________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
Form 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 0-22696
DISC GRAPHICS, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 13-3678012
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10 Gilpin Avenue, Hauppauge, New York 11788
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Class A Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 1, 1999, the aggregate market value of the voting stock held by
non-affiliates of Registrant was approximately $13.7 million based on the
closing price of the Common Stock on the Nasdaq Stock Market on that date.
At March 1, 1999, the Registrant had outstanding 5,518,412 shares of Common
Stock, $.01 par value per share.
Documents Incorporated by Reference: The Registrant's Proxy Statement for its
1999 Annual Meeting of Stockholders is incorporated by reference into Part III
(Items 10, 11, 12, and 13 of this Form 10-K).
PART I
ITEM 1. Business
General
Disc Graphics, Inc. ("Disc Graphics" or the "Company"), headquartered in
Hauppauge, New York, is a diversified manufacturer and printer of specialty
paperboard packaging focused on the home video, music, entertainment software,
cosmetics, pharmaceutical, and other consumer markets. Products include:
pre-recorded video sleeves, compact disc ("CD") and audio cassette packaging;
folding cartons for entertainment software, food, pharmaceuticals and cosmetics;
posters, pressure sensitive labels and general commercial printing. Customers
include leading software, CD-ROM and video distributors; vitamin, cosmetic and
fragrance companies; major book publishers; and many Fortune 500 companies. The
Company operates in one business segment: the manufacturing and printing of
specialty paperboard packaging.
The Company'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 and potentially new customers, as well as position the Company to
offer a service and cost advantage over its competitors; and (3) to develop
innovative packaging designs and techniques for new and existing markets.
Disc Graphics is actively involved in investigating additional printing and
packaging related business opportunities. However, the Company is not a party to
any definitive agreement with respect to any such acquisition. In addition,
there can be no assurance that the Company will consummate any potential
acquisition, or if completed, that any such acquisition will be profitable for
the Company.
Historically, the Company has grown primarily through the development of
new customers by capitalizing on its superior service and response capabilities
and increases in orders from existing customers. In 1996, the Company acquired
Pointille, Inc., a packaging printer, and in 1997, the Company acquired Benham
Press, Inc., an Indiana based commercial printing company, and has since
integrated each of their manufacturing facilities and sales/marketing programs
into Disc Graphics. The Company intends to continue and enhance its historic
growth by acquiring strategically-located folding carton and printing companies,
expanding existing facilities to serve regional U.S. markets, broadening the
Company's product line and continuing ongoing internal expansion.
The Company'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.
1
Background
The Company was formed as the result of a reverse merger of RCL Capital
Corp ("RCL") into a printing company formerly known as Disc Graphics, Inc., a
New York corporation ("Old Disc"). RCL was incorporated in August 1992 to serve
as a vehicle to effect a business combination with an operating business. On
November 18, 1993, RCL completed a public offering of units ("Units"), each Unit
consisting of one share of the RCL's Common Stock and two redeemable warrants.
Net proceeds of the public offering after the payment of certain additional
expenses yielded approximately $6,400,000, which was put into escrow pending the
acquisition of an operating business.
On October 30, 1995, Old Disc merged with and into RCL. Following the
merger, RCL changed its name to Disc Graphics, Inc. Net proceeds of the merger
after the payment for the redemption of approximately 185,000 shares of Common
Stock at $5.15 per share, in accordance with the terms of the original RCL
offering, yielded proceeds to the 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 was 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.
Packaging/Printing Industry
Approximately 64% of the Company's revenue in 1998 was derived from the
manufacture and sale of paperboard folding cartons. An industry trade
publication has estimated that in 1998 there were approximately 298 companies
operating 474 folding carton manufacturing plants in the United States and the
total revenues from the sale of folding cartons was approximately $5.1 billion,
remaining at the same level as 1997. The number of folding carton plants
remained steady from 1997 and the reversal of a decline in industry revenues
seen in the past reflects the development of market niches by many carton
manufacturers to compete with alternative forms of packaging.
Folding carton manufacturers are divided into three main segments:
integrated manufacturers (those owned by or affiliated with a paperboard mill),
non-integrated or independent manufacturers, and in-plant or "captive"
manufacturers which are owned directly by the end user. The Company generally
competes with independent manufacturers.
The Company focuses on those markets that use the folding carton as part of
a product's marketing. The promotional function of the carton may employ
multiple colors, coatings, several printing techniques, stamping and other
graphic design considerations. The Company has
2
concentrated in markets, such as the home video, software, cosmetics, music and
pharmaceutical packaging markets, which utilize those techniques to a
significant extent. The Company has devoted substantial resources toward
developing the specialized processes required in such markets.
The Company's business also includes commercial printing and labels.
Industry trade sources have estimated that the total United States commercial
printing market in 1998 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 an average of 22 employees. Based on 1997 revenues,
the Company was ranked 128 in the top 500 printing companies in the United
States by an industry trade publication.
Packaging Products
The Company's largest market for folding cartons is video/entertainment
software. For the home video market the Company manufactures bottom-load video
sleeves, multi-packs and other specialty items. In addition to printing for
major studios the Company has historically concentrated on the catalogue and
special interest video/software markets. The Company'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
product line. Packaging for these videos is often sold to independent
distributors and videotape duplicators. Through these distributors and
duplicators, the Company has produced packaging for many Fortune 500 companies.
Software packaging continues to be a growing portion of the Company's
revenues. The Company produces packaging for some of the largest entertainment
software companies and applications software companies, including Computer
Associates. The Company believes that its national network of production
facilities and its capabilities in producing high value-added packaging are
strategic advantages in competing in this market.
The Company manufactures compact disc packaging, including tray cards and
booklets, pre-recorded cassette packaging, such as insert or "J" cards,
cassingles (cassettes with only one or a few songs), as well as audio book
packaging and other printed materials for the music/audio industry. The music
industry customers often require that packaging be produced quickly, often
within days of placing an order. The Company has assembled a combination of
skilled workers, advanced equipment, and production systems to meet these
requirements.
The Company has long standing customer relationships with many of the major
record companies in the United States and also manufactures packaging for major
duplicators in the United States. Additionally, the Company manufactures
packaging for special interest and secondary markets.
The other major component of this market is audio publishing packaging. The
Company believes that it has a significant share of this market. The Company's
principal customers include two of the largest publishers in this market. The
Company also manufactures packaging for self- help and specialty cassettes,
which are a growing portion of this market.
The Company manufactures cartons and packaging for fragrances, skin
lotions, pet products, food and other specialty packaging for these markets.
Given the high value added nature
3
of the packaging, these markets are a prime focus for the Company. Recently, the
Company started Cosmetic Sampling Technologies, Inc. ("CST") a wholly owned
subsidiary. CST has applied for a patent on TRYALS(TM), its unique lipstick
sampler. TRYALS(TM) is a unit dose, self applicator, for a trial size amount of
lipstick. Management has committed resources to the development of this and
other innovative packaging to penetrate the cosmetic market. To date, CST has
not received any orders for TRYALS(TM) and TRYALS(TM) has not generated any
revenues, and there can be no assurance that it will do so in future periods.
The Company produces folding cartons for over-the-counter ("OTC")
pharmaceuticals, vitamins and nutritional supplements. A large part of the
Company's revenue for OTC-style cartons is for "private label" products. Vibrant
designs are emphasized in the packaging, which requires the use of multi-color
graphics to convey product identity and brand recognition. Sales of these
cartons are made directly to several major vitamin manufacturers and contract
drug manufacturers.
In the area of commercial printing, the Company prints brochures, posters,
sell sheets and other promotional material. The Company prints book jackets and
covers, as well as children's books and "cut labels" for vitamin and food
packaging.
The Company 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, pet products and specialty items. Labels are sold
primarily to existing customers for packaging. Many video and folding carton
orders include an order for the corresponding labels.
Marketing and Sales
The Company's revenues are derived from several markets. The largest market
as a percentage of total 1998 net sales was video/entertainment software, which
accounted for approximately 36%; followed by consumer product packaging, which
accounted for approximately 23%; next were music/audio packaging and commercial
printing, which accounted for approximately 15% each; then labels which
accounted for approximately 6%; and pharmaceutical/vitamin packaging, which
accounted for approximately 5%. These markets represent product lines within the
business segment in which the Company operates.
The Company's sales are primarily the result of direct solicitation by its
executive officers and full-time sales people. The Company's package engineering
staff assists customers with new package design and development. Because the
Company has a short turnaround time, it has a small order backlog, with most
orders processed and delivered in one to four weeks.
Seasonality
Historically, the Company's revenues have been moderately seasonal. In the
last two quarters of 1998 and 1997, the Company's revenues were approximately
54% of annual sales. This seasonality is primarily the result of certain markets
which the Company services, such as music/audio packaging, video/entertainment
software packaging and consumer product packaging,
4
which require that products be produced and shipped between August and October
for sale during the holiday season. These three categories accounted for
approximately 74% of the Company's sales in each of 1998 and 1997, causing the
Company's revenues to be greater in the last six months of each calendar year
versus the first six months.
Competition
The Company competes with a small number of printed paperboard packaging
companies within each of its markets. In the music, video and software
industries, the Company has several competitors, the largest of which is
Shorewood Packaging Corporation. There are no significant competitors in other
markets. These industries require high quality packaging with rapid turnaround
time and competitive pricing. These competitive factors are also evident in the
Company's other markets. The Company believes that its ability to perform all
aspects of the manufacturing process in-house is an important factor in
maintaining and improving its competitive position.
While the Company believes its present competitive position is strong,
there can be no assurance that this will not change. Several of the Company's
competitors have financial resources that are greater than the Company's. In
addition, because the Company supplies packaging to consumer industries, it is
also subject to the competitive forces affecting its customers.
Employees
As of February 15, 1999, the Company had approximately 455 employees. Of
these employees, 304 are located in the Company's Hauppauge, New York facility,
with 243 serving in manufacturing capacities and 61 serving in selling and
administrative capacities. Eighty employees are located in the Company's
Burbank, California facility, with 68 serving in manufacturing capacities and 12
serving in selling and administrative capacities. Twenty-five employees are
located in the Company's Rockaway, New Jersey facility, with 22 serving in
manufacturing capacities and three serving in selling and administrative
capacities. Forty-six employees are located in the Company's Indianapolis,
Indiana facility, with 34 serving in manufacturing capacities and 12 serving in
selling and administrative capacities. A majority of the manufacturing employees
located in Burbank, California facility are represented by a labor union. The
Company considers its relationship with its employees to be satisfactory. See
"Item 3. Legal Proceedings," below.
Materials
The Company uses a variety of raw materials. The most significant types of
raw materials 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. The Company has been successful in obtaining
adequate materials to satisfy all sales orders, and does not anticipate any
significant difficulties in obtaining supplies of such materials in the future.
There are no assurances, however, that the Company will not encounter difficulty
in obtaining supplies of such material to fulfill its requirements.
5
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. As a specialty printing company, the Company's continued
growth and competitiveness requires a continuous investment in capital
equipment.
Forward Looking Statements
This Form 10-K contains predictions, projections and other statements about
the future that are intended to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
those expressed or implied by such statements. Such risks, uncertainties, and
other important factors include, among others: the Company's ability to sustain
current growth rates in net sales; the potential inability of the Company to
implement its expansion, marketing and other business strategies; the amounts
required for capital expenditures and regulatory compliance in future periods;
the availability and cost of materials; potential effects of Year 2000 problems
on the Company's business; and continuing industry-wide pricing pressures and
other industry conditions. Such forward-looking statements speak only as of the
date of this Report, and the Company disclaims any obligation or undertaking to
update such statements. Each forward-looking statement that the Company believes
is material is accompanied by one or more cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statement. The cautionary statements are
set forth following the forward-looking statement, in other sections of this
Form 10-K, and/or in the Company's other documents filed with the Securities and
Exchange Commission, whether or not such documents are incorporated herein by
reference. In assessing forward-looking statements, readers are urged to read
carefully all such cautionary statements.
Regulation
Disc Graphics, Inc.'s activities are subject to various environmental,
health and employee safety laws. The Company has expended resources, both
financial and managerial, to comply with applicable environmental, health and
worker safety laws in its operations and at its facilities and anticipates that
it will continue to do so in the future. Compliance with environmental laws has
not historically had a material effect on the Company's capital expenditures,
earnings or competitive position, and the Company does not anticipate that such
compliance will have a material effect on the Company. Although the Company
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.
6
Executive Officers of the Registrant
Donald Sinkin (50 years of age) has been Chairman of the Board, President,
Chief Executive Officer and the largest shareholder of the Company since 1986.
Mr. Sinkin joined Disc Graphics as Pre-Press Supervisor and became Plant Manager
in 1982. Prior to joining Disc Graphics, Mr. Sinkin helped found and manage
Rutgers Packaging, a division of Queens Group, Inc. d/b/a Queens Litho.
Stephen Frey (45 years of age) is a Member of the Board, Senior Vice
President of Operations, Secretary and a major shareholder of the Company. Mr.
Frey joined Disc Graphics in the Pre-Press Department in 1978, became Supervisor
of that department in 1983, and established the Production and Planning
Department in 1985. Mr. Frey was elected Vice President and Secretary in 1988
and a Director in 1990. He served as Chief Operating Officer from 1991 to 1995
and was elected Senior Vice President of Operations in 1998. Prior to joining
Disc, Mr. Frey held various management positions with Kordet Color Corporation
and Terrace Litho.
John Rebecchi (43 years of age) is a Member of the Board, Senior Vice
President of Sales & Marketing, and a major shareholder of the Company. Mr.
Rebecchi joined Disc Graphics' predecessor in the Accounting Department and,
upon Disc's formation in 1983, he served as Controller. After a brief absence
from the Company, Mr. Rebecchi re-joined Disc in 1988 and was elected Vice
President and Treasurer in 1988 and a Director in 1990. He served as Chief
Financial Officer from 1991 through 1995 and was elected Senior Vice President
of Sales & Marketing in 1998.
Margaret M. Krumholz (39 years of age) is Senior Vice President of Finance
and Chief Financial Officer of the Company. Ms. Krumholz joined Disc Graphics in
1994 and served as Controller until 1996 when she was elected Chief Financial
Officer. She was elected Senior Vice President of Finance in August 1998. Prior
to joining Disc, Ms. Krumholz held various financial and accounting positions,
including Corporate Finance Manager for General Foods Baking Company and
received her C.P.A. while employed with PricewaterhouseCoopers.
Frank A. Bress (51 years of age) is Vice President for Legal Affairs and
Human Resource Policy and General Counsel of the Company. Mr. Bress joined the
Company in January 1998 as General Counsel, and was elected Vice President for
Legal Affairs in August 1998 and Vice President for Human Resource Policy in
October 1998. Prior to joining Disc Graphics, Mr. Bress served as principal
outside counsel to the Company from 1988 through 1997 while a partner in various
law firms. Mr. Bress was an Associate Professor of Law at New York University
School of Law from 1974 to 1986, and a Professor of Law and Associate Dean at
Pace University School of Law from 1986 to 1988.
7
TEM 2. Properties
As of December 31, 1998, the Company's principal properties were as
follows:
Approximate Square
Location Activities Conducted Footage of Facility
Hauppauge, NY Executive offices and manufacturing (1) 55,000
Hauppauge, NY Warehouse (2) 40,000
Burbank, CA Manufacturing (3) 30,000
Indianapolis, IN Manufacturing (4) 27,000
Rockaway, NJ Manufacturing (5) 8,400
New York, NY Sales (6) 1,200
(1) The lease for this facility terminates on December 31, 2007. The facility
is owned by certain principals of the Company through a limited
partnership, and the Company believes that the lease terms were and are at
least as favorable to the Company as terms which could have been obtained
from unaffiliated third parties for similar office and manufacturing space.
(2) The lease for this property is scheduled to terminate on August 31, 2001.
(3) This lease is scheduled to terminate on May 17, 2000.
(4) The Company owns this facility, subject to a mortgage.
(5) This lease is scheduled to terminate on June 30, 200l.
(6) This lease will terminate on August 9, 1999 and is renewable at the
Company's option through August 9, 2000.
Management of the Company 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.
8
Recently, the Company overwhelmingly defeated an attempt by Local One-L of
the Amalgamated Lithographers of America, Graphic Communications International
Union to represent a small group of employees in its Hauppauge facility. Local
One-L filed a petition on January 25, 1999 with the National Labor Relations
Board ("NLRB") seeking a representation election. The NLRB supervised election
was held on March 4, 1999, and the Company prevailed by a 4-to-1 margin.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1998, there were
no matters submitted to a vote of the Disc Graphics, Inc. security holders
through the solicitation of proxies or otherwise.
9
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
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 noted.
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 noted.
Common Stock Class A Warrants
High Low High Low
Quarter Ended
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
March 31, 1998 4.750 4.125 .688 .563
June 30, 1998 4.625 3.625 .625 .375
September 30, 1998 5.125 3.688 .688 .375
December 31, 1998 5.188 4.000 1.000 .438
On February 24, 1999, the closing bid prices for the Common Stock and the
Class A Warrants were $4.875 and $.625, respectively.
Holders of Common Stock
As of February 2, 1999, there were 46 holders of record and approximately
500 beneficial owners of the Common Stock, and two holders of record of Class A
Warrants.
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 the
Company's revenues and earnings, capital requirements and general financial
condition and any other factors deemed relevant by the
10
Company's Board of Directors. The Company presently intends to retain all
earnings for use in the Company's business operations and to further the growth
of the Company's business. Accordingly, the Company's Board of Directors does
not anticipate declaring any dividends in the foreseeable future.
11
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 the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial statements and
notes (including without limitation Note 19) thereto, all of which are contained
in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
Year Ended December 31,
________________________________________________________________________________
1998 1997 1996 1995 1994
________________________________________________________________________________
Income statement data:
<S> <C> <C> <C> <C> <C>
Net Sales .................... $58,882 $48,445 $42,575 $36,149 $30,550
Gross Profit ................. 15,799 12,693 10,911 7,481 6,797
Operating expenses ........... 10,550 8,483 7,612 5,733 5,020
Operating income ............. 5,249 4,210 3,299 1,748 1,777
Interest expense ............. 634 612 764 838 837
Net income ................... 2,864 2,159 1,454 501 502
Net income per common share
Basic .52 .40 .29 .18 .22
Diluted .52 .40 .29 .18 .22
Weighted average number
of shares outstanding
Basic 5,474 5,387 5,091 2,714 2,247
Diluted 5,492 5,397 5,098 2,714 2,247
</TABLE>
<TABLE>
As of December 31,
________________________________________________________________________________
1998 1997 1996 1995 1994
________________________________________________________________________________
Balance sheet data:
<S> <C> <C> <C> <C> <C>
Total assets ................. $28,372 $26,747 $22,046 $18,604 $14,048
Long term liabilities ........ 6,737 8,494 5,598 7,243 6,933
Stockholders' equity ......... 13,940 11,112 8,964 7,427 2,280
</TABLE>
12
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 periods indicated. This discussion
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included in this Annual Report. Results for the
periods reported herein are not necessarily indicative of results that may be
expected in future periods.
Pointille Acquisition
On May 18, 1996, the Company acquired 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 purchase price
consisted of $662,545 in cash, 74,074 shares of the Company's Common Stock, and
a promissory note in the amount of $330,000, payable in 36 equal monthly
installments of principal and interest beginning on June 17, 1996, and
transaction costs. This was offset by a receivable from the former owner of
$175,633, which was $0 as of December 31, 1998. The Pointille 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 the date of the acquisition.
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 $87,043 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
totaling 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 Benham acquisition was recorded using the purchase
method of accounting and accordingly, the results of Benham's operations are
included in the Company's results of operation from the date of the acquisition.
13
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales
Net sales for the year ended December 31, 1998 were $58,882,000 compared to
$48,445,000 for the same period the prior year, representing an increase of
$10,437,000 or 22%. The Benham acquisition accounted for approximately
$3,507,000 of the increase in sales. The overall increase was most evident in
video and entertainment software packaging ($6,138,000 or 41%) and music and
audio packaging ($396,000 or 5%) between the comparison periods. Consumer
product packaging has increased $1,448,000 or 12%. The Company has continued to
focus on high end specialty packaging and has focused less on the lower margin,
less value added product categories, resulting in a decline in sales levels in
those categories.
The increase in video and entertainment software packaging and music and
audio packaging has been achieved through intense sales efforts and investment
in both sales and customer service personnel. The competitive pricing
environment which exists throughout these product categories has been mitigated
by the Company's strategy of concentrating on custom-designed specialty
packaging, as evidenced by the development of a lipstick sampler and the
start-up of a new division, Cosmetic Sampling Technologies, Inc. Although this
product was not in production in 1998, it has provided the opportunity to
increase sales in consumer product packaging by developing customer
relationships with cosmetic companies. New product development has been
important to the Company's growth and diversification strategy.
Gross Profit
Gross profit for the year ended December 31, 1998 was $15,799,000 (a 26.8%
profit margin) compared to $12,693,000 (a 26.2% profit margin) for the prior
year, representing an increase of $3,106,000 or 24%. Improvements in profit
margin continue to be increasingly more challenging in an environment of
downward price pressure. Improving manufacturing efficiencies through improved
processes, competitive purchasing practices, and capital investment has enabled
the Company to remain competitive and improve profitability.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 1998 were $10,550,000 (17.9% of net sales) compared to $8,483,000
(17.5% of net sales) for the prior year, an increase of $2,067,000, or 24%. This
increase was due primarily to revenue related expenses (such as freight to
customers and commissions), costs associated with the Indiana facility, and
investment in sales and customer service personnel to focus on custom-designed
packaging.
Interest Expense
Interest expense for the year ended December 31, 1998 was $634,000 compared
to $612,000 for the prior year. The slight increase in interest expense was
primarily related to the increase in investments in equipment through capital
leases, offset by interest earned on overnight investments.
14
Income Taxes
The provision for income taxes for the year ended December 31, 1998
increased primarily due to the increase in pretax income of $1,168,000.
Net Income
Net income for the year ended December 31, 1998 was $2,864,000 compared to
$2,159,000 for the prior year, an increase of $705,000, or 33%. This increase
was a result of an increase in net sales, gross margin improvement, and gain on
the sale of certain equipment ($150,000), offset slightly by increased SG&A. 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 1998 compared to 1997.
15
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
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 Pointille acquisition,
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%; and consumer product packaging, which increased $566,000 or
5%. The Company continued to experience strong growth in both CD-ROM and video
sales between 1996 and 1997. The Company became better positioned between 1996
and 1997 to compete in these categories of the West Coast markets. As a result,
$1,722,000 or 29% of the Company's increased net sales in 1997 were from the
additional video/software packaging sales at the California facility.
Both the Pointille and Benham acquisitions have contributed significantly
to the growth in commercial sales between comparison periods. The Indiana
facility is primarily engaged in commercial printing, and contributed over
$600,000 in sales from October 24, 1997 through December 31, 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 same October to December period.
Both pharmaceutical/vitamin packaging and label sales experienced a slight
decrease of $362,000 or 8% and $113,000 or 4%, respectively, between 1996 and
1997 periods. This was a result of the Company's continued focus on growing
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 the cost of goods sold as a percentage of revenue,
increased sales volume and both the Pointille and Benham acquisitions in 1997.
The Company has continued to focus on improving manufacturing processes and
making capital investments in 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
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 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. The Company will
16
continue to focus on reducing SG&A costs through synergies among facilities,
thus leveraging its 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. The decline in interest expense was
primarily related to the improved borrowing rate under a new revolving credit
agreement with Key Bank, National Association (the "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.
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
resulted from an increase in net sales and the gross margin improvement at all
facilities. 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 resulted in strong earnings growth in 1997 compared to
1996.
Liquidity and Capital Resources
The primary sources of cash for the Company's business activities have been
cash provided from operations and borrowings under the Credit Agreement with its
current bank lender. As of December 31, 1998, the Company had working capital of
$8,684,000 compared to $7,434,000 as of December 31, 1997.
Net cash provided by operating activities for the year ended December 31,
1998 was $3,691,000 compared to $1,854,000 for the prior year, which reflects
the Company's increase in earnings between comparison periods. Cash used in
investing activities was primarily for capital expenditures, net of proceeds
from the sale of equipment.
Capital expenditures have been primarily for purchases of manufacturing
equipment, building and building improvements, and the purchase of furniture and
fixtures. Capital expenditures in 1998 were $1,026,000 as compared to $2,420,000
in 1997. The focus of the capital expenditures has been to improve efficiency,
quality, and safety of the Company's operations. As of December 31, 1998, the
Company committed to purchase a $1,000,000 stamping press.
On December 1, 1998, the Company renegotiated certain provisions of the
Credit Agreement. The Credit Agreement allows for borrowing up to $10,000,000.
The Credit Agreement is secured
17
by substantially all of the unencumbered assets of the Company. The borrowing
rate under this agreement is either (i) LIBOR plus 100 to 150 basis points
depending on the Debt Coverage Ratio (as defined) or (ii) the Bank's Base Rate
(as defined), which was
7.75% per annum at December 31, 1998. 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, 1998, the
Company was in compliance with all the covenants. At December 31, 1998, the
Company had approximately $9,130,000 available for borrowing under the Credit
Agreement.
On September 3, 1998, the Company traded in a printing press, which was
previously financed by an equipment note through GE Capital Public Finance
("GECPF"), for a new press. In connection with the transaction, the Company
entered into a seven year capital lease arrangement with the Suffolk County
Industrial Development Association ("SCIDA"), pursuant to which the SCIDA: (a)
issued a $2,003,657 industrial development bond to finance its purchase of the
press; (b) leased the press to the Company; and (c) assigned its rights in the
lease to GECPF, which purchased the bond. The carrying value of the old press
approximated the related obligation and, therefore, no gain was recognized on
the trade-in of the press. The new lease contains certain provisions limiting
the Company's capital expenditures in Suffolk County over the next three years,
and certain debt covenants consistent with those contained in the Company's
amended Credit Agreement. The lease payments are calculated on the basis of a
below market interest rate, which is subject to an increase to the prevailing
market rate in the event the Company exceeds the capital expenditure limits. The
Company believes that any such rate increase would not have a material effect on
the Company, because the Company presently has and intends to maintain the
ability to satisfy its lease obligations through its Credit Agreement. The
Company also has the option to terminate the lease at any time upon payment of a
scheduled prepayment amount.
The Company believes that it has adequate liquidity and sufficient capital
to fund its current operating plans.
Inflation and Seasonality
The Company has experienced increases in variable and fixed costs. The
Company has continued to manage the impact of these cost increases by obtaining
certain volume discounts through the purchase of larger quantities of raw
material and improving manufacturing efficiencies while providing the same high
quality product at competitive prices.
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 the Company's business has been moderately
seasonal. The requirements of the home video, music and cosmetic markets for
products to be delivered for the holiday season generally causes an increase in
sales from August through October. See "Item 1. Business-Seasonality," above.
18
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards No. 132 and 133 related to "Pensions and Other
Postretirement Benefit Disclosures" and "Accounting for Derivative Instruments
and Hedging Activities," respectively. Statement No. 132 is not applicable to
the Company. Statement No. 133 is not expected to have a material impact on the
consolidated financial statements of the Company.
Year 2000 Date Conversion
The Company is in the process of identifying, assessing and developing
contingency plans to address problems that may arise as a result of the
inability of the Company's computers, or those of its material vendors and
customers, to properly recognize and manipulate dates in the Year 2000 beginning
with the first two digits "20" instead of "19." In its evaluation process, the
Company considers a computer to be Year 2000 compliant if: (a) any valid date,
both before and after December 31, 1999 (including February 29, 2000), does not
cause an interruption in the desired operation; and (b) (i) the computer will
correctly sort, calculate and compare all dates; and (ii) if the first two
digits of the date are implicit, ( i.e., the date is represented by only 2
digits, e.g., "99" for "1999" and "00" for "2000"), the computer will interpret
the dates consistently and with the result that "99" always means 1999, and "00"
always means 2000).
The Company's evaluation of the Year 2000 problem includes the assessment
of its computer systems and its equipment and other systems that are controlled
or monitored by computers or embedded computer chips, and the ability of its
critical vendors and customers to ensure timely delivery of goods and services
and payment of invoices, respectively.
In March 1997, the Company installed a fully-integrated computer system
that is Year 2000 compliant. The software calculates the date incrementally from
a fixed past date, using a five-byte data field (compared to the standard
two-byte data field). For example, from the date of March 1, 1916, the software
can calculate incrementally 99,999 days from that fixed date, approximately
until the year 2189. Each software module has been examined to confirm that it
uses the five-byte date field in all date sorts, calculations and comparisons.
During the fourth quarter of 1998, the Company performed a full test of the
software by advancing the date past 2000 (including February 29, 2000) and ran
each software module with test data to confirm empirically that the system
accommodates the century rollover. The test confirmed that all mission critical
modules are Y2K compliant. Several modules contained two or eight character date
fields that are not used in calculations, and are not adversely effected by the
date change. One module contains a two character date field that is used in
calculations and must be fixed. The Company expects to fix all the modules and
fully retest the system by June 30, 1999.
The Company has also undertaken to test the Year 2000 compatibility of each
desktop and portable computer and each piece of equipment containing an embedded
computer chip, by confirming empirically that each computer and its associated
software and each piece of equipment will function properly with dates occurring
both before and after 2000. The tests of personal computers is expected to be
completed by June 30, 1999.
19
The Company's business could be materially affected if various material
vendors and customers are not themselves Year 2000 compliant. In particular, if
the Company is unable to obtain necessary supplies, services or critical machine
parts, its operations could suffer. If its major customers are unable to make
payments or continue purchases, the Company's cash flow could suffer. The
inability of major utilities to supply power or telephone service after the
rollover could also adversely affect the Company's operations. In order to
assess and address such problems, the Company is in the process of surveying all
its material vendors and customers to determine their likely state of Year 2000
compliance at the rollover. The survey is expected to be completed by June 30,
1999.
Although the Company is currently unaware of any material vendor or
customer who will not be Year 2000 compliant, it has and will continue to
develop contingency plans in the event any material vendors or customers are
unable in the Year 2000 to fulfill their supply or payment obligations to the
Company. In particular, the Company has taken steps to ensure that no
significant vendor is a sole-source or limited-source supplier, by arranging
multiple sources for all critical resources, by warehousing or stocking a
limited supply of critical materials and parts, and by developing the ability to
fabricate critical machine parts in an in-house facility.
The Company is exploring with its insurer whether present policies provide
any coverage for potential business losses and liability to third parties
resulting from the Company's failure or inability to be Year 2000 compliant due
to factors not under its control, and if not, whether such policies are
available.
The Company has established a Year 2000 Compliance Committee to assess the
impact of the Year 2000 problem on the Company's business and to ensure its Year
2000 compliance. The Committee is co-chaired by the Vice President for Legal
Affairs and Human Resource Policy and the Management Information Systems
Manager, and is comprised of representatives from all major departments and all
facilities within the Company. Management has committed all resources, both
financial and personnel, reasonably necessary to achieve Year 2000 compliance
and/or implement its contingency plans for events outside its control. The
Company does not believe that the costs it has incurred to date or currently
expects to incur in future periods are or will be material, in the aggregate,
primarily because these costs have been and will be incurred in connection with
projects begun before, and/or budgeted without regard to, the Company's Year
2000 compliance efforts.
Although the Company believes it will be Year 2000 compliant no later than
June 30, 1999, there can be no assurance that the Company will successfully
identify all systems, vendors or customers which are not Year 2000 compliant,
that the Company will not have to increase significantly its expenditures
relating to any such non- compliance, or that its business will not be
materially adversely affected by any such non-compliance.
20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company finances the purchase of production equipment and other capital
expenditures through long-term debt and/or capital leases. The stated or
implicit interest rates on such obligations are generally fixed. In those
instances where rates are variable, the Company will generally fix the rate
through an interest rate swap agreement. Accordingly, the Company does not
believe it is materially exposed to changes in interest rates.
The Company does not have any sales, purchases, assets or liabilities
denominated in currencies other than the U.S. dollar, and as such is not subject
to foreign currency exchange rate risk.
21
ITEM 8. Financial Statements and Supplementary Data
Page
Independent Auditors' Report.................................................F-1
Consolidated Balance Sheets as of December 31, 1998
and 1997...............................................................F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996 .....................................F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997, and 1996......................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................F-5
Notes to Consolidated Financial Statements...................................F-6
22
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
and Stockholders
Disc Graphics, Inc.
We have audited the accompanying consolidated balance sheets of Disc Graphics,
Inc. and subsidiaries as of December 31, 1998, and 1997, and the related
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
KPMG LLP
Melville, New York
January 28, 1999
F-1
<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents ...................... $ 43,313 31,753
Accounts receivable, net of allowance
for doubtful accounts of
$1,332,000 and $1,162,000, respectively ....... 12,721,102 11,698,364
Inventories .................................... 2,379,627 1,906,694
Prepaid expenses and other current assets ...... 271,462 389,659
Deferred income taxes .......................... 963,000 549,000
------- -------
Total current assets ................. 16,378,504 14,575,470
Property, plant and equipment, net ............. 9,997,743 10,510,266
Goodwill, net .................................. 1,265,210 1,379,408
Security deposits and other assets ............. 730,084 281,503
------- -------
Total assets ......................... $28,371,541 26,746,647
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of
equipment notes payable ...................... $ 123,948 451,403
Current portion of long-term debt .............. 112,613 103,530
Current maturities of capitalized
lease obligations payable .................... 1,433,328 1,069,209
Accounts payable ............................... 2,373,626 2,281,609
Accrued expenses ............................... 2,834,852 2,725,463
Income taxes payable ........................... 815,952 509,927
------- -------
Total current liabilities ..................... 7,694,319 7,141,141
Long-term debt, less current maturities ........ 1,415,625 2,805,113
Equipment notes payable, less
current maturities ........................... 53,325 1,447,860
Capitalized lease obligations payable,
less current maturities ...................... 3,944,868 3,492,857
Deferred income taxes .......................... 1,323,000 748,000
--------- -------
Total liabilities ..................... 14,431,137 15,634,971
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 5,548,761 in 1998 and 5,440,256 in 1997 55,488 54,403
Additional paid-in capital 5,009,671 5,044,934
Retained earnings 8,906,581 6,042,154
--------- ---------
13,971,740 11,141,491
Less:
Treasury stock, 30,349 and 30,059 common shares
in 1998 and 1997, respectively (31,336) ( 29,815 )
------- --------
Total stockholders' equity 13,940,404 11,111,676
---------- ----------
Total liabilities and
stockholders' equity $ 28,371,541 26,746,647
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ......................... $58,881,533 48,444,890 42,575,120
Cost of sales ..................... 43,082,081 35,751,899 31,663,934
---------- ---------- ----------
Gross profit .................. 15,799,452 12,692,991 10,911,186
Operating expenses:
Selling and shipping
expenses .................... 6,018,562 4,426,729 3,682,886
General and administrative
expenses .................... 4,531,620 4,056,293 3,929,521
--------- --------- ---------
Operating income............... 5,249,270 4,209,969 3,298,779
Interest expense, net ............. 633,512 612,181 763,793
Gain on disposal of equipment ..... 149,669 -- --
------- -------- --------
Income before provision for
income taxes .................... 4,765,427 3,597,788 2,534,986
Provision for income taxes ........ 1,901,000 1,439,000 1,081,000
--------- --------- ---------
Net income .................... $ 2,864,427 2,158,788 1,453,986
========= ========= =========
Net income per share:
Basic $ .52 .40 .29
=== === ===
Diluted $ .52 .40 .29
=== === ===
Weighted average shares outstanding:
Basic ................ 5,474,444 5,387,240 5,090,810
========= ========= =========
Diluted .................. 5,492,050 5,397,130 5,097,566
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
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, 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 Merge -- -- 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
Shares issued in connection with
warrants exchanged -- -- 108,505 1,085 (1,085) -- -- --
Purchase of treasury stock -- -- -- -- -- -- (1,521) (1,521)
Purchase of warrants -- -- -- -- (34,178) -- -- (34,178)
Net income -- -- -- -- -- 2,864,427 -- 2,864,427
----- ----- ------ ----- ------ ---------- ----- ---------
Balance, December 31, 1998 -- -- 5,548,761 $ 55,488 5,009,671 8,906,581 (31,336) 13,940,404
====== ===== ========= ========== ========= ========= ======= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,864,427 2,158,788 1,453,986
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,216,705 2,124,596 1,529,246
Deferred income tax 161,000 89,000 78,406
Allowance for doubtful accounts 402,470 526,548 496,662
Gain on disposal of equipment (149,669) -- ---
Change in assets and liabilities,
net of acquisition of business:
Accounts receivable (1,425,208) (2,515,895) (637,390)
Inventories (472,933) 322,582 42,407
Prepaid expenses and other
current assets 57,458 269,381 (156,577)
Accounts payable and
accrued liabilities 201,406 (731,561) 1,765,149
Income taxes payable 306,025 (444,161) 691,862
Security deposits and
other assets (470,413) 54,768 45,135
-------- ------ ------
Net cash provided by operating
activities 3,691,268 1,854,046 5,308,886
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (1,025,613) (2,419,829) (782,374)
Purchase of net assets of
business acquired 18,211 (206,497) (662,545)
Proceeds from sales of equipment 166,900 55,200 ---
------- ------ --------
Net cash used in investing activities (840,502) (2,571,126) (1,444,919)
-------- ---------- ----------
Cash flows from financing activities:
Proceeds from (repayments of)
long-term debt, net (1,380,405) (493,382) (3,820,459)
Payments of notes receivable 40,406 43,261 57,700
Proceeds from capital lease obligations 745,549 2,524,917 79,688
Principal payments of
equipment notes payable (333,755) (460,226) (500,077)
Principal payments of capital
lease obligations (1,875,302) (847,938) (867,576)
Additional merger expenses -- -- (35,000)
Purchase of warrants (34,178) -- (32,400)
Purchase of treasury stock (1,521) (5,154) (24,661)
Expenses incurred in relation
to the exchange offer -- (43,504) --
----- -------- - ----
Net cash provided by (used by)
financing activities (2,839,206) 717,974 (5,142,785)
---------- ------- ----------
Net increase (decrease) in cash
and cash equivalents 11,560 894 (1,278,818)
Cash and cash equivalents at
beginning of year 31,753 30,859 1,309,677
------ ------ ---------
Cash and cash equivalents at end of year $ 43,313 31,753 30,859
=========== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Description of Business
-----------------------
Disc Graphics, Inc. and subsidiaries (the Company) operates in one business
segment: printing and manufacturing of paperboard packaging. The Company's
customers include music, home video, pharmaceutical and general consumer
products companies. 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 was treated as a re- capitalization of Disc
with Disc as the acquirer (reverse acquisition).
Prior to October 30, 1995, RCL was a publicly held, development stage
entity with assets consisting primarily of cash (a public shell). The Company
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 wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
F-6
(c) Revenue Recognition
-------------------
Revenues are recognized when merchandise is shipped.
(d) Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. There were no cash equivalents in 1996,
1997 and 1998.
(e) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
(f) Property, 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:
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
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) 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.
(h) 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 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.
F-7
(i) 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 1996,
1997 and 1998 does not include incremental shares relating to outstanding
warrants since the exercise price of the warrants exceeded the market price.
(j) 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 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 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.
(k) Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long- lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(1) Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive income be reported in annual
consolidated financial statements and be displayed with the same prominence as
other items in annual consolidated financial statements. Other comprehensive
income may include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable securities
classified as available for sale. The Company has no elements of other
comprehensive income other than net income, therefore, comprehensive income
equals reported net income.
F-8
(m) 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.
(n) Reclassifications
-----------------
Reclassifications are made whenever necessary to conform with the current
year's presentation.
(2) 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 $87,043 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. The acquisition was accounted for using the
purchase method of accounting. Goodwill amortization amounted to $21,598
and $5,325 for the years ended December 31, 1998 and 1997, respectively.
The allocation of the purchase price of Benham was as follows:
Purchase price:
Cash $ 87,043
Common stock 37,500
Transaction costs 101,242
-------
225,785
Net deficit of business acquired
(fair value of tangible assets and
liabilities acquired approximated
carrying value) (247,752)
--------
473,537
Allocated to:
Covenant not to compete 100,000
-------
Goodwill $ 373,537
=========
(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
F-9
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.
Goodwill amortization amounted to $74,388 and $74,175 for the years ended
December 31, 1998 and 1997, respectively.
The allocation of the purchase price of Pointille was as follows:
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 of business acquired
(fair value of tangible assets and
liabilities acquired approximated
carrying value) --
---------
Allocated to Goodwill $ 1,115,856
=========
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 on January 1, 1996. The effect of Benham's operations
to the consolidated financial statements of the Company for the years ended
December 31, 1997 and 1996 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, 1996,
nor of future results of operations of the consolidated entities.
1996
----
(in thousands, except
per share amounts)
Net sales $ 45,401
Net income $ 1,487
Net income per share:
Basic and diluted $ .29
(3) Supplemental Cash Flow Information
----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
F-10
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Interest $ 664,586 581,162 812,747
Income taxes 1,448,500 1,986,692 460,071
(4) Covenant 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. 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 $20,000 and $3,763 for the
years ended December 31, 1998 and 1997, respectively. The unamortized balances
of $76,237 and $96,237 as of December 31, 1998 and 1997, respectively, are
included in security deposits and other assets in the accompanying consolidated
balance sheets.
(5) Inventories
-----------
Inventories consist of the following:
1998 1997
---- ----
Raw materials $ 1,577,349 1,412,613
Work-in-process 659,552 359,743
Finished goods 142,726 134,338
------- -------
$ 2,379,627 1,906,694
========= =========
(6) Property, Plant and Equipment
------------------------------
Property, plant and equipment consist of the following:
1998 1997
---- ----
Land and building $ 550,000 550,000
Machinery and equipment 15,145,272 14,868,633
Furniture and fixtures 1,290,616 1,205,516
Leasehold improvements 1,390,758 1,234,793
Automobiles and trucks 217,565 171,689
------- -------
18,594,211 18,030,631
Less accumulated depreciation
and amortization 8,596,468 7,520,365
--------- ---------
$ 9,997,743 10,510,266
========= ==========
Depreciation and amortization expense of property, plant, and equipment
amounted to $2,078,554, $2,020,999 and $1,446,633 for the years ended
December 31, 1998, 1997, and 1996, respectively.
F-11
(7) Accrued Liabilities
-------------------
Accrued liabilities at December 31, 1998 and 1997 consisted of the
following:
1998 1997
---- ----
Accrued payroll and other
employee benefits $ 1,610,996 1,781,295
Accrued vacation 438,342 404,808
Accrued commissions 549,049 377,658
Accrued other 236,465 161,702
------- -------
$ 2,834,852 2,725,463
========= =========
F-12
(8) Long-term Debt
--------------
Long-term Debt summarized as follows:
1998 1997
---- ----
Revolving line of credit (a) $ 870,000 2,760,000
6.36% Promissory Note due in monthly
installments of 9,167 through May 1999 (b) 45,113 148,643
Mortgage payable due in varied monthly
installments through February 2008 (c) 613,125 ---
------- -------
1,528,238 2,908,643
Less current portion 112,613 103,530
------- -------
$ 1,415,625 2,805,113
========= =========
(a) In February, 1997, the Company entered into a financing agreement with
Key Bank, N.A. as amended on December 1, 1998. The eight year
Revolving Credit - Term Loan facility provides the Company the option
to convert the outstanding balance at February 21, 2001 to a fixed
term loan to be repaid over four years. The revolving credit portion
of the loan provides financing as defined, not to exceed $10,000,000.
The financing agreement bears interest at the lower of LIBOR plus
1.00% to 1.50% based on the debt coverage ratio or the bank's base
rate. At December 31, 1998, the base rate was 7.75%. The financing
agreement is secured by all personal property of the Company. In
addition, the financing agreement contains various covenants including
the maintenance of certain financial ratios including consolidated net
worth, working capital, debt service, funded debt to EBITDA and the
maintenance of net income.
(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.
(c) On January 16, 1998, the Company secured a mortgage with a lending
institution in the amount of $675,000 for the building and land
acquired in the purchase of Benham. The mortgage is payable over ten
years at a fixed rate of 8.125%. This mortgage is secured by a first
lien on the premises and an assignment of rents and leases on the
premises.
(9) Equipment Notes Payable
-----------------------
Notes payable at December 31, 1998 and 1997 consist of the following:
1998 1997
---- ----
Various secured equipment financing notes, payable
In monthly installments aggregating $12,400 and
$48,857, respectively, including interest at 8.2%
maturing from October 1999 through September
2000 secured by equipment with a net book value
of $389,681 at December 31, 1998 $177,273 1,861,055
F-13
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 and two vice presidents -- 23,300
Other -- 14,908
----- ------
177,273 1,899,263
Less current maturities 123,948 451,403
------- -------
$ 53,325 1,447,860
======== =========
(10) Leases
------
The Company is obligated under several capital leases for certain
machinery and equipment that expire at various dates during the next
seven years. At December 31, 1998 and 1997, the gross amount of plant
and equipment and related accumulated amortization recorded under
capital leases were as follows:
1998 1997
---- ----
Machinery and equipment $ 7,921,301 6,201,998
Less accumulated amortization 2,051,589 1,341,922
--------- ---------
$ 5,869,712 4,860,076
========= =========
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,
1998, 1997 and 1996 was $1,162,154, $1,034,416, and $900,442,
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, 1998 are:
Capital Operating
Leases Leases
------ ------
Year ending December 31:
1999 $ 1,817,273 1,163,492
2000 1,542,991 890,629
2001 1,122,786 588,276
2002 781,570 462,546
2003 350,100 385,023
2004 and thereafter 612,675 1,044,000
------- ---------
Total minimum lease payments 6,227,395 4,533,966
========= =========
Less amount representing interest (at
rates ranging from 5.9% to 10.5%) 849,199
-------
F-14
Net principal portion 5,378,196
Less portion due within one year 1,433,328
---------
Long-term portion $ 3,944,868
=========
Liabilities under certain capital leases are personally guaranteed by the
president and two vice-presidents.
In 1998, the Company traded in a printing press, which was previously
financed by an equipment note through GE Capital Public Finance ("GECPF"),
for a new press. The carrying value of the old press, approximately
$1,489,000, approximated the related obligation, and accordingly no gain or
loss was recognized. In connection with the transaction, the Company
entered into a seven year capital lease arrangement with the Suffolk County
Industrial Development Association ("SCIDA") and GECPF. The lease contains
certain provisions limiting the Company's capital expenditures in Suffolk
County over the next three years and certain debt covenants consistent with
those contained in the Company's revolving credit agreement with Key Bank,
NA. The initial carrying value of the new press and the net present value
of the related capital lease obligation is $2,003,657.
In 1998, the Company also converted three of its capital lease obligations
with variable rates to fixed rates through an interest rate swap agreement
with an affiliate of the lessor. The present value of these three leases as
of December 31, 1998, was $1,933,325.
(11) Stockholders' Equity
--------------------
(a) Stock Options
-------------
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, 1998,
there were 214,355 additional shares available for grant under the Plan.
Changes in options outstanding are as follows:
Weighted-average
Shares exercise price
------ --------------
Outstanding December 31, 1995 ................. 62,500 $ 4.13
Granted ....................................... 61,000 2.89
------
Outstanding December 31, 1996 ................. 123,500 3.51
Granted ....................................... 52,000 4.66
------
Outstanding December 31,1997 .................. 175,500 3.85
Granted ....................................... 110,145 4.06
-------
Outstanding December 31, 1998 ................. 285,645 3.93
=======
Exercisable at December 31, 1998 .............. 177,500 $ 3.86
======= ========
The weighted average remaining life of options outstanding as of December
31, 1998, was 7.25 years.
F-15
The assumptions used in determining the weighted average fair value of
options granted are as follows:
1998 1997 1996
---- ---- ----
Weighted average fair value $ 2.91 2.61 1.43
Divided yield --- --- ---
Risk free interest rate 5.73% 5.99% 6.49%
Stock volatility 59% 63% 31%
Expected option Life 9.77 5.19 9.80
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:
1998 1997 1996
---- ---- ----
Net income:
As reported $2,864,427 2,158,788 1,453,986
Pro forma $2,744,554 2,116,869 1,368,329
Net income per share:
As reported: basic and diluted
$ .52 .40 .29
Pro forma: basic and diluted
$ .50 .39 .27
(b) Warrants
--------
The Company has 1,242,105 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 per share equals
or exceeds $9.50 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 1998, third parties exchanged 922,300 Class A warrants for 108,505
shares of common stock, at a ratio similar to the 1997 exchange offer.
During 1996, 168,000 Class A warrants were repurchased for $32,400. During
1998, 100,000 Class A warrants were repurchased for $34,178.
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, 1999. The exercise price of the Class A warrants
contained in the Units is $5.50 per share.
F-16
(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 for (benefit of) income taxes for the years ended
December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996
---- ---- ----
Current
Federal $ 1,484,000 1,204,000 931,400
State 256,000 324,000 228,000
------- ------- -------
1,740,000 1,528,000 1,159,400
Deferred:
Federal 200,000 (79,000) (66,640)
State (39,000) (10,000) (11,760)
------- ------- -------
161,000 (89,000) (78,400)
------- ------- -------
$ 1,901,000 1,439,000 1,081,000
========= ========= =========
The provision for income taxes for the years ended December 31, 1998, 1997,
and 1996 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.
The tax effects of temporary differences that give rise to a significant
portion of the net deferred tax liability at December 31, 1998 and 1997 are
as follows:
1998 1997
---- ----
Deferred tax assets:
Inventory valuation $ 44,000 38,000
Allowance for doubtful accounts 387,000 176,000
Uniform cost capitalization for inventory 40,000 33,000
Accrued vacation 143,000 134,000
Accrued salaries and commissions 68,000 10,000
Sales return allowance 30,000 23,000
Investment tax credit carryforwards 457,000 476,000
------- -------
Total deferred tax assets 1,169,000 890,000
Less valuation allowance 206,000 341,000
-------- -------
Net deferred tax assets 963,000 549,000
F-17
Deferred tax liability:
Accelerated depreciation for
tax purposes (1,323,000) (748,000)
--------- --------
Net deferred tax liability $ 360,000 199,000
======= =======
The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $206,000 and $341,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 was a decrease of
$135,000. 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, 1998.
At December 31, 1998, the Company has available New York State investment
tax credit carryforwards aggregating approximately $693,000 expiring
through 2013.
(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, 1998, 1997 and 1996, and a
security deposit of $115,000 paid on the lease is included in security
deposits and other assets at December 31, 1998.
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, as amended, to
provide three of its shareholders a minimum annual fee of $37,333 through
August 31, 2001. The aggregate expense under these agreements was $111,999,
$111,999 and $132,412 for 1998, 1997 and 1996, 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
F-18
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 $115,800, $123,500, and $117,700 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(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 is 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 their carrying values
based on the related interest rates compared to rates currently available
to the Company.
(18) Business and Credit Concentrations
----------------------------------
Most of the Company's customers are located in the northeastern United
States. No one customer accounted for more than 10% of the Company's sales
for 1998, 1997, and 1996. At December 31, 1998 and 1997, four customers
(aggregating 35%) and three customers (aggregating 20%) each accounted for
more than 5% of the net accounts receivable balance, respectively.
The Company generally grants credit based upon analysis of the customer's
financial position and previously established buying and selling patterns.
(19) Unaudited Quarterly Financial Information
-----------------------------------------
The following is a summary of unaudited quarterly operating results for
fiscal 1998 and 1997 (in thousands, except per share amounts):
1998
----
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Net sales $ 12,612 14,306 15,674 16,290
Gross profit 2,897 3,840 4,448 4,614
Net income 118 632 951 1,163
Net income per share:
Basic and diluted .02 .12 .17 .21
=== === === ===
1997
----
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
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 and diluted .09 .05 .15 .11
=== === === ===
F-19
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
In accordance with General Instruction G(3) to Form 10-K, except as
indicated in the following sentence, the information called for by Items 10, 11,
12 and 13 is incorporated by reference from the Registrant's definitive proxy
statement pursuant to Regulation 14A for the Registrant's 1999 Annual Meeting of
Stockholders. As permitted by General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K, the information on executive
officers called for by Item 10 is included in Part I of this Annual Report.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed with this Report:
(1) Financial Statements. (See Item 8 above.) Disc Graphics, Inc.
Consolidated Financial Statements for each of the three years in the
three-year period ended December 31, 1998.
(2) Financial Statement Schedules. (See Item 8 above.)
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits: See Exhibit Index included elsewhere in this Report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of 1998.
(c) Exhibits. See Exhibit Index included elsewhere in this Report.
(d) Financial Statement Schedules. See Items 8 and 14(a)(2) above.
23
<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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 Period
<S> ................. <C> <C> <C> <C> <C>
For the year ended December 31, 1996: .......... 494,000 497,000 (147,000) 844,000
Allowance for doubtful accounts
For the year ended December 31, 1997: .......... 844,000 527,000 (229,000) 20,000(2) 1,162,000
Allowance for doubtful accounts
For the year ended December 31, 1998: ..........1,162,000 403,000 (233,000) 1,332,000
Allowance for doubtful accounts
</TABLE>
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries
(2) Allowance for doubtful accounts of acquired business
24
EXHIBIT INDEX
Exhibit Description
2 Agreement and Plan of Merger dated as of May 8, 1995 between the
Registrant and Old Disc (filed as Exhibit 2.1 to the Form S-4
Registration Statement, Amendment No. 1 dated August 31, 1995 [File
No. 33-94068]*).
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 8-A, filed June 21, 1996*).
4.a Redeemable Warrant Agreement between the Registrant and American Stock
Transfer & Trust Company, as warrant agent, including the form of
Certificates representing the Class A Warrants (filed as Exhibit 4.3
to the Form S-1 Registration Statement, declared effective November 9,
1993 [File No. 33-62980]*).
4.b Form of Merger Warrants, with Schedule indicating particular terms of
each of 60 individual warrants (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.c 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]*).
4.d Agreement dated as of October 27, 1995 between certain stockholders of
the Registrant and certain stockholders of Old Disc, a New York
corporation (filed as Exhibit 4.h to the Current Report on Form 8-K
dated October 27, 1995, as amended by the Form 8-K/A Amendment No. 1
thereto*).
4.e 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.f Option to purchase 50,000 shares in favor of Jeffrey J. Bowe, dated
October 24, 1997 (filed as an Exhibit to the Registrant's Form 10-K
for the fiscal year ended December 31, 1997*).
9.a Voting and Registration Rights Agreement dated October 30, 1995 among
the Registrant and its shareholders listed in Exhibit 1 thereto (filed
as Exhibit 4.b to the Current Report on Form 8-K dated October 27,
1995, as amended by the Form 8-K/A Amendment No.1 thereto*).
25
10.a Security Agreement dated February 26, 1997 between the Registrant and
KeyBank National Association (filed as Exhibit 10.a to Registrant's
Form 10-K for the fiscal year ended December 31, 1996*).
10.b Asset Purchase Agreement dated as of May 17, 1996, by and among
Registrant, Pointille, Inc. and the shareholders of Pointille (filed
as Exhibit 2 to the Current Report on Form 8-K dated May 18, 1996*).
10.c 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.d 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.e Agreement of Lease, dated as of December 1, 1992 between Registrant
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.f Agreement of Lease, dated as of September 15, 1993 between Registrant
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.g Agreement of Lease, dated as of June 14, 1995 between Disc Graphics
Label Group, Inc. and Kertzner Associates, Ltd. (filed as an Exhibit
to the Registration Statement on Form S-4, File No. 33-94068, declared
effective on October 30, 1995*).
10.h Form of Employment Agreement, dated June 28, 1995, between Registrant
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.i Form of Employment Agreement, dated June 28, 1995, between Registrant
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.j Form of Employment Agreement, dated June 28, 1995, between Registrant
and Steven Frey (filed as Exhibit to the Registration Statement on
Form S-4, File No. 33-94068 declared effective October 30, 1995*).
10.k Asset Purchase Agreement between Registrant and Benham Press, Inc.
dated as of September 19, 1997 (filed as an Exhibit to the
Registrant's Form 10-K for the fiscal year ended December 31, 1997*).
26
10.l Employment Agreement between Registrant and Jeffrey J. Bowe dated as
of October 24, 1997 (filed as an Exhibit to the Registrant's Form 10-K
for the fiscal year ended December 31, 1997*).
10.m $675,000 Mortgage and Security Agreement between Registrant and
KeyBank National Association dated January 16, 1998 (filed as an
Exhibit to the Registrant's Form 10-K for the fiscal year ended
December 31, 1997*).
10.n Amended and Restated Credit Agreement dated December 1, 1998 between
the Registrant and KeyBank National Association.**
10.o Borrower's Confirmation of Security Agreement dated December 1, 1998
between the Registrant and KeyBank National Association.**
21.1 Subsidiaries of the Company.**
23 Consent of Independent Accountants.**
25.1 Power of Attorney (included in the signature page of this Report).**
27 Financial Data Schedule.**
*Document previously filed and incorporated herein by reference.
**Document filed herewith.
27
Signatures and Power of Attorney
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 15th day of
March, 1999.
DISC GRAPHICS, INC
By: /s/Donald Sinkin
----------------
Donald Sinkin, Chairman of
the Board, Chief Executive
Officer and President
(Principal Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Donald Sinkin, Margaret M.
Krumholz and Frank A. Bress, or any of them, with full power to act, his or her
attorney-in-fact, with the power of substitution for him or her in any and all
capacities, to sign any or all amendments to this report, and to file the same
with the Securities and Exchange Commission, hereby ratifying and confirming
that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.
28
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 15, 1999 by the following persons in the
capacities indicated:
Signature Title
- --------- -----
/s/Donald Sinkin Chairman of the Board, Chief
- ----------------- Executive Officer and President
Donald Sinkin (Principal Executive Officer)
/s/Stephen Frey Senior Vice President of Operations,
- ---------------- Secretary and Director
Stephen Frey (Principal Operating Officer)
/s/Margaret Krumholz Chief Financial Officer and Senior
- -------------------- Vice President of Finance
Margaret Krumholz (Principal Accounting Officer)
/s/John Rebecchi Senior Vice President of Sales and
- ----------------- Marketing and Director
John Rebecchi
s/Frank A. Bress Vice President for Legal Affairs and
- ----------------- General Counsel
Frank A. Bress
/s/Daniel Levinson Director
- -------------------
Daniel Levinson
/s/Seymour W. Zises Director
- --------------------
Seymour W. Zises
/s/Mark L. Friedman Director
- ---------------------
Mark L. Friedman
29
$10,000,000
AMENDED AND RESTATED
CREDIT AGREEMENT
December 1, 1998
between
DISC GRAPHICS, INC.
and
KEYBANK NATIONAL ASSOCIATION
AMENDED AND RESTATED CREDIT AGREEMENT dated December 1, 1998 between
Disc Graphics, Inc., 10 Gilpin Avenue, Hauppauge, New York 11788, a Delaware
corporation ("Borrower") and KeyBank National Association, 1377 Motor Parkway,
Islandia, New York 11788, a national banking association (the "Bank").
WHEREAS, Borrower and the Bank are parties to a credit agreement dated
February 26, 1997 (the "Prior Credit Agreement"); and
WHEREAS, Borrower desires to modify and extend the terms of the Prior
Credit Agreement; and WHEREAS, the Bank is willing to do in accordance with the
terms provided below; NOW, THEREFORE, in consideration of the foregoing, the
parties agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS.
Section 1.01. Definitions. As used in this Agreement, the following
terms have the following meanings:
"Acquisition" means any transaction pursuant to which Borrower or any
of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any corporation, partnership,
limited liability company or other business organization, or any entity which is
not then a Subsidiary of Borrower, pursuant to a solicitation of tenders
therefor, or in one or more negotiated block, market or other transactions not
involving a tender offer, or a combination of any of the foregoing, or (b) makes
any entity not then a Subsidiary of Borrower a Subsidiary of Borrower, or causes
any such entity to be merged into or purchased by Borrower or any of its
Subsidiaries, in any case pursuant to a merger, purchase of assets or any
reorganization providing for the delivery or issuance to the holders of such
entity's then outstanding securities, in exchange for such securities, of cash
or securities of Borrower or any of its Subsidiaries, or a combination thereof,
or (c) purchases all or substantially all of the business or assets of any
entity.
"Additional Costs" shall have the meaning given to that term in
Section 4.01 hereof.
"Affiliate" means, with respect to any Person, any Person (a) that
directly or indirectly controls, or is controlled by, or is under common control
with, such Person, (b) that directly or indirectly beneficially owns or holds 5%
or more of any class of voting stock of such Person, (c) 5% or more of the
voting stock of which is directly or indirectly beneficially
- 1 -
owned or held by such Person, (d) which is a partnership or limited liability
company in which such Person is respectively a general partner or manager or (e)
who is among such Person's officers, directors joint venturers, managers or
partners. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Aggregate Outstandings" means, at a particular time, the aggregate
outstanding principal balance of all Revolving Credit Loans. "Agreement" means
this credit agreement, as amended or supplemented from time to time.
"Amortization" means amortization as determined in accordance with
GAAP.
"Bank" means KeyBank National Association and its successors and
assigns.
"Banking Day" means any day on which commercial banks are not
authorized or required to close in New York State, and whenever such day relates
to a LIBOR Loan or notice with respect to any LIBOR Loan, a day on which
dealings in dollar deposits are also carried out in the London interbank market.
"Capital Lease" means any lease which is required to be capitalized on
the balance sheet of the lessee in accordance with GAAP.
"Closing Date" means the date this Agreement has been executed by
Borrower and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" means all personal property of Borrower and its
Subsidiaries, whether now existing or hereafter arising, which is subject or
which is to be subject to the Liens granted by the Security Agreement.
"Commitment Fee" means the fee described in Section 3.01.
"Current Assets" means, at a particular date, all amounts which would,
in accordance with GAAP, be included under current assets on a consolidated
balance sheet of Borrower and its Subsidiaries as at such date.
- 2 -
"Current Debt" means, on the date of determination with respect to any
entity, that portion of such entity's Total Funded Debt (including Capital
Leases) that is due and payable within 12 months of the date of determination.
"Current Liabilities" means, at a particular date, all amounts which
would, in accordance with GAAP, be included under current liabilities on a
consolidated balance sheet of Borrower and its Subsidiaries as at such date
including, without limitation, (a) all obligations payable on demand or within
one year after the date in which the determination is made, and (b) installment
and sinking fund payments required to be made within one year after the date on
which determination is made, but excluding all such liabilities or obligations
which are renewable or extendable at the option of Borrower to a date more than
one year from the date of determination.
"Current Ratio" means the ratio of (a) Current Assets of Borrower and
its Subsidiaries, on a consolidated basis to (b) Current Liabilities of Borrower
and its Subsidiaries on a consolidated basis.
"Debt" means, with respect to any Person (a) indebtedness of such
Person for borrowed money, (b) indebtedness for the deferred purchase price of
property or services, (c) the face amount of any outstanding letters of credit
issued for the account of such Person, (d) obligations arising under acceptance
facilities, (e) guaranties, endorsements (other than for collection in the
ordinary course of business) and other contingent obligations to purchase, to
provide funds for payment, to supply funds to invest in any Person, or otherwise
to assure a creditor against loss, (f) obligations secured by any Lien on
property of such Person, (g) obligations of such Person as lessee under Capital
Leases and (h) indebtedness of such Person evidenced by a note, bond, indenture
or similar instrument.
- 3 -
"Debt Coverage Ratio" means (a) the consolidated EBITDA of Borrower
and its Subsidiaries, minus any cash Dividends paid or declared to be paid to
shareholders of Borrower during such period, (b) divided by the sum of the
Current Debt and Interest Expense of Borrower and its Subsidiaries all on a
consolidated basis, as determined at the end of each fiscal quarter, based upon
Borrower's financial statements delivered in accordance with Section 8.08 for
the period of 12 months preceding the date of determination.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and,
to the extent permitted by law, any other amount payable by Borrower under this
Agreement or the Note a rate per annum equal to 2% above the rate of interest
otherwise applicable to such Loan or other amount.
"Depreciation" means depreciation as determined in accordance with
GAAP.
"Dividends" means, for any period, dividends paid by Borrower or any
Subsidiary during such period.
"EBITDA" means, for any period, the sum of (a) Net Income, (b) income
taxes paid or payable to any government or government instrumentality, (c) all
Interest Expense paid or accrued on any Debt, (d) Depreciation and (e)
Amortization during such period.
"Environmental Laws" means (i) the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), (ii) the Resource
Conservation and Recovery Act ("RCRA"), (iii) the Federal Water Pollution
Control Act, (iv) the Clean Air Act, (v) the Toxic Substances Control Act, (vi)
the Safe Drinking Water Act, (vii) the Occupational Safety and Health Act of
1970, and (viii) the New York State Environmental Conservation Law ("ECL"),
Articles 1 through 71, (ix) the Hazardous Material Transportation Act, and (x)
any so-called federal, state or local "Superfund" or "Superlien" laws and (b)
any and all other laws, rules or regulations, relating to or imposing liability,
including without limitation (i) strict liability, (ii) standards of conduct
concerning hazardous materials, (iii) protection of the environment (including,
without limitation, air, surface water, ground water, or soil), including,
without limitation, any of the same relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
- 4 -
"ERISA Affiliate" means any corporation or trade or business which is
a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as Borrower or is under common control (within the
meaning of Section 414(c) of the Code) with Borrower.
"Event of Default" has the meaning given such term in Section 11.01.
"Extension and Modification Fee" means the fee described in Section
2.09(b) hereof.
"Facility Fee" means the fee described in Section 2.09(a) hereof.
"Forfeiture Proceeding" means the commencement of any prejudgment
action or proceeding affecting Borrower or any of its Subsidiaries pursuant to
any statute, rule or regulation which permits any governmental agency or
instrumentality to obtain a prejudgment seizure or forfeiture of any of their
property.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
Section 7.05.
"Guaranty" means the Guaranty in the form of Exhibit B executed by
each of the Guarantors, secured by a Security Agreement.
"Guarantor Confirmation Agreement" means the Guarantor Confirmation
Agreement in the form of Exhibit B-1, to be executed by each of the Guarantors.
"Guarantors" means Four Seasons Litho, Inc., Disc Graphics Label
Group, Inc., and Cosmetic Sampling Technologies, Inc., each a Subsidiary of
Borrower and each a party to the Guaranty and the Guaranty Confirmation.
Guarantors shall include each future Subsidiary which is required to become a
party to the Guaranty in accordance with Section 9.10 hereof.
"Hazardous Substance" means any substance, waste or material regulated
under by any Environmental Law, and any substance which, due to its toxicity or
reactivity (as determined by any court, governmental or regulatory authority or
agency having jurisdiction or interpretative power thereon), poses a threat to
human health or the environment, including, but not limited to, all materials,
wastes, substances, pollutants and contaminants from time to time defined or
classified as such under any Environmental Law.
"Interest Expense" means interest expense of Borrower and its
Subsidiaries on a consolidated basis for a particular period as reflected in its
financial statements and calculated in accordance with GAAP.
- 5 -
"Interest Period" means the period commencing on the date a LIBOR Loan
is made (or, with respect to a LIBOR Loan that represents the continuation of a
previous LIBOR Loan, the day immediately following the last day of the Interest
Period of such previous LIBOR Loan), and ending, as Borrower may select on the
30th, 60th or 90th day thereafter, provided that no Interest Period shall extend
beyond the Revolving Credit Termination Date.
"LIBOR" means, for any LIBOR Loan, the rate per annum (rounded upwards
if necessary to the nearest 1/16 of 1%) quoted by the Bank two Banking Days
prior to the first day of the Interest Period for such Revolving Credit Loan for
the offering to leading banks in the London interbank market of U.S. dollar
deposits in immediately available funds, for a period, and in an amount,
comparable to such Interest Period and principal amount of the LIBOR Loan which
shall be outstanding during such Interest Period.
"LIBOR Loan" means any Revolving Credit Loan when and to the extent
the interest rate therefor is determined on the basis of LIBOR.
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, charge, conditional sale, title
retention agreement, Capital Lease or other encumbrance or similar right of
others, or any agreement to give any of the foregoing.
"Loan" means any loan made by the Bank pursuant to Section 2.01 or
3.01 hereof.
"Loan Documents" means this Agreement, the Notes, the Guaranty, the
Guarantor Confirmation Agreement, the Security Agreements, the Security
Agreement Confirmations, the Notice of Borrowing and all other documents or
instruments executed in connection herewith or therewith.
"Margin" means (a) if Borrower's Debt Coverage Ratio is equal to or
less than 1.30:1.0, 150 basis points per annum, (b) if Borrower's Debt Coverage
Ratio is greater than 1.30:1.0 but less than or equal to 2.25:1.0, 125 basis
points per annum, and (c) if Borrower's Debt Coverage Ratio is greater than
2.25:1.0, 100 basis points per annum.
"Multiemployer Plan" means a Plan defined as such in Section
4001(a)(3) of ERISA to which contributions have been made by Borrower or any
ERISA affiliate and which is covered by Title IV of ERISA.
"Net Income" means, with respect to any entity for any period, such
entity's net income after taxes for such period as reflected on such entity's
financial statements.
"Notes" mean the Revolving Credit Note and the Term Note.
- 6 -
"Notice of Borrowing" means the document signed by an officer of
Borrower in the form annexed as Exhibit F.
"Original Closing Date" shall mean February 26, 1997.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, limited liability company, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by Borrower or any ERISA
Affiliate and which is covered by Title IV of ERISA or to which Section 412 of
the Code applies provided that such term shall not include plans terminated
prior to the date hereof.
"Prime Rate" means that rate of interest from time to time determined
or announced by the Bank at its Principal Office from time to time as its prime
lending rate. The Prime Rate is not necessarily the lowest rate of interest
charged by the Bank on loans or other credit relationships.
"Prime Rate Loans" mean any Revolving Credit Loan when and to the
extent the interest rate for such Revolving Credit Loan is determined in
relation to the Prime Rate.
"Principal Office" means the principal office of the Bank, presently
located at 66 South Pearl Street, Albany, New York.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulatory Change" means any change after the date of this Agreement
in federal, state, municipal or foreign laws or regulations (including
Regulation D) or the adoption or making after such date of any interpretations,
directives or requests applying to a class of banks including the Bank of any
federal, state, municipal or foreign laws or regulations (whether or not having
the force of law) by any court or governmental or monetary authority charged
with the interpretation or administration thereof.
"Reportable Event" means any of the events set forth in Section
4043(b) of ERISA as to which events the PBGC by regulation has not waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section
- 7 -
302 of ERISA shall be a Reportable Event regardless of any waivers given under
Section 412(d) of the Code.
"Revolving Credit Commitment" means the obligation of the Bank to
extend revolving credit to Borrower in accordance with the terms hereof in the
aggregate principal amount not to exceed $10,000,000, as such amount may be
reduced or otherwise modified from time to time in accordance with the terms
hereof.
"Revolving Credit Facility" means the Revolving Credit Facility
provided for in Article II hereof.
"Revolving Credit Loans" mean any Loan made by the Bank pursuant to
Section 2.01 hereof.
"Revolving Credit Note" means a promissory note of Borrower in the
form of Exhibit A-1 hereto evidencing the Revolving Credit Loans made by the
Bank hereunder.
"Revolving Credit Termination Date" means the earlier of (i) the date
on which the Revolving Credit Loan is paid in full and the Revolving Credit
Commitments shall terminate hereunder and the obligations of Borrower in
connection therewith have been satisfied or (ii) February 25, 2001 unless such
date is not a Banking Day, then the next succeeding Banking Day.
"Security Agreement" means, with respect to Borrower, the Security
Agreement in substantially the form of Exhibit C-I, and with respect to each
Guarantor, in the form of Exhibit C-2, delivered by Borrower under the terms of
this Agreement.
"Security Agreement Confirmations" means, with respect to Borrower,
the Confirmation of Security Agreement in substantially the form of Exhibit C-3,
and with respect to each Guarantor, the Confirmation of Security Agreement, in
the form of Exhibit C-4, to be delivered by Borrower under the terms of this
Agreement.
"Solvent" means, when used with respect to any Person on a particular
date, that on such date (a) the fair saleable value of its assets is in excess
of the total amount of its liabilities, including, without limitation, the
reasonably expected amount of such Person's obligations with respect to
contingent liabilities, (b) the present fair saleable value of the assets of
such Person is not less than the amount that will be required to pay the
probable liability of such Person on its Debts as they become absolute and
matured, (c) such Person does not intend to and does not believe that it will
incur Debts or liabilities beyond such Person's ability to pay as such Debts and
liabilities mature and (d) such Person is not engaged in business or a
transaction, for which such Person's property, would constitute an unreasonably
small capital.
- 8 -
"Subsidiary" means, as to any Person, any corporation, partnership,
limited liability company or other business organization or entity of which at
least a majority of the securities or other ownership interests having ordinary
voting power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by such Person.
"Tangible Net Worth" means, at any particular date, the amount of
excess of Total Assets over Total Liabilities which would, in accordance with
GAAP, be included under shareholders' equity on a consolidated balance sheet of
Borrower and its Subsidiaries as at such date, excluding, however, from the
determination of Total Assets all intangible assets, including, without
limitation, organizational expenses, patents, trademarks, copyrights, goodwill,
covenants not to compete, research and developmental costs, training costs,
treasury stock, deferred charges and any loans receivable from officers or
Affiliates.
"Term Loan" means the Loan to Borrower pursuant to Section 3.01.
"Term Loan Maturity Date" means February 25, 2005.
"Term Loan Note" means the promissory note of Borrower in the form of
Exhibit A-2 hereto evidencing a Term Loan made by the Bank hereunder.
"Total Assets" means, at a particular date, all amounts which would,
in accordance with GAAP, be included under assets on a consolidated balance
sheet of Borrower and its Subsidiaries as at such date.
"Total Funded Debt" means, with respect to any Person, (a)
indebtedness of such Person for borrowed money, (b) obligations of such Person
as lessee under Capital Leases, (c) indebtedness of such Person evidenced by a
note, bond, indenture or a similar instrument evidencing an obligation to repay
money and (d) the face amount of any outstanding letters of credit issued for
the account of such Person.
"Total Liabilities" means, at a particular date, all amounts which
would, in accordance with GAAP, be included under liabilities on a consolidated
balance sheet of Borrower and its Subsidiaries as at such date.
"Unfunded Vested Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all vested benefits under the Plan
exceeds the fair market value of all Plan assets allocable to such benefits, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of Borrower or
any ERISA Affiliate to the PBGC or the Plan under Title IV of ERISA.
- 9 -
Section 1.02. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
ARTICLE 2. REVOLVING CREDIT FACILITY
Section 2.01. Revolving Credit Loans.
(a) Subject to the terms and conditions of this Agreement, the Bank
agrees to make Revolving Credit Loans to Borrower from time to time from and
including the date hereof to but excluding the Revolving Credit Termination Date
up to but not exceeding at any one time outstanding the amount of its Revolving
Credit Commitment; provided, that no Revolving Credit Loan shall be made if,
after giving effect to such Revolving Credit Loan, the Aggregate Outstandings at
the time would exceed the Revolving Credit Commitment in effect on such date.
The Revolving Credit Loans may be Prime Rate Loans or LIBOR Loans; provided,
however, that during the occurrence and continuance of an Event of Default, the
Bank shall have no obligation to make any Revolving Credit Loans. Subject to the
foregoing limits, Borrower may borrow, repay and reborrow, on or after the date
hereof and prior to the Revolving Credit Termination Date, all or a portion of
the Revolving Credit Commitment hereunder.
(b) If at any time for any reason the Aggregate Outstandings exceed
the amount of the Revolving Credit Commitment, Borrower shall pay the amount of
such excess to the Bank immediately on demand.
Section 2.02. The Revolving Credit Note. The Revolving Credit Loans
shall be evidenced by a single Revolving Credit Note in favor of the Bank
substantially in the form of Exhibit A-1 with appropriate insertions, duly
executed and completed by Borrower. The Bank is authorized to record the date,
type and amount of each Revolving Credit Loan, the date and amount of each
payment or prepayment of principal thereof, the date of each interest rate
conversion pursuant to Section 2.05 and the principal amount subject thereto and
the Interest Period and interest rate with respect thereto in its records or on
the schedules annexed to and constituting a part of the Revolving Credit Note,
and, absent manifest error, any such recordation shall constitute conclusive
evidence of the information so recorded; provided that the failure to make any
such recordation shall not in any way affect Borrower's obligation to repay the
Revolving Credit Loans. The Revolving Credit Note shall (a) be dated the date
hereof, (b) mature on the Revolving Credit Termination Date and (c) bear
interest from and including the date hereof on the unpaid principal amount
thereof from time to time outstanding as provided herein.
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Section 2.03. Use of Proceeds.
(a) Borrower shall use the proceeds of the Revolving Credit Loans to
repay existing bank indebtedness, for general working capital purposes, and
subject to the sublimit described in Section 2.08, to finance Acquisitions. No
part of the proceeds of any of the Loans will be used for any purpose which
violates the provisions of Regulation G, T, U or X of the Board of Governors of
the Federal Reserve System as in effect on the date of making such Loans.
(b) Borrower shall indemnify the Bank and hold it harmless from and
against any and all liabilities, losses, damages, costs and expenses (including,
without limitation, the reasonable fees and disbursements of counsel for the
Bank in connection with any investigative, administrative or judicial
proceeding, whether or not the Bank is designated a party thereto) which may be
incurred by the Bank, relating to or arising out of this Agreement or any actual
or proposed use of proceeds of Loans hereunder; provided, that the Bank shall
not have the right to be indemnified hereunder for its own gross negligence or
willful misconduct.
Section 2.04. Borrowing Procedures for Revolving Credit Loans.
Borrower may request a borrowing under the Revolving Credit Commitment as
provided in Section 4.01. Not later than 2:00 p.m. New York City time on the
date of such borrowing as stated in the Notice of Borrowing, subject to the
conditions of this Agreement, the Bank shall make available to Borrower, in
immediately available funds, the amount of such Revolving Credit Loan by
crediting a designated account of Borrower maintained with the Bank.
Section 2.05. Interest on Revolving Credit Loans.
(a) Base Rate Loans. Borrower shall pay interest on the outstanding
and unpaid principal amount of each Prime Rate Loan made under this Agreement at
a fluctuating rate per annum equal to the Prime Rate from time to time in
effect. Each change in the interest rate shall take effect simultaneously with
the corresponding change in the Prime Rate. Borrower shall pay interest on Prime
Rate Loans in arrears on the first day of each month and on the Revolving Credit
Termination Date, calculated on the basis of the actual number of days elapsed
divided by a 360 day year. Any principal amount not paid when due (at maturity,
on acceleration, or otherwise) shall bear interest thereafter until paid at the
Default Rate.
(b) LIBOR Loans. Borrower shall pay interest on the outstanding
principal amount of each LIBOR Loan made under this Agreement at a fixed rate
equal to LIBOR plus the applicable Margin. Borrower shall pay interest on LIBOR
Loans calculated on the basis of the actual number of days elapsed divided by a
360 day year. Any principal amount not paid when due (at maturity or
acceleration or otherwise) shall bear interest thereafter until paid at the
Default Rate. Accrued interest on LIBOR Loans shall be due and payable in
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arrears upon any payment of principal and on the last day of the Interest Period
with respect thereto; provided that, after an Event of Default, interest shall
accrue at the Default Rate and shall be due and payable from time to time on
demand of the Bank. Any principal amount of LIBOR Loans not paid when due (at
maturity, on acceleration, or otherwise) shall bear interest thereafter until
paid at such Default Rate.
(c) Adjustments to Margin. The applicable Margin shall be adjusted for
all LIBOR Loans based upon Borrower's Debt Coverage Ratio as reflected in its
financial statements delivered to the Bank from time to time as required
hereunder. Once determined, the Margin shall remain in effect until the fifth
Banking Day after the Bank's receipt on or before the dates set forth in Section
8.08 of the relevant financial statements, whereupon if appropriate based upon
the then existing Debt Coverage Ratio, the Margin shall adjust for all new LIBOR
Loans and for any continuation of an existing LIBOR Loan at the end of an
Interest Period. If Borrower delivers its annual audited statements more than 90
days after the end of its fiscal year and if the Debt Coverage Ratio as reported
in such financial statements is lower than the Debt Coverage Ratio as reported
in Borrower's quarterly financial statements for the third quarter of such
fiscal year with the result that a higher Margin would apply, Borrower shall pay
the Bank, within ten Banking Days of demand, an amount equal to the excess of
the interest that would have been paid at such higher rate over the interest
actually paid during the relevant period between March 30th and the date the
annual statements are delivered. In no event shall Borrower receive a refund of
interest paid to the Bank under the provision of this Section.
(d) Interest Periods for LIBOR Loans. In the case of each LIBOR Loan,
Borrower shall select an Interest Period of any duration in accordance with the
definition of Interest Period in Section 1.01, subject to the following
limitations: (a) no Interest Period shall have a duration less than one month,
and if any such proposed Interest Period would otherwise be for a shorter
period, such Interest Period shall not be available and (b) if an Interest
Period would end on a day which is not a Banking Day, such Interest Period shall
be extended to the next Banking Day, unless such Banking Day would fall in the
next calendar month in which event such Interest Period shall end on the
immediately preceding Banking Day. Any Interest Period which would otherwise
extend beyond the Revolving Credit Termination Date shall end on the Revolving
Credit Termination Date.
(e) Conversions. Upon the expiration of an Interest Period for any
LIBOR Loan, or any portion thereof, such LIBOR Loan or portion thereof shall be
automatically converted to a Prime Rate Loan except to the extent that such
Revolving Credit Loan shall be repaid hereunder or shall be required to be paid
hereunder or unless Borrower shall have notified the Bank, as provided in
Section 4.01 hereof, of its intention to continue such LIBOR Loan or any portion
thereof as a LIBOR Loan. Subject to the following conditions and to the terms
and conditions of this Agreement, Borrower may convert any Revolving Credit Loan
or portion thereof to a different type of Revolving Credit Loan:
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(i) if less than all Revolving Credit Loans at the time
outstanding shall be converted, the notice given by Borrower to the Bank shall
specify the aggregate amount of Revolving Credit Loans in each case to be
converted;
(ii) in the case of a conversion of less than all outstanding
Revolving Credit Loans, the aggregate principal amount of Revolving Credit Loans
to be converted shall not be less than $50,000 (and if greater in integral
multiples of $10,000);
(iii) no Revolving Credit Loan may be converted to a LIBOR Loan
less than one month before the Revolving Credit Termination Date;
(iv) a LIBOR Loan may be converted to a Prime Rate Loan only on
the last day of an Interest Period; and
(v) no Revolving Credit Loan or portion thereof may be converted
to a LIBOR Loan during the occurrence and continuance of an Event of Default.
Section 2.06. Changes of Commitment. Borrower may reduce or terminate
the amount of unused Revolving Credit Commitment from time to time but not more
than four times during the term of this Agreement or more than once during any
calendar year by giving notice to the Bank of each such reduction or termination
to the Bank as provided in Section 4.01. Any partial reduction shall be in a
minimum aggregate amount of $1,000,000 or, if greater, in integral multiples of
$250,000. Once reduced or terminated, the Revolving Credit Commitment may not be
reinstated.
Section 2.07. Minimum Amounts. Except for borrowings which exhaust the
full remaining amount of the Revolving Credit Commitment, and prepayments (in
the case of Prime Rate Loans only) which result in the prepayment of all Loans,
each borrowing and each prepayment of principal shall be at least $50,000, and
if greater, in integral multiples of $10,000.
Section 2.08. Acquisitions. Subject to the terms and conditions
hereof, the Bank agrees to make one or more Revolving Credit Loans to finance
Borrower's Acquisitions, provided that, (a) the requirements of Section 9.07 are
satisfied and (b) no Revolving Credit Loan for Acquisitions shall be permitted
if (i) an Event of Default has occurred which continues at such time, (ii) after
giving effect to such Loan, the Aggregate Outstandings at the time of such
issuance would exceed the Revolving Credit Commitment in effect on such date or
(iii) as a result of such Acquisition or the making of such Loan, an Event of
Default would occur.
Section 2.09. Fees. (a) Borrower has paid to the Bank a Facility Fee
equal to $5,000 on the Original Closing Date and shall continue to pay a
Facility Fee on each anniversary of the Original Closing Date until the
Revolving Credit Termination Date.
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(b) Borrower shall pay to the Bank an Extension and Modification Fee
equal to $5,000 on the Closing Date.
Section 2.10. Conversion to Term Loan. On the Revolving Credit
Termination Date, provided there has been no Default or Event of Default,
Borrower may convert all or a part, but not less than $2,000,000 of the
outstanding principal balance of the Revolving Credit Loans to the Term Loan,
having the terms and conditions specified in Article 3.
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ARTICLE 3. TERM LOAN.
Section 3.01. Term Loan. If Borrower exercises the option described in
Section 2.10, Borrower shall give the Bank notice three Banking Days prior to
the Revolving Credit Termination Date, and together with such notice, pay the
Bank a Commitment Fee equal to 0.5% of the amount of the Revolving Credit Loans
to be converted to a Term Loan. Subject to the terms and conditions hereof, the
Bank shall make a four year Term Loan to Borrower in the amount of the Aggregate
Outstandings or such lesser amount permitted under Section 2.10 at and effective
as of the Revolving Credit Termination Date.
Section 3.02. The Term Note. The Term Loan shall be evidenced by a
single promissory note of Borrower substantially in the form of Exhibit A-2
hereto, with appropriate insertions, payable to the order of the Bank and
representing the obligation of Borrower to pay the unpaid principal amount of
the Term Loan, with interest thereon as described herein. The Term Loan Note
shall (a) be dated the Revolving Credit Termination Date, mature in 48 equal
consecutive monthly installments, be payable on the first day of each month
commencing on the first day of the month following the Revolving Credit
Termination Date and ending on the Term Loan Maturity Date, and (c) bear
interest for a period from the date hereof until the Term Maturity Loan Date on
the unpaid principal amount thereof at the applicable rates per annum specified
herein. All accrued and unpaid interest and fees shall be due and payable on the
Term Loan Maturity Date.
Section 3.03. Interest on the Term Loans. Borrower shall pay interest
on the outstanding and unpaid principal balance of the Term Loan a fluctuating
rate per annum equal to (i) the Prime Rate or (ii) LIBOR plus a margin of 250
basis points. Each change in the interest rate shall take effect simultaneously
with the corresponding change in the Prime Rate. Interest on the Term Loan shall
be calculated on the basis of a 360 day year and shall be paid in arrears on the
first day of each month and on the Term Loan Maturity Date. Any principal amount
not paid when due (at maturity, on acceleration or otherwise) shall bear
interest thereafter until paid at the Default Rate. At Borrower's election made
during the period beginning on the Revolving Credit Termination Date through two
years thereafter, provided no Default or Event of Default then exists, Borrower
may effect a change in the interest rate on the Term Loan to a fixed rate from
the Prime Rate by entering into a Swap Agreement between the Borrower and the
Bank, at the rate established by exchange, through Key Capital Markets, Inc., of
the obligation evidenced by the Term Loan Note for an obligation bearing
interest at a fixed rate having a term that is equivalent to the term of the
Term Loan. The rights and obligations of Borrower and the Bank respecting such
exchange shall be set forth in a Swap Agreement to be executed between them.
ARTICLE 4. GENERAL CREDIT PROVISIONS; FEES AND PAYMENTS.
Section 4.01. Certain Notices. Borrower shall give Notice of Borrowing
to the Bank of each borrowing pursuant to Section 2.04, each prepayment pursuant
to Section 4.02,
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each conversion or continuation of LIBOR Loans pursuant to Section 2.05 and each
reduction or termination of Revolving Credit Commitment pursuant to Section
2.06. Each such notice shall be irrevocable, and shall be effective on the date
of receipt only if received by the Bank not later than 11:00 a.m., New York City
time as follows:
(a) In the case of borrowings and prepayments of Prime Rate Loans, at
least one Banking Day prior thereto;
(b) In the case of LIBOR Loans, at least three Banking Days prior
thereto;
(c) In the case of reductions or termination of the Revolving Credit
Commitment, ten days prior thereto; and
(d) In the case of conversions or continuations of Loans pursuant to
Section 2.05, three Banking Days prior thereto.
Each such notice relating to the borrowing, conversion or prepayment of a Loan
shall specify the Loans to be borrowed, converted or prepaid and the amount and
type of the Loans to be borrowed or prepaid and the date of borrowing,
conversion or prepayment (which shall be a Banking Day). Each such notice of
reduction or termination of the Revolving Credit Commitment shall specify the
amount of the Revolving Credit Commitment to be reduced or terminated.
Section 4.02. Prepayments.
(a) Borrower shall have the right at any time and from time to time to
prepay any Prime Rate Loan, in whole or in part, upon at least one Banking Day's
prior written notice to the Bank; provided, however, that each such partial
prepayment of Prime Rate Loans shall not be less than $50,000 or if greater, in
amounts which are integral multiples of $10,000. Except as required by paragraph
(b) below or on the last day of an Interest Period with respect thereto,
Borrower shall not be permitted to prepay LIBOR Loans.
(b) On the date of any reduction of the Revolving Credit Commitment as
provided in Section 2.06, Borrower shall pay or prepay so much of the Loans as
shall be necessary in order that the Aggregate Outstandings will not exceed the
Revolving Credit Commitment after giving effect to such reduction. All
prepayments of LIBOR Loans due to a reduction of the Revolving Credit Commitment
shall be subject to Section 5.05.
(c) All prepayments of principal required by paragraph (b) above shall
be applied first to Prime Rate Loans outstanding, and then to LIBOR Loans
outstanding.
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(d) All prepayments of principal shall be accompanied by the payment
of all accrued interest on the amount so prepaid and, in the case of LIBOR
Loans, by all amounts required to be paid pursuant to Section 5.05.
Section 4.03. Default Interest. Notwithstanding any other provision of
this Agreement, upon the occurrence and continuance of an Event of Default, each
Loan outstanding hereunder shall bear interest at a rate per annum equal to the
Default Rate.
Section 4.04. Payments Generally. All payments under this Agreement or
the Notes shall be made in immediately available funds not later than 1:00 p.m.
New York City time on the relevant dates specified above at the Bank's office at
1377 Motor Parkway, Islandia, New York 11788.
(a) Any payment made after such time on such due date shall be deemed
to have been made on the next succeeding Banking Day.
(b) Whenever a new Loan is to be made on a date Borrower repays any
principal of an outstanding Loan, the Bank shall apply the proceeds of such new
Loan to the payment of the principal to be repaid and only an amount equal to
the difference between the principal to be borrowed and the principal to be
repaid shall be made available by the Bank to Borrower as provided in Section
2.04 or paid by Borrower to the Bank pursuant to this Section 4.04, as the case
may be.
(c) The Bank may (but shall not be obligated to) debit the amount of
any such payment which is not made by the time specified in Section 4.04(a) to
any ordinary deposit account of Borrower with the Bank. Borrower shall, at the
time of making each payment under this Agreement or the Note, specify to the
Bank the principal or other amount payable by Borrower under this Agreement. If
Borrower fails to so specify, the payment will be applied first to interest and
then to principal, unless a Default or Event of Default has occurred and is
continuing, in which case the Bank may apply such payment as it may elect in its
sole discretion. If the due date of any payment under this Agreement or the Note
would otherwise fall on a day which is not a Banking Day, such date shall be
extended to the next succeeding Banking Day and interest shall be payable for
any principal so extended for the period of such extension.
ARTICLE 5. YIELD PROTECTION; ETC.
Section 5.01. Additional Costs.
(a) Borrower shall pay directly to the Bank from time to time on
demand such amounts as the Bank may determine (in the manner set forth in
Section 5.01(d)) to be necessary to compensate it for any increases in costs
attributable to its making or maintaining any LIBOR Loans under this Agreement
or its Note or its obligation to make any LIBOR
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Loans hereunder or any reduction in any amount receivable by the Bank hereunder
in respect of any LIBOR Loans or such obligation or capital in respect of this
Agreement (such increases in costs and reductions in amounts receivable being
herein called "Additional Costs"), resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts payable to the Bank under this
Agreement or the Revolving Credit Note in respect of any of such LIBOR Loans
(other than taxes imposed on the overall net income of the Bank for any LIBOR
Loans by the jurisdiction in which the Bank has its principal office); or (ii)
imposes or modifies any reserve, special deposit, deposit insurance or
assessment, minimum capital, capital ratio or similar requirements relating to
any extensions of credit or other assets of, or any deposits with or other
liabilities of, the Bank; or (iii) imposes any other condition affecting this
Agreement or the Note (or any of such extensions of credit or liabilities). The
Bank will notify Borrower of any event occurring after the date of this
Agreement which will entitle the Bank to compensation pursuant to this Section
as promptly as practicable after it obtains knowledge thereof by furnishing
Borrower a written statement describing the Additional Costs entitling it to
compensation hereunder and the Bank's method of allocating to Borrower such
Additional Costs. If the Bank requests compensation from Borrower under this
Section or under Section 5.01(c), Borrower may suspend the obligation of the
Bank to make Loans of the type with respect to which such compensation is
requested.
(b) Without limiting the effect of the foregoing provisions of this
Section if by reason of any Regulatory Change, the Bank either (i) incurs
Additional Costs based on or measured by the excess above a specified level of a
category of deposits or other liabilities of the Bank which includes deposits by
reference to which the interest rate on LIBOR Loans is determined as provided in
this Agreement or a category of extensions of credit or other assets of the Bank
which includes LIBOR Loans or (ii) becomes subject to restrictions on the amount
of such a category of liabilities or assets which it may hold, then, if the Bank
so elects by notice to Borrower, the obligation of the Bank to make Loans of
such type hereunder shall be suspended until the date such Regulatory Change
ceases to be in effect.
(c) Without limiting the effect of the foregoing provisions of this
Section, Borrower shall pay directly to the Bank from time to time on request
such amounts as the Bank may determine (in the manner set forth in Section
5.01(d)) to be necessary to compensate the Bank for any Additional Costs which
are attributable to the maintenance by it or any of its affiliates (pursuant to
any Regulatory Change) of capital in respect of its Loans hereunder or its
obligation to make Loans hereunder (such compensation to include, without
limitation, an amount equal to any reduction in return on assets or equity of
the Bank to a level below that which it would have achieved but for such
Regulatory Change). The Bank will notify Borrower if it is entitled to
compensation pursuant to this Section as promptly as practicable after it
obtains knowledge thereof by furnishing Borrower with a written statement
describing the Additional Costs entitling it to compensation hereunder and the
Bank's method of allocating to Borrower such Additional Costs.
- 18 -
(d) Reasonable determinations and allocations by the Bank for purposes
of the effect of any Regulatory Change pursuant to Sections 5.01(a), (b) or (c)
on its costs of making or maintaining Loans or its obligation to make Loans, or
on amounts receivable by, or the rate of return to, it in respect of Loans or
such obligation, and of the additional amounts required to compensate the Bank,
shall be conclusive absent demonstrated error.
(e) Any amounts the Bank receives pursuant to the foregoing provisions
of this Section 5.01 shall not be duplicative of compensation payable to the
Bank under Section 5.05.
Section 5.02. Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if:
(a) the Bank determines (which determination shall be conclusive
absent demonstrated error) that quotations of interest rates for the relevant
deposits referred to in the definition of "LIBOR" in Section 1.01 are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for any type of LIBOR Loans as provided in this
Agreement; or
(b) the Bank determines (which determination shall be conclusive
absent demonstrated error) that the relevant rates of interest referred to in
the definition of LIBOR in Section 1.01 upon the basis of which the rate of
interest for any type of LIBOR Loans is to be determined do not adequately cover
the cost to the Bank of making or maintaining such Loans;
then the Bank shall give Borrower prompt notice thereof, and so long as such
condition remains in effect, the obligations of the Bank to make LIBOR Loans
shall be suspended (in which case the provisions of Section 5.04 shall be
applicable).
Section 5.03. Illegality. Notwithstanding any other provision in this
Agreement, if it becomes unlawful for the Bank to honor its obligation to make
or maintain LIBOR Loans hereunder, the Bank shall promptly notify Borrower and
the Bank's obligation to make or maintain LIBOR Loans hereunder shall be
suspended until such time as the Bank may again make and maintain such affected
Loans (in which case the provisions of Section 5.04 shall be applicable).
Section 5.04. Conversion to Prime Rate Loans. If the obligations of
the Bank to make LIBOR Loans shall be suspended pursuant to any of the foregoing
Sections all Loans which would otherwise be made by the Bank as LIBOR Loans
shall be made instead as Prime Rate Loans and, if an event referred to in
Section 5.01(b) or 5.03 has occurred and the Bank so requests by notice to
Borrower, all LIBOR Loans of the Bank then outstanding shall be automatically
converted into Prime Rate Loans on the date specified by the Bank in such
notice, and, to the extent that LIBOR Loans are so made as (or converted into)
Prime Rate
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Loans, all payments of principal which would otherwise be applied to the Bank's
LIBOR Loans shall be applied instead to its Prime Rate Loans. If any LIBOR Loan
is converted to a Prime Rate Loan pursuant to this Section prior to the last day
of the Interest Period with respect to such LIBOR Loan, Borrower shall pay to
the Bank all amounts required to be paid pursuant to Section 5.05 hereof.
Section 5.05. Certain Compensation.
(a) Borrower shall pay to the Bank such reasonable amount or amounts
as shall be sufficient (in the reasonable opinion of the Bank) to compensate it
for any loss, cost or expense which the Bank determines is attributable to:
(i) Borrower's prepayment of a LIBOR Loan (whether by reason of
the mandatory or voluntary prepayment provisions of this Agreement or otherwise)
or failure to pay principal or interest on a LIBOR Loan when due; or
(ii) Borrower's failure to borrow, convert into or continue a
LIBOR Loan on the date specified therefor in the relevant notice given under
Section 4.01; or
(iii) Borrower's failure to prepay a LIBOR Loan on the date
specified therefor in the relevant notice under Section 4.02.
(b) A reasonable determination by the Bank of amounts payable pursuant
to this Section shall be conclusive absent manifest error. In the case of
prepayments of LIBOR Loans, Borrower shall pay to the Bank a prepayment premium
equal to any costs, loss or expense that it may sustain or incur as a result of
Borrower's prepaying the LIBOR Loan, including (but not limited to) the Bank's
loss of anticipated interest on such LIBOR Loan at the applicable interest rate,
or any interest or other charge payable by the Bank to others who provided funds
to the Bank to enable it to make or maintain such LIBOR Loan. In addition,
Borrower shall reimburse the Bank for all administrative costs incurred by the
Bank as a result of such prepayment.
ARTICLE 6. CONDITIONS PRECEDENT.
Section 6.01. Conditions to the Initial Borrowings. The obligations of
the Bank to make the Loans constituting the initial borrowing under 3.01, or the
Term Loan under 3.01, were subject to the conditions precedent listed below, all
of which were satisfied by the Borrower:
(a) the Bank's receipt of each of the following, in form and substance
satisfactory to the Bank and its counsel:
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(i) the Revolving Credit Note or the Term Loan Note, as
applicable, duly executed by Borrower;
(ii) a certificate of the Secretary or Assistant Secretary of
Borrower and of each Guarantor, dated the Original Closing Date or the Revolving
Credit Termination Date, as applicable, attesting to all corporate action taken
by Borrower or such Guarantor, including resolutions of its Board of Directors
authorizing the execution, delivery and performance of the Loan Documents and
each other document delivered pursuant to this Agreement and certifying the
names and true signatures of the officers of Borrower or each Guarantor
executing the Loan Documents and the other documents delivered by Borrower or
such Guarantor under this Agreement;
(iii) certified copies of the certificate or articles of
incorporation and the by-laws of Borrower or such Guarantor, as the case may be,
stating that the resolutions and corporate documents thereby certified had not
been amended, modified, revoked or rescinded as of the date of such certificate;
(iv) a certificate of a duly authorized officer of Borrower,
dated the Original Closing Date or the Revolving Credit Termination Date, as
applicable, stating that the representations and warranties in Article 7 were
true and correct on such date as though made on and as of such date (unless made
as of a specific date earlier than the date hereof, in which case they shall be
true and correct as of such earlier date) and that no event had occurred and was
continuing which would constitute a Default or Event of Default;
(v) the Guaranty duly executed by each of the Guarantors;
(vi) the Security Agreement, duly executed by Borrower, together
with such UCC-1 financing statements as were required by the Bank;
(vii) such duly executed UCC-3 Revolving Credit Termination
Statements as were necessary to terminate existing liens on the assets of
Borrower;
(viii) a favorable opinion of counsel for Borrower, dated the
Original Closing Date or the Revolving Credit Termination Date, as applicable,
in substantially the form of Exhibit E and as to such other matters as the Bank
had reasonably requested;
(ix) satisfactory evidence that Borrower and each of the
Guarantors were duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation; and
(x) such other documents, instruments, approvals, opinions and
evidence of compliance with the terms hereof as the Bank had required;
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(b) Borrower's payment of all fees required to be paid hereunder or in
connection herewith and all accrued fees and expenses of the Bank in connection
with the preparation, execution and delivery of this Agreement, and the other
Loan Documents and the consummation of the transactions contemplated thereby;
(c) Borrower's and Guarantors' obtainment of all consents, permits and
approvals required in connection with the execution, delivery and performance by
Borrower and the Guarantors of their respective obligations hereunder and under
the other Loan Documents and such consents, permits and approvals shall continue
in full force and effect; and
(d) all legal matters in connection with this financing were
satisfactory to the Bank and its counsel.
Section 6.02. Conditions to All Borrowings. The obligations of the
Bank to make any Loan (including the initial Revolving Credit Loan) hereunder
have been and shall continue to be subject to the further conditions precedent
that on the date of such Loan:
(a) the truth of the following statements:
(i) the representations and warranties contained in Article 7
were and are true and correct on and as of the date of such Loan as though made
on and as of such date (unless such representations and warranties are made as
of a specific earlier date in which case they shall be true and correct as at
such date);
(ii) no Default or Event of Default has occurred and is
continuing, or would result from such Loan; and
(iii) no material adverse change has occurred in the business,
financial condition or operations of Borrower since the date of the most recent
financial statements of Borrower delivered to the Bank hereunder or in
connection herewith; and
(b) the Bank's receipt of such approvals, opinions, documents or
instruments as the Bank may have reasonably requested.
Section 6.03. Deemed Representations. Unless Borrower otherwise
notifies the Bank prior to any borrowing hereunder, the acceptance by Borrower
of the proceeds of any Loan shall constitute a representation and warranty that
the statements contained in Section 6.02(a) are true and correct as of the date
of such Loan.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants that:
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Section 7.01. Incorporation, Good Standing and Due Qualification;
Compliance with Law. Each of Borrower and the Guarantors is duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its assets and to
transact the business in which it is now engaged or proposed to be engaged, and
is duly qualified as a foreign corporation and in good standing under the laws
of each other jurisdiction in which such qualification is required except where
the failure to so qualify and/or be in good standing could not in any case or in
the aggregate, have a material adverse effect on the operations, business,
property or financial condition of any of Borrower or any Guarantor or on its
respective ability to perform its respective obligations hereunder. In addition,
each of Borrower and the Guarantors is in compliance with all laws, treaties,
rules or regulations, or determination of an arbitration or a court or other
governmental authority, in each case applicable to or binding upon it or any of
its property or to which it or any of its property is subject, except to the
extent that the failure to so comply could not, in any case or in the aggregate,
have a material adverse effect on the operations, business, property or
financial condition of Borrower and the Guarantors, taken as a whole, or on
their ability to perform their obligations under the Loan Documents.
Section 7.02. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by each of Borrower and each of the
Guarantors of the Loan Documents have been duly authorized by all necessary
corporate action and do not and will not (a) require any consent or approval of
its stockholders that has not been obtained, (b) contravene its charter or
by-laws, (c) violate any provision of, or require any filing (other than filings
contemplated hereby and/or by the other Loan Documents), registration, consent
or approval under, any law, rule, regulation (including, without limitation, the
provisions of Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System as in effect from time to time), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to Borrower or such Guarantor, (d) result in a breach of or
constitute a default or require any consent under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which Borrower
or such Guarantor is a party or by which any of its properties may be bound or
affected, (e) result in, or require, the creation or imposition of any Lien,
upon or with respect to any of the properties now owned or hereafter acquired by
Borrower or such Guarantor other than Liens created by this Agreement and/or the
other Loan Documents, or (f) cause Borrower or such Guarantor to be in default
under any such rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
Section 7.03. Legally Enforceable Agreements. Each Loan Document is,
or when delivered under this Agreement will be, a legal, valid and binding
obligation of Borrower or each Guarantor party thereto, enforceable against
Borrower or such Guarantor in accordance with its terms.
Section 7.04. Litigation. There are no actions, suits or proceedings
pending or to Borrower's knowledge, threatened against or affecting Borrower or
any of the Guarantors
- 23 -
or any of their respective Subsidiaries before any court, governmental agency or
arbitrator, which could, in any one case or in the aggregate, adversely affect
the financial condition, operations, properties or business of Borrower and the
Guarantors, taken as a whole, or their ability to perform their respective
obligations under the Loan Documents.
Section 7.05. Financial Statements. The consolidated balance sheet of
Borrower and its Subsidiaries as at December 31, 1997 and the related
consolidated income statement and statement of cash flow of Borrower and its
Subsidiaries for the fiscal year then ended, and the accompanying notes,
together with the opinion thereon, of KPMG Peat Marwick LLP, independent
certified public accountants (the "Auditor"), and the consolidated financial
statements for the six month period ended June 30, 1998, copies of which were
delivered to the Bank, fairly present the consolidated financial condition of
Borrower and its Subsidiaries as at such dates and the consolidated results of
the operations of Borrower and its Subsidiaries for the periods covered by such
statements, all in accordance with GAAP consistently applied. As of the date
hereof, there are no liabilities of Borrower and its Subsidiaries, fixed or
contingent, which are material but are not reflected in such financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business since June 30, 1998 and the liabilities created by
this Agreement. Since the date of the most recent financial statements delivered
to the Bank and the Closing Date, there has been no material adverse change in
the condition (financial or otherwise), business, operations or, to the
knowledge of Borrower, prospects of any of Borrower or the Guarantors. With
respect to any Loans made after the Original Closing Date, since the date of the
most recent financial statements delivered to the Bank hereunder and the date of
such Loan, there has been no material adverse change in the condition (financial
or otherwise), business, operations or, to the knowledge of Borrower, prospects
of Borrower and the Guarantors, taken as a whole.
Section 7.06. Ownership and Liens. Each of Borrower and the Guarantors
has title to, or valid leasehold interests in, all of its properties and assets,
real and personal, reflected in the financial statements referred to in Section
7.05 (other than any properties or assets disposed of since the date of such
financial statements as no longer used or useful in the conduct of their
respective business or as have been disposed of in the ordinary course of
business), and none of the properties and assets owned by Borrower or the
Guarantors, or any of them, and none of their leasehold interests, is subject to
any Lien, except as disclosed in Schedule I or as may be permitted hereunder.
Section 7.07. Taxes. Each of Borrower and the Guarantors has filed all
tax returns (federal, state and local) required to be filed except where the
failure to file could not, in any case or in the aggregate, have an adverse
effect upon the operations, business, property or financial condition of any of
Borrower or the Guarantors or on their ability to perform their obligations
under the Loan Documents. Each of Borrower and the Guarantors has paid when due
all taxes, assessments and governmental charges and levies shown thereon to be
due, including interest and penalties, other than taxes, assessments and
governmental charges
- 24 -
and levies being contested in good faith by appropriate proceedings and with
respect to which adequate reserves in conformity with GAAP shall have been
provided on the books of Borrower or the Guarantors, as the case may be.
Section 7.08. ERISA. Each of Borrower and the Guarantors is in
compliance in all material respects with all applicable provisions of ERISA. No
Reportable Event has occurred with respect to any Plan, no notice of intent to
terminate a Plan has been filed nor has any Plan been terminated, no
circumstance exists which constitutes grounds under Section 4042 of ERISA
entitling the PBGC to institute proceedings to terminate, or appoint a trustee
to administer, a Plan, nor has the PBGC instituted any such proceedings, none of
Borrower nor its ERISA Affiliates has completely or partially withdrawn under
Sections 4201 or 4204 of ERISA from a Multiemployer Plan and each of Borrower
and each of its ERISA Affiliates has met its minimum funding requirements under
ERISA with respect to all of its Plans and there are no Unfunded Vested
Liabilities. None of Borrower nor its ERISA Affiliates has incurred any
liability to the PBGC under ERISA, other than to make contributions in the
ordinary course and other than contingent liabilities that would arise on the
termination of any Plan (no such termination being reasonably foreseen by
Borrower).
Section 7.09. Subsidiaries and Ownership of Stock. Schedule II is a
complete and accurate list of the Subsidiaries of Borrower, showing the
jurisdiction of incorporation or organization of each Subsidiary and the
percentage of Borrower's ownership of the outstanding stock or other interest of
each such Subsidiary.
Section 7.10. Credit Arrangements. Schedule III is a complete and
correct list of all credit agreements, indentures, purchase agreements outside
the ordinary course of Borrower's business, guaranties, Capital Leases and other
investments, agreements and arrangements in effect on the date of this Agreement
providing for or relating to extensions of credit to Borrower or to the
Guarantors or to any of them (including agreements and arrangements for the
issuance of letters of credit or for acceptance financing) in respect of which
Borrower, the Guarantors or any of them is in any manner directly or
contingently obligated. Schedule III shows the maximum principal or face amounts
of the credit in question, outstanding and which can be outstanding, are
correctly stated, and all Liens of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule and
Schedule I.
Section 7.11. Operation of Business. Each of Borrower and each
Guarantor possesses all material licenses, permits, franchises, patents,
copyrights, trademarks and trade names, or rights thereto, to conduct their
business as now conducted and as presently proposed to be conducted and to
Borrower's best knowledge, none of Borrower nor any of the Guarantors is in
violation of any valid rights of others with respect to any of the foregoing.
Section 7.12. Hazardous Substances. Each of Borrower and the
Guarantors is in compliance with all Environmental Laws, and has obtained all
necessary licenses and
- 25 -
<PAGE>
permits required to be issued pursuant to any Environmental Law. None of
Borrower nor any of the Guarantors has received any written notice or
communication from any governmental agency with respect to any Hazardous
Substance relative to its operations, property or acts or any investigation,
demand or request pursuant to or enforcing any Environmental Law relating to it
or its operations, and no such investigation is pending or, to the knowledge of
Borrower, threatened.
Section 7.13. Compliance with Loans and Judgments. Borrower and each
Subsidiary are in compliance, in all material respects, with all laws, rules,
regulations, orders and decrees which are applicable to Borrower or its
Subsidiaries, or to any of their respective properties. Each of Borrower and the
Guarantors has satisfied all judgments and none of Borrower nor any of the
Guarantors is in default with respect to any judgment, writ, injunction, decree,
rule or regulation of any court, arbitrator or federal, state, municipal or
other governmental authority, commission, board, bureau, agency or
instrumentality, domestic or foreign.
Section 7.14. No Defaults on Other Agreements. Except as disclosed on
Schedule IV, none of Borrower nor any of the Guarantors is a party to any
indenture, loan or credit agreement or any lease or other agreement or
instrument or subject to any charter or corporate restriction which would in any
case or in the aggregate have an adverse effect on its ability to carry out its
obligations under the Loan Documents. None of Borrower nor any of the Guarantors
is in default in any respect in the performance, observance or fulfillment of
any of the obligations, covenants or conditions contained in any agreement or
instrument material to its business to which it is a party except where such
default would not, in any case or in the aggregate, have a material and adverse
effect on the business, properties, assets, operations or condition, financial
or otherwise, of Borrower and the Guarantors, taken as a whole, or on their
ability to perform their obligations under the Loan Documents.
Section 7.15. Labor Disputes and Force Majure. Neither the business
nor the properties of Borrower or any of the Guarantors is affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, force majure or of the public enemy or other casualty
(whether or not covered by insurance), materially and adversely affecting such
business or properties or the operations of Borrower and the Guarantors, taken
as a whole, or their ability to perform their obligations under the Loan
Documents.
Section 7.16. Governmental Regulation. None of Borrower or the
Guarantors is subject to regulation under the Public Utility Holding Company Act
of 1935, the Investment Company Act of 1940 or any other statute or regulation
limiting its ability to incur indebtedness for money borrowed as contemplated
hereby.
Section 7.17. Partnerships. None of Borrower or the Guarantors is a
partner in any partnership or a member of any joint venture or limited liability
company.
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<PAGE>
Section 7.18. No Forfeiture. None of Borrower nor any of the
Guarantors is engaged in or proposes to be engaged in any unlawful activity
which is reasonably likely to result in a Forfeiture Proceeding and no
Forfeiture Proceeding against any of them is pending or, to the best of
Borrower's knowledge, threatened.
Section 7.19. Security Agreement. The provisions of the Security
Agreements, as confirmed by the Security Agreement Confirmations, are effective
to create in favor of the Bank legal, valid and enforceable security interests
in all right, title and interest of Borrower in all the Collateral described
therein, assuming the same has been duly executed by the Bank and the Bank has
filed the forms UCC-1 referred to therein.
Section 7.20. Disclosure. This Agreement, each Loan Document and,
except as set forth in Section 7.21, each other document, certificate, exhibit,
report or written statement furnished to the Bank by or on behalf of Borrower or
for use in connection with the Loans, do not contain any untrue statement of
material fact or omit to state a material fact necessary to make the statement
contained herein or therein not misleading under the circumstances in which they
were made.
Section 7.21. Projections and Forecasts. Any financial
projection or forecast furnished by Borrower or any Guarantor shall be prepared
in accordance with GAAP to the extent applicable, based on the good faith
judgment of Borrower's management of present circumstances, expected conditions
and expected courses of action, and with respect to projections, based on the
occurrence of the hypothetical events described therein. The underlying
assumptions in such forecasts and projections shall be appropriate and
reasonable under the circumstances and, if the forecast or projection presents a
range, such range shall not be selected in a misleading manner.
ARTICLE 8. AFFIRMATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
obligations under this Agreement, Borrower shall and shall cause the Guarantors
to:
Section 8.01. Maintenance of Existence. Except as otherwise provided
in this Agreement, preserve and maintain its corporate existence and good
standing in the jurisdiction of its incorporation, and qualify and remain
qualified as a foreign corporation in each jurisdiction in which such
qualification is required.
Section 8.02. Conduct of Business. Continue to engage in its current
business or related businesses.
Section 8.03. Maintenance of Properties. Maintain, keep and preserve
all of its properties (tangible and intangible) necessary to the conduct of its
business in good working order and condition, ordinary wear and tear excepted.
- 27 -
Section 8.04. Maintenance of Records. Keep records and books of
account, in which complete entries will be made in accordance with GAAP.
Section 8.05. Maintenance of Insurance. Maintain insurance with
financially sound and reputable insurance companies or associations in such
amounts and covering such risks as are usually carried by companies engaged in
the same or a similar business and similarly situated.
Section 8.06. Compliance with Laws. Comply in all respects with all
applicable laws, rules, regulations and orders.
Section 8.07. Right of Inspection. At any reasonable time and from
time to time, upon reasonable notice during normal business hours, permit the
Bank or any agent or representative thereof, to examine and make copies and
abstracts from the records and books of account of, and visit the properties of,
such entity, to discuss the affairs, finances and accounts of such entity with
any of their respective officers and directors and such entity's independent
accountants, and from time to time at Borrower's expense to conduct such
collateral and other audits as the Bank deems necessary.
Section 8.08. Reporting Requirements. Furnish directly to each of the
Bank:
(a) as soon as available and in any event within 120 days after the
end of each fiscal year of Borrower, consolidated financial statements of
Borrower and its Consolidated Subsidiaries which shall include a consolidated
balance sheet of Borrower and its Subsidiaries as of the end of such fiscal year
and a consolidated income statement and statement of cash flows of such entities
for such fiscal year, stating in comparative form the respective consolidated
figures for the corresponding date and period in the prior fiscal year and all
prepared in accordance with GAAP, accompanied by an opinion thereon acceptable
to the Bank by the Auditor, which opinion neither includes an exception as to
adherence with GAAP nor contains a disclaimer;
(b) as soon as available and in any event within 45 days after the end
of each of the first three quarters of each fiscal year of Borrower, a
consolidated balance sheet of Borrower and its Subsidiaries as of the end of
such quarter and a consolidated income statement and statements of cash flows of
such entities for the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, all in reasonable detail and stating in
comparative form the respective consolidated figures for the corresponding date
and period in the previous fiscal year and all prepared in accordance with GAAP
and attested to by the president or chief financial officer of Borrower (subject
to year-end adjustments);
(c) simultaneously with the delivery of the financial statements
referred to in (a) and (b) above, a certificate of the president or chief
financial officer of Borrower (i) certifying that to the best of his knowledge
no Default or Event of Default has occurred and
- 28 -
is continuing or, if a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action which is
proposed to be taken with respect thereto, and (ii) with computations
demonstrating compliance with the covenants contained in Article 10;
(d) within 30 days after the delivery of the financial statements
referred to in (a) above, annual forecasts and Borrower's budget for the
upcoming fiscal year, with a comparison of actual results to budget for the
fiscal year then ended;
(e) promptly upon receipt thereof, a copy of the management letter, if
any, prepared by the Auditor;
(f) on or prior to the fifteenth day of each calendar month, a
schedule of inventory of the Company and its Subsidiaries certified by the
President or Chief Financial Officer and current as of the last Banking Day of
the preceding month, which shall contain a breakdown of the inventory by type,
amount and location and such other information reasonably requested by the Bank;
(g) promptly after Borrower becomes aware of the commencement thereof,
notice of all actions, suits, and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, involving claims of $150,000 or more affecting Borrower, or any of its
Subsidiaries, including, without limitation, any such proceeding relating to any
alleged violation of any Environmental Law;
(h) as soon as possible and in any event within five days after the
occurrence of each Default or Event of Default, a written notice specifying and
describing in reasonable detail such Default or Event of Default and describing
in reasonable detail the action which is proposed to be taken by Borrower with
respect thereto;
(i) promptly after the commencement thereof or promptly after Borrower
knows of the commencement or threat thereof, notice of any Forfeiture
Proceeding;
(j) promptly after submission to any government or regulatory agency,
all documents and information furnished to such government or regulatory agency
other than such documents and information prepared in the normal course of
business and which would not result in any adverse action to be taken by such
agency;
(k) as soon as possible and in any event within five Banking Days
after Borrower knows that any of the events or conditions specified below with
respect to any Plan or Multiemployer Plan have occurred or exist, a statement
signed by a chief financial officer of Borrower setting forth details respecting
such event or condition and the action, if any, which Borrower or the ERISA
Affiliate propose to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by Borrower or an ERISA
Affiliate with respect to such event or condition):
- 29 -
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued thereunder, with respect to a Plan, as to which PBGC
has not by regulation waived the requirement of Section 4043(a) of ERISA that it
be notified within 30 days of the occurrence of such event (provided that a
failure to meet the minimum funding standard of Section 412 of the Code or
Section 302 of ERISA shall be a reportable event regardless of the issuance of
any waivers in accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of intent
to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan, or the receipt by Borrower or any ERISA Affiliate, of a notice from a
Multiemployer Plan that such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal by Borrower or any ERISA
Affiliate under Section 4201 or 4204 of ERISA from a Multiemployer Plan, or the
receipt by Borrower, or any ERISA Affiliate, of notice from a Multiemployer Plan
that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of
ERISA or that it intends to terminate or has terminated under Section 4041A of
ERISA; and
(v) the institution of a proceeding by a fiduciary or any
Multiemployer Plan against Borrower or any ERISA Affiliate to enforce Section
515 of ERISA, which proceeding is not dismissed within 30 days;
(l) promptly, and in any event within five business days after the
sending or filing thereof, copies of all proxy statements, financial statements,
and reports which Borrower sends to its stockholders, and copies of all regular,
periodic and special reports and all registration statements which Borrower
files with the Securities and Exchange Commission or any other governmental
authority, or with any national securities exchange;
(m) such other information respecting the condition or operations,
financial or otherwise, of Borrower, or any Guarantor, as the Bank may from time
to time reasonably request.
Section 8.09. Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all material Debt except for any Debt which is being contested in good faith
and with respect to which, on a consolidated basis, adequate reserves are
maintained in conformity with GAAP.
Section 8.10. Payment of Taxes. Pay and discharge promptly all taxes,
assessments and government charges or levies imposed upon it or upon its income
and profits, or upon any of its property, real, personal or mixed, or upon any
part thereof, before the same
- 30 -
shall become in default, and all other material obligations (including lawful
claims for labor, materials and supplies which, if unpaid, might become a Lien)
except that neither the Company nor any Guarantor shall be required to pay any
such tax, assessment, charge, levy or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings and there shall have
been set aside on its books adequate reserves determined in accordance with GAAP
with respect to any such tax, assessment, charge, levy or claim so contested,
provided that, except as provided in Section 9.02, the Company and each
Guarantor shall pay all such taxes, assessments, charges, levies or claims
promptly if any Lien has attached as security therefor.
Section 8.11. Acquisitions. Prior to entering into any letter of
intent, agreement or other commitment or proposed commitment relating to any
Acquisition, furnish the Bank with notice of same and with such information
relating to the Acquisition as Borrower possesses at the time it provides notice
to the Bank and which the Bank may reasonably request.
Section 8.12. Management. Use its best efforts to cause Donald Sinkin,
Stephen Frey, Margaret Krumholz and John Rebecchi to continue in the employ of
the Borrower in their present positions with their existing authority as
executive officers of Borrower, and consult with the Bank regarding the
replacement of any of them.
ARTICLE 9. NEGATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
obligations under this Agreement, Borrower shall not:
Section 9.01. Debt and Guaranties.
(a) Create, incur, assume or suffer to exist, or permit any Guarantors
to create, incur, assume or suffer to exist any Debt, except:
(i) Debt arising under this Agreement or the Note;
(ii) Debt described in Schedule III, and any renewals, extensions
or refinancings thereof, provided that such renewals, extensions or refinancing
are on terms no less favorable to Borrower or the Guarantor than the original
terms of such Debt (except for increases in interest rates not inconsistent with
increases in prevailing interest rates);
(iii) Debt incurred in connection with operating leases entered
into by Borrower, the Guarantors, or any of them, consistent with past practices
or in the ordinary course of business; and
- 31 -
(iv) Debt of Borrower, or the Guarantors, or any of them, secured
by purchase money Liens permitted by Section 9.02.
(b) Guaranty, endorse, become surety for or otherwise in any way
become or be responsible for the Debt or obligations of any Person, whether by
agreement to maintain capital, equity, net worth or solvency of any Person, by
agreement to purchase or discharge the Debt of any Person, or agreement to
purchase merchandise, materials, supplies or other property, if such agreement
provides that payment shall be made whether or not delivery of such merchandise,
materials, supplies or other property is ever made or tendered except:
(i) guarantees executed prior to the date hereof as described on
Schedule V attached hereto;
(ii) endorsements of negotiable instruments for collection or
deposit in the ordinary course of business; and
(iii) guarantees under this Agreement or of Debt of Borrower or
any Guarantor owing to the Bank.
Section 9.02. Liens. Create, incur, assume or suffer to exist, or
permit any of the Guarantors to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
(a) Liens in favor of the Bank securing the Loans hereunder;
(b) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained in conformity with GAAP;
(c) Liens (i) imposed by law, such as mechanic's, supplier's,
materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar
Liens, securing obligations incurred in the ordinary course of business which
are not past due for more than 30 days or (ii) which are being contested in good
faith by appropriate proceedings and for which appropriate reserves have been
established which, when aggregated with all indebtedness secured by all such
other Liens, secure indebtedness having an aggregate principal balance not in
excess of $50,000;
(d) Liens under workers' compensation unemployment insurance, social
security or similar legislation (other than ERISA);
(e) judgment and other similar Liens arising in connection with court
proceedings that have been in existence for fewer than 30 days after entry of
the judgment or
- 32 -
the execution or other enforcement of which is effectively stayed, and the
claims secured thereby are being actively contested, in Borrower's reasonable
judgment, in good faith and by appropriate proceedings, or which relate to
judgments which, when aggregated with all other judgments secured by such Liens,
total less than $50,000; and
(f) purchase money Liens on any property heretofore or hereafter
acquired or the assumption of any Lien on property existing at the time of such
acquisition, or a Lien incurred in connection with any conditional sale or other
title retention agreement or a Capital Lease; provided that such liens attach
only to the property as acquired and do not extend to any additional property of
Borrower.
Section 9.03. Investments and Advances. Make or permit any Subsidiary
to make any loan or advance to any Person, or purchase, redeem or otherwise
acquire, or permit any such Subsidiary to purchase, redeem or otherwise acquire
any capital stock, assets, obligations or other securities, or make any capital
contribution to otherwise invest in or acquire any interest in any Person
(including, without limitation, any Borrower or any Subsidiary or Affiliate of
any Borrower), except:
(a) obligations issued or guaranteed by states or municipalities
within the United States of American and rated at least A-1 by Standard &
Poor's;
(b) obligations issued or guaranteed by the United States of America
or any agency or subdivision thereof, the payment or guarantee of which
constitutes a full faith and credit obligation of the United States of America;
(c) certificates of deposit, time deposits, Eurodollar certificates of
deposit, bankers acceptances and other money market instruments issued by any
bank, trust company or financial institution organized under the laws of the
United States of America or any state (or in the case of Eurodollar certificates
of deposit, a branch of any such bank, trust company or financial institution)
having capital and surplus in an aggregate amount not less than $200,000,000 and
with such instrument rated at least A-1 by Standard & Poor's;
(d) commercial paper rated at least Prime-1 by Moody's Investor
Services or A-1 by Standard & Poor's;
(e) repurchase agreements entered into with any bank, trust company or
other financial institution organized under the laws of the United States of
America or any state having capital and surplus in an aggregate amount not less
than $200,000,000 and which are fully secured by obligations of the type
described in Section 9.03(b);
(f) Acquisitions permitted pursuant to Section 9.07 hereof; and
- 33 -
<PAGE>
(g) Investments of Borrower in any Subsidiary or investment of any
Subsidiary in any other Subsidiary.
Section 9.04. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, or permit any of the Guarantors to sell, lease, assign,
transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets (including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests) except for (i) assets
disposed of as no longer used or useful in the conduct of their respective
business or as have been disposed of in the ordinary course of business
consistent with Borrower's past practice or (ii) transfers of assets between or
among Borrower and Subsidiaries of Borrower, provided all such Subsidiaries are
Guarantors which have executed Security Agreements.
Section 9.05. Transactions with Affiliates. Enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any Affiliate or permit any of
the Guarantors to enter into any transaction, including, without limitation, the
purchase, sale or exchange of property or the rendering of any service, with any
Affiliate, except in the ordinary course of and pursuant to the reasonable
requirements of Borrower's or such Guarantors business and upon fair and
reasonable terms not materially less favorable to Borrower or such Guarantor
than would be obtained in a comparable arm's length transaction with a Person
not an Affiliate.
Section 9.06. Mergers. Except as permitted in Section 9.07, and except
for mergers of any Subsidiary with and into either Borrower or any Subsidiary
which is at such time a Guarantor, merge or consolidate with, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of the Guarantors to do so.
Section 9.07. Acquisitions. Make any Acquisition, unless the entity to
be acquired is primarily in the business of manufacturing and printing of
specialty packaging and the Bank has been furnished with (a) such documents as
are necessary in the Bank's discretion to provide the Bank with a Guaranty of
the entity to be acquired (if it is to be a Subsidiary) and to grant the Bank a
perfected lien upon the assets so acquired, (b) satisfactory evidence that the
ratio of Borrower's Total Funded Debt to EBITDA, on a consolidated basis and
after giving effect to such Acquisition, does not exceed 3.0:1, (c) a
certificate of the president or chief financial officer of Borrower certifying
that no Default or Event of Default has occurred and is continuing and that no
Default or Event of Default would occur as a result of Borrower's making such
Acquisition and (d) within 15 days of completing such Acquisition, a balance
sheet of the Borrower prepared by Borrower's management demonstrating
compliance, on a pro forma basis, with the covenants contained in Article 10
immediately after the Acquisition.
- 34 -
Section 9.08. No Activities Leading to Forfeiture Proceeding. Engage
in or permit any Guarantor to engage in any unlawful activity which could
reasonably be expected to result in a Forfeiture Proceeding.
Section 9.09. Corporate Documents; Fiscal Year. Change its fiscal
year, or amend, modify or supplement its certificate or articles of
incorporation or by-laws in any way with the result that any of the individuals
identified in Section 8.12 have diminished responsibilities or operating and
management authority over Borrower and its Subsidiaries.
Section 9.10. New Subsidiaries. Form, or permit any Guarantor to form,
any Subsidiary unless such Subsidiary shall become a party to the Guaranty.
ARTICLE 10. FINANCIAL COVENANTS.
So long as any of the Notes shall remain unpaid or the Bank has any
obligations under this Agreement:
Section 10.01. Net Income. Borrower shall maintain at all times a
positive Net Income on a fiscal year basis.
Section 10.02. Current Ratio. Borrower shall maintain at all times a
Current Ratio of not less than 1.25:1.00.
Section 10.03. Maximum Liabilities to Worth Ratio. Borrower shall
maintain on a consolidated basis at all times a ratio of Total Liabilities to
Tangible Net Worth of not more than 2.75:1.0.
Section 10.04. Debt Coverage Ratio. Borrower shall maintain on a
consolidated basis at all times a Debt Coverage Ratio of not less than 1.25:1.0.
Section 10.05. Total Funded Debt to EBITDA Ratio. Borrower shall
maintain on a consolidated basis at all times a ratio of Total Funded Debt to
EBITDA of not more than 3.00:1.00.
Section 10.06. Determination of Compliance. Compliance with these
financial covenants shall be determined by reference to the consolidated
financial statements of Borrower and its Subsidiaries delivered to the Bank in
accordance with Section 8.08. Except as set forth in 10.01, all financial
covenants shall be applicable at all times and shall be tested at the end of
each fiscal quarter based upon the balance sheet information and the results of
operations for the period of 12 months preceding the date of determination. For
purposes of calculating compliance with Sections 10.02, 10.03 and 10.04, the
principal portion of all
- 35 -
Revolving Credit Loans and the Revolving Credit Note shall be deemed to be a
current liability and not long-term indebtedness.
ARTICLE 11. EVENTS OF DEFAULT.
Section 11.01. Events of Default. The occurrence of any of the
following events shall be an "Event of Default":
(a) Borrower shall fail to pay within five days of due date (i)
principal of the Note, (ii) interest on the Note or (iii) any fee or other
amount due hereunder as and when due and payable.
(b) Any representation or warranty made or deemed made by Borrower in
this Agreement, or by Borrower or any Guarantor in any certificate delivered
pursuant to this Agreement or any other Loan Document, or which is contained in
any certificate, document, opinion, financial or other statement furnished to
the Bank at any time pursuant to any Loan Document, shall prove to have been
incorrect in any material respect on or as of the date made or deemed made;
(c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in Section 2.03 or Articles 8, 9 or 10;
(d) Borrower or any Guarantor shall fail to perform or observe any
term, covenant or agreement on its part to be performed or observed in any Loan
Document and such failure shall continue for 15 consecutive days;
(e) Borrower or any Guarantor shall (i) fail to pay any amounts with
respect to any Debt in favor of the Bank, including but not limited to
indebtedness for borrowed money (other than the payment obligations described in
(a) above) of Borrower or such Guarantor, as the case may be, or any interest or
premium thereon, when due (giving effect to any applicable grace period),
whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise, (ii) fail to pay any amounts in excess of $50,000 in the aggregate
with respect to any other Debt, including but not limited to indebtedness for
borrowed money of Borrower or such Guarantor, as the case may be, or any
interest or premium thereon, when due (giving effect to any applicable grace
period), whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise, (iii) fail to perform or observe any term, covenant or
condition on its part to be performed or observed under any agreement or
instrument relating to any Debt when required to be performed or observed, if
the effect of such failure to perform or observe is to accelerate, or to permit
the acceleration of, after the giving of notice or passage of time or both, the
maturity of such Debt, whether or not such failure to perform or observe shall
be waived by the holder of such
- 36 -
Debt or (iv) any Debt shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment) prior to the
stated maturity thereof;
(f) Borrower or any Guarantor shall (i) generally not, be unable to or
admit in writing its or their inability to, pay its or their debts as such debts
become due; or (ii) make an assignment for the benefit of creditors, petition or
apply to any court or otherwise for the appointment of a custodian, receiver or
trustee for it or a substantial part of its or their assets, (iii) as debtor,
commence any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, (iv) have had any such
petition or application filed or any such proceeding shall have been commenced,
against it or them, in which an adjudication or appointment is made or order for
relief is entered, and which petition, application or proceeding remains
undismissed for a period of 30 days or more, or (v) by any act or omission shall
indicate its or their consent to, approval of or acquiescence in any such
petition, application or proceeding or order for relief or the appointment of a
custodian, receiver or trustee for all or any substantial part of its or their
property, (vi) suffer any such custodianship, receivership or trusteeship to
continue undischarged for a period of 30 days or more or (vii) cease to be
Solvent;
(g) one or more judgments, decrees or orders for the payment of money
in excess of $50,000 in the aggregate in respect of uninsured or unbonded claims
shall be rendered against Borrower or any of Guarantor and such judgments,
decrees or orders shall continue unsatisfied and in effect for a period of 30
consecutive days without being vacated, discharged, satisfied or stayed or
bonded pending appeal;
(h) An event or condition specified in Section 8.08(m) hereof shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a result
of such event or condition, together with all other such events or conditions,
Borrower or any ERISA Affiliate shall incur or in the opinion of the Bank shall
be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or
PBGC (or any combination of the foregoing) which is, in the determination of the
Bank, material in relation to the financial condition, operations, business or
prospects of Borrower or the Guarantors;
(i) Any Forfeiture Proceeding shall have been commenced; or
(j) The Security Agreement shall at any time after its execution and
delivery and for any reason cease to create a valid and perfected first security
interest in the Collateral or to be in full force and effect, or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by Borrower, or Borrower shall deny that it has any further liability
or obligation under a Security Agreement to which it is a party, or Borrower
shall fail to perform any of its material obligations under any Security
Agreement.
- 37 -
Section 11.02. Remedies. If any Event of Default shall occur, the Bank
shall (a) declare the Revolving Credit Commitment to be terminated, whereupon
the same shall forthwith terminate, and (b) declare the outstanding principal of
the Notes, all interest thereon and all other amounts payable under this
Agreement and the Notes to be forthwith due and payable, whereupon the Notes,
all such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by Borrower; provided that, in the case of
an Event of Default referred to in Section 11.01(e) or Section 11.01(h) above,
the Commitments shall be immediately terminated, and the Note, all interest
thereon and all other amounts payable under this Agreement and the Note shall be
immediately due and payable without notice, presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by
Borrower.
ARTICLE 12. MISCELLANEOUS
Section 12.01. All of Borrower's and each Subsidiary's computer
hardware and software which performs or supports Borrower's principal business
functions, or its accounting, financial reporting or management information
systems (collectively, "Principal Systems") have the ability to (a) consistently
handle date information before, during and after January 1, 2000, including but
not limited to accepting date input, providing date output and performing
calculations on dates or portions of dates, (b) function accurately in
accordance with the specifications of such computer hardware or software and
without interruption before, during and after January 1, 2000, without any
change in operations associated with the advent of the new century, (c) respond
to two-digit date input in a way that resolves any ambiguity as to century in a
disclosed, defined and predetermined manner and (d) store and provide output of
date information in ways that are unambiguous as to century. With respect to the
Principal Systems, any reprogramming or other corrective modifications required
to permit the proper functioning beginning immediately after December 31, 1999
of (i) the computer systems of Borrower, its Subsidiaries and Affiliates and
(ii) equipment containing embedded microchips (including systems and equipment
supplied by others or with which systems of Borrower, its Subsidiaries and
Affiliates interface) and the testing of all such systems and equipment, as so
reprogrammed, has been completed.
Section 12.02. Amendments and Waivers. Except as otherwise expressly
provided in this Agreement, any provision of this Agreement may be amended or
modified only by an instrument in writing signed by Borrower and the Bank, and
any provision of this Agreement may be waived by Borrower or by the Bank;
provided that no amendment, modification or waiver shall be effective, unless by
an instrument signed by the Bank. No failure on the part of the Bank to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof or preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
- 38 -
Section 12.03. Usury. Anything herein to the contrary notwithstanding,
the obligations of Borrower under this Agreement and the Notes shall be subject
to the limitation that payments of interest shall not be required to the extent
that receipt thereof would be contrary to provisions of applicable law limiting
rates of interest which the Bank may charge or collect.
Section 12.04. Expenses. Borrower shall reimburse the Bank on demand
for all reasonable costs, expenses, and charges (including, without limitation,
reasonable fees and charges of external legal counsel for the Bank) incurred by
the Bank in connection with the preparation or performance of this Agreement and
the Loan Documents. In addition, Borrower shall reimburse the Bank for all of
its reasonable costs and expenses in connection with the enforcement or
preservation of any rights under this Agreement, the Note or the other Loan
Documents. Borrower agrees to indemnify the Bank and its directors, officers,
employees and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims, damages or expenses incurred by any of them arising
out of or by reason of any investigation or litigation or other proceedings
(including any threatened investigation or litigation or other proceedings)
relating to any actual or proposed use by Borrower, of the proceeds of the
Loans, including, without limitation, the reasonable fees and disbursements of
counsel incurred in connection with any such investigation or litigation or
other proceedings (but excluding any such losses, liabilities, claims, damages
or expenses incurred by reason of the gross negligence or willful misconduct of
the Person to be indemnified).
Section 12.05. Survival. The obligations of Borrower under Section
2.03(b), Article 5 and Section 12.03 shall survive the repayment of the Loans
for a period corresponding to the maximum applicable statute of limitations in
effect in the State of New York from time to time.
Section 12.06. Assignment. This Agreement shall be binding upon, and
shall inure to the benefit of, Borrower and the Bank and their respective
successors and assigns, except that Borrower may not assign or transfer its
rights or obligations hereunder.
Section 12.07. Notices. All notices, consents, approvals and other
communications required or permitted to be given to a party under this Agreement
shall be in writing and shall be delivered personally to the party, sent by any
national overnight courier or mailed first class certified mail, return receipt
requested, to the party at the address indicated on page one, to the attention
of Joseph Burns for the Bank and to the attention of Margaret Krumholz for
Borrower. Any item delivered in accordance with the provisions of this Section
shall be deemed to have been delivered (i) on the date of personal delivery,
(ii) on the business day following the date sent by overnight courier or (ii) on
the fifth day following the date on which it was so mailed, as the case may be.
Section 12.08. Setoff. Borrower agrees that, in addition to (and
without limitation of) any right of setoff, banker's lien or counterclaim the
Bank may otherwise have,
- 39 -
the Bank shall be entitled, at its option without any prior notice to Borrower
(any such notice being expressly waived by Borrower to the extent permitted by
applicable law), to offset balances (general or special, time or demand,
provisional or final) held by it for the account of Borrower at any of the
Bank's offices against any amount then due and payable by Borrower to the Bank
under this Agreement or the Note which is not paid when due (regardless of
whether such balances are then due to Borrower), in which case it shall promptly
notify Borrower thereof, provided that the Bank's failure to give such notice
shall not affect the validity thereof. Payments by Borrower hereunder shall be
made without setoff or counterclaim.
Section 12.09. Jurisdiction; Immunities.
(a) Borrowers hereby irrevocably submits to the jurisdiction of any
New York State or United States Federal court sitting in Suffolk or Nassau
County over any action or proceeding arising out of or relating to this
Agreement or the Note, and Borrower hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such New
York State or Federal court. To the extent permitted by applicable law, Borrower
irrevocably consents to the service of any and all process in any such action or
proceeding by the mailing (by certified or registered mail) of copies of such
process to it. Borrower agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. To the extent
permitted by applicable law, Borrower further waives any objection to venue in
such State or Federal Court and any objection to an action or proceeding in such
State or Federal Court on the basis of forum non conveniens. Borrower further
agrees that any action or proceeding brought against the Bank shall be brought
only in New York State or United States Federal court sitting in Suffolk or
Nassau County.
(b) THE PARTIES WAIVE ANY RIGHT TO A JURY TRIAL.
(c) Nothing in this Section shall affect the right of the Bank to
serve legal process in any other manner permitted by law or affect the right of
the Bank to bring any action or proceeding against Borrower or its property in
the courts of any other jurisdictions.
(d) To the extent that Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to itself or its property, Borrower hereby
irrevocably waives, to the extent permitted by applicable law, such immunity in
respect of its obligations under this Agreement and the Note.
Section 12.10. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such
- 40 -
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
thereof in any other jurisdiction or the remaining provisions hereof in any
jurisdiction.
Section 12.11. Integration. The Loan Documents set forth the entire
agreement among the parties hereto relating to the transactions contemplated
thereby and supersede any prior oral or written statements or agreements with
respect to such transactions.
- 41 -
Section 12.12. Governing Law. This Agreement shall be governed by, and
interpreted and construed in accordance with, the law of the State of New York
applicable to agreements made and to be performed wholly within the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
DISC GRAPHICS, INC. KEYBANK NATIONAL ASSOCIATION
By:____________________________ By:______________________
Name: Donald Sinkin Name: Joseph Burns
Title: President and Title: Vice President
Chief Executive Officer
- 42 -
List of Schedules and Exhibits
Schedule I Description of Liens
Schedule II List of subsidiaries of Borrower
Schedule III List of Credit Agreements
(including indentures, purchase
agreements, guaranties, Capital
Leases, etc.)
Schedule IV Agreements effecting Loan Documents
Schedule V List of Guaranties
* * * * *
Exhibit A-1 Form of Revolving Credit Note
Exhibit A-2 Form of Term Note
Exhibit B Form of Guaranty
Exhibit B-1 Form of Guarantor Confirmation Agreement
Exhibit C-1 Security Agreement of Borrower
Exhibit C-2 Security Agreement of Guarantors
Exhibit C-3 Security Agreement Confirmation of Borrower
Exhibit C-4 Security Agreement Confirmation of Guarantors
Exhibit E Form of Opinion of Counsel
Exhibit F Form of Notice of Borrowing
- 43 -
EXHIBIT A-1
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$10,000,000 December 1, 1998
Islandia, New York
For value received, Disc Graphics, Inc., a Delaware corporation
("Borrower"), hereby promises to pay to the order of KeyBank National
Association, a national banking association (the "Bank"), at the Bank's office
at 1377 Motor Parkway, Islandia, New York 11788, on or before February 25, 2001,
the principal amount of $10,000,000, or the actual amount loaned by the Bank to
Borrower pursuant to the "Credit Agreement" (defined below), in lawful money of
the United States of America and in immediately available funds, on the date and
in the manner provided in the Credit Agreement. Borrower also promises to pay
interest on the unpaid principal balance hereof at the rate or rates of interest
as provided in the Credit Agreement, on the dates and in the manner provided
therein.
The holder of this Revolving Credit Note shall record the date and
amount of each Revolving Credit Loan made by the Bank, and the date and amount
of each payment of principal or interest, either on the schedule attached
hereto, or on such computer, magnetic disk, tape or other such electronic data
storage and retrieval system as the Bank considers adequate for such purpose, in
its sole and absolute discretion. Any such record shall constitute prima facie
evidence of the accuracy of the information so recorded, but no failure so to
record, or any error in so recording, shall affect the obligation of the
Borrower to repay any Revolving Credit Loans, with interest thereon, as provided
herein or in the Credit Agreement.
This is the Revolving Credit Note referred to in that certain
Revolving Credit Agreement dated February 26, 1997 between Borrower and the Bank
as amended and restated on December 1, 1998 (the "Credit Agreement"), and
evidences the Revolving Credit Loans made by the Bank thereunder. This Note is a
substitute for the one given by Borrower in the same amount on February 26,
1997. All terms not defined herein shall have the meanings given to them in the
Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
principal upon the occurrence of certain Events of Default, for a Default Rate
of interest and for prepayments on the terms and conditions specified therein.
Borrower waives presentment, notice of dishonor, protest and any other
notice or formality with respect to this Revolving Credit Note, except as may be
set forth in the Credit Agreement.
The terms of this Revolving Credit Note may not be changed orally, but
only by an instrument duly executed by Borrower and the Bank.
This Revolving Credit Note shall be governed by, and interpreted and
construed in accordance with, the laws of the State of New York.
DISC GRAPHICS, INC.
By:_______________________________
Name:
Title:
<PAGE>
SCHEDULE OF REVOLVING CREDIT LOANS
Date Type Principal Principal
of of Interest Amount of Maturity Paid or
Loan Loan Rate Loan of Loan
Unpaid
EXHIBIT A-2
TERM NOTE
$ February 25, 2001
Islandia, New York
For value received, Disc Graphics, Inc., a Delaware corporation
("Borrower"), hereby promises to pay to the order of KeyBank National
Association, a national banking association (the "Bank"), at the Bank's office
at 1377 Motor Parkway, Islandia, New York 11788, the principal sum of [insert
amount between $2,000,000 and $10,000,000] in 48 equal consecutive monthly
installments of [insert principal amount divided by 48], in lawful money of the
United States of America and in immediately available funds, in the manner
provided in the "Credit Agreement" (defined below) on the first day of each
calendar month commencing on __________, 2001 and ending with a final
installment of all unpaid principal hereunder on the Term Loan Maturity Date.
Borrower also promises to pay interest on the unpaid principal balance hereof at
the fluctuating annual rate of interest equal to the Base Rate plus a margin of
0.5%, as provided in the Credit Agreement, on the dates and in the manner set
forth therein.
This is the Term Loan Note referred to in that certain Credit
Agreement dated February 26, 1997 by and between Borrower and the Bank, as
amended and restated on December 1, 1998 (the "Credit Agreement"), and evidences
the Term Loan made by the Bank thereunder. All terms not defined herein shall
have the meanings given to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
principal upon the occurrence of certain Events of Default, for a Default Rate
of interest and for prepayments on the terms and conditions specified therein.
Borrower waives presentment, notice of dishonor, protest and any other
notice or formality with respect to this Term Loan Note. The terms of this Term
Loan Note may not be changed orally, but only by an instrument duly executed by
Borrower and the Bank.
This Term Loan Note shall be governed by, and interpreted and
construed in accordance with, the laws of the State of New York.
DISC GRAPHICS, INC.
By:_______________________________
Name:
Title:
Borrower's Confirmation of Security Agreement
Confirmation of Security Agreement dated effective December 1, 1998 in
favor of KeyBank National Association (the "Bank") given by Disc Graphics, Inc.
("Borrower").
Borrower has entered into an Amended and Restated Credit Agreement dated
the "Restated Credit Agreement") with the Bank, pursuant to which the Bank has
agreed to modify and extend the terms of a prior credit agreement dated February
26, 1997 between the parties (the "Credit Agreement") in accordance with the
terms of the Restated Credit Agreement.
Pursuant to the Credit Agreement, Borrower previously executed and
delivered to the Bank a Security Agreement dated February 26, 1997 (the
"Security Agreement"), under which Borrower granted the Bank a security interest
in and to certain assets of Borrower, then existing or later acquired, described
and defined as "Collateral" in Section 1(b)(ii) of the Security Agreement.
Borrower has asked the Bank to modify and extend the terms of the Credit
Agreement, and the Bank agreed to do so, but only on condition that the Borrower
confirms to the Bank that its interest in the Collateral given under the
Security Agreement in connection with the Credit Agreement constitutes a valid
security in favor of the Bank for the purposes of the Restated Credit Agreement.
Accordingly, to induce the Bank to modify and extend the terms of the
Credit Agreement in accordance with the terms of the Restated Credit Agreement
and in consideration therefor, Borrower confirms, acknowledges and represents to
the Bank as follows:
The Security Agreement is in full force and effect in accordance with the
terms thereof, and constitutes a legal, binding and enforceable agreement of
Borrower. The Security Agreement covers and grants the Bank a first lien
priority interest in all assets and properties of Borrower now existing or
hereafter acquired which constitute Collateral. All warranties and
representations set forth in the Security Agreement respecting Borrower are true
and correct, and all covenants of Borrower described therein have been
performed, as of the date hereof. There have been no changes to the information
set forth in Schedule I of the Security Agreement.
IN WITNESS WHEREOF, Borrower has executed this confirmation of Security
Agreement.
Disc Graphics, Inc.
By:_______________________________
Name: Donald Sinkin
Title: President and Chief
Executive Officer
SCHEDULE I
TO
DISC GRAPHICS, INC.
SECURITY AGREEMENT
Principal Office*
10 Gilpin Avenue
Hauppauge, New York 11788
Other Offices Where Records Are Kept*
25 Hoffman Avenue, Hauppauge, New York 11788
3116 Vanowen Street, Burbank, California 91505
1160 West 16th Street, Indianapolis, Indiana 46202
Locations Where Collateral
Is Stored, Used or Located*
10 Gilpin Avenue, Hauppauge, New York 11788
198 Greenpond Road, Rockaway, New Jersey 07866
25 Hoffman Avenue, Hauppauge, New York 11788
3116 Vanowen Street, Burbank, California 91505
1160 West 16th Street, Indianapolis, Indiana 46202
Business and Trade Names
Used by Debtor
Current Names* Discontinued Names
Disc Graphics Four Seasons Litho
Benham Press
* Forms UCC-1 shall be filed in all jurisdictions where Debtor has offices or
stores, uses or places Collateral, under each actual and trade name used by
Debtor.
EXHIBIT 21.1
Subsidiaries of the Company
Name of Subsidiary State of Incorporation
------------------ ----------------------
Disc Graphics Label Group, Inc. Delaware
Four Seasons Litho, Inc. New York
Cosmetic Sampling Technologies, Inc. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
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, 1999, relating to the
consolidated balance sheets of Disc Graphics, Inc. and subsidiaries as of
December 31, 1998 and 1997, 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, 1998 and related schedule, which report appears in the
December 31, 1998 annual report on Form 10-K of Disc Graphics, Inc.
/s/ KPMG LLP
KPMG LLP
Melville, New York
March 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEEMENTS FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,313
<SECURITIES> 0
<RECEIVABLES> 14,053,102
<ALLOWANCES> (1,332,000)
<INVENTORY> 2,379,627
<CURRENT-ASSETS> 16,378,504
<PP&E> 18,594,211
<DEPRECIATION> (8,596,468)
<TOTAL-ASSETS> 28,371,541
<CURRENT-LIABILITIES> 7,694,319
<BONDS> 5,413,818
0
0
<COMMON> 55,488
<OTHER-SE> 13,884,916
<TOTAL-LIABILITY-AND-EQUITY> 28,371,541
<SALES> 58,881,533
<TOTAL-REVENUES> 58,881,533
<CGS> 43,082,081
<TOTAL-COSTS> 43,082,081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 402,470
<INTEREST-EXPENSE> 633,512
<INCOME-PRETAX> 4,765,427
<INCOME-TAX> 1,901,000
<INCOME-CONTINUING> 2,864,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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