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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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.
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<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996 and 1995
(with Independent Auditors' Report Thereon)
<PAGE>
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>
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>
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>
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>
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>
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>
(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>
(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>
(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>
<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>
(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>
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>
(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>
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>
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>
(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>
<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>
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>
(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>
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>
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>
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>
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>
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>
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
$10,000,000
CREDIT AGREEMENT
February 26, 1997
between
DISC GRAPHICS, INC.
and
KEYBANK NATIONAL ASSOCIATION
<PAGE>
CREDIT AGREEMENT (the "Agreement") dated February 26, 1997 between Disc
Graphics, Inc., 10 Gilpin Avenue, Hauppauge, New York 11788, a Delaware
corporation ("Borrower") and KeyBank National Association, 1377 Motor Parkway,
Islandia, New York 11788, a national banking association (the "Bank").
Borrower desires that the Bank extend credit to it as provided herein, and
the Bank is willing to do so. Accordingly, Borrower and the Bank agree as
follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS.
Section 1.01. Definitions. As used in this Agreement, the following terms
have the following meanings:
"Acquisition" means any transaction pursuant to which Borrower or any of
its Subsidiaries (a) acquires equity securities (or warrants, options or other
rights to acquire such securities) of any corporation, partnership, limited
liability company or other business organization, or any entity which is not
then a Subsidiary of Borrower, pursuant to a solicitation of tenders therefor,
or in one or more negotiated block, market or other transactions not involving a
tender offer, or a combination of any of the foregoing, or (b) makes any entity
not then a Subsidiary of Borrower a Subsidiary of Borrower, or causes any such
entity to be merged into or purchased by Borrower or any of its Subsidiaries, in
any case pursuant to a merger, purchase of assets or any reorganization
providing for the delivery or issuance to the holders of such entity's then
outstanding securities, in exchange for such securities, of cash or securities
of Borrower or any of its Subsidiaries, or a combination thereof, or (c)
purchases all or substantially all of the business or assets of any entity.
"Additional Costs" shall have the meaning given to that term in Section
4.01 hereof.
"Affiliate" means, with respect to any Person, any Person (a) that directly
or indirectly controls, or is controlled by, or is under common control with,
such Person, (b) that directly or indirectly beneficially owns or holds 5% or
more of any class of voting stock of such Person, (c) 5% or more of the voting
stock of which is directly or indirectly beneficially owned or held by such
Person, (d) which is a partnership or limited liability company in which such
Person is respectively a general partner or manager or (e) who is among such
Person's officers, directors joint venturers, managers or partners. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract, or otherwise.
"Aggregate Acquisition Outstandings" means, at a particular time, the
aggregate maximum amount then outstanding to be drawn to finance Acquisitions.
<PAGE>
"Aggregate Outstandings" means, at a particular time, the sum of the
Aggregate Acquisition Outstandings at such time plus the aggregate outstanding
principal balance of all other Revolving Credit Loans.
"Agreement" means this Credit Agreement, as amended or supplemented from
time to time.
"Amortization" means amortization as determined in accordance with GAAP.
"Bank" means KeyBank National Association and its successors and assigns.
"Banking Day" means any day on which commercial banks are not authorized or
required to close in New York State, and whenever such day relates to a LIBOR
Loan or notice with respect to any LIBOR Loan, a day on which dealings in dollar
deposits are also carried out in the London interbank market.
"Base Rate" means that rate of interest from time to time determined or
announced by the Bank at its Principal Office from time to time as its base
lending rate. The Base Rate is not necessarily the lowest rate of interest
charged by the Bank on loans or other credit relationships.
"Base Rate Loans" mean any Revolving Credit Loan when and to the extent the
interest rate for such Revolving Credit Loan is determined in relation to the
Base Rate.
"Borrowing Base" means at any time an amount equal to the sum of (i) 85% of
Borrower's Eligible Receivables and (ii), subject to the limitation described in
the definition of Eligible Inventory, up to 70% of Borrower's Eligible
Inventory.
"Borrowing Base Certificate" means a certificate signed by an officer of
Borrower in the form of Exhibit D annexed with such changes as the Bank may
require from time to time.
"Capital Lease" means any lease which is required to be capitalized on the
balance sheet of the lessee in accordance with GAAP.
"Closing Date" means the date this Agreement has been executed by Borrower
and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral" means all personal property of Borrower and its Subsidiaries,
whether now existing or hereafter arising, which is subject or which is to be
subject to the Liens granted by the Security Agreement.
"Commitment Fee" means the fee described in Section 3.01.
<PAGE>
"Current Assets" means, at a particular date, all amounts which would, in
accordance with GAAP, be included under current assets on a consolidated balance
sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, at a particular date, all amounts which would,
in accordance with GAAP, be included under current liabilities on a consolidated
balance sheet of Borrower and its Subsidiaries as at such date including,
without limitation, (a) all obligations payable on demand or within one year
after the date in which the determination is made, and (b) installment and
sinking fund payments required to be made within one year after the date on
which determination is made, but excluding all such liabilities or obligations
which are renewable or extendable at the option of Borrower to a date more than
one year from the date of determination.
"Current Debt" means, on the date of determination with respect to any
entity, (a) that portion of such entity's long term Debt (including Capital
Leases) that is due and payable within the next 12 months, including the
outstanding principal balance of all Loans and (b) all Debt of such entity that
is due within 12 months of the date of determination.
"Current Ratio" means the ratio of (a) Current Assets of Borrower and its
Subsidiaries, on a consolidated basis to (b) Current Liabilities of Borrower and
its Subsidiaries on a consolidated basis.
"Debt" means, with respect to any Person (a) indebtedness of such Person
for borrowed money, (b) indebtedness for the deferred purchase price of property
or services, (c) the face amount of any outstanding letters of credit issued for
the account of such Person, (d) obligations arising under acceptance facilities,
(e) guaranties, endorsements (other than for collection in the ordinary course
of business) and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss, (f) obligations secured by any Lien on property of such
Person, (g) obligations of such Person as lessee under Capital Leases and (h)
indebtedness of such Person evidenced by a note, bond, indenture or similar
instrument.
"Debt Coverage Ratio" means (a) the consolidated EBITDA of Borrower and its
Subsidiaries, minus any cash Dividends paid or declared to be paid to
shareholders of Borrower during such period, (b) divided by the sum of the
Current Debt and Interest Expense of Borrower and its Subsidiaries all on a
consolidated basis, as determined at the end of each fiscal quarter, based upon
Borrower's financial statements delivered in accordance with Section 8.08 for
the period of 12 months preceding the date of determination.
"Default" means any event which with the giving of notice or lapse of time,
or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and, to the
extent permitted by law, any other amount payable by Borrower under this
Agreement or the Note a rate per annum equal to 2% above the rate of interest
otherwise applicable to such Loan or other amount.
<PAGE>
"Depreciation" means depreciation as determined in accordance with GAAP.
"Dividends" means, for any period, dividends paid by Borrower or any
Subsidiary during such period.
"EBITDA" means, for any period, the sum of (a) Net Income, (b) income taxes
paid or payable to any government or government instrumentality, (c) all
Interest Expense paid or accrued on any Debt, (d) Depreciation and (e)
Amortization during such period.
"Eligible Inventory" shall mean the gross amount of Borrower's "rolled
inventory" located in the United States of America, consisting of unopened
paper, card stock and other paper stock, with all original packaging and
wrappings intact, less any (a) damaged obsolete or unsalable goods, (b) goods to
be returned to Borrower's suppliers, (c) goods in transit to Borrower, (d)
rental or consigned inventory, (e) inventory located at facilities where the
Bank has not been granted a perfected security interest and (f) inventory
subject to Borrower's obsolescence reserve in accordance with GAAP. If any
inventory is moved to a location where, under applicable law, the Bank's
security interest therein becomes unperfected as a result, provided it meets the
other requirements set forth in this definition, such inventory shall become
Eligible Inventory 91 days after the date on which the Bank's security interests
are perfected under applicable law. The maximum value of Eligible Inventory
included in the Borrowing Base shall be $2,142,850.
"Eligible Receivables" shall mean the gross amount of Borrower's accounts
receivable, arising out of sales in the ordinary course of Borrower's business,
which are not in dispute or subject to credit, allowance, defense, offset,
counterclaim or adjustment (other than any discount allowed for prompt payment)
and for which records are maintained at a location of Borrower in the United
States, excluding (a) intercompany accounts or other amounts due from any
Affiliate of Borrower, (b) credit balances over 120 days from invoice date, (c)
notes receivable, from customers, (d) sales tax and any separately billed or
invoiced freight charges, (e) government accounts, (f) deposits or prepayments,
(g) foreign accounts and (h) amounts billed for goods not yet shipped to
customers. Any receivables shall be ineligible if the account debtor for such
receivables has filed and there is pending a case for bankruptcy, reorganization
or other relief under the federal bankruptcy code or any similar state or other
laws, if any such case has been filed and is pending against such account
debtor, or if such account debtor has made and there is pending a general
assignment for the benefit of creditors, or if the account debtor suspended
business operation, becomes insolvent or has suffered or is suffering a receiver
or a trustee to be appointed for all or a significant portion of its assets or
affairs.
"Environmental Laws" means (i) the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), (ii) the Resource Conservation and
Recovery Act ("RCRA"), (iii) the Federal Water Pollution Control Act, (iv) the
<PAGE>
Clean Air Act, (v) the Toxic Substances Control Act, (vi) the Safe Drinking
Water Act, (vii) the Occupational Safety and Health Act of 1970, and (viii) the
New York State Environmental Conservation Law ("ECL"), Articles 1 through 71,
(ix) the Hazardous Material Transportation Act, and (x) any so-called federal,
state or local "Superfund" or "Superlien" laws and (b) any and all other laws,
rules or regulations, relating to or imposing liability, including without
limitation (i) strict liability, (ii) standards of conduct concerning hazardous
materials, (iii) protection of the environment (including, without limitation,
air, surface water, ground water, or soil), including, without limitation, any
of the same relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as Borrower or is under common control (within the
meaning of Section 414(c) of the Code) with Borrower.
"Event of Default" has the meaning given such term in Section 11.01.
"Facility Fee" means the fee described in Section 2.09 hereof.
"Forfeiture Proceeding" means the commencement of any prejudgment action or
proceeding affecting Borrower or any of its Subsidiaries pursuant to any
statute, rule or regulation which permits any governmental agency or
instrumentality to obtain a prejudgment seizure or forfeiture of any of their
property.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, applied on a basis consistent with
those used in the preparation of the financial statements referred to in Section
7.05.
"Guaranty" means the Guaranty in the form of Exhibit B to be executed by
each of the Guarantors, secured by a Security Agreement.
"Guarantors" means Four Seasons Litho, Inc. and Disc Graphics Label, Inc.,
both Subsidiaries of Borrower and each a party to the Guaranty. Guarantors shall
include each future Subsidiary which is required to become a party to the
Guaranty in accordance with Section 9.10 hereof.
"Hazardous Substance" means any substance, waste or material regulated
under by any Environmental Law, and any substance which, due to its toxicity or
reactivity (as determined by any court, governmental or regulatory authority or
agency having jurisdiction or interpretative power thereon), poses a threat to
human health or the environment, including, but not limited to, all materials,
wastes, substances, pollutants and contaminants from time to time defined or
classified as such under any Environmental Law.
<PAGE>
"Interest Expense" means interest expense of Borrower and its Subsidiaries
on a consolidated basis for a particular period as reflected in its financial
statements and calculated in accordance with GAAP.
"Interest Period" means the period commencing on the date a LIBOR Loan is
made (or, with respect to a LIBOR Loan that represents the continuation of a
previous LIBOR Loan, the day immediately following the last day of the Interest
Period of such previous LIBOR Loan), and ending, as Borrower may select on the
30th, 60th or 90th day thereafter, provided that no Interest Period shall extend
beyond the Revolving Credit Termination Date.
"LIBOR" means, for any LIBOR Loan, the rate per annum (rounded upwards if
necessary to the nearest 1/16 of 1%) quoted by the Bank two Banking Days prior
to the first day of the Interest Period for such Revolving Credit Loan for the
offering to leading banks in the London interbank market of U.S. dollar deposits
in immediately available funds, for a period, and in an amount, comparable to
such Interest Period and principal amount of the LIBOR Loan which shall be
outstanding during such Interest Period.
"LIBOR Loan" means any Revolving Credit Loan when and to the extent the
interest rate therefor is determined on the basis of LIBOR.
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, charge, conditional sale, title
retention agreement, Capital Lease or other encumbrance or similar right of
others, or any agreement to give any of the foregoing.
"Loan" means any loan made by the Bank pursuant to Section 2.01 or 3.01
hereof.
"Loan Documents" means this Agreement, the Notes, the Guaranty, the
Security Agreements, the Borrowing Base Certificate, the Notice of Borrowing and
all other documents or instruments executed in connection herewith or therewith.
"Margin" means (a) if Borrower's Debt Coverage Ratio is equal to or less
than 1.30:1.0, 175 basis points per annum, (b) if Borrower's Debt Coverage Ratio
is greater than 1.30:1.0 but less than or equal to 2.25:1.0, 150 basis points
per annum, and (c) if Borrower's Debt Coverage Ratio is greater than 2.25:1.0,
125 basis points per annum.
"Multiemployer Plan" means a Plan defined as such in Section 4001(a)(3) of
ERISA to which contributions have been made by Borrower or any ERISA affiliate
and which is covered by Title IV of ERISA.
"Net Income" means, with respect to any entity for any period, such
entity's net income after taxes for such period as reflected on such entity's
financial statements.
<PAGE>
"Notes" mean the Revolving Credit Note and the Term Note.
"Notice of Borrowing" means the document signed by an officer of Borrower
in the form annexed as Exhibit F.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, limited liability company, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Plan" means any employee benefit or other plan established or maintained,
or to which contributions have been made, by Borrower or any ERISA Affiliate and
which is covered by Title IV of ERISA or to which Section 412 of the Code
applies provided that such term shall not include plans terminated prior to the
date hereof.
"Principal Office" means the principal office of the Bank, presently
located at 66 South Pearl Street, Albany, New York.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as the same may be amended or supplemented from time to time.
"Regulatory Change" means any change after the date of this Agreement in
federal, state, municipal or foreign laws or regulations (including Regulation
D) or the adoption or making after such date of any interpretations, directives
or requests applying to a class of banks including the Bank of any federal,
state, municipal or foreign laws or regulations (whether or not having the force
of law) by any court or governmental or monetary authority charged with the
interpretation or administration thereof.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA as to which events the PBGC by regulation has not waived the requirement
of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence
of such event, provided that a failure to meet the minimum funding standard of
Section 412 of the Code or Section 302 of ERISA shall be a Reportable Event
regardless of any waivers given under Section 412(d) of the Code.
"Revolving Credit Commitment" means the obligation of the Bank to extend
revolving credit to Borrower in accordance with the terms hereof in the
aggregate principal amount not to exceed the lesser of (a) $10,000,000, as such
amount may be reduced or otherwise modified from time to time in accordance with
the terms hereof or (b) the Borrowing Base.
"Revolving Credit Facility" means the Revolving Credit Facility provided
for in Article II hereof.
<PAGE>
"Revolving Credit Loans" mean any Loan made by the Bank pursuant to Section
2.01 hereof.
"Revolving Credit Note" means a promissory note of Borrower in the form of
Exhibit A-1 hereto evidencing the Revolving Credit Loans made by the Bank
hereunder.
"Revolving Credit Termination Date" means the earlier of (i) the date on
which the Revolving Credit Loan is paid in full and the Revolving Credit
Commitments shall terminate hereunder and the obligations of Borrower in
connection therewith have been satisfied or (ii) the date three years from the
date hereof unless such date is not a Banking Day, then the next succeeding
Banking Day.
"Security Agreement" means, with respect to Borrower, the Security
Agreement in substantially the form of Exhibit C-I, and with respect to each
Subsidiary, in the form of Exhibit C-2, to be delivered by Borrower under the
terms of this Agreement.
"Solvent" means, when used with respect to any Person on a particular date,
that on such date (a) the fair saleable value of its assets is in excess of the
total amount of its liabilities, including, without limitation, the reasonably
expected amount of such Person's obligations with respect to contingent
liabilities, (b) the present fair saleable value of the assets of such Person is
not less than the amount that will be required to pay the probable liability of
such Person on its Debts as they become absolute and matured, (c) such Person
does not intend to and does not believe that it will incur Debts or liabilities
beyond such Person's ability to pay as such Debts and liabilities mature and (d)
such Person is not engaged in business or a transaction, for which such Person's
property, would constitute an unreasonably small capital.
"Subsidiary" means, as to any Person, any corporation, partnership, limited
liability company or other business organization or entity of which at least a
majority of the securities or other ownership interests having ordinary voting
power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by such Person.
"Tangible Net Worth" means, at any particular date, the amount of excess of
Total Assets over Total Liabilities which would, in accordance with GAAP, be
included under shareholders' equity on a consolidated balance sheet of Borrower
and its Subsidiaries as at such date, excluding, however, from the determination
of Total Assets all intangible assets, including, without limitation,
organizational expenses, patents, trademarks, copyrights, goodwill, covenants
not to compete, research and developmental costs, training costs, treasury
stock, deferred charges and any loans receivable from officers or Affiliates.
"Term Loan" means the Loan to Borrower pursuant to Section 3.01.
"Term Loan Maturity Date" means February 25, 2004.
<PAGE>
"Term Loan Note" means the promissory note of Borrower in the form of
Exhibit A-2 hereto evidencing a Term Loan made by the Bank hereunder.
"Total Assets" means, at a particular date, all amounts which would, in
accordance with GAAP, be included under assets on a consolidated balance sheet
of Borrower and its Subsidiaries as at such date.
"Total Liabilities" means, at a particular date, all amounts which would,
in accordance with GAAP, be included under liabilities on a consolidated balance
sheet of Borrower and its Subsidiaries as at such date.
"Unfunded Vested Liabilities" means, with respect to any Plan, the amount
(if any) by which the present value of all vested benefits under the Plan
exceeds the fair market value of all Plan assets allocable to such benefits, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of Borrower or
any ERISA Affiliate to the PBGC or the Plan under Title IV of ERISA.
Section 1.02. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
ARTICLE 2. REVOLVING CREDIT FACILITY
Section 2.01. Revolving Credit Loans.
(a) Subject to the terms and conditions of this Agreement, the Bank agrees
to make Revolving Credit Loans to Borrower from time to time from and including
the date hereof to but excluding the Revolving Credit Termination Date up to but
not exceeding at any one time outstanding the amount of its Revolving Credit
Commitment; provided, that no Revolving Credit Loan shall be made if, after
giving effect to such Revolving Credit Loan, the Aggregate Outstandings at the
time would exceed the Revolving Credit Commitment in effect on such date. The
Revolving Credit Loans may be Base Rate Loans or LIBOR Loans; provided, however,
that during the occurrence and continuance of an Event of Default, the Bank
shall have no obligation to make any Revolving Credit Loans. Subject to the
foregoing limits, Borrower may borrow, repay and reborrow, on or after the date
hereof and prior to the Revolving Credit Termination Date, all or a portion of
the Revolving Credit Commitment hereunder.
(b) If at any time for any reason the Aggregate Outstandings exceed the
amount of the Revolving Credit Commitment, Borrower shall pay the amount of such
excess to the Bank immediately on demand.
Section 2.02. The Revolving Credit Note. The Revolving Credit Loans shall
be evidenced by a single Revolving Credit Note in favor of the Bank
substantially in the form of Exhibit A-1 with appropriate insertions, duly
<PAGE>
executed and completed by Borrower. The Bank is authorized to record the date,
type and amount of each Revolving Credit Loan, the date and amount of each
payment or prepayment of principal thereof, the date of each interest rate
conversion pursuant to Section 2.05 and the principal amount subject thereto and
the Interest Period and interest rate with respect thereto in its records or on
the schedules annexed to and constituting a part of the Revolving Credit Note,
and, absent manifest error, any such recordation shall constitute conclusive
evidence of the information so recorded; provided that the failure to make any
such recordation shall not in any way affect Borrower's obligation to repay the
Revolving Credit Loans. The Revolving Credit Note shall (a) be dated the date
hereof, (b) mature on the Revolving Credit Termination Date and (c) bear
interest from and including the date hereof on the unpaid principal amount
thereof from time to time outstanding as provided herein.
Section 2.03. Use of Proceeds.
(a) Borrower shall use the proceeds of the Revolving Credit Loans to repay
existing bank indebtedness, for general working capital purposes, and subject to
the sublimit described in Section 2.08, to finance Acquisitions. No part of the
proceeds of any of the Loans will be used for any purpose which violates the
provisions of Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System as in effect on the date of making such Loans.
(b) Borrower shall indemnify the Bank and hold it harmless from and against
any and all liabilities, losses, damages, costs and expenses (including, without
limitation, the reasonable fees and disbursements of counsel for the Bank in
connection with any investigative, administrative or judicial proceeding,
whether or not the Bank is designated a party thereto) which may be incurred by
the Bank, relating to or arising out of this Agreement or any actual or proposed
use of proceeds of Loans hereunder; provided, that the Bank shall not have the
right to be indemnified hereunder for its own gross negligence or willful
misconduct.
Section 2.04. Borrowing Procedures for Revolving Credit Loans. Borrower may
request a borrowing under the Revolving Credit Commitment as provided in Section
4.01. Not later than 2:00 p.m. New York City time on the date of such borrowing
as stated in the Notice of Borrowing, subject to the conditions of this
Agreement, the Bank shall make available to Borrower, in immediately available
funds, the amount of such Revolving Credit Loan by crediting a designated
account of Borrower maintained with the Bank.
Section 2.05. Interest on Revolving Credit Loans.
(a) Base Rate Loans. Borrower shall pay interest on the outstanding and
unpaid principal amount of each Base Rate Loan made under this Agreement at a
fluctuating rate per annum equal to the Base Rate from time to time in effect.
Each change in the interest rate shall take effect simultaneously with the
corresponding change in the Base Rate. Borrower shall pay interest on Base Rate
<PAGE>
Loans in arrears on the first day of each month and on the Revolving Credit
Termination Date, calculated on the basis of the actual number of days elapsed
divided by a 360 day year. Any principal amount not paid when due (at maturity,
on acceleration, or otherwise) shall bear interest thereafter until paid at the
Default Rate.
(b) LIBOR Loans. Borrower shall pay interest on the outstanding principal
amount of each LIBOR Loan made under this Agreement at a fixed rate equal to
LIBOR plus the applicable Margin. Borrower shall pay interest on LIBOR Loans
calculated on the basis of the actual number of days elapsed divided by a 360
day year. Any principal amount not paid when due (at maturity or acceleration or
otherwise) shall bear interest thereafter until paid at the Default Rate.
Accrued interest on LIBOR Loans shall be due and payable in arrears upon any
payment of principal and on the last day of the Interest Period with respect
thereto; provided that, after an Event of Default, interest shall accrue at the
Default Rate and shall be due and payable from time to time on demand of the
Bank. Any principal amount of LIBOR Loans not paid when due (at maturity, on
acceleration, or otherwise) shall bear interest thereafter until paid at such
Default Rate.
(c) Adjustments to Margin. The applicable Margin shall be adjusted for all
LIBOR Loans based upon Borrower's Debt Coverage Ratio as reflected in its
financial statements delivered to the Bank from time to time as required
hereunder. Once determined, the Margin shall remain in effect until the fifth
Banking Day after the Bank's receipt on or before the dates set forth in Section
8.08 of the relevant financial statements, whereupon if appropriate based upon
the then existing Debt Coverage Ratio, the Margin shall adjust for all new LIBOR
Loans and for any continuation of an existing LIBOR Loan at the end of an
Interest Period. If Borrower delivers its annual audited statements more than 90
days after the end of its fiscal year and if the Debt Coverage Ratio as reported
in such financial statements is lower than the Debt Coverage Ratio as reported
in Borrower's quarterly financial statements for the third quarter of such
fiscal year with the result that a higher Margin would apply, Borrower shall pay
the Bank, within ten Banking Days of demand, an amount equal to the excess of
the interest that would have been paid at such higher rate over the interest
actually paid during the relevant period between March 30th and the date the
annual statements are delivered. In no event shall Borrower receive a refund of
interest paid to the Bank under the provision of this Section.
(d) Interest Periods for LIBOR Loans. In the case of each LIBOR Loan, Borr-
ower shall select an Interest Period of any duration in accordance with the
definition of Interest Period in Section 1.01, subject to the following
limitations: (a) no Interest Period shall have a duration less than one month,
and if any such proposed Interest Period would otherwise be for a shorter
period, such Interest Period shall not be available and (b) if an Interest
Period would end on a day which is not a Banking Day, such Interest Period shall
be extended to the next Banking Day, unless such Banking Day would fall in the
next calendar month in which event such Interest Period shall end on the
immediately preceding Banking Day. Any Interest Period which would otherwise
extend beyond the Revolving Credit Termination Date shall end on the Revolving
Credit Termination Date.
(e) Conversions. Upon the expiration of an Interest Period for any LIBOR
Loan, or any portion thereof, such LIBOR Loan or portion thereof shall be
<PAGE>
automatically converted to a Base Rate Loan except to the extent that such
Revolving Credit Loan shall be repaid hereunder or shall be required to be paid
hereunder or unless Borrower shall have notified the Bank, as provided in
Section 4.01 hereof, of its intention to continue such LIBOR Loan or any portion
thereof as a LIBOR Loan. Subject to the following conditions and to the terms
and conditions of this Agreement, Borrower may convert any Revolving Credit Loan
or portion thereof to a different type of Revolving Credit Loan:
(i) if less than all Revolving Credit Loans at the time outstanding
shall be converted, the notice given by Borrower to the Bank shall specify
the aggregate amount of Revolving Credit Loans in each case to be converted;
(ii) in the case of a conversion of less than all outstanding
Revolving Credit Loans, the aggregate principal amount of Revolving Credit
Loans to be converted shall not be less than $50,000 (and if greater in
integral multiples of $10,000);
(iii) no Revolving Credit Loan may be converted to a LIBOR Loan less
than one month before the Revolving Credit Termination Date;
(iv) a LIBOR Loan may be converted to a Base Rate Loan only on the
last day of an Interest Period; and
(v) no Revolving Credit Loan or portion thereof may be converted to
a LIBOR Loan during the occurrence and continuance of an Event of Default.
Section 2.06. Changes of Commitment. Borrower may reduce or terminate the
amount of unused Revolving Credit Commitment from time to time but not more than
four times during the term of this Agreement or more than once during any
calendar year by giving notice to the Bank of each such reduction or termination
to the Bank as provided in Section 4.01. Any partial reduction shall be in a
minimum aggregate amount of $1,000,000 or, if greater, in integral multiples of
$250,000. Once reduced or terminated, the Revolving Credit Commitment may not be
reinstated.
Section 2.07. Minimum Amounts. Except for borrowings which exhaust the full
remaining amount of the Revolving Credit Commitment, and prepayments (in the
case of Base Rate Loans only) which result in the prepayment of all Loans, each
borrowing and each prepayment of principal shall be at least $50,000, and if
greater, in integral multiples of $10,000.
Section 2.08. The Sublimit. Subject to the terms and conditions hereof, the
Bank agrees to make one or more Revolving Credit Loans to finance Borrower's
Acquisitions, provided that, (a) the Aggregate Acquisition Outstandings shall
not exceed at any time the lesser of (i) $3,000,000 or (ii) 25% of Borrower's
Tangible Net Worth and (b) no Revolving Credit Loan for Acquisitions shall be
permitted if (i) an Event of Default has occurred which continues at such time,
<PAGE>
(ii) after giving effect to such Loan, the Aggregate Outstandings at the time of
such issuance would exceed the Revolving Credit Commitment in effect on such
date or (iii) as a result of such Acquisition or the making of such Loan, an
Event of Default would occur.
Section 2.09. Facility Fee. Borrower shall pay to the Bank a Facility Fee
equal to $5,000 at the Closing Date and on each anniversary of the Closing Date
until the Revolving Credit Termination Date.
Section 2.10. Conversion to Term Loan. On the Revolving Credit Termination
Date, provided there has been no Default or Event of Default, Borrower may
convert all or a part, but not less than $2,000,000 of the outstanding principal
balance of the Revolving Credit Loans to the Term Loan, having the terms and
conditions specified in Article 3.
ARTICLE 3. TERM LOAN.
Section 3.01. Term Loan. If Borrower exercises the option described in
Section 2.10, Borrower shall give the Bank notice three Banking Days prior to
the Revolving Credit Termination Date, and together with such notice, pay the
Bank a Commitment Fee equal to 0.5% of the amount of the Revolving Credit Loans
to be converted to a Term Loan. Subject to the terms and conditions hereof, the
Bank shall make a four year Term Loan to Borrower in the amount of the Aggregate
Outstandings or such lesser amount permitted under Section 2.10 at and effective
as of the Revolving Credit Termination Date.
Section 3.02. The Term Note. The Term Loan shall be evidenced by a single
promissory note of Borrower substantially in the form of Exhibit A-2 hereto,
with appropriate insertions, payable to the order of the Bank and representing
the obligation of Borrower to pay the unpaid principal amount of the Term Loan,
with interest thereon as described herein. The Term Loan Note shall (a) be dated
the Revolving Credit Termination Date, mature in 48 equal consecutive monthly
installments, be payable on the first day of each month commencing on the first
day of the month following the Revolving Credit Termination Date and ending on
the Term Loan Maturity Date, and (c) bear interest for a period from the date
hereof until the Term Maturity Loan Date on the unpaid principal amount thereof
at the applicable rates per annum specified herein. All accrued and unpaid
interest and fees shall be due and payable on the Term Loan Maturity Date.
Section 3.03. Interest on the Term Loans. Borrower shall pay interest on
the outstanding and unpaid principal balance of the Term Loan a fluctuating rate
per annum equal to the Base Rate plus a margin of 0.5%. Each change in the
interest rate shall take effect simultaneously with the corresponding change in
the Base Rate. Interest on the Term Loan shall be calculated on the basis of a
360 day year and shall be paid in arrears on the first day of each month and on
the Term Loan Maturity Date. Any principal amount not paid when due (at
maturity, on acceleration or otherwise) shall bear interest thereafter until
paid at the Default Rate. At Borrower's election made during the period
<PAGE>
beginning on the Revolving Credit Termination Date through two years thereafter,
provided no Default or Event of Default then exists, Borrower may effect a
change in the interest rate on the Term Loan to a fixed rate from the Base Rate
by entering into a Swap Agreement between the Borrower and the Bank, at the rate
established by exchange, through Key Capital Markets, Inc., of the obligation
evidenced by the Term Loan Note for an obligation bearing interest at a fixed
rate having a term that is equivalent to the term of the Term Loan. The rights
and obligations of Borrower and the Bank respecting such exchange shall be set
forth in a Swap Agreement to be executed between them.
ARTICLE 4. GENERAL CREDIT PROVISIONS; FEES AND PAYMENTS.
Section 4.01. Certain Notices. Borrower shall give Notice of Borrowing to
the Bank of each borrowing pursuant to Section 2.04, each prepayment pursuant to
Section 4.02, each conversion or continuation of LIBOR Loans pursuant to Section
2.05 and each reduction or termination of Revolving Credit Commitment pursuant
to Section 2.06. Each such notice shall be irrevocable, and shall be effective
on the date of receipt only if received by the Bank not later than 11:00 a.m.,
New York City time as follows:
(a) In the case of borrowings and prepayments of Base Rate Loans, at least
one Banking Day prior thereto;
(b) In the case of LIBOR Loans, at least three Banking Days prior thereto;
(c) In the case of reductions or termination of the Revolving Credit
Commitment, ten days prior thereto; and
(d) In the case of conversions or continuations of Loans pursuant to
Section 2.05, three Banking Days prior thereto.
Each such notice relating to the borrowing, conversion or prepayment of a
Loan shall specify the Loans to be borrowed, converted or prepaid and the amount
and type of the Loans to be borrowed or prepaid and the date of borrowing,
conversion or prepayment (which shall be a Banking Day). Each such notice of
reduction or termination of the Revolving Credit Commitment shall specify the
amount of the Revolving Credit Commitment to be reduced or terminated.
Section 4.02. Prepayments.
(a) Borrower shall have the right at any time and from time to time to
prepay any Base Rate Loan, in whole or in part, upon at least one Banking Day's
prior written notice to the Bank; provided, however, that each such partial
prepayment of Base Rate Loans shall not be less than $50,000 or if greater, in
amounts which are integral multiples of $10,000. Except as required by paragraph
(b) below or on the last day of an Interest Period with respect thereto,
Borrower shall not be permitted to prepay LIBOR Loans.
(b) On the date of any reduction of the Revolving Credit Commitment as
provided in Section 2.06, Borrower shall pay or prepay so much of the Loans as
shall be necessary in order that the Aggregate Outstandings will not exceed the
Revolving Credit Commitment after giving effect to such reduction. All
prepayments of LIBOR Loans due to a reduction of the Revolving Credit Commitment
shall be subject to Section 5.05.
<PAGE>
(c) All prepayments of principal required by paragraph (b) above shall be
applied first to Base Rate Loans outstanding, and then to LIBOR Loans
outstanding.
(d) All prepayments of principal shall be accompanied by the payment of all
accrued interest on the amount so prepaid and, in the case of LIBOR Loans, by
all amounts required to be paid pursuant to Section 5.05.
Section 4.03. Default Interest. Notwithstanding any other provision of this
Agreement, upon the occurrence and continuance of an Event of Default, each Loan
outstanding hereunder shall bear interest at a rate per annum equal to the
Default Rate.
Section 4.04. Payments Generally. All payments under this Agreement or the
Notes shall be made in immediately available funds not later than 1:00 p.m. New
York City time on the relevant dates specified above at the Bank's office at
1377 Motor Parkway, Islandia, New York 11788.
(a) Any payment made after such time on such due date shall be deemed to
have been made on the next succeeding Banking Day.
(b) Whenever a new Loan is to be made on a date Borrower repays any
principal of an outstanding Loan, the Bank shall apply the proceeds of such new
Loan to the payment of the principal to be repaid and only an amount equal to
the difference between the principal to be borrowed and the principal to be
repaid shall be made available by the Bank to Borrower as provided in Section
2.04 or paid by Borrower to the Bank pursuant to this Section 4.04, as the case
may be.
(c) The Bank may (but shall not be obligated to) debit the amount of any
such payment which is not made by the time specified in Section 4.04(a) to any
ordinary deposit account of Borrower with the Bank. Borrower shall, at the time
of making each payment under this Agreement or the Note, specify to the Bank the
principal or other amount payable by Borrower under this Agreement. If Borrower
fails to so specify, the payment will be applied first to interest and then to
principal, unless a Default or Event of Default has occurred and is continuing,
in which case the Bank may apply such payment as it may elect in its sole
discretion. If the due date of any payment under this Agreement or the Note
would otherwise fall on a day which is not a Banking Day, such date shall be
extended to the next succeeding Banking Day and interest shall be payable for
any principal so extended for the period of such extension.
<PAGE>
ARTICLE 5. YIELD PROTECTION; ETC.
Section 5.01. Additional Costs.
(a) Borrower shall pay directly to the Bank from time to time on demand
such amounts as the Bank may determine (in the manner set forth in Section
5.01(d)) to be necessary to compensate it for any increases in costs
attributable to its making or maintaining any LIBOR Loans under this Agreement
or its Note or its obligation to make any LIBOR Loans hereunder or any reduction
in any amount receivable by the Bank hereunder in respect of any LIBOR Loans or
such obligation or capital in respect of this Agreement (such increases in costs
and reductions in amounts receivable being herein called "Additional Costs"),
resulting from any Regulatory Change which: (i) changes the basis of taxation of
any amounts payable to the Bank under this Agreement or the Revolving Credit
Note in respect of any of such LIBOR Loans (other than taxes imposed on the
overall net income of the Bank for any LIBOR Loans by the jurisdiction in which
the Bank has its principal office); or (ii) imposes or modifies any reserve,
special deposit, deposit insurance or assessment, minimum capital, capital ratio
or similar requirements relating to any extensions of credit or other assets of,
or any deposits with or other liabilities of, the Bank; or (iii) imposes any
other condition affecting this Agreement or the Note (or any of such extensions
of credit or liabilities). The Bank will notify Borrower of any event occurring
after the date of this Agreement which will entitle the Bank to compensation
pursuant to this Section as promptly as practicable after it obtains knowledge
thereof by furnishing Borrower a written statement describing the Additional
Costs entitling it to compensation hereunder and the Bank's method of allocating
to Borrower such Additional Costs. If the Bank requests compensation from
Borrower under this Section or under Section 5.01(c), Borrower may suspend the
obligation of the Bank to make Loans of the type with respect to which such
compensation is requested.
(b) Without limiting the effect of the foregoing provisions of this Section
if by reason of any Regulatory Change, the Bank either (i) incurs Additional
Costs based on or measured by the excess above a specified level of a category
of deposits or other liabilities of the Bank which includes deposits by
reference to which the interest rate on LIBOR Loans is determined as provided in
this Agreement or a category of extensions of credit or other assets of the Bank
which includes LIBOR Loans or (ii) becomes subject to restrictions on the amount
of such a category of liabilities or assets which it may hold, then, if the Bank
so elects by notice to Borrower, the obligation of the Bank to make Loans of
such type hereunder shall be suspended until the date such Regulatory Change
ceases to be in effect.
(c) Without limiting the effect of the foregoing provisions of this
Section, Borrower shall pay directly to the Bank from time to time on request
such amounts as the Bank may determine (in the manner set forth in Section
5.01(d)) to be necessary to compensate the Bank for any Additional Costs which
are attributable to the maintenance by it or any of its affiliates (pursuant to
any Regulatory Change) of capital in respect of its Loans hereunder or its
obligation to make Loans hereunder (such compensation to include, without
limitation, an amount equal to any reduction in return on assets or equity of
<PAGE>
the Bank to a level below that which it would have achieved but for such
Regulatory Change). The Bank will notify Borrower if it is entitled to
compensation pursuant to this Section as promptly as practicable after it
obtains knowledge thereof by furnishing Borrower with a written statement
describing the Additional Costs entitling it to compensation hereunder and the
Bank's method of allocating to Borrower such Additional Costs.
(d) Reasonable determinations and allocations by the Bank for purposes of
the effect of any Regulatory Change pursuant to Sections 5.01(a), (b) or (c) on
its costs of making or maintaining Loans or its obligation to make Loans, or on
amounts receivable by, or the rate of return to, it in respect of Loans or such
obligation, and of the additional amounts required to compensate the Bank, shall
be conclusive absent demonstrated error.
(e) Any amounts the Bank receives pursuant to the foregoing provisions of
this Section 5.01 shall not be duplicative of compensation payable to the Bank
under Section 5.05.
Section 5.02. Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, if:
(a) the Bank determines (which determination shall be conclusive absent
demonstrated error) that quotations of interest rates for the relevant deposits
referred to in the definition of "LIBOR" in Section 1.01 are not being provided
in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for any type of LIBOR Loans as provided in this
Agreement; or
(b) the Bank determines (which determination shall be conclusive absent
demonstrated error) that the relevant rates of interest referred to in the
definition of LIBOR in Section 1.01 upon the basis of which the rate of interest
for any type of LIBOR Loans is to be determined do not adequately cover the cost
to the Bank of making or maintaining such Loans; then the Bank shall give
Borrower prompt notice thereof, and so long as such condition remains in effect,
the obligations of the Bank to make LIBOR Loans shall be suspended (in which
case the provisions of Section 5.04 shall be applicable).
Section 5.03. Illegality. Notwithstanding any other provision in this
Agreement, if it becomes unlawful for the Bank to honor its obligation to make
or maintain LIBOR Loans hereunder, the Bank shall promptly notify Borrower and
the Bank's obligation to make or maintain LIBOR Loans hereunder shall be
suspended until such time as the Bank may again make and maintain such affected
Loans (in which case the provisions of Section 5.04 shall be applicable).
Section 5.04. Conversion to Base Rate Loans. If the obligations of the Bank
to make LIBOR Loans shall be suspended pursuant to any of the foregoing Sections
all Loans which would otherwise be made by the Bank as LIBOR Loans shall be made
instead as Base Rate Loans and, if an event referred to in Section 5.01(b) or
5.03 has occurred and the Bank so requests by notice to Borrower, all LIBOR
Loans of the Bank then outstanding shall be automatically converted into Base
<PAGE>
Rate Loans on the date specified by the Bank in such notice, and, to the extent
that LIBOR Loans are so made as (or converted into) Base Rate Loans, all
payments of principal which would otherwise be applied to the Bank's LIBOR Loans
shall be applied instead to its Base Rate Loans. If any LIBOR Loan is converted
to a Base Rate Loan pursuant to this Section prior to the last day of the
Interest Period with respect to such LIBOR Loan, Borrower shall pay to the Bank
all amounts required to be paid pursuant to Section 5.05 hereof.
Section 5.05. Certain Compensation.
(a) Borrower shall pay to the Bank such reasonable amount or amounts as
shall be sufficient (in the reasonable opinion of the Bank) to compensate it for
any loss, cost or expense which the Bank determines is attributable to:
(i) Borrower's prepayment of a LIBOR Loan (whether by reason
of the mandatory or voluntary prepayment provisions of this Agreement or
otherwise) or failure to pay principal or interest on a LIBOR Loan when due; or
(ii) Borrower's failure to borrow, convert into or continue a LIBOR
Loan on the date specified therefor in the relevant notice given under Section
4.01; or
(iii) Borrower's failure to prepay a LIBOR Loan on the date
specified therefor in the relevant notice under Section 4.02.
(b) A reasonable determination by the Bank of amounts payable pursuant to
this Section shall be conclusive absent manifest error. In the case of
prepayments of LIBOR Loans, Borrower shall pay to the Bank a prepayment premium
equal to any costs, loss or expense that it may sustain or incur as a result of
Borrower's prepaying the LIBOR Loan, including (but not limited to) the Bank's
loss of anticipated interest on such LIBOR Loan at the applicable interest rate,
or any interest or other charge payable by the Bank to others who provided funds
to the Bank to enable it to make or maintain such LIBOR Loan. In addition,
Borrower shall reimburse the Bank for all administrative costs incurred by the
Bank as a result of such prepayment.
ARTICLE 6. CONDITIONS PRECEDENT.
Section 6.01. Conditions to the Initial Borrowings Hereunder. The
obligations of the Bank to make the Loans constituting the initial borrowing
under 3.01, or the Term Loan under 3.01, are subject to the conditions precedent
that:
(a) the Bank shall have received on or before the date of such Loans each
of the following, in form and substance satisfactory to the Bank and its
counsel:
<PAGE>
(i) the Revolving Credit Note or the Term Loan Note, as
applicable, duly executed by Borrower;
(ii) a certificate of the Secretary or Assistant Secretary of
Borrower and of each Guarantor, dated the Closing Date or the Revolving
Credit Termination Date, as applicable, attesting to all corporate action taken
by Borrower or such Guarantor, including resolutions of its Board of Directors
authorizing the execution, delivery and performance of the Loan Documents and
each other document to be delivered pursuant to this Agreement and certifying
the names and true signatures of the officers of Borrower or each Guarantor
executing the Loan Documents and the other documents to be delivered by Borrower
or such Guarantor under this Agreement;
(iii) certified copies of the certificate or articles of
incorporation and the by-laws of Borrower or such Guarantor, as the case
may be; and such certificate shall state that the resolutions and corporate
documents thereby certified have not been amended, modified, revoked or
rescinded as of the date of such certificate;
(iv) a certificate of a duly authorized officer of Borrower,
dated the Closing Date or the Revolving Credit Termination Date, as
applicable, stating that the representations and warranties in Article 7 are
true and correct on such date as though made on and as of such date (unless made
as of a specific date earlier than the date hereof, in which case they shall be
true and correct as of such earlier date) and that no event has occurred and is
continuing which constitutes a Default or Event of Default;
(v) the Guaranty duly executed by each of the Guarantors;
(vi) the Security Agreement, duly executed by Borrower, together
with such UCC-1 financing statements as are required by the Bank;
(vii) such duly executed UCC-3 Revolving Credit Termination
Statements as are necessary to terminate existing liens on the assets of
Borrower;
(viii) a favorable opinion of counsel for Borrower, dated the
Closing Date or the Revolving Credit Termination Date, as applicable, in
substantially the form of Exhibit E and as to such other matters as the Bank
may reasonably request;
(ix) satisfactory evidence that Borrower and each of the
Guarantors is duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation; and
(x) such other documents, instruments, approvals, opinions and
evidence of compliance with the terms hereof as the Bank may require.;
<PAGE>
(b) Borrower shall have paid or caused to be paid all fees required to be
paid hereunder or in connection herewith and all accrued fees and expenses of
the Bank in connection with the preparation, execution and delivery of this
Agreement, and the other Loan Documents and the consummation of the transactions
contemplated thereby;
(c) Borrower and the Guarantors shall have obtained all consents, permits
and approvals required in connection with the execution, delivery and
performance by Borrower and the Guarantors of their respective obligations
hereunder and under the other Loan Documents and such consents, permits and
approvals shall continue in full force and effect; and
(d) all legal matters in connection with this financing shall be
satisfactory to the Bank and its counsel.
Section 6.02. Conditions to All Borrowings. The obligations of the Bank to
make any Loan (including the initial Revolving Credit Loan) hereunder shall be
subject to the further conditions precedent that on the date of such Loan:
(a) the following statements shall be true:
(i) the representations and warranties contained in Article 7 are
true and correct on and as of the date of such Loan as though made on and
as of such date (unless such representations and warranties are made as of a
specific earlier date in which case they shall be true and correct as at such
date);
(ii) no Default or Event of Default has occurred and is continuing,
or would result from such Loan; and
(iii) no material adverse change shall have occurred in the
business, financial condition or operations of Borrower since the date of the
most recent financial statements of Borrower delivered to the Bank
hereunder or in connection herewith; and
(b) the Bank shall have received such approvals, opinions, documents or
instruments as the Bank may have reasonably requested.
Section 6.03. Deemed Representations. Unless Borrower otherwise notifies
the Bank prior to any borrowing hereunder, the acceptance by Borrower of the
proceeds of any Loan shall constitute a representation and warranty that the
statements contained in Section 6.02(a) are true and correct as of the date of
such Loan.
<PAGE>
ARTICLE 7. REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants that:
Section 7.01. Incorporation, Good Standing and Due Qualification;
Compliance with Law. Each of Borrower and the Guarantors is duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its assets and to
transact the business in which it is now engaged or proposed to be engaged, and
is duly qualified as a foreign corporation and in good standing under the laws
of each other jurisdiction in which such qualification is required except where
the failure to so qualify and/or be in good standing could not in any case or in
the aggregate, have a material adverse effect on the operations, business,
property or financial condition of any of Borrower or any Guarantor or on its
respective ability to perform its respective obligations hereunder. In addition,
each of Borrower and the Guarantors is in compliance with all laws, treaties,
rules or regulations, or determination of an arbitration or a court or other
governmental authority, in each case applicable to or binding upon it or any of
its property or to which it or any of its property is subject, except to the
extent that the failure to so comply could not, in any case or in the aggregate,
have a material adverse effect on the operations, business, property or
financial condition of Borrower and the Guarantors, taken as a whole, or on
their ability to perform their obligations under the Loan Documents.
Section 7.02. Corporate Power and Authority; No Conflicts. The execution,
delivery and performance by each of Borrower and each of the Guarantors of the
Loan Documents have been duly authorized by all necessary corporate action and
do not and will not (a) require any consent or approval of its stockholders that
has not been obtained, (b) contravene its charter or by-laws, (c) violate any
provision of, or require any filing (other than filings contemplated hereby
and/or by the other Loan Documents), registration, consent or approval under,
any law, rule, regulation (including, without limitation, the provisions of
Regulation G, T, U or X of the Board of Governors of the Federal Reserve System
as in effect from time to time), order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to Borrower or
such Guarantor, (d) result in a breach of or constitute a default or require any
consent under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which Borrower or such Guarantor is a party or by which
any of its properties may be bound or affected, (e) result in, or require, the
creation or imposition of any Lien, upon or with respect to any of the
properties now owned or hereafter acquired by Borrower or such Guarantor other
than Liens created by this Agreement and/or the other Loan Documents, or (f)
cause Borrower or such Guarantor to be in default under any such rule,
regulation, order, writ, judgment, injunction, decree, determination or award or
any such indenture, agreement, lease or instrument.
Section 7.03. Legally Enforceable Agreements. Each Loan Document is, or
when delivered under this Agreement will be, a legal, valid and binding
obligation of Borrower or each Guarantor party thereto, enforceable against
Borrower or such Guarantor in accordance with its terms.
<PAGE>
Section 7.04. Litigation. There are no actions, suits or proceedings
pending or to Borrower's knowledge, threatened against or affecting Borrower or
any of the Guarantors or any of their respective Subsidiaries before any court,
governmental agency or arbitrator, which could, in any one case or in the
aggregate, adversely affect the financial condition, operations, properties or
business of Borrower and the Guarantors, taken as a whole, or their ability to
perform their respective obligations under the Loan Documents.
Section 7.05. Financial Statements. The consolidated balance sheet of
Borrower and its Subsidiaries as at December 31, 1995 and the related
consolidated income statement and statement of cash flow of Borrower and its
Subsidiaries for the fiscal year then ended, and the accompanying notes,
together with the opinion thereon, of KPMG Peat Marwick LLP, independent
certified public accountants (the "Auditor"), and the consolidated financial
statements for the nine month period ended September 30, 1996, copies of which
were delivered to the Bank, fairly present the consolidated financial condition
of Borrower and its Subsidiaries as at such dates and the consolidated results
of the operations of Borrower and its Subsidiaries for the periods covered by
such statements, all in accordance with GAAP consistently applied. As of the
date hereof, there are no liabilities of Borrower and its Subsidiaries, fixed or
contingent, which are material but are not reflected in such financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business since September 30, 1996 and the liabilities created
by this Agreement. Since the date of the most recent financial statements
delivered to the Bank and the Closing Date, there has been no material adverse
change in the condition (financial or otherwise), business, operations or, to
the knowledge of Borrower, prospects of any of Borrower or the Guarantors. With
respect to any Loans made after the Closing Date, since the date of the most
recent financial statements delivered to the Bank hereunder and the date of such
Loan, there has been no material adverse change in the condition (financial or
otherwise), business, operations or, to the knowledge of Borrower, prospects of
Borrower and the Guarantors, taken as a whole.
Section 7.06. Ownership and Liens. Each of Borrower and the Guarantors has
title to, or valid leasehold interests in, all of its properties and assets,
real and personal, reflected in the financial statements referred to in Section
7.05 (other than any properties or assets disposed of since the date of such
financial statements as no longer used or useful in the conduct of their
respective business or as have been disposed of in the ordinary course of
business), and none of the properties and assets owned by Borrower or the
Guarantors, or any of them, and none of their leasehold interests, is subject to
any Lien, except as disclosed in Schedule I or as may be permitted hereunder.
Section 7.07. Taxes. Each of Borrower and the Guarantors has filed all tax
returns (federal, state and local) required to be filed except where the failure
to file could not, in any case or in the aggregate, have an adverse effect upon
the operations, business, property or financial condition of any of Borrower or
the Guarantors or on their ability to perform their obligations under the Loan
Documents. Each of Borrower and the Guarantors has paid when due all taxes,
assessments and governmental charges and levies shown thereon to be due,
including interest and penalties, other than taxes, assessments and governmental
charges and levies being contested in good faith by appropriate proceedings and
with respect to which adequate reserves in conformity with GAAP shall have been
provided on the books of Borrower or the Guarantors, as the case may be.
<PAGE>
Section 7.08. ERISA. Each of Borrower and the Guarantors is in compliance
in all material respects with all applicable provisions of ERISA. No Reportable
Event has occurred with respect to any Plan, no notice of intent to terminate a
Plan has been filed nor has any Plan been terminated, no circumstance exists
which constitutes grounds under Section 4042 of ERISA entitling the PBGC to
institute proceedings to terminate, or appoint a trustee to administer, a Plan,
nor has the PBGC instituted any such proceedings, none of Borrower nor its ERISA
Affiliates has completely or partially withdrawn under Sections 4201 or 4204 of
ERISA from a Multiemployer Plan and each of Borrower and each of its ERISA
Affiliates has met its minimum funding requirements under ERISA with respect to
all of its Plans and there are no Unfunded Vested Liabilities. None of Borrower
nor its ERISA Affiliates has incurred any liability to the PBGC under ERISA,
other than to make contributions in the ordinary course and other than
contingent liabilities that would arise on the termination of any Plan (no such
termination being reasonably foreseen by Borrower).
Section 7.09. Subsidiaries and Ownership of Stock. Schedule II is a
complete and accurate list of the Subsidiaries of Borrower, showing the
jurisdiction of incorporation or organization of each Subsidiary and the
percentage of Borrower's ownership of the outstanding stock or other interest of
each such Subsidiary.
Section 7.10. Credit Arrangements. Schedule III is a complete and correct
list of all credit agreements, indentures, purchase agreements outside the
ordinary course of Borrower's business, guaranties, Capital Leases and other
investments, agreements and arrangements in effect on the date of this Agreement
providing for or relating to extensions of credit to Borrower or to the
Guarantors or to any of them (including agreements and arrangements for the
issuance of letters of credit or for acceptance financing) in respect of which
Borrower, the Guarantors or any of them is in any manner directly or
contingently obligated. Schedule III shows the maximum principal or face amounts
of the credit in question, outstanding and which can be outstanding, are
correctly stated, and all Liens of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule and
Schedule I.
Section 7.11. Operation of Business. Each of Borrower and each Guarantor
possesses all material licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, to conduct their business as now
conducted and as presently proposed to be conducted and to Borrower's best
knowledge, none of Borrower nor any of the Guarantors is in violation of any
valid rights of others with respect to any of the foregoing.
Section 7.12. Hazardous Substances. Each of Borrower and the Guarantors is
in compliance with all Environmental Laws, and has obtained all necessary
licenses and permits required to be issued pursuant to any Environmental Law.
None of Borrower nor any of the Guarantors has received any written notice or
communication from any governmental agency with respect to any Hazardous
Substance relative to its operations, property or acts or any investigation,
demand or request pursuant to or enforcing any Environmental Law relating to it
or its operations, and no such investigation is pending or, to the knowledge of
Borrower, threatened.
<PAGE>
Section 7.13. Compliance with Loans and Judgments. Borrower and each
Subsidiary are in compliance, in all material respects, with all laws, rules,
regulations, orders and decrees which are applicable to Borrower or its
Subsidiaries, or to any of their respective properties. Each of Borrower and the
Guarantors has satisfied all judgments and none of Borrower nor any of the
Guarantors is in default with respect to any judgment, writ, injunction, decree,
rule or regulation of any court, arbitrator or federal, state, municipal or
other governmental authority, commission, board, bureau, agency or
instrumentality, domestic or foreign.
Section 7.14. No Defaults on Other Agreements. Except as disclosed on
Schedule IV, none of Borrower nor any of the Guarantors is a party to any
indenture, loan or credit agreement or any lease or other agreement or
instrument or subject to any charter or corporate restriction which would in any
case or in the aggregate have an adverse effect on its ability to carry out its
obligations under the Loan Documents. None of Borrower nor any of the Guarantors
is in default in any respect in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any agreement or
instrument material to its business to which it is a party except where such
default would not, in any case or in the aggregate, have a material and adverse
effect on the business, properties, assets, operations or condition, financial
or otherwise, of Borrower and the Guarantors, taken as a whole, or on their
ability to perform their obligations under the Loan Documents.
Section 7.15. Labor Disputes and Force Majure. Neither the business nor the
properties of Borrower or any of the Guarantors is affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, force majure or of the public enemy or other casualty
(whether or not covered by insurance), materially and adversely affecting such
business or properties or the operations of Borrower and the Guarantors, taken
as a whole, or their ability to perform their obligations under the Loan
Documents.
Section 7.16. Governmental Regulation. None of Borrower or the Guarantors
is subject to regulation under the Public Utility Holding Company Act of 1935,
the Investment Company Act of 1940 or any other statute or regulation limiting
its ability to incur indebtedness for money borrowed as contemplated hereby.
Section 7.17. Partnerships. None of Borrower or the Guarantors is a partner
in any partnership or a member of any joint venture or limited liability
company.
Section 7.18. No Forfeiture. None of Borrower nor any of the Guarantors is
engaged in or proposes to be engaged in any unlawful activity which is
reasonably likely to result in a Forfeiture Proceeding and no Forfeiture
Proceeding against any of them is pending or, to the best of Borrower's
knowledge, threatened.
<PAGE>
Section 7.19. Security Agreement. The provisions of the Security Agreements
are effective to create in favor of the Bank legal, valid and enforceable
security interests in all right, title and interest of Borrower in all the
Collateral described therein, assuming the same has been duly executed by the
Bank and the Bank has filed the forms UCC-1 referred to therein.
Section 7.20. Disclosure. This Agreement, each Loan Document and, except as
set forth in Section 7.21, each other document, certificate, exhibit, report or
written statement furnished to the Bank by or on behalf of Borrower or for use
in connection with the Loans, do not contain any untrue statement of material
fact or omit to state a material fact necessary to make the statement contained
herein or therein not misleading under the circumstances in which they were
made.
Section 7.21. Projections and Forecasts. Any financial projection or
forecast furnished by Borrower or any Guarantor shall be prepared in accordance
with GAAP to the extent applicable, based on the good faith judgment of
Borrower's management of present circumstances, expected conditions and expected
courses of action, and with respect to projections, based on the occurrence of
the hypothetical events described therein. The underlying assumptions in such
forecasts and projections shall be appropriate and reasonable under the
circumstances and, if the forecast or projection presents a range, such range
shall not be selected in a misleading manner.
ARTICLE 8. AFFIRMATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
obligations under this Agreement, Borrower shall and shall cause the Guarantors
to:
Section 8.01. Maintenance of Existence. Except as otherwise provided in
this Agreement, preserve and maintain its corporate existence and good standing
in the jurisdiction of its incorporation, and qualify and remain qualified as a
foreign corporation in each jurisdiction in which such qualification is
required.
Section 8.02. Conduct of Business. Continue to engage in its current
business or related businesses.
Section 8.03. Maintenance of Properties. Maintain, keep and preserve all of
its properties (tangible and intangible) necessary to the conduct of its
business in good working order and condition, ordinary wear and tear excepted.
Section 8.04. Maintenance of Records. Keep records and books of account, in
which complete entries will be made in accordance with GAAP.
<PAGE>
Section 8.05. Maintenance of Insurance. Maintain insurance with financially
sound and reputable insurance companies or associations in such amounts and
covering such risks as are usually carried by companies engaged in the same or a
similar business and similarly situated.
Section 8.06. Compliance with Laws. Comply in all respects with all
applicable laws, rules, regulations and orders.
Section 8.07. Right of Inspection. At any reasonable time and from time to
time, upon reasonable notice during normal business hours, permit the Bank or
any agent or representative thereof, to examine and make copies and abstracts
from the records and books of account of, and visit the properties of, such
entity, to discuss the affairs, finances and accounts of such entity with any of
their respective officers and directors and such entity's independent
accountants, and from time to time at Borrower's expense to conduct such
collateral and other audits as the Bank deems necessary.
Section 8.08. Reporting Requirements. Furnish directly to each of the Bank:
(a) as soon as available and in any event within 120 days after the end of
each fiscal year of Borrower, consolidated financial statements of Borrower and
its Consolidated Subsidiaries which shall include a consolidated balance sheet
of Borrower and its Subsidiaries as of the end of such fiscal year and a
consolidated income statement and statement of cash flows of such entities for
such fiscal year, stating in comparative form the respective consolidated
figures for the corresponding date and period in the prior fiscal year and all
prepared in accordance with GAAP, accompanied by an opinion thereon acceptable
to the Bank by the Auditor, which opinion neither includes an exception as to
adherence with GAAP nor contains a disclaimer;
(b) as soon as available and in any event within 45 days after the end of
each of the first three quarters of each fiscal year of Borrower, a consolidated
balance sheet of Borrower and its Subsidiaries as of the end of such quarter and
a consolidated income statement and statements of cash flows of such entities
for the period commencing at the end of the previous fiscal year and ending with
the end of such quarter, all in reasonable detail and stating in comparative
form the respective consolidated figures for the corresponding date and period
in the previous fiscal year and all prepared in accordance with GAAP and
attested to by the president or chief financial officer of Borrower (subject to
year-end adjustments);
(c) simultaneously with the delivery of the financial statements referred
to in (a) and (b) above, a certificate of the president or chief financial
officer of Borrower (i) certifying that to the best of his knowledge no Default
or Event of Default has occurred and is continuing or, if a Default or Event of
Default has occurred and is continuing, a statement as to the nature thereof and
the action which is proposed to be taken with respect thereto, and (ii) with
computations demonstrating compliance with the covenants contained in Article
10;
<PAGE>
(d) within 30 days after the delivery of the financial statements referred
to in (a) above, annual forecasts and Borrower's budget for the upcoming fiscal
year, with a comparison of actual results to budget for the fiscal year then
ended;
(e) promptly upon receipt thereof, a copy of the management letter, if any,
prepared by the Auditor;
(f) on or prior to the fifteenth day of each calendar month, a schedule of
accounts receivable of the Company and its Subsidiaries certified by the
President or Chief Financial Officer and current as of the last Banking Day of
the preceding month, which shall include accounts receivable summary agings, all
in form and in such detail satisfactory to the Bank;
(g) on or prior to the fifteenth day of each calendar month, a schedule of
inventory of the Company and its Subsidiaries certified by the President or
Chief Financial Officer and current as of the last Banking Day of the preceding
month, which shall contain a breakdown of the inventory by type, amount and
location and such other information reasonably requested by the Bank;
(h) on or prior to the fifteenth day of each calendar month, a Borrowing
Base Certificate in the form annexed as Exhibit D, current as of the last
Banking Day of the preceding month;
(i) promptly after Borrower becomes aware of the commencement thereof,
notice of all actions, suits, and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, involving claims of $25,000 or more affecting Borrower, or any of its
Subsidiaries, including, without limitation, any such proceeding relating to any
alleged violation of any Environmental Law;
(j) as soon as possible and in any event within five days after the
occurrence of each Default or Event of Default, a written notice specifying and
describing in reasonable detail such Default or Event of Default and describing
in reasonable detail the action which is proposed to be taken by Borrower with
respect thereto;
(k) promptly after the commencement thereof or promptly after Borrower
knows of the commencement or threat thereof, notice of any Forfeiture
Proceeding;
(l) promptly after submission to any government or regulatory agency, all
documents and information furnished to such government or regulatory agency
other than such documents and information prepared in the normal course of
business and which would not result in any adverse action to be taken by such
agency;
(m) as soon as possible and in any event within five Banking Days after
Borrower knows that any of the events or conditions specified below with respect
to any Plan or Multiemployer Plan have occurred or exist, a statement signed by
a chief financial officer of Borrower setting forth details respecting such
event or condition and the action, if any, which Borrower or the ERISA Affiliate
propose to take with respect thereto (and a copy of any report or notice
required to be filed with or given to PBGC by Borrower or an ERISA Affiliate
with respect to such event or condition):
<PAGE>
(i) any reportable event, as defined in Section 4043(b) of ERISA and the
regulations issued thereunder, with respect to a Plan, as to which PBGC has not
by regulation waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event (provided that a failure
to meet the minimum funding standard of Section 412 of the Code or Section 302
of ERISA shall be a reportable event regardless of the issuance of any waivers
in accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of intent to
terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan,
or the receipt by Borrower or any ERISA Affiliate, of a notice from a
Multiemployer Plan that such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal by Borrower or any ERISA Affiliate
under Section 4201 or 4204 of ERISA from a Multiemployer Plan, or the receipt by
Borrower, or any ERISA Affiliate, of notice from a Multiemployer Plan that it is
in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or
that it intends to terminate or has terminated under Section 4041A of ERISA; and
(v) the institution of a proceeding by a fiduciary or any Multiemployer
Plan against Borrower or any ERISA Affiliate to enforce Section 515 of ERISA,
which proceeding is not dismissed within 30 days;
(n) promptly, and in any event within five business days after the sending
or filing thereof, copies of all proxy statements, financial statements, and
reports which Borrower sends to its stockholders, and copies of all regular,
periodic and special reports and all registration statements which Borrower
files with the Securities and Exchange Commission or any other governmental
authority, or with any national securities exchange;
(o) such other information respecting the condition or operations,
financial or otherwise, of Borrower, or any Guarantor, as the Bank may from time
to time reasonably request.
Section 8.09. Payment of Obligations. Pay, discharge or otherwise satisfy
at or before maturity or before they become delinquent, as the case may be, all
material Debt except for any Debt which is being contested in good faith and
with respect to which, on a consolidated basis, adequate reserves are maintained
in conformity with GAAP.
<PAGE>
Section 8.10. Payment of Taxes. Pay and discharge promptly all taxes,
assessments and government charges or levies imposed upon it or upon its income
and profits, or upon any of its property, real, personal or mixed, or upon any
part thereof, before the same shall become in default, and all other material
obligations (including lawful claims for labor, materials and supplies which, if
unpaid, might become a Lien) except that neither the Company nor any Guarantor
shall be required to pay any such tax, assessment, charge, levy or claim so long
as the validity thereof shall be contested in good faith by appropriate
proceedings and there shall have been set aside on its books adequate reserves
determined in accordance with GAAP with respect to any such tax, assessment,
charge, levy or claim so contested, provided that, except as provided in Section
9.02, the Company and each Guarantor shall pay all such taxes, assessments,
charges, levies or claims promptly if any Lien has attached as security
therefor.
Section 8.11. Acquisitions. Prior to entering into any letter of intent,
agreement or other commitment or proposed commitment relating to any
Acquisition, furnish the Bank with notice of same and with such information
relating to the Acquisition as Borrower possesses at the time it provides notice
to the Bank and which the Bank may reasonably request.
Section 8.12. Management. Use its best efforts to cause Donald Sinkin,
Stephen Frey, Margaret Krumholz and John Rebecchi to continue in the employ of
the Borrower in their present positions with their existing authority as
executive officers of Borrower, and consult with the Bank regarding the
replacement of any of them.
ARTICLE 9. NEGATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
obligations under this Agreement, Borrower shall not:
Section 9.01. Debt and Guaranties.
(a) Create, incur, assume or suffer to exist, or permit any Guarantors to
create, incur, assume or suffer to exist any Debt, except:
(i) Debt arising under this Agreement or the Note;
(ii) Debt described in Schedule III, and any renewals,
extensions or refinancings thereof, provided that such renewals, extensions
or refinancing are on terms no less favorable to Borrower or the Guarantor than
the original terms of such Debt (except for increases in interest rates not
inconsistent with increases in prevailing interest rates);
(iii) Debt incurred in connection with operating leases entered
into by Borrower, the Guarantors, or any of them, consistent with past practices
or in the ordinary course of business; and
<PAGE>
(iv) Debt of Borrower, or the Guarantors, or any of them,
secured by purchase money Liens permitted by Section 9.02.
(b) Guaranty, endorse, become surety for or otherwise in any way become or
be responsible for the Debt or obligations of any Person, whether by agreement
to maintain capital, equity, net worth or solvency of any Person, by agreement
to purchase or discharge the Debt of any Person, or agreement to purchase
merchandise, materials, supplies or other property, if such agreement provides
that payment shall be made whether or not delivery of such merchandise,
materials, supplies or other property is ever made or tendered except:
(i) guarantees executed prior to the date hereof as described on
Schedule V attached hereto;
(ii) endorsements of negotiable instruments for collection or
deposit in the ordinary course of business; and
(iii) guarantees under this Agreement or of Debt of Borrower or
any Guarantor owing to the Bank.
Section 9.02. Liens. Create, incur, assume or suffer to exist, or permit
any of the Guarantors to create, incur, assume or suffer to exist, any Lien,
upon or with respect to any of its properties, now owned or hereafter acquired,
except:
(a) Liens in favor of the Bank securing the Loans hereunder;
(b) Liens for taxes or assessments or other government charges or levies if
not yet due and payable or if due and payable if they are being contested in
good faith by appropriate proceedings and for which appropriate reserves are
maintained in conformity with GAAP;
(c) Liens (i) imposed by law, such as mechanic's, supplier's,
materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar
Liens, securing obligations incurred in the ordinary course of business which
are not past due for more than 30 days or (ii) which are being contested in good
faith by appropriate proceedings and for which appropriate reserves have been
established which, when aggregated with all indebtedness secured by all such
other Liens, secure indebtedness having an aggregate principal balance not in
excess of $50,000;
(d) Liens under workers' compensation unemployment insurance, social
security or similar legislation (other than ERISA);
(e) judgment and other similar Liens arising in connection with court
proceedings that have been in existence for fewer than 30 days after entry of
the judgment or the execution or other enforcement of which is effectively
stayed, and the claims secured thereby are being actively contested, in
Borrower's reasonable judgment, in good faith and by appropriate proceedings, or
which relate to judgments which, when aggregated with all other judgments
secured by such Liens, total less than $50,000; and
<PAGE>
(f) purchase money Liens on any property heretofore or hereafter acquired
or the assumption of any Lien on property existing at the time of such
acquisition, or a Lien incurred in connection with any conditional sale or other
title retention agreement or a Capital Lease; provided that such liens attach
only to the property as acquired and do not extend to any additional property of
Borrower.
Section 9.03. Investments and Advances. Make or permit any Subsidiary to
make any loan or advance to any Person, or purchase, redeem or otherwise
acquire, or permit any such Subsidiary to purchase, redeem or otherwise acquire
any capital stock, assets, obligations or other securities, or make any capital
contribution to otherwise invest in or acquire any interest in any Person
(including, without limitation, any Borrower or any Subsidiary or Affiliate of
any Borrower), except:
(a) obligations issued or guaranteed by states or municipalities within the
United States of American and rated at least A-1 by Standard & Poor's;
(b) obligations issued or guaranteed by the United States of America or any
agency or subdivision thereof, the payment or guarantee of which constitutes a
full faith and credit obligation of the United States of America;
(c) certificates of deposit, time deposits, Eurodollar certificates of
deposit, bankers acceptances and other money market instruments issued by any
bank, trust company or financial institution organized under the laws of the
United States of America or any state (or in the case of Eurodollar certificates
of deposit, a branch of any such bank, trust company or financial institution)
having capital and surplus in an aggregate amount not less than $200,000,000 and
with such instrument rated at least A-1 by Standard & Poor's;
(d) commercial paper rated at least Prime-1 by Moody's Investor Services or
A-1 by Standard & Poor's;
(e) repurchase agreements entered into with any bank, trust company or
other financial institution organized under the laws of the United States of
America or any state having capital and surplus in an aggregate amount not less
than $200,000,000 and which are fully secured by obligations of the type
described in Section 9.03(b);
(f) Acquisitions permitted pursuant to Section 9.07 hereof; and
(g) Investments of Borrower in any Subsidiary or investment of any
Subsidiary in any other Subsidiary.
<PAGE>
Section 9.04. Sale of Assets. Sell, lease, assign, transfer or otherwise
dispose of, or permit any of the Guarantors to sell, lease, assign, transfer or
otherwise dispose of, any of its now owned or hereafter acquired assets
(including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests) except for (i) assets
disposed of as no longer used or useful in the conduct of their respective
business or as have been disposed of in the ordinary course of business
consistent with Borrower's past practice or (ii) transfers of assets between or
among Borrower and Subsidiaries of Borrower, provided all such Subsidiaries are
Guarantors which have executed Security Agreements.
Section 9.05. Transactions with Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service, with any Affiliate or permit any of the Guarantors to
enter into any transaction, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service, with any Affiliate, except
in the ordinary course of and pursuant to the reasonable requirements of
Borrower's or such Guarantors business and upon fair and reasonable terms not
materially less favorable to Borrower or such Guarantor than would be obtained
in a comparable arm's length transaction with a Person not an Affiliate.
Section 9.06. Mergers. Except as permitted in Section 9.07, and except for
mergers of any Subsidiary with and into either Borrower or any Subsidiary which
is at such time a Guarantor, merge or consolidate with, or sell, assign, lease
or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of the Guarantors to do so.
Section 9.07. Acquisitions. Make any Acquisition, unless the entity to be
acquired is primarily in the business of manufacturing and printing of specialty
packaging and the Bank has been furnished with (a) such documents as are
necessary in the Bank's discretion to provide the Bank with a Guaranty of the
entity to be acquired (if it is to be a Subsidiary) and to grant the Bank a
perfected lien upon the assets so acquired, (b) satisfactory evidence that the
total cash consideration paid or to be paid by the Borrower in connection with
such Acquisition, when aggregated with the cash consideration paid or to be paid
in connection with all other Acquisitions during the period beginning on the
Closing Date, does not exceed the lesser of (i) $3,000,000 or (ii) 25% of
Tangible Net Worth, (c) a certificate of the president or chief financial
officer of Borrower certifying that no Default or Event of Default has occurred
and is continuing and that no Default or Event of Default would occur as a
result of Borrower's making such Acquisition and (d) within 15 days of
completing such Acquisition, a balance sheet of the Borrower prepared by
Borrower's management demonstrating compliance, on a pro forma basis, with the
covenants contained in Article 10 immediately after the Acquisition.
Section 9.08. No Activities Leading to Forfeiture Proceeding. Engage in or
permit any Guarantor to engage in any unlawful activity which could reasonably
be expected to result in a Forfeiture Proceeding.
<PAGE>
Section 9.09. Corporate Documents; Fiscal Year. Change its fiscal year, or
amend, modify or supplement its certificate or articles of incorporation or
by-laws in any way with the result that any of the individuals identified in
Section 8.12 have diminished responsibilities or operating and management
authority over Borrower and its Subsidiaries.
Section 9.10. New Subsidiaries. Form, or permit any Guarantor to form, any
Subsidiary unless such Subsidiary shall become a party to the Guaranty.
ARTICLE 10. FINANCIAL COVENANTS.
So long as any of the Notes shall remain unpaid or the Bank has any
obligations under this Agreement:
Section 10.01. Net Income. Borrower shall maintain at all times a positive
Net Income on a fiscal year basis.
Section 10.02. Current Ratio. Borrower shall maintain at all times a
Current Ratio of not less than 1.25:1.00.
Section 10.03. Maximum Liabilities to Worth Ratio. Borrower shall maintain
on a consolidated basis at all times a ratio of Total Liabilities to Tangible
Net Worth of not more than 2.75:1.0.
Section 10.04. Debt Coverage Ratio. Borrower shall maintain on a
consolidated basis at all times a Debt Coverage Ratio of not less than 1.25:1.0.
Section 10.05. Determination of Compliance. Compliance with these financial
covenants shall be determined by reference to the consolidated financial
statements of Borrower and its Subsidiaries delivered to the Bank in accordance
with Section 8.08. Except as set forth in 10.01, all financial covenants shall
be applicable at all times and shall be tested at the end of each fiscal quarter
based upon the balance sheet information and the results of operations for the
period of 12 months preceding the date of determination. For purposes of
calculating compliance with Sections 10.02, 10.03 and 10.04, the principal
portion of all Revolving Credit Loans and the Revolving Credit Note shall be
deemed to be a current liability and not long-term indebtedness.
ARTICLE 11. EVENTS OF DEFAULT.
Section 11.01. Events of Default. The occurrence of any of the following
events shall be an "Event of Default":
(a) Borrower shall fail to pay within five days of due date (i) principal
of the Note, (ii) interest on the Note or (iii) any fee or other amount due
hereunder as and when due and payable.
<PAGE>
(b) Any representation or warranty made or deemed made by Borrower in this
Agreement, or by Borrower or any Guarantor in any certificate delivered pursuant
to this Agreement or any other Loan Document, or which is contained in any
certificate, document, opinion, financial or other statement furnished to the
Bank at any time pursuant to any Loan Document, shall prove to have been
incorrect in any material respect on or as of the date made or deemed made;
(c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in Section 2.03 or Articles 8, 9 or 10;
(d) Borrower or any Guarantor shall fail to perform or observe any term,
covenant or agreement on its part to be performed or observed in any Loan
Document and such failure shall continue for 15 consecutive days;
(e) Borrower or any Guarantor shall (i) fail to pay any amounts with
respect to any Debt in favor of the Bank, including but not limited to
indebtedness for borrowed money (other than the payment obligations described in
(a) above) of Borrower or such Guarantor, as the case may be, or any interest or
premium thereon, when due (giving effect to any applicable grace period),
whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise, (ii) fail to pay any amounts in excess of $50,000 in the aggregate
with respect to any other Debt, including but not limited to indebtedness for
borrowed money of Borrower or such Guarantor, as the case may be, or any
interest or premium thereon, when due (giving effect to any applicable grace
period), whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise, (iii) fail to perform or observe any term, covenant or
condition on its part to be performed or observed under any agreement or
instrument relating to any Debt when required to be performed or observed, if
the effect of such failure to perform or observe is to accelerate, or to permit
the acceleration of, after the giving of notice or passage of time or both, the
maturity of such Debt, whether or not such failure to perform or observe shall
be waived by the holder of such Debt or (iv) any Debt shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment) prior to the stated maturity thereof;
(f) Borrower or any Guarantor shall (i) generally not, be unable to or
admit in writing its or their inability to, pay its or their debts as such debts
become due; or (ii) make an assignment for the benefit of creditors, petition or
apply to any court or otherwise for the appointment of a custodian, receiver or
trustee for it or a substantial part of its or their assets, (iii) as debtor,
commence any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, (iv) have had any such
petition or application filed or any such proceeding shall have been commenced,
against it or them, in which an adjudication or appointment is made or order for
relief is entered, and which petition, application or proceeding remains
undismissed for a period of 30 days or more, or (v) by any act or omission shall
indicate its or their consent to, approval of or acquiescence in any such
petition, application or proceeding or order for relief or the appointment of a
custodian, receiver or trustee for all or any substantial part of its or their
property, (vi) suffer any such custodianship, receivership or trusteeship to
continue undischarged for a period of 30 days or more or (vii) cease to be
Solvent;
<PAGE>
(g) one or more judgments, decrees or orders for the payment of money in
excess of $50,000 in the aggregate in respect of uninsured or unbonded claims
shall be rendered against Borrower or any of Guarantor and such judgments,
decrees or orders shall continue unsatisfied and in effect for a period of 30
consecutive days without being vacated, discharged, satisfied or stayed or
bonded pending appeal;
(h) An event or condition specified in Section 8.08(m) hereof shall occur
or exist with respect to any Plan or Multiemployer Plan and, as a result of such
event or condition, together with all other such events or conditions, Borrower
or any ERISA Affiliate shall incur or in the opinion of the Bank shall be
reasonably likely to incur a liability to a Plan, a Multiemployer Plan or PBGC
(or any combination of the foregoing) which is, in the determination of the
Bank, material in relation to the financial condition, operations, business or
prospects of Borrower or the Guarantors;
(i) Any Forfeiture Proceeding shall have been commenced; or
(j) The Security Agreement shall at any time after its execution and
delivery and for any reason cease to create a valid and perfected first security
interest in the Collateral or to be in full force and effect, or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by Borrower, or Borrower shall deny that it has any further liability
or obligation under a Security Agreement to which it is a party, or Borrower
shall fail to perform any of its material obligations under any Security
Agreement.
Section 11.02. Remedies. If any Event of Default shall occur, the Bank
shall (a) declare the Revolving Credit Commitment to be terminated, whereupon
the same shall forthwith terminate, and (b) declare the outstanding principal of
the Notes, all interest thereon and all other amounts payable under this
Agreement and the Notes to be forthwith due and payable, whereupon the Notes,
all such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by Borrower; provided that, in the case of
an Event of Default referred to in Section 11.01(e) or Section 11.01(h) above,
the Commitments shall be immediately terminated, and the Note, all interest
thereon and all other amounts payable under this Agreement and the Note shall be
immediately due and payable without notice, presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by
Borrower.
ARTICLE 12. MISCELLANEOUS.
Section 12.01. Amendments and Waivers. Except as otherwise expressly
provided in this Agreement, any provision of this Agreement may be amended or
modified only by an instrument in writing signed by Borrower and the Bank, and
any provision of this Agreement may be waived by Borrower or by the Bank;
provided that no amendment, modification or waiver shall be effective, unless by
<PAGE>
an instrument signed by the Bank. No failure on the part of the Bank to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof or preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 12.02. Usury. Anything herein to the contrary notwithstanding, the
obligations of Borrower under this Agreement and the Notes shall be subject to
the limitation that payments of interest shall not be required to the extent
that receipt thereof would be contrary to provisions of law applicable to the
Bank limiting rates of interest which may be charged or collected by the Bank.
Section 12.03. Expenses. Borrower shall reimburse the Bank on demand for
all reasonable costs, expenses, and charges (including, without limitation,
reasonable fees and charges of external legal counsel for the Bank) incurred by
the Bank in connection with the preparation or performance of this Agreement and
the Loan Documents. In addition, Borrower shall reimburse the Bank for all of
its reasonable costs and expenses in connection with the enforcement or
preservation of any rights under this Agreement, the Note or the other Loan
Documents. Borrower agrees to indemnify the Bank and its directors, officers,
employees and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims, damages or expenses incurred by any of them arising
out of or by reason of any investigation or litigation or other proceedings
(including any threatened investigation or litigation or other proceedings)
relating to any actual or proposed use by Borrower, of the proceeds of the
Loans, including, without limitation, the reasonable fees and disbursements of
counsel incurred in connection with any such investigation or litigation or
other proceedings (but excluding any such losses, liabilities, claims, damages
or expenses incurred by reason of the gross negligence or willful misconduct of
the Person to be indemnified).
Section 12.04. Survival. The obligations of Borrower under Section 2.03(b),
Article 5 and Section 12.03 shall survive the repayment of the Loans for a
period corresponding to the maximum applicable statute of limitations in effect
in the State of New York from time to time.
Section 12.05. Assignment. This Agreement shall be binding upon, and shall
inure to the benefit of, Borrower and the Bank and their respective successors
and assigns, except that Borrower may not assign or transfer its rights or
obligations hereunder.
Section 12.06. Notices. All notices, consents, approvals and other
communications required or permitted to be given to a party under this Agreement
shall be in writing and shall be delivered personally to the party, sent by any
national overnight courier or mailed first class certified mail, return receipt
requested, to the party at the address indicated on page one, to the attention
of Joseph Burns for the Bank and to the attention of Margaret Krumholz for
Borrower. Any item delivered in accordance with the provisions of this Section
shall be deemed to have been delivered (i) on the date of personal delivery,
(ii) on the business day following the date sent by overnight courier or (ii) on
the fifth day following the date on which it was so mailed, as the case may be.
<PAGE>
Section 12.07. Setoff. Borrower agrees that, in addition to (and without
limitation of) any right of setoff, banker's lien or counterclaim the Bank may
otherwise have, the Bank shall be entitled, at its option without any prior
notice to Borrower (any such notice being expressly waived by Borrower to the
extent permitted by applicable law), to offset balances (general or special,
time or demand, provisional or final) held by it for the account of Borrower at
any of the Bank's offices against any amount then due and payable by Borrower to
the Bank under this Agreement or the Note which is not paid when due (regardless
of whether such balances are then due to Borrower), in which case it shall
promptly notify Borrower thereof, provided that the Bank's failure to give such
notice shall not affect the validity thereof. Payments by Borrower hereunder
shall be made without setoff or counterclaim.
Section 12.08. Jurisdiction; Immunities.
(a) Borrowers hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in Suffolk or Nassau
County over any action or proceeding arising out of or relating to this
Agreement or the Note, and Borrower hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such New
York State or Federal court. To the extent permitted by applicable law, Borrower
irrevocably consents to the service of any and all process in any such action or
proceeding by the mailing (by certified or registered mail) of copies of such
process to it. Borrower agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. To the extent
permitted by applicable law, Borrower further waives any objection to venue in
such State or Federal Court and any objection to an action or proceeding in such
State or Federal Court on the basis of forum non conveniens. Borrower further
agrees that any action or proceeding brought against the Bank shall be brought
only in New York State or United States Federal court sitting in Suffolk or
Nassau County.
(b) THE PARTIES WAIVE ANY RIGHT TO A JURY TRIAL.
(c) Nothing in this Section shall affect the right of the Bank to
serve legal process in any other manner permitted by law or affect the
right of the Bank to bring any action or proceeding against Borrower or its
property in the courts of any other jurisdictions.
(d) To the extent that Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
from service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property,
Borrower hereby irrevocably waives, to the extent permitted by applicable law,
such immunity in respect of its obligations under this Agreement and the Note.
<PAGE>
Section 12.09. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 12.10. Integration. The Loan Documents set forth the
entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
Section 12.11. Governing Law. This Agreement shall be governed by,
and interpreted and construed in accordance with, the law of the State of New
York applicable to agreements made and to be performed wholly within the State
of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
DISC GRAPHICS, INC. KEYBANK NATIONAL ASSOCIATION
By: /s/ Donald Sinkin By: /s/ Joseph Burns
Name: Donald Sinkin Name: Joseph Burns
Title: President and Title: Vice President
Chief Executive Officer
<PAGE>
List of Schedules and Exhibits
Schedule I Description of Liens
Schedule II List of subsidiaries of Borrower
Schedule III List of Credit Agreements (including indentures, purchase
agreements, guaranties, Capital Leases, etc.)
Schedule IV Agreements effecting Loan Documents
Schedule V List of Guaranties
* * * * *
Exhibit A-1 Form of Revolving Credit Note
Exhibit A-2 Form of Term Note
Exhibit B Form of Guaranty
Exhibit C-1 Security Agreement of Borrower
Exhibit C-2 Security Agreement of Guarantors
Exhibit D Form of Borrowing Base Certificate
Exhibit E Form of Opinion of Counsel
Exhibit F Form of Notice of Borrowing
<PAGE>
Security Agreement
Security Agreement dated February 26, 1997 between Disc Graphics,
Inc., a Delaware corporation, 10 Gilpin Avenue, Hauppauge, New York 11788 (the
"Company") and KeyBank National Association, a national banking association with
offices at 1377 Motor Parkway, Hauppauge, New York 11788 (the "Secured Party").
Secured Party and the Company have entered into a Credit Agreement
pursuant to which the Company will receive Loans and other financial
accommodations from Secured Party. Under the Credit Agreement and loan and other
agreements between Secured Party and the Company, the Company will incur
Obligations to Secured Party. In addition, Secured Party will not extend credit
to the Company unless, among other conditions, the Company executes and delivers
this Agreement.
To induce Secured Party to extend credit to the Company on and after
the date hereof, the Company wishes to grant Secured Party a first priority
perfected security interest in all its assets, as provided herein, to secure the
payment and performance of all Obligations.
Accordingly, the parties agree as follows:
1. Definitions.
(a) Capitalized terms used herein and not otherwise defined herein
shall have the meanings given in the Credit Agreement.
(b) The following words and phrases shall have the meanings set forth
below:
(i) "Agreement" shall mean this Agreement as it may be amended
from time to time.
(ii) "Collateral" means all of the following:
(A) Equipment, Inventory and Receivables;
(B) All choses in action, causes of action, any rights
arising under any judgment, statute or rule, all corporate and business records,
customer lists, credit files, trademarks, trade styles, trade names, designs,
patents, copyrights, licenses, license agreements, and any applications for
patents or trademarks, and all amounts, claims and proceeds, including returned
or unearned premiums, which may become payable under any policy of insurance
maintained by the Company covering the Collateral;
(C) All other personal property of the Company, whether now
or hereafter existing or now owned or hereafter acquired and wherever located,
of every kind and description, tangible or intangible, including, without
limitation, the balance of every deposit account now or hereafter existing of
the Company with Secured Party, and all goods, equipment, furniture, general
intangibles, credits, claims, demands and any other obligations of any kind,
whether now or hereafter arising, of the Company; and
(D) Any and all additions and accessions to the foregoing
Collateral, all substitutions and replacements therefor and all products and
proceeds thereof.
<PAGE>
(iii) "Credit Agreement" means the Credit Agreement between the
Company and Secured Party dated the date hereof, as it may be amended from time
to time.
(iv) "Equipment" shall mean all of the Company's machinery and
equipment wherever located, and all additions, accessions, substitutions,
replacements, parts and fuel to or for the same, and all products and proceeds
thereof, excluding, however, the Equipment listed on Exhibit 1 hereto.
(v) "Inventory" shall mean all goods now or hereafter owned by
the Company or in which the Company now or hereafter has an interest, intended
for sale, lease or other disposition by or consumption in the business of the
Company, of every kind and nature and wherever located, including without
limitation all raw materials, work in process, finished goods, goods consigned
to the Company to the extent of its interest therein as consignee, goods in
transit, materials and supplies of any kind, nature or description which are or
might be used in connection with the manufacture, packing, shipping,
advertising, selling or finishing of any such goods, all documents of title or
documents representing the same and all records, files and writings with respect
thereto.
(vi) "Obligations" shall mean all payment and performance
obligations, liabilities and indebtedness of the Company or any Subsidiary to
Secured Party, under the Notes, the Credit Agreement, any Loan Document or any
other agreement or instrument, whether now existing or hereafter created,
absolute or contingent, direct or indirect, due or not, whether
created directly or acquired by assignment or otherwise, including without
limitation reimbursement of Letters of Credit and the payment of performance of
all other loans, obligations, liabilities, and indebtedness of the Company or
any Subsidiary to Secured Party, and all fees, costs, expenses and indemnity
obligations hereunder or thereunder.
(vii) "Receivables" shall mean all right, title and interest of
the Company in all present and future accounts receivable, contract rights,
promissory notes, chattel paper, all tax refunds and rights to receive tax
refunds, bonds, rights of indemnification, contribution and subrogation, leases,
computer tapes, programs and software, deposits and claims against third parties
of every kind or nature, investment securities, notes, drafts, acceptances,
letters of credit and rights to receive proceeds of letters of credit,
instruments and deposit accounts, book accounts, credits and reserves and all
forms of obligations owing to the Company, together with all instruments, all
documents of title representing any of the foregoing, and all rights in any
merchandise or goods which any of the same may represent, all books, ledgers,
files and records with respect to any Collateral or security given to Secured
Party hereunder by the Company, together with all right, title, security and
guaranties with respect to each Receivable, including any right of stoppage in
transit.
(viii) "Uniform Commercial Code" means the Uniform Commercial
Code as in effect in New York State from time to time during the term of this
Agreement.
2. Security Interest.
(a) Grant of Security. As security for the Obligations, the Company
grants to Secured Party a first lien priority security interest in all of the
Company's right, title and interest, whether now existing or hereafter arising
or acquired, in and to the Collateral.
<PAGE>
(b) Security for Obligations. This Agreement secures the payment or
performance of all now existing or hereafter arising Obligations to Secured
Party, whether primary or secondary, direct or indirect, absolute or contingent,
joint or several, secured or unsecured, due or not, liquidated or unliquidated,
arising by operation of law or otherwise.
(c) The Company Remains Liable. This Agreement shall not affect the
Company's liability to perform all of its obligations under the transactions
giving rise to the Obligations. The exercise by Secured Party of any of the
rights hereunder shall not release the Company from any of its obligations under
the transactions giving rise to the Obligations, which shall remain unchanged as
if this Agreement had not been executed. Secured Party shall not have any
obligation or liability under the transactions giving rise to the Obligations by
reason of this Agreement, nor shall Secured Party be required to perform any of
the obligations of the Company thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
(d) Continuing Agreement. This Agreement shall create a continuing
security interest in the Collateral and shall remain in full force and effect
until payment in full of the Obligations.
3. The Company's Title; Liens and Encumbrances.
(a) The Company represents and warrants that the Company is, or to the
extent that this Agreement covers Collateral that is to be acquired after the
date hereof, will be, the owner of the Collateral, having good and
marketable title thereto, free from any and all Liens, except as permitted under
Section 9.02 of the Credit Agreement. The Company will not create or assume or
permit to exist any Lien on or against the Collateral except as created by this
Agreement or as permitted by the Credit Agreement. The Company shall notify
Secured Party promptly of any such other claim, lien, security interest or other
encumbrance made or asserted against the Collateral and will defend the
Collateral against any such claim, lien, security interest or other encumbrance.
(b) With respect to any personal property that the Company acquires
which is subject to a purchase money lien permitted under Section 9.02 of the
Credit Agreement, if the terms of such acquisition prohibit the Liens granted
hereby in favor of Secured Party, Secured Party shall execute and deliver such
instruments as the purchase money lender may reasonably require to waive or
release Secured Party's security interest in such item of personal property for
so long as the purchase money security interest is in effect.
4. Representations, Warranties and Covenants.
The Company represents and warrants to Secured Party as follows:
(a) The Company has no place of business, offices where the Company's
books of account and records are kept, or places where the Collateral is used,
stored or manufactured, except as set forth on Schedule I annexed hereto. The
Company shall at all times maintain its records as to the Collateral at its
chief place of business at the address referred to on Schedule I and at no
other. Except as permitted hereby, the Company shall not store, use or locate
any of the Collateral at any place other than as listed on Schedule I. The
Company shall not establish any new office or place of business, move its
principal office or move any of the Collateral to any location other than those
locations existing on the date hereof and listed on Schedule I unless in each
case the Company gives Secured Party 20 Banking Days prior notice of its
intention to do so, identifying the new location and providing such other
information as Secured Party deems reasonably necessary, and delivers to Secured
Party financing statements and such other documentation in form and substance
satisfactory to Secured Party to preserve its security interest in the
Collateral.
<PAGE>
(b) The Company currently uses the business or trade names set forth
on Schedule I, and has not used any other trade names during the last five
years, except as set forth on Schedule I. The Company shall not make any changes
in, additions to, or deletions from the business or trade names used by the
Company for billing purposes, except in connection with any Acquisition
permitted under Section 9.07 of the Credit Agreement.
(c) The Collateral is now and will be used in the Company's business
and not for personal, family, household or farming use.
(d) The Company has paid and, except as provided in Section 8.10 of
the Credit Agreement, will continue to pay or otherwise provide for the payment
when due, of all taxes, assessments or contributions required by law which have
been or may be assessed or levied against the Company, whether with respect to
any of the Collateral, to any wages or salaries paid by the Company or
otherwise, and will deliver satisfactory proof of such payment to Secured Party
on demand.
(e) Assuming it has been duly executed by Secured Party and that
Secured Party has filed the forms UCC-1 referred to on Schedule I, the security
interests and liens granted to Secured Party under this Agreement hereof shall
constitute valid, perfected and first priority security interests in and to the
Collateral in each case enforceable against all third parties and securing the
payment of all Obligations purported to be secured thereby, subject only to the
Liens permitted pursuant to Section 9.02 of the Credit Agreement.
5. Perfection of Security Interest.
The Company shall execute all such financing statements pursuant to
the Uniform Commercial Code or other notices necessary or appropriate under
applicable law, including the Federal Assignment of Claims Act and any state
motor vehicles registration statute, as Secured Party may require, each in form
satisfactory to Secured Party. The Company also shall pay all filing or
recording costs with respect thereto, and all costs of filing or recording this
Agreement or any other agreement or document executed and delivered pursuant
hereto or to the Obligations (including the cost of all federal, state or local
mortgage, documentary, stamp or other taxes), in each case, in all public
offices where filing or recording is deemed by Secured Party to be
necessary or desirable. The Company authorizes Secured Party to (a) file any
Uniform Commercial Code financing statements or amendments thereto without the
signature of the Company or by signing of the Company's name to any such
financing statements as its attorney-in-fact, (b) file notices of assignment
pursuant to the Federal Assignment of Claims Act, (c) file applications for
certificates of title or (d) take all other action which Secured Party may deem
necessary or desirable to perfect or otherwise protect the liens and security
interests created hereunder and to obtain the benefits of this Agreement.
6. General Covenants.
The Company shall have the following obligations to Secured Party
until full payment and complete performance of all Obligations and termination
of this Agreement.
<PAGE>
(a) Furnish Secured Party from time to time at Secured Party's request
with such statements and schedules further identifying and describing the
Collateral and all locations thereof in such detail as Secured Party may
reasonably require.
(b) Advise Secured Party promptly, in sufficient detail, of any
substantial change in the Collateral or of the occurrence of any event which
would effect the value of the Collateral or Secured Party's security interest
therein.
(c) Comply with all acts, rules, regulations and orders of any
legislative, administrative or judicial body or official applicable to the
Company or any Collateral or to the operation of the Company's business except
where the failure to comply (i) is non-material and (ii) has no effect on the
value of the Collateral or on the ability of Secured Party to exercise its
rights and remedies hereunder.
(d) Perform and observe all covenants, restrictions and conditions
contained in the Loan Documents and any other agreement or document executed in
connection with the Obligations as though the same were fully set forth in this
Agreement.
(e) Promptly execute and deliver to Secured Party such further
agreements or other instruments and take such further action from time to time
as Secured Party may deem necessary or appropriate to perfect, protect or
enforce its security interests in the Collateral or otherwise to effect the
intent of this Agreement.
(f) Keep or cause the Collateral to be kept in good working order and
marketable condition, ordinary wear and tear excepted.
(g) Insure the Collateral against loss or damage by fire or other
casualties, providing extended coverage for theft, burglary, bodily injury and
such other risks, with such companies and in such amounts, as Secured Party may
require from time to time.
(h) Use the Collateral for lawful purposes only in conformity with all
laws, rules and regulations.
(i) Allow Secured Party and its agents, (i) at all reasonable times
on reasonable notice, to inspect any of the Collateral and to examine and make
extracts from the Company's books and records relating to the Collateral and
(ii) once yearly at the Company's expense and, if requested, more frequently
at Secured Party's expense, to conduct an audit of the Collateral.
(j) Not assign, sell, mortgage, lease, transfer, pledge, grant a
security interest in or Lien upon, or otherwise dispose of or abandon any part
or all of the Collateral without the prior consent of Secured Party, except for
the sale from time to time in the ordinary course of business of the Company of
such items of Collateral as may constitute part of the business Inventory, and
except as provided in Sections 9.02 or 9.04 of the Credit Agreement.
(k) Cause each mortgagee of any real property owned by the Company and
each landlord of all real property leased by the Company to waive, by
instruments satisfactory in form and substance to Secured Party, any rights in
the Collateral, and to acknowledge the right of Secured Party to enter the
premises to remove Collateral.
(l) Not take or omit to take any action adversely affecting or
impairing the security interest in the Collateral in favor of Secured Party.
<PAGE>
7. Assignment of Insurance.
At or prior to the date hereof, the Company shall deliver to Secured
Party certificates of the issuing companies with respect to all policies of
insurance maintained for or by the Company covering or in any manner relating to
the Collateral, in form and substance satisfactory to Secured Party, naming
Secured Party as an additional insured party as its interests may appear with
respect to liability coverage and as loss payee with respect to property,
casualty and extended insurance coverage, and indicating that no such policy
will be terminated or reduced in coverage or amount without at least 30 days
prior written notice from the insurer to Secured Party. The Company hereby
assigns to Secured Party all amounts, including returned or unearned premiums,
which may become payable under or in respect of any such policy of insurance,
and directs each insurance company issuing any such policy to make payment of
sums directly to Secured Party. The Company hereby appoints Secured Party as its
attorney-in-fact with authority to endorse any check or draft representing any
such payment and to execute any proof of claim, subrogation receipt and any
other document required by such insurance company in connection with such
payment, and upon the occurrence of any Event of Default, to cancel, assign or
surrender any such policies. All such sums received by Secured Party shall be
applied by Secured Party to satisfaction of the Obligations or, to the extent
that such sums represent unearned premiums in respect of any policy of insurance
on the Collateral refunded by reason of cancellation, toward payment for similar
insurance protecting the respective interests of the Company and Secured Party,
or as otherwise required by applicable law.
8. Fixtures.
Except to the extent that fixtures are included in the definition of
Collateral, it is the intent of the Company and Secured Party that none of the
Collateral is or shall be regarded as fixtures, as that term is used or defined
in Article 9 of the Uniform Commercial Code, and the Company represents and
warrants that it has not made and is not bound by any lease or other agreement
which is inconsistent with such intent. If any Collateral or any part thereof is
or becomes attached or affixed to any real estate, upon request the Company
shall furnish Secured Party with a disclaimer or subordination in form
satisfactory to Secured Party of the holder of any interest in the real estate
to which the Collateral is attached or affixed, together with the names and
addresses of the record owners of and all other persons having interest in such
real estate.
9. Collections.
(a) Except as provided herein, the Company may collect all checks,
drafts, cash or other remittances (i) in payment of any of its Receivables, (ii)
in payment of any Inventory sold, transferred, leased or otherwise disposed of
or (iii) in payment of or in account of its accounts, contracts, notes, drafts,
acceptances and all other forms of obligations relating to any of the
Receivables or Inventory so sold, transferred, or leased or otherwise disposed
of. All of the foregoing amounts so collected after the occurrence of an Event
of Default shall be held in trust by the Company for and as the property of
Secured Party, and shall not be commingled with other funds, money or property
of the Company.
<PAGE>
(b) If requested by Secured Party upon or after an Event of Default
occurs, the Company will immediately following receipt of all such checks,
drafts, cash or other remittances in payment of any of its Receivable or in
payment for any Inventory sold, transferred, leased or otherwise disposed of,
deliver any such items to Secured Party accompanied by a remittance report in
form supplied or approved by Secured Party. The Company shall deliver such items
in the same form received, endorsed or otherwise assigned by the Company where
necessary to permit collection of such items.
(c) If requested by Secured Party upon or after an Event of Default
occurs, the Company will promptly notify Secured Party of the return or
rejection of any goods represented by any Receivables, and shall forthwith
account therefor to Secured Party in cash. Until such payment has been received
by Secured Party, the Company shall hold all such goods separate and apart, in
trust for and subject to Secured Party's security interest, and Secured Party is
authorized to sell, for the Company's account and at the Company's sole risk,
all or any part of such goods.
(d) In its discretion, upon or after an Event of Default occurs,
Secured Party may in its name or the Company's notify any account debtor or
obligor of any account, contract, instrument, chattel paper or general
intangible included in the Collateral to make payment to Secured Party.
(e) All of the foregoing remittances shall be applied and credited by
Secured Party in accordance with the provisions of Section 11(c) of this
Agreement.
10. Events of Default.
The occurrence of any one or more of the following events shall
constitute an event of default ("Event of Default") by the Company under this
Agreement:
(a) if a "Default" or "Event of Default" occurs under the Loan
Documents or the terms of any agreement executed in connection with the
Obligations;
(b) if at any time, acting in a commercially reasonable manner
following an audit of the Collateral, Secured Party considers the Obligations
insecure or any part of the Collateral unsafe, insecure or insufficient, and the
Company does not (i) within five Banking Days of notice, enter into written
agreement to furnish other collateral or make payment on account in the amount
necessary to reduce the Obligations to the extent Secured Party considers the
Obligations insecure or the Collateral unsafe, insecure or insufficient and (ii)
within 30 days of entering into such agreement, fulfill the obligations required
of it thereunder;
(c) if any obligor, guarantor of or any party to any of the
Obligations or the Collateral (the same, excluding the Company and the
Guarantors, collectively the "Obligors") defaults in the punctual payment of any
sum payable with respect to, or in the observance or performance of any of the
terms and conditions of any Obligations or of any other agreement between any
Obligor and Secured Party;
(d) if any warranty or representation made to Secured Party by or on
behalf of the Company, any Guarantor or any Obligor is false or misleading in
any material respect when made or, with respect to the Company, when deemed made
under the terms of the Credit Agreement;
(e) if there is any loss, theft, substantial damage to or destruction
of any Collateral, or the making or filing of any lien, levy, or execution on,
or seizure, attachment or garnishment of any of the Collateral;
<PAGE>
(f) if any Obligor is dissolved or fails to maintain its existence in
good standing under the laws of the states of its formation and qualification;
(g) if any of the Obligors becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or send
notice of an intended bulk transfer, if there is convened a meeting of the
creditors or principal creditors of any of the Obligors or if a committee of
creditors is appointed for any of them;
(h) if there is filed by or against any of the Obligors any petition
for any relief under the bankruptcy laws of the United States now or hereafter
in effect or under any insolvency, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction now or hereafter in effect;
(i) if the usual business of any of the Obligors shall be terminated
or suspended;
(j) if any proceedings or procedure supplementary to or in
enforcement of any judgment is commenced against any Obligor or with respect to
any of their property; or
(k) if any petition or application to any court is filed by or against
any of the Obligors for the appointment of any receiver or trustee for any of
the Obligors or any part of the property of any of them.
11. Rights and Remedies.
(a) If any Event of Default occurs, Secured Party thereafter may, to
the extent permitted by applicable law, without notice to the Company, as to any
or all of the Collateral, by any available judicial procedure or without
judicial process, take possession of the Collateral and without liability for
trespass enter any premises where the Collateral may be located for the purpose
of taking possession of or removing the Collateral, and generally exercise any
rights afforded to a secured party under the Uniform Commercial Code or other
applicable law. Secured Party shall have the right to sell, otherwise dispose of
all or any part of the Collateral, whether in its then condition or after
further preparation or processing, either at public or private sale or at any
broker's board, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such terms and conditions, all as
Secured Party in its sole discretion may deem advisable, and Secured Party shall
have the right to purchase at any such sale. If any Collateral shall require
rebuilding, repairing, maintenance, preparation, or is in process or other
unfinished state, Secured Party may do so to put the Collateral in such saleable
or disposable form as it shall deem appropriate. At Secured Party's request, the
Company shall assemble the Collateral and make it available to Secured Party at
places which Secured Party shall select, whether at the Company's premises or
elsewhere, and make available to Secured Party, without rent, all of the
Company's premises and facilities for the purpose of Secured Party's taking
possession of, removing or putting the Collateral in saleable or disposable
form. If any of the Collateral consists of motor vehicles, Secured Party may use
the Company's license plates.
<PAGE>
(b) Any sale, lease or other disposition of Collateral may be made
without demand for performance or notice of advertisement except that, where
applicable law requires reasonable notice of sale or other disposition, five
days notice by overnight courier or personal delivery, to the Company of the
place and time of any public sale or of the time at which any private sale or
other intended disposition is to be made, shall be deemed reasonable notice
thereof. Notwithstanding the foregoing, if any of the Collateral is perishable
and may be materially diminished in value during such five day period, Secured
Party shall provide the Company with such shorter notice as it deems reasonable
in the circumstances.
(c) The proceeds of any sale, lease or other disposition of the
Collateral shall be applied first to the expenses of retaking, storing,
processing and preparing for sale, selling and the like and to the reasonable
attorneys' fees and legal expenses incurred by Secured Party, next to
satisfaction of the Obligations, and then to the payment of any other amounts
required by applicable law, after which Secured Party shall account to the
Company for any surplus. If the proceeds are insufficient to pay all amounts to
which Secured Party is entitled, the Company shall be liable for the deficiency,
together with interest thereon, at the rate prescribed in the agreements giving
rise to the Obligations, and the reasonable fees of any attorneys employed by
Secured Party to collect such deficiency. The Company waives all claims, damages
and demands against Secured Party arising out of the repossession, removal,
retention or sale of the Collateral.
(d) Secured Party has no obligation to preserve rights to any
Collateral against prior parties, to proceed first against any Collateral or to
marshall any collateral of any kind for the benefit of any other creditors of
the Company or any other Person. Upon the occurrence of an Event of Default and
as long as it continues, Secured Party shall have a license and right to use,
without charge, the Company's labels, patents, copyrights, and all its rights of
use of any name, trade secrets, trade names, trademarks and advertising matter,
or any property of a similar nature pertaining to the Collateral, in completing
production of, advertising for sale, and selling any Collateral, and the
Company's rights under all licenses and any franchise, sales or distribution
agreements shall inure to Secured Party's benefit.
12. Costs and Expenses.
The Company shall pay on demand any and all of Secured Party's fees,
costs and expenses, including the reasonable attorneys' fees and legal expenses,
paid or incurred in connection with the filing or recording of financing
statements and other documents in public offices (including all taxes in
connection therewith), the payment or discharge of any taxes, insurance
premiums, encumbrances or otherwise protecting, maintaining or preserving the
Collateral and Secured Party's security interest therein, or in defending or
prosecuting any actions or proceedings arising out of or related to the
transaction to which this Agreement relates. Until so paid, all such amounts
shall be added to the principal amount of the Obligations and shall bear
interest at the rate prescribed in the agreements giving rise to the
Obligations.
<PAGE>
13. Power of Attorney.
(a) The Company authorizes Secured Party and does hereby make,
constitute and appoint Secured Party, and any officer or agent of Secured Party,
with full power of substitution, as the Company's true and lawful
attorney-in-fact, with power, in its own name or in the name of the Company (a)
to endorse any notes, checks, drafts, money orders, or other instruments of
payment (including payments payable under or in respect of any policy of
insurance) in respect of the Collateral that may come into possession of Secured
Party, (b) to sign and endorse any invoice, freight or express bill, bill of
lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with accounts, and other documents
relating to Collateral, (c) to pay or discharge any taxes, liens, security
interest or other encumbrances at any time levied or placed on or threatened
against the Collateral, (d) to demand, collect, receipt for, compromise, settle
and sue for monies due in respect of the Collateral, (e) to receive, open and
dispose of all mail addressed to the Company and to notify the Post Office
authorities to change the address for delivery of mail addressed to the Company
to such address as Secured Party may designate and (f) generally to do all acts
and things which Secured Party deems necessary to protect, preserve and realize
upon the Collateral and Secured Party's security interest therein. The Company
hereby approves and ratifies all acts of said attorney or designee, who shall
not be liable for any acts of commission or omission, nor for any error or
judgment or mistake of fact or law except for its own gross negligence or wilful
misconduct. This power of attorney shall be irrevocable as long as any of the
Obligations shall be outstanding.
(b) Secured Party shall not exercise any rights under or take any
actions pursuant to the foregoing power of attorney unless an Event of Default
has occurred.
14. Notices.
All notices, consents, approvals and other communications required or
permitted to be given to a party under this Agreement shall be in writing and
shall be delivered personally to the party, sent by any national overnight
courier or mailed first class certified mail, return receipt requested, to the
party at the address indicated on page one, to the attention of Joseph Burns for
Secured Party and to the attention of Margaret Krumholz for the Company. Any
item delivered in accordance with the provisions of this Section shall be deemed
to have been delivered (i) on the date of personal delivery, (ii) on the
business day following the date sent by overnight courier or (iii) on the fifth
day following the date on which it was so mailed, as the case may be.
<PAGE>
15. Other Security.
Secured Party's rights and remedies hereunder shall not be diminished,
impaired or otherwise affected if the Obligations are now or hereafter secured
by property other than the Collateral, or by the guarantee, endorsement or
property of any other Person. Secured Party shall have the right in its sole
discretion to take any other action with respect thereto, concurrently with or
separately from any action hereunder.
16. Further Security.
The Company grants, pledges and assigns to Secured Party a continuing
lien on, security interest in and rights of set-off in all money, securities and
other property of the Company, and the proceeds thereof, actually or
constructively held or received by or for Secured Party or any Affiliate of
Secured Party. The Company authorizes Secured Party to deliver a copy of this
Agreement to give others notice of the Company's transfer of a security interest
in such property. Upon or after an Event of Default, Secured Party may from time
to time without notice apply all or part of such moneys, securities, property,
proceeds, deposits or credits to any of the Obligations in such amounts as
Secured Party may elect in its discretion, even though the Obligations may then
be contingent or unmatured, whether or not the Collateral is adequate security.
17. Miscellaneous.
(a) Beyond the safe custody thereof, Secured Party shall have no duty
as to the collection of any Collateral in its possession or control or in the
possession or control of any agent or nominee of Secured Party, or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto.
(b) No course of dealing between the Company and Secured Party, or
Secured Party's failure to exercise or delay in exercising any right, power or
privilege hereunder shall operate as a waiver thereof. Any single or partial
exercise of any right, power or privilege hereunder shall not preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege.
(c) All of Secured Party's rights and remedies with respect to the
Collateral, whether established hereby or by any other agreements, instruments
or documents or by law, shall be cumulative and may be exercised singly or
concurrently.
(d) This Agreement may be amended or modified, and a provision hereof
may be waived, only by a writing signed by all of the parties hereto.
(e) The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction and shall not in any
manner affect such clause or provision in any other jurisdiction, or any other
clause or provision of this Agreement in any jurisdiction.
(f) The benefits of this Agreement shall inure to the benefit of the
successors and assigns of Secured Party. The rights and obligations of the
Company under this Agreement shall not be assigned or delegated without the
prior consent of Secured Party.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to its conflicts of laws
principles.
<PAGE>
(h) The Company hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in Suffolk or Nassau
County over any action or proceeding arising out of or relating to this
Agreement, and the Company hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such New York State
of Federal court. To the extent permitted by applicable law, the Company
irrevocably consents to the service of any and all process in any such action or
proceeding by the mailing (by certified or registered mail) of copies of such
process to it. The Company agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or any other manner provided by law. To the extent
permitted by applicable law, the Company waives any objection to venue in such
State of Federal Court and any objection to an action or proceeding in such
State of Federal Court on the basis of forum non conveniens. The Company agrees
that any action or proceeding brought against Secured Party shall be brought
only in New York State or United States Federal court sitting in Suffolk or
Nassau County.
(i) THE PARTIES WAIVE ANY RIGHT TO A JURY TRIAL.
(j) The Company shall indemnify Secured Party and hold it harmless
from and against any and all claims, damages, judgments, liabilities, costs and
expenses ("Loss") (including reasonable fees and disbursements of counsel) which
may be incurred by or asserted against Secured Party in connection with or
arising out of Secured Party's exercise of its rights or assertion of its
security interest under the provisions of this Agreement, any Loan Document or
any agreement relating to the Obligations which permit Secured Party to collect,
settle or adjust Receivables or to deal with Collateral in any way, except to
the extent that such Loss resulted from the gross negligence or without
misconduct of Secured Party. This indemnity includes Secured Party's activities
in connection with the realization, repossession, safeguarding, insuring or
other protection of Collateral or collecting, perfecting or protecting the
Secured Party's liens and security interests hereunder or under any Loan
Document.
IN WITNESS WHEREOF, the parties have executed this Agreement.
KeyBank National Association Disc Graphics, Inc.
By: By:
Name: Joseph Burns Name: Donald Sinkin
Title: Vice President Title: President and Chief
Executive Officer
<PAGE>
SCHEDULE I
TO
DISC GRAPHICS, INC.
SECURITY AGREEMENT
Principal Office*
10 Gilpin Avenue
Hauppauge, New York 11788
Other Offices Where Records Are Kept*
25 Hoffman Avenue, Hauppauge, New York 11788
3116 Vanowen Street, Burbank, California 91505
Locations Where Collateral
Is Stored, Used or Located*
10 Gilpin Avenue, Hauppauge, New York 11788
198 Greenpond Road, Rockaway, New Jersey 07866
25 Hoffman Avenue, Hauppauge, New York 11788
3116 Vanowen Street, Burbank, California 91505
Business and Trade Names
Used by Debtor
Current Names* Discontinued Names
--------------- ------------------
Disc Graphics Four Seasons Litho
* Forms UCC-1 shall be filed in all jurisdictions where Debtor has offices or
stores, uses or places Collateral, under each actual and trade name used by
Debtor.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,859
<SECURITIES> 0
<RECEIVABLES> 9,899,995
<ALLOWANCES> (844,000)
<INVENTORY> 2,013,333
<CURRENT-ASSETS> 12,485,128
<PP&E> 13,839,955
<DEPRECIATION> 5,585,035
<TOTAL-ASSETS> 22,045,682
<CURRENT-LIABILITIES> 7,483,329
<BONDS> 5,598,307
0
0
<COMMON> 53,786
<OTHER-SE> 8,910,260
<TOTAL-LIABILITY-AND-EQUITY> 22,045,682
<SALES> 42,575,120
<TOTAL-REVENUES> 42,575,120
<CGS> 31,663,934
<TOTAL-COSTS> 31,663,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 496,662
<INTEREST-EXPENSE> 763,793
<INCOME-PRETAX> 2,534,986
<INCOME-TAX> 1,081,000
<INCOME-CONTINUING> 1,453,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,453,986
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
