/s/ Donald Sinkin
Donald Sinkin, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1997 by the following persons in
the capacities indicated:
/s/ Donald Sinkin Chairman of the Board, Chief Executive Officer
Donald Sinkin and President (Principal Executive Officer)
/s/ Stephen Frey Vice President of Operations and Director
Stephen Frey (Principal Operating Officer)
/s/ Margaret Krumholz Chief Financial Officer
Margaret Krumholz (Principal Accounting Officer)
/s/ John Rebecchi Vice President of Sales and Marketing
John Rebecchi and Director
/s/ Daniel Levinson Director
Daniel Levinson
/s/ Seymour W. Zises Director
Seymour W. Zises
/s/ Mark L. Friedman Director
Mark L. Friedman
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] - QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from January 1, 1997 to March 31, 1997
Commission File Number: 0-22696
DISC GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3678012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Gilpin Avenue, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234 -1400
(Former name, former address and former fiscal year, if changed since last
report)
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 and 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 [ ]
As of May 13, 1997, 5,368,358 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
<PAGE> 2
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996......................................... 1
Consolidated Statements of Income for the Three Months ended
March 31, 1997 and 1996....................................... 2
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1997 and 1996 ................................ 3
Notes to Consolidated Financial Statements ................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II - OTHER INFORMATION
Signatures ................................................. 12
<PAGE> 3
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1997 and December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 30,638 $ 30,859
Accounts receivable, net of allowance for doubtful
accounts of $819,000 and $844,000, respectively 8,962,907 9,055,995
Inventories 1,875,590 2,013,333
Prepaid expenses and other current assets 779,242 599,927
Current maturities of notes receivable 57,005 85,014
Deferred income taxes 700,000 700,000
------- -------
Total current assets 12,405,382 12,485,128
Plant and equipment, net 8,851,244 8,254,920
Goodwill, net of amortization of $58,891 and $46,493,
respectively 1,055,115 1,069,363
Security deposits and other assets 305,531 236,271
------- -------
Total assets $22,617,272 $22,045,682
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 538,126 $ 456,651
Current portion, long-term debt 98,720 97,167
Current maturities of capitalized lease obligations
payable 555,840 692,852
Accounts payable and accrued expenses 5,366,381 5,282,571
Income taxes payable 164,891 954,088
------- -------
Total current liabilities 6,723,958 7,483,329
Long term debt 1,628,373 515,234
Equipment notes payable, less current maturities 1,738,319 1,902,838
Capitalized lease obligations payable, less current
maturities 2,074,953 2,192,235
Deferred income taxes 988,000 988,000
------- -------
Total liabilities 13,153,603 13,081,636
Stockholders' equity:
Preferred stock:
$.01 par value; authorized 5,000 shares;
no shares issued and outstanding - -
Common stock:
$.01 par value; authorized 20,000,000 shares;
issued 5,378,518 53,786 53,786
Additional paid in capital 5,051,555 5,051,555
Retained earnings 4,387,671 3,883,366
--------- ---------
9,493,012 8,988,707
Less: Treasury stock at cost, 10,160 and 8,710 shares at
March 31, 1997 and December 31, 1996 respectively (29,342) (24,661)
------- -------
Total stockholders' equity 9,463,670 8,964,046
Total liabilities and stockholders' equity $22,617,272 $22,045,682
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE> 4
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
---------- ---------
<S> <C> <C>
Sales $11,197,838 $ 8,304,328
Cost of sales 8,214,806 6,572,176
--------- ---------
Gross profit 2,983,032 1,732,152
Operating expenses:
Selling and shipping 950,073 656,168
General and administrative 1,043,086 867,304
--------- -------
Operating income 989,873 208,680
Interest expense, net 149,367 178,679
------- -------
Income before provision for income taxes 840,506 30,001
------- ------
Provision for income taxes 336,203 12,897
------- ------
Net income $504,303 $ 17,104
======== ========
Net Income per share $0.09 $0.00
===== =====
Weighted average number of shares
outstanding 5,380,369 4,962,188
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE> 5
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $504,303 $ 17,104
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 474,777 331,182
Decrease (Increase) in accounts receivable 93,088 (463,672)
Decrease in inventory 137,743 152,097
Decrease (Increase) in prepaid expenses and
other current assets (179,315) 114,645
Increase (Decrease) in prepaid taxes - (129,370)
Increase in accounts payable and accrued
expenses 83,810 394,848
Decrease in income taxes payable
(789,197) (105,083)
Decrease (Increase) in security deposits
and other assets (69,260) 49,974
------- ------
Total adjustments (248,354) 344,621
-------- -------
Net cash provided by (used in)
operating activities 255,949 361,725
------- -------
Cash flows from investing activities:
Capital expenditures (1,056,852) (84,704)
---------- -------
Net cash used in investing activities (1,056,852) (84,704)
---------- -------
Cash flows from financing activities:
Proceeds of secured bank loan payable,
net of repayments 1,015,972 -
Origination of long term note receivable (9,460)
Payments of notes receivable 28,009
Payments of long-term debt (238,618) (316,234)
Expenses in connection with merger - (35,000)
Purchase of treasury stock (4,681) -
------ -------
Net cash provided by (used in)
financing activities 800,682 (360,694)
------- --------
Net increase (decrease) in cash (221) (83,673)
---- -------
Cash, December 31 $ 30,859 $ 1,309,677
========= ===========
Cash, March 31 $ 30,638 $ 1,226,004
========= ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE> 6
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization, Operation and Summary of Significant Accounting Policies:
General
-------
The financial statements included herein have been prepared by Disc
Graphics, Inc. (the "Company") without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. While the
Company believes that the disclosures made are adequate to make the
information presented not misleading, it is recommended that these financial
statements should be read in conjunction with the audited financial statements
and the notes thereto for the year ended December 31, 1996 and the Company's
Annual Report on Form 10-K for the period ended December 31, 1996. The
December 31, 1996 figures included herein were derived from the audited
consolidated financial statements. In the opinion of management, the
information furnished herein reflects all adjustments that are necessary to
fairly present such information. These adjustments consist only of normal
recurring adjustments and adjustments made for the acquisition of Pointille,
Inc.
The Merger
----------
On October 30, 1995, the Company, then known as RCL Capital Corp.
("RCL"), consummated the merger (the "Merger") pursuant to the Agreement and
Plan of Merger dated as of May 8, 1995 (the "Merger Agreement") between RCL
and Disc Graphics, Inc., a New York corporation ("Old Disc"). Pursuant to the
Merger Agreement, (i) Old Disc merged with and into RCL, (ii) RCL's name was
changed to Disc Graphics, Inc., and (iii) all of the outstanding shares of
Class A Common Stock, no par value, and Class B Common Stock, no par value, of
Old Disc were converted into (a) an aggregate of 3,100,000 shares of Common
Stock of the Company and (b) and an aggregate of 1,000,000 warrants to
purchase an aggregate of 1,000,000 shares of Common Stock of the Company,
one-quarter of which shall be exercised at a price of each of $7.00, $8.00,
$9.00 and $10.00.
Potential Future Issuance of Shares of Common Stock by the Company
-------------------------------------------------------------------
Pursuant to the Merger Agreement as modified by a certain Agreement dated
as of October 30, 1995 by and among certain stockholders of RCL (the "RCL
Stockholders") and the former shareholders of Old Disc (the "Old Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine
from time to time until up to five years after October 30, 1995 (the
"Effective Time") that, as of the Effective Time, either (i) RCL did not have
cash or marketable securities with a fair market value as of the Effective
Time of not less than $6,000,000 (the actual amount of cash and marketable
securities held by RCL as of the Effective Time, the "First Amount") or (ii)
the cash and marketable securities of RCL did not exceed all liabilities of
RCL of any kind or nature (whether fixed or contingent, matured or unmatured)
(including, without limitation, all liabilities based upon, relating to or
arising from any actions taken by or on behalf of RCL or the failure of RCL to
take any actions prior to the Effective Time or any facts or
<PAGE> 7
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization, Operation and Summary of Significant Accounting Policies
(continued):
circumstances existing prior to the Effective Time, which in any such case
results in any liabilities, obligations or claims against the Company after
the Effective Time (all such liabilities collectively, the "RCL
Liabilities")), by not less than $6,000,000 (the actual amount of cash and
marketable securities held by RCL as of the Effective Time less such
liabilities, the "Second Amount"), then promptly upon notice of such
determination by the Old Disc Shareholders to the Company, the Company shall
issue to such Old Disc Shareholders, on a pro rata basis based on the number
of shares of Old Disc Common Stock held by such shareholders immediately prior
to the Effective Time, the number of shares of the Company's Common Stock (the
"RCL Designated Shares") sufficient (without duplication) to increase the
percentage ownership of the Company by all of such shareholders that such
shareholders have had immediately after the Effective Time (excluding, any RCL
Indemnity Shares (as defined below) issued after the Effective Time) from
60.23% to a percentage determined by a formula defined in the Merger
Agreement. Although the formula in the Merger Agreement allows the Old Disc
Shareholders to receive as much as three times the number of RCL Designated
Shares, the Old Disc Shareholders agreed to limit the calculation to two times
the number of RCL Designated Shares.
Notwithstanding the provision of the Merger Agreement described in the
immediately preceding paragraph, the RCL Stockholders and the Old Disc
Shareholders have entered into an agreement (the "Letter Agreement") pursuant
to which the RCL Stockholders will transfer to the Old Disc Shareholders
shares of DGI Common Stock owned by the RCL Stockholders instead of the
Company issuing certain shares of DGI Common Stock to the Old Disc
Shareholders, but only if and to the extent that the net assets are between
$4,900,000 and $5,304,750. "Net Assets" means RCL's cash and marketable
securities at the Effective Time less the RCL liabilities.
Pursuant to the Merger Agreement, the Old Disc Shareholders were issued
342,256 shares of its Common Stock on December 3, 1996. The RCL Stockholders
also transfered 60,000 shares of Common Stock of the Company to Old Disc
Shareholders (the "RCL Indemnity Shares").
Net Income Per Share
--------------------
Net income per share is computed under the treasury stock method which
assumes the exercise of all outstanding options and warrents which are
dilutive. The computation of weighted average shares outstanding does not
include incremental shares relating to outstanding warrants since the exercise
price of the warrants exceed the market price.
<PAGE> 8
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization, Operation and Summary of Significant Accounting Policies
(continued):
Amortization of Costs in Excess of Fair Market Value of Net Assets Acquired
- ---------------------------------------------------------------------------
Costs in excess of fair market value of net assets acquired are being
amortized over a period of 15 years by the straight-line method.
Inventories
------------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -------------
<S> <C> <C>
Raw materials $ 1,284,384 $ 1,425,230
Work-in-process 304,190 248,210
Finished goods 287,016 339,893
------- -------
$ 1,875,590 $ 2,013,333
=========== ===========
</TABLE>
Note 2 - Acquisition
On May 17, 1996, the Company acquired substantially all of the assets and
certain liabilities of Pointille, Inc., a California based printing company
("Pointille") , for $662,545 in cash, the issuance of 74,074 shares of the
Company's Common Stock, and the issuance of a promissory note in the amount
of $330,000 (principal and interest), payable in 36 equal monthly
installments of principal and interest beginning on June 17, 1996 (the
"California Acquisition"). The Company recorded the value of the 74,074
shares of the Company's Common Stock issued at the estimated fair value at
the date of the California Acquisition. The California Acquisition was
accounted for using the purchase method of accounting and in accordance with
generally accepted accounting principles. The net worth of Pointille as of
May 17, 1996 is expected to be finalized by May 1997; therefore, an estimate
of the allocation of the purchase price was made on the basis of currently
available information.
The allocation of the purchase price of Pointille was as follows:
<TABLE>
<S> <C>
Purchase price
Cash $662,545
Promissory note (present value) 299,708
Receivable from former owner (175,633)
Common Stock 175,000
Transaction Costs 154,236
-------
$1,115,856
Pointille's net asset value $ 0
----------
Excess of cost over fair value of
business acquired $1,115,856
----------
</TABLE>
<PAGE> 9
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions (continued):
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as (i) additional
amortization expense due to goodwill resulting from the California Acquisition
and (ii) an increased interest expense due to cash borrowed under the Company's
financing agreement with Fleet Bank for the payment of the purchase price and
the repayment of Pointille's bank line of credit and notes payable (which was
partially offset by the payment of Pointille's bank line of credit and notes
payable). These unaudited proforma results do not purport to be indicative of
the results of operations which actually would have resulted had the purchase
been effected on January 1, 1996, nor of future results of operations of the
consolidated entities. For purposes of proforma and interim reporting, the
financial information of Pointille, which was on a February 28 fiscal year, was
adjusted to conform with the Company's reporting periods.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Pointille as if the
California Acquisition had occurred January 1, 1996.
<TABLE>
<CAPTION>
1997 1996
(thousands except per share amounts)
<S> <C> <C>
Net sales $11,198 $9,983
Net income (loss) $504 ($25)
Earnings per Common share $.09 $.00
</TABLE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
-------
The following is a discussion of the consolidated financial condition and
results of operation of the Company for the three month period ended March 31,
1997. The discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in the Annual
Report.
Introduction
------------
Disc Graphics, Inc. was incorporated in August 1992 under the name RCL
Capital Corp. ("RCL") to serve as a vehicle to effect a business combination
with an operating business. On November 18, 1993, RCL completed the public
offering of Units, each Unit consisting of one share of RCL's Common Stock and
two redeemable warrants. Net proceeds of the public offering after the payment
of certain additional expenses yielded approximately $6,400,000, which was put
into escrow pending the acquisition of an operating business.
<PAGE> 10
Merger
------
On October 30, 1995, RCL consummated the merger (the "Merger") pursuant to
the Agreement and Plan of Merger dated as of May 8, 1995 (the "Merger
Agreement") between RCL and Old Disc. The merger was subject to, among other
things, approval by RCL's stockholders, which approval was obtained at a
special meeting of stockholders held on October 27, 1995. Pursuant to the
Merger Agreement (i) Old Disc merged with and into RCL, (ii) RCL's name was
changed to Disc Graphics, Inc. and (iii) all of the outstanding shares of
Class A Common Stock, no par value, and the Class B Common Stock, no par
value, of Old Disc were converted into (a) an aggregate of 3,100,000 shares of
Common Stock of RCL and (b) and an aggregate of 1,000,000 warrants to purchase
an aggregate of 1,000,000 shares of Common Stock of RCL, one-quarter of which
shall be exercisable at a price of each of $7.00, $8.00, $9.00 and $10.00.
Potential Future Issuance's of Shares of Common Stock by the Company
--------------------------------------------------------------------
Pursuant to the Merger Agreement as modified by a certain Agreement as of
October 30, 1995 by and among certain stockholders of RCL (the "RCL
Stockholders") and the former shareholders of Old Disc (the "Old Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine
from time to time until up to five years after October 30, 1995 (the
"Effective Time") that, as of the Effective Time, either (i) RCL did not have
cash or marketable securities with a fair market value as of the Effective
Time of not less than $6,000,000 (the actual amount of cash and marketable
securities held by RCL as of the Effective Time, the "First Amount") or (ii)
the cash and marketable securities of RCL did not exceed all the liabilities
of RCL of any kind or nature (whether fixed or contingent, matured or
unmatured) (including, without limitation, all liabilities based upon,
relating to or arising from any actions taken by or on behalf of RCL or the
failure of RCL to take any actions prior to the Effective Time or any facts or
circumstances existing prior to the Effective Time, which is any such case
result in any liabilities, obligations or claims against the Company after the
Effective Time) (all such liabilities collectively, the "RCL Liabilities") by
not less than $6,000,000 (the actual amount of cash and marketable securities
held by RCL as of the Effective Time less such liabilities, the "Second
Amount"), then promptly upon notice of such determination by the Old Disc
Shareholders to the Company, the Company shall issue to such Old Disc
Shareholders, on a pro rata basis based on the number of shares of Old Disc
Common Stock held by such shareholders immediately prior to the Effective
Time, the number of shares of the Company's Common Stock (the "RCL Designated
Shares") sufficient (without duplication) to increase the percentage of
ownership of the Company by all of such shareholders that such shareholders
have had immediately after the Effective Time (excluding any RCL Indemnity
Shares (as defined below) issued after the Effective Time) from 60.23% to a
percentage determined by a formula defined in the Merger Agreement. Although
the formula in the Merger Agreement allows for the Old Disc Shareholders to
receive as much as three times the number of RCL Designated Shares the Old
Disc Shareholders agreed to limit the calculation to two times the number of
RCL Designated Shares.
Notwithstanding the provision of the Merger Agreement described in the
immediately preceding paragraph, the RCL Stockholders and the Old Disc
Shareholders have entered into an agreement pursuant to which the RCL
Stockholders will transfer to the Old Disc Shareholders shares of Disc Common
Stock owned by the RCL Stockholders instead of the Company issuing certain
shares of Disc Common Stock to the old Disc Shareholders, but only if and to
the extent that Net Assets are between $4,900,000 and $5,304,750. "Net Assets"
means RCL's cash and marketable securities at the Effective Time less the RCL
Liabilities.
Pursuant to the agreement the Old Disc Shareholders were issued 342,256
shares of Company Common Stock on December 3, 1996. The RCL Stockholders also
transferred 60,000 shares of Common Stock to the Old Disc Shareholders.
<PAGE> 11
Proceeds of the Merger
----------------------
Net proceeds of the merger after the payment for the redemption of
approximately 185,000 shares of Common Stock at $5.15 per share, in accordance
with the terms of the original RCL offering, yielded proceeds to the Company
of approximately $5,000,000. These proceeds were used primarily to reduce
certain indebtedness of the Company and for working capital purposes.
The Merger has been treated for accounting and financial reporting purposes
as a reverse merger of RCL into Old Disc. Accordingly, the Company's results
of operations prior to October 30, 1995 are those of Old Disc. In addition, in
connection with the merger, Disc adopted a December 31 fiscal year.
Pointille Acquisition
---------------------
On May 18, 1996, the Company, acquired (the "California Acquisition")
substantially all of the assets and certain liabilities of Pointille, Inc., a
California corporation ("Pointille"), pursuant to an asset purchase agreement
dated as of May 17, 1996, by and among the Company, Pointille and the sole
shareholder of Pointille (the "Asset Purchase Agreement"). The purchase price
consisted of $662,545 in cash, 74,074 shares of the Company's Common Stock,
$.01 par value per share, a promissory note in the amount of $330,000, payable
in 36 equal monthly installments of principal and interest beginning on June
16, 1996, and transaction costs. The California Acquisition was recorded using
the purchase method of accounting and accordingly, the results of Pointille's
operations are included in the Company's results of operation from May 18,
1996. The goodwill related to Pointille was approximately $1,055,115 at March
31, 1997.
<PAGE> 12
Three Months Ended March 31, 1997 Compared
to Three Months Ended March 31, 1996.
Results of Operations
---------------------
Net Sales
Net sales for the three months ended March 31, 1997 were $11,198,000
compared to $8,304,000 for the same period the prior year, representing an
increase of $2,894,000 or 34.9%. The California Acquisition continues to
contribute measurably to this growth, representing approximately $1,937,000 in
net sales. The categories of the business which continue to experience growth
are video/software packaging and consumer product packaging which increased
$1,399,000 or 64% and $1,028,000 or 51%, respectively. Commercial and music
sales also increased by 57% and 23%, respectively. The Company's base
music/audio packaging sales have stabilized, with the overall sales increase
within this category coming from the California Acquisition. The categories
which decreased in the three months ended March 31, 1997 compared to the same
three months of the prior year, were pharmaceutical, vitamin packaging and
labels. These categories decreased by $283,000 or 25%, and $57,000 or 7%,
respectively. The pharmaceutical/vitamin packaging decline is a result of the
change in the Company's focus to growing earnings, thereby concentrating on more
profitable segments within this business category.
Gross Profit
Gross profit for the three months ended March 31, 1997 was $2,983,000 (a
26.6% profit margin) compared to $1,732,000 (a 21% profit margin) for the same
period the prior year, representing an increase of $1,251,000 or 72%. This
increase was due primarily to the increase in sales, the California acquisition,
and continued focus on both variable and fixed manufacturing costs through
improved efficiencies.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months
ended March 31, 1997 were $1,993,000 compared to $1,524,000 for the same period
the prior year, an increase of $469,000 or 31%. This increase is due primarily
to normal inflationary increases, costs associated with the facility acquired in
the California Acquisition and revenue related expenses (such as freight to
customers and commissions). SG&A as a percent of revenue declined from 18.4% for
the three months ended March 1996 compared to 17.8% for the same period in 1997
a 0.6 percentage point improvement.
Interest Expense
Interest expense for the three months ended March 31, 1997 was $149,000
compared to $179,000 for the same three months of the prior period, a decrease
of $30,000 or 17%. This decrease was due primarily to the repayment of debt
<PAGE> 13
with cash provided by operating activities. The Company also entered into a
new revolving credit agreement on February 26, 1997, providing for borrowing at
a rate of LIBOR plus 150; which represents approximately a 2 percentage point
decrease from the interest rate payable under the Company's prior revolving
credit agreement.
Income Taxes
The provision for income taxes for the three months ended March 31, 1997
was $336,000, compared to $13,000, an increase of $323,000. This increase is
primarily due to the increase in pretax income and offset by a decline in the
effective tax rate from 43% in 1996 to 40% in 1997.
Net Income
Net income for the three months ended March 31, 1997 was $504,000 compared
to $17,000 for the same period of the prior year, an increase of $487,000. This
net income improvement resulted from the increase in sales, coupled with
improved efficiencies in the manufacturing processes and the decline in the
effective tax rate.
Liquidity and Capital Resources
The primary source of cash for the Company's business has been cash flow
from operations and borrowing under the financing agreement with the Company's
prior revolving credit agreement. As of March 31, 1997, the Company had working
capital of $5,681,424. Net cash provided by operating activities for the three
months ended March 31, 1997 was $255,949, due to general business growth.
The Company anticipates capital expenditures of $700,000 for the remainder
of 1997, primarily for the purchases of manufacturing equipment to increase
capacity and improve plant efficiencies.
On February 26, 1997, the Company entered into a new revolving credit
agreement (the "Credit Agreement") with Key Bank which allows for borrowings
equal to 85% of eligible accounts receivable plus up to 70% of eligible
inventory, not to exceed $10,000,000. As of March 31, 1997 our eligible
borrowing lease was $8,000,000. The Credit Agreement is secured by substantially
all of the unencumbered assets of the Company. The borrowing rate under this
agreement is either (i) LIBOR plus 125 to 175 basis points depending on the Debt
Coverage Ratio or (ii) the Banks Base Rate. The Credit Agreement also provides
for a borrowing sublimit for acquisitions in an amount equal to the lesser of
$3,000,000 or 25% of the Companys tangible net worth. The utilization of this
sublimit must be in compliance with the Credit Agreement as a whole. As of March
31, 1997, DGI was in compliance with the covenants specified in the Credit
Agreement.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share", is effective for annual and interim periods ending after December 15,
1997. SFAS No. 128 specifies the computation, presentation and disclosure
requirement for earning per share for public entities. This statement requires
entities with complex capital structures to present both basic earnings per
share (EPS) and dilutive EPS, as defined in the pronouncement. SFAS No. 128 does
not permit early application and requires restatement of all prior EPS data
presented. The Company is continuing to assess the impact of this pronouncement
and does not believe that the adoption of SFAS No. 128 will have a material
effect on previously reported earnings per share.
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Disc Graphics, Inc.
(Registrant)
May 15, 1997 /s/ Donald Sinkin
--------------- ------------------------------
Date Donald Sinkin - President
May 15, 1997 /s/ Margaret Krumholz
--------------- -----------------------------
Date Margaret Krumholz -
Chief Financial Officer
<PAGE> 1
EXCHANGE AGENT AGREEMENT
As of July 1, 1997
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Ladies and Gentlemen:
In connection with the exchange offer ("Exchange Offer") of Disc Graphics,
Inc., a Delaware corporation (the "Company") as described in the Company's
Exchange Offer dated July 11, 1997 (the "Exchange Offer"), pursuant to the
Exchange Offer, the Company will exchange one share of the Company's common
stock, par value $.01 per share ("Common Stock") for each eight and one-half of
the Company's Class A Redeemable Common Stock Purchase Warrants ("Warrants"),
together with cash (without interest) in lieu of fractional shares at a rate for
each share of Common Stock based on a formula outlined in the Prospectus. You
will be notified of the Expiration Date (as defined in the Prospectus) and the
purchase price for fractional shares by no later than the first business day
following the Expiration Date.
The Company has delivered or will deliver to you or as transfer agent for
the Warrants and the Common Stock you have in your possession (i) a copy of the
letter of transmittal ("Letter of Transmittal") to be sent to holders of record
of Warrants ("Warrantholders"), (ii) copies of all other documents or materials,
if any, to be forwarded to Warrantholders, (iii) a certified copy of resolutions
adopted by the Board of Directors of the Company authorizing the Exchange Offer,
the appointment of an exchange agent and execution of an exchange agent
agreement, (iv) a list showing the names and addresses of all Warrantholders as
of the Expiration Date and the number of Warrants held by each Warrantholder
immediately prior to the Expiration Date, and (v) a list of certificates
(including certificate numbers) representing Warrants that have been or are, as
such date, lost, stolen, destroyed or replaced or restricted as to transfer
(noting the text of the restrictive legends applicable thereto) or with respect
to which a stop transfer order has been noted (such lists being herein referred
to as the "Lists").
As soon as practicable after (and in any event no later than the third
business day after) the effective date of the Registration Statement, as to
which the Company will provide the Exchange Agent with written notice, the
Exchange Agent (as defined below) will mail to each Warrantholder (a) a notice
advising such holder of the Exchange Offer and the applicable terms of the
exchange effected thereby, (b) a Letter of Transmittal with instructions, (c) a
self-addressed return envelope, (d) tax certification guidelines, and (e) any
other material deemed appropriate by the Company.
<PAGE> 2
This will confirm the appointment by the Company of American Stock Transfer
& Trust Company as the exchange agent ("Exchange Agent") and, in that capacity,
the authorization of the Exchange Agent to act as agent for the Warrantholders
for the purpose of receiving the Common Stock and cash in lieu of fractional
shares to be issued in exchange for Warrants and transmitting the same to the
Warrantholders upon satisfaction of the conditions set forth herein. Your
duties, liabilities and rights as Exchange Agent are as set forth herein and
will be governed, in addition, by the applicable terms of the Exchange Offer.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following:
1. Examination of Letters of Transmittal. You are to examine Letters
of Transmittal, certificates representing Warrants and other documents delivered
or mailed to you by or for Warrantholders to ascertain, to the extent reasonably
determined by you, whether:
(a) the Letters of Transmittal appear to be duly executed and
properly completed in accordance with the instructions set forth therein;
(b) the certificates for Warrants appear to be properly
surrendered and, if applicable, endorsed for transfer;
(c) the other documents, if any, used in the exchange appear to
be duly executed and properly completed and in the proper form; and
(d) the certificates for Warrants are free of restrictions on
transfer or stop orders.
In the event you ascertain that any Letter of Transmittal or other
document has been improperly completed or executed, that any of the certificates
for Warrants are not in proper form or some other irregularity exists, you shall
attempt to resolve promptly the irregularity and may use your best efforts to
contact the appropriate Warrantholder by whatever means of communication you
deem most expedient to correct the irregularity and, upon consultation with the
Company, shall endeavor to take such other reasonable action as may be necessary
to cause such irregularity to be corrected, and the determination of any
questions referred to the Company or its counsel by you as to the validity, form
and eligibility, as well as the proper completion or execution of the Letters of
Transmittal and other documents, shall be final and binding, and you may rely
thereon as provided in Section 12(a) hereof.
2. Exchange of Warrants. (a) As soon as practicable after the Expiration
Date and after surrender to you of all certificates for Warrants registered to a
particular record holder or holders (and only after surrender of all such
certificates) and the return of a properly completed and signed Letter of
Transmittal relating thereto, you shall cause to be issued and distributed to
the
2
<PAGE> 3
holder(s) in whose name such certificates were registered (or such other person
as shall have been specified pursuant to the terms hereof) (i) the whole number
of shares of Common Stock issuable pursuant to the Exchange Offer, registered in
the name of such holder(s) and (ii) a check in lieu of any fractional shares
("Cash Amount"). The Company shall provide you the amount of cash sufficient to
make all payments for fractional shares calculated.
(b) Until so surrendered, each certificate as to which a Letter
of Transmittal was received which immediately prior to the Expiration Date
represented outstanding Warrants shall, at and after the Expiration Date,
entitle the holder(s) thereof only to receive, upon surrender of it and all
other identically registered certificates, the certificates representing shares
of Common Stock and the Cash Amount contemplated by the preceding paragraph.
(c) If any certificates representing shares of Common Stock are
to be issued in, or a Cash Amount is to be paid to, a name other than that in
which the certificate for Warrants surrendered in exchange therefore is
registered, it shall be a condition of the issuance or payment thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall pay to you
any transfer or other taxes required, or shall establish to your satisfaction
that such tax has been paid or is not payable.
(d) Certificates to be delivered by mail shall be forwarded by
first class mail under the Exchange Agent's blanket surety bond, which the
Company understand protects the Company and the Exchange Agent from loss or
liability arising by virtue of the non-receipt or non-delivery of such
certificates. It is understood that the market value of the securities in any
one shipment sent by first class mail under this procedure will not be in excess
of $250,000. In the event the market value shall exceed $250,000, the envelope
shall be mailed by registered mail and shall be insured separately for the
replacement value of its contents at the time of mailing.
3. Lost, Stolen or Destroyed Certificates. In the event that any
Warrantholder claims that any certificates representing Warrants is lost, stolen
or destroyed, the Exchange Agent shall mail to such Warrantholder an affidavit
of loss and an indemnity bond. The Exchange Agent shall make the distribution of
certificates representing shares of Common Stock only upon receipt of a properly
completed affidavit of loss and indemnity bond.
4. Reports. The Exchange Agent shall furnish, until otherwise notified,
monthly, or more frequently if requested by the Company, reports to the Company
showing:
(a) number of Warrants surrendered and number of full shares of
Common Stock issued in exchange therefor (previous, herewith and total);
(b) fractional shares adjusted (previous, herewith and total);
3
<PAGE> 4
(c) cash paid in lieu of fractional shares (previous, herewith
and total).
5. IRS Filings. You shall arrange to comply with all requirements under
the tax laws of the United States, including those relating to missing tax
identification numbers, and shall file any appropriate reports with the Internal
Revenue Service ("IRS") (e.g., 1099, 1099B, etc.) You may be required to deduct
31% from cash paid in lieu of fractional shares to Warrantholders who have not
supplied their correct taxpayer identification number or required certification.
Such funds will be turned over to the IRS by you.
6. Restricted Certificates for Warrants. The Lists set forth, among other
things, certificates representing Warrants that have been or are, as of the date
of such Lists, restricted as to transfer (noting the text of the restrictive
legends applicable thereto). The Company understands that the Lists will also
set forth a legend or legends to be placed on certificates representing Common
Stock to be issued in exchange for such certificates, if any, and you shall
place such legends on such certificates as directed in the Lists. In the event a
certificate bearing a restrictive legend that is not included in the Lists is
presented, you are instructed to delay issuance of a certificate representing
shares of Common Stock with respect thereto pending instructions from the
Company.
7. Restricted Certificates of Common Stock Each of the persons listed on
Schedule A hereto may be deemed an "affiliate" of the Company within the meaning
of Rule 145 under the Securities Act of 1933, as amended, and applicable rules
and regulations promulgated by the Securities and Exchange Commission.
You are hereby authorized and instructed to place on the face of each of
the certificates representing shares of Common Stock issued to each of the
aforesaid persons in exchange for the Warrants held by them a legend reading in
its entirety as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATED WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS
AMENDED, APPLIES. THESE SHARES MAY NOT BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER OF THESE SHARES TO THE EFFECT THAT REGISTRATION IS NOT
REQUIRED UNDER SUCH ACT AND SUCH STATE SECURITIES LAWS."
8. Copies of Documents. You shall take such action at the Company's
expense as may from time to time be reasonably requested by the Company to
furnish copies of the Letter of Transmittal to persons designated by the
Company.
4
<PAGE> 5
9. Receipt of Disposal. Letters of Transmittal and telegrams, telexes,
facsimile transmissions and other materials submitted to you by Warrantholders
shall be preserved by you until delivered or otherwise disposed of in accordance
with the Company's instructions at or prior to the termination hereof.
10. Maintenance of Records. You will keep and maintain complete and
accurate ledgers showing all shares exchanged by you and payments made by you.
You are authorized to cooperate with and furnish information to any organization
or its legal representatives designated from time to time by the Company in any
manner reasonably requested by any of them in connection with the Exchange Offer
and exchange pursuant thereto.
11. Delivery of Surrendered Warrants. All certificates for Warrants
surrendered to you shall be retained by you and following exchange and payment
thereof shall be forwarded to the Company or elsewhere as directed by the
Company.
12. Exchange Agent's Duties and Obligations. As Exchange Agent, you:
(a) will have no duties or obligations other than those
specifically set forth herein, or may subsequently be agreed to in writing by
you and the Company;
(b) will be regarded as making no representations or warranties
and having no responsibilities regarding the validity, sufficiency, value or
genuineness of any certificates for Warrants surrendered to you or the Warrants
to purchase shares of Common Stock represented thereby; will not be required or
requested to make any representations as to the validity or genuineness of any
certificates for shares of Common Stock or shares of Common Stock represented
thereby; and will not be responsible in any manner whatsoever for the
correctness of the statements made herein or in the Prospectus or in any
document furnished to you by the Company;
(c) will be obligated to institute or defend any action, suit or
legal proceeding in connection with the Exchange Offer, or your duties
hereunder, or take any other action which might in your judgment involve, or
result in, expense or liability to you, unless the Company shall first furnish
you an indemnity satisfactory to you;
(d) may rely on, and shall be protected in acting upon, any
certificate, instrument, opinion, representation, notice, letter, telegram or
other document delivered to you and believed by you to be genuine and to have
been signed by the proper party or parties;
(e) may rely on, and shall be protected in acting upon, written
or oral instructions given by any officer of, or any party authorized by, the
Company with respect to any matter relating to your actions as Exchange Agent;
5
<PAGE> 6
(f) may consult with counsel satisfactory to you (including
counsel for the Company), and the written advice or opinion of such counsel
shall be full and complete authorization and protection in the respect of any
action taken, suffered or omitted by you hereunder in good faith and in
accordance with such advice or opinion of such counsel; and
(g) may retain an agent or agents of your choice to assist you in
performing your duties and obligations hereunder, at your cost and without
relieving you of any liability hereunder.
13. Termination of Exchange Agent's Duties and Obligations. This
agreement shall terminate upon demand by the Company, at which time all
undistributed certificates representing shares of Common Stock, cash to be paid
in lieu of fractional shares, and any dividends and distributions in respect of
Common Stock, shall be delivered by the Exchange Agent to the Company.
14. Indemnification of Exchange Agent. The Company hereby covenant
and agree to reimburse, indemnify and hold you harmless from and against any and
all claims, actions, judgments, damages, losses, liabilities, costs, transfer or
other taxes, and expenses (including, without limitation, reasonable attorneys'
fees and expenses) incurred or suffered by you, or to which you may become
subject and not resulting from any negligence, bad faith or willful misconduct
on your part, arising out of or incident to this Agreement or the administration
of your duties hereunder, or arising out of or incident to your compliance with
the instructions set forth herein or with any instructions delivered to you
pursuant hereto, or as a result of defending yourself against any claim or
liability resulting from your actions as Exchange Agent, including any claim
against you by any tendering Warrantholder, which covenant and agreement shall
survive the termination hereof. You hereby represent that you will notify the
Company by letter, or facsimile confirmed by letter, of any receipt by you of a
written assertion of a claim against you, or any action commenced against you,
within five (5) business days after your receipt of written notice of such
assertion or your having been served with the summons or other first legal
process giving information as to the nature and basis of any such assertion.
However, your failure to so notify the Company shall not operate in any manner
whatsoever to relieve the Company from any liability which they may have on
account of this Section 14 if no prejudice occurs. At its election, the Company
may assume the conduct of your defense in any such action or claim at their sole
cost and expense. In the event that the Company elect to assume the defense of
any such action or claim and confirm to you in writing that the indemnity
provided for in this Section 14 applies to such action or claim, the Company
shall not be liable for the fees and expenses of any counsel thereafter retained
by you.
15. Compensation and Expenses. For services rendered as Exchange
Agent hereunder, your fees are approved as set forth in the schedule attached to
this agreement.
16. Modification. Except as otherwise provided in Section 12(a)
hereof, (i) the instructions contained herein may be modified or supplemented
only by authorized representatives of the Company, and (ii) any inconsistency
between this agreement and the
6
<PAGE> 7
Prospectus shall be resolved in favor of the Prospectus.
17. Notices. Except as otherwise provided herein, no notice,
instruction or other communication by one party shall be binding upon the other
party unless hand delivered or sent by certified mail, return receipt requested,
nationally recognized overnight courier service or by facsimile transmission
electronically confirmed. Notice to you shall be sent or delivered to your
above-noted address or such other addresses as you shall hereafter designate in
writing in accordance herewith. Notice to the Company shall be sent or delivered
to:
If to the Company:
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, New York 11788
Attention: Donald Sinkin, Chairman of the Board
with a copy to:
Blau, Kramer, Wactlar & Lieberman, P.C.
100 Jericho Quadrangle
Jericho, New York 11753
Attention: Nancy D. Lieberman, Esq.
18. Counterparts. This agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same agreement.
19. Governing Law; Binding Upon Successors and Assigns. This
agreement shall be construed and enforced in accordance with the laws of the
State of New York, without regard to the principles thereof respecting conflicts
of laws, and shall inure to the benefit of, and the obligations created hereby
shall be binding upon, the successors and assigns of the parties hereto.
Executed this __ th day of July, 1997.
DISC GRAPHICS, INC.
By: /s/ Donald Sinkin
--------------------
Name:
Title:
Agreed To and Accepted:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
7
<PAGE> 8
By: /s/ Herbert J. Lemmer
----------------------------------
Name:
Title:
8
<PAGE> 9
Schedule A
Donald Sinkin
John Rebecchi
Stephen Frey
Seymour Zises
Mark Friedman
Daniel Levinson
Fees
$3,500
9
<PAGE> 1
AGREEMENT, dated this 10th day of 1993, between RCL CAPITAL CORP.,
a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER & TRUST
COMPANY, a New York corporation, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with (i) the offering to the public of
1,350,000 units (the "Units"), each unit consisting of one share of the
Company's common stock, $.01 par value ("Common Stock"), and two Class A
Redeemable Common Stock Purchase Warrants (the "Warrants") each Warrant
entitling the registered holder thereof to purchase one (1) share of Common
Stock, (ii) the over-allotment option to purchase up to an additional 202,500
Units, (the "Over-allotment Option"), and (iii) the sale to RAS Securities Corp.
and Rodman & Renshaw, Inc., their successors and assigns (collectively, the
"Representatives") of warrants (the "Representatives' Warrants") to purchase up
to 135,000 Units, the Company will issue up to 3,375,000 Warrants (subject to
increase as provided in the Representatives' Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the
<PAGE> 2
Company, the Representatives, the holders of certificates representing the
Warrants and the Warrant Agent, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
(b) "Corporate Office" shall mean the office of the
Warrant Agent (or its successor) at which at any particular time its principal
business in New York, New York, shall be administered, which office is located
on the date hereof at 40 Wall Street, New York, New York 10005.
(c) "Exercise Date" shall mean, subject to the provisions
of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder hereof or
his attorney duly authorized in writing, and (ii) payment in cash or by check
made payable to the Warrant Agent for the account of the Company, of the amount
in lawful money of the United States of America equal to the applicable Purchase
Price.
(d) "Initial Warrant Exercise Date" shall mean the
Separation Date.
(e) "Initial Warrant Redemption Date" shall mean the
Separation Date.
(f) "Purchase Price" shall mean, subject to modification
and adjustment as provided in Section 8, $5.50 for the Warrants and further
subject to the Company's right, in its sole
<PAGE> 3
discretion, to decrease the Purchase Price for a period of not less than 30 days
on not less than 30 days' prior written notice to the Registered Holders and the
Representatives.
(g) "Registered Holder" shall mean the person in whose
name any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Separation Date" shall mean the earlier of (a) 90
days after the effective date of the Registration Statement or (b) the date the
Units become separately tradeable.
(i) "Subsidiary"or "Subsidiaries" shall mean any
corporation or corporations, as the case may be, of which stock having ordinary
power to elect a majority of the Board of Directors of such corporation
(regardless of whether or not at the time stock of any other class or classes of
such corporation shall have or may have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by the Company
or by one or more Subsidiaries, or by the Company and one or more Subsidiaries.
(j) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, New York, New York, or its authorized successor.
(k) "Underwriting Agreement" shall mean the underwriting
agreement dated November 10, 1993 between the Company and the Representatives,
as representatives of the several underwriters listed therein, relating to the
purchase for resale to the public of the 1,350,000 Units.
(m) "Representatives' Warrant Agreement" shall mean the
agreement dated as of November 10, 1993 among the Company, RAS Securities Corp.
and Rodman & Renshaw, Inc. relating to and governing the terms and provisions of
the Representatives' Warrants.
<PAGE> 4
(n) "Warrant Certificate" shall mean a certificate
representing the Warrants substantially in the form annexed hereto as Exhibit A
and Exhibit B, respectively.
(o) "Warrant Expiration Date" shall mean, unless the
Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00
p.m. (New York time) on November 9, 1999 or, if such date shall in the State of
New York be a holiday or a day on which banks are authorized to close, then 5:00
p.m. (New York time) on the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close, subject to the
Company's right, prior to the Warrant Expiration Date, in its sole discretion,
to extend such Warrant Expiration Date on five business days prior written
notice to the Registered Holders.
(p) "Warrant Agent" shall mean American Stock Transfer &
Trust Company, New York, New York or its authorized successor.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) One Warrant shall initially entitle the Registered
holder of the Warrant Certificate representing such Warrant to purchase at the
Purchase Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing 2,700,000 Warrants to purchase up to an aggregate of 2,700,000
shares of Common Stock (subject to modification and adjustment as provided in
Section 8) shall be executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Over-allotment Option, in whole
or in part, Warrant Certificates representing up to 405,000 Warrants to
purchase up to an aggregate of 405,000 shares
<PAGE> 5
of Common Stock (subject to modification and adjustment as provided in Section
8) shall be executed by the Company and delivered to the Warrant Agent.
(d) Upon exercise of the Representatives' Warrants as
provided therein, Warrant Certificates representing 270,000 Warrants to
purchase up to an aggregate of 270,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representatives' Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by its
Chairman of the Board, President or a Vice President and by its Treasurer or an
Assistant Treasurer or its Secretary or an Assistant Secretary.
(e) From time to time, up to the Warrant Expiration Date,
as the case may be, the Warrant Agent shall countersign and deliver Warrant
Certificates in required denominations of one or whole number multiples thereof
to the person entitled thereto in connection with any transfer or exchange
permitted under this Agreement. Except as provided in Section 7 hereof, no
Warrant Certificates shall be issued except (i) Warrant Certificates initially
issued hereunder, (ii) Warrant Certificates issued upon any transfer or exchange
of Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Representatives' Warrant Agreement
(including Warrants in excess of the 135,000 Representatives' Warrants issued as
a result of the antidilution provisions contained in the Representatives;
Warrant Agreement), and (v) at the option of the Company, Warrant Certificates
in such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Purchase Price, the number of shares of Common Stock
purchasable upon exercise of the Warrants or the Redemption Price therefor made
pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
<PAGE> 6
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A for the Warrants (the provisions of which are
hereby incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates).
(b) Warrant Certificates shall be executed on behalf of
the Company by its Chairman of the Board, President or any Vice President and by
its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valued for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates, or before countersignature by the Warrant Agent and issue and
delivery thereof such Warrant Certificate, nevertheless, may be countersigned by
the Warrant Agent, issued and delivered with the same force and effect as though
the person who signed such Warrant Certificates had not ceased to be such
officer of the Company.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number
multiples thereof may be exercised commencing at any time on or after the
Initial Warrant Exercise Date, but not after the
<PAGE> 7
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein (including the provision set forth in Sections 5 and 9 hereof) and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, together with payment in cash or by check made payable to
the Warrant Agent for the account of the Company, of an amount in lawful money
of the United States of America equal to the applicable Purchase Price has been
received in good funds by the Warrant Agent. The person entitled to receive the
securities deliverable upon such exercise shall be treated for all purposes as
the holder of such securities as of the close of business on the Exercise Date.
If Warrants in denominations other than two or whole number multiples thereof
shall be exercised at one time by the same Registered Holder, the number of full
shares of Common Stock which shall be issuable upon exercise thereof shall be
computed on the basis of the aggregate number of full shares of Common Stock
issuable upon such exercise. As soon as practicable on or after the Exercise
Date and in any event within five business days after such date, if two or more
Warrants have been exercised, the Warrant Agent on behalf of the Company shall
cause to be issued to the person or persons entitled to receive the same a
Common Stock certificate or certificates for the shares of Common Stock
deliverable upon such exercise, and the Warrant Agent shall deliver the same to
the person or persons entitled thereto. Upon the exercise of any two or more
Warrants, the Warrant Agent shall promptly notify the Company in writing of such
fact and of the number of securities delivered upon such exercise and, subject
to subsection (b) below, shall cause all payments of an amount in cash or by
check made payable to the order of the Company, equal to the Purchase Price, to
be deposited promptly in the Company's bank account.
<PAGE> 8
(b) At any time upon the exercise of any two or more
Warrants after the date hereof, the Warrant Agent shall, on a daily basis,
within two business days after such exercise, notify the Representatives, their
successors or assigns of the exercise of any such Warrants and shall, on a
weekly basis (subject to collection of funds constituting the tendered Purchase
Price, but in no event later than five business days after the last day of the
calendar week in which such funds were tendered), remit to the Representatives
an amount equal to $.40 for each Warrant being then exercised unless the
Representatives shall have notified the Warrant Agent that the payment of such
amount with respect to such Warrant is violative of the General Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as amended,
(the 'Exchange Act"), or the rules and regulations of the National Association
of Securities Dealers, Inc. ("NASD") or applicable state securities or "blue
sky" laws, or the Warrants are those underlying the Representatives' Warrants in
which event, the Warrant Agent shall have to pay such amount to the Company;
provided, that, the Warrant Agent shall not be obligated to pay any amounts
pursuant to this Section 4(b) during any week that such amounts payable are less
than $1,000 and the Warrant Agent's obligation to make such payments shall be
suspended until the amount payable aggregates $1,000, and provided further,
that, in any event, any such payment (regardless of amount) shall be made not
less frequently than monthly.
(c) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any Warrant
or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fraction equal to or greater than one-half shall be
rounded up to the next full share or Warrant, as the case may be, any fraction
less than one-half shall be eliminated.
<PAGE> 9
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants. such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery thereof, be duly and validly
issued and fully paid and nonassessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, and that
upon issuance such shares shall be listed on each securities exchange, if any,
on which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to be reserved
for the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post effective amendment, use its best efforts to cause the same to become
effective, keep such registration statement current while any of the Warrants
are outstanding and deliver a prospectus which complies with Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Act"), to the Registered Holder
exercising the Warrant (except, if in the opinion of counsel to the Company,
such registration is not required under the federal securities law or if the
Company receives a letter from the staff of the Securities and Exchange
Commission (the "Commission") stating that it would not take any enforcement
action if such registration is not effected). The Company will use best efforts
to obtain appropriate approvals or registrations under state "blue sky"
securities laws. With respect
<PAGE> 10
to any such securities, however, Warrants may not be exercised by, or shares of
Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant's Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office,
<PAGE> 11
the Company shall execute and the Warrant Agent shall issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing.
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange shall be promptly canceled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of and the
loss, theft, destruction or mutilation of any Warrant Certificate and (in the
case of loss, theft or destruction) of indemnity satisfactory to them, and (in
case of mutilation) upon surrender and cancellation thereof, the
<PAGE> 12
Company shall execute and the Warrant Agent shall countersign and deliver in
lieu thereof a new Warrant Certificate representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of
Common Stock Deliverable.
(a) (i) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof, sell any shares
of Common Stock for a consideration per share less than the Purchase Price or
issue any shares of Common Stock as a stock dividend to the holders of Common
Stock, or subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such sale, issuance, subdivision or
combination being herein called a "Change of Shares"), then, and thereafter upon
each further Change of Shares, the Purchase Price for the Warrants (whether or
not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (i) the sum of
(a) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares, and (b) the consideration, if any, received By
the Company upon such sale, issuance, subdivision or combination by (ii) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares; provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
<PAGE> 13
For the purposes of any adjustment to be made in accordance
with this Section 8(a) the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock (or
of other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be cash, the
amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a dividend
or other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company on the basis of a record
of values of similar property or services.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business
<PAGE> 14
on the day following the record date for the determination of shareholders
entitled to receive such dividend or other distribution and shall be deemed to
have been issued without consideration.
(D) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this Section 8(a).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(ii) Upon each adjustment of the Purchase Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.
(b) In case the Company shall at any time after the date hereof
issue options, rights or warrants to subscribe for shares of Common Stock, or
issue any securities convertible into or exchangeable for shares of Common
Stock, for a consideration per share (determined as provided in Section 8(a) and
as provided below) less than the Purchase Price in effect immediately prior to
the issuance of such options, rights or warrants, or such convertible or
exchangeable securities, or
<PAGE> 15
without consideration (including the issuance of any such securities by way of
dividend or other distribution), the Purchase Price for the Warrants (whether or
not the same shall be issued and outstanding) in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a price
determined by making the computation in accordance with the provisions of
Section 8(a) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable or that may become issuable under such options, rights or
warrants(assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may
<PAGE> 16
become issuable upon conversion or exchange of any convertible or exchangeable
securities (assuming conversion or exchange in full even if not then currently
convertible or exchangeable in full) shall be deemed to be issued and
outstanding at the time of issuance of such securities, for a consideration
equal to the consideration received by the Company for such securities, plus the
minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the termination of the right to
convert or exchange such convertible or exchangeable securities (whether by
reason of redemption or otherwise), the number of shares of Common Stock deemed
to be issued and outstanding pursuant to this subsection (B) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in subsection (A) of this
Section 8(b), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(b) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the
<PAGE> 17
exercise or conversion or exchange thereof, and the Company shall be deemed to
have issued upon such date new options, rights or warrants or convertible or
exchangeable securities.
(c) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination), or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger with a Subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification or change of the
then outstanding shares of Common Stock or other capital stock issuable upon
exercise of the Warrants (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of subdivision or
combination) or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, then, as
a condition of such reclassification, change, consolidation, merger, sale or
conveyance, the Company, or such successor or purchasing corporation, as the
case may be, shall make lawful and adequate provision whereby the Registered
Holder of each Warrant then outstanding shall have the right thereafter to
receive on exercise of such Warrant the kind and amount of securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance by a holder of the number of securities issuable upon
exercise of such Warrant immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and shall forthwith file at the
Corporate Office of the Warrant Agent a statement signed by its President or a
Vice President and by its Treasurer or an Assistant Treasurer or its Secretary
or an Assistant Secretary evidencing such provision. Such provisions shall
include provision for adjustments which shall be as nearly equivalent as may be
practicable to the
<PAGE> 18
adjustments provided for in Section 8(a) and (b). The above provisions of this
Section 8(c) shall similarly apply to successive reclassifications and changes
of shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 8. the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie
<PAGE> 19
evidence of the facts stated therein.
(f) No adjustment of the Purchase Price shall be made as a result
of or in connection with (A) the issuance of shares of Common Stock upon
consummation of and in connection with the Business Combination and the grant by
the Company of options or warrants to purchase Common Stock which may be issued
or granted upon the consummation of and in connection with the Business
Combination; (B) the issuance or sale of shares of Common Stock pursuant to
options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof, (C) the issuance or sale
of shares of Common Stock upon the exercise of any "incentive stock options" (as
such term is defined in the Internal Revenue Code of 1986, as amended), whether
or not such options were outstanding on the date hereof, or (D) the issuance or
sale of shares of Common Stock if the amount of said adjustment shall be less
than $.10, provided, however, that in such case, any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment that shall
amount, together with any adjustment so carried forward, to at least $.10. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any Warrant or Warrants held by them.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on 30 days prior written notice redeem all the Warrants at $.05 per
Warrant, provided, however, that before any such call for redemption of Warrants
can take place, the (A) high closing bid price for the Common Stock in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System or (B) the closing sale price on the primary
exchange on which the
<PAGE> 20
Common Stock is traded, if the Common Stock is traded on a national securities
exchange, shall have for twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date on
which the notice contemplated by (b) and (c) below is given, equalled or
exceeded $9.50 per share with respect to the Warrants (subject to adjustment in
the event of any stock splits or other similar events as provided in Section 8
hereof). Notwithstanding the foregoing, the Warrants underlying the
Representatives' Warrants are not subject to redemption prior to the issuance of
the underlying Representatives' Warrants.
(b) In case the Company shall exercise its right to redeem all of
the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five business days prior
to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to the
Representatives a similar notice telephonically and confirmed in writing
together with a list of the Registered Holders (including their respective
addresses and number of Warrants beneficially owned) to whom such notice of
redemption has been or will be given.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, which shall in no event be less than
thirty (30) days after the date of mailing of such notice, (iii) the place where
the Warrant Certificate shall be delivered and the redemption price shall be
paid, (iv) that the Representatives are the Company's exclusive warrant
solicitation agent and shall receive the commission contemplated by Section 4(b)
hereof, and (v) that the right to exercise
<PAGE> 21
the Warrant shall terminate at 5:00 p.m. (New York time) on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrants shall be the Redemption Date. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a holder (a) to
whom notice was not mailed or (b) whose notice was defective. An affidavit of
the Warrant Agent or the Secretary or Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m.
(New York time) on the business day immediately preceding the Redemption Date.
The redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
(e) The Company shall indemnify the underwriters and each person,
if any, who controls the underwriters within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from the registration statement or prospectus referred to in Section 5(b) hereof
to the same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the Company has agreed to
indemnify the underwriters contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the Company
shall furnish to the Representatives (i) an opinion of counsel to the Company,
dated such date and addressed to the Representatives, and (ii) a "cold comfort"
letter dated such date addressed to the Representatives, signed by the
independent public accountants who have issued a report on the Company's
financial
<PAGE> 22
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities, including, without limitation, those matters covered in Sections
6(d) and (i) of the Underwriting Agreement.
(g) The Company shall as soon as practicable after the Redemption
Date, and in any event within 15 months thereafter, make " generally available
to its security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with Section 11 (a) of
the Act and covering a period of at least 12 consecutive months beginning after
the Redemption Date.
(h) The Company shall deliver within five business days prior to
the Redemption Date copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to such registration statement and
permit the Representatives to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as the
Representatives shall reasonably request.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the
<PAGE> 23
Company and the underwriters, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of fact contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order
or demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board of
<PAGE> 24
Directors, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted bv the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own gross negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation the
Company shall appoint in writing a new warrant agent. If the Company shall fail
to make such appointment within a period of 30 days after it has been notified
in writing of such resignation by the resigning Warrant Agent, then the
Registered Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or trust
company having a capital and surplus, as shown by its last published report to
its stockholders, of not less than $10,000,000 or a stock transfer
<PAGE> 25
company doing business in New York, New York. After acceptance in writing of
such appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the warrant agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
<PAGE> 26
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from
the date of exercise any Warrant Certificate received by it upon such exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental
agreement make any changes or corrections in this Agreement (i) that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error herein contained; or (ii)
that they may deem necessary or desirable and which shall not adversely affect
the interests of the holders of Warrant Certificates; provided, however, that
this Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the consent in writing of the Registered Holders; provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or to increase the Purchase Price therefor,
shall be made without the consent in writing of the Registered Holders
representing not less than 66 2/3 % of the Warrants then outstanding, other than
such changes as are presenting specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of the Representatives, other
than to cure any ambiguity or to correct any provision which is inconsistent
with any other provision of this Agreement or to make any such change that is
necessary or desirable and which shall not adversely affect the interests of the
underwriters except as stated herein and except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid, or
<PAGE> 27
delivered to a telegraph office for transmission if to the Registered Holder of
a Warrant Certificate, at the address of such holder as shown on the registry
books maintained by the Warrant Agent; if to the Company at 800 Second Avenue,
Suite 603, New York, New York 10017, Attention: H. Sean Mathis, President, or at
such other address as may have been furnished to the Warrant Agent in writing by
the Company; and if to the Warrant Agent, at its Corporate Office. Copies of any
notice delivered pursuant to this Agreement shall be delivered to the
Representatives c/o RAS Securities Corp., Two Broadway, New York, New York
10004, Attention: Robert A. Schneider, or at such other address as may have been
furnished to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit
of the Company, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them. Except
as hereinafter stated, nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim or to
impose upon any other person any duty, liability or obligation. The underwriters
are, and shall at all times irrevocably be deemed to be, third-party
beneficiaries of this Agreement, with full power, authority and standing to
enforce the rights granted to it hereunder.
SECTION 15. Counterparts.
This Agreement may be executed in several counterparts, which
taken together shall constitute a single document.
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the first date first above written.
[SEAL]
RCL CAPITAL CORP. AMERICAN STOCK TRANSFER & TRUST
COMPANY
As Warrant Agent
By: /s/ H. Sean Mathis By: /s/ Herbert J. Lemmer
--------------------- ------------------------
H. Sean Mathis Name: Herbert J. Lemmer
President Title: Vice President
By: /s/ Mark L. Friedman
---------------------
Mark L. Friedman
Secretary
<PAGE> 29
EXHIBIT A
No. W_____ VOID AFTER November 9, 1999
WARRANTS
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
RCL CAPITAL CORP.
CUSIP ____
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants (the "Class A Warrants")
specified above. Each Class A Warrant initially entities the Registered Holder
to purchase, subject to the terms and conditions set forth in this Certificate
and the Warrant Agreement (as hereinafter defined), one fully paid and
nonassessable share of Common Stock. $.01 par value, of RCL Capital Corp.. a
Delaware corporation (the "Company"), at any time from November 10, 1993, and
prior to the Expiration Date (as hereinafter defined) upon-the presentation
and surrender of this Warrant Certificate with the Subscription Form on the
reverse hereof duly executed, at the corporate office of American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005, as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$5.50, subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant Agent
for the account of the Company.
This Warrant Certificate and each Class A Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated November 10,
1993, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement,
the Purchase Price and the number of shares of Common Stock subject to purchase
upon the exercise of each Class A Warrant represented hereby are subject to
modification or adjustment.
A-1
<PAGE> 30
Each Class A Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Class A Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Class A Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time)
on November 9, 1999. If each such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 p.m. (New York time)the next following day which in the
State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Class A Warrant unless a registration statement
under the Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, to keep such registration statement current, if required under the
Act, while any of the Class A Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Class A Warrant. This Class A Warrant shall not be exercisable
by a Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Class A Warrants, each of such new Warrant
Certificates to represent such number of Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment and
payment of any tax or other charge imposed in connection therewith or incident
thereto, for registration of transfer of this Warrant Certificate at such
office, a new Warrant Certificate representing an equal aggregate number of
Class A Warrants will be issued to the transferee in exchange therefor, subject
to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented hereby,
the Registered Holder shall not be entitled to any rights of a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Class A
Warrant may be redeemed at the option of the Company, at a redemption price of
$.05 per Class A Warrant, at any time commencing after the Separation Date,
provided that (i) the high closing bid price for the Company's Common Stock in
the over-the-counter market as reported By the National Association of
Securities Dealers Automated Quotation System, or (ii) the closing sale price on
the primary exchange on which the Common Stock is traded, if the Common Stock is
traded on a national securities exchange, shall have for twenty (20) trading
days within a period of thirty(30)consecutive trading days ending on the fifth
trading day prior to the Notice of Redemption,
A-2
<PAGE> 31
as defined below, equalled or exceeded $9.50 per share (subject to adjustment in
the event of any stock splits or other similar events). Notice of redemption
(the "Notice of Redemption") shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Class A Warrant except to receive the $.05 per
Warrant upon surrender of this Certificate.
Under certain circumstances, RAS Securities Corp. and Rodman &
Renshaw, Inc., as representatives of the several underwriters, shall be entitled
to receive an aggregate of $.40 for each Class A Warrant represented hereby.
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary, except as
provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
A-3
<PAGE> 32
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
Dated: ,1993
RCL CAPITAL CORP.
[SEAL]
By:_______________
H. Sean Mathis
President
By:_______________
Mark L. Friedman
Secretary
COUNTERSIGNED:
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By:_______________
Authorized Officer
A-4
<PAGE> 33
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
- --------
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and be delivered to
--------------------------
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by RAS Securities Corp.
or Rodman & Renshaw, Inc. unless the following box is checked:
-------
2. The exercise of this Warrant was
A-5
<PAGE> 34
solicited by:
------
--------------------
3. If the exercise of this Warrant was not solicited, please check the
following box:
----------
Dated:
-------------
X
-----------------------
------------------------
------------------------
Address
------------------------
Social Security or Taxpayer
Identification Number
------------------------
Signature Guaranteed
-------------------------
A-6
<PAGE> 35
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
-------------
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
--------------------------
--------------------------
--------------------------
-------------------------------------
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and
- ------------------
hereby irrevocably constitutes and appoints Attorney
-------------------------
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated:
----------- --------------------
Signature Guaranteed
---------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE.
A-7
<PAGE> 1
1995 INCENTIVE STOCK OPTION PLAN
OF
DISC GRAPHICS, INC.
1. Purpose. The purpose of this Plan is to advance the interests of the
Company by encouraging and enabling the acquisition of a larger personal
proprietary interest in the Company by key employees and directors of, and
consultants to, the Company and its Subsidiaries upon whose judgement and keen
interest the Company is largely dependent for the successful conduct of its
operations. It is anticipated that the acquisition of such proprietary interest
in the Company will stimulate the efforts of such key employees, directors and
consultants on behalf of the Company and its Subsidiaries and strengthen their
desire to remain with the Company and its Subsidiaries. It is also expected that
the opportunity to acquire such a proprietary interest will enable the Company
and its Subsidiaries to attract desirable personnel and consultants.
2. Definitions. When used in this Plan, unless the context otherwise
requires:
(a) "Board" shall mean the Board of Directors of the Company,
as constituted at any time.
(b) "Chairman" shall mean the person who at the time shall be
Chairman of the Board.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Committee" shall mean the Committee hereinafter described
in Section 3.
(e) "Company" shall mean Disc Graphics, Inc., a Delaware
corporation.
(f) "Delaware Act" shall mean the Delaware General Corporation
Law, as from time to time amended.
(g) "Director" shall mean any person who shall from time to
time serve as a member of the Board of Directors of the Company.
(h) "Effective Date" shall mean the date of the consummation
of the merger of Disc Graphics, Inc., a New York corporation, with and
into the Company (the name of which was RCL Capital Corp. immediately
prior to the time of such merger).
(i) "Exchange Act" shall mean the Securities Exchange Act of
1934, as from time to time amended.
(j) "Fair Market Value" on a specified date shall mean the
closing price at which one Share is traded on the Nasdaq National
Market, or, if the Shares are not listed on the Nasdaq National Market,
the closing price at which one Share is traded on the stock exchange,
if any, on which Shares are primarily traded, or, if the Shares are not
listed on a stock exchange, the
1
<PAGE> 2
average of the bid and ask closing prices at which one Share is traded
on the over-the-counter market, as reported on the National Association
of Security Dealers Automated Quotation System, but, in any case, if no
Shares were traded on such date, then on the last previous date on
which a Share was so traded, or, if none of the above are applicable,
the value of a Share as established by the Committee for such date
using any reasonable method of valuation.
(k) "Independent Director" shall mean any Director who is not
also an employee of the Company or any Subsidiary.
(l) "Options" shall mean the stock options granted pursuant to
this Plan.
(m) "Participant" shall mean any person to whom an Option
shall have been granted under this Plan.
(n) "Plan" shall mean this 1995 Incentive Stock Option Plan of
Disc Graphics, Inc., as adopted by the Board on _______ __, 1995, as
such Plan from time to time may be amended.
(o) "President" shall mean the person who at the time shall be
the President of the Company.
(p) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(q) "Share" shall mean a share of common stock, par value $.01
per share, of the Company.
(r) "Subsidiary" shall mean any corporation or partnership 50%
or more of whose stock having general voting power or, in the case of a
partnership, equity securities is owned by the Company or by another
Subsidiary of the Company.
3. Committees. The Plan shall be administered by a Committee which
shall consist of two or more Independent Directors each of whom is a
"disinterested person" within the meaning of Rule 16b-3(c) (2) (i) under the
Exchange Act (including the provisions of Rule 16b-3 (d) (3) as in effect on
April 30, 1991). The members of the Committee shall be selected by the Board.
Any member of the Committee may resign by giving written notice thereof to the
Board, and any member of the Committee may be removed at any time, with or
without cause, by the Board. If, for any reason, a member of the Committee shall
cease to serve, the vacancy shall be filled by the Board. The Committee shall
establish such rules and procedures as are necessary or advisable to administer
the Plan.
4. Participants. The class of persons who are potential recipients of
Options granted under this Plan consist of the (i) Independent Directors (other
than members of the Committee), (ii) key employees of the Company or any
Subsidiary and (iii) consultants and advisors to the Company
2
<PAGE> 3
or any Subsidiary, in each case, as determined by the Committee. The key
employees and consultants to whom Options are granted under this Plan, and the
number of Shares subject to each such Option, shall be determined by the
Committee is its sole discretion, subject, however, to the terms and conditions
of this Plan. Employees to whom Options may be granted include key employees who
are also Directors. No Independent Director who is a member of the Committee may
be granted an Option while serving as such or during the one-year period prior
to serving as such, other than in accordance with Section 12.
5. Shares. The Committee may, but shall not be required to, grant, in
accordance with this Plan, Options to purchase an aggregate of up to 500,000
Shares, which may be either Shares held in treasury or authorized but unissued
Shares.
At the time an Option is granted, the Committee may, in its sole
discretion, designate whether such Option (a) is to be considered as an
incentive stock option within the meaning of Section 422 of the Code, or (b) is
not to be treated as an incentive stock option for purposes of this Plan and the
Code. No Option which is intended to qualify as an incentive stock option shall
be granted under this Plan to any individual who, at the time of such grant, is
not an employee of the Company or a Subsidiary.
Notwithstanding any other provision of this Plan to the contrary, to
the extent that the aggregate Fair Market Value (determined as of the date an
Option is granted) of the Shares with respect to which Options which are
designated as incentive stock options, and any other incentive stock options,
granted to an employee (under this Plan, or any other incentive stock option
plan maintained by the Company or any Subsidiary that meets the requirements of
Section 422 of the Code) first become exercisable in any calendar year exceeds
$100,000, such Options shall be treated as Options which are not incentive stock
options. Options with respect to which no designation is made by the Committee
shall be deemed to be incentive stock options to the extent that the $100,000
limitation described in the preceding sentence is met. This paragraph shall be
applied by taking options into account in the order in which they are granted.
If any Option shall expire, be canceled or terminate for any reason
without having been exercised in full, the unpurchased Shares subject thereto
may again be made subject to Options under the Plan.
Nothing herein contained shall be construed to prohibit the issuance of
Options at different times to the same Participant.
The form of Option shall be determined from time to time by the
Committee. A certificate of Option signed by the Chairman or the President or
any Vice President of the Company, attested by the Treasurer or an Assistant
Treasurer, or Secretary or an Assistant Secretary of the Company, shall be
issued to each Participant. The certificate of Option for an Option shall be
legended to indicate whether or not the Option is an incentive stock option.
3
<PAGE> 4
6. Price. The price per share of the Shares to be purchased pursuant to
the exercise of any Option shall be fixed by the Committee at the time of grant;
provided, however, that the purchase price per share of the Shares to be
purchased pursuant to the exercise of an incentive stock option shall not be
less than the Fair Market Value of a Share on the day on which the Option is
granted.
7. Duration of Options. The duration of any Option granted under this
Plan shall be fixed by the Committee in its sole discretion; provided, however,
that no Option shall remain in effect for a period of more than ten years from
the date upon which the Option is granted.
8. Ten Percent Stockholders. Notwithstanding any other provision of
this Plan to the contrary, no Option which is intended to qualify as an
incentive stock option may be granted under this Plan to any employee who, at
the time the Option is granted, owns shares possessing more than ten percent
(10%) of the total combined voting power or value of all classes of stock of the
Company or a Subsidiary, unless the exercise price under such Option is at least
110% of the Fair Market Value of a Share on the date such Option is granted and
the duration of such Option is no more than five years.
9. Consideration for Options. Subject to the requirements of the
Delaware Act, the Company shall obtain such consideration for the grant of an
Option as the Committee in its discretion may request.
10. Non-transferability of Options. Options and all rights thereunder
shall be non-transferable and non-assignable by Participants, except to the
extent, that the estate of a deceased Participant may be permitted to exercise
them. A Participant is required to notify the Company if he or she disposes of
Shares acquired pursuant to exercise of an incentive stock option within two
years after the date such option was granted or within one year of the date such
option was exercised.
11. Exercise of Options. An Option, after the grant thereof, shall be
exercisable by the Participant at such rate and times as may be fixed by the
Committee; provided, however, that no Option may be exercised in part or in full
prior to the approval of the Plan by the stockholders of the Company as provided
in Section 18, and no Option may be exercised until at least six months after
the date upon which the Option was granted.
Notwithstanding the foregoing, all or any part of any remaining
unexercised Options granted to any Participant (other than a member of the
Committee) may be exercised in the following circumstances (but in no event
during the six-month period commencing on the date granted): (a) immediately
upon (but prior to the expiration of the term of the Option) the Participant's
retirement from the Company and all Subsidiaries on or after his 65th birthday,
(b) subject to the provisions of Section 13 hereof, upon the disability (to the
extent and in a manner as shall be determined by the Committee in its sole
discretion) or death of the Participant, (c) upon the occurrence of such special
circumstances or events as in the opinion of the Committee merits special
consideration, or (d) if, while the Participant is employed by, or serving as a
Director or consultant of the Company or a
4
<PAGE> 5
Subsidiary, there occurs a Change in Control. For purposes of this Plan, a
"Change in Control" shall be deemed to have occurred if either (i) after the
Effective Date, any person (within the meaning of Sections 13(d) and 14(d)(2) of
the Exchange Act) becomes, without the approval of the Board, the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities
representing 30% or more of the combined voting power of the Company; (ii) the
stockholders of the Company approve either (A) an agreement to merge or
consolidate in a transaction in which the Company is not the surviving entity
(B) an agreement to sell or dispose of all or substantially all of the Company's
assets, or (C) a plan to liquidate the Company, unless the Board determines that
Options will not vest upon an event described in (A), (B) or (C); or (iii)
during any period of two consecutive years, individuals constituting at least a
majority of the Board at the beginning of such period cease to constitute a
majority thereof, unless the election or nomination for election by the
Company's stockholders of each new Director was approved by a vote of at least
two-thirds of the Directors then still in office who were Directors at the
beginning of such period.
An Option shall be exercised by the delivery of a written notice duly
signed by the Participant to such effect, together with the Option certificate
and the full purchase price of the Shares purchased pursuant to the exercise of
the Option, to the Chairman or an officer of the Company appointed by the
Chairman for the purpose of receiving the same. Payment of the full purchase
price shall be made as follows: in cash; by check payable to the order of the
Company; by delivery to the Company of Shares which shall be valued at their
Fair Market Value on the date of exercise of the Option; or by such other
methods as the Committee may permit from time to time; provided, however, that a
Participant may not use any Shares acquired pursuant to the exercise of an
option granted under this Plan or any other stock option plan maintained by the
Company or any Subsidiary unless the holder has beneficially owned such Shares
for at least six months. No Option may be granted pursuant to the Plan or
exercised at anytime when such option, or the granting, exercise or payment
thereof, may result in the violation of any law or governmental order or
regulation. The Plan is intended to comply with Rule 16b-3 under the Exchange
Act. Any provision inconsistent with such Rule shall be inoperative and shall
not affect the validity of the Plan.
Within a reasonable time after the exercise of an Option, the Company
shall cause to be delivered to the Participant a certificate for the Shares
purchased pursuant to the exercise of the Option. If the option shall have been
exercised with respect to less than all of the Shares subject to the Option, the
Company shall also cause to be delivered to the Participant a new Option
certificate in replacement of the certificate surrendered at the time of the
exercise of the Option, indicating the number of Shares with respect to which
the Option remains available for exercise, or the original Option certificate
shall be endorsed to give effect to the partial exercise thereof.
In the event that the holder of an Option which is an incentive stock
option disposes of any Shares purchased pursuant to the exercise of such Option
in a "disqualifying disposition" (within the meaning of Section 421 of the Code)
within two years from the date of grant of such Option or one year from the date
of exercise of such Option, such holder shall notify the Company of such
disposition.
5
<PAGE> 6
12. Grants of Options to Members of the Committee. Each Director who is
a member of the Committee shall be granted Option on January 1 of each calendar
year, which Option shall be a non-incentive stock option; provided, however,
that such Options shall only be granted to such person if he is a member of the
Committee on the date such Option is to be granted and such Option (or portion
thereof) shall not be granted if, in the opinion of counsel to the Company, the
grant of such an Option (or portion thereof) would be improper. Each such Option
shall entitle such Director to purchase 1,000 Shares at a purchase price per
share equal to the Fair Market Value of a Share on the date of grant. Each such
Option shall have a duration of ten years from the date of grant and shall
become exercisable six months after the date upon which the Option was granted.
Any Option granted pursuant to this Section 12, to the extent unexercised, shall
terminate immediately upon the holder's ceasing to serve as a Director of the
Company, except that the holder shall have until three months following the
cessation of such service to exercise any unexercised Option that he or she
could have exercised on the day on which such service terminated; provided that
such exercise must be accomplished prior to the expiration of the term of such
Option; and provided, further, however, that such three-month period is extended
to one year in the event that the holder's cessation of service is due to
permanent disability (within the meaning of Section 22(e)(3) of the Code), or to
death, in which case the estate or the heirs of the holder may exercise such
Option. Notwithstanding the preceding, if the service of any holder of an Option
granted pursuant to this Section 12 shall be terminated because of the holder's
(a) fraud or intentional misrepresentation, or (b) embezzlement,
misappropriation or conversion of assets or opportunities of the Company or any
Subsidiary, then all such unexercised Options of the holder shall terminate
immediately upon such termination of the holder's service.
Upon the exercise of any Option granted pursuant to this Section 12,
payment of the full purchase price shall be made in cash, by check payable to
the order of the Company, or by delivery to the Company of Shares which shall be
valued at their Fair Market Value on the date of exercise of the Option;
provided, however, that a holder may not use any Shares acquired pursuant to the
exercise of an option granted under this Plan or any other stock option plan
maintained by the Company or any Subsidiary unless the holder has beneficially
owned such Shares for at least six months.
13. Termination of Employment or Service. All or any part of any
Option, to the extent unexercised, shall terminate immediately upon (i) the
cessation or termination for any reason of the Participant's employment by or
consulting arrangements with the Company and all Subsidiaries and (ii) the
Participant's ceasing to serve as a Director of the Company and as a Director of
all Subsidiaries, except that the Participant shall have until the three months
following the cessation of his employment or consulting arrangement with the
Company and Subsidiaries or his service as a Director, and no longer, to
exercise any unexercised Option that such Participant could have exercised on
the day on which such employment, consulting arrangement or service terminated;
provided that such exercise must be accomplished prior to the expiration of the
term of such Option. Notwithstanding the foregoing, if the cessation of
employment, consulting arrangement or service is due to disability (to an extent
and in a manner as shall be determined in each case by the Committee in its sole
discretion) or to death, the Option holder or the representative of the estate
or
6
<PAGE> 7
the heirs of a deceased Participant shall have the privilege of exercising the
Options which are unexercised at the time of such retirement or of such
disability or death; provided, however, that such exercise must be accomplished
prior to the expiration of the term of such Option and within one year of the
Participant's disability or death, as the case may be. If the employment,
consulting arrangements or service of any Participant with the Company or a
Subsidiary shall be terminated because of the Participant's violation of the
duties of such employment, consulting arrangement or service with the Company or
a Subsidiary as he or she may from time to time have, the existence of which
violation shall be determined by the Committee in its sole discretion (which
determination by the Committee shall be conclusive) all unexercised Options of
such Participant shall terminate immediately upon such termination of such
Participant's employment, consulting arrangement or service with the Company and
all Subsidiaries, and a Participant whose employment, consulting arrangement or
service with the Company and Subsidiaries is so terminated, shall have no right
after such termination to exercise any unexercised Option he or she might have
exercised prior to the termination of his or her employment, consulting
arrangement or service with the Company and Subsidiaries.
Nothing contained herein or in the Option certificate shall be
construed to confer on any employee, Director (including an Independent
Director), or consultant any right to be continued in the employ of the Company
or any Subsidiary, to continue serving as a Director of the Company or of a
Subsidiary or as a consultant to the Company or any Subsidiary, as the case may
be, or derogate from any right of the Company or any Subsidiary to request the
resignation of or discharge such employee, Director or consultant (without or
with pay), at any time, with or without cause.
14. Adjustment of Optioned Shares. If prior to the complete exercise of
any Option there shall be declared and paid a distribution payable in Shares
upon the Shares of the Company or if the Shares of the Company shall be split
up, converted, exchanged, reclassified, or in any way substituted for, the
Option, to the extent that it has not been exercise, shall entitle the holder
thereof upon the future exercise of the Option to such number and kind of
securities or other property subject to the terms of the Option to which such
holder would have been entitled had such holder actually owned the Shares
subject to the unexercised portion of the Option at the time of the occurrence
of such stock dividend, split-up, conversion, exchange, reclassification or
substitution; and the aggregate purchase price upon the future exercise of the
Option shall be the same as if the originally optioned Shares were being
purchased thereunder. Any fractional shares or securities payable upon the
exercise of the option as a result of such adjustment shall be payable in cash
based upon the Fair Market Value of such shares or securities at the time of
such exercise. If any such event should occur, the number of Shares with respect
to which options remain to be issued, or with respect to which Options may be
reissued, shall be adjusted in a similar manner.
Notwithstanding any other provision of the Plan, in the event
of a recapitalization, merger, consolidation, rights offering, separation,
reorganization or liquidation, or any other change in the corporate structure or
outstanding Shares, the Committee may make such equitable adjustments to the
number of Shares and the class of shares available hereunder or to any
outstanding Options as it shall deem appropriate to prevent dilution or
enlargement of rights.
15. Issuance of Shares and Compliance with Securities Act. The Company
may postpone the issuance and delivery of Shares upon any exercise of an option
until (a) the admission of such Shares to listing
7
<PAGE> 8
on any stock exchange on which Shares of the Company of the same class are then
listed, and (b) the completion of such registration or other qualification of
such Shares under any State or Federal law, rule or regulation as the Company
shall determine to be necessary or advisable. Any Participant exercising an
Option shall make such representations and furnish such information as may, in
the opinion of counsel for the Company, be appropriate to permit the Company, in
the light of the then existence or non-existence with respect to such Shares of
an effective registration statement under the Securities Act, to issue the
Shares in compliance with the provisions of the Securities Act or any comparable
act. The Company shall have the right, in its sole discretion, to legend any
Shares which may be issued pursuant to the exercise of an option, or may issue
stop transfer orders in respect thereof.
16. Income Tax Withholding. If the Company or a Subsidiary shall be
required to withhold any amounts by reason of any Federal, State or local tax
rules or regulations in respect of the issuance of Shares pursuant to the
exercise of such Option, the Company or the Subsidiary shall be entitled to
deduct and withhold such amounts from any cash payments to be made to the holder
of such Option. In any event, a holder with respect to whom any such withholding
requirement exists shall make available to the Company or Subsidiary, promptly
when requested by the Company or such Subsidiary, sufficient funds to meet the
requirements of such withholding; and the Company or Subsidiary shall be
entitled to take and authorize such steps as it may deem advisable in order to
have such funds made available to the Company or Subsidiary out of any funds or
property due or to become due to the holder of such Option.
17. Administration and Amendment of the Plan. Except as hereinafter
provided, the Board or the Committee may amend or terminate the Plan and any
Options at any time or from time to time; provided, however, that any amendment
that would (i) increase the maximum number of Shares as to which Options may be
granted under the Plan or (ii) materially modify the requirements as to
eligibility for participation in the Plan, shall be subject to approval by the
stockholders of the Company. No amendment may adversely affect the rights of any
Participant under an Option granted prior to such amendment, unless the
Participant consents thereto. In addition, no amendment may be made that would
result in the disqualification of any incentive stock option as an "incentive
stock option" within the meaning of Section 422 of the Code.
Determinations of the Committee as to any question which may arise with
respect to the interpretation of the provisions of the Plan and Options shall be
final. The Committee may authorize and establish such rules, regulations and
revisions thereof not inconsistent with the provisions of the Plan, as it may
deem advisable to make the Plan and Options effective or provide for their
administration, and may take such other action with regard to the Plan and
Options as it shall deem desirable to effectuate their purpose.
18. Effective Date of the Plan. This Plan is conditioned upon its
approval by the stockholders of the Company on or before _________ __, 1995.
19. Final Issuance Date. No Option shall be granted under the Plan
after ________, 2005.
8
