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, 1999
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: (631) 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
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, 2000, the aggregate market value of the voting and
non-voting stock held by non-affiliates of Registrant was approximately $11.2
million, based on the closing price of the Common Stock on the Nasdaq Stock
Market on that date.
At March 1, 2000, the Registrant had outstanding 5,518,352 shares of
Common Stock, $.01 par value per share.
Documents incorporated by reference: The Registrant's Proxy Statement
for its 2000 Annual Meeting of Stockholders is incorporated by reference into
Part III (Items 10, 11, 12, and 13) of this Form 10-K.
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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; (2) to
acquire other strategically-located specialty packaging and printing companies
that serve geographic markets and industries near existing and potentially new
customers, and to position the Company to offer service and cost advantages over
its competitors; and (3) to develop innovative packaging designs and techniques
for new and existing markets. The Company is actively involved in investigating
additional printing and packaging related business opportunities, which may
include acquisitions, joint ventures or other business relationships. The
Company recently announced the signing of a letter of understanding to acquire
Industrial Publishing, Inc. d/b/a Koke Printing ("IP/Koke"), a Eugene, Oregon
based commercial printer with approximately $12 million of revenue. Consummation
of the acquisition is subject to the Company's completion of due diligence and
the negotiation of a definitive acquisition agreement. The Company is not a
party to any definitive agreement with respect to any other such transaction. In
addition, there can be no assurance that the Company will consummate any
potential acquisition, or if completed, that any such transaction will be
profitable for the Company, or that the Company will be able to increase its
market share in accordance with its stated business strategies.
Historically, the Company has grown primarily by developing new
customers, increasing orders from existing customers, and by capitalizing on its
superior service and response capabilities and through acquisitions. In 1996,
the Company acquired the assets and certain liabilities of Pointille, Inc., a
California based packaging printer; in 1997, the Company acquired the assets and
certain liabilities of Benham Press, Inc., an Indiana based commercial printing
company (the "Benham Acquisition"); and in 1999, the Company acquired the assets
and certain liabilities of Contemporary Color Graphics, Inc. ("CCG"), a New York
based commercial printing company (the "CCG Acquisition"). The Company has since
integrated each of their manufacturing capabilities and sales and marketing
programs into Disc Graphics' operations. Since 1995, the Company has operated a
facility in Rockaway, New Jersey, which provides a majority of the label
production for Disc Graphics.
The Company's principal executive offices and principal manufacturing
operations are located at 10 Gilpin Avenue, Hauppauge, New York 11788. Its
telephone number is (631) 234-1400.
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
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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
The Company derived significant revenue in 1999 from the manufacture
and sale of paperboard folding cartons. An industry trade publication has
estimated that in 1999 there were approximately 295 companies operating 469
folding carton manufacturing plants in the United States, and the total revenues
from the sale of folding cartons was approximately $5.0 billion, reflecting a 2%
decline from 1998 levels. The overall folding carton market has seen significant
competition from resin based alternative packaging and growth in corrugated as
an alternative to paperboard packaging. The Company is currently exploring
opportunities in the corrugated packaging market. Industry consolidation has
resulted in a decline in the number of carton plants and the number of operating
companies.
Folding carton manufacturers are divided into three main categories:
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 primarily 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 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 1999 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 3,200
printing establishments with an average of 16 employees.
Based on 1998 revenues, the Company was ranked 117 in the top 500
printing companies in the United States by an industry trade publication, as
compared to 128 in 1997. Comparable rankings for 1999 were not available at the
date of this report.
Packaging Products
One of the Company's largest markets for folding cartons are the video
and entertainment software markets. 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 and 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.
Sales of software packaging continue to contribute to a growing portion
of the Company's revenues. The Company produces packaging for some of the
largest entertainment software and software application companies. The Company
believes that its national network of production facilities and its capabilities
in producing high value-
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added packaging are strategic advantages in competing in this market.
The Company manufactures CD packaging, including tray cards and
booklets, pre-recorded cassette packaging, such as insert or "J" cards, as well
as audio book packaging and other printed materials for the music and audio
industries. The Company's 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 music and audio markets. The other major component of this market is
audio book 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.
In the consumer products 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 of the packaging,
these markets are a prime focus for the Company. Recently, the Company founded
Cosmetic Sampling Technologies, Inc. ("CST"), a wholly owned subsidiary. CST has
received a patent on TRYALS(TM), its unique lipstick sampler. TRYALS(TM) is a
unit dose, self-applicator, for sampling lipstick. Management is committed to
the development of this and other innovative packaging to penetrate the cosmetic
market.
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 and drug manufacturers.
In the commercial printing market, the Company prints brochures,
posters, sell sheets and other promotional material.
The Company prints labels on pressure sensitive stock that is die cut
to a customer's specifications. The primary markets for labels are
pharmaceuticals, vitamins, video packages, pet products and specialty items.
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 1999 net sales was the video and entertainment
software market, which accounted for approximately 38%; followed by the consumer
product packaging market, which accounted for approximately 23%; and the music
and audio packaging and commercial printing markets, which accounted for
approximately 15% and 13%, respectively. These markets correspond to product
lines within the business segment in which the Company operates.
The Company's sales and marketing efforts are conducted through direct
solicitation by its executive officers and internal 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 backlog
of orders, with most produced and delivered in one to four weeks.
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Seasonality
Historically, the Company's revenues have been moderately seasonal. In
the last two quarters of 1999 and 1998, the Company's revenues were
approximately 56% and 54%, respectively, of annual sales. This seasonality is
primarily the result of certain markets, such as the music and audio packaging
markets, the video and entertainment software packaging markets and the consumer
product packaging market, which require that products be produced and shipped
between August and October of each year for sale during the holiday season.
These three markets accounted for approximately 76% and 74%, respectively of the
Company's total net sales in each of 1999 and 1998, causing the Company's
revenues to be greater in the last six months of each calendar year than in the
first six months.
Competition
The Company competes with a small number of printed paperboard
packaging companies within each of its markets. These industries require high
quality packaging with rapid turnaround time and competitive pricing. 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 in each market 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 17, 2000, the Company had approximately 559 employees.
Of these employees, 338 are located in the Company's Hauppauge, New York
facility, with 270 serving in manufacturing capacities and 68 serving in selling
and administrative capacities. The Company's Burbank, California facility has 92
employees, with 75 serving in manufacturing capacities and 17 serving in selling
and administrative capacities. Disc Graphics' Rockaway, New Jersey facility has
26 employees, with 24 serving in manufacturing capacities and two serving in
selling and administrative capacities. The Company's Indianapolis, Indiana
facility has 57 employees, with 48 serving in manufacturing capacities and 9
serving in selling and administrative capacities. Disc Graphics' Edgewood, New
York facility has 46 employees, with 35 serving in manufacturing capacities and
11 serving in selling and administrative capacities. A majority of the
manufacturing employees located in the Burbank, California facility are
represented by a labor union. The Company believes that its employee relations
are good.
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, and
the Company has several alternate sources for each. The Company has historically
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 can be no assurances, however, that the Company
will not encounter difficulty in obtaining supplies of such material to fulfill
future requirements.
Equipment
The Company owns or leases certain 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.
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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 fulfill
its stated business strategies; the Company's ability to identify and consummate
future acquisitions and other strategic business opportunities, and to integrate
any such businesses into the Company's operations; the Company's ability to
identify and develop additional product innovations; the Company's ability to
sustain current growth rates in net sales of certain products; the effects of
recent equipment purchases and leases for additional space on the Company's
operations; the Company's ability to continue to improve efficiencies through
the purchase or lease of equipment; the effects of the Company's ISO
certification efforts; the amounts required for capital expenditures 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.
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Executive Officers of the Registrant
Donald Sinkin (51 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 (46 years of age) is a Director, 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 Graphics, Mr.
Frey held various management positions with Kordet Color Corporation and Terrace
Litho.
John Rebecchi (44 years of age) is a Director, 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 Graphics'
formation in 1983, he served as Controller. After a brief absence from the
Company, Mr. Rebecchi re-joined Disc Graphics 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 (40 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 Graphics, 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 (52 years of age) is Vice President for Legal Affairs
and Human Resource Policy and General Counsel of the Company. Mr. Bress joined
Disc Graphics 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.
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ITEM 2. Properties
As of December 31, 1999, 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
Edgewood, NY Manufacturing (5) 22,000
Rockaway, NJ Manufacturing (6) 8,400
New York, NY Sales (7) 2,400
(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) On January 1, 2000, the Company entered into a lease expiring
August 31, 2001 to sublet to a third party approximately
36,000 square feet of the 40,000 square feet at the facility located
in Hauppauge, New York. The 4,000 remaining square feet will be used
for office space.
(3) This lease is scheduled to terminate on May 18, 2001.
(4) The Company owns this facility, subject to a mortgage.
(5) This lease is scheduled to terminate on July 14, 2003.
(6) This lease is scheduled to terminate on June 30, 2007.
(7) On January 1, 1999, the Company entered into a new lease expiring
December 30, 2009 for this facility.
On January 1, 2000, the Company entered into a lease expiring January
31, 2008 for an 87,000 square foot facility located in Hauppauge, New
York. This facility will be used for manufacturing and office space
and will be in addition to the 55,000 square feet at the current
facility located in Hauppauge, New York.
ITEM 3. Legal Proceedings
As of December 31, 1999, there were no lawsuits pending against the
Company.
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ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1999, there
were no matters submitted to a vote of the Company's security holders through
the solicitation of proxies or otherwise.
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Price Range of Common Stock
The Company's Common Stock, par value $.01 per share (the "Common
Stock") trades on the Nasdaq SmallCap Market under the symbol DSGR. The table
set forth below contains the range of the high and low bid prices on the Nasdaq
SmallCap Market for the quarters noted.
The Company's Class A Redeemable Common Stock Purchase Warrants (the
"Class A Warrants") were authorized for trading on the Nasdaq SmallCap Market
under the symbol DSGRW. On November 9, 1999 these Class A Warrants expired by
their terms. The table set forth below contains the range of the high and low
bid prices on the Nasdaq SmallCap Market for the quarters noted.
Common Stock Class A Warrants
High Low High Low
Quarter Ended
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
March 31, 1999 5.563 4.250 .844 .375
June 30, 1999 5.000 3.750 .938 .125
September 30, 1999 5.313 3.625 .313 .031
December 31, 1999 (a) 3.750 2.313 .031 .000
On February 1, 2000, the closing bid price for the Common Stock on the
Nasdaq Small Cap Market was $3.250.
(a) On November 9, 1999, the Company's Class A Redeemable Common
Stock purchase warrants expired by their term.
Holders of Common Stock
As of February 10, 2000, there were 45 holders of record and
approximately 800 beneficial owners of the Common Stock.
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 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.
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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 18) thereto, all of which are contained
in this Annual Report on Form 10-K.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Income statement data:
Net sales $67,988 $58,882 $48,445 $42,575 $36,149
Gross profit 17,290 15,799 12,693 10,911 7,481
Operating expenses 12,360 10,550 8,483 7,612 5,733
Operating income 4,930 5,249 4,210 3,299 1,748
Net income 2,507 2,864 2,159 1,454 501
Net income per common share
Basic .45 .52 .40 .29 .18
Diluted .45 .52 .40 .29 .18
Weighted average number
of shares outstanding
Basic 5,518 5,474 5,387 5,091 2,714
Diluted 5,540 5,492 5,397 5,098 2,714
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance sheet data:
Total assets $ 42,508 $ 28,372 $ 26,747 $ 22,046 $ 18,604
Long term liabilities 15,493 6,737 8,494 5,598 7,243
Stockholders' equity 16,447 13,940 11,112 8,964 7,427
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.
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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"). The purchase price consisted of $87,043 in cash, 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 Benham Acquisition.
Contemporary Color Graphics Acquisition
On July 1, 1999, the Company acquired substantially all of the assets
and certain liabilities of Contemporary Color Graphics, Inc. ("CCG"), a New York
based commercial printer. The purchase price consisted of $3,500,000 in cash,
and a promissory note in the amount of $1,000,000, a supplemental note in the
amount of $1,000,000, convertible debentures in the amount of $600,000 and
assumed debt of approximately $1,200,000, subject to adjustment. The Company
paid the cash portion of the purchase price from borrowings under its revolving
credit facility. Principal payments will commence on August 1, 2000 with respect
to the promissory note and debentures, and on August 1, 2003 with respect to the
supplemental note. The former shareholders of CCG have the option of converting
the debentures into shares of the Company's common stock, valued at $5.50 per
share, at least 30 days before any principal or interest payment on the
debentures. The CCG Acquisition was accounted for using the purchase method of
accounting and accordingly, the results of CCG's operations are included in the
Company's results from the date of the CCG Acquisition.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales
Net sales for the year ended December 31, 1999 were approximately
$67,988,000 compared to approximately $58,882,000 for the same period the prior
year, representing an increase of approximately $9,106,000 or 15.5%. The CCG
Acquisition accounted for approximately $2,803,000 of the increase in sales. The
overall increase, excluding the effect of the CCG Acquisition, was most evident
in video and entertainment software packaging (approximately $4,857,000 or
23.1%), music and audio packaging (approximately $1,393,000 or 15.3%) and
consumer product packaging (approximately $1,920,000 or 14.0%) between the
comparison periods. Within the video and entertainment software category,
entertainment software, specifically computer games, continues to be the primary
driver in sales growth. Music/audio packaging sales also increased as a result
of increased unit volume within this category, which enabled the Company to
offset pricing pressures in the music and audio packaging industry.
Gross Profit
The Company recognized gross profit of approximately $17,290,000 (a
25.4% profit margin) for the year ended December 31, 1999, as compared to
approximately $15,799,000 (a 26.8% profit margin) for the prior year,
representing an increase of approximately $1,491,000, or 9.4%. The increased
dollar amount is primarily due to the increase in net sales between comparison
periods, as discussed above. The decrease of 1.4 percentage points in gross
profit margin is due to increased costs in 1999 associated with downward pricing
pressures, the Company's decision to invest significantly in the expansion of
its capacity, the integration of the CCG Acquisition, and its implementation of
ISO 9001 procedures. See "Selling, General and Administrative Expenses," below.
As discussed below under "Liquidity and Capital Resources" the Company has
purchased new equipment and entered into a lease for additional space in order
to expand its capacity. The installation of such new equipment and the expansion
of its Hauppauge facility, by entering into additional leases, continued into
the first quarter of fiscal 2000 and will most likely continue to have an
adverse impact on earnings. The Company's integration of this new equipment
should enhance its
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operating efficiencies and improve its ability to compete in new markets, but
there can be no assurance that the Company will be able to achieve these goals.
See "Liquidity and Capital Resources".
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 1999 were approximately $12,360,000 (18.2% of net sales)
compared to approximately $10,550,000 (17.9% of net sales) for the prior year,
an increase of approximately $1,810,000. The increase in the dollar amount of
SG&A is primarily due to normal operating expenses and the amortization of
goodwill, in each case associated with the CCG Acquisition. In addition, on
April 29, 1999, Disc Graphics retained a consulting firm to assist the Company
in becoming ISO certified. The Company expects to receive its ISO 9001
certification during fiscal 2000. Disc Graphics has experienced and expects to
continue to experience consulting and operating expenses associated with this
project throughout fiscal 2000, which may impact future operating results. Disc
Graphics believes that this investment will ultimately transform the processes
of the organization to improve product quality, increase production volume, and
shorten the manufacturing time cycle. The Company believes that this commitment
to improve customer satisfaction should enhance its competitive edge in current
and new markets, but there can be no assurance of this. The remainder of the
increase is due to normal inflationary increases, and revenue related expenses
such as freight to customers and commissions. See "Liquidity and Capital
Resources".
Interest Expense
Net interest expense for the year ended December 31, 1999 was
approximately $747,000 compared to approximately $634,000 for the prior year.
Interest expense includes interest payable under the Company's revolving credit
facility, its capital lease obligations on equipment and its note, supplemental
note and debenture issued in connection with the CCG Acquisition. The increase
in net interest expense is due to increased borrowings under the Company's
revolving credit facility and the note, supplemental note and debenture related
to the CCG Acquisition.
Income Taxes
The provision for income taxes for the year ended December 31, 1999
decreased from the 1998 level primarily due to the decrease in pretax income of
approximately $583,000 between comparison periods, with no significant change in
the effective tax rate.
Net Income
Net income for the year ended December 31, 1999 was approximately
$2,507,000, compared to approximately $2,864,000 for the prior year, a decrease
of approximately $358,000, or 12.5%. Downward pricing pressures, the Company's
decision to invest significantly in the expansion of its capacity, the
integration of the CCG acquisition, and its implementation of ISO 9001
procedures all contributed to the decrease in net income.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales
Net sales for the year ended December 31, 1998 were approximately
$58,882,000 compared to approximately $48,445,000 for the same period the prior
year, representing an increase of approximately $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
markets (approximately $6,138,000 or 41%) and music and audio packaging markets
(approximately $396,000 or 5%) between the comparison periods. The consumer
product packaging market has increased approximately $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
-13-
<PAGE>
a decline in sales levels in those categories.
Gross Profit
Gross profit for the year ended December 31, 1998 was approximately
$15,799,000 (a 26.8% profit margin) compared to approximately $12,693,000 (a
26.2% profit margin) for the prior year, representing an increase of
approximately $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 approximately $10,550,000 (17.9% of net sales)
compared to approximately $8,483,000 (17.5% of net sales) for the prior year, an
increase of approximately $2,067,000, or 24.4%. 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 approximately
$634,000, compared to approximately $612,000 for the prior year. The slight
increase in interest expense was primarily related to increased investments in
equipment through capital leases, offset by interest earned on overnight
investments.
Income Taxes
The provision for income taxes for the year ended December 31, 1998
increased primarily due to the increase in pretax income of approximately
$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.
Liquidity and Capital Resources
The primary source of cash for the Company's business has been cash
flow from operations and availability under the Company's $10 million revolving
credit facility. Cash as of December 31, 1999 was approximately $143,000,
compared to approximately $43,000 as of December 31, 1998. Net cash provided
from operations for the year ended December 31, 1999 was approximately
$4,533,000 compared to approximately $3,691,000, for the year ended December 31,
1998. The improvement in cash flows from operations is primarily attributable to
management's increased focus on overall cash management. As of December 31,
1999, the Company had working capital of approximately $9,123,000, and
approximately $2,250,000 was available to the Company under its revolving credit
facility.
At December 31, 1999, the Company was not in compliance with certain
financial covenants of the Credit Agreement covering its $10 million revolving
credit facility. On February 25, 2000, the Company renegotiated
-14-
<PAGE>
certain provisions of the Credit Agreement. The amended Agreement allows for
borrowings up to $15,000,000. The amended Credit Agreement contains revised
covenants which require Disc Graphics to satisfy certain performance criteria,
net worth levels and debt service ratios. The amendment also waived the
Company's non-compliance with the original covenants. At December 31, 1999, and
at the date of this report, the Company was in compliance with the revised
covenants.
On July 1, 1999, the Company completed the acquisition of substantially
all of the assets and certain liabilities of CCG. The Company paid $3.5 million
of the purchase price in cash, and paid the balance by issuing a promissory note
in the amount of $1.0 million, a supplemental note in the amount of $1.0
million, a convertible debenture in the amount of $0.6 million and assumed debt
of approximately $1.2 million, subject to adjustment. The Company paid the cash
portion of the purchase price and serviced the assumed debt from borrowings
under its revolving credit facility. Principal payments will commence on August
1, 2000 with respect to the promissory note and debenture, and on August 1, 2003
with respect to the supplemental note. The former shareholders of CCG have the
option of converting the debenture into shares of the Company's common stock,
valued at $5.50 per share, at least 30 days before any principal or interest
payment on the debenture. As a result of the CCG Acquisition, the Company's
total indebtedness and future debt service obligations have increased
significantly from prior levels. The Company intends to fund these debt service
obligations from operating cash flow in future periods, and believes that it
will have sufficient funds to do so. There can be no assurance, however that the
Company will be able to integrate CCG's business successfully or realize any
benefit from the CCG Acquisition, or that earnings attributable to the CCG
Acquisition will be sufficient to offset the related costs associated with the
Company's debt service obligations.
During the year ended December 31, 1999, the Company incurred a total
of approximately $2.6 million of capital improvements in connection with the
purchase, preparation, and installation of a new 56-inch high speed diecutter
and 56-inch seven color press. The Company is obligated to make additional
installment payments and expects to incur additional installation costs related
to this equipment, which in the aggregate will result in additional expenditures
of approximately $5 million. The Company is currently in negotiations with
certain lenders to refinance substantially all of the $2.6 million in costs
incurred to date and expects to complete these negotiations by the second
quarter of fiscal 2000. Further, the Company anticipates that it will finance
approximately $8 to $9 million, which is inclusive of the aforementioned 56-inch
equipment, as well as additional manufacturing equipment by the second quarter
of fiscal 2000. The installation of the diecutter, press, and future additional
equipment is intended primarily to increase capacity and further improve plant
efficiencies. However, there can be no assurance that the Company will be able
to enter into financing agreements for such equipment on satisfactory terms,
that the installation of such equipment will result in improved efficiencies, or
that the Company's future results of operations will be improved as a result of
any such plans.
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. 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 lease contained certain provisions limiting the
Company's capital expenditures in Suffolk County and certain debt covenants
consistent with those contained in the Company's Credit Agreement. On February
29, 2000, the Company refinanced this lease with GECPF by entering into a seven
year promissory note arrangement that does not contain the same provisions, or
debt covenants, as the SCIDA lease.
-15-
<PAGE>
Inflation and Seasonality
The Company has experienced certain inflationary 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.
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.
New Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) as amended by SFAS 137, which is effective for
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 provides
guidance for accounting for all derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The management of the Company does not believe that the implementation of SFAS
No. 133 will have a material impact on its financial position or results of
operations.
Year 2000 Date Conversion
The Company experienced no difficulties as a result of the Year 2000
rollover, but it will continue to monitor the situation, particularly with
respect to the ability of its systems to recognize the date February 29, 2000.
Prior to December 31, 1999, the Company completed the process of
identifying, assessing and developing contingency plans to address problems that
might have arisen 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 ("Y2K"). The Company's evaluation of the Y2K
problem included 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 Y2K compliant computer system.
Tests during 1998 and 1999 confirmed that all mission critical modules of its
computer system were Y2K compliant. The Company also tested each desktop and
portable computer and each piece of equipment containing an embedded computer
chip, and confirmed empirically that each computer and its associated software
and each piece of equipment would function properly with dates occurring both
before and after 2000.
In 1998, the Company established a Y2K Compliance Committee to assess
the impact of the Y2K problem on the Company's business and to ensure its Y2K
compliance. The Committee is co-chaired by the Vice President for Legal Affairs
and the Management Information Systems Manager, and consists of representatives
from all major departments and all facilities within the Company. Management
committed all resources, both financial and personnel, reasonably necessary to
achieve Y2K compliance and/or implementation of 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 were or will be incurred in
connection with projects begun before, and/or budgeted without regard to, the
Company's Y2K compliance efforts.
Although the Company believes it is fully Y2K compliant, there can be
no assurance that the Company has successfully identified all systems, vendors
or customers which are not Y2K 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.
-16-
<PAGE>
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. The majority of the Company's long term
debt is its revolving line of credit, which is exposed to changes in interest
rates. The Company believes that changes in interest rates will not have a
material effect on operations.
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.
-17-
ITEM 8. Financial Statements and Supplementary Data
Page
Independent Auditors' Report.................................................F-1
Consolidated Balance Sheets as of December 31, 1999
and 1998............................................................F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997...................................F-3
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998, and 1997...................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................................F-5
Notes to Consolidated Financial Statements...................................F-6
Schedule II:
Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997...................................F-23
-18-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(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, 1999 and 1998, and the related
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 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
February 2, 2000, except for
Notes 8(a) and 9, which are as of February 29, 2000
-F1-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
1999 1998
---- ----
Assets
Current assets:
<S> <C> <C>
Cash $ 142,531 43,313
Accounts receivable, net of allowance for doubtful accounts
of $1,418,000 and $1,332,000, respectively 13,579,201 12,721,102
Inventories 4,428,374 2,379,627
Prepaid expenses and other current assets 448,364 271,462
Deferred income taxes 1,092,000 963,000
---------- -------
Total current assets 19,690,470 16,378,504
Plant and equipment, net 14,574,393 9,997,743
Goodwill, net of amortization of $499,000 and $222,000, respectively 6,247,588 1,265,210
Covenants not to compete, net of amortization of $144,000 and $24,000,
respectively 956,236 76,237
Security deposits and other assets 1,039,119 653,847
---------- -------
Total assets $ 42,507,806 28,371,541
============= ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long term debt $ 564,425 236,561
Current maturities of capitalized lease obligations payable 1,287,753 1,433,328
Accounts payable and accrued expenses 8,125,209 5,208,478
Income taxes payable 590,104 815,952
-------- -------
Total current liabilities 10,567,491 7,694,319
Long term debt, less current maturities 11,309,675 1,468,950
Capitalized lease obligations payable, less current maturities 2,604,586 3,944,868
Deferred income taxes 1,579,000 1,323,000
---------- ---------
Total liabilities 26,060,752 14,431,137
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 shares 55,488 55,488
Additional paid in capital 5,009,671 5,009,671
Retained earnings 11,413,501 8,906,581
----------- ---------
Less: 16,478,660 13,971,740
Treasury stock, at cost, 30,409 and 30,349 shares at
December 31, 1999 and December 31, 1998, respectively (31,606) (31,336)
----------- --------
Total stockholders' equity 16,447,054 13,940,404
----------- ----------
Total liabilities and stockholders' equity $ 42,507,806 28,371,541
============= ==========
See accompanying notes to Consolidated Financial Statements.
F-2
</TABLE>
<PAGE>
<TABLE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 67,987,941 58,881,533 48,444,890
Cost of sales 50,697,468 43,082,081 35,751,899
----------- ----------- ----------
Gross profit 17,290,473 15,799,452 12,692,991
Operating Expenses:
Selling and shipping 6,804,982 6,018,562 4,426,729
General and administrative 5,555,369 4,531,620 4,056,293
---------- ---------- ---------
Operating income 4,930,122 5,249,270 4,209,969
Interest expense, net 747,202 633,512 612,181
Gain on disposal of equipment ---- 149,669 ----
--------- -------
Income before provision for income taxes 4,182,920 4,765,427 3,597,788
Provision for income taxes 1,676,000 1,901,000 1,439,000
---------- ---------- ---------
Net income $ 2,506,920 2,864,427 2,158,788
========== ========== =========
Net income per share:
Basic $ 0.45 0.52 0.40
===== ==== ====
Diluted $ 0.45 0.52 0.40
===== ==== ====
Weighted average number of shares outstanding
Basic 5,518,361 5,474,444 5,387,240
Diluted 5,540,265 5,492,050 5,397,130
See accompanying notes to Consolidated Financial Statements.
F-3
</TABLE>
<PAGE>
<TABLE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998, and 1997
Preferred stock Common Stock Additional
--------------- ------------ paid in Retained Treasury
Shares Amount Shares Amount capital earnings Stock Total
------ ------ ------ ------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
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
Purchase of treasury stock ---- ---- ---- ---- ---- ---- (270) (270)
Net income ---- ---- ---- ---- ---- 2,506,920 ---- 2,506,920
--------- --------- -------------- ----------- ------------- ------------- ----------- -------------
Balance, December 31, 1999 ---- $ ---- 5,548,761 $ 55,488 5,009,671 11,413,501 (31,606) 16,447,054
========= ========= ========= ====== ========= ========== ======= ==========
See accompanying notes to Consolidated Financial Statements.
F-4
</TABLE>
<PAGE>
<TABLE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,506,920 2,864,427 2,158,788
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,477,667 2,216,705 2,124,596
Deferred income tax 127,000 161,000 89,000
Provision for doubtful accounts 422,721 402,470 526,548
Gain on disposal of equipment ---- (149,669) ----
Changes in assets and liabilities, net of the
effect of business acquired:
Accounts receivable (210,400) (1,425,208) (2,515,895)
Inventory (1,857,906) (472,933) 322,582
Prepaid expenses and other current assets (46,677) 57,458 269,381
Accounts payable and accrued expenses 1,641,772 201,406 (731,561)
Income taxes payable (225,848) 306,025 (444,161)
Security deposits and other assets (302,272) (470,413) 54,768
---------- ---------- ----------
Net cash provided by operating activities 4,532,977 3,691,268 1,854,046
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (5,722,182) (1,025,613) (2,419,829)
Purchase of net assets of business acquired (3,581,806) 18,211 (206,497)
Proceeds from sale of equipment ---- 166,900 55,200
-------------- -------------- --------------
Net cash used in investing activities (9,303,988) (840,502) (2,571,126)
---------- -------- ----------
Cash flows from financing activities:
Proceeds (repayments) of long-term debt 6,356,356 (1,714,160) (953,608)
Principal proceeds from notes receivable ---- 40,406 43,261
Proceeds from capital lease obligations ---- 745,549 2,524,917
Principal payments of capital lease obligations (1,485,857) (1,875,302) (847,938)
Purchase of warrants ---- (34,178) ----
Purchase of treasury stock (270) (1,521) (5,154)
-------------- -------------- --------------
Expenses incurred in relation to the exchange offer ---- ---- (43,504)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 4,870,229 (2,839,206) 717,974
-------------- -------------- --------------
Net increase in cash 99,218 11,560 894
Cash at beginning of year 43,313 31,753 30,859
-------------- -------------- --------------
Cash at end of year $ 142,531 43,313 31,753
============== ============== ==============
See accompanying notes to Consolidated Financial Statements.
F-5
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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.
(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.
(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 1997, 1998 and 1999.
(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
-F6-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
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 financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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
realized 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.
(i) Net Income Per Share
--------------------
Basic earnings per share are computed by dividing income available to
common stockholders (which, for the Company, equals its net income) by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflect the potential dilution that
would occur if all securities exercisable or exchangeable for or
convertible into shares of common stock that were outstanding during
the period, such as stock options, warrants and convertible
debentures, were exercised or converted into shares of common stock.
The computation of weighted average shares outstanding used in the
calculation of diluted earnings per share does not include shares of
common stock that would be issuable upon the exercise of the Company's
outstanding Class A Warrants or the conversion of the convertible
debenture, because the exercise price of such warrants and the
conversion rate of such debentures exceeded the market price of the
Company's common stock during the relevant periods.
-F7-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(j) Stock Option Plan
-----------------
The Company records compensation expense for employee stock options
only if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. The Company has elected not
to implement the fair value based accounting method for employee stock
options, but has elected to disclose the pro forma net earnings and
pro forma earnings per share for employee stock option grants as if
such method had been used to account for stock-based compensation
cost.
(k) Impairment of Long Lived Assets and Long Lived Assets to Be
Disposed Of
-----------------------------------------------------------------
The Company reviews long-lived assets and certain identifiable
intangibles 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.
(l) Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which established standards for the reporting and display of
comprehensive income and its components with the same prominence as
other items in annual consolidated financial statements. The Company
has no elements of other comprehensive income other than net income;
therefore, comprehensive income equals reported net income.
(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 have been made to the prior years' presentation to
conform with the current year's presentation.
-F8-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(2) Acquisitions
(a) Contemporary Color Graphics, Inc.
---------------------------------
On July 1, 1999, the Company acquired substantially all of the assets
and certain liabilities of Contemporary Color Graphics, Inc., a New
York based commercial printer ("CCG") for $3,500,000 in cash at
closing, a promissory note in the amount of $1,000,000, a supplemental
note in the amount of $1,000,000, convertible debentures in the amount
of $600,000 and assumed debt of approximately $1,200,000, subject to
adjustment. See Note 8 for further information regarding the notes,
debentures and debt assumed. The Company paid the cash portion of the
purchase price from borrowings under its revolving credit facility.
The acquisition was accounted for using the purchase method of
accounting and in accordance with generally accepted accounting
principles.
Purchase price (including transaction
costs of $82,000, excluding
assumed liabilities) $ 6,182,000
Net assets of business acquired, at cost 37,200
Fair value adjustment of
plant and equipment (114,500)
---------
(77,300)
-------
6,259,300
Allocated to:
Covenant not to compete 1,000,000
---------
Excess of cost over fair value
of business acquired $ 5,259,300
=========
-F9-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
The following unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments such as (i)
additional amortization expense due to goodwill (15 years) and the
covenant not to compete (5 years) resulting from the CCG acquisition
and (ii) increased interest expense due to cash borrowed under the
Company's financing agreement for the payment of the purchase price,
the repayment of CCG's notes payable and the note, supplemental note
and convertible debenture issued by the Company. These unaudited pro
forma results are not necessarily indicative of the results of
operations which actually would have resulted had the purchase been
effected on January 1, 1998, nor of future results of operations of
the consolidated entities.
1999 1998
---- ----
(In thousands, except per share amounts)
Net sales $ 71,606 66,350
Net income 2,307 2,874
Net income per share:
Basic .42 .52
Diluted .42 .52
(b) Benham
------
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 approximately $87,000 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 of $37,500 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.
-F10-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
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
---------
Excess of cost over fair value of business
acquired $ 373,537
=========
The effect of Benham's operations to the consolidated financial
statements for the year ended December 31, 1997 was not material and
therefore pro forma financial information is not presented.
(3) Supplemental Cash Flow Information
-----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
1999 1998 1997
---- ---- ----
Cash paid during the year for:
Interest $ 737,073 664,586 581,162
Income taxes $ 1,774,848 1,448,500 1,986,692
(4) Covenants Not to Compete
------------------------
In 1999, the Company obtained non-compete agreements from the former
owners in connection with the CCG acquisition. The non-compete
agreements were valued at $1,000,000. The non-compete agreements are
being amortized over their term of five years using the straight-line
method. Amortization of these covenants not to compete amounted to
$100,000 for the year ended December 31, 1999.
In 1997, the Company obtained a non-compete agreement in connection
with the acquisition of Benham. The non-compete agreement was valued at
$100,000. The non-compete agreement is being amortized over its term of
five years using the straight-line method. Amortization of the covenant
not to compete amounted to $20,000, $20,000 and $3,760 for the years
ended December 31, 1999, 1998 and 1997, respectively.
-F11
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(5) Inventories
-----------
Inventories consist of the following:
1999 1998
---- ----
Raw materials $ 3,477,610 1,577,349
Work-in-process 700,981 659,552
Finished goods 249,783 142,726
------------ ----------
$ 4,428,374 2,379,627
========= =========
(6) Property, Plant and Equipment
--------- -------------------
Property, plant and equipment consist of the following:
1999 1998
---- ----
Land and building $ 550,000 550,000
Machinery and equipment 21,249,849 15,145,272
Furniture and fixtures 1,731,718 1,290,616
Leasehold improvements 1,472,713 1,390,758
Automobiles and trucks 222,328 217,565
------------ ------------
25,226,608 18,594,211
Less accumulated depreciation
and amortization 10,652,215 8,596,468
------------ -----------
$ 14,574,393 9,997,743
=========== ===========
Depreciation and amortization expense of property, plant, and equipment
amounted to $2,076,563, $2,078,554 and $2,020,999 for the years ended
December 31, 1999, 1998, and 1997, respectively.
-F12-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(7) Accounts Payable and Accrued Liabilities
----------------------------------------
Accrued liabilities at December 31, 1999 and 1998 consisted of the
following:
1999 1998
---- ----
Accounts payable and accrued accounts payable $ 4,275,144 2,373,626
Accrued payroll and other employee benefits 2,582,444 1,610,996
Accrued vacation 396,688 438,342
Accrued commissions 643,773 549,049
Accrued other 227,160 236,465
---------- ---------
$ 8,125,209 5,208,478
========== =========
(8) Long Term Debt
--------------
Long Term Debt is summarized as follows:
1999 1998
---- ----
Revolving line of credit (a) $ 7,750,000 870,000
Promissory note (b) 1,000,000 ----
Supplemental note (c) 1,041,650 ----
Convertible debenture (d) 600,000 ----
Secured equipment financing notes (e) 883,500 ----
Mortgage payable (f) 545,625 613,125
Various secured equipment financing
notes (g) 53,325 177,273
6.36% Promissory note (h) ---- 45,113
------------ -------
11,874,100 1,705,511
Less current maturities 564,425 236,561
------------- --------
$ 11,309,675 1,468,950
========== ===========
-F13-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(a) In February, 1997, the Company entered into a financing agreement with
Key Bank, N.A., now known as the Dime Savings Bank of New York, FSB,
as amended on December 1, 1998 (the "Credit Agreement"). The Credit
Agreement provides the Company with 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 Credit
Agreement provides financing (as defined), not to exceed $10,000,000.
The Credit 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, 1999 the base rate was 8.50%. The Credit Agreement is
secured by substantially all of the Company's unsecured assets. In
addition, the Credit Agreement contains various covenants, including
the maintenance of certain financial ratios, including consolidated
net worth, working capital, debt service, and funded debt to EBITDA.
At December 31, 1999, the Company was not in compliance with certain
covenants of the Credit Agreement. On February 25, 2000, the Company
renegotiated certain provisions of the Credit Agreement. The amended
Credit Agreement allows for borrowing up to $15,000,000, and contains
revised covenants which require the Company to satisfy certain
performance criteria, net worth levels and debt service ratios. The
amendment also waived the Company's noncompliance with the original
covenants. At December 31, 1999, the Company was in compliance with
the revised covenants.
(b) In connection with the acquisition of CCG, the Company issued a
$1,000,000 promissory note. Principal on the promissory note must be
paid in three annual installments commencing on August 1, 2000.
Interest at a rate of 8.33% per annum on the note is paid quarterly.
The principal amounts of this note and the debentures referred to
below are subject to downward adjustment if CCG does not meet certain
minimum revenue levels. In the event such levels are not met and the
principal amounts are reduced, goodwill will be adjusted accordingly.
(c) In connection with the acquisition of CCG, the Company issued a
$1,000,000 supplemental note. Principal on the supplemental note must
be paid in two annual installments commencing on August 1, 2003.
Interest at a rate of 8.33% per annum on the note must be paid on each
principal payment date. Interest accrued on the supplemental note as
of December 31, 1999 is $41,650.
(d) In connection with the acquisition of CCG, the Company issued a
$600,000 convertible debenture. The convertible debenture must be paid
in three annual installments commencing on August 1, 2000. Interest at
a rate of 8.33% per annum on the note is paid quarterly. The former
shareholders of CCG have the right to convert the debentures into
shares of the Company's common stock, not less than 30 days before any
principal or interest payment date at a rate of one share for every
$5.50 of principal or interest.
-F14-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(e) Secured equipment financing note payable to a bank, payable in monthly
installments ranging from $9,700 in 1999 to $14,700 in 2006, plus
interest. Interest is variable, calculated at a rate of 1.75% points
below the bank's current index rate, which was 8.50% at December 31,
1999. The current interest rate for this note as of December 31, 1999
was 6.75%.
(f) In connection with the acquisition of Benham, the Company secured a
mortgage with a lending institution in the amount of $675,000 for the
building and land acquired. The mortgage is payable over ten years,
commencing March 1, 1998, 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.
(g) Various secured equipment financing notes, which are payable in
various monthly installment amounts aggregating $12,000 and $12,400,
respectively, including interest at 8.2% maturing from October 1999
through September 2000 secured by equipment with an aggregate net book
value of approximately $390,000 at December 31, 1999.
(h) In connection with an acquisition, the Company issued a promissory
note in the amount of $330,000 (principal and interest). The
promissory note was fully repaid in 1999.
The aggregate maturities of long-term debt outstanding as of December
31 for each of the five years subsequent to 1999, including amounts
outstanding under the Credit Agreement, are as follows: $564,425 in
2000; $839,500 in 2001; $2,388,022 in 2002; $2,548,260 in 2003;
$2,772,335 in 2004; $2,761,558 thereafter.
(9) Leases
------
The Company is obligated under several capital leases for certain
machinery and equipment that expire at various dates during the next
six years. At December 31, 1999 and 1998, the gross amount of plant
and equipment and related accumulated amortization recorded under
capital leases were as follows:
1999 1998
---- ----
Machinery and equipment $ 7,921,301 7,921,301
Less accumulated amortization 2,824,867 2,051,589
---------- ----------
$ 5,096,434 5,869,712
========= =========
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 13). 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,
1999, 1998 and 1997 was $1,178,058, $1,162,154, and $1,034,416,
respectively.
-F15-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
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, 1999 are:
Capital Operating
Leases Leases
Year ending December 31:
2000 $ 1,542,991 $ 910,586
2001 1,122,786 605,657
2002 781,570 474,776
2003 350,100 391,461
2004 350,100 349,797
2005 and thereafter 262,575 696,000
---------- ----------
Total minimum lease payments 4,410,122 3,428,277
Less amount representing
interest (at rates ranging
from 5.9% to 10.5%) 517,783
-----------
Net principal portion 3,892,339
Less portion due within one year 1,287,753
----------
Long-term portion $ 2,604,586
==========
Liabilities under certain capital leases are personally guaranteed by
the President and two Vice-Presidents of the Company.
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 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 was $2,003,657. On February 29, 2000, the Company
refinanced the lease with GECPF by entering into a seven year
promissory note arrangement that does not contain the same capital
expenditure provisions, or debt covenants, as the SCIDA lease.
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, 1999, was $1,466,885.
-F16-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(10) Stockholders' Equity
--------------------
(a) Stock Options
-------------
Pursuant to the Company's 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 granted 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 must 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, 1999, there were 195,476 additional shares
available for grant under the Plan.
Changes in options outstanding are as follows:
Weighted-average
Shares exercise price
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
Granted 18,879 4.50
--------
Outstanding December 31, 1999 304,524 3.97
=======
Exercisable at December 31, 1999 190,645 $ 3.91
======= =====
The weighted average remaining life of options outstanding as of December 31,
1999, was 6.42 years.
-F17-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
The assumptions used in determining the weighted average fair value of
options granted are as follows:
1999 1998 1997
---- ---- ----
Weighted average fair value $ 3.06 2.91 2.61
Divided yield ---- ---- ----
Risk free interest rate 4.70% 5.73% 5.99%
Stock volatility 56% 59% 63%
Expected option life 10.00 9.77 5.19
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:
1999 1998 1997
---- ---- ----
Net income:
As reported $ 2,506,920 2,864,427 2,158,788
Pro forma $ 2,395,469 2,744,554 2,116,869
Net income per share:
As reported: basic
and diluted $.45 .52 .40
Pro forma: basic
and diluted $.43 .50 .39
(b) Warrants
--------
The Company issued 1,242,105 Class A Warrants in connection
with its predecessor's initial public offering ("IPO"). These
warrants expired on November 9, 1999. The warrants were
separable and tradable and each warrant entitled the holder to
purchase one share of the Company's Common Stock at $5.50 per
share. The warrants were redeemable, at the Company's option,
at a price of $.05 per warrant provided the closing bid price
per share equaled or exceeded $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 1998, 100,000 Class A Warrants were
repurchased for $34,178.
-F18-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
In connection with its predecessor's IPO, warrants to purchase
135,000 units were issued to the underwriter ("Underwriters'
Warrants"). The Underwriters' Warrants were exercisable at a
price of $9.00 per unit, with each unit consisting of one
share of the Company's Common Stock and two Class A Warrants
("Units"). The Underwriter's Warrants expired on November 9,
1999.
In connection with the Company's merger with its predecessor,
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.
(11) Notes Receivable-Stockholders
-----------------------------
In December 1991, two Vice Presidents of the Company were advanced
$536,360 each in exchange for notes receivable. These notes were
unsecured and provided for interest at 9%. The balance of the notes
from the two Vice Presidents was repaid during 1997.
(12) Income Taxes
------------
The provision for (benefit of) income taxes for the years ended
December 31, 1999, 1998 and 1997 consists of the following:
1999 1998 1997
---- ---- ----
Current
Federal $ 1,268,000 1,484,000 1,204,000
State 281,000 256,000 324,000
---------- ---------- ----------
1,549,000 1,740,000 1,528,000
Deferred:
Federal 82,000 200,000 (79,000)
State 45,000 (39,000) (10,000)
----------- ------------ ----------
127,000 161,000 (89,000)
---------- ----------- ----------
$ 1,676,000 1,901,000 1,439,000
========= ========== =========
The provision for income taxes for the years ended December 31, 1999,
1998, and 1997 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.
-F19-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
The tax effects of temporary differences that give rise to a significant portion
of the net deferred tax liability at December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Inventory valuation $ 45,000 44,000
Allowance for doubtful accounts 470,000 387,000
Uniform cost capitalization for inventory 67,000 40,000
Accrued vacation 133,000 143,000
Accrued salaries and commissions 57,000 68,000
Sales return allowance 48,000 30,000
Investment tax credit carryforwards 613,000 457,000
---------- ----------
Total deferred tax assets 1,433,000 1,169,000
Less valuation allowance (341,000) (206,000)
--------- ---------
Net deferred tax assets 1,092,000 963,000
Deferred tax liability:
Accelerated depreciation
for tax purposes (1,579,000) (1,323,000)
----------- -----------
Net deferred tax liability $ (487,000) (360,000)
============ ===========
The valuation allowance for deferred tax assets as of December 31, 1999
and 1998 was $341,000 and $206,000, respectively. The net change in the
total valuation allowance for the years ended December 31, 1999 was an
increase 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, 1999.
At December 31, 1999, the Company has available New York State
investment tax credit carryforwards aggregating approximately $908,000
expiring through 2014.
-F20-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
(13) 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, 1999,
1998 and 1997, and a security deposit of $115,000 paid on the lease is
included in security deposits and other assets at December 31, 1999.
(14) Commitments and Contingencies
-----------------------------
In 1992, the Company entered into consulting agreements, as amended, to
provide three of its shareholders a minimum annual consulting fee of
$37,333 through August 31, 2001. The aggregate expense under these
agreements was $111,999 in each of the years ended December 31, 1999,
1998 and 1997.
(15) Benefit Plans
-------------
The Company maintains an Employee 401(k) Savings Plan. The plan is a
defined contribution plan which is administered by the Company. All
employees are eligible for voluntary participation upon completing
three consecutive months of service. The plan provides for growth in
savings through contributions and income from investments. It is
subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA), as amended. Plan participants are allowed to
contribute a specified percentage of their base salary. The Company
matches the participants' contributions up to a maximum of 2% of
compensation. The costs related to the plan approximated $224,000,
$116,000, and $124,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
(16) 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 values of all financial instruments classified as
current assets or current liabilities are deemed to approximate fair
value because of the short maturity of these investments. In the
opinion of management, the fair values of 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.
(17) Business and Credit Concentrations
----------------------------------
Most of the Company's customers are located in the United States. No
one customer accounted for more than 10% of the Company's sales for
1999, 1998, and 1997. At December 31, 1999 and 1998, two customers
(aggregating 19%) and four customers (aggregating 35%) each accounted
for more than 5% of the net accounts receivable balance, respectively.
-F21-
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
December 31, 1999 and 1998
The Company generally grants credit based upon analysis of the
customer's financial position and previously established buying and
selling patterns.
(18) Unaudited Quarterly Financial Information
The following is a summary of unaudited quarterly operating results for
fiscal 1999 and 1998 (in thousands, except per share amounts):
1999
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $ 14,895 14,708 18,972 19,413
Gross profit 3,424 4,091 4,903 4,872
Net income 301 700 748 758
Net income per share:
Basic and diluted .05 .13 .14 .14
=== === === ===
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
=== === === ===
Net income per share calculations for each of the quarters are based on
weighted average numbers of share outstanding in each period. Therefore,
the sum of the quarters in a year does not necessarily equal the year's
earnings per share.
-F22-
<PAGE>
<TABLE>
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 Deduction(1) Other Period
- ----------------------------------------------- --------------- ----------------- ---------------- ------------ ---------------
For the year ended December 31, 1997:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 844,000 $527,000 $(229,000) $20,000(2) $1,162,000
For the year ended December 31, 1998:
Allowance for doubtful accounts $1,162,000 $403,000 $(233,000) $1,332,000
For the year ended December 31, 1999:
Allowance for doubtful accounts $1,332,000 $423,000 $(337,000) $1,418,000
</TABLE>
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
(2) Allowance for doubtful accounts of acquired business.
-F23-
<PAGE>
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
-19-
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 to the Registrant's definitive Proxy
Statement pursuant to Regulation 14A for the Registrant's 2000 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, 1999.
(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
1999.
(c) Exhibits. See Exhibit Index included elsewhere in
this Report.
(d) Financial Statement Schedules. See Items 8 and
14(a)(2) above.
-20-
<PAGE>
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]*).
2.1 Asset Purchase Agreement dated as of July 1, 1999, by and
among the Registrant, Contemporary Color Graphics, Inc.
("CCG") and the shareholders of CCG named therein (filed as
Exhibit 2.1 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.2 Promissory Note dated July 1, 1999, made by the Registrant
to CCG in the principal sum of $1.0 million (filed as
Exhibit 2.2 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.3 Supplemental Note dated July 1, 1999, made by the Registrant
to CCG in the principal sum of $1.0 million (filed as
Exhibit 2.3 to the Registrant's Form 8-K dated July 1, 1999
and incorporated herein by reference).
2.4 Security Agreement dated July 1, 1999 between the Registrant
and CCG (filed as Exhibit 2.4 to the Registrant's Form 8-K
dated July 1, 1999 and incorporated herein by reference).
2.5 Agreement of Amendment dated July 1, 1999, between KeyBank
National Association and the Registrant (filed as Exhibit
2.5 to the Registrant's Form 8-K dated July 1, 1999 and
incorporated herein by reference).
3.1 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*).
3.2 Amended and Restated By-Laws of the Registrant (filed as
Exhibit 3.2 to Form 8-A, filed June 21, 1996*).
4.1 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]*).
4.2 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*).
4.3 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]*).
4.4 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*).
4.5 Form of certificate evidencing shares of Common Stock (filed
as an Exhibit to the Registration Statement on Form S-1,
File No. 33-62980 declared effective on November 9, 1993*).
4.6 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*).
-21-
<PAGE>
4.7 Convertible Debenture due July 1, 2002, issued by the
Registrant to CCG on July 1, 1999, in the principal amount
of $600,000 (filed as Exhibit 4.1 to the Registrant's Form
8-K dated July 1, 1999 and incorporated herein by
reference).
9.1 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*).
10.1 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*).
10.2 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*).
10.3 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*).
10.4 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*).
10.5 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*).
10.6 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*).
10.7 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*).
10.8 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*).
10.9 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*).
10.10 Form of Employment Agreement, dated June 28, 1995, between
Registrant and Stephen Frey (filed as Exhibit to the
Registration Statement on Form S-4, File No. 33-94068
declared effective October 30, 1995*).
-22-
<PAGE>
10.11 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*).
10.12 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*).
10.13 $675,000 Mortgage and Security Agreement between Registrant
and KeyBank National Association dated January 16, 1998
(filed as Exhibit 10.m to the Registrant's Form 10-K for the
fiscal year ended December 31, 1997*).
10.14 Amended and Restated Credit Agreement dated December 1, 1998
between the Registrant and KeyBank National Association
(filed as Exhibit 10.n to the Registrant's Form 10-K for the
fiscal year ended December 31, 1998*).
10.15 Borrower's Confirmation of Security Agreement dated December
1, 1998 between the Registrant and KeyBank National
Association (filed as Exhibit 10.o to the Registrant's Form
10-K for the fiscal year ended December 31, 1998*).
10.16 Assignment and Assumption, dated as of January 1, 2000 by
and among Allied Digital Technologies Corp., Registrant and
Lee Halpern and Larry Halpern.**
10.17 Second Amendment to Commercial Lease, dated February 16,
2000 between Registrant and the William S. Pine and Lisa
Pine Trust u/d/t January 21, 1982.**
10.18 Lease Extension and Expansion Agreement, dated February 17,
2000 between Registrant and Kerzner Associates Limited.**
10.19 Sublease, dated as of January 1, 2000 between Registrant and
Banco Union, New York Agency.**
10.20 Amendment No. 2 to the Amended and Restated Credit
Agreement, dated December 1, 1998, between the Registrant
and The Dime Savings Bank of New York, FSB f/k/a KeyBank
National Association.**
10.21 Borrower's Confirmation of Security Agreement dated February
25, 2000, between the Registrant and The Dime Savings Bank
of New York, FSB, f/k/a 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.
-23-
<PAGE>
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, hereunto duly authorized.
DISC GRAPHICS, INC
March 6, 2000 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.
-24-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Donald Sinkin
- -----------------
Donald Sinkin Chairman of the Board, Chief March 3, 2000
Executive Officer and President
(Principal Executive Officer)
/s/ Stephen Frey
- ----------------
Stephen Frey Senior or Vice President of March 3, 2000
Operations, Secretary and Director
(Principal Operating Officer)
/s/ Margaret Krumholz
- ---------------------
Margaret Krumholz Chief Financial Officer and Senior March 3, 2000
Vice President of Finance
(Financial Officer and Principal
Accounting Officer)
/s/ John Rebecci
- ----------------
John Rebecchi Senior Vice President of Sales and March 3, 2000
Marketing and Director
/s/ Frank A. Bress
- ------------------
Frank A. Bress Vice President for Legal Affairs March 3, 2000
and General Counsel
/s/ Daniel Levinson
- -------------------
Daniel Levinson Director March 6, 2000
/s/ Seymour W. Zises
- --------------------
Seymour W. Zises Director March 6, 2000
/s/ Mark L. Friedman
- --------------------
Mark L. Friedman Director March 6, 2000
-25-
EXHIBIT 10.16
Assignment and Assumption
Assignment and Assumption dated as of January 1, 2000 by and among
Allied Digital Technologies Corp., a Delaware corporation having an office at 15
Gilpin Avenue, Hauppauge, New York 11788 ("Assignor"), Disc Graphics, Inc., a
Delaware corporation having an office at 10 Gilpin Avenue, Hauppauge, New York
11788 ("Assignee") and Lee Halpern and Larry Halpern, having an address of 16076
Villa Vizcaya, Delray Beach, Florida 33446 (collectively, "Landlord").
RECITALS
A. Landlord, as landlord, and Assignor, as tenant, are parties to a
lease dated as of November 15, 1996 (the "Lease"), covering the building located
at 30 Gilpin Avenue, Hauppauge, New York 11788 and more particularly described
on Exhibit A attached hereto and made a part hereof (the "Premises").
B. Assignor desires to assign to Assignee all of Assignor's right,
title and interest in and to the Lease and is about to enter into a Sublease of
even date herewith between Assignee, as sublandlord, Assignor, as subtenant, for
the premises located at 903 Motor Parkway, Hauppauge, New York (the "903
Sublease") as more particularly described in the Sublease.
C. Assignee desires to assume all of Assignor's rights and obligations
in, to and under the Lease from and after the date hereof, and to enter into the
903 Sublease.
Accordingly, Assignor, Assignee and Landlord agree as follows:
1. Assignor hereby assigns to Assignee all of Assignor's right, title
and interest in and to the Lease. Assignor hereby represents and warrants to
Assignee that: (i) the Lease is in full force and effect, (ii) Assignor has
received no written notice of default (that remains uncured beyond any
applicable notice and cure period) from the landlord under the Lease, (iii)
Assignor has not assigned, encumbered or otherwise transferred any interest of
Assignor as tenant under the Lease nor subleased any space demised by the Lease,
(iv) Assignor has performed all of its material or monetary obligations under
the Lease, and (v) no event has occurred or failed to occur which, with the
giving of notice or the passage of time, or both, would constitute a default
under the Lease by Assignor.
2. Assignee hereby assumes all of Assignor's obligations in, to and
under the Lease arising or accruing on or after the date hereof and shall
defend, indemnify and hold harmless Assignor from all costs, damages,
liabilities and expenses (including, without limitation, reasonable attorneys'
fees) imposed upon or incurred by Assignor by reason of Assignee's failure to
perform Assignor's obligations under the Lease arising or accruing on or after
the date hereof.
3. Assignor shall defend, indemnify and hold harmless Assignee from
all costs, damages, liabilities and expenses (including, without limitation,
reasonable attorneys' fees) imposed upon or incurred by Assignee by reason of
Assignor's failure to perform Assignor's obligations under the Lease arising or
accruing prior to the date hereof.
<PAGE>
4. Upon the full execution and delivery of this Agreement and the
Sublease to Assignor, Assignor shall (i) pay to Landlord a sum equal to
$171,118.00 (representing the amount equal to $250,000.00 less $78,882.00
representing additional rent previously paid by Assignor to Landlord for real
estate taxes (the "Prepaid Real Estate Taxes")) and (ii) release Landlord of its
obligation to refund to Assignor the amount equal to such Prepaid Real Estate
Taxes. As further consideration for Landlord's execution of this Agreement,
Assignor shall pay Landlord a sum equal to $150,000.00 on February 1, 2000 and a
sum equal to $250,000.00 on August 1, 2000 (any such sum paid by Assignor to
Landlord being called the "Cancellation Fee").
5. Articles 3.01 (a), (b) and (c) of the Lease are hereby deleted and
the following is hereby inserted in their place:
"a. For the period January 1, 2000 through July 31, 2000,
$198,070.00 annually, payable in monthly installments of $16,505.83.
b. For the period August 1, 2000 through July 31, 2001,
$206,032.00 annually, payable in monthly installments of $17,169.33.
c. For the period August 1, 2001 through July 31, 2002,
$364,150.00 annually, payable in monthly installments of $30,345.83.
d. For the period August 1, 2002 through July 31, 2003,
$372,430.00 annually, payable in monthly installments of $31,035.83
e. For the period August 1, 2003 through July 31, 2004,
$430,878.00 annually, payable in monthly installments of $35,906.50.
f. For the period August 1, 2004 through July 31, 2005,
$439,494.00 annually, payable in monthly installments of $36,624.50.
g. For the period August 1, 2005 through July 31, 2006,
$444,684.00 annually, payable in monthly installments of $37,057.00.
h. For the period August 1, 2006 through July 31, 2007,
$449,982.00 annually, payable in monthly installments of $37,498.50.
i. For the period August 1, 2007 through January 31, 2008,
$227,220.00 for such period, payable in monthly installments of
$37,870.00."
6. Article 8.01 of the Lease is hereby amended by adding the following
sentence to the end of said Article:
"Notwithstanding the forgoing, Lessee may also use the
premises for the manufacture of printed products and cosmetic and home
care product sampling devices and containers."
7. Article 12.01 of the Lease is hereby amended by adding the
following sub-article:
"i. Notwithstanding the foregoing, Tenant may assign this
Lease or sublet all or a portion of the Premises without Landlord's
prior consent (i) in connection with the sale of substantially all of
Tenant's assets located in the Premises or a sale of Tenant's
business, (ii) in connection with a merger, reorganization or
consolidation of Tenant, or (iii) in connection with a registered
public offering of stock in Tenant."
8. Article 12.01(b) of the Lease is hereby amended by adding the
following language to the beginning of the sub-article:
"Except in connection with an assignment or subletting to an
entity which is a publicly traded company,".
9. For the purposes of Article 20.01 of the Lease, the phrase "the
condition in which [the Premises] was originally delivered to Lessee" shall mean
the condition as it exits on the date hereof.
<PAGE>
10. For the purposes of Article 30 of the Lease, all notices to the
Assignee, as lessee, shall be addressed to:
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, New York 11788
Attention: Margaret Krumholz, CFO
with copy to:
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, New York 11788
Attention: Frank A. Bress, Esq.
11. To the extent applicable, the fixed rent, additional rent, real
estate taxes, and operating expenses shall be apportioned as of midnight of the
day before the date hereof.
12. For the purposes of Article 17.02 of the Lease, the reference to
Section 18.01 of the Lease is amended to read "Section 17.01."
13. Prior to the date hereof, Assignor shall remove the vacuum pump
and all air compressors from the Premises
14. a. Provided Assignee shall not be in default of its obligations as
sublessor under the 903 Sublease, on or before the delivery date (collectively,
the "Delivery Dates" (or such other date as may be agreed to by Assignor and
Assignee in writing, that date being deemed the respective Delivery Date)) set
forth on the table below, Assignor shall deliver to Assignee the respective area
(collectively, the "Areas", as more particularly described on Exhibit A) in
vacant and broom clean condition.
Delivery Date Area(s)
- ------------- -------
January 1, 2000 1 & 2
February 16, 2000 3B
March 1, 2000 3A
b. In the event Assignor is unable to deliver any such Area
on its respective Delivery Date (provided, however, if the delivery of
any such Area is delayed past its respective Delivery Date by reason
of acts of God, labor disputes, civil commotion, war, fire or other
casualty, inability to procure materials, governmental regulations,
statutes, ordinances, restrictions or decrees, or other causes beyond
the control of Assignor or Assignee (financial inability excepted)
(collectively, "Force Majeure"), such respective Delivery Date shall
be extended for a period equivalent to the period of such delay from
and after said Delivery Date), Assignor shall pay to Assignee an
amount equal to the sum of (x) $10,000.00 plus (y) $1,000.00 per day
for each day delay thereafter, as liquidated damages for such failure.
If the delivery of any such Area is delayed past the respective
Delivery Date due to (i) any act or omission of Assignee or any of its
employees, agents or contractors or (ii) Assignee's failing to deliver
to Assignor any such space pursuant to the 903 Sublease, then such
Area shall be deemed delivered on the Delivery Date and no liquidated
damages shall be due to Assignee.
c. In the event Assignor shall fail to deliver any such Area
in broom clean condition (other than due to Force Majeure or any act
or omission of Assignee or any of its employees, agents or
contractors), Assignor shall pay Assignee an amount equal to the cost
of making the Area broom clean within 30 days after the date Assignee
delivers to Assignor paid invoices evidencing the payment by Assignee
for such work (which invoices must be delivered by Assignee to
Assignor on or before 15 days following the date of such work).
15. Assignor shall indemnify, defend (by counsel selected by
Assignor), and hold harmless Assignee from and against any and all third party
claims pursuant to any environmental laws arising from or related to the release
of any hazardous or toxic material by Assignor on the Premises during the Lease
term prior to the date hereof. The preceding sentence shall not diminish the
rights or obligations of either party under the common law or any environmental
law.
<PAGE>
16. Landlord hereby (a) consents to the execution, delivery and
performance of this Assignment and the Sublease and (b) releases Assignor from
and against any and all claims, obligations and liabilities of every kind or
nature whatsoever arising under or relating to the Lease.
IN WITNESS WHEREOF, this Assignment has been duly executed by the
parties hereto on the day and year first above written.
ASSIGNOR
Allied Digital Technologies Corp.
By: /s/ Douglas G. McDonald
---------------------------
Name: Douglas G. McDonald
Title: Executive V.P. and CFO
ASSIGNEE
Disc Graphics, Inc.
By: /s/ Margaret Krumholz
-------------------------
Name: Margaret Krumholz
Title: Sr. V.P. and CFO
LANDLORD (except as to the
provisions with respect to
the 903 Sublease)
/s/ Lee Halpern
---------------
Lee Halpern
/s/ Larry Halpern
-----------------
Larry Halpern
EXHIBIT 10.17
SECOND AMENDMENT TO COMMERCIAL LEASE
FOR VALUABLE CONSIDERATION, the adequacy and receipt of which is
hereby acknowledged, that certain Commercial Lease dated May 17, 1996 ("Lease")
entered into by and between the William S. Pine and Lisa Pine Trust u/d/t
January 21, 1982 ("Landlord") and Disc Graphics, Inc. ("Tenant"), as amended by
that certain First Amendment to Commercial Lease dated March 18, 1998 ("First
Amendment"), is hereby amended in the following particulars only:
1. Pursuant to Paragraph 1.2 of the Lease, Tenant hereby exercises its
Renewal Option to extend the term of the Lease for one (1) year, thereby
extending the term of the Lease to May 18, 2001.
2. Commencing with the basic monthly rental payment due on June 1,
2000, and continuing each month thereafter of the term of the Lease, the basic
monthly rental payment shall be increased from $18,405.33 to $22,405.33. Said
monthly rental payment increase shall be in lieu of the rental adjustment to be
made as of June 1, 2000 pursuant to Section 3.2 of the Lease. For the avoidance
of doubt, the basic monthly rental payment due on June 1, 2000 and each month
thereafter of the term of the Lease shall remain subject to the terms and
conditions of the Rental Abatement provided for in Paragraph 2 of the First
Amendment.
3. On or after June 1, 2000 and provided that Tenant is not then in
default under the Lease, Tenant shall have the option to effectuate an early
termination of the Lease ("Termination Option"). If Tenant elects to exercise
the Termination Option, same shall be exercised by Tenant giving written notice
of exercise of the Termination Option to Landlord at least six (6) months prior
to the requested termination date.
4. Except as otherwise provided for herein, the terms of the Lease, as
amended by the First Amendment, shall remain in full force and effect.
5. This Second Amendment to Commercial Lease may be executed by the
parties exchanging facsimile signed counterparts of same.
IN WITNESS WHEREOF, this Second Amendment to Commercial Lease is
executed as of the set forth hereinbelow.
Dated: February 16, 2000 "Landlord"
THE WILLIAM S. PINE AND LISA PINE
TRUST u/d/t January 21, 1982
By: /s/ William S. Pine
-----------------------
WILLIAM S. PINE, Trustee
By: /s/ Lisa Pina
-----------------
LISA PINE, Trustee
(Signatures continued on next page)
Dated: February 16, 2000 "Tenant"
DISC GRAPHICS, INC.
By: /s/ Donald S. Sinkin
------------------------
DONALD SINKIN, President
EXHIBIT 10.18
LEASE EXTENSION AND EXPANSION AGREEMENT
THIS AGREEMENT made the 17th day of February, 2000, between KERZNER
ASSOCIATES LIMITED, a Limited Partnership, having an office at 4 Corporate
Drive, Cranbury, New Jersey 08512-3610 (Landlord) and DISC GRAPHICS, INC., a
Delaware corporation, located at 198 Green Pond Road, Rockaway, New Jersey
(Tenant).
WHEREAS, Landlord and Tenant (by its affiliated company DISC GRAPHICS
LABEL GROUP, INC.) entered into a Lease Agreement dated June 14, 1995 (the
Original Lease) for premises located at 198 Green Pond Road, Rockaway, New
Jersey, consisting of 8,400 square feet of rental area more or less (the
Existing Area); and
WHEREAS, by letter agreement between the parties dated February 11,
1999, the Lease is scheduled to terminate on June 30, 2000; and
WHEREAS, Landlord anticipates that approximately 5,950 square feet of
rental area contiguous with the rental area covered by the Lease will become
available for rental to Tenant as of July 1, 2000 (the Additional Area); and
WHEREAS, Landlord and Tenant desire and intend to set forth the terms
of an extension of the Lease, together with the terms of rental of the
Additional Area upon the terms and conditions hereafter set forth;
NOW THEREFORE, IN CONSIDERATION of the mutual covenants herein
contained, the parties agree as follows:
ORIGINAL LEASE
1. Original Lease Extension - Landlord and Tenant hereby agree to
extend the term of the Original Lease for a period of seven (7) years,
commencing July 1, 2000 and ending June 30, 2007.
2. Rent for Extension Term - The annual rent during the Extension Term
shall be as follows: (a) Years one and two, $44,100 per annum, payable in equal
monthly installments of $3,675; (b) Years three through seven, $48,300 per
annum, payable in equal monthly installments of $4,025.
ADDITIONAL AREA
3. Description of Additional Area - Subject to the provisions of
paragraph 13th (infra) Landlord does hereby lease to Tenant 5,950 square feet of
rental area contiguous with the rental area of the Original Lease, located at
198 Green Pond Road, Rockaway, New Jersey, in the building containing
approximately 48,000 square feet of rental area.
4. Site Percentage - The Site Percentage attributable to the
Additional Area is 12.4% of the rentable area of the site.
5. Term for Additional Area - The term for the Additional Area is
seven (7) years, commencing July 1, 2000 and ending June 30, 2007.
6. Rent for Additional Area - The annual rent for the Additional Area
shall be as follows:
(a) Years one and two, $38,377 per annum, payable in monthly
installments of $3,198;
(b) Years three through seven, $38,972 per annum payable in
monthly installments of $3,248.
<PAGE>
7. Security Deposit - Upon execution hereof Tenant shall deposit with
Landlord the sum of $3,500 as security for the rental of the Additional Area.
8. Parking - Modifying paragraph 37 of the Original Lease, Tenant
shall have the right to use a total of 23 parking spaces (13 associated with the
Existing Space and 10 associated with the Additional Space), 17 of which may be
used on a non-exclusive basis and in common with other tenants of the Building
and 6 of which, inclusive of existing exclusive spaces, proximate to the
entrances of the Existing Space and the Additional Space. These exclusive spaces
shall be designated by the Landlord and shall be for the exclusive use of
Tenant. Tenant may, at its expense, post signs at each exclusive use parking
space designating it as reserved for Tenant.
PROVISIONS COMMON TO ORIGINAL LEASE
AND ADDITIONAL AREA
9. Assignment and Subletting - If Tenant desires to assign this Lease
or sub-let all or any portion of the Existing Area or Additional Area, Tenant
shall communicate to Landlord in writing at least sixty (60) days prior to the
date that Tenant would like to assign the Lease or sub-let the premises the
following information:
1. Name and address of the proposed assignee or sub-lessee
2. Terms and conditions of the proposed assignment or sub-letting
3. Nature and character of the proposed business
4. Banking, financial and other credit information relating to the
proposed assignee or sub-lessee reasonably sufficient to enable the Landlord to
determine the proposed assignees or sub-lessees financial responsibility.
After receipt of the requested information Landlord shall have the
option (i) to recapture the proposed sub-leased or assigned area so that the
prospective assignee or sub-lessee shall become the direct Tenant of the
Landlord and the Tenant shall be fully released from any and all obligations
hereunder, except such obligations accruing prior to the date of termination.
For the purposes of this clause, date of termination shall be the date that the
term of the new Lease with the assignee or sub-lessee commences. (ii) Landlord
may consent to the assignment of this Lease or sub-letting of the demised
premises, upon compliance with the following terms and conditions:
(a) The assignee or sub-lessee shall assume by written instrument all
the obligations of this Lease and a copy of the Assignment and Assumption
Agreement shall be furnished to the Landlord within ten days of its execution;
(b) Tenant and any assignee or sub-lessee shall be and remain liable
for the observing of all covenants and provisions of this Lease including but
not limited to the payment of fixed rent and additional rent provided for herein
throughout the term of this Lease;
(c) Tenant and any assignee or sub-lessee shall promptly pay to
Landlord any and all rent received for assignment or sub-letting as and when
received in excess of the rent required to be paid by Tenant under the terms of
this Lease, and
(d) Tenant and the assignee or sub-lessee shall defend and hold
Landlord harmless from and against any and all claims from broker's commissions
or other claims in connection with the assignment or sub-letting.
(e) Tenant may not assign or sub-let all or part of the Demised
Premises to any present or former Tenant at 198 Green Pond Road, Rockaway, New
Jersey.
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In the alternative:
(iii) Landlord may deny consent to assignment of the Lease or
sub-letting of the demised premises; except the Landlord shall not unreasonably
deny, condition or delay its consent.
(iv) In the event Landlord consents to the assignment or sub-letting,
Tenant shall reimburse Landlord on demand for any reasonable costs that may be
incurred by Landlord in connection with any assignment or sub-lease including
but without limitation, the costs of making investigation as to the financial
acceptability of the proposed assignee or sub- lessee; legal costs incurred in
connection with preparation or review of any documents arising therefrom; and
costs of tenant review including reasonable legal expenses for same.
(v) Notwithstanding anything to the contrary contained in this
paragraph 9:
a. on written notice to Landlord, but without Landlord's prior
consent, Tenant may assign the Lease or sublet all or any portion of the
Existing Area or the Additional Area to a subsidiary or affiliated company in
which it has a controlling interest, provided Tenant remains fully liable under
the Lease; and
b. on written notice to Landlord and with Landlord's prior consent,
which shall not be unreasonably denied, conditioned or delayed, but without
Landlord's right to recapture the proposed assigned space, Tenant may assign all
but not less than all of the Existing Area or Additional Area it then occupies
to an entity that acquires all or substantially all of the stock or assets of
Tenant or with which Tenant otherwise combines, provided such entity's net worth
is at least as favorable as Tenant's.
10. Landlord's Work - Prior to occupancy by Tenant, Landlord agrees to
close the existing opening at the north demising wall of the additional area.
Except for such work, the Additional Area is leased in "as is" condition.
11. Tenant's Work - Immediately upon occupying the Additional Area, at
its expense Tenant will join the Existing Area and the Additional Area by
creating two openings in the common, non-bearing north demising wall, one of
which will be 16' wide by 12' high and the other will be 8' wide by 8' high. All
work will be performed by competent and where necessary licensed craftsmen in a
workmanlike manner and consistent with the standards of the original building
construction. Upon vacating the premises, at the request of the Landlord and at
Tenant's expense, Tenant will restore the demising wall to its original
condition. Tenant also intends to install in the Additional Space printing
equipment of the nature, size and weight of that present in the Existing Area.
Landlord hereby consents to such construction and to the installation of such
equipment, and such consent satisfied the requirements of paragraph 6th of the
Original Lease.
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12. Option to Renew - Provided it has fully complied with all the
terms, covenants and conditions of this Lease, Tenant shall have the option to
renew the same either for the Existing Area or the Additional Area, or both, for
a five (5) year term commencing July 1, 2007 and terminating June 30, 2012 (the
Option Period); provided however, that written notice of exercise of the option
shall be given by Tenant to Landlord at least six (6) months prior to the end of
the term of this extended Lease. Annual rent during the Option Period shall be
as follows:
(i) Existing Area (8,400 square feet) $53,130 per annum payable in
monthly installments of $4,427.50;
(ii) Additional area (5,950 square feet) $42,869.75 per annum payable
in monthly installments of $3,572.48.
All other terms and conditions of the Original Lease as heretofore amended, and
supplemented or modified by this Agreement, shall be applicable during the term
of this extended lease and the Option Period.
13. Present Lease Terms - (a) Paragraph 4th of the Original Lease
entitled "Operational Costs and Taxes" is hereby amended to delete the last
sentence; and paragraph 39 of said Lease is superceded by the terms of this
Agreement. (b) Except as otherwise amended or superceded by the terms of this
Agreement, all terms, covenants and conditions of the Original Lease as amended
and supplemented, shall remain in full force and effect and are incorporated
herein by reference.
14. Additional Area - The Additional Area being leased by terms of
this Agreement is presently occupied by Ridge Associates. Tenant is aware that
Ridge Associates has informed Landlord of its intent to vacate the said premises
on or prior to June 30, 2000. In the event, however, Ridge Associates fails to
do so, Landlord will promptly make and diligently pursue an effort to remove
said Tenant by judicial process or otherwise, it being represented by Landlord
that the Lease between Landlord and Ridge Associates terminates as of June 30,
2000. The terms of this Agreement of Lease Extension and Expansion shall become
operative with respect to the Additional Space only when, as and if the
additional area is in fact vacated as herein provided.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
the day and year first above written.
KERZNER ASSOCIATES LTD.
By: /s/ Sandy Kerzner
---------------------
Sandy Kerzner
Attest:
DISC GRAPHICS, INC.
/s/ Debra A. Sluter By: /s/ Frank A. Bress
- ------------------- ----------------------
Notary Public Frank A. Bress
EXHIBIT 10.19
SUBLEASE
BANCO UNION, NEW YORK AGENCY, LANDLORD
to
DISC GRAPHICS, INC., TENANT
Location: 609 Fifth Avenue
New York, New York
Dated: as of January 1, 2000
The Land Affected by the Within Instrument Lies
in Section 1284, Block 69 on the Tax
Map of the County of New York.
<PAGE>
Index of Terms Used in Lease
TERM SECTION
AAA 14.01(a)
Additional Rent 4.01(b)
Annual Rental 4.01(a)(i)
Applicable Laws 15.01(a)
Bankruptcy Code 13.01(a)
Brokers 23.01
Building Recitals
Commencement Date 2.01
Common Building Facilities 1.01(c)
consideration 16.04(a)
Expiration Date 2.01
Free Rent Period 4.01(a)(ii)
JHMLIC Recitals
Landlord Preamble
Lease Preamble
Lease Interest Rate 13.06
Leased Premises 1.01(a)
Overlandlord Recitals
Overlease Recitals
Overlease Premises Recitals
16.04(b) Permitted Expenses
Tenant Preamble
Tenant Surcharges 4.01(d)
Tenant's Estimated Share of
the Electricity Charge 4.01(b)
Tenant's Proportionate Share 4.01(c)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE ONE SUBLEASE OF PREMISES
Section 1.01. Sublease of Premises............................................1
ARTICLE TWO TERM
Section 2.01. Term............................................................2
Section 2.02. Effect of Termination...........................................2
ARTICLE THREE CONDITION OF LEASED PREMISES AND OVERLEASE
Section 3.01. Condition of Leased Premises....................................2
Section 3.02. Overlease.......................................................2
ARTICLE FOUR RENTAL
Section 4.01. Annual Rental...................................................4
Section 4.02. Late Payment....................................................4
ARTICLE FIVE SERVICES
Section 5.01. Services to Be Performed by Overlandlord........................6
Section 5.02. Heating, Ventilating and Air Conditioning.......................7
Section 5.03. Tenant's Security...............................................7
Section 5.04. Window Cleaning.................................................7
Section 5.05. Insurance.......................................................7
ARTICLE SIX ELECTRICITY
Section 6.01. Risers and Feeders..............................................9
Section 6.02. Increase and Decrease of the Electricity Charge................ 9
Section 6.03. Discontinuance.................................................10
ARTICLE SEVEN USE AND ACCESS
Section 7.01. Use............................................................10
Section 7.02. Access.........................................................11
Section 7.03. Use of the Lobby...............................................11
Section 7.04. Building Directory; Signage....................................11
Section 7.05. Waste Discharge................................................11
Section 7.06. Floor Loads....................................................12
Section 7.07. Prohibited Uses................................................12
ARTICLE EIGHT REPAIRS AND MAINTENANCE
Section 8.01. Tenant's Obligations...........................................12
ARTICLE NINE FIRE AND OTHER CASUALTY
Section 9.01. Damage or Destruction..........................................13
Section 9.02. Waiver of Subrogation Rights...................................14
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ARTICLE TEN LIABILITY
Section 10.01. Indemnification of the Parties................................14
Section 10.02. Landlord's Liability..........................................14
ARTICLE ELEVEN ALTERATIONS AND FIXTURES
Section 11.01. Alterations by Tenant.........................................15
Section 11.02. Tenant's Property.............................................17
ARTICLE TWELVE CONDEMNATION
Section 12.01. Condemnation..................................................17
ARTICLE THIRTEEN REMEDIES AND DEFAULTS
Section 13.01. Bankruptcy....................................................18
Section 13.02. Conditions of Limitation......................................19
Section 13.03. Re-entry......................................................21
Section 13.04. Damages.......................................................21
Section 13.05. Default by Landlord...........................................23
Section 13.06. Suspension of Tenant Default..................................23
ARTICLE FOURTEEN ARBITRATION
Section 14.01. Arbitration...................................................24
ARTICLE FIFTEEN COMPLIANCE WITH LAWS
Section 15.01. Tenant's Compliance with Laws.................................24
ARTICLE SIXTEEN ASSIGNMENT AND SUBLETTING
Section 16.01. General Prohibition...........................................25
Section 16.02. Rights of Landlord............................................25
Section 16.03. Net Profits...................................................26
Section 16.04. Remedy for Delayed or Withheld
Consent........................26s
ARTICLE SEVENTEEN LANDLORD'S ACCESS
Section 17.01. Landlord's Access to Premises.................................27
Section 17.02. Overlandlord's Right to Change the Building...................27
ARTICLE EIGHTEEN NAME OF BUILDING; SIGNS
Section 18.01. Landlord's Right to Designate Building Name...................27
Section 18.02. Signs.........................................................27
ARTICLE NINETEEN QUIET ENJOYMENT
Section 19.01. Covenant of Quiet Enjoyment...................................28
ARTICLE TWENTY NON-WAIVER
Section 20.01. Non-Waiver by Either Party....................................28
ARTICLE TWENTY-ONE NOTICES
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ARTICLE TWENTY-TWO PARTIAL INVALIDITY
Section 22.01. Severability Clause...........................................29
ARTICLE TWENTY-THREE BROKERAGE
Section 23.01. Brokerage.....................................................29
ARTICLE TWENTY-FOUR ESTOPPEL CERTIFICATES
Section 24.01. Estoppel Certificates.........................................29
ARTICLE TWENTY-FIVE TENANT'S RIGHT OF FIRST REFUSAL
Section 25.01. Tenant's Right of First Refusal...............................30
Section 25.02. Effect of Failure to Exercise Right...........................30
ARTICLE TWENTY-SIX SUBORDINATION
Section 26.01. Subordination.................................................31
ARTICLE TWENTY-SEVEN SECURITY DEPOSIT
Section 27.01. Security Deposit..............................................31
ARTICLE TWENTY-EIGHT RULES AND REGULATIONS
Section 28.01. General; This Lease Controls in Event of Conflict.............32
ARTICLE TWENTY-NINE MISCELLANEOUS
Section 29.01. Certain Miscellaneous Provisions..............................32
Section 29.02. Governing Law.................................................32
Section 29.03. Memoranda Agreements..........................................32
iii
<PAGE>
EXHIBITS
Exhibit A - Floor Plan
Exhibit B - Landlord's Work
iv
<PAGE>
SUBLEASE
SUBLEASE ("this Lease"), dated as of January 1, 2000, between BANCO
UNION, NEW YORK AGENCY, with an office at 609 Fifth Avenue, New York, New York
10017 ("Landlord"), and DISC GRAPHICS, INC., with an office at 10 Gilpin Avenue,
New York, New York 11788 ("Tenant").
W I T N E S S E T H :
WHEREAS, by lease (the "Overlease") dated as of December 30, 1994,
John Hancock Mutual Life Insurance Company ("JHMLIC"), and 609 Fifth Avenue
Corporation, as tenants-in-common (collectively hereinafter called
"Overlandlord"), leased to Landlord a portion of the Mezzanine, second floor and
portions of the basement in the building (the "Building") commonly known as 609
Fifth Avenue, New York, New York (the "Overlease Premises"); and
WHEREAS, a copy of the Overlease has been delivered to Tenant, and
Tenant, by its execution hereof, acknowledges receipt of the same; and
WHEREAS, Tenant desires to sublease from Landlord a portion of the
Overlease Premises for a term, at a rent, and upon and subject to the covenants,
agreements, terms, provisions, conditions, limitations, exceptions and
reservations herein contained.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto, for themselves, their
heirs, executors, legal representatives, successors and assigns, hereby covenant
and agree as follows:
ARTICLE ONE
SUBLEASE OF PREMISES
Section 1.01. Sublease of Premises. (a) Landlord hereby subleases to
Tenant, and Tenant hereby subleases from Landlord, upon and subject to the
covenants, agreements, terms, provisions and conditions of this Lease, for the
term and at the rent hereinafter stated, the premises referred to in subsection
(b) below (the "Leased Premises") in the Building.
(b) The Leased Premises shall be the portion of the second
floor substantially as shown hatched on the floor plan annexed hereto as Exhibit
A. The parties agree that the rentable area of the Leased Premises is
approximately 2,386 square feet. In the case of any discrepancy between the
floor plan annexed as Exhibit A and the actual space occupied by Tenant, the
latter shall be controlling.
(c) This Lease includes the right of Tenant to use the Common
Building Facilities (as defined below) in common with other tenants in the
Building. The term "Common Building Facilities" shall mean all of the common
facilities in the Building designed and intended for use by all tenants in the
Building in common with Landlord and each other, including, but not limited to,
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hallways, elevators, fire stairs, restrooms, service areas, lobbies and all
other common areas of the Building intended for such use. Floors wholly occupied
by Tenant shall not have any facilities which shall be used in common with other
tenants except for fire stairs, elevators and any other facilities servicing
other areas or leased premises which require access thereto.
ARTICLE TWO
TERM
Section 2.01. Term. This Lease is effective as of the date hereof. The
term of this Lease shall commence on the date hereof (the "Commencement Date")
and shall terminate on December 30, 2009 (the "Expiration Date") or on such
earlier date on which the term may expire or be terminated pursuant to the
provisions of the Overlease, this Lease or pursuant to law.
Section 2.02. Effect of Termination. In the event that Landlord elects
to terminate the Overlease pursuant to Section 1.07 thereof, Tenant shall not be
required to pay any of the penalty described in said Section 1.07.
ARTICLE THREE
CONDITION OF LEASED PREMISES AND OVERLEASE
Section 3.01. Condition of Leased Premises. Tenant acknowledges that
it is fully familiar with the condition of the Building and Leased Premises and
the quantity, quality, character and nature of all services supplied by the
owner of the Building; and Tenant accepts possession of the Leased Premises in
their current "as is" condition; and Tenant agrees that Landlord shall not be
required to perform any work or furnish any materials to further prepare the
Leased Premises for Tenant's occupancy, except as set forth in Exhibit B. Tenant
further acknowledges that neither Landlord nor any officer, employee or agent of
Landlord has made any representation or warranty as to the Leased Premises, the
rentable area thereof or the suitability thereof for Tenant.
Section 3.02. Overlease. (a) Tenant acknowledges and agrees that this
Lease and the estate hereby granted are subject and subordinate to all of the
terms, covenants, provisions, conditions and agreements contained in the
Overlease, and to all leases, mortgages, encumbrances and other agreements and
matters to which the Overlease is now or may hereafter become subject and
subordinate, as any of the foregoing may be amended or modified provided such
amendments or modifications do not adversely affect Tenant's rights or increase
Tenant's obligations under this Lease. The foregoing clause shall be
self-operative and no further instrument of subordination shall be required.
Tenant shall, however, execute any certificates confirming such subordination
which Landlord may request within ten (10) days after receipt of such request.
(b) Tenant covenants and agrees (i) to perform and to observe all of
the terms, covenants, provisions, conditions and agreements of the Overlease
(including any and all rules and regulations which shall be in effect from time
to time during the term of this Lease pursuant to the Overlease) on Landlord's
part (as tenant under the Overlease) to be performed and observed to the
2
<PAGE>
extent the same apply to the Leased Premises; (ii) that Tenant will not do or
cause to be done or suffer or permit any act or thing to be done which would or
might cause the Overlease or the rights of Landlord as tenant thereunder to be
cancelled, terminated or forfeited or which would make Landlord liable for any
increase of the additional rent payable by Landlord, unless Tenant reimburses
Landlord for any such additional rent increases as provided in this Lease, or
for any damages, claims or penalties; and (iii) to indemnify and hold harmless
Landlord of, from and against any and all liabilities, losses, damages, suits,
penalties, claims and demands of every kind or nature (including, without being
limited to, reasonable attorneys' fees and expenses of defense and of enforcing
this indemnity) by reason of Tenant's failure to comply with the foregoing or
arising from the use, occupancy or manner of use or occupancy of the Leased
Premises or of any business conducted therein, or from any work or thing
whatsoever done or any conditions created by or any other act or omission of
Tenant, its assignees or subtenants, or their respective employees, agents,
servants, contractors, invitees, visitors or licensees, in or about the Leased
Premises or any other part of the Building.
(c) Upon the expiration or termination of the Overlease pursuant to
the terms and provisions thereof or otherwise, this Lease shall automatically
expire and terminate; provided, however, that the liability of Landlord to
Tenant for termination caused by Landlord's default or the liability of Tenant
to Landlord for termination caused by Tenant's default shall not be discharged
by reason of such termination. Landlord represents that the Overlease is in full
force and effect and that, to the best of Landlord's knowledge, Landlord is not
in default with respect to any material obligation of Landlord under the
Overlease. Except as otherwise provided in this Lease or as provided in Section
1.07 of the Overlease, Landlord agrees that it will not agree to a termination
of the Overlease unless in connection therewith the Overlandlord accepts this
Lease as a direct lease between Overlandlord and Tenant. Tenant agrees to attorn
to Overlandlord in connection with any termination, cancellation, re-entry or
dispossess by Overlandlord or successor to Overlandlord, as provided in Section
27.04 of the Overlease.
(d) Wherever in this Lease the consent or approval of Landlord is
required for any act or thing and the consent or approval of Overlandlord is
required under the Overlease for the same act or thing, Landlord's refusal to
give such consent or approval shall be deemed reasonable if, inter alia,
Overlandlord shall have refused to give such consent or approval. If Landlord is
willing to give such consent or approval, Landlord agrees to cooperate
reasonably with Tenant in endeavoring to obtain Overlandlord's consent or
approval and Tenant agrees that (i) Tenant shall reimburse Landlord for any
out-of-pocket costs incurred by Landlord in connection with seeking such consent
or approval, (ii) Landlord shall not be required to make any payments to
Overlandlord or to enter into any agreements or to modify the Overlease or this
Lease in order to obtain any such consent or approval and (iii) if Tenant agrees
or is otherwise obligated to make any payments to Landlord or Overlandlord in
connection with such request for such consent or approval, Tenant will make
arrangements for such payments which are satisfactory to Landlord. Nothing
contained in the preceding sentence shall be deemed to require Landlord to give
any consent or approval because Overlandlord has given such consent or approval.
Wherever in this Lease Landlord is granted the right to prescribe, approve or
require certain standards or performance by Tenant, Overlandlord shall also be
deemed to have such right. All plans, working drawings, specifications and other
information which Tenant is required to submit to Overlandlord must also be
submitted to Landlord.
(e) This Section 3.02 shall survive the expiration or sooner
termination of this Lease.
3
<PAGE>
ARTICLE FOUR
RENTAL
Section 4.01. Annual Rental. (a) (i) Tenant shall pay to Landlord as
rent, at Landlord's address noted in the first paragraph of this Lease or
elsewhere and/or to Landlord's agent as directed from time to time by Landlord's
written notice to Tenant, a base rental (the "Annual Rental") for the Leased
Premises, as follows:
(A) One Hundred Thousand Two Hundred Twelve Dollars ($100,212.00) per
annum, for the period commencing on the Commencement Date and ending on the last
day of the month preceding the month in which the third (3rd) anniversary of the
Commencement Date occurs;
(B) One Hundred Four Thousand Nine Hundred Eighty Four ($104,984.00)
per annum, for the period commencing on the first day of the month in which the
third (3rd) anniversary of the Commencement Date occurs and ending on the last
day of the month preceding the month in which the seventh (7th) anniversary of
the Commencement Date occurs; and
(C) One Hundred Nine Thousand Seven Hundred Fifty Dollars
($109,756.00) per annum, for the period commencing on the first day of the month
in which the seventh (7th) anniversary of the Commencement Date occurs and
ending on the Expiration Date.
The Annual Rental shall be payable in twelve (12) equal monthly installments, in
advance, on the first day of each and every month of the term of this Lease. A
prorated monthly installment shall be paid if the term of this Lease terminates
on a day other than the last day of a month.
(ii) Notwithstanding anything to the contrary contained herein Tenant
shall pay no rent, except the Estimated Electricity Charge (as defined in the
Overlease) or the Electricity Charge (as defined herein), as the case may be,
during the period commencing on the Commencement Date and ending on the date
which is five (5) months after the Commencement Date (the "Free Rent Period").
(b) Tenant shall also pay to Landlord (or as otherwise directed
pursuant to subsection (a) above) Tenant Surcharges (as defined in subparagraph
(d) hereof) and Tenant's Estimated Share of the Electricity Charge (as defined
in Section 24.03(a) of the Overlease). "Tenant's Estimated Share of the
Electricity Charge" shall mean a percentage, to be determined by the parties
subsequent to the date hereof based on an electrical survey to be performed by
Cushman and Wakefield. The parties agree to amend this Lease to reflect the
calculation of the Tenant's Estimated Share of the Electricity Charge for the
second floor, within thirty (30) days of a request by either party to execute
such an amendment. Tenant shall also pay to Landlord Tenant's Proportionate
Share (as defined in subsection (c) hereof) of (i) Tenant's Proportionate Share
(Operating Expenses) (as defined in Section 26.01(c) of the Overlease) and (ii)
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<PAGE>
Tenant's Proportionate Share (Real EstateTaxes) (as defined in Section 26.01(c)
of the Overlease), provided that for purposes of this subparagraph (b) only as
it relates to Tenant, (I) for purposes of calculating Tenant's Proportionate
Share (Operating Expenses) (as defined in Section 26.01(c) of the Overlease),
the Base Year Operating Expenses (as defined in Section 26.01(e) of the
Overlease) shall mean the Operating Expenses for the Operation Year ending
December 31, 2000, and (II) for purposes of calculating Tenant's Proportionate
Share (Real Estate Taxes) (as defined in Section 26.01(c) of the Overlease),
Real Estate Tax Base (as defined in Section 26.01(g) of the Overlease) shall
mean the sum of one- half the Real Estate Taxes for the Tax Year ending on June
30, 2000 plus one-half of the Real Estate Taxes for the Tax Year ending on June
30, 2001. (Tenant Surcharges, Tenant's Estimated Share of the Electricity
Charge, Tenant's Proportionate Share of Tenant's Proportionate Share (Operating
Expenses) and Tenant's Proportionate Share (Real Estate Taxes), where
applicable, are hereinafter referred to collectively as "Additional Rental").
The Annual Rental and Additional Rental shall be promptly paid when due without
notice or demand and without abatement, deduction or setoff, except as may be
expressly provided in this Lease. Except where a specified period is provided
herein, all Additional Rental shall be due within thirty (30) days after Tenant
is billed therefor. The Annual Rental and Additional Rental shall be paid by a
good and sufficient check, subject to collection, drawn on a bank having an
office in New York City. In the event Landlord shall receive from Overlandlord
any refund of any amounts for which Tenant shall have paid Additional Rental to
Landlord under the provisions of this subparagraph (b), Landlord shall retain
out of such refund the costs and expenses incurred by Landlord, if any, of
obtaining such refund and shall then pay to Tenant's Proportionate Share of the
remainder of such refund. In the event any controversy is referred to
arbitration pursuant to the terms of the Overlease, the determination thereof
shall bind Landlord and Tenant.
(c) "Tenant's Proportionate Share" shall be that fraction the
numerator of which shall be the rentable area of the Leased Premises and the
denominator of which shall be the rentable area of the Overlease Premises as the
same may be modified from time to time. For purposes of computing Tenant's
Proportionate Share, it is agreed that on the date hereof the rentable area of
the Leased Premises is 2,386 square feet and the rentable area of the Overlease
Premises is 15,296 square feet, and expressed as a percentage, Tenant's
Proportionate Share is 15.5988%.
(d) "Tenant Surcharges" shall mean any and all amounts which may
become due and payable by Landlord to Overlandlord pursuant to the Overlease or
otherwise or to any other party or parties which would not have become due and
payable but for the acts or failure to act of Tenant under this Lease,
including, but not limited to: (i) any increases in Overlandlord's or Landlord's
fire, rent or other insurance premiums resulting from any act or omission of
Tenant, (ii) any additional charges to Landlord on account of Tenant's extra use
of heating, ventilation, air conditioning or cleaning services as provided in
Section 17.03 of the Overlease, (iii) any additional charges to Landlord on
account of Tenant's use of water in excess of normal usage, as provided in
Section 24.07 of the Overlease, (iv) any increases in the Electricity Charge
pursuant to Section 24.03 of the Overlease, and (v) any interest, penalties, or
other charges incurred by Landlord or Overlandlord on account of Tenant's
failure to perform, delay in performance, or other default hereunder; provided,
however, that should any of the after hours services set forth in clause (ii)
hereinabove be requested by both Landlord and Tenant for any weekend, evening or
holiday, Tenant shall only pay Tenant's Proportionate Share of the charges to
Landlord by Overlandlord in respect of such after hours service.
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(e) No payment by Tenant or receipt or acceptance by Landlord of a
lesser amount than the correct Annual Rental or Additional Rental shall be
deemed to be other than a payment on account, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment be deemed
an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance due or pursue any
other remedy in this Lease or at law provided.
(f) Additional Rental shall be deemed to be additional rent. Tenant's
failure to pay Additional Rental shall be considered a failure to pay rent and
Landlord shall be entitled to all rights and remedies provided herein or by law
in connection therewith.
(g) If any of the Annual Rental or Additional Rental payable under the
terms and provisions of this Lease shall be or become uncollectible, reduced or
required to be refunded because of any act or law enacted by a governmental
authority, Tenant shall enter into such agreement(s) and take such other steps
(without additional expense to Tenant) as Landlord may reasonably request and as
may be legally permissible to permit Landlord to collect the maximum rents which
from time to time during the continuance of such legal rent restriction may be
legally permissible (and not in excess of the amounts reserved therefor under
this Lease). Upon the termination of such legal rent restriction, (a) the Annual
Rental and/or Additional Rental shall become and thereafter be payable in
accordance with the amounts reserved herein for the periods following such
termination and (b) Tenant shall pay to Landlord promptly upon being billed, to
the maximum extent legally permissible, an amount equal to (i) the Annual Rental
and/or Additional Rental which would have been paid pursuant to this Lease but
for such legal rent restriction less (ii) the amounts in respect thereof paid by
Tenant during the period such legal rent restriction was in effect.
Section 4.02. Late Payment. In addition to any other remedies Landlord
may have under this Lease, and without reducing or adversely affecting any of
Landlord's rights and remedies under Section 13.02, if any Annual Rent or
Additional Rental payable under this Lease by Tenant to Landlord are not paid on
or before the fifth day of the month during which the same is due, Tenant shall
pay Landlord as an additional rent, on or before the first day of the following
month, 6(cent) for each dollar so overdue in order to defray Landlord's
administrative and other costs in connection with such late payment.
ARTICLE FIVE
SERVICES
Section 5.01. Services to Be Performed by Overlandlord.
Notwithstanding anything to the contrary contained in this Lease, Tenant
understands and agrees that all improvements, services, repairs, restorations,
equipment and access which are required to be provided and made for the benefit
of the Leased Premises in accordance with the provisions of the Overlease,
including, without limiting the foregoing, those set forth in Articles 5 and 6
and Section 8.01 thereof and in Schedule C thereto, will, in fact, be provided
by Overlandlord, and Landlord shall have no obligation during the term of this
Lease to provide any such improvements, services, repairs, restorations,
equipment or access. Tenant agrees to look solely to Overlandlord for the
furnishing of such improvements, services, repairs, restorations, equipment and
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access. Landlord shall in no event beliable to Tenant nor shall the obligations
of Tenant hereunder be impaired or the performance thereof excused because of
any failure or delay on Overlandlord's part in furnishing such improvements,
services, repairs, restorations, equipment or access. If Overlandlord shall
default in any of its obligations to Landlord with respect to the Leased
Premises, Tenant shall be entitled to participate with Landlord in the
performance of Landlord's rights against Overlandlord, but Landlord shall have
no obligations to bring any action or proceeding or to take any steps to enforce
Landlord's rights against Overlandlord. If, after written request from Tenant,
Landlord shall fail or refuse to take appropriate action for the enforcement of
Landlord's rights against Overlandlord with respect to the Leased Premises
within a reasonable period of time considering the nature of Overlandlord's
default, Tenant shall have the right to take such action in its own name and at
its own expense and, for that purpose and only to such extent, all of the rights
of Landlord under the Overlease hereby are conferred upon and assigned to Tenant
and Tenant hereby is subrogated to such rights to the extent that the same shall
apply to the Leased Premises. If any such action against Overlandlord in
Tenant's name shall be barred by reason of lack of privity, nonassignability or
otherwise, Tenant may take such action in Landlord's name provided that Tenant
has obtained the prior written consent of Landlord (which consent shall not be
unreasonably withheld or delayed), and further provided, and Tenant hereby
agrees, that Tenant shall indemnify and hold Landlord harmless from and against
all liability, loss, damage or expense (including, without limitation,
reasonable attorneys' fees), which Landlord shall suffer or incur by reason of
such action.
Section 5.02. Heating, Ventilating and Air Conditioning. Landlord
shall, upon reasonable advance notice from Tenant, request Overlandlord to
furnish Tenant HVAC services at any time or times other than the regular hours
specified in Section 17.01 of the Overlease, with the cost of any such overtime
service to be paid by Tenant to Landlord as provided in Section 4.01(d) hereof.
Section 5.03. Tenant's Security. Tenant, at its expense and with the
prior written approval of Overlandlord and Landlord, which approval shall not be
unreasonably withheld, may install safety and security systems or devices,
including, without limitation, smoke detectors, electronic security devices and
auxiliary emergency electric power supplies, as Tenant may deem appropriate; it
being understood that nothing contained herein is intended to nor shall impose
any liability or responsibility upon Overlandlord or Landlord in connection with
any security or security measures for or of Tenant. Tenant shall have the right,
at Tenant's expense, by installation of a key system or otherwise, to control
access of all elevators to floors wholly occupied by Tenant, if any; provided
that (i) Tenant's use of such system shall comply with all applicable laws,
rules and regulations and not interfere with Landlord's or Overlandlord's
obligations to provide services or perform any work under the Overlease, this
Lease or any other lease or agreement affecting the Building; (ii) Landlord
shall have access to the Leased Premises in emergencies; and (iii) Tenant shall
provide Landlord with duplicate keys to elevators and/or the Leased Premises, as
applicable.
Section 5.04. Window Cleaning. Tenant shall not clean, nor require,
permit, suffer or allow any windows in the Leased Premises to be cleaned, from
the outside in violation of Section 202 of the Labor Law, or any other
applicable law.
Section 5.05. Insurance. (a) Tenant shall not violate, or permit the
violation of, any condition imposed by any standard insurance policy then issued
in respect of the Building and/or the property therein and shall not do, or
permit anything to be done, or keep or permit anything to be kept in the Leased
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Premises which would subject the Overlandlord, Landlord or any Superior
Mortgagee to any liability or responsibility for personal injury or death or
property damage, or which would increase any insurance rate in respect of the
Building or the property therein over the rate which would otherwise then be in
effect or which would result in insurance companies of good standing refusing to
insure the Building or the property therein in amounts reasonably satisfactory
to Landlord, or which would result in the cancellation of or the assertion of
any defense by the insurer in whole or in part to claims under any standard
policy of insurance in respect of the Building or the property therein.
(b) Landlord and Tenant shall each secure an appropriate clause in, or
an endorsement upon, each insurance policy obtained by it and covering or
applicable to the Leased Premises or the personal property, fixtures and
equipment located therein or thereon, pursuant to which the insurance company
waives subrogation or permits the insured, prior to any loss, to agree with a
third party to waive any claim it might have against said third party without
invalidating the coverage under the insurance policy. The waiver of subrogation
or permission for waiver of any claim shall extend to Landlord or Tenant, as the
case may be, and its agents and employees and each Superior Mortgagee. Tenant
hereby releases Landlord and its agents and employees and Superior Mortgagee,
and Landlord hereby releases Tenant and its agents and employees, in respect of
any claim (including a claim for negligence) which it might otherwise have
against the other for loss, damage or destruction with respect to the other's
property by fire or other casualty (including rental value or business interest,
as the case may be) occurring during the term of this Lease and normally covered
under a fire insurance policy with extended coverage endorsement in the form
normally used in respect of similar property in New York County.
(c) If, by reason of any failure of Tenant to comply with the
provisions of subsection (b) above, the premiums on Overlandlord's or Landlord's
insurance on the Building and/or equipment therein shall be higher than they
otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of
such premiums attributable to such failure on the part of Tenant. A schedule or
"make up" of rates for the Building or the Leased Premises, as the case may be,
issued by the New York Fire Insurance Rating organization or other similar body
making rates for insurance for the Building or the Leased Premises, as the case
may be, shall be conclusive evidence of the facts therein stated and of the
several items and charges in the insurance rate then applicable to the Building
or the Leased Premises, as the case may be.
(d) Tenant covenants, at its expense, to provide prior to entry upon
the Premises and to keep in force and effect during the demised term: (1)
comprehensive general liability insurance with respect to the Premises and its
appurtenances on an occurrence basis against claims for bodily injury and
property damage with minimum limits of liability in amount of THREE MILLION and
00/100 DOLLARS ($3,000,000.00) combined single limit for bodily injury and
property damage (including coverage for all operations of Tenant,
products/completed operations, independent contractors, broad form property
damage, personal injury liability and contractual liability coverage); (2) if
the nature of Tenant's business is such as to place all or any of its employees
under worker's compensation or similar statutes, workers' compensation or
similar insurance affording statutory coverage and containing statutory limits;
and (3) all-risk property damage insurance on, including theft or attempted
theft of, Tenant's personal property, including improvements and betterments for
which Tenant is responsible under this Lease. Tenant agrees to deliver to
Landlord, at least thirty (30) days prior to the time such insurance is first
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required to be carried by Tenant, and thereafter at lease thirty (30) days prior
to the expiration of any such policy, either an original policy or a certificate
of insurance procured by Tenant in compliance with its obligations hereunder,
together with evidence of payment therefor and including an endorsement which
states that such insurance may not be cancelled except upon thirty (30) days'
written notice to Landlord and any designee(s) of Landlord. Workers'
compensation insurance provided for in this Section may be procured by Tenant's
contractors.
(e) Landlord may from time to time require that the amount of the
insurance to be maintained by Tenant under subsection (d)(2) above be increased,
so that the amount thereof reasonably protects Landlord's interest.
ARTICLE SIX
ELECTRICITY
Section 6.01. Risers and Feeders. Subject to the provisions of Section
24.05 of the Overlease, Landlord shall request Overlandlord to install any
feeders or risers required to supply any additional electrical requirements
which Tenant may have during the Term of this Lease, and all other equipment
proper and necessary in connection with such feeders or risers. Such
installation shall be at the sole cost and expense of Tenant, provided that, in
Overlandlord's and Landlord's reasonable judgment, such additional feeders,
risers or equipment are necessary and are permissible under applicable laws and
insurance regulations and the installation of such feeders, risers or equipment
will not cause permanent damage or injury to the Building or the Leased Premises
or cause or create a dangerous or hazardous condition or entail excessive or
unreasonable alterations or interfere with or disturb other tenants or occupants
of the Building. Tenant covenants that at no time shall the use of electrical
energy in the Leased Premises exceed the capacity of the existing feeders or
wiring installations then serving the Leased Premises. In order to insure that
such capacity is not exceeded and to avert possible adverse effect upon the
Building's electric service, Tenant shall not, without the prior consent of
Landlord and Overlandlord in each instance, connect any fixtures, appliances or
equipment to the Building's electric distribution system or make any alteration
or addition to the electric system of the Premises existing on the date hereof
other than desktop personal computers, typewriters, lamps, desk calculators,
photocopier and similar small office appliances. Should Landlord and
Overlandlord grant such consent, any additional risers or other equipment
required therefor shall be provided in accordance with, and subject to, the
provisions of the Overlease and the cost thereof shall be paid by Tenant to
Landlord (or, at Landlord's direction, directly to Overlandlord) within ten (10)
Business Days after a bill therefor has been rendered to Tenant.
Section 6.02. Increase and Decrease of the Electricity Charge. Any
increase or decrease in the Electricity Charge pursuant to the provisions of
Sections 24.03(b) and 24.03(c) of the Overlease shall be (i) solely paid by or
credited to, as the case may be, Tenant with respect to any such increase or
decrease insofar as it relates to the mezzanine and (ii) paid by or credited to,
as the case may be, each of Landlord and Tenant based on an estimate of actual
electricity use in accordance with the provisions of 4.01(b) hereof with respect
to any such increase or decrease insofar as it relates to the second floor. Any
increase in Tenant's Estimated Share of the Electricity Charge due to an
increase in the Electricity Charge pursuant to the provisions of Sections
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24.03(b) and 24.03(c) of the Overlease with respect to the period from the
effective date of such increase to the last day of the month in which such
increase shall be fixed by agreement or determination shall be payable by Tenant
upon demand of Landlord. Any decrease in the Electricity Charge pursuant to the
provisions of Sections 24.03(b) and 24.03(c) of the Overlease with respect to
the period from the effective date of such decrease to the last day of the month
in which such decrease shall be fixed by agreement or determination shall be
credited to Tenant against the next monthly installments of the Electricity
Charge (unless there are not enough of such installments remaining for any such
credit to be fully applied, in which event the portion of such credit which
could not be applied to the remaining installments of the Annual Rental or the
total amount of such credit if such agreement or determination be made after the
expiration of the Term of this Lease shall be payable by Landlord to Tenant
within fifteen (15) days next following such agreement or determination).
Subject to the first sentence of this Section 6.02, the monthly installments of
the Electricity Charge payable after the date upon which any such increase or
decrease is so fixed shall be adjusted to reflect such increase or decrease in
the Electricity Charge.
Section 6.03. Discontinuance. In the event that Overlandlord elects,
pursuant to Section 24.06 of the Overlease, to discontinue the redistribution or
furnishing of electrical energy, (a) Landlord agrees to give notice of any such
discontinuance to Tenant within three (3) days of Landlord's receipt of
Overlandlord's notice thereof; (b) Landlord agrees to permit Tenant, at Tenant's
expense, to receive electrical service directly from the public utility
corporation supplying electrical service to the Building and to permit the
existing feeders, risers, wiring and other electrical facilities serving the
Leased Premises to be used by Tenant for such purpose to the extent they are
suitable and safely capable; (c) to the extent that Landlord is required under
the terms of the Overlease (including, without limitation, Section 24.06
thereof) to pay any amount in respect of Overlandlord's charges in respect of
such discontinuance and the installation of meters, additional panel boards,
feeders, wiring and other conductors and equipment which may be required to
obtain electric energy directly from such public utility company, such amount
shall be payable solely by Landlord (and Tenant shall not be required to
reimburse Landlord for Tenant's Proportionate Share of such amounts required to
be paid by Landlord); (d) the Tenant's Estimated Share of the Electricity Charge
shall not be payable by Tenant from and after such discontinuance; and (e) this
Lease shall remain in full force and effect and such discontinuance shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent except as expressly provided in
subsection (d) above, or relieve Tenant from any of its obligations under this
Lease or impose any liability upon Overlandlord, Landlord or their respective
agents by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
ARTICLE SEVEN
USE AND ACCESS
Section 7.01. Use. (a) Tenant, its permitted assignees and subtenants,
shall have the right to use the Leased Premises for executive, general and
administrative office purposes only and for no other purposes except the
following uses incidental (and which shall remain incidental) thereto.
(b) To the extent any special uses to which Tenant puts the Leased
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Premises require a specific Certificate of Occupancy, or a special entry on the
general Certificate of Occupancy for the Building, Tenant, as a condition
precedent to such use and at Tenant's sole cost and expense, shall be
responsible for obtaining the same as well as any other governmental permit,
approval or license required by applicable law. Landlord shall cooperate with
Tenant and shall execute all applications, authorizations and other instruments
reasonably required to enable Tenant to fulfill its responsibilities under this
subsection, provided, however, the foregoing do not impose any monetary or
personal obligation on Landlord. Tenant shall reimburse Landlord for all
reasonable costs and expenses incurred by Landlord in connection with the
foregoing and shall provide Landlord with copies of all applications and other
materials filed by Tenant in connection therewith.
(c) Tenant shall not use the Premises or any part thereof, or permit
the Premises or any part thereof to be used in any manner which would violate
the Certificate of Occupancy for the Building, or for any purpose other than the
use hereinbefore specifically mentioned. Those portions, if any, of the
Premises, identified as toilets and utility areas shall be used by Tenant only
for the purposes for which they are designed. Tenant shall not use or permit the
use of the Premises or any part thereof in any way which would violate any of
the covenants, agreements, terms, provisions and conditions of this Lease or of
the Overlease or for any unlawful purposes or in any unlawful manner and Tenant
shall not suffer or permit the Premises or any part thereof to be used in any
manner or anything to be done therein or anything to be brought into or kept
therein which, in the judgment of Landlord or Overlandlord, shall in any way
impair or tend to impair the character, reputation or appearance of the Building
as a high quality office building, impair or interfere with or tend to impair or
interfere with any of the Building services or the proper and economic heating,
cleaning, air conditioning or other servicing of the Building or Leased
Premises, or impair or interfere with or tend to impair or interfere with the
use of any of the other areas of the Building by, or occasion discomfort,
inconvenience or annoyance to, any of the other tenants or occupants of the
Building.
Section 7.02. Access. Tenant, its permitted subtenants and their
employees, licensees and guests, shall have access to the Leased Premises at all
times, 24 hours per day, every day of the year.
Section 7.03. Use of the Lobby. As long as the mezzanine is directly
accessed from the lobby, the lobby of the Building shall not be used to present
public events or exhibits without Tenant's prior written consent not to be
unreasonably withheld or delayed.
Section 7.04. Building Directory; Signage. (a) Landlord shall request
that Overlandlord provide to Tenant, at no charge, Tenant's Proportionate Share
of the listings on the Building Directory provided to Landlord pursuant to
Section 25.07 of the Overlease.
(b) Subject to the Overlease, Article Eighteen hereof, and Landlord's
approval not to be unreasonably withheld or delayed, Tenant may install a sign
(with Tenant's name and/or logo) on Tenant's door to the Leased Premises and in
the elevator lobby on the second floor of the Building.
Section 7.05. Waste Discharge. Tenant shall not discharge or permit to
be discharged any materials into waste lines, vents or flues of the Building,
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which may cause damage thereto. Thewater and wash closets and other plumbing
fixtures in or serving the Leased Premises shall not be used for any purposes
other than those for which they shall have been designed or constructed, and no
sweepings, rubbish, rags, acids or other foreign substances shall be deposited
therein.
Section 7.06. Floor Loads. Tenant shall not place a load upon any
floor of the Leased Premises exceeding 120 pounds per square foot, live load,
and such load shall be placed by Tenant, at Tenant's expense, so as to
distribute the weight. Business machines and mechanical equipment shall be
placed and maintained by Tenant, at Tenant's expense, in setting sufficient in
Overlandlord's and Landlord's judgment to absorb and prevent vibration, noise
and annoyance.
Section 7.07. Prohibited Uses. Notwithstanding anything contained in
this Lease to the contrary, Tenant covenants and agrees that Tenant will not use
the Premises or any part thereof, or permit the Premises or any part thereof to
be used:
(i) as a retail stock brokerage office or for retail stock
brokerage purposes,
(ii) as a news and cigar stand, as such,
(iii) as a restaurant and/or bar and/or for the sale of
confectionery and/or soda and/or beverages and/or sandwiches and/or ice
cream and/or baked goods or for the preparation, dispensing or
consumption of food or beverages in any manner whatsoever,
(iv) for the business of photographic or documentary
reproductions or offset printing (except for photographic and/or
documentary reproductions and/or offset printing in connection with,
directly or indirectly, its own business and/or activities), or
(v) for any charitable, religious, union or other
not-for-profit or tax exempt purpose (nor shall Tenant or any occupant,
user or subtenant be a charitable, religious, union or other others
not-for-profit organization or entity or tax exempt organization or
entity.
ARTICLE EIGHT
REPAIRS AND MAINTENANCE
Section 8.01. Tenant's Obligations. (a) Tenant shall, at its expense,
throughout the term of this Lease, take good care of and maintain in good order
and condition the Leased Premises and the fixtures and appurtenances therein.
Tenant shall also be responsible for the reasonable cost of all repairs,
interior and exterior, structural and non-structural, ordinary and
extraordinary, foreseen or unforeseen, in and to the Building and the facilities
and systems thereof, the need for which arises out of (i) the performance or
existence of Tenant's work, (ii) the installation, use or operation of Tenant's
property, (iii) the moving of Tenant's property in or out of the Building or
(iv) the act, omission, misuse or neglect of Tenant or any of its subtenants or
its or their employees, agents, contractors or invitees. Any repairs in or to
the Building and the facilities and systems thereof for which Tenant is
responsible shall be performed by Landlord at Tenant's expense.
(b) Upon termination of this Lease, Tenant shall surrender and deliver
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up the Leased Premises in the same condition in which they existed at the
commencement of this Lease, except for ordinary wear and tear, Tenant's
alterations made pursuant to Section 11.01 hereof, repairs and maintenance
assumed by Landlord, damage arising from fire or other casualty and damage
caused by others for whom Tenant is not responsible.
ARTICLE NINE
FIRE AND OTHER CASUALTY
Section 9.01. Damage or Destruction. (a) If the Leased Premises or any
part thereof shall be damaged by fire or other casualty, Tenant shall give
prompt written notice thereof to Landlord and Overlandlord and this Lease shall
continue in full force and effect except as hereinafter set forth.
(b) In the event that the Leased Premises or the Building shall be
partially or totally damaged by fire or other cause, the consequences thereof
shall be determined pursuant to Article 7 of the Overlease. Tenant shall be
entitled to participate with Landlord in the enforcement of Landlord's rights
against Overlandlord under said Article 7 in the same manner as is provided in
Section 5.01 hereof. Tenant's right to an apportionment and/or abatement of rent
and to repairs shall be dependent upon whether or not Landlord has a right to
apportionment and/or abatement of rents and repairs with respect to the Leased
Premises under said Article 7. No damage, compensation or claims shall be
payable by Landlord for inconvenience, loss of business or annoyance arising
from any such damage by fire or other cause or by the repair or restoration of
any portion of the Leased Premises or of the Building. Landlord will not carry
insurance of any kind on Tenant's personal property kept at the Premises, and
Landlord shall not be obligated to repair any damage thereto or replace the
same.
(c) If Overlandlord terminates the Overlease by written notice to
Landlord as provided in Section 7.02 thereof, upon the date specified in such
notice the term of this Lease shall expire as fully and completely as if such
date were the Expiration Date, and Tenant shall forthwith quit, surrender and
vacate the Leased Premises without prejudice however, to Landlord's rights and
remedies against Tenant under the Lease provisions in effect prior to such
termination, and any Annual Rental or Additional Rental owing shall be paid up
to such date and any payments of Annual Rental or Additional Rental made by
Tenant which were on account of any period subsequent to such date shall be
returned to Tenant. In the event that Overlandlord elects to restore the
Building, Tenant shall cooperate with Overlandlord's restoration by removing
from the Leased Premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture, and other property.
Tenant's liability for Annual Rental or Additional Rental shall resume five (5)
days after the Leased Premises are substantially ready for Tenant's occupancy
and Landlord has given Tenant written notice thereof.
(d) This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Building or any part thereof by fire or
other casualty, and Section 227 of the Real Property Law of the State of New
York providing for such a contingency in the absence of express agreement, and
any other law of like import now or hereafter in force, shall have no
application in such case.
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(e) It is agreed that if (i) reconstruction of the Overlease Premises
is not substantially complete within six (6) months after a casualty described
in Section 9.01(b) hereof and (ii) Landlord, pursuant to Section 7.01 of the
Overlease, elects to terminate the Overlease by giving Overlandlord written
notice of such election with a copy thereof to Tenant, this Lease shall
terminate as of the date of such election.
Section 9.02. Waiver of Subrogation Rights. Notwithstanding any
provision of this Lease to the contrary, the parties hereto hereby waive any and
all rights of recovery, claim, action or cause of action, against each other,
their respective agents, officers and employees, for any loss or damage that may
occur to the Leased Premises or the Building and to all property, whether real,
personal or mixed, located in the Leased Premises or the Building, by reason of
fire, the elements, or any other cause normally insured against under the terms
of standard fire and extended coverage insurance policies of the type prescribed
from time to time for use in respect of the Building, regardless of cause or
origin, including negligence of the parties hereto, their respective agents and
employees. Each party agrees to provide the other with reasonable evidence of
its insurance carrier's consent to such waiver of subrogation.
ARTICLE TEN
LIABILITY
Section 10.01. Indemnification of the Parties. Subject to the
provisions of Section 9.02, Landlord and Tenant each agree to indemnify and save
the other harmless from any and all claims with respect to bodily injury or
property damage, arising from any breach or default on the part of the
indemnifying party in the performance of any covenant or agreement on its part
to be performed pursuant to the terms of this Lease or arising from its
negligence or the negligence of any of its agents or employees, including all
costs, counsel fees, expenses and liabilities incurred in or about any such
claim. Without limiting the foregoing, Tenant shall indemnify and hold harmless
Landlord and all Superior Mortgagees and its and their respective partners,
directors, officers, agents and employees from and against any and all claims
arising from or in connection with (a) the conduct or management of the Leased
Premises or of any business therein, or any work or thing whatsoever done, or
any condition created (other than by Landlord) in or about the Leased Premises
during the term of this Lease; (b) any act, omission or negligence of Tenant or
any of its subtenants or licensees or its or their partners, directors,
officers, agents, employees or contractors; and (c) any accident, injury or
damage whatever (unless caused by Landlord's negligence) occurring in, at or
upon the Leased Premises; together with all costs, expenses and liabilities
incurred in or in connection with each such claim or action or proceeding
brought thereon, including, without limitation, reasonable attorneys' fees and
expenses. In case any action or proceeding is brought against Landlord and/or
any Superior Mortgagee and/or its or their partners, directors, officers, agents
and/or employees by reason of any such claim, the indemnified party shall give
prompt notice to the indemnifying party who shall resist and defend such action
or proceeding (by insurance company counsel or, if there is no insurance company
counsel, counsel reasonably satisfactory to the indemnified party).
Section 10.02. Landlord's Liability. (a) The term "Landlord" shall
mean only the owner or owners at the time in question of Landlord's interest in
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this Lease, so that in the event ofany transfer of Landlord's interest in this
Lease upon notification to Tenant of such transfer, the said transferor landlord
shall be and hereby is entirely freed and relieved of all future covenants,
obligations and liabilities of Landlord hereunder; provided, however, that any
sums received by such transferor landlord which are payable to Tenant shall be
retained by such transferor landlord for payment of any such sums to Tenant, and
provided further that any other funds in the hands of such transferor landlord
at the time of such transfer in which Tenant has an interest shall be turned
over to the new owner and holders of the Landlord's interest in this Lease and
any amount then due and payable by Tenant to such transferor landlord, shall be
so paid, and provided further that upon any such transfer, the transferee shall
expressly assume in writing, subject to the limitations of this Section, all of
the terms, covenants and conditions of this Lease to be performed on the part of
landlord hereunder.
(b) Tenant shall look solely to the Building and Land (or the proceeds
thereof) and, where expressly provided in this Lease, to offsets against the
rents payable under this Lease, for the satisfaction of any monetary claims
hereunder or the collection of any judgment (or other judicial process) based
thereon, and no other property or assets of Landlord, any joint venturer,
partner, co-owner, officer, director, shareholder or beneficiary of or with the
Landlord shall be subject to levy, execution or other enforcement procedure for
the satisfaction of such claim or judgment (or other judicial process);
provided, however, that the foregoing shall not limit such rights, if any, as
Tenant may have to injunctive relief or specific enforcement of the obligations
of Landlord hereunder.
ARTICLE ELEVEN
ALTERATIONS AND FIXTURES
Section 11.01. Alterations by Tenant. (a) Tenant shall make no
alterations in or additions to the Leased Premises without the prior written
consent of Overlandlord and Landlord in each instance. Landlord agrees that its
consent to such alterations and/or additions shall not be unreasonably withheld
or delayed provided that Tenant shall have first obtained Overlandlord's consent
in accordance with Article 5 of the Overlease.
Notwithstanding anything to the contrary contained in this Lease, all
alterations and additions which are not customary office installations shall, at
the request of Landlord, be removed by Tenant at the expiration or sooner
termination of the term of this Lease, and Tenant shall, at Tenant's expense, so
remove said alterations and additions and repair and restore the Leased Premises
to the conditions of same existing immediately prior to the making of such
alterations and additions.
(b) (i) All alterations or additions made by Tenant in the Leased
Premises shall be constructed and completed in a good and workmanlike manner at
Tenant's expense by contractors approved by Landlord, such approval not to be
unreasonably withheld or delayed provided that Tenant shall have first obtained
Overlandlord's approval. Tenant shall obtain all necessary governmental permits,
licenses and approvals and shall comply with all applicable laws. In connection
with any major alteration, Tenant shall submit to Landlord and Overlandlord in
advance of any work being performed, complete drawings, plans and specifications
for Landlord's and Overlandlord's approval as provided in Section 5.01(e)l of
the Overlease.
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(ii) Upon Landlord's and Overlandlord's approval of Tenant's plans and
specifications, Tenant shall submit to Landlord and Overlandlord cost estimates
certified by Tenant's architect for such work for Landlord's and Overlandlord's
review pursuant to the procedures set forth in Section 5.01(e)1 of the
Overlease.
(iii) Upon a request from Landlord and Overlandlord as provided in
Section 5.01(e)l of the Overlease (and prior to Tenant's commencing any work),
Tenant shall deliver to Overlandlord, at Tenant's sole cost and expense, to
secure the prompt and proper completion of Tenant's work either (i) a payment
and performance bond, issued by a surety company acceptable to Landlord and
Overlandlord in an amount at least equal to the estimated cost of such Tenant's
work, or (ii) at Tenant's option, an irrevocable, unconditional, negotiable
letter of credit, issued by and drawn on a bank which is a member of The New
York Clearing House Association and otherwise satisfactory to Landlord and
Overlandlord and in a form reasonably satisfactory to Overlandlord and Landlord,
in an amount equal to the aggregate of (A) the aforesaid final cost estimate and
(B) ten per cent (10%) of such sum and otherwise subject to the provisions of
Section 5.01(e)l of the Overlease. The letter of credit shall be for one year
and shall be renewed by Tenant each and every year until Tenant's work is
completed and shall be delivered to Overlandlord not less than 30 days prior to
the expiration of the then current letter of credit. Failure to deliver such new
letter of credit on or before said date shall entitle Overlandlord to present
the then current letter of credit for payment and hold the proceeds thereof for
application as provided herein. The bank referred to in this subsection shall be
a bank independent of Landlord and shall be a bank other than Tenant and any
Affiliate of Landlord or Tenant.
(c) All improvements not removable by Tenant in the Leased Premises
shall be fully paid for by Tenant in cash and shall not be subject to
conditional bills of sale, chattel mortgage or other title retention agreements.
(d) Upon approval of such plans and specifications, with any charges
Landlord or Overlandlord may reasonably require, the alteration may only be
performed in accordance with the approved plans and specifications with only
such changes thereto, except immaterial field changes as Landlord and
Overlandlord shall approve. In connection with the performance of any alteration
(whether or not a major alteration) by Tenant: (i) neither Tenant nor its agents
or employees shall interfere with the work being done by Overlandlord, Landlord
or their agents and employees, (ii) Tenant shall comply with any reasonable work
schedule, rules and regulations proposed by Overlandlord, Landlord, or their
agents or employees, (iii) the labor employed by Tenant shall be harmonious and
compatible with the labor employed by Overlandlord in the building, it being
agreed that if in Landlord's or Overlandlord's reasonable judgment the labor is
incompatible Tenant shall forthwith upon Landlord's or Overlandlord's demand
withdraw such labor from the Leased Premises, (iv) Tenant shall procure and
deliver to Overlandlord and Landlord workmen's compensation public liability,
property damage and such other insurance policies, in such amounts as shall be
reasonably required by either of them in connection with Tenant's work, and
shall upon Landlord's or Overlandlord's request cause Landlord or Overlandlord
to be named as an insured thereunder, (v) Tenant shall hold Landlord and
Overlandlord harmless from and against any and all claims arising from or in
connection with any act or omission of Tenant or its agent or employees and (vi)
Tenant shall promptly pay for Tenant's work in full and shall not permit any
lien to attach to the Leased Premises or the Building.
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Section 11.02. Tenant's Property. (a) Subject to Tenant obtaining any
consent of Overlandlord which may be required pursuant to Article 5 of the
Overlease, Tenant, at its expense, may, at any time and from time to time,
install in and remove from the Leased Premises its trade fixtures, equipment,
partitions, walls and wall systems, furniture and furnishings, provided such
installation or removal is accomplished without material damage to the Leased
Premises or the Building and Tenant promptly repairs any such damage. All
fixtures, equipment, improvements and appurtenances attached to or built into
the Leased Premises for and on behalf of Tenant, whether at or prior to the
commencement of this Lease or during the term of this Lease, not removable as
aforesaid shall be deemed the property of Landlord and shall not be removed by
Tenant, except that (i) at the time of the approval of the alterations, Landlord
may require Tenant to remove any of such property which does not constitute a
customary office installation upon the expiration or termination of this Lease,
and (ii) Tenant may alter or remove the same if no longer useful to Tenant and
in compliance with Section 11.01 hereof. Upon removal of any such property by
Tenant pursuant to clause (i) above, Tenant shall, at its expense, repair and
restore the Leased Premises to a reasonable and usable condition.
(b) Upon the expiration or sooner termination of this Lease, Tenant
shall remove all of Tenant's property (including any installation or other work
performed by Tenant or on its behalf) not permanently affixed to the Building.
Tenant shall quit and surrender the Leased Premises in "broom clean" condition
and in good order and repair, except for ordinary wear and tear. If Tenant fails
to remove any of Tenant's property (including any installation or other work
performed by Tenant or on its behalf) that Tenant may or is required to remove
upon the termination of this Lease, any such property not so removed shall, at
Landlord's election, become the property of Landlord and/or be removed by
Landlord at Tenant's expense.
ARTICLE TWELVE
CONDEMNATION
Section 12.01. Condemnation. In the event that the Demised Premises or
any part thereof or the Building shall be acquired or condemned by eminent
domain for any public or quasi- public use or purpose, whether partially or
totally and whether temporarily or permanently, the consequences thereof shall
be determined pursuant to Article 8 of the Overlease. Tenant shall be entitled
to participate with Landlord in the enforcement of Landlord's rights against
Overlandlord under said Article 8 in the same manner as is provided in Section
5.01 hereof. Tenant's right to an apportionment of rent and to repairs shall be
dependent upon whether or not Landlord has a right to apportionment of rents and
repairs with respect to the Leased Premises under said Article 8. No damage,
compensation or claims shall be payable by Landlord for inconvenience, loss of
business or annoyance arising from any such condemnation or the repair or
restoration of any portion of the Leased Premises or of the Building required
thereby.
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ARTICLE THIRTEEN
REMEDIES AND DEFAULTS
Section 13.01. Bankruptcy. (a) In the event a petition is filed by or
against Tenant under the United States Bankruptcy Code, 11 U.S.C. Sections
101-1330, as amended, or any successor thereto (the "Bankruptcy Code"), Tenant,
as debtor and debtor-in-possession, and any trustee who may be appointed, agree
to adequately protect Landlord as follows: (i) to pay monthly in advance on the
first day of each month as reasonable compensation for use and occupancy of the
Leased Premises an amount equal to all Annual Rent and Additional Rent due
pursuant to this Lease; (ii) to perform each and every obligation of Tenant
under this Lease until such time as this Lease is either rejected or assumed by
order of a court of competent jurisdiction; (iii) to determine within sixty (60)
days after the filing of such petition whether to assume or to reject this
Lease; (iv) to give Landlord at least thirty (30) days' prior written notice,
unless a shorter notice period is agreed to in writing by the parties, of any
proceeding relating to any assumption of this Lease; (v) to give at least thirty
(30) days' prior written notice of any vacation or abandonment of the Leased
Premises, any such vacation or abandonment to be deemed a rejection of this
Lease; and (vi) to do all other things of benefit to Landlord otherwise required
under the Bankruptcy Code. Tenant shall be deemed to have rejected this Lease in
the event of the failure to comply with any of the above.
(b) If Tenant or a trustee elects to reject this Lease subsequent to
the filing of a petition under the Bankruptcy Code, or if this Lease is
otherwise rejected, Tenant shall immediately vacate and surrender possession of
the Leased Premises in accordance with Section 8.01(b) hereof.
(c) If Tenant or a trustee elects to assume this Lease subsequent to
the filing of a petition under the Bankruptcy Code, Tenant, as debtor and as
debtor-in-possession, and any trustee who may be appointed agree as follows: (i)
to cure each and every existing breach by Tenant within not more than ninety
(90) days after assumption of this Lease; (ii) within ninety (90) days of this
Lease to compensate Landlord for any actual pecuniary loss resulting from any
existing breach, including, without limitation, Landlord's reasonable costs,
expenses and attorneys' fees incurred as a result of such breach, as determined
by a court of competent jurisdiction; (iii) in the event of an existing breach,
to provide adequate assurance of Tenant's future performance, including, without
limitation, (A) the deposit of a sum equal to three (3) months' installments of
Annual Rent to be held to secure Tenant's obligations under the Lease, (B) the
production to Landlord of written documentation establishing that Tenant has
sufficient present and anticipated financial ability to perform each and every
obligation of Tenant under this Lease, and (C) such additional assurances, in
form reasonably acceptable to Landlord, as may be required under any applicable
provision of the Bankruptcy Code; (iv) the assumption will not breach any
provision of this Lease; (v) the assumption will be subject to all of the
provisions of this Lease unless the prior written consent of Landlord is
obtained; and (vi) to obtain the prior written consent of any Superior Mortgagee
to which this Lease has been assigned as collateral security to such assumption.
(d) If Tenant assumes this Lease and proposes to assign the same
pursuant to the provisions of the Bankruptcy Code to any person or entity who
shall have made a bona fide offer to accept an assignment of this Lease on terms
acceptable to Tenant, then notices of such proposed assignment, setting forth
(i) the name and address of such person, (ii) all the terms and conditions of
such offer, and (iii) the adequate assurances to be provided Landlord to assure
such person's future performance under the Lease, shall be given to Landlord by
Tenant no later than twenty (20) days after receipt by Tenant, but in any event
no later than ten (10) days prior to the date that Tenant shall make application
to a court of competent jurisdiction for authority and approval to enter into
such assignment and assumption, and Landlord shall thereupon have the prior
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right and option, to beexercised by notice to Tenant given at any time prior to
the effective date of such proposed assignment, to accept an assignment of this
Lease upon the same terms and conditions for the same consideration, if any, as
the bona fide offer made by such person, less any brokerage commissions which
may be payable out of the consideration to be paid by such person for the
assignment of this Lease. The adequate assurance to be provided Landlord to
assure the assignee's future performance under the Lease shall include without
limitation: (A) the deposit of a sum equal to three (3) months' installments of
the Annual Rental to be held to secure Tenant's obligations under this Lease,
(B) a written demonstration that the assignee meets all reasonable financial and
other criteria of Landlord as did Tenant and its business at the time of
execution of this Lease, including the production of the most recent audited
financial statement of the assignee prepared by an independent certified public
accountant, (C) use of the Leased Premises in compliance with the terms of
Section 7.01 of this Lease, and (D) such additional assurances, in form
reasonably acceptable to Landlord, as to all matters identified in any
applicable provision of the Bankruptcy Code.
(e) Neither Tenant nor any trustee who may be appointed in the event
of the filing of a petition under the Bankruptcy Code shall conduct or permit
the conduct of any "fire," "bankruptcy," "going out of business" or auction sale
in or from the Leased Premises.
Section 13.02. Conditions of Limitation. This Lease and the term and
estate hereby granted are subject to the limitation that:
(i) in case Tenant shall make an assignment of its property for the
benefit of creditors or shall file a voluntary petition under any bankruptcy or
insolvency law, or an insolvency petition under any bankruptcy or insolvency law
shall be filed against Tenant and such involuntary petition is not dismissed
within ninety (90) days after the filing thereof;
(ii) in case a receiver, trustee or liquidator shall be appointed for
Tenant or of or for the property of Tenant, and such receiver, trustee or
liquidator shall not have been discharged within ninety (90) days from the date
of such appointment;
(iii) in case Tenant shall default in the payment of any Annual Rent
or Additional Rent or any other charge payable hereunder by Tenant to Landlord
on any date upon which the same becomes due, and such default shall continue for
five (5) days after Landlord shall have given to Tenant a written notice
specifying such default;
(iv) in case Tenant shall default in the due keeping, observing or
performance of any covenant, agreement, term, provision or condition of Article
3 hereof on the part of Tenant to be kept, observed or performed and if such
default (A) would, if not cured, cause Landlord to be subject to fine, penalty,
violation, revocation or suspension of the certificate of occupancy for the
Building, or other damages and (B) shall continue and shall not be remedied by
Tenant within such time as is reasonable to leave Landlord sufficient time to
remedy should Tenant fail to do so in the time allotted (but in any event no
more than ten (10) days nor less than forty-eight (48) hours after Landlord
shall have given to Tenant a written notice specifying the same (otherwise
clause (v) of this Section 13.02 shall apply);
(v) in case Tenant shall default in the due keeping, observing or
performance of any covenant, agreement, term, provision or condition of this
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Lease on the part of Tenant to be kept, observed or performed (other than a
default of the character referred to in clauses (iii) or (iv) of this Section
13.02), and if such default shall continue and shall not be remedied by Tenant
within thirty (30) days after Landlord shall have given to Tenant a written
notice specifying the same, or, in the case of such a default which for causes
beyond Tenant's control cannot with due diligence be cured within said period of
thirty (30) days, if Tenant (A) shall not, promptly upon the giving of such
notice, advise Landlord in writing of Tenant's intention to take all steps
necessary to remedy such default with due diligence, (B) shall not duly
institute and thereafter diligently prosecute to completion all steps necessary
to remedy the same, and (C) shall not remedy the same within a reasonable time
after the date of the giving of said notice by Landlord;
(vi) in case any event shall occur or any contingency shall arise
whereby this Lease or the estate hereby granted or the unexpired balance of the
term hereof would, by operation of law or otherwise, devolve upon or pass to any
firm, association, corporation, person or entity other than Tenant except as
expressly permitted under Article 16 hereof, or whenever Tenant shall desert or
abandon all or substantially all of the Leased Premises for a period of thirty
(30) consecutive days or the same shall become vacant for a period of thirty
(30) consecutive days (whether the keys be surrendered or not and whether the
rent be paid or not); or (vii) in case any assignee of Tenant, which is not an
Affiliate (as defined herein) of Tenant, shall default in the payment of any
Fixed Rent or Additional Rent payable hereunder more than twice, in the
aggregate, in any period of twelve (12) months, notwithstanding that such
defaults shall have been cured within the applicable cure period, then, in any
of said cases, Landlord may give to Tenant a notice of intention to end the term
of this Lease at the expiration of three (3) days from the date of the giving of
such notice, and, in the event such notice is given, this Lease and the term and
estate hereby granted (whether or not the term shall theretofore have commenced)
shall expire and terminate upon the expiration of said three days with the same
effect as if that day were the date hereinbefore set for the expiration of the
full term of this Lease, but Tenant shall remain liable for damages as provided
in this Lease or pursuant to law. If the term "Tenant", as used in this Lease,
refers to more than one person, then as used in clauses (i) and (ii) of this
Section 13.02, said term shall be deemed to include all such persons or any one
of them, if any of the obligations of Tenant under this lease is guaranteed, the
term "Tenant", as used in said clauses, shall be deemed to include also the
guarantor or, if there be more than one Guarantor, all or any one of them; and,
if this Lease shall have been assigned, the term "Tenant", as used in said
clauses, shall be deemed to include the assignee and the assignor or either of
them under any such assignment unless Landlord shall, in connection with such
assignment, release the assignor from any further liability under this Lease, in
which event the term "Tenant", as used in said clauses, shall not include the
assignor so released.
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Section 13.03. Re-entry. (a) If Tenant shall default in the payment of
any Annual Rental or Additional Rental, and such default shall continue beyond
any applicable grace or cure period for same, if any, or if this Lease shall
terminate as provided in Section 13.02, Landlord or Landlord's agents and
employees may immediately or at any time thereafter re-enter the Leased
Premises, or any part thereof, either by summary dispossess proceedings or by
any suitable action or proceeding at law, or otherwise, without being liable to
indictment, prosecution or damages therefor, and may repossess the same, and may
remove any person therefrom, to the end that Landlord may have, hold and enjoy
the Leased Premises. The word "re-enter," as used herein, is not restricted to
its technical legal meaning. If this Lease is terminated under the provisions of
Section 13.02, or if Landlord shall re-enter the Leased Premises under the
provisions of this Section, or in the event of the termination of this Lease, or
of re-entry, by or under any summary dispossess or other proceeding or action or
any provision of law by reason of default hereunder on the part of Tenant,
Tenant shall thereupon pay to Landlord the Annual Rental and Additional Rental
payable up to the time of such termination of this Lease, or of such recovery of
possession of the Leased Premises by Landlord, as the case may be, and shall
also pay to Landlord damages as provided in Section 13.04.
(b) In the event of a breach or threatened breach by Tenant of
any of its obligations under this Lease, Landlord shall also have the right of
injunction. The special remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies to which
Landlord may lawfully be entitled at any time and Landlord may invoke any remedy
allowed at law or in equity as if specific remedies were not provided for
herein.
(c) If this Lease shall terminate under the provisions of
Section 13.02, or if Landlord shall re-enter the Leased Premises under the
provisions of this Section 13.03, or in the event of the termination of this
Lease, or of re-entry, by or under any summary dispossess or other proceeding or
action or any provision of law by reason of default hereunder on the part of
Tenant, Landlord shall be entitled to retain all monies, if any, paid by Tenant
to Landlord, whether as advance rent, security or otherwise, but such monies
shall be credited by Landlord against any Annual Rental or Additional Rental due
from Tenant at the time of such termination or re-entry or, at Landlord's
option, against any damages payable by Tenant under Section 13.04 or pursuant to
law.
Section 13.04. Damages. (a) If this Lease is terminated under
the provisions of Section 13.02, or if Landlord shall re-enter the Leased
Premises under the provisions of Section 13.03, or in the event of the
termination of this Lease, or of re-entry, by or under any summary dispossess or
other proceeding or action or any provision of law by reason of default
hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the
election of Landlord, either:
(A) a sum which at the time of such termination of this Lease
or at the time of any such re-entry by Landlord, as the case may be,
represents the then value of the excess, if any, of (i) the aggregate
amount of the Annual Rental and the Additional Rental which would have
been payable by Tenant (conclusively presuming the average monthly
Additional Rental to be the same as were payable for the last 12
calendar months, or if less than 12 calendar months have then elapsed
since the date hereof, all of the calendar months, immediately
preceding such termination or re-entry) for the period commencing with
such earlier termination of this Lease or the date of any such
re-entry, as the case may be, and ending with the date contemplated as
the expiration date hereof if this Lease had not so terminated or if
Landlord has not so re-entered the Leased Premises, over (ii) the
aggregate rental value of the Leased Premises for the same period, or
(B) sums equal to the Annual Rental and the Additional Rental
under Article Four which would have been payable by Tenant had this
Lease not so terminated, or had Landlord not so re-entered the Leased
Premises, payable upon the due dates therefor specified herein
following such termination or such re-entry and until the date
contemplated as the expiration
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date hereof if this Lease had not so terminated or if Landlord had not
so re-entered the Leased Premises, provided, however, that if Landlord
shall relet the Leased Premises during said period, Landlord shall
credit Tenant with the net rents received by Landlord from such
reletting, such net rents to be determined by first deducting from the
gross rents as and when received by Landlord from such reletting the
expenses incurred or paid by Landlord in terminating this Lease or in
re-entering the Leased Premises and in securing possession thereof, as
well as the expenses of reletting, including, without limitation,
altering and preparing the Leased Premises for new tenants, brokers'
commissions, legal fees, and all other expenses properly chargeable
against the Leased Premises and the rental therefrom, it being
understood that any such reletting may be for a period shorter or
longer than the remaining term of this Lease; but in no event shall
Tenant be entitled to receive any excess of such net rents over the
sums payable by Tenant to Landlord hereunder, nor shall Tenant be
entitled in any suit for the collection of damages pursuant to this
subdivision to a credit in respect of any net rents from a reletting,
except to the extent that such net rents are actually received by
Landlord. If the Leased Premises or any part thereof should be relet in
combination with other space, then proper apportionment on a square
foot basis shall be made of the rent received from such reletting and
of the expenses of reletting.
If the Leased Premises or any part thereof be relet by Landlord for the
unexpired portion of the term of this Lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal, the
amount of rent reserved upon such reletting shall, prima facie, be the fair and
reasonable rental value for the Leased Premises, or part thereof, so relet
during the term of the reletting. Landlord shall not be liable in any way
whatsoever for its failure or refusal to relet the Leased Premises or any part
thereof, or if the Leased Premises or any part thereof are relet, for its
failure to collect the rent under such reletting, and no such refusal or failure
to relet or failure to collect rent shall release or affect Tenant's liability
for damages or otherwise under this Lease.
(b) Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have expired if
it had not been so terminated under the provisions of Section 13.02, or under
any provision of law, or had Landlord not re-entered the Leased Premises.
Nothing herein contained shall be construed to limit or preclude recovery by
Landlord against Tenant of any sums or damages to which, in addition to the
damages particularly provided above, Landlord may lawfully be entitled by reason
of any default hereunder on the part of Tenant. Nothing herein contained shall
be construed to limit or prejudice the right of Landlord to prove for and obtain
as damages by reason of the termination of this lease or re-entry on the Leased
Premises for the default of Tenant under this Lease an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, such damages are to be proved whether or not
such amount be greater, equal to, or less than any of the sums referred to in
subsection (a) herein above.
(c) In addition, if this Lease is terminated under the
provisions of Section 13.02, or if Landlord shall re-enter the Leased Premises
under the provisions of Section 13.03, Tenant agrees that:
(i) the Leased Premises then shall be in the same condition as that in
which
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Tenant has agreed to surrender the same to Landlord at the expiration
of the term hereof;
(ii) Tenant shall have performed prior to any such termination
any covenant of Tenant contained in this Lease for the making of any
Tenant's work or for restoring or rebuilding the Leased Premises or the
Building, or any part thereof; and
(iii) for the breach of any covenant of Tenant set forth above
in this subsection (c), Landlord shall be entitled immediately, without
notice or other action by Landlord, to recover, and Tenant shall pay,
as and for liquidated damages therefor, the cost of performing such
covenant (as estimated by an independent contractor selected by
Landlord).
Section 13.05. Default by Landlord. If Landlord shall fail to make any
payment which Landlord is obligated to make to Tenant under the terms of this
Lease for a period of five (5) days after written notice thereof, or if Landlord
shall default in any of its obligations under this Lease (other than a default
in the payment of any money) and such default shall continue and not be remedied
as soon as practicable, and in any event within thirty (30) days after Tenant
had given to Landlord a notice specifying the same, or, in the case of a default
which cannot with due diligence be cured within a period of thirty (30) days, if
Landlord shall not (x) within said thirty (30)-day period advise Tenant of
Landlord's intention to take all steps necessary to remedy such default, (y)
duly commence within said thirty (30)-day period, and thereafter diligently
prosecute to completion all steps necessary to remedy the default, and (z)
complete such remedy within a reasonable period of time after the date of such
notice from Tenant, then Tenant shall be entitled, without being obligated to
and in addition to those remedies Tenant may have at law or in equity, to refer
the matter to arbitration pursuant to Article 14.
Section 13.06. Suspension of Tenant Default. Except as otherwise
expressly provided herein, in the event that Tenant shall dispute, in good
faith, any Additional Rental or other sum (other than Annual Rental) claimed by
Landlord hereunder and Tenant shall give Landlord written notice specifying in
reasonable detail the basis for its dispute, Tenant may withhold payment of the
particular amount in dispute and shall not be deemed to be in default hereunder
by reason hereof unless and until such dispute is determined adversely to Tenant
and Tenant shall fail to pay the withheld amount, or so much thereof as shall be
determined to be payable to Landlord, within ten (10) days of the determination
of such dispute, together with interest thereon at the Lease Interest Rate, from
the date such amount was due until paid in full plus the late charge provided by
Section 4.03. The term "Lease Interest Rate" shall mean the rate announced from
time to time by Citibank, N.A. as its base rate for 90 day unsecured loans to
creditworthy customers, but in no event to exceed a rate which would make said
rate usurious under the laws of the State of New York. Tenant and Landlord shall
proceed diligently to resolve any such dispute by arbitration in the manner
provided in Article Fourteen. If the arbitrators shall affirmatively determine
that Tenant acted in bad faith in invoking this Section 13.06, the applicable
interest rate, in lieu of the Lease Interest Rate, shall be 24% per annum, but
in no event to exceed a rate which would make said rate usurious under the laws
of the State of New York.
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ARTICLE FOURTEEN
ARBITRATION
Section 14.01. Arbitration. (a) Wherever in this Lease arbitration is
specified or permitted, it shall be conducted as provided in this Section 14.01.
The arbitration shall be conducted by a single arbitrator, if the parties agree
to a specified single arbitrator, or otherwise by a panel of three arbitrators,
in either event in accordance with the rules and regulations for commercial
matters then obtaining of the New York City branch of the American Arbitration
Association or its successor (the "AAA"). The arbitration shall be conducted in
the Borough of Manhattan. The determination of the arbitrators shall be final,
binding and conclusive on all the parties, and judgment may be rendered thereon
by any court having jurisdiction, upon application of either Landlord or Tenant.
The arbitrators shall have no right to modify or amend the terms of this Lease.
If a panel of three arbitrators is used, each party shall have the right to
select one of the arbitrators, and the third arbitrator, who shall be a
competent and impartial person with at least 10 years' experience in the Borough
of Manhattan in a calling connected with the subject matter of the arbitration,
shall be selected by the other two arbitrators or, failing agreement by them,
the AAA. The arbitrators shall be entitled to award costs as part of their
decision and shall award costs to the prevailing party, if there is one.
(b) Tenant agrees that notwithstanding any reference herein to
determination of any dispute by arbitration, Tenant shall not have the right to
determine any such dispute by arbitration if Landlord shall not have the
equivalent right under the Overlease or if the delay involved in the
determination of such a dispute hereunder by arbitration would or could result
in a default by Landlord under the Overlease. Landlord agrees that it will, to
the extent permitted to do so by Overlandlord, permit Tenant to participate in
any arbitration proceedings under the Overlease which involve Tenant or the
Leased Premises.
ARTICLE FIFTEEN
COMPLIANCE WITH LAWS
Section 15.01. Tenant's Compliance with Laws. (a) Tenant shall give
prompt notice to Landlord of any notice it receives of the violation of any law
or requirement of any public authority with respect to the Leased Premises or
the use or occupation thereof. Tenant, at its expense, shall comply with any
valid and applicable laws, rules, orders, ordinances, regulations and other
requirements, present or future (collectively, "Applicable Laws"), affecting the
Leased Premises and/or the Building that are promulgated by any governmental
authority or agency having jurisdiction over the Leased Premises and/or the
Building and with any requirements of the insurance companies insuring Landlord
against damage, loss or liability for accidents in or connected with the
Building to the extent that the same shall arise out of or affect or be
applicable to (i) Tenant's use or manner of use of the Leased Premises, (ii)
alterations and improvements made by Tenant, (iii) a breach by Tenant of its
obligations under this Lease, (iv) the installation, modification or maintenance
of any gas, smoke, fire detector, alarm, sprinkler or other system to prevent or
extinguish fires or combustions or to promote fire safety arising out of
Tenant's use of the Leased Premises or (v) any cause or condition created by
Tenant. Tenant shall not at any time use or occupy the Leased Premises so as to
violate the Certificate of Occupancy for the Building. Nothing herein contained,
however, shall be deemed to impose any obligation upon Tenant to make any
structural changes or repairs unless necessitated by reason of a particular use
by Tenant of the Leased Premises, its manner of use of the same or its use
thereof as a bank.
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(b) Tenant may, at its expense (and, if necessary, in the name of but
without expense to, Landlord) contest, by appropriate proceedings diligently
prosecuted, the validity, or applicability to the Leased Premises, any matter it
may be required to comply with pursuant to subsection (a) above, and may
postpone its compliance therewith until such contest shall be decided.
(c) Tenant shall pay all the costs. expenses. fines, penalties and
damages which may be imposed upon Overlandlord, Landlord or any Superior
Mortgagee by reason of or arising out of Tenant's failure to fully and promptly
comply with and observe the provisions of this Section. If Tenant installs a
sprinkler system in the Leased Premises, Tenant may, with Landlord's consent,
which shall not be unreasonably withheld provided that Tenant shall have first
obtained Overlandlord's consent, connect such system to the sprinkler system in
the Building. Such connection shall be deemed an alteration for all of the
purposes of this Lease.
ARTICLE SIXTEEN
ASSIGNMENT AND SUBLETTING
Section 16.01. General Prohibition. Neither this Lease nor all or any
part of the leasehold interest created hereby shall, by operation of law or
otherwise, be assigned, mortgaged, pledged, encumbered or otherwise transferred
by Tenant and neither the Leased Premises nor any part thereof shall be sublet
or be used or occupied for any purpose by anyone other than Tenant, without the
prior consent of Overlandlord and Landlord in each instance, except as otherwise
provided in this Article. No permitted subtenant shall assign, encumber, modify
or extend its sublease or further sublet all or any portion of its sublet space,
or otherwise permit any portion of the sublet space to be used or occupied by
others, without the prior consent of Overlandlord and Landlord in each instance
and each proposed sublease shall contain appropriate prohibitions in furtherance
of the foregoing. Provided that Tenant shall have first obtained Overlandlord's
consent in accordance with Article 25 of the Overlease, Landlord agrees that it
shall not unreasonably withhold its consent to any such assignment or subletting
by a permitted subtenant provided the conditions for same contained in the said
Article 25 are satisfied and no event of default exists and is continuing. Any
assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention
of this Article 16 shall be void.
Section 16.02. Rights of Landlord. If this Lease is assigned, whether
or not in violation of the terms of this Lease, Landlord may collect rent from
the assignee. If the Leased Premises or any part thereof is sublet or be used or
occupied by anybody other than Tenant, Landlord may, after default by Tenant,
collect rent from such subtenant or occupant. In either event, Landlord may
apply the next amount collected to the rents herein reserved. The consent by
Overlandlord or Landlord to an assignment, transfer, encumbering or subletting
pursuant to any provision of this Lease shall not relieve Tenant or any assignee
or subtenant from obtaining the express prior consent of Overlandlord and
Landlord to any other or further assignment, transfer, encumbering or
subletting. The listing of any name other than that of Tenant on any Building
directory or tenant listing shall not vest in such person any right or interest
in this Lease or the Leased Premises or constitute any consent of Overlandlord
or Landlord required under this Article. Tenant agrees to pay to Landlord the
reasonable attorneys' fees and out-of-pocket expenses incurred by Landlord in
connection with any proposed assignment or subletting. Neither any assignment of
this Lease nor
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any subletting, occupancy or use of the Leased Premises or any part thereof by
any person other than Tenant, nor any collection of rent by Landlord from any
person other than Tenant, nor any application of any such rent as provided in
this Article shall be deemed a waiver of any of the provisions of Section 16.01
or, relieve, impair, release or discharge Tenant of its obligation fully to
perform the terms of this Lease on Tenant's part to be performed, and Tenant
shall remain fully and primarily liable hereunder. The joint and several
liability of Tenant and any immediate or remote successor in interest of Tenant
and the due performance of the obligations of this Lease on Tenant's part to be
performed or observed shall not be discharged, released or impaired in any
respect by any agreement or stipulation made by Landlord extending the time of,
or modifying any of the obligations of, this Lease, or by any waiver or failure
of Landlord to enforce any of the obligations of this Lease, provided that the
liability of any predecessor Tenant may not be increased thereby.
Section 16.03. Net Profits. (a) If Tenant shall assign or sublet the
Leased Premises, Tenant shall pay to Landlord, after deduction of "Permitted
Expenses" (as hereinafter defined), the following amounts: (i) in the case of an
assignment, an amount equal to one hundred percent (100%) of all consideration
received by Tenant for such assignment and (ii) in the case of a subletting, one
hundred percent (100%) of any rents or other consideration paid under the
sublease in excess of the rents payable for the subleased space (on a
proportionate rentable area basis) hereunder for the same period. The term
"consideration" shall include all sums paid in consideration of the assignment
or subletting, including, without being limited to, any sums paid for the
purchase or rental of Tenant's property, less, in the case of a sale thereof,
the then net unamortized or undepreciated cost thereof determined on the basis
of Tenant's federal income tax returns. The term "consideration" shall not
include any amounts payable by subtenants to Tenant for cleaning services unless
at such time Tenant is paying Landlord for such services under this Lease.
(b) As used herein, the term "Permitted Expenses" shall mean the
aggregate of reasonable and customary (i) broker commissions and legal fees
incurred by Tenant in connection with any such assignment or sublease, (ii)
Annual Rent and Additional Rental paid by Tenant with respect to any portion of
the Leased Premises involved in such transaction for the period of time the same
remained unleased and prior to the effective date of any such assignment or the
commencement of rental payments under any such sublease or during any period
that rental payments thereunder are abated, (iii) the costs, if any, incurred by
Tenant in separating the space from the balance of the Leased Premises, (iv)
advertising expenses incurred by Tenant, (v) costs incurred by Tenant in
preparing the space for occupancy, including cash allowances in lieu thereof and
(vi) any amounts payable to Overlandlord pursuant to Section 25.06 of the
Overlease.
Section 16.04. Remedy for Delayed or Withheld Consent. Tenant shall
not be entitled to make any claim, and Tenant hereby waives any claim, for money
damages (nor shall Tenant claim any money damages by way of setoff, counterclaim
or defense), based upon any claim or assertion by Tenant that Landlord has
unreasonably withheld or unreasonably delayed any consent or approval to a
proposed assignment or subletting as provided for above, but Tenant's sole
remedy in such event shall be an action or proceeding to enforce any such
provision, or for specific performance, injunction or declaratory judgment;
provided, however, that Tenant may make such a claim in the event and only in
the event that it is finally determined by arbitration or court proceeding that
Landlord acted in a grossly arbitrary or grossly capricious manner in
withholding or delaying the consent or approval in issue.
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ARTICLE SEVENTEEN
LANDLORD'S ACCESS
Section 17.01. Landlord's Access to Premises. Tenant covenants and
agrees that Tenant will permit Overlandlord, Landlord and any mortgagee of the
Building and/or the Land or of the interest of Landlord therein and any lessor
under any ground or underlying lease, and their representatives, to enter the
Premises (including the Second Floor roof setback) at all reasonable hours, and
upon reasonable advance notice to Tenant (except that in the case of an
emergency no notice shall be required), for the purposes of inspection, or of
making repairs, replacements or improvements in or to the Premises or the
Building or equipment, or of complying with all laws, orders and requirements of
governmental or other authority or of exercising any right reserved to
Overlandlord and Landlord by this Lease and by the Overlease (including the
right during the progress of such repairs, replacements or improvements or while
performing work and furnishing materials in connection with compliance with any
such laws, orders or requirements, to keep and store within the Premises all
necessary materials, tools and equipment). In connection with the foregoing,
Landlord will use reasonable efforts to minimize interference with Tenant's use
of the Premises. Tenant may designate one or more areas in the Leased Premises
as secure areas, and Overlandlord and Landlord shall have no access thereto
without being accompanied by a designated representative of Tenant except in the
case of emergencies with the accompaniment of members of the New York City Fire
or Police Department or other appropriate government officer or agent.
Section 17.02. Overlandlord's Right to Change the Building. Pursuant
to Section 6.01 of the Overlease, Overlandlord shall have the right, at any
time, without incurring any liability to Tenant therefor, and without affecting
or reducing any of Tenant's covenants and obligations hereunder, to make or
permit to be made such changes, alterations, additions and improvements in or to
the Building (including the Premises) and the fixtures and equipment thereof, as
well as in or to the sidewalks, vaults, street entrances, halls, passages,
elevators, escalators, stairways and other parts thereof, and to erect, maintain
and use pipes, ducts and conduits in and through the Leased Premises, all as
Landlord and Overlandlord may deem reasonably necessary or desirable. Nothing
contained in this Article 17.02 shall relieve Tenant of any duty, obligation or
liability of Tenant set forth in this Lease with respect to making any repair,
replacement or improvement or complying with any law, order or requirement of
any governmental or other authority.
ARTICLE EIGHTEEN
NAME OF BUILDING; SIGNS
Section 18.01. Landlord's Right to Designate Building Name.
Overlandlord shall have the right to designate, and thereafter change, the name
of the Building and to change the address of the Building pursuant to Section
6.02 of the Overlease.
Section 18.02. Signs. Tenant shall not install or permit installation
of any signs, sculptures and/or graphics which adversely reflect on the dignity
or character of the Building or could reasonably be construed to rename the
Building and shall not permit the Building to be identified by the name of
another company through signage.
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ARTICLE NINETEEN
QUIET ENJOYMENT
Section 19.01. Covenant of Quiet Enjoyment. So long as Tenant pays all
of the Annual Rental and Additional Rental and performs all of Tenant's other
obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy
the Leased Premises without hindrance, ejection or molestation by Landlord or
any person lawfully claiming through or under Landlord, subject, nevertheless,
to the provisions of this Lease and to Mortgages. This covenant shall be
construed as a covenant running with the Land, and is not, nor shall it be
construed as, a personal covenant of Landlord, except to the extent of
Landlord's interest in this Lease and only so long as such interest shall
continue, and thereafter this covenant shall be binding only upon subsequent
successors in interest of Landlord's interest in this Lease, to the extent of
their respective interests, as and when they shall acquire the same, and so long
as they shall retain such interest.
ARTICLE TWENTY
NON-WAIVER
Section 20.01. Non-Waiver by Either Party. Failure by either party to
complain of any action, nonaction or default of the other party shall not
constitute a waiver of any aggrieved party's rights hereunder. Waiver by either
party of any right for any default of the other party shall not constitute a
waiver of any right for either a subsequent default of the same obligation or
for any other default, past, present or future.
ARTICLE TWENTY-ONE
NOTICES
Section 21.01. Notices to Landlord or Tenant. Any notice or
communication to Landlord or Tenant required or permitted to be given under this
Lease shall be effectively given only if in writing and mailed by United States
Registered or Certified Mail, postage prepaid, return receipt requested (any
notice so given shall be effective two (2) days after the mailing thereof at a
U.S. Postal Service office in the Borough of Manhattan) or (ii) personal
delivery against receipt or (iii) overnight courier for next business day
morning delivery, addressed as follows:
If to Landlord, as follows:
Banco Union
New York Agency
609 Fifth Avenue
New York, New York 10017
Attention: Regional Vice President
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If to Tenant, as follows:
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, New York 11788
Attention:
Either party shall have the right to change the address to which notices shall
thereafter be sent by giving notice to the other party as aforesaid. Any notice
so given shall be effective two (2) days after the mailing thereof at a United
States Postal Service office or box in the Borough of Manhattan.
ARTICLE TWENTY-TWO
PARTIAL INVALIDITY
Section 22.01. Severability Clause. If any term. covenant, condition
or provision of this Lease, or the application thereof to any person or
circumstance, shall ever be held to be invalid or unenforceable, then in each
such event the remainder of this Lease or the application of such term,
covenant, condition or provision to any other person or any other circumstance
(other than those as to which it shall be invalid or unenforceable) shall not be
thereby affected, and each term, covenant, condition and provision hereof shall
remain valid and enforceable to the fullest extent permitted by law.
ARTICLE TWENTY-THREE
BROKERAGE
Section 23.01. Brokerage. Landlord and Tenant mutually represent to
each other that they have dealt with no brokers with respect to this Lease other
than Colliers ABR, Inc. and Promenade Real Estate Corp. (collectively, the
"Brokers"). Each party agrees to indemnify and hold harmless the other from and
against any claims for commissions based upon a breach of the foregoing
representation. Landlord shall pay the Brokers a commission in accordance with a
separate agreement.
ARTICLE TWENTY-FOUR
ESTOPPEL CERTIFICATES
Section 24.01. Estoppel Certificates. Landlord and Tenant shall,
without charge, at any time and from time to time, within ten (10) days after
request by the other party, deliver a written instrument to the asking party or
any other person, firm or corporation specified by the asking party, duly
executed and acknowledged, certifying, as applicable:
(a) That this Lease is unmodified and in full force and effect
or, if there has been any modification, that the same is in full force
and effect as modified and stating any such modification;
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(b) Whether or not there are then existing any defenses or
offsets which are not claims under subsection (d) below against the
enforcement of any of the agreements, terms, covenants, or conditions
of this Lease and any modification thereof upon the part of Tenant or
Landlord to be performed or complied with, and, if so, specifying the
same;
(c) The dates to which the Annual Rental and Additional
Rental, and other charges hereunder, have been paid; and
(d) Whether or not Tenant has made any claim against Landlord
under this Lease and, if so, the nature thereof and the dollar amount,
if any, of such claim.
ARTICLE TWENTY-FIVE
TENANT'S RIGHT OF FIRST REFUSAL
Section 25.01. Tenant's Right of First Refusal. In the event that
Landlord contemplates a sublease of any or all of the Overlease Premises other
than to an Affiliate (as defined in Section 25.03(b) of the Overlease) or a
Successor Corporation (as defined in Section 25.04(b) of the Overlease),
Landlord agrees to give Tenant written notice thereof at least ninety (90) days
prior to the proposed effective date of such sublease but, in any event, no
later than thirty (30) days prior to the date upon which Landlord shall give
notice thereof to Overlandlord pursuant to Section 25.05 of the Overlease.
Landlord's notice shall set forth the proposed effective date of such sublease
and the proposed term thereof. Tenant shall have the option, to be exercised by
written notice to Landlord within thirty (30) days after receipt of Landlord's
notice, to enter into a sublease with Landlord for the space specified in
Landlord's notice for the term of the proposed subletting. Said sublease shall
be upon the same terms and conditions and shall contain the same covenants,
agreements, and provisions which are set forth in this Lease except such as are
irrelevant or inapplicable, and except as otherwise expressly set forth to the
contrary in this Section 25. The fixed rent and additional rent, respectively,
payable pursuant to such sublease by Tenant shall be the rental rate per
rentable square foot of Annual Rental and Additional Rental payable by Landlord
pursuant to the Overlease with respect to the space during the term of the
sublease.
Section 25.02. Effect of Failure to Exercise Right. If Tenant shall
waive or shall fail to exercise its option, then Landlord may proceed to give
notice of the proposed subletting to Overlandlord in accordance with the
Overlease and, in the event that Overlandlord does not exercise its right of
recapture under the Overlease, Landlord may sublease the subject premises upon
the terms and conditions to which Landlord and any subtenant shall agree. Any
such sublease to a third party shall not be restricted to the terms and
conditions which would have been required in a sublease to Tenant pursuant to
Section 25.01 hereof except that the space to be sublet and the term of the
sublease shall be as set forth in Landlord's notice to Tenant. Upon the
consummation of any such permitted subletting, the provisions of this Article 25
shall continue to apply to such interest with respect to any future sublease and
shall continue to apply to any sublease of any part of the Overlease Premises
not included in such permitted subletting. In the event, however, that Landlord
shall not execute a proposed sublease within sixty (60) days after the date for
the commencement
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thereof set forth in Landlord's notice to Tenant, or within six months from the
date of Landlord's notice if no date for the proposed sublease is set forth in
Landlord's notice to Tenant, then such proposed subletting shall not be made
unless such interest is again offered to Tenant in accordance with the
provisions of this Article 25. The failure of Tenant to exercise its option with
respect to any proposed subletting shall not affect Tenant's option under this
Article 25 with respect to any other proposed subletting
ARTICLE TWENTY-SIX
SUBORDINATION
Section 26.01. Subordination. Upon the request of Landlord and at no
expense to Tenant, Tenant agrees to execute a subordination agreement confirming
that this Lease is subject and subordinate in all respects to the Overlease and
to all matters to which the Overlease is subject and subordinate.
ARTICLE TWENTY-SEVEN
SECURITY DEPOSIT
Section 27.01. Security Deposit. (a) Tenant has deposited with
Landlord $25,053.00 as security for the faithful performance and observance by
Tenant of the terms, provisions, covenants and conditions of this Lease (the
"Security Deposit"). Landlord shall deposit the Security Deposit in an
interest-bearing account in a federally insured, New York Clearing House Bank
located in New York State. To the extent not prohibited by law, Landlord shall
be entitled to receive and retain as an administrative expense an amount equal
to interest on the Security Deposit at the rate of one percent (1%) per annum,
which fee Landlord shall have the right to withdraw, at any time and from time
to time, as Landlord may reasonably determine. The balance of the interest shall
be paid to Tenant, or, at Landlord's option, credited against the next ensuing
installments of Fixed Rent due hereunder, within a reasonable time following
each anniversary of the Commencement Date.
(b) It is agreed that in the event Tenant defaults, beyond the
applicable notice and grace periods, in respect of any of the terms, provisions,
covenants and conditions of this Lease, including, but not limited to, the
payment of Annual Rental and Additional Rental, Landlord may use, apply or
retain the whole or any part of the security so deposited to the extent required
for the payment of any Annual Rental and Additional Rental, or any other sum as
to which Tenant is in default or for any sum which Landlord may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
provisions, covenants and conditions of this Lease, including but not limited
to, any damages or deficiency accrued before or after summary proceedings or
other re-entry by Landlord. In the event that Tenant shall fully and faithfully
comply with all of the terms, provisions, covenants and conditions of this
Lease, the security shall be returned to Tenant after the Expiration Date and
after delivery of entire possession of the Leased Premises to Landlord. In the
event of a sale of the Land and Building or leasing of the Building, of which
the Leased Premises form a part, Landlord shall have the right to transfer the
security to the vendee or lessee and Landlord shall thereupon be released by
Tenant from all liabilities for the return of such security; and Tenant agrees
to look solely to the new Landlord for the return of said security; and it is
agreed
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that the provisions hereof shall apply to every transfer or assignment made of
the security to a new landlord. Tenant further covenants that it will not assign
or encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Landlord nor its successors or assigns shall be bound
by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. In the event Landlord applies or retains any portion or all of the
security deposited, Tenant shall forthwith restore the amount so applied or
retained so that at all times the amount deposited shall be as $25,053.00.
ARTICLE TWENTY-EIGHT
RULES AND REGULATIONS
Section 28.01. General: This Lease Controls in Event of Conflict. The
Overlease contains Overlandlord's Rules and Regulations for the Building. Tenant
shall faithfully observe and comply with such Rules and Regulations (except as
hereinafter provided) and such changes therein (whether by modification,
elimination, addition or waiver) as Overlandlord at any time or times hereafter
may make and Landlord shall communicate in writing to Tenant.
ARTICLE TWENTY-NINE
MISCELLANEOUS
Section 29.01. Certain Miscellaneous Provisions. This Lease (including
the Exhibits referred to herein, and all supplementary agreements provided for
herein) contains the entire agreement between the parties and all prior
negotiations and agreements are merged into this Lease. This Lease may not be
changed, modified, terminated or discharged, in whole or in part, except by a
writing, executed by the party against whom enforcement of the change,
modification, termination or discharge is to be sought. The Article and Section
headings or titles in this Lease are inserted for convenience only and are not
to be given any effect in its construction. Wherever appropriate in this Lease,
personal pronouns shall be deemed to include the other genders and the singular
to include the plural. The covenants and agreements contained herein shall inure
to and be binding upon Landlord, its successors and assigns, and Tenant, its
successors and assigns.
Section 29.02. Governing Law. This Lease shall be governed in all
respects by the laws of the State of New York.
Section 29.03. Memoranda Agreements. Landlord shall, at Tenant's
request, execute and deliver a memorandum or short-form of this Lease, and
memoranda or short-forms of all agreements supplementary hereto, which Tenant
may, at its expense, file and record of record.
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THIS LEASE is hereby executed and delivered effective as of
the date and year first above written.
WITNESSES: LANDLORD:
BANCO UNION,
NEW YORK AGENCY
By: /s/ Patricia Romero
- -----------------------
Notary Public By: /s/ Alfredo J. Gonzalez
---------------------------
Alfredo J. Gonzalez
Regional Vice President
WITNESSES: TENANT:
DISC GRAPHICS, INC.
By: /s/ Debra A. Sluter
- -----------------------
Notary Public By: /s/ Frank A. Bress
----------------------
Frank A. Bress
Vice President for Legal Affairs
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EXHIBIT A
FLOOR PLAN
34
EXHIBIT B
LANDLORD'S WORK
Landlord, at Landlord's expense, shall perform or cause to be
performed the following work at the Leased Premises:
(i) clean and shampoo the carpet throughout the Leased
Premises; and
(ii) remove stored materials in the Leased Premises.
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EXHIBIT 10.20
AMENDMENT NO. 2 TO
THE AMENDED AND RESTATED
CREDIT AGREEMENT
AMENDMENT NUMBER 2 TO THE AMENDED AND RESTATED CREDIT AGREEMENT, dated
December 1, 1998 between Disc Graphics, Inc., 10 Gilpin Avenue, Hauppauge, New
York 11788 ("Borrower") and KeyBank National Association, now known as The Dime
Savings Bank of New York, FSB, 1377 Motor Parkway, Islandia, New York 11788 (the
"Bank").
RECITALS:
--------
Bank and Borrower entered in an Amended and Restated Credit Agreement,
dated December 1, 1998, which was previously amended on July 1, 1999 (the
Amended and Restated Credit Agreement and the July 1, 1999 amendment thereto are
together referred to as the "Credit Agreement").
The parties hereto desire to further amend the Credit Agreement on the
terms and conditions hereinafter set forth.
Accordingly, the parties agree as follows:
ARTICLE 1.
AMENDMENTS TO CREDIT AGREEMENT.
Section 1.1. General. Capitalized words and phrases used herein which
are not defined in this Amendment shall have the meanings given to them in the
Credit Agreement. This Amendment constitutes an amendment to the Credit
Agreement and shall not be construed in any way as a replacement or substitution
therefor. All of the terms and provisions of this Amendment are hereby
incorporated by reference into the Credit Agreement as if such terms were set
forth in full therein.
Section 1.2. Amendments to Definitions. Section 1.01 of the Credit
Agreement is hereby amended by deleting the existing definitions of "Current
Debt", "Revolving Credit Commitment", "Revolving Credit Termination Date" and
"Term Loan Maturity Date" and substituting the following in their respective
places:
"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,
excluding however, for the period beginning on January 1,
2000 through and including February 25, 2001, the aggregate
outstanding principal balance of all Revolving Credit Loans.
"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 $15,000,000, as such amount may be reduced or
otherwise modified from time to time in accordance with the
terms hereof.
"Revolving Credit Termination Date" means the earlier of (i)
the date on which all Revolving Credit Loans are paid in
full and the Revolving Credit Commitment shall terminate
hereunder and the obligations of Borrower in connection
therewith have been satisfied or (ii) February 25, 2002,
unless such date is not a Banking Day, then the next
succeeding Banking Day.
"Term Loan Maturity Date" means February 25, 2006.
<PAGE>
Section 1.3. Financial Covenants. The last sentence which now appears
in Section 10.06 of the Credit Agreement is deleted, effective for the purposes
of compliance with the financial covenants contained in Article 10 as of January
1, 2000.
Section 1.4. The Notes. The form of Notes annexed as Exhibits A-1 and
A-2 to the Credit Agreement is deleted and the Notes annexed hereto as Exhibits
A-1 and A-2 are substituted in their respective places. Exhibit A-1 is herein
referred to as the "Substitute Note". Each reference in the Credit Agreement or
the other Loan Documents to the Revolving Credit Note (whether as such, or as
one of the Notes) shall be deemed to refer to the Substitute Note.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank as follows:
Section 2.1. Confirm Warranties and Representations. Except as
disclosed in the following sentence, Borrower confirms that each of the
representations and warranties set forth in Article 7 of the Credit Agreement is
true in all material respects as of the date hereof with respect to the Borrower
and, to the extent applicable, the Guarantors, with the same effect as though
made on the date hereof (except when such representation or warranty by its
terms relates to a specific date other than the date hereof), and each is hereby
incorporated herein in full by reference as if fully restated in its entirety.
With respect to the representations contained in section 7.14 of the Credit
Agreement, the Bank acknowledges the occurrence of an event of default under the
terms of the Lease Agreement dated September 1, 1998 between Borrower and the
Suffolk County Industrial Development Agency (the "Lease Agreement"). Since
September 30, 1999, there has been no material adverse change in the business,
operations, assets or financial or other condition of the Borrower, or of the
Borrower and the Guarantors.
Section 2.2. No Default. No Default or Event of Default, as defined in
the Agreement now exists, except as specifically waived in Article 4.
Section 2.3. Corporate Power. The Borrower has the requisite corporate
power and authority to enter into, perform and deliver this Amendment and the
Substitute Note, and any other documents, instruments, agreements or other
writings to be delivered in connection herewith. This Amendment and the
Substitute Note, and all documents contemplated hereby or delivered in
connection herewith, have each been duly authorized, executed and delivered and
the transactions contemplated herein have been duly authorized by all necessary
action.
Section 2.4. Enforceability. This Amendment and the Substitute Note
and any other documents, agreements or instruments now or hereafter executed and
delivered to the Bank by the Borrower in connection herewith constitute (or
shall, when delivered, constitute) valid and legally binding obligations of
Borrower, each of which is and shall be enforceable against Borrower in
accordance with their respective terms.
Section 2.5. Consents. No consent, waiver or approval of any entity is
or will be required in connection with the execution, delivery, performance,
validity or enforcement or priority of this Amendment and the Substitute Note,
or any other agreements, instruments or documents to be executed or delivered in
connection herewith.
Section 2.6. No Omission. No representation, warranty or statement by
the Borrower contained herein or in any other document to be furnished by the
Borrower in connection herewith contains, or at the time of delivery shall
contain, any untrue statement of material fact, or omits or at the time of
delivery shall omit to state a material fact necessary to make such
representation, warranty or statement not misleading.
<PAGE>
ARTICLE 3.
CONDITIONS
Section 3.1. Conditions to Effectiveness. This Amendment shall become
effective only upon satisfaction of the following conditions precedent:
(a) The Bank shall have received each of the following
documents, in form and substance reasonably satisfactory to the Bank and its
counsel:
(i) this Amendment and the Substitute Note, duly executed by
the Borrower;
(ii) copies of resolutions of Borrower's Board of Directors
authorizing the execution, delivery and performance of this Amendment
and each other document to be delivered pursuant to this Amendment,
together with a certificate of Borrower's secretary that the articles
of incorporation and the by-laws of the Borrower have not been
amended, modified, revoked or rescinded since the Original Closing
Date;
(iii) Guarantor Confirmation Agreements from each Guarantor;
(iv) Security Agreement confirmations from Borrower and each
Guarantor;
(v) satisfactory evidence that the Borrower and the
Guarantors are duly organized, validly existing and in good standing
under the laws of their respective jurisdictions of incorporation and
each other jurisdiction where qualification is necessary; and
(vi) such other documents, instruments, approvals, opinions
and evidence as the Bank may reasonably require.
(b) The Borrower shall have paid the Bank a fee of $5,000 and the fees
and expenses of the Bank's counsel in connection with the preparation, execution
and delivery of this amendment and the other documents referred to herein.
(c) The Borrower and the Guarantors shall obtain all consents, permits
and approvals required in connection with the execution, delivery and
performance by the Borrower and the Guarantors of their obligations hereunder
and such consents, permits and approvals shall continue in full force and
effect.
(d) All legal matters in connection with this Amendment and financing
shall be reasonably satisfactory to the Bank and their counsel.
<PAGE>
ARTICLE 4.
WAIVERS
Section 4.1. Waiver of Non-Compliance with Financial Covenants. The
Bank waives Borrower's non-compliance with the covenants described in Sections
10.02 and 10.04 of the Credit Agreement, but only with respect to the fiscal
quarters ended September 30, 1999 and December 31, 1999, and for the fiscal year
ended December 31, 1999.
Section 4.2. Waiver of Cross Default. (a) Subject to 4.2(b), the Bank
waives Borrower's Default under subsection (e)(iii) of Section 11.01 of the
Credit Agreement, but only with respect to Borrower's obligations under Section
8.22 (violation of current ratio), Section 8.4(c)(iii) (asset purchase which
resulted in an event of default), and Section 10.1(g) (occurrence of an Event of
Taxability) of the Lease Agreement in connection with the issuance of a
$2,003,657 1998 Industrial Development Revenue Bond, issued as of September 1,
1998 (the "Bond").
(b) The waiver of Borrower's default under the Bond is conditional
upon Borrower's refinancing all the Debt represented thereby on or before March
15, 2000, under circumstances where Borrower is not in default under the Debt
then or formerly represented by the Bond, and no other Default or Extent of
Default exists at such time.
Section 4.3. No Other Waiver. The foregoing waivers shall not
constitute a waiver of any further non-compliance with Sections 10.02 or 10.04
or 11.01(e)(iii), or of any other breach, Default or other failure to comply
with any other term or provision of the Credit Agreement.
ARTICLE 5
MISCELLANEOUS
Section 5.1. Counterparts. This Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Amendment by signing any
such counterpart.
Section 5.2. Credit Agreement. Except as specifically amended hereby,
the Credit Agreement shall remain in full force and effect in accordance with
its terms, unaffected by this Amendment or the waiver contained in Article 4.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment.
The Dime Savings Bank of Disc Graphics, Inc.
New York, FSB
By: /s/ Joseph F. Burns By: /s/ Margaret Krumholz
-------------------- --------------------------------
Name: Joseph F. Burns Name: Margaret Krumholz
Title: Vice President Title: Senior V.P. and CFO
<PAGE>
EXHIBIT A-1
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$15,000,000 February 25, 2000
For value received, Disc Graphics, Inc., a Delaware corporation
("Borrower"), hereby promises to pay to the order of The Dime Savings Bank of
New York, FSB (the "Bank"), at the Bank's office at 1377 Motor Parkway,
Islandia, New York 11788, on or before February 25, 2002, the principal amount
of $15,000,000, 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, and further amended on July 1, 1999
and February ___, 2000 (the "Credit Agreement"), and evidences the Revolving
Credit Loans made by the Bank thereunder. This Note is a substitute for and
replaces the one given by Borrower in the amount of $10,000,000 on December 1,
1998. 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 pre- payments 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 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:
SCHEDULE OF REVOLVING CREDIT LOANS
Date Type Principal Principal
of of Interest Amount of Maturity Paid or
Loan Loan Rate Loan of Loan Unpaid
- ---- ---- -------- ----------- ------ -------
<PAGE>
EXHIBIT A-2
TERM NOTE
$_______________________ February 25, 2002
For value received, Disc Graphics, Inc., a Delaware corporation
("Borrower"), hereby promises to pay to the order of The Dime Savings Bank of
New York, FSB, 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 $15,000,000] 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 __________, 2002 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 and further amended on July 1, 1999 and
February ___, 2000 (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 pre-payments 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:
EXHIBIT 10.21
Borrower's Confirmation of Security Agreement
Confirmation of Security Agreement dated February 25, 2000 in favor of
The Dime Savings Bank of New York, FSB, formerly known as KeyBank National
Association (the "Bank") given by Disc Graphics, Inc. ("Borrower").
A. Borrower has on the date hereof entered into Amendment Number 2 to
the Amended and Restated Credit Agreement dated December 1, 1998 ("Restated
Credit Agreement") with the Bank, pursuant to which the Bank has agreed to
increase the amount of the Revolving Credit Commitment to Borrower and extend
its term, among other things. (The Amended and Restated Credit Agreement,
together with its amendments, are collectively referred to as the "Credit
Agreement").
B. 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.
C. The Bank has agreed to modify the Credit Agreement as provided in
Amendment Number 2, 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.
D. To induce the Bank to modify the Credit Agreement in accordance
with the terms of Amendment Number 2 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 secures all obligations of Borrower to the Bank,
and 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: /s/ Margaret Krumholz
-------------------------
Name: Margaret Krumholz
Title: Senior V.P. and CFO
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
-27-
Exhibit 23
The Board of Directors
Disc Graphics, Inc.:
We consent to incorporation by reference in the Registration Statement No.
333-28013 on Form S-8 of Disc Graphics, Inc. of our report dated February 2,
2000, except for notes 8(a) and 9, which are as of February 29, 2000, relating
to the consolidated balance sheets of Disc Graphics, Inc. and subsidiaries as of
December 31, 1999 and 1998, 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, 1999 and related schedule, which report appears in the
December 31, 1999 annual report on Form 10-K of Disc Graphics, Inc.
KPMG LLP
/s/ KPMG LLP
------------
Melville, New York
March 6, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000904541
<NAME> DISC GRAPHICS, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 142,531
<SECURITIES> 0
<RECEIVABLES> 14,997,201
<ALLOWANCES> (1,418,000)
<INVENTORY> 4,428,374
<CURRENT-ASSETS> 19,690,470
<PP&E> 25,226,608
<DEPRECIATION> (10,652,215)
<TOTAL-ASSETS> 42,507,806
<CURRENT-LIABILITIES> 10,567,491
<BONDS> 13,914,261
0
0
<COMMON> 55,488
<OTHER-SE> 16,391,566
<TOTAL-LIABILITY-AND-EQUITY> 42,507,806
<SALES> 67,987,941
<TOTAL-REVENUES> 67,987,941
<CGS> 50,697,468
<TOTAL-COSTS> 50,697,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 422,721
<INTEREST-EXPENSE> 747,202
<INCOME-PRETAX> 4,182,920
<INCOME-TAX> 1,676,000
<INCOME-CONTINUING> 2,506,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,506,920
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.45
</TABLE>
