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, 1997
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: $4,428,142.
Common Stock, par value $.005 per share ("Common Stock"), was
the only class of voting stock of the Registrant outstanding on April
9, 1998. Based on the closing bid price of the Common Stock on the
National Association of Securities Dealers, Inc. OTC Bulletin Board, as
reported on April 9, 1998 ($.27), the aggregate market value of the
$5,969,899 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 $1,611,870. 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 8,927,725 shares of its $.005 par value
Common Stock issued and outstanding as of April 9, 1998.
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
THE COMPANY
General
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 to replace 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 1996 represented in excess of 70% of all music sales in the $12
billion record industry.
A predominant portion of the Company's manufacturing process of CDs
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 Elvis Presley,
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 satisfied a segment of 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 the holders of music
masters. 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"
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series which features the best of a certain performance era or type of music.
The Company has 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 nonexclusive 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, under the
Company's trade labels, 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 100% 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 written image
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will appear on the bottom of the picture as a named theme or event. The film is
then loaded into the 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.
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 leisure-time consumer
products as they develop. The niche markets which are presently being pursued by
the Company are reissues of catalogs of music masters, 24k gold CDs and, a joint
venture in the market for audio books. The Company through Photo Dimensions
Inc., a wholly owned subsidiary acquired during 1996, has launched its new
product known as the "Single-Use Caption Camera."
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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 leisure-time consumer product
niche markets either through acquisition or license. Management believes that
the greatest growth will come from the Company's efforts to manufacture, 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 been successful in satisfying the consumer demand for
reissues and compilations of music originally issued on vinyl and
audio-cassettes. This success has been achieved both through the purchase,
exploitation and sale of catalogs of music masters and by licensing rights from
others of music masters for marketing.
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Licensing Agreements
The Company has 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
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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 was the exclusive
distributor for the Company's core market for CDs. However, during the spring
of 1997, the distributor, Passport Music Distributors, Inc., filed for
protection of the bankruptcy court under Chapter 11 of the Federal Bankruptcy
laws. The Company entered into distribution agreements with Distribution North
America and K-Tel to replace Passport Music. The Company continues 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
The Company's new product, the Single-Use Caption Camera, utilizes the
technology the Company acquired in its acquisition of Photo Dimensions, Inc. The
laser technology of pre-exposure burns a written image into the film which is
similar to laser printing on paper. The image appears 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 written image is burned on the film by the Company's
technology, the film is shipped to an assembler who constructs the disposable
cameras. The Company estimates the assembler will require approximately 30-60
days to complete the assembly of the cameras and ship the cameras to its
destination. This assembly process will allow the Company to ramp-up production
with relatively minimal lead-time and capital investment.
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The Company has entered into agreements with third party 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 disposable 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 disposable cameras so that 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 the wholesale market
for disposable cameras worldwide exceeded $1 billion in 1996 which represents
an estimated 200 million disposable cameras sold, with approximately 53 million
sold in the United States.
Patent -- U.S. Patent Number 5,615,396 was issued on March 25, 1997, to
Photo Dimensions, Inc., the Company's wholly owned subsidiary. The Patent is
entitled "Producing Smoothly Blended Double Exposure Composite Images." The
patent protects the invention of combining two images onto the same frame of a
film in a single photograph in a way that minimizes the known problems in the
prior act of poor image blending and visible lines of demarcation between
images. The invention utilizes a disposable camera, pre-exposed film and a
non-opaque exposure limiting device to uniquely create a composite photograph
that more aesthetically blends two images. The Company is investigating seeking
similar patents in Europe and Asia.
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
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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 the 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.
Employees -- The Company employs 12 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, which was the location of PDI, the Company's
wholly owned subsidiary, was closed on December 23, 1997. The production manger
and the chief engineer, who both worked at the North Carolina office, have
moved to the Company's California office.
ITEM 2. DESCRIPTION OF PROPERTIES
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
which covers a term of five years concluding April 2000 at an adjusted base
rental of approximately
$5,521 per month.
ITEM 3. LEGAL PROCEEDINGS
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
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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 lawsuit is 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, it is the opinion of counsel that the Company has
meritorious defenses to the lawsuit. Further, counsel believes that the
Company has meritorious claims against the defendants. In the opinion of
management, the lawsuit, when finally concluded, should not have a material
adverse effect on the Company's financial condition.
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
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
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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 are meritorious and that the
Company has meritorious defenses and offsets with respect to the
cross-complaint. In the opinion of management, the lawsuit, when finally
concluded, should not have a material adverse effect on the Company's financial
condition.
In a third matter, the Company filed a lawsuit during March 1997
against Robert Craig and RE-PAC corporation in the United States District Court
for the Central District of California. The complaint is for fraud, breach of
contract, intentional misrepresentation, negligent misrepresentation, and breach
of fiduciary duty. The lawsuit arises out of the contract entered into on June
30, 1996 to purchase Photo Dimensions, Inc. ("PDI") from RE-PAC corporation. PDI
is a wholly owned subsidiary of the Company and holds the patent on "Producing
Smoothly Blended Double Exposure Composite Images." Robert Craig is the inventor
of the process. The Company alleges in its complaint that Mr. Craig overstated
the revenues generated by PDI and understated the cost of equipment owned by
PDI. Further, it is alleged that Mr. Craig overbilled the Company for rent and
employee costs at the North Carolina facility, and that Mr. Craig had no
intention of transferring the patent to DCC by executing the necessary
documents. Counsel for the Company believes that the Company's claims against
the defendants are meritorious.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There was no matter submitted during the fourth quarter ended December
31, 1997 by the Company to a vote of the shareholders of common stock.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(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
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indicated. These quotations reflect prices between dealers, do not include
retail mark-ups, mark-downs or commission and may not necessarily represent
actual transactions.
Low High
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March 31, 1996 $1.75 $2.00
June 30, 1996 1.31 1.56
September 30, 1996 .63 1.25
December 31, 1996 .63 1.38
March 31, 1997 .81 .88
June 30, 1997 1.00 .50
September 30, 1997 .8125 .625
December 31, 1997 .6875 .25
March 31, 1998 .4375 .27
(b) As of April 9, 1998, there were 411 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
9, 1998 was $0.27.
(c) 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 RESULTS OF OPERATIONS
Overview
Overview -- The Company is in the business of developing, producing,
and marketing leisure - time consumer products under its three operating
divisions:
DCC Compact Classics has specialized during the last decade in
creating re-issues of the original masters of vinyl records of
recording artists by transferring original recording masters to high
quality CDs. Some of the recording artists are Elvis Presley, Frank
Sinatra, Miles Davis, The Eagles, Creedence Clearwater Revival, The
Beach Boys, and the Doors. DCC Compact Classics also
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creates compilations of re-issues based on specific musical genres
and themes. DCC Compact Classics produces the highest quality CDs and
vinyl record albums available in the marketplace at competitive
prices, and is one of the industry leaders in the manufacturing
process of CDs which utilizes a coating of 24k gold.
Romance Alive has operated as a partnership since 1993 with
the objective of satisfying the growing interest of adult women in audio romance
novels. During 1995, Romance Alive switched from distributing its audio tape
novels to entering into a contract with Time Warner Books for product
distribution into the marketplace. Disappointment with the results of the switch
caused management during the beginning of 1998 to re-evaluate the profitability
potential of audio romance novels in the marketplace. Commencing in February
1998, the Company has been in negotiations to enter into a contract with one or
more distributors so that management's involvement will become passive, and
which should reduce any future financial commitment by the Company. Management's
goal is to enter into a contract so that the Company receives a royalty based on
the volume of sales.
Photo Dimensions, Inc. ("PDI") is a wholly owned subsidiary
which the Company acquired during July 1996. PDI is the holder of a patented
technological process utilized in the Single-Use Caption Camera. The essence of
the technology is the combining of a pre- written caption at the bottom of the
frame of film with the picture. The captions come in three basic versions: a
generic statement for example: It's a Boy!, It's a Girl, Happy Birthday, Merry
Christmas; locations (cities and states), major attractions, theme parks, and
professional sports teams; and premium users such as large corporations. Since
the acquisition of PDI, management has concentrated its effort to refine the
manufacturing process used in the disposable camera for the purpose of mass
production to meet the projected demand for the Single-Use Caption Camera.
The Company is investigating seeking similar patents in Europe and Asia.
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Key Factors Affecting Financial Conditions -- Two key factors are
responsible for the net losses incurred during the calendar years ended December
31, 1996 and 1997 which disrupted the Company's yearly profitability since 1990.
One factor is the bankruptcy during 1997 of Passport Music Distributors, Inc.,
the Company's, and one of the entire music industry's, largest distributor. The
second factor is the acquisition costs of Photo Dimensions, Inc., and the costs
incurred to establish production capacity to manufacture the Single-Use Caption
Camera.
During 1996, the Company changed its primary distributor for the sale
of compact discs to one national distributor, Passport Music Distributors, Inc.,
as opposed to eight regional distributors. The change was intended to enable
management to devote a greater percentage of their time and energy to the
production, marketing and sales of the Single-Use Caption Camera. 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.
Passport Music's 1997 filing for protection of the bankruptcy court
under Chapter 11 of the Federal Bankruptcy Laws was an unanticipated set back
for the Company. The Company reduced its accounts receivable by approximately
$617,000 including $200,000 previously reserved for uncollectible accounts
receivable. Related royalties were written down by approximately $250,000, and
approximately $385,000 was recorded as returned inventory. The charges taken by
the Company as the result of the bankruptcy by Passport Music are one-time
charges which have been absorbed by the Company. The Company entered into
distribution agreements during 1997 with Distribution North American and with
K-Tel to replace Passport Music. The training of the two distributors' sales
staff has been completed and the distributors have adequate levels of inventory
to sell the Company's musical products under a new marketing and sales program.
The Company's acquisition of Photo Dimensions, Inc. ("PDI"), which was
completed during July 1996, resulted in the Company incurring significant
acquisition costs and other expenses. During 1997, a significant amount of
management's time and company expense was incurred developing the manufacturing
capacity to produce the
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patented process used in the Single-Use Caption Camera. While the technology of
the Camera is patented, the ability to apply the technology into the mass
production of film and disposable cameras required significant modifications
during 1997 to the production process. The production modification caused
delays in fulfilling orders during 1997 for the Single-Use Caption Camera.
During February 1998, the Company received delivery of its custom built,
high-speed printer which will allow in-house production of the locational and
premium-user versions of the caption film by increasing production capacity to
20,000 cameras per day from 1,500 cameras per day. The Company has recently
entered into a contract with a Hong-Kong based company to mass produce the
generic statements version of the disposable camera. Moving forward, management
believes that the Company is positioned to process the anticipated volume of
orders for the Camera.
Outlook -- The Company's 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. Management believes that the factors which were responsible for the
net losses for the Company's calendar years ended December 31, 1996, and 1997,
will not be repeated. Management has implemented plans which hopefully will
result in the Company returning to profitability for its calendar year ending
December 31, 1998. There can be, however, no assurance that revenue growth and
profitability will be achieved or 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 -- Twelve Months Ended December 31,
1997 compared to Twelve Months Ended December 31, 1996.
Revenues -- Revenues for the twelve months ended December 30, 1997
("Calendar 1997") were $4,428,142 versus $4,665,576 for the twelve months ended
December 30, 1996 ("Calendar 1996"). Revenues for Calendar 1997 from music
recordings / master tapes and
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the Single-Use Caption Camera were $3,720,404 and $636,347, respectively. There
were only nominal sales of the Camera during Calendar 1996. Revenues for
Calendar 1996 from music recordings / master tapes were $4,418,193. Sales for
Calendar 1997 from Romance Alive were $26,391 and compared to $175,405 for
1996. Sales of compact discs were down for Calendar 1997 from Calendar 1996 by
approximately 15% due primarily to the bankruptcy of Passport Music and the
return of the inventory of compact discs from both terminated agreements with
distributors and from Passport Music.
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
1998 and surpass revenues generated by its compact disc product line beyond
1998. For calendar year ending December 31, 1998, management is forecasting that
revenues generated from the sales of the Camera to be approximately $3,000,000,
with most of the sales occurring during the last six months of 1998.
Cost of Sales -- Cost of Sales for Calendar 1997 and Calendar 1996
were $2,811,367 and $2,184,121, respectively. Royalties for Calendar 1997 were
$601,159 compared to $908,748 for Calendar 1996. The increase in the cost of
sales for Calendar 1997 verses Calendar 1996 of $627,246, representing an
increase of 29%, resulted in a decrease in the gross profit margin to 23% for
Calendar 1997 verses 34% for Calendar 1996. The increase in the cost of sales
is primarily attributed to the high costs of achieving the production runs of
the Single-Use Caption Camera. The Single-Use Caption Camera had little impact
on the cost of sales during the Calendar 1996. As sales of the Camera increase
during 1998, and for future years, management plans to subcontract field sales,
distribution, billing and collection. Subcontracting such services is the same
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%.
Selling, Administrative, and Other Operating Expenses -- Selling,
Administrative, and operating expenses of operations for Calendar 1997 were
$2,453,927 versus $2,204,054 for Calendar 1996. The 11% increase is attributable
to the overhead associated with operating the facility in Salem, North Carolina
in which Photo Dimensions, Inc., the Company's wholly owned subsidiary, was
17
<PAGE>
housed. Overhead was incurred for most of Calendar 1997 whereas the overhead was
incurred for less than six months for Calendar 1996. During December 1997, the
North Carolina facility was closed and expenses were incurred to move the
facility to the Company's Chatsworth, California location. More significantly,
the adverse effects to the Company of the Chapter 11 bankruptcy of Passport
Music Distributors, Inc., resulted in total charges of approximately
$635,000 being taken by the Company during Calendar 1997.
Other Income (Expenses) -- Other income of $70,000 received during
Calendar 1997 represents a legal settlement relating to a discontinued
distribution agreement. Interest expense increased to $94,253 for Calendar 1997
from $39,896 for Calendar 1996 due to
increased borrowings by the Company.
Liquidity and Capital Resources -- At the end of Calendar 1997, the
Company had negative working capital of $913,942 compared to negative working
capital of $512,000 at the end of Calendar 1996. The selling of shares of the
Company's common stock during Calendar 1997 in private placements raised a net
amount of $989,200 and was an important source of capital to fund the operating
losses of Calendar 1997 which drained capital from the Company. During 1998, the
Company received $630,000 from certain individuals, most of whom are directors
of the Company, as loans pursuant to certain commitment agreements entered into
between the individuals and the Company. Under the agreements the loans are to
converted into equity during 1998. The loan proceeds were used as working
capital and to fund net losses incurred by the Company for its calendar quarter
ended March 31, 1998.
The Company's line of credit with Merrill Lynch Business Financial
Services, Inc. matures on June 30, 1998. Also, $150,000 of long-term debt is
maturing during the calendar year ending December 31, 1998. The Merrill Lynch
line of credit is a revolving line which matures each June 30th. The renewal of
the line of credit is important to the Company. Although Merrill Lynch has
agreed to renew the line of credit for each of the last five years, Merrill
Lynch has not begun the process of determining whether to renew the line of
credit. Management does not know at this time whether Merrill Lynch will agree
to renew the line of credit.
18
<PAGE>
Management anticipates returning to profitability for its calendar year
ending December 31, 1998. If this assumption proves correct, then the strain on
the Company's liquidity will be partially alleviated. However, in the shore-run,
management anticipates the need to raise capital to satisfy its working capital
needs. Management has been active in pursuing additional financing. There can be
no assurances that additional financing will be available in sufficient and
timely amounts.
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
disposable 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
Private Securities Litigation Reform Act of 1995). Because such forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward- looking statements. All
statements which address operating performance, events or development that
management expects or anticipates to occur in the future, including statements
relating to sales and earnings growth or statements expressing general optimism
about future operating results, are forward-looking statements. The forward
looking statements are based on managements current views and assumptions
regarding future events and operating performance. Many factors could cause
actual results to differ materially from estimates contained in management's
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 calendar year ended December 31, 1995, the only calendar year
audited by the firm, or any subsequent
19
<PAGE>
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 calendar years ended December 31,
1996 and December 31, 1997. 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. The six
directors have been nominated for election at the Company's annual meeting of
stockholders scheduled on May 26, 1998 and to serve for one year or until their
successors are elected and qualify. Officers are elected by the Board of
Directors and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.
Name Age Position
---- --- --------
Marshall Blonstein 53 President, Chief Executive
Officer, Chief Financial
Officer, Director
Samuel J. Passamano, Jr. 42 Senior Vice President,
General Manager, Director
Martin M. Cooper 56 Chairman, Director, Interim
Chief Operating Officer
Leonard Hecht 61 Director
Carl LoBue 52 Director
Robert L. Siner 56 Director
20
<PAGE>
Mr. Blonstein and Mr. Passamano devote their full time to the business
of the Company. At the present time, no other person, other than those listed
above, have been chosen or nominated to become a director of the Company.
During April 1998, Mr. Dan Montano resigned as a director of the Company, a
position which he held since August 1997.
Marshall Blonstein -- Mr. Blonstein was a co-founder of the Company.
He has been President, Chief Executive Officer and a Director since the 1987
acquisition by the Company of Dunhill Compact Classics, Inc., 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.
21
<PAGE>
Martin M. Cooper -- Mr. Cooper has been Chairman and a Director of the
Company since August 1997. Mr. Cooper is President of Cooper Communications,
Inc., which he founded in 1982. The firm provides management and marketing
services to corporate, governmental, and non-profit clients. Many of the firm's
corporate clients are Fortune 500 companies. Prior to forming his own firm, Mr.
Cooper was Senior Vice President of Marketing and Communications for Playboy
Enterprises, Inc. From 1971 to 1979, Mr. Cooper was Senior Vice President of
Harshe-Rotman & Druck Public Relations, Inc. From 1968 to 1979, he was director
of Marketing for Universal Studios' Recreation Division. From 1963 to 1968, Mr.
Cooper was Disneyland's Advertising and Promotion manager. Mr. Cooper teaches
marketing, management, and public relations courses at UCLA.
Leonard Hecht -- Mr. Hecht has been a Director of the Company since
August 1997. Mr. Hecht has been a director of Osicon Technologies, Inc. since
June 1996. He has been President of Chrysalis Capital Group which he founded in
1994. The firm is an investment banking company specializing in mergers,
acquisitions, and financings. From 1987 to 1993, Mr. Hecht was Managing
Director of the Investment Banking Group and head of the Technology Assessment
Group of Houlihan, Lokey, Howard & Zukin, a financial advisory firm. From 1984
to 1987, Mr. Hecht was the Vice Chairman of the Board and Chief Executive
Officer of Quantech Electronics Corp., a diversified publicly-held electronics
company. Prior to joining Quantech, Mr. Hecht was a founding principal of Xerox
Development Corporation, a wholly-owned subsidiary of the Xerox Corporation.
Xerox Development Corporation was active in strategic planning, mergers and
acquisitions, divestitures, licensing, joint ventures and venture investing for
the Xerox Corporation.
Carl A. LoBue -- Mr. LoBue has been a Director of the Company since
August 1997. Mr. LoBue is Chairman of the Board of Directors of LoBue
Associates, Inc.,which he founded in 1981. The firm provides consulting
services to the financial services industry. From 1979 to 1981, he was a senior
Vice President of Crocker National Bank from 1970 to 1979, Mr. LoBue was a Vice
President of Citibank, N.A. Mr. LoBue's banking experience includes the
management of up to 800 staff personnel in the departments of marketing, sales,
credit, operations, systems and client management.
22
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Cash 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, 1997 aggregated approximately $165,000. Set
forth below is summary compensation table in the tabular format specified in the
applicable rules of the 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
Annual Compensation Long Term Compensation
<TABLE>
<CAPTION>
Awards Payouts
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, 1997 $165,000 ----- $6,300 - ---- - ---
CEO 1996 $165,000 $50,000 $3,000 - 500,000 - $3,000
1995 $150,000 ----- $6,000 - 200,000 - ---
* Personal use of Company vehicle
</TABLE>
Employment Contract -- 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.
Options / SAR Grants in Last Fiscal Year -- The Company did not grant
any stock options nor stock appreciation rights to any of its executives during
1997. During 1997, 75,000 stock options were issued to independent consultants
at an exercise price of $1.00 per share to expire on April 1, 2000.
23
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Option/SARs Option/SARs
Shares at FY-End (#) at FY-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Marshall Blonstein 0 0 900,000 $117,250
</TABLE>
Compensation of Directors -- The directors were not compensated for
services provided in their capacity as directors to the Company for the fiscal
year ended December 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth Common Stock ownership as of March 31,
1998 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 8,927,725 shares of the Company's Common Stock issued and
outstanding as of April 9, 1998.
Shares Percent
Name Beneficially Owned(1) of Class
Marshall Blonstein(2) 3,137,835 31.9%
All Officers and
Directors as a Group
(6 persons)................ 3,387,835 34.5%
(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 900,000 shares of Common Stock issuable upon exercise of
certain options by Mr. Blonstein.
(3) Includes 900,000 shares and 50,000 shares of Common Stock issuable
upon exercise of certain options by Mr. Blonstein and Mr. Passamano,
respectively.
24
<PAGE>
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.
During December 1997, the Company entered into a consulting contract
with Cooper Communications, Inc. ("CCI"). CCI is owned by Martin Cooper who is a
director of the Company. Under the contract CCI is to provide management and
marketing consulting services to the Company for a period of six months
commencing January 1, 1998. The consulting fee is $7,000 each month for a total
of $42,000 for the six month term of the contract.
During January 1997, the Company entered into a contract with C&K
Capital Corporation ("C&K"). Under the contract, C&K's affiliate, C.K. Cooper &
Company ("C.K."), acted as managing dealer of a private placement made by the
Company during 1997. Dan Montano, who was a director of the Company, is an
officer of C&K and C.K. Pursuant to the private placement, the Company sold
1,970,000 shares of Common Stock at $.050 a share during 1997 to accredited
investors (as such term is defined in Rule 501 promulgated under the Securities
Act). As compensation for serving as managing agent, C&K received ten percent of
the funds raised, and the Company agreed to issue 97,000 warrants to C&K which
equaled ten percent of the amount raised. The warrants have a three-year
conversion period during which each warrant can be converted into one share of
Common Stock at $0.50 a share.
1995 Stock Option Plan -- The 1995 Stock Option Plan (the "1995 Plan")
provides for the grant of options ("Options") to acquire the Company's Common
Stock. The Board of Directors, or the Compensation Committee, of the Company is
authorized to issue Options which meet the requirements of Section 422 of the
Internal Revenue Code, as amended (the "Code"), and are known as incentive
stock options ("ISOs"), Options which are not ISOs ("NSOs") and ISOs or NSOs
which upon exercise have a provision that new Options are issued ("Reload
Options"). The aggregate number of shares of Common Stock which may be
purchased pursuant to the exercise of Options under the 1995 Plan is 5,000,000.
If any change is made to the Common Stock subject to the 1995 Plan (on account
of stock dividends, recapitalization resulting in stock split-ups, or
combinations or exchanges of shares of Common Stock, or otherwise), the 1995
Plan provides that appropriate adjustments will be made as to the maximum
number of shares subject to the 1995 Plan and the number of shares and exercise
price per share of Common Stock subject to the outstanding Options. There are
currently outstanding Options to acquire 1,300,000 shares of Common Stock under
the 1995 Plan.
The Company believes that the 1995 Plan represents an important factor
in attracting and retaining executives and other key employees, as well as
consultants. ISOs may be granted only to individuals who have been employed by
the Company, or subsidiary, for a continuous period of at least sixty days. NSOs
may be granted to such employees, any director of the Company, or subsidiary, or
any consultant of the Company or subsidiary.
25
<PAGE>
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.
(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
- ------ -----------------------
3.1 Articles of Incorporation(1)
3.2 Articles of Correction dated September 8, 1987(1)
3.2.1 Amendment to Articles of Incorporation filed August 10, 1989(2)
3.2.2 Amendment to Articles of Incorporation dated February 13, 1991
3.2.3 Amendment to Articles of Incorporation dated December 10, 1996
3.2.4 Amendment to Articles of Incorporation dated April 17, 1997
3.2.5 Amendment to Articles of Incorporation dated September 18, 1997
3.3 Bylaws(3)
26
<PAGE>
10.1 Employment Agreement - dated February 1, 1996 with Marshall
Blonstein (4)
10.2 Agreement with Passport Music (4)
10.3 Lease for Chatsworth, California (5)
10.4 Line of Credit documents with Merrill Lynch Business Financial
Services, Inc. (5)
10.5 Partnership Agreement with Romance Alive Audio, Inc.(4)
10.6 $250,000 Term Loan Documents with Merrill Lynch Business
Financial Services, Inc. (5)
10.7 Stock Purchase Agreements
10.8 Registration Agreement
10.9 Distribution North American Agreement, dated June 4, 1997
(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 the Annual Report on Form 10-KSB for the year ended December
31, 1996, as filed with the Securities and Exchange Commission.
(5) 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.
27
<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 18th day of May, 1998.
DCC COMPACT CLASSICS, INC.
By: /s/Marshall Blonstein
------------------------------
Marshall Blonstein
Director, Chief Executive
Officer, and Chief
Financial 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
<TABLE>
<S> <C> <C>
/s/Marshall Blonstein Director, President and May 18, 1998
- -------------------------- Principal Executive, Financial
Marshall Blonstein and Accounting Officer
/s/Samuel J. Passamano,Jr. Senior Vice President, May 18, 1998
- -------------------------- General Manager, and
Samuel J. Passamano, Jr. Director
/s/Martin M. Cooper Chairman of the Board, May 18, 1998
- -------------------------- Director, and Interim
Martin M. Cooper Chief Operating Officer
/s/Carl A. LoBue Director May 18, 1998
- --------------------------
Carl A. LoBue
</TABLE>
28
<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 9-20
F-1
<PAGE>
DCC COMPACT CLASSICS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1996
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of DCC Compact Classics, Inc and Subsidiaries.
I have audited the accompanying consolidated balance sheets of DCC Compact
Classics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years 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
audits.
I conducted my audits 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
F-2
<PAGE>
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 audits
provide 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, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses in the development of its
Photo Dimensions subsidiary and has a working capital deficit that raise
substantial doubt about its ability to continue as a going concern unless
additional capital is obtained or operational profitability is achieved.
Management's plans to raise capital and achieve profitability are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Hurley & Company
Granada Hills, CA
March 20, 1998
F-3
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 98,320 $ 155,222
Accounts receivable, net
of bad debt and return
allowances of $380,670
and $233,061, respectively 1,254,343 915,215
Notes receivable 125,000 125,000
Officer receivable 15,000 -
Inventories 1,342,253 1,063,563
Advance royalties 258,453 218,663
Prepaid expenses 53,435 -
Income taxes receivable 51,363 80,000
------------- ------------
Total current assets 3,198,167 2,557,663
------------- ------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 31,957 39,033
Machinery and equipment 805,770 650,540
Leasehold improvements 15,928 16,935
------------- ------------
853,655 706,508
Less accumulated depreciation
and amortization 225,616 117,151
------------- ------------
628,039 589,357
------------- ------------
OTHER ASSETS
Deferred income taxes 46,864 46,864
Mastering costs, net 686,259 650,761
Intangibles, net 241,713 270,151
Other 51,521 52,762
------------- ------------
1,026,357 1,020,538
------------- ------------
Total assets $4,852,563 $4,167,558
============= ============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 770,202 $ 710,025
Accounts payable 1,082,205 472,087
Royalties payable 2,110,475 1,731,134
Other accrued expenses 37,661 3,358
Deferred revenue - 78,485
Current portion of long-term debt 150,000 75,000
------------- -------------
Total current liabilities 4,150,543 3,070,089
------------- -------------
LONG-TERM DEBT, net of current portion 191,250 75,000
------------- -------------
Total liabilities 4,341,793 3,145,089
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, par value $.005
per share; authorized 10,000,000
shares, issued and outstanding
8,927,725 and 6,746,725 shares 44,639 33,734
Additional paid-in capital 2,105,617 1,094,322
Accumulated deficit (1,639,486) (105,587)
------------- -------------
Total stockholders' equity 510,770 1,022,469
------------- -------------
Total liabilities and
stockholders' equity $4,852,563 $ 4,167,558
============= =============
The accompanying notes are an integral part of these financial statements.
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996
and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Net Sales $ 4,428,142 $4,665,576 $4,200,596
Cost of sales (2,811,367) (2,184,121) (1,730,639)
Royalties (601,159) (908,748) (921,780)
----------- ---------- ----------
Gross profit 1,015,616 1,572,707 1,548,177
Selling, administrative
and other operating
expenses 2,453,927 2,204,054 1,405,848
----------- ---------- ----------
Operating
income (loss) (1,438,311) (631,347) 142,329
Other income (expense)
Interest income 642 10,274 41,316
Interest expense (94,253) (39,896) (34,488)
Other income 70,000 2,504 -
Loss on disposal of assets (37,313) - -
----------- ---------- ----------
Income (loss) before
income tax provision (1,499,235) (658,465) 149,157
Income tax
provision (benefit) 34,664 (80,001) 49,900
----------- ---------- ----------
Net income (loss) $(1,533,899) $ (578,464) $ 99,257
=========== ========== ==========
Earnings (loss)
per share-basic $ (.19) $ (.09) $ .02
=========== ========== ==========
Weighted-average number of
shares outstanding-basic 7,954,318 6,188,614 4,960,506
=========== ========== ==========
Earnings (loss)
per share-diluted $ (.19) $ (.09) $ .02
=========== ========== ==========
Weighted-average number of
shares outstanding-diluted 7,954,318 6,188,614 6,498,374
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 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 - (578,464) (578,464)
------------ --------- ---------- --------- ------------ ----------
Balance 12/31/96 6,746,725 $ 33,734 $1,094,322 $ - (105,587) $1,022,469
Additional shares sold 2,131,000 10,655 1,070,345 - - 1,081,000
Shares issued for
services 50,000 250 32,750 - 33,000
Private placement fees - - (91,800) - - (91,800)
Net loss - (1,533,899) (1,533,899)
------------ --------- ---------- --------- ----------- ----------
Balance 12/31/97 9,127,725 $ 44,639 $2,105,617 $ - $ (1,639,486) $ 510,770
============ ========= ========== ========= ============ ==========
</TABLE>
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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,533,899) $ (578,464) $ 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 144,898 347,869 217,585
Loss on disposal of assets 37,313 - -
Deferred income taxes - (13,764) -
Changes in:
Receivables (339,128) 525,241 (432,820)
Inventories (278,690) (110,762) 101,134
Employee receivable (15,000) - -
Royalty advances (39,790) (55,075) 133,573
Prepaid expenses (53,435) - -
Other 1,241 96,336 (28,273)
Accounts payable and
accrued expenses 659,408 9,172 (447,917)
Royalties payable 379,341 (226,108) 198,868
Deferred revenue (78,485) 78,485 -
Income taxes 28,637 (176,001) 49,900
------------ ------------ ----------
Total adjustments 446,310 475,393 (207,950)
Net cash used in
operating activities (1,087,589) (103,071) (108,693)
------------ ------------ ----------
Cash flows from investing activities:
Capital expenditures (192,945) (416,269) (17,211)
Proceeds from sale of
master tapes - - 150,000
Proceeds from sale of assets 490 - -
Marketable securities - 400,000 (400,000)
Mastering costs (35,498) (359,121) (294,496)
------------ ------------ ----------
Net cash used in
investing activities (227,953) (375,390) (561,707)
------------ ------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings-line of credit $ 1,120,190 $ 685,314 $ 1,274
Payments on line of credit (1,075,000) (293,463) -
Additional long term debt 250,000 250,000 -
Repayments on long term debt (58,750) (250,000) -
Issuance of common stock 1,114,000 110,006 -
Private placement fees (91,800) - -
------------- ------------ ----------
Net cash provided by
financing activities 1,258,640 501,857 1,274
------------- ------------ ----------
Net increase (decrease) in
cash and cash equivalents (56,902) 23,396 (669,126)
Cash and cash equivalents
at beginning of year 155,222 131,826 800,952
------------ ------------ ----------
Cash and cash equivalents
at end of year $ 98,320 $ 155,222 $ 131,826
============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 34,664 $ 49,555 $ -
============ ============ ==========
Interest paid $ 88,862 $ 33,896 $ 33,488
============ ============ ==========
Non-Cash Transactions
Issuance of common 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 $ -
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Basis
The consolidated financial statements of "the Company" include the
accounts of DCC Compact Classics, Inc., "DCC", its wholly owned
subsidiary, Photo Dimensions, Inc. "PDI", and its 70% owned
partnership, Romance Alive Audio "RAA". All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated
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 changes to the calculations
be made by these agencies, final settlement of the obligations is
recorded in the Company's operations in the year in which the review is
completed. Also, 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 consolidated financial statements.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company
disclose estimated fair values for its financial instruments. The
following summary presents a description of the methodologies and
assumptions used to determine such amounts.
Fair value estimates are made at a specific point in time and are based
on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties,
matters of judgement and, therefore, cannot be determined with
precision. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Changes in assumptions could
significantly affect the estimates.
Since the fair value is estimated at December 31, 1997, the amounts
that will actually be realized or paid at settlement of the instruments
could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the
fair value because of the liquidity of these instruments. Accounts
receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. The recorded
balance of notes payable are assumed to be the fair value since the
rates specified in the notes approximate current market rates.
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and on deposit and
highly liquid debt instruments with original maturities of 90 days or
less. Substantially all funds are on deposit with one financial
institution.
Inventories
Inventories are stated at the lower of cost, on a first-in first-out
basis, or market and consist of the following at December 31, 1997 and
1996:
1997 1996
------------- -----------
Raw materials-music $ 566,307 $ 206,353
Raw materials-romance audio 35,130
Raw materials-single use camera 30,632
Finished goods-music 689,168
Finished goods-romance audio 36,068 857,210
Finished goods-single use camera 14,948
Reserve for obsolescence-music (30,000)
------------- ------------
Total $ 1,342,253 $1,063,563
============ ===========
Property and Equipment
Property and equipment are stated at cost. 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. Amortization of
leasehold improvements is computed over the expected useful life of the
improvements of 5 years using the straight-line method.
Goodwill
Goodwill of $284,370, connected with the purchase of Photo Dimensions,
Inc., is being amortized over 10 years on a straight-line basis.
Accumulated amortization of goodwill was $42,657 and $14,219 as of
December 31, 1997 and 1996, respectively.
Mastering costs
Costs incurred for mastering, including artwork and recording costs,
are capitalized and charged to expense on a straight-line basis over
the estimated period of benefit of 4 years. Mastering costs consist of
the following at December 31, 1997 and 1996:
F-11
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
1997 1996
------------ -----------
Mastering costs $1,488,638 $1,144,314
Accumulated amortization (802,379) (493,553)
-------------- -----------
Total $ 686,259 $ 650,761
========== ===========
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, noncancellable 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 remaining performance period, which is generally the period
covered by the license agreement. The above policies are in accordance
with SFAS No. 50, pertaining to financial accounting and reporting in
the "Record and Music Industry".
Advertising and promotional costs
Advertising and promotional costs are expensed as incurred. Advertising
and promotional expenses were $210,928 and $224,262 in 1997 and 1996,
respectively.
Earnings (loss) per share
Earnings (loss) 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.
F-12
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 2. BASIS OF PRESENTATION
During the two years ended December 31, 1997 and 1996, the Company's
operations were negatively impacted by expenses incurred to bring Photo
Dimensions to full operations, increased costs associated with music
recordings, by the large amounts of sales returns due to the change of
the Company's main distributor from Navarre to Passport Music, and the
subsequent bankruptcy of Passport Music (see note 13). Management's
plans to return to profitability are two-fold. First, Photo Dimensions
has been moved into the Chatsworth, California location, so that
management is closer to production and can work to fulfill sales
commitments that previously could not be filled timely. Management
expects that the Photo Dimensions subsidiary will be able to generate
working capital in 1998 after reaching higher levels of sales. Also,
management expects camera production costs will be lower per unit since
production has been brought in house.
Secondly, management believes that the large amount of sales returns
received in 1997 and 1996 will not be repeated. Also, management is
expecting a larger percentage of sales of gold and vinyl products,
traditionally higher margin items. Music sales are projected to be at
historical levels.
Management has obtained some additional financing subsequent to
year-end and is expecting to raise more capital to meet its short-term
working capital requirements.
It is not possible to predict the success of management's subsequent
efforts to achieve profitability and raise capital. If management is
unable to achieve its goals, the Company may find it necessary to
undertake actions as may be appropriate to continue operations and meet
its commitments.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of the
recorded asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31, 1997 and
1996:
1997 1996
----------- -----------
Accounts receivable $ 1,635,013 $ 1,148,276
Allowance for sales returns (205,000) (118,000)
Allowance for doubtful accounts (175,670) (115,061)
----------- -----------
$ 1,254,343 $ 915,215
=========== ===========
NOTE 4. NOTES RECEIVABLE
The Company has been awarded damages of $125,000 from a lawsuit
judgement in 1994. This award was confirmed by the Supreme Court of the
State of New York in the fall of 1996
F-13
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 4. NOTES RECEIVABLE (continued)
and is currently in the enforcement stage.
In 1997, the Company loaned a director/officer of the Company $15,000.
No repayment terms have been set.
NOTE 5. LINE OF CREDIT
The Company has a revolving line of credit for $750,000, and additional
unsecured business credit facilities of $35,000, of which $750,000 and
$694,137 of the credit line and $20,202 and $15,888 of the business
lines had been used at December 31, 1997 and 1996, respectively. The
unused portions of the revolving credit line were $0 and $55,863, and
the unused portions of the business credit facilities were $14,798 and
$19,112 as of December 31, 1997 and 1996, respectively. 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 day commercial paper plus 2.9%, which equaled 8.75% and 8.8% at
December 31, 1997 and 1996, respectively. The line of credit expires
June 30, 1998. The interest rates on the unsecured business lines were
approximately 15% and 17% at December 31, 1997 and 1996, respectively.
Interest expense on the outstanding lines for the years ended December
31, 1997, 1996, and 1995 was $68,748, $30,559, and $33,688
respectively.
NOTE 6 LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the
following:
December 31, December 31,
1997 1996
------------ -------------
Note payable, secured by
substantially all the assets
of DCC, payable in monthly
installments of $4,167.
Interest accrues at a bank
reference rate plus 2.9%,
currently 8.4%. Matures
2002. $ 216,250 $ -
Note payable, secured by substantially all the assets of Photo
Dimensions, Inc, payable in semi-annual installments of $25,000, plus
interest at 8% per annum.
Matures 1999. $ 125,000 $ 150,000
------------ -----------
341,250 150,000
F-14
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 6 LONG-TERM DEBT (continued)
Less current portion 150,000 75,000
--------- ---------
$ 191,250 $ 75,000
========= =========
Current maturities of this debt are as follows:
Year ended December 31, 1998 $ 150,000
1999 75,000
2000 50,000
2001 50,000
2002 16,250
---------
$ 341,250
=========
NOTE 7. RELATED PARTY TRANSACTIONS
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 10 and 11 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.
The spouse of the Company's president received management fees from
Romance Alive Audio during the years ended December 31, 1997, 1996, and
1995 of approximately $26,000, $18,000, and $20,400 respectively.
NOTE 8. 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 payments over the next three years are as follows:
For the year ended December 31, 1998 $ 66,253
1999 66,253
2000 22,084
--------
$154,590
========
NOTE 9. ACQUISITION OF PHOTO DIMENSIONS
In June 1996, the Company paid $75,000 in cash, and issued a note for
$150,000 (see note 6 above) along with 300,000 shares of common stock
in exchange for the assets (predominately equipment used to produce
captioned photographs along with goodwill) that
F-15
<PAGE>
NOTE 9. ACQUISITION OF PHOTO DIMENSIONS (continued)
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 $192,030 of property and equipment and $284,370 in
goodwill.
NOTE 11. 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 1999 to April 2000. The following
summarizes transactions pertaining to these agreements for the years
ended December 31, 1997 and 1996:
Option price
Shares per share
------------ ------------
Options outstanding at 1/1/96 1,900,000 .05 to .20
Exercised (1,200,000) .05 to .13
Expired (25,000) .10
Granted 550,000 .13 to .50
---------- -----------
Options outstanding at 12/31/96 1,225,000 .13 to .50
Options granted in 1997 75,000 1.00
---------- -----------
Options outstanding at 12/31/97 1,300,000 .13 to 1.00
========== ===========
Of the 550,000 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. No
options were granted to officers in 1997. 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 (loss)
and earnings (loss) per share for the years ended December 31, 1997, 1996 and
1995 would have been as follows:
F-16
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 11. STOCK OPTIONS (continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Net income (loss) As reported $(1,533,899) $(578,464) $ 99,257
Pro forma - (960,963) (320,993)
Earnings (loss)
per share As reported (.19) $ (.09) $ .02
Pro forma - (.16) (.07)
</TABLE>
NOTE 11. CAPITAL STOCK
The Company issued 50,000 shares for $33,000 and 35,000 shares for
$15,750 in 1997 and 1996, respectively, to certain individuals who had
performed services for the Company.
An additional 2,331,000 shares of common stock were issued for
$1,081,000 in 1997 in a private placement offering. Fees associated
with this offering of $91,800 were charged to additional paid-in
capital
1,449,999 common stock options were exercised during the year ended
December 31, 1996 for $160,250 at exercise prices ranging from $0.05 to
$0.13 per share, including 725,000 options held by the Company's
president (see note 7 and note 10 above).
The income tax provision (benefit) consisted of the following for the
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
----------- --------- ---------
Federal income tax
provision(benefit) $ 33,864 $ (80,801) $ 41,421
State income tax provision 800 800 8,479
----------- --------- ---------
Total income tax
provision (benefit) $ 34,664 $ (80,001) $ 49,900
=========== ========= =========
1997 1996 1995
----------- --------- ---------
Current $ 34,664 $ (66,237) $ 49,900
Deferred - (13,764) -
----------- --------- ---------
$ 34,664 $ (80,001) $ 49,900
=========== ========= =========
The differences between the effective income tax rate and the statutory
federal income tax rate were as follows:
F-17
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 11. CAPITAL STOCK (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax
provision (benefit)
at statutory income
tax rate $ (509,740) $(202,788) $ 41,421
State franchise tax
provision (benefit) net
of federal income
tax effect (87,471) (17,776) 8,479
Rate differential due to
utilization of federal net
operating loss carryback - 26,760 -
Other (54,933) (13,764) -
Overaccrual - prior years 6,808 (22,433) -
Valuation allowance 680,000 150,000 -
---------- ---------- ---------
Income tax provision
(benefit) $ 34,664 $ (80,001) $ 49,900
========== ========== =========
<CAPTION>
Significant components of the Company's deferred tax asset at December
31, 1997, 1996 and 1995 were:
1997 1996 1995
---------- ---------- ---------
Benefit of federal and
state net operating
loss carryforward $ 647,256 $ 113,804 $ -
Bad debt and returns
allowance 163,079 46,864 -
Royalty reserve 21,420 - -
Accrued officer expense - 33,100
Other - net 98,233 36,196 -
Valuation allowance (829,676) (150,000) -
---------- ---------- ---------
Deferred tax asset $ 46,864 $ 46,864 $ 33,100
========== ========== =========
</TABLE>
The Company incurred federal net operating losses of approximately
$1,500,000 and $600,000 for 1997 and 1996, respectively, of which
approximately $300,000 of the 1996 loss is being carried back to prior
years. Accordingly, an estimated receivable in the amount of $51,000
has been recorded at December 31, 1997 in anticipation of a federal
income tax refund. The remaining federal net operating loss
carryforward has a tax benefit of approximately $100,000. Timing
differences, primarily from allowances for returns and royalties, were
approximately $267,000 in 1997 and approximately $50,000 in 1996.
F-18
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 11. CAPITAL STOCK (continued)
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.
Federal net operating losses of $300,000 expire in 2011 and
approximately $1,500,000 expire in the year 2012. Approximately
$275,000 of the California net operating loss carryforward expires in
the year 2001, and approximately $60,000 expires in 2002.
NOTE 13. 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 of products. Passport was expected to account for 70% of the
Company's sales. Navarre had represented approximately 60% of the
Company's sales prior to termination. In July 1997, Passport filed for
protection under Chapter 11 of the Bankruptcy Code. Passport
subsequently returned products totaling approximately $472,000.
$298,000 of this product was then sold to other distributors. At
December 31, 1996 the Company had an outstanding receivable balance
from Passport of approximately $358,000, which was collected in 1997 in
the form of returns and cash payments.
NOTE 14. 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. The Company's Counsel and Management
have reached a tentative agreement with PSI that would not materially
affect the Company's financial position.
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 to be in the
F-19
<PAGE>
DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 14. LITIGATION (continued)
$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 as a result
of the suit to the Company's financial condition. The suit is scheduled
to go to trial in late April 1998.
In 1997, the Company was named in a lawsuit filed by Robert Craig and
Re-Pac Corporation in the United States District Court in North
Carolina. The lawsuit alleges a breach of contract by the Company of a
promissory note to Re-Pac, and nonpayment of consulting fees to Robert
Craig in connection with the acquisition of the Photo Dimensions
subsidiary. The Company's president posted a $250,000 bond on behalf of
the Company relating to this lawsuit, pledging his personal shares of
the Company's stock. The Company has filed a counter suit alleging
misrepresentation by Robert Craig as president of Re-Pac Corporation in
the purchase of Photo Dimensions, Inc. and the fraudulent invoicing of
rent, employee wages and expenses of Photo Dimensions, Inc. Both cases
are in the discovery stage.
NOTE 15. SUBSEQUENT EVENT
In 1998, standby letters of intent to purchase stock in the Company
were signed by certain members of the Board of Directors. As of May
1998, $630,000 had been received relating to these letters in the form
of loans earning 8% interest in lieu of dividends. These loans will be
converted to equity at a later date.
NOTE 16. 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.
F-20
<PAGE>
NOTE 16. BUSINESS SEGMENTS (continued)
<TABLE>
<CAPTION>
Income (Loss) Depreciation
Before Income Capital and
Sales* Tax Provision Assets Expenditures Amortization
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Music recordings and master tapes $3,765,404 $ (452,613) $3,541,385 $ 15,413 $ 10,090
Romance audio 26,391 (110,460) 181,234 325 2,442
Single use camera 636,347 (875,238) 1,129,943 177,207 132,366
---------- -------------- ---------- ----------- ----------
$4,428,142 (1,438,311) $4,852,562 $ 192,945 $ 144,898
========== ============== ========== =========== ==========
Net interest expense (income) and other 60,924
-------------
$(1,499,235)
=============
Year ended December 31, 1996:
Music recordings and master tapes $4,418,193 $ (356,979) $3,015,018 $ 1,968 $ 256,129
Romance audio 175,405 (59,668) 277,389 41,632
Single use camera 71,978 (214,700) 875,151 50,108
---------- ------------- ---------- ----------- ----------
$4,665,576 (631,347) $4,167,558 $ 608,299 $ 347,869
========== ============= ========== =========== ==========
Net interest expense (income) and other 27,118
-------------
$ (658,465)
=============
Year ended December 313, 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 61,848
---------- ------------- ---------- ----------- ----------
$4,200,596 142,329 $4,137,368 $ 217,585
========== ============= ========== =========== ==========
Net interest expense (income) and other (6,828)
-------------
$ 149,157
=============
</TABLE>
*All sales were made to unaffiliated customers and there were no
intersegment sales.
F-21
<PAGE>
EXHIBIT 3.2.2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
DCC COMPACT CLASSICS, INC.
02-15-91 16:26
911009873 $30.00
DCC COMPACT CLASSICS, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the Colorado Corporation Code, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of said corporation, by written unanimous
consent filed with the minutes of the board, adopted the following resolutions
proposing and declaring advisable the following amendment to the Articles of
Incorporation of said corporation:
1. That Article "IV" Paragraph "1" of the Articles of Incorporation be
amended and, as amended, reads as follows:
"1. The aggregate number of shares which this corporation shall have
authority to issue is ten million (10,000,000) shares, all of one class, of
$.005 par value, which shares shall be designated "Common Stock."
SECOND: That the aforesaid amendment was duly adopted on January 14, 1991, at
a special meeting of stockholders in accordance with the applicable provisions
of Section 7-2-107 of the Colorado Corporation Code.
THIRD: Upon the filing of these Articles of Amendment to the Articles of
Incorporation with the Colorado Secretary of State, all issued and outstanding
shares of the Corporation's Common Stock shall be reverse split on a
one-for-fifty basis. Any stockholder desiring to exchange his, her, or its
common stock certificate(s) for new certificate(s) that reflect this reverse
split, should contact the Corporation.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by Marshall Blonstein, its President, and attested by Marcia McGovern,
its Secretary, this 13th day of February, 1991.
DCC COMPACT CLASSICS, INC.
/s/
---------------------------------
By: Marshall Blonstein, President
ATTEST
By: /s/
------------------------------
Marcia McGovern, Secretary
<PAGE>
EXHIBIT 3.2.3
FILED COPY
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
DCC COMPACT CLASSICS, INC.
961166545 C $25.00
SECRETARY OF STATE
12-23-96 12:42
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
adopted 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 10th day of
December, 1996.
DCC COMPACT CLASSICS, INC.
/s/
---------------------------------
By: Marshall Blonstein, President
ATTEST
By: /s/
---------------------------
Marcia McGovern, Secretary
<PAGE>
EXHIBIT 3.2.4
DPC19871699824
FILED COPY
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
DCC COMPACT CLASSICS, INC.
19971095185
$ 25.00
SECRETARY OF STATE
06-16-97 11:27:07
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: An amendment {the "Amendment") to the Articles of Incorporation was
adopted on November 27, 1996, as prescribed by the Colorado Business Corporation
Act, by a vote of the shareholders whose number of such votes was sufficient for
approval.
THIRD: Upon the December 23, 1996 filing date of the Amendment, all issued and
outstanding shares of Common Stock of the Corporation held by each shareholder
of record on October 23, 1996 was to be combined at a rate of one for three
(1:3).
FOURTH: The October 23, 1996 record date stated in the Amendment is hereby
changed to October 1, 1997. The Amendment shall remain in full force and effect
in all other respects.
IN WITNESS WHEREOF, the undersigned being the President of this
Corporation has executed these Articles of Amendment as of the 17th day of
April, 1997.
DCC COMPACT CLASSICS, INC.
/s/
---------------------------------
By: Marshall Blonstein, President
ATTEST
By: /s/
--------------------------
Marcia McGovern, Secretary
<PAGE>
EXHIBIT 3.2.5
FILED COPY
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
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: An amendment (the "Amendment") to the Articles of Incorporation was
adopted on November 27 1996, as prescribed by the Colorado Business Corporation
Act, by a vote of the shareholders whose number of such votes was sufficient for
approval.
THIRD: Upon the December 23, 1996 filing date of the Amendment, all issued and
outstanding shares of Common Stock of the Corporation held by each shareholder
of record on October 23, 1996 were to be combined at a rate of one for three
(1:3). The Articles of Incorporation were amended, with a firing date of June
16, 1997, 50 that the October 23 1996 filing date was changed to October 1,
1997.
FOURTH: The October 1, 1997 record date is hereby changed to April 1, 1998 The
Amendment shall remain in full force and effect in all other respects.
IN WITNESS WHEREOF, the undersigned being the President of this
Corporation has executed these Articles of Amendment as of the 18th day of
September, 1997.
DCC COMPACT CLASSICS, INC.
/s/
---------------------------------
By: Marshall Blonstein, President
ATTEST
By: /s/
---------------------------
Marcia McGovern, Secretary
19971152753 M
$ 25.OO
SECRETARY OF STATE
09-24-97 11:09:49
EXHIBIT 10.7
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of March 28, 1997, is entered
into by and between DCC COMPACT CLASSICS, INC., A COLORADO CORPORATION ("DCC"),
and DAYSTAR PARTNERS, L.P., A CALIFORNIA LIMITED PARTNERSHIP ("DayStar").
FACTUAL BACKGROUND
DayStar wishes to purchase from DCC, and DCC wishes to sell to DayStar,
shares of DCC'S Common Stock, $.005 par value ("Common Stock"). DayStar and DCC
desire to provide for the foregoing purchase and sale and to establish various
rights and obligations in connection therewith. Certain other persons (the
"Other Purchasers") will purchase Common Stock under Agreements substantially
similar to this Agreement. The Other Purchasers and DayStar are collectively
referred to as the "Purchasers."
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. SALE OF SHARES.
Subject to the terms and conditions of this Agreement, at the Closing
(as defined below), DCC will sell and issue to DayStar, and DayStar will
purchase, 80,000 shares of Common Stock (the "Shares") for a total price in cash
of Eighty Thousand Dollars ($80,000) (the "Total Purchase Price"), which equals
$1.00 per Share (the "Share Purchase Price"). The Shares shall be subject to a
Registration Rights Agreement (the "Registration Rights Agreement"),
substantially in the form of Exhibit A hereto. DCC hereby authorizes Day Star to
deduct from the purchase price of the Shares $7500 on account of the legal
expenses which the Purchasers incur in negotiating and documenting this
Agreement, which legal expenses DCC has agreed to reimburse upon presentation of
invoice.
2. THE CLOSING.
2.1 Closing. The closing ("Closing") of this transaction shall
take place at the offices of Coblentz, Cahen, McCabe & Breyer, LLP ("CCMB"), 222
Kearny Street, 7th Floor, San Francisco, California 94108 at 10:00 a.m. on the
date hereof (the "Closing Date"), or at such other time, date and place as are
mutually agreeable to DCC and DayStar.
2.2 Delivery. At the Closing, subject to the terms of this
Agreement, DCC will deliver or cause to be delivered to DayStar, against
DayStar's payment at the Closing of the Total Purchase Price by one or more
checks or by wire transfer to an account or accounts designated by DCC, a stock
certificate or certificates evidencing the Shares in such denominations as
DayStar has requested, dated the Closing Date and registered in the name or
names requested by DayStar.
STOCK PURCHASE AGREEMENT Page 1
<PAGE>
3. REPRESENTATIONS OF DCC. DCC hereby represents, warrants and
covenants to DayStar as follows:
3.1 Organization and Standing. DCC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it and to enter into and
perform this Agreement and to carry out the transactions contemplated by this
Agreement. DCC is duly qualified to do business as a foreign corporation and is
in good standing in all states and jurisdictions in which the nature of the
business conducted or property owned by DCC make such qualification necessary.
DCC has furnished DayStar with copies of its Certificate of Incorporation and
its Bylaws and those of any subsidiaries. Said copies are true, correct, and
complete and contain all amendments through the date of the Closing.
3.2 Due Authorization. The execution and delivery of this
Agreement and the consummation by DCC of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on behalf of DCC.
This Agreement, when executed and delivered, will have been duly executed and
delivered by DCC and constitutes a valid and binding agreement of DCC,
enforceable in accordance with its terms.
3.3 Issuance of Shares. The issuance, sale and delivery of the
Shares in accordance with this Agreement have been duly authorized by all
necessary corporate action on the part of DCC, and all the Shares have been duly
reserved for issuance. The Shares, when issued and delivered against payment
therefor, will be duly and validly issued, fully paid and non-assessable. The
Shares are not subject to any preemptive rights or any right of first refusal
and the issuance of the Shares will not give rise to any such rights.
3.4 Exchange Act Documents.
3.4.1 DCC has been subject to the requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") for a period of at least twelve calendar months immediately
preceding the Closing Date hereof and has filed in a timely manner all reports
required to be filed during the twelve calendar months immediately preceding
the Closing Date (the "Exchange Act Documents"). At the time of filing, the
Exchange Act Documents conformed in all material respects to the requirements
of the Exchange Act and all the rules and regulations thereunder, and none of
such documents contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so filed, when
such documents become effective or are filed with the Securities and Exchange
Commission (the "Commission"), as the case may be, will conform in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder, and none of such documents will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
3.4.2 The financial statements (together with the
related notes thereto) contained in the Exchange Act Documents present fairly
the financial position of DCC and its consolidated subsidiaries as of and at
the dates indicated and the results of their operations for the
STOCK PURCHASE AGREEMENT Page 2
<PAGE>
periods specified; and except as otherwise disclosed in the Exchange Act
Documents, said financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied. The accountants
who have audited certain financial statements included in the Exchange Act
Documents are independent public accountants as required by the Exchange Act and
the rules and regulations thereunder.
3.4.3 The information set forth in the Form 10KSB
filed by DCC on May 30, 1996 (the "10K") is complete and accurate in all
material respects as of the Closing Date, and since the date of the 10K, except
as otherwise stated therein, (i) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of DCC and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) there have been
no transactions entered into by DCC or any of its subsidiaries, other than
those in the normal course of business, which are material with respect to DCC
and its subsidiaries considered as one enterprise and (iii) except for regular
dividends on the common stock in amounts per share that are consistent with
past practice, there' has been no dividend or distribution of any kind
declared, paid or made by DCC on any class of its capital stock.
3.5 Compliance with Other Instruments, None Burdensome, etc.
DCC is not in violation of any term of its Articles of Incorporation or Bylaws,
or in any material respect of any mortgage, indenture, contract, agreement,
instrument, or, to DCC's best knowledge, any judgment, decree, order, statute,
rule, or regulation applicable to it. The execution, delivery, and performance
by DCC of this Agreement and the issuance and sale of the Shares pursuant
hereto, will not result in any such material violation or be in conflict with or
constitute a material default under any such term, or cause the acceleration of
maturity of any loan or material obligation to which DCC is a party or by which
it is bound or with respect to which it is an obligor or guarantor, or result in
the creation or imposition of any material lien, claim, charge, restriction,
equity or encumbrance of any kind whatsoever upon, or, to DC C's best knowledge
give to any other person any interest or right (including any right of
termination or cancellation) in or with respect to any of the material
properties, assets, business or agreements of DCC. To DCC's best knowledge, no
such term or condition materially adversely affects the business, property,
prospects, condition, affairs, or operations of DCC.
3.6 Governmental Consents. Other than the timely filing of a
Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act") and similar Blue Sky notification, no consent,
approval, order or authorization of; or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by DayStar in Section 4 hereof the offer and sale of
the Shares to DayStar will be in compliance with applicable Federal and state
securities laws.
3.7 Registration Rights. Except for the grant of registration
rights to the Purchasers as contemplated by the provisions hereof; DCC is not
under any obligation to register any of its presently outstanding securities or
any of its securities which may hereafter be issued.
STOCK PURCHASE AGREEMENT Page 3
<PAGE>
3.8 Patents, Trademarks, etc. Except as set forth on Schedule
3.8, DCC owns and possesses or licenses all patents, patent applications,
licenses, trademarks, service marks, trade names, brand names, inventions, trade
secrets, processes, formulae, copyrights, hardware and software necessary for
the operation of its business as now conducted and as proposed to be conducted
(the "Intellectual Property"). DCC has not received any notice or claim of
infringement of any rights, trademarks, trade names, trade secrets, copyrights
or other intellectual property or proprietary rights of others with respect to
DCC's operation of its business. To the knowledge of DCC, except as set forth on
Schedule 3.8, the Intellectual Property does not infringe upon or violate any
rights, trademarks, trade names, trade secrets, copyrights or other intellectual
property or proprietary rights of any person or entity.
3.9 Insurance. DCC has adequate insurance, with financially
sound and reputable insurers, with respect to its business and properties which
are of a character customarily insured by corporations of established reputation
engaged in the same or a similar business and similarly situated, against loss
or damage of the kinds customarily insured against by such corporations, which
insurance is of such types (including public liability and workmen's
compensation insurance) as are customarily carried under similar circumstances
by such other corporations.
3.10 Use of Proceeds. The net proceeds from the sale of the
Shares shall be used as set forth in Schedule 3.10 hereto. DCC shall not
directly or indirectly use such proceeds for any other purpose.
3.11 Disclosure. Neither this Agreement (including, without
limitation, the Schedules and the Exhibits hereto), nor any other document
delivered to DayStar or its counsel or agents in connection herewith contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading. To the best of DCC's knowledge, there is no fact (or facts) which
(individually or in the aggregate) materially adversely affects the business,
prospects, condition, affairs, or operations of DCC or its properties or assets
which has (or have) not been set forth in this Agreement and the Schedules and
Exhibits hereto.
4. REPRESENTATIONS OF DAYSTAR. DayStar hereby represents and warrants
to DCC as follows:
4.1 Investment. DayStar is acquiring the Shares for its own
account for investment and not with a view to, or for sale in connection with,
any distribution thereof, nor with any present intention of distributing or
selling the same.
4.2 Authority. DayStar has lull power and authority to enter
into and to perform this Agreement in accordance with its terms.
4.3 Experience. DayStar has sufficient knowledge and
experience in investing in companies similar to DCC so as to be able to evaluate
the risks and merits of its investment in DCC.
STOCK PURCHASE AGREEMENT Page 4
<PAGE>
4.4 Legend. DayStar understands that the stock certificate
representing the Shares shall bear a legend substantially to the following
effect:
THE SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE
REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO DCC IS
OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
4.5 Accredited Investor. DayStar is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act.
5. COVENANTS OF DCC. DCC hereby covenants and agrees as follows:
5.1 Consents and Best Efforts. Subject to the terms and
conditions provided herein, DCC covenants and agrees to use its commercially
reasonable best efforts to take, or cause to be taken, all action or do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby and to cause the fulfillment of its obligations hereunder.
5.2 Notification of Certain Matters. DCC shall give prompt
notice to Day Star, and DayStar shall give prompt notice to DCC, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect as of the Closing Date and (ii)
any material failure of DCC or DayStar, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder, and each party shall use all reasonable efforts to remedy same.
5.3 Nondisclosure Agreements. DCC shall require all key
managers and other key employees now or hereafter employed by DCC who have
access to confidential and proprietary information of DCC to enter into
nondisclosure agreements in a form that is commercially reasonable.
5.4 Exchange Act Reports. Following the Closing, DCC shall
deliver to DayStar all reports required to be filed by it pursuant to the
Exchange Act and the rules and regulations thereunder concurrently with
transmittal of such reports to the Commission.
5.5 Board Visitation Rights. DCC shall allow DayStar, on
behalf of the Purchasers, to have one observer present at all meetings of the
Board of Directors and committees of the Board of Directors and such observer
shall be entitled to participate in discussions and consult with the Board of
Directors and committees of the Board of Directors, without voting. To
facilitate such visitation, DCC shall provide DayStar with written notice of all
such meetings not later than it provides such notice to its directors.
STOCK PURCHASE AGREEMENT Page 5
<PAGE>
6. CLOSING CONDITIONS. The obligations of DayStar hereunder are
subject to Day Star's satisfaction in its sole discretion with the results of
its due diligence investigation and to the fulfillment or waiver on or before
the Closing of the following conditions:
6.1 Representations and Warranties True. All representations
and warranties of DCC made in Section 3 or otherwise under or pursuant to this
Agreement shall be true on the Closing Date and DCC shall have delivered to Day
Star a certificate of an authorized officer of DCC dated the Closing Date,
certifying to such effect.
6.2 Instruments and Proceedings to be Satisfactory. All
instruments and corporate proceedings relating to the sale of the Shares
hereunder by DCC or otherwise relating to the transactions contemplated hereby
shall be satisfactory to DayStar.
6.3 Other Agreements. All documents and instruments specified
for delivery at the Closing shall have been executed and delivered by DCC and
DayStar, as appropriate.
6.4 Due Diligence and Legal Fees. DCC shall pay at the Closing
or, if the estimated amount paid at closing is insufficient, promptly upon
demand all of the reasonable fees and expenses of counsel to DayStar incurred in
connection with the preparation and negotiation of this Agreement and the
Closing of the transactions contemplated hereby. In addition, DCC shall pay all
reasonable fees and expenses of counsel for DayStar in connection with any
amendment of any document contemplated hereby, any waiver under such document
and any consultation or action related to enforcement thereof.
6.5 Legal Opinion. Richard Leach, as counsel to DCC, shall
have executed and delivered to DayStar a legal opinion, dated the Closing Date,
in form and substance satisfactory to counsel for DayStar covering the matters
set forth in Schedule 6.6 hereto.
6.6 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
the value of the Shares, DayStar's registration rights, or DCC.
6.7 Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions (including the materials
provided to DayStar and its special counsel) shall be reasonably satisfactory in
substance and form to DayStar and its special counsel, and DayStar and its
special counsel shall have received all such counterpart originals or certified
or other copies of such documents as they may reasonably request.
STOCK PURCHASE AGREEMENT Page 6
<PAGE>
7. CONDITION TO THE OBLIGATIONS OF DCC. The obligations of DCC
hereunder are subject to the fulfillment or waiver of the following conditions
on or before the Closing:
7.1 Accuracy of Representations and Warranties. The
representations and warranties of DayStar contained in Section 4 shall be true
on the Closing Date.
7.2 Purchase Price. Payment of the applicable purchase price
to DCC as set forth in Section 2 hereof.
7.3 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
DCC.
8. GENERAL.
8.1 Indemnity.
(a) Each party agrees to indemnify and save harmless the
other party hereto and such other party's officers, directors, employees and
agents, and each person who controls such other party within the meaning of the
Securities Act or the Exchange Act, from and against any and all costs,
expenses, damages, claims, actions, diminution in value or other liabilities,
including costs of investigation and defense (collectively, "Damages") suffered
or incurred by the indemnified party as a result of any breach by the
indemnifying party of any of its agreements, representations, warranties or
covenants contained in this Agreement, other than Damages resulting, directly
or indirectly from the breach by the indemnified party of any of its
agreements, representations, warranties or covenants contained herein;
provided, however, that if and to the extent that such indemnification is
unenforceable for any reason, the indemnifying party shall make the maximum
contribution to the payment and satisfaction of such indemnified liability
which shall be permissible under applicable law.
(b) The indemnified party under this Section 8.1 will,
promptly after the receipt of notice of the commencement of any action against
such indemnified party in respect of which indemnity may be sought from the
indemnifying party on account of an indemnity agreement contained in this
Section 8.1, notify the indemnifying party in writing of the commencement
thereof. The omission of any indemnified party to so notify the indemnifying
party of any such action shall not relieve the indemnifying party from any
liability which it may have to such indemnified party except to the extent the
indemnifying party shall have been materially prejudiced by the omission of
such indemnified party to so notify the indemnifying party, pursuant to this
Section 8.1. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof
the indemnifying party shall be entitled to participate therein and, to the
extent that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof the indemnifying party will not be liable to such indemnified party
under this Section 8.1 for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof nor for any
settlement thereof entered into without
STOCK PURCHASE AGREEMENT Page 7
<PAGE>
the consent of the indemnifying party; provided, however, that (i) if the
indemnifying party shall elect not to assume the defense of such claim or action
or (ii) if the indemnified party reasonably determines (x) that there may be a
conflict between the positions of the indemnifying party and of the indemnified
party in defending such claim or action or (y) that there may be legal defenses
available to such indemnified party different from or in addition to those
available to the indemnifying party, then separate counsel for the indemnified
party shall be entitled to participate in and conduct the defense, in the case
of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the
indemnifying party shall be liable for any reasonable legal or other expenses
incurred by the indemnified party in connection with such defense(s);
(c) All representations and warranties made by the parties
herein or in any instrument or document finished in connection herewith shall
survive the Closing and any investigation at any time made by or on behalf of
the parties hereto. All such representations and warranties shall expire on the
second anniversary of the respective Closing Dates, except for claims, if any,
asserted in writing prior to such second anniversary, which shall survive until
finally resolved and satisfied in full. All claims and actions for indemnity
pursuant to this Section 8 for breach of any representation or warranty shall
be asserted or maintained in writing by a party hereto on or prior to the
expiration of such two-year period.
8.2 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by reputable overnight courier or mailed by first class certified or
registered mall, return receipt requested, postage prepaid:
If to DCC: 9301 Jordan Avenue, No.105
Chatsworth, CA 91311
Attention: President
With copy to: Richard Leach
22900 Ventura Boulevard, No.110
Woodland Hills, CA 91364
If to DayStar: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attention: Larry Wells
With copy to: Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
Notices provided in accordance with this Section 8.2 shall be deemed
delivered upon personal delivery, one business day after deposit with a
reputable overnight delivery service, or two business days after deposit in the
mail. Any party may change its address for notice by notice similarly given.
STOCK PURCHASE AGREEMENT Page 8
<PAGE>
8.3 Further Assurances. Upon the terms and subject to the
conditions contained herein, each of the parties hereto agrees, both before and
after the Closing, (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement, (ii) to execute any documents, instruments or conveyances of any
kind which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder or thereunder, and (iii) to cooperate with
each other in connection with the foregoing, including, without limitation,
using their respective best efforts (A) to obtain all consents, approvals and
waivers from any person necessary to permit the consummation of the transactions
contemplated by this Agreement, and (B) to fulfill all conditions to this
Agreement.
8.4 Specific Enforcement. DayStar, on the one hand, and DCC,
on the other, acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction to
prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they may be entitled at law or
equity.
8.5 Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
8.6 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of DCC and DayStar. No waivers of or
exceptions to any term, condition or provision of this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
8.7 Survival. The representations, warranties, covenants, and
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by DayStar.
8.8 Successors and Assigns. All covenants and agreements
contained herein shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns, provided, however, that DCC may not
assign any of its rights or delegate its duties without the prior written
consent of Day Star.
8.9 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
8.10 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
STOCK PURCHASE AGREEMENT Page 9
<PAGE>
8.11 Governing Law; Jurisdiction; Venue. This Agreement shall
be governed by and construed in accordance with the laws of the State of
California as applied to contracts executed and entirely performed within
California. Any litigation or arbitration between the parties which arises out
of this Agreement shall be instituted and prosecuted only in the appropriate
California or Federal court or other tribunal, situated in San Francisco,
California. DCC specifically submits itself and its properties to the exclusive
jurisdiction of such courts for purposes of any such action and the enforcement
of any judgment or order arising therefrom. DCC waives any right to a change of
venue and any and all objections to the jurisdiction of the California courts.
Notwithstanding the foregoing, DayStar may take such actions in a foreign
jurisdiction which DayStar deems necessary and appropriate to enforce or collect
any court judgment in any dispute arising out of this Agreement or to seek and
obtain other relief as is necessary to enforce the terms of this Agreement. Each
party agrees that service upon such party in any such action or proceeding may
be made by first class mail, certified or registered, return receipt requested
as provided for the giving of notices in Section 8.2.
Executed as of the date first written above.
DCC:
DCC COMPACT CLASSICS, INC.
a California corporation
By:________________________________________
Title:______________________________________
DayStar:
DAYSTAR PARTNERS L.P.,
a California limited partnership
By: LARRY WELLS CO., INC., its
General Partner
By: _____________________________
Larry Wells, President
N:\USER\SCK\Wells\DCC\STCKPUR6.doc
STOCK PURCHASE AGREEMENT Page 10
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibits
Exhibit A - Form of Registration Rights Agreement
Schedules
Schedule 3.8 - Intellectual Property
Schedule 3.10 - Use of Proceeds
Schedule 6.6 - Matters to be Covered by Legal Opinion
STOCK PURCHASE AGREEMENT
EXHIBITS AND SCHEDULES
<PAGE>
SCHEDULE 3.8
OF
THE STOCK PURCHASE AGREEMENT
INTELLECTUAL PROPERTY
There are no exceptions to be set forth on this Schedule 3.8 in accordance with
Section 3.8, Patents; Trademarks, etc., of the Stock Purchase Agreement.
<PAGE>
SCHEDULE 3.10
OF
THE STOCK PURCHASE AGREEMENT
USE OF PROCEEDS
The net proceeds from the sale of the SHARES are to be used as follows:
Application $Amount Percentage
- ----------- ------- ----------
Purchase of additional equipment to $200,000 22.22%
employ the laser technology which
burns the image onto the film used
in the Single Use Caption Camera.
Marketing and Advertising of the $300,000 33.33%
Single Use Caption Camera
Reserve related to trade financing $200,000 22.22%
for purchase orders of the Single
Use Caption Camera
Working capital $300,000* 22.22%
-------- ------
Total $1,000,000 100.00%
*commissions, legal fees and other costs of placement will be paid from working
capital.
<PAGE>
SCHEDULE 6.6
MATTERS TO BE COVERED BY LEGAL OPINION
OF_____________________
(1) DCC is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has full corporate power
and authority to conduct its business as presently conducted and as proposed to
be conducted by it and to enter into and perform this Agreement and to carry out
the transactions contemplated by this Agreement. DCC is duly qualified to do
business as a foreign corporation and is in good standing in all states and
jurisdictions in which the nature of the business conducted or property owned by
DCC make such qualification necessary.
(2) The execution and delivery of this Agreement and the consummation
by DCC of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on behalf of DCC. This Agreement, when executed and
delivered, will have been duly executed and delivered by DCC and constitutes a
valid and binding agreement of DCC, enforceable in accordance with its terms.
(3) The issuance, sale and delivery of the Shares in accordance with
this Agreement have been duly authorized by all necessary corporate action on
the part of DCC. The Shares, when issued and delivered against payment therefor,
will be duly and validly issued, fully paid and non-assessable. The Shares are
not subject to any preemptive rights or any right of first refusal right nor
will the issuance of the Shares give rise to any such rights.
(4) DCC has been subject to the requirements of Section 12 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") for a
period of at least twelve calendar months immediately preceding the Closing
Date, and has filed in a timely manner all reports required to be filed during
the twelve calendar months immediately preceding the Closing date (the "Exchange
Act Documents"). At the time of filing, the Exchange Act Documents (other than
financial statements, schedules and other financial data included therein as to
which such counsel need not express any opinion) conformed in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder.
(5) DCC is not in violation of any term of its Articles of
Incorporation or Bylaws, or in any material respect of any mortgage, indenture,
contract, agreement, instrument, or, to such counsel's best knowledge, any
judgment, decree, order, statute, rule, or regulation applicable to it. The
execution, delivery, and performance by DCC of the Agreement and the issuance
and sale of the Shares pursuant hereto, will not result in any such violation or
be in conflict with or constitute a default under any such term, or cause the
acceleration of maturity of any loan or material obligation to which DCC is a
party or by which it is bound or with respect to which it is an obligor or
guarantor, or result in the creation or imposition of any material lien, claim,
charge, restriction, equity or encumbrance of any kind whatsoever upon, or, to
such counsel's best knowledge give to any other person any interest or right
(including any right of termination or
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 1
<PAGE>
cancellation) in or with respect to any of the material properties, assets,
business or agreements of DCC. To such counsel's best knowledge, no such term
or condition materially adversely affects the business, property, prospects,
condition, affairs, or operations of DCC.
(6) Other than the timely filing of a Form D pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
no consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by DayStar in Section 4 of the Agreement, the offer
and sale of the Shares to DayStar will be in compliance with applicable Federal
and state securities laws.
(7) Except for the grant of registration rights to the Purchasers as
contemplated by the provisions hereof DCC is not under any obligation to
register any of its presently outstanding securities or any of its securities
which may hereafter be issued.
(8) To such counsel's best knowledge, DCC has not received any notice
or claim of infringement of any rights, trademarks, trade names, trade secrets,
copyrights or other intellectual property or proprietary rights of others with
respect to DCC's operation of its business.
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 2
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of March 28, 1997, is entered
into by and between DCC COMPACT CLASSICS, INC., A COLORADO CORPORATION ("DCC"),
and SUNDANCE VENTURE PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP
("Purchaser").
FACTUAL BACKGROUND
Purchaser wishes to purchase from DCC, and DCC wishes to sell to
Purchaser, shares of DCC's Common Stock, $.005 par value ("Common Stock").
Purchaser and DCC desire to provide for the foregoing purchase and sale and to
establish various rights and obligations in connection therewith. Persons other
than Purchaser (the "Other Purchasers") have purchased, or will purchase Common
Stock under agreements substantially similar to this Agreement. The Other
Purchasers and Purchaser are collectively referred to as the "Purchasers."
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. SALE OF SHARES.
Subject to the terms and conditions of this Agreement, at the Closing
(as defined below), DCC will sell and issue to Purchaser, and Purchaser will
purchase, 150,000 shares of Common Stock (the "Shares") for a total price in
cash of One Hundred Fifty Thousand Dollars ($150,000) (the "Total Purchase
Price"), which equals $1.00 per Share (the "Share Purchase Price"). The Shares
shall be subject to a Registration Rights Agreement (the "Registration Rights
Agreement"), substantially in the form of Exhibit A hereto.
2. THE CLOSING.
2.1 Closing. The closing ("Closing") of this transaction shall
take place at the offices of Coblentz, Cahen, McCabe & Breyer, LLP ("CCMB"), 222
Kearny Street, 7th Floor, San Francisco, California 94108 at 10:00 a.m. on
______________, 1997 (the "Closing Date"), or at such other time, date and place
as are mutually agreeable to DCC and Purchaser.
2.2 Delivery. At the Closing, subject to the terms of this
Agreement, DCC will deliver or cause to be delivered to Purchaser, against
Purchaser's payment at the Closing of the Total Purchase Price by one or more
checks or by wire transfer to an account or accounts designated by DCC, a stock
certificate or certificates evidencing the Shares in such denominations as
Purchaser has requested, dated the Closing Date and registered in the name or
names requested by Purchaser.
STOCK PURCHASE AGREEMENT Page 1
<PAGE>
3. REPRESENTATIONS OF DCC. DCC hereby represents, warrants and
covenants to Purchaser as follows:
3.1 Organization and Standing. DCC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it and to enter into and
perform this Agreement and to carry out the transactions contemplated by this
Agreement. DCC is duly qualified to do business as a foreign corporation and is
in good standing in all states and jurisdictions in which the nature of the
business conducted or property owned by DCC make such qualification necessary.
DCC has furnished Purchaser with copies of its Certificate of Incorporation and
its Bylaws and those of any subsidiaries. Said copies are true, correct, and
complete and contain all amendments through the date of the Closing.
3.2 Due Authorization. The execution and delivery of this
Agreement and the consummation by DCC of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on behalf of DCC.
This Agreement, when executed and delivered, will have been duly executed and
delivered by DCC and constitutes a valid and binding agreement of DCC,
enforceable in accordance with its terms.
3.3 Issuance of Shares. The issuance, sale and delivery of the
Shares in accordance with this Agreement have been duly authorized by all
necessary corporate action on the part of DCC, and all the Shares have been duly
reserved for issuance. The Shares, when issued and delivered against payment
therefor, will be duly and validly issued, fully paid and non-assessable. The
Shares are not subject to any preemptive rights or any right of first refusal
and the issuance of the Shares will not give rise to any such rights.
3.4 Exchange Act Documents.
3.4.1 DCC has been subject to the requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") for a period of at least twelve calendar months immediately
preceding the Closing Date hereof and has filed in a timely manner all reports
required to be filed during the twelve calendar months immediately preceding
the Closing Date (the "Exchange Act Documents"). At the time of filing, the
Exchange Act Documents conformed in all material respects to the requirements
of the Exchange Act and all the rules and regulations thereunder, and none of
such documents contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so filed, when
such documents become effective or are filed with the Securities and Exchange
Commission (the "Commission"), as the case may be, will conform in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder, and none of such documents will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
3.4.2 The financial statements (together with the
related notes thereto) contained in the Exchange Act Documents present fairly
the financial position of DCC and its consolidated subsidiaries as of and at
the dates indicated and the results of their operations for the
STOCK PURCHASE AGREEMENT Page 2
<PAGE>
periods specified; and except as otherwise disclosed in the Exchange Act
Documents, said financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied. The accountants
who have audited certain financial statements included in the Exchange Act
Documents are independent public accountants as required by the Exchange Act
and the rules and regulations thereunder.
3.4.3 The information set forth in the Form 10KSB
filed by DCC on May 30, 1996 (the "10K") is complete and accurate in all
material respects as of the Closing Date, and since the date of the 10K, except
as otherwise stated therein, (i) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of DCC and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) there have been
no transactions entered into by DCC or any of its subsidiaries, other than
those in the normal course of business, which are material with respect to DCC
and its subsidiaries considered as one enterprise and (iii) except for regular
dividends on the common stock in amounts per share that are consistent with
past practice, there' has been no dividend or distribution of any kind
declared, paid or made by DCC on any class of its capital stock.
3.5 Compliance with Other Instruments, None Burdensome, etc.
DCC is not in violation of any term of its Articles of Incorporation or Bylaws,
or in any material respect of any mortgage, indenture, contract, agreement,
instrument, or, to DCC's best knowledge, any judgment, decree, order, statute,
rule, or regulation applicable to it. The execution, delivery, and performance
by DCC of this Agreement and the issuance and sale of the Shares pursuant
hereto, will not result in any such material violation or be in conflict with or
constitute a material default under any such term, or cause the acceleration of
maturity of any loan or material obligation to which DCC is a party or by which
it is bound or with respect to which it is an obligor or guarantor, or result in
the creation or imposition of any material lien, claim, charge, restriction,
equity or encumbrance of any kind whatsoever upon, or, to DC C's best knowledge
give to any other person any interest or right (including any right of
termination or cancellation) in or with respect to any of the material
properties, assets, business or agreements of DCC. To DCC's best knowledge, no
such term or condition materially adversely affects the business, property,
prospects, condition, affairs, or operations of DCC.
3.6 Governmental Consents. Other than the timely filing of a
Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act") and similar Blue Sky notification, no consent,
approval, order or authorization of; or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by Purchaser in Section 4 hereof the offer and sale
of the Shares to Purchaser will be in compliance with applicable Federal and
state securities laws.
3.7 Registration Rights. Except for the grant of registration
rights to the Purchasers as contemplated by the provisions hereof; DCC is not
under any obligation to register any of its presently outstanding securities or
any of its securities which may hereafter be issued.
STOCK PURCHASE AGREEMENT Page 3
<PAGE>
3.8 Patents, Trademarks, etc. Except as set forth on Schedule
3.8, DCC owns and possesses or licenses all patents, patent applications,
licenses, trademarks, service marks, trade names, brand names, inventions,
trade secrets, processes, formulae, copyrights, hardware and software necessary
for the operation of its business as now conducted and as proposed to be
conducted (the "Intellectual Property"). DCC has not received any notice or
claim of infringement of any rights, trademarks, trade names, trade secrets,
copyrights or other intellectual property or proprietary rights of others with
respect to DCC's operation of its business. To the knowledge of DCC, except as
set forth on Schedule 3.8, the Intellectual Property does not infringe upon or
violate any rights, trademarks, trade names, trade secrets, copyrights or other
intellectual property or proprietary rights of any person or entity.
3.9 Insurance. DCC has adequate insurance, with financially
sound and reputable insurers, with respect to its business and properties which
are of a character customarily insured by corporations of established reputation
engaged in the same or a similar business and similarly situated, against loss
or damage of the kinds customarily insured against by such corporations, which
insurance is of such types (including public liability and workmen's
compensation insurance) as are customarily carried under similar circumstances
by such other corporations.
3.10 Use of Proceeds. The net proceeds from the sale of the
Shares shall be used as set forth in Schedule 3.10 hereto. DCC shall not
directly or indirectly use such proceeds for any other purpose.
3.11 Disclosure. Neither this Agreement (including, without
limitation, the Schedules and the Exhibits hereto), nor any other document
delivered to Purchaser or its counsel or agents in connection herewith contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading. To the best of DCC's knowledge, there is no fact (or facts) which
(individually or in the aggregate) materially adversely affects the business,
prospects, condition, affairs, or operations of DCC or its properties or assets
which has (or have) not been set forth in this Agreement and the Schedules and
Exhibits hereto.
4. REPRESENTATIONS OF Purchaser. Purchaser hereby represents and
warrants to DCC as follows:
4.1 Investment. Purchaser is acquiring the Shares for its own
account for investment and not with a view to, or for sale in connection with,
any distribution thereof, nor with any present intention of distributing or
selling the same.
4.2 Authority. Purchaser has lull power and authority to enter
into and to perform this Agreement in accordance with its terms.
4.3 Experience. Purchaser has sufficient knowledge and
experience in investing in companies similar to DCC so as to be able to evaluate
the risks and merits of its investment in DCC.
STOCK PURCHASE AGREEMENT Page 4
<PAGE>
4.4 Legend. Purchaser understands that the stock certificate
representing the Shares shall bear a legend substantially to the following
effect:
THE SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE
REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO DCC IS OBTAINED TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED.
4.5 Accredited Investor. Purchaser is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act.
5. COVENANTS OF DCC. DCC hereby covenants and agrees as follows:
5.1 Consents and Best Efforts. Subject to the terms and
conditions provided herein, DCC covenants and agrees to use its commercially
reasonable best efforts to take, or cause to be taken, all action or do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby and to cause the fulfillment of its obligations hereunder.
5.2 Notification of Certain Matters. DCC shall give prompt
notice to Day Star, and Purchaser shall give prompt notice to DCC, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect as of the Closing Date and (ii)
any material failure of DCC or Purchaser, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder, and each party shall use all reasonable efforts to remedy same.
5.3 Nondisclosure Agreements. DCC shall require all key
managers and other key employees now or hereafter employed by DCC who have
access to confidential and proprietary information of DCC to enter into
nondisclosure agreements in a form that is commercially reasonable.
5.4 Exchange Act Reports. Following the Closing, DCC shall
deliver to Purchaser all reports required to be filed by it pursuant to the
Exchange Act and the rules and regulations thereunder concurrently with
transmittal of such reports to the Commission.
5.5 Board Visitation Rights. DCC shall allow Purchaser, on
behalf of the Purchasers, to have one observer present at all meetings of the
Board of Directors and committees of the Board of Directors and such observer
shall be entitled to participate in discussions and consult with the Board of
Directors and committees of the Board of Directors, without voting. To
facilitate such visitation, DCC shall provide Purchaser with written notice of
all such meetings not later than it provides such notice to its directors.
STOCK PURCHASE AGREEMENT Page 5
<PAGE>
6. CLOSING CONDITIONS. The obligations of Purchaser hereunder are
subject to Day Star's satisfaction in its sole discretion with the results of
its due diligence investigation and to the fulfillment or waiver on or before
the Closing of the following conditions:
6.1 Representations and Warranties True. All representations
and warranties of DCC made in Section 3 or otherwise under or pursuant to this
Agreement shall be true on the Closing Date and DCC shall have delivered to Day
Star a certificate of an authorized officer of DCC dated the Closing Date,
certifying to such effect.
6.2 Instruments and Proceedings to be Satisfactory. All
instruments and corporate proceedings relating to the sale of the Shares
hereunder by DCC or otherwise relating to the transactions contemplated hereby
shall be satisfactory to Purchaser.
6.3 Other Agreements. All documents and instruments specified
for delivery at the Closing shall have been executed and delivered by DCC and
Purchaser, as appropriate.
6.4 Due Diligence and Legal Fees. DCC shall pay at the Closing
or, if the estimated amount paid at closing is insufficient, promptly upon
demand all of the reasonable fees and expenses of counsel to Purchaser incurred
in connection with the preparation and negotiation of this Agreement and the
Closing of the transactions contemplated hereby. In addition, DCC shall pay all
reasonable fees and expenses of counsel for Purchaser in connection with any
amendment of any document contemplated hereby, any waiver under such document
and any consultation or action related to enforcement thereof.
6.5 Legal Opinion. Richard Leach, as counsel to DCC, shall
have executed and delivered to Purchaser a legal opinion, dated the Closing
Date, in form and substance satisfactory to counsel for Purchaser covering the
matters set forth in Schedule 6.6 hereto.
6.6 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
the value of the Shares, Purchaser's registration rights, or DCC.
6.7 Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions (including the materials
provided to Purchaser and its special counsel) shall be reasonably satisfactory
in substance and form to Purchaser and its special counsel, and Purchaser and
its special counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.
STOCK PURCHASE AGREEMENT Page 6
<PAGE>
7. CONDITION TO THE OBLIGATIONS OF DCC. The obligations of DCC
hereunder are subject to the fulfillment or waiver of the following conditions
on or before the Closing:
7.1 Accuracy of Representations and Warranties. The
representations and Warranties of Purchaser contained in Section 4 shall be
true on the Closing Date.
7.2 Purchase Price. Payment of the applicable purchase
price to DCC as set forth in Section 2 hereof.
7.3 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
DCC.
8. GENERAL.
8.1 Indemnity.
(a) Each party agrees to indemnify and save
harmless the other party hereto and such other party's officers, directors,
employees and agents, and each person who controls such other party within the
meaning of the Securities Act or the Exchange Act, from and against any and all
costs, expenses, damages, claims, actions, diminution in value or other
liabilities, including costs of investigation and defense (collectively,
"Damages") suffered or incurred by the indemnified party as a result of any
breach by the indemnifying party of any of its agreements, representations,
warranties or covenants contained in this Agreement, other than Damages
resulting, directly or indirectly from the breach by the indemnified party of
any of its agreements, representations, warranties or covenants contained
herein; provided, however, that if and to the extent that such indemnification
is unenforceable for any reason, the indemnifying party shall make the maximum
contribution to the payment and satisfaction of such indemnified liability
which shall be permissible under applicable law.
(b) The indemnified party under this Section
8.1 will, promptly after the receipt of notice of the commencement of any
action against such indemnified party in respect of which indemnity may be
sought from the indemnifying party on account of an indemnity agreement
contained in this Section 8.1, notify the indemnifying party in writing of the
commencement thereof. The omission of any indemnified party to so notify the
indemnifying party of any such action shall not relieve the indemnifying party
from any liability which it may have to such indemnified party except to the
extent the indemnifying party shall have been materially prejudiced by the
omission of such indemnified party to so notify the indemnifying party,
pursuant to this Section 8.1. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof the indemnifying party shall be entitled to participate
therein and, to the extent that it may wish, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof the indemnifying party will not be liable to such
indemnified party under this Section 8.1 for any legal or other expense
subsequently incurred by such indemnified party in connection with the defense
thereof nor for any settlement thereof entered into without
STOCK PURCHASE AGREEMENT Page 7
<PAGE>
the consent of the indemnifying party; provided, however, that (i) if the
indemnifying party shall elect not to assume the defense of such claim or action
or (ii) if the indemnified party reasonably determines (x) that there may be a
conflict between the positions of the indemnifying party and of the indemnified
party in defending such claim or action or (y) that there may be legal defenses
available to such indemnified party different from or in addition to those
available to the indemnifying party, then separate counsel for the indemnified
party shall be entitled to participate in and conduct the defense, in the case
of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the
indemnifying party shall be liable for any reasonable legal or other expenses
incurred by the indemnified party in connection with such defense(s);
(c) All representations and warranties made by
the parties herein or in any instrument or document finished in connection
herewith shall survive the Closing and any investigation at any time made by or
on behalf of the parties hereto. All such representations and warranties shall
expire on the second anniversary of the respective Closing Dates, except for
claims, if any, asserted in writing prior to such second anniversary, which
shall survive until finally resolved and satisfied in full. All claims and
actions for indemnity pursuant to this Section 8 for breach of any
representation or warranty shall be asserted or maintained in writing by a
party hereto on or prior to the expiration of such two-year period.
8.2 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by reputable overnight courier or mailed by first class certified or
registered mall, return receipt requested, postage prepaid:
If to DCC: 9301 Jordan Avenue, No.105
Chatsworth, CA 91311
Attention: President
With copy to: Richard Leach
22900 Ventura Boulevard, No.110
Woodland Hills, CA 91364
If to Purchaser: Sundance Venture Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attn: Larry Wells
With copy to: COBLENTZ, CAHEN, MCCABE & BREYER, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
If to DayStar: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attention: Larry Wells
STOCK PURCHASE AGREEMENT Page 8
<PAGE>
With copy to: Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
Notices provided in accordance with this Section 8.2 shall be deemed
delivered upon personal delivery, one business day after deposit with a
reputable overnight delivery service, or two business days after deposit in the
mail. Any party may change its address for notice by notice similarly given.
8.3 Further Assurances. Upon the terms and subject to the
conditions contained herein, each of the parties hereto agrees, both before and
after the Closing, (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement, (ii) to execute any documents, instruments or conveyances of any
kind which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder or thereunder, and (iii) to cooperate with
each other in connection with the foregoing, including, without limitation,
using their respective best efforts (A) to obtain all consents, approvals and
waivers from any person necessary to permit the consummation of the transactions
contemplated by this Agreement, and (B) to fulfill all conditions to this
Agreement.
8.4 Specific Enforcement. Purchaser, on the one hand, and DCC,
on the other, acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction to
prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they may be entitled at law or
equity.
8.5 Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
8.6 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of DCC and Purchaser. No waivers of or
exceptions to any term, condition or provision of this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
8.7 Survival. The representations, warranties, covenants, and
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by Purchaser.
8.8 Successors and Assigns. All covenants and agreements
contained herein shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns, provided, however, that DCC may not
assign any of its rights or delegate its duties without the prior written
consent of Day Star.
STOCK PURCHASE AGREEMENT Page 9
<PAGE>
8.9 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
8.10 Severability. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
8.11 Governing Law; Jurisdiction; Venue. This Agreement shall
be governed by and construed in accordance with the laws of the State of
California as applied to contracts executed and entirely performed within
California. Any litigation or arbitration between the parties which arises out
of this Agreement shall be instituted and prosecuted only in the appropriate
California or Federal court or other tribunal, situated in San Francisco,
California. DCC specifically submits itself and its properties to the exclusive
jurisdiction of such courts for purposes of any such action and the enforcement
of any judgment or order arising therefrom. DCC waives any right to a change of
venue and any and all objections to the jurisdiction of the California courts.
Notwithstanding the foregoing, Purchaser may take such actions in a foreign
jurisdiction which Purchaser deems necessary and appropriate to enforce or
collect any court judgment in any dispute arising out of this Agreement or to
seek and obtain other relief as is necessary to enforce the terms of this
Agreement. Each party agrees that service upon such party in any such action or
proceeding may be made by first class mail, certified or registered, return
receipt requested as provided for the giving of notices in Section 8.2.
Executed as of the date first written above.
DCC: DCC COMPACT CLASSICS, INC.
a California corporation
By:/s/Marshall Blonstein
-------------------------------
Title: President
----------------------------
Purchaser: SUNDANCE VENTURE PARTNERS, L.P., A
DELAWARE LIMITED PARTNERSHIP
By:
------------------------------
Larry Wells
STOCK PURCHASE AGREEMENT Page 10
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibits
Exhibit A - Form of Registration Rights Agreement
Schedules
Schedule 3.8 - Intellectual Property
Schedule 3.10 - Use of Proceeds
Schedule 6.6 - Matters to be Covered by Legal Opinion
STOCK PURCHASE AGREEMENT
EXHIBITS AND SCHEDULES
<PAGE>
SCHEDULE 3.8
OF
THE STOCK PURCHASE AGREEMENT
INTELLECTUAL PROPERTY
There are no exceptions to be set forth on this Schedule 3.8 in accordance with
Section 3.8, Patents; Trademarks, etc., of the Stock Purchase Agreement.
<PAGE>
SCHEDULE 3.10
OF
THE STOCK PURCHASE AGREEMENT
USE OF PROCEEDS
The net proceeds from the sale of the SHARES are to be used as follows:
Application $Amount Percentage
- ----------- ------- ----------
Purchase of additional equipment to $200,000 22.22%
employ the laser technology which
burns the image onto the film used
in the Single Use Caption Camera.
Marketing and Advertising of the $300,000 33.33%
Single Use Caption Camera
Reserve related to trade financing $200,000 22.22%
for purchase orders of the Single
Use Caption Camera
Working capital $300,000* 22.22%
-------- ------
Total $1,000,000 100.00%
*commissions, legal fees and other costs of placement will be paid from working
capital.
<PAGE>
SCHEDULE 6.6
MATTERS TO BE COVERED BY LEGAL OPINION
OF_____________________
(1) DCC is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has full corporate power
and authority to conduct its business as presently conducted and as proposed to
be conducted by it and to enter into and perform this Agreement and to carry
out the transactions contemplated by this Agreement. DCC is duly qualified to
do business as a foreign corporation and is in good standing in all states and
jurisdictions in which the nature of the business conducted or property owned
by DCC make such qualification necessary.
(2) The execution and delivery of this Agreement and the consummation
by DCC of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on behalf of DCC. This Agreement, when executed and
delivered, will have been duly executed and delivered by DCC and constitutes a
valid and binding agreement of DCC, enforceable in accordance with its terms.
(3) The issuance, sale and delivery of the Shares in accordance with
this Agreement have been duly authorized by all necessary corporate action on
the part of DCC. The Shares, when issued and delivered against payment therefor,
will be duly and validly issued, fully paid and non-assessable. The Shares are
not subject to any preemptive rights or any right of first refusal right nor
will the issuance of the Shares give rise to any such rights.
(4) DCC has been subject to the requirements of Section 12 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") for a
period of at least twelve calendar months immediately preceding the Closing
Date, and has filed in a timely manner all reports required to be filed during
the twelve calendar months immediately preceding the Closing date (the "Exchange
Act Documents"). At the time of filing, the Exchange Act Documents (other than
financial statements, schedules and other financial data included therein as to
which such counsel need not express any opinion) conformed in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder.
(5) DCC is not in violation of any term of its Articles of
Incorporation or Bylaws, or in any material respect of any mortgage, indenture,
contract, agreement, instrument, or, to such counsel's best knowledge, any
judgment, decree, order, statute, rule, or regulation applicable to it. The
execution, delivery, and performance by DCC of the Agreement and the issuance
and sale of the Shares pursuant hereto, will not result in any such violation or
be in conflict with or constitute a default under any such term, or cause the
acceleration of maturity of any loan or material obligation to which DCC is a
party or by which it is bound or with respect to which it is an obligor or
guarantor, or result in the creation or imposition of any material lien, claim,
charge, restriction, equity or encumbrance of any kind whatsoever upon, or, to
such counsel's best knowledge give to any other person any interest or right
(including any right of termination or
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 1
<PAGE>
cancellation) in or with respect to any of the material properties, assets,
business or agreements of DCC. To such counsel's best knowledge, no such term or
condition materially adversely affects the business, property, prospects,
condition, affairs, or operations of DCC.
(6) Other than the timely filing of a Form D pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
no consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by Purchaser in Section 4 of the Agreement, the
offer and sale of the Shares to Purchaser will be in compliance with applicable
Federal and state securities laws.
(7) Except for the grant of registration rights to the Purchasers as
contemplated by the provisions hereof DCC is not under any obligation to
register any of its presently outstanding securities or any of its securities
which may hereafter be issued.
(8) To such counsel's best knowledge, DCC has not received any notice
or claim of infringement of any rights, trademarks, trade names, trade secrets,
copyrights or other intellectual property or proprietary rights of others with
respect to DCC's operation of its business.
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 2
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of March 28, 1997, is entered
into by and between DCC COMPACT CLASSICS, INC., A COLORADO CORPORATION ("DCC"),
and LARRY WELLS, AN INDIVIDUAL ("Purchaser").
FACTUAL BACKGROUND
Purchaser wishes to purchase from DCC, and DCC wishes to sell to
Purchaser, shares of DCC'S Common Stock, $.005 par value ("Common Stock").
Purchaser and DCC desire to provide for the foregoing purchase and sale and to
establish various rights and obligations in connection therewith. Persons other
than Purchaser (the "Other Purchasers") have purchased, or will purchase Common
Stock under agreements substantially similar to this Agreement. The Other
Purchasers and Purchaser are collectively referred to as the "Purchasers."
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. SALE OF SHARES.
Subject to the terms and conditions of this Agreement, at the Closing
(as defined below), DCC will sell and issue to Purchaser, and Purchaser will
purchase, 20,000 shares of Common Stock (the "Shares") for a total price in cash
of Twenty Thousand Dollars ($20,000) (the "Total Purchase Price"), which equals
$1.00 per Share (the "Share Purchase Price"). The Shares shall be subject to a
Registration Rights Agreement (the "Registration Rights Agreement"),
substantially in the form of Exhibit A hereto.
2. THE CLOSING.
2.1 Closing. The closing ("Closing") of this transaction shall
take place at the offices of Coblentz, Cahen, McCabe & Breyer, LLP ("CCMB"), 222
Kearny Street, 7th Floor, San Francisco, California 94108 at 10:00 a.m. on
___________, 1997 (the "Closing Date"), or at such other time, date and place as
are mutually agreeable to DCC and Purchaser.
2.2 Delivery. At the Closing, subject to the terms of this
Agreement, DCC will deliver or cause to be delivered to Purchaser, against
Purchaser's payment at the Closing of the Total Purchase Price by one or more
checks or by wire transfer to an account or accounts designated by DCC, a stock
certificate or certificates evidencing the Shares in such denominations as
Purchaser has requested, dated the Closing Date and registered in the name or
names requested by Purchaser.
STOCK PURCHASE AGREEMENT Page 1
<PAGE>
3. REPRESENTATIONS OF DCC. DCC hereby represents, warrants and
covenants to Purchaser as follows:
3.1 Organization and Standing. DCC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has full corporate power and authority to conduct its business as
presently conducted and as proposed to be conducted by it and to enter into and
perform this Agreement and to carry out the transactions contemplated by this
Agreement. DCC is duly qualified to do business as a foreign corporation and is
in good standing in all states and jurisdictions in which the nature of the
business conducted or property owned by DCC make such qualification necessary.
DCC has furnished Purchaser with copies of its Certificate of Incorporation and
its Bylaws and those of any subsidiaries. Said copies are true, correct, and
complete and contain all amendments through the date of the Closing.
3.2 Due Authorization. The execution and delivery of this
Agreement and the consummation by DCC of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on behalf of DCC.
This Agreement, when executed and delivered, will have been duly executed and
delivered by DCC and constitutes a valid and binding agreement of DCC,
enforceable in accordance with its terms.
3.3 Issuance of Shares. The issuance, sale and delivery of the
Shares in accordance with this Agreement have been duly authorized by all
necessary corporate action on the part of DCC, and all the Shares have been duly
reserved for issuance. The Shares, when issued and delivered against payment
therefor, will be duly and validly issued, fully paid and non-assessable. The
Shares are not subject to any preemptive rights or any right of first refusal
and the issuance of the Shares will not give rise to any such rights.
3.4 Exchange Act Documents.
3.4.1 DCC has been subject to the requirements of
Section 12 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") for a period of at least twelve calendar months immediately
preceding the Closing Date hereof and has filed in a timely manner all reports
required to be filed during the twelve calendar months immediately preceding
the Closing Date (the "Exchange Act Documents"). At the time of filing, the
Exchange Act Documents conformed in all material respects to the requirements
of the Exchange Act and all the rules and regulations thereunder, and none of
such documents contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so filed, when
such documents become effective or are filed with the Securities and Exchange
Commission (the "Commission"), as the case may be, will conform in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder, and none of such documents will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
3.4.2 The financial statements (together with the
related notes thereto) contained in the Exchange Act Documents present fairly
the financial position of DCC and its consolidated subsidiaries as of and at
the dates indicated and the results of their operations for the
STOCK PURCHASE AGREEMENT Page 2
<PAGE>
periods specified; and except as otherwise disclosed in the Exchange Act
Documents, said financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied. The accountants
who have audited certain financial statements included in the Exchange Act
Documents are independent public accountants as required by the Exchange Act and
the rules and regulations thereunder.
3.4.3 The information set forth in the Form 10KSB
filed by DCC on May 30, 1996 (the "10K") is complete and accurate in all
material respects as of the Closing Date, and since the date of the 10K, except
as otherwise stated therein, (i) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of DCC and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, (ii)
there have been no transactions entered into by DCC or any of its subsidiaries,
other than those in the normal course of business, which are material with
respect to DCC and its subsidiaries considered as one enterprise and (iii)
except for regular dividends on the common stock in amounts per share that are
consistent with past practice, there' has been no dividend or distribution of
any kind declared, paid or made by DCC on any class of its capital stock.
3.5 Compliance with Other Instruments, None Burdensome, etc.
DCC is not in violation of any term of its Articles of Incorporation or Bylaws,
or in any material respect of any mortgage, indenture, contract, agreement,
instrument, or, to DCC's best knowledge, any judgment, decree, order, statute,
rule, or regulation applicable to it. The execution, delivery, and performance
by DCC of this Agreement and the issuance and sale of the Shares pursuant
hereto, will not result in any such material violation or be in conflict with or
constitute a material default under any such term, or cause the acceleration of
maturity of any loan or material obligation to which DCC is a party or by which
it is bound or with respect to which it is an obligor or guarantor, or result in
the creation or imposition of any material lien, claim, charge, restriction,
equity or encumbrance of any kind whatsoever upon, or, to DC C's best knowledge
give to any other person any interest or right (including any right of
termination or cancellation) in or with respect to any of the material
properties, assets, business or agreements of DCC. To DCC's best knowledge, no
such term or condition materially adversely affects the business, property,
prospects, condition, affairs, or operations of DCC.
3.6 Governmental Consents. Other than the timely filing of a
Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act") and similar Blue Sky notification, no consent,
approval, order or authorization of; or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by Purchaser in Section 4 hereof the offer and sale
of the Shares to Purchaser will be in compliance with applicable Federal and
state securities laws.
3.7 Registration Rights. Except for the grant of registration
rights to the Purchasers as contemplated by the provisions hereof; DCC is not
under any obligation to register any of its presently outstanding securities or
any of its securities which may hereafter be issued.
STOCK PURCHASE AGREEMENT Page 3
<PAGE>
3.8 Patents, Trademarks, etc. Except as set forth on Schedule
3.8, DCC owns and possesses or licenses all patents, patent applications,
licenses, trademarks, service marks, trade names, brand names, inventions, trade
secrets, processes, formulae, copyrights, hardware and software necessary for
the operation of its business as now conducted and as proposed to be conducted
(the "Intellectual Property"). DCC has not received any notice or claim of
infringement of any rights, trademarks, trade names, trade secrets, copyrights
or other intellectual property or proprietary rights of others with respect to
DCC's operation of its business. To the knowledge of DCC, except as set forth on
Schedule 3.8, the Intellectual Property does not infringe upon or violate any
rights, trademarks, trade names, trade secrets, copyrights or other intellectual
property or proprietary rights of any person or entity.
3.9 Insurance. DCC has adequate insurance, with financially
sound and reputable insurers, with respect to its business and properties which
are of a character customarily insured by corporations of established reputation
engaged in the same or a similar business and similarly situated, against loss
or damage of the kinds customarily insured against by such corporations, which
insurance is of such types (including public liability and workmen's
compensation insurance) as are customarily carried under similar circumstances
by such other corporations.
3.10 Use of Proceeds. The net proceeds from the sale of the
Shares shall be used as set forth in Schedule 3.10 hereto. DCC shall not
directly or indirectly use such proceeds for any other purpose.
3.11 Disclosure. Neither this Agreement (including, without
limitation, the Schedules and the Exhibits hereto), nor any other document
delivered to Purchaser or its counsel or agents in connection herewith contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading. To the best of DCC's knowledge, there is no fact (or facts) which
(individually or in the aggregate) materially adversely affects the business,
prospects, condition, affairs, or operations of DCC or its properties or assets
which has (or have) not been set forth in this Agreement and the Schedules and
Exhibits hereto.
4. REPRESENTATIONS OF Purchaser. Purchaser hereby represents and
warrants to DCC as follows:
4.1 Investment. Purchaser is acquiring the Shares for its own
account for investment and not with a view to, or for sale in connection with,
any distribution thereof, nor with any present intention of distributing or
selling the same.
4.2 Authority. Purchaser has lull power and authority to enter
into and to perform this Agreement in accordance with its terms.
4.3 Experience. Purchaser has sufficient knowledge and
experience in investing in companies similar to DCC so as to be able to evaluate
the risks and merits of its investment in DCC.
STOCK PURCHASE AGREEMENT Page 4
<PAGE>
4.4 Legend. Purchaser understands that the stock certificate
representing the Shares shall bear a legend substantially to the following
effect:
THE SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE
REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO DCC IS OBTAINED TO THE EFFECT THAT SUCH
REGISTRATION IS NOT REQUIRED.
<PAGE>
4.5 Accredited Investor. Purchaser is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act.
5. COVENANTS OF DCC. DCC hereby covenants and agrees as follows:
5.1 Consents and Best Efforts. Subject to the terms and
conditions provided herein, DCC covenants and agrees to use its commercially
reasonable best efforts to take, or cause to be taken, all action or do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby and to cause the fulfillment of its obligations hereunder.
5.2 Notification of Certain Matters. DCC shall give prompt
notice to Day Star, and Purchaser shall give prompt notice to DCC, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect as of the Closing Date and (ii)
any material failure of DCC or Purchaser, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder, and each party shall use all reasonable efforts to remedy same.
5.3 Nondisclosure Agreements. DCC shall require all key
managers and other key employees now or hereafter employed by DCC who have
access to confidential and proprietary information of DCC to enter into
nondisclosure agreements in a form that is commercially reasonable.
5.4 Exchange Act Reports. Following the Closing, DCC shall
deliver to Purchaser all reports required to be filed by it pursuant to the
Exchange Act and the rules and regulations thereunder concurrently with
transmittal of such reports to the Commission.
5.5 Board Visitation Rights. DCC shall allow Purchaser, on
behalf of the Purchasers, to have one observer present at all meetings of the
Board of Directors and committees of the Board of Directors and such observer
shall be entitled to participate in discussions and consult with the Board of
Directors and committees of the Board of Directors, without voting. To
facilitate such visitation, DCC shall provide Purchaser with written notice of
all such meetings not later than it provides such notice to its directors.
STOCK PURCHASE AGREEMENT Page 5
<PAGE>
6. CLOSING CONDITIONS. The obligations of Purchaser hereunder are
subject to Day Star's satisfaction in its sole discretion with the results of
its due diligence investigation and to the fulfillment or waiver on or before
the Closing of the following conditions:
6.1 Representations and Warranties True. All representations
and warranties of DCC made in Section 3 or otherwise under or pursuant to this
Agreement shall be true on the Closing Date and DCC shall have delivered to Day
Star a certificate of an authorized officer of DCC dated the Closing Date,
certifying to such effect.
6.2 Instruments and Proceedings to be Satisfactory. All
instruments and corporate proceedings relating to the sale of the Shares
hereunder by DCC or otherwise relating to the transactions contemplated hereby
shall be satisfactory to Purchaser.
6.3 Other Agreements. All documents and instruments specified
for delivery at the Closing shall have been executed and delivered by DCC and
Purchaser, as appropriate.
6.4 Due Diligence and Legal Fees. DCC shall pay at the Closing
or, if the estimated amount paid at closing is insufficient, promptly upon
demand all of the reasonable fees and expenses of counsel to Purchaser incurred
in connection with the preparation and negotiation of this Agreement and the
Closing of the transactions contemplated hereby. In addition, DCC shall pay all
reasonable fees and expenses of counsel for Purchaser in connection with any
amendment of any document contemplated hereby, any waiver under such document
and any consultation or action related to enforcement thereof.
6.5 Legal Opinion. Richard Leach, as counsel to DCC, shall
have executed and delivered to Purchaser a legal opinion, dated the Closing
Date, in form and substance satisfactory to counsel for Purchaser covering the
matters set forth in Schedule 6.6 hereto.
6.6 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
the value of the Shares, Purchaser's registration rights, or DCC.
6.7 Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions (including the materials
provided to Purchaser and its special counsel) shall be reasonably satisfactory
in substance and form to Purchaser and its special counsel, and Purchaser and
its special counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.
STOCK PURCHASE AGREEMENT Page 6
<PAGE>
7. CONDITION TO THE OBLIGATIONS OF DCC. The obligations of DCC
hereunder are subject to the fulfillment or waiver of the following conditions
on or before the Closing:
7.1 Accuracy of Representations and Warranties. The
representations and warranties of Purchaser contained in Section 4 shall be true
on the Closing Date.
7.2 Purchase Price. Payment of the applicable purchase price
to DCC as set forth in Section 2 hereof.
7.3 No Suit. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
DCC.
8. GENERAL.
8.1 Indemnity.
(a) Each party agrees to indemnify and save harmless
the other party hereto and such other party's officers, directors, employees
and agents, and each person who controls such other party within the meaning of
the Securities Act or the Exchange Act, from and against any and all costs,
expenses, damages, claims, actions, diminution in value or other liabilities,
including costs of investigation and defense (collectively, "Damages") suffered
or incurred by the indemnified party as a result of any breach by the
indemnifying party of any of its agreements, representations, warranties or
covenants contained in this Agreement, other than Damages resulting, directly
or indirectly from the breach by the indemnified party of any of its
agreements, representations, warranties or covenants contained herein;
provided, however, that if and to the extent that such indemnification is
unenforceable for any reason, the indemnifying party shall make the maximum
contribution to the payment and satisfaction of such indemnified liability
which shall be permissible under applicable law.
(b) The indemnified party under this Section 8.1
will, promptly after the receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be sought from
the indemnifying party on account of an indemnity agreement contained in this
Section 8.1, notify the indemnifying party in writing of the commencement
thereof. The omission of any indemnified party to so notify the indemnifying
party of any such action shall not relieve the indemnifying party from any
liability which it may have to such indemnified party except to the extent the
indemnifying party shall have been materially prejudiced by the omission of
such indemnified party to so notify the indemnifying party, pursuant to this
Section 8.1. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof
the indemnifying party shall be entitled to participate therein and, to the
extent that it may wish, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof the indemnifying party will not be liable to such indemnified party
under this Section 8.1 for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof nor for any
settlement thereof entered into without
STOCK PURCHASE AGREEMENT Page 7
<PAGE>
the consent of the indemnifying party; provided, however, that (i) if the
indemnifying party shall elect not to assume the defense of such claim or action
or (ii) if the indemnified party reasonably determines (x) that there may be a
conflict between the positions of the indemnifying party and of the indemnified
party in defending such claim or action or (y) that there may be legal defenses
available to such indemnified party different from or in addition to those
available to the indemnifying party, then separate counsel for the indemnified
party shall be entitled to participate in and conduct the defense, in the case
of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the
indemnifying party shall be liable for any reasonable legal or other expenses
incurred by the indemnified party in connection with such defense(s);
(c) All representations and warranties made by the
parties herein or in any instrument or document finished in connection herewith
shall survive the Closing and any investigation at any time made by or on
behalf of the parties hereto. All such representations and warranties shall
expire on the second anniversary of the respective Closing Dates, except for
claims, if any, asserted in writing prior to such second anniversary, which
shall survive until finally resolved and satisfied in full. All claims and
actions for indemnity pursuant to this Section 8 for breach of any
representation or warranty shall be asserted or maintained in writing by a
party hereto on or prior to the expiration of such two-year period.
8.2 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by reputable overnight courier or mailed by first class certified or
registered mall, return receipt requested, postage prepaid:
If to DCC: 9301 Jordan Avenue, No.105
Chatsworth, CA 91311
Attention: President
With copy to: Richard Leach
22900 Ventura Boulevard, No.110
Woodland Hills, CA 91364
If to Purchaser: Larry Wells
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
With copy to: COBLENTZ, CAHEN, MCCABE & BREYER, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
If to DayStar: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attention: Larry Wells
STOCK PURCHASE AGREEMENT Page 8
<PAGE>
With copy to: Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
Notices provided in accordance with this Section 8.2 shall be deemed
delivered upon personal delivery, one business day after deposit with a
reputable overnight delivery service, or two business days after deposit in the
mail. Any party may change its address for notice by notice similarly given.
8.3 Further Assurances. Upon the terms and subject to the
conditions contained herein, each of the parties hereto agrees, both before and
after the Closing, (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement, (ii) to execute any documents, instruments or conveyances of
any kind which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder or thereunder, and (iii) to cooperate with
each other in connection with the foregoing, including, without limitation,
using their respective best efforts (A) to obtain all consents, approvals and
waivers from any person necessary to permit the consummation of the
transactions contemplated by this Agreement, and (B) to fulfill all conditions
to this Agreement.
8.4 Specific Enforcement. Purchaser, on the one hand, and DCC,
on the other, acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction to
prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they may be entitled at law or
equity.
8.5 Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
8.6 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of DCC and Purchaser. No waivers of or
exceptions to any term, condition or provision of this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
8.7 Survival. The representations, warranties, covenants, and
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by Purchaser.
8.8 Successors and Assigns. All covenants and agreements
contained herein shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns, provided, however, that DCC may not
assign any of its rights or delegate its duties
STOCK PURCHASE AGREEMENT Page 9
<PAGE>
without the prior written consent of Day Star.
8.9 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall be one and the same document.
8.10 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
8.11 Governing Law; Jurisdiction; Venue. This Agreement shall
be governed by and construed in accordance with the laws of the State of
California as applied to contracts executed and entirely performed within
California. Any litigation or arbitration between the parties which arises out
of this Agreement shall be instituted and prosecuted only in the appropriate
California or Federal court or other tribunal, situated in San Francisco,
California. DCC specifically submits itself and its properties to the exclusive
jurisdiction of such courts for purposes of any such action and the enforcement
of any judgment or order arising therefrom. DCC waives any right to a change of
venue and any and all objections to the jurisdiction of the California courts.
Notwithstanding the foregoing, Purchaser may take such actions in a foreign
jurisdiction which Purchaser deems necessary and appropriate to enforce or
collect any court judgment in any dispute arising out of this Agreement or to
seek and obtain other relief as is necessary to enforce the terms of this
Agreement. Each party agrees that service upon such party in any such action or
proceeding may be made by first class mail, certified or registered, return
receipt requested as provided for the giving of notices in Section 8.2.
Executed as of the date first written above.
DCC:
DCC COMPACT CLASSICS, INC.
a California corporation
By: /s/ Marshall Blonstein
-----------------------------------
Title: President
--------------------------------
Purchaser:
-----------------------------
Larry Wells
STOCK PURCHASE AGREEMENT Page 10
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibits
Exhibit A - Form of Registration Rights Agreement
Schedules
Schedule 3.8 - Intellectual Property
Schedule 3.10 - Use of Proceeds
Schedule 6.6 - Matters to be Covered by Legal Opinion
STOCK PURCHASE AGREEMENT
EXHIBITS AND SCHEDULES
<PAGE>
SCHEDULE 3.8
OF
THE STOCK PURCHASE AGREEMENT
INTELLECTUAL PROPERTY
There are no exceptions to be set forth on this Schedule 3.8 in accordance with
Section 3.8, Patents; Trademarks, etc., of the Stock Purchase Agreement.
<PAGE>
SCHEDULE 3.10
OF
THE STOCK PURCHASE AGREEMENT
USE OF PROCEEDS
The net proceeds from the sale of the SHARES are to be used as follows:
Application $Amount Percentage
- ----------- ------- ----------
Purchase of additional equipment to $200,000 22.22%
employ the laser technology which
burns the image onto the film used
in the Single Use Caption Camera.
Marketing and Advertising of the $300,000 33.33%
Single Use Caption Camera
Reserve related to trade financing $200,000 22.22%
for purchase orders of the Single
Use Caption Camera
Working capital $300,000* 22.22%
-------- ------
Total $1,000,000 100.00%
*commissions, legal fees and other costs of placement will be paid from working
capital.
<PAGE>
SCHEDULE 6.6
MATTERS TO BE COVERED BY LEGAL OPINION
OF_____________________
(1) DCC is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has full corporate power
and authority to conduct its business as presently conducted and as proposed to
be conducted by it and to enter into and perform this Agreement and to carry out
the transactions contemplated by this Agreement. DCC is duly qualified to do
business as a foreign corporation and is in good standing in all states and
jurisdictions in which the nature of the business conducted or property owned by
DCC make such qualification necessary.
(2) The execution and delivery of this Agreement and the consummation
by DCC of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on behalf of DCC. This Agreement, when executed and
delivered, will have been duly executed and delivered by DCC and constitutes a
valid and binding agreement of DCC, enforceable in accordance with its terms.
(3) The issuance, sale and delivery of the Shares in accordance with
this Agreement have been duly authorized by all necessary corporate action on
the part of DCC. The Shares, when issued and delivered against payment therefor,
will be duly and validly issued, fully paid and non-assessable. The Shares are
not subject to any preemptive rights or any right of first refusal right nor
will the issuance of the Shares give rise to any such rights.
(4) DCC has been subject to the requirements of Section 12 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") for a
period of at least twelve calendar months immediately preceding the Closing
Date, and has filed in a timely manner all reports required to be filed during
the twelve calendar months immediately preceding the Closing date (the "Exchange
Act Documents"). At the time of filing, the Exchange Act Documents (other than
financial statements, schedules and other financial data included therein as to
which such counsel need not express any opinion) conformed in all material
respects to the requirements of the Exchange Act and all the rules and
regulations thereunder.
(5) DCC is not in violation of any term of its Articles of
Incorporation or Bylaws, or in any material respect of any mortgage, indenture,
contract, agreement, instrument, or, to such counsel's best knowledge, any
judgment, decree, order, statute, rule, or regulation applicable to it. The
execution, delivery, and performance by DCC of the Agreement and the issuance
and sale of the Shares pursuant hereto, will not result in any such violation or
be in conflict with or constitute a default under any such term, or cause the
acceleration of maturity of any loan or material obligation to which DCC is a
party or by which it is bound or with respect to which it is an obligor or
guarantor, or result in the creation or imposition of any material lien, claim,
charge, restriction, equity or encumbrance of any kind whatsoever upon, or, to
such counsel's best knowledge give to any other person any interest or right
(including any right of termination or
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 1
<PAGE>
cancellation) in or with respect to any of the material properties, assets,
business or agreements of DCC. To such counsel's best knowledge, no such term or
condition materially adversely affects the business, property, prospects,
condition, affairs, or operations of DCC.
(6) Other than the timely filing of a Form D pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
no consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority is required
on the part of DCC in connection with the execution and delivery of this
Agreement or the offer, issuance, sale and delivery of the Shares. Based in part
on the representations made by Purchaser in Section 4 of the Agreement, the
offer and sale of the Shares to Purchaser will be in compliance with applicable
Federal and state securities laws.
(7) Except for the grant of registration rights to the Purchasers as
contemplated by the provisions hereof DCC is not under any obligation to
register any of its presently outstanding securities or any of its securities
which may hereafter be issued.
(8) To such counsel's best knowledge, DCC has not received any notice
or claim of infringement of any rights, trademarks, trade names, trade secrets,
copyrights or other intellectual property or proprietary rights of others with
respect to DCC's operation of its business.
STOCK PURCHASE AGREEMENT
SCHEDULE 6.6 PAGE 2
<PAGE>
EXHIBIT 10.8
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of March 28, 1997, by and between DCC COMPACT CLASSICS, INC., a
Colorado corporation (the "Company"), DAYSTAR PARTNERS, L.P., a California
limited partnership ("DayStar"), and each of the other persons ("Other
Purchasers") who are purchasers of Common Stock from the Company under a Stock
Purchase Agreement dated as of the date hereof (the "Purchase Agreement").
DayStar and the Other Purchasers are collectively referred to herein as the
"Purchasers."
FACTUAL BACKGROUND
A. The Company and the Purchasers have entered into Purchase
Agreements pursuant to which the Purchasers will acquire common stock of the
Company (the "Shares"); and
B. The Company and the Purchasers desire to provide for certain
arrangements with respect to the registration of the Shares under the Securities
Act of 1933, as amended.
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 Act: The Securities Act of 1933, as amended, or any other statute
in effect from time to time corresponding to such act.
1.2 Holder: Any Purchaser who holds Registrable Securities or any
holder of Registrable Securities to whom registration rights have been
transferred in compliance with paragraph 9.1 hereof.
1.3 Initiating Holders: A H~der or Holders who in the aggregate holds
not less than 25% of the outstanding Registrable Securities.
1.4 Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
1.5 Participating Holders: Those Holders participating in any
registration pursuant to Article 2 or Article 3 hereof.
REGISTRATION RIGHTS AGREEMENT Page 1
<PAGE>
1.6 Prospectus: The prospectus included in any Registration Statement,
as amended or supplemented by any prospectus supplement with respect to the
terms of the offering of any portion of the Registrable Securities covered by
the Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
1.7 Register, registered, and registration: A registration effected by
preparing and filing a Registration Statement in compliance with the Act and the
declaration or ordering of effectiveness of such Registration Statement by the
SEC.
1.8 Registrable Securities: All Shares owned by the Purchasers (and
their permitted transferees); provided that Shares cease to be Registrable
Securities when they are transferred other than pursuant hereto or if it is no
longer a Restricted Security. Shares are Restricted Securities unless, until and
for so long as:
1.8.1 they have been effectively registered under the Act and
may be disposed of in accordance with the Registration Statement covering it,
except for such registrations withdrawn pursuant hereto; or
1.8.2 as to any Holder, when all of the Common Stock owned by
such Holder may be distributed to the public pursuant to Rule 144 (or any
similar provision then in force) under the Act within the succeeding ninety days
without regard to the volume of trading in the Company's securities.
1.9 Registration Statement: Any registration statement of the Company
which covers Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
Registration Statement, post-effective amendments, and all exhibits and all
material incorporated by reference in such Registration Statement.
1.10 SEC: The Securities and Exchange Commission or any other agency
assuming or succeeding to the responsibilities thereof in connection with the
registration of securities.
ARTICLE 2
COMPANY REGISTRATION
2.1 COMPANY REGISTRATION. Subject to Article 5 hereof, if at any time
after the date of this Agreement the Company determines to register, either for
its own account or the account of any security holder or holders, any of its
common stock on a form that would also permit the registration of Registrable
Securities (expressly excluding any public offering relating solely to Form S-8
for employee benefit plans or Form S-4 for certain business combinations, or
their successor forms, or any form that does not permit secondary offerings),
the Company shall, each such time, promptly give each Holder written notice of
such determination which notice shall list those jurisdictions in which the
Company intends to attempt to qualify such securities under applicable blue sky
laws Upon the written request of
REGISTRATION RIGHTS AGREEMENT Page 2
<PAGE>
every Holder electing to participate, with each such request given within twenty
(20) days after mailing of any such notice by the Company, the Company shall use
its best efforts to include in such registration (and any related qualification
under blue sky laws, and in any underwriting) all of the Registrable Securities
that the Participating Holders have requested be registered. The Company may
withdraw any registration pursuant to this Article 2 at any time prior to the
effectiveness of the Registration Statement whether or not any Holder has
elected to participate. Subject to the provisions of Article 8 hereof, each
Holder may participate in an unlimited number of registrations pursuant to this
Article 2.
2.2 MANDATORY REGISTRATION. Notwithstanding anything to the contrary
contained herein, not later than six months after the date hereof, the Company
shall register on any applicable form all of the Registrable Securities on a
shelf registration and keep such registration statement effective for not less
than 24 months. The Company shall deregister the shares at any time if so
requested by the Holders.
2.3 TIME IS OF THE ESSENCE. If the Company shall fail to perform its
obligations under this Paragraph 2.2, then, in addition to any other remedies
that shall be available to the Holders, the Company shall automatically issue to
each Holder on the first day of each calendar month until such registration
shall be effective a number of Shares equal to five percent of the number of
Shares such Holder owned immediately prior to such issuance. In the event of a
disagreement with respect to such number of Shares, the records of the Holder
shall be presumptively correct.
ARTICLE 3
DEMAND REGISTRATION
3.1 DEMAND REGISTRATION. Subject to the provisions of Article 5 hereof,
if at any time or from time to time after six (6) months following the date
hereof an Initiating Holder provides the Company with a written demand (the
"Demand") that the Company effect a registration under the Act of all or any
part of Registrable Securities having an aggregate offering price in excess of
$500,000, then the Company shall (i) give written notice of the Demand to all
other Holders within 10 days following its receipt of the Demand; and (ii) use
its best efforts to effect such registration (a "Demand Registration") as to all
Registrable Securities included in the Demand together with all or such portion
of the Registrable Securities of any other Holder joining in such Demand as
specified in a written notice received by the Company within 20 days following
such other Holder's receipt of the Demand from the Company. Subject to (i) the
provisions of Article 5 hereof and (ii) the absolute priority of the Holders,
the Company may include in any Demand Registration, other securities of the
Company whether being sold for the accounts of others or for the account of the
Company.
3.2 LIMITATIONS ON DEMAND REGISTRATIONS. The rights of the Holders to
effect a Demand Registration shall be limited as follows:
REGISTRATION RIGHTS AGREEMENT Page 3
<PAGE>
3.2.1 Except as set forth in subparagraph 3.2.2, the Company
shall not be required to effect more than one Demand Registration.
3.2.2 Notwithstanding subparagraph 3.2.1 and subject to the
provisions of paragraph 3.3 hereof, the Holders shall be entitled to two (2)
Demand Registrations at the Company's expense on Form 5-3 or any similar
short-form registration, provided that the Company qualifies for such short-form
registration, and provided further that any Demand Registration pursuant to this
subparagraph 3.2.2 shall not be counted as one of the Demand Registrations
allowed under subparagraph 3.2.1 above.
3.2.3 Notwithstanding subparagraph 3.2.2, the Holders shall be
entitled to an unlimited number of Demand Registrations at their own expense on
any applicable form of registration.
3.2.4 The Company shall not be obligated to effect a
registration, qualification, or compliance under this Article 3 during the
period starting sixty (60) days prior to the Company's good faith estimate of
the date of filing of; and ending. on a date one hundred eighty (180) days
following the effective date of, a Company- initiated registration (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively and in good faith
employing all reasonable efforts to cause such registration to become effective
and to continue to be effective as set forth in Paragraph 4.1.1 hereof.
3.2.5 The Company will not be deemed to have provided a Demand
Registration hereunder unless, in addition to the satisfaction of any other
conditions required by this Agreement, such registration has become effective.
3.2.6 Any Demand Registration must be firmly underwritten by
underwriters selected by the Initiating Holders, subject to the approval of the
Company, which approval shall not be unreasonably withheld, and the Company and
the Initiating Holders shall obtain the commitment of such underwriter to firmly
underwrite the offering.
3.2.7 If the Company shall furnish to the Holders making such
Demand a certificate signed by the President of the Company stating that, in the
unanimous good faith judgment of the Board of Directors of the Company, it would
be seriously detrimental to the Company and its shareholders for such
Registration Statement to be filed at the date filing would be required
hereunder, then the Company shall have an additional period of not more than
ninety (90) days within which to file such Registration Statement.
3.3 REGISTRATION ON FORM S-3. If any Holder or Holders request that the
Company file a registration statement on Form S-3 (or any successor form) for a
public offering of Registrable Securities the reasonably anticipated aggregate
offering proceeds of which would exceed $500,000 and the Company is entitled to
use Form S-3 for such offering, then the Company shall use its best efforts to
cause such Registrable Securities to be registered on such form and to be
qualified in such jurisdictions as the Holder or Holders may
REGISTRATION RIGHTS AGREEMENT Page 4
<PAGE>
reasonably request; provided, however, that the Company shall not be required to
effect more than one (1) registration pursuant to this paragraph in any nine (9)
month period or more than three (3) registrations in total pursuant to this
paragraph. The obligations of this paragraph shall be subject to the limitations
set forth in subparagraphs 3.2.6 and 3.2.7 above.
ARTICLE 4
OBLIGATIONS OF THE COMPANY
4.1 OBLIGATIONS OF THE COMPANY. Whenever required under Article 2 or
Article 3 to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
4.1.1 Prepare and file with the SEC a Registration Statement
with respect to such Registrable Securities as promptly as possible (but in no
event, in the case of a Demand Registration, if audited financial statements for
the immediately preceding year are available, later than seventy-five (75) days
following the Company's receipt of the Demand) and use its best efforts to cause
such Registration Statement to become and remain effective for a period of two
years or until the Participating Holders have completed the distribution
described in the Registration Statement, whichever first occurs; provided,
however, that in connection with any proposed registration intended to permit an
offering of any securities from time to time (i.e., a so-called "shelf
registration"), the Company shall in no event be obligated to cause any such
registration to remain effective for more than three years.
4.1.2 Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such Registration Statement and
the Prospectus used in connection with such Registration Statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such Registration Statement;
4.1.3 Keep the Participating Holders advised as to the
progress of the registration and offering, and furnish to the Holders, at any
time and from time to time, such numbers of copies of a Prospectus, including a
preliminary prospectus, amendments or supplements, in conformity with the
requirements of the Act, and such other documents as any of them from time to
time may reasonably request in order to facilitate the disposition of
Registrable Securities owned by the Participating Holders; and
4.1.4 Notify each Participating Holder of the happening of any
event which might cause the Prospectus included in such Registration Statement,
as then in effect, to include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such Prospectus as may be necessary so
REGISTRATION RIGHTS AGREEMENT Page 5
<PAGE>
that, as thereafter delivered to the purchasers of such shares, such Prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances than
existing.
4.1.5 Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
4.1.6 Provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such registration statement and a
CUSIP number of all such Registrable Securities, in each case not later than the
effective date of such registration.
4.1.7 Use its best efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the
distribution of the securities covered by the Registration Statement, provided
that the Company shall not be required to register or qualify the securities in
any jurisdiction where the Company, in connection with such registration or
qualification or as a condition thereto, is required to qualify to do business
or to file a general consent to service of process (unless the Company is
already subject to service in such jurisdiction and except as required by the
Act), and further provided that (anything in this Agreement to the contrary
notwithstanding with respect to the bearing of expenses) if any jurisdiction in
which the securities shall be qualified shall require that expenses incurred in
connection with the qualification of the securities in that jurisdiction be
borne by selling shareholders, then such expenses shall be payable by the
Participating Holders, pro rata, to the extent required by such jurisdiction.
4.2 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to any Participating Holder that such person furnish to the Company such
information regarding it, the Registrable Securities held by it, and the
intended method of disposition of such securities as the Company shall
reasonably request and as shall be required in connection with the action to be
taken by the Company.
4.3 EXPENSES OF REGISTRATION. Except as set forth in subparagraph 3.2.3
hereof, all expenses incurred in connection with any registration effected
hereunder (excluding underwriters' discounts and commissions and stock transfer
taxes), including without limitation all registration and qualification fees and
printers', legal and accounting fees and costs, shall be borne by the Company.
In addition, the Company shall bear the reasonable attorneys' fees and costs
incurred by the Participating Holders up to an aggregate amount of $10,000.
Further, the Company shall not be required to pay for any expenses of any
registration commenced pursuant to Article 3 hereof and subsequently withdrawn
at the request of the Participating Holders unless such withdrawal is based upon
either (i) adverse market conditions or (ii) material adverse information
relating to the Company that was unknown or unavailable to the Initiating
Holders at the time of making the Demand. If such
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withdrawn registration was a Demand Registration as provided in Section 3.1
hereof, then the Company may count such withdrawn registration as a Demand
Registration, notwithstanding the provisions of Subsection 3.2.6 hereof, unless
such withdrawal is based upon either (i) adverse market conditions or (ii)
material adverse information relating to the Company that was unknown or
unavailable to the Initiating Holders at the time of making the Demand.
4.4 CERTAIN LIMITATIONS IN CONNECTION WITH FUTURE GRANTS OF
REGISTRATION RIGHTS. From and after the date of this Agreement, the Company
shall not enter into any agreement with any holder or prospective holder of any
securities of the Company providing for the granting of registration rights to
such holder unless (i) such agreement includes provisions substantially
equivalent to paragraph 9.1 hereof and (ii) such agreement requires that, in the
case of any public offering involving an underwritten registered offering under
Article 2 or Article 3 hereof, the Holders have priority as to registration over
any subsequent purchaser of the Company's Common Stock.
4.5 NON-EXCLUSIVE REMEDY. If any registration contemplated herein shall
not become effective as set forth herein, with time being of the essence, then,
in addition to any other remedies which may be available, for each whole or
partial month until the registration does become effective, the Company shall
issue to each Holder a stock certificate for 4% of the shares owned by such
Holder on the date of the issuance.
ARTICLE 5
UNDERWRITING REQUIREMENTS
5.1 UNDERWRITING. If any registration hereunder shall involve an
underwriting, then the Company and all Holders shall be so advised in writing.
In such event, the right of any Holder to participate in any registration
hereunder shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. The Company, together with all
Holders proposing to distribute their Registrable Securities through such
underwriting, shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the Company,
or in the case of a Demand Registration pursuant to Article 3 hereof, selected
pursuant to the terms hereof. Notwithstanding any other provisions of this
Agreement, if the underwriter or underwriters determine that marketing factors
require a limitation on the number of shares of Common Stock to be underwritten,
then the Company shall so advise all Participating Holders and the securities to
be included in such registration shall be allocated as follows:
5.1.1 In the event of a registration pursuant to Article 2
hereof, the Company shall be entitled to include all securities it proposed to
register for its own account in its notice to Holders, and the number of shares
of Registrable Securities which may thereafter be included in the registration
and underwriting shall be allocated first, as nearly as practical, among the
Participating Holders in proportion to the number of Registrable Securities held
by each such person at the time of the initial filing of the
REGISTRATION RIGHTS AGREEMENT Page 7
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Registration Statement, and then to other participants, including the Company,
as may be agreed by such other participants.
5.1.2 In the event of a Demand Registration effected pursuant
to paragraph 3.1 hereof, the number of shares of Registrable Securities that may
be included in the registration and underwriting shall be allocated, as nearly
as practical, to the Participating Holders pro rata in proportion to the number
of shares of Registrable Securities held by each such person at the time of the
initial filing of the Registration Statement, and then to the other
participants, including the Company, as may be agreed by such participants.
5.1.3 No Registrable Securities excluded from the underwriting
by reason of this Article 5 shall be included in such registration. If any
person disapproves of the terms of the underwriting, it may elect to withdraw
therefrom by written notice to the Company and the underwriter or underwriters.
All Registrable Securities so withdrawn shall also be withdrawn from the
registration and shall not be transferred in a public distribution prior to one
hundred and twenty (120) days after the effective date of the Registration
Statement relating thereto or such other shorter period of time as the
underwriter or underwriters may require.
ARTICLE 6
INDEMNIFICATION
6.1 INDEMNIFICATION BY COMPANY. To the extent permitted by law, the
Company will indemnify and hold harmless each of the Holders, each of the
Holder's respective partners, officers, directors, employees, heirs, successors,
assigns and agents, and each Person, if any, who controls any Holder within the
meaning of either Section 15 of the Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (each such person being sometimes
hereinafter referred to as an "Indemnified Holder"), from and against any and
all losses, claims, damages, liabilities and expenses (or actions, proceedings
or settlements with respect thereto) including reasonable costs of investigation
and legal fees and expenses, (i) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (or in any amendment or supplement thereto
or in any preliminary prospectus) or any document relating thereto, or (ii)
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) arising out of or based upon any violation by
the Company of the Act or any rule or regulation thereunder applicable to the
Company and the relating action or inaction required of the Company in
connection therewith, and the Company will reimburse each Holder, each of its
partners, officers, directors, employees, heirs, successors, assigns and agents,
and each person controlling such Holder, for any and all legal and other
expenses reasonably incurred in connection with investigating, defending or
settling such loss, claim, damage or liability. Notwithstanding the above, this
indemnity and duty to defend shall not apply to any Holder to the extent that
such losses, claims, damages, liabilities or expenses arise out of or are based
upon any untrue statement or omission or allegation thereof based
REGISTRATION RIGHTS AGREEMENT Page 8
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upon information furnished in writing to the Company by such Holder expressly
for use in any Registration Statement or Prospectus, or any amendment or
supplement thereto, or any preliminary prospectus, or given supplementally to
the SEC, the National Association of Securities Dealers, any exchange or state
securities regulators. Further, the Company shall not be liable nor have any
duty to defend in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any preliminary
prospectus if (i) such Indemnified Holder failed to send or deliver a copy of
the Prospectus with or prior to the delivery of written confirmation of the sale
of Registrable Securities, and (ii) the Prospectus would have completely
corrected such untrue statement or omission. Further, the Company shall not be
liable nor have any duty to defend in any case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in the
Prospectus if such untrue statement or alleged untrue statement, omission or
alleged omission is completely corrected in an amendment or supplement to the
Prospectus and if, having previously been furnished by or on behalf of the
Company with copies of the Prospectus as so amended or supplemented, such
Indemnified Holder thereafter fails to deliver such Prospectus as so amended or
supplemented, prior to or concurrently with the sale of a Registrable Security
to the person asserting such loss, claim, damage, liability or expense who
purchased such Registrable Security which is the subject thereof from such
Indemnified Holder. This indemnity will be in addition to any liability which
the Company may otherwise have. This indemnify shall not apply to any amount
paid or incurred in settlement without the express written consent of the
Company, which consent shall not be unreasonably withheld.
Each Indemnified Holder shall give prompt written notice to the Company
after it has actual knowledge of any claim in respect of which indemnity may be
sought from the Company hereunder. In such notice, an Indemnified Holder may in
its discretion demand indemnification, in which case the Company shall assume
the defense thereof at the Company's expense, provided that counsel for the
Company shall be satisfactory to such Indemnified Holder (whose approval shall
not be unreasonably withheld). The failure of any Indemnified Holder to give
notice as provided herein shall not relieve the Company of any of its
obligations hereunder to the extent such failure is not prejudicial. If the
Company assumes the defense in such action, such Indemnified Holder shall retain
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall be the
expense of such Indemnified Holder unless (i) the Company has expressly agreed
in writing to pay such fees and expenses, or (ii) the Company shall have a duty
to assume the defense of such action or proceeding and has failed to do so and
failed to employ counsel satisfactory to such Indemnified Holder in any such
action or proceeding as required hereunder, or (iii) the named parties to any
such action or proceeding (including any impleaded parties) include both the
Indemnified Holder and the Company, and such Indemnified Holder shall have been
advised by counsel that there may be one or more legal defenses available to
such Indemnified Holder which are different from or additional to those
available to the Company and which conflict with those of the Company. In all
circumstances, if the Indemnified Holder notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company, the Company
shall not have the obligation to assume the defense of such action or proceeding
on behalf of such Indemnified Holder; it being understood, however, that the
Company shall not, in connection with any one
REGISTRATION RIGHTS AGREEMENT Page 9
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such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys at any time for such Indemnified
Holder, which firm shall be designated in writing by such Indemnified Holder and
shall be subject to approval of the Company, which approval shall not be
unreasonably withheld. The Company shall not be liable for any settlement of any
such action or proceeding effected without its written consent, but if settled
with its written consent, or if there be a final judgment for the plaintiff in
any such action or proceeding, the Company agrees to indemnify and hold harmless
such Indemnified Holder from and against any loss or liability by reason of such
settlement or judgment.
6.2 INDEMNIFICATION BY HOLDERS. To the extent permitted by law, each of
the Holders agrees to indemnify and hold harmless the Company, its directors,
employees, officers and agents, and each person, if any, who controls the
Company within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, and each other Holder, and each other Holder's partners, officers,
directors, employees, heirs, successors, assigns and agents and each person
controlling such Holder, to the same extent as the foregoing indemnity from the
Company to the Indemnified Holders, but only with respect to information
relating to each Holder furnished in writing by such Holder expressly for use in
any Registration Statement or Prospectus, or any amendment or supplement
thereto, or any preliminary prospectus, or given supplementally to the SEC, the
National Association of Securities Dealers, any exchange or state securities
regulators. In case any action or proceeding shall be brought in respect of
which indemnity may be sought against any Holder hereunder, such Holder shall
have the rights and duties given the Company, and the Company and its directors,
officers, employees or agents and controlling persons, and each other Holder,
and each other Holder's partners, officers, directors, employees, heirs,
successors, assigns and agents and each Person controlling such Holder, shall
have the rights and duties given to each Indemnified Holder by paragraph 6.1. In
no event shall the liability of any Holder hereunder be greater in amount than
the dollar amount of the proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
6.3 CONTRIBUTION. If the indemnification provided for in this Article 6
is unavailable to an indemnified party under paragraphs 6.1 or 6.2 hereof (other
than by reason of exceptions provided in those paragraphs) in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying patty, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and of
the Indemnified Holder or Holders on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Indemnified Holder or Holders on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Indemnified Holder or Holders and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses
REGISTRATION RIGHTS AGREEMENT Page 10
<PAGE>
referred to above shall be deemed to include, subject to the limitations set
forth in paragraph 6.1, any legal or other fees or expenses reasonably incurred
by such party in connection with investigating or defending any action or claim.
The Company, and the Holders agree that it would not be just and equitable if
contribution pursuant to this paragraph 6.3 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to herein. Notwithstanding the provisions
of this paragraph 6.3, no Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Registrable
Securities sold by such Holder and distributed to the public were offered to the
public exceeds the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
6.4 SURVIVAL. All provisions of this Article 6 shall survive the
expiration or termination of this Agreement for any reason.
ARTICLE 7
TERM AND TERMINATION
7.1 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company's obligations
pursuant to Articles 2 and 3 shall expire December 31, 2005.
ARTICLE 8
RULE 144 REPORTING
8.1 REPORTS UNDER EXCHANGE ACT. With a view to making available to
Holders the benefits of Rule 144 promulgated under the Act ("Rule 144") and any
other rule or regulation of the SEC that may at any time permit the Holders to
sell securities of the Company to the public without registration, the Company
agrees to use its best efforts to:
8.1.1 at all times make and keep public information available,
as those terms are understood and defined in Rule 144;
8.1.2 file with the SEC, in a timely manner, all reports and
other documents required of the Company under the Act and the Exchange Act; and
8.1.3 so long as such person owns any Registrable Securities,
furnish to the Holders forthwith upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, and of
the Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly
report of the Company, and (iii) such other reports and documents so filed by
the Company as may
REGISTRATION RIGHTS AGREEMENT Page 11
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be reasonably requested in availing the Holders of any rule or regulation of the
SEC permitting the selling of any such securities without registration.
ARTICLE 9
OBLIGATIONS OF THE HOLDERS
9.1 NOTICE OF PROPOSED TRANSFERS. The rights to cause the Company to
register securities under Articles I and II hereunder shall be transferrable or
assignable only to a transferee or assignee of Registrable Securities (as
presently constituted and subject to adjustments for stock splits, stock
dividends, and the like) equal to not less than 0.5% of the Company's
outstanding common stock. Prior. to any proposed sale, assignment, transfer or
pledge of any Registrable Securities (other than a transfer not involving a
change in beneficial ownership) unless there is in effect a registration
statement under the Act covering the proposed transfer, the Holder thereof shall
give written notice to the Company of such Holder's intention to effect such
transfer, sale, assignment or pledge in sufficient detail, and, if requested by
the Company, such notice shall be accompanied, at such Holder's expense, by
either (i) an unqualified written opinion of legal counsel who shall be, and
whose legal opinion shall be, reasonably satisfactory to the Company, addressed
to the Company, to the effect that the proposed transfer of the Registrable
Securities may be effected without registration under the Act, or (ii) a "no
action" letter from the SEC to the effect that the transfer of such securities
without registration will not result in a recommendation by the staff of the SEC
that action be taken with respect thereto, whereupon the Holder of such
Registrable Securities shall be entitled to transfer such Registrable Securities
in accordance with the terms of the notice delivered by the Holder to the
Company. It is agreed that the Company will not request an opinion of counsel
for the Holder for transactions made in reliance on Rule 144 under the Act, as
to which no notice shall be necessary. Each certificate evidencing the
Registrable Securities transferred as above provided shall bear the appropriate
restrictive legend except that such certificate shall not bear any restrictive
legend if in the opinion of counsel for such Holder and the Company such legend
is not required in order to establish compliance with any provision of the Act.
9.2 NO RIGHT TO DELAY. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as a result of
any controversy this Agreement.
ARTICLE 10
MISCELLANEOUS
10.1 ASSIGNMENT. The terms and conditions of this Agreement shall be
binding upon and inure to the benefit of the respective successors and assigns
of the parties hereto and shall be binding upon the parties with respect to
shares of capital stock subsequently acquired by any Holder.
REGISTRATION RIGHTS AGREEMENT Page 12
<PAGE>
10.2 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including the
Exhibits hereto, if any) constitutes the fill and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated, except by a written instrument signed by the Company and the Holders
of at least 80% of the then outstanding Registrable Securities and any such
amendment, waiver, discharge or termination shall be binding on all the Holders,
but in no event shall the obligation of any Holder hereunder the materially
increased, except upon the written consent of such Holder.
10.3 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by it pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys) or use such information to the detriment of
the Company, except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Holder is required to disclose such information by a
governmental body.
10.4 FURTHER ASSURANCES. The parties hereto shall use their best
efforts to do and perform or cause to be done and performed all such further
acts and things and shall execute and deliver all such other agreements,
certificates, instruments or documents as any other party may reasonably request
in order to carry out the intent and purpose of this Agreement and the
consummation of the transactions contemplated hereby and thereby. Neither
Company nor any Holder shall voluntarily undertake any course of action
inconsistent with satisfaction of the requirements applicable to them set forth
in this Agreement and each shall promptly do all such acts and take all such
measures as may be appropriate to enable them to perform as early as practicable
the obligations herein and therein required to be performed by them.
10.5 THIRD PARTIES. Nothing in this Agreement, express or implied, is
intended to confer upon any Person, other than the parties hereto, the
Indemnified Holders, the Company's directors, controlling persons, employees,
officers, agents and their respective heirs, successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
10.6 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
executed by residents of California and wholly to be performed in California.
Each party hereby submits to the exclusive jurisdiction and venue of the
Superior Court of the State of California for the City and County of San
Francisco or the Federal District Court for the Northern District of California
for purposes of any legal or equitable action or proceeding arising out of this
Agreement. Each party agrees that service upon such party in any such action or
proceeding may be made by first class mail, certified or registered, return
receipt requested as provided by the giving of notices in Section 10.8.
10.7 TITLES AND SUBTITLES; FORM OF PRONOUNS. The titles of the
articles and sections of this Agreement are for convenience only and are not to
be considered in
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construing this Agreement. All pronouns used in this Agreement shall be deemed
to include masculine, feminine and neuter forms.
10.8 NOTICES. Except as otherwise expressly provided herein, all
notices and other communications required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon receipted personal
delivery (professional courier permissible), United States certified mail
delivery or confirmed facsimile transmission to the address set forth with
respect to such party on the signature pages of this Agreement (and with copies
as indicated thereon), or to such other address as such party shall have given
notice of pursuant hereto to the other patty or parties.
10.9 RIGHTS; SEVERABILITY. Unless otherwise expressly set forth herein,
a Holder's rights and obligations hereunder are several rights, not rights
jointly held with the other Holders. If one or more provisions of this Agreement
are held to be invalid, illegal or unenforceable under applicable law, portions
of such provisions, or such provisions in their entirety, to the extent
necessary, shall be severed from this Agreement, and the balance of this
Agreement shall be enforceable in accordance with its terms.
10.10 DELAYS OR OMISSIONS. No delays or omissions to exercise any
right, power or remedy accruing to any patty to this Agreement, upon any breach
or default of the other party, shall impair any such right, power or remedy of
such nonbreaching party nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any holder, shall be cumulative
and not alternative.
10.11 ATTORNEYS' FEES. In the event of litigation hereunder, the
prevailing party or parties shall be entitled to recover its or their costs of
litigation, including reasonable attorneys' fees, in addition to all other
relief as may be granted.
10.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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REGISTRATION RIGHTS AGREEMENT Page 14
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IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
COMPANY: DCC COMPACT CLASSICS, INC., a Colorado
corporation
By:/s/Marshall Blonstein
----------------------------------
Marshall Blonstein, President
Address for Notice: DCC Compact Classics, Inc
9301 Jordan Avenue, Suite 105
Chatsworth, CA 91311
With a copy to: Richard Leach
22900 Ventura Blvd., Suite 110
Woodland Hills, CA 91364
DAYSTAR: DAYSTAR PARTNERS, L.P., a California
limited partnership
By: LARRY WELLS CO., INC., its
General Partner
By:
-----------------------------
Larry Wells, President
Address for Notice: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attn: Larry Wells
With a copy to: Barry Reder, Esq.
Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, California 94108
REGISTRATION RIGHTS AGREEMENT Page 15
<PAGE>
OTHER PURCHASERS:
-----------------------------
Larry Wells
Address for Notice: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
SUNDANCE VENTURE PARTNERS, L.P., a
Delaware limited partnership
By:
-----------------------------------
Its:
-----------------------------------
Address for Notice: 10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attn: Larry Wells
REGISTRATION RIGHTS AGREEMENT Page 16
<PAGE>
EXHIBIT 10.9
DISTRIBUTION AGREEMENT
This Agreement is made as of June 4, 1997, (the "Effective Date")
between DCC Compact Classics, Inc. ("Supplier") and Distribution North America
("Distributor").
WHEREAS, Supplier is engaged in the business of manufacturing and
marketing phonorecords; and Distributor is engaged in the business of
distributing goods manufactured by others; and Supplier desires to appoint
Distributor to act as distributor of the Products; and Distributor is willing to
accept such appointment.
NOW, THEREFORE, Supplier and Distributor do hereby agree as follows:
1. DEFINITION.
Products. The term "Products" means all phonorecords embodying or
derived from sound recordings and any copies of audiovisual works which during
the Term are owned or controlled by Supplier and are released by Supplier, or
for which Supplier possesses the right to authorize distribution.
2. GRANT OF DISTRIBUTORSHIP.
2.1 Nature of Relationship / Territory. Supplier hereby appoints
Distributor as its sole and exclusive distributor for the Products during the
Term within the United States, its territories and possessions (the "Territory")
in accordance with the terms and conditions set forth herein. Notwithstanding
the foregoing, Distributor agrees to allow Supplier to sell Product directly to
those customers listed in Exhibit B.
2.2 Selected Product. From time to time, Supplier may identify certain
titles of Product ("Title" or "Titles") for which, due to minimum purchase
requirements placed on Supplier by its suppliers of such Titles, Supplier
believes it must use channels of distribution either in addition to or instead
of Distributor or those customers listed in Exhibit B. For each such Title so
identified by Supplier, Supplier agrees to notify Distributor in writing ten
(10) business days prior to the completion of the purchase arrangements for the
Title with the proposed supplier of such Title. During the Term, the cumulative
sales volume of Titles by Supplier so distributed shall not exceed five percent
(5%) of Distributor's cumulative sales volume of Product.
2.3 Notice. Supplier agrees to provide Distributor with at least ninety
(90) days written notice prior to changing or discontinuing any of the Products
during the Term.
3. ORDERS AND SHIPMENTS.
3.1 Purchase Orders. Distributor shall place orders for the Products
with Supplier on Distributor's standard purchase order.
3.2 Terms of Shipment.
(a) Supplier shall pay any insurance, duty and customs, or
other similar charges associated with shipments of Products from Supplier's
facilities to the destination in the Territory designated by Distributor.
<PAGE>
(b) Supplier will ship the Products to Distributor in wrapped
packaged containers with all necessary bar coding and in such manner as is
consistent with industry practice. In the event Product is shipped directly from
Supplier, or Supplier's manufacturer, to Distributor's customers ("Drop
Shipments"), Supplier will submit to Distributor proof of delivery of such
shipments and an invoice which documents the sale to Distributor of the Product.
(c) Distributor shall pay Supplier's actual freight costs of
delivering Product to Distributor's facility or as Drop Shipments. Distributor
shall pay its freight costs in returning product to Supplier, except as provided
in Section 4.2(1,) upon termination of this Agreement.
4. PRICES, PAYMENT TERMS, AND RETURNS.
4.1 Prices. The price to be paid by Distributor for Product during the
Term shall be in accordance with Exhibit A. Prices paid for Product not included
in Exhibit A shall be mutually determined by Distributor and Supplier. All
prices are inclusive of all royalties and applicable taxes. The prices at which
Product is sold by Distributor shall be at the discretion of Distributor.
4.2 Terms of Payment.
(a) For purchases of Product during the Term, Distributor
shall pay to Supplier by check, the verified amount of Supplier's invoice, net
of a ten percent (10%) reserve against returns of Product to be made from
Distributor to Supplier (less any actual returns made by Distributor to Supplier
since the date of the last payment to Supplier by Distributor), advertising
commitments made by Distributor on behalf of Supplier, and overpayments (except
as separately provided in Section 4.6), within sixty (60) days upon delivery of
Product ordered by Distributor from Supplier to Distributor's warehouse or
Distributor's designated Drop Shipment location. So long as this Agreement is in
effect (no notice from either Supplier or Distributor to the other party or
other event of termination being in existence), the reserve against returns
shall be repaid to Supplier by Distributor during the thirteenth month following
the month in which such reserve is established, to the extent that such reserve
has not already been utilized in the form of actual returns made by Distributor
to Supplier during the month such reserve was established. During the term of
this Agreement, any and all Product of Supplier in the hands of Distributor
shall be returnable to Supplier by Distributor under the provisions of this
section 4.2. For payments made by Distributor to Supplier in a timely manner per
this Section 4.2(a), Distributor shall be entitled to a discount of two percent
(2%) from Distributor's cost of the Product.
(b) Within one hundred eighty (180) days after the expiration
or termination of this Agreement, subject to Distributor's right hereunder to
fulfill outstanding orders, Distributor will ship to Supplier, or Supplier's
designee, at Supplier's request all unsold Product in Distributor's possession
or control, subject to Supplier's written financial commitment and documented
ability to pay for or to arrange payment by Supplier's designee for such
Product. Supplier will be responsible for the shipping costs incurred for
Product so returned.
(c) Neither the provisions of this Section 4 nor any other
provision of this Agreement may be modified by Supplier through invoices or
other documents provided to Distributor, nor may such writings are intended by
Supplier to establish additional or different terms than those set forth in this
Agreement unless in either case such writing is signed by an authorized
representative of Distributor.
4.3 Existing Supplier Product at Valley Record Distributors, Inc.
("Valley"). As recorded product of Distributor is co-mingled with recorded
product of Valley Record Distributors, Inc. (a full-service "one stop"
distributor of recorded product), it will be necessary for Distributor to
purchase any Supplier Product
<PAGE>
owned by Valley from Valley subsequent to the execution of this Agreement.
Supplier agrees to pay Distributor any difference in the price of such Product
from Valley to Distributor (at Valley's average purchased cost for such Product)
over the price at which Distributor is purchasing the same Product from Supplier
under the provisions of this Agreement. Distributor may deduct the value of such
difference from amounts otherwise due to Supplier under the provisions of this
Agreement.
4.4 Required Order. Subsequent to the Effective Date, Distributor shall
place an initial purchase order with Supplier for Product which, employing its
standard inventory management practices, Distributor believes is necessary to
have in stock for sales to its customers ("Required Order"). Supplier shall fill
the Required Order from its own stock of inventory to the extent such product is
on hand at Supplier as of the Effective Date. Payment for the Required Order by
Distributor (as to the portion filled by Supplier) shall be in accordance with
Sections 4.2(a) and 4.6. A portion of the Required Order may also be filled with
Product from the predecessor Distributor of Supplier. Financial arrangements
with the predecessor distributor for purchases of such Product shall be made
directly between the predecessor distributor and Distributor.
4.5 Excess Product. Distributor also agrees to accept an initial
purchase from Supplier of Product in excess of the Required Order which is in
possession of Supplier as of the Effective Date ("Excess Product"). Payment for
Excess Product shall be in accordance with Section 4.2(a), except that the
invoice or invoices for the Excess Product shall be due within one hundred
eighty (180) days ("Excess Due Date"), as compared to the sixty (60) day
provision of Section 4.2(a). Distributor also agrees to purchase excess product
which is in the hands of Supplier's predecessor distributor as of the Effective
Date. Financial arrangements with the predecessor distributor for purchases of
such Product shall be made directly between the predecessor distributor and
Distributor.
4.6 Initial Payment. Subsequent to the Effective Date, Distributor
shall pay to Supplier by check, the amount of two hundred fifty-thousand dollars
($250,000) ("Initial Payment"). Such payment shall be recovered from Supplier by
reducing future amounts due to Supplier by Distributor by applying the Initial
Payment to invoices due to Supplier pursuant to the Required Order, or to any
other so-called "new release" orders as required if the total amount due
pursuant to the Required Order is less than the Initial Payment. Invoices to
which the Initial Payment is applied shall be subject to a ten percent (10%)
discount, such discounts to take the form of so-called "free goods".
5. MARKETING AND ADVERTISING.
5.1 Distributor's Undertaking.
(a) Distributor shall use commercially reasonable efforts to
distribute Supplier's Product by soliciting and fulfilling orders for such
Product. The method of distribution of Products hereunder and the collection of
payment therefor shall be within the sole discretion of Distributor.
(b) Distributor shall use reasonable efforts to promote the
sale of Supplier's Products. So-called "co-op advertising" with respect to the
Products may be placed by Distributor on Supplier's behalf with Supplier's
authorization and the expense thereof incurred by Distributor will be charged
back to Supplier. The method of release and advertising of the Products shall be
mutually determined.
(c) Distributor may, upon Supplier's written approval, offer
certain Product for sale to its customers for certain periods of time
("Promotional Period") at a discounted price. Distributor shall typically offer
such Product to its customers at a percentage discount from Distributor's normal
selling price. An amount shall be deducted from payments otherwise due to
Supplier as a percentage discount from Distributor's per unit purchase price
from Supplier for such Product which is offered at a discount during the
<PAGE>
Promotional Period ("Computed Discount"). The ratio of Distributor's percentage
discount from selling price to the Computed Discount shall be not be greater
than seven (7) to ten (10). For example, seven percent (7%) off selling price
offered to customers by Distributor would correspond to a Computed Discount
often percent (10%) off unit price paid to Supplier by Distributor for sales of
Product offered at a discount during the Promotional Period. Distributor shall
not track which customers order Product at the discounted price and which
customers, if any, order Product at regular price during the Promotional Period,
but shall instead deduct from payment to Supplier the Computed Discount as
applied of all sales of Product offered at a discount during the Promotional
Period. The Computed Discount may take the form of so-called "free goods", if
such an arrangement is made in advance with the mutual consent of Distributor
and Supplier.
5.2 Right to Appoint Sub-Dealers. Distributor shall have the right, at
its own discretion and upon Supplier's written approval, to appoint Valley
Record Distributors, of Woodland, California, and other sub-dealers to market
the Products.
5.3 Supplier's Undertaking.
(a) Supplier shall be solely responsible for all costs of
production and manufacture of the Product, including but not limited to: costs
of producing, recording and manufacturing such Product; costs of artwork; costs
and expenses of advertising, marketing and promoting Product (except for
Distributor's sales materials which Distributor distributes to its accounts and
vendors); the payment of royalties (including mechanical royalties), fees, or
other sums to artists, producers, record Suppliers or others; and any other
costs arising out of the production, recording, manufacture and sale of Product
for which Distributor is not otherwise responsible as specifically provided in
this Agreement.
(b) Supplier agrees to provide Distributor, at no cost to
Distributor, such sales materials (e.g., posters, flyers, point-of-purchase
materials) with respect to Products as Supplier generally makes available, and
Distributor may reproduce such sales materials as reasonably required.
6. CONFIDENTIALITY OF INFORMATION AND MATERIALS. Each of the parties
hereto shall hold in strict confidence and shall not disclose to any third
party or use, either before or after the termination or expiration of this
Agreement, any of the terms and conditions of this Agreement, or any
confidential information marked as such which is disclosed hereunder. The
foregoing shall not apply to such disclosure if necessary or reasonably
required in connection with the performance of either party's obligations
hereunder.
7. WARRANTIES AND REPRESENTATIONS.
7.1 Supplier's Representations and Warranties. Supplier represents
and warrants that:
(a) Supplier has and shall have, good, clear and marketable
title to the Products.
(b) Supplier is duly organized and existing in good standing
under the laws of its state of incorporation. or formation., and the execution,
delivery and performance of this agreement has been duly authorized by all
requisite corporate action.
(c) The exercise of Distributor's rights hereunder shall not
obligate Distributor to make any payments other than as specifically set forth
herein or obtain consents from any third party.
(d) The Products and their distribution shall not violate the
copyright, trademark, unfair competition, privacy, publicity, or other right of
any third party.
<PAGE>
(e) Supplier has not, and will not have sold, assigned,
transferred, leased, conveyed or granted a security interest in, or otherwise
disposed of the Products covered by this Agreement adverse to or derogatory of
the material rights granted to Distributor herein, and will not authorize any
other person to distribute and sell Products in the Territory in contravention
of Distributor's exclusive rights hereunder.
7.2 Distributor's Representations and Warranties. Distributor warrants
and represents that (i) it is duly organized and existing in good standing under
applicable law, and (ii) the execution, delivery and performance of this
Agreement are within Distributor's powers.
8. RECORDS. Distributor agrees to maintain copies of all documentation relating
to its purchase and sale of Products under this Agreement. Distributor shall
permit Supplier to have access to such documentation at Distributor's place of
business where Distributor keeps its books and records to be examined, during
ordinary business hours, provided Supplier gives Distributor reasonable prior
written notice specifying the documentation to be examined. Any such examination
shall be conducted by a certified public accountant or attorney on behalf of
Supplier, shall be at Supplier's sole cost and expense and shall be conducted in
a manner that does not unreasonably interfere with the normal operation of
Distributor's business.
9. INTELLECTUAL PROPERTY RIGHTS.
9.1 Acknowledgment of Rights. Supplier represents and warrants that it
is the owner of or otherwise possesses the right to grant to Distributor, as
specifically provided herein, the rights in and to the names, designs, artwork,
packaging, and advertising associated with its Products, including all
performances and artistic, musical material embodied in the Products, and the
trademarks and logos used in connection therewith, together with any new or
revised names, designs, artwork, packaging, and advertising which Supplier may
adopt to identify it or any Product during the Term (collectively "Materials").
9.2 License to Use Materials. Supplier hereby grants to Distributor the
right during the Term to reproduce, publicly perform, distribute and display,
and otherwise use the Materials and the names, likenesses, and biographical
material contained therein throughout the Territory in connection with the
distribution and sale of Products hereunder. Distributor hereby agrees to
promptly notify Supplier of any infringement of any of the Materials in the
Territory of which it becomes aware.
9.3 Intellectual Property Claims. In the event that any claim or suit
is brought against Distributor alleging that the sale of Products hereunder is
an infringement of any intellectual property right, Supplier will defend any
claim brought against Distributor and will indemnify Distributor against any
losses, liabilities, expenses or damages (including reasonable attorneys' fees).
10. INDEMNIFICATION OBLIGATIONS.
10.1 Indemnification by Supplier. Supplier shall indemnify and hold
Distributor and its respective owners, shareholders, subsidiaries, affiliates,
customers and persons serving as officers, directors, partners or employees
thereof harmless from any damages, liabilities, costs and expenses (including,
without limitation, reasonable attorney fees) which may be sustained or suffered
by any of them arising out of any actual or alleged breach by Supplier of any of
the representations, warranties, agreements or covenants of Supplier under this
Agreement.
10.2 Indemnification by Distributor. Distributor shall indemnify and
hold Supplier and its respective owners, shareholders, subsidiaries, affiliates,
customers and persons serving as officers, directors, partners or employees
thereof harmless from any damages, liabilities, costs and expenses (including,
without limitation, reasonable attorney fees) which may be sustained or suffered
by any of them arising out of any
<PAGE>
actual or alleged breach by Distributor of any of the representations,
warranties, agreements or covenants of Distributor under this Agreement.
11. ASSIGNMENT. Distributor or Supplier may not assign, transfer, or license its
rights hereunder without the prior written consent of the other party.
Distributor may, however, appoint sub-dealers per Section 5.2.
12. TERM OF AGREEMENT. This Agreement shall commence on the Effective Date and
remain in effect until May 31, 2000 (the "Term"), and shall be automatically
renewed for an additional one (1) year term provided that neither party gives
written notice to the other at least ninety (90) days prior to the end of any
such term of its intention to discontinue the Agreement.
13. TERMINATION.
13.1 Events of Termination - Material Breach. This Agreement may be
terminated by either party if one party commits a material breach of any of the
provisions of this Agreement and does not cure such breach within thirty (30)
days after receipt of written notice thereof.
13.2 Events of Termination - Key-person Change. Supplier has deemed the
following personnel of Distributor as essential and material to the Agreement
and the distribution relationship formed by it:: General Manager - Ron Phillips,
Business Manager - James Colson, VP Sales - Charles "Pip" Smith. In the event
that any two of these three personnel are no longer employed by Distributor or
Valley during the Term ("Key-person Change"), Supplier shall have the right to
terminate this Agreement upon thirty (30) days advance written notice to
Distributor. The ability of Supplier to terminate upon the occurrence of a
Key-person Change shall lapse if not exercised within sixty (60) days subsequent
to the occurrence of such an event In the event Distributor does make a change
in one or more of these three personnel during the Term, Distributor may ask
Supplier to sign a document stating that such replacement personnel are
acceptable, and attach such signed document as an amendment to this Agreement.
If Supplier does in fact sign such a document, then such personnel listed on the
document shall be deemed an acceptable replacement for all purposes of this
section 13.2.
13.3 Rights upon Termination. Upon termination of this Agreement, all
further rights and obligations of the parties shall cease, except that the
parties shall not be relieved of (i) their respective obligations to pay any
moneys due or which become due as of or subsequent to the date of termination,
and (ii) any other respective obligations under this Agreement which are
intended or required to be performed after the date of termination, including
the indemnification and return provisions.
13.4 Returns. After termination or expiration of this Agreement,
Supplier will contractually obligate the successor distributor of Distributor to
accept returns of Products in the hands of customers of Distributor and issue
credit to customers at such successor distributor's selling prices. In the event
no successor distributor to Distributor of Supplier's Product exists upon the
expiration or termination of this Agreement, Supplier will accept all returns of
Products in the hands of Distributor's customers and returns of all Supplier's
Product directly from Distributor at prices equal to prices paid by Distributor.
Upon acceptance of such returns, Supplier will pay Distributor in full
immediately to the extent such returns result in a balance due from Supplier to
Distributor. Distributor shall pay Supplier in full immediately to the extent
such returns result in a balance due from Distributor to Supplier.
14. MISCELLANEOUS.
14.1 Force Majeure. If the performance of any obligation under this
Agreement is prevented, restricted or interfered with by reason of war, civil
commotion, strikes, any law or proclamation, or any other
<PAGE>
act whatsoever, which is beyond the reasonable control of the party affected,
then the party so affected shall, upon giving prior written notice to the other
party, be excused from such performance to the extent of such prevention,
restriction, or interference, provided that the party so affected shall use
reasonable commercial efforts to avoid or remove such causes of nonperformance,
and shall continue performance hereunder with reasonable dispatch whenever such
causes are removed.
14.2 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all previous negotiations, agreements and commitments with respect
thereto, and shall not be released, discharged, changed or modified in any
manner except by instruments signed by duly authorized officers or
representatives of each of the parties hereto.
14.3 Applicable Law. The validity, interpretation and legal effect of
this Agreement shall be governed by the laws of the State of California
applicable to contracts entered into and performed entirely within said State.
14.4 Partial Illegality. If any provision of this Agreement or the
application thereof to any party or circumstances shall be declared void,
illegal or unenforceable, the remainder of this Agreement shall be valid and
enforceable to the extent permitted by applicable law.
14.5 Waiver of Compliance. Any failure by any party hereto to enforce
at any time any term or condition under this Agreement shall not be considered a
waiver of that party's right thereafter to enforce each and every term and
condition of this Agreement.
14.6 Obligations. The rights and obligations of each party shall inure
to its respective successors, heirs, administrators, and permitted assigns.
14.7 Notices. All notices in connection with this Agreement shall be in
writing and shall be sent to the following addresses, or to such other addresses
as may be designated by the parties in writing from time to time, by express
mail, registered or certified mail, or telefax with a hard copy to follow via
air mail.
To Distributor at: Distribution North America
c/o Valley Record Distributors, Inc.
1280 Santa Anita Court
Woodland, CA 95776
Attention: James Colson
To Supplier at: Marshall Blonstein
DCC Compact Classics, Inc.
9301 Jordan Avenue, Suite 105
Chatsworth, CA 91311
14.8 Attorneys' Fees. The prevailing party in any action or proceeding
arising out of this Agreement shall be entitled to collect its reasonable
attorneys' fees from the opposing party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives as of the Effective Date.
DISTRIBUTION NORTH AMERICA DCC COMPACT CLASSICS, INC
By: /s/ By: /s/
Title: Business Manager Title: President
<PAGE>
EXHIBIT A
PRICES TO BE PAID BY DISTRIBUTOR
Label and Prefix Price To Be Paid
Compact Discs
Rural Rhythm $4.80
DCC/DCC Jazz/Garland (DZS/DJZ/GRZ $5.30
DCC and Sandstone (DZS/DJZ/GRZ) $5.87
DCC and Invisible Sound (DZS/IZS) $6.50
Marquee (MMD) $6.90
DCC and VRG (DZS/VRG) $8.00
DCC(DZS) $8.33
Marquee (MMD)
Native American Collection (3 CD Box Set) $10.15
Invisible Sound (IZS) (2 CD Box Set) $11.80
Sandstone (SAN) 2 CDs $12.20
DCC Gold (GZS) Single $17.10(with 1 in 10 CDs free)
DCC Gold Single - Jethro Tull/
Aqualung (GZS 1105) $18.25(with 1 in 10 CDs free)
DCC Gold (GZS2) Double $27.90(with 1 in 10 CDs free)
DCC 4 CD Box Set (DZS)
Club Verboten $29.95
Cassettes
Svengali (SV Cassette Single) $1.61
<PAGE>
Rural Rhythm $2.10
DCC (DZC) $4.30
DCC (DZC) Rick Dees $4.70
Cassettes (continued)
DCC (DZC) Rick Dees $4.70
DCC/Invisible Sound
Babyscapes (2 CD Box Set) $8.05
LPS
Svengali (SV) 12" Single $3.01
LPZ Single LP $15.67
LPZ Single LP - Jethro Tull
Aqualung (LPZ-2030) $16.50
LPZ(2) Double LP Raiders of the Lost Arc
(LPZ(2)-2009) $22.00
<PAGE>
EXHIBIT B
(Accounts Excluded From The DNA Distribution Agreement)
- -------------------------------------------------------------------------------
GENERAL AREAS:
Audio Shops & Catalog Company's (Audio Equipment & Accessory Retailers)
Audiophile Gold CD & Vinyl LP Catalog Company's
Gay & Lesbian Book Retailers
INDIVIDUAL ACCOUNTS:
Acoustic Sounds
Aztec Corp. (Rediscover)
Book Of The Month Club
Doubleday Direct
Entertainment Software (ESI)
Goldenrod Distribution
Gotham Distributing
Grammy Awards Guide
H.L. Distributors
Kandamerica
Ladyslipper
Music Design
New Leaf Distributing
Pacific Coast One-Stop (Gold CD's & Vinyl LP's for Export Only)
Playboy Enterprises (Collector's Choice)
Price Club / COSTCO
Record Depot (Rural Rhythm selections)
Rhinodirect
Rivertown Trading Company
Sam's Club
Tower Records
Walt Disney World Company
White Swan Music
- -------------------------------------------------------------------------------
Page 2
<PAGE>
(Selections Excluded From the DNA Agreement)
Format Number Title (all various Artists)
- ------ ------ ---------------------------
CD DZS-050 Monsters of Rock & Roll
CD DZS-104 Duets: A Man & A Woman
CD DZS-121 Divas Of Dance, Vol. 1
Cass. DZC-121 Divas Of Dance, Vol. 1
CD DZS-122 Divas Of Dance, Vol. 2
Cass. DZC-122 Divas Of Dance, Vol. 2
CD DZS-123 Divas Of Dance, Vol. 3
Cass. DZC-123 Divas Of Dance, Vol. 3
CD DZS-124 Divas Of Dance, Vol. 4
CD DZS-125 Divas Of Dance, Vol. 5
CD DZS-126 Totally Tejano, OLD SCHOOL, Vol. 1
Cass. DZC-126 Totally Tejano, OLD SCHOOL, Vol. 1
CD DZS-127 Totally Tejano, OLD SCHOOL, Vol. 2
Cass. DZS-127 Totally Tejano, OLD SCHOOL, Vol. 2
CD DZS-128 Totally Tejano, OLD SCHOOL, Vol. 3
Cass. DZC-128 Totally Tejano, OLD SCHOOL, Vol. 3
CD DZS-131 Hi-NRG, Vol. 1
CD DZS-132 Hi-NRG, Vol. 2
CD DZS-139 Rock The First, Vol. 9
CD DZS-140 Rock The First, Vol. 10
CD DZS-141 Groove On!, Vol. 1
CD DZS-142 Groove On!, Vol. 2
CD DZS-143 Groove On!, Vol. 3
