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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, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from _____ to _____
Commission file number 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
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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 [ ]
At March 30, 1998, the aggregate market value of the voting stock held by
non-affiliates of Registrant was approximately $9,117,554 based on the
closing price of the Common Stock on the Nasdaq Stock Market on that date.
At March 30, 1998, the Registrant had outstanding 5,440,256 shares of
Common Stock, $.01 par value per share.
Documents Incorporated by Reference: Part III - Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Exchange Act.
<PAGE>
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, ("Disc Graphics, Inc." 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, Disc Graphics, Inc. adopted a December 31 fiscal
year.
General
Disc Graphics, Inc., 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.
Disc Graphics, Inc.'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 Disc
Graphics, Inc. to offer a service and cost advantage over its competitors; and
(3) to develop innovative packaging designs and techniques for new and existing
markets.
<PAGE>
Disc Graphics, Inc. is actively involved in investigating additional
printing and packaging related business opportunities, including potential
acquisitions similar to the acquisition of Benham Press, Inc. (Benham), a
commercial printer, in October 1997. However, Disc Graphics, Inc. has not
entered into any definitive agreement with respect to any such acquisition. In
addition, there can be no assurance that Disc Graphics, Inc. will consummate any
potential acquisition, or if completed, that any such acquisition will be
profitable for Disc Graphics, Inc.
Historically, Disc Graphics, Inc. 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, Disc
Graphics, Inc. acquired Four Seasons Litho, Inc., a commercial printer with
revenues of approximately $3 million per year; in 1996, Disc Graphics, Inc.
acquired Pointille, Inc., a packaging printer with revenues of approximately $8
million per year and in 1997, Disc Graphics, Inc. acquired substantially all of
the assets and certain liabilities of Benham and has since integrated each of
their manufacturing facilities and sales/marketing programs into Disc Graphics.
Disc Graphics, Inc. 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, expanding Disc Graphics, Inc.'s
product line and continuing ongoing internal expansion.
Disc Graphics, Inc.'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 65% of Disc Graphics, Inc.'s revenue in 1997 was derived from
the manufacture and sale of paperboard folding cartons. An industry trade
publication has estimated that in 1997 there were over 300 companies operating
473 folding carton manufacturing plants in the United States and the total
revenues from the sale of folding cartons was approximately $5.1 billion,
reflecting a 5.5% decline from 1996. The reduction in the number of folding
carton plants and a decline in industry revenues reflects the loss of market
share to alternative forms of packaging and a consolidation or closure of some
U.S. plants.
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. Disc Graphics, Inc.
<PAGE>
generally competes with independent manufacturers. Disc Graphics, Inc. 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.
Disc Graphics, Inc. has concentrated in markets, such as the home video,
software, cosmetics, music and pharmaceutical packaging markets, which utilize
those techniques to a significant extent. Disc Graphics, Inc. has devoted
substantial resources toward developing the specialized processes required in
such markets.
Disc Graphics, Inc.'s business includes commercial printing, book component
printing and labels. Industry trade sources have estimated that the total United
States commercial printing market in 1997 was approximately $78 billion. The
industry is fragmented with many small printing companies serving regional
markets. For example, within the New York City Metropolitan area, there are over
3,000 printing establishments with 76% having fewer than ten employees. Disc
Graphics, Inc. is listed in the top 200 printers in the United States, based on
revenues. Based on 1996 revenues, Disc Graphics, Inc. was ranked 142 in the top
500 printing companies in the United States by an industry trade publication.
Products
Video/Entertainment Software Packaging
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Disc Graphics, Inc. manufactures video packaging, including bottom load
video sleeves, multi-packs and specialty items. Disc Graphics, Inc. has
historically concentrated on the catalogue and special interest video/software
markets. Disc Graphics Inc.'s catalogue customers typically have licensed or
purchased products from major movie production studios. As in prior years,
special interest video continues to be a growing segment of the market.
Packaging for these videos is often sold to independent distributors and video
tape duplicators. Through these distributors and duplicators Disc Graphics, Inc.
has produced packaging for many Fortune 500 companies. Disc Graphics, Inc.'s
west coast operation is producing video packaging for major film studios.
Software packaging continues to be a growing segment of Disc Graphics, Inc.
revenues. Disc Graphics, Inc. produces packaging for some of the largest
entertainment software companies including GT Interactive Software and
Activision. In addition, Disc Graphics, Inc. has made in-roads into the
applications software market producing packaging for companies such as Computer
Associates.
Music/Audio Packaging
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Disc Graphics, Inc. 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.
<PAGE>
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, Disc Graphics, Inc. has assembled a combination of
skilled workers, advanced equipment, and production systems to meet these
requirements.
Disc Graphics, Inc. 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, Disc Graphics, Inc.
manufactures packaging for special interest and secondary markets. Many of the
largest music/audio companies produce or distribute product from the mid-west
region of the United States. The recent acquisition of Benham Press provides
Disc Graphics, Inc. with a location in close proximity to many of these
distribution centers.
The other major segment of this market is audio publishing packaging. Disc
Graphics, Inc. believes that it has a significant share of this market. Disc
Graphics, Inc.'s principal customers include two of the largest publishers in
this market. Disc Graphics, Inc. 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. Disc Graphics, Inc. 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 Disc Graphics, Inc.'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
Disc Graphics, Inc.'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
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Disc Graphics, Inc. manufactures cartons and packaging for fragrances, skin
lotions, pet products, food and other specialty packaging for this market. Those
packagings may be the actual product carton or special point-of-purchase
promotions for the major cosmetic companies or educational packages for
pharmaceutical companies. Disc Graphics, Inc. sells packaging for this market
both directly and through brokers representing national brands and private label
companies.
<PAGE>
Commercial Printing
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In the area of commercial printing, Disc Graphics, Inc. prints brochures,
posters, sell sheets and other promotional material. Disc Graphics, Inc. prints
book jackets and covers, as well as children's books and "cut labels" for
vitamin and food packaging.
Labels
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Disc Graphics, Inc. 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
Disc Graphics, Inc.'s revenues are derived from several markets. The
largest market as a percentage of total 1997 net sales, was video/entertainment
software which accounted for approximately 30%; followed by consumer product
packaging, which accounted for approximately 25%; next was music/audio
packaging, which accounted for approximately 18%; then commercial printing,
which accounted for approximately 12%; then pharmaceutical/vitamin packaging,
which accounted for approximately 9%; and labels which accounted for
approximately 6%.
Disc Graphics, Inc.'s sales are primarily the result of direct solicitation
by its executive officers and full-time sales people. Disc Graphics, Inc.'s
package engineering staff assists customers with new package design and
development. Because Disc Graphics, Inc. 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 Notes thereto located
elsewhere in this Annual Report.
Seasonality
Historically, Disc Graphics, Inc.'s revenues have been moderately seasonal.
In the last two quarters of 1997 and 1996, Disc Graphic, Inc.'s revenues were
approximately 54% and 56% of annual sales, respectively. This seasonality is
primarily the result of certain markets which Disc Graphics, Inc. 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 74% of Disc Graphics, Inc.'s sales in 1997,
the revenues of Disc Graphics, Inc. are typically greater in the last six months
of the calendar year versus the first six months.
<PAGE>
Competition
Disc Graphics, Inc. competes with a small number of printed paperboard
packaging companies within each of its markets. In the music, video and software
industries, Disc Graphics, Inc. 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. Disc Graphics, Inc.
believes that its ability to perform all aspects of the manufacturing process
in-house is an important factor in maintaining and improving its competitive
position.
While Disc Graphics, Inc. believes its present competitive position is
strong, there can be no assurance that this will not change. Several of Disc
Graphics, Inc.'s competitors have financial resources that are greater than Disc
Graphics, Inc.'s. In addition, because Disc Graphics, Inc. supplies packaging to
consumer industries, it is also subject to the competitive forces affecting its
customers.
Employees
As of February 15, 1998, Disc Graphics, Inc. had approximately 456
employees. 304 of these employees are located in the Company's Hauppauge, New
York facility, with 246 serving in manufacturing capacities and 58 serving in
selling and administrative capacities. Eighty-five employees are located in the
Company's Burbank, California facility, with 75 serving in manufacturing
capacities and 10 serving in selling and administrative capacities. Twenty-four
employees are located in the Company's Rockaway, New Jersey facility, with 21
serving in manufacturing capacities and 3 serving in selling and administrative
capacities. Forty-three employees are located in the Company's Indianapolis,
Indiana facility, with 30 serving in manufacturing capacities and 13 serving in
selling and administrative capacities. A majority of the manufacturing employees
located in Burbank, California facility are represented by a labor union. Disc
Graphics, Inc. considers its relationship with its employees to be satisfactory.
Materials
Disc Graphics, Inc. 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, Disc Graphics, Inc. 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 Disc Graphics, Inc. will
not encounter difficulty in obtaining supplies of such material to fulfill its
requirements.
<PAGE>
Equipment
Disc Graphics, Inc. owns or leases various manufacturing, computer and
other equipment used in the manufacture of its products and for its
administrative support.
Regulation
Disc Graphics, Inc.'s activities are subject to various environmental,
health and employee safety laws. Disc Graphics, Inc. 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 Disc Graphics, Inc.'s capital
expenditures, earnings or competitive position, and Disc Graphics, Inc. does not
anticipate that such compliance will have a material effect on Disc Graphics,
Inc. in the future. Although Disc Graphics, Inc. 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.
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 the founder of Colt
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 Specialty Retail Group, Inc. and several other companies.
Mark L. Friedman is a Director of the Company, and is counsel to the New
York law firm of Baer Marks & Upham, LLP.
Margaret M. Krumholz is Chief Financial Officer of the Company.
<PAGE>
ITEM 2. Properties
Disc Graphics, Inc.'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 Disc Graphics, Inc. through a limited partnership and Disc
Graphics, Inc. believes that the lease terms were and are at least as favorable
to Disc Graphics, Inc. as the lease terms which could have been obtained from
unaffiliated third parties for similar office, manufacturing and warehouse
space. Disc Graphics, Inc.'s warehouse facility is a building adjacent to its
executive offices of which 40,000 square feet is occupied by Disc Graphics, Inc.
The monthly lease payment for the warehouse is $12,500 and the lease terminates
on August 31, 1998. Disc Graphics, Inc. also leases an office in Manhattan. The
monthly lease payment for the office is $2,800 and the lease terminates on
August 9, 1998. Disc Graphics, Inc. also maintains an 8,400 square foot printing
facility in Rockaway, New Jersey. The monthly lease payment for the New Jersey
facility is $3,458 and the lease terminates on June 13, 1998. Disc Graphics,
Inc. 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. Disc Graphics, Inc. also owns a 27,000 square foot
manufacturing facility in Indianapolis, Indiana. The monthly mortgage payment
for this facility is $8,253 and terminates on February 1, 2008. Management of
Disc Graphics, Inc. believes that the facilities are adequate to meet current
operational needs.
ITEM 3. Legal Proceedings
From time to time, Disc Graphics, Inc. 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 Disc Graphics, Inc.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1997, there were
no matters submitted to a vote of the Disc Graphics, Inc. security holders
through the solicitation of proxies or otherwise.
<PAGE>
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 Nasdaq SmallCap
Market under the symbol DSGR. From October 31, 1995 to May 28, 1996, Disc
Graphics, Inc.'s Common Stock was listed on the American Stock Exchange under
the symbol DGI The table set forth below contains the range of the high and low
closing bid prices on the Nasdaq SmallCap Market for the quarters ended
September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997, September
30, 1997, and December 31, 1997. The prices for the quarters ended March 31,
1996 and June 30, 1996 are the high and low closing sales prices on the American
Stock Exchange.
The Company's Class A Warrants are currently authorized for trading on the
Nasdaq 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. The table set forth below contains the range of the high
and low closing bid prices on the Nasdaq SmallCap Market for the quarters ended
September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997, September
30, 1997 and December 31, 1997. The prices of the Class A Warrants for the
quarters ended 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
High Low High Low
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Quarter Ended
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<S> <C> <C> <C> <C>
March 31, 1996 $4.250 3.313 .813 .438
June 30, 1996 3.938 2.628 .750 .375
September 30, 1996 2.938 1.688 .375 .125
December 31, 1996 2.750 2.125 .250 .125
March 31, 1997 3.188 2.188 .125 .438
June 30, 1997 3.625 2.625 .313 .688
September 30, 1997 4.000 2.875 .313 .813
December 31, 1997 5.000 3.750 .500 .875
</TABLE>
On March 19, 1998, the closing bid prices for the Common Stock and the
Class A Warrants were $4.50 and $.5625, respectively.
<PAGE>
(b) Holders of Common Stock
As of March 26, 1998, there were 52 holders of record and approximately 500
beneficial owners of the Common Stock and 3 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 Disc
Graphics, Inc.'s revenues and earnings, capital requirements and general
financial condition and any other factors deemed relevant by the Disc Graphics,
Inc. Board of Directors. Disc Graphics, Inc. presently intends to retain all
earnings for use in Disc Graphics, Inc.'s business operations and to further the
growth of Disc Graphics' business. Accordingly, the Disc Graphics, Inc. Board of
Directors does not anticipate declaring any dividends in the foreseeable future.
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.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Income statement data:
Sales $48,445 $42,575 $36,149 $30,550 $26,651
Gross profit 12,693 10,911 7,481 6,797 5,819
Operating expenses 8,483 7,612 5,733 5,020 4,559
Income from operations 4,210 3,299 1,748 1,777 1,260
Interest expense 612 764 838 837 697
Net income 2,159 1,454 501 502 215
Net income per common share
Basic 0.40 0.29 0.18 0.22 0.10
Diluted 0.40 0.29 0.18 0.22 0.10
Weighted average number
of shares outstanding
Basic 5,387 5,091 2,714 2,247 2,247
Diluted 5,397 5,098 2,714 2,247 2,247
As of December 31,
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1997 1996 1995 1994 1993
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Balance sheet data:
Total assets $26,747 $22,046 18,604 $14,048 $12,831
Current liabilities 7,141 7,483 3,934 4,835 4,257
Long term liabilities 8,494 5,598 7,243 6,933 6,796
Stockholders' equity 11,112 8,964 7,427 2,280 1,778
</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, 1997. The discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in this Annual
Report.
Introduction
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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.
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.
<PAGE>
The Merger has been treated for accounting and financial reporting
purposes as a reverse merger of RCL into Old Disc. Accordingly, the Company's
results of operations prior to October 30, 1995 are those of Old Disc. In
addition, in connection with the Merger, Disc adopted a December 31 fiscal year.
Pointille Acquisition
- ---------------------
On May 18, 1996, the Company, acquired (the "California Acquisition")
substantially all of the assets and certain liabilities of Pointille, Inc., a
California corporation ("Pointille") pursuant to an asset purchase agreement
dated as of May 17, 1996, by and among the Company, Pointille and the sole
shareholder of Pointille (the "Asset Purchase Agreement"). The purchase price
consisted of $662,545 in cash, 74,074 shares of the Company's common stock, 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. This was offset by a receivable from the former owner of
$175,633, which was $55,268 at December 31, 1997. 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 $993,000 at
December 31, 1997.
Benham Acquisition
- ------------------
On October 24, 1997, the Company acquired substantially all of the assets
and certain liabilities of Benham Press, Inc., an Indiana based printing company
("Benham"), for $128,781 in cash, the issuance of 10,499 shares of the Company's
common stock and the assumption of certain liabilities associated with
outstanding borrowing under a line of credit agreement and notes payable of
approximately $2,637,000. The Company liquidated such liabilities with
additional borrowings under the Company's line of credit. The Company recorded
the value of the 10,499 shares of common stock at the estimated fair value at
the date of Acquisition. The results of operations of Benham have been included
in the accompanying financial statements from the date of acquisition through
December 31, 1997. The acquisition was accounted for using the purchase price
method of accounting in accordance with generally accepted accounting
principles. Goodwill amortization amounted to $5,325 for the year ended December
31, 1997.
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
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Net Sales
- ---------
Net sales for the year ended December 31, 1997 were $48,445,000 compared to
$42,575,000 for the same period the prior year, representing an increase of
$5,870,000 or 14%. This increase was primarily due to the California Division,
which accounted for approximately $3,786,000 of the increase in net sales. The
categories of the business which experienced significant growth were
video/software packaging, which increased $2,714,000 or 22%, followed by
commercial which increased $1,764,000 or 45%; music/audio which increased
$1,301,000 or 17%; consumer product packaging increased $566,000 or 5%. There
continues to be strong growth in both CD-ROM and video sales. As expected, the
Company has been better positioned over the past year to compete in these
segments of the west coast markets. As a result, $1,722,000 or 29% of the
Company's increased net sales were from the additional video/software packaging
sales at the California facility.
Both the California and Indiana Acquisitions have contributed
significantly to the growth in commercial sales. The Indiana facility is
primarily engaged in commercial printing, contributing over $600,000 in sales
since October 24, 1997. The music/audio category continues to grow in the New
York and California facilities. Indiana also added to this category with over
$100,000 in sales over the two months.
Both pharmaceutical/vitamin packaging and label sales experienced a
slight decrease of $362,000 or 8% and $113,000 or 4%, respectively. This was a
result of the Company's continued focus to grow earnings by concentrating on
more profitable accounts within these business categories.
Gross Profit
- ------------
Gross profit for the year ended December 31, 1997 was $12,693,000 (a
26.2% profit margin) compared to $10,911,000 (a 25.6% profit margin) for the
prior year representing an increase of $1,782,000 or 16%. The increase was due
primarily to the reduction in costs of goods sold as a percentage of revenue,
increased sales volume and both the California Acquisition and Indiana
Acquisition. The Company has continued to focus on improving manufacturing
processes and capital investment of more efficient equipment. This strategy has
resulted in improved gross profit margins at all facilities during the twelve
months ended December 31, 1997. This focus has enabled the Company to remain
competitive, as well as improve profitability.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 1997 were $8,483,000 (17.5% of net sales) compared to $7,612,000
(17.9% of net sales) for the prior year, an increase of $871,000, or 11%. This
<PAGE>
increase was due primarily to revenue related expenses (such as freight to
customers and commissions) and costs associated with both the California and
Indiana facilities. These increases were offset by a decline in professional
fees which were renegotiated effective January 1, 1997. The Company will
continue to focus on reducing SG&A costs through synergies among facilities,
thus leveraging the fixed cost base with business growth.
Interest Expense
- ----------------
Interest expense for the year ended December 31, 1997 was $612,000,
compared to $764,000 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 was primarily related
to the improved borrowing rate under the new Credit Agreement as compared to the
rate under the former Financing Agreement.
Income Taxes
- ------------
The provision for income taxes for the year ended December 31, 1997
increased primarily due to the increase in pretax income of $1,063,000 and
offset by a decrease in the effective tax rate from 42.6% in 1996 to 40.0% in
1997.
Net Income
- ----------
Net income for the year ended December 31, 1997 was $2,159,000 compared
to $1,454,000 for the prior year, an increase of $705,000, or 48%. This increase
was a result of an increase in net sales of approximately 14% along with the
gross profit improvement at all facilities with a total improvement of 0.6
percentage points of sales. Management's continued focus on cost reductions
resulted in savings in professional fees and interest expenses. The Company's
strategy of growing revenue both internally and through acquisitions coupled
with cost reduction projects and investments has resulted in strong earnings
growth in 1997 compared to 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
Disc Graphics, Inc. to compete more aggressively in the west coast markets and
that this should be beneficial as it relates to the entertainment segment (i.e.
video/software and music/audio packaging) and CD-ROM packaging segment of Disc
Graphics, Inc.'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 music and audio packaging
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 was 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 $3,430,000. 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 year 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 .
<PAGE>
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.
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 was 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 year 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.
Liquidity and Capital Resources
- -------------------------------
The primary sources of cash for Disc Graphics, Inc.'s business activities
have been cash provided from operations, borrowings under the financing
agreements with its current bank lender (the "Credit Agreement") and proceeds
from the merger RCL and Old Disc. As of December 31, 1997, Disc Graphics, Inc.
had working capital of $7,434,000 compared to $5,002,000 as of December 31,
1996. This increase was due primarily to the increase in accounts receivable and
decrease in accrued expenses and income taxes payable.
<PAGE>
Net cash provided by operating activities for the year ended December 31,
1997 was $1,854,000 compared to $5,309,000 from the prior year. Cash used in
investing activities were primarily for capital expenditures.
Capital expenditures have been primarily for purchases of manufacturing
equipment, building and building improvements, and the purchase of furniture and
fixtures. Capital expenditures in 1997 were $2,420,000 as compared to $782,000
in 1996. In 1997, the Company invested in several higher speed and more
technologically advanced pieces of equipment to upgrade the throughput and
quality.
On February 26, 1997 the Company entered into a new revolving credit
agreement (the "Credit Agreement") with a different bank which allows for
borrowings equal to 85% of eligible accounts receivable plus up to 70% of
eligible inventory, not to exceed $10,000,000. 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 8.5% per annum
at December 31, 1997). 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. The Company utilized
approximately $2.7 million of the sublimit for the Indiana Acquisition. The
Credit Agreement contains certain covenants which require Disc Graphics, Inc. to
satisfy certain performance criteria, net worth levels and debt service ratios.
At December 31, 1997, Disc Graphics, Inc. was in compliance with all the
covenants. At December 31, 1997, Disc Graphics, Inc. had approximately
$7,240,000 available for borrowing under the Credit Agreement.
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 introducing a new process to certain customers which provides high
quality products at a lower cost.
<PAGE>
In addition, despite inflationary increases in direct labor, the Company
has managed through more efficient equipment to continue to reduce the cost of
labor as a percentage of revenues. The Company, like its competitors, has
whenever possible passed on increased costs by way of increased pricing in
various markets.
Historically, a portion of Disc's business has been moderately 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 Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997. This Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement further
requires that an entity display an amount representing total comprehensive
income for the period in that financial statement. This Statement also requires
that an entity classify items of other comprehensive income by their nature in a
financial statement. For example, other comprehensive income may include foreign
currency items and unrealized gains and losses on investments in equity
securities. Reclassifications of financial statements for earlier periods,
provided for comparative purposes, is required. Based on current accounting
standards, this Statement is not expected to have a material impact on the
Company's consolidated financial statements. The Company will adopt this
accounting standard effective December 1, 1999, as required.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets, and other amounts
disclosed for segments to corresponding amounts reported in the consolidated
financial statements. Restatement of comparative information for earlier periods
<PAGE>
presented is required in the initial year of application. Interim information is
not required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statements disclosures. The Company will adopt this accounting standard
effective December 1, 1999, as required.
Year 2000 Date Conversion
- -------------------------
On March 1, 1997, the Company implemented a fully integrated computer
system. In preparing the system-specification for vendor selection, the Company
required that the system be Year 2000 compliant. The newly implemented software
uses a five-byte numeric field compared to the standard two-byte numeric field.
Consequently, the software does accommodate century rollovers. The Company does
not anticipate any issues relating to Year 2000 system requirements. The Company
continues to assess the impact, if any, to its vendors and customers.
ITEM 8. Financial Statements and Supplementary Data
Page
----
Consolidated Financial Statements - Disc Graphics and Subsidiaries
Independent Auditors' Report............................................... 19
Consolidated Balance Sheets as of December 31, 1997 and 1996............... 20
Consolidated Statements of Income for the years ended December 31,
1997, 1996, and 1995..................................................... 21
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996, and 1995........................ 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995........................................ 23
Notes to Consolidated Financial Statements................................. 24
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG PEAT MARWICK LLP
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, 1997, and 1996, and the related
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997. 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 have 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 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.
Jericho, New York
January 28, 1998
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,753 30,859
Accounts receivable, net of allowance for doubtful accounts of
$1,162,000 and $844,000, respectively 11,698,364 9,055,995
Inventories 1,906,694 2,013,333
Prepaid expenses and other current assets 345,701 599,927
Current maturities of notes receivable 43,958 85,014
Deferred income taxes 549,000 700,000
----------- ----------
Total current assets 14,575,470 12,485,128
Property, plant and equipment, net 10,510,266 8,254,920
Goodwill 1,379,408 1,069,363
Security deposits and other assets 281,503 236,271
----------- ----------
Total assets $26,746,647 22,045,682
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of equipment notes payable 451,403 456,651
Current portion, long-term debt 103,530 97,167
Current maturities of capitalized lease obligations payable 1,069,209 692,852
Accounts payable 2,281,609 2,088,473
Accrued expenses 2,725,463 3,194,098
Income taxes payable 509,927 954,088
----------- ----------
Total current liabilities 7,141,141 7,483,329
Long-term debt, less current maturities 2,805,113 515,234
Equipment notes payable, less current maturities 1,447,860 1,902,838
Capitalized lease obligations payable, less current maturities 3,492,857 2,192,235
Deferred income taxes 748,000 988,000
----------- ----------
Total liabilities 15,634,971 13,081,636
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
5,440,256 in 1997 and 5,378,518 in 1996 54,403 53,786
Additional paid-in capital 5,044,934 5,051,555
Retained earnings 6,042,154 3,883,366
----------- ----------
11,141,491 8,988,707
Less:
Treasury stock, 10,295 and 8,710 common shares
in 1997 and 1996, respectively (29,815) (24,661)
Total stockholders' equity 11,111,676 8,964,046
----------- ----------
Total liabilities and stockholders' equity $26,746,647 22,045,682
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $48,444,890 42,575,120 36,149,096
Cost of sales 35,751,899 31,663,934 28,668,506
----------- ---------- ----------
Gross profit 12,692,991 10,911,186 7,480,590
Operating expenses:
Selling and shipping expenses 4,426,729 3,682,886 2,775,768
General and administrative expenses 4,056,293 3,929,521 2,957,253
---------- --------- ---------
Operating income 4,209,969 3,298,779 1,747,569
Interest expense, net 612,181 763,793 838,263
Loss on disposal of equipment - - (40,777)
---------- --------- ---------
Income before provision for income taxes 3,597,788 2,534,986 868,529
Provision for income taxes 1,439,000 1,081,000 368,000
---------- --------- ---------
Net income $2,158,788 1,453,986 500,529
========== ========= =========
Net income per share:
Basic $ .40 .29 .18
========== ========= =========
Diluted $ .40 .29 .18
========== ========= =========
Weighted average shares outstanding:
Basic 5,387,240 5,090,810 2,714,229
========== ========= =========
Diluted 5,397,130 5,097,566 2,714,229
========== ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<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, 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
Shares issued in connection with
an acquisition - - 10,499 105 37,395 - - 37,500
Shares issued in connection with
warrant exchange offer - - 51,239 512 (44,016) - - (43,504)
Purchase of treasury stock - - - - - - (5,154) (5,154)
Net income - - - - - 2,158,788 - 2,158,788
------ ------ --------- -------- --------- --------- ------ ----------
Balance, December 31, 1997 - $ - 5,440,256 $ 54,403 5,044,934 6,042,154 (29,815) 11,111,676
====== ====== ========= ======== ========= ========= ====== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,158,788 1,453,986 500,529
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,124,596 1,529,246 1,062,873
Deferred income taxes 89,000 78,406 168,000
Allowance for doubtful accounts 526,548 496,662 197,624
Loss on disposition of assets - - 40,777
Change in assets and liabilities, net of
acquisition of business:
Accounts receivable (2,515,895) (637,390) (231,563)
Inventories 322,582 42,407 (196,656)
Prepaid expenses and other current assets 269,381 (156,577) (353,523)
Accounts payable and accrued liabilities (731,561) 1,765,149 (970,315)
Income taxes payable (444,161) 691,862 (76,547)
Security deposits and other assets 54,768 45,135 (38,892)
---------- --------- ---------
Net cash provided by operating
activities 1,854,046 5,308,886 102,307
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,419,829) (782,374) (3,485,023)
Purchase of net assets of business acquired (206,497) (662,545)
Proceeds from sale of equipment 55,200 - -
---------- --------- ---------
Net cash used in investing activities (2,571,126) (1,444,919) (3,485,023)
---------- --------- ---------
Cash flows from financing activities:
Repayments under revolving credit agreement,
net of proceeds (493,382) (3,820,459) (2,035,268)
Payments of notes receivable 43,261 57,700 247,774
Proceeds under long-term debt 2,524,917 79,688 2,700,292
Principal payments of equipment notes payable (460,226) (500,077) (176,188)
Principal payments of capital lease obligations (847,938) (867,576) (696,005)
Net proceeds from issuance of common stock - - 4,646,966
Decrease in paid in capital - (35,000)
Purchase of warrants - (32,400) -
Purchase of treasury stock (5,154) (24,661) -
Expenses incurred in relation to the exchange offer (43,504) - -
---------- --------- ---------
Net cash provided by (used by)
financing activities 717,974 (5,142,785) 4,687,571
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents 894 (1,278,818) 1,304,855
Cash and cash equivalents at beginning of year 30,859 1,309,677 4,822
---------- --------- ---------
Cash and cash equivalents at end of year $ 31,753 30,859 1,309,677
========== ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(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 moderately 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 re-capitalization 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 was
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 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
----------------
Forpurposes 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. There were no cash
equivalents in 1996 and 1997.
(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:
<TABLE>
<S> <C>
Building 30 years
Machinery and equipment 3 to 11 years
Furniture and fixtures 3 to 7 years
Automobiles and trucks 3 to 5 years
Leasehold improvements 2 to 10 years
</TABLE>
Capitalized values of assets under leases are amortized over the lesser of
the 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 agreements are amortized using the
straight-line method over the original life of the intangible asset.
(h) Net Income Per Share
--------------------
Earnings per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
per share, which became effective for the Company as of December 31,
1997. As required by the Statement, earnings per share for all prior
periods presented have been restated. Basic earnings per share is
computed by dividing income available to common stockholders (which
for the Company equals its recorded net income) by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities to issue common stock, such as stock options and warrants,
were exercised, converted into common stock or otherwise resulted in
the issuance of common stock. The computation of weighted average
shares outstanding for 1995, 1996 and 1997 does not include
incremental shares relating to outstanding warrants since the exercise
price of the warrants exceeded the market price.
(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 on 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 Opinion,
Accounting for Stock Issued to Employees (APB No.25), 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
SFAS, Accounting for Stock-Based Compensation (SFAS No.123), 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 whichthe 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.
<PAGE>
(Continued)
(n) Reclassifications
-----------------
Reclassifications are made whenever necessary to conform with the current
year's presentation.
Acquisitions
- ------------
(a) Benham Press, Inc.
-----------------
On October 24, 1997, the Company acquired substantially all of the assets and
certain liabilities of Benham Press, Inc., an Indiana based printing
company (Benham), for $128,781 in cash, the issuance of 10,499 shares of
the Company's common stock and the assumption of certain liabilities
associated with outstanding borrowing under a line of credit agreement and
notes payable of approximately $2,637,000. The Company liquidated such
liabilities with additional borrowings under the Company's line of credit.
The Company recorded the value of the 10,499 shares of common stock at the
estimated fair value at the date of Acquisition. The results of operations
of Benham have been included in the accompanying financial statements from
the date of acquisition through December 31, 1997. The acquisition was
accounted for using the purchase price method of accounting in accordance
with generally accepted accounting principles. Goodwill amortization
amounted to $5,325 for the year ended December 31, 1997.
On January 16, 1998, Disc Graphics secured a mortgage with a lending
institution in the amount of $675,000 for the building and land acquired
in the purchase of Benham Press. The mortgage is payable over ten years at
an interest rate selected by the Company of either the bank's base rate
plus 1/2 of a percent or the 30 day LIBOR rate plus 250 basis points. The
current rate is 8.125%. This mortgage is secured by a first lien on the
premises and an assignment of rents and leases on the premises.
The allocation of the purchase price of Benham was as follows:
<TABLE>
<S> <C>
Purchase price:
Cash $ 128,781
Common stock 37,500
Transaction costs 77,716
---------
243,997
Net deficit (247,752)
---------
491,749
Allocated to:
Covenant not to compete 100,000
---------
Goodwill $ 391,749
=========
</TABLE>
(b) Pointille, Inc.
--------------
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 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. Goodwill amortization amounted to $74,175 and
$46,493 for the years ended December 31, 1997 and 1996, respectively.
(Continued)
<PAGE>
The allocation of the purchase price of Pointille was as follows:
<TABLE>
<S> <C>
Purchase price:
Cash $ 662,545
Promissory note (present value) 299,708
Receivable from former owner (175,633)
Common stock 175,000
Transaction costs 154,236
----------
1,115,856
Net asset value -
----------
Allocated to:
Goodwill $ 1,115,856
===========
</TABLE>
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. The effect of Benham's operation
to the consolidated financial statements of the Company for the year
ending December 31, 1997 was not material and therefore pro forma
financial information is not presented.
The 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 the 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.
<TABLE>
<CAPTION>
1996 1995
---- ----
(thousands except per
share amounts)
<S> <C> <C>
Net sales $ 45,401 44,203
Net income 1,487 575
Net income per share:
Basic .29 .21
Diluted .29 .21
</TABLE>
(Continued)
<PAGE>
(3) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statement of cash flows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 581,162 812,747 816,763
Income taxes 1,986,692 460,071 274,606
Common stock issued in
connection with an acquisition 37,500 175,000 -
Assets under capital lease assumed - 2,077,388 -
Warrants exchanged for common stock 512 - -
</TABLE>
(4) Covenants Not to Compete
------------------------
In 1997, the Company obtained a non-compete agreement in connection with
the acquisition of Benham. Under the terms of the acquisition
agreement, the non-compete agreement was valued at $100,000, which is
included in other assets in the accompanying consolidated financial
statements. The non-compete agreement has an original life of 5 years
and will be amortized using the straight-line method. Amortization of
the intangible asset amounted to $3,763 for the year ended December
31, 1997.
In 1992, the Company entered into a non-compete agreement in connection
with the acquisition of a company. Under the non-compete 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 consolidated
financial statements. The non-compete agreement was fully amortized
during 1996. Amortization of the intangible asset amounted to $11,544
and $34,632 for the years ended December 31, 1996 and 1995,
respectively.
(5) Inventories
-----------
Inventories consist of the following:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 1,412,613 1,425,230
Work-in-process 359,743 248,210
Finished goods 134,338 339,893
----------- ---------
$ 1,906,694 2,013,333
</TABLE>
(Continued)
<PAGE>
(6) Property, Plant and Equipment
------------------------------
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and building $ 550,000 -
Machinery and equipment 14,868,633 11,664,480
Furniture and fixtures 1,205,516 973,251
Leasehold improvements 1,234,793 1,052,678
Automobiles and trucks 171,689 149,546
----------- ----------
18,030,631 13,839,955
Less accumulated depreciation
and amortization 7,520,365 5,585,035
----------- ----------
$10,510,266 8,254,920
=========== ==========
</TABLE>
Depreciation and amortization expense of property, plant and equipment
amounted to $2,020,999, $1,446,633 and $1,022,601 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(7) Accrued Liabilities
-------------------
Accrued liabilities at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued payroll and other employee benefits $ 2,186,103 2,723,754
Accrued commissions 377,658 253,751
Accrued other 161,702 216,593
----------- ---------
$ 2,725,463 3,194,098
=========== =========
</TABLE>
(8) Long-Term Debt
--------------
(a) In February, 1997, the Company entered into a 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. At
December 31, 1997 the outstanding borrowings under this financing
agreement aggregated $2,760,000.
(Continued)
<PAGE>
(b) In connection with the acquisition of Pointille, 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, 1997 is $148,643, of which
$103,530 is currently payable on such date.
(9) Equipment Notes Payable
-----------------------
Notes payable at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Various secured equipment financing notes, payable in monthly installments
aggregating $48,857 including interest at 8.2% maturing from October
1999 through June 2003 secured by equipment with a net book
value of $1,995,087 at December 31, 1997 $ 1,861,055 2,271,241
Secured equipment financing note payable to a bank payable in monthly
installments of $2,416 with interest at 7.9% through October 1998,
personally guaranteed by the president & two vice presidents 23,300 49,295
Other 14,908 38,953
------------- ---------
1,899,263 2,359,489
Less current maturities 451,403 456,651
------------- ---------
$ 1,447,860 1,902,838
============= =========
</TABLE>
The aggregate maturities of equipment notes payable for each of the five
years subsequent to December 31, 1997 are as follows: 1998: $451,403;
1999: $406,299; 2000: $335,678; 2001: $282,353 and 2002: $282,353.
(10) Leases
------
The Company is obligated under several capital leases for certain machinery
and equipment that expire at various dates during the next five years. At
December 31, 1997 and 1996, the gross amount of plant and equipment and
related accumulated amortization recorded under capital leases were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $6,201,998 4,917,515
Less accumulated amortization 1,341,922 1,850,842
---------- ---------
$4,860,076 3,066,673
========== =========
</TABLE>
(Continued)
<PAGE>
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 non-cancelable
equipment leases.
Rent expense under operating leases for the years ended December 31, 1997,
1996 and 1995 was $1,034,416, $900,442 and $1,012,975 respectively.
Future minimum lease payments under non-cancelable 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, 1997 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
1998 $1,404,826 1,031,341
1999 1,375,644 739,973
2000 1,118,305 567,426
2001 817,476 446,885
2002 673,319 428,866
2003 and thereafter 6,130 1,770,035
---------- ---------
Total minimum lease payments 5,395,700 4,984,526
=========
Less amount representing interest
(at rates ranging from 5.9% to
20.9%) 833,634
----------
Net principal portion 4,562,066
Less portion due within one year 1,069,209
----------
Long-term portion $3,492,857
==========
</TABLE>
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 five or ten years. The
duration of any option granted under this Plan shall be fixed by the
Incentive Stock Option Committee in its sole discretion and no option may
be exercised until at least six months after the date of grant. At
December 31, 1997, there were 324,500 additional shares available for
grant under the Plan.
(Continued)
<PAGE>
Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
Weighted-average
Shares exercise price
------ ----------------
<S> <C> <C>
Outstanding December 31, 1994 - -
Granted 75,000 4.13
Exercised - -
Forfeited (12,500) 4.13
------- ----
Outstanding December 31, 1995 62,500 4.13
Granted 61,000 2.89
Exercised - -
Forfeited - -
------- ----
Outstanding December 31, 1996 123,500 3.51
Granted 52,000 4.66
Exercised - -
Forfeited - -
------- ----
Outstanding December 31,1997 175,500 3.85
=======
Exercisable at December 31, 1997 125,500
=======
</TABLE>
The options outstanding as of December 31, 1997 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--2.06 2.00 37,000 8-3/4 yrs
$ 3.25--3.25 3.25 1,000 8 yrs
$ 4.13--4.76 4.36 137,500 6-2/3 yrs
</TABLE>
The pershare weighted average fair value of stock options granted during
1997, 1996 and 1995 was $2.61, $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, 1996 and 1997 - expected
dividend yield of 0%, risk free interest rates of 6.0 - 6.5%, expected
stock volatility of 39.5% and an expected option life of 5-10 years.
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 2,158,788 1,453,986 500,529
Pro forma 2,116,869 1,368,329 478,350
Net income per share:
As reported: basic and diluted $ .40 .29 .18
Pro forma .39 .27 .18
</TABLE>
(Continued)
<PAGE>
Proforma net earnings reflect only options granted in 1997, 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 2,264,405 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 1997, the company made an exchange offer to holders of the warrants. Under
the terms of the offer, each warrant holder was entitled to one share of
the Company's common stock for approximately every 8.5 warrants exchanged.
The exchange offer expired in August 1997. During the exchange period
435,595 warrants were exchanged for 51,239 shares of common stock.
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. These 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 Class A 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 president satisfied his note balance in
1995 and the balance of the notes from the two vice presidents were
received during 1997.
(13) Income Taxes
------------
The provision (benefit) for income taxes for the years ended December 31,
1997, 1996 and 1995 consists of the following:
(Continued)
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal $1,204,000 931,400 150,000
State 324,000 228,000 50,000
---------- --------- -------
1,528,000 1,159,400 200,000
---------- --------- -------
Deferred:
Federal (79,000) (66,640) 126,000
State (10,000) (11,760) 42,000
---------- --------- -------
(89,000) (78,400) 168,000
---------- --------- -------
$1,439,000 1,081,000 368,000
========== ========= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1997, 1996,
and 1995 differed from the amounts computed by applying the Federal income
tax rate of 34% primarily as a result of state and local income taxes, net
of Federal income tax benefits, offset by decreases in the beginning of
the year valuation allowance and utilization of state net operating loss
carryforwards.
The tax effects of temporary differences that give rise to significant
portion of the net deferred tax liability at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory valuation $ 38,000 66,000
Allowance for doubtful accounts, net 176,000 333,000
Uniform cost capitalization for inventory 33,000 25,000
Accrued vacation 134,000 143,000
Accrued salaries and commissions 10,000 57,000
Sales return allowance 23,000 66,000
State net operating loss carryforward - 32,000
Investment tax credit carryforwards 476,000 450,000
--------- ---------
Total deferred tax assets 890,000 1,172,000
--------- ---------
Less valuation allowance (341,000) (472,000)
--------- ---------
Net deferred tax assets 549,000 700,000
--------- ---------
Deferred tax liability:
Accelerated depreciation for tax purposes 748,000 988,000
--------- ---------
Net deferred tax liability $ 199,000 288,000
========= =========
</TABLE>
(Continued)
<PAGE>
The valuation allowance for deferred tax assets as of January 1, 1996 and
1997 was $472,000 and $341,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 was a decrease
of $131,000. 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, 1997.
At December 31, 1997, the Company has available New York State investment tax
credit carryforwards aggregating approximately $721,000 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, 1997, 1996 and
1995, and a security deposit of $115,000 paid on the lease is included
in security deposits and other assets at December 31, 1997.
On January 1, 1996, the Company assumed three leases with a net
capitalizable value of $2,077,388 from this 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 leases remaining
lives.
(15) Commitments and Contingencies
-----------------------------
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
$111,999, $132,412 and $117,500 for 1997, 1996 and 1995 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 $123,500,
$117,700 and $116,500 for the years ended December 31, 1997, 1996 and
1995 respectively.
(Continued)
<PAGE>
(17) Fair Value of Financial Instruments
-----------------------------------
The fair value of a financial instrument is 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.
(18) Business and Credit Concentrations
----------------------------------
Most of the Company's customers are located in the northeastern United
States. Three customers collectively accounted for 14%, 21% and 23% of
the Company's sales for 1997, 1996 and 1995 respectively. At December
31, 1997, three customers comprised approximately 20% of the net
accounts receivable balance. At December 31, 1996, two customers
comprised approximately 15% of the net accounts receivable balance.
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 1997
and 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997
---------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 11,198 11,065 13,234 12,948
Gross profit 2,983 2,690 3,624 3,396
Net income 504 245 798 612
Net income per share:
Basic .09 .05 .15 .11
Diluted .09 .05 .15 .11
======== ====== ===== ======
1996
---------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------ ------- --------
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:
Basic .00 .05 .13 .10
Diluted .00 .05 .13 .10
======== ====== ====== ======
</TABLE>
<PAGE>
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
In connection with the 1998 Annual Meeting of Stockholders of the
Registrant, the Registrant intends to furnish Stockholder with proxy material
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.
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, 1995, 1996, and 1997 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>
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 (1) Other (2) Period
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1995: 462,000 197,000 165,000 494,000
Allowance for doubtful accounts
(deducted from accounts
receivable)
For the year ended December 31, 1996: 494,000 497,000 147,000 844,000
Allowance for doubtful accounts
(deducted from accounts
receivable)
For the year ended December 31, 1997: 844,000 527,000 229,000 20,000 1,162,000
Allowance for doubtful accounts
(deducted from accounts
receivable)
<FN>
(1) Deductions relate to uncollectible accounts charged off to valuation accounts, net of recoveries
(2) Allowance for doubtful accounts of acquired business
</FN>
</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. (Filed as Exhibit 3.2
to Form 8A filed June 21, 1996)
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 R egistration 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 Agreeme nt 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 War rants 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 Oct ober 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).
<PAGE>
4.i Form of certificate evidencing shares of Commons Stock (filed as an
Exhibit to the Registration Statement on Form S-1, File No. 33- 62980
declared effective on November 9, 1993).
4.j Option to purchase 50,000 shares in favor of Jeffrey J. Bowe, dated
October 24, 1997.
10.a Credit Agreement dated February 26, 1997 between the Registrant and
Key Bank National Association. (Filed as Exhibit 10.a to Registrant's
Form 10-K for the fiscal year ended December 31, 1996)
10.b Security Agreement dated February 26, 1997 between the Registrant and
Key Bank National Association. (Filed as Exhibit 10.b to Registrant's
Form 10-K for the fiscal year ended December 31, 1996)
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, dat ed 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
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).
<PAGE>
10.i Form of Consulting Agreement, dated as of December 12, 1991,
between Disc and Timothy F. Healy & 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 Exhibit to the Registration Statement
on Form S-4, File No. 33-94068 declared effective 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).
10.p Asset Purchase Agreement between Disc and Benham Press, Inc.
dated as of September 19, 1997.
10.q Employment Agreement between Disc and Jeffrey J. Bowe dated as of
October 24, 1997.
10.r $675,000 Mortgage and Security Agreement between Disc and Key
Bank National Association dated January 16, 1998.
<PAGE>
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
23 Consent of Independent Accountants
27 Financial Data Schedules
<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 30th day of
March, 1998.
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 30, 1998 by the following persons in the
capacities indicated:
/s/Donald Sinkin
------------------- Chairman of the Board, Chief
Donald Sinkin Executive Officer and President
(Principal Executive Officer)
/s/Stephen Frey
-------------------- Vice President of Operations
Stephen Frey and Director
(Principal Operating Officer)
/s/Margaret Krumholz
-------------------- Chief Financial Officer
Margaret Krumholz (Principal Accounting Officer)
/s/John Rebecchi
-------------------- Vice President of Sales and
John Rebecchi Marketing and Director
-------------------- Director
Daniel Levinson
-------------------- Director
Seymour W. Zises
/s/Mark L. Friedman
-------------------- Director
Mark L. Friedman
STOCK OPTION AGREEMENT
----------------------
AGREEMENT made the 24th day of October 1997, between Disc Graphics, Inc., a
Delaware corporation, (hereinafter called the "Company") and Jeffrey J. Bowe,
residing at 7752 Chesapeake West Drive, Indianapolis, Indiana 46326 (hereinafter
called the "Optionee").
W I T N E S S E T H:
- - - - - - - - - -
Whereas, the Company, Benham Press Inc. ("Benham") and the Stockholders of
Benham entered into an Asset Purchase Agreement dated as of September 19, 1997,
pursuant to which the Company will acquire substantially all of the assets and
certain of the liabilities of Benham (the "Acquisition"); and
Whereas, in connection with the Acquisition, the Optionee and the Company
have agreed that, upon the Closing of the Acquisition, the Optionee is to become
an employee of the Company; and
Whereas, the Board of Directors of the Company has determined that, in
connection with such employment, Optionee is eligible for, and should be
granted, upon the Closing of the Acquisition as hereinafter provided, an option
as hereinbelow provided, and Optionee desires to have such option;
Now, Therefore, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Grant and Exercise of Option. The Company hereby grants to Optionee an
option to purchase a total of 50,000 shares of the authorized and unissued
Common Stock of the Company, having a par value of $.01 per share, at the price
of $4.7625 per share, upon and subject to the following terms and conditions:
(a) The within option may be exercised on or before October 23, 2002
(the "Expiration Date"). The option may not be exercised until the expiration of
six (6) months from the date hereof (the "Effective Date") of this Agreement,
whereupon this option may be exercised in full. It is expressly understood and
agreed that in the event the within option is not exercised on or before the
Expiration Date, as to any part or all of the shares which may be purchased
under the option, the right to purchase such shares shall completely lapse;
(b) Each exercise of the within option shall be by delivery to the
Company, at its then principal office (attention of the Secretary) of written
notice stating the number of shares to be purchased, accompanied by payment in
full of the option price of such shares. The option price shall be payable in
United States dollars in cash or by certified check, bank draft, postal or
express money order; provided, however, that in lieu of payment in full in cash,
an optionee may, with the prior approval of the Board of Directors, exercise his
option by tendering to the Company shares of the Company's Common Stock owned by
him and having a fair market value (as determined by the Board of Directors in
its absolute discretion) equal to the cash exercise price (or the balance
thereof) applicable to his option.
(c) In the event of each exercise of the within option, the Company
shall deliver to the Optionee, personally or at the Optionee's designated
address, as soon as practicable, a certificate made out to the Optionee for the
number of shares being purchased.
<PAGE>
2. Non-Transferability of Option. The option granted under this Agreement
shall not be transferred otherwise than by will or the laws of descent and
distribution and shall be exercisable during Optionee's lifetime only by the
Optionee. No option granted hereunder shall be subject to execution, attachment,
pledge, hypothecation, or other process.
3. Death of Optionee. Any option, the period of which has not expired,
shall terminate at the time of death of the Optionee, and no share of Common
Stock may thereafter be delivered pursuant to such option, except that upon the
death of the Optionee, the person or persons to whom such Optionee's rights
under the option are transferred by will or the laws of descent and distribution
may, within six (6) months after the date of such Optionee's death, but in no
event after the Expiration Date, purchase all or any part of the shares with
respect to which the option was exercisable on the date of termination of
employment or service in accordance herewith.
4. Dilution and Other Adjustments. In the event that there is any change in
the stock subject to the within option through merger, consolidation or
reorganization, or in the event of any dividend in stock of the same class to
holders of issued and outstanding stock of the same class, or the issuance to
the holders of such stock of rights to subscribe to stock of the same class, or
in the event of any split, combination or exchange of stock or other change in
the capital structure of the Company, the Board of Directors of the Company
shall make such adjustments in the within option as it may deem equitable to
prevent dilution or enlargement of the rights granted to the optionee hereunder,
and such adjustments, when so made, shall be conclusive and binding on the
parties to this Agreement; and provided, further, that nothing herein shall be
construed as limiting or preventing the Company from exercising any right or
power to make or enter into adjustments, reclassifications, reorganizations, or
changes in its capital or business structure or to merge, consolidate or
dissolve or to sell or transfer all or any part of its business or assets.
5. Requirements of Law.
(a) If any law, regulation of the Securities and Exchange Commission,
or any regulation of any other commission or agency having jurisdiction shall
require the Company or the Optionee to take any action with respect to the
shares of stock to be acquired upon the exercise of the within option, then the
date upon which the Company shall deliver or cause to be delivered the
certificate or certificates for the shares of stock shall be postponed until
full compliance has been made with all such requirements of law or regulation.
(b) Neither the Optionee nor any person or persons referred to in
Paragraph 3 above, as the case may be, shall be, or shall be deemed to be, a
holder of any shares subject to the within option unless and until certificates
for such shares are delivered to him or them in accordance with this Agreement,
and no certificates may be delivered until the shares represented thereby are
paid in full.
6. Purchase for Investment. The Optionee represents, on behalf of himself
and the person or persons referred to in Paragraph 3 above, that any shares of
the Company purchased pursuant to this Agreement will be acquired in good faith
for investment and not for resale or distribution, and Optionee on behalf of
himself and said person or persons, agrees that each notice of the exercise of
the within option shall contain or be accompanied by a representation in writing
signed by him or said person or persons, as the case may be, in form
satisfactory to the Company, that the shares of the Company to be purchased
pursuant to such notice are being so acquired and will not be sold except in
compliance with applicable securities laws. The requirements of this Paragraph 6
may be waived by the Company if the Company shall have received an opinion of
its counsel that such representation is not required.
<PAGE>
7. Acknowledgment. Optionee represents that he has read and understands the
terms and conditions of this Agreement and agrees to be bound thereby.
In Witness Whereof, the parties hereto have duly executed this Agreement as
of the day and year first above written.
DISC GRAPHICS, INC.
By: ____________________________
--------------------------------
Jeffrey J. Bowe, Optionee
ASSET PURCHASE AGREEMENT
Dated as of September 19, 1997
By and Between
Benham Press, Inc.
and
Disc Graphics, Inc.
<PAGE>
ARTICLE 1.
The Assets . . . . . . . . . . . . . . . . . . . . . . . .1
1.01 (a) Sale of Acquired Assets. . . . . . . . . . .1
(b) Retained Assets. . . . . . . . . . . . . . .4
1.02 (a) Assumption of Liabilities. . . . . . . . . .4
(b) Limitations on Assumption. . . . . . . . . .5
1.03. The Closing . . . . . . . . . . . . . . . . . . .8
1.04 Allocation of Purchase Price . . . . . . . . . .9
1.05 Net Worth Adjustment . . . . . . . . . . . . . 10
ARTICLE 2.
Representations and Warranties Concerning Seller . . . . 12
2.01. Description and Lists . . . . . . . . . . . . . 12
2.02. Corporate Organization; Authority.. . . . . . . 16
2.03. Capitalization. . . . . . . . . . . . . . . . . 17
2.04. Subsidiaries. . . . . . . . . . . . . . . . . . 17
2.05. No Violation. . . . . . . . . . . . . . . . . . 17
2.06. Consents and Approvals of Governmental
Authorities1 . . . . . . . . . . . . . . . . . 18
2.07. Financial Statements of the Seller. . . . . . . 18
2.08. No Undisclosed Liabilities; No Dealings with
Officers . . . . . . . . . . . . . . . . . . . 19
2.09. Absence of Certain Changes. . . . . . . . . . . 19
2.10. Title to Property; Leases; Encumbrances . . . . 21
2.11. Patents, Trademarks, Trade Names. . . . . . . . 23
2.12. Litigation; Compliance with Laws. . . . . . . . 24
2.13. Taxes . . . . . . . . . . . . . . . . . . . . . 26
2.14. Benefit Plans . . . . . . . . . . . . . . . . . 27
2.15. Labor Matters . . . . . . . . . . . . . . . . . 29
2.16. Purchase and Sale Commitments . . . . . . . . . 29
2.17. Insurance . . . . . . . . . . . . . . . . . . . 29
2.18. Validity. . . . . . . . . . . . . . . . . . . . 30
2.19. Finders and Investment Bankers. . . . . . . . . 30
2.20 Licenses, Permits and Authorizations. . . . . . 30
2.21. FIRPTA. . . . . . . . . . . . . . . . . . . . . 31
2.22. Entire Business . . . . . . . . . . . . . . . . 31
2.23. Disclosure. . . . . . . . . . . . . . . . . . . 31
ARTICLE 3.
Representations and Warranties of Purchaser . . . . . . . 31
3.01. Organization; Etc . . . . . . . . . . . . . . . 31
3.02. Authorization; Etc. . . . . . . . . . . . . . . 32
3.03. No Violation. . . . . . . . . . . . . . . . . . 32
3.04. Consents and Approvals of Governmental
Authorities . . . . . . . . . . . . . . . . . 32
<PAGE>
3.05. Certain Fees. . . . . . . . . . . . . . . . . . 33
ARTICLE 4.
Conduct of Business Pending Closing . . . . . . . . . . . 33
4.01 Regular Court of Business . . . . . . . . . . . 33
4.02 Amendments. . . . . . . . . . . . . . . . . . . 33
4.03 Distributions; Redemptions. . . . . . . . . . . 33
4.04 Organization. . . . . . . . . . . . . . . . . . 34
4.05 Contracts . . . . . . . . . . . . . . . . . . . 34
4.06 Consultation with Purchaser . . . . . . . . . . 34
4.07 Maintain Properties . . . . . . . . . . . . . . 34
4.08 Compensation. . . . . . . . . . . . . . . . . . 34
4.09 Liens . . . . . . . . . . . . . . . . . . . . . 34
4.10 Taxes . . . . . . . . . . . . . . . . . . . . . 35
4.11 Insurance . . . . . . . . . . . . . . . . . . . 35
4.12 No Mergers . . . . . . . . . . . . . . . . . . 35
4.13 No Solicitation . . . . . . . . . . . . . . . . 35
4.14 No Breach . . . . . . . . . . . . . . . . . . . 36
4.15 Due Compliance . . . . . . . . . . . . . . . . 36
4.16 Accounting Practice . . . . . . . . . . . . . . 36
ARTICLE 5.
Additional Agreements . . . . . . . . . . . . . . . . . . 36
5.01. Transfer Tax. . . . . . . . . . . . . . . . . . 36
5.02. Employment Agreement. . . . . . . . . . . . . . 37
5.03. Payment of Certain Retained Liabilities . . . . 37
5.04. Payment of Indebtedness to Bank One . . . . . . 37
5.05. Continuing Employees; Severance.. . . . . . . . 37
5.06. Vacation. . . . . . . . . . . . . . . . . . . . 38
5.07. Health and Welfare Benefits . . . . . . . . . . 38
5.09. Payment of Assumed Liabilities. . . . . . . . . 39
5.10. Advice of Change. . . . . . . . . . . . . . . . 39
5.11. Reasonable Access . . . . . . . . . . . . . . . 40
5.12. Financing . . . . . . . . . . . . . . . . . . . 40
5.13. Failure to Close. . . . . . . . . . . . . . . . 40
5.14. Satisfaction of Closing Conditions. . . . . . . 40
5.15. Additional Instruments. . . . . . . . . . . . . 41
ARTICLE 6. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Deliveries at Closing . . . . . . . . . . . . . . . . . . 41
6.01 Deliveries to Purchaser . . . . . . . . . . . . 41
6.02. Deliveries to Seller. . . . . . . . . . . . . . 42
<PAGE>
ARTICLE 7.
Conditions Precedent . . . . . . . . . . . . . . . . . . 43
7.01. Conditions to Obligations of the Purchaser. . . 43
7.02. Conditions to Obligations of Seller . . . . . . 45
ARTICLE 8.
Termination . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE 9.
Representations and Warranties Concerning Stockholder . . 47
9.01. Authority . . . . . . . . . . . . . . . . . . . 47
9.02. Prohibitions. . . . . . . . . . . . . . . . . . 47
9.03. Consents and Approvals of Governmental
Authorities. . . . . . . . . . . . . . . . . . 48
ARTICLE 10.
Indemnification . . . . . . . . . . . . . . . . . . . . . 48
10.01. Indemnity of Seller and Stockholder . . . . . . 48
10.02. Indemnity of Purchaser. . . . . . . . . . . . . 49
10.03. Indemnification Procedure . . . . . . . . . . . 49
10.04. Special Provisions Relating to Environmental
Matters . . . . . . . . . . . . . . . . . . . 51
10.05 Survival of Representations and Warranties. . . 55
10.06 Limitation on Indemnification . . . . . . . . . 55
ARTICLE 11.. . . . . . . . . . . . . . . . . . . . . . . . . . 55
Confidentiality; Non-Competition. . . . . . . . . . . . . 55
11.01 Confidentiality . . . . . . . . . . . . . . . . 55
11.02 Non-Competition . . . . . . . . . . . . . . . . 56
11.03. Specific Performance. . . . . . . . . . . . . . 57
11.04. Severability. . . . . . . . . . . . . . . . . . 57
Resolution of Disputes . . . . . . . . . . . . . . . . . . . . 58
12.01 Dispute Resolution. . . . . . . . . . . . . . . 58
12.02 Arbitration Procedures. . . . . . . . . . . . . 59
Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . 61
13.01. Additional Instruments. . . . . . . . . . . . . 61
13.02. Amendment and Modification. . . . . . . . . . . 61
13.03. Waiver. . . . . . . . . . . . . . . . . . . . . 61
13.04. Notices . . . . . . . . . . . . . . . . . . . . 61
13.05. Binding Nature; Assignment. . . . . . . . . . . 62
13.06. Governing Law . . . . . . . . . . . . . . . . . 63
13.07. Expenses . . . . . . . . . . . . . . . . . . . 63
13.08. Counterparts. . . . . . . . . . . . . . . . . . 63
<PAGE>
13.09. Headings. . . . . . . . . . . . . . . . . . . . 63
13.10. Obligations of Predecessors . . . . . . . . . . 63
13.11. Entire Agreement. . . . . . . . . . . . . . . . 64
13.12. Third Party Beneficiaries . . . . . . . . . . . 64
LIST OF SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . 66
LIST OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . 67
<PAGE>
ASSET PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this 19th day of
September, 1997, by and among Benham Press Inc., an Indiana corporation (the
"Seller"), Jeffrey Bowe (the "Stockholder") and Disc Graphics, Inc., a Delaware
corporation ("Purchaser").
BACKGROUND
----------
The Seller is engaged in the business of full-service color and black and
white commercial printing and digital printing (the "Business"). Seller desires
to sell and Purchaser desires to purchase all of the assets of the Seller except
as provided in Section 1.01(b) (the "Acquired Assets"), all at the price and on
the terms and conditions hereinafter set forth. Stockholder is the owner of the
number of shares of issued and outstanding Common Stock, no par value per share,
set forth beneath his name on the signature page of this Agreement. For purposes
of this Agreement, the term "Documents" shall include all instruments,
certificates, documents and agreements to be executed and/or delivered herewith
or in connection with the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants hereinafter set forth, the parties
hereto hereby agree as follows:
ARTICLE 1.
The Assets
----------
1.01 (a) Sale of Acquired Assets. On the terms and subject to the
conditions set forth in this Agreement, Seller agrees to and, at the Closing (as
defined in Section 1.03) will, sell, convey, transfer, deliver and assign to
Purchaser, and Purchaser agrees to at the Closing and will purchase all of the
Acquired Assets including, without limitation, all of the tangible and
intangible assets, rights, interests and properties of every kind and nature,
wherever located and by whomever possessed, owned by Seller as of the date
hereof (together with any proceeds thereof or any payment thereon which may be
received by Seller subsequent to the date hereof), including, without
limitation, the following:
(i) all cash, bank accounts and accounts and notes receivable (whether
current or non-current);
(ii) all prepayments and prepaid expenses;
(iii) all inventories (the "Inventory") and supplies;
(iv) all real property and real estate leases;
(v) all interests in fixed machinery and equipment, other fixtures and
fittings, moveable plant, machinery and equipment (including, without
limitation, all equipment that has been fully depreciated or expensed by
Seller), furniture, one truck, and other vehicles, tools, spare parts and
supplies (office, production and other), packaging and shipping material and
other tangible personal property, whether owned or leased;
(vi) all intangible assets of an intellectual property nature (including,
without limitation, registered and unregistered trademarks, service marks and
trade names, all other trademark rights, trade dress, logos and other names,
marks and slogans, including "Benham Press", or "BPI" and all variations and
permutations thereof), and all associated goodwill; all copyrights and
registrations thereof; all patents, inventions, shop rights, know-how, trade
secrets and confidential information; and all applications for any of the
foregoing; together with all rights to use all of the foregoing; together with
all rights to use all of the foregoing forever and all other rights in, to, and
under the foregoing in all countries; all discoveries, improvements, processes,
formulae (secret or otherwise), data, confidential information, engineering,
technical and shop drawings, specifications and ideas, whether patentable or
not, all licenses and other similar agreements, and all drawings, records, books
or other indicia, however evidenced, of the foregoing;
<PAGE>
(vii) all rights existing under contracts, licenses, permits, supply and
distribution arrangements, sales and purchase agreements and orders, employment
and consulting agreements, consignment arrangements, warranties, consents,
orders, registrations, privileges (accountant-client, corporate or other),
franchises, memberships, certificates, approvals, authorizations or other
similar rights and all other agreements, arrangements and understandings;
(viii) the right to receive pertinent mail and other pertinent
communications addressed to Seller which are required for the continuing
operation of the Business (including, without limitation, mail and
communications from customers, suppliers, distributors, agents and others and
accounts receivable payments);
(ix) all lists and records pertaining to customers, suppliers,
distributors, personnel and agents and all documents, correspondence, plats,
architectural plans, drawings and specifications, computer print-outs and
software, computer programs and business records of every kind and nature
relating to the Business;
(x) all creative materials (including, without limitation, films, art work,
color separations and the like), advertising and promotional materials and all
other printed or written materials;
(xi) all claims, refunds (other than refunds in respect of property and
casualty insurance premiums paid prior to the Closing Date for periods prior
thereto), causes of action, choses in action, rights of recovery and rights of
set-off of every kind and nature;
(xii) all goodwill as a going concern and all other intangible property;
and (xiii) all existing insurance policies and all prepaid expenses under
existing insurance policies, other than insurance policies in respect of the
automobiles identified on Schedule 1.01(b) hereof and insurance on the lives of
Jeffrey Bowe and John Bowe.
(b) Retained Assets. Notwithstanding the foregoing, the following
properties, assets, rights and interests are expressly excluded from the
purchase and sale contemplated hereby ("Retained Assets"): (i) all of the right,
title and interest of the Seller in and to the automobiles identified on
Schedule 1.01(b) hereof; (ii) all of the right, title, and interest of the
Seller in and to existing insurance policies in respect of the automobile
identified on Schedule 1.01(b) hereof and insurance policies on the lives of
Jeffrey Bowe and John Bowe; (iii) the corporate minute books and stock ledgers
of Press (provided, that the Seller and the Stockholder shall provide access to
any such documents to Purchaser to the extent reasonably necessary in connection
with the operation of the Business, will maintain such records for a period of
five years from the date hereof, or, if the Seller and the Stockholder desire to
destroy such records, will notify Purchaser and give Purchaser an opportunity to
take possession thereof); and (iv) refunds of property and casualty insurance
premiums paid prior to the Closing Date for periods prior thereto.
1.02 (a) Assumption of Liabilities. At the Closing, Purchaser shall execute
and deliver an Assumption of Liabilities Agreement substantially in the Form of
Exhibit B hereto, pursuant to which Purchaser shall assume and agree to pay,
perform or discharge, when due, the Assumed Liabilities. As used herein the term
"Assumed Liabilities" means all liabilities and obligations of Seller listed on
Schedule 1.02(a) and increases in such listed liabilities and obligations
through the Closing Date to the extent arising in connection with, incurred by,
<PAGE>
or relating to, the normal operations of the Business; provided that the
disclosure of additional liabilities and obligations in the Schedules to this
Agreement shall not be construed to increase such Assumed Liabilities. Assumed
Liabilities shall include, without limitation, the leases specified on Schedule
2.01 (a) hereof.
(b) Limitations on Assumption. Any provision of this Agreement to the
contrary notwithstanding, Purchaser will not and does not assume the following
liabilities and obligations (the "Retained Liabilities") of Seller even if, to
any extent, they were reflected in the Financial Statements and arose in
connection with, were incurred by or were related to the operation of the
Business: (i) liabilities or obligations of Seller to any officer, director or
stockholder of the Seller, whether or not owed to such person in his capacity as
such, any person affiliated with any of the foregoing or any person related to
or sharing a household with any of the foregoing except liabilities for accrued
wages and salaries reflected in the Financial Statements; provided, that
Purchaser will assume the liability to John A. Bowe, Inc. in the principal
amount of $340,000 plus all accrued and unpaid interest thereon, which liability
shall be paid on the Closing Date, and the obligation to pay John A. Bowe an
aggregate $48,000 at the rate of $1,000 per month pursuant to Section 12 of the
Employment Agreement between Seller and John A. Bowe dated September 29,1995;
(ii) expenses incurred by the Seller in connection with the transactions
contemplated herein, including, without limitation, fees and expenses of
Seller's counsel and accountants provided, that Purchaser shall pay for the fees
and expenses of Seller's accountants incurred in connection with the preparation
of the Seller's audited financial statements for the years ended September 30,
1995 and September 30, 1996, the period ended May 30, 1997, of the Financial
Statements and of the Closing Date Net Worth Statements (as defined in Section
1.05);
(iii) any obligation or liability of the Seller to the Purchaser created by
this Agreement;
(iv) any obligation or liability with respect to the Retained Assets;
(v) any foreign, federal, state or local tax based on income or revenues or
interest or penalties relating thereto, whether arising by reason of the sale of
the Acquired Assets as herein provided or by reason of the existence or
operations of the Seller prior to or after the date hereof and any sales or use
taxes incurred by Seller on or prior to the Closing;
(vi) to the extent not paid for under existing insurance policies assigned
to Purchaser hereunder, workman's compensation claims against Seller based on
occurrences prior to the execution and delivery of the Agreement (including
without limitation those claims listed in Schedule 2.01(k) to the Agreement);
(vii) to the extent not paid for under existing insurance policies assigned
to Purchaser hereunder, liabilities to third parties for tort and product
liability claims made against Seller prior to the execution and delivery of the
Agreement based upon occurrences prior to the execution and delivery of the
Agreement (including without limitation those claims listed in Schedule 2.01(k)
to the Agreement);
(viii) all obligations of Seller incurred after the date hereof
other than those incurred in the ordinary course of business and, to the extent
any one obligation exceeds $10,000 or any of the following obligations exceed
$50,000 in the aggregate approved by Purchaser: buying and alteration of
merchandise; freight; supplies; automobiles and trucks; licenses; insurance;
computer charges; service charges; office supplies and expenses; accounting,
legal and professional fees; rental equipment; franchise and other taxes;
telephone and utility charges; travel; customer relations; dues and
subscriptions; contributions;
<PAGE>
(ix) all other liabilities or obligations of Seller to the extent any of
such liabilities or obligations constitute a breach of the representations or
warranties of Seller set forth in Article II hereof;
(x) obligations or liabilities of Seller with respect to any Plan (as
hereinafter defined) including, without limitation, any underfunding or
termination liability;
(xi) liabilities or obligations of Seller in connection with its failure to
obtain, its failure to maintain in full force and effect or its default under
any approval, authorization, consent, certificate of occupancy (or local
equivalent), license, franchise, order or other permit of any governmental or
regulatory agency, whether federal, state, local or foreign necessary to the
operation of Seller's business as presently conducted including, without
limitation, the construction, alteration, operation, use or occupancy of the
premises demised under the Real Property Leases, or any improvements thereon;
(xii) except to the extent expressly provided herein or in any other
document executed in connection herewith, any liabilities to employees or former
employees of the Seller, and their beneficiaries, whether pursuant to agreement
or otherwise, including those for salaries, bonus and employment benefits (other
than the bonus of $5,000 payable to Donald D. Carnagua), fringe benefits,
insurance, welfare, post retirement medical (other than for John Bowe), medical
reimbursement, deferred compensation, sick pay, termination, severance, stock
option, stock purchase, accident, disability (other than with respect to
self-insurance payments for a period not to exceed 30 days), vacation, health,
medical and worker's compensation insurance or benefits;
(xiii) any and all Environmental Liabilities (as defined in Section 10.04
hereof) arising out of or resulting from any or all of the following conditions,
which hereinafter are collectively referred to as the "Pre-closing Liability
Conditions": (a) the existence prior to the Closing Date of Hazardous Materials
(as defined in Section 10.04 hereof) upon, within or beneath any of the Real
Property, or migrating from such Real Property; (b) any violations of
Environmental Requirements (as defined in Section 10.04 hereof) premised upon,
or arising out of any of the conditions described in) (a) above; (c) any
violations of Environmental Requirements pertaining to the use or operation of
the Real Property or any other of the Purchased Assets prior to the Closing
Date, or the conduct of operation of the business of the Seller prior to the
Closing Date; and (d) the existence of any underground storage tank (USTs) at
the Real Property, including but not limited to the USTs identified in the Phase
I Report and the Closure Report (as such terms are defined in Section 10.04
hereof);
(xiv) any liability to Bayer Financial pursuant to the operating lease
dated January 3, 1996, as amended, for an Agfa Chromapress;
(xv) any other liabilities or obligations of Seller which do not constitute
Assumed Liabilities.
1.03. The Closing. The closing of the transactions contemplated
hereby (the "Closing") shall take place at the offices of Blau, Kramer, Wactlar
& Lieberman, P.C., 100 Jericho Quadrangle, Jericho, New York on October 17, 1997
at 11 a.m. or such other place and time as the parties may agree (the "Closing
Date"). At the Closing, the Purchaser will purchase the Acquired Assets and
assume the Assumed Liabilities and Seller will sell the Acquired Assets in
consideration for the payment by Purchaser of two hundred-fifty thousand
($250,000) dollars in the amounts set forth below and the undertakings of the
Purchaser hereunder (the "Purchase Price"):
<PAGE>
(a) $200,000 in cash;
(b) $50,000 of common stock, par value $.01 per share of Purchaser
("Common Stock"), valued based on an average of the closing price of such Common
Stock on the NASDAQ Small Cap Market on the ten (10) days ending three (3)
business days prior to the Closing Date hereof.
In addition, pursuant to the employment agreement between Purchaser
and Jeffrey Bowe, Purchaser shall issue options to purchase 50,000 shares of
Common Stock of Purchaser having a term of five (5) years, an exercise price
equal to the average of the closing price of such Common Stock on the NASDAQ
Small Cap Market on the ten (10) days ending three (3) business days prior to
the Closing Date hereof (the "Options") and otherwise subject to the terms and
conditions of Purchaser's 1995 Incentive Stock Option Plan.
At the Closing, Seller shall deliver to Purchaser the Bill of Sale and
Assignment and Purchaser shall deliver the Purchase Price, the Options and the
Instrument of Assumption and the parties shall make the other deliveries
required by Article 6 hereof.
1.04 Allocation of Purchase Price. Pursuant to Section 1060 of the Internal
Revenue Code of 1986, as amended (the "IRC") and the regulations promulgated
thereunder, the Purchase Price shall be allocated in accordance with Schedule
1.04. Further, Purchaser and Seller agree to each file a Form 8594 consistent
with such allocation.
1.05 Net Worth Adjustment.
(a) Promptly after the Closing Date, Seller shall prepare, and, the
independent certified public accountants of Seller the ("Accountants") shall
audit, a statement of assets and liabilities actually assumed by Purchaser as at
the Closing Date (the "Closing Date Net Worth Statement"). The Closing Date Net
Worth Statement shall set forth on its face the Net Worth of the Seller as at
the Closing Date (the "Closing Date Net Worth"). For the purposes of this
Agreement, the Net Worth of the Seller shall be the net book value of the
Acquired Assets less the Assumed Liabilities. The Closing Date Net Worth
Statement shall be (i) prepared in accordance with GAAP, applied on a consistent
basis throughout the period indicated and on a basis consistent with the
preparation of the corresponding Seller Financial Statements as at, or for the
years ended, September 30, 1996 and September 30, 1995 and (ii) audited by the
Accountants in accordance with generally accepted auditing standards and this
Agreement.
(b) Within 30 days following the Closing Date, Seller shall deliver to
Purchaser the Closing Date Net Worth Statement, together with the audit working
papers of the Accountants and an opinion and special purpose report of the
Accountants certifying without qualification that (i) their examination of the
Closing Date Net Worth Statement was made in accordance with generally accepted
auditing standards and accordingly included such tests of the accounting records
and such other audit procedures as they considered necessary in the
circumstances, and (ii) the Closing Date Net Worth Statement has been prepared
in accordance with GAAP, applied on a consistent basis throughout the periods
indicated and on a basis consistent with the preparation of the corresponding
Annual Financial Statements as at or for the years ended September 30, 1996 and
September 30, 1995 and fairly present the net worth of Seller, as at the Closing
Date.
<PAGE>
(c) Within 5 days of the receipt of the Closing Date Net Worth Statement,
Seller shall pay the Purchaser, by wire transfer to a bank account designated in
writing by the Purchaser, the amount, if any by which the net worth as set forth
on the Closing Date Net Worth Statement (the "Closing Date Net Worth") is less
than a negative Two Hundred Thousand Dollars (-$200,000) (the "Shortfall").
(d) Within 45 days following receipt by Purchaser of the Closing Date Net
Worth Statement, the accompanying working papers and the opinion and special
purpose report, Purchaser shall deliver to Seller a letter (i) stating that
Purchaser concurs with the Closing Date Net Worth Statement or (ii) setting
forth Purchaser's objections to the Closing Date Net Worth Statement. If
Purchaser shall not have sent to Seller any communication within such 45 day
period, Purchaser shall be deemed to have accepted the Closing Date Net Worth
Statement. If Purchaser and Seller are unable to resolve Purchaser's objections
to the Closing Date Net Worth Statement within 15 days after receipt by Seller
of such letter, any such objections as remain unresolved shall be resolved by
final binding arbitration of Coopers & Lybrand (the "Referee"). If the Referee
determines that the resolution of a given disputed item requires an
interpretation of law, then the Referee may request a legal opinion of a law
firm selected by the Referee, so long as such firm has no client relationship
with any party hereto, as to such matter. The unresolved disputed items, if any,
will be solely as determined by the Referee. The cost of such Referee's review
(including reasonable attorneys' fees, if any) shall be borne by the party or
parties as determined by the Referee. If the Net Worth as determined by the
Referee is greater or less than the amount set forth on the Closing Date Net
Worth Statement, then promptly following receipt of such determination, and in
any event no later than 3 business days following receipt thereof, the Purchaser
or Seller, as the case may be, shall pay the other such party by wire transfer
an amount so that the amount that would have been required under Section 1.05
had such payment been made based on the Net Worth as determined by the Referee
shall have been paid.
(e) During the period of Seller's preparation of the Closing Date Net Worth
Statement, Purchaser and KPMG Peat Marwick LLP, Purchaser's independent auditors
("KPMG"), shall be permitted to observe the audit and review the audit working
papers of the Accountants. During the preparation of the Closing Date Net Worth
Statement and the period of any dispute within the contemplation of this Section
1.05, Purchaser shall (i) provide Seller and the Accountants, upon reasonable
notice and at Seller's reasonable expense, with copies of all such books,
records and documents reasonably necessary to prepare the Closing Date Net Worth
Statement and resolve any dispute related thereto, to the extent required for
the preparation of the Closing Date Net Worth Statement and resolution of any
dispute related thereto (ii) provide Seller and the Accountants with such
cooperation from Purchaser, as may reasonably be requested by Seller or the
Accountants in connection with the preparation of the Closing Date Net Worth
Statement.
ARTICLE 2.
Representations and Warranties Concerning Seller
------------------------------------------------
Seller and the Stockholder hereby jointly and severally represent and
warrant to Purchaser as follows:
2.01. Description and Lists. Schedules 2.01(a) through 2.01(n) hereto
contain the following information and all such information is true, correct and
complete:
(a) Schedule 2.01(a) contains a brief description of all interests in
real property owned, leased, subleased or otherwise used or claimed by the
Seller, stating the location of such property and, if applicable, the name of
the Landlord. There are no contracts or commitments by the Seller to hereafter:
(x) acquire (in fee or as a leasehold); (y) mortgage or otherwise encumber; or
(z) lease (as lessor or sublessor or as lessee or sublessee) any real property
or interests therein;
<PAGE>
(b) Schedule 2.01(b) contains a list of all Intangible Property (as
defined in Section 2.11 hereof) indicating any applications, registrations,
filings or notices associated therewith and indicating whether such Intangible
Property is owned or licensed;
(c) Schedule 2.01(c) contains (except as may be listed on any other
Schedule to this Agreement): (i) a list and description (including the subject
matter, annual rent and expiration dates) of each lease agreement to which the
Seller is a party with respect to personal property; (ii) a list and description
(including the subject matter, payment terms and expiration dates) of each
written agreement or understanding of the Seller (including, without limitation,
any agreement or document relating to any merger, reorganization, bankruptcy
proceeding, business acquisition, transaction or transactions for the
acquisition of all or any substantial portion of the assets of any person or
involving the assumption of the liability of any person involving the Seller or
any of its direct or indirect predecessors), and a list and description of each
oral agreement or understanding of the Seller, in each case involving in excess
of $10,000 or having a remaining term of more than six months from the date
hereof; and (iii) a list and description of each purchase order for merchandise
and all other purchase orders in excess of $10,000 (or series of purchase orders
with a single entity or related entities) to which the Seller is a party and a
statement that the Seller is not a party to any sales orders;
(d) Schedule 2.01(d) contains a list of: (i) all officers and
directors of the Seller; (ii) the names and current annual salary rates of all
present employees and agents of the Seller compensated on a non-hourly basis
(including, without limitation, benefits and bonuses); (iii) all written and
oral employment or compensation agreements with each employee of the Seller,
other than oral agreements with employees who are employed by the Seller on an
at-will basis; and (iv) a list of the number of employees compensated on an
hourly basis and their hourly wages.
(e) Schedule 2.01(e) contains: (i) a list and brief description of
each agreement, mortgage or other instrument or other arrangement regarding
money borrowed or obligations guaranteed by the Seller or letters of credit
issued at the request or on behalf of the Seller and (ii) the principal amount
outstanding as of the date hereof under each such arrangement and the interest
thereon as of September 12, 1997;
(f) Schedule 2.01(f) contains: (i) the name of every bank in which the
Seller has an account or safe deposit box; (ii) the identifying numbers of all
such accounts and safe deposit boxes; and (iii) the names of all persons having
power to borrow, discount debt obligations, cash or draw checks or otherwise act
on behalf of the Seller in any dealings with such banks;
(g) Schedule 2.01(g) contains a schedule of the accounts receivable of
the Seller as of September 12, 1997, which schedule sets forth information
regarding the aging of such accounts receivable;
(h) Schedule 2.01(h) contains a list of each approved capital
expenditure project (including without limitation, each construction project),
including projects which have been commenced but are not yet completed, projects
which have not been commenced and projects which have been completed in respect
of which payment has not been made, each within the past twelve (12) months;
(i) Schedule 2.01(i) contains a list of each supplier from which
purchases of merchandise or other purchases in excess of $5,000 were made by the
Seller during the period from July 1, 1997 through a date no earlier than three
days prior to the execution and delivery hereof and the amount of such
purchases;
<PAGE>
(j) Schedule 2.01(j) contains copies of the Articles of Incorporation
and By-Laws of the Seller, each as amended to date;
(k) Schedule 2.01(k) contains a list and brief description of: (i) all
claims for workers compensation during the period commencing July 1, 1997
through a date no earlier than three days prior to the execution and delivery
hereof; and (ii) all claims for products liability now pending against the
Seller or which have been pending against the Seller or any Predecessor at any
time during the past five years;
(l) Schedule 2.01(l) contains a list of the names of all persons
holding powers of attorney from the Seller or authorized to act as agents for
the Seller;
(m) Schedule 2.01(m) contains a list of all machinery and equipment
owned by the Seller, including the net book value per item whether or not fully
depreciated or expensed; and
(n) Schedule 2.01(n) contains a list and brief description of all
policies of fire, liability, title, products liability and other forms of
insurance held by the Seller together with a list and brief description of all
claims of the Seller which have been submitted to any insurer but which have not
been finally disposed of.
The Seller has furnished to the Purchaser true, correct and complete copies
of all documents, instruments and agreements which are referred to or otherwise
related to any item referred to in Schedules 2.01(a) through 2.01(n) and all
amendments, modifications, supplements, renewals or consolidations with respect
thereto, all of which are included in a separate Volume I, the cover of which
has been executed by the parties hereto.
2.02. Corporate Organization; Authority.
(a) The Seller is duly organized, validly existing and in good
standing under the laws of the State of Indiana. The Seller has full corporate
power and authority to carry on its business as such business is now being
conducted and to own the properties and assets it now owns. The Seller is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction set forth on Schedule 2.02 hereto (together with
the state in which the Seller is organized, the "Disclosed Jurisdictions"), such
listed jurisdictions constituting all those in which its ownership of property
or the conduct of its business requires such qualification. Throughout the past
five (5) years the name of Seller has been Benham Press Inc. and Seller has done
business solely under that name or under the name Benham Press, Inc. and no
other names, for the past five (5) years. The executive offices of Seller have
been located at 1160 West 16th Street, Indianapolis, Indiana 46202 and at no
other location for the past five (5) years.
(b) Seller has full corporate power and authority to enter into this
Agreement and the Documents and to consummate the transactions contemplated
thereby. The Board of Directors and the Stockholder of Seller has taken all
action required to authorize the execution and delivery of this Agreement and
the Documents by Seller, the performance of the obligations of Seller hereunder
and thereunder and the consummation by Seller of the transactions contemplated
hereby and thereby. No other corporate proceedings on the part of Seller are
necessary to authorize the execution and delivery of this Agreement and the
Documents by Seller or the performance by Seller of its obligations hereunder
and thereunder. The Agreement and each Document will be a valid and binding
agreement of Seller, enforceable against Seller in accordance with its terms.
<PAGE>
(c) The corporate records of the Seller are complete, correct and
current in all material respects, with all necessary signatures, and have been
maintained in accordance with good business practices.
2.03. Capitalization. Schedule 2.03 hereto lists the authorized, the issued
and the outstanding capital stock (the "Stock") of Seller. All shares of the
Stock are owned by the Stockholder and are validly issued, fully paid and
non-assessable, with no personal liability attached to the ownership thereof.
2.04. Subsidiaries. The Seller has no subsidiaries. The Seller owns no
interest, directly or indirectly, and has no commitment to purchase any
interest, direct or indirect, in any other corporation, partnership or
enterprise.
2.05. No Violation. Except as set forth in Schedule 2.05 hereto, neither
the execution and delivery of this Agreement or of any of the Documents, the
performance by the Seller of its obligations hereunder and thereunder, nor the
consummation of the transactions contemplated hereby or thereby will: (i)
violate any provisions of the Articles of Incorporation or By-laws of the
Seller; (ii) with or without the giving of notice or the passage of time, or
both, violate, or be in conflict with, or constitute a default under, or cause
or permit the termination or the acceleration of the maturity of, any debt,
contract, agreement or obligation of the Seller or require the payment of any
prepayment or other penalty with respect thereto; (iii) require notice to or the
consent of any party to any agreement or commitment, including, without
limitation, any lease, or sublease or license, to which the Seller is a party,
or by which it or its properties is bound or subject or permit any such party to
renegotiate, receive a refund with respect to, modify or otherwise change any
such agreement or commitment; (iv) result in the creation or imposition of any
security interest, lien, or other encumbrance upon any property or assets of the
Seller under any agreement or commitment to which it is a party, or by which it
or its properties is bound or subject; or (v) violate any statute or law or any
judgment, decree, order, regulation or rule of any court or governmental
authority to which the Seller or its properties is bound or subject.
2.06. Consents and Approvals of Governmental Authorities. No consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority is required to be made or obtained by the
Seller in connection with the execution or delivery by the Seller of this
Agreement or any of the Documents, the performance by the Seller of its
obligations thereunder or the consummation by the Seller of the transactions
contemplated thereby.
2.07. Financial Statements of the Seller. Seller has delivered to Purchaser
accurate and complete copies of its balance sheet as of September 30, 1996 and
the related statements of income and retained earnings and changes in financial
position for the periods ended September 30, 1995 and September 30, 1996, and
the notes thereto, accompanied by a report thereon by Geo. S. Olive & Co., the
Accountants (the "Audited Financial Statements"), as well as a balance sheet and
related statements of income and retained earnings as of June 30, 1997 (the
"Internal Financial Satements" and, together with the Audited Financal
Statements, the "Financial Statements"). The Audited Financial Statements: (a)
present fairly the financial position of the Seller at the dates thereof and the
results of its operations and the changes in its financial positions for the
periods then ended; and (b) have been prepared in conformity with generally
accepted accounting principles consistently applied. The Internal Financial
Statements present fairly the financial position of the Seller at the date
thereof and the results of its operations. All inventory reflected in the
Financial Statements is saleable in the ordinary course of business at usual and
customary prices, subject to normal returns and markdowns consistent with the
Seller's past practice and experience. The books of account and other financial
records of the Seller are in good order and have been properly maintained in all
material respects.
<PAGE>
2.08. No Undisclosed Liabilities; No Dealings with Officers. Except as
disclosed in Schedule 2.08 hereto, as of June 30, 1997, the Seller had no
liabilities or obligations of any nature, whether absolute, accrued, contingent
or otherwise and whether due or to become due, that were not reflected in the
Financial Statements or in the notes thereto other than those incurred in the
ordinary course of business which do not exceed, in the aggregate $2,000. Except
as disclosed in Schedule 2.08 hereto, the Seller does not, directly or
indirectly, have any contractual arrangement with or commitment, obligation or
liability to or from any of its Stockholder, officers, directors or employees.
Seller has no liabilities or obligations in respect of vacation benefits due or
accrued other than as disclosed on Schedule 2.08. Without limiting the
generality of the foregoing, except as disclosed in Schedule 2.08, no
stockholder, officer, director or employee of the Seller was or is, directly or
indirectly, a joint investor or coventurer, or owner, lessor, lessee, licensor
or licensee of any real or personal property, tangible or intangible, owned or
used by the Seller, and no such person is, directly or indirectly, a lender to
or debtor of the Seller.
2.09. Absence of Certain Changes. Except as set forth in Schedule 2.09
hereto, since June 30, 1997, the Seller has conducted its business only in the
ordinary course in a manner consistent with past practices and has not:
(a) suffered any material adverse change in its condition (financial or
otherwise), results of operation, properties, business or prospects;
(b) incurred or entered into any agreement to incur indebtedness for
borrowed money, or guaranteed any liabilities or obligations of any other
person;
(c) created, permitted or allowed any mortgage, assignment, pledge, lien,
security interest, encumbrance, restriction or charge of any kind with respect
to its properties, business or assets;
(d) made or granted any increase in the benefits of or compensation payable
or to become payable to officers or employees (including any increase pursuant
to any bonus, pension, profit-sharing or other plan or commitment) or granted
any severance or termination pay to any officer, director or employee of the
Seller;
(e) declared, paid or set aside for payment any dividend or liquidating or
other distribution in respect of the Stock of the corporation, or, directly or
indirectly, redeemed, purchased or otherwise acquired or agreed to acquire any
shares of Stock or other securities of the Seller;
(f) written down the value of any inventory or written off as uncollectible
any notes or accounts receivable, or suffered any condemnation, damage,
destruction or loss (by destruction, theft or otherwise) of or to any of the
Seller's assets or properties of a nature that would interfere with the ordinary
conduct of the Seller's business or that involves in excess of $2,000 in the
aggregate (whether or not covered by insurance);
(g) issued or sold any stock, bonds or other corporate securities;
(h) acquired knowledge of any statute enacted or any official rule or
regulation adopted by a legislative or administrative body in any jurisdiction
which statute, rule or regulation specifically addresses, affects or relates to
the Business, business prospects or operations of the Seller and which has had
or would have a materially adverse effect thereon; or
(i) sold, transferred, or otherwise disposed of any tangible asset of the
Seller or sold, assigned, transferred or otherwise disposed of any of its
Intangible Property; or
<PAGE>
(j) made any loan, advance or capital contribution to or investment in any
person; or
(k) made any change in any method of accounting or accounting practice
employed by the Seller.
2.10. Title to Property; Leases; Encumbrances.
(a) The Seller has good and marketable title in fee simple to all of
the real property listed as Item (i) in Schedule 2.01(a) hereto, and the
buildings and other improvements thereon, and all fixtures and other
appurtenances thereto (collectively, the "Real Property"), free and clear of any
encroachment, mortgage, pledge, lien, security interest, encumbrance, claim,
charge, covenant, conditional limitation, or other restriction of any kind
except for the following (collectively, "Permitted Encumbrances"): (i) real
property taxes, if any, affecting the Real Property only, not yet due and
payable; (ii) the matters and exceptions set forth in Schedule 2.10(a) hereto;
and (iii) the state of facts shown on the surveys listed in Schedule 2.10(a)
hereto, as of the date of such surveys so listed. None of the improvements
erected on the Real Property encroach on adjoining property. None of the
properties constituting the Real Property are located in a Flood Zone as defined
by the Federal Insurance Administration. No proceeding is pending or, to the
best knowledge of Sellers and the Corporation, threatened for the taking or
condemnation of all or any portion of the Real Property. The Real Property is
all of the real property owned by the Corporation. No person other than the
Corporation has any oral or written right to lease, sublease or otherwise occupy
any portion of the Real Property.
(b) There are no leasehold estates under which the Seller is a lessee
(or sublessee) of any real property or interest therein (the "Real Property
Leases").
(c) Except as set forth in Schedule 2.10(c) hereto, to the best
knowledge of the Seller and the Stockholder, there are no unrecorded covenants,
deed restrictions, easements, leases, subleases, concessions or rights of
occupancy or mortgages, pledges, liens, security interests, encumbrances,
claims, charges or other restrictions of any kind which encumber the Real
Property.
(d) Except as set forth in Schedule 2.10(d) hereto, to the best
knowledge of Seller and the Stockholder, there are no easements, rights of way
or licenses necessary for the operation of any of the parcels constituting the
Real Property which are not in full force and effect.
(e) Except as set forth in Schedule 2.10(e) hereto, (i) the Real
Property and any other properties and assets owned, leased or used by the Seller
in the operation of the Real Property are adequate and sufficient for the
current operations of the Seller, and such properties now being used by the
Seller in its business and operations, whether leased or owned, are in good
working order, repair and operating condition, are without any structural
defects other than minimal structural defects which do not affect the value or
use of such properties, without any unrepaired casualty or other damage, and
have been maintained in accordance with generally accepted industry practices,
(ii) the Seller currently occupies and conducts its business in the parcels
constituting the Real Property, and (iii) the parcels constituting the Real
Property is occupied under and in compliance with all permits and licenses
required for the legal occupancy and use of such premises and such permits and
licenses are in full force and effect.
(f) Except as set forth in Schedule 2.10(f) hereto, the Seller has
good and marketable title to all tangible personal properties shown as owned by
the Seller on its books and records, including, without limitation, all the
<PAGE>
properties and assets reflected on the Financial Statements and all properties
and assets purchased by the Seller and delivered to it since June 30, 1997
(except for properties and assets sold or disposed of since June 30, 1997 in the
ordinary course of business) free and clear of any mortgages, pledges, liens,
claims, security interests or encumbrances of any kind (including, without
limitation, any claim that the acquisition of such property by the Seller
constitutes a fraudulent conveyance). Schedule 2.10(f) contains a list of all
tangible personal property leased by Seller. The personal properties and assets
owned or leased by the Seller are adequate and sufficient for the current
operations of the Seller, and such properties now being used by the Seller in
its business and operations, whether leased or owned, are in good working order
and have been maintained in accordance with generally accepted industry
practices.
(g) The Seller has acquired the present property listed on Exhibit C
hereto (the "Significant Equipment") directly from the manufacture thereof or
from a dealer of goods of that kind, in a transaction in the ordinary course of
business. Exhibit C includes a list of each bill of sale, warranty agreement or
other similar transfer and related agreements associated with the acquisition of
the Significant Equipment by Seller.
(h) Seller has the right of ingress and egress, through a public road
or street, to and from each of the parcels comprising the Real Property. No
utility easement or right of way which services any portion of the Real Property
may be terminated by the owner or mortgagee of any property through which any
such easement or right of way runs.
2.11. Patents, Trademarks, Trade Names. Except as set forth in Schedule
2.11 hereto: (i) the Seller is the sole owner of or has the full and exclusive
right to use, for the life of the proprietary right, all patents, trademarks,
service marks, trade names (whether registered or unregistered), copyrights and
confidential information and has the non-exclusive right to use any
non-confidential information (including, without limitation, know-how, processes
and technology) used in or necessary for the conduct of the business as
heretofore conducted (the "Intangible Property"); and (ii) the use of such
Intangible Property by the Seller does not infringe on the rights of any other
person and neither the Stockholder nor the Seller has received any notice of any
conflict with the asserted rights of others with respect to such Intangible
Property.
2.12. Litigation; Compliance with Laws.
(a) Except as set forth in Schedule 2.12 hereto, there is no action,
suit, proceeding or investigation pending or, to the best knowledge of either
the Stockholder or the Seller, threatened against or involving the Seller or its
assets (whether or not covered by insurance) and neither the Stockholder nor the
Seller know of any basis for the commencement of any action, proceeding or
investigation against the Seller. There is no outstanding judgment, order, writ,
injunction or decree against the Seller or relating to its assets.
(b) The Seller has complied and is in compliance with all laws, rules,
regulations, ordinances, orders, judgments and decrees, the non-compliance with
which, individually or in the aggregate, could result in liability to the Seller
of $2,000 or more (including without limitation applicable insurance
requirements, requirements of any Board of Fire Underwriters or similar body,
building, zoning, occupational safety and health, pension, fair employment,
equal opportunity or similar laws, rules, regulations and ordinances) applicable
to its business, properties, plants, structures or equipment, or to the
construction, maintenance, operation or use thereof, and no condition exists
which, with or without the giving of notice or the passage of time, or both,
will result in a violation of or liability under or with respect to any such
laws, rules, regulations, ordinances, orders, judgments or decrees currently in
effect or in effect at any time prior to the date hereof.
<PAGE>
Seller has complied and is in compliance with, and to the best knowledge of
the Seller and the Stockholders, the predecessors of Seller have complied with
and have not violated, all Environmental Requirements (including, without
limitation, the common law) applicable to its business, properties, plants,
structures or equipment, or to the construction, maintenance, operation or use
thereof, and no condition exists which, with or without the giving of notice or
the passage of time, or both, will result in a violation of or liability under
or with respect to any such Environmental Requirements currently in effect or in
effect at any time prior to the date hereof.
No notice, warning or information request has been received by the
Stockholder or the Seller with respect to any alleged violation or violation by
the Seller of any such legal requirements.
(c) None of the Real Property nor to the best knowledge of the Seller
and the Stockholder any real property previously owned or leased by Seller or
any of its predecessors have been used at any time: (i) as a site for the
storage or disposal of waste (including, without limitation, as that term is
used in the Resource Conservation Recovery Act (the "Conservation Act") (42
U.S.C. 901 et seq); (ii) so as to cause a violation of or to give rise to a
removal or restoration obligation or liability for the costs of removal or
restoration by others, or liability for damages to others, under any statute,
ordinance, order, decree, or under the common law of any state, federal,
municipal or other governmental entity, body or agency having jurisdiction over
any of the Real Property or any such previously owned or leased property,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA") (42 U.S.C. 9601 et seq.),
or any similar Environmental Requirement, nor has any such violation, obligation
or liability been created by the removal by or at the request of the Seller or,
to the best knowledge of the Seller and the Stockholder, any of its predecessors
of any waste from the Real Property or such leased or previously owned or leased
properties, the disposition of such removed waste or by reason of the
discontinuance of operations of any business conducted at the Real Property or
the previously owned or leased properties or (iii) to the best knowledge of the
Seller and the Stockholder, for storage of Hazardous Materials in USTs, except
as identified in the Phase I Report and the Closure Report. Seller and the
Stockholder have delivered to Purchaser true, complete and correct copies or
results of any reports, studies or tests in the possession of or initiated by
Sellers or the Stockholder pertaining to the existence of Hazardous Materials
and other environmental concerns at any part of the Real Property or any
properties previously owned or leased by Seller or any of its predecessors or
concerning compliance with or liability under laws relating to toxic waste and
other environmental matters in the operation of the business and properties of
the Seller or any of its predecessors.
2.13. Taxes. All federal, state, local or other returns, reports,
statements and other documents with respect to federal, state, local and foreign
income taxes, estimated taxes, excise taxes, sales taxes, use taxes, fuel taxes,
gross receipts taxes, franchise taxes, withholding, employment and payroll
related taxes, property taxes, import duties and other taxes, whether or not
measured in whole or in part by net-income (hereinafter, "Taxes" or,
individually, a "Tax") required to be filed by the Seller or (to the extent they
concern the Seller) the Stockholder (collectively, the "Returns") have been duly
and timely filed and complied with and are complete and correct as filed. The
<PAGE>
Seller and (to the extent they concern the Seller) the Stockholder have duly
paid in full all Taxes shown as due on the Returns and, if not shown as due,
have made adequate provision for all such Taxes and all such Taxes and reserves
are reflected in the notes to the Financial Statements. Neither the Stockholder
nor the Seller has received notice of any claim or claims for additional Taxes
claimed to be due from it by federal (in a notice of deficiency as authorized by
Section 6212 of the IRC, or a "30-day letter" as that term is generally used by
the Internal Revenue Service (the "IRS")), state, local or foreign taxing
authorities in connection with any Returns. Neither the Stockholder nor the
Seller has received any notice or notification that any income tax or other tax
or similar returns for the Seller are now under examination by the IRS or any
other governmental authority. The Seller and the Stockholder have paid all Taxes
required to be paid without the filing of Returns. There are no encumbrances for
any Taxes, assessments or government charges and levies upon any property or
assets of the Seller. There are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any Return for any period.
Neither the Seller nor the Stockholder has filed a statement or agreement under
Section 341(f) of the IRC consenting to have the provisions of Section 341(f)(2)
of the IRC apply to any disposition of any of its assets or property.
Seller has paid or will pay all federal, state and local sales taxes
payable through Closing Date upon its properties and business and has prepared
or will and timely filed or will prepare and timely file all tax and other
returns and reports which are required to be filed in respect of such sales
taxes.
2.14. Benefit Plans.
(a) Schedule 2.14(a) hereto lists all plans, contracts, commitments,
programs and policies (including, but not limited to, any stock option, stock
purchase, stock appreciation right, bonus, commission, deferred compensation,
excess benefits, profit sharing, pension, thrift, savings, stock bonus, employee
stock ownership, salary continuation, severance, retirement, supplemental
retirement, short or long-term disability, hospitalization, major medical, life
and accident insurance, vacation and sick leave policies, union contract,
non-competition agreement, or other employee benefit plans, contracts,
commitments, programs and policies) maintained by the Seller (or formerly
maintained by the Seller at any time) providing benefits to any employee, or
former employee or agent of the Seller, whether or not any of the foregoing is
funded (i) with respect to which the Seller has an obligation or (ii) with
respect to which the Seller has made any payments or contributions or may
otherwise have any liability, (collectively, the "Plans" and individually, a
"Plan"). Except as set forth on such Schedule 2.14(a), the Seller has no
commitment to participate in or create any additional Plan.
(b) Except as set forth on Schedule 2.14(b), all obligations of any
kind of the Seller, whether arising by operation of law, by contract, or by past
custom or practice, for (i) payments by the Seller to any trust or other fund or
to any governmental or administrative authority, with respect to pension
benefits, unemployment compensation benefits, social security, or other
benefits, or (ii) salaries, vacation, holiday and sick pay, bonuses, and other
forms of compensation for employees or former employees of the Seller have been
paid, fully funded or adequate accruals therefor or appropriate footnote
references have been made in the Financial Statements.
(c) Seller has provided Purchaser with (i) a copy of each Plan (or, in
the case of any unwritten Plan, descriptions thereof), (ii) the most recent
annual report of Form 5500 file with the IRS with respect to each Plan, (iii)
the most recent summary plan description (or similar Plan document) for each
Plan for which a summary plan description is required by applicable law or was
otherwise provide to Plan participants or beneficiaries, (iv) a copy of the most
recent determination letter with respect to the qualified tax status of any
Plan, (v) each trust agreement or annuity contract relating to any Plan, and
each of the foregoing is true, complete and correct. Except as set forth in
Schedule 2.14(c), Seller has made all requisite filings with all governmental or
administrative agencies regarding the Plans.
<PAGE>
(d) Except as set forth in Schedule 2.14(d), there are no severance
payments which are or could become payable by the Seller to any director,
officer, or any other past or present employee or agent of the Seller under the
terms of any oral or written agreement or commitment or any custom, trade,
practice, or otherwise and there are no loans outstanding to any participant of
any Plan under any such Plans.
2.15. Labor Matters. Within the last 3 years, the Seller has not
experienced any labor disputes or any work stoppages due to labor disagreements
and there is no such dispute or work stoppage threatened against the Seller.
Except as set forth in Schedule 2.15 hereto, no employee of the Seller is
represented by any union or collective bargaining agent and, to the best
knowledge of Stockholder and Seller, there has been no union organizational
effort in respect of any employees of the Seller within the past three (3)
years.
2.16. Purchase and Sale Commitments. The outstanding purchase and sale
commitments of the Seller are in conformity with the normal, ordinary and usual
requirements of the business of the Seller, and the contract prices to which the
Seller has agreed in any outstanding purchase or sale commitment are not
excessively high or low, respectively, when compared to current market prices
for the relevant materials, products or services.
2.17. Insurance. The insurance coverage of the Seller is adequate for the
assets, business and operations of the Seller. The Seller is not in default with
respect to any provisions or requirements of any policy of issuance nor has it
failed to give any notice or present any claim thereunder in due and timely
fashion. Neither the Stockholder nor the Seller has received any notice and
neither has any knowledge of any claims by the Seller against any policies of
fire, liability, workmen's compensation or other insurance owned or held by the
Seller, as to which any insurer is denying liability or defending under any
reservation of rights clause. The Stockholder and the Seller have not received
any notice of cancellation or termination in respect of any of the insurance
policies listed on Schedule 2.01(n) hereto.
2.18. Validity. Except as set forth in Schedule 2.18 hereto, all of the
contracts, agreements, indentures, instruments, plans, leases, policies and
licenses (collectively, "Contracts") to which the Seller is a party, or by which
it or any of its property or assets may be bound or affected, are legal, valid
and binding obligations of the Seller, enforceable in accordance with their
terms, are in full force and effect, and: (i) there is no default on the part of
the Seller thereunder or, to the best knowledge of the Seller and the
Stockholder, of any other party thereto; and (ii) there is no claimed or
purported or alleged breach or material default in any obligation to be
performed on the part of the Seller thereunder or of any other party thereto
which, individually or in aggregate, could result in liability to the Seller of
$2000 or more.
2.19. Finders and Investment Bankers. Except as set forth in Schedule 2.19
hereto, neither the Seller nor the Stockholder have employed any broker, finder,
investment banker or financial advisor as to whom the Seller may have an
obligation to pay moneys, or incurred any liability for any brokerage fees or
commissions or for any finders', investment banking or financial advisory fees
for which the Seller may be responsible in connection with the transactions
contemplated hereby.
2.20 Licenses, Permits and Authorizations. To the best of its knowledge,
the Seller has obtained all material approvals, authorizations, consents,
certificates of occupancy (or local equivalents), licenses, franchises, orders
and other permits of all governmental or regulatory agencies, whether federal,
state, local or foreign (collectively, the "Approvals") necessary to the
operation of its Business as presently conducted including, without limitation,
the construction, alteration, operation, use or occupancy of the Real Property
or any part thereof, or any improvements thereon. Schedule 2.20 contains a list
of all Approvals. Such Approvals are in full force and effect and in good
standing. Seller is not in default under any Approval and there exists no basis
for the termination, suspension or revocation of any such Approvals.
<PAGE>
2.21. FIRPTA. . Seller is a "United States person" for purposes of Section
1445 of the IRC.
2.22. Entire Business. No portion of the business of the Seller is
conducted by the Stockholder or any affiliate of the Stockholder, and all of the
assets necessary for the conduct of the business of the Seller as presently
conducted are owned, leased or operated by the Seller.
2.23. Disclosure. No representation or warranty of the Seller or the
Stockholder contained in this Agreement or in any of the Documents or in any
statement or certificate furnished or to be furnished to Purchaser pursuant
hereto or thereto in connection with the transactions contemplated hereby or
thereby contains or will contain any known untrue statement of a material fact
or omits or will omit to state a known material fact necessary to make the
statements made herein or therein, in the light of the circumstances under which
they were made, not misleading.
ARTICLE 3.
Representations and Warranties of Purchaser
-------------------------------------------
Purchaser hereby represents and warrants to the Stockholder as follows:
3.01. Organization; Etc. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
3.02. Authorization; Etc. Purchaser has full corporate power and authority
to enter into this Agreement and the Documents and to carry out the transactions
contemplated hereby and thereby. The Board of Directors of Purchaser has taken
all action required to authorize the execution and delivery of this Agreement
and the other Documents by Purchaser, the performance by Purchaser of its
obligations hereunder and thereunder and the consummation by Purchaser of the
transactions contemplated hereby and thereby. No other corporate proceedings on
the part of Purchaser are necessary to authorize the execution and delivery by
Purchaser of this Agreement or the Documents or the performance by Purchaser of
its obligations hereunder or thereunder. This Agreement and the Documents are
valid and binding agreements of Purchaser, enforceable against it in accordance
with their terms.
3.03. No Violation. Neither the execution and delivery of this Agreement or
the other Documents nor the consummation of the transactions contemplated hereby
or thereby will violate any provisions of the Certificate of Incorporation or
By-laws of Purchaser, or violate, or be in conflict with, or allow the
termination, or constitute a default under, or cause the acceleration of the
maturity of, any debt or obligation pursuant to any agreement or commitment to
which Purchaser is a party or by which it is bound, or violate any statute, any
law or any judgment, decree, order, regulation or rule of any court or
governmental authority to which Purchaser is subject.
3.04. Consents and Approvals of Governmental Authorities. No consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority is required to be made or obtained by
Purchaser in connection with the execution, delivery and performance of this
Agreement or the Documents or the consummation by Purchaser of the transactions
contemplated hereby and thereby. Purchaser has obtained or is in the process of
obtaining all material approvals, authorizations, licenses and permits necessary
to the operation of the Business.
<PAGE>
3.05. Certain Fees. Purchaser has not employed any broker, finder,
investment banker or financial advisor or incurred any liability for any
brokerage fees or commissions or for any finders', investment banking or
financial advisory fees in connection with the transactions contemplated hereby.
ARTICLE 4.
Conduct of Business Pending Closing.
-----------------------------------
From and after the date hereof until the Closing, and except as otherwise
specifically contemplated by this Agreement and the Documents and the Schedules
and Exhibits hereto or thereto, or consented to or approved by Purchaser in
writing, Seller shall conform to the following:
4.01 Regular Conduct of Business. Except as set forth in Schedule 4.01
hereto, Seller shall carry on its Business in the same manner as heretofore
conducted, and shall not engage in any transaction or activity or make any
payments except in the ordinary course of business, and shall not enter into any
agreement or make any commitment with any partner, officer, or employee of
Seller, or any person affiliated with any of the foregoing to the extent that
such agreement or commitment affects or could affect the Business or the
Acquired Assets.
4.02 Amendments. No change or amendment which shall affect the performance
of Seller's obligations hereunder or consummation of the transactions
contemplated hereby shall be made in the Articles of Incorporation or other
governing instruments of Seller.
4.03 Distributions; Redemptions. Seller shall not declare, pay or set aside
for payment any dividend or other distribution in respect of any outstanding
Stock or other equity interest or directly or indirectly redeem, purchase or
otherwise acquire any outstanding Stock or equity interest.
4.04 Organization. Seller shall use its best efforts to preserve its
properties, assets (reasonable wear and tear excepted), and legal and business
relationships with its employees, suppliers, customers and others having
business relations with Seller.
4.05 Contracts. Except for contracts entered into in the ordinary course of
business, relating to or which affects the Business or the Acquired Assets, no
contracts or commitments involving, individually, in excess of $2,000 (or
$20,000 in the aggregate), or having a term of more than one (1) year, shall be
entered into by or on behalf of Seller.
4.06 Consultation with Purchaser. To the fullest extent practicable and in
accordance with applicable law, Seller shall, upon of Purchaser from time to
time, cause its executive officers to consult with and consider the views of
Purchaser in operating the Business through the Closing Date; provided, that the
foregoing shall not be deemed to give Purchaser the right to manage or control
Seller prior to the Closing.
4.07 Maintain Properties. Seller will maintain the Acquired Assets, whether
owned or leased, in good repair, order and condition, reasonable wear and tear
excepted and shall not sell, lease, mortgage, pledge or otherwise dispose of or
agree to sell, lease, mortgage, pledge or otherwise dispose of any of the
Acquired Assets.
4.08 Compensation. Seller will not grant any increase in compensation to
any partner, officer, employee or agent, other than base salary increases at
such times and in amounts as are in accordance with past practice, or enter into
or amend any Plan or any employment or consulting agreement.
<PAGE>
4.09 Liens. Seller will not create, incur or assume any indebtedness
(including, without limitation, under existing lines of credit and revolving
loans) other than in the ordinary course of business and in an amount not to
exceed $2,000 in the aggregate, or guarantee or otherwise become liable with
respect to any indebtedness for borrowed money if such indebtedness or guarantee
may result in the Acquired Assets being or becoming subject to a lien, pledge,
security interest or other encumbrance. Seller will not make any capital
expenditures in excess of $3,000 in the aggregate and will not make any loan,
advance, capital contribution to or investment in, any other person to the
extent such action may encumber the Acquired Assets.
4.10 Taxes. Except for Taxes contested in good faith, Seller will pay all
Taxes upon its properties and business as they become due and prepare and timely
file all tax and other returns and reports which are required to be filed in
respect of Taxes.
4.11 Insurance. Seller will maintain insurance upon the Business and the
Acquired Assets and insurance in respect of the kinds of risks currently insured
against, in accordance with its current practice.
4.12 No Mergers. Seller will not and shall not agree to merge or
consolidate with any other partnership or corporation, or acquire any stock or
other interest, business, or substantially all or any substantial portion of the
property or assets of, any other person, firm, association, corporation or other
business organization.
4.13 No Solicitation. Neither Seller, nor any of its partners, officers,
directors, employees, representatives, agents or affiliates, shall, directly or
indirectly, knowingly encourage, solicit or initiate in any way any discussions
or negotiations with, nor knowingly provide any information to any corporation,
partnership, person or other entity or group (other than Purchaser), concerning
any merger, acquisition, tender offer, combination, consolidation, liquidation,
recapitalization, reorganization, purchase or sale of substantial or material
assets, purchase or sale of interests or similar transactions involving the
Business. Nothing contained in this Section 4.13 shall prohibit Seller from
taking such action which, with the advice of counsel, may be required under
applicable law or under its fiduciary duties. The Seller will promptly
communicate to Purchaser the terms of any proposal or inquiry which it may
receive in respect of any such transaction, or of any such information requested
from it or of any such negotiations or discussions being sought to be initiated
with Seller. Seller agrees not to release any third party from any
confidentiality or standstill agreement to which Seller is a party, or amend or
modify the terms of any such confidentiality or standstill agreement.
4.14 No Breach. Seller shall not do any act or omit to do any act which,
with or without the giving of notice or the passage of time, or both, would
result in a material breach of or default under the contract, commitment or
obligation of Seller, which breach or default has or may result in an adverse
affect on the Business or the Acquired Assets.
4.15 Due Compliance. Seller will duly comply in all material respects with
all laws applicable to it and to the conduct of the Business.
4.16 Accounting Practice. Seller shall not change any method of accounting
practice currently employed by it, except as required by changes in generally
accepted accounting principles.
ARTICLE 5.
Additional Agreements
---------------------
5.01. Transfer Tax. Stockholder has and has caused the Seller to comply
with the requirements of any state, city or local law, statute, ordinance,
regulation or otherwise in any state, city or locality in which any of the Real
Property and the property demised under the Real Property Leases is located,
which law, statute, ordinance or regulation imposes a sales tax, transfer,
recording or gains tax and/or filing requirement in connection with the transfer
of the Acquired Assets ("Transfer Taxes"). Seller shall pay all sums due under
the Transfer Taxes in the manner required by law.
<PAGE>
5.02. Employment Agreement. Purchaser shall enter into a Employment
Agreement with Jeffrey Bowe in the form of Exhibit E hereto.
5.03. Payment of Certain Retained Liabilities. The Seller shall pay or
discharge, before the same shall become delinquent, the Retained Liabilities.
5.04. Payment of Indebtedness to Bank One. Prior to or Simultaneously with
the Closing, Seller shall discharge its liabilities and obligations to Bank One,
Indianapolis, Indiana ("Bank One") including, without limitation, all
obligations arising under the promissory notes and other loan documents (the"
Loan Documents") using monies provided by Purchaser pursuant to the terms of
Section 1.02 (a) hereof; and shall provide Purchaser with written evidence
satisfactory to it that Seller has taken all actions necessary to discharge such
indebtedness in full satisfaction of Seller's obligations to Bank One. Such
written evidence shall include a signed statement by Bank One addressed to
Seller and Purchaser stating that all obligations of the Seller to Bank One,
including, without limitation, those obligations under the Loan Documents have
been satisfied and are fully discharged. In addition, Seller shall obtain from
Bank One a satisfaction of mortgage and Forms UCC-3 terminating all existing UCC
filings with respect to the Acquired Assets of Seller, as well as undertaking to
take any other action Purchaser may reasonably request to terminate such
existing UCC filings, which undertaking shall be relied on by Purchaser.
5.05. Continuing Employees; Severance. On the Closing Date, Seller shall
terminate all employees of Seller and the Purchaser shall offer employment to
commence immediately on the Closing Date to all employees of the Seller who are
employed immediately prior to the Closing Date (other than the Employees listed
on Schedule 5.05 ("Continuing Employees")), in the same position held by them
prior to the Closing and on terms and conditions that are, to the extent
consistent with the Purchaser's existing employment terms, conditions and
policies, comparable to those enjoyed by such employees prior to the Closing;
provided, that the foregoing shall not limit any specific requirement herein as
to coverage for Continuing Employees under specific plans or programs of the
Purchaser.
5.06. Vacation. As of the Closing Date, the Purchaser agrees to make
available to Continuing Employees any vacation days that have accrued but remain
unused by such Continuing Employees under the Seller's vacation pay policy, the
value of which has not been paid by the Seller to such employees as of such
date, and to take account of the credited service of Continuing Employees with
the Seller through the Closing Date for purposes of calculating entitlement to
vacation time after the Closing Date.
5.07. Health and Welfare Benefits. As of the Closing Date, the Purchaser
shall commence coverage of Continuing Employees under any life insurance and
disability plans, programs and arrangements that it then provides to its other
employees. As of the day following the Closing, the Seller shall commence
coverage of Continuing Employees under any medical, hospitalization and dental
programs or arrangements that it then provides to its other employees; provided,
that the Purchaser shall waive any preexisting conditions exclusion or
limitation otherwise applicable under its medical, hospitalization and dental
plans. The Seller shall assume all liability for claims incurred prior to the
Closing Date under its employee benefit plans and programs, including its
medical, hospitalization and dental plans. The Purchaser shall assume all
liability for claims incurred on or after the Closing Date under its employee
benefit plans and programs, including its medical, hospitalization and dental
plans. For purposes of this Section 5.08, a claim shall be considered incurred
at the time goods or services are rendered in connection with a benefit covered
under the particular plan.
<PAGE>
5.08. COBRA Rights. Effective the Closing Date, the Purchaser shall assume
all liability for providing continuation coverage under ERISA Section 602 and
Internal Revenue Code Section 4980B and any related state law with respect to
(i) all Continuing Employees who accept the Purchaser's offer of employment and
who are employed by the Purchaser on the Closing Date, (ii) any past employees
of Seller who are receiving such coverage, as listed on Schedule 5.08 hereto and
(iii) any past employees of Seller who are eligible to receive such coverage on
the Closing Date, as listed on Schedule 5.08 hereof, including all notice
requirements and administrative obligations under ERISA, the Internal Revenue
Code and state law, irrespective of whether such laws would impose any
obligations on the Seller.
5.09. Payment of Assumed Liabilities. Purchaser will pay or discharge,
before the same shall become delinquent, the Assumed Liabilities; provided,
however, Purchaser shall not be required to pay or discharge any Assumed
Liability whose amount, applicability or validity is being contested in good
faith by appropriate proceedings and, if required by generally accepted
accounting principles, for which adequate provision has been made.
5.10 Advice of Change. Seller and the Stockholder will promptly advise
Purchaser in writing, upon obtaining knowledge, of: (i) any event which occurred
on or prior to the date of execution of this Agreement that is not disclosed
herein and any event which occurs after the date of this Agreement, in each case
that would, under this Agreement or any Exhibit of Schedule delivered pursuant
hereto, have been required to be disclosed on the date of execution of this
Agreement by Seller of the Stockholder; and (ii) any change in the business,
operations, prospects, properties, assets or condition, financial or otherwise,
of the Seller.
5.11. Reasonable Access. From the date hereof through the Closing, Seller
shall afford to Purchaser and to its authorized representatives, during normal
business hours, full access to the plants, properties, personnel, books and
records of the Seller in order that Purchaser may have a full opportunity to
make such investigation as it shall reasonably desire to make of the affairs of
the Seller and to obtain copies of relevant documents in connection therewith.
5.12. Financing. Seller shall cooperate with Purchaser in taking such
actions as may be reasonably requested by Purchaser in taking such actions as
may be reasonably requested by Purchaser in order to permit Purchaser to obtain
any necessary financing for the transactions contemplated hereby.
5.13. Failure to Close. In the event that the transactions contemplated
herein do not close on or before October 15, 1997, then either party may
terminate this transaction by notice to the other party and each party shall
retain its rights hereunder with respect to any breach by the other party of any
representation, warranty, covenant or agreement in addition to any other rights
or remedies that any party hereto may have against any other party hereto in
connection therewith.
5.14. Satisfaction of Closing Conditions. Seller, the Stockholder and
Purchaser shall use their reasonable business efforts, and the Stockholder shall
cause the Seller to use its reasonable business efforts, to cause all of the
conditions to the obligations of Seller and Purchaser set forth in Article 6 and
Article 7 hereof to be satisfied.
5.15. Additional Instruments. Seller, the Stockholder and Purchaser, as the
case may be, at the request of the other, at or after the Closing, will execute
and deliver, or cause to be executed and delivered, to the other such documents
and instruments, in addition to those specifically required by the provisions of
this Agreement, in form and substance reasonably satisfactory to the other, as
may reasonably be necessary or desirable to carry out or implement any provision
of this Agreement.
<PAGE>
ARTICLE 6.
Deliveries at Closing
---------------------
6.01 Deliveries to Purchaser. At the Closing, Seller and the Stockholder
shall deliver to Purchaser the following:
(a) Purchaser shall receive the Bill of Sale and Assignment, in the
form of Exhibit E hereto.
(b) Purchaser shall receive an opinion of Bingham, Summers, Welsh &
Spillman, counsel to Seller and the Stockholder inform and substance reasonably
acceptable to counsel to Purchaser.
(c) Purchaser and any persons designated by Purchaser that are
providing Purchaser with financing, shall receive, certificates of the secretary
and other appropriate officers of the Seller, which secretary or officer's
certificate shall include certification of by-laws, Articles of Incorporation,
corporate resolutions and incumbency.
(d) Purchaser shall receive originals of all certificates of occupancy
(or local equivalents) in Seller's possession or control, permits and licenses
with respect to the Real Property, all guaranties or warranties with respect to
any fixtures, machinery or equipment located in such premises, and Seller shall
have transferred to Purchaser all transferable permits, licenses, guaranties and
warranties.
(e) Purchaser shall receive an Assignment and Assumption of Leases in
respect of equipment leases listed on Schedule 2.10(f) hereof.
(f) Purchaser shall receive evidence satisfactory to it that Seller
has discharged, at or simultaneously with the Closing, its outstanding
indebtedness to Bank One.
(g) Purchaser, and any person providing Purchaser with financing,
shall receive Forms UCC-3 of Bank One terminating all existing UCC filings with
respect to the Acquired Assets of Seller.
(h) Purchaser shall receive evidence satisfactory to it that the
Seller and the Stockholder shall have taken all action necessary and appropriate
to cause, simultaneously herewith, the amendment of the Seller's Articles of
Incorporation to change its name to BP Benefits, Inc. and to cease doing
business under the names Benham Press, Inc., BPI and any variation and
permutations thereof and a consent to Purchaser's use of the names "Benham
Press" or "BPI" and any variations and permutations thereof.
(i) Purchaser shall receive Volume I, as described in Section 2.01
hereof.
6.02. Deliveries to Seller. At the Closing, Purchaser shall deliver to
Seller or Stockholder the following:
(a) Seller shall receive the Purchase Price.
(b) Seller shall receive the of Assumption of Liabilities Agreement,
in the form of Exhibit B hereto.
(c) Seller shall receive the Options.
(d) Seller shall receive an opinion of Blau, Kramer, Wactlar &
Lieberman, P.C., counsel to Purchaser in form and substance reasonably
acceptable to counsel to Seller.
<PAGE>
(d) Seller shall receive certificates of the secretary or other
appropriate officers of Purchaser, which secretary or officers certificate shall
include appropriate certification of by-laws, Articles of Incorporation,
corporate resolutions and incumbency.
(e) Jeffrey Bowe shall receive the Employment Agreement, in the form
of Exhibit D hereto.
ARTICLE 7.
Conditions Precedent.
--------------------
7.01. Conditions to Obligations of the Purchaser.
The obligation of the Purchaser to pay the Purchase Price to Seller and to
satisfy its other obligations hereunder shall be subject to the fulfillment (or
waiver by the Purchaser) at or prior to the Closing, of the following additional
conditions, which Seller agrees to use its best efforts to cause to be
fulfilled:
(a) Representations, Performance. If the Closing Date is not the date
hereof, the representations and warranties contained in Article 2 hereof shall
be true at and as of the date hereof and shall be repeated and shall be true at
and as of the Closing Date with the same effect as though made at and as of the
Closing Date, except as affected by the transactions contemplated hereby; Seller
shall have duly performed and complied with all agreements and conditions
required by this Agreement to be performed or complied with by it prior to or on
the Closing Date; and Seller shall have delivered to Purchaser a certificate
dated the Closing Date, and signed by its Chairman or President and by its chief
financial officer, to the effect set forth above in this section 7.01.(a).
(b) Consents. Any required consent to the sale or transfer of the
Acquired Assets under any agreement or contract shall have been obtained.
(c) Litigation. No suit, action, arbitration or other proceeding or
investigation shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit or to obtain material
damages or other material relief in connection with this Agreement or the
consummation of the transactions contemplated hereby or which is likely to
affect materially the value of the Acquired Assets.
(d) Payments of Transfer and Recording Taxes. Seller shall have paid
all Transfer Taxes in connection with the sale of the Acquired Assets from
Seller to the Purchaser.
(e) U.C.C. and Lien Search. The Purchaser shall have received (at its
expense) copies of a report of a Uniform Commercial Code search and tax and
judgment lien search in the jurisdictions listed on Schedule 2.02, searching the
relevant names of or used by Seller reasonably satisfactory in form and
substance to the Purchaser.
(f) Proceedings and Documentation. All corporate and other proceedings
of Seller in connection with the transactions contemplated by this Agreement,
and all documents and instruments incident to such corporate proceedings, shall
be satisfactory in form and substance to the Purchaser and the Purchaser's
counsel, and the Purchaser and the Purchaser's counsel shall have received all
such receipts, documents and instruments, or copies thereof, certified if
requested, to which Purchaser is entitled and as may be reasonably requested.
(g) Property Loss. No portion of the Acquired Assets shall, after the
date hereof and before the Closing Date, have been destroyed or damaged or taken
by condemnation under circumstances where the loss thereof will not be
substantially reimbursed to the Purchaser through the proceeds of applicable
insurance or condemnation award.
(h) Bulk Sales Notice. The Seller shall deliver to Purchaser a list of
creditors, certified as true, complete and correct, as required by Indiana bulk
sales law and Purchaser shall deliver to such creditors any notice required to
be delivered by such law and any other similar laws to each of such creditors
and any other persons entitled to receive such notice.
<PAGE>
(i) Consents and Approvals. All material licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental or
regulatory bodies which are (i) necessary to enable the Purchaser to fully
utilize the Acquired Assets as contemplated from and after the Closing shall
have been obtained and be in full force and effect, including licenses, permits
consents, approvals, authorizations, qualifications and orders of governmental
or regulatory bodies held in the name or on behalf of Seller but under which the
Purchaser may legally continue to conduct such business or (ii) necessary for
the consummation of the transactions contemplated hereby, shall have been
obtained. Consents by the other parties to each contract constituting part of
the Acquired Assets to the assignment to and assumption thereof by the Purchaser
shall have been obtained.
7.02. Conditions to Obligations of Seller.
The obligation of Seller to deliver the bills of sale, assignments,
endorsements and other instruments of transfer relating to the Acquired Assets
and to satisfy Seller's other obligations hereunder shall be subject to the
fulfillment, on or prior to the Closing Date (or waiver by Seller), of the
following conditions, which Purchaser agrees to use its best efforts to cause to
be fulfilled.
(a) Representations, Performance, etc. If the Closing Date is not the
date hereof, the representations and warranties of the Purchaser contained in
Article 3 hereof shall be true at and as of the date hereof and shall be
repeated and shall be true at and as of the Closing Date with the same effect as
though made at and as of such time; the Purchaser shall have duly performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or on the Closing Date; and the
Purchaser shall have delivered to Seller a certificate dated the Closing Date,
and signed by its President or any Vice President and by its chief financial
officer to the effect set forth above in this Section 7.02.(a)
(b) Proceedings and Documentation. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement, and all
documents and instruments incident thereto, shall be satisfactory in form and
substance to Seller and Company's counsel, and Seller and Company's counsel
shall have received all such receipts, documents and instruments, or copies
thereof, certified if requested, to which Seller is entitled and as may be
reasonably requested.
ARTICLE 8.
Termination.
-----------
(a) This Agreement may be terminated at any time prior to the Closing Date:
(i) by mutual consent of the parties hereto.
(ii) by the Purchaser by notice to Seller (A) if any of the conditions set
forth in Section 7.01 hereof shall not, or it becomes apparent that any of such
conditions will not, have been fulfilled by November 15, 1997, (B) if Purchaser
shall not be satisfied, in its sole discretion, with the results of its
investigation of the Business of Seller, (C) if any material default under or
material breach of any agreement or condition of this Agreement, or any material
misrepresentation or material breach of any warranty contained herein, on the
part of Seller shall have occurred and shall not have been cured; or (D) if
Purchaser shall not be reasonably satisfied with the results of the
environmental tests to be performed by Heritage Environmental Services, Inc.
described in their proposal attached as Exhibit F hereto.
<PAGE>
(iii) by Seller by notice to the Purchaser, (A) if any of the conditions
set forth in Section 7.02 hereof shall not, or it becomes apparent that any of
such conditions will not, have been fulfilled by November 15, 1997, or (B) if
any material default under or material breach of any agreement or condition of
this Agreement, or any material misrepresentation or material breach of any
warranty contained herein, on the part of the Purchaser shall have occurred and
shall not have been cured.
(b) In the event of the termination of this Agreement pursuant to the
provisions of Section 8(a) hereof, this Agreement shall become void and have no
effect, without any liability on the part of any party hereto or its directors,
officers or Stockholder in respect of this Agreement, except that nothing herein
shall limit the right of either party to seek damages from the other for willful
breach of this Agreement.
ARTICLE 9.
Representations and Warranties Concerning Stockholder
-----------------------------------------------------
The Stockholder hereby represents to the Purchaser as follows:
9.01. Authority. The Stockholder has the full right, capacity, power and
authority to enter into this Agreement and the Documents and to consummate the
transactions contemplated hereby and thereby. This Agreement and the Documents
have been duly executed and delivered by the Stockholder and constitute valid
and binding obligations enforceable against the Stockholder in accordance with
their terms.
9.02. Prohibitions. Except as set forth in Schedule 9.02 hereto, neither
the execution and delivery of this Agreement or any of the Documents, the
performance by the Stockholder of his obligations hereunder and thereunder, nor
the consummation of the transactions contemplated hereby or thereby will: (i)
with or without the giving of notice or the passage of time, or both, violate,
or be in conflict with, or constitute a default under, or cause or permit the
termination or the acceleration
of the maturity of, any debt or obligation of the Stockholder or require the
payment of any pre-payment or other penalty with respect thereto; (ii) require
notice to or the consent of any party to any agreement or commitment, including,
without limitation, any lease or license or any agreement including a right of
first refusal or similar right, to which the Stockholder is a party, or by which
he or his properties is bound or subject; (iii) result in the creation or
imposition of any security interest, lien, or other encumbrance upon any
property or assets of the Stockholder under any agreement or commitment to which
he is a party, or by which he or his properties is bound or subject; or (iv)
violate any statute or law or any judgment, decree, order, regulation or rule of
any court or governmental authority to which the Stockholder or his properties
is bound or subject.
9.03. Consents and Approvals of Governmental Authorities. No consent,
approval or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority is required to be made or obtained by the
Stockholder in connection with the execution and delivery by the Stockholder of
this Agreement or the Documents, the performance by the Stockholder of his
obligations hereunder or thereunder or the consummation by the Stockholder of
the transactions contemplated hereby or thereby.
<PAGE>
ARTICLE 10.
Indemnification
---------------
10.01. Indemnity of Seller and Stockholder. Purchaser agrees to indemnify,
defend and hold the Seller and the Stockholder harmless from and against any and
all Losses (as hereinafter defined) arising out of or resulting from the breach
by Purchaser of any representation, warranty, covenant or agreement of Purchaser
contained in this Agreement or the Documents including, without limitation, the
failure to pay any Assumed Liability. For purposes of this Article 10, the term
"Losses" shall mean all damages, costs and expenses (including reasonable
attorneys' fees) of every kind, nature or description, it being the intent of
the parties that the amount of any such Loss shall be the amount necessary to
restore the indemnified party to the position it would have been in
(economically or otherwise), including any costs or expenses incident to such
restoration, had the breach, event, occurrence or condition occasioning such
Loss never occurred.
10.02. Indemnity of Purchaser. The Stockholder and the Seller jointly and
severally agree to indemnify, defend and hold Purchaser harmless from and
against any and all Losses arising out of or resulting from (a) the breach by
Stockholder of any representation, warranty, agreement or covenant contained in
this Agreement or the Documents (including all Exhibits and Schedules hereto)
and (b) the imposition of any Retained Liability on Purchaser; provided, that
Purchaser shall have the right to offset any Losses arising out of or resulting
from the imposition of any Retained Liability on Purchaser against any fees
payable to the Stockholder pursuant to any Employment Agreement. The
indemnification provided by the Stockholder hereunder shall be as primary
obligor and not as guarantor, and without those defenses available under
applicable law to a surety.
10.03. Indemnification Procedure.
(a) An indemnified party shall notify the indemnifying party of any
claim of such indemnified party for indemnification under this Agreement within
thirty days of the date on which such indemnified party or an executive officer
or representative of such indemnified party first becomes aware of the existence
of such claim; provided, however, that in case the Purchaser is the indemnified
party for purposes of this Section 10.03, such thirty-day period shall not
commence until the date on which an executive officer of Purchaser first becomes
aware of such claim. Such notice shall specify the nature of such claim in
reasonable detail and the indemnifying party shall be given reasonable access to
any documents or properties within the control of the indemnified party as may
be useful in the investigation of the basis for such claim. The failure to so
notify the indemnifying party within such thirty-day period shall not constitute
a waiver of such claim but an indemnified party shall not be entitled to receive
any indemnification with respect to any additional loss that occurred as a
result of the failure of such person to give such notice.
In the event any indemnified party is entitled to indemnification hereunder
based upon a claim asserted by a third party (including a claim arising from an
assertion or potential assertion of a claim for Taxes), the indemnifying party
shall be given prompt notice thereof, in reasonable detail. The failure to so
notify the indemnifying party shall not constitute a waiver of such claim but an
indemnified party shall not be entitled to receive any indemnification with
respect to any Loss that occurred as a result of the failure of such person to
give such notice. The indemnifying party shall have the right (without prejudice
to the right of any indemnified party to participate at its expense through
counsel of its own choosing) to defend or prosecute such claim at its expense
and through counsel of its own choosing if it gives written notice of its
intention to do so not later than twenty days following notice thereof by the
indemnifying party or such shorter time period as required so that the interests
of the indemnified party would not be materially prejudiced as a result of its
failure to have received such notice; provided, however, that if the defendants
in any action shall include both an indemnifying party and an indemnified party
and the indemnified party shall have reasonably concluded that counsel selected
by the indemnifying party has a conflict of interest because of the availability
of different or additional defenses to the indemnified party, the indemnified
party shall have the right to select separate counsel to participate in the
<PAGE>
defense of such action on its behalf, at the expense of the indemnifying party.
If the indemnifying party does not so choose to defend or prosecute any such
claim asserted by a third party for which any indemnified party would be
entitled to indemnification hereunder, then the indemnified party shall be
entitled to recover from the indemnifying party, on a monthly basis, all of its
attorneys' reasonable fees and other costs and expenses of litigation of any
nature whatsoever incurred in the defense of such claim. Notwithstanding the
assumption of the defense of any claim by an indemnifying party pursuant to this
paragraph, the indemnified party shall have the right to approve the terms of
any settlement of a claim (which approval shall not be unreasonably withheld).
(b) The indemnifying party and the indemnified party shall cooperate
in furnishing evidence and testimony and in any other manner which the other may
reasonably request, and shall in all other respects have an obligation of good
faith dealing, one to the other, so as not to unreasonably expose the other to
an undue risk of loss. The indemnified party shall be entitled to reimbursement
for out-of-pocket expenses reasonably incurred by it in connection with such
cooperation. Except for fees and expenses for which indemnification is provided
pursuant to Section 10.01 or Section 10.02, as the case may be, and as provided
in the preceding sentence, each party shall bear its own fees and expenses
incurred pursuant to this paragraph (b).
10.04. Special Provisions Relating to Environmental Matters.
(a) Definitions.
Hazardous Material. As used in this Agreement, "Hazardous Material" means
any substance: (i) the presence of which requires investigation or remediation
under any federal, state or local statute, regulation, ordinance, order, action,
policy or common law; or (ii) which is defined as a waste, substance, pollutant,
contaminant or other material that is toxic, dangerous or hazardous, or as a
pesticide or petroleum product under any federal, state or local statute,
regulation, rule or ordinance or amendments thereto including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C., Section 9601 et. seq.) and/or the Resource Conservation and
Recovery Act (42 U.S.C., Section 6901 et. seq.).
Environmental Liabilities. As used in this Agreement, "Environmental
Liabilities" means: (i) all claims, judgments, liabilities, damages, losses,
penalties, fines, (including strict liability), encumbrances or liens, in each
case with respect to claims by a third party arising from or related to the
existence, creation or occurrence of the Pre-closing Liability Conditions, and
the costs and expenses of investigation and defense of any such claim, as well
as any good faith settlement thereof; (ii) damages to third parties for personal
injury, or injury to property or natural resources occurring on or off any Real
Property arising from or related to the existence, creation or occurrence of the
Pre-closing Liability Conditions; and (iii) fees incurred for the services of
attorneys, consultants, contractors, experts, laboratories and all other costs
incurred in connection with the investigation or remediation of any of the Real
Property arising from or related to the existence, creation or occurrence of the
pre-closing liability Conditions, to the extent required by paragraph (d) below.
For the purposes hereof, "third party" means a person other than: (i) one
of the parties to this Agreement or (ii) an heir, estate, assign, successor,
parent or affiliate corporation, or subsidiary corporation of one of the parties
to this Agreement.
<PAGE>
Environmental Requirements. As used in this Agreement, "Environmental
Requirements" means all applicable present statutes, regulations, rules,
ordinances, codes of all governmental agencies, departments, commissions,
boards, bureaus, or instrumentalities of the United States, states and political
subdivisions thereof including, without limitation the Conservation and CERCLA
and all applicable judicial, administrative, and regulatory decrees, judgments,
and orders relating to the protection of the environment, including, without
limitation, all requirements, pertaining to the health and safety of employees.
Phase I Report. As used in this Agreement, "Phase I Report" means the
August 7, 1997 report prepared by HOK/K Industrial, Inc.
Closure Report. As used in this Agreement, "Closure Report" means the
August 15, 1997 report prepared by Keramida Environmental, Inc.
(b) The Seller agrees to indemnify, defend, reimburse and hold
harmless the Purchaser from and against any and all Environmental Liabilities.
The Purchaser hereby waives any and all other claims against the Seller under
any Environmental Requirements or common law.
(c) In addition, the Seller shall, at its own expense, defend all
claims, suits and administrative proceedings relating to Environmental
Liabilities and conduct all negotiations of any description, and pay and
discharge, when and as the same become due, any and all judgments, settlements,
penalties or other sums due against the Purchaser, but in each case only to the
extent relating to Environmental Liabilities. The Purchaser shall cooperate in
such activities to the extent reasonably requested by the Seller. The Seller, as
reasonably requested by the Purchaser, shall keep the Purchaser apprised of the
status of all such claims, suits, administrative proceedings and negotiations
and provide to the Purchaser copies of all relevant documents and legal papers
pertaining thereto.
(d) The Seller shall, at its sole cost and expense but only to the
extent relating the Environmental Liabilities, take all actions to remediate any
of the Lease Properties that are required or reasonably necessary to meet
Environmental Requirements, but only to the extent that such remediation is
required as a result of Environmental Liabilities ("Environmental Work"). The
Seller shall proceed diligently with such investigatory and remedial actions,
provided that in all cases, such actions shall be in accordance with all
applicable requirements of governmental entities. Any such actions shall be
performed in a good, safe and workmanlike manner. The Seller shall use its best
efforts to minimize any impact on the business conducted by the Purchaser at the
Leased Property involved; provided that such efforts shall not include the
incurrence of any additional costs unless such costs are borne by the Purchaser.
The Seller shall promptly provide to the Purchaser copies of testing results and
reports that are generated in connection with the above activities. The
Purchaser shall grant to the Seller reasonable access to the Leased Properties
to perform Environmental Work. Anything else in this Agreement to the contrary
notwithstanding, the Seller shall not be responsible or liable to the Purchaser
for any consequential or incidental damages to the Purchaser on account of the
performance of any Environmental Work, including without limitation any lost
profits resulting from complete or partial shutdowns required during the
performance of Environmental Work.
(e) Whenever the Purchaser shall become aware of or receive notice or
other communication of any actual or threatened Environmental Liability for
which the Purchaser claims it is entitled to indemnification hereunder,
including but not limited to, notice or other communication concerning any
actual or threatened investigation, inquiry, lawsuit, claim, citation,
directive, summons, proceeding, complaint, notice, order, writ or injunction,
relating to same, the Purchaser shall deliver to the Seller, within ten days of
the receipt of such notice or communication by the Purchaser, a written
description of any actual or threatened Environmental Liability, together with
copies of any documents evidencing same.
<PAGE>
(f) Failure by the Purchaser to provide prompt notice to the Seller
hereunder shall not avoid the Seller's obligation to indemnify the Purchaser
except to the extent that the Seller was actually prejudiced thereby.
10.05 Survival of Representations and Warranties. All representations and
warranties contained in this Agreement or in any certificate or other writing
delivered pursuant hereto shall survive the Closing. The obligation of the
Seller and Stockholder to indemnify the Purchaser and of the Purchaser to
indemnify the Seller and Stockholder hereunder shall survive until the
expiration of two years after the Closing. The foregoing limitations shall not
apply to any existing claim for Losses as to which the indemnified party has
notified the indemnifying party in reasonable detail before the date on which
the respective obligations to indemnify would otherwise expire pursuant to the
foregoing limitations. Any representation and warranty herein or in any such
certificate or writing shall be deemed to have been relied upon by the party or
parties to which made, notwithstanding any investigation or inspection made by
or on behalf of such party or parties and shall not be affected in any respect
by any such investigation or inspection.
10.06 Limitation on Indemnification. Notwithstanding anything herein to the
contrary the maximum aggregate amount of liability for indemnification of the
parties under Sections 10.01, 10.02 and 10.04 shall not exceed the amount of the
total consideration for the Acquired Assets to be paid to the Seller, including
the amount of the Assumed Liabilities assumed by Purchaser.
ARTICLE 11.
Confidentiality; Non-Competition
--------------------------------
11.01 Confidentiality. Seller and the Stockholder agree not to, directly or
indirectly, divulge or communicate to any person nor shall they direct any
employee, representative or agent of Purchaser or its affiliates to divulge or
communicate to any person or entity or use to the detriment of the Purchaser or
for the benefit of any other person or entity, including without limitation any
competitor, supplier, licensor, licensee or customer of the Purchaser or Press,
any confidential or proprietary data or information relating to the Business.
The term "confidential or proprietary data or information" as used in this
Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel information,
financial information, customer lists, account lists or other account
information, names, telephone numbers or addresses, supplier lists, trade
secrets, patented or proprietary information, forms, information regarding
operations, systems, methods, financing, services, know how, computer and any
other processed or collated data, computer programs, pricing, marketing and
advertising data of Benham as of the date hereof.
11.02 Non-Competition. For a period of five (5) years from the date hereof,
Seller and its affiliates shall not, without the written consent of the
Purchaser, directly or indirectly, (i) become associated with, render services
to, invest in, represent, advise or otherwise participate in as an officer,
employee, director, stockholder, partner, promoter, agent of, consultant for or
otherwise, any business which is conducted in any of the jurisdictions in which
the Purchaser's business is conducted and which is competitive with the
manufacturing and printing specialty packaging business; (ii) for their own
account or for the account of any other person or entity (A) interfere with the
Purchaser's relationship with any of its suppliers, material customers,
<PAGE>
accounts, brokers, representatives or agents or (B) contact, telephone, meet,
solicit or transact any business with any material customer, account or supplier
of Purchaser who or which transacts or has transacted business with Seller one
(1) year prior to the Closing Date; or (iii) employ or otherwise engage, or
solicit, entice or induce on behalf of themselves or any other person or entity,
the services, retention or employment of any person who has been an employee,
principal, partner, stockholder, sales representative, trainee, consultant to or
agent of Press within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting Purchaser
from pursuing any other remedies available to it for such violation, including
but not limited to any injunctive or other equitable relief or the recovery of
damages from the Employee.
11.03. Specific Performance. Seller and the Stockholder acknowledge that
the covenants contained in this Article 11 are fair and reasonable in order to
protect Purchaser's business and were a material and necessary inducement for
Purchaser to agree to the terms of this Agreement and to the transactions
contemplated by this Agreement. Seller and the Stockholder further acknowledge
that they have realized significant monetary benefit from these transactions,
that any remedy at law for any breach or threatened or attempted breach of the
covenants contained in this Article 11 may be inadequate and that the violation
of any of the covenants contained in this Article 11 will cause irreparable and
continuing damage to Purchaser. Accordingly, Purchaser shall be entitled to
specific performance or any other mode of injunctive and/or other equitable
relief to enforce its rights hereunder, including without limitation an order
restraining any further violation of such covenants, or any other relief a court
might award, which injunctive relief shall be cumulative and in addition to any
other rights or remedies to which Purchaser. The covenants in this Article 11
shall run in favor of Purchaser and its successors and assigns. In addition, in
the event that the Purchaser is successful, the Seller agrees to pay Purchaser
the costs it incurs, including reasonable attorneys' fees and expenses, in
bringing and prosecuting any proceeding to enforce the terms of this Article 11.
11.04. Severability. In case any one or more of the terms or provisions
contained in this Section 11.02 shall for any reason be held invalid, illegal or
unenforceable, such invalidity, illegality or unenforceability shall not affect
any other terms or provisions hereof, but such term or provision shall be deemed
modified or deleted as or to the extent required by applicable law, and such
modification or deletion shall not affect the validity of the other terms or
provisions of this Article 11. In addition, if any one or more of the
restrictions contained in this Article 11 shall for any reason be held to be
unreasonable with regard to time, duration, geographic scope or activity, the
parties contemplate and hereby agree that such restriction shall be modified and
shall be enforced to the full extent compatible with applicable law. The parties
hereto intend that the covenants contained in this Article 11 shall be deemed a
series of separate covenants for each country, state, county and city. If, in
any judicial proceeding, a court shall refuse to enforce all the separate
covenants deemed included in this Article 11 because, taken together, they cover
too extensive a geographic area, the parties intend that those of such covenants
(taken in order of the cities, counties, states and countries therein which are
lease populous) which if eliminated would permit the remaining separate
covenants to be enforced in such proceeding shall, for the purpose of such
proceeding, be deemed eliminated from the provisions of this Article 11.
<PAGE>
ARTICLE 12.
Resolution of Disputes
----------------------
Purchaser, Stockholder and the Seller agree that any and all disputes
arising after the Closing Date under this Agreement shall be finally and
exclusively resolved by arbitration as provided in this Article 12.
12.01 Dispute Resolution. Any and all disputes arising out of this
Agreement, including accounting-related disputes and those which shall not have
been settled by negotiation between the parties shall be resolved by arbitration
conducted before a board of three arbitrators chosen by the parties. Each party
shall select one arbitrator, and the two arbitrators so selected shall select a
third arbitrator. Except as provided in this Agreement or as the parties and the
arbitrators otherwise agree, the arbitration panel thus chosen shall apply the
Commercial Arbitration Rules of the American Arbitration Association. In the
event the arbitrators chosen by the parties are unable to agree upon the
resolution of any dispute, the decision of the third arbitrator alone shall be
controlling. the determination of the panel shall be conclusive and binding upon
the parties and a judgment upon the award of the Arbitrators may be entered in
any court having jurisdiction.
12.02 Arbitration Procedures. All arbitration proceedings shall be held in
Long Island, New York, unless otherwise agreed by the parties. The expenses of
each party, including legal and accounting expenses, shall be borne by the party
incurring them, except that the parties shall pay equally all fees and expenses
of the arbitrators and any consultants or advisors providing services to the
arbitrators. Arbitration shall be initiated by either party making written
demand on the other for arbitration of a specifically stated issue or issues if
the parties fail within any time limits provided in this Agreement (or 30
calendar days, if no shorter limit is stated) to resolve the matter by mutual
discussions. Within 10 calendar days after either party has so notified the
other of its demand for arbitration, the parties shall select arbitrators as
provided in Section 12. Within (15) calendar days after the selection of the
arbitrators, the parties will consult for the purpose of attempting to define
and limit the issues to be decided by the arbitrators; will exchange all
documents to be offered in the arbitration proceeding; and will provide each
other with the names of witnesses each proposes to present at any arbitration
hearing together with a statement summarizing the testimony such witness is
anticipated to offer. Evidence in the arbitration will be limited to (a) an
initial position statement from each party; (b) a reply by each party to the
other's initial position statement; (c) documents and statements of witnesses
identified during such 15 day period as provided above; and (d) if a hearing is
held, opening and closing oral presentations by the parties or their
representatives and responses to direct questions from the arbitrators. A
party's initial position statement must be submitted to the arbitrators and the
other party within 30 calendar days after the selection of the arbitrators. The
reply by a party to the other party's initial position statement must be
submitted to the arbitrators and the other party within 20 calendar days after
receipt of such other party's initial position statement. The arbitrators shall
have the discretion to determine whether or not a hearing upon the matters in
dispute is desirable or whether to make the arbitration decisions based on the
submitted statements and documents. In any event, the arbitrations will render
decisions on all issues in dispute within 30 calendar days after the earlier of
(i) the last submittal by both parties of their replies and accompanying
documents, as provided above, or (ii) the last day upon which a party may submit
its statements, reply, and accompanying documents within the times stated above.
The arbitrators shall be authorized only to determine which positions presented
to them is more correct or supported by the facts and applicable laws, and shall
not be authorized to determine a different result than presented by one party or
the other. For purposes of such deadlines, a period of time shall be counted
beginning on the day following the occurrence or instance establishing the
beginning of the period (such as the receipt of a party's initial position
<PAGE>
statement) and, if a period shall end on a Sunday or postal holiday, it shall be
extended to the next regular business day. No interrogatories, depositions or
other discovery, and no extensions of the above timetables, shall be permitted
except by mutual consent of the parties or as approved by the arbitrators for
good cause shown.
ARTICLE 13.
Miscellaneous Provisions
------------------------
13.01. Additional Instruments. Stockholder, the Seller and Purchaser, as
the case may be, at the request of the other, will execute and deliver, or cause
to be executed and delivered, to the other such documents and instruments, in
addition to those specifically required by the provisions of this Agreement, in
form and substance reasonably satisfactory to the other, as may reasonably be
necessary or desirable to carry out or implement any provision of this
Agreement.
13.02. Amendment and Modification. This Agreement may be amended, modified
or supplemented only by written agreement of all of the parties hereto.
13.03. Waiver. Any breach of any obligation, covenant, agreement or
condition contained herein shall be deemed waived by the non-breaching party
only by a writing, setting forth with particularity the breach being waived and
the scope of the waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other breach. No waiver shall be
implied from any conduct or action of the non-breaching party. No failure or
delay by any party in exercising any right, power or privilege hereunder or
under the Documents and no course of dealing by any party shall operate as a
waiver of any right, power or privilege hereunder or under any Document nor
shall any single or partial exercise thereof or the exercise of any other right,
power or privilege so operate.
13.04. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be delivered by
certified mail, return receipt requested, and shall be deemed to have been duly
given upon receipt thereof:
(a) If to Seller or Stockholder, to:
Benham Press Inc.
1160 West 16th Street
Indianapolis, Indiana 46202
with a copy to:
Bingham Summers Welsh & Spillman
2700 Market Tower Building
10 West Mark Street
Indianapolis, Indiana 46204
Attn: Gerald Moss, Esq.
or to such other person or address as Seller or the Stockholder shall furnish
Purchaser in writing.
(b) If to Purchaser, to:
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, NY 11788
Att: Margaret Krumholz
with a copy to:
Blau, Kramer, Wactlar & Lieberman, P.C.
100 Jericho Quadrangle
Jericho, NY 11753
Att: Nancy D. Lieberman, Esq.
or to such other person or address as Purchaser shall furnish Stockholder and
the Seller in writing.
<PAGE>
13.05. Binding Nature; Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, but neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of-the other parties; provided,
however, that the rights of the Purchaser hereunder may be assigned to (i) any
entity controlling, controlled by or under common control with Purchaser, (ii)
any lender or financial institution as security for a loan or loans granted in
order to facilitate participation in the transaction contemplated herein and
(iii) any future purchaser of all or any substantial portion of the Acquired
Assets.
13.06. Governing Law. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York applicable to contracts made and performed therein.
13.07. Expenses. All costs and expenses incurred in connection with
negotiating, preparing and executing this Agreement and the Documents shall be
paid by the party incurring such cost or expense and Stockholder shall pay all
out-of-pocket expenses including, without limitation, legal expenses and
accounting expenses incurred by the Seller in connection with negotiating,
preparing and executing this Agreement and the transactions contemplated hereby
except as otherwise provided in Section 1.02(b)(ii).
13.08. Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
13.09. Headings. The headings contained in this Agreement are inserted for
convenience only and shall not constitute a part hereof.
13.10. Obligations of Predecessors. When any provision of this Agreement or
any Document refers to or contemplates: (i) any agreement, lease, license,
permit or authorization to which the Seller is a party or by which its assets
are bound or subject; (ii) any other obligation or duty of the Seller of any
kind or nature; or (iii) the existence or absence of any fact or matter, such
provision shall be deemed to include, in addition to any contract, document,
agreement, lease, license, permit or authorization or other obligation or duty
of the Seller or the existence or absence of any fact or matter: (x) any
contract, document, agreement, lease, license, permit or authorization or other
obligation or duty assigned to or assumed by the Seller or its predecessors,
directly or indirectly, by agreement, by operation of law or otherwise and (y)
the existence of any fact or matter to the extent relevant to any such
predecessor.
When any provision of this Agreement or any Document refers to a
"predecessor," such reference shall be deemed to include any corporation,
partnership, joint venture or other business, business organization or entity
which is the predecessor of the Seller and shall include any or all of the
foregoing to the extent that the Seller is the direct or indirect successor
thereof.
13.11. Entire Agreement. This Agreement, together with the Schedules and
Exhibits hereto and the Documents, constitutes the entire agreement between the
parties hereto pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, documents, negotiations and discussions, whether
oral or written, of the parties hereto.
13.12. Third Party Beneficiaries. Nothing in this Agreement or the
Documents is intended to, or shall be construed so as to create any third party
beneficiary to this Agreement or otherwise confer any rights in or upon any
persons except Stockholder, Purchaser and the Seller.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first above written.
DISC GRAPHICS, INC.
By: ____________________________________
BENHAM PRESS INC.
By:_____________________________________
------------------------------------
Jeffrey J. Bowe
Number of Shares: 100
<PAGE>
LIST OF SCHEDULES
-----------------
1.01(b) - Retained Assets
1.02(a) - Assumed Liabilities
1.04 - Allocation of Purchase Price 2.01(a) - Real Property
2.01 (a) - Real Property
(b) - Intangible Property
(c) - Material Agreements
(d) - Employees and Compensation Arrangements
(e) - Debt (Including Security Agreements and Mortgages)
(f) - Banks
(g) - Accounts Receivable
(h) - Capital Expenditures
(i) - Major Suppliers
(j) - Certificate of Incorporation and By-Laws, as amended
(k) - Workers Compensation and Product Liability Claims
(1) - Powers of Attorney
(m) - Machinery and Equipment
(n) - Insurance
2.02 - States Where Seller is Qualified to do Business
2.03 - Authorized, Issued and Outstanding Stock, Voting
Agreements, Options, Warrants, Etc.
2.05 - Violations, Accelerations, Consents
2.08 - Contractual Arrangements with Stockholder, Officers, Directors or
Employees
2.09 - Certain Changes
2.10 (c) - Unrecorded Interests
(d) - Easements
(e) - Adequacy and Condition of Real Property
(f) - Title to Personal Property
2.11 - Limitations on Patent and Trademark Rights
2.12 - Litigation
2.14 (a) - Plan Commitments
(b) - Unfunded Benefits
<PAGE>
(c) - Requisite Filings
(d) - Severance Payments
2.15 - Collective Bargaining Agreements
2.18 - Validity
2.19 - Finders and Investment Bankers
2.20 - Required Approvals
5.05 - Employees Not Hired; Severance
5.08 - COBRA
9.02 - Prohibitions
LIST OF EXHIBITS
----------------
Exhibit A - Intentionally Omitted
Exhibit B - Assumption of Liabilities Agreement
Exhibit C - Significant Equipment
Exhibit D - Employment Agreement
Exhibit E - Bill of Sale and Assignment
Exhibit F - Heritage Environmental Services, Inc. environmental proposal
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 24th day of October 1997 by and between DISC
GRAPHICS, INC., a Delaware corporation (the "Company") and Jeffrey J. Bowe, an
individual residing at________________ (hereinafter called the "Employee").
W I T N E S S E T H:
WHEREAS, pursuant to an Asset Purchase Agreement dated as of September 19,
1997 (the "Purchase Agreement"), the Company is acquiring substantially all of
the assets and certain of the liabilities of Benham Press Inc., an Indiana
corporation ("Press"); and
WHEREAS, the Company and the Employee are entering into this Employment
Agreement as a condition precedent to the consummation of the transactions
contemplated by the Purchase Agreement; and
WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between or among Press, the Company,
and the Employee relating to the employment of the Employee.
NOW, THEREFORE, it is agreed as follows:
1. Retention of Services. The Company hereby retains the services of
Employee, and Employee agrees to furnish such services, upon the terms and
conditions hereinafter set forth.
2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a
three (3) year period of employment commencing on the date hereof, and shall be
extended thereafter for additional one-year periods unless or until the Company
or the Employee provides sixty (60) days' notice to the other party of the
termination of this Agreement.
3. Duties and Extent of Services During Period of Employment. During the
term of employment, Employee shall be employed by the Company as Midwest General
Manager or in such other equivalent positions with the Company and its
affiliates as may be determined by the President of the Company. In such
capacity, Employee agrees that he shall devote his full time business efforts to
serving the Company and its affiliates under the direction of the President of
the Company, shall perform all duties incident to his position on behalf of the
Company to the best of his ability and shall perform such other duties as may
from time to time be assigned to him by the President of the Company, including
the following: (i) management of the entire business operations at the Company's
midwest facility, including overseeing sales, manufacturing and administration;
(ii) ensuring the efficient workflow of customer order from the securing of
orders through printing and shipment; (iii) maintaining a high level of internal
controls so as to ensure the integrity of the books, records and information
<PAGE>
systems; (iv) overseeing sales strategies to expand the Company's current
customer base, as well as adding new business through additional customers,
increased market share and expanded geographic regions; and (v) responsibility
for maintaining the morale and productivity of the workforce.
4. Restriction on Outside Activities. In light of the nature and extent of
Employee's duties and responsibilities under this Agreement, Employee shall not
engage in any outside business activities on his own account or on the account
of others, with or without compensation, as principal, agent, broker, employee,
consultant, adviser or otherwise, except the simple investment of money on his
own account, without the prior written consent of the President of the Company,
which consent shall not unreasonably be withheld. Any proposed outside business
activities shall be submitted to the President of the Company in writing prior
to commencing or entering commitments to commence such activities. Such notice
shall contain sufficient information and shall be provided sufficiently in
advance to enable the Company to reasonably investigate and assess the impact
that such proposed outside business activities may have on Employee's ability to
perform his obligations under and fulfill the terms of this Agreement.
Employee's engagement in prohibited outside business activities without the
written prior approval of the President of the Company, or without providing
timely written notice shall constitute a material failure to perform the
material duties and responsibilities of his position and a substantial violation
of the terms of this Agreement, and shall serve as grounds for termination with
cause under paragraph 10(a) hereof; provided, however, that in the event the
Company believes that the Employee has engaged in such prohibited outside
business activities, the Company shall provide written notice of such alleged
violation to the Employee, specifying in reasonable detail the alleged
violation, and the Employee shall be provided with an opportunity to cure such
breach by ceasing such conduct or obtaining such written approval from the
President of the Company within ten (10) days after receipt of such notice.
Notwithstanding the foregoing, the Company permits Employee to (i) act as a
director, officer and shareholder of Press and Benham Imaging, (ii) manage a
maximum of two rental properties, and (iii) attend up to four meetings in any
twelve month period during the term hereof as director of Campus Classics Inc.
5. Remuneration. During the period of employment, the Company shall pay to
Employee the following compensation for his services:
(a) The Company shall pay to Employee a salary at the rate of $100,000
per annum, payable in equal bi-weekly installments, or in such other manner as
shall be agreeable to the Company and Employee.
(b) During the initial term of this Agreement, the Company shall pay
to Employee a bonus in an amount equal to 1.25% percent of the net sales
generated by the accounts listed on Schedule 5(b) hereto. For the purposes of
this Agreement, "net sales" shall be deemed to be generated in the month in
which the Company receives payment in respect of any invoice. Such bonuses shall
be payable by the Company, on the fifteenth day of the next succeeding calendar
month.
(c) The Company shall issue to Employee options to purchase 50,000
shares of Common Stock of the Company having a term of five (5) years, an
exercise price equal to the average of the closing price of such Common Stock on
the NASDAQ Small Cap Market on the ten (10) days ending three (3) business days
prior to the date hereof.
<PAGE>
(d) During any extension of the initial term, the Employee shall be
eligible to participate in the management employees' bonus pool in lieu of the
bonus payable to the Employee pursuant to Section 5(b), above.
6. Employee Benefits; Car Allowance.
(a) During the term of this Agreement, the Company shall provide to
the Employee the right to participate in the Company's then existing medical and
dental insurance and other employee benefit plans and policies on the same terms
as are then generally available to the Company's employees, subject to the
Employee's qualification with the standard requirements of such plans.
(b) During the term of this Agreement, the Company shall provide to
the Employee a car allowance in the amount of $500 per month.
7. Disability. In the event of the partial or total physical or mental
disability of the Employee during the Term, which renders him unable
substantially to perform the essential functions of his job, with or without
accommodation, for a period of 75 days in any twelve-month period during the
term of this Agreement, the Company may thereafter, upon at least 20 days'
written notice to Employee, place him on disability status. After such action by
the Company, Employee shall no longer be entitled to receive any compensation
hereunder until the Employee returns to full-time status; provided, that this
Section 7 is in not intended to and shall in no way alter, amend or diminish any
right the Employee may have under the Americans with Disabilities Act, the
Family and Medical Leave Act or any other federal or state statute or law.
8. Confidential Information.
(a) In the course of Employee's employment by the Company, Employee
will have access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations. Employee will
not during Employee's employment by the Company or at any time thereafter
divulge or communicate to any person nor shall Employee direct any employee,
representative or agent of the Company or its affiliates to divulge or
communicate to any person or entity (other than to a person or entity bound by
confidentiality obligations similar to those contained herein and other than as
necessary in performing Employee's duties hereunder) or use to the detriment of
the Company or for the benefit of any other person or entity, including without
limitation any competitor, supplier, licensor, licensee or customer of the
Company or Press, any of such confidential or proprietary data or information or
make or remove any copies thereof, whether or not marked or otherwise identified
as "confidential" or "secret." Employee shall take all reasonable precautions in
handling the confidential or proprietary data or information within the Company
to a strict need-to-know basis and shall comply with any and all security
systems and measures adopted from time to time by the Company to protect the
confidentiality of confidential or proprietary data or information.
<PAGE>
(b) The term "confidential or proprietary data or information" as used
in this Agreement shall mean information not generally available to the public
which possesses independent economic value from not being generally known or
readily ascertainable to persons or entities who can obtain economic value from
its disclosure or use, including, without limitation, all database information,
personnel information, financial information, customer lists, account lists or
other account information, supplier lists, trade secrets, patented or
proprietary information, forms, information regarding operations, systems,
methods, financing, services, know how, computer and any other processed or
collated data, computer programs, pricing, marketing and advertising data of the
Company and its subsidiaries and, as of the date hereof, of Press.
(c) Employee will at all times promptly disclose to the Company in
such form and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, including without
limitation relating to programs, methods, forms, systems, services, designs,
marketing ideas, products or processes (whether or not capable of being
trademarked, copyrighted or patented) conceived or developed or created by
Employee during or in connection with Employee's employment hereunder and which
relate to the business of the Company ("Intellectual Property"). Employee agrees
that all such Intellectual Property shall be the sole property of the Company.
Employee further agrees that Employee will execute such instruments and perform
such acts as may reasonably be requested by the Company to transfer to and
perfect in the Company all legally protectable rights in such Intellectual
Property.
(d) All written materials, books, records and documents made by
Employee or coming into Employee's possession during Employee's employment by
the Company concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company, including without
limitation any files, customer records such as names, telephone numbers and
addresses, lists, firm records, brochures and literature, shall be the sole
property of the Company, shall not be removed from the Company's premises by the
Employee other than in the ordinary course of his employment, and upon
termination of Employee's employment by the Company, or upon request of the
Company during Employee's employment by the Company, Employee shall promptly
deliver the same to the Company. In addition, upon termination of Employee's
employment by the Company, Employee will deliver to the Company all other
Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales data,
customer and supplier lists, account lists and other account information,
database information and other documents, and any Company credit cards.
(e) The Employee acknowledges that the covenants contained in this
Section 8 are fair and reasonable in order to protect the Company's business and
were a material and necessary inducement for the Company to agree to the terms
of this Agreement and the transactions contemplated by the Purchase Agreement.
The Employee further acknowledges that he has realized significant monetary
benefit from these transactions, that any remedy at law for any breach or
threatened or attempted breach of the covenants contained in this Section 8 may
be inadequate and that the violation of any of the covenants contained in this
Section 8 will cause irreparable and continuing damage to the Company.
Accordingly, the Company may seek specific performance or any other mode of
injunctive and/or other equitable relief to enforce its rights hereunder,
including without limitation an order restraining any further violation of such
<PAGE>
covenants, or any other relief a court might award, and such injunctive relief
shall be cumulative and in addition to any other rights or remedies to which the
Company may be entitled. The covenants in this Section 8 shall run in favor of
the Company and its successors and assigns. In addition, the Employee agrees to
pay the Company the costs it incurs, including reasonable attorneys' fees and
expenses, in bringing and prosecuting any proceeding to enforce the terms of
this Agreement; provided, that the Company is successful in such proceeding.
(f) The provisions of this Section 8 shall survive the termination of
this Employment Agreement.
9. Non-Competition.
(a) During the term of this Agreement and, other than with respect to
clause (i) below, for two years thereafter (the "Restricted Period"), the
Employee shall not, without the written consent of the Company, directly or
indirectly,
(i) become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in the State of Indiana and which is competitive
with the manufacturing and printing specialty packaging business;
(ii) for the Employee's own account or for the account of any other
person or entity (A) interfere with the Company's or Press' relationship with
any of its respective suppliers, material customers, accounts, brokers,
representatives or agents or (B) contact, telephone, meet, solicit or transact
any business with any material customer, account or supplier of the Company or
Press who or which transacts or has transacted business with the Company Press
at any time during the term of this Agreement, and in the case of Press, six (6)
months prior thereto; or
(iii) employ or otherwise engage, or solicit, entice or induce on
behalf of the Employee or any other person or entity, the services, retention or
employment of any person who has been an employee, principal, partner,
stockholder, sales representative, trainee, consultant to or agent of the
Company or Press within one year of the date of such offer or solicitation.
(b) Nothing herein contained shall be construed as prohibiting the
Company or Press from pursuing any other remedies available to it for such
violation, including but not limited to any injunctive or other equitable relief
or the recovery of damages from the Employee.
(c) The Employee acknowledges that the covenants contained in this
Section 9 are fair and reasonable in order to protect the Company's or Press'
business and were a material and necessary inducement for the Company to agree
to the terms of this Agreement and to the transactions contemplated by the
Purchase Agreement. The Employee further acknowledges that he has realized
significant monetary benefit from these transactions, that any remedy at law for
<PAGE>
any breach or threatened or attempted breach of the covenants contained in this
Section 9 may be inadequate and that the violation of any of the covenants
contained in this Section 9 will cause irreparable and continuing damage to the
Company. Accordingly, the Company may seek specific performance or any other
mode of injunctive and/or other equitable relief to enforce their rights
hereunder, including without limitation an order restraining any further
violation of such covenants, or any other relief a court might award, and such
injunctive relief shall be cumulative and in addition to any other rights or
remedies to which the Company and Press may be entitled. The covenants in this
Section 9 shall run in favor of the Company and its successors and assigns. In
addition, the Employee agrees to pay the Company the costs it incurs, including
reasonable attorneys' fees and expenses, in bringing and prosecuting any
proceeding to enforce the terms of this Agreement; provided, that the Company is
successful in such proceeding.
(d) In case any one or more of the terms or provisions contained in
this Section 9 shall for any reason be held invalid, illegal or unenforceable,
such invalidity, illegality or unenforceability shall not affect any other terms
or provisions hereof, but such term or provision shall be deemed modified or
deleted as or to the extent required by applicable law, and such modification or
deletion shall not affect the validity of the other terms or provisions of this
Section 9. In addition, if any one or more of the restrictions contained in this
Section 9 shall for any reason be held to be unreasonable with regard to time,
duration, geographic scope or activity, the parties contemplate and hereby agree
that such restriction shall be modified and shall be enforced to the full extent
compatible with applicable law. The parties hereto intend that the covenants
contained in this Section 9 shall be deemed a series of separate covenants for
each country, state, county and city. If, in any judicial proceeding, a court
shall refuse to enforce all the separate covenants deemed included in this
Section 9 because, taken together, they cover too extensive a geographic area,
the parties intend that those of such covenants (taken in order of the cities,
counties, states and countries therein which are lease populous) which if
eliminated would permit the remaining separate covenants to be enforced in such
proceeding shall, for the purpose of such proceeding, be deemed eliminated from
the provisions of this Section 9.
(e) The provisions of this Section 9 shall survive the termination of
this Employment Agreement.
10. Termination.
(a) The Company may terminate the Employee's services hereunder "for
cause" by delivering to Employee not less than ten (10) days prior to the date
on which the termination is to be effective, a written notice of termination for
cause specifying the act, acts or failure to act that constitute the cause. For
the purposes of this agreement, "for cause" shall mean; (i) any act of
dishonesty, fraud or embezzlement adversely affecting the financial, market,
reputation or other interests of the Company, its subsidiaries or any of their
affiliates, (ii) in the event that the Employee is unable to perform the
essential functions of his job, as described in Section 7 hereof, more than once
during the term hereof, (iii) in the event of a conviction of the Employee for
any crime of moral turpitude or any knowing violation of any federal or state
securities law or regulation or any crime resulting in his imprisonment for more
than 90 days, (iv) failure to perform Employees duties hereunder, (v) any
material breach by the Employee of this Agreement, or (vi) the death of the
Employee.
<PAGE>
(b) If the Company terminates Employee's employment hereunder for any
reason other than "for cause" as set forth in Section 10(a) hereof, the Company
shall pay to the Employee compensation pursuant to Sections 5(a) and 5(b) hereof
at the time and in the manner provided for herein, and no other compensation
payable hereunder shall be payable to the Employee. If the Company terminates
Employee's employment hereunder "for cause" as set forth in Section 10(a)
hereof, Employee shall not be entitled to receive any further compensation
hereunder. Employee and the Company acknowledge that the foregoing provisions of
this paragraph 10(b) are reasonable and are based upon the facts and
circumstances of the parties at the time of entering into this Agreement, and
with due regard to future expectations.
11. Notices. Any notice to be given to the Company hereunder shall be
deemed sufficient if addressed to the Company in writing and delivered or mailed
by certified or registered mail to it at 10 Gilpin Avenue, Hauppauge, New York
11788, Attention: Margaret Krumholz or case to such other address as the Company
may hereafter designate, and a copy to Blau, Kramer, Wactlar & Lieberman, P.C.,
100 Jericho Quadrangle, Jericho, New York 11753, Attention: Nancy D. Lieberman,
Esq. Any notice to be given to Employee hereunder shall be delivered or mailed
by certified or registered mail to him at the address set forth at the head of
this Agreement or such other address as he may hereafter designate.
12. Successors and Assigns; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company, and unless clearly inapplicable, all references herein to the Company
shall be deemed to include any such successor. In addition, this Agreement shall
be binding upon and inure to the benefit of the Employee and his heirs,
executors, legal representatives and assigns; provided, however, that the
obligations of Employee hereunder may not be delegated without the prior written
approval of the Board of Directors of the Company. The Company and the Employee
acknowledge and agree that Press and Imaging are entitled to the benefits of
certain provisions of this Agreement as a third party beneficiary and shall be
entitled to enforce any such provision of this Agreement as fully as if it were
the Company or otherwise a party hereto.
13. Amendments. This Agreement may not be altered, modified, amended or
terminated except by a written instrument signed by each of the parties hereto.
14. Prior Agreements Superseded. This Agreement contains the entire
agreement of the parties and supersedes any other agreements, oral or written,
entered into between Employee and the Company prior to the date of this
Agreement.
15. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York, without regard to
conflicts of laws.
16. Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law or public policy, the
remaining provisions shall remain in full force and effect.
<PAGE>
17. Waiver. No term or provision hereof shall be deemed waived and no
breach consented to or excused, unless such waiver, consent or excuse shall be
in writing and signed by the party claimed to have waived, consented or excused.
A consent, waiver or excuse of any breach shall not constitute a consent to,
waiver or, or excuse of any other or subsequent breach whether or not of the
same kind of the original breach.
18. Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
agreement.
19. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement, has had an opportunity to consult counsel regarding this Agreement
and hereby represents and warrants to the Company that Employee's entering into
this Agreement, and the obligations and duties undertaken by Employee hereunder,
will not conflict with, constitute a breach of or otherwise violate the terms of
any other agreement to which Employee is a party and that Employee is not
required to obtain the consent of any person, firm, corporation or other entity
in order to enter into and perform his obligations under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
DISC GRAPHICS, INC.
By:
------------------------------------
Name:
Title:
---------------------------------------
Jeffrey J. Bowe
MORTGAGE AND SECURITY AGREEMENT
$675,000
THIS MORTGAGE AND SECURITY AGREEMENT, dated January 16, 1998 from Disc
Graphics, Inc., 10 Gilpin Avenue, Hauppauge, New York 11788 ("Mortgagor") to
KeyBank National Association, a national banking association, 1377 Motor
Parkway, Islandia, New York 11788 ("Mortgagee").
WITNESSETH, that to secure the payment of an indebtedness evidenced by
Mortgagor's Promissory Note for $675,000 bearing even date herewith, as the same
may be modified, renewed or extended (the "Note"), which sum, with interest
thereon, is to be paid by Mortgagor to Mortgagee in accordance with the terms of
the Note, and also to secure the payment by Mortgagor to Mortgagee of all sums
expended or advanced by Mortgagee pursuant to any covenant, term or provision of
this Mortgage or any other Loan Document (as that term is defined in the Note),
and to secure the performance of each covenant, term and provision by Mortgagor
to be performed pursuant to this Mortgage or any other Loan Document, Mortgagor
hereby mortgages and warrants to Mortgagee, its successors and assigns, the
following property (the "Mortgaged Property") whether now owned or held or
hereafter acquired:
ALL THAT TRACT OR PARCEL OF LAND situate in the State of Indiana, City of
Indianapolis, County of Marion, and being the same premises described in
Schedule "A" hereto annexed and made a part hereof (the "Premises").
ALL RIGHT, TITLE AND INTEREST of Mortgagor in and to any and all buildings,
structures and improvements, including without limitation, the foundations and
footings thereof, now or at any time hereafter erected, constructed or situated
upon the Premises or any part thereof (the "Improvements").
TOGETHER with all fixtures, chattels and articles of personal property now
or hereafter attached to and used in connection with the Premises, together with
any and all replacements thereof and additions thereto (the "Chattels"). This
Mortgage shall be considered a financing statement pursuant to the provisions of
the Uniform Commercial Code, covering fixtures which are affixed to the
Premises. The types of collateral covered hereby are described in this
paragraph. The debtor is Disc Graphics, Inc. The secured party is KeyBank
National Association. Their addresses are set forth above.
TOGETHER with all right, title and interest, if any, of Mortgagor of, in
and to the bed of any street, road or avenue, opened or proposed, in front of,
adjoining or abutting upon the Premises to the center line thereof.
TOGETHER with any and all awards heretofore and hereafter made with respect
to the Premises by any governmental or other lawful authorities for the taking
by eminent domain of the whole or any part of the Premises, or any easement
therein, including any awards for any changes of grade of streets, which said
awards are hereby assigned to Mortgagee, who is hereby authorized to collect and
receive the proceeds of any such awards from such authorities and to give proper
receipts and acquittances therefor, and to apply the same toward the payment of
the amount owing on account of this Mortgage and the Note, notwithstanding the
fact that the amount owing thereon may not then be due and payable.
<PAGE>
TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee, its
successors and assigns, PROVIDED ALWAYS that if Mortgagor shall pay or cause to
be paid to Mortgagee, its successors and assigns, said principal sum of money
and other charges mentioned and set forth in this Mortgage and in the Note,
together with interest thereon, then and from thence forth, the Mortgaged
Property and the estate hereby granted shall cease, determine and be void.
AND Mortgagor covenants with Mortgagee as follows:
1. Representations. Mortgagor hereby represents and warrants to Mortgagee
as follows:
(a) The Loan Documents are in all respects valid and legally binding
obligations, enforceable in accordance with their respective terms.
(b) The execution and delivery of the Loan Documents by Mortgagor and
any guarantor do not, and the performance and observance by Mortgagor and any
guarantor of their obligations thereunder will not, contravene or result in a
breach of (i) any provision of Mortgagor's certificate of incorporation or
by-laws, or (ii) any governmental requirements, or (iii) any decree or judgment
binding on Mortgagor or any guarantor, or (iv) any material agreement or
instrument binding on Mortgagor or any guarantor or any of their respective
properties, nor will the same result in the creation of any lien or security
interest under any such agreement or instrument.
(c) There are no actions, suits, investigations or proceedings pending
at law, in equity or by any governmental authority, or to the knowledge of
Mortgagor, threatened against or affecting Mortgagor (or any officer, director
or shareholder of Mortgagor), any guarantor or the Mortgaged Property, or
involving the validity or enforceability of any of the Loan Documents or the
priority of the lien thereof, or which will affect Mortgagor's ability to repay
the Note.
(d) Mortgagor represents and warrants that it is the fee simple owner
of the Mortgaged Property free of defects, liens, and encumbrances of any
nature, other than those exceptions to title that are set forth in the policy of
title insurance insuring this Mortgage issued to Mortgagee on the date hereof
("Permitted Exceptions"). Mortgagor warrants that this Mortgage is and shall be
maintained as a valid first lien priority mortgage on the Mortgaged Property,
subject only to the Permitted Exceptions, and shall defend the same against the
claims of all persons. Mortgagor has no knowledge of any violations or notices
of violations of any requirements.
(e) Mortgagor is a Delaware corporation (i) is duly formed and validly
existing under the laws of the state in which it is formed, (ii) if required by
the laws of the state in which the Premises is located, is fully qualified to do
business in Indiana, (iii) has the power, authority and legal right to own and
operate its properties and assets, to carry on the business conducted and
proposed to be conducted by it, and to engage in the transactions contemplated
by the Loan Documents, and (iv) the execution and delivery of the Loan Documents
to which it is a party and the performance and observance of the provisions
thereof have all been duly authorized by all necessary corporate actions.
<PAGE>
(f) All utility services necessary and sufficient for the
construction, development and operation of the Mortgaged Property for its
intended purposes are presently available to the Premises through dedicated
public rights of way or through perpetual private easements.
(g) Neither the Mortgaged Property nor any portion thereof is now
damaged as result of any fire, explosion, accident, flood or other casualty or
has been the subject of any taking, and to Mortgagor's knowledge, no taking is
pending or contemplated.
(h) Any brokerage commissions due in connection with the transactions
contemplated hereby have been paid in full and that any such commissions coming
due in the future will be promptly paid by Mortgagor. Mortgagor shall indemnify
Mortgagee from any liability, claims or losses arising by reason of any such
brokerage commissions. This provision shall survive the repayment of the Note
and shall continue in full force and effect so long as the possibility of such
liability, claims or losses exists.
(i) The financial statements of Mortgagor and any guarantor previously
delivered to Mortgagee are true and correct in all respects, have been prepared
in accordance with generally accepted accounting principles consistently
applied, and fairly present the respective financial conditions of Mortgagor and
any guarantor as of the respective dates thereof and the results of their
operations for the periods covered thereby. No material adverse change has
occurred in the assets, liabilities, or financial conditions reflected therein
since the respective dates thereof.
(j) All federal, state and other tax returns of Mortgagor and any
guarantor required by law to be filed have been filed, that all federal, state
and other taxes, assessments and other governmental charges upon Mortgagor and
any guarantor or their respective properties which are due and payable have been
paid or are being contested in good faith, and Mortgagor and any guarantor have
set aside on their books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods for which such returns have been
filed.
(k) Mortgagor has made no contract or arrangement of any kind (whether
oral or written, formal or informal), the performance of which by the other
party thereto is expected to give rise to a lien or encumbrance on the Mortgaged
Property, except for contracts (all of which have been disclosed in writing to
Mortgagee) made by Mortgagor with parties who have executed and delivered lien
waivers to Mortgagor, and which will not create rights in existing or future
lien claimants which may be superior to the lien of the Mortgage.
<PAGE>
(l) The rights of way for all roads necessary for the full utilization
of the Improvements for their intended purposes have either been acquired by
Mortgagor, the appropriate governmental authority or have been dedicated to
public use and accepted by such governmental authority, and all such roads shall
have been completed, or all necessary steps shall have been taken by Mortgagor
and such governmental authority to assure the complete construction and
installation thereof prior to the date upon which access to the Mortgaged
Property via such roads will be necessary. All curb cuts, driveway permits and
traffic signals necessary for access to the Mortgaged Property are existing or
have been fully approved by the appropriate governmental authority.
(m) No Event of Default (hereinbelow defined) exists and no event
which but for the passage of time, the giving of notice or both would constitute
an Event of Default has occurred.
2. The Indebtedness. Mortgagor will pay the indebtedness as provided
in the Note or in any modification, renewal or extension of the Note.
3. Insurance. Mortgagor shall maintain insurance with respect to the
Premises, the Improvements and the Chattels against such risks and for such
amounts as are customarily insured against by businesses of like size and type,
and shall pay, as the same become due and payable, all premiums in respect
thereto, including but not limited to:
(a) Insurance protecting the interests of Mortgagor and Mortgagee as
their interests may appear against loss or damage to the Improvements by fire,
lightning, flood and other casualties normally insured against, with a uniform
standard extended coverage endorsement, such insurance at all times to be in an
amount of the Note or the total cash replacement value of the Improvements, as
determined at least once every three years by a recognized appraiser or insurer
selected by Mortgagor and approved by Mortgagee.
(b) Boiler and machinery insurance covering physical damage to the
Improvements and to the major components of any central heating, air
conditioning or ventilation systems and such other equipment as Mortgagee shall
designate.
(c) Business interruption insurance in an amount sufficient to allow
Mortgagor to recover 80% of the net income derived from its operations at the
Mortgaged Property.
(d) Workers' compensation insurance, disability benefits insurance,
and such other form of insurance which Mortgagor is required by law to provide,
covering loss resulting from injury, sickness, disability or death of employees
of Mortgagor who are located at or assigned to the Premises.
(e) Insurance protecting Mortgagor and Mortgagee against loss or
losses from liabilities imposed by law or assumed in any written contract and
arising from personal injury and death or damage to the property of others
caused by accident or occurrence, in such amounts as may be designated from time
to time by Mortgagee, excluding liability imposed upon Mortgagor by any
applicable workers' compensation law, or such other amounts as may be required
in writing by Mortgagee; and a blanket excess liability policy in an amount
reasonably satisfactory to Mortgagee protecting Mortgagor and Mortgagee against
any loss or liability or damage for personal injury or property damage.
<PAGE>
4. Other Insurance Provisions. (a) All insurance required under this
Mortgage shall be procured and maintained in financially sound and generally
recognized responsible insurance companies selected by Mortgagor and authorized
to write such insurance in the State of Indiana and acceptable to Mortgagee.
Such insurance may be written with deductible amounts comparable to those on
similar policies carried by other entities engaged in businesses similar in
size, character and other respects to those in which Mortgagor is engaged. All
policies evidencing such insurance shall provide for (i) payment of the losses
to Mortgagor and Mortgagee as their respective interests may appear, and (ii) at
least 30 days written notice to Mortgagor and Mortgagee prior to cancellation,
reduction in policy limits or material change in coverage thereof. The insurance
required by Section 3(a) shall contain a standard mortgagee endorsement in favor
of Mortgagee. All insurance required hereunder shall be in form, content and
coverage reasonably satisfactory to Mortgagee. The original policy, or a
certified duplicate copy thereof, for all insurance required hereby shall be
delivered to Mortgagee. The proceeds of any insurance which are paid to
Mortgagee may be applied by Mortgagee toward the payment of any monies secured
by this Mortgage, or, may be paid over, wholly or in part, to Mortgagor for the
repair of the Improvements or for any other purpose or object satisfactory to
Mortgagee. Mortgagor shall deliver to Mortgagee at least 30 days prior to the
expiration date of any insurance coverages required hereunder, a certificate
reciting that there is in full force and effect, with a term covering at least
the next succeeding year, insurance in the amounts and of the types required
hereunder.
(b) Notwithstanding the foregoing, Mortgagee shall allow the use of
such proceeds for the restoration of the Improvements if (i) Mortgagee
determines such proceeds are sufficient to complete the restoration, or if such
proceeds are insufficient for completion of such restoration, Mortgagor deposits
with Mortgagee an amount equal to the difference between Mortgagee's estimated
cost of restoration and the insurance proceeds, or adequate security (in
Mortgagee's reasonable judgment) therefor (ii) there has been no Event of
Default under this Mortgage which continues at the time of such loss, (iii) the
date of the casualty loss is not less than 12 months prior to maturity date of
the Note and (iv) Mortgagor has in effect the business interruption insurance
described in Section 3(c). If the foregoing conditions are met, Mortgagee may
restore the damage, but the use and advancing of the proceeds shall be as
provided in subsection (d) of this Section.
(c) Mortgagor shall give Mortgagee prompt written notice of damage to or
destruction of any Mortgaged Property. If Mortgagee does not require full
payment of the Note within 30 days of the damage or destruction and permits
Mortgagor to use insurance proceeds for the repair thereof, Mortgagor shall
promptly commence and diligently continue to perform the repairs and rebuilding
<PAGE>
of the Mortgaged Property so damaged or destroyed (the "Work"). The Work shall
be conducted and completed in full compliance with the provisions hereof and all
legal requirements and so that the Mortgaged Property shall be at least equal in
value and general utility as they were prior to such damage or destruction. If
the cost of the Work in the reasonable judgment of Mortgagee exceeds $75,000
("Major Work"), Mortgagor shall prior to the commencement of the Major Work
furnish to Mortgagee for its approval (i) complete plans and specifications for
the Major Work, with satisfactory evidence of the approval thereof by all
governmental authorities whose approval is required and by an architect
satisfactory to Mortgagee (the "Architect") accompanied by the Architect's
signed estimate of the entire cost of completing the Major Work, (ii) certified
copies of all permits and approvals required by law in connection with the
commencement and conduct of the Major Work, and (iii) either (A) a surety bond
or guaranty of the payment for and completion of the Major Work in form
satisfactory to Mortgagee in an amount not less than the Architect's estimate of
the entire cost of completing the Major Work, less the amount of insurance
proceeds then held by Mortgagee for application toward the cost of the Major
Work or (B) a deposit equal to the difference between Mortgagee's estimated cost
of restoration and such insurance proceeds. After commencing the Major Work,
Mortgagor shall perform the Major Work diligently and in good faith in
accordance with the plans and specifications submitted.
(d) If Mortgagor is permitted under the terms hereof to use the net
insurance proceeds, after any cost to Mortgagee of recovery and of paying out
such proceeds (including reasonable attorneys' fees and costs allocable to
inspecting the Work and the plans and specifications therefor), towards
restoration of the damaged Mortgaged Property, Mortgagee or its agent shall
apply such insurance proceeds as follows:
(i) At Mortgagee's option exercised from time to time, to
Mortgagor or directly to the contractors, subcontractors, materialmen, laborers,
engineers, architects and other persons rendering services or materials for the
Work, as said Work progresses except as otherwise hereinafter provided, but
subject to the following conditions, any of which Mortgagee may freely waive:
(A) The Architect shall be in charge of the Work if it is
Major Work;
(B) Each request for payment shall be made on seven days
notice to Mortgagee and shall be accompanied by a certificate of the Architect
(if one is required) or an officer of Mortgagor stating that (i) all of the Work
completed has been done in compliance with the approved plans and
specifications, if required, and in accordance with all provisions of law, (ii)
the sum requested is to pay or reimburse Mortgagor for payments by Mortgagor to
the contractor, subcontractor, materialmen, laborers, engineers, architects or
other persons rendering services or materials for the Work (giving a brief
description of such services and materials), and that when added to any sums
previously paid out by Mortgagee, does not exceed the estimated value of the
Work done to date of such certificate and (iii) the amount of such proceeds and
other deposits remaining in the hands of Mortgagee is estimated to be sufficient
on completion of the Work to pay for the same in full (giving in such reasonable
detail as Mortgagee may require an estimate of the cost of such completion);
<PAGE>
(C) Each request shall be accompanied by waivers of liens satisfactory to
Mortgagee covering any Work previously paid for and with respect to the final
payment request, by a search prepared by the title company which insured the
lien hereof or other evidence satisfactory to Mortgagee that there is not a
mechanic's or other lien or encumbrance in respect of any part of the Work and
that there exist no liens or encumbrances on or affecting any Mortgaged Property
other than Permitted Exceptions;
(D) The request for any payment after the Work has been completed shall be
accompanied by a copy of all certificates, permits, licenses or other documents
required by law to render occupancy of the Premises and Improvements legal.
(ii) Upon completion of the Work and payment in full therefor, or
if Mortgagor fails to commence promptly after collection of the insurance
proceeds or diligently to continue the Work, or at any time upon request by
Mortgagor, Mortgagee may apply the amount of any such proceeds it holds to the
payment of the Note. Nothing herein shall prevent Mortgagee from applying at any
time any such proceeds to the curing of any Event of Default under this Mortgage
or the Note.
5. Alterations. No Improvements shall be structurally altered, removed or
demolished without the prior written consent of Mortgagee.
6. Appointment of Receiver. Mortgagee in any action to foreclose this
Mortgage shall be entitled, without notice and as a matter of right and without
regard to the adequacy of any security of the indebtedness or the solvency of
Mortgagor, upon application to any court having jurisdiction, to the appointment
of a receiver of the rents, income and profits of the Mortgaged Property. If an
Event of Default (hereinbelow defined) occurs under this Mortgage, as a matter
of right and without regard to the adequacy of any security for the Note,
Mortgagor, upon demand of Mortgagee, shall surrender the possession of, and it
shall be lawful for Mortgagee, by such officer or agent as it may appoint, to
take possession, of all or any part of the Mortgaged Property together with the
books, papers, and accounts of Mortgagor pertaining thereto, and to hold,
operate and manage the same, and from time to time to make all needed repairs
and improvements as Mortgagee shall deem wise; and, if Mortgagee deems it
necessary or desirable, to complete construction and equipping of any
Improvements and in the course of such construction or equipping to make such
changes to the same as it may deem desirable; and Mortgagee may sell the
Mortgaged Property or any part thereof, or institute proceedings for the
complete or partial foreclosure of the lien of this Mortgage on the Mortgaged
Property, or lease the Premises or any part thereof in the name and for the
account of Mortgagor or Mortgagee and collect, receive and sequester the rents,
revenues, earnings, income, products and profits therefrom, and out of the same
and any other monies received hereunder pay or provide for the payment of, all
proper costs and expenses of taking, holding, leasing, selling and managing the
same, including reasonable compensation to Mortgagee, its agents and counsel,
and any charges of Mortgagee hereunder, and any taxes and other charges prior to
the lien of this Mortgage which Mortgagee may deem it wise to pay.
<PAGE>
7. Payment of Taxes. (a) Mortgagor will pay all taxes, assessments,
sewer rents or water rates or sums due under any payment in lieu of tax
agreement ("Pilot Agreement") and in default thereof, Mortgagee may pay the
same. If Mortgagee shall pay any such tax, assessment, sewer rent or water rate,
Mortgagee shall have the right, among other rights, to declare the amount so
paid with interest thereon immediately due and payable, and upon default of
Mortgagor in paying any such amount with interest thereon, Mortgagee shall have
the right to foreclose for such amount subject to the continuing lien of this
Mortgage for the balance of the mortgage indebtedness not then due.
(b) If Mortgagor fails to pay any sum Mortgagor has agreed to pay
pursuant to this covenant for a period in excess of 60 days after the same is
due and payable, in addition to any other remedies available to Mortgagee
hereunder, Mortgagee may, at its option, require that Mortgagor deposit with
Mortgagee, monthly, one-twelfth of the annual charges for taxes and any other
sums Mortgagor is obligated to pay pursuant to this covenant and Mortgagor shall
make such deposits with Mortgagee. Mortgagor shall simultaneously therewith
deposit with Mortgagee a sum of money which together with the monthly
installments aforementioned will be sufficient to make payment of all sums
required to be paid hereunder at least 30 days prior to the due date of such
payments, it being understood that Mortgagee shall calculate the amount of such
deposits and notify Mortgagor of the sum due. Should an Event of Default occur,
the funds deposited with Mortgagee pursuant to this provision may be applied in
payment of the charges for which said funds shall have been deposited or to the
payment of any other sums secured by this Mortgage as Mortgagee sees fit.
8. [intentionally omitted]
9. Statement of Amount Due. Mortgagor, within five days upon request
in person or within 15 days upon request by mail, shall furnish a written
statement duly acknowledged of the amount due on this Mortgage and whether any
offsets or defenses exist against the said indebtedness.
10. 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 Mortgagee, and to the attention of Donald Sinkin and Frank
A. Bress, Esq., general counsel for Mortgagor. 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.
11. Warranty of Title. Mortgagor warrants the title to the Premises,
Improvements and Chattels.
<PAGE>
12. Sale in One Parcel. In case of a sale, the Premises may be sold in
one parcel together with the Improvements and Chattels. Should the Premises
consist of more than one parcel, in the event of a foreclosure of this Mortgage
or any mortgage at any time consolidated with this Mortgage, Mortgagor agrees
that Mortgagee shall be entitled to a judgment directing the referee appointed
in the foreclosure proceeding to sell all of the parcels constituting the
Premises at one foreclosure sale, either as a group or separately and that
Mortgagor expressly waives any right that it may now have or hereafter acquire
to (i) request or require that the parcels be sold separately or (ii) request,
if Mortgagee has elected to sell parcels separately, that there be a
determination of any deficiency amount after any such separate sale or otherwise
require a calculation of whether said parcel or parcels separately sold were
conveyed for their "fair market value".
13. [intentionally omitted]
14. Negative Covenants. Mortgagor will not (i) execute an assignment
of the rents, income or profits, or any part thereof from the Mortgaged Property
except to Mortgagee, or (ii) except where the tenant is in default thereunder,
terminate or consent to the cancellation or surrender of any lease of the
Premises or Improvements or of any part thereof, now existing or hereafter to be
made, having an unexpired term of two years or more, except that any lease may
be canceled provided that promptly after the cancellation or surrender thereof a
new lease is entered into with a new tenant having a credit standing, in the
judgment of Mortgagee, at least equivalent to that of the tenant whose lease was
canceled, on substantially the same terms as the terminated or canceled lease,
or modify any such lease so as to shorten the unexpired term thereof or so as to
decrease the amount of the rents payable thereunder, or (iii) accept prepayments
of any sums to become due under such leases, except prepayments of rent for more
than one month in advance or prepayments in the nature of security for the
performance of the tenants thereunder, (iv) in any other manner impair the value
of the Mortgaged Property or the security of this Mortgage, (v) enter into any
lease for all or a substantial part of the Mortgaged Property (other than to an
affiliate of Mortgagor) or (vi) further encumber, alienate, hypothecate, grant a
security interest in or grant any other interest whatsoever in the Mortgaged
Property. No rent reserved under any lease of the Premises or Improvements has
been assigned or anticipated, and no rent for any period subsequent to the date
hereof has been collected in advance of the due date. Mortgagor will not execute
any lease of all or a substantial portion of the Premises or Improvements except
for actual occupancy by the tenant thereunder, and will at all times promptly
and faithfully perform, or cause to be performed, all of the covenants,
conditions and agreements contained in all current or future leases of the
Premises or Improvements required on the part of the landlord to be kept and
performed, and will at all times do all things necessary to compel performance
by the tenant under each lease of all obligations, covenants and agreements by
such tenant to be performed. If any lease provides for tenant's giving status
certificates, Mortgagor shall exercise its right to request such certificates
within five days of any demand therefor by Mortgagee. Mortgagor shall furnish to
Mortgagee, upon request of Mortgagee to do so, a written statement containing
the names of all tenants of the Premises or Improvements, the terms of their
respective leases, the space occupied and the rentals payable thereunder.
<PAGE>
15. [intentionally omitted]
16. Books and Records. (a) In addition to any requirements elsewhere in the
Loan Documents, Mortgagor shall keep and maintain at all times at Mortgagors'
addresses stated in this Mortgage, complete and accurate books of accounts and
records adequate to reflect correctly the results of the operation of the
Mortgaged Property and copies of all written contracts, leases and other
instruments which affect the Mortgaged Property. Mortgagor may relocate such
books and records to the extent permitted under the terms of the Credit
Agreement and Security Agreement, both dated February 26, 1997, between
Mortgagor and Mortgagee. Such books, records, contracts, leases and other
instruments shall be subject to examination and inspection at any reasonable
time by Mortgagee.
(b) Upon request of Mortgagee in writing, Mortgagor shall promptly provide
Mortgagee with all documents reasonably requested by Mortgagee prepared in the
form and manner called for in such request and as may reasonably relate to the
operation or condition thereof, or the financial condition of Mortgagor or any
party obligated on the Note or under any guaranty, including, without
limitation, all leases or leasehold interests granted to or by Mortgagor, rent
rolls and tenant lists, rent and damage deposit ledgers, operating statements,
profit and loss statements and balance sheets, personal financial statements of
Mortgagor or income tax returns (including quarterly returns), any or all of
which documents shall be audited or certified as true and accurate by a
certified public accountant, if requested by Mortgagee, and shall cover such
period or periods as may be specified by Mortgagee.
(c) In addition, Mortgagor shall promptly furnish or cause to be furnished
to Mortgagee, to the extent any tenant prepares the same or the same are
required by any tenant's lease, annual financial statements of any tenant of the
Mortgaged Property where such tenant leases 15% percent or more of the gross
leasable area of the Improvements, each such statement to be delivered as soon
as practicable following the end of each fiscal year of such tenant, but in any
event within 120 days thereafter, and each such statement to include balance
sheets, statements of operations and statements of changes in financial position
as of the end of such year.
(d) So long as the Note is outstanding, Mortgagor shall furnish Mortgagee
with the financial statements and information required under the terms of the
Credit Agreement dated February 26, 1997 between them, and shall comply with all
affirmative and negative covenants set forth in such Credit Agreement.
(e) Mortgagee or its agents will have the right of access and to inspect
and copy all records at Mortgagor's premises at all times during normal business
hours and upon reasonable notice.
(f) All other loans or debt of Mortgagor, including specifically but
without limitation, any loans from any guarantor, shall be subordinate in
payment and priority to the Note and any other loans from Mortgagee to
Mortgagor.
<PAGE>
17. Future Laws. If after the date of this Mortgage of any federal, state
or municipal law is enacted, deducting from the value of land for the purposes
of taxation any lien thereon, or changing in any way, the laws for the taxation
of mortgages or debts secured by mortgages, or the manner of collection of any
such taxes so as to affect Mortgagee, this Mortgage, or said indebtedness,
Mortgagee shall have the right to accelerate payment of said indebtedness upon
30 days notice to Mortgagor, whereupon payment of said indebtedness shall become
due, payable and collectible.
18. [intentionally omitted]
19. Provisions regarding use of Mortgaged Property. Mortgagor is not
responsible for any action or omission, and does not know of any action or
omission by any prior owner, that would cause the Mortgaged Property to be
subject to forfeiture pursuant to any law, rule or regulation (a "Forfeiture").
The Mortgaged Property has not been acquired with any proceeds from a
transaction or an activity that would cause the Mortgaged Property to be subject
to Forfeiture, and Mortgagor shall not use, and will not permit any third party
to use, the Mortgaged Property or any portion thereof or interest therein for
any purpose or activity that would cause a Forfeiture.
20. Actions and Proceedings. If any action or proceeding is commenced to
which Mortgagee is made a party and in which it becomes necessary in the opinion
of Mortgagee to defend or uphold the lien of this Mortgage, all sums paid by
Mortgagee for the expense of any litigation to prosecute and defend the rights
and lien created by this Mortgage, including reasonable counsel fees, costs and
allowances, shall, together with interest thereon be a lien on the Mortgaged
Property and secured by this Mortgage and shall be collectible like said
indebtedness and paid on demand.
21. Security Interest under the Uniform Commercial Code. Mortgagee is
authorized to sign as the agent of Mortgagor such additional agreements as
Mortgagee at any time may deem necessary or proper or require to grant to
Mortgagee a perfected security interest in the Chattels. If Mortgagor declines
to do so, then Mortgagee is authorized to file financing statements (as such
term is defined in said Uniform Commercial Code) with respect to the Chattels,
at any time, without the signature of Mortgagor. Mortgagor will, however, at any
time upon request of Mortgagee, sign such financing statements. Mortgagor will
pay all filing fees for the filing of such financing statements and for the
refiling thereof at the times required, in the opinion of Mortgagee, by said
Uniform Commercial Code. If the lien of this Mortgage is subject to any security
agreement covering the Chattels, then in the event of any default under this
Mortgage, all the right, title and interest of Mortgagor in and to any and all
of the Chattels is hereby assigned to Mortgagee, together with the benefit of
any deposits or payments now or hereafter made thereof by Mortgagor or the
predecessors or successors in title of Mortgagor in the Mortgaged Property.
22. Condemnation. (a) Any and all awards heretofore and hereafter made to
Mortgagor and all subsequent owners of the Mortgaged Property by any
governmental or other lawful authorities for the taking by eminent domain of the
<PAGE>
whole or any part of the Mortgaged Property or any easement therein, including
any awards for any changes of grade of streets, are hereby assigned to
Mortgagee, who is hereby authorized to collect and receive the proceeds of any
such awards from such authorities, to give proper receipts and acquittances
therefor and to apply the same toward the payment of the amount owing on account
of this Mortgage and said indebtedness, notwithstanding the fact that the amount
owing thereon may not then be due and payable; and Mortgagor hereby covenants
and agrees, upon request, to make, execute and deliver any and all assignments
and other instruments sufficient for the purpose of assigning the aforesaid
awards to Mortgagee free, clear and discharged of any and all encumbrances of
any kind or nature whatsoever. Mortgagor shall continue to make all payments
required by the Note until any such award shall have been actually received by
Mortgagee and any reduction in said indebtedness resulting from the application
by Mortgagee of such award shall be deemed to take effect only on the date of
such receipt.
(b) Notwithstanding the foregoing, if any one or more of the portions
of the Mortgaged Property described below shall be damaged or taken through
condemnation, either temporarily or permanently, then the entire balance due
under the Note and any other Loan Documents shall, at the option of Mortgagee,
become immediately due and payable:
(i) Any portion or portions of the Improvements or the support or
foundation of any portion or portions of the Improvements; or
(ii) Ten percent or more of any parking area; or
(iii) Any portion or portions of the Premises which, when so damaged or
taken, would result either in (A) an impairment of access to the Improvements
from the publicly dedicated rights of way now adjoining the Premises, or (B) the
failure of the Improvements to comply with any building code, zoning or other
governmental laws or regulations, lease or other agreement to which the
Mortgaged Property is subject.
(c) Mortgagor authorizes Mortgagee, at Mortgagee's option, as attorney
in fact for Mortgagor, to commence, appear in and prosecute in Mortgagor's or
Mortgagee's name, any action or proceeding relating to any condemnation or other
taking of the Mortgaged Property and to settle or compromise any claim in
connection with such condemnation or other taking, but Mortgagor also shall have
the right to have its own co-counsel in any such proceeding and to approve any
settlement.
23. No Defenses. This Mortgage is a valid first priority lien securing
the debt represented by the Note and there are no defenses or offsets to this
Mortgage or to the said indebtedness.
24. Leases of the Mortgaged Property. Mortgagor will not lease all or
any portion of the Mortgaged Property (other than to an affiliate of Mortgagor)
without Mortgagee's consent. If such consent is given, all leases covering more
than 15% of the gross leasable area of the Mortgaged Property must require the
<PAGE>
tenant to provide Mortgagee with annual financial statements of the tenant
certified to by an independent certified public accountant. Mortgagor, at
Mortgagee's request, shall furnish Mortgagee with executed copies of all leases
hereafter made of all or any part of the Mortgaged Property, and all leases now
or hereafter entered into will be in form and substance subject to the approval
of Mortgagee.
25. Transfer of Mortgaged Property. The full amount of the outstanding
indebtedness secured hereby, with all accrued interest, shall be immediately due
and payable at Mortgagee's option in the event of the sale, conveyance or
transfer, by deed, lease (other than as permitted herein), any other voluntary
or involuntary act or by operation of law or otherwise (including the entry into
any land sale contract, sale-leaseback arrangement or other similar agreement)
of any interest in any of the Mortgaged Property, or if any other mortgages,
liens or encumbrances are placed on the Mortgaged Property other than Permitted
Exceptions.
26. Access. Mortgagee, by its employees or agents, shall at all times have
the right to enter upon the Mortgaged Property during reasonable business hours
for the purpose of examining and inspecting the same.
27. [intentionally omitted]
28. Performance of Mortgagor's Covenants by Mortgagee. In the event of any
default in the performance of any of the covenants, terms, or provisions of
Mortgagor under this Mortgage, Mortgagee may, at the option of Mortgagee,
perform the same and the cost thereof, with interest, shall immediately be due
from Mortgagor to Mortgagee and secured by this Mortgage.
29. Remedies not Exclusive. Mortgagee shall have the right from time to
time, to take action to recover any amounts of past due principal indebtedness
and interest thereon, or any installment of either, or any other sums required
to be paid under the covenants, terms and provisions of this Mortgage or the
Note, as the same become due, whether or not the principal indebtedness secured,
or any other sums secured by the Note or this Mortgage shall be due, and without
prejudice to the right of Mortgagee thereafter to bring an action of
foreclosure, or any other action, for default or defaults by Mortgagor existing
at the time such earlier action was commenced.
30. Additional Acts and Documents. Mortgagor covenants that it will do,
execute, acknowledge, deliver, file or record, or cause to be recorded every and
all such further acts, deeds, conveyances, advances, mortgages, transfers and
assurances, in law as Mortgagee shall require for the better assuring,
conveying, transferring, mortgaging, assigning and confirming unto Mortgagee all
and singular the Mortgaged Property.
31. Remedies Cumulative. The rights and remedies herein afforded to
Mortgagee shall be cumulative and supplementary to and not exclusive of any
other rights and remedies afforded the holder of this Mortgage and the Note.
<PAGE>
32. Successors. All of the provisions of this Mortgage shall inure to the
benefit of Mortgagee and of any subsequent holder of this Mortgage and shall be
binding upon Mortgagor and each subsequent owner of the Mortgaged Property.
33. Effect of Releases. Mortgagee, without notice, may release any part of
the security described herein, or any person or entity liable for any
indebtedness secured hereby without affecting the lien hereof upon any part of
the security not expressly released, and may agree with any party obligated on
said indebtedness or having any interest in the security described herein to
extend the time for payment of any part or all of the indebtedness secured
hereby. Such agreement shall not release or impair the lien hereof, but shall
extend the lien hereof as against the title of all parties having any interest
in said security, which interest is subject to said lien, and no such release or
agreement shall release any person or entity obligated to pay any indebtedness
secured hereby.
34. Waivers. Any failure by Mortgagee to insist upon Mortgagor's strict
performance of any of the covenants, terms and provisions of this Mortgage shall
not be deemed to be a waiver thereof. Notwithstanding any such failure,
Mortgagee shall have the right thereafter to insist upon the strict performance
by Mortgagor of any and all of the covenants, terms and provisions of this
Mortgage. Neither Mortgagor nor any other person or entity now or hereafter
obligated for the payment of the whole or any part of said indebtedness shall be
relieved of such obligation by reason of (i) the failure of Mortgagee to comply
with any request of Mortgagor, or of any other person or entity so obligated,
(ii) the failure of Mortgagee to take action to foreclose this Mortgage or
otherwise enforce any of the covenants, terms and provisions of this Mortgage or
the Note, (iii) the release, regardless of consideration, of the whole or any
part of the security held for payment of said indebtedness or (iv) any agreement
or stipulation between any subsequent owner or owners of the Mortgaged Property
and Mortgagee modifying the covenants, terms and provisions of this Mortgage or
the Note without first having obtained the consent of Mortgagor or such other
person or entity. In the last mentioned event, Mortgagor and all such other
persons or entities shall continue liable to make such payments according to the
terms and provisions of any such agreement or extension or modification unless
expressly released and discharged in writing by Mortgagee. Mortgagee may
release, regardless of consideration, any part of the security held for payment
of said indebtedness without, as to the remainder of the security, in any way
impairing or affecting the lien of this Mortgage or the priority of such lien
over any subordinate lien. Mortgagee may resort for the payment of said
indebtedness to any other security therefor held by Mortgagee in such order and
manner as Mortgagee may elect.
35. Interest on Advances. Wherever under this Mortgage or by law Mortgagee
is entitled to interest on advances made or expenses incurred, it shall be
computed at the interest rate payable under the Note.
36. Mortgagee not Obligated. Nothing herein contained shall be construed as
making the payment of any insurance premiums, taxes or assessments obligatory
upon Mortgagee, although Mortgagee may pay same, or as making Mortgagee liable
in any way for loss, damage or injury, resulting from the non-payment of any
such insurance premiums, taxes or assessments.
<PAGE>
37. [intentionally omitted]
38. Environmental Warranties and Covenants. (a) Except as may otherwise be
set forth on a Schedule hereto, Mortgagor makes the following representations
and warranties: (i) Mortgagor is in compliance in all material respects with all
applicable federal, state and local laws and regulations, including, without
limitation, those relating to toxic and hazardous substances and other
environmental matters (the "Laws"), and to the extent Mortgagor is not in
compliance (whether material or not), Mortgagor shall remedy promptly any
non-compliance, (ii) Mortgagor does not use any portion of the Mortgaged
Property in a manner that is not in material compliance with Laws, and to
Mortgagor's best knowledge, the Mortgaged Property was not at any previous time
used for the disposal, storage, treatment, processing or other handling of any
hazardous or toxic substances in a manner that did not comply with the Laws,
(iii) the soil and any surface water and ground water which are a part of the
Mortgaged Property do not contain any solid wastes, toxic or hazardous substance
or contaminant which exceeds applicable action levels under applicable Laws and
(iv) neither the federal government nor the State of Indiana Department of
Environmental Conservation or any other governmental or quasi governmental
entity has filed a lien on the Mortgaged Property, nor are there any
governmental, judicial or administrative actions with respect to environmental
matters pending, or to the best of Mortgagor's knowledge, threatened, which
involve the Mortgaged Property.
(b) Mortgagor agrees that Mortgagee or its agents or representatives
may in its judgment reasonably exercised, at any reasonable time and at
Mortgagor's expense inspect Mortgagor's books and records and inspect and
conduct any sampling or other tests on the Mortgaged Property to determine
whether Mortgagor is in continuing compliance with the Laws, subject to the
provisions of paragraph 3(b) of the Hazardous Substances Indemnity Agreement of
even date to which Mortgagor is a party.
(c) If any environmental contamination is found on the Mortgaged
Property for which any removal or remedial action is required pursuant to Law,
ordinance, order, rule, regulation or governmental action, Mortgagor agrees that
it will at its sole cost and expense, take such removal or remedial action
promptly and in accordance with Laws.
(d) Mortgagor agrees to defend, indemnify and hold harmless Mortgagee,
its employees, agents, officers and directors from and against any claims,
actions, demands, penalties, fines, liabilities, settlements, damages, costs or
expenses (including, without limitation, reasonable attorney and consultant
fees, investigations and laboratory fees, court costs and litigation expenses of
whatever kind or nature known or unknown, contingent or otherwise) arising out
of or in any way related to (i) the past or present disposal, release or
threatened release of any hazardous or toxic substances on the Mortgaged
Property; (ii) any personal injury (including wrongful death or property damage)
arising out of or related to such hazardous or toxic substances; (iii) any
lawsuit brought, settlement reached or government order given relating to such
hazardous or toxic substances; and/or (iv) any violation of any law, order,
regulation, requirement, or demand of any government authority, or any policies
or requirements of Mortgagee, which are based upon or in any way related to such
hazardous or toxic substances.
<PAGE>
(e) To Mortgagor's best knowledge, Mortgagor has not used any on-site or
off-site locations where hazardous or toxic substances from the operation of any
Improvement or otherwise have been stored, treated, recycled or disposed of,
other than in accordance with Laws.
(f) With respect to any lease or other occupancy of the Mortgaged Property
(if consented to by Mortgagee), Mortgagor shall not knowingly permit the
occupant, tenant or subtenant to conduct operations at the Mortgaged Property in
a manner which involves use of hazardous or toxic substances other than in
compliance with Laws.
(g) Mortgagor acknowledges that any action Mortgagee takes under this
Mortgage shall be taken to protect Mortgagee's security interest only; Mortgagee
does not hereby intend to be involved in the operations of Mortgagor.
(h) Mortgagor acknowledges that any determinations Mortgagee makes under
this Section regarding compliance with environmental laws shall be made for
Mortgagee's benefit only and are not intended to be relied upon by any other
party.
(i) The provisions of this Section shall be in addition to any other
obligations and liabilities Mortgagor may have to Mortgagee at common law, and
shall survive the transactions contemplated herein.
(j) The term "hazardous substance" shall include, without limit, any
substance or material defined in 42 U.S.C. Section 9601 (as the same may be
amended from time to time), the Hazardous Materials Transportation Act (as
amended from to time), and the Resource Conservation And Recovery Act (as each
may be amended from time to time) and in any regulations adopted or promulgated
pursuant to any of the foregoing.
39. Events of Default. The whole of the principal sum of the
indebtedness secured hereby and interest thereon, and all other sums due and
payable hereunder shall become due, at the option of Mortgagee, if one or more
of the following events (an "Event of Default") shall happen:
(a) The occurrence of an "Event of Default" under the Note, any other Loan
Document, under any other loan or debt of Mortgagor to Mortgagee, or under any
other loan or debt from any guarantor to Mortgagee; or
(b) If Mortgagor defaults in the payment of any tax, water rate or sewer
rent or payment under any Pilot Agreement against the Mortgaged Property for 30
days after the same become due and payable or fails to exhibit to Mortgagee,
within 30 days after demand, receipts showing payment of all taxes, water rates
or sewer rents; or
(c) The actual or threatened removal, demolition or structural alteration,
in whole or in material part, of any Improvement, without the prior written
consent of Mortgagee; or the removal, demolition or destruction in whole or in
material part, of any Chattels without replacing the same with Chattels at least
equal in quality and condition to those replaced, free from any security
interest or other encumbrance thereon and free from any reservation of title
thereto; or the commission of any material waste in respect to the Mortgaged
Property; or
<PAGE>
(d) Failure of Mortgagor to pay within 15 days after notice and demand
any installment of any assessment made against the Premises for local
improvements, heretofore or hereafter made, which assessment is, or may become,
a lien on the Premises prior to the lien of this Mortgage; or
(e) Failure of Mortgagor to pay the said indebtedness secured by this
Mortgage within 30 days after notice and demand, in the event of the passage
after the date of this Mortgage of any federal, state or municipal law deducting
from the value of land for the purpose of taxation any lien thereon, or changing
in any way the laws now in force for the taxation of mortgages, or of debts
secured by mortgages, or the manner of collection of any such taxes, so as to
affect Mortgagee, this Mortgage or the indebtedness which is secured,
notwithstanding that Mortgagor, before or after such notice, may have the option
to pay or contest the payment of such tax; or
(f) Failure of Mortgagor to maintain the Improvements on the Premises
in a rentable or tenantable state of repair to the reasonable satisfaction of
Mortgagee, for 30 days after notice of such failure has been given to Mortgagor,
or to comply with any order or requirement of any municipal, state, federal or
other governmental authority having jurisdiction of the Premises within 30 days
after such order or requirement shall have been issued by any such authority; or
failure of Mortgagor or of any tenant holding under Mortgagor, to comply with
any and all and singular the statutes, requirements, orders or decrees of any
federal, state or municipal authority relating to the use of the Mortgaged
Property, or of any part thereof; or failure of Mortgagor to observe and timely
perform all of the covenants, terms and provisions contained in any lease now or
hereafter affecting the Premises or the Improvements or any portion thereof, on
the part of the landlord to be observed and performed; or
(g) Failure of Mortgagor, if a final judgment for the payment of money
is entered against Mortgagor, to discharge such judgment or to have it stayed
pending appeal within 30 days from the entry thereof, or if such judgment shall
be affirmed on appeal, the failure to discharge such judgment within 30 days
from the entry of such affirmance; or
(h) Failure of Mortgagor to pay within 15 days after notice and demand
any filing or refiling fees required hereunder; or
(i) Failure of Mortgagor or any occupant of the Mortgaged Property, to
allow or permit Mortgagee, or its duly authorized agent, to inspect said
Mortgaged Property on reasonable notice from time to time during business hours;
or
(j) Default for 15 days after notice and demand in the observance or
performance of any other covenant or agreement under this Mortgage; or
<PAGE>
(k) If any warranty or representation of Mortgagee contained herein or
any other Loan Document is false or misleading in any material respect, or if
any such statement omits to state any material fact which, by reason of such
omission, is false or misleading; or
(l) Occurrence of an "Event of Default" under the Promissory Note
executed and delivered by Mortgagor to Mortgagee on even date herewith.
40. Interest to Accrue. If the whole of the principal sum evidenced by
the Note and interest, shall become due by exercise of the option of Mortgagee
after default by Mortgagor under any of the terms, covenants and conditions of
this Mortgage or the Note, or if the whole of said principal sum and interest
shall mature and become due under the terms, covenants and conditions of this
Mortgage and the Note regardless of default, if any, on the part of Mortgagor,
then interest on said principal sum shall continue to accrue at the rate
provided for in the Note, and in this Mortgage, until said principal sum is
fully paid.
41. Flood Insurance. In addition to the terms and provisions of this
Mortgage with regard to insurance, if the Premises are determined to be in a
special flood hazard area as determined by any governmental agency, Mortgagor
shall insure the Premises and Improvements against loss or damage by flood, with
coverage as is therein provided for by fire and other specified perils to the
same extent and effect as if such flood insurance was therein specifically set
forth.
42. Costs, Expenses and Attorney's Fees. If after an Event of Default
an action is commenced for the foreclosure of this Mortgage, Mortgagee shall be
entitled to recover all sums due hereunder, statutory costs, and any additional
allowances, including reasonable attorneys' fees in such proceeding and in all
proceedings related to the foreclosing proceeding, and such amount shall be
added to the principal balance and interest then due and shall be a lien on the
Mortgaged Property prior to any right or title to, interest in or claim upon the
Mortgaged Property attaching and accruing subsequent to the lien of this
Mortgage, and shall be deemed to be secured by this Mortgage and the
indebtedness which it secures.
43. Intervening Liens. Should any agreement be hereafter entered into
modifying or changing the terms of this Mortgage or the Note secured hereby in
any manner, the rights of the parties to such agreement shall be superior to the
rights of the holder of any intervening lien.
44. Terms. It is understood and agreed that the words, "Mortgagor" and
"Mortgagee" herein shall include the successors and assigns of Mortgagee and to
the extent permitted hereby, the heirs, successors and assigns of Mortgagor.
Where used herein, the word, "Mortgagor" may be read "Mortgagors" where
applicable.
45. Entire Agreement. This Mortgage and the other Loan Documents
constitute the entire understanding between Mortgagor, any guarantors, and
Mortgagee and to the extent that any writings not signed by Mortgagee or oral
statements or conversations at any time made or had shall be inconsistent with
the provisions of this Mortgage and the other Loan Documents, the same shall be
null and void.
<PAGE>
46. Governing Law; Severability. This Mortgage shall be governed by
the law of the jurisdiction in which the Mortgaged Property is located. In the
event that any provision or clause of this Mortgage or the Note conflicts with
applicable law, such conflict shall not affect other provisions of this Mortgage
or the Note which can be given effect without the conflicting provision, and to
this end, the provisions of this Mortgage and the Note are declared to be
severable.
47. Time of the Essence. Time is of the essence with respect to each
and every covenant, agreement and obligation of Mortgagor under this Mortgage,
the Note and any and all other Loan Documents.
48. Indemnification; Subrogation; Waiver of Offset. (a) Mortgagor
shall indemnify, defend and hold Mortgagee harmless against: (i) any and all
claims for brokerage, leasing, finders or similar fees which may be made
relating to the Mortgaged Property or the loan which is the subject of the Note,
and (ii) against any and all liability, obligations, losses, damages, penalties,
claims, actions, suits, costs, and expenses (including its reasonable attorneys'
fees, together with reasonable appellate counsel fees, if any) of whatever kind
or nature which may be imposed on or incurred by Mortgagee at any time pursuant
either to a judgment or decree or other order entered into by a court or
administrative agency or to a settlement reasonably approved by Mortgagor, which
judgment, decree, order or settlement relates in any way to or arises out of the
offer, sale or lease of the Mortgaged Property or the ownership, use, occupation
or operation of any portion of the Mortgaged Property.
(b) If Mortgagee is made a party defendant to any litigation
concerning the loan which is the subject of the Note, this Mortgage, the
Mortgaged Property, or any part thereof, or any interest therein, or the
occupancy thereof, then Mortgagor shall indemnify, defend and hold Mortgagee
harmless from all liability by reason of said litigation, including reasonable
attorneys' fees (together with reasonable appellate counsel fees, if any) and
expenses incurred by Mortgagee in any such litigation, whether or not any such
litigation is prosecuted to judgment. If Mortgagee commences an action against
Mortgagor to enforce any of the terms hereof or to prosecute any breach by
Mortgagor of any of the terms hereof or to recover any sum secured hereby,
Mortgagor shall pay to Mortgagee such reasonable attorneys' fees (together with
reasonable appellate counsel fees, if any) and expenses. The right to such
attorneys fees (together with reasonable appellate counsel fees, if any) and
expenses shall be deemed to have accrued on the commencement of such action, and
shall be enforceable whether or not such action is prosecuted to judgment. If
Mortgagor breaches any term of this Mortgage, Mortgagee may employ an attorney
or attorneys to protect its rights hereunder, and in the event of such
employment following any breach by Mortgagor, Mortgagor shall pay Mortgagee
reasonable attorneys' fees (together with reasonable appellate counsel fees, if
any) and expenses incurred by Mortgagee, whether or not an action is actually
commenced against Mortgagor by reason of such breach.
<PAGE>
(c) A waiver of subrogation shall be obtained by Mortgagor from its
insurance carrier and, consequently, Mortgagor waives any and all right to claim
or recover against Mortgagee, its officers, employees, agents and
representatives, for loss of or damage to Mortgagor, the Mortgaged Property,
Mortgagor's property or the property of others under Mortgagor's control from
any cause insured against or required to be insured against by the provisions of
this Mortgage.
(d) All sums payable by Mortgagor hereunder shall be paid without notice
(except as may otherwise be provided herein), demand, counterclaim, set-off,
deduction or defense and without abatement, suspension or reduction, and the
obligations and liabilities of Mortgagor hereunder shall in no way be released,
discharged or otherwise affected by reason of: (i) any damage to or destruction
of or any condemnation or similar taking of the Mortgaged Property or any part
thereof; (ii) any restriction or prevention of or interference with any use of
the Mortgaged Property or any part thereof; (iii) any title defect or
encumbrance or any eviction from the Premises or the Improvements or any part
thereof by title superior or otherwise; (iv) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation, or other like
proceeding relating to Mortgagee, or any action taken with respect to this
Mortgage by any trustee or receiver of Mortgagee, or by any court, in such
proceeding; (v) any claim which Mortgagor has, or might have, against Mortgagee;
(vi) any default or failure of Mortgagee to perform or comply with any of the
terms hereof or of any other agreement with Mortgagor; or (vii) any other
occurrence whatsoever, whether similar or dissimilar to the foregoing, whether
or not Mortgagor shall have notice or knowledge of any of the foregoing.
Mortgagor waives all rights now or hereafter conferred by statute or otherwise
to any abatement, suspension or reduction of any sum secured hereby and payable
by Mortgagor.
49. Waiver of Jury Trial. Mortgagor and Mortgagee hereby waive trial
by jury in any litigation in any court with respect to, in connection with, or
arising out of this Mortgage or any other Loan Document, or any instrument or
document delivered in connection with the loan
which is the subject of the Note, or the validity, protection, interpretation,
collection or enforcement thereof, or the relationship between Mortgagor and
Mortgagee as borrower and lender, or any other claim or dispute howsoever
arising between Mortgagor and Mortgagee.
IN WITNESS WHEREOF, this Mortgage has been duly executed by Mortgagor.
Disc Graphics, Inc.
By:_____________________________
Name: Margaret Krumholz
Title: Chief Financial Officer
<PAGE>
SCHEDULE A
DESCRIPTION
Lots 61, 62, 63, 64, 65, 66, 67 and 30 feet by parallel lines off the entire
south side of lot numbered 68 in Kothe and Lieber's Addition to the City of
Indianapolis, as per plat thereof, recorded in Plat Book 10, page 108, in the
Office of the Recorder of Marion County, Indiana.
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF SUFFOLK )
On January 16, 1998, before me, the undersigned, a Notary Public in New
York State, personally appeared Margaret Krumholz personally known to me or
proved to me on the basis of satisfactory evidence to be the individual whose
name is subscribed to the within instrument and acknowledged to me that she
executed the same in her capacity, and that by her signature on the instrument,
the individual, or the person upon behalf of which the individual acted,
executed the instrument.
------------------------------
Notary Public
This instrument was prepared by William Cornachio, an
attorney at law.
After recording, please return to:
William Cornachio, Esq.
McMillan, Rather, Bennett & Rigano, P.C.
48 South Service Road
Melville, New York 11747
KPMG Peat Marwick LLP
The Board of Directors
Disc Graphics, Inc.
We consent to incorporation in the registration statement No. 333-28013 on Form
S-8 of Disc Graphics, Inc. of our report dated January 28, 1998, relating to the
consolidated balance sheets of Disc Graphics, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997 and related schedule, which report appears in the
December 31, 1997, annual report on Form 10-K of Disc Graphics, Inc.
/s/KPMG Peat Marwick LLP
Jericho, New York
March 30, 1998
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