U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996
Commission File No. 0-21114
DCC COMPACT CLASSICS, INC.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-1046186
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9301 Jordan Avenue, Suite 105, Chatsworth, California 91311
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(Address of Principal Executive Offices) (Zip Code)
(818) 993-8822
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be contained, to the best of issuer's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $4,665,576.
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Common Stock, par value $.005 per share ("Common Stock"), was
the only class of voting stock of the Registrant outstanding on
April 2, 1997. Based on the closing bid price of the Common Stock on
the National Association of Securities Dealers, Inc. OTC Bulletin
Board as reported on April 2, 1997 ($.75), the aggregate market
value of the 3,409,000 shares of the Common Stock held by persons
other than officers, directors and persons known to the Registrant
to be the beneficial owner (as that term is defined under the rules
of the Securities and Exchange Commission) of more than five percent
of the Common Stock on that date was approximately $2,556,750. By
the foregoing statements, the Registrant does not intend to imply
that any of these officers, directors or beneficial owners are
affiliates of the Registrant or that the aggregate market value, as
computed pursuant to rules of the Securities and Exchange
Commission, is in any way indicative of the amount which could be
obtained for such shares of Common Stock.
The Registrant had 7,051,725 shares of its $.005
par value Common Stock issued and outstanding as of
April 2, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes ; No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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THE COMPANY
General
The focus of the Company's operations for approximately the first decade
of its operations, has been to build a specialized niche in the market for
compact discs ("CDS"). The emergence of CD technology in the early 1980s led to
segments of the consuming public replacing their collections of vinyl and audio
cassettes with the superior quality and convenience of CDS. Classical music
listeners were the first segment to accept CD technology and the initial CDS
were comprised of classical albums. Since that time there has been substantial
acceptance of CDS for all types of music, including classical, jazz, rock and
oldies. Sales of CDS grew rapidly and by the end of 1995 represented in excess
of 70% of all music sales in the $12 billion record industry.
A predominant portion of the Company's manufacturing process utilizes a
coating of 24k gold and a proprietary vintage vacuum tube system which are
considered by various audiophiles to have a superior phonic quality compared
with standard CDS, and thereby can be sold at a premium in excess of the
incremental manufacturing costs. The Company is presently one of the industry
leaders in the sale of 24k gold CDS and has license rights to the exclusive
exploitation of 24k gold CDS albums by such artists as Frank Sinatra, Beach
Boys, The Doors, The Eagles, Paul McCartney, Cream, Miles Davis, Creedence
Clearwater Revival, The Steve Miller Band, Ringo Starr and Bob Seeger. The
Company has successfully exploited the consumer demand for reissues and
compilations of music originally issued on vinyl and audio cassettes. This has
been achieved through the purchase, marketing and sale of catalogs of music
masters and by licensing rights from others of music masters for exploitation.
The Company's basic concept has been to provide the listening public a CD line
that specializes in contemporary music which includes jazz, classical and oldies
and the 24k gold limited edition series. In addition, the Company has developed
various "Compilation" series which features the best of a certain performance
era or type of music.
The Company has entered into licensing agreements with major record
labels, including Sony, MCA, Warner, Elektra, Atlantic, Arista, Capitol and
Polygram among others. Typically, licensing agreements range from three to five
years in term with possible renewal options. Royalties are paid to the licensor
at between $.55 to $6.00 per unit sold for the term of the agreement. The
licensing agreements grant the Company the exclusive or non exclusive right to
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utilize master recordings of many top artists for the purpose of enhancing the
sound quality through a digital sound recording process and then to market under
the Company's trade label, the individual recordings, or compilations. The
Company follows the normal practice for independent record labels, which entails
subcontracting manufacturing, field sales, physical distribution, billing and
collections to specialized entities providing such services.
During 1993, the Company formed a general partnership, "Romance Alive
Audio" (the "Partnership"), with Romance Alive Audio, Inc. ("Romance Alive") to
enter the emerging market for audio books. Romance Alive is owned by Beverly
Blonstein, the spouse of Marshall Blonstein, the Chief Executive Officer of the
Company. The Partnership, which operates out of the same building as the
Company, specializes in the publishing of romance novels on audio- cassette,
sold primarily through chain-drug stores, supermarkets and traditional book
outlets. The Partnership has achieved its goal of becoming a significant
publisher of women's romance novels on audio cassette in the United States.
Under the terms of the partnership arrangement, the Company and Romance Alive
divide revenues and costs on a 70/30 basis, respectively.
On June 30, 1996, the Company entered into an agreement with Re-Pac Corp.
to purchase all of the shares of corporate stock of Photo Dimensions, Inc.
("PDI") which were owned by Re-Pac Corp. Through the acquisition, which was
completed during July 1996, the Company acquired the technology for use in the
Company's promising new product known as the "Single-Use Caption Camera." The
Single- Use Caption Camera is a disposable camera that combines two images onto
the same frame of film in a single photograph. Part of the film frame is
pre-exposed, before the film is loaded into the disposable camera, to a first
image. The image will appear on the bottom of the picture as a named theme or
event. The film is then loaded into a Single-Use Caption Camera. When the user
takes a picture, the film is exposed to a second image, namely the target image.
The two images are then simultaneously developed by conventional means as a
single image. On June 25, 1996, PDI filed an application with the U.S. Patent
and Trademark Office for a patent of the method and apparatus use in the
Single-Use Caption Camera. The patent was issued on March 25, 1997 as U.S.
Patent Number 5,615,396. The Patent is entitled "Producing Smoothly Blended
Double Exposure Composite Images."
The Company's principal product has been CDS. Management plans to continue
its efforts to maintain the Company's market share for CDS. Management is
equally committed to the success of the Single- Use Caption Camera.
The Company's executive offices are located at 9301 Jordan Avenue, Suite
105, Chatsworth, California 91311; the telephone number of the Company is (818)
993-8822.
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Background
The Company was incorporated as Total Capital Corporation, a Colorado
corporation, on December 5, 1986. On October 19, 1987, the shareholders of the
Company approved an agreement and plan of merger with Dunhill Compact Classics,
Inc., a privately held California Corporation ("Dunhill") incorporated on
February 19, 1986. Pursuant to the merger, the Company changed its name to
Dunhill Compact Classics, Inc. effective October 20, 1987. On August 8, 1989,
the shareholders of the Company approved a name change to "DCC Compact Classics,
Inc." The Company continued the business of Dunhill.
The Company's mission after the acquisition of Dunhill has been to exploit
the then-emerging market for compact discs. Since that time, the Company has
extended its mission to enter new niche markets in the entertainment business as
they develop. The niche markets which are presently being exploited are reissues
of catalogs of music masters, 24k gold CDS and, more recently, a joint venture
in the emerging market for Audio Books. The Company through Photo Dimensions
Inc., a wholly owned subsidiary acquired during 1996, is launching a new product
known as the "Single-Use Caption Camera."
Growth Strategy
The Company's basic concept has been to provide to the listening public a
compact disc line that specializes in contemporary music which includes jazz,
classical and oldies, and 24k gold limited edition series. It is the opinion of
the management that continued significant investment will be made to license as
many master tape rights as can be obtained. An important indicator of future
growth is the amount of product (i.e., licensing of artists) it can control in
the marketplace.
The Company continues to explore other entertainment niche markets to
exploit either through acquisition or license. Management believes that the
greatest growth will come from the Company's most recent efforts to develop,
market and distribute for sale its Single-Use Caption Camera to the wholesale
marketplace and premium users.
Catalogs of Music Masters
The emergence of compact disc technology in the early 1980s has led to
consumers replacing their collections of vinyl and audio-cassettes with the much
higher quality and convenience of compact discs, which now account for over 70%
of music sales in the United States.
The Company has successfully exploited the consumer demand for reissues
and compilations of music originally issued on vinyl and audio-cassettes. This
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has been achieved both through the purchase, exploitation and sale of catalogs
of music masters and by licensing rights from others to music masters for
exploitation.
Licensing Agreements
The Company has entered into licensing agreements with major record
labels, including Sony, MCA, Warner, Elektra, Atlantic, Arista, Capitol,
Polygram, and among others. Each licensing agreement carries different royalty
arrangements and terms with various options. Typically, licensing agreements
range from three to five years in term, and in some cases, with several
additional renewal options. Royalties are paid to the licensor between $.55 to
$6.00 per unit sold for the term of the various agreements.
The license agreements grant the Company the exclusive or non-exclusive
right to utilize master recordings of many top artists for the purpose of
enhancing the sound quality through a digital sound recording process, and then
to market the recordings under the Company's trade names, the individual
recordings, or compilations. The Company has the right to select which
recordings are suitable for the compact disc presentation under its trade names.
Typically, royalties are paid either quarterly or semi-annually after the
compact disc has been shipped to the retail outlets. In some cases the Company
pays an advance against royalties ranging from $1,000 to $25,000, depending on
the artist. If an advance is made, the Company does not pay additional royalties
until the amount of the advance has been recouped.
Production, Distribution, Marketing and Sales
The Company follows the normal practice for independent record labels,
which entails sub-contracting manufacturing, field sales, physical distribution,
billing and collections, to specialized entities providing such services. The
Company offers international penetration and domestic (U.S.) marketing for CDS
through independent sales representatives. The Company employs a staff to handle
licensing, recording, quality control and marketing, and to oversee the
sub-contracted services relating to CDS.
DCC LABEL -- The Company has been producing compact discs since 1986.
Distribution outlets for DCC Label are principally independent distributors,
which currently represent 90% of Company sales. In other cases, bulk sales may
be made directly to major record stores. The Company follows normal record
distribution concepts (i.e, compact discs are sold to a distributor or retailer
who then marks up the price for sale to consumers). During 1996, the Company
terminated its distribution agreements with eight regional distributors and
entered into a distribution agreement with one national distributor which will
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be the exclusive distributor for the Company's core market for CDS. The Company
will continue to use other distributors for specialized markets.
SANDSTONE LABEL -- This label is currently being distributed in the same
manner as the DCC label. The line features popular artists and older recordings
including Aretha Franklin, Red Hot Chili Peppers, and Roxette. The label has
also picked up the distribution of various labels which specializes in house
dance
music.
Single-Use Caption Cameras
With respect to the Company's new product, the Single-Use Caption Camera,
the Company will utilize the technology it acquired in its acquisition of Photo
Dimensions, Inc. completed during July 1996. The laser technology of
pre-exposure burns an image into the film which is similar to laser printing on
paper. The image will appear on the bottom of all of the pictures taken by the
Single-Use Caption Camera. The image will be either a named theme or event.
Examples of named themes or events are the birth of a child, a birthday or
anniversary, a trip to a theme park or vacation resort, or other special events.
The pictures will have captions like "It's a Boy," "It's a Girl," "Happy
Birthday," "Happy Anniversary," "Hawaii," etc.
After the desired image is burned on the film by the Company's technology,
the film will be shipped to an assembler who will construct the disposable
cameras. The Company estimates the assembler will require approximately 30-60
days to complete the assembly of the camera and ship the camera to its
destination. This assembly process will allow the Company to ramp-up production
with relatively minimal lead-time and capital investment.
The Company has independent sales representatives to market its Single-Use
Caption Camera to the wholesale marketplace and large quantity users. One group
of sales representatives will concentrate on marketing Single-Use Caption
Cameras to convenience stores for impulse purchases, at card stores, at one-hour
photo stores, toy stores, tourist locations and resorts, theme parks and other
outlets. A second group of sales representatives will concentrate on generic
quantity users.
The management of the Company believes that the introduction and marketing
of its new Single-Use Caption Camera presents the opportunity for the Company to
become a significant participant in the single-use camera industry. Management
anticipates that the addition of the caption feature technology to the
single-use (disposable) camera may be appealing to a sufficient portion of the
users of single-use cameras so that sales generated from the sales of the
Company's new product could grow substantially over the next five years.
However, there is no assurance that the growth will be achieved. The growth of
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the wholesale market for single-use cameras worldwide exceeded $1 billion in
1996 which represents an estimated 200 million single-use cameras sold, with
approximately 53 million sold in the United States.
Competition
COMPACT DISCS -- There is intense competition in the $12 billion domestic
U.S. music industry, which is dominated by six major global entities - Warner
Music Group, Sony Music, Polygram, Bertelsman Music Group, EMI Records Group and
MCA Music Entertainment - known as "the Majors." The Company's principal
competitors are the departments of these "Majors" specializing in catalog
reissues.
While the "Majors" have larger financial and promotional budgets, the
Company has a competitive advantage compared with the catalog re-issue
departments of the Majors, due to its reputation in the market place as expert
in the field and because the "Majors" focus is often deflected by the priority
of exploiting new material from current superstar and developing artists.
SINGLE-USE CAPTION CAMERAS -- The Company is aware of only one direct
competitor possessing technology that can produce a caption camera similar in
technology to the Company's technology. The competitor's technology is, however,
different, but the competitor's technology does produce captions on film as does
the Company's technology. Other competitors could develop new technology that
would further increase the competition in the marketplace. The management of the
Company is unaware of any other direct competitors at this time.
Competitors who sell single-use cameras but are not anticipated to compete
directly with the Company's new Single-Use Caption Cameras are primarily large
companies in the photograph industry. The major competitors are Eastman Kodak,
Fuji Film, and others.
Employees
The Company employs 14 people on a full-time basis in the Company's
California office of which 3 employees are in executive positions and the
balance are engaged in technical and administrative capacities. The Company's
North Carolina office employs 4 people.
ITEM 2. DESCRIPTION OF PROPERTIES
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The Company's principal offices are located at 9301 Jordan Avenue, Suite
105, Chatsworth, California 91311. These premises, which consist of
approximately 9,000 square feet of space, are the subject of a lease agreement
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which covers a term of five years concluding April 2000 at an adjusted base
rental of approximately $5,521 per month. The Company leases approximately 1,800
square feet of space on a month to month basis at approximately $2,000 per month
in North Carolina.
ITEM 3. LEGAL PROCEEDINGS
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The Company was named as one of two defendants in a lawsuit filed on
October 17, 1996 by PSI Industries, Inc., a Florida corporation ("PSI") in the
Circuit Court of the 15th Judicial Circuit for Palm Beach County, Florida. The
actions against the Company were breach of a written non-disclosure and
confidentiality agreement, misappropriation of trade secrets, unfair
competition, and deceptive advertising. The actions are based on allegations
relating to discussions initiated by PSI with the Company during late 1995
regarding the possible merger of the two companies. In connection therewith, the
Company signed a non-disclosure and confidentiality agreement. PSI had been
granted an exclusive license by Keepsake, Inc., a Florida corporation
("Keepsake") for the marketing of Keepsake's pre-exposed message camera process.
PSI alleges that the Company acted in concert with the second defendant, a
former marketing manager for PSI, to form a business enterprise, referred to as
Photo Dimensions, for the purpose of manufacturing or distributing the
single-use message cameras using Keepsake's proprietary message camera process.
After conducting its due diligence, the Company concluded that it was not in its
best interest to form a merger with PSI. During 1996, the Company purchased
Photo Dimensions, Inc. ("PDI") which has rights and technology to a double
exposure camera. On March 25, 1997, the United States Patent and Trademark
Office issued a patent to PDI entitled "Producing Smoothly Blended Double
Exposure Composite Images." During January 1997, the Company filed a lawsuit
against PSI in the United States District Court for the Central District of
California. The complaint is for declaratory relief, unfair competition, slander
of title, intentional misrepresentation, negligent misrepresentation, and breach
of contract. While the outcome of the lawsuit against the Company cannot be
predicted with certainty, it is the opinion of counsel that the Company has
meritorious defenses to the lawsuit. In the opinion of management, the lawsuit,
when finally concluded, will not have a material adverse effect on the Company's
financial condition. Further, counsel believes that the Company has meritorious
claims against the defendants.
In a second matter, the Company filed a lawsuit during September 1996
against VRG Records, Page Hufty, and LV-Wax Records in the Superior Court for
the County of Los Angeles, California. The Company's complaint alleges that VRG
Records breached a 4 year exclusive distribution agreement under which the
Company, through its distributors, were to be the exclusive distributor of VRG
Record products. After the Company's initial success, Page Hufty, the President
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and owner of VRG Record, created LV-Wax Records to distribute VRG Record
products for which the Company was named as the exclusive distributor under the
exclusive distribution agreement. The Company has claimed damages of $50,000 to
$100,000 as a consequence of VRG Record's breach. VRG Record filed a
cross-complaint against the Company alleging that the Company has failed to
account and pay amounts owed to VRG Record under the agreement. Counsel for the
Company believes that the Company's claims against the defendants is meritorious
and that the Company has meritorious defenses and offsets with respect to the
cross-complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
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A special meeting of the shareholders of the Company's common stock was
held on November 27, 1996. A proxy statement was furnished to the shareholders
in connection with the solicitation by the Company's Board of Directors of
proxies to amend the Company's Articles of Incorporation to effect a
one-for-three (1:3) reverse stock split of the issued and outstanding common
stock of the Company on the basis of one newly issued common stock share for
each three shares of the Company's presently issued and outstanding common
stock. Of the 6,746,725 shares issued and outstanding, as of November 27, 1996,
4,559,078 shares voted for the proposal, 2,715 shares voted against and 2,450
shares abstained. The reverse stock split was to become effective upon the
filing of an amendment to the Company's articles of incorporation with the
Secretary of State of Colorado. The filing occurred during December 1996. During
April 1997, the Company's board of directors approved, as being in the best
interest of the Company and its shareholders, a resolution to amend the
Company's articles of incorporation to delay the effective date of the reverse
stock split. The amendment will be filed by the end of April 1997 with the
Secretary of State of Colorado and will provide that all issued and outstanding
shares of the Company's common stock held by each holder of record on October 1,
1997 shall be automatically combined at the rate of one for three (1:3). The
shareholders will then be notified and requested to surrender their stock
certificates representing pre- reverse stock split shares to the Company's
transfer agent in exchange for stock certificates representing post-reverse
stock split shares.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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(a) The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "DCCC." The following table sets forth the high and low bid
quotations for the Common Stock for the periods indicated. These quotations
reflect prices between dealers, do not include retail mark-ups, mark-downs or
commission and may not necessarily represent actual transactions.
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Low High
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March 31, 1995 $ .18 $ .33
June 30, 1995 .18 .78
September 30, 1995 .72 1.06
December 31, 1995 1.12 1.87
March 31, 1996 1.75 2.00
June 30, 1996 1.56 1.56
September 30, 1996 .63 1.25
December 31, 1996 .63 1.38
March 31, 1997 .81 .88
As of April 2, 1997, there were 214 holders of record of the Company's
common stock. The closing bid price quoted on the OTC Bulletin Board sheets for
the Company's Common Stock at April 2, 1997 was $.75.
The Company has never declared or paid, and has no present intention to
pay, cash dividends on its Common Stock. Any future dividends will necessarily
depend upon the Company's future earnings, capital requirements, financial
condition and other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Overview
The focus of the Company's operations during the last decade has been to
maintain a specialized niche in the market for compact discs for music
listeners. The Company is one of the industry leaders in a manufacturing process
which utilizes a coating of 24k gold. The 24k gold compact discs have a superior
phonic quality than standard compact discs and can be sold at a premium in
excess of the incremental manufacturing costs. Another specialized niche which
the Company has successfully exploited is the consumer demand for reissues and
compilations of music originally issued on vinyl and audio cassettes.
The Company's growth strategy is to exploit other entertainment niches
either through acquisitions or licensing agreement. Since the formation during
1993 of Romance Alive Audio, a California general partnership by the Company and
Romance Alive Audio, Inc, the partnership has become a significant publisher in
the United States of women's romance novels on audio cassette. The
audio-cassettes are sold primarily through chain-drug stores, supermarkets and
traditional book outlets.
During July 1996, the Company completed the acquisition of Photo
Dimensions, Inc. Through the acquisition, the Company acquired the technology
that is in the Company's promising new product known as the "Single-Use Caption
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Camera." The Single-Use Caption Camera is a disposable camera which utilizes the
technology of combining two images onto the same frame of film in a single
photograph. Management believes that the Company's greatest growth will come
from the sales of this new product to the wholesale marketplace and premium
users.
During November 1996, test sales of the Single-Use Caption Camera began.
The Company sold approximately 3,000 Cameras to a select number of premium
resalers. The indoor and outdoor use of the Camera was tested for quality and
acceptability by the end-user. The results of the test were positive. The
Company did not receive any user complaints regarding the performance of the
Camera nor the quality of the pictures produced by the Camera, both of which met
the quality criteria established by the Company.
Beginning in 1997, the Single-Use Caption Cameras will be marketed by
independent sales representatives to convenience stores for impulse purchases,
at card stores, at one-hour photo stores, toy stores, tourist locations, theme
parks, and similar outlets. The Single-Use Camera will also be marketed to large
quantity users such as universities, tourist bureaus, healthcare providers and
other major users. For example, a healthcare provider may purchase Cameras with
the caption, "It's a Boy," or "It's a Girl."
Results of operations for 1996 were significantly affected by the
implementation by management of its plan to position the Company to exploit the
market for its Single-Use Caption Camera. First, the Company consolidated its
distribution system for the sale of compact discs to one major national
distributor as opposed to eight regional distributors. The consolidation will
enable Management to devote a greater percentage of its time and energy to the
production, marketing and sales of the Single-Use Caption Camera. However, under
the distribution agreements, the termination of the regional distributors
resulted in the return of all unsold inventory of compact discs held by the
regional distributors. The returned inventory negatively impacted the results of
operations for 1996 (see "Cost of Sales" below). Management believes that the
long-term benefits of the streamlining of its distribution system for the sale
of compact discs outweighs the short-term negative impact on the Company's
operations for 1996.
Second, the Company's acquisition of Photo Dimensions, Inc. ("PDI"), which
was completed during July 1996, resulted in the Company incurring acquisition
and other costs (See "Liquidity and Capital Resources" below).
Management believes that the streamlining of its distribution system for
its compact discs, and the expenditures related to the acquisition of PDI, have
contributed to position the Company to exploit the potential of the Single-Use
Caption Camera in terms of increasing the Company's sales and net income.
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Results of operations in the future will be influenced by numerous factors
including market and structural conditions in the record recording industry,
increases in expenses associated with sales growth, market acceptance of the
Company's products (particularly, the Single-Use Caption Camera), the capacity
of the Company to develop and manage the introduction of new reissues of
recording classics as well as new products, competition, and the ability of the
Company to control costs. Management is confident of the Company's future
prospects. There can be, however, no assurance that revenue growth and
profitability will be sustained, that the Company will be able to develop
sufficient cash flow and obtain adequate financial resources to enable it to
sustain its operations, or that profitability on a quarterly or annual basis
will occur in the future.
Results of Operations
Year Ended December 31, 1996 compared to Year Ended December 31, 1995.
Revenues
Revenues for the year ended December 31, 1996 ("Fiscal 1996") were
$4,666,000 versus $4,201,000 for the year ended December 31, 1995 ("Fiscal
1995"). The increase of approximately 11% is primarily attributed to the new
releases of compact discs based on an increase in the licensing of artists.
The test sales of the Single-Use Caption Camera, which started during
November 1996, had a negligible impact on Company sales for 1996. Based on
Management's forecasts, sales of its Single-Use Caption Camera are anticipated
to become a significant portion of the Company's revenues for 1997 and surpass
revenues generated by its compact disc product line beyond 1997.
Cost of Sales
Cost of Sales for Fiscal 1996 and Fiscal 1995 was $2,184,000 and
$1,731,000, respectively. The increase in the cost of sales for Fiscal 1996
verses Fiscal 1995 of $453,000, representing 26%, resulted in a decrease in
gross profit margin to 53% for Fiscal 1996 verses 59% for Fiscal 1995. The
increase in the cost of sales is primarily attributed to the consolidation of
the Company's distribution system for compact discs to one nationwide
distributor from eight regional distributors. As a consequence of the
consolidation, the eight regional distributors returned approximately $782,000
in product recalled by the Company. The Single-Use Caption Camera had little
impact on the cost of sales during fiscal 1996. As sales of the Camera increase
during 1997, and for future years, Management plans to subcontract field sales,
distribution, billing and collection. Subcontracting such services is the same
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practice that the Company follows for compact discs. As the market develops,
Management is forecasting that gross profit margins for the Single-Use Caption
Camera will range from 30% to 40%.
Royalties
Royalties paid by the Company for Fiscal 1996 were $909,000 and were
comparable to $922,000 for Fiscal 1995.
Selling, Administrative, and Other Operating Expenses
Selling, Administrative, and operating expenses of operations for Fiscal
1996 were $2,142,000 versus $1,406,000 for Fiscal 1995. The 52% increase is
primarily attributed to several components as follows: costs relating to the
acquisition of Photo Dimensions, Inc., of approximately $220,000; an increase in
bad debts of approximately $100,000; and an increase in legal fees of
approximately $90,000.
Other Income (Expenses)
Interest income was $10,000 for Fiscal 1996 versus $41,000 for Fiscal
1995. The reduction in interest income is attributed to the employment of the
Company's marketable securities towards the finance of the acquisition and
start-up costs of PDI. Interest expense was $40,000 for Fiscal 1996 versus
$34,000 for Fiscal 1995.
Liquidity and Capital Resources
At the end of Fiscal 1996, the Company had a negative working capital of
$512,000 compared to working capital of $376,000 at the end of Fiscal 1995. The
Company used a substantial portion of its available working capital to finance
the acquisition of PDI and to fund its operating loss for Fiscal 1996. Working
capital declined approximately $900,000 of which approximately $500,000 is
attributable to a loss for Fiscal 1996 and approximately $400,000 is
attributable to the Company's investment in Photo Dimensions, Inc.
The total acquisition price for the shares of PDI was $225,000 plus the
issuance of 300,000 shares of the Company's restricted common stock which were
valued at $1.09 per share, the estimated market price at the time of the
closing. The Company issued a promissory note in the principal amount of
$150,000 for the balance of the cash portion of the acquisition price. The note
bears interest at 8% per annum and is secured by the assets of PDI. $25,000 of
principal plus the accrued and unpaid interest is due semi-annually with all of
the outstanding principal plus accrued and unpaid interest due on June 30, 1999.
As a consequence of the operations of PDI being located in North Carolina, the
Company incurred additional administrative costs during 1996 of approximately
14
<PAGE>
$225,000. Subsequent to fiscal 1996, the Company consolidated certain
administrative functions of PDI's North Carolina operations with the Company's
California headquarters. Management believes that most of the additional
administrative and start-up costs with respect to PDI were incurred during
Fiscal 1996 and such costs are not anticipated to be reoccurring. During Fiscal
1996, the Company incurred legal expenses of approximately $90,000 to acquire
PDI and to obtain the patent for its Single-Use Caption Camera.
During Fiscal 1996, the Company incurred approximately $75,000 of capital
expenditures to: upgrade its laser equipment which is used to burn the captioned
images onto the film for use in the Single-Use Caption Camera; and research and
development to enable the Company to make in-house adjustments to the Single-Use
Caption Camera if such service should be required. Additional capital
expenditures to increase capacity will be a function of the growth in sales of
the Single-Use Caption Camera.
The operating loss for Fiscal 1996 was another user of working capital.
The Company used the net borrowing under its line of credit as a source of
working capital which helped to finance the operating loss. The net amount
borrowed during 1996 under the Company's $750,000 line of credit was $393,000.
$250,000 of long-term debt, incurred prior to Fiscal 1996 was repaid
during Fiscal 1996. In addition to the $150,000 note given as part of the
acquisition price for PDI, during Fiscal 1996 the Company received a $250,000
term loan which provided working capital.
During February 1997, the Company received a commitment for the private
placement of up to 1,000,000 shares of the Company's common stock at a price of
$1 per share. The Company has received $470,000 under the commitment. Management
believes the Company will receive the $530,000 balance under the commitment.
The amount available under its line of credit of approximately $350,000
together with receipt of the $530,000 balance of the private placement
commitment are needed by the Company to satisfy its anticipated working capital
needs for 1997. If the Company fails to receive substantially all of the
$530,000 balance under the commitment, then a source to replace the funds will
be needed. Further, the Company will need to obtain additional sources of
capital to acquire and exploit new licensing agreements for compact discs, and
to meet forecasted demand for the Single-Use Caption Camera in an efficient and
timely manner.
Management has been active in pursuing additional financing. There can be
no assurances that additional financing will be available in sufficient and
timely amounts.
15
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" heading, and
elsewhere in this report, such as statements concerning the Company's ability to
increase revenues and net income, the continued growth of the market for
single-use cameras, the acceptance of the Company's Single-Use Caption Camera by
the market, and other statements contained herein regarding matters that are not
historical facts, are forward-looking statements (as such term is defined in the
Act). Because such forward-looking statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The financial statements and supplementary data are included under Item
13(a)(1) and (2) of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Effective February 17, 1997, the Company discontinued the services of
Winter, Scheifley & Associates, P.C., the Company's independent auditors. The
Company and Winter, Scheifley & Associates, P.C., did not have any disagreements
regarding the two fiscal years ending December 31, 1995 or any subsequent
interim period with respect to matters of accounting principles or practices,
financial statement disclosure or auditing scope, or procedure which, if not
resolved to the firm's satisfaction, would have caused it to make reference to
the subject matter of such disagreement in the firm's reports. In connection
with the termination of such relationship, the Company decided to engage Hurley
& Company, Certified Public Accountants, as the Company's accountants to audit
the Company's financial statements for the fiscal year ending December 31, 1996.
The Company's board of directors approved the change of accounting firms.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
--------------------------------------------------------------------
COMPLIANCE UNDER SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------------------
The following table sets forth the names, ages and positions with the
Company of the executive officers and directors of the Company. Directors will
be elected at the Company's annual meeting of stockholders and serve for one
year or until their successors are elected and qualify. Officers are elected by
the Board and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.
16
<PAGE>
Name Age Position
---- --- --------
Marshall Blonstein 52 President, Chief Executive
Officer, Chief Financial
Officer, Director
Samuel J. Passamano, Jr. 42 Senior Vice President,
General Manager, Director
Robert L. Siner 54 Director
The officers are elected annually by the Board of Directors and serve at
the discretion of the Board of Directors. Mr. Blonstein and Mr. Passamano devote
their full time to the business of the Company.
MARSHALL BLONSTEIN -- Mr. Blonstein was a co-founder of the Company. He
has been President, Chief Executive Officer and a Director since the inception
of the Company, and since December 1989, Chief Financial Officer of the Company.
He has been involved in the music industry since 1965. Between 1981 and 1986,
Mr. Blonstein was President of Morada Records, Inc., headquartered in Nashville,
Tennessee, which he founded. He also served as President of Island Records,
headquartered in New York, New York, in its Los Angeles, California office,
between 1979 and 1981, and was Co-founder and General Manager of Ode Records,
Los Angeles, California from 1970 through 1979. He is a member of the National
Association of Recording Merchandisers.
SAMUEL J. PASSAMANO, Jr. -- Mr. Passamano has been a Director since
January 1996, and Senior Vice President/General Manager of the Company since
July 1996. Mr. Passamano held the position of Senior Vice President/Sales &
Marketing between March 1996 and June 1996. Between January 1995 and March 1996,
Mr. Passamano was Vice President of Sales. Mr. Passamano purchased Uncle Jim
O'Neal, Rural Rhythm as a major international Bluegrass and Country Catalog
Music label. Prior to the purchase in 1987, Mr. Passamano and Dr. Art Ulene, the
NBC TODAY Show's "Family Physician," formed Feeling Fine Programs, Inc., a
multimedia publishing company, in which Mr. Passamano served as Executive Vice
President/Chief Operating Officer. Prior to forming Feeling Fine Programs, Inc.,
Mr. Passamano was Director of Marketing for MCA Records, Inc. for six (6) years.
ROBERT L. SINER -- Mr. Siner has been a Director of the Company since
January 1996. Mr. Siner is the President and Chief Executive Officer of Marquee
Music, Inc., a company of Spencer Entertainment, Inc., formed in 1995. Mr. Siner
was recruited in 1971 by MCA Records, Inc., where he served in such positions as
Advertising Director, Media Director, Vice President of Advertising and
Merchandising, Vice President of Marketing, Executive Vice President and
President. Mr. Siner served as President of MCA Records, Inc. for more than
seven (7) years.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Cash Compensation
Total cash compensation paid to all executive officers as a group for
services provided to the Company in all capacities during the year ended
December 31, 1996 aggregated approximately $270,200. Set forth below is summary
compensation table in the tabular format specified in the applicable rules of
the Securities and Exchange Commission. As indicated, no officer of the Company
or any of its subsidiaries, except for Marshall Blonstein, received total salary
and bonus which exceeded $100,000 during the periods reflected.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Other All
Name and Annual Restricted Other
Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation* Award(s) SARs(#) Payouts sation
- -------- ------ ------ ----- ------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marshall Blonstein, 1996 $165,000 $50,000 $3,000 - 500,000 - $3,000
Chairman 1995 $150,000 - $6,000 - 200,000 - $ -0-
and CEO 1994 $150,000 - $6,000 - 200,000 - $ -0-
</TABLE>
*Personal use of Company vehicle.
Employment Agreements
On February 1, 1996, the Company entered into a four-year Agreement with
Mr. Marshall Blonstein which provides for an annual base salary of $170,000, a
separate cash bonus at the time of signing of $50,000 and the use of a Company
vehicle valued at $6,120 per year. Mr. Blonstein is also entitled to receive
standard health benefits and term life insurance coverage in the amount of
$250,000 payable to the beneficiaries of Mr. Blonstein. In the event of the
death of Mr. Blonstein during the term of this employment agreement, Mr.
Blonstein's spouse will be entitled to receive his salary for a period of
eighteen months. Mr. Blonstein is also entitled to certain payments from the
Company in the event that a change of control of the Company occurs without the
approval of the Board of Directors, and Mr. Blonstein is entitled to receive a
security interest in the assets of the Company in order to secure any payments
due to Mr. Blonstein in the event of any default under the terms of the
agreement following a change in control.
18
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
- --------------------------------------------------------------------------------------------
Percent of
Number of Total Options/
Securities SARs Granted
Underlying to Employees Exercise or
Options/SARs in Fiscal Base Price Expiration
Name Granted (#) Year ($/Sh) Date
- ---------------------------------------------------------------------------------------------
Marshall Blonstein
<S> <C> <C> <C> <C> <C>
02/01/96 300,000 .20 02/01/99
07/05/96 200,000 .50 07/05/99
-------
Total 500,000 91%
Option Exercises and Values at Year End
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Value of
Number of Unexercised
Unexercised In-the-Money
Option/SARs Option/SARs
at FY-End (#) at FY-End
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
---- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Marshall Blonstein 725,000 $66,000 700,000 $900,000
</TABLE>
Option Grants
The Company has awarded Samuel J. Passamano, Jr. options to purchase
50,000 shares of Common Stock exercisable at $.50 per share on or prior to July
5, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth Common Stock ownership as of March 31, 1997
with respect to (i) each person known to the Company to be the beneficial owner
of five (5%) percent or more of the Company's outstanding Common Stock, (ii)
each director of the Company and (iii) all executive officers and directors of
the Company as a group. This information as to beneficial ownership was
furnished to the Company by or on behalf of the persons named. Unless otherwise
indicated, the business address of each person listed is 903 Jordan Avenue,
Suite 105, Chatsworth, California 91311. Information with respect to the percent
of class is based on 7,051,725 shares of the Company's Common Stock issued and
outstanding as of April 2, 1997.
19
<PAGE>
Shares Percent
Name Beneficially Owned(1) of Class
---- --------------------- --------
Marshall Blonstein(2) 2,917,605 41.4%
Milton Barbarosh 675,000 9.6%
All Officers and
Directors as a Group
(3 persons)................ 3,642,605 51.7%
____________
(1) Except as otherwise indicated in the footnote (2) and (3) below, each
shareholder has sole power to vote and dispose of all the shares of Common
Stock listed opposite his name.
(2) Includes 700,000 shares of Common Stock issuable upon exercise of certain
options by Mr. Blonstein.
(3) Includes 700,000 shares and 50,000 shares of Common Stock issuable upon
exercise of certain options by Mr. Blonstein and Mr. Passamano,
respectively.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During 1993, the Company formed a general partnership, "Romance Alive
Audio" (the "Partnership"), with Romance Alive Audio, Inc. ("Romance Alive") to
enter the emerging market for audio books. Romance Alive is owned by Beverly
Blonstein, the spouse of Marshall Blonstein, the Chief Executive Officer of the
Company. The Partnership, which operates out of the same building as the
Company, specializes in the publishing of romance novels on audio-cassette, sold
primarily through chain-drug stores, supermarkets and traditional book outlets.
With the number of authors signed over the past several years, the Partnership
has the opportunity to be a significant publisher of women's romance novels on
audio cassette in the United States. Under the terms of the partnership
arrangement, the Company and Romance Alive divide revenues and costs on a 70/30
basis, respectively.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
(a)(1) and (2) Financial Statements and Schedules
----------------------------------
The financial statements listed on the index to financial statements on
page F-1 are filed as part of this Form 10-KSB.
20
<PAGE>
(b) Reports on Form 8-K
-------------------
The Company filed Form 8-K/A report dated February 17, 1997 (item 8).
(c) Exhibits (Index)
--------
The following Exhibits are incorporated by reference or included in this
report:
Number Description of Document
- ------ -----------------------
2.1 Acquisition Agreement between the Company and Re-
Pac Corp.
3.1 Articles of Incorporation(1)
3.2 Articles of Correction(1)
3.2.1 Amendment to Articles of Incorporation(2)
3.2.2 Amendment to Articles of Incorporation
3.3 Bylaws(3)
10.1 Employment Agreement - dated February 1, 1996 with
Marshall Blonstein
10.2 Agreement with Passport Music
10.3 Lease for Chatsworth, California (4)
10.4 Line of Credit documents with Merrill Lynch Business
Financial Services, Inc.
10.5 Partnership Agreement with Romance Alive Audio,
Inc.(4)
10.6 $250,000 Term Loan Documents with Merrill Lynch Business
Financial Services, Inc.
(1) Incorporated by reference to the Exhibits to the Registration Statement on
Form S-18 as amended, Registration Number 33- 11473-D, as filed with the
Securities and Exchange Commission.
(2) Incorporated by reference to the Exhibits to the Company's Form 10-K for
the year ended December 31, 1989, as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to the Exhibits to the Company's Form 8-K,
January 11, 1993 as filed with the Securities and Exchange Commission.
(4) Filed with Annual Report on Form 10-KSB for the year ended December 31,
1995, as filed with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
No annual report or proxy material; covering the Registrant's last fiscal year
has been sent to security holders. Copies of any such report or proxy materials
furnished to security holder subsequent to the filing of the annual report of
this form shall be furnished to the Commission when it is sent to security
holders.
21
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on this 15th day of April, 1997.
DCC COMPACT CLASSICS, INC.
By:/s/Marshall Blonstein
-----------------------------------
Marshall Blonstein
Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange, this Report has been signed below by the
following person on behalf of the Registrant, and in the capacities and on the
date indicated.
Signature
---------
Chairman of the Board,
President and Principal
/s/Marshall Blonstein Executive, Financial and
Marshall Blonstein Accounting Officer April 15, 1997
/s/Samuel J. Passamano,Jr. Senior Vice President, April 15, 1997
- -------------------------- General Manager, and
Samuel J. Passamano, Jr. Director
22
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page No.
INDEPENDENT AUDITOR'S REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet F 3-4
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in
Stockholders' Equity F-6
Consolidated Statements of Cash Flows F 7-8
Notes to Consolidated Financial Statements F 9-18
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of DCC Compact Classics, Inc.
I have audited the accompanying consolidated balance sheet of DCC Compact
Classics, Inc. and subsidiaries, as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 consolidated financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DCC
Compact Classics, Inc. and subsidiaries, as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Hurley & Company
Granada Hills, CA
April 8, 1997
F-2
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
1996
----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 155,222
Accounts receivable, net of
bad debt and return
allowances of $233,061 915,215
Note receivable 125,000
Inventories 1,063,563
Advance royalties 218,663
Income tax receivable 80,000
----------
Total current assets 2,557,663
----------
PROPERTY, PLANT & EQUIPMENT:
Furniture and fixtures 39,033
Machinery and equipment 650,540
Leasehold improvements 16,935
----------
706,508
Less accumulated depreciation 117,151
----------
589,357
----------
OTHER ASSETS
Deferred income taxes 46,864
Mastering costs, net 650,761
Receivable from affiliate 62,031
Intangibles, net of accumulated
amortization of $14,219 270,151
Other 52,762
----------
Total assets $4,229,589
==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
1996
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 710,025
Accounts payable 472,087
Royalties payable 1,731,134
Other accrued expenses 3,358
Deferred revenue 78,485
Current portion of long-term debt 75,000
-----------
Total current liabilities 3,070,089
-----------
LONG-TERM DEBT 75,000
-----------
Total Liabilities 3,145,089
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
6,746,725 shares 33,734
Additional paid-in capital 1,094,322
Accumulated deficit (43,556)
-----------
Total stockholders' equit 1,084,500
-----------
Total liabilities and
stockholders' equity $ 4,229,589
===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996 and 1995
1996 1995
----------- -----------
Sales $ 4,665,576 $ 4,200,596
Cost of sales (2,184,121) (1,730,639)
Royalties (908,748) (921,780)
----------- -----------
Gross profit 1,572,707 1,548,177
Selling, adminis-
trative and other
operating expenses 2,142,023 1,405,848
----------- -----------
Operating
income (loss) (569,316) 142,329
Other income (expense)
Interest income 10,274 41,316
Interest expense (39,896) (34,488)
Other income 2,504 --
----------- -----------
Income (loss)
before
income taxes (596,434) 149,157
Income tax provision (benefit) (80,001) 49,900
----------- -----------
Net income (loss) $ (516,433) $ 99,257
=========== ===========
Earnings (loss)
per share $ (.08) $ .02
=========== ===========
Average weighted
number of shares
outstanding 6,188,614 4,960,506
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid in Treasury (Accumulated
Shares Amount Capital Stock Deficit) Total
--------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance 1/1/95 4,960,506 $ 24,803 $ 623,397 $(22,550) $ 373,620 $ 999,270
Net income 99,257 99,257
--------- -------- ---------- -------- ----------- ----------
Balance 12/31/95 4,960,506 24,803 623,397 (22,550) 472,877 1,098,527
Issuance of stock to
purchase subsidiary
company 300,000 1,500 324,900 - - 326,400
Stock options exercised 1,449,999 7,250 153,000 - - 160,250
Additional shares sold 1,220 6 - - - 6
Shares issued for
services 35,000 175 15,575 - - 15,750
Retirement of treasury
stock - - (22,550) 22,550 - -
Net loss (516,433) (516,433)
--------- -------- ---------- -------- ------------ ----------
Balance 12/31/96 6,746,725 $ 33,734 $1,094,322 $ - $ (43,556) $1,084,500
========= ======== ========== ======== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
1996 1995
--------- ---------
Cash flows from operating
activities:
Net income (loss) $(516,433) $ 99,257
--------- ---------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash items included
in net income (loss):
Depreciation and
amortization 347,869 217,585
Royalty adjustments (373,517) --
Deferred income taxes (13,764) --
Changes in:
Receivables 525,241 (432,820)
Inventories (110,762) 101,134
Royalty advances (55,075) 133,573
Other 34,305 (28,273)
Accounts payable and
accrued expenses 9,172 (447,917)
Royalties payable 147,409 198,868
Deferred revenue 78,485 --
Income taxes (176,001) 49,900
--------- ---------
Total adjustments 413,362 (207,950)
Net cash used in
operating activities (103,071) (108,693)
--------- ---------
Cash flows from investing
activities:
Capital expenditures (416,269) (17,211)
Proceeds from sale of master tapes -- 150,000
Marketable securities 400,000 (400,000)
Mastering costs (359,121) (294,496)
--------- ---------
Net cash used in
investing activities (375,390) (561,707)
--------- ---------
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
1996 1995
--------- ---------
Cash flows from financing
activities:
Borrowing under line of credit $ 685,314 $ 1,274
Payments on line of credit (293,463) --
Additional long term debt 250,000 --
Repayments on long-term debt (250,000) --
Issuance of common stock 110,006 --
--------- ---------
Net cash provided by
financing activities 501,857 1,274
--------- ---------
Net increase (decrease) in
cash and cash equivalents 23,396 (669,126)
Cash and cash equivalents
at beginning of period 131,826 800,952
--------- ---------
Cash and cash equivalents
at end of period $ 155,222 $ 131,826
========= =========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Income taxes paid $ 49,555 $ --
========= =========
Interest paid $ 33,896 $ 33,488
========= =========
Non-Cash Transactions
Issuance of stock ($326,400)
and debt ($150,000) in exchange
for property and equipment ($192,030)
and goodwill ($284,370) $ 476,400 $ --
========= =========
Common stock issued to officer
in exchange for liability $ 66,000 --
========= =========
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Basis
-------------------
The consolidated financial statements of "the Company" include the
accounts of DCC Compact Classics, Inc., its wholly owned subsidiary, Photo
Dimensions, Inc. and its 70% owned partnership, Romance Alive Audio. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates. In addition, the Company records liabilities for license and
royalty fees based upon contractual obligations. These calculations are
subject to review by independent agencies. Should the results of a review
produce amounts greater than those recorded by the Company, there may be a
negative impact on the Company's financial statements.
Fair value of financial instruments
-----------------------------------
For certain of the Company's financial instruments, including accounts and
notes receivable, short-term borrowings, notes payable, accounts payable
and other accrued liabilities, the carrying amount of these instruments
approximates fair value.
Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of deposits and highly liquid debt
instruments with original maturities of 90 days or less. Substantially all
funds are on deposit with one financial institution.
Short-term Securities
---------------------
The Company's short-term securities are bought and held primarily for the
purpose of selling them in the near term. The Company recorded the
securities at cost, which approximate market.
F-9
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
---------
Inventory is stated at the lower of cost, on a first-in first-out basis,
or market and consists of the following at December 31, 1996:
Raw materials $ 206,353
Finished goods and components 857,210
----------
Total $1,063,563
==========
Depreciation
------------
Depreciation is computed on property and equipment using the straight-line
method over the expected useful lives of the assets which are generally 5
years.
Mastering Costs
---------------
Costs incurred for mastering, including artwork and recording costs, are
capitalized and charged to expense over the estimated period of benefit of
4 years.
Intangible Assets
-----------------
Intangible assets consist of goodwill connected with the purchase of Photo
Dimensions, Inc. Goodwill is being amortized over ten years on a
straight-line basis.
Revenue recognition
-------------------
Sales revenue is recorded when music recordings are shipped to
distributors and/or retail customers. As a licensor of master tapes, the
Company also recognizes revenue upon the signing of license agreements
under fixed-fee, noncancelable contracts, whenever rights have been
delivered to the licensee, who is free to exercise them and no remaining
significant obligations to furnish music or records exist and the
collectibility of the full fee is reasonably assured. When a minimum
guarantee is paid in advance by a licensee, the Company reports such a
minimum guarantee as a liability initially and recognizes the guarantee
(i.e., recoupable advance) as the license fee is earned under the
agreement. When the amount of the licensee fee earned cannot otherwise be
determined, the guarantee is recognized as revenue equally over the
F-10
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
-------------------
remaining performance period, which is generally the period covered by the
license agreement. The above is in accordance with SFAS No. 50, pertaining
to financial accounting and reporting in the "Record and Music Industry".
Earnings per share
------------------
Earnings per share is calculated based upon the weighted average number of
common shares outstanding for the year. No effect has been given to
options outstanding as the effect of the exercise of these options would
be anti-dilutive.
Reclassifications
-----------------
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the current year's presentation.
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31, 1996:
Accounts receivable $1,148,276
Allowance for sales returns (118,000)
Allowance for doubtful accounts (115,061)
----------
$ 915,215
==========
NOTE 3. NOTE RECEIVABLE
The Company has been awarded damages of $125,000 from a lawsuit judgment
in 1994. This award was confirmed by the Supreme Court of the State of New
York in the fall of 1996, and is currently in the enforcement stage.
NOTE 4. LINE OF CREDIT
The Company has a revolving line of credit for $750,000, and additional
business lines of $35,000, of which $694,137 of the credit line and
$15,888 of the business lines had been used at December 31, 1996. The
revolving line of credit is secured by substantially all the assets of the
Company. Interest on the credit line is payable monthly at the rate of 30
F-11
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 4. LINE OF CREDIT (continued)
day commercial paper plus 2.9%, which equaled 8.8% at December 31, 1996.
The credit line expires June 30, 1997. The interest rates on the business
lines were approximately 17% at December 31, 1996. Interest expense on the
outstanding lines for the years ended December 31, 1996 and 1995 was
$30,559 and $33,688, respectively.
NOTE 5. LONG-TERM DEBT
The Company issued a note for $150,000 in exchange for certain assets (see
note 8). The note bears interest at 8% and is secured by the assets of
Photo Dimensions, Inc.. $25,000 in principal plus the accrued interest is
due semi-annually. During the year ended December 31, 1996, $6,000 in
interest expense was accrued on the note.
Maturity of this debt is as follows:
Year ended December 31, 1997 $ 75,000
1998 50,000
1999 25,000
-------
$150,000
=======
In June 1996, the Company took out a term loan with its primary lender in
the amount of $250,000. The note was repaid in September 1996 along with
$3,337 in accrued interest.
In January 1997, the Company secured a $250,000 installment note with its
primary lender, collateralized by substantially all the assets of the
Company. The loan is to be repaid over a five-year period, with $50,000 of
principal due each year. Interest (along with pro rata principal in the
amount of $4,167) is payable monthly. The annual interest rate is set at
the 30-day commercial paper rate plus 2.9%, which was 8.3% at the funding
date. Any portion of the remaining loan commitment in excess of the
current year's $50,000 principal repayment requirement can be paid down
(with no prepayment penalty) and re-borrowed throughout the remaining term
of the loan agreement.
NOTE 6. RELATED PARTY TRANSACTIONS
In July 1996, the Company granted the president a 5% royalty on sales of
the in-house production of "Politics as Usual". For the year ended
December 31, 1996, this royalty was $2,633.
F-12
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 6. RELATED PARTY TRANSACTIONS (continued)
In 1996, the president exercised options for 725,000 shares of common
stock at prices ranging from between $0.05 and $0.13 per share (see notes
8 and 9 below). Payment of $66,000 for these shares was made by forgiving
the debt owed the officer for previous signing bonuses and for salary
increases not paid in prior years.
Receivable from affiliate represents amounts due from a subsidiary
controlled by the spouse of the Company's president. As of December 31,
1996, the amount approximately $62,031.
The spouse of the Company's president received approximately $18,000 in
management fees from Romance Alive Audio during the year ended December
31, 1996.
NOTE 7. LEASE COMMITMENT
In May 1995, the Company entered into a 60 month lease for office and
warehouse space for $5,521 per month plus a pro rata share of operating
expenses. This lease expires on April 30, 2000. The future minimum lease
commitment is as follows:
For the year ended December 31, 1997 $ 66,253
1998 66,253
1999 66,253
2000 22,084
--------
$220,843
========
NOTE 8. ACQUISITION OF PHOTO DIMENSIONS
In June 1996, the Company paid $75,000 in cash, and issued a note for
$150,000 (see note 5 above) along with 300,000 shares of common stock in
exchange for the assets (predominantly equipment used to produce captioned
photographs along with goodwill) that had been transferred to a newly
formed corporation (Photo Dimensions, Inc). The transaction was recorded
as a business purchase. The issued shares were valued at approximately
$1.09, which was the estimated market price at the time of the transaction
(discounted by 20% due to the shares being restricted), bringing the total
stock portion of the transaction to approximately $326,400. Total assets
recorded were $551,400, including approximately $284,370 in goodwill. The
Company has invested more than $300,000 in additional property and
equipment since the acquisition date. There were no material sales of
captioned cameras prior to the purchase of the intangible assets and
equipment.
F-13
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 9. CAPITAL STOCK
The Company issued 35,000 restricted shares valued at $15,750 to certain
individuals who had performed services for the Company.
An additional 1,449,999 common stock options were exercised during the
year ended December 31, 1996 for $160,250 at exercise prices ranging from
$.05 to $.13 per share, including 725,000 options held by the Company's
president (see note 6 above and note 9 below).
NOTE 10. STOCK OPTIONS
The Company has several outside agreements with certain current directors,
former directors, and employees under which options have been granted to
purchase the Company's common stock. These outstanding option agreements
expire from April 1996 to April 2000. The following summarizes
transactions pertaining to these agreements for the year ended December
31, 1996:
Option price
Shares per share
------ ---------
Options outstanding at 1/1/96 1,900,000 .05 to .20
Exercised (1,499,999) .05 to .13
Expired (25,000) .10
Granted 799,999 .13 to .50
--------- ------------
Options outstanding at 12/31/96 1,225,000 .13 to .50
========= ============
Of the 799,999 options granted in 1996, 500,000 were granted to the
president of the Company, and 50,000 were granted to a current
director/officer.
The Company has elected to continue to account for stock-based
compensation under the guidelines of Accounting Principles Board Opinion
No. 25; however, additional disclosure as required under the guidelines of
SFAS No. 123, "Accounting for Stock-Based Compensation," is included
below. Actual stock- based compensation cost charged against income was
not material in 1996 and 1995. If the Company had elected to recognize
stock-based compensation expense based on the fair value of granted
options at the grant date (as determined under SFAS No. 123), net income
F-14
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 10. STOCK OPTIONS (continued)
(loss) and earnings (loss) per share for the years ended December 31, 1996
and 1995 would have been as follows:
1996 1995
---------- ----------
Net income (loss) As reported $ (516,433) $ 99,257
Pro forma (898,932) (320,993)
Earnings (loss)
per share As reported $ (.08) $ .02
Pro forma (.15) (.06)
NOTE 11. INCOME TAXES
The Company incurred a federal net operating loss of approximately
$600,000 for 1996, of which approximately $300,000 is being carried back
to prior years. Accordingly, an estimated receivable in the amount of
$80,000 has been recorded in anticipation of a federal income tax refund.
The remaining net operating loss carryforward has a tax benefit of
approximately $100,000. Timing differences, primarily from allowances for
returns, are approximately $50,000. Approximately $47,000 has been
recorded as a deferred tax benefit. A valuation allowance has been taken
against the balance of the tax benefit due to the uncertainty of future
realization.
The federal net operating loss carryforward of approximately $300,000
expires in the year 2011. The California net operating loss carryforward
of approximately $275,000 expires in the year 2001.
NOTE 12. SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In June 1996, the Company entered into an agreement with Passport Music to
be the exclusive distributor for the Company. Passport paid a $750,000
fee, which was recognized over the first four months of sales. The Company
terminated its relationship with Navarre and other distributors. As a
result, these distributors returned approximately $1,000,000 in products.
Passport is expected to account for 70% of the Company's sales. Navarre
had represented approximately 60% of sales prior to termination. At
December 31, 1996, the Company had an outstanding receivable balance from
Passport of approximately $358,000.
F-15
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 13. LITIGATION
In October 1996, the Company was named in a lawsuit filed by PSI
Industries, Inc. ("PSI") in Florida. The lawsuit alleges that the Company
was in breach of a written-disclosure and confidentiality agreement and
misappropriated trade secrets. The allegations by PSI are the result of
the Company having purchased the assets of Photo Dimensions, Inc. ("PDI")
in 1996, subsequent to PDI filing an application for (and later obtaining)
a U.S. patent to produce and market a double exposure camera process. The
Company filed a cross-complaint for declaratory relief, unfair
competition, slander of title, intentional misrepresentation, and breach
of contract. The two lawsuits have been consolidated and are now in
discovery. The Company's management believes the lawsuit being prosecuted
by PSI is without merit. The Company's counsel believes that the Company
has a meritorious defense.
In September 1996, the Company filed suit in California against VRG
Records, Inc. ("VRG") and others seeking both compensatory and punitive
damages arising from the defendants' alleged violation of the Company's
exclusive distribution agreement with VRG. The Company estimates its
damage claims in the $50,000 to $100,000 range. VRG has filed a
cross-complaint against the Company, alleging that the Company has failed
to pay amounts owed to VRG under the aforementioned agreement. Both the
Company's management and counsel believe that the Company has meritorious
claims against VRG and offsets of at least the amount claimed by VRG in
its cross-complaint, and that there will be no adverse effect to the
Company's financial condition.
F-16
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
<TABLE>
<CAPTION>
NOTE 14. BUSINESS SEGMENTS
The principal business of the Company is the selling and licensing of music recordings
and master tapes. The Company has two subsidiaries: (1) Romance Alive Audio which
produces romance novels on audio cassette, and (2) Photo Dimensions, Inc. which produces
a single use caption camera.
Income (Loss) Depreciation
Before Income Capital and
Sales* Tax Provision Assets Expenditures Amortization
------ ------------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Music recordings and
master tapes $4,418,193 $(294,948) $3,077,049 $ 1,968 $ 256,129
Romance audio 175,405 (59,668) 268,859 817 41,632
Single use camera 71,978 (214,700) 875,151 605,514 50,108
---------- --------- ---------- --------- ----------
$4,665,576 (569,316) $4,221,059 $ 608,299 $ 347,869
========== ========== ========= ==========
Net interest expense (income) and other 27,118
---------
$(596,434)
=========
Year ended December 31, 1995:
Music recordings and
master tapes $3,859,560 $ 150,433 $3,802,718 $ 16,308 $ 155,737
Romance audio 341,036 (8,104) 334,650 903 61,848
---------- --------- ---------- --------- ----------
$4,200,596 142,329 $4,137,368 $ 17,211 $ 217,585
========== ========== =========== ==========
Net interest expense (income) and other (6,828)
---------
$ 149,157
=========
* All sales were made to unaffiliated customers and there were no intersegment sales.
</TABLE>
F-17
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 15. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Company received a commitment from an
investor to purchase 1,000,000 shares of the Company's common stock at a
price of $1.00 per share. As of April 1, 1997, approximately $400,000 in
cash has been received from the investor. Management is confident the
balance will be received in 1997. Management is also exploring alternative
sources of financing. The Company needs the additional financing to meet
its short and mid-term capital requirements, which include resolving the
delays in bringing the caption camera program to market.
The shareholders have voted to have the common stock of the Company
undergo a 1 for 3 reverse stock split. In April 1997, management has set
the effective date of the reverse split at October 1, 1997. All share
amounts will be retroactively restated after the effective date of the
split.
F-18
- --------------------------------------------------------------------------------
Acquisition Agreement between the Company and Re-Pac Corp.
- --------------------------------------------------------------------------------
STATE OF NORTH CAROLINA )
)
COUNTY OF FORSYTH )
THIS AGREEMENT, made June 30, 1996, between RE-PAC CORP, a North Carolina
Corporation (the "Seller"), and DCC COMPACT CLASSICS, INC., a Colorado
corporation (the "Purchaser").
The Seller owns all the shares of PHOTO DIMENSIONS, INC. ("PD"), a
corporation engaged in the business of photo-imaging which incorporates words
and pictures, including, but not limited to, worldwide rights to the special
graphic capability in a single-use camera application.
The Purchaser is engaged in a business similar, in part, to that conducted
by PD, and desires to acquire all the shares of the Seller with a view to
integrating or combining the operations of PD with its own operations.
By this Agreement, Seller RE-PAC sells, conveys and transfers to Buyer
DCC, all of the corporate stock, assets and goodwill of PHOTO DIMENSIONS, INC
("PC")), including but not limited to all of PD's worldwide rights to what is
identified as "special graphic capability in a single- use camera application."
It is therefore agreed:
1. Consideration and Purchase Price:
---------------------------------
As consideration for the sale and transfer by RE-PAC to DCC of all the
corporate stock, assets and goodwill of PD, DCC agrees to provide the following
consideration to RE-PAC:
(a) Immediately upon execution of this Agreement, or within thirty (30)
days thereafter, simultaneous with RE-PAC transferring to DCC, RE-PAC's
shares in PD, consisting of 50,000 common shares without par value, duly
endorsed, DCC will simultaneously convey to RE-PAC 300,000 DCC restricted
common shares with a par value of $0.005.
(b) Simultaneously with the execution of this Agreement, or within thirty
(30) days thereafter, and simultaneous with the transfer of corporate
securities, by both RE-PAC and DCC, DCC will pay to RE-PAC Seventy-Five
Thousand ($75,000.00) in cash. DCC shall make all cash payments by bank
check or other means for cleared funds acceptable to Seller.
(C) Upon execution of this Agreement and the exchange of corporate stock,
DCC will issue to RE-PAC a Promissory Note in the principal amount of One
Hundred Fifty Thousand Dollars ($150,000.00). The note shall bear interest
at the rate of eight percent (8%) per annum and shall be secured by the
assets of PD as set forth in Exhibit _____ attached. DCC's Note shall be
paid in six (6) semi-annual installments of$25,000.00 plus accrued
interest with the first installment due and payable six (6) months from
the date of this Agreement.
<PAGE>
2. Obligation of Seller.
---------------------
Seller RE-PAC agrees to indemnify and hold harmless DCC from any loss or expense
which DCC may sustain by reason of any claim presented against PD within three
(3) years from the date of this Agreement on account of anything whatsoever
initiated, existing, or occurring prior to the date of this Agreement which is
not identified on the balance sheet of PD.
In furtherance of this indemnity, RE-PAC agrees to add DCC as a named insured to
all of RE-PAC's insurance policies for the current term of insurance and to
provide a list of those policies to DCC within thirty (30) days of the date of
execution of this Agreement.
This Agreement imposes on both RE-PAC and DCC the highest duty of good faith and
fair dealing with regard to DC C's purchase and ongoing operations of PD.
Both RE-PAC and DCC agree to assist one another and to act in good faith each
with the other in carrying out the terms and intent of this Agreement.
RE-PAC agrees to hold in confidence and retain as confidential all information,
technology, and "know how" that it has acquired as a result of ownership of PD,
and RE-PAC agrees not to disclose this "information" to any party or any other
individual without DCC's prior written permission. To the extent that PD remains
at or within the location of RE-PAC, RE-PAC agrees that any other information or
"know how" obtained with regard to PD's activities or operations is to be deemed
confidential and proprietary and RE-PAC agrees not to disclose that information
to any entity or individual with DCC without prior written permission from DCC.
3. Resignation of Seller.
----------------------
The Seller will deliver to the Purchaser the resignation of the Officers and
Directors of Photo Dimensions, Inc., effective upon delivery, immediately after
the execution of this agreement.
4. Investment Intent.
------------------
The Seller acknowledges that the shares of DCC Compact Classic, Inc. common
stock transferred to RE-PAC resulting from this transaction have not been
registered under the Securities Act of 1933, as amended, and may not be resold
unless the Securities are registered under this Act or an exception from such
registration is available.
5. Representations of Seller.
--------------------------
The Seller hereby warrants and represents:
(a) The Seller is the sole owner of and has the sole right to sell all the
corporate shares of Photo Dimensions, Inc. to purchaser.
(1)) Photo Dimensions, Inc. (PD) is a business corporation duly organized and
existing under the laws of the State of North Carolina, and is fully entitled to
own or lease its properties and to carry on its business as and in the places
where such properties are now owned, leased or operated and such business is
<PAGE>
conducted. PD is a wholly owned subsidiary of Re-Pac. Seller is duly licensed
or qualified and in good standing as a foreign corporation where the character
of the properties owned by the Seller or the nature of the business transacted
by it make such license or qualification necessary. Seller does not have any
other subsidiaries, and does not otherwise own or control, directly or
indirectly, any equity or proprietary interest in any corporation, association
or other business entity.
(c) This section includes the unaudited balance sheet of Seller as at December
31,1994, and December 31,1995, and the related unaudited statements of
operations, Shareholders' equity and cash flows including the footnotes thereto
for the year ended December 31, 1995, and the unaudited balance sheet of Seller
as of May 31, 1996, and the related statements of operations, shareholders
equity and cash flows for the nine months then ended (the "Financial
Statement"). The Financial Statements fairly represent the financial position of
the Seller as at such dates and the results of its operations and its cash flows
for such year and period and are prepared in accordance with generally-accepted
accounting principles applied on a consistent basis with prior periods. The
books of account and other financial records of the Seller are in all respects
complete and correct and are maintained in accordance with good business
practices and are accurately reflected in the Financial Statements. Since May
31,1996, the date of the last available balance sheet (the "Balance Sheet"), and
except as set forth on Schedule 5(c), there has not been:
(i) any material adverse change in the assets, prospective business,
operations or condition (financial or otherwise) of PD;
(ii) any damage, destruction or event materially affecting the assets,
prospective business, operations or condition (financial or otherwise) of
PD, whether or not covered by insurance;
(iii) any sale, lease, transfer mortgage, pledge or assignment or security
interest imposed upon any assets, tangible or intangible, of PD other than
for a fair consideration in the ordinary course of business;
(iv) any agreement, contract, lease, or license (or series of related
agreements, contracts, leases and licenses) by PD other than in the
ordinary course of business;
(v) any acceleration, termination, material modification or cancellation
of any material agreement, contract, lease or license to which PD is a
party;
(vi) the issuance of PD of any note, bond or other debt security or the
assumption, incurrence or guarantee of any indebtedness for borrowed money
or capitalized lease obligations either involving more than $100.00 singly
or $500.00 in the aggregate;
(vii) any employment contract for key or executive personnel, written or
oral, or modification of the terms of any such existing contract.
(d) Seller has prepared and filed all appropriate federal, state and local tax
returns of every kind and category (including, without limitation, income taxes,
employee withholding taxes, estimated taxes, excise taxes, sales taxes,
inventory taxes, use taxes, gross receipt taxes, franchise taxes and property
taxes) for all periods prior to and through the date hereof for which any such
returns have been required to be filed by it and have paid all taxes shown to be
due by said returns or on any assessments received by it or have made adequate
<PAGE>
provision for the payment thereof. The provisions for taxes (federal, state and
local) and interest and penalties, if any, reflected in the Balance Sheet are
adequate to cover any taxes (including any interest and penalties in connection
therewith) which have been or may be assessed with respect to the properties,
business and operations of the Seller for all fiscal periods ending on or prior
to March 31, 1996. All taxes or other assessments and levies which Seller is
required by law to withhold or collect have been duly withheld and collected and
have been paid over to the proper governmental authorities or held for such
payment. There is no agreement, waiver or other arrangement for an extension of
time with respect to the assessment of any tax or deficiency against the Seller,
nor is there any action, suit, proceeding, investigation or claim now pending,
or to the best knowledge of the Seller, threatened against Seller in respect of
any tax or assessment, or any matter of discussion with any federal, state or
local authority, relating to any tax or assessment, or claims for any additional
tax or assessment asserted by any such authority. Seller has not filed any claim
for refund of or with respect to any federal, state or local taxes.
(e) To the best of its knowledge, Seller has complied with all federal, state,
county and local laws, ordinances, regulations, inspections, orders, judgments,
injunctions, awards or decrees applicable to the Seller or to its business, the
breach of which would not adversely affect its business.
(f) Except as set forth on Schedule 5(f), there is no outstanding order,
judgment, injunction, award or decree of any court, governmental or regulatory
body or arbitration tribunal against or involving PD or Re-Pac (to the extent
that any would affect PD). Except as set forth on Schedule 5(f), there is no
action, suit or claim or legal, administrative or arbitral proceeding pending
or, to the best knowledge of the Seller, threatened that would give rise to any
right of Indemnification on the part of any director or officer of Seller or the
heirs, executors or administrators of such director or officer against the
Seller.
g) To the best of the Seller's knowledge, based on reasonable inquiry and
belief, (i) any account receivable reflected on the Balance Sheet and any
account receivable arising subsequent to May 31, 1996, has arisen in the
ordinary course of business of the Seller and represents valid obligations due
to the Seller; (ii) any item that is required by generally- accepted accounting
principles to be reflected as an account receivable on the Balance Sheet is so
reflected; and (iii) there is a sufficient amount reserved to cover any and all
accounts receivable reflected on the Balance Sheet which Seller deems to be
doubtful or uncollectible.
(h) To the best of the Seller's knowledge, based on reasonable inquiry and
believe, (i) all inventory reflected on the Balance Sheet and all inventory
acquired subsequent to May 31, 1996, to and including the Closing Date is and
will be of a quality and quantity usable or saleable in the ordinary course of
business. The materials, supplies and work-in-progress included in inventory are
of at least standard quality for such items in the industry in which the Seller
is engaged; (ii) there is no adverse condition affecting the supply of materials
available to the Seller, and (iii) the amount of the inventory reflected on the
Balance Sheet and on the books and records of the Seller has been determined in
accordance with generally-accepted accounting principles consistently applied.
<PAGE>
(i) To the best of the Seller's knowledge, based on reasonable inquiry and
belief, (i) Schedule 5(1) sets forth all machinery, equipment, furniture,
leasehold improvements, fixtures, vehicles, structures, any related capitalized
items or other tangible property material to the business of the Seller (the
"Tangible Assets"). Except as set forth on Schedule 5(i) and in the Financial
Statements, the Seller holds all rights, title and interest in the Tangible
Assets free and clear of all liens, pledges, mortgages, security interests,
conditional sales contracts or any other encumbrances; and (ii) except as set
forth on Schedule 5(i), all of the Tangible Assets that are used in the Seller's
business as presently conducted are in good operating condition and repair and
are useable in the ordinary course of business of the Seller and conform to all
applicable laws, ordinances and governmental orders, rules and regulations
relating to their construction and operation, including compliance with federal
and state governmental minimum standard for the handling and disposition of
toxic substances, if any.
(j) Schedule 5(1) sets forth any patent, trademark, service mark, trade name,
patent, franchise, and other proprietary rights, including the worldwide rights
to the special graphic capability in a single-use camera application, and any
application for any of the foregoing. Except as set forth on Schedule 5(1), the
rights of Seller in the property set forth on Schedule 5(1) are free and clear
of any liens or other encumbrances. Except as set forth on Schedule 5(1), to the
best knowledge of the Seller, there is no notice given to the Seller of any
adversely held patent, invention, trademark, service mark or trade name of any
other person or notice of any claim of any other person relating to any of the
property set forth on Schedule 5(1) or any process or confidential information
of the Seller, and to the best knowledge of the Seller (and without
investigation), Seller is not aware of any facts which could form the basis for
any such charge or claim.
(k) All accounts payable of the Seller have arisen in the ordinary course of
business and correctly reflect bona fide transactions involving the purchase of
goods, materials or services for the sole benefit of the Seller and are not
unusual in amount either individually or in the aggregate.
(l) As at May 31,1996, except as set forth on Schedule 5(1), the Seller does not
have any direct or indirect indebtedness, liability, claim, damage, deficiency,
obligation or responsibility, known or unknown, fixed or unfixed, liquidated or
unliquidated, secured or unsecured, accrued or absolute, contingent or
otherwise, including, without limitation, any liability on account of taxes, any
other governmental charge or lawsuit brought, whether or not of a kind required
by generally-accepted accounting principles to be set forth on a financial
statement (all of the foregoing collectively defined to as "Liabilities"), which
were not fully, fairly and adequately reflected in the Balance Sheet. As of the
Closing Date, the Seller will not have any Liabilities, other than Liabilities
fully and adequately reflected on the Balance Sheet and on Schedule 5(1). To the
best knowledge of the Seller, there is no circumstance, condition, event or
arrangement which may hereafter give rise to Liabilities other than as set forth
on Schedule 5(l).
(m) PD does not have or need any such intellectual property license or permit in
order to conduct its operations, except those listed on Schedule 5(m). No goods
or articles manufactured, sold or used by PD and no method or process employed
by PD infringes any patents, trademarks, registered designs, copyrights or other
industrial or commercial rights of any third party, and no claim has been made
against Seller with respect to any such infringement. Seller owns or has
<PAGE>
adequate licenses or other rights to use all trademarks, trade names, copyrights
and designs either use in or necessary for the conduct of its business. All
trademarks, trade names, copyrights and designs owned by or under license to the
Seller, together with all pertinent information relating thereto, including
filing, registration and expiration dates, serial numbers, record owners and
licenses, and their essential terms are listed on Exhibit 5(m). There currently
is in process a patent application for a patent known as the "Craig" patent
which is an asset of PD.
(n) Seller has the full legal right and power and all authority and approval
required to enter into, execute and deliver this Agreement and to perform fully
its obligations hereunder. This agreement has been duly executed and delivered
and is the valid and binding obligation of the Seller, enforceable in accordance
with its terms, except as may be limited by bankruptcy, moratorium, insolvency
or other similar laws generally affecting the enforcement of creditors' rights.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and the performance by the Seller of this
Agreement, in accordance with its respective terms and conditions will not (i)
require the approval or consent of any foreign, federal, state, county, local or
other governmental or regulatory body or the approval or consent of any other
person; (ii) conflict with or result in any breach or violation of any of the
terms and conditions of, or constitute (or with notice or lapse of time or both
would constitute) a default under, any order, judgment or decree applicable to
the Seller or any instrument, contract or other agreement to which the Seller is
a party or by or to which the Seller is bound or subject or (iii) result in the
creation of any lien or other encumbrance on the assets or properties of the
Seller.
(o) No representation or warranty by the Seller in this Agreement or in any
document to be delivered by them pursuant hereto, and no statement, list,
certificate or instrument furnished or to be furnished to the Buyer pursuant
hereto or in connection with the execution or performance of this Agreement
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make any statement herein or
therein not materially misleading or necessary to a complete and correct
presentation of all material aspects of the business of the Seller. To the best
knowledge of the Seller (not taking into account the transaction contemplated by
this Agreement), there is no fact, development or threatened development (except
for general economic conditions affecting business generally) which the Seller
has not disclosed to the Buyer in writing and which materially adversely affects
or, so far as the Seller can now reasonably foresee, may materially adversely
affect the business of the Seller.
6. Representations of Buyer.
-------------------------
The Buyer hereby warrants and represents:
(a) Buyer is a corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado, and is entitled to own or lease its
properties and to carry on its business as and in the places where such
properties are now owned, leased or operated and such business is conducted.
Buyer is duly licensed or qualified and in good standing as a foreign
corporation where the character of the properties owned by the Buyer or the
nature of the business transacted by it make such license or qualification
necessary. Buyer does not have any subsidiaries or any affiliated companies, and
does not otherwise own or control, directly or indirectly, any equity or
proprietary interest in any corporation, association or other business entity.
<PAGE>
(b) The aggregate number of authorized shares of the Buyer is 10,000,000 shares
of Common Stock, $.005 par value, of which 6,696,725 shares are issued and
3,303,275 are outstanding. All of such shares are validly issued, fully paid and
non-assessable. Buyer has no authorized or outstanding securities convertible
into or exchangeable for stock or securities of the Buyer except as set forth on
Schedule 6~) or in the Buyer's periodic reports ("Periodic Reports") filed with
the Securities and Exchange Commission. There are no outstanding subscriptions,
rights, options, warrants or other agreements obligating the Buyer to issue any
stock or other securities.
(c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not (i) violate any
provision of the Articles of Incorporation or By-Laws of the Buyer; (ii)
violate, conflict with or result in the breach of any of the terms of, result in
a material modification of, otherwise give any other contracting party the right
to terminate, or constitute (or with notice or lapse of time or both constitute)
a default under, any contract or other agreement to which the Buyer is a party
or by or to which it or any of its assets or properties may be bound or subject;
(iii) violate nay order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, the
Buyer, or upon the properties or business of the Buyer; or (iv) violate
any~statute, law or regulation of any jurisdiction.
(d) There is no outstanding order, judgment, injunction, award or decree of any
court, governmental or regulatory body or arbitration tribunal against or
involving the Buyer. There is no action, suit or claim or legal, administrative
or arbitral proceeding or, to the best knowledge of the Buyer, any investigation
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending or, to the best knowledge of the Buyer, threatened
against or involving the Buyer or any of its properties or assets. To the best
knowledge of the Buyer, there is no fact, event or circumstances that may give
rise to any suit, action, claim, investigation or proceeding that is currently
pending or threatened. There is no action, suit or claim or legal,
administrative or arbitral proceeding pending or, to the best knowledge of the
Buyer, threatened that would give rise to any right of indemnification on the
part of any director or officer of Buyer or the heirs, executors or
administrators of such director or officer against the Buyer.
(e) Buyer has the full legal right and power and all authority and approval
required to enter into, execute and deliver this Agreement and to perform fully
its obligations hereunder. This Agreement has been duly executed and delivered
and is the valid and binding obligation of the Buyer, enforceable in accordance
with its terms, except as may be limited by bankruptcy, moratorium, insolvency
or other similar laws generally affecting the enforcement of creditors' rights.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and the performance by the Buyer of this
Agreement, in accordance with its respective terms and conditions, will not (i)
require the approval or consent of any foreign, federal state, county, local or
other governmental or regulatory body or the approval or consent of any other
person; (ii) conflict with or result in any breach or violation of any of the
terms and conditions of, or constitute (or with notice or lapse of time or both
would constitute) a default under, any order, judgment or decree applicable to
the Buyer or any instrument, contract or other agreement to which the Buyer is a
party or by or to which the Buyer is bound or subject or (iii) result in the
creation of any lien or other encumbrance on the assets or properties of the
Buyer.
<PAGE>
(f) No representation or warranty by the Buyer in this Agreement or in any
document to be delivered by it pursuant hereto, and no statement, list,
certificate or instrument furnished or to be furnished to the Seller pursuant
hereto or in connection with the execution or performance of this Agreement
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make any statement herein or
therein not materially misleading or necessary to a complete and correct
presentation of all material aspects of the businesses of the Buyer. To the best
knowledge of the Buyer (not taking into account the transaction contemplated by
this Agreement), there is no fact, development or threatened development (except
for general economic conditions affecting business generally) which the Buyer
has not disclosed to the Seller in writing and which materially adversely
affects or, so far as the Buyer can now reasonably foresee, may materially
adversely affect the business of the Buyer.
7. Additional Covenants.
---------------------
Seller and Buyer agree as follows:
(a) In case at any time after the Closing Date any further action is necessary
or desirable to carry out the purposes of this Agreement, each of the parties
will take such further action (including the execution and delivery of such
further instruments and documents) as the other party reasonably may request,
all at the sole cost and expense of the requesting party (unless the requesting
party is entitled to indemnification as may be provided herein). Seller
acknowledges and agrees that from and after the Closing, the Buyer shall be
entitled to possession of all documents, books, records (including tax records),
agreements and financial date of any sort or copies thereof relating to Seller.
(b) In the event and for so long as any party actively is contesting or
defending against any action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand in connection with (i) any transaction contemplated
under this Agreement or (ii) any fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction relating to events and circumstances occurring on
or prior to the Closing date involving the Seller, the other party will
cooperate with the contesting or defending party and its counsel in the contest
or defense, make available its personnel and provide such testimony and access
to its books and records as shall be necessary in connection with the contest or
defense, all at the sole cost and expense of the contesting or defending party
(unless the contesting or defending party is entitled to indemnification
therefore as may be provided herein).
(c) Seller will not take any action that is designed or intended to have the
effect of discouraging any lessor, licensor, customer, supplier or other
business associate of the Seller from maintaining the same business
relationships with the Buyer after the Closing Date as it maintained with the
Seller prior to the Closing Date. Seller will refer all customer inquiries
relating to the business of the Seller to the Buyer from and after the Closing
Date.
(d) For a period of five (5) years from the Closing Date, the Seller shall not,
in any manner, directly or indirectly, on behalf of itself or any person, firm,
partnership, joint venture, corporation or other business entity, (i) enter into
or engage in any capacity in the business described in the second preamble on
the cover page of this Agreement, or in any other way compete with the Buyer in
the United States in conduct of the Business; (ii) solicit or cause to be
solicited within the United States, any present customers of the Seller; or
<PAGE>
(iii) recruit or cause any other person to recruit any present employee of the
Seller to any such business or businesses. The ownership by the Seller of not in
excess of 10% of the capital stock of any such business entity shall not be
deemed to represent proscribed competition under the terms of this section.
(e) Seller shall sublease to the Buyer the facilities at 4015 Brownsboro Road,
Winston- Salem, North Carolina for one year, renewable annually, at a rental of
$1,900.00 per month.
(f) The parties to this Agreement shall bear their respective direct and
indirect expenses incurred in connection with the preparation, negotiation,
execution and performance of this Agreement and the transactions contemplated
hereby, whether or not the transactions contemplated hereby are consummated,
including, without limitation, all fees and expenses of agents, representatives,
counsel and accountants.
(g) The parties shall execute such documents and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby. Each such party
shall use its best efforts to fulfill or obtain the fulfillment of the
conditions to the Closing, including without limitation, the execution and
delivery of any documents or other papers, the execution and delivery of which
are conditions precedent to the Closing.
(h) Neither party will make public disclosure of information pertaining to the
existence of the letter of intent entered into between PD and the Buyer on April
10, 1996 (the "LOI"), or the subject matter contained in the LOI without the
express written consent of the other party; provided however, that each party
shall be permitted to make such disclosures to the public to governmental
agencies as its counsel shall deem necessary to maintain compliance with and to
prevent violation of applicable federal or state securities or other laws. In
the event the transactions contemplated by this Agreement are not consummated,
the Buyer and the Seller agree to keep confidential any information disclosed to
each other in connection with this Agreement for a period of the years from the
date hereof; provided, however, such obligation shall not apply to information
which (i) at the time of disclosure was public knowledge, (ii) after the time of
disclosure becomes public knowledge (except due to the action of the receiving
part), or (iii) the receiving party had within its possession at the time of
disclosure.
8. Conditions Precedent to Closing~ or Which Shall Survive Closing:
(a) At closing or within ten (10) days after closing, Buyer shall have entered
into a contract with Re-Pac wherein Seller shall provide the services of Robert
Craig under Contract to Buyer for three (3) years at a rate of $120,000.00 per
year, payable monthly. Said contract shall contain Robert Craig's five-year
non-competition provision.
(b) Seller shall be entitled to up to an additional Two Hundred Thousand
(200,000) shares of common stock of the Buyer, pursuant to a bonus program as
described in Exhibit _____ attached hereto.
(c) Notwithstanding any right of the Buyer fully to investigate the affairs of
Seller and notwithstanding knowledge of facts determined or determinable by the
Buyer pursuant to such investigation or right of investigation, the Buyer shall
<PAGE>
have the right to rely fully upon the representations, warranties, covenants and
agreements of the Seller contained in this Agreement or in any document
delivered to the Buyer by the Seller or any of its representatives, in
connection with the transactions contemplated by this Agreement. All such
representations, warranties, covenants and agreements shall survive the
execution and delivery hereof and the Closing hereunder for the period of the
less of six (6) months following the Closing Date or the completion of the
initial audit of the financial statements of the Buyer reflecting the
acquisition of the Seller's Assets and assumption of Liabilities as provided
herein following the Closing date.
(d) Notwithstanding any right of the Seller fully to investigate the affairs of
the Buyer and notwithstanding any knowledge of facts determined or determinable
by the Seller pursuant to such investigation or right of investigation, the
Seller shall have the right to rely fully upon the representations, warranties,
covenants and agreements of the Buyer contained in this Agreement or in any
document delivered to the Seller by the Buyer or any of their representatives,
in connection with the transactions contemplated by this Agreement. All such
representations, warranties, covenants and agreements shall survive the
execution and delivery hereof the Closing hereunder for six (6) months following
the Closing date.
(e) Subject to limitations on the survival of representations and warrant
contained in 8(c), Seller hereby agrees to indemnify, defend and hold harmless
the Buyer from and against any losses, liabilities, damages, deficiencies, costs
or expenses including interest, penalties and reasonable attorneys' fees and
disbursements ("Loss"), based upon, arising out of or otherwise due to any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Seller contained in this Agreement or in any document or other
writing delivered pursuant to this Agreement.
(f) Subject to the limitations on the survival of representations and warranties
contained in 8(d), the Buyer hereby agrees to indemnify, defend and hold
harmless the Seller from and against any losses, liabilities, damages,
deficiencies, costs or expenses, including interest, penalties and reasonable
attorneys' fees and disbursements ("Loss"), based upon, arising out of or
otherwise due to any inaccuracy in or any breach of any representation,
warranty, covenant or agreement of the Buyer contained in this Agreement or in
any document or other writing delivered pursuant to this Agreement.
<PAGE>
9. Notices.
--------
Any notice or other communication required or which may be given hereunder
shall be in writing and shall be delivered personally, telegraphed, telexed,
sent by facsimile transmission or sent by certified, registered or express mail,
postage prepaid, and shall be deemed given when so delivered personally,
telegraphed, telexed or sent by facsimile transmission or, if mailed, four days
after the date of mailing, as follows:
(i) If to the Buyer, to:
DCC Compact Classics, Inc.
9301 Jordan Avenue, Suite 105
Chatsworth, California 91311
Attention: President
With copies to:
Atlas, Pearlman & Trop, P.A.
Suite 1900
200 East Las OAS Boulevard
Ft. Lauderdale, Florida 33316
Attention: Jim Schneider, Esq.
(ii) If to the Seller, to:
Re-Pac Corp.
4015 Brownsboro Road
Winston-Salem, North Carolina 27106
With copies to:
Richard E. Stover, Esq.
STOVER, CROMER & BENNETT
P.O. Box 775
King, North Carolina 27021
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notice hereunder.
10. Waivers and Amendments.
----------------------
This Agreement may be amended, modified, superseded, canceled, renewed or
extended, and the terms and conditions hereof may be waived, only by a written
instrument signed by the parties or, in the case of a waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, not shall any
waiver on the part of any party of any right, power or privilege hereunder,
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder. The rights and remedies herein provided are
<PAGE>
cumulative and are not exclusive of any rights or remedies which any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which the claim of any inaccuracy or breach is based
may also be the subject matter of any other representation, warranty, covenant
or agreement contained in this Agreement (or in any other agreement between the
parties) as to which there is no inaccuracy or breach.
11. Construction.
The parties have participated jointly in the negotiation and drafting of
this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by parties, and no presumption or burden of proof shall arise favor or
disfavoring any party by virtue of the authorship of any of provisions of this
Agreement. The parties intend that each representation, warranty and covenant
contained herein shall have independent significance. If any party has breached
representation, warranty or covenant contained herein in respect, the fact that
there exists another representation, warranty or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty or covenant.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
the day and year first above written.
RE-PAC CORP.
BY: /s/ Undistinguishable
-----------------------
President
DCC COMPACT CLASSICS, INC.
BY: /s/Marshall Blonstein
-----------------------
President
- --------------------------------------------------------------------------------
Amendment to Articles of Incorporation
- --------------------------------------------------------------------------------
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF lNCORPORATION
OF
DCC COMPACT CLASSICS, INC.
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the Corporation is DCC Compact Classics, Inc.
SECOND: The following amendment to the Articles of Incorporation was
adapted on November 22, 1996, as prescribed by the Colorado Business Corporation
Act, in the manner marked with an X below;
No shares have been issued or Directors elected - Action by
- ----- Incorporators
- ----- No shares have been issued but Directors elected-Action by Directors
Such amendment was adopted by the board of directors where shares
- ----- have been Issued and shareholder action was not required.
X Such amendment was adopted by a vote of the shareholders, The number
- ----- of shares voted for the amendment was sufficient for approval.
THIRD: Upon the filing of these Articles of Amendment to the Articles of
Incorporation, all Issued and outstanding shares of Common Stock of the
Corporation held by each holder of record on October 23,1996 shall be
automatically combined at a rate of one for three (1:3). No fractional share or
scrip representing a fractional share will be issued upon the Reverse Stock
Split. Fractional shares of .5 of Common Stock will be rounded up to the next
highest share, and fractional interest of less than .5 of Common Stock will be
reduced down to the next nearest share Any shareholder whose aggregate
shareholding is reduced. to a fraction of one (1) share will receive one (1)
share of New Common Stock.
IN WITNESS WHEREOF, the undersigned being the President of this
Corporation has executed these Articles of Amendment as of the l0th day of
December, 1996.
DCC COMPACT CLASSICS, INC.
/s/Marshall Blonstein
---------------------------------
By: Marshall Blonstein, President
ATTEST
/s/Marcia McGovern
- --------------------------
Marcia McGovern, Secretary
- --------------------------------------------------------------------------------
Employment Agreement dated February 1, 1996 with Marshall Blonstein
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
--------------------
I. This Employment AGREEMENT ("AGREEMENT') is entered into as of
February 1, 1996, and is to continue for four (4) years to January 31, 2000,
between DCC Compact Classics, Inc. ('DCC") , a Colorado corporation, on the one
hand, Employer ("EMPLOYER"), and Marshall Blonstein ("EMPLOYEE" or "BLONSTEIN"),
on the other hand.
II. EMPLOYER and EMPLOYEE agree that EMPLOYEE BLONSTEIN possesses unique
talents of an unusual value to DCC.
III. EMPLOYER and EMPLOYEE agree that EMPLOYEE BLONSTEIN's services are
of a special value to DCC and, therefore, DCC is willing to provide EMPLOYEE
BLONSTEIN with certain rights, benefits, and compensation to secure the services
of EMPLOYEE BLONSTEIN for the duration of this AGREEMENT.
IV Both EMPLOYER DCC and EMPLOYEE BLONSTEIN agree to the following:
A. Employment. DCC hereby employs BLONSTEIN to perform the duties and
render the services set forth in this AGREEMENT, for a period of four (4) years
from the commencement date of the AGREEMENT, that commencement date being
February 1, 1996. Subject to the termination provisions as provided in the
AGREEMENT, EMPLOYEE BLONSTEIN hereby accepts these employment obligations and
agrees faithfully to perform the services required of EMPLOYEE BLONSTEIN, during
the term of this AGREEMENT.
B. Duties. BLONSTEIN agrees to perform such duties as may be reasonably
required of him in his capacity as an employee of DCC. BLONSTEIN for this four
<PAGE>
(4) year period of this AGREEMENT, shall assume and carry out the duties of
President of DCC and shall be responsible for and shall be in charge of all
aspects of the executive management of DCC, including, but not limited to: (i)
undertaking all strategic management decisions, and supervision of DCC
employees, (ii) undertaking of executive hiring and termination, (iii)
maintaining the principal relationship between DCC and its Board of Directors,
its accountants, its legal counsel, and all other interested outside
constituencies. The type of services to be rendered shall be at BLONSTEIN's
discretion and judgment. In addition, EMPLOYEE BLONSTEIN, at his discretion,
agrees to serve and shall serve on the Board of Directors through the term of
this AGREEMENT, and, by this AGREEMENT, the DCC Board of Directors agrees to
nominate BLONSTEIN for Board membership. BLONSTEIN's voluntary resignation from
the Board of Directors shall not be construed as a breach of this AGREEMENT.
C. No Acts Inconsistent. EMPLOYEE BLONSTEIN agrees during the term of
this AGREEMENT not to undertake any acts inconsistent with his duties under this
AGREEMENT.
D. Compensation. In consideration for the services to be rendered by
EMPLOYEE BLONSTEIN, EMPLOYER DCC shall pay to EMPLOYEE BLONSTEIN and EMPLOYEE
BLONSTEIN shall receive the following compensation:
(1) Annual Salary. Effective February 1, 1996, and continuing for
forty-eight (48) months, EMPLOYEE BLONSTEIN shall receive; for the first twelve
(12) months, for the year 1996: $170,000 payable at the rate of $14,166 per
2
<PAGE>
month; for the second twelve (12) months (1997) , EMPLOYEE BLONSTEIN shall
receive a total of $170,000, payable at the rate of $14,100 per month; and, for
the third twelve (12) months (1998), $170,000 or $14,106.00 per month and for
the fourth twelfth (12) months (1999) $170,000 or $14,106.00 per month.
(2) Signing Bonus. EMPLOYEE BLONSTEIN shall receive a $50,000
signing bonus upon execution of this Employment AGREEMENT.
(3) Stock Options: Upon execution of this Employment AGREEMENT
BLONSTEIN is granted an option to purchase 300,000 shares of DCC common stock at
the price of $0.20 a share. The option period whereby BLONSTEIN may exercise
this option shall be from February 1, 1996 to January 31, 1999. The entire
option for 300,000 DCC shares may be exercised in one transaction or may be
partially exercised in several transactions totaling 300,000 shares which
BLONSTEIN shall determine at his discretion. The option or partial exercise of
the option shall be undertaken by BLONSTEIN by notification to the Secretary of
the Corporation of DCC of the request to exercise the option(s) with the
payment amount after which DCC shall issue the stock to BLONSTEIN within five
(5) days.
(3) Other Benefits.
(a) Automobile Benefits. During the term of this AGREEMENT,
DCC shall provide BLONSTEIN, at his discretion, an automobile, reasonably
insured, to be used primarily for business purposes. DCC shall pay all
reasonable expenses connected with BLONSTEIN' 5 automobile.
3
<PAGE>
(b) Insurance. During the term of the AGREEMENT, DCC shall
provide BLONSTEIN with Term Insurance Coverage with a minimum value of $250,000.
The beneficiaries or this Term Insurance Coverage shall be BEVERLY BLONSTEIN, or
the ESTATE OF BLONSTEIN, as BLONSTEIN may designate.
(c) DCC shall pay BLONSTEIN such additional amount or
amounts as a bonus for services rendered by BLONSTEIN as the Board of Directors
of the Company may, from time to time and the Board's sole discretion,
determine. In determining the amount of such bonus, DCC shall look to the
quality and extent of services rendered by BLONSTEIN hereunder, particularly as
such services may result in revenue received by DCC.
(d) BLONSTEIN's services hereunder are to be rendered
principally at BLONSTEIN's home or at DCC's offices, within twenty (20) miles
thereof. However, BLONSTEIN shall also render services at such other place or
places within or without the United States as DCC may designate from time to
time. When and if BLONSTEIN is required to render such services away from home,
DCC agrees to either furnish such necessary transportation and living expenses
may reasonable be required for BLONSTEIN during and on account of the rendition
of such services, or pay BLONSTEIN a fixed weekly sum as reimbursement for such
expenses incurred by BLONSTEIN. In the latter regard, BLONSTEIN agrees to keep
records of such expenses and furnish DCC reasonably detailed reports of actual
expenses incurred by BLONSTEIN. All expenses incurred by DCC for travel,
entertainment or business are deemed to be business expenses which are ordinary
and necessary to the conduct of the regular operating affairs of DCC. However,
should it be finally determined by an authorized representative of the
4
<PAGE>
Internal Revenue Service that any or all of such expense are not ordinary and
necessary business expenses, then such expenditures by DCC shall be considered
additional compensation to BLONSTEIN for services actually rendered thereby in
addition to the items specified above. BLONSTEIN shall be entitled to
participate in each and every fringe benefit program adopted by DCC and
benefiting employees performing same or similar functions as BLONSTEIN.
E. Termination; Default by DCC. The term of this AGREEMENT may be
terminated by DCC only as a result of death, or, change of control, or
termination for cause, and for no other cause or reason:
(a) Death. BLONSTEIN's salary and all other benefits under
the AGREEMENT shall continue to be paid for a period of thirty (30) days
following the date of EMPLOYEE BLONSTEIN's death. The term of this AGREEMENT
shall be deemed to terminate thirty (30) days after the death of BLONSTEIN, as
though it had expired by its own terms.
(b) Payment to Spouse as a Result of Death. If BLONSTEIN
dies while employed by DCC, DCC will pay BLONSTEIN's spouse (or BLONSTEIN's
successor-in-interest, if there is no surviving spouse) BLONSTEIN'S then monthly
salary for a period of eighteen (18) months following the month which BLONSTEIN
passes away. DCC shall also pay the sum of Five Thousand Dollars ($5,000) within
ninety (90) days after BLONSTEIN's death to BLONSTEIN's spouse or, if BLONSTEIN
is not survived by a spouse, to BLONSTEIN's successor-in-interest. It is the
purpose and intent of this paragraph that the foregoing payment shall qualify
5
<PAGE>
as an employee death benefit under Section 101(b) of the Internal Revenue Code
of 1986, as amended.
(c) Change in Control. For purposes of this AGREEMENT, the
term "change in control" shall mean, without the approval of DCC Board of
Directors obtained prior thereto (i) the acquisition by a single entity or
group of affiliated entities of more than fifty (50~) percent of the outstanding
capital stock of DCC (ii) the consummation of any merger of DCC into another
company or any sale, transfer or other disposition of all or substantially all
of DCC's assets to another entity or a parent company.
F. Payment to BLONSTEIN. Upon a change in control of DCC,
EMPLOYEE BLONSTEIN shall be entitled to receive under this AGREEMENT the amounts
described in Paragraph G below. Such amounts shall be paid in full, immediately
upon a 'change in control," or, immediately prior to the consummation of a
merger, sale or other disposition.
G. Severance Pay. Upon termination other than that for death or
cause, EMPLOYEE BLONSTEIN shall be entitled to severance pay in an amount equal
to the total compensation due EMPLOYEE BLONSTEIN, throughout the balance of the
term remaining in this AGREEMENT, or, two (2) times EMPLOYEE BLONSTEIN's current
total annual salary, whichever is greater.
H. Lien in Favor of BLONSTEIN. DCC hereby grants to BLONSTEIN a
first lien and a security interest against assets of DCC (as listed in Exhibit A
attached to this AGREEMENT), or assets of equivalent value and liquidity. DCC
shall execute and file a UCC-l financing statement identifying BLONSTEIN as a
6
<PAGE>
secured creditor, in order to secure payment to EMPLOYEE BLONSTEIN, of any sums
due EMPLOYEE BLONSTEIN under this AGREEMENT.
I. Default in Payment. In the event DCC fails to pay to BLONSTEIN
the compensation and benefits provided in this AGREEMENT for a period in excess
of thirty (30) days, or fails on more than one (1) occasion to pay for a period
of ten (10) days or more, EMPLOYEE BLONSTEIN shall have the right to cease the
provision of EMPLOYEE BLONSTEIN's services under this AGREEMENT, and shall have
the right to immediately receive the severance payment set forth in Paragraph G.
J. Termination For Cause. The term of this AGREEMENT may be
terminated by DCC for cause, which shall be one of the following:
(1) final judgment convicting EMPLOYEE BLONSTEIN of a felony
involving specific intent; or
(2) breach by EMPLOYEE BLONSTEIN of the Provisions of
Paragraph IV of this AGREEMENT.
K. Payment Pending Resolution of Disputes. In the event of any
dispute under this EMPLOYMENT AGREEMENT, DCC shall continue to pay all fees and
compensation and Board of Director expense due EMPLOYEE BLONSTEIN under this
AGREEMENT, and DCC shall not have the right to terminate the payment of such
fees and compensation due BLONSTEIN except and until there is adjudication of a
final judgment by a court in favor of DCC. In the event of a dispute, DCC agrees
to pay BLONSTEIN his reasonable legal fees with regard to defense or claims
under this AGREEMENT on a current basis until the dispute is resolved.
7
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L. Non-Competition. While EMPLOYEE BLONSTEIN is employed by DCC,
EMPLOYEE BLONSTEIN shall not engage in or participate in any business in direct
competition with that of DCC, in any of the states where DCC now does business
except with the written approval of DCC. Such prohibition shall not apply to
individual real estate or securities investments made individually or with
isolated groups of individuals known to EMPLOYEE BLONSTEIN, provided that
EMPLOYEE BLONSTEIN advises DCC of such investments.
M. Renewal. This AGREEMENT shall automatically be renewed for
successive terms of one (1) year at the expiration of the term set forth in
Section 1 under this AGREEMENT, unless either the Board of Directors or EMPLOYEE
BLONSTEIN shall give written notice to the other of it or his intention not to
renew this AGREEMENT at least ninety (90) days prior to the expiration of such
term or renewed term.
N. Assignment. This AGREEMENT shall inure to the benefit of and
shall be binding upon the successors and the assigns of DCC. Since this
AGREEMENT is based upon the unique abilities of and personal confidence in
EMPLOYEE BLONSTEIN, he shall have no right to assign this AGREEMENT or any of
the rights under this AGREEMENT without the written consent of DCC.
O. Indemnity. DCC shall indemnify EMPLOYEE BLONSTEIN and hold him
harmless from any cost, expense or liability arising out of his activities as an
EMPLOYEE of DCC, to the fullest extent available. Among other items provided in
the indemnification provisions DCC shall pay all expenses including reasonable
8
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attorney's fees actually incurred by EMPLOYEE BLONSTEIN in or proceeding
(including any appeals therefrom) alleged or brought by a third party arising
out of or relating to BLONSTEIN's performance under this AGREEMENT.
P. If any claim, action or suit is sought against DCC, pursuant
to the foregoing, EMPLOYEE BLONSTEIN shall promptly notify DCC in writing and
DCC shall have the right to assume and control the defense by counsel reasonably
satisfactory to EMPLOYEE BLONSTEIN. Without limiting any other provision of this
AGREEMENT, this provision shall survive the termination or expiration of this
AGREEMENT for a term of three (3) years after expiration of this AGREEMENT or
EMPLOYEE BLONSTEIN's voluntary resignation from the Board of Directors.
Q. Prior Contracts. Any prior contract or AGREEMENT between DCC
and EMPLOYEE BLONSTEIN regarding employment is hereby canceled and shall be of
no further force or effect.
R. Severability. If any provision of this AGREEMENT shall be
found invalid by any court of incompetent jurisdiction, such findings shall not
effect the validity of the other provisions under this AGREEMENT and the invalid
provisions shall be deemed to have been severed herefrom.
S. Waiver of Breach. The waiver of DCC or EMPLOYEE BLONSTEIN of
the breach of any provision of this AGREEMENT by the other party or the failure
to exercise by DCC or EMPLOYEE BLONSTEIN of any right granted under this
AGREEMENT shall not operate or be construed as the waiver of any subsequent
breach by the other party or the waiver of the right to exercise any such right.
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T. Entire AGREEMENT. This instrument contains the entire
AGREEMENT of the parties, and may be amended only by an AGREEMENT in writing
signed by the parties.
U. Notice. Any notice required or permitted to be given under
this AGREEMENT shall be sufficient if in writing and if sent by certified mail
to BLONSTEIN's residence, in case of the EMPLOYEE BLONSTEIN, or to its principal
office, in the case of DCC.
V. California Law. This AGREEMENT is entered into and executed in
the State of California and shall be governed by the laws of such state.
W. Arbitration. Any dispute as to the rights of the parties under
this AGREEMENT or its construction or its validity or enforcement or as to any
such dispute shall be submitted to binding arbitration in Los Angeles,
California to a retired Superior or Federal Court Judge. The Arbitrator will be
required to follow the laws of the Sate of California. The Arbitrator's decision
upon confirmation will be an appealable decision, appealable to the Court of
Appeals subject to the laws of the State of California as if it were a decision
by a Judge in a Court trial. The prevailing party in such arbitration, or any
proceedings in respect thereof, shall be entitled to receive its or his
attorneys' fees incurred in connection therewith.
X. DCC Representation. DCC represents and warrants (i) that this
AGREEMENT has been approved by DCC's Board of Directors and specifically DCC's
non-employee members with EMPLOYEE BLONSTEIN abstaining from the vote, and is
binding on DCC; (ii) that this AGREEMENT will not violate the corporate charter
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or By-Laws of DCC and/or any DCC affiliate, or any covenants heretofore made by
DCC and/or the DCC affiliate; (iii) that DCC and the DCC affiliate agree not to
hereafter enter into any covenants or undertake any other acts which conflict
with this AGREEMENT.
IN WITNESS WHEREOF, the parties to this AGREEMENT have hereunto set
their hands as of the day and year first above written.
EMPLOYEE DCC COMPACT CLASSICS, INC.
By:/s/Gary Gillman
/s/Marshall Blonstein --------------------------
- ---------------------
Marshall Blonstein
Name: Gary Gillman
I ------------------------
Title:
-----------------------
11
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Agreement with Passport Music Distributors, Inc.
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AGREEMENT made this day of May, 1996 by and between PASSPORT MUSIC
DISTRIBUTORS, INC., a Colorado corporation (the "Distributor"), and DCC COMPACT
CLASSICS, INC. a Colorado corporation (the "Company").
WHEREAS, the Company is engaged in the business of acquiring rights in,
and producing master audio recordings of, certain prerecorded music and other
audio configurations;
WHEREAS, the Distributor is engaged in the business of distributing,
promoting and marketing prerecorded music in all modes, manner and methods of
delivery whether in existence on the date hereof or invented hereafter;
WHEREAS, the Company desires for the Distributor to distribute all of the
master audio recordings directly controlled or owned by the Company (the
"Recordings") in the Territory as defined below, upon the terms and conditions
hereinafter set forth; and
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do hereby agree as
follows:
1. APPOINTMENT.
1.1 TERRITORY. Subject to the terms and conditions of this Agreement,
the Company hereby engages and appoints the Distributor as its exclusive
distributor for and in connection with the sale of the Recordings through normal
retail channels to customers in the United States (the "Territory"); except that
the Company reserves the right to distribute Recordings directly to the Tower
Records account until September 1, 1996, upon which date the Distributor shall
be appointed as exclusive distributor for such account as well. The Company's
current labels, including DCC, Garland, and Sandstone, and any additional labels
created by the Company during the term of this Agreement, are included under
this appointment. Notwithstanding the foregoing, the Distributor and the Company
agree that the Company's label known as "Romance Alive Audio" shall not be
subject to the terms of this Agreement.
1.2 DISTRIBUTION SERVICES. As part of this appointment, the Distributor
shall perform customary distribution services within the Territory for the
purposes of distribution and selling through normal retail channels, including
direct mail marketing and electronic distribution (but notwithstanding the
foregoing, direct mail marketing and electronic distribution shall be on a
non-exclusive basis), all of the Recordings.
1.3 EXCLUSIVITY. In furtherance of its appointment of Distributor as
exclusive distributor in the Territory during the Term, the Company shall not,
nor will the Company authorize, license or allow any other party to, distribute
Recordings within the Territory during the Term for such period of the Term as
the Distributor has the exclusive right to distribute therein, except as
provided in Section 1.1 hereof.
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1.4 RESERVED RIGHTS. Notwithstanding the foregoing, the Company reserves
the right to distribute Recordings directly hereunder through means other than
those traditionally and regularly serviced by the Distributor (e.g. record clubs
and premium sales).
2. ACCEPTANCE.
2.1 ACCEPTANCE OF APPOINTMENT. The Distributor hereby accepts such
appointment and exclusive right to distribute the Recordings in the Territory
subject to the terms and conditions of this Agreement.
2.2 RIGHT TO REFUSE TO DISTRIBUTE. Notwithstanding anything to the
contrary contained herein, the Distributor hereby reserves the right, without
any liability to the Distributor, to decline within two (2) weeks after receipt
of a digital audio tape or master of a Recording to distribute any of the
Recordings that, in the Distributor's sole judgment, is (a) obscene, (b)
libelous, slanderous or defamatory or otherwise violative of the laws of any
jurisdiction, or (c) infringes upon the rights of others, including without
limitation, the utilization within the Recording of uncleared and unauthorized
musical sound recordings and materials protected by copyright. To the extent
that the Distributor refuses to accept any Recordings for distribution pursuant
to the terms set forth herein, the Distributor shall have no rights to such
Recordings, and the Company shall have the right to distribute such Recordings
throughout the Territory either through the Company or through a third party
distributor.
3. TERM AND TERMINATION.
3.1 TERM. This Agreement shall commence on the date hereof and shall
continue for a period of three (3) years (the "Term").
3.2 AUTO RENEWAL. The Term shall automatically be renewed on a year- to
year basis on the same terms and conditions contained herein, unless either
party gives to the other written notice of termination on or before sixty (60)
days prior to the conclusion of the Term then in effect of its intention not to
renew.
3.3 CONCLUSION OF TERM SELL-OFF PERIOD. The termination or expiration of
this Agreement shall in no way relieve either party from its obligations to pay
the other party any sums accrued hereunder prior to such termination or
expiration. Upon the termination or expiration of this Agreement, accounts
between the parties shall be settled promptly, and each party shall pay all
amounts due the other party within forty-five (45) days after receipt of a
statement from the party seeking payment. Although there may exist disputed
items which cannot be resolved within said forty-five (45) day period,
undisputed amounts will nevertheless be paid within said period. Each party will
use its best efforts to minimize adverse effects upon the other which can or
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might result from such expiration or termination. Further, the Company shall be
obligated to purchase or to cause the Company's subsequent distributor to
purchase all of the Distributor's existing inventory of the Recordings at the
prices enumerated in Section 6.1 hereof. Until such time as the Company
purchases all of the Distributors inventory of the Recordings, or in the event
the Company purchases only a portion of such inventory, then
a) The Distributor shall have a non-exclusive sell-off period of
six (6) months to sell off its existing inventory of the Recordings (the
"Sell-Off Period"). During the Sell-Off Period, the Distributor can fulfill
orders for Recordings placed during the Term on the same terms and conditions
contained herein.
b) Upon the expiration of the Sell-Off Period, and subject to
full payment of outstanding debts to the Distributor hereunder, the Company
shall have a period of thirty (30) days following such expiration to order the
Distributor either to destroy all inventory of Recordings and other materials
then in its possession or to deliver to the Company, at the Company's sole
expense, all of the Distributor's inventory of the Recordings then on hand (and
subsequent returns). If within thirty (30) days after the date of such
termination the Company has not given the Distributor delivery instructions for
such Recordings, the Distributor shall have the right to:
(i) destroy such Recordings on the Company's behalf and at the
Company's expense,
(ii) continue to sell-off same;
(iii) charge the Company the cost of warehousing such Recordings
until the Company accepts delivery thereof
The provisions of this Section 3.3 shall survive the termination of this
Agreement.
3.4 NEW RECORDINGS. Notwithstanding Section 3.1 hereof, each new
Recording released during the Term shall be retained by the Distributor as an
exclusive title for no less than twelve (12) months from the date of delivery of
finished goods by the Company; provided that, in the event the Company delivers
a new Recording during the last six months of the Term, the Distributor shall
not be entitled to a sell-off period for such new Recording. The Distributor's
rights under this Section 3.4 shall survive the termination of this Agreement.
3.5 BREACH. In the event either party shall materially breach any
of the terms, conditions and agreements contained herein to be kept, observed or
performed by it, then the other party may terminate this Agreement, provided the
non-breaching party has given written notice of such material breach and such
material breach has not been cured within five (5) days of receipt of such
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notice, with respect to default in the payment of amounts owed hereunder, or
thirty (30) days of receipt of such notice with respect to any other material
breach.
4. RELEASE SCHEDULE; DELIVERY; MARKETING COMMITMENT.
4.1 DELIVERY. Delivery of any Recording hereunder shall be
complete when the Company has delivered to the Distributor inventory of the
Recordings suitable for resale in the reasonable judgment of the Distributor
(the "Inventory").
4.2 RELEASE SCHEDULE. The Company shall give the Distributor sixty
(60) days advance written notice of the date of release (street date) of each
new release of a Recording. Such notice shall include the following information:
(i) name of artist, (ii) title of Recording, (iii) the Company's catalogue
number, (iv) suggested list price, (v) twelve digit UPC code, and (vi) firm
street date.
4.3 MARKETING COMMITMENT. The Company agrees to use its best
efforts to market, promote and publicize all Recordings released through the
Distributor hereunder, in the manner and to the extent customary in the
industry.
5. MANUFACTURING; SHIPPING. Except as set forth below, the Company
shall deliver manufactured Recordings from the Company or from the pressing
plant to the Distributor's designated place of delivery in Denver, Colorado. The
Company and the Distributor agree that from time to time the Distributor may
request the Company to ship Recordings directly to other locations and that the
Company shall use reasonable efforts to comply with such requests, subject to
appropriate allocation of additional freight expenses incurred in connection
therewith. The number of Recordings to be delivered to Distributor shall be
determined by mutual agreement of the Company and the Distributor. Freight costs
of all such shipments shall be shared equally by the Company and the
Distributor. The Distributor shall, in its sole reasonable discretion, designate
the carrier, pay the ~ll freight costs, and charge back half such freight costs
to the Company It is understood between the parties hereto that the Company's
one-half share of freight costs advanced pursuant to this Section 5 are fully
recoupable as provided in Section 7 hereof and are an obligation of the Company
to the Distributor, and the Company hereby guarantees to the Distributor the
repayment of any of such freight costs which are not recouped at the end of the
Term then in effect.
6. PURCHASE PRICE AND PAYMENT.
6.1 PURCHASE PRICE. As compensation for the distribution rights
granted herein, the Distributor shall pay to the Company the prices set forth in
Schedule B attached hereto and incorporated herein by reference, for each
configuration of the Recordings. Such prices are subject to Section 6.2 below.
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6.2 DISCOUNTS.
a) TERMS DISCOUNT. With respect to all of the Recordings other
than the Recordings in the Gold Series, the Distributor shall receive a discount
of two percent (2%) from the invoice price on solely for invoices paid in
accordance with the terms set forth in Section 6.4. Amounts recouped against the
Company's invoices pursuant to Section 7 hereof shall be deemed paid in
accordance with such terms. With respect to the Gold Series of Recordings, the
Distributor shall not be entitled to a two percent (2%) discount as set forth
above. In order to implement the difference in payment and discount policy on
the Gold Series of Recordings, the Company shall either: (i) invoice the Gold
Series of Recordings separately, at the prices set forth in Section 6.1, or (ii)
invoice the Gold Series Recordings together with other Recordings hereunder,
adding two percent to the prices set forth in Section 6.1, and advise the
Distributor that the Company has added such amount to the price on such
Recordings.
b) PROGRAM DISCOUNTS. Unless otherwise agreed to in writing by
the Distributor and the Company, up to three (3) times a year, during the Term
and any extensions thereof (excluding the Sell-Off Period, if any), for a period
not longer than four (4) weeks each time, the Distributor may offer its
customers a seasonal discount equal to no more than five percent (5%) of the
wholesale price of the Recordings, and receive an equivalent discount from the
price for each Recording set forth in Section 6.1 hereof, provided, however,
that with respect to the Gold Series of Recordings such programs shall be
limited to two times a year with a maximum discount of no more than two and
one-half percent (2.5%).
6.3 INVOICES. The Company shall invoice the Distributor for each
shipment of Recordings to the Distributor, at the address designated by the
Distributor for submission of invoices for payment.
6.4 PAYMENT TERMS. Except as otherwise provided in this Agreement, on
the 25th of every month, the Distributor shall pay to the Company by check an
amount equal to invoices payable to the Company (net of (i) returns, as
described in Section 8 hereof, (ii) any applicable discounts as described in
Section 6.2 hereof and (iii) recoupment of any Unrecouped Advances and Expenses
as provided in Section 7 hereof) for goods which were received by the
Distributor on or prior to the 25th day of the month ended one month prior to
the first day of the month of such payment. For example, on September 25th, the
Distributor will deliver a check to the Company in an amount equal to the net
invoices for product received on or prior to July 25th, and on October 25th, the
Distributor will deliver a check in an amount equal to the net invoices for
product received on or prior to August 25th.
6.5 ADVANCES. Based upon the Company's promise faithfully to perform all
of the Company's duties and responsibilities required under this Agreement, and
based on the accuracy of the representations in Addendum A attached hereto, the
Distributor shall pay to the Company a recoupable advance (the "Initial
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VERSION May 21, 1996
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Advance") in an amount of Seven Hundred Fifty Thousand Dollars ($750,000.00),
payable upon execution of this Agreement. It is understood between the parties
hereto that the Initial Advance and any other advances paid to the Company
pursuant to this Agreement are fully recoupable as provided in Section 7 of this
Agreement, and are an obligation of the Company to the Distributor; and the
Company hereby guarantees to the Distributor the repayment of any part of the
Initial Advance (and any other advances paid to the Company pursuant to this
Agreement) which is not recouped at the end of the Term then in effect.
6.6 FREE GOODS. Promptly after the end of each of the four (4)
billing periods during which the Distributor has recouped an installment of the
Initial Advance as provided in Section 7.1 hereof, the Company shall supply the
Distributor with free Recordings equal in value to five percent (5%) of the
amount of such recoupment. For purposes of this Section 6.6, the free Recordings
shall be valued at the price for each Recording set forth in Section 6.1 hereof
The Distributor may sell such free Recordings to its customers subject to the
terms of this Agreement.
7. RECOUPMENT.
7.1 RECOUPMENT OF THE INITIAL ADVANCE. The Initial Advance shall
be recouped in four (4) installments of One Hundred Eighty-Seven Thousand Five
Hundred Dollars ($187,500.00) each, one installment in each of four consecutive
monthly billing periods, beginning with the billing period ended May 25, 1996.
7.2 RECOUPMENT OF OTHER UNRECOUPED ADVANCES AND EXPENSES. To the
extent that there are any Unrecouped Advances and Expenses, other than the
Initial Advance or any portion thereof, as of the date of any payment to be made
by the Distributor to the Company hereunder, an amount equal to one hundred
percent (100%) of such Unrecouped Advances and Expenses (other than the Initial
Advance or any portion thereof) due and owing to the Distributor shall be
credited against any payments to be made to the Company hereunder after
recoupment of the Initial Advance as provided in Section 7.1. "Unrecouped
Advances and Expenses" shall include: (i) any unrecouped portion of any advances
other than the Initial Advance; (ii) any unrecouped freight costs described in
Section 5 above, (iii) any unrecouped promotional expenses described in Section
11, and (iv) any other approved and unrecouped costs, advances or other
expenditures to be charged back to the Company as provided hereunder.
8. RETURN RESERVE.
8.1 ESTABLISHMENT. During each billing period, the Distributor
shall have the right to establish a reserve for anticipated credits, returns and
exchanges of up to ten percent (10%) of the amount otherwise payable to the
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Company pursuant to Section 6.1 (the "Return Reserve") and to hold back from
payment due to the Company the amount of the Return Reserve.
8.2 LIQUIDATION OF RETURN RESERVE. The Return Reserve for a given
month shall be held for a four (4) month period after it is established, then
the balance not utilized of each such Return Reserve for a given month shall be
liquidated in full in the billing period after the fourth month following the
month in which such Return Reserve was established.
9. RETURN POLICY.
9.1 DURING THE TERM. The Distributor shall have the right, at its
expense, to return all Recordings to the Company which the Distributor has not
sold or which have been returned by any customer of the Distributor. The Company
agrees to accept all returns of Recordings stickered by customers of the
Distributor as defective merchandise; provided, however, that the Distributor
shall limit the return of such stickered product to situations where there are
significant quantities of such product and/or where the such stickered product
cannot be reasonably recycled and resold by the Distributor. The Distributor
shall be entitled to a credit for all actual returns made during each invoice
period equal to the price for each Recording set forth in Section 6.1 hereof
subject to any applicable discounts. If the amount of actual returns and/or
credits exceed the amount of the Return Reserve held by the Distributor, then
the Distributor shall deduct the unrecovered portion from any monies that may
then or subsequently be due to the Company. The Distributor's rights under this
Section 9.1 shall survive the termination of this Agreement.
9.2 AFTER THE TERM. Following the termination of this Agreement
for any reason, or the expiration of the Term hereof the Company will accept, or
contractually obligate the successor distributor of the Recordings to accept,
returns of Recordings in the hands of customers of the Distributor located in
the Territory at not less than the price that was paid by such customer. The
Company shall indemnify and hold harmless the Distributor from and against any
claims by customers based upon such customers' return privileges. The provisions
of this Section 9.2 shall survive the termination of this Agreement.
9.3 GUARANTY. The Company hereby guaranties the payment to the
Distributor of any credits for returns during the one-year period following the
termination of the Term. The provisions of this Section 9.3 shall survive the
termination of this Agreement.
9.4 PREVIOUS DISTRIBUTORS. The Company will use its best efforts
to ensure that inventory in the hands of any current distributor of the Company
is returned to the Company promptly after the date hereof rather than sold into
the marketplace by such distributor.
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10. INTENTIONALLY DELETED.
11. PROMOTION.
11.1 CO-OP ADVERTISING. Subject to the last sentence of this
Section 11.1, on a quarterly basis, the Company shall utilize a minimum of Five
Percent (5%) of the amount of invoices payable to the Company (net of returns
and any applicable discounts as described in Section 6.2) to find the Company's
retail co-op advertising costs. The Distributor shall furnish the Company with
proof of performance of such co-op advertising and the related costs. It is
understood between the parties hereto that such finding is recoupable by the
Distributor as provided in Section 7 hereof and is an obligation of the Company
to the Distributor, and the Company hereby guarantees to the Distributor the
repayment of any of such finding which is not recouped at the end of the Term
then in effect. Co-op advertising does not include any finds spent by the
Company on marketing outside of retail, and the Company shall provide separate
finding for special events (e.g. retail conventions). The Distributor will
provide to the Company a list of such special events and their respective costs.
The Distributor shall submit all co-op advertising plans for the Company's
approval in advance, such approval not to be unreasonably withheld.
11.2 ADDITIONAL PROMOTION BY DISTRIBUTOR. Notwithstanding that the
Company is primarily responsible for the promotion of the Recordings and filly
responsible for the costs thereof the Company may negotiate with the Distributor
for the Distributor to provide additional marketing and promotion) over and
above co-op advertising described in Section 11.1 above. The Distributor shall
charge back to the Company all hard costs of such marketing and promotion,
including without limitation, all printing, photography and postage, as well as
any applicable fees, upon which the parties hereto have mutually agreed.
11.3 RIGHT TO USE THE TRADEMARKS. NAME AND LIKENESS. The Company
agrees that the Distributor shall be permitted to affix to the Recordings
stickers that carry the Distributor's logo. Such stickers shall be produced and
delivered to the Company's manufacturer by the Distributor and affixed by or on
behalf of the Company at the Distributor's expense. The Company grants to the
Distributor the right during the Term to use the Company's trademark and logo as
well as the artwork accompanying the Recordings and each Artist's name, likeness
and biographical material as it appears in such artwork, solely in connection
with the distribution, marketing and promoting of the Recordings as provided
herein.
11.4 PROMOTIONAL RECORDS. The Distributor shall have the right to
distribute free Recordings for promotional purposes, such as providing
Recordings to the broadcast and press media and to the Distributor's sales force
around the time of a new release, and not for resale. In addition to the free
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Recordings supplied to the Distributor pursuant to Section 6.6 hereof, the
Company shall supply the Distributor with the promotional Recordings in an
amount equal to ten percent (10%) of the total CD pressing of each new release,
provided that the number of promotional Recordings shall not exceed one hundred
(100) CDs for Gold Series of Recordings and four hundred (400) CDS per other new
release.
11.5 RECOUPMENT OF PROMOTIONAL EXPENSES. Any and all promotional
expenses incurred by the Distributor and that are previously authorized in
writing by the Company shall be recoupable from any monies which may be due and
owing to the Company by the Distributor.
11.6 NO REPRESENTATIONS. The Distributor makes no representations,
express or implied, about the results of any its efforts to promote the
Recordings. Failure of promotion undertaken by the Distributor to increase sales
of the Recordings shall not constitute a breach by the Distributor of its
obligations hereunder.
12. INTENTIONALLY DELETED.
13. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants
to the Distributor that:
13.1 The Company has all requisite legal rights to produce,
manufacture, sell or distribute any and all Recordings sold to the Distributor
hereunder, including but not limited to all copyright, trademark and
synchronization rights, and all necessary rights in the artwork and package
design materials and the Company's trademark and logo. Upon reasonable written
request of the Distributor, the Company shall tender to the Distributor for its
review the current recording contracts with each recording artist or licensing
agreements with the holders of copyrights for each of the Recordings delivered
pursuant to this Agreement.
13.2 The Company has not granted and will not grant any rights in
the Recordings contrary to the provisions of this Agreement or inconsistent with
the rights granted the Distributor hereunder.
13.3 The Recordings and any advertising, promotional artwork and
package design materials supplied by the Company in connection therewith do not
and will not contain any material which will violate, infringe upon or give rise
to any adverse claim with respect to any common law or any other right,
including without limitation, any copyright, trademark, musical, right of
privacy or publicity or contract right of any person or organization.
13.4 The Distributor shall not have any responsibility or liability
for the making of payments to any person or organization other than the Company,
including without limitation, any writer, producer, composer, musician or
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performer, copyright proprietor or any union or guild representing such members.
Any and all residual and third-party payments, deferred compensation and profit
or gross receipt participation shall be the sole responsibility of the Company
as are payments for any artwork, packaging, advertising or promotional
materials, including any videos.
13.5 The Recordings have been produced in accordance with all
applicable laws and regulations and all contracts, rules and regulations of all
unions and guilds, if any, having jurisdiction. All Recordings delivered to the
Distributor's warehouse have been manufactured in accordance with all applicable
laws and regulations and all contracts, rules and regulations of all unions and
guilds, if any, having jurisdiction. Additionally, such Recordings have been
manufactured in a technically competent manner and will be technically
satisfactory to the Distributor.
14. ACCOUNTING; AUDIT RIGHTS.
14.1 ACCOUNTING. Each payment made to the Company pursuant to
Section 6.4 hereof shall be accompanied by a remittance advice setting forth the
invoices paid and credits taken against the payment for returns, recoupment of
costs, advances or other expenditures to be charged back to the Company
hereunder.
14.2 AUDIT RIGHTS. The Company shall have the right at its sole
cost and expense to appoint a certified public accountant to examine the
Distributor's books and records which pertain to the manufacture of the
Recordings and deductions related to returns, recoupment of advances or charge
backs; provided that such examination shall be for a reasonable duration and
shall take place at the Distributor's offices during normal business hours on
reasonable prior written notice and shall not occur more than once in any year
of the Term, unless the Company notifies the Distributor of a specific problem
and it is not resolved within thirty (30) days of such notice. The Company shall
promptly supply the Distributor with a copy of any report (and all work papers,
if requested) made by such accountant pursuant to such examination. If it shall
be determined by mutual agreement of the Distributor and the Company that the
Distributor has underpaid the Company, then the Distributor shall forthwith pay
to the Company the amount of the underpayment; and if any such underpayment
exceeds ten percent (10%) of the monies paid to the Company for the period
covered by such examination, then the Distributor shall pay to the Company the
amount of the underpayment together with reimbursement for the actual and
reasonable costs and disbursements incurred by the Company for such examination.
15. INDEMNIFICATION. The Company shall at all times indemnify and hold
harmless the Distributor from and against any and all claims, damages,
liabilities, costs and expenses, including legal expenses and reasonable counsel
fees, which arise out of any breach or alleged breach by the Company of any
warranty, representation~ covenant or agreement embodied in this Agreement, and
result in a final judgment or a settlement that has received is settled with the
Distribution Agmt. 10
VERSION May 21, 1996
dcclass3.doc
<PAGE>
Company's prior written consent, such consent not to be unreasonably withheld.
Such indemnification shall include any copyright infringement claim resulting
from the use of uncleared or unauthorized samples contained in the Recordings
distributed by the Distributor and the use of the Company's trademark and logo.
During the pendency of any such claim against the Distributor, unless the
Company posts a bond or puts into escrow an amount bearing a reasonable relation
to the Company's potential liability to the Distributor under this Section, the
Distributor may withhold monies otherwise due to the Company in an amount
bearing a reasonable relation to the Company's potential liability to the
Distributor under this Section. Notwithstanding the foregoing, if no lawsuit is
instituted within one (1) year following the Distributor '5 receipt of notice of
the claim at issue, and it does not appear to the Distributor in the exercise of
its reasonable business judgment as though any lawsuit will be instituted, the
Distributor shall release all funds so withheld without prejudice. The Company
shall notify the Distributor of any claim to which the foregoing indemnity
relates promptly after it receives knowledge thereof; and the Distributor shall
have the right to engage an attorney of its choice at the expense of the Company
to conduct the defense thereto.
16. INDEPENDENT CONTRACTOR. The relationship established by this
Agreement is solely that of supplier and distributor, and the Company and the
Distributor acknowledge that the Distributor is an independent contractor. In
all transactions the Distributor shall act for its own account, and neither the
Company nor the Distributor shall have any power to assume, create or make
binding any obligation or to make any representation, commitment, guaranty or
warranty on behalf of each of the other. This Agreement shall not be construed
to create the relationship of principal and agent, joint venturers, copartners,
or any other similar relationship. Neither party shall be liable to any
third-party in any way for any engagement, obligation, contract, representation
or transaction, or for any negligent act or omission to act of; the other,
except as expressly provided herein.
17. AUTHORITY. Each of the Distributor and the Company hereby covenants
and represents to the other that neither the execution and delivery of this
Agreement nor the performance of the transactions contemplated hereby will cause
a breach under, or violate provisions of; any other agreement to which it is a
party or by which its assets are or may be bound.
18. ENTIRE AGREEMENT. This Agreement represents the entire understanding
of the parties with respect to the subject matter hereof and supersedes all
prior agreements, negotiations, understandings, representations, statements and
writings among the parties relating thereto. No modification, alteration, waiver
or change in any of the terms of this Agreement shall be valid or binding upon
the parties hereto unless made in writing and duly executed by both of the
parties hereto.
19. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and permitted
assignees. The parties hereto shall not assign this Agreement or any of their
Distribution Agmt. 11
VERSION May 21, 1996
dcclass3.doc
<PAGE>
rights or obligations hereunder except upon the other party's prior written
consent, such consent not to be unreasonably withheld.
20. SEVERABILITY. Should any part of this Agreement be held
unenforceable or in conflict with the applicable laws or regulations of any
jurisdiction, the invalid or unenforceable part or provision shall be replaced
with a provision which accomplishes, to the extent possible, the original
business purpose of such part or provision in a valid and enforceable manner,
and the remainder of this Agreement shall remain binding upon the parties.
21. WAIVER. Waiver by either party of a default or breach or a
succession of defaults or breaches, or any failure by either party to enforce
any rights hereunder, shall not be deemed to constitute a waiver of any
subsequent default or breach with respect to the name or any~other provision
hereof and shall not deprive such party of any right to terminate this Agreement
arising by reason of any subsequent default or breach.
22. GOVERNING LAW AND INTERPRETATION. This Agreement shall be governed
by and interpreted in accordance with the laws of the State of New York, without
regard to the principles of conflicts of law. The parties hereby consent to and
submit to jurisdiction of a competent court located in the State of New York.
Such court shall be the sole and exclusive venue for resolution of any disputes
or disagreements between the parties relating to this Agreement or the
transactions contemplated hereby or otherwise arising hereunder or with respect
to any breach of the terms and provisions hereof.
23. CAPTIONS. The captions of this Agreement are solely for convenience
of reference and shall not affect its interpretation.
24. NOTICES. All notices given to the parties hereunder and all
statements and payments hereunder shall be addressed to the parties at the
address set forth below or at such other parties as shall be designated in
writing from time to time:
COMPANY: with a copy to:
DCC Compact Classics, Inc. Roger A. Sandau, Esq.
[address] 8733 Sunset Boulevard) Suite 202
[city, state] Los Angeles, California 90069
Attn:
DISTRIBUTOR: with a copy to:
Passport Music Distribution, Inc. Alliance Entertainment Corp.
2335 Delgany Street 110 East 59th Street, 18th Floor
Denver, Colorado 80216 New York, New York 10022
Attn: Toby Knobel Attn: General Counsel
Distribution Agmt. 12
VERSION May 21, 1996
dcclass3.doc
<PAGE>
All notices shall be in writing and shall be personally delivered) or served by
certified mail, return receipt requested, or by overnight mail service such as
Federal Express, all charges pre-paid. Except as otherwise provided herein, such
notices shall be deemed given when mailed or delivered to an overnight mail
service, all charges prepaid, except that notices of change of address shall be
effective only after actual receipt thereof. The failure of the recipient to
accept or receive notice given by certified mail, return receipt requested,
postage pre-paid, does not affect the validity of the notice.
25. COUNTERPARTS.This Agreement may be executed in one or more
counterparts each of which shall be deemed an original but all of which taken
together shall be deemed one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this agreement as of the day and year first written
above.
PASSPORT MUSIC DCC COMPACT CLASSICS
DISTRIBUTION INC.
By: /s/ Toby Knobel By: /s/ Marshall Blonstein
---------------------- ---------------------------
Toby Knobel Marshall Blonstein
President President
Distribution Agmt. 13
VERSION May 21, 1996
dcclass3.doc
<PAGE>
Addendum A
[TO BE SUPPLIED]
Distribution Agmt. 14
VERSION May 21, 1996
dcclass3.doc
<PAGE>
Schedule B
Purchase Price for the Recordings
---------------------------------
Suggested Retail List Price The Distributor's Purchase Price
--------------------------- --------------------------------
LP's
$ 39.98 $ 22.00
29.98 15.67
Compact Disc:
$ GoldDouble $ 25.11
Double Sinatra 24.00
Gold Single 15.39
16.98 8.50
15.98 8.00
14.98 7.50
13.98 7.10
12.98 6.40
11.98 6.10
10.98 5.50
CASSETTE:
$ 9.98 $ 4.70
8.98 4.30
Garland Product 3.30
Distribution Agmt. 15
VERSION May 21, 1996
dcclass3.doc
- --------------------------------------------------------------------------------
Line of Credit Documents with Merrill Lynch Business Financial Services, Inc.
- --------------------------------------------------------------------------------
Merrill Lynch
Business Financial Services Inc.
33 West Monroe Street
22nd Floor
Chicago. Illinois 60603
312 2691384
FAX 312 845 9093
Merrill Lynch Denise M. Glab
Credit Analyst
February 16, 1996
DCC Compact Classics Inc.
9301 Jordan Avenue
Suite 105
Chatsworth, CA 91311
Attention: Mr. Marshall Blonstein
Re: WORKING CAPITAL MANAGEMENT ACCOUNT ("WCMA") No. 230-07N09
---------------------------------------------------------
Gentlemen:
It is our pleasure to inform you that we have approved an extension of your WCMA
Line of Credit
As extended, the new Maturity Date for your WCMA Line of Credit will be February
28, 1997, with all other terms and conditions of our agreements remaining
unchanged.
In connection with this extension, a $1,500.00 fee will be charged to your WCMA
Account.
With so many institutions offering financial services today, we realize that you
have a choice and we thank you for choosing Merrill Lynch. You are a very
important client to us and we hope that the WCMA Line of Credit has provided
better control of your working capital and helped enhance your company's bottom
line. In addition to the WCMA Line of Credit, Merrill Lynch offers a broad range
of products and services to our business clients including:
Term Financing: Equipment Purchases, Fixed Asset Acquisitions and
ESOP Financing;
Business Advisory Services: Business Valuations. Private Placements,
ESOP Advisory, Acquisition Advisory and Sale of Business; and
Business Investment Services: Strategies for Short-term and
Intermediate-term investments.
Again, we are pleased to provide you with an extension of your WCMA Line of
Credit and would enjoy discussing additional business services with you in
greater detail. If you have any questions, please contact Ed Lanchantin at (213)
236-2077.
Sincerely,
/s/ Denise M. Glab
- ---------------------
Denise M Glab
Credit Analyst
jc
cc Marianne Youngkheerre - MLPF&S - Los Angeles, CA (LA)
Ed Lanchantin - MLBFS - Los Angeles, CA
- --------------------------------------------------------------------------------
$250,000 Term Loan Documents with Merrill Lynch Business Financial Services,
Inc.
- --------------------------------------------------------------------------------
MERRILL LYNCH NO.9612340201
- --------------------------------------------------------------------------------
TERM WCMA(R) LOAN AND SECURITY AGREEMENT
TERM WCMA LOAN AND SECURITY AGREEMENT ("Loan Agreement") dated as of December 6,
1996, between DCC COMPACT CLASSICS, INC., a corporation organized and existing
under the laws of the State of Colorado having its principal office at 9301
Jordan Avenue, Suite 105, Chatsworth, CA 91311 ("Customer"), and MERRILL LYNCH
BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the
laws of the State of Delaware having its principal office at 33 West Monroe
Street, Chicago, IL 60603 ("MLBFS").
In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT
NO.230-07137 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL
LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed
to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by
this reference incorporated as a part hereof. In conjunction therewith, Customer
has requested that MLBFS make the Term WCMA Loan hereinafter described (the
"Loan"); and, subject to the terms and conditions herein set forth, MLBFS has
agreed to make the Loan to Customer.
The Loan combines the equivalent of five successive one-year term loans, each
equal to that portion of the Loan that will be fully amortized in the ensuing
year, with a line of credit under the WCMA Program ("WCMA Line of Credit") equal
to that portion of the Loan that will not be amortized in the ensuing year.
Subject to the terms hereof, each year after the initial funding there will be
an additional funding on account of the term portion of the Loan, with the
proceeds deposited into Customer's WCMA Account concurrently with a
corresponding reduction in the Maximum WCMA Line of Credit.
This structure provides Customer with substantially the same initial funding and
loan amortization as a conventional term loan. However, unlike most conventional
term loans, it permits both a prepayment in whole or in part at any time without
penalty, and, subject to the terms and conditions herein set forth, a
re-borrowing on a revolving basis of any such amounts prepaid on account of the
WCMA Line of Credit portion of the Loan. The structure of the Loan therefore
enables Customer at its option to use any free cash balances that it may have
from time to time to reduce interest expense on the line of credit portion of
the Loan without impairing its working capital.
Accordingly, and in consideration of the premises and of the mutual covenants of
the parties hereto, Customer and MLBFS hereby agree as follows:
Article I. DEFINITIONS
1.1 Specific Terms. In addition to terms defined elsewhere in this Loan
Agreement, when used herein the following terms shall have the following
meanings:
(a) "Account Debtor" shall mean any party who is or may become obligated with
respect to an Account or Chattel Paper.
(b) "Additional Agreements" shall mean all agreements, instruments, documents
and opinions other than this Loan Agreement, whether with or from Customer or
any other party, which are contemplated hereby or otherwise reasonably required
by MLBFS in connection herewith, or which evidence the creation, guaranty or
collateralization of any of the Obligations or the granting or perfection of
liens or security interests upon the Collateral or any other collateral for the
Obligations, and shall include, without limitation, the Term WCMA Note.
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<PAGE>
(c) "Business Day" shall mean any day other than a Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
(d) "Closing Date" shall mean the date upon which all conditions precedent to
MLBFS' obligation to make the Loan shall have been met to the satisfaction of
MLBFS.
(e) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights,
Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents
and Instruments of Customer, howsoever arising, whether now owned or existing or
hereafter acquired or arising, and wherever located; together with all books and
records (including computer records) directly related thereto, all proceeds
thereof (including, without limitation, proceeds in the form of Accounts and
insurance proceeds), and the additional collateral described in Section 4.6 (b)
hereof.
(f) "Commitment Expiration Date" shall mean January 5,1997.
(g) "Commitment Fee" shall mean a fee of $625.00 due to MLBFS in connection with
this Loan Agreement.
(h) "General Funding Conditions" shall mean each of the following conditions to
any loan or advance by MLBFS hereunder: (i) no Event of Default, or event which
with the giving of notice, passage of time, or both, would constitute an Event
of Default, shall have occurred and be continuing or would result from the
making of such loan or advance hereunder by MLBFS; (ii) there shall not have
occurred and be continuing any material adverse change in the business or
financial condition of Customer; (iii) all representations and warranties of
Customer herein or in any Additional Agreements shall then be true and correct
in all material respects; (iv) MLBFS shall have received this Loan Agreement and
all Additional Agreements, duly executed and filed or recorded where applicable,
all of which shall be in form and substance reasonably satisfactory to MLBFS;
(v) the Commitment Fee shall have been paid in full; (vi) MLBFS shall have
received evidence reasonably satisfactory to it as to the ownership of the
Collateral and the perfection and priority of MLBFS' liens and security
interests thereon, as well as the ownership of and the perfection and priority
of MLBFS' liens and security interests on any other collateral for the
Obligations furnished pursuant to any of the Additional Agreements; (vii) MLBFS
shall have received evidence reasonably satisfactory to it of the insurance
required hereby or by any of the Additional Agreements; and (viii) any
additional conditions specified in the "Term WCMA Approval" letter executed by
MLBFS with respect to the transactions contemplated hereby shall have been met
to the reasonable satisfaction of MLBFS.
(i) "Interest Rate" shall mean a variable per annum rate equal to the sum of (i)
2.90%, and (ii) the 30-Day Commercial Paper Rate. The "30-Day Commercial Paper
Rate" shall mean, as of the date of any determination, the interest rate from
time to time published in the "Money Rates" section of The Wall Street Journal
for 30-day high-grade unsecured notes sold through dealers by major
corporations. The Interest Rate will change as of the date of publication in The
Wall Street Journal of a 30-Day Commercial Paper Rate that is different from
that published on the preceding Business Day. In the event that The Wall Street
Journal shall, for any reason, fail or cease to publish the 30-Day Commercial
Paper Rate, MLBFS will choose a reasonably comparable index or source to use as
the basis for the Interest Rate.
(1) "Loan Amount" shall mean an amount equal to the lesser of (i) 100% of the
aggregate cost to Customer of satisfying or fulfilling the Loan Purpose, (ii)
the aggregate amount which Customer shall request be advanced by MLBFS on
account of the Loan Purpose, or (iii) $250,000.00.
(k) "Loan Purpose" shall mean the purpose for which the proceeds of the Loan
will be used; to wit: To provide permanent working capital.
(l) "Location of Tangible Collateral" shall mean the address of Customer set
forth at the beginning of this Loan Agreement, together with any other address
or addresses set forth on an exhibit hereto as being a Location of Tangible
Collateral.
(m) "Maximum WCMA Line of Credit" shall mean the maximum aggregate line of
credit which MLBFS will extend to Customer subject to the terms and conditions
hereof, as the same shall be reduced from time to time in accordance with the
terms hereof.
2
<PAGE>
(n) "Obligations" shall mean all liabilities, indebtedness and other obligations
of Customer to MLBFS, howsoever created, arising or evidenced, whether now
existing or hereafter arising, whether direct or indirect, absolute or
contingent, due or to become due, primary or secondary or joint or several, and,
without limiting the foregoing, shall include interest accruing after the filing
of any petition in bankruptcy, and all present and future liabilities,
indebtedness and obligations of Customer under this Loan Agreement and the Term
WCMA Note.
(0) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for
current taxes not delinquent, other non-consensual liens arising in the ordinary
course of business for sums not due, and, if MLBFS' rights to and interest in
the Collateral are not materially and adversely affected thereby, any such liens
for taxes or other non-consensual liens arising in the ordinary course of
business being contested in good faith by appropriate proceedings; (ii) liens in
favor of MLBFS; (iii) liens which will be discharged with the proceeds of the
initial WCMA Loan; and (iv) any other liens expressly permitted in writing by
MLBFS.
(p) "Term WCMA Note" shall mean and refer to the Term WCMA Note executed by
Customer and dated as of the date hereof which incorporates both a WCMA Note
evidencing amounts owing on account of the WCMA Line of Credit portion of the
Loan, and a Term Note evidencing amounts owing on account of the term portion of
the Loan.
(q) "WCMA Account" shall mean and refer to the Working Capital Management
Account of Customer with MLPF&S identified as WCMA Account No. 230-07137.
(r) "WCMA Loan" shall mean each advance made by MLBFS pursuant to the WCMA Line
of Credit.
(s) "WCMA Loan Balance" shall mean an amount equal to the aggregate unpaid
principal balance of all WCMA Loans.
1.2 Other Terms. Except as otherwise defined herein: (i) all terms used in this
Loan Agreement which are defined in the Uniform Commercial Code of Illinois
("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms
used herein which are defined in the WCMA Agreement shall have the meaning set
forth in the WCMA Agreement.
Article II. THE LOAN
2.1 Commitment. Subject to the terms and conditions hereof, MLBFS hereby agrees
to make the Loan to Customer, and Customer hereby agrees to borrow the Loan from
MLBFS. Unless otherwise hereafter agreed by MLBFS, the entire proceeds of the
Loan will be disbursed either directly to the applicable third party or parties
on account of the Loan Purpose or to reimburse Customer for amounts directly
expended by it; all as directed by Customer in a Closing Certificate to be
executed and delivered to MLBFS prior to the date of funding.
2.2 Operation of Loan.
(a) Term WCMA Note. The Loan will be evidenced by and shall be repayable in
accordance with the terms of the Term WCMA Note and this Loan Agreement. The
Term WCMA Note combines two promissory notes, one evidencing the term portion of
the Loan (the "Term Note") and the other evidencing the WCMA Line of Credit
portion of the Loan (the "WCMA Note"). The balance owing by Customer on account
of the Loan at any time shall be an amount equal to the sum of the then
outstanding balances under the WCMA Note and the Term Note included in the Term
WCMA Note. The Term WCMA Note is hereby incorporated as a part hereof.
(b) Term Note Principal. The principal balance owing under the Term Note at any
time shall be an amount equal to the difference between (i) the Loan Amount less
the aggregate principal paid by Customer on account of the Term Note; and (ii)
the Maximum WCMA Line of Credit. So long as there shall be any moneys owing by
Customer to MLBFS hereunder or there shall be a WCMA Line of Credit, no
3
<PAGE>
reduction in the unpaid principal balance of the Term Note to zero shall be
deemed a payment of the Term Note in full or an extinguishment of any of the
obligations of Customer thereunder or hereunder.
(c) Term Note Funding. Subject to the terms hereof, the Term Note will be funded
by MLBFS in five annual installments, each equal to one-fifth of the Loan
Amount. The first one-fifth installment funded by MLBFS will be funded on the
Closing Date and applied on account of the Loan Purpose, as aforesaid.
Subsequent installments will be funded on a date chosen by MLBFS in its sole
discretion which will be on or within two weeks before or after each subsequent
anniversary of the last day of the calendar month in which the Closing Date
occurs (each, a "Subsequent Funding Date"). Each Term Note funding after the
first shall be deposited into Customer's WCMA Account.
(d) Activation of WCMA Line. On the Closing Date, MLBFS will activate and make
available as an integral part of the Loan a WCMA Line of Credit equal to
four-fifths of the Loan Amount, all of which will be immediately disbursed on
account of the Loan Purpose as part of the Loan in accordance with the
directions of Customer set forth in the Closing Certificate, as aforesaid.
(e) Subsequent Fundings. On the first Subsequent Funding Date, concurrently with
MLBFS' funding of the second installment of the debt evidenced by the Term Note
into the WCMA Account, the Maximum WCMA Line of Credit will be reduced to an
amount equal to three-fifths of the Loan Amount. On the second Subsequent
Funding Date, the Maximum WCMA Line of Credit will be reduced to an amount equal
to two-fifths of the Loan Amount; and on the third Subsequent Funding Date the
Maximum WCMA Line of Credit will be reduced to an amount equal to one-fifth of
the Loan Amount.
(f) WCMA Maturity Date. On the fourth Subsequent Funding Date (the "WCMA
Maturity Date"), the WCMA Line of Credit will be terminated and the WCMA
Account, at the option of Customer, will either be converted to a WCMA Cash
Account (subject to any requirements of MLPF&S) or terminated.
2.3 Conditions of MLBFS' Obligation. The Closing Date and MLBFS' obligation to
make the Loan on the Closing Date are subject to the prior fulfillment of each
of the following conditions: (a) MLBFS shall have received a written request
from Customer that the Loan be funded in accordance with the terms hereof,
together with a written direction from Customer as to the method of payment and
payee(s) of the proceeds of the Loan, which request and direction shall have
been received by MLBFS not less than two Business Days prior to any requested
funding date; (b) MLBFS shall have received a copy of invoices, bills of sale,
payoff letters or other applicable evidence reasonably satisfactory to it that
the proceeds of the Loan will satisfy or fulfill the Loan Purpose; (c) the
Commitment Expiration Date shall not then have occurred; and (d) each of the
General Funding Conditions shall have been met or satisfied to the reasonable
satisfaction of MLBFS.
2.4 Conditions of Subsequent Fundings. The obligation of MLBFS to fund
installments of the term portion of the Loan on any Subsequent Funding Date
shall be subject to each of the conditions specified in Section 2.3 hereof being
met at such date, and the further condition that all payments due under the Term
Note on or prior to any Subsequent Funding Date shall have been paid in full;
provided, however, that notwithstanding the failure of any such conditions to
have been met, MLBFS may in its sole discretion fund such installment and/or any
other installments, and no such funding shall constitute a waiver by MLBFS of
any of its rights hereunder or under any of the Additional Agreements. Without
limiting the foregoing, it is understood that no funding by MLBFS of any sum
hereunder while an Event of Default shall have occurred and is continuing shall
under any circumstances be deemed a waiver by MLBFS of such Event of Default, or
a waiver of any of MLBFS' rights hereunder.
2.5 Commitment Fee. In consideration of the agreement by MLBFS to extend the
Loan to Customer in accordance with and subject to the terms hereof, Customer
has paid or shall, on or before the Closing Date pay, the Commitment Fee to
MLBFS. Customer acknowledges and agrees that the Commitment Fee has been fully
earned by MLBFS, and that it will not under any circumstances be refundable.
2.6 Acknowledgments of Customer. Customer acknowledges, covenants and agrees
that:
4
<PAGE>
(a) Payment of WCMA Interest; Additional Deposits. Under the terms of this Loan
Agreement, interest accrued on amounts outstanding on the WCMA Line of Credit
each month will, subject to the terms hereof, ordinarily be paid from the
proceeds of a borrowing of an additional sum under the WCMA Line of Credit.
Because all or substantially all of the Maximum WCMA Line of Credit will
ordinarily be drawn on the Closing Date, Customer agrees that it will, without
demand, invoicing or the request of MLBFS, from time to time make sufficient
deposits into the WCMA Account in order to assure that the Maximum WCMA Line of
Credit is not exceeded. Installments of principal and interest under the Term
Note shall be paid directly to MLBFS in accordance with the terms of the Term
Note.
(b) Additional Interest Charges. SUBJECT TO THE TERMS HEREOF, ON EACH SUBSEQUENT
FUNDING DATE MLBFS WILL DEPOSIT THE AMOUNT FUNDED INTO THE WCMA ACCOUNT. DUE TO
POSSIBLE DELAYS IN POSTING AS WELL AS CERTAIN DELAYS IN RECOGNITION OF DEPOSITS
INHERENT IN THE WCMA PROGRAM, CUSTOMER WILL NOT RECEIVE CREDIT FOR THE AMOUNT
DEPOSITED FOR UP TO SEVERAL DAYS THEREAFTER, RESULTING IN AN INTEREST CHARGE FOR
THAT PERIOD OF TIME ACCRUING AND CHARGED IN THE WCMA ACCOUNT. ON THE OTHER HAND,
BECAUSE MLBFS BORROWS ALL OR SUBSTANTIALLY ALL OF THE FUNDS THAT IT LENDS ON THE
DATE OF FUNDING, IT MUST CHARGE INTEREST ON THE AMOUNT FUNDED ON EACH SUBSEQUENT
FUNDING DATE FROM THE DATE OF ITS DEPOSIT INTO THE WCMA ACCOUNT, WHETHER OR NOT
SUCH DEPOSIT IS IMMEDIATELY RECOGNIZED. THE TIMING DIFFERENCES BETWEEN THE DATE
OF DEPOSIT AND DATE OF RECOGNITION OF THE DEPOSIT IN THE WCMA ACCOUNT WILL
THEREFORE RESULT IN EXTRA INTEREST CHARGES TO CUSTOMER, WHICH CUSTOMER
ACKNOWLEDGES ARE AN ADDITIONAL COST OF THE LOAN AND HEREBY UNCONDITIONALLY
AGREES TO PAY.
Article III. THE WCMA LINE OF CREDIT
3.1 WCMA Note.
All amounts owing under the WCMA Line of Credit shall be deemed owing under and
evidenced by the WCMA Note included in the Term WCMA Note.
3.2 WCMA Loans.
(a) Loan Commitment and Requests. Subject to the terms and conditions hereof:
(i) on the Closing Date, MLBFS will make a WCMA Loan to Customer in an amount
equal to the Maximum WCMA Line of Credit, the entire proceeds of which will be
disbursed on account of the Loan Purpose, as aforesaid; and (ii) during the
period from and after the Closing Date to the WCMA Maturity Date: (x) Customer
may repay said WCMA Loan and any other WCMA Loans in whole or in part at any
time without premium or penalty, and request a re-borrowing of amounts repaid on
a revolving basis, and (y) MLBFS will make such additional WCMA Loans as
Customer may from time to time request in accordance with the terms hereof.
Customer may request WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges,
wire transfers, or such other means of access to the WCMA Line of Credit as may
be permitted by MLBFS from time to time; it being understood that so long as the
WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account
which but for the WCMA Line of Credit would under the terms of the WCMA
Agreement result in an overdraft, shall be deemed a request by Customer for a
WCMA Loan.
(b) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be
obligated to make any WCMA Loan, and may without notice refuse to honor any such
request by Customer, if at the time of receipt by MLBFS of Customer's request:
(i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to
be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of
Credit shall have otherwise been terminated in accordance with the terms hereof;
or (iii) an event shall have occurred and is continuing which shall have caused
any of the General Funding Conditions to not then be met or satisfied to the
reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time
when any one or more of said conditions shall not have been met shall not in any
event be construed as a waiver of said condition or conditions or of any Event
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of Default, and shall not prevent MLBFS at any time thereafter while any
condition shall not have been met from refusing to honor any request by Customer
for a WCMA Loan.
(c) Force Majeure. MLBFS shall not be responsible, and shall have no liability
to Customer or any other party, for any delay or failure of MLBFS to honor any
request of Customer for a WCMA Loan or any other act or omission of MLBFS,
MLPF&S or any of their affiliates due to or resulting from any system failure,
error or delay in posting or other clerical error, loss of power, fire, Act of
God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of
their affiliates unless directly arising out of the willful wrongful act or
active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer
or any other party for any incidental or consequential damages arising from any
act or omission by MLBFS, MLPF&S or any of their affiliates in connection with
the WCMA Line of Credit or this Loan Agreement.
(d) Interest. The WCMA Loan Balance shall bear interest at the Interest Rate.
Interest shall be computed for the actual number of days elapsed on the basis of
a year consisting of 360 days. Notwithstanding any other provision in this Loan
Agreement or any Additional Agreements to the contrary, in no event shall the
Interest Rate exceed the highest rate permissible under any applicable law. In
the event that any court having jurisdiction determines that MLBFS has received
excess interest hereunder, MLBFS will promptly refund such excess interest to
Customer, without charge or penalty. Except as otherwise provided herein,
accrued and unpaid interest on the WCMA Loan Balance shall be payable monthly on
the last Business Day of each calendar month, commencing with the last Business
Day of the calendar month in which the Closing Date shall occur. Customer hereby
irrevocably authorizes and directs MLPF&S to pay MLBFS such accrued interest
from any available free credit balances in the WCMA Account, and if such
available free credit balances are insufficient to satisfy any interest payment
due, to liquidate any investments in the Money Accounts (other than any
investments constituting any Minimum Money Accounts Balance under the WCMA
Directed Reserve program) in an amount up to the balance of such accrued
interest, and pay to MLBFS the available proceeds on account thereof. If
available free credit balances in the WCMA Account and available proceeds of the
Money Accounts are insufficient to pay the entire balance of accrued interest,
and Customer otherwise fails to make such payment when due, MLBFS may, in its
sole discretion, make a WCMA Loan in an amount equal to the balance of such
accrued interest and pay the proceeds of such WCMA Loan to itself on account of
such interest. The amount of any such WCMA Loan will be added to the WCMA Loan
Balance. If MLBFS declines to extend a WCMA Loan to Customer under these
circumstances, Customer hereby authorizes and directs MLPF&S to make all such
interest payments to MLBFS from any Minimum Money Accounts Balance. If there is
no Minimum Money Accounts Balance, or it is insufficient to pay all such
interest, MLBFS will invoice Customer for payment of the balance of the accrued
interest, and Customer shall pay such interest as directed by MLBFS within 5
Business Days of receipt of such invoice.
(e) Payments. All payments required or permitted to be made pursuant to this
Loan Agreement shall be made in lawful money of the United States. Unless
otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be
made by the delivery of checks (other than WCMA Checks), or by means of FTS or
wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S
for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA
Agreement to the contrary, Customer hereby irrevocably authorizes and directs
MLPF&S to apply available free credit balances in the WCMA Account to the
repayment of the WCMA Loan Balance prior to application for any other purpose.
Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by
Customer upon the same basis and schedule as funds are made available for
investment in the Money Accounts in accordance with the terms of the WCMA
Agreement. The acceptance by or on behalf of MLBFS of a check or other payment
for a lesser amount than shall be due from Customer, regardless of any
endorsement or statement thereon or transmitted therewith, shall not be deemed
an accord and satisfaction or anything other than a payment on account, and
MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment
without prejudice to the rights of MLBFS to recover the balance actually due or
to pursue any other remedy under this Loan Agreement or applicable law for such
balance. All checks accepted by or on behalf of MLBFS in connection with the
Loan and WCMA Line of Credit are subject to final collection.
(f) Exceeding the Maximum WCMA Line of Credit. In the event that the WCMA Loan
Balance shall at any time exceed the Maximum WCMA Line of Credit, Customer shall
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within 1 Business Day of the first to occur of (i) any request or demand of
MLBFS, or (ii) receipt by Customer of a statement from MLPF&S showing a 6 WCMA
Loan Balance in excess of the Maximum WCMA Line of Credit, deposit sufficient
funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum
WCMA Line of Credit.
(g) Statements. MLPF&S will include in each monthly statement it issues under
the WCMA Program information with respect to WCMA Loans and the WCMA Loan
Balance. Any questions that Customer may have with respect to such information
should be directed to MLBFS; and any questions with respect to any other matter
in such statements or about or affecting the WCMA Program should be directed to
MLPF&S.
Article IV. GENERAL PROVISIONS
4.1 Representations and Warranties.
Customer represents and warrants to MLBFS that:
(a) Organization and Existence. Customer is a corporation, duly organized and
validly existing in good standing under the laws of the State of Colorado and is
qualified to do business and in good standing in each other state where the
nature of its business or the property owned by it make such qualification
necessary.
(b) Execution, Delivery and Performance. The execution, delivery and performance
by Customer of this Loan Agreement and such of the Additional Agreements to
which it is a party: (i) have been duly authorized by all requisite action, (ii)
do not and will not violate or conflict with any law or other governmental
requirement, or any of the agreements, instruments or documents which formed or
govern Customer, and (iii) do not and will not breach or violate any of the
provisions of, and will not result in a default by Customer under, any other
agreement, instrument or document to which it is a party or by which it or its
properties are bound.
(c) Notices and Approvals. Except as may have been given or obtained, no notice
to or consent or approval of any governmental body or authority or other third
party whatsoever (including, without limitation, any other creditor) is required
in connection with the execution, delivery or performance by Customer of such of
this Loan Agreement, the Term WCMA Note and the other Additional Agreements to
which it is a party.
(d) Enforceability. This Loan Agreement, the Term WCMA Note and such of the
other Additional Agreements to which it is a party are the legal, valid and
binding obligations of Customer, enforceable against it in accordance with their
respective terms, except as enforceability may be limited by bankruptcy and
other similar laws affecting the rights of creditors generally or by general
principles of equity.
(e) Collateral. Subject to Permitted Liens: (i) Customer has good and marketable
title to the Collateral, (ii) none of the Collateral is subject to any lien,
encumbrance or security interest, and (iii) upon the filing of all Uniform
Commercial Code financing statements executed by Customer with respect to the
Collateral in the appropriate jurisdiction(s) and/or the completion of any other
action required by applicable law to perfect its liens and security interests,
MLBFS will have valid and perfected first liens and security interests upon all
of the Collateral.
(f) Financial Statements. Except as expressly set forth in Customer's financial
statements, all financial statements of Customer furnished to MLBFS have been
prepared in conformity with generally accepted accounting principles,
consistently applied, are true and correct, and fairly present the financial
condition of it as at such dates and the results of its operations for the
periods then ended; and since the most recent date covered by such financial
statements, there has been no material adverse change in any such financial
condition or operation.
(g) Litigation. No litigation, arbitration, administrative or governmental
proceedings are pending or, to the knowledge of Customer, threatened against
Customer, which would, if adversely determined, materially and adversely affect
the liens and security interests of MLBFS hereunder or under any of the
Additional Agreements, the financial condition of Customer or the continued
operations of Customer.
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(h) Tax Returns. All federal, state and local tax returns, reports and
statements required to be filed by Customer have been filed with the appropriate
governmental agencies and all taxes due and payable by Customer have been timely
paid (except to the extent that any such failure to file or pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder or under any of the Additional Agreements, the financial condition of
Customer, or the continued operations of Customer).
(i) Collateral Location. All of the tangible Collateral is located at a Location
of Tangible Collateral.
Each of the foregoing representations and warranties: (i) has been relied upon
as an inducement to MLBFS to make the Loan, and (ii) is continuing and shall be
deemed remade by Customer on the Closing Date, on each Subsequent Funding Date
and concurrently with each request for a WCMA Loan.
4.2 Financial and Other Information.
Customer shall furnish or cause to be furnished to MLBFS during the term of this
Loan Agreement all of the following:
(a) Annual Financial Statements. Within 120 days after the close of each fiscal
year of Customer, Customer shall furnish or cause to be furnished to MLBFS: (i)
a copy of the annual audited financial statements of Customer consisting of at
least a balance sheet as at the close of such fiscal year and related statements
of income, retained earnings and cash flows, certified by its current
independent certified public accountants or other independent certified public
accountants reasonably acceptable to MLBFS; and (ii) a copy of the 10K report of
Customer, when and as filed with the SEC.
(b) Interim Financial Statements. Within 45 days after the close of each fiscal
quarter of Customer, Customer shall furnish or cause to be furnished to MLBFS:
(i) a statement of profit and loss for the fiscal quarter then ended, (ii) a
balance sheet as at the close of such fiscal quarter; all in reasonable detail
and certified by its chief financial officer, and (iii) a copy of the 10Q report
of Customer, when and as filed with the SEC.
(c) Aging of Accounts. Within 45 days after the close of each fiscal quarter of
Customer, Customer shall furnish or cause to be furnished to MLBFS an aging of
its Accounts and any Chattel Paper, certified by its chief financial officer.
(d) Other Information. Customer shall furnish or cause to be furnished to MLBFS
such other information as MLBFS may from time to time reasonably request
relating to Customer or the Collateral.
4.3 Other Covenants. Customer further covenants and agrees during the term of
this Loan Agreement that:
(a) Financial Records; Inspection. Customer will: (i) maintain at its principal
place of business complete and accurate books and records, and maintain all of
its financial records in a manner consistent with the financial statements
heretofore furnished to MLBFS, or prepared on such other basis as may be
approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized
representatives, upon reasonable notice and at reasonable times, to inspect its
properties (both real or personal), operations, books and records.
(b) Taxes. Customer will pay when due all taxes, assessments and other
governmental charges, howsoever designated, and all other liabilities and
obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of MLBFS
hereunder or under any of the Additional Agreements, the financial condition of
Customer or the continued operations of Customer.
(c) Compliance With Laws and Agreements. Customer will not violate any law,
regulation or other governmental requirement, any judgment or order of any court
or governmental agency or authority, or any agreement, instrument or document to
which it is a party or by which it is bound, if any such violation will
materially and adversely affect either the liens and security interests of MLBFS
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hereunder or under any of the Additional Agreements, or the financial condition
or the continued operations of Customer.
(d) Use of Loan Proceeds; Securities Transactions. The proceeds of the Loan
(including the initial WCMA Loan) shall be used by Customer solely for the Loan
Purpose, or, with the prior written consent of MLBFS, for other lawful business
purposes of Customer not prohibited hereby. The proceeds of each WCMA Loan other
than the initial WCMA Loan shall be used by Customer solely for working capital
in the ordinary course of Customer's business, or, with the prior written
consent of MLBFS, for other lawful business purposes of Customer not prohibited
hereby. Customer agrees that under no circumstances will the Loan or funds
borrowed from MLBFS through the WCMA Line of Credit be used: ((i) for personal,
family or household purposes of any person whatsoever, or (ii) to directly or
indirectly purchase, carry or trade in securities, or repay debt incurred to
purchase, carry or trade in securities, whether in or in connection with the
WCMA Account, another account of Customer with MLPF&S or an account of Customer
at any other broker or dealer in securities.
(e) Notification By Customer. Customer shall provide MLBFS with prompt written
notification of: (i) any Event of Default, or event which with the giving of
notice, passage of time, or both, would constitute an Event of Default; (ii) any
materially adverse change in the business, financial condition or operations of
Customer; and (iii) any information which indicates that any financial
statements of Customer fail in any material respect to present fairly the
financial condition and results of operations purported to be presented in such
statements. Each notification by Customer pursuant hereto shall specify the
event or information causing such notification, and, to the extent applicable,
shall specify the steps being taken to rectify or remedy such event or
information.
(f) Continuity. Except upon the prior written consent of MLBFS, which consent
will not be unreasonably withheld: (i) Customer will not be a party to any
merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets or stock of, or any material partnership or
joint venture interest in, any person or entity, or sell, transfer or lease all
or any substantial part of its assets if any such action causes a material
change in its control or principal business, or a material adverse change in its
financial condition or operations; (ii) Customer will preserve its existence and
good standing in the jurisdictions of establishment and operation, and will not
operate in any material business other than a business substantially the same as
its business as of the date of application by Customer for credit from MLBFS;
and (iii) Customer will not cause or permit any material change in its
controlling ownership, controlling senior management or, except upon not less
than 30 days prior written notice to MLBFS, its name or principal place of
business.
4.4 Collateral
(a) Pledge of Collateral. To secure payment and performance of the Obligations,
Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants
to MLBFS first liens and security interests in and upon all of the Collateral,
subject only to Permitted Liens.
(b) Liens. Except upon the prior written consent of MLBFS, Customer shall not
create or permit to exist any lien, encumbrance or security interest upon or
with respect to any Collateral now owned or hereafter acquired other than
Permitted Liens.
(c) Performance of Obligations. Customer shall perform all of its obligations
owing on account of or with respect to the Collateral; it being understood that
nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or
otherwise, shall be deemed an assumption by MLBFS of any of Customer's said
obligations.
(d) Sales and Collections. So long as no Event of Default shall have occurred
and is continuing, Customer may in the ordinary course of its business: (i) sell
any Inventory normally held by Customer for sale, (ii) use or consume any
materials and supplies normally held by Customer for use or consumption, and
(iii) collect all of its Accounts. Customer shall take such action with respect
to protection of its Inventory and the other Collateral and the collection of
its Accounts as MLBFS may from time to time reasonably request.
(e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable
time or times hereafter, Customer shall deliver to MLBFS, in addition to the
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other information required hereunder, a schedule identifying, for each Account
and all Chattel Paper subject to MLBFS' security interests hereunder, each
Account Debtor by name and address and amount, invoice or contract number and
date of each invoice or contract. Customer shall furnish to MLBFS such
additional information with respect to the Collateral, and amounts received by
Customer as proceeds of any of the Collateral, as MLBFS may from time to time
reasonably request.
(f) Alterations and Maintenance. Except upon the prior written consent of MLBFS,
Customer shall not make or permit any material alterations to any tangible
Collateral which might materially reduce or impair its market value or utility.
Customer shall at all times keep the tangible Collateral in good condition and
repair and shall pay or cause to be paid all obligations arising from the repair
and maintenance of such Collateral, as well as all obligations with respect to
each Location of Tangible Collateral, except for any such obligations being
contested by Customer in good faith by appropriate proceedings.
(g) Location. Except for movements required in the ordinary course of Customer's
business, Customer shall give MLBFS 30 days' prior written notice of the placing
at or movement of any tangible Collateral to any location other than a Location
of Tangible Collateral. In no event shall Customer cause or permit any material
tangible Collateral to be removed from the United States without the express
prior written consent of MLBFS.
(h) Insurance. Customer shall insure all of the tangible Collateral under a
policy or policies of physical damage insurance providing that losses will be
payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable
Endorsement and containing such other provisions as may be reasonably required
by MLBFS. Customer shall further provide and maintain a policy or policies of
comprehensive public liability insurance naming MLBFS as an additional party
insured. Customer shall maintain such other insurance as may be required by law
or is customarily maintained by companies in a similar business or otherwise
reasonably required by MLBFS. All such insurance shall provide that MLBFS will
receive not less than 10 days prior written notice of any cancellation, and
shall otherwise be in form and amount and with an insurer or insurers reasonably
acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of
each such policy or policies and, prior to any expiration or cancellation, each
renewal or replacement thereof.
(i) Event of Loss. Customer shall at its expense promptly repair all repairable
damage to any tangible Collateral. In the event that any tangible Collateral is
damaged beyond repair, lost, totally destroyed or confiscated (an "Event of
Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00
or more, then, on or before the first to occur of (i) 90 days after the
occurrence of such Event of Loss, or (ii) 10 Business Days after the date on
which either Customer or MLBFS shall receive any proceeds of insurance on
account of such Event of Loss, or any underwriter of insurance on such
Collateral shall advise either Customer or MLBFS that it disclaims liability in
respect of such Event of Loss, Customer shall, at Customer's option, either
replace the Collateral subject to such Event of Loss with comparable Collateral
free of all liens other than Permitted Liens (in which event Customer shall be
entitled to utilize the proceeds of insurance on account of such Event of Loss
for such purpose, and may retain any excess proceeds of such insurance), or
prepay the Loan by an amount equal to the actual cash value of such Collateral
as determined by either the insurance company's payment (plus any applicable
deductible) or, in absence of insurance company payment, as reasonably
determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence
of such Event of Loss or any time thereafter prior to replacement or prepayment,
as aforesaid, an Event of Default shall occur hereunder, then MLBFS may at its
sole option, exercisable at any time while such Event of Default shall be
continuing, require Customer to either replace such Collateral or prepay the
Loan, as aforesaid. Any prepayment of the Loan pursuant to this Section shall be
applied first to installments on account of the then "Term Note Balance" (as
defined in the Term WCMA Note) in inverse order of maturity; with any prepayment
in excess of the then Term Note Balance applied on account of the WCMA Note
concurrently with: (i) a like permanent reduction in the Maximum WCMA Line of
Credit, and (ii) a like reduction in the obligation of MLBFS to fund future
installments on account of the Term Note in inverse order of funding. No amount
prepaid pursuant to this Section may be re-borrowed by Customer.
(j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any
attachment, lien, judicial process, encumbrance or claim affecting or involving
$25,000.00 or more of the Collateral.
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(k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless
from and against any and all claims, liabilities, losses, costs and expenses
(including, without limitation, reasonable attorneys fees and expenses) of any
nature whatsoever which may be asserted against or incurred by MLBFS arising out
of or in any manner occasioned by (i) the ownership, collection, possession, use
or operation of any Collateral, or (ii) any failure by Customer to perform any
of its obligations hereunder; excluding, however, from said indemnity any such
claims, liabilities, etc. arising directly out of the willful wrongful act or
active gross negligence of MLBFS. This indemnity shall survive the expiration or
termination of this Loan Agreement as to all matters arising or accruing prior
to such expiration or termination.
4.5 Events of Default.
The occurrence of any of the following events shall constitute an "Event of
Default" under this Loan Agreement:
(a) Failure to Pay. Customer shall fail to pay to MLBFS or deposit into the WCMA
Account when due any amount owing or required to be paid or deposited by
Customer under this Loan Agreement or the Term WCMA Note, or shall fail to pay
when due any other Obligations, and any such failure shall continue for more
than 5 Business Days after written notice thereof shall have been given by MLBFS
to Customer.
(b) Failure to Perform. Customer shall default in the performance or observance
of any covenant or agreement on its part to be performed or observed under this
Loan Agreement, the Term WCMA Note or any of the other Additional Agreements
(not constituting an Event of Default under any other clause of this Section),
and such default shall continue unremedied for 10 Business Days after written
notice thereof shall have been given by MLBFS to Customer.
(c) Breach of Warranty. Any representation or warranty made by Customer or any
other party providing collateral for the Obligations contained in this Loan
Agreement, the Term WCMA Note or any of the other Additional Agreements shall at
any time prove to have been incorrect in any material respect when made.
(d) Default Under Other Agreement. A default or Event of Default by Customer
shall occur under the terms of any other agreement, instrument or document with
or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any
required notice shall have been given and required passage of time shall have
elapsed.
(e) Bankruptcy, Etc. A proceeding under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt or receivership law or statute
shall be filed by Customer, or any such proceeding shall be filed against
Customer and shall not be dismissed or withdrawn within 60 days after filing, or
Customer shall make an assignment for the benefit of creditors, or Customer
shall become insolvent or generally fail to pay, or admit in writing its
inability to pay, its debts as they become due.
(f) Material Impairment. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of payment or performance by
Customer has been materially impaired.
(g) Acceleration of Debt to Other Creditors. Any event shall occur which results
in the acceleration of the maturity of any indebtedness of $100,000.00 or more
of Customer to another creditor under any indenture, agreement, undertaking, or
otherwise.
(h) Seizure or Abuse of Collateral. The Collateral, or any material part
thereof, shall be or become subject to any material abuse or misuse, or any
levy, attachment, seizure or confiscation which is not released within 10
Business Days.
4.6 Remedies.
(a) Remedies Upon Default. Upon the occurrence and during the continuance of any
Event of Default, MLBFS may at its sole option do any one or more or all of the
following, at such time and in such order as MLBFS may in its sole discretion
choose:
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(i) Termination. MLBFS may without notice terminate its obligation to make the
Loan (if the Loan has not then been funded),), or fund any further amount on
account of the Term WCMA Note, or make or continue to make the WCMA Line of
Credit available to Customer, or otherwise extend any credit to or for the
benefit of Customer; and upon any such termination MLBFS shall be relieved of
all such obligations.
(ii) Acceleration. MLBFS may declare the principal of and interest on the Term
Note and WCMA Note included in the Term WCMA Note, and all other Obligations to
be forthwith due and payable, whereupon all such amounts shall be immediately
due and payable, without presentment, demand for payment, protest and notice of
protest, notice of dishonor, notice of acceleration, notice of intent to
accelerate or other notice or formality of any kind, all of which are hereby
expressly waived.
(iii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the
remedies of a secured party under applicable law, including, but not limited to,
the UCC, and any or all of its other rights and remedies under this Loan
Agreement and the Additional Agreements.
(iv) Possession. MLBFS may require Customer to make the Collateral and the
records pertaining to the Collateral available to MLBFS at a place designated by
MLBFS which is reasonably convenient to Customer, or may take possession of the
Collateral and the records pertaining to the Collateral without the use of any
judicial process and without any prior notice to Customer.
(v) Sale. MLBFS may sell any or all of the Collateral at public or private sale
upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may
purchase any Collateral at any such public sale. The net proceeds of any such
public or private sale and all other amounts actually collected or received by
MLBFS pursuant hereto, after deducting all costs and expenses incurred at any
time in the collection of the Obligations and in the protection, collection and
sale of the Collateral, will be applied to the payment of the Obligations, with
any remaining proceeds paid to Customer or whoever else may be entitled thereto,
and with Customer remaining liable for any amount remaining unpaid after such
application.
(vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon
receipt, transmit and deliver to MLBFS in the form received, all cash, checks,
drafts and other instruments for the payment of money (properly endorsed, where
required, so that such items may be collected by MLBFS) which may be received by
Customer at any time in full or partial payment of any Collateral, and require
that Customer not commingle any such items which may be so received by Customer
with any other of its funds or property but instead hold them separate and apart
and in trust for MLBFS until delivery is made to MLBFS.
(vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that
its Account or Chattel Paper has been assigned to MLBFS and direct such Account
Debtor to make payment directly to MLBFS of all amounts due or becoming due with
respect to such Account or Chattel Paper; and MLBFS may enforce payment and
collect, by legal proceedings or otherwise, such Account or Chattel Paper.
(viii) Control of Collateral. MLBFS may otherwise take control in any lawful
manner of any cash or non-cash items of payment or proceeds of Collateral and of
any rejected, returned, stopped in transit or repossessed goods included in the
Collateral and endorse Customer's name on any item of payment on or proceeds of
the Collateral.
(b) Set-Off. MLBFS shall have the further right upon the occurrence and during
the continuance of an Event of Default to set-off, appropriate and apply toward
payment of any of the Obligations, in such order of application as MLBFS may
from time to time and at any time elect, any cash, credit, deposits, accounts,
securities and any other property of Customer which is in transit to or in the
possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or
affiliate of MLBFS or MLPF&S, including, without limitation, all securities
accounts with MLPF&S and all cash and securities and other financial assets
therein or controlled thereby, and all proceeds thereof. Customer hereby
collaterally assigns and grants to MLBFS a continuing security interest in all
such property as additional Collateral.
(c) Power of Attorney. Effective upon the occurrence and during the continuance
of an Event of Default, Customer hereby irrevocably appoints MLBFS as its
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attorney-in-fact, with full power of substitution, in its place and stead and in
its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion
take any action and to execute any instrument which MLBFS may deem necessary or
advisable to accomplish the purposes of this Loan Agreement, including, but not
limited to, to receive, endorse and collect all checks, drafts and other
instruments for the payment of money made payable to Customer and included in
the Collateral.
(d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available in the Term WCMA Note, the other Additional Agreements, at
law or in equity, and any one or more of such rights and remedies may be
exercised simultaneously or successively.
(e) Notices. To the fullest extent permitted by applicable law, Customer hereby
irrevocably waives and releases MLBFS of and from any and all liabilities and
penalties for failure of MLBFS to comply with any statutory or other requirement
imposed upon MLBFS relating to notices of sale, holding of sale or reporting of
any sale, and Customer waives all rights of redemption or reinstatement from any
such sale. Any notices required under applicable law shall be reasonably and
properly given to Customer if given by any of the methods provided herein at
least 5 Business Days prior to taking action. MLBFS shall have the right to
postpone or adjourn any sale or other disposition of Collateral at any time
without giving notice of any such postponed or adjourned date. In the event
MLBFS seeks to take possession of any or all of the Collateral by court process,
Customer further irrevocably waives to the fullest extent permitted by law any
bonds and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession, and any demand for
possession prior to the commencement of any suit or action.
4.7 Miscellaneous.
(a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any
right, power or remedy pursuant to this Loan Agreement, the Term WCMA Note or
any of the other Additional Agreements shall operate as a waiver thereof, and no
single or partial exercise of any such right, power or remedy shall preclude any
other or further exercise thereof, or the exercise of any other right, power or
remedy. Neither any waiver of any provision of this Loan Agreement, the Term
WCMA Note or any of the other Additional Agreements, nor any consent to any
departure by Customer therefrom, shall be effective unless the same shall be in
writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement,
the Term WCMA Note or any of the other Additional Agreements and any consent to
any departure by Customer from the terms thereof shall be effective only in the
specific instance and for the specific purpose for which given. Except as
otherwise expressly provided herein, no notice to or demand on Customer shall in
any case entitle Customer to any other or further notice or demand in similar or
other circumstances.
(b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its
affiliates, including without limitation MLPF&S, to at any time (whether or not
an Event of Default shall have occurred) obtain from and disclose to each other
any and all financial and other information about Customer.
(c) Communications. All notices and other communications required or permitted
hereunder or in connection with any of the Additional Agreements shall be in
writing, and shall be either delivered personally, mailed by postage prepaid
certified mail or sent by express overnight courier or by facsimile. Such
notices and communications shall be deemed to be given on the date of personal
delivery, facsimile transmission or actual delivery of certified mail, or one
Business Day after delivery to an express overnight courier. Unless otherwise
specified in a notice sent or delivered in accordance with the terms hereof,
notices and other communications in writing shall be given to the parties hereto
at their respective addresses set forth at the beginning of this Loan Agreement,
or, in the case of facsimile transmission, to the parties at their respective
regular facsimile telephone number.
(d) Costs, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS
for: (i) all Uniform Commercial Code and other filing and search fees and
expenses incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS' rights hereunder or in the Collateral or any other
collateral for the Obligations; (ii) any and all stamp, transfer and other taxes
and fees payable or determined to be payable in connection with the execution,
delivery and/or recording of this Loan Agreement or any of the Additional
Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including,
13
<PAGE>
but not limited to, reasonable fees and expenses of outside counsel) incurred by
MLBFS in connection with the enforcement of this Loan Agreement or any of the
Additional Agreements and the protection of MLBFS' rights hereunder or
thereunder, excluding, however, salaries and expenses of MLBFS' employees. The
obligations of Customer under this paragraph shall survive the expiration or
termination of this Loan Agreement and the discharge of the other Obligations.
(e) Right to Perform Obligations. If Customer shall fail to do any act or thing
which it has covenanted to do under this Loan Agreement or any representation or
warranty on the part of Customer contained in this Loan Agreement shall be
breached, MLBFS may, in its sole discretion, after 5 Business Days written
notice is sent to Customer (or such lesser notice, including no notice, as is
reasonable under the circumstances), do the same or cause it to be done or
remedy any such breach, and may expend its funds for such purpose. Any and all
reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer
upon demand, with interest at the Interest Rate during the period from and
including the date funds are so expended by MLBFS to the date of repayment, and
all such amounts shall be additional Obligations. The payment or performance by
MLBFS of any of Customer's obligations hereunder shall not relieve Customer of
said obligations or of the consequences of having failed to pay or perform the
same, and shall not waive or be deemed a cure of any Event of Default.
(f) Late Charge. Any payment required to be made by Customer pursuant to this
Loan Agreement or any of the Additional Agreements not paid within 10 days of
the applicable due date shall be subject to a late charge in an amount equal to
the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount
permitted by applicable law. Such late charge shall be payable on demand, or,
without demand, may in the sole discretion of MLBFS be paid by a WCMA Loan and
added to the WCMA Loan Balance in the same manner as provided herein for accrued
interest with respect to the WCMA Line of Credit.
(g) Further Assurances. Customer agrees to do such further acts and things and
to execute and deliver to MLBFS such additional agreements, instruments and
documents as MLBFS may reasonably require or deem advisable to effectuate the
purposes of this Loan Agreement, the Term WCMA Note or any the other Additional
Agreements, or to establish, perfect and maintain MLBFS' security interests and
liens upon the Collateral, including, but not limited to: (i) executing
financing statements or amendments thereto when and as reasonably requested by
MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local
law, causing the owners and/or mortgagees of the real property on which any
Collateral may be located to execute and deliver to MLBFS waivers or
subordinations reasonably satisfactory to MLBFS with respect to any rights in
such Collateral.
(h) Binding Effect. This Loan Agreement, the Term WCMA Note and the other
Additional Agreements shall be binding upon, and shall inure to the benefit of
MLBFS, Customer and their respective successors and assigns. Customer shall not
assign any of its rights or delegate any of its obligations under this Loan
Agreement, the Term WCMA Note or any of the other Additional Agreements without
the prior written consent of MLBFS. Unless otherwise expressly agreed to in a
writing signed by MLBFS, no such consent shall in any event relieve Customer of
any of its obligations under this Loan Agreement, the Term WCMA Note or any of
the other Additional Agreements.
(i) Headings. Captions and section and paragraph headings in this Loan Agreement
are inserted only as a matter of convenience, and shall not affect the
interpretation hereof.
(1) Governing Law. This Loan Agreement, the Term WCMA Note and, unless otherwise
expressly provided therein, each of the other Additional Agreements, shall be
governed in all respects by the laws of the State of Illinois.
(k) Severability of Provisions. Whenever possible, each provision of this Loan
Agreement, the Term WCMA Note and the other Additional Agreements shall be
interpreted in such manner as to be effective and valid under applicable law.
Any provision of this Loan Agreement, the Term WCMA Note or any of the other
Additional Agreements which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Loan Agreement, the Term WCMA Note and the other Additional Agreements or
affecting the validity or enforceability of such provision in any other
jurisdiction.
14
<PAGE>
(l) Term. This Loan Agreement shall become effective on the date accepted by
MLBFS at its offices in Chicago, Illinois, and, subject to the terms hereof,
shall continue in effect so long thereafter as either MLBFS shall be obligated
to make the Loan, or, after the Closing Date, there shall be any moneys
outstanding under the Term Note or WCMA Note included in the Term WCMA Note or
under this Loan Agreement, or there shall be any other Obligations outstanding.
(m) Counterparts. This Loan Agreement may be executed in one or more
counterparts which, when taken together, constitute one and the same agreement
(n) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE TERM WCMA NOTE AND THE
OTHER ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS
THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN
AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. Without limiting
the foregoing, Customer acknowledges that: (i) no promise or commitment has been
made to it by MLBFS, MLPF&S or any of their respective
employees, agents or representatives to make the Loan on any terms other than as
expressly set forth herein and in the Term WCMA Note, or to make any other loan
or otherwise extend any other credit to Customer or any other party; and (ii)
except as otherwise expressly provided herein, this Loan Agreement supersedes
and replaces any and all proposals, letters of intent and approval and
commitment letters from MLBFS to Customer, none of which shall be considered an
Additional Agreement. No amendment or modification of this Agreement or any of
the Additional Agreements to which Customer is a party shall be effective unless
in a writing signed by both MLBFS and Customer.
(o) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS
BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN
ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT, THE TERM WCMA NOTE AND THE
OTHER ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER
JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE
LOCATED. CUSTOMER CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN
ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER
WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. CUSTOMER
FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY
JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND
CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST
THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY
WAY CONNECTED WITH THE LOAN, THIS LOAN AGREEMENT, THE TERM WCMA NOTE, ANY OTHER
ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT
MATTER OF THIS LOAN AGREEMENT.
15
<PAGE>
IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year
first above written.
DCC COMPACT CLASSICS, INC.
By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS
---------------------------------------------
Signature Signature (2)
Marshall Blonstein
- -------------------------------------------------
Printed Name Printed Name
President
- -------------------------------------------------
Title Title
Accepted at Chicago, Illinois:
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC.
By: ____________________________________
16
<PAGE>
MERRILL LYNCH NO.9612340201
- --------------------------------------------------------------------------------
$250,000.00 December 6, 1996
TERM WCMA(R) NOTE
FOR VALUE RECEIVED, DCC COMPACT CLASSICS, INC., a corporation organized and
existing under the laws of the State of Colorado ("Customer"), hereby promises
to pay to the order of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a
corporation organized and existing under the laws of the State of Delaware
("MLBFS"), in lawful money of the United States, the principal sum of
$250,000.00, or, if more or less, an amount equal to the sum of the balances
from time to time outstanding under the "Term Note" and "WCMA Note" included
herein, as follows:
DEFINITIONS
In addition to terms defined elsewhere in this Note, as used herein, the
following terms shall have the following meanings:
(i) "Closing Date" shall mean the date of advancement of funds hereunder.
(ii) "Excess Interest" shall mean any amount of interest in excess of the
maximum amount of interest permitted to be charged by law.
(iii) "Interest Rate" shall mean a variable per annum rate equal to the sum of
(i) 2.90% per annum, and (ii) the interest rate from time to time published in
the "Money Rates" section of The Wall Street Journal for 30- day high-grade
unsecured notes sold through dealers by major corporations (the "30-Day
Commercial Paper Rate"). The Interest Rate will change as of the date of
publication in The Wall Street Journal of a 30-Day Commercial Paper Rate that is
different from that published on the preceding Business Day. In the event that
The Wall Street Journal shall, for any reason, fail or cease to publish the
30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable index or
source to use as the basis for the Interest Rate.
(iv) "Loan Agreement" shall mean that certain TERM WCMA LOAN AND SECURITY
AGREEMENT NO. 9612340201 between Customer and MLBFS, as the same may have been
or may hereafter be amended or supplemented.
(v) "Note" shall mean this TERM WCMA NOTE.
Capitalized terms used herein and not defined herein shall have the meaning set
forth in the Loan Agreement. Without limiting the foregoing, the terms
"Additional Agreements", "Event of Default" and "WCMA Loan Balance" shall have
the respective meanings set forth in the Loan Agreement.
TERM NOTE
FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, in
lawful money of the United States, an amount equal to the difference between (i)
the principal sum of $250,000.00 or, if more or less, the aggregate amount
advanced by MLBFS to Customer pursuant to the Loan Agreement (the "Loan
Amount"), and (ii) the sum of (x) the aggregate amount paid by Customer on
account of the principal hereof, and (y) the Maximum WCMA Line of Credit (said
difference being herein called the "Term Note Balance"); together with interest
on the Term Note Balance, from the date of advancement of funds hereunder until
payment, at the Interest Rate.
Said indebtedness shall be payable in 60 consecutive monthly installments
commencing on the first day of the second calendar month following the Closing
<PAGE>
Date, and continuing on the first day of each calendar month thereafter until
this Note shall be paid in full. Each such installment shall be in an amount
equal to the sum of (i) accrued and unpaid interest at the Interest Rate (with
the first such installment including interest accrued from the Closing Date),
and (ii) 1/60th of the Loan Amount. All sums payable hereunder shall be payable
at the office of MLBFS at 33 West Monroe Street, Chicago, Illinois 60603, or at
such other place or places as the holder hereof may from time to time appoint in
writing.
Customer may prepay this Term Note at any time in whole or in pant without
premium or penalty. Any partial prepayment shall be applied to installments of
the Loan Amount in inverse order of maturity. Customer shall not have the right
to re-borrow amounts prepaid on account of this Term Note.
WCMA NOTE
FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at
the times and in the manner set forth in the Loan Agreement, or in such other
manner and at such place as MLBFS may hereafter designate in writing, the
following: (a) on the WCMA Maturity Date, the then WCMA Loan Balance; and (b)
interest at the Interest Rate on the outstanding WCMA Loan Balance, from and
including the date on which the initial WCMA Loan is made until the date of
payment of all WCMA Loans in full. Interest shall be payable in the manner and
on the dates specified in, or determined in accordance with, the Loan Agreement.
PROVISIONS APPLICABLE TO BOTH TERM NOTE AND WCMA NOTE
Any part of the principal hereof or interest hereon not paid within 10 days of
the applicable due date shall be subject to a late charge equal to the lesser of
(i) 5% of the overdue amount, or (ii) the maximum amount permitted by law. All
interest shall be computed on the basis of actual days elapsed over a 360-day
year.
This Term WCMA Note constitutes and includes both the "Term Note" and the "WCMA
Note" referred to in, and is entitled to all of the benefits of the Loan
Agreement. The Loan Agreement is by this reference hereby incorporated as a part
hereof.
If Customer shall fail to pay when due any installment or other sum due
hereunder, and any such failure shall continue for more than 5 Business Days
after written notice thereof from the holder hereof to Customer, or if any other
Event of Default shall occur and be continuing, then at the option of the holder
hereof, and in addition to all other rights and remedies available to such
holder under the Loan Agreement and otherwise, an amount equal to the sum of the
WCMA Loan Balance and the Term Note Balance at such time remaining unpaid,
together with all accrued and unpaid interest thereon and all other sums then
owing by Customer under the Loan Agreement, may be declared to be and thereby
become immediately due and payable.
It is expressly understood, however, that nothing contained in the Loan
Agreement, any other agreement, instrument or document executed by Customer, or
otherwise, shall affect or impair the right, which is unconditional and
absolute, of the holder hereof to enforce payment of all sums due under this
Term WCMA Note at or after maturity, whether by acceleration or otherwise, or
shall affect the obligation of Customer, which is also unconditional and
absolute, to pay the sums payable under this Term WCMA Note in accordance with
its terms. Except as otherwise expressly set forth herein or in the Loan
Agreement, Customer hereby waives presentment, demand for payment, protest and
notice of protest, notice of dishonor, notice of acceleration, notice of intent
to accelerate and all other notices and formalities in connection with this Term
WCMA Note.
Wherever possible each provision of this Term WCMA Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Term WCMA Note shall be prohibited by or invalid under such
law, such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Term WCMA Note.
Notwithstanding any provision to the contrary in this Term WCMA Note, the Loan
Agreement or any of the Additional Agreements, no provision of this Term WCMA
-2-
<PAGE>
Note, the Loan Agreement or any of the Additional Agreements shall require the
payment or permit the collection of any Excess Interest. If any Excess Interest
is provided for, or is adjudicated as being provided for, in this Term WCMA
Note, the Loan Agreement or any of the Additional Agreements, then: (a) Customer
shall not be obligated to pay any Excess Interest; and (b) any Excess Interest
that MLBFS may have received under this Term WCMA Note, the Loan Agreement or
any of the Additional Agreements shall, at the option of MLBFS, be: (i) applied
as a credit against the then unpaid principal balance of this Term WCMA Note, or
accrued and unpaid interest hereon not to exceed the maximum amount permitted by
law, or both, (ii) refunded to the payor thereof, or (iii) any combination of
the foregoing.
This Term WCMA Note shall be construed in accordance with the laws of the State
of Illinois and may be enforced by the holder hereof in any jurisdiction in
which the Loan Agreement may be enforced.
IN WITNESS WHEREOF, this Term WCMA Note has been executed by Customer as of the
day and year first above written.
DCC COMPACT CLASSICS, INC.
By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS
---------------------------------------------
Signature Signature (2)
Marshall Blonstein
- -------------------------------------------------
Printed Name Printed Name
President
- -------------------------------------------------
Title Title
-3-
<PAGE>
MERRILL LYNCH NO.9612340201
- --------------------------------------------------------------------------------
CLOSING CERTIFICATE
The undersigned, DCC COMPACT CLASSICS, INC., a corporation organized and
existing under the laws of the State of Colorado ("Customer"), as a primary
inducement to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to make a
loan to Customer (the "Loan") pursuant to that certain TERM WCMA LOAN AND
SECURITY AGREEMENT No.9612340201 between Customer and MLBFS dated as of December
6,1996 (the "Loan Agreement") DOES HEREBY REPRESENT, WARRANT AND AGREE AS
FOLLOWS:
1. All of Customer's representations and warranties in the Loan Agreement are
true and correct and remade as of the date hereof, and, without limiting the
foregoing: (i) subject only to "Permitted Liens" (as defined in the Loan
Agreement), MLBFS has a first lien and security interest upon all of the
"Collateral" under the Loan Agreement (including any Collateral financed or
refinanced with the proceeds of the Loan), and (ii) the Loan is being applied on
account of and will satisfy the "Loan Purpose" under the Loan Agreement.
2. There has not occurred any event which constitutes an "Event of Default"
under the Loan Agreement, or any event which with the giving of notice, passage
of time, or both would constitute such an Event of Default.
3. There has not occurred any material adverse change in the business or
financial condition of Customer since the date of the last financial statements
submitted to MLBFS.
4. MLBFS is hereby authorized and directed to disburse the proceeds of the Loan,
as follows:
Wire to WCMA Acct. No. 230-07N09.
Dated this 12 of 11 , 1996
---- ----
DCC COMPACT CLASSICS, INC.
By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS
---------------------------------------------
Signature Signature (2)
Marshall Blonstein
- -------------------------------------------------
Printed Name Printed Name
President
- -------------------------------------------------
Title Title
<PAGE>
MERRILL LYNCH
- --------------------------------------------------------------------------------
Certificate of Secretary
(Term WCMA Loan)
The undersigned hereby certifies that the undersigned is the duly appointed and
acting Secretary (or Assistant Secretary) of DCC COMPACT CLASSICS, INC., a
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado; and that the following is a true, accurate and
compared transcript of resolutions duly, validly and lawfully adopted on the day
of , 1996 by the Board of Directors of said corporation acting in accordance
with the laws of the state of incorporation and the charter and by-laws of said
corporation:
"RESOLVED, that it is advisable and in the best interests of this Corporation
that in connection with the Working capital Management Account that this
corporation is subscribing from Merrill Lynch, Pierce, Fenner & Smith
Incorporated it obtain from MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
("MLBFS") a combination term loan and line of credit referred to by MLBFS as a
"Term WCMA Loan"; and
"FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary
or other officer of this Corporation, or any one or more of them, be and each of
them hereby is authorized and empowered for and on behalf of this Corporation
to; (a) execute and deliver to MLBFS: (i) a Term WCMA Loan and Security
Agreement, Term WCMA Note, and all other agreements, instruments and documents
required by MLBFS in connection with said Term WCMA Loan, and (ii) any present
or future amendments to any of the foregoing; all in such form as such officer
shall approve, as conclusively evidenced by his signature thereon; (b) grant to
MLBFS such liens and security interests on any of the assets of this Corporation
as collateral for said Term WCMA Loan and/or the other obligations of this
Corporation to MLBFS as may be required by MLBFS; and (c) do and perform all
such acts and things deemed by any such officer to be necessary or advisable to
carry out and perform the undertakings and agreements of this Corporation in
connection therewith; and all prior acts of said officers in these premises are
hereby ratified and confirmed; and
"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation, which
change or revocation shall not in any event affect the obligations of this
Corporation with respect to any transaction committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS."
The undersigned further certifies that the foregoing resolutions have not been
rescinded, modified or repealed in any manner and are in full force and effect
as of the date of this Certificate, and that the following individuals are now
the duly elected and acting officers of said corporation:
President: /S/ Marshall Blonstein
-------------------------------------------
Vice President: Sam Passamano
--------------------------------------
Secretary: Bob Siner
-------------------------------------------
Treasurer:
-------------------------------------------
IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said corporation hereto, pursuant to due authorization, all
as of this 12 day of DECEMBER, 1996.
(Corporate Seal)
/S/ Marcia Mcgovern
--------------------------
Secretary
Marcia Mcgovern
--------------------------
Printed Name
<PAGE>
MERRILL LYNCH
- --------------------------------------------------------------------------------
PAYMENT AUTHORIZATION
The undersigned hereby authorizes and directs MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC. ("MLBFS") to charge to and pay out of the undersigned's WCMA
Account No. 230-07N09 all amounts necessary to pay the sum of $ 625.00,
representing the fees due to MLBFS in connection with the extension or
continuance of one or more credit facilities.
Dated as of December 11, 1996.
DCC COMPACT CLASSICS, INC.
By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS
---------------------------------------------
Signature Signature (2)
Marshall Blonstein
- -------------------------------------------------
Printed Name Printed Name
President
- -------------------------------------------------
Title Title
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DDC COMPACT CLASSICS, INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 155
<SECURITIES> 0
<RECEIVABLES> 1,148
<ALLOWANCES> 233
<INVENTORY> 1,064
<CURRENT-ASSETS> 2,558
<PP&E> 707
<DEPRECIATION> 117
<TOTAL-ASSETS> 4,230
<CURRENT-LIABILITIES> 3,070
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 1,051
<TOTAL-LIABILITY-AND-EQUITY> 4,230
<SALES> 4,666
<TOTAL-REVENUES> 4,666
<CGS> 2,184
<TOTAL-COSTS> 3,093
<OTHER-EXPENSES> 2,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (596)
<INCOME-TAX> (80)
<INCOME-CONTINUING> (516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (516)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
