-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IlGEFETXsu8aTR9q+RcYQUMOfwFtIUF/dlTa5H3Nd5XtP/o6CfQk8qcurCw19387 R1W4+9ctNR9LlLxcIqOcdg== 0000949459-97-000198.txt : 19970428 0000949459-97-000198.hdr.sgml : 19970428 ACCESSION NUMBER: 0000949459-97-000198 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970425 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DCC COMPACT CLASSICS INC CENTRAL INDEX KEY: 0000809932 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 841046186 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21114 FILM NUMBER: 97586928 BUSINESS ADDRESS: STREET 1: 9301 JORDON AVE STREET 2: STE 105 CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8189938822 MAIL ADDRESS: STREET 1: 200 E LAS OLAS BLVD STREET 2: C/O ATLAS PEARLMAN TROP & BORKSON CITY: FT LAUDERDALE STATE: FL ZIP: 33301 FORMER COMPANY: FORMER CONFORMED NAME: DUNHILL COMPACT CLASSICS INC DATE OF NAME CHANGE: 19900522 FORMER COMPANY: FORMER CONFORMED NAME: TOTAL CAPITAL CORP DATE OF NAME CHANGE: 19871103 10KSB 1 DCC COMPACT CLASSICS, INC. U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year Ended December 31, 1996 Commission File No. 0-21114 DCC COMPACT CLASSICS, INC. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in Its Charter) Colorado 84-1046186 - -------------------------------------------------------------------------------- (State of Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9301 Jordan Avenue, Suite 105, Chatsworth, California 91311 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (818) 993-8822 - -------------------------------------------------------------------------------- (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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $4,665,576. 1 Common Stock, par value $.005 per share ("Common Stock"), was the only class of voting stock of the Registrant outstanding on April 2, 1997. Based on the closing bid price of the Common Stock on the National Association of Securities Dealers, Inc. OTC Bulletin Board as reported on April 2, 1997 ($.75), the aggregate market value of the 3,409,000 shares of the Common Stock held by persons other than officers, directors and persons known to the Registrant to be the beneficial owner (as that term is defined under the rules of the Securities and Exchange Commission) of more than five percent of the Common Stock on that date was approximately $2,556,750. By the foregoing statements, the Registrant does not intend to imply that any of these officers, directors or beneficial owners are affiliates of the Registrant or that the aggregate market value, as computed pursuant to rules of the Securities and Exchange Commission, is in any way indicative of the amount which could be obtained for such shares of Common Stock. The Registrant had 7,051,725 shares of its $.005 par value Common Stock issued and outstanding as of April 2, 1997. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference: None. Transitional Small Business Disclosure Format: Yes ; No X --- --- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS ----------------------- THE COMPANY General The focus of the Company's operations for approximately the first decade of its operations, has been to build a specialized niche in the market for compact discs ("CDS"). The emergence of CD technology in the early 1980s led to segments of the consuming public replacing their collections of vinyl and audio cassettes with the superior quality and convenience of CDS. Classical music listeners were the first segment to accept CD technology and the initial CDS were comprised of classical albums. Since that time there has been substantial acceptance of CDS for all types of music, including classical, jazz, rock and oldies. Sales of CDS grew rapidly and by the end of 1995 represented in excess of 70% of all music sales in the $12 billion record industry. A predominant portion of the Company's manufacturing process utilizes a coating of 24k gold and a proprietary vintage vacuum tube system which are considered by various audiophiles to have a superior phonic quality compared with standard CDS, and thereby can be sold at a premium in excess of the incremental manufacturing costs. The Company is presently one of the industry leaders in the sale of 24k gold CDS and has license rights to the exclusive exploitation of 24k gold CDS albums by such artists as Frank Sinatra, Beach Boys, The Doors, The Eagles, Paul McCartney, Cream, Miles Davis, Creedence Clearwater Revival, The Steve Miller Band, Ringo Starr and Bob Seeger. The Company has successfully exploited the consumer demand for reissues and compilations of music originally issued on vinyl and audio cassettes. This has been achieved through the purchase, marketing and sale of catalogs of music masters and by licensing rights from others of music masters for exploitation. The Company's basic concept has been to provide the listening public a CD line that specializes in contemporary music which includes jazz, classical and oldies and the 24k gold limited edition series. In addition, the Company has developed various "Compilation" series which features the best of a certain performance era or type of music. The Company has entered into licensing agreements with major record labels, including Sony, MCA, Warner, Elektra, Atlantic, Arista, Capitol and Polygram among others. Typically, licensing agreements range from three to five years in term with possible renewal options. Royalties are paid to the licensor at between $.55 to $6.00 per unit sold for the term of the agreement. The licensing agreements grant the Company the exclusive or non exclusive right to 3 utilize master recordings of many top artists for the purpose of enhancing the sound quality through a digital sound recording process and then to market under the Company's trade label, the individual recordings, or compilations. The Company follows the normal practice for independent record labels, which entails subcontracting manufacturing, field sales, physical distribution, billing and collections to specialized entities providing such services. During 1993, the Company formed a general partnership, "Romance Alive Audio" (the "Partnership"), with Romance Alive Audio, Inc. ("Romance Alive") to enter the emerging market for audio books. Romance Alive is owned by Beverly Blonstein, the spouse of Marshall Blonstein, the Chief Executive Officer of the Company. The Partnership, which operates out of the same building as the Company, specializes in the publishing of romance novels on audio- cassette, sold primarily through chain-drug stores, supermarkets and traditional book outlets. The Partnership has achieved its goal of becoming a significant publisher of women's romance novels on audio cassette in the United States. Under the terms of the partnership arrangement, the Company and Romance Alive divide revenues and costs on a 70/30 basis, respectively. On June 30, 1996, the Company entered into an agreement with Re-Pac Corp. to purchase all of the shares of corporate stock of Photo Dimensions, Inc. ("PDI") which were owned by Re-Pac Corp. Through the acquisition, which was completed during July 1996, the Company acquired the technology for use in the Company's promising new product known as the "Single-Use Caption Camera." The Single- Use Caption Camera is a disposable camera that combines two images onto the same frame of film in a single photograph. Part of the film frame is pre-exposed, before the film is loaded into the disposable camera, to a first image. The image will appear on the bottom of the picture as a named theme or event. The film is then loaded into a Single-Use Caption Camera. When the user takes a picture, the film is exposed to a second image, namely the target image. The two images are then simultaneously developed by conventional means as a single image. On June 25, 1996, PDI filed an application with the U.S. Patent and Trademark Office for a patent of the method and apparatus use in the Single-Use Caption Camera. The patent was issued on March 25, 1997 as U.S. Patent Number 5,615,396. The Patent is entitled "Producing Smoothly Blended Double Exposure Composite Images." The Company's principal product has been CDS. Management plans to continue its efforts to maintain the Company's market share for CDS. Management is equally committed to the success of the Single- Use Caption Camera. The Company's executive offices are located at 9301 Jordan Avenue, Suite 105, Chatsworth, California 91311; the telephone number of the Company is (818) 993-8822. 4 Background The Company was incorporated as Total Capital Corporation, a Colorado corporation, on December 5, 1986. On October 19, 1987, the shareholders of the Company approved an agreement and plan of merger with Dunhill Compact Classics, Inc., a privately held California Corporation ("Dunhill") incorporated on February 19, 1986. Pursuant to the merger, the Company changed its name to Dunhill Compact Classics, Inc. effective October 20, 1987. On August 8, 1989, the shareholders of the Company approved a name change to "DCC Compact Classics, Inc." The Company continued the business of Dunhill. The Company's mission after the acquisition of Dunhill has been to exploit the then-emerging market for compact discs. Since that time, the Company has extended its mission to enter new niche markets in the entertainment business as they develop. The niche markets which are presently being exploited are reissues of catalogs of music masters, 24k gold CDS and, more recently, a joint venture in the emerging market for Audio Books. The Company through Photo Dimensions Inc., a wholly owned subsidiary acquired during 1996, is launching a new product known as the "Single-Use Caption Camera." Growth Strategy The Company's basic concept has been to provide to the listening public a compact disc line that specializes in contemporary music which includes jazz, classical and oldies, and 24k gold limited edition series. It is the opinion of the management that continued significant investment will be made to license as many master tape rights as can be obtained. An important indicator of future growth is the amount of product (i.e., licensing of artists) it can control in the marketplace. The Company continues to explore other entertainment niche markets to exploit either through acquisition or license. Management believes that the greatest growth will come from the Company's most recent efforts to develop, market and distribute for sale its Single-Use Caption Camera to the wholesale marketplace and premium users. Catalogs of Music Masters The emergence of compact disc technology in the early 1980s has led to consumers replacing their collections of vinyl and audio-cassettes with the much higher quality and convenience of compact discs, which now account for over 70% of music sales in the United States. The Company has successfully exploited the consumer demand for reissues and compilations of music originally issued on vinyl and audio-cassettes. This 5 has been achieved both through the purchase, exploitation and sale of catalogs of music masters and by licensing rights from others to music masters for exploitation. Licensing Agreements The Company has entered into licensing agreements with major record labels, including Sony, MCA, Warner, Elektra, Atlantic, Arista, Capitol, Polygram, and among others. Each licensing agreement carries different royalty arrangements and terms with various options. Typically, licensing agreements range from three to five years in term, and in some cases, with several additional renewal options. Royalties are paid to the licensor between $.55 to $6.00 per unit sold for the term of the various agreements. The license agreements grant the Company the exclusive or non-exclusive right to utilize master recordings of many top artists for the purpose of enhancing the sound quality through a digital sound recording process, and then to market the recordings under the Company's trade names, the individual recordings, or compilations. The Company has the right to select which recordings are suitable for the compact disc presentation under its trade names. Typically, royalties are paid either quarterly or semi-annually after the compact disc has been shipped to the retail outlets. In some cases the Company pays an advance against royalties ranging from $1,000 to $25,000, depending on the artist. If an advance is made, the Company does not pay additional royalties until the amount of the advance has been recouped. Production, Distribution, Marketing and Sales The Company follows the normal practice for independent record labels, which entails sub-contracting manufacturing, field sales, physical distribution, billing and collections, to specialized entities providing such services. The Company offers international penetration and domestic (U.S.) marketing for CDS through independent sales representatives. The Company employs a staff to handle licensing, recording, quality control and marketing, and to oversee the sub-contracted services relating to CDS. DCC LABEL -- The Company has been producing compact discs since 1986. Distribution outlets for DCC Label are principally independent distributors, which currently represent 90% of Company sales. In other cases, bulk sales may be made directly to major record stores. The Company follows normal record distribution concepts (i.e, compact discs are sold to a distributor or retailer who then marks up the price for sale to consumers). During 1996, the Company terminated its distribution agreements with eight regional distributors and entered into a distribution agreement with one national distributor which will 6 be the exclusive distributor for the Company's core market for CDS. The Company will continue to use other distributors for specialized markets. SANDSTONE LABEL -- This label is currently being distributed in the same manner as the DCC label. The line features popular artists and older recordings including Aretha Franklin, Red Hot Chili Peppers, and Roxette. The label has also picked up the distribution of various labels which specializes in house dance music. Single-Use Caption Cameras With respect to the Company's new product, the Single-Use Caption Camera, the Company will utilize the technology it acquired in its acquisition of Photo Dimensions, Inc. completed during July 1996. The laser technology of pre-exposure burns an image into the film which is similar to laser printing on paper. The image will appear on the bottom of all of the pictures taken by the Single-Use Caption Camera. The image will be either a named theme or event. Examples of named themes or events are the birth of a child, a birthday or anniversary, a trip to a theme park or vacation resort, or other special events. The pictures will have captions like "It's a Boy," "It's a Girl," "Happy Birthday," "Happy Anniversary," "Hawaii," etc. After the desired image is burned on the film by the Company's technology, the film will be shipped to an assembler who will construct the disposable cameras. The Company estimates the assembler will require approximately 30-60 days to complete the assembly of the camera and ship the camera to its destination. This assembly process will allow the Company to ramp-up production with relatively minimal lead-time and capital investment. The Company has independent sales representatives to market its Single-Use Caption Camera to the wholesale marketplace and large quantity users. One group of sales representatives will concentrate on marketing Single-Use Caption Cameras to convenience stores for impulse purchases, at card stores, at one-hour photo stores, toy stores, tourist locations and resorts, theme parks and other outlets. A second group of sales representatives will concentrate on generic quantity users. The management of the Company believes that the introduction and marketing of its new Single-Use Caption Camera presents the opportunity for the Company to become a significant participant in the single-use camera industry. Management anticipates that the addition of the caption feature technology to the single-use (disposable) camera may be appealing to a sufficient portion of the users of single-use cameras so that sales generated from the sales of the Company's new product could grow substantially over the next five years. However, there is no assurance that the growth will be achieved. The growth of 7 the wholesale market for single-use cameras worldwide exceeded $1 billion in 1996 which represents an estimated 200 million single-use cameras sold, with approximately 53 million sold in the United States. Competition COMPACT DISCS -- There is intense competition in the $12 billion domestic U.S. music industry, which is dominated by six major global entities - Warner Music Group, Sony Music, Polygram, Bertelsman Music Group, EMI Records Group and MCA Music Entertainment - known as "the Majors." The Company's principal competitors are the departments of these "Majors" specializing in catalog reissues. While the "Majors" have larger financial and promotional budgets, the Company has a competitive advantage compared with the catalog re-issue departments of the Majors, due to its reputation in the market place as expert in the field and because the "Majors" focus is often deflected by the priority of exploiting new material from current superstar and developing artists. SINGLE-USE CAPTION CAMERAS -- The Company is aware of only one direct competitor possessing technology that can produce a caption camera similar in technology to the Company's technology. The competitor's technology is, however, different, but the competitor's technology does produce captions on film as does the Company's technology. Other competitors could develop new technology that would further increase the competition in the marketplace. The management of the Company is unaware of any other direct competitors at this time. Competitors who sell single-use cameras but are not anticipated to compete directly with the Company's new Single-Use Caption Cameras are primarily large companies in the photograph industry. The major competitors are Eastman Kodak, Fuji Film, and others. Employees The Company employs 14 people on a full-time basis in the Company's California office of which 3 employees are in executive positions and the balance are engaged in technical and administrative capacities. The Company's North Carolina office employs 4 people. ITEM 2. DESCRIPTION OF PROPERTIES ------------------------- 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 8 which covers a term of five years concluding April 2000 at an adjusted base rental of approximately $5,521 per month. The Company leases approximately 1,800 square feet of space on a month to month basis at approximately $2,000 per month in North Carolina. ITEM 3. LEGAL PROCEEDINGS ----------------- The Company was named as one of two defendants in a lawsuit filed on October 17, 1996 by PSI Industries, Inc., a Florida corporation ("PSI") in the Circuit Court of the 15th Judicial Circuit for Palm Beach County, Florida. The actions against the Company were breach of a written non-disclosure and confidentiality agreement, misappropriation of trade secrets, unfair competition, and deceptive advertising. The actions are based on allegations relating to discussions initiated by PSI with the Company during late 1995 regarding the possible merger of the two companies. In connection therewith, the Company signed a non-disclosure and confidentiality agreement. PSI had been granted an exclusive license by Keepsake, Inc., a Florida corporation ("Keepsake") for the marketing of Keepsake's pre-exposed message camera process. PSI alleges that the Company acted in concert with the second defendant, a former marketing manager for PSI, to form a business enterprise, referred to as Photo Dimensions, for the purpose of manufacturing or distributing the single-use message cameras using Keepsake's proprietary message camera process. After conducting its due diligence, the Company concluded that it was not in its best interest to form a merger with PSI. During 1996, the Company purchased Photo Dimensions, Inc. ("PDI") which has rights and technology to a double exposure camera. On March 25, 1997, the United States Patent and Trademark Office issued a patent to PDI entitled "Producing Smoothly Blended Double Exposure Composite Images." During January 1997, the Company filed a lawsuit against PSI in the United States District Court for the Central District of California. The complaint is for declaratory relief, unfair competition, slander of title, intentional misrepresentation, negligent misrepresentation, and breach of contract. While the outcome of the lawsuit against the Company cannot be predicted with certainty, it is the opinion of counsel that the Company has meritorious defenses to the lawsuit. In the opinion of management, the lawsuit, when finally concluded, will not have a material adverse effect on the Company's financial condition. Further, counsel believes that the Company has meritorious claims against the defendants. In a second matter, the Company filed a lawsuit during September 1996 against VRG Records, Page Hufty, and LV-Wax Records in the Superior Court for the County of Los Angeles, California. The Company's complaint alleges that VRG Records breached a 4 year exclusive distribution agreement under which the Company, through its distributors, were to be the exclusive distributor of VRG Record products. After the Company's initial success, Page Hufty, the President 9 and owner of VRG Record, created LV-Wax Records to distribute VRG Record products for which the Company was named as the exclusive distributor under the exclusive distribution agreement. The Company has claimed damages of $50,000 to $100,000 as a consequence of VRG Record's breach. VRG Record filed a cross-complaint against the Company alleging that the Company has failed to account and pay amounts owed to VRG Record under the agreement. Counsel for the Company believes that the Company's claims against the defendants is meritorious and that the Company has meritorious defenses and offsets with respect to the cross-complaint. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS --------------------------------------------------- A special meeting of the shareholders of the Company's common stock was held on November 27, 1996. A proxy statement was furnished to the shareholders in connection with the solicitation by the Company's Board of Directors of proxies to amend the Company's Articles of Incorporation to effect a one-for-three (1:3) reverse stock split of the issued and outstanding common stock of the Company on the basis of one newly issued common stock share for each three shares of the Company's presently issued and outstanding common stock. Of the 6,746,725 shares issued and outstanding, as of November 27, 1996, 4,559,078 shares voted for the proposal, 2,715 shares voted against and 2,450 shares abstained. The reverse stock split was to become effective upon the filing of an amendment to the Company's articles of incorporation with the Secretary of State of Colorado. The filing occurred during December 1996. During April 1997, the Company's board of directors approved, as being in the best interest of the Company and its shareholders, a resolution to amend the Company's articles of incorporation to delay the effective date of the reverse stock split. The amendment will be filed by the end of April 1997 with the Secretary of State of Colorado and will provide that all issued and outstanding shares of the Company's common stock held by each holder of record on October 1, 1997 shall be automatically combined at the rate of one for three (1:3). The shareholders will then be notified and requested to surrender their stock certificates representing pre- reverse stock split shares to the Company's transfer agent in exchange for stock certificates representing post-reverse stock split shares. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------- (a) The Company's Common Stock is traded on the OTC Bulletin Board under the symbol "DCCC." The following table sets forth the high and low bid quotations for the Common Stock for the periods indicated. These quotations reflect prices between dealers, do not include retail mark-ups, mark-downs or commission and may not necessarily represent actual transactions. 10 Low High --- ---- March 31, 1995 $ .18 $ .33 June 30, 1995 .18 .78 September 30, 1995 .72 1.06 December 31, 1995 1.12 1.87 March 31, 1996 1.75 2.00 June 30, 1996 1.56 1.56 September 30, 1996 .63 1.25 December 31, 1996 .63 1.38 March 31, 1997 .81 .88 As of April 2, 1997, there were 214 holders of record of the Company's common stock. The closing bid price quoted on the OTC Bulletin Board sheets for the Company's Common Stock at April 2, 1997 was $.75. The Company has never declared or paid, and has no present intention to pay, cash dividends on its Common Stock. Any future dividends will necessarily depend upon the Company's future earnings, capital requirements, financial condition and other factors. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND -------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Overview The focus of the Company's operations during the last decade has been to maintain a specialized niche in the market for compact discs for music listeners. The Company is one of the industry leaders in a manufacturing process which utilizes a coating of 24k gold. The 24k gold compact discs have a superior phonic quality than standard compact discs and can be sold at a premium in excess of the incremental manufacturing costs. Another specialized niche which the Company has successfully exploited is the consumer demand for reissues and compilations of music originally issued on vinyl and audio cassettes. The Company's growth strategy is to exploit other entertainment niches either through acquisitions or licensing agreement. Since the formation during 1993 of Romance Alive Audio, a California general partnership by the Company and Romance Alive Audio, Inc, the partnership has become a significant publisher in the United States of women's romance novels on audio cassette. The audio-cassettes are sold primarily through chain-drug stores, supermarkets and traditional book outlets. During July 1996, the Company completed the acquisition of Photo Dimensions, Inc. Through the acquisition, the Company acquired the technology that is in the Company's promising new product known as the "Single-Use Caption 11 Camera." The Single-Use Caption Camera is a disposable camera which utilizes the technology of combining two images onto the same frame of film in a single photograph. Management believes that the Company's greatest growth will come from the sales of this new product to the wholesale marketplace and premium users. During November 1996, test sales of the Single-Use Caption Camera began. The Company sold approximately 3,000 Cameras to a select number of premium resalers. The indoor and outdoor use of the Camera was tested for quality and acceptability by the end-user. The results of the test were positive. The Company did not receive any user complaints regarding the performance of the Camera nor the quality of the pictures produced by the Camera, both of which met the quality criteria established by the Company. Beginning in 1997, the Single-Use Caption Cameras will be marketed by independent sales representatives to convenience stores for impulse purchases, at card stores, at one-hour photo stores, toy stores, tourist locations, theme parks, and similar outlets. The Single-Use Camera will also be marketed to large quantity users such as universities, tourist bureaus, healthcare providers and other major users. For example, a healthcare provider may purchase Cameras with the caption, "It's a Boy," or "It's a Girl." Results of operations for 1996 were significantly affected by the implementation by management of its plan to position the Company to exploit the market for its Single-Use Caption Camera. First, the Company consolidated its distribution system for the sale of compact discs to one major national distributor as opposed to eight regional distributors. The consolidation will enable Management to devote a greater percentage of its time and energy to the production, marketing and sales of the Single-Use Caption Camera. However, under the distribution agreements, the termination of the regional distributors resulted in the return of all unsold inventory of compact discs held by the regional distributors. The returned inventory negatively impacted the results of operations for 1996 (see "Cost of Sales" below). Management believes that the long-term benefits of the streamlining of its distribution system for the sale of compact discs outweighs the short-term negative impact on the Company's operations for 1996. Second, the Company's acquisition of Photo Dimensions, Inc. ("PDI"), which was completed during July 1996, resulted in the Company incurring acquisition and other costs (See "Liquidity and Capital Resources" below). Management believes that the streamlining of its distribution system for its compact discs, and the expenditures related to the acquisition of PDI, have contributed to position the Company to exploit the potential of the Single-Use Caption Camera in terms of increasing the Company's sales and net income. 12 Results of operations in the future will be influenced by numerous factors including market and structural conditions in the record recording industry, increases in expenses associated with sales growth, market acceptance of the Company's products (particularly, the Single-Use Caption Camera), the capacity of the Company to develop and manage the introduction of new reissues of recording classics as well as new products, competition, and the ability of the Company to control costs. Management is confident of the Company's future prospects. There can be, however, no assurance that revenue growth and profitability will be sustained, that the Company will be able to develop sufficient cash flow and obtain adequate financial resources to enable it to sustain its operations, or that profitability on a quarterly or annual basis will occur in the future. Results of Operations Year Ended December 31, 1996 compared to Year Ended December 31, 1995. Revenues Revenues for the year ended December 31, 1996 ("Fiscal 1996") were $4,666,000 versus $4,201,000 for the year ended December 31, 1995 ("Fiscal 1995"). The increase of approximately 11% is primarily attributed to the new releases of compact discs based on an increase in the licensing of artists. The test sales of the Single-Use Caption Camera, which started during November 1996, had a negligible impact on Company sales for 1996. Based on Management's forecasts, sales of its Single-Use Caption Camera are anticipated to become a significant portion of the Company's revenues for 1997 and surpass revenues generated by its compact disc product line beyond 1997. Cost of Sales Cost of Sales for Fiscal 1996 and Fiscal 1995 was $2,184,000 and $1,731,000, respectively. The increase in the cost of sales for Fiscal 1996 verses Fiscal 1995 of $453,000, representing 26%, resulted in a decrease in gross profit margin to 53% for Fiscal 1996 verses 59% for Fiscal 1995. The increase in the cost of sales is primarily attributed to the consolidation of the Company's distribution system for compact discs to one nationwide distributor from eight regional distributors. As a consequence of the consolidation, the eight regional distributors returned approximately $782,000 in product recalled by the Company. The Single-Use Caption Camera had little impact on the cost of sales during fiscal 1996. As sales of the Camera increase during 1997, and for future years, Management plans to subcontract field sales, distribution, billing and collection. Subcontracting such services is the same 13 practice that the Company follows for compact discs. As the market develops, Management is forecasting that gross profit margins for the Single-Use Caption Camera will range from 30% to 40%. Royalties Royalties paid by the Company for Fiscal 1996 were $909,000 and were comparable to $922,000 for Fiscal 1995. Selling, Administrative, and Other Operating Expenses Selling, Administrative, and operating expenses of operations for Fiscal 1996 were $2,142,000 versus $1,406,000 for Fiscal 1995. The 52% increase is primarily attributed to several components as follows: costs relating to the acquisition of Photo Dimensions, Inc., of approximately $220,000; an increase in bad debts of approximately $100,000; and an increase in legal fees of approximately $90,000. Other Income (Expenses) Interest income was $10,000 for Fiscal 1996 versus $41,000 for Fiscal 1995. The reduction in interest income is attributed to the employment of the Company's marketable securities towards the finance of the acquisition and start-up costs of PDI. Interest expense was $40,000 for Fiscal 1996 versus $34,000 for Fiscal 1995. Liquidity and Capital Resources At the end of Fiscal 1996, the Company had a negative working capital of $512,000 compared to working capital of $376,000 at the end of Fiscal 1995. The Company used a substantial portion of its available working capital to finance the acquisition of PDI and to fund its operating loss for Fiscal 1996. Working capital declined approximately $900,000 of which approximately $500,000 is attributable to a loss for Fiscal 1996 and approximately $400,000 is attributable to the Company's investment in Photo Dimensions, Inc. The total acquisition price for the shares of PDI was $225,000 plus the issuance of 300,000 shares of the Company's restricted common stock which were valued at $1.09 per share, the estimated market price at the time of the closing. The Company issued a promissory note in the principal amount of $150,000 for the balance of the cash portion of the acquisition price. The note bears interest at 8% per annum and is secured by the assets of PDI. $25,000 of principal plus the accrued and unpaid interest is due semi-annually with all of the outstanding principal plus accrued and unpaid interest due on June 30, 1999. As a consequence of the operations of PDI being located in North Carolina, the Company incurred additional administrative costs during 1996 of approximately 14 $225,000. Subsequent to fiscal 1996, the Company consolidated certain administrative functions of PDI's North Carolina operations with the Company's California headquarters. Management believes that most of the additional administrative and start-up costs with respect to PDI were incurred during Fiscal 1996 and such costs are not anticipated to be reoccurring. During Fiscal 1996, the Company incurred legal expenses of approximately $90,000 to acquire PDI and to obtain the patent for its Single-Use Caption Camera. During Fiscal 1996, the Company incurred approximately $75,000 of capital expenditures to: upgrade its laser equipment which is used to burn the captioned images onto the film for use in the Single-Use Caption Camera; and research and development to enable the Company to make in-house adjustments to the Single-Use Caption Camera if such service should be required. Additional capital expenditures to increase capacity will be a function of the growth in sales of the Single-Use Caption Camera. The operating loss for Fiscal 1996 was another user of working capital. The Company used the net borrowing under its line of credit as a source of working capital which helped to finance the operating loss. The net amount borrowed during 1996 under the Company's $750,000 line of credit was $393,000. $250,000 of long-term debt, incurred prior to Fiscal 1996 was repaid during Fiscal 1996. In addition to the $150,000 note given as part of the acquisition price for PDI, during Fiscal 1996 the Company received a $250,000 term loan which provided working capital. During February 1997, the Company received a commitment for the private placement of up to 1,000,000 shares of the Company's common stock at a price of $1 per share. The Company has received $470,000 under the commitment. Management believes the Company will receive the $530,000 balance under the commitment. The amount available under its line of credit of approximately $350,000 together with receipt of the $530,000 balance of the private placement commitment are needed by the Company to satisfy its anticipated working capital needs for 1997. If the Company fails to receive substantially all of the $530,000 balance under the commitment, then a source to replace the funds will be needed. Further, the Company will need to obtain additional sources of capital to acquire and exploit new licensing agreements for compact discs, and to meet forecasted demand for the Single-Use Caption Camera in an efficient and timely manner. Management has been active in pursuing additional financing. There can be no assurances that additional financing will be available in sufficient and timely amounts. 15 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained under the "Management's Discussion and Analysis of Financial Condition and Results of Operations" heading, and elsewhere in this report, such as statements concerning the Company's ability to increase revenues and net income, the continued growth of the market for single-use cameras, the acceptance of the Company's Single-Use Caption Camera by the market, and other statements contained herein regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Act). Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. ITEM 7. FINANCIAL STATEMENTS -------------------- The financial statements and supplementary data are included under Item 13(a)(1) and (2) of this Report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND -------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Effective February 17, 1997, the Company discontinued the services of Winter, Scheifley & Associates, P.C., the Company's independent auditors. The Company and Winter, Scheifley & Associates, P.C., did not have any disagreements regarding the two fiscal years ending December 31, 1995 or any subsequent interim period with respect to matters of accounting principles or practices, financial statement disclosure or auditing scope, or procedure which, if not resolved to the firm's satisfaction, would have caused it to make reference to the subject matter of such disagreement in the firm's reports. In connection with the termination of such relationship, the Company decided to engage Hurley & Company, Certified Public Accountants, as the Company's accountants to audit the Company's financial statements for the fiscal year ending December 31, 1996. The Company's board of directors approved the change of accounting firms. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; -------------------------------------------------------------------- COMPLIANCE UNDER SECTION 16(a) OF THE EXCHANGE ACT -------------------------------------------------- The following table sets forth the names, ages and positions with the Company of the executive officers and directors of the Company. Directors will be elected at the Company's annual meeting of stockholders and serve for one year or until their successors are elected and qualify. Officers are elected by the Board and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board. 16 Name Age Position ---- --- -------- Marshall Blonstein 52 President, Chief Executive Officer, Chief Financial Officer, Director Samuel J. Passamano, Jr. 42 Senior Vice President, General Manager, Director Robert L. Siner 54 Director The officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. Mr. Blonstein and Mr. Passamano devote their full time to the business of the Company. MARSHALL BLONSTEIN -- Mr. Blonstein was a co-founder of the Company. He has been President, Chief Executive Officer and a Director since the inception of the Company, and since December 1989, Chief Financial Officer of the Company. He has been involved in the music industry since 1965. Between 1981 and 1986, Mr. Blonstein was President of Morada Records, Inc., headquartered in Nashville, Tennessee, which he founded. He also served as President of Island Records, headquartered in New York, New York, in its Los Angeles, California office, between 1979 and 1981, and was Co-founder and General Manager of Ode Records, Los Angeles, California from 1970 through 1979. He is a member of the National Association of Recording Merchandisers. SAMUEL J. PASSAMANO, Jr. -- Mr. Passamano has been a Director since January 1996, and Senior Vice President/General Manager of the Company since July 1996. Mr. Passamano held the position of Senior Vice President/Sales & Marketing between March 1996 and June 1996. Between January 1995 and March 1996, Mr. Passamano was Vice President of Sales. Mr. Passamano purchased Uncle Jim O'Neal, Rural Rhythm as a major international Bluegrass and Country Catalog Music label. Prior to the purchase in 1987, Mr. Passamano and Dr. Art Ulene, the NBC TODAY Show's "Family Physician," formed Feeling Fine Programs, Inc., a multimedia publishing company, in which Mr. Passamano served as Executive Vice President/Chief Operating Officer. Prior to forming Feeling Fine Programs, Inc., Mr. Passamano was Director of Marketing for MCA Records, Inc. for six (6) years. ROBERT L. SINER -- Mr. Siner has been a Director of the Company since January 1996. Mr. Siner is the President and Chief Executive Officer of Marquee Music, Inc., a company of Spencer Entertainment, Inc., formed in 1995. Mr. Siner was recruited in 1971 by MCA Records, Inc., where he served in such positions as Advertising Director, Media Director, Vice President of Advertising and Merchandising, Vice President of Marketing, Executive Vice President and President. Mr. Siner served as President of MCA Records, Inc. for more than seven (7) years. 17 ITEM 10. EXECUTIVE COMPENSATION ---------------------- Cash Compensation Total cash compensation paid to all executive officers as a group for services provided to the Company in all capacities during the year ended December 31, 1996 aggregated approximately $270,200. Set forth below is summary compensation table in the tabular format specified in the applicable rules of the Securities and Exchange Commission. As indicated, no officer of the Company or any of its subsidiaries, except for Marshall Blonstein, received total salary and bonus which exceeded $100,000 during the periods reflected. Summary Compensation Table --------------------------
Other All Name and Annual Restricted Other Principal Compen- Stock Options/ LTIP Compen- Position Period Salary Bonus sation* Award(s) SARs(#) Payouts sation - -------- ------ ------ ----- ------- -------- ------- ------- ------ Marshall Blonstein, 1996 $165,000 $50,000 $3,000 - 500,000 - $3,000 Chairman 1995 $150,000 - $6,000 - 200,000 - $ -0- and CEO 1994 $150,000 - $6,000 - 200,000 - $ -0-
*Personal use of Company vehicle. Employment Agreements On February 1, 1996, the Company entered into a four-year Agreement with Mr. Marshall Blonstein which provides for an annual base salary of $170,000, a separate cash bonus at the time of signing of $50,000 and the use of a Company vehicle valued at $6,120 per year. Mr. Blonstein is also entitled to receive standard health benefits and term life insurance coverage in the amount of $250,000 payable to the beneficiaries of Mr. Blonstein. In the event of the death of Mr. Blonstein during the term of this employment agreement, Mr. Blonstein's spouse will be entitled to receive his salary for a period of eighteen months. Mr. Blonstein is also entitled to certain payments from the Company in the event that a change of control of the Company occurs without the approval of the Board of Directors, and Mr. Blonstein is entitled to receive a security interest in the assets of the Company in order to secure any payments due to Mr. Blonstein in the event of any default under the terms of the agreement following a change in control. 18
OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS) - -------------------------------------------------------------------------------------------- Percent of Number of Total Options/ Securities SARs Granted Underlying to Employees Exercise or Options/SARs in Fiscal Base Price Expiration Name Granted (#) Year ($/Sh) Date - --------------------------------------------------------------------------------------------- Marshall Blonstein 02/01/96 300,000 .20 02/01/99 07/05/96 200,000 .50 07/05/99 ------- Total 500,000 91% Option Exercises and Values at Year End Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Value of Number of Unexercised Unexercised In-the-Money Option/SARs Option/SARs at FY-End (#) at FY-End Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized Unexercisable Unexercisable ---- ------------ -------- ------------- ------------- Marshall Blonstein 725,000 $66,000 700,000 $900,000
Option Grants The Company has awarded Samuel J. Passamano, Jr. options to purchase 50,000 shares of Common Stock exercisable at $.50 per share on or prior to July 5, 1999. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth Common Stock ownership as of March 31, 1997 with respect to (i) each person known to the Company to be the beneficial owner of five (5%) percent or more of the Company's outstanding Common Stock, (ii) each director of the Company and (iii) all executive officers and directors of the Company as a group. This information as to beneficial ownership was furnished to the Company by or on behalf of the persons named. Unless otherwise indicated, the business address of each person listed is 903 Jordan Avenue, Suite 105, Chatsworth, California 91311. Information with respect to the percent of class is based on 7,051,725 shares of the Company's Common Stock issued and outstanding as of April 2, 1997. 19 Shares Percent Name Beneficially Owned(1) of Class ---- --------------------- -------- Marshall Blonstein(2) 2,917,605 41.4% Milton Barbarosh 675,000 9.6% All Officers and Directors as a Group (3 persons)................ 3,642,605 51.7% ____________ (1) Except as otherwise indicated in the footnote (2) and (3) below, each shareholder has sole power to vote and dispose of all the shares of Common Stock listed opposite his name. (2) Includes 700,000 shares of Common Stock issuable upon exercise of certain options by Mr. Blonstein. (3) Includes 700,000 shares and 50,000 shares of Common Stock issuable upon exercise of certain options by Mr. Blonstein and Mr. Passamano, respectively. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- During 1993, the Company formed a general partnership, "Romance Alive Audio" (the "Partnership"), with Romance Alive Audio, Inc. ("Romance Alive") to enter the emerging market for audio books. Romance Alive is owned by Beverly Blonstein, the spouse of Marshall Blonstein, the Chief Executive Officer of the Company. The Partnership, which operates out of the same building as the Company, specializes in the publishing of romance novels on audio-cassette, sold primarily through chain-drug stores, supermarkets and traditional book outlets. With the number of authors signed over the past several years, the Partnership has the opportunity to be a significant publisher of women's romance novels on audio cassette in the United States. Under the terms of the partnership arrangement, the Company and Romance Alive divide revenues and costs on a 70/30 basis, respectively. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K -------------------------------------- (a)(1) and (2) Financial Statements and Schedules ---------------------------------- The financial statements listed on the index to financial statements on page F-1 are filed as part of this Form 10-KSB. 20 (b) Reports on Form 8-K ------------------- The Company filed Form 8-K/A report dated February 17, 1997 (item 8). (c) Exhibits (Index) -------- The following Exhibits are incorporated by reference or included in this report: Number Description of Document - ------ ----------------------- 2.1 Acquisition Agreement between the Company and Re- Pac Corp. 3.1 Articles of Incorporation(1) 3.2 Articles of Correction(1) 3.2.1 Amendment to Articles of Incorporation(2) 3.2.2 Amendment to Articles of Incorporation 3.3 Bylaws(3) 10.1 Employment Agreement - dated February 1, 1996 with Marshall Blonstein 10.2 Agreement with Passport Music 10.3 Lease for Chatsworth, California (4) 10.4 Line of Credit documents with Merrill Lynch Business Financial Services, Inc. 10.5 Partnership Agreement with Romance Alive Audio, Inc.(4) 10.6 $250,000 Term Loan Documents with Merrill Lynch Business Financial Services, Inc. (1) Incorporated by reference to the Exhibits to the Registration Statement on Form S-18 as amended, Registration Number 33- 11473-D, as filed with the Securities and Exchange Commission. (2) Incorporated by reference to the Exhibits to the Company's Form 10-K for the year ended December 31, 1989, as filed with the Securities and Exchange Commission. (3) Incorporated by reference to the Exhibits to the Company's Form 8-K, January 11, 1993 as filed with the Securities and Exchange Commission. (4) Filed with Annual Report on Form 10-KSB for the year ended December 31, 1995, as filed with the Securities and Exchange Commission. - -------------------------------------------------------------------------------- No annual report or proxy material; covering the Registrant's last fiscal year has been sent to security holders. Copies of any such report or proxy materials furnished to security holder subsequent to the filing of the annual report of this form shall be furnished to the Commission when it is sent to security holders. 21 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 15th day of April, 1997. DCC COMPACT CLASSICS, INC. By:/s/Marshall Blonstein ----------------------------------- Marshall Blonstein Chairman of the Board and Chief Executive Officer In accordance with the Exchange, this Report has been signed below by the following person on behalf of the Registrant, and in the capacities and on the date indicated. Signature --------- Chairman of the Board, President and Principal /s/Marshall Blonstein Executive, Financial and Marshall Blonstein Accounting Officer April 15, 1997 /s/Samuel J. Passamano,Jr. Senior Vice President, April 15, 1997 - -------------------------- General Manager, and Samuel J. Passamano, Jr. Director 22 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page No. INDEPENDENT AUDITOR'S REPORT F-2 FINANCIAL STATEMENTS Consolidated Balance Sheet F 3-4 Consolidated Statements of Operations F-5 Consolidated Statement of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F 7-8 Notes to Consolidated Financial Statements F 9-18 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of DCC Compact Classics, Inc. I have audited the accompanying consolidated balance sheet of DCC Compact Classics, Inc. and subsidiaries, as of December 31, 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DCC Compact Classics, Inc. and subsidiaries, as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Hurley & Company Granada Hills, CA April 8, 1997 F-2 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1996 1996 ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 155,222 Accounts receivable, net of bad debt and return allowances of $233,061 915,215 Note receivable 125,000 Inventories 1,063,563 Advance royalties 218,663 Income tax receivable 80,000 ---------- Total current assets 2,557,663 ---------- PROPERTY, PLANT & EQUIPMENT: Furniture and fixtures 39,033 Machinery and equipment 650,540 Leasehold improvements 16,935 ---------- 706,508 Less accumulated depreciation 117,151 ---------- 589,357 ---------- OTHER ASSETS Deferred income taxes 46,864 Mastering costs, net 650,761 Receivable from affiliate 62,031 Intangibles, net of accumulated amortization of $14,219 270,151 Other 52,762 ---------- Total assets $4,229,589 ========== The accompanying notes are an integral part of these financial statements. F-3 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1996 1996 ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 710,025 Accounts payable 472,087 Royalties payable 1,731,134 Other accrued expenses 3,358 Deferred revenue 78,485 Current portion of long-term debt 75,000 ----------- Total current liabilities 3,070,089 ----------- LONG-TERM DEBT 75,000 ----------- Total Liabilities 3,145,089 COMMITMENTS AND CONTINGENCIES -- STOCKHOLDERS' EQUITY Common stock, par value $.005 per share; authorized 10,000,000 shares, issued and outstanding 6,746,725 shares 33,734 Additional paid-in capital 1,094,322 Accumulated deficit (43,556) ----------- Total stockholders' equit 1,084,500 ----------- Total liabilities and stockholders' equity $ 4,229,589 =========== The accompanying notes are an integral part of these financial statements. F-4 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996 and 1995 1996 1995 ----------- ----------- Sales $ 4,665,576 $ 4,200,596 Cost of sales (2,184,121) (1,730,639) Royalties (908,748) (921,780) ----------- ----------- Gross profit 1,572,707 1,548,177 Selling, adminis- trative and other operating expenses 2,142,023 1,405,848 ----------- ----------- Operating income (loss) (569,316) 142,329 Other income (expense) Interest income 10,274 41,316 Interest expense (39,896) (34,488) Other income 2,504 -- ----------- ----------- Income (loss) before income taxes (596,434) 149,157 Income tax provision (benefit) (80,001) 49,900 ----------- ----------- Net income (loss) $ (516,433) $ 99,257 =========== =========== Earnings (loss) per share $ (.08) $ .02 =========== =========== Average weighted number of shares outstanding 6,188,614 4,960,506 =========== =========== The accompanying notes are an integral part of these financial statements. F-5 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996 and 1995
Retained Additional Earnings Common Stock Paid in Treasury (Accumulated Shares Amount Capital Stock Deficit) Total --------- -------- ---------- -------- ----------- ---------- Balance 1/1/95 4,960,506 $ 24,803 $ 623,397 $(22,550) $ 373,620 $ 999,270 Net income 99,257 99,257 --------- -------- ---------- -------- ----------- ---------- Balance 12/31/95 4,960,506 24,803 623,397 (22,550) 472,877 1,098,527 Issuance of stock to purchase subsidiary company 300,000 1,500 324,900 - - 326,400 Stock options exercised 1,449,999 7,250 153,000 - - 160,250 Additional shares sold 1,220 6 - - - 6 Shares issued for services 35,000 175 15,575 - - 15,750 Retirement of treasury stock - - (22,550) 22,550 - - Net loss (516,433) (516,433) --------- -------- ---------- -------- ------------ ---------- Balance 12/31/96 6,746,725 $ 33,734 $1,094,322 $ - $ (43,556) $1,084,500 ========= ======== ========== ======== ============ ==========
The accompanying notes are an integral part of these financial statements. F-6 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996 and 1995 1996 1995 --------- --------- Cash flows from operating activities: Net income (loss) $(516,433) $ 99,257 --------- --------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Non-cash items included in net income (loss): Depreciation and amortization 347,869 217,585 Royalty adjustments (373,517) -- Deferred income taxes (13,764) -- Changes in: Receivables 525,241 (432,820) Inventories (110,762) 101,134 Royalty advances (55,075) 133,573 Other 34,305 (28,273) Accounts payable and accrued expenses 9,172 (447,917) Royalties payable 147,409 198,868 Deferred revenue 78,485 -- Income taxes (176,001) 49,900 --------- --------- Total adjustments 413,362 (207,950) Net cash used in operating activities (103,071) (108,693) --------- --------- Cash flows from investing activities: Capital expenditures (416,269) (17,211) Proceeds from sale of master tapes -- 150,000 Marketable securities 400,000 (400,000) Mastering costs (359,121) (294,496) --------- --------- Net cash used in investing activities (375,390) (561,707) --------- --------- The accompanying notes are an integral part of these financial statements. F-7 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996 and 1995 1996 1995 --------- --------- Cash flows from financing activities: Borrowing under line of credit $ 685,314 $ 1,274 Payments on line of credit (293,463) -- Additional long term debt 250,000 -- Repayments on long-term debt (250,000) -- Issuance of common stock 110,006 -- --------- --------- Net cash provided by financing activities 501,857 1,274 --------- --------- Net increase (decrease) in cash and cash equivalents 23,396 (669,126) Cash and cash equivalents at beginning of period 131,826 800,952 --------- --------- Cash and cash equivalents at end of period $ 155,222 $ 131,826 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid $ 49,555 $ -- ========= ========= Interest paid $ 33,896 $ 33,488 ========= ========= Non-Cash Transactions Issuance of stock ($326,400) and debt ($150,000) in exchange for property and equipment ($192,030) and goodwill ($284,370) $ 476,400 $ -- ========= ========= Common stock issued to officer in exchange for liability $ 66,000 -- ========= ========= The accompanying notes are an integral part of these financial statements. F-8 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Basis ------------------- The consolidated financial statements of "the Company" include the accounts of DCC Compact Classics, Inc., its wholly owned subsidiary, Photo Dimensions, Inc. and its 70% owned partnership, Romance Alive Audio. All material intercompany accounts and transactions have been eliminated in consolidation. Use of estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. In addition, the Company records liabilities for license and royalty fees based upon contractual obligations. These calculations are subject to review by independent agencies. Should the results of a review produce amounts greater than those recorded by the Company, there may be a negative impact on the Company's financial statements. Fair value of financial instruments ----------------------------------- For certain of the Company's financial instruments, including accounts and notes receivable, short-term borrowings, notes payable, accounts payable and other accrued liabilities, the carrying amount of these instruments approximates fair value. Cash and cash equivalents ------------------------- Cash and cash equivalents consist of deposits and highly liquid debt instruments with original maturities of 90 days or less. Substantially all funds are on deposit with one financial institution. Short-term Securities --------------------- The Company's short-term securities are bought and held primarily for the purpose of selling them in the near term. The Company recorded the securities at cost, which approximate market. F-9 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Inventory --------- Inventory is stated at the lower of cost, on a first-in first-out basis, or market and consists of the following at December 31, 1996: Raw materials $ 206,353 Finished goods and components 857,210 ---------- Total $1,063,563 ========== Depreciation ------------ Depreciation is computed on property and equipment using the straight-line method over the expected useful lives of the assets which are generally 5 years. Mastering Costs --------------- Costs incurred for mastering, including artwork and recording costs, are capitalized and charged to expense over the estimated period of benefit of 4 years. Intangible Assets ----------------- Intangible assets consist of goodwill connected with the purchase of Photo Dimensions, Inc. Goodwill is being amortized over ten years on a straight-line basis. Revenue recognition ------------------- Sales revenue is recorded when music recordings are shipped to distributors and/or retail customers. As a licensor of master tapes, the Company also recognizes revenue upon the signing of license agreements under fixed-fee, noncancelable contracts, whenever rights have been delivered to the licensee, who is free to exercise them and no remaining significant obligations to furnish music or records exist and the collectibility of the full fee is reasonably assured. When a minimum guarantee is paid in advance by a licensee, the Company reports such a minimum guarantee as a liability initially and recognizes the guarantee (i.e., recoupable advance) as the license fee is earned under the agreement. When the amount of the licensee fee earned cannot otherwise be determined, the guarantee is recognized as revenue equally over the F-10 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition (continued) ------------------- remaining performance period, which is generally the period covered by the license agreement. The above is in accordance with SFAS No. 50, pertaining to financial accounting and reporting in the "Record and Music Industry". Earnings per share ------------------ Earnings per share is calculated based upon the weighted average number of common shares outstanding for the year. No effect has been given to options outstanding as the effect of the exercise of these options would be anti-dilutive. Reclassifications ----------------- Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the current year's presentation. NOTE 2. ACCOUNTS RECEIVABLE Accounts receivable consists of the following at December 31, 1996: Accounts receivable $1,148,276 Allowance for sales returns (118,000) Allowance for doubtful accounts (115,061) ---------- $ 915,215 ========== NOTE 3. NOTE RECEIVABLE The Company has been awarded damages of $125,000 from a lawsuit judgment in 1994. This award was confirmed by the Supreme Court of the State of New York in the fall of 1996, and is currently in the enforcement stage. NOTE 4. LINE OF CREDIT The Company has a revolving line of credit for $750,000, and additional business lines of $35,000, of which $694,137 of the credit line and $15,888 of the business lines had been used at December 31, 1996. The revolving line of credit is secured by substantially all the assets of the Company. Interest on the credit line is payable monthly at the rate of 30 F-11 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 4. LINE OF CREDIT (continued) day commercial paper plus 2.9%, which equaled 8.8% at December 31, 1996. The credit line expires June 30, 1997. The interest rates on the business lines were approximately 17% at December 31, 1996. Interest expense on the outstanding lines for the years ended December 31, 1996 and 1995 was $30,559 and $33,688, respectively. NOTE 5. LONG-TERM DEBT The Company issued a note for $150,000 in exchange for certain assets (see note 8). The note bears interest at 8% and is secured by the assets of Photo Dimensions, Inc.. $25,000 in principal plus the accrued interest is due semi-annually. During the year ended December 31, 1996, $6,000 in interest expense was accrued on the note. Maturity of this debt is as follows: Year ended December 31, 1997 $ 75,000 1998 50,000 1999 25,000 ------- $150,000 ======= In June 1996, the Company took out a term loan with its primary lender in the amount of $250,000. The note was repaid in September 1996 along with $3,337 in accrued interest. In January 1997, the Company secured a $250,000 installment note with its primary lender, collateralized by substantially all the assets of the Company. The loan is to be repaid over a five-year period, with $50,000 of principal due each year. Interest (along with pro rata principal in the amount of $4,167) is payable monthly. The annual interest rate is set at the 30-day commercial paper rate plus 2.9%, which was 8.3% at the funding date. Any portion of the remaining loan commitment in excess of the current year's $50,000 principal repayment requirement can be paid down (with no prepayment penalty) and re-borrowed throughout the remaining term of the loan agreement. NOTE 6. RELATED PARTY TRANSACTIONS In July 1996, the Company granted the president a 5% royalty on sales of the in-house production of "Politics as Usual". For the year ended December 31, 1996, this royalty was $2,633. F-12 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 6. RELATED PARTY TRANSACTIONS (continued) In 1996, the president exercised options for 725,000 shares of common stock at prices ranging from between $0.05 and $0.13 per share (see notes 8 and 9 below). Payment of $66,000 for these shares was made by forgiving the debt owed the officer for previous signing bonuses and for salary increases not paid in prior years. Receivable from affiliate represents amounts due from a subsidiary controlled by the spouse of the Company's president. As of December 31, 1996, the amount approximately $62,031. The spouse of the Company's president received approximately $18,000 in management fees from Romance Alive Audio during the year ended December 31, 1996. NOTE 7. LEASE COMMITMENT In May 1995, the Company entered into a 60 month lease for office and warehouse space for $5,521 per month plus a pro rata share of operating expenses. This lease expires on April 30, 2000. The future minimum lease commitment is as follows: For the year ended December 31, 1997 $ 66,253 1998 66,253 1999 66,253 2000 22,084 -------- $220,843 ======== NOTE 8. ACQUISITION OF PHOTO DIMENSIONS In June 1996, the Company paid $75,000 in cash, and issued a note for $150,000 (see note 5 above) along with 300,000 shares of common stock in exchange for the assets (predominantly equipment used to produce captioned photographs along with goodwill) that had been transferred to a newly formed corporation (Photo Dimensions, Inc). The transaction was recorded as a business purchase. The issued shares were valued at approximately $1.09, which was the estimated market price at the time of the transaction (discounted by 20% due to the shares being restricted), bringing the total stock portion of the transaction to approximately $326,400. Total assets recorded were $551,400, including approximately $284,370 in goodwill. The Company has invested more than $300,000 in additional property and equipment since the acquisition date. There were no material sales of captioned cameras prior to the purchase of the intangible assets and equipment. F-13 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 9. CAPITAL STOCK The Company issued 35,000 restricted shares valued at $15,750 to certain individuals who had performed services for the Company. An additional 1,449,999 common stock options were exercised during the year ended December 31, 1996 for $160,250 at exercise prices ranging from $.05 to $.13 per share, including 725,000 options held by the Company's president (see note 6 above and note 9 below). NOTE 10. STOCK OPTIONS The Company has several outside agreements with certain current directors, former directors, and employees under which options have been granted to purchase the Company's common stock. These outstanding option agreements expire from April 1996 to April 2000. The following summarizes transactions pertaining to these agreements for the year ended December 31, 1996: Option price Shares per share ------ --------- Options outstanding at 1/1/96 1,900,000 .05 to .20 Exercised (1,499,999) .05 to .13 Expired (25,000) .10 Granted 799,999 .13 to .50 --------- ------------ Options outstanding at 12/31/96 1,225,000 .13 to .50 ========= ============ Of the 799,999 options granted in 1996, 500,000 were granted to the president of the Company, and 50,000 were granted to a current director/officer. The Company has elected to continue to account for stock-based compensation under the guidelines of Accounting Principles Board Opinion No. 25; however, additional disclosure as required under the guidelines of SFAS No. 123, "Accounting for Stock-Based Compensation," is included below. Actual stock- based compensation cost charged against income was not material in 1996 and 1995. If the Company had elected to recognize stock-based compensation expense based on the fair value of granted options at the grant date (as determined under SFAS No. 123), net income F-14 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 10. STOCK OPTIONS (continued) (loss) and earnings (loss) per share for the years ended December 31, 1996 and 1995 would have been as follows: 1996 1995 ---------- ---------- Net income (loss) As reported $ (516,433) $ 99,257 Pro forma (898,932) (320,993) Earnings (loss) per share As reported $ (.08) $ .02 Pro forma (.15) (.06) NOTE 11. INCOME TAXES The Company incurred a federal net operating loss of approximately $600,000 for 1996, of which approximately $300,000 is being carried back to prior years. Accordingly, an estimated receivable in the amount of $80,000 has been recorded in anticipation of a federal income tax refund. The remaining net operating loss carryforward has a tax benefit of approximately $100,000. Timing differences, primarily from allowances for returns, are approximately $50,000. Approximately $47,000 has been recorded as a deferred tax benefit. A valuation allowance has been taken against the balance of the tax benefit due to the uncertainty of future realization. The federal net operating loss carryforward of approximately $300,000 expires in the year 2011. The California net operating loss carryforward of approximately $275,000 expires in the year 2001. NOTE 12. SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK In June 1996, the Company entered into an agreement with Passport Music to be the exclusive distributor for the Company. Passport paid a $750,000 fee, which was recognized over the first four months of sales. The Company terminated its relationship with Navarre and other distributors. As a result, these distributors returned approximately $1,000,000 in products. Passport is expected to account for 70% of the Company's sales. Navarre had represented approximately 60% of sales prior to termination. At December 31, 1996, the Company had an outstanding receivable balance from Passport of approximately $358,000. F-15 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 13. LITIGATION In October 1996, the Company was named in a lawsuit filed by PSI Industries, Inc. ("PSI") in Florida. The lawsuit alleges that the Company was in breach of a written-disclosure and confidentiality agreement and misappropriated trade secrets. The allegations by PSI are the result of the Company having purchased the assets of Photo Dimensions, Inc. ("PDI") in 1996, subsequent to PDI filing an application for (and later obtaining) a U.S. patent to produce and market a double exposure camera process. The Company filed a cross-complaint for declaratory relief, unfair competition, slander of title, intentional misrepresentation, and breach of contract. The two lawsuits have been consolidated and are now in discovery. The Company's management believes the lawsuit being prosecuted by PSI is without merit. The Company's counsel believes that the Company has a meritorious defense. In September 1996, the Company filed suit in California against VRG Records, Inc. ("VRG") and others seeking both compensatory and punitive damages arising from the defendants' alleged violation of the Company's exclusive distribution agreement with VRG. The Company estimates its damage claims in the $50,000 to $100,000 range. VRG has filed a cross-complaint against the Company, alleging that the Company has failed to pay amounts owed to VRG under the aforementioned agreement. Both the Company's management and counsel believe that the Company has meritorious claims against VRG and offsets of at least the amount claimed by VRG in its cross-complaint, and that there will be no adverse effect to the Company's financial condition. F-16 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996
NOTE 14. BUSINESS SEGMENTS The principal business of the Company is the selling and licensing of music recordings and master tapes. The Company has two subsidiaries: (1) Romance Alive Audio which produces romance novels on audio cassette, and (2) Photo Dimensions, Inc. which produces a single use caption camera. Income (Loss) Depreciation Before Income Capital and Sales* Tax Provision Assets Expenditures Amortization ------ ------------- ------ ------------ ------------ Year ended December 31, 1996: Music recordings and master tapes $4,418,193 $(294,948) $3,077,049 $ 1,968 $ 256,129 Romance audio 175,405 (59,668) 268,859 817 41,632 Single use camera 71,978 (214,700) 875,151 605,514 50,108 ---------- --------- ---------- --------- ---------- $4,665,576 (569,316) $4,221,059 $ 608,299 $ 347,869 ========== ========== ========= ========== Net interest expense (income) and other 27,118 --------- $(596,434) ========= Year ended December 31, 1995: Music recordings and master tapes $3,859,560 $ 150,433 $3,802,718 $ 16,308 $ 155,737 Romance audio 341,036 (8,104) 334,650 903 61,848 ---------- --------- ---------- --------- ---------- $4,200,596 142,329 $4,137,368 $ 17,211 $ 217,585 ========== ========== =========== ========== Net interest expense (income) and other (6,828) --------- $ 149,157 ========= * All sales were made to unaffiliated customers and there were no intersegment sales.
F-17 DCC COMPACT CLASSICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 NOTE 15. SUBSEQUENT EVENT Subsequent to December 31, 1996, the Company received a commitment from an investor to purchase 1,000,000 shares of the Company's common stock at a price of $1.00 per share. As of April 1, 1997, approximately $400,000 in cash has been received from the investor. Management is confident the balance will be received in 1997. Management is also exploring alternative sources of financing. The Company needs the additional financing to meet its short and mid-term capital requirements, which include resolving the delays in bringing the caption camera program to market. The shareholders have voted to have the common stock of the Company undergo a 1 for 3 reverse stock split. In April 1997, management has set the effective date of the reverse split at October 1, 1997. All share amounts will be retroactively restated after the effective date of the split. F-18 EX-2 2 EXHIBIT 2.1 - -------------------------------------------------------------------------------- Acquisition Agreement between the Company and Re-Pac Corp. - -------------------------------------------------------------------------------- STATE OF NORTH CAROLINA ) ) COUNTY OF FORSYTH ) THIS AGREEMENT, made June 30, 1996, between RE-PAC CORP, a North Carolina Corporation (the "Seller"), and DCC COMPACT CLASSICS, INC., a Colorado corporation (the "Purchaser"). The Seller owns all the shares of PHOTO DIMENSIONS, INC. ("PD"), a corporation engaged in the business of photo-imaging which incorporates words and pictures, including, but not limited to, worldwide rights to the special graphic capability in a single-use camera application. The Purchaser is engaged in a business similar, in part, to that conducted by PD, and desires to acquire all the shares of the Seller with a view to integrating or combining the operations of PD with its own operations. By this Agreement, Seller RE-PAC sells, conveys and transfers to Buyer DCC, all of the corporate stock, assets and goodwill of PHOTO DIMENSIONS, INC ("PC")), including but not limited to all of PD's worldwide rights to what is identified as "special graphic capability in a single- use camera application." It is therefore agreed: 1. Consideration and Purchase Price: --------------------------------- As consideration for the sale and transfer by RE-PAC to DCC of all the corporate stock, assets and goodwill of PD, DCC agrees to provide the following consideration to RE-PAC: (a) Immediately upon execution of this Agreement, or within thirty (30) days thereafter, simultaneous with RE-PAC transferring to DCC, RE-PAC's shares in PD, consisting of 50,000 common shares without par value, duly endorsed, DCC will simultaneously convey to RE-PAC 300,000 DCC restricted common shares with a par value of $0.005. (b) Simultaneously with the execution of this Agreement, or within thirty (30) days thereafter, and simultaneous with the transfer of corporate securities, by both RE-PAC and DCC, DCC will pay to RE-PAC Seventy-Five Thousand ($75,000.00) in cash. DCC shall make all cash payments by bank check or other means for cleared funds acceptable to Seller. (C) Upon execution of this Agreement and the exchange of corporate stock, DCC will issue to RE-PAC a Promissory Note in the principal amount of One Hundred Fifty Thousand Dollars ($150,000.00). The note shall bear interest at the rate of eight percent (8%) per annum and shall be secured by the assets of PD as set forth in Exhibit _____ attached. DCC's Note shall be paid in six (6) semi-annual installments of$25,000.00 plus accrued interest with the first installment due and payable six (6) months from the date of this Agreement. 2. Obligation of Seller. --------------------- Seller RE-PAC agrees to indemnify and hold harmless DCC from any loss or expense which DCC may sustain by reason of any claim presented against PD within three (3) years from the date of this Agreement on account of anything whatsoever initiated, existing, or occurring prior to the date of this Agreement which is not identified on the balance sheet of PD. In furtherance of this indemnity, RE-PAC agrees to add DCC as a named insured to all of RE-PAC's insurance policies for the current term of insurance and to provide a list of those policies to DCC within thirty (30) days of the date of execution of this Agreement. This Agreement imposes on both RE-PAC and DCC the highest duty of good faith and fair dealing with regard to DC C's purchase and ongoing operations of PD. Both RE-PAC and DCC agree to assist one another and to act in good faith each with the other in carrying out the terms and intent of this Agreement. RE-PAC agrees to hold in confidence and retain as confidential all information, technology, and "know how" that it has acquired as a result of ownership of PD, and RE-PAC agrees not to disclose this "information" to any party or any other individual without DCC's prior written permission. To the extent that PD remains at or within the location of RE-PAC, RE-PAC agrees that any other information or "know how" obtained with regard to PD's activities or operations is to be deemed confidential and proprietary and RE-PAC agrees not to disclose that information to any entity or individual with DCC without prior written permission from DCC. 3. Resignation of Seller. ---------------------- The Seller will deliver to the Purchaser the resignation of the Officers and Directors of Photo Dimensions, Inc., effective upon delivery, immediately after the execution of this agreement. 4. Investment Intent. ------------------ The Seller acknowledges that the shares of DCC Compact Classic, Inc. common stock transferred to RE-PAC resulting from this transaction have not been registered under the Securities Act of 1933, as amended, and may not be resold unless the Securities are registered under this Act or an exception from such registration is available. 5. Representations of Seller. -------------------------- The Seller hereby warrants and represents: (a) The Seller is the sole owner of and has the sole right to sell all the corporate shares of Photo Dimensions, Inc. to purchaser. (1)) Photo Dimensions, Inc. (PD) is a business corporation duly organized and existing under the laws of the State of North Carolina, and is fully entitled to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated and such business is conducted. PD is a wholly owned subsidiary of Re-Pac. Seller is duly licensed or qualified and in good standing as a foreign corporation where the character of the properties owned by the Seller or the nature of the business transacted by it make such license or qualification necessary. Seller does not have any other subsidiaries, and does not otherwise own or control, directly or indirectly, any equity or proprietary interest in any corporation, association or other business entity. (c) This section includes the unaudited balance sheet of Seller as at December 31,1994, and December 31,1995, and the related unaudited statements of operations, Shareholders' equity and cash flows including the footnotes thereto for the year ended December 31, 1995, and the unaudited balance sheet of Seller as of May 31, 1996, and the related statements of operations, shareholders equity and cash flows for the nine months then ended (the "Financial Statement"). The Financial Statements fairly represent the financial position of the Seller as at such dates and the results of its operations and its cash flows for such year and period and are prepared in accordance with generally-accepted accounting principles applied on a consistent basis with prior periods. The books of account and other financial records of the Seller are in all respects complete and correct and are maintained in accordance with good business practices and are accurately reflected in the Financial Statements. Since May 31,1996, the date of the last available balance sheet (the "Balance Sheet"), and except as set forth on Schedule 5(c), there has not been: (i) any material adverse change in the assets, prospective business, operations or condition (financial or otherwise) of PD; (ii) any damage, destruction or event materially affecting the assets, prospective business, operations or condition (financial or otherwise) of PD, whether or not covered by insurance; (iii) any sale, lease, transfer mortgage, pledge or assignment or security interest imposed upon any assets, tangible or intangible, of PD other than for a fair consideration in the ordinary course of business; (iv) any agreement, contract, lease, or license (or series of related agreements, contracts, leases and licenses) by PD other than in the ordinary course of business; (v) any acceleration, termination, material modification or cancellation of any material agreement, contract, lease or license to which PD is a party; (vi) the issuance of PD of any note, bond or other debt security or the assumption, incurrence or guarantee of any indebtedness for borrowed money or capitalized lease obligations either involving more than $100.00 singly or $500.00 in the aggregate; (vii) any employment contract for key or executive personnel, written or oral, or modification of the terms of any such existing contract. (d) Seller has prepared and filed all appropriate federal, state and local tax returns of every kind and category (including, without limitation, income taxes, employee withholding taxes, estimated taxes, excise taxes, sales taxes, inventory taxes, use taxes, gross receipt taxes, franchise taxes and property taxes) for all periods prior to and through the date hereof for which any such returns have been required to be filed by it and have paid all taxes shown to be due by said returns or on any assessments received by it or have made adequate provision for the payment thereof. The provisions for taxes (federal, state and local) and interest and penalties, if any, reflected in the Balance Sheet are adequate to cover any taxes (including any interest and penalties in connection therewith) which have been or may be assessed with respect to the properties, business and operations of the Seller for all fiscal periods ending on or prior to March 31, 1996. All taxes or other assessments and levies which Seller is required by law to withhold or collect have been duly withheld and collected and have been paid over to the proper governmental authorities or held for such payment. There is no agreement, waiver or other arrangement for an extension of time with respect to the assessment of any tax or deficiency against the Seller, nor is there any action, suit, proceeding, investigation or claim now pending, or to the best knowledge of the Seller, threatened against Seller in respect of any tax or assessment, or any matter of discussion with any federal, state or local authority, relating to any tax or assessment, or claims for any additional tax or assessment asserted by any such authority. Seller has not filed any claim for refund of or with respect to any federal, state or local taxes. (e) To the best of its knowledge, Seller has complied with all federal, state, county and local laws, ordinances, regulations, inspections, orders, judgments, injunctions, awards or decrees applicable to the Seller or to its business, the breach of which would not adversely affect its business. (f) Except as set forth on Schedule 5(f), there is no outstanding order, judgment, injunction, award or decree of any court, governmental or regulatory body or arbitration tribunal against or involving PD or Re-Pac (to the extent that any would affect PD). Except as set forth on Schedule 5(f), there is no action, suit or claim or legal, administrative or arbitral proceeding pending or, to the best knowledge of the Seller, threatened that would give rise to any right of Indemnification on the part of any director or officer of Seller or the heirs, executors or administrators of such director or officer against the Seller. g) To the best of the Seller's knowledge, based on reasonable inquiry and belief, (i) any account receivable reflected on the Balance Sheet and any account receivable arising subsequent to May 31, 1996, has arisen in the ordinary course of business of the Seller and represents valid obligations due to the Seller; (ii) any item that is required by generally- accepted accounting principles to be reflected as an account receivable on the Balance Sheet is so reflected; and (iii) there is a sufficient amount reserved to cover any and all accounts receivable reflected on the Balance Sheet which Seller deems to be doubtful or uncollectible. (h) To the best of the Seller's knowledge, based on reasonable inquiry and believe, (i) all inventory reflected on the Balance Sheet and all inventory acquired subsequent to May 31, 1996, to and including the Closing Date is and will be of a quality and quantity usable or saleable in the ordinary course of business. The materials, supplies and work-in-progress included in inventory are of at least standard quality for such items in the industry in which the Seller is engaged; (ii) there is no adverse condition affecting the supply of materials available to the Seller, and (iii) the amount of the inventory reflected on the Balance Sheet and on the books and records of the Seller has been determined in accordance with generally-accepted accounting principles consistently applied. (i) To the best of the Seller's knowledge, based on reasonable inquiry and belief, (i) Schedule 5(1) sets forth all machinery, equipment, furniture, leasehold improvements, fixtures, vehicles, structures, any related capitalized items or other tangible property material to the business of the Seller (the "Tangible Assets"). Except as set forth on Schedule 5(i) and in the Financial Statements, the Seller holds all rights, title and interest in the Tangible Assets free and clear of all liens, pledges, mortgages, security interests, conditional sales contracts or any other encumbrances; and (ii) except as set forth on Schedule 5(i), all of the Tangible Assets that are used in the Seller's business as presently conducted are in good operating condition and repair and are useable in the ordinary course of business of the Seller and conform to all applicable laws, ordinances and governmental orders, rules and regulations relating to their construction and operation, including compliance with federal and state governmental minimum standard for the handling and disposition of toxic substances, if any. (j) Schedule 5(1) sets forth any patent, trademark, service mark, trade name, patent, franchise, and other proprietary rights, including the worldwide rights to the special graphic capability in a single-use camera application, and any application for any of the foregoing. Except as set forth on Schedule 5(1), the rights of Seller in the property set forth on Schedule 5(1) are free and clear of any liens or other encumbrances. Except as set forth on Schedule 5(1), to the best knowledge of the Seller, there is no notice given to the Seller of any adversely held patent, invention, trademark, service mark or trade name of any other person or notice of any claim of any other person relating to any of the property set forth on Schedule 5(1) or any process or confidential information of the Seller, and to the best knowledge of the Seller (and without investigation), Seller is not aware of any facts which could form the basis for any such charge or claim. (k) All accounts payable of the Seller have arisen in the ordinary course of business and correctly reflect bona fide transactions involving the purchase of goods, materials or services for the sole benefit of the Seller and are not unusual in amount either individually or in the aggregate. (l) As at May 31,1996, except as set forth on Schedule 5(1), the Seller does not have any direct or indirect indebtedness, liability, claim, damage, deficiency, obligation or responsibility, known or unknown, fixed or unfixed, liquidated or unliquidated, secured or unsecured, accrued or absolute, contingent or otherwise, including, without limitation, any liability on account of taxes, any other governmental charge or lawsuit brought, whether or not of a kind required by generally-accepted accounting principles to be set forth on a financial statement (all of the foregoing collectively defined to as "Liabilities"), which were not fully, fairly and adequately reflected in the Balance Sheet. As of the Closing Date, the Seller will not have any Liabilities, other than Liabilities fully and adequately reflected on the Balance Sheet and on Schedule 5(1). To the best knowledge of the Seller, there is no circumstance, condition, event or arrangement which may hereafter give rise to Liabilities other than as set forth on Schedule 5(l). (m) PD does not have or need any such intellectual property license or permit in order to conduct its operations, except those listed on Schedule 5(m). No goods or articles manufactured, sold or used by PD and no method or process employed by PD infringes any patents, trademarks, registered designs, copyrights or other industrial or commercial rights of any third party, and no claim has been made against Seller with respect to any such infringement. Seller owns or has adequate licenses or other rights to use all trademarks, trade names, copyrights and designs either use in or necessary for the conduct of its business. All trademarks, trade names, copyrights and designs owned by or under license to the Seller, together with all pertinent information relating thereto, including filing, registration and expiration dates, serial numbers, record owners and licenses, and their essential terms are listed on Exhibit 5(m). There currently is in process a patent application for a patent known as the "Craig" patent which is an asset of PD. (n) Seller has the full legal right and power and all authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This agreement has been duly executed and delivered and is the valid and binding obligation of the Seller, enforceable in accordance with its terms, except as may be limited by bankruptcy, moratorium, insolvency or other similar laws generally affecting the enforcement of creditors' rights. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the performance by the Seller of this Agreement, in accordance with its respective terms and conditions will not (i) require the approval or consent of any foreign, federal, state, county, local or other governmental or regulatory body or the approval or consent of any other person; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice or lapse of time or both would constitute) a default under, any order, judgment or decree applicable to the Seller or any instrument, contract or other agreement to which the Seller is a party or by or to which the Seller is bound or subject or (iii) result in the creation of any lien or other encumbrance on the assets or properties of the Seller. (o) No representation or warranty by the Seller in this Agreement or in any document to be delivered by them pursuant hereto, and no statement, list, certificate or instrument furnished or to be furnished to the Buyer pursuant hereto or in connection with the execution or performance of this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make any statement herein or therein not materially misleading or necessary to a complete and correct presentation of all material aspects of the business of the Seller. To the best knowledge of the Seller (not taking into account the transaction contemplated by this Agreement), there is no fact, development or threatened development (except for general economic conditions affecting business generally) which the Seller has not disclosed to the Buyer in writing and which materially adversely affects or, so far as the Seller can now reasonably foresee, may materially adversely affect the business of the Seller. 6. Representations of Buyer. ------------------------- The Buyer hereby warrants and represents: (a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado, and is entitled to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated and such business is conducted. Buyer is duly licensed or qualified and in good standing as a foreign corporation where the character of the properties owned by the Buyer or the nature of the business transacted by it make such license or qualification necessary. Buyer does not have any subsidiaries or any affiliated companies, and does not otherwise own or control, directly or indirectly, any equity or proprietary interest in any corporation, association or other business entity. (b) The aggregate number of authorized shares of the Buyer is 10,000,000 shares of Common Stock, $.005 par value, of which 6,696,725 shares are issued and 3,303,275 are outstanding. All of such shares are validly issued, fully paid and non-assessable. Buyer has no authorized or outstanding securities convertible into or exchangeable for stock or securities of the Buyer except as set forth on Schedule 6~) or in the Buyer's periodic reports ("Periodic Reports") filed with the Securities and Exchange Commission. There are no outstanding subscriptions, rights, options, warrants or other agreements obligating the Buyer to issue any stock or other securities. (c) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not (i) violate any provision of the Articles of Incorporation or By-Laws of the Buyer; (ii) violate, conflict with or result in the breach of any of the terms of, result in a material modification of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any contract or other agreement to which the Buyer is a party or by or to which it or any of its assets or properties may be bound or subject; (iii) violate nay order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, the Buyer, or upon the properties or business of the Buyer; or (iv) violate any~statute, law or regulation of any jurisdiction. (d) There is no outstanding order, judgment, injunction, award or decree of any court, governmental or regulatory body or arbitration tribunal against or involving the Buyer. There is no action, suit or claim or legal, administrative or arbitral proceeding or, to the best knowledge of the Buyer, any investigation (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) pending or, to the best knowledge of the Buyer, threatened against or involving the Buyer or any of its properties or assets. To the best knowledge of the Buyer, there is no fact, event or circumstances that may give rise to any suit, action, claim, investigation or proceeding that is currently pending or threatened. There is no action, suit or claim or legal, administrative or arbitral proceeding pending or, to the best knowledge of the Buyer, threatened that would give rise to any right of indemnification on the part of any director or officer of Buyer or the heirs, executors or administrators of such director or officer against the Buyer. (e) Buyer has the full legal right and power and all authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered and is the valid and binding obligation of the Buyer, enforceable in accordance with its terms, except as may be limited by bankruptcy, moratorium, insolvency or other similar laws generally affecting the enforcement of creditors' rights. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the performance by the Buyer of this Agreement, in accordance with its respective terms and conditions, will not (i) require the approval or consent of any foreign, federal state, county, local or other governmental or regulatory body or the approval or consent of any other person; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice or lapse of time or both would constitute) a default under, any order, judgment or decree applicable to the Buyer or any instrument, contract or other agreement to which the Buyer is a party or by or to which the Buyer is bound or subject or (iii) result in the creation of any lien or other encumbrance on the assets or properties of the Buyer. (f) No representation or warranty by the Buyer in this Agreement or in any document to be delivered by it pursuant hereto, and no statement, list, certificate or instrument furnished or to be furnished to the Seller pursuant hereto or in connection with the execution or performance of this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make any statement herein or therein not materially misleading or necessary to a complete and correct presentation of all material aspects of the businesses of the Buyer. To the best knowledge of the Buyer (not taking into account the transaction contemplated by this Agreement), there is no fact, development or threatened development (except for general economic conditions affecting business generally) which the Buyer has not disclosed to the Seller in writing and which materially adversely affects or, so far as the Buyer can now reasonably foresee, may materially adversely affect the business of the Buyer. 7. Additional Covenants. --------------------- Seller and Buyer agree as follows: (a) In case at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as the other party reasonably may request, all at the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification as may be provided herein). Seller acknowledges and agrees that from and after the Closing, the Buyer shall be entitled to possession of all documents, books, records (including tax records), agreements and financial date of any sort or copies thereof relating to Seller. (b) In the event and for so long as any party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction relating to events and circumstances occurring on or prior to the Closing date involving the Seller, the other party will cooperate with the contesting or defending party and its counsel in the contest or defense, make available its personnel and provide such testimony and access to its books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending party (unless the contesting or defending party is entitled to indemnification therefore as may be provided herein). (c) Seller will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate of the Seller from maintaining the same business relationships with the Buyer after the Closing Date as it maintained with the Seller prior to the Closing Date. Seller will refer all customer inquiries relating to the business of the Seller to the Buyer from and after the Closing Date. (d) For a period of five (5) years from the Closing Date, the Seller shall not, in any manner, directly or indirectly, on behalf of itself or any person, firm, partnership, joint venture, corporation or other business entity, (i) enter into or engage in any capacity in the business described in the second preamble on the cover page of this Agreement, or in any other way compete with the Buyer in the United States in conduct of the Business; (ii) solicit or cause to be solicited within the United States, any present customers of the Seller; or (iii) recruit or cause any other person to recruit any present employee of the Seller to any such business or businesses. The ownership by the Seller of not in excess of 10% of the capital stock of any such business entity shall not be deemed to represent proscribed competition under the terms of this section. (e) Seller shall sublease to the Buyer the facilities at 4015 Brownsboro Road, Winston- Salem, North Carolina for one year, renewable annually, at a rental of $1,900.00 per month. (f) The parties to this Agreement shall bear their respective direct and indirect expenses incurred in connection with the preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby, whether or not the transactions contemplated hereby are consummated, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. (g) The parties shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. Each such party shall use its best efforts to fulfill or obtain the fulfillment of the conditions to the Closing, including without limitation, the execution and delivery of any documents or other papers, the execution and delivery of which are conditions precedent to the Closing. (h) Neither party will make public disclosure of information pertaining to the existence of the letter of intent entered into between PD and the Buyer on April 10, 1996 (the "LOI"), or the subject matter contained in the LOI without the express written consent of the other party; provided however, that each party shall be permitted to make such disclosures to the public to governmental agencies as its counsel shall deem necessary to maintain compliance with and to prevent violation of applicable federal or state securities or other laws. In the event the transactions contemplated by this Agreement are not consummated, the Buyer and the Seller agree to keep confidential any information disclosed to each other in connection with this Agreement for a period of the years from the date hereof; provided, however, such obligation shall not apply to information which (i) at the time of disclosure was public knowledge, (ii) after the time of disclosure becomes public knowledge (except due to the action of the receiving part), or (iii) the receiving party had within its possession at the time of disclosure. 8. Conditions Precedent to Closing~ or Which Shall Survive Closing: (a) At closing or within ten (10) days after closing, Buyer shall have entered into a contract with Re-Pac wherein Seller shall provide the services of Robert Craig under Contract to Buyer for three (3) years at a rate of $120,000.00 per year, payable monthly. Said contract shall contain Robert Craig's five-year non-competition provision. (b) Seller shall be entitled to up to an additional Two Hundred Thousand (200,000) shares of common stock of the Buyer, pursuant to a bonus program as described in Exhibit _____ attached hereto. (c) Notwithstanding any right of the Buyer fully to investigate the affairs of Seller and notwithstanding knowledge of facts determined or determinable by the Buyer pursuant to such investigation or right of investigation, the Buyer shall have the right to rely fully upon the representations, warranties, covenants and agreements of the Seller contained in this Agreement or in any document delivered to the Buyer by the Seller or any of its representatives, in connection with the transactions contemplated by this Agreement. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof and the Closing hereunder for the period of the less of six (6) months following the Closing Date or the completion of the initial audit of the financial statements of the Buyer reflecting the acquisition of the Seller's Assets and assumption of Liabilities as provided herein following the Closing date. (d) Notwithstanding any right of the Seller fully to investigate the affairs of the Buyer and notwithstanding any knowledge of facts determined or determinable by the Seller pursuant to such investigation or right of investigation, the Seller shall have the right to rely fully upon the representations, warranties, covenants and agreements of the Buyer contained in this Agreement or in any document delivered to the Seller by the Buyer or any of their representatives, in connection with the transactions contemplated by this Agreement. All such representations, warranties, covenants and agreements shall survive the execution and delivery hereof the Closing hereunder for six (6) months following the Closing date. (e) Subject to limitations on the survival of representations and warrant contained in 8(c), Seller hereby agrees to indemnify, defend and hold harmless the Buyer from and against any losses, liabilities, damages, deficiencies, costs or expenses including interest, penalties and reasonable attorneys' fees and disbursements ("Loss"), based upon, arising out of or otherwise due to any inaccuracy in or any breach of any representation, warranty, covenant or agreement of the Seller contained in this Agreement or in any document or other writing delivered pursuant to this Agreement. (f) Subject to the limitations on the survival of representations and warranties contained in 8(d), the Buyer hereby agrees to indemnify, defend and hold harmless the Seller from and against any losses, liabilities, damages, deficiencies, costs or expenses, including interest, penalties and reasonable attorneys' fees and disbursements ("Loss"), based upon, arising out of or otherwise due to any inaccuracy in or any breach of any representation, warranty, covenant or agreement of the Buyer contained in this Agreement or in any document or other writing delivered pursuant to this Agreement. 9. Notices. -------- Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, four days after the date of mailing, as follows: (i) If to the Buyer, to: DCC Compact Classics, Inc. 9301 Jordan Avenue, Suite 105 Chatsworth, California 91311 Attention: President With copies to: Atlas, Pearlman & Trop, P.A. Suite 1900 200 East Las OAS Boulevard Ft. Lauderdale, Florida 33316 Attention: Jim Schneider, Esq. (ii) If to the Seller, to: Re-Pac Corp. 4015 Brownsboro Road Winston-Salem, North Carolina 27106 With copies to: Richard E. Stover, Esq. STOVER, CROMER & BENNETT P.O. Box 775 King, North Carolina 27021 Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notice hereunder. 10. Waivers and Amendments. ---------------------- This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, not shall any waiver on the part of any party of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which the claim of any inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. 11. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by parties, and no presumption or burden of proof shall arise favor or disfavoring any party by virtue of the authorship of any of provisions of this Agreement. The parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any party has breached representation, warranty or covenant contained herein in respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty or covenant. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed the day and year first above written. RE-PAC CORP. BY: /s/ Undistinguishable ----------------------- President DCC COMPACT CLASSICS, INC. BY: /s/Marshall Blonstein ----------------------- President EX-3.(I) 3 EXHIBIT 3.2.2 - -------------------------------------------------------------------------------- Amendment to Articles of Incorporation - -------------------------------------------------------------------------------- ARTICLES OF AMENDMENT TO THE ARTICLES OF lNCORPORATION OF DCC COMPACT CLASSICS, INC. Pursuant to the provisions of the Colorado Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the Corporation is DCC Compact Classics, Inc. SECOND: The following amendment to the Articles of Incorporation was adapted on November 22, 1996, as prescribed by the Colorado Business Corporation Act, in the manner marked with an X below; No shares have been issued or Directors elected - Action by - ----- Incorporators - ----- No shares have been issued but Directors elected-Action by Directors Such amendment was adopted by the board of directors where shares - ----- have been Issued and shareholder action was not required. X Such amendment was adopted by a vote of the shareholders, The number - ----- of shares voted for the amendment was sufficient for approval. THIRD: Upon the filing of these Articles of Amendment to the Articles of Incorporation, all Issued and outstanding shares of Common Stock of the Corporation held by each holder of record on October 23,1996 shall be automatically combined at a rate of one for three (1:3). No fractional share or scrip representing a fractional share will be issued upon the Reverse Stock Split. Fractional shares of .5 of Common Stock will be rounded up to the next highest share, and fractional interest of less than .5 of Common Stock will be reduced down to the next nearest share Any shareholder whose aggregate shareholding is reduced. to a fraction of one (1) share will receive one (1) share of New Common Stock. IN WITNESS WHEREOF, the undersigned being the President of this Corporation has executed these Articles of Amendment as of the l0th day of December, 1996. DCC COMPACT CLASSICS, INC. /s/Marshall Blonstein --------------------------------- By: Marshall Blonstein, President ATTEST /s/Marcia McGovern - -------------------------- Marcia McGovern, Secretary EX-10 4 EXHIBIT 10.1 - -------------------------------------------------------------------------------- Employment Agreement dated February 1, 1996 with Marshall Blonstein - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT -------------------- I. This Employment AGREEMENT ("AGREEMENT') is entered into as of February 1, 1996, and is to continue for four (4) years to January 31, 2000, between DCC Compact Classics, Inc. ('DCC") , a Colorado corporation, on the one hand, Employer ("EMPLOYER"), and Marshall Blonstein ("EMPLOYEE" or "BLONSTEIN"), on the other hand. II. EMPLOYER and EMPLOYEE agree that EMPLOYEE BLONSTEIN possesses unique talents of an unusual value to DCC. III. EMPLOYER and EMPLOYEE agree that EMPLOYEE BLONSTEIN's services are of a special value to DCC and, therefore, DCC is willing to provide EMPLOYEE BLONSTEIN with certain rights, benefits, and compensation to secure the services of EMPLOYEE BLONSTEIN for the duration of this AGREEMENT. IV Both EMPLOYER DCC and EMPLOYEE BLONSTEIN agree to the following: A. Employment. DCC hereby employs BLONSTEIN to perform the duties and render the services set forth in this AGREEMENT, for a period of four (4) years from the commencement date of the AGREEMENT, that commencement date being February 1, 1996. Subject to the termination provisions as provided in the AGREEMENT, EMPLOYEE BLONSTEIN hereby accepts these employment obligations and agrees faithfully to perform the services required of EMPLOYEE BLONSTEIN, during the term of this AGREEMENT. B. Duties. BLONSTEIN agrees to perform such duties as may be reasonably required of him in his capacity as an employee of DCC. BLONSTEIN for this four (4) year period of this AGREEMENT, shall assume and carry out the duties of President of DCC and shall be responsible for and shall be in charge of all aspects of the executive management of DCC, including, but not limited to: (i) undertaking all strategic management decisions, and supervision of DCC employees, (ii) undertaking of executive hiring and termination, (iii) maintaining the principal relationship between DCC and its Board of Directors, its accountants, its legal counsel, and all other interested outside constituencies. The type of services to be rendered shall be at BLONSTEIN's discretion and judgment. In addition, EMPLOYEE BLONSTEIN, at his discretion, agrees to serve and shall serve on the Board of Directors through the term of this AGREEMENT, and, by this AGREEMENT, the DCC Board of Directors agrees to nominate BLONSTEIN for Board membership. BLONSTEIN's voluntary resignation from the Board of Directors shall not be construed as a breach of this AGREEMENT. C. No Acts Inconsistent. EMPLOYEE BLONSTEIN agrees during the term of this AGREEMENT not to undertake any acts inconsistent with his duties under this AGREEMENT. D. Compensation. In consideration for the services to be rendered by EMPLOYEE BLONSTEIN, EMPLOYER DCC shall pay to EMPLOYEE BLONSTEIN and EMPLOYEE BLONSTEIN shall receive the following compensation: (1) Annual Salary. Effective February 1, 1996, and continuing for forty-eight (48) months, EMPLOYEE BLONSTEIN shall receive; for the first twelve (12) months, for the year 1996: $170,000 payable at the rate of $14,166 per 2 month; for the second twelve (12) months (1997) , EMPLOYEE BLONSTEIN shall receive a total of $170,000, payable at the rate of $14,100 per month; and, for the third twelve (12) months (1998), $170,000 or $14,106.00 per month and for the fourth twelfth (12) months (1999) $170,000 or $14,106.00 per month. (2) Signing Bonus. EMPLOYEE BLONSTEIN shall receive a $50,000 signing bonus upon execution of this Employment AGREEMENT. (3) Stock Options: Upon execution of this Employment AGREEMENT BLONSTEIN is granted an option to purchase 300,000 shares of DCC common stock at the price of $0.20 a share. The option period whereby BLONSTEIN may exercise this option shall be from February 1, 1996 to January 31, 1999. The entire option for 300,000 DCC shares may be exercised in one transaction or may be partially exercised in several transactions totaling 300,000 shares which BLONSTEIN shall determine at his discretion. The option or partial exercise of the option shall be undertaken by BLONSTEIN by notification to the Secretary of the Corporation of DCC of the request to exercise the option(s) with the payment amount after which DCC shall issue the stock to BLONSTEIN within five (5) days. (3) Other Benefits. (a) Automobile Benefits. During the term of this AGREEMENT, DCC shall provide BLONSTEIN, at his discretion, an automobile, reasonably insured, to be used primarily for business purposes. DCC shall pay all reasonable expenses connected with BLONSTEIN' 5 automobile. 3 (b) Insurance. During the term of the AGREEMENT, DCC shall provide BLONSTEIN with Term Insurance Coverage with a minimum value of $250,000. The beneficiaries or this Term Insurance Coverage shall be BEVERLY BLONSTEIN, or the ESTATE OF BLONSTEIN, as BLONSTEIN may designate. (c) DCC shall pay BLONSTEIN such additional amount or amounts as a bonus for services rendered by BLONSTEIN as the Board of Directors of the Company may, from time to time and the Board's sole discretion, determine. In determining the amount of such bonus, DCC shall look to the quality and extent of services rendered by BLONSTEIN hereunder, particularly as such services may result in revenue received by DCC. (d) BLONSTEIN's services hereunder are to be rendered principally at BLONSTEIN's home or at DCC's offices, within twenty (20) miles thereof. However, BLONSTEIN shall also render services at such other place or places within or without the United States as DCC may designate from time to time. When and if BLONSTEIN is required to render such services away from home, DCC agrees to either furnish such necessary transportation and living expenses may reasonable be required for BLONSTEIN during and on account of the rendition of such services, or pay BLONSTEIN a fixed weekly sum as reimbursement for such expenses incurred by BLONSTEIN. In the latter regard, BLONSTEIN agrees to keep records of such expenses and furnish DCC reasonably detailed reports of actual expenses incurred by BLONSTEIN. All expenses incurred by DCC for travel, entertainment or business are deemed to be business expenses which are ordinary and necessary to the conduct of the regular operating affairs of DCC. However, should it be finally determined by an authorized representative of the 4 Internal Revenue Service that any or all of such expense are not ordinary and necessary business expenses, then such expenditures by DCC shall be considered additional compensation to BLONSTEIN for services actually rendered thereby in addition to the items specified above. BLONSTEIN shall be entitled to participate in each and every fringe benefit program adopted by DCC and benefiting employees performing same or similar functions as BLONSTEIN. E. Termination; Default by DCC. The term of this AGREEMENT may be terminated by DCC only as a result of death, or, change of control, or termination for cause, and for no other cause or reason: (a) Death. BLONSTEIN's salary and all other benefits under the AGREEMENT shall continue to be paid for a period of thirty (30) days following the date of EMPLOYEE BLONSTEIN's death. The term of this AGREEMENT shall be deemed to terminate thirty (30) days after the death of BLONSTEIN, as though it had expired by its own terms. (b) Payment to Spouse as a Result of Death. If BLONSTEIN dies while employed by DCC, DCC will pay BLONSTEIN's spouse (or BLONSTEIN's successor-in-interest, if there is no surviving spouse) BLONSTEIN'S then monthly salary for a period of eighteen (18) months following the month which BLONSTEIN passes away. DCC shall also pay the sum of Five Thousand Dollars ($5,000) within ninety (90) days after BLONSTEIN's death to BLONSTEIN's spouse or, if BLONSTEIN is not survived by a spouse, to BLONSTEIN's successor-in-interest. It is the purpose and intent of this paragraph that the foregoing payment shall qualify 5 as an employee death benefit under Section 101(b) of the Internal Revenue Code of 1986, as amended. (c) Change in Control. For purposes of this AGREEMENT, the term "change in control" shall mean, without the approval of DCC Board of Directors obtained prior thereto (i) the acquisition by a single entity or group of affiliated entities of more than fifty (50~) percent of the outstanding capital stock of DCC (ii) the consummation of any merger of DCC into another company or any sale, transfer or other disposition of all or substantially all of DCC's assets to another entity or a parent company. F. Payment to BLONSTEIN. Upon a change in control of DCC, EMPLOYEE BLONSTEIN shall be entitled to receive under this AGREEMENT the amounts described in Paragraph G below. Such amounts shall be paid in full, immediately upon a 'change in control," or, immediately prior to the consummation of a merger, sale or other disposition. G. Severance Pay. Upon termination other than that for death or cause, EMPLOYEE BLONSTEIN shall be entitled to severance pay in an amount equal to the total compensation due EMPLOYEE BLONSTEIN, throughout the balance of the term remaining in this AGREEMENT, or, two (2) times EMPLOYEE BLONSTEIN's current total annual salary, whichever is greater. H. Lien in Favor of BLONSTEIN. DCC hereby grants to BLONSTEIN a first lien and a security interest against assets of DCC (as listed in Exhibit A attached to this AGREEMENT), or assets of equivalent value and liquidity. DCC shall execute and file a UCC-l financing statement identifying BLONSTEIN as a 6 secured creditor, in order to secure payment to EMPLOYEE BLONSTEIN, of any sums due EMPLOYEE BLONSTEIN under this AGREEMENT. I. Default in Payment. In the event DCC fails to pay to BLONSTEIN the compensation and benefits provided in this AGREEMENT for a period in excess of thirty (30) days, or fails on more than one (1) occasion to pay for a period of ten (10) days or more, EMPLOYEE BLONSTEIN shall have the right to cease the provision of EMPLOYEE BLONSTEIN's services under this AGREEMENT, and shall have the right to immediately receive the severance payment set forth in Paragraph G. J. Termination For Cause. The term of this AGREEMENT may be terminated by DCC for cause, which shall be one of the following: (1) final judgment convicting EMPLOYEE BLONSTEIN of a felony involving specific intent; or (2) breach by EMPLOYEE BLONSTEIN of the Provisions of Paragraph IV of this AGREEMENT. K. Payment Pending Resolution of Disputes. In the event of any dispute under this EMPLOYMENT AGREEMENT, DCC shall continue to pay all fees and compensation and Board of Director expense due EMPLOYEE BLONSTEIN under this AGREEMENT, and DCC shall not have the right to terminate the payment of such fees and compensation due BLONSTEIN except and until there is adjudication of a final judgment by a court in favor of DCC. In the event of a dispute, DCC agrees to pay BLONSTEIN his reasonable legal fees with regard to defense or claims under this AGREEMENT on a current basis until the dispute is resolved. 7 L. Non-Competition. While EMPLOYEE BLONSTEIN is employed by DCC, EMPLOYEE BLONSTEIN shall not engage in or participate in any business in direct competition with that of DCC, in any of the states where DCC now does business except with the written approval of DCC. Such prohibition shall not apply to individual real estate or securities investments made individually or with isolated groups of individuals known to EMPLOYEE BLONSTEIN, provided that EMPLOYEE BLONSTEIN advises DCC of such investments. M. Renewal. This AGREEMENT shall automatically be renewed for successive terms of one (1) year at the expiration of the term set forth in Section 1 under this AGREEMENT, unless either the Board of Directors or EMPLOYEE BLONSTEIN shall give written notice to the other of it or his intention not to renew this AGREEMENT at least ninety (90) days prior to the expiration of such term or renewed term. N. Assignment. This AGREEMENT shall inure to the benefit of and shall be binding upon the successors and the assigns of DCC. Since this AGREEMENT is based upon the unique abilities of and personal confidence in EMPLOYEE BLONSTEIN, he shall have no right to assign this AGREEMENT or any of the rights under this AGREEMENT without the written consent of DCC. O. Indemnity. DCC shall indemnify EMPLOYEE BLONSTEIN and hold him harmless from any cost, expense or liability arising out of his activities as an EMPLOYEE of DCC, to the fullest extent available. Among other items provided in the indemnification provisions DCC shall pay all expenses including reasonable 8 attorney's fees actually incurred by EMPLOYEE BLONSTEIN in or proceeding (including any appeals therefrom) alleged or brought by a third party arising out of or relating to BLONSTEIN's performance under this AGREEMENT. P. If any claim, action or suit is sought against DCC, pursuant to the foregoing, EMPLOYEE BLONSTEIN shall promptly notify DCC in writing and DCC shall have the right to assume and control the defense by counsel reasonably satisfactory to EMPLOYEE BLONSTEIN. Without limiting any other provision of this AGREEMENT, this provision shall survive the termination or expiration of this AGREEMENT for a term of three (3) years after expiration of this AGREEMENT or EMPLOYEE BLONSTEIN's voluntary resignation from the Board of Directors. Q. Prior Contracts. Any prior contract or AGREEMENT between DCC and EMPLOYEE BLONSTEIN regarding employment is hereby canceled and shall be of no further force or effect. R. Severability. If any provision of this AGREEMENT shall be found invalid by any court of incompetent jurisdiction, such findings shall not effect the validity of the other provisions under this AGREEMENT and the invalid provisions shall be deemed to have been severed herefrom. S. Waiver of Breach. The waiver of DCC or EMPLOYEE BLONSTEIN of the breach of any provision of this AGREEMENT by the other party or the failure to exercise by DCC or EMPLOYEE BLONSTEIN of any right granted under this AGREEMENT shall not operate or be construed as the waiver of any subsequent breach by the other party or the waiver of the right to exercise any such right. 9 T. Entire AGREEMENT. This instrument contains the entire AGREEMENT of the parties, and may be amended only by an AGREEMENT in writing signed by the parties. U. Notice. Any notice required or permitted to be given under this AGREEMENT shall be sufficient if in writing and if sent by certified mail to BLONSTEIN's residence, in case of the EMPLOYEE BLONSTEIN, or to its principal office, in the case of DCC. V. California Law. This AGREEMENT is entered into and executed in the State of California and shall be governed by the laws of such state. W. Arbitration. Any dispute as to the rights of the parties under this AGREEMENT or its construction or its validity or enforcement or as to any such dispute shall be submitted to binding arbitration in Los Angeles, California to a retired Superior or Federal Court Judge. The Arbitrator will be required to follow the laws of the Sate of California. The Arbitrator's decision upon confirmation will be an appealable decision, appealable to the Court of Appeals subject to the laws of the State of California as if it were a decision by a Judge in a Court trial. The prevailing party in such arbitration, or any proceedings in respect thereof, shall be entitled to receive its or his attorneys' fees incurred in connection therewith. X. DCC Representation. DCC represents and warrants (i) that this AGREEMENT has been approved by DCC's Board of Directors and specifically DCC's non-employee members with EMPLOYEE BLONSTEIN abstaining from the vote, and is binding on DCC; (ii) that this AGREEMENT will not violate the corporate charter 10 or By-Laws of DCC and/or any DCC affiliate, or any covenants heretofore made by DCC and/or the DCC affiliate; (iii) that DCC and the DCC affiliate agree not to hereafter enter into any covenants or undertake any other acts which conflict with this AGREEMENT. IN WITNESS WHEREOF, the parties to this AGREEMENT have hereunto set their hands as of the day and year first above written. EMPLOYEE DCC COMPACT CLASSICS, INC. By:/s/Gary Gillman /s/Marshall Blonstein -------------------------- - --------------------- Marshall Blonstein Name: Gary Gillman I ------------------------ Title: ----------------------- 11 EX-10 5 EXHIBIT 10.2 - -------------------------------------------------------------------------------- Agreement with Passport Music Distributors, Inc. - -------------------------------------------------------------------------------- AGREEMENT made this day of May, 1996 by and between PASSPORT MUSIC DISTRIBUTORS, INC., a Colorado corporation (the "Distributor"), and DCC COMPACT CLASSICS, INC. a Colorado corporation (the "Company"). WHEREAS, the Company is engaged in the business of acquiring rights in, and producing master audio recordings of, certain prerecorded music and other audio configurations; WHEREAS, the Distributor is engaged in the business of distributing, promoting and marketing prerecorded music in all modes, manner and methods of delivery whether in existence on the date hereof or invented hereafter; WHEREAS, the Company desires for the Distributor to distribute all of the master audio recordings directly controlled or owned by the Company (the "Recordings") in the Territory as defined below, upon the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows: 1. APPOINTMENT. 1.1 TERRITORY. Subject to the terms and conditions of this Agreement, the Company hereby engages and appoints the Distributor as its exclusive distributor for and in connection with the sale of the Recordings through normal retail channels to customers in the United States (the "Territory"); except that the Company reserves the right to distribute Recordings directly to the Tower Records account until September 1, 1996, upon which date the Distributor shall be appointed as exclusive distributor for such account as well. The Company's current labels, including DCC, Garland, and Sandstone, and any additional labels created by the Company during the term of this Agreement, are included under this appointment. Notwithstanding the foregoing, the Distributor and the Company agree that the Company's label known as "Romance Alive Audio" shall not be subject to the terms of this Agreement. 1.2 DISTRIBUTION SERVICES. As part of this appointment, the Distributor shall perform customary distribution services within the Territory for the purposes of distribution and selling through normal retail channels, including direct mail marketing and electronic distribution (but notwithstanding the foregoing, direct mail marketing and electronic distribution shall be on a non-exclusive basis), all of the Recordings. 1.3 EXCLUSIVITY. In furtherance of its appointment of Distributor as exclusive distributor in the Territory during the Term, the Company shall not, nor will the Company authorize, license or allow any other party to, distribute Recordings within the Territory during the Term for such period of the Term as the Distributor has the exclusive right to distribute therein, except as provided in Section 1.1 hereof. Distribution Agmt. 1 VERSION May 21, 1996 dcclass3.doc 1.4 RESERVED RIGHTS. Notwithstanding the foregoing, the Company reserves the right to distribute Recordings directly hereunder through means other than those traditionally and regularly serviced by the Distributor (e.g. record clubs and premium sales). 2. ACCEPTANCE. 2.1 ACCEPTANCE OF APPOINTMENT. The Distributor hereby accepts such appointment and exclusive right to distribute the Recordings in the Territory subject to the terms and conditions of this Agreement. 2.2 RIGHT TO REFUSE TO DISTRIBUTE. Notwithstanding anything to the contrary contained herein, the Distributor hereby reserves the right, without any liability to the Distributor, to decline within two (2) weeks after receipt of a digital audio tape or master of a Recording to distribute any of the Recordings that, in the Distributor's sole judgment, is (a) obscene, (b) libelous, slanderous or defamatory or otherwise violative of the laws of any jurisdiction, or (c) infringes upon the rights of others, including without limitation, the utilization within the Recording of uncleared and unauthorized musical sound recordings and materials protected by copyright. To the extent that the Distributor refuses to accept any Recordings for distribution pursuant to the terms set forth herein, the Distributor shall have no rights to such Recordings, and the Company shall have the right to distribute such Recordings throughout the Territory either through the Company or through a third party distributor. 3. TERM AND TERMINATION. 3.1 TERM. This Agreement shall commence on the date hereof and shall continue for a period of three (3) years (the "Term"). 3.2 AUTO RENEWAL. The Term shall automatically be renewed on a year- to year basis on the same terms and conditions contained herein, unless either party gives to the other written notice of termination on or before sixty (60) days prior to the conclusion of the Term then in effect of its intention not to renew. 3.3 CONCLUSION OF TERM SELL-OFF PERIOD. The termination or expiration of this Agreement shall in no way relieve either party from its obligations to pay the other party any sums accrued hereunder prior to such termination or expiration. Upon the termination or expiration of this Agreement, accounts between the parties shall be settled promptly, and each party shall pay all amounts due the other party within forty-five (45) days after receipt of a statement from the party seeking payment. Although there may exist disputed items which cannot be resolved within said forty-five (45) day period, undisputed amounts will nevertheless be paid within said period. Each party will use its best efforts to minimize adverse effects upon the other which can or Distribution Agmt. 2 VERSION May 21, 1996 dcclass3 .doc might result from such expiration or termination. Further, the Company shall be obligated to purchase or to cause the Company's subsequent distributor to purchase all of the Distributor's existing inventory of the Recordings at the prices enumerated in Section 6.1 hereof. Until such time as the Company purchases all of the Distributors inventory of the Recordings, or in the event the Company purchases only a portion of such inventory, then a) The Distributor shall have a non-exclusive sell-off period of six (6) months to sell off its existing inventory of the Recordings (the "Sell-Off Period"). During the Sell-Off Period, the Distributor can fulfill orders for Recordings placed during the Term on the same terms and conditions contained herein. b) Upon the expiration of the Sell-Off Period, and subject to full payment of outstanding debts to the Distributor hereunder, the Company shall have a period of thirty (30) days following such expiration to order the Distributor either to destroy all inventory of Recordings and other materials then in its possession or to deliver to the Company, at the Company's sole expense, all of the Distributor's inventory of the Recordings then on hand (and subsequent returns). If within thirty (30) days after the date of such termination the Company has not given the Distributor delivery instructions for such Recordings, the Distributor shall have the right to: (i) destroy such Recordings on the Company's behalf and at the Company's expense, (ii) continue to sell-off same; (iii) charge the Company the cost of warehousing such Recordings until the Company accepts delivery thereof The provisions of this Section 3.3 shall survive the termination of this Agreement. 3.4 NEW RECORDINGS. Notwithstanding Section 3.1 hereof, each new Recording released during the Term shall be retained by the Distributor as an exclusive title for no less than twelve (12) months from the date of delivery of finished goods by the Company; provided that, in the event the Company delivers a new Recording during the last six months of the Term, the Distributor shall not be entitled to a sell-off period for such new Recording. The Distributor's rights under this Section 3.4 shall survive the termination of this Agreement. 3.5 BREACH. In the event either party shall materially breach any of the terms, conditions and agreements contained herein to be kept, observed or performed by it, then the other party may terminate this Agreement, provided the non-breaching party has given written notice of such material breach and such material breach has not been cured within five (5) days of receipt of such Distribution Agmt. 3 VERSION May 21, 1996 dcclass3 .doc notice, with respect to default in the payment of amounts owed hereunder, or thirty (30) days of receipt of such notice with respect to any other material breach. 4. RELEASE SCHEDULE; DELIVERY; MARKETING COMMITMENT. 4.1 DELIVERY. Delivery of any Recording hereunder shall be complete when the Company has delivered to the Distributor inventory of the Recordings suitable for resale in the reasonable judgment of the Distributor (the "Inventory"). 4.2 RELEASE SCHEDULE. The Company shall give the Distributor sixty (60) days advance written notice of the date of release (street date) of each new release of a Recording. Such notice shall include the following information: (i) name of artist, (ii) title of Recording, (iii) the Company's catalogue number, (iv) suggested list price, (v) twelve digit UPC code, and (vi) firm street date. 4.3 MARKETING COMMITMENT. The Company agrees to use its best efforts to market, promote and publicize all Recordings released through the Distributor hereunder, in the manner and to the extent customary in the industry. 5. MANUFACTURING; SHIPPING. Except as set forth below, the Company shall deliver manufactured Recordings from the Company or from the pressing plant to the Distributor's designated place of delivery in Denver, Colorado. The Company and the Distributor agree that from time to time the Distributor may request the Company to ship Recordings directly to other locations and that the Company shall use reasonable efforts to comply with such requests, subject to appropriate allocation of additional freight expenses incurred in connection therewith. The number of Recordings to be delivered to Distributor shall be determined by mutual agreement of the Company and the Distributor. Freight costs of all such shipments shall be shared equally by the Company and the Distributor. The Distributor shall, in its sole reasonable discretion, designate the carrier, pay the ~ll freight costs, and charge back half such freight costs to the Company It is understood between the parties hereto that the Company's one-half share of freight costs advanced pursuant to this Section 5 are fully recoupable as provided in Section 7 hereof and are an obligation of the Company to the Distributor, and the Company hereby guarantees to the Distributor the repayment of any of such freight costs which are not recouped at the end of the Term then in effect. 6. PURCHASE PRICE AND PAYMENT. 6.1 PURCHASE PRICE. As compensation for the distribution rights granted herein, the Distributor shall pay to the Company the prices set forth in Schedule B attached hereto and incorporated herein by reference, for each configuration of the Recordings. Such prices are subject to Section 6.2 below. Distribution Agmt. 4 VERSION May 21,1996 dcclass3.doc 6.2 DISCOUNTS. a) TERMS DISCOUNT. With respect to all of the Recordings other than the Recordings in the Gold Series, the Distributor shall receive a discount of two percent (2%) from the invoice price on solely for invoices paid in accordance with the terms set forth in Section 6.4. Amounts recouped against the Company's invoices pursuant to Section 7 hereof shall be deemed paid in accordance with such terms. With respect to the Gold Series of Recordings, the Distributor shall not be entitled to a two percent (2%) discount as set forth above. In order to implement the difference in payment and discount policy on the Gold Series of Recordings, the Company shall either: (i) invoice the Gold Series of Recordings separately, at the prices set forth in Section 6.1, or (ii) invoice the Gold Series Recordings together with other Recordings hereunder, adding two percent to the prices set forth in Section 6.1, and advise the Distributor that the Company has added such amount to the price on such Recordings. b) PROGRAM DISCOUNTS. Unless otherwise agreed to in writing by the Distributor and the Company, up to three (3) times a year, during the Term and any extensions thereof (excluding the Sell-Off Period, if any), for a period not longer than four (4) weeks each time, the Distributor may offer its customers a seasonal discount equal to no more than five percent (5%) of the wholesale price of the Recordings, and receive an equivalent discount from the price for each Recording set forth in Section 6.1 hereof, provided, however, that with respect to the Gold Series of Recordings such programs shall be limited to two times a year with a maximum discount of no more than two and one-half percent (2.5%). 6.3 INVOICES. The Company shall invoice the Distributor for each shipment of Recordings to the Distributor, at the address designated by the Distributor for submission of invoices for payment. 6.4 PAYMENT TERMS. Except as otherwise provided in this Agreement, on the 25th of every month, the Distributor shall pay to the Company by check an amount equal to invoices payable to the Company (net of (i) returns, as described in Section 8 hereof, (ii) any applicable discounts as described in Section 6.2 hereof and (iii) recoupment of any Unrecouped Advances and Expenses as provided in Section 7 hereof) for goods which were received by the Distributor on or prior to the 25th day of the month ended one month prior to the first day of the month of such payment. For example, on September 25th, the Distributor will deliver a check to the Company in an amount equal to the net invoices for product received on or prior to July 25th, and on October 25th, the Distributor will deliver a check in an amount equal to the net invoices for product received on or prior to August 25th. 6.5 ADVANCES. Based upon the Company's promise faithfully to perform all of the Company's duties and responsibilities required under this Agreement, and based on the accuracy of the representations in Addendum A attached hereto, the Distributor shall pay to the Company a recoupable advance (the "Initial Distribution Agmt. 5 VERSION May 21, 1996 dcclass3.doc Advance") in an amount of Seven Hundred Fifty Thousand Dollars ($750,000.00), payable upon execution of this Agreement. It is understood between the parties hereto that the Initial Advance and any other advances paid to the Company pursuant to this Agreement are fully recoupable as provided in Section 7 of this Agreement, and are an obligation of the Company to the Distributor; and the Company hereby guarantees to the Distributor the repayment of any part of the Initial Advance (and any other advances paid to the Company pursuant to this Agreement) which is not recouped at the end of the Term then in effect. 6.6 FREE GOODS. Promptly after the end of each of the four (4) billing periods during which the Distributor has recouped an installment of the Initial Advance as provided in Section 7.1 hereof, the Company shall supply the Distributor with free Recordings equal in value to five percent (5%) of the amount of such recoupment. For purposes of this Section 6.6, the free Recordings shall be valued at the price for each Recording set forth in Section 6.1 hereof The Distributor may sell such free Recordings to its customers subject to the terms of this Agreement. 7. RECOUPMENT. 7.1 RECOUPMENT OF THE INITIAL ADVANCE. The Initial Advance shall be recouped in four (4) installments of One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500.00) each, one installment in each of four consecutive monthly billing periods, beginning with the billing period ended May 25, 1996. 7.2 RECOUPMENT OF OTHER UNRECOUPED ADVANCES AND EXPENSES. To the extent that there are any Unrecouped Advances and Expenses, other than the Initial Advance or any portion thereof, as of the date of any payment to be made by the Distributor to the Company hereunder, an amount equal to one hundred percent (100%) of such Unrecouped Advances and Expenses (other than the Initial Advance or any portion thereof) due and owing to the Distributor shall be credited against any payments to be made to the Company hereunder after recoupment of the Initial Advance as provided in Section 7.1. "Unrecouped Advances and Expenses" shall include: (i) any unrecouped portion of any advances other than the Initial Advance; (ii) any unrecouped freight costs described in Section 5 above, (iii) any unrecouped promotional expenses described in Section 11, and (iv) any other approved and unrecouped costs, advances or other expenditures to be charged back to the Company as provided hereunder. 8. RETURN RESERVE. 8.1 ESTABLISHMENT. During each billing period, the Distributor shall have the right to establish a reserve for anticipated credits, returns and exchanges of up to ten percent (10%) of the amount otherwise payable to the Distribution Agmt. 6 VERSION May 21,1996 dcclass3.doc Company pursuant to Section 6.1 (the "Return Reserve") and to hold back from payment due to the Company the amount of the Return Reserve. 8.2 LIQUIDATION OF RETURN RESERVE. The Return Reserve for a given month shall be held for a four (4) month period after it is established, then the balance not utilized of each such Return Reserve for a given month shall be liquidated in full in the billing period after the fourth month following the month in which such Return Reserve was established. 9. RETURN POLICY. 9.1 DURING THE TERM. The Distributor shall have the right, at its expense, to return all Recordings to the Company which the Distributor has not sold or which have been returned by any customer of the Distributor. The Company agrees to accept all returns of Recordings stickered by customers of the Distributor as defective merchandise; provided, however, that the Distributor shall limit the return of such stickered product to situations where there are significant quantities of such product and/or where the such stickered product cannot be reasonably recycled and resold by the Distributor. The Distributor shall be entitled to a credit for all actual returns made during each invoice period equal to the price for each Recording set forth in Section 6.1 hereof subject to any applicable discounts. If the amount of actual returns and/or credits exceed the amount of the Return Reserve held by the Distributor, then the Distributor shall deduct the unrecovered portion from any monies that may then or subsequently be due to the Company. The Distributor's rights under this Section 9.1 shall survive the termination of this Agreement. 9.2 AFTER THE TERM. Following the termination of this Agreement for any reason, or the expiration of the Term hereof the Company will accept, or contractually obligate the successor distributor of the Recordings to accept, returns of Recordings in the hands of customers of the Distributor located in the Territory at not less than the price that was paid by such customer. The Company shall indemnify and hold harmless the Distributor from and against any claims by customers based upon such customers' return privileges. The provisions of this Section 9.2 shall survive the termination of this Agreement. 9.3 GUARANTY. The Company hereby guaranties the payment to the Distributor of any credits for returns during the one-year period following the termination of the Term. The provisions of this Section 9.3 shall survive the termination of this Agreement. 9.4 PREVIOUS DISTRIBUTORS. The Company will use its best efforts to ensure that inventory in the hands of any current distributor of the Company is returned to the Company promptly after the date hereof rather than sold into the marketplace by such distributor. Distribution Agmt. 7 VERSION May 21, 1996 dcclass3.doc 10. INTENTIONALLY DELETED. 11. PROMOTION. 11.1 CO-OP ADVERTISING. Subject to the last sentence of this Section 11.1, on a quarterly basis, the Company shall utilize a minimum of Five Percent (5%) of the amount of invoices payable to the Company (net of returns and any applicable discounts as described in Section 6.2) to find the Company's retail co-op advertising costs. The Distributor shall furnish the Company with proof of performance of such co-op advertising and the related costs. It is understood between the parties hereto that such finding is recoupable by the Distributor as provided in Section 7 hereof and is an obligation of the Company to the Distributor, and the Company hereby guarantees to the Distributor the repayment of any of such finding which is not recouped at the end of the Term then in effect. Co-op advertising does not include any finds spent by the Company on marketing outside of retail, and the Company shall provide separate finding for special events (e.g. retail conventions). The Distributor will provide to the Company a list of such special events and their respective costs. The Distributor shall submit all co-op advertising plans for the Company's approval in advance, such approval not to be unreasonably withheld. 11.2 ADDITIONAL PROMOTION BY DISTRIBUTOR. Notwithstanding that the Company is primarily responsible for the promotion of the Recordings and filly responsible for the costs thereof the Company may negotiate with the Distributor for the Distributor to provide additional marketing and promotion) over and above co-op advertising described in Section 11.1 above. The Distributor shall charge back to the Company all hard costs of such marketing and promotion, including without limitation, all printing, photography and postage, as well as any applicable fees, upon which the parties hereto have mutually agreed. 11.3 RIGHT TO USE THE TRADEMARKS. NAME AND LIKENESS. The Company agrees that the Distributor shall be permitted to affix to the Recordings stickers that carry the Distributor's logo. Such stickers shall be produced and delivered to the Company's manufacturer by the Distributor and affixed by or on behalf of the Company at the Distributor's expense. The Company grants to the Distributor the right during the Term to use the Company's trademark and logo as well as the artwork accompanying the Recordings and each Artist's name, likeness and biographical material as it appears in such artwork, solely in connection with the distribution, marketing and promoting of the Recordings as provided herein. 11.4 PROMOTIONAL RECORDS. The Distributor shall have the right to distribute free Recordings for promotional purposes, such as providing Recordings to the broadcast and press media and to the Distributor's sales force around the time of a new release, and not for resale. In addition to the free Distribution Agmt. 8 VERSION May 21, 1996 dcclass3 .doc Recordings supplied to the Distributor pursuant to Section 6.6 hereof, the Company shall supply the Distributor with the promotional Recordings in an amount equal to ten percent (10%) of the total CD pressing of each new release, provided that the number of promotional Recordings shall not exceed one hundred (100) CDs for Gold Series of Recordings and four hundred (400) CDS per other new release. 11.5 RECOUPMENT OF PROMOTIONAL EXPENSES. Any and all promotional expenses incurred by the Distributor and that are previously authorized in writing by the Company shall be recoupable from any monies which may be due and owing to the Company by the Distributor. 11.6 NO REPRESENTATIONS. The Distributor makes no representations, express or implied, about the results of any its efforts to promote the Recordings. Failure of promotion undertaken by the Distributor to increase sales of the Recordings shall not constitute a breach by the Distributor of its obligations hereunder. 12. INTENTIONALLY DELETED. 13. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to the Distributor that: 13.1 The Company has all requisite legal rights to produce, manufacture, sell or distribute any and all Recordings sold to the Distributor hereunder, including but not limited to all copyright, trademark and synchronization rights, and all necessary rights in the artwork and package design materials and the Company's trademark and logo. Upon reasonable written request of the Distributor, the Company shall tender to the Distributor for its review the current recording contracts with each recording artist or licensing agreements with the holders of copyrights for each of the Recordings delivered pursuant to this Agreement. 13.2 The Company has not granted and will not grant any rights in the Recordings contrary to the provisions of this Agreement or inconsistent with the rights granted the Distributor hereunder. 13.3 The Recordings and any advertising, promotional artwork and package design materials supplied by the Company in connection therewith do not and will not contain any material which will violate, infringe upon or give rise to any adverse claim with respect to any common law or any other right, including without limitation, any copyright, trademark, musical, right of privacy or publicity or contract right of any person or organization. 13.4 The Distributor shall not have any responsibility or liability for the making of payments to any person or organization other than the Company, including without limitation, any writer, producer, composer, musician or Distribution Agmt. 9 VERSION May 21, 1996 dcclass3.doc performer, copyright proprietor or any union or guild representing such members. Any and all residual and third-party payments, deferred compensation and profit or gross receipt participation shall be the sole responsibility of the Company as are payments for any artwork, packaging, advertising or promotional materials, including any videos. 13.5 The Recordings have been produced in accordance with all applicable laws and regulations and all contracts, rules and regulations of all unions and guilds, if any, having jurisdiction. All Recordings delivered to the Distributor's warehouse have been manufactured in accordance with all applicable laws and regulations and all contracts, rules and regulations of all unions and guilds, if any, having jurisdiction. Additionally, such Recordings have been manufactured in a technically competent manner and will be technically satisfactory to the Distributor. 14. ACCOUNTING; AUDIT RIGHTS. 14.1 ACCOUNTING. Each payment made to the Company pursuant to Section 6.4 hereof shall be accompanied by a remittance advice setting forth the invoices paid and credits taken against the payment for returns, recoupment of costs, advances or other expenditures to be charged back to the Company hereunder. 14.2 AUDIT RIGHTS. The Company shall have the right at its sole cost and expense to appoint a certified public accountant to examine the Distributor's books and records which pertain to the manufacture of the Recordings and deductions related to returns, recoupment of advances or charge backs; provided that such examination shall be for a reasonable duration and shall take place at the Distributor's offices during normal business hours on reasonable prior written notice and shall not occur more than once in any year of the Term, unless the Company notifies the Distributor of a specific problem and it is not resolved within thirty (30) days of such notice. The Company shall promptly supply the Distributor with a copy of any report (and all work papers, if requested) made by such accountant pursuant to such examination. If it shall be determined by mutual agreement of the Distributor and the Company that the Distributor has underpaid the Company, then the Distributor shall forthwith pay to the Company the amount of the underpayment; and if any such underpayment exceeds ten percent (10%) of the monies paid to the Company for the period covered by such examination, then the Distributor shall pay to the Company the amount of the underpayment together with reimbursement for the actual and reasonable costs and disbursements incurred by the Company for such examination. 15. INDEMNIFICATION. The Company shall at all times indemnify and hold harmless the Distributor from and against any and all claims, damages, liabilities, costs and expenses, including legal expenses and reasonable counsel fees, which arise out of any breach or alleged breach by the Company of any warranty, representation~ covenant or agreement embodied in this Agreement, and result in a final judgment or a settlement that has received is settled with the Distribution Agmt. 10 VERSION May 21, 1996 dcclass3.doc Company's prior written consent, such consent not to be unreasonably withheld. Such indemnification shall include any copyright infringement claim resulting from the use of uncleared or unauthorized samples contained in the Recordings distributed by the Distributor and the use of the Company's trademark and logo. During the pendency of any such claim against the Distributor, unless the Company posts a bond or puts into escrow an amount bearing a reasonable relation to the Company's potential liability to the Distributor under this Section, the Distributor may withhold monies otherwise due to the Company in an amount bearing a reasonable relation to the Company's potential liability to the Distributor under this Section. Notwithstanding the foregoing, if no lawsuit is instituted within one (1) year following the Distributor '5 receipt of notice of the claim at issue, and it does not appear to the Distributor in the exercise of its reasonable business judgment as though any lawsuit will be instituted, the Distributor shall release all funds so withheld without prejudice. The Company shall notify the Distributor of any claim to which the foregoing indemnity relates promptly after it receives knowledge thereof; and the Distributor shall have the right to engage an attorney of its choice at the expense of the Company to conduct the defense thereto. 16. INDEPENDENT CONTRACTOR. The relationship established by this Agreement is solely that of supplier and distributor, and the Company and the Distributor acknowledge that the Distributor is an independent contractor. In all transactions the Distributor shall act for its own account, and neither the Company nor the Distributor shall have any power to assume, create or make binding any obligation or to make any representation, commitment, guaranty or warranty on behalf of each of the other. This Agreement shall not be construed to create the relationship of principal and agent, joint venturers, copartners, or any other similar relationship. Neither party shall be liable to any third-party in any way for any engagement, obligation, contract, representation or transaction, or for any negligent act or omission to act of; the other, except as expressly provided herein. 17. AUTHORITY. Each of the Distributor and the Company hereby covenants and represents to the other that neither the execution and delivery of this Agreement nor the performance of the transactions contemplated hereby will cause a breach under, or violate provisions of; any other agreement to which it is a party or by which its assets are or may be bound. 18. ENTIRE AGREEMENT. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements, negotiations, understandings, representations, statements and writings among the parties relating thereto. No modification, alteration, waiver or change in any of the terms of this Agreement shall be valid or binding upon the parties hereto unless made in writing and duly executed by both of the parties hereto. 19. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assignees. The parties hereto shall not assign this Agreement or any of their Distribution Agmt. 11 VERSION May 21, 1996 dcclass3.doc rights or obligations hereunder except upon the other party's prior written consent, such consent not to be unreasonably withheld. 20. SEVERABILITY. Should any part of this Agreement be held unenforceable or in conflict with the applicable laws or regulations of any jurisdiction, the invalid or unenforceable part or provision shall be replaced with a provision which accomplishes, to the extent possible, the original business purpose of such part or provision in a valid and enforceable manner, and the remainder of this Agreement shall remain binding upon the parties. 21. WAIVER. Waiver by either party of a default or breach or a succession of defaults or breaches, or any failure by either party to enforce any rights hereunder, shall not be deemed to constitute a waiver of any subsequent default or breach with respect to the name or any~other provision hereof and shall not deprive such party of any right to terminate this Agreement arising by reason of any subsequent default or breach. 22. GOVERNING LAW AND INTERPRETATION. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without regard to the principles of conflicts of law. The parties hereby consent to and submit to jurisdiction of a competent court located in the State of New York. Such court shall be the sole and exclusive venue for resolution of any disputes or disagreements between the parties relating to this Agreement or the transactions contemplated hereby or otherwise arising hereunder or with respect to any breach of the terms and provisions hereof. 23. CAPTIONS. The captions of this Agreement are solely for convenience of reference and shall not affect its interpretation. 24. NOTICES. All notices given to the parties hereunder and all statements and payments hereunder shall be addressed to the parties at the address set forth below or at such other parties as shall be designated in writing from time to time: COMPANY: with a copy to: DCC Compact Classics, Inc. Roger A. Sandau, Esq. [address] 8733 Sunset Boulevard) Suite 202 [city, state] Los Angeles, California 90069 Attn: DISTRIBUTOR: with a copy to: Passport Music Distribution, Inc. Alliance Entertainment Corp. 2335 Delgany Street 110 East 59th Street, 18th Floor Denver, Colorado 80216 New York, New York 10022 Attn: Toby Knobel Attn: General Counsel Distribution Agmt. 12 VERSION May 21, 1996 dcclass3.doc All notices shall be in writing and shall be personally delivered) or served by certified mail, return receipt requested, or by overnight mail service such as Federal Express, all charges pre-paid. Except as otherwise provided herein, such notices shall be deemed given when mailed or delivered to an overnight mail service, all charges prepaid, except that notices of change of address shall be effective only after actual receipt thereof. The failure of the recipient to accept or receive notice given by certified mail, return receipt requested, postage pre-paid, does not affect the validity of the notice. 25. COUNTERPARTS.This Agreement may be executed in one or more counterparts each of which shall be deemed an original but all of which taken together shall be deemed one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this agreement as of the day and year first written above. PASSPORT MUSIC DCC COMPACT CLASSICS DISTRIBUTION INC. By: /s/ Toby Knobel By: /s/ Marshall Blonstein ---------------------- --------------------------- Toby Knobel Marshall Blonstein President President Distribution Agmt. 13 VERSION May 21, 1996 dcclass3.doc Addendum A [TO BE SUPPLIED] Distribution Agmt. 14 VERSION May 21, 1996 dcclass3.doc Schedule B Purchase Price for the Recordings --------------------------------- Suggested Retail List Price The Distributor's Purchase Price --------------------------- -------------------------------- LP's $ 39.98 $ 22.00 29.98 15.67 Compact Disc: $ GoldDouble $ 25.11 Double Sinatra 24.00 Gold Single 15.39 16.98 8.50 15.98 8.00 14.98 7.50 13.98 7.10 12.98 6.40 11.98 6.10 10.98 5.50 CASSETTE: $ 9.98 $ 4.70 8.98 4.30 Garland Product 3.30 Distribution Agmt. 15 VERSION May 21, 1996 dcclass3.doc EX-10 6 EXHIBIT 10.4 - -------------------------------------------------------------------------------- Line of Credit Documents with Merrill Lynch Business Financial Services, Inc. - -------------------------------------------------------------------------------- Merrill Lynch Business Financial Services Inc. 33 West Monroe Street 22nd Floor Chicago. Illinois 60603 312 2691384 FAX 312 845 9093 Merrill Lynch Denise M. Glab Credit Analyst February 16, 1996 DCC Compact Classics Inc. 9301 Jordan Avenue Suite 105 Chatsworth, CA 91311 Attention: Mr. Marshall Blonstein Re: WORKING CAPITAL MANAGEMENT ACCOUNT ("WCMA") No. 230-07N09 --------------------------------------------------------- Gentlemen: It is our pleasure to inform you that we have approved an extension of your WCMA Line of Credit As extended, the new Maturity Date for your WCMA Line of Credit will be February 28, 1997, with all other terms and conditions of our agreements remaining unchanged. In connection with this extension, a $1,500.00 fee will be charged to your WCMA Account. With so many institutions offering financial services today, we realize that you have a choice and we thank you for choosing Merrill Lynch. You are a very important client to us and we hope that the WCMA Line of Credit has provided better control of your working capital and helped enhance your company's bottom line. In addition to the WCMA Line of Credit, Merrill Lynch offers a broad range of products and services to our business clients including: Term Financing: Equipment Purchases, Fixed Asset Acquisitions and ESOP Financing; Business Advisory Services: Business Valuations. Private Placements, ESOP Advisory, Acquisition Advisory and Sale of Business; and Business Investment Services: Strategies for Short-term and Intermediate-term investments. Again, we are pleased to provide you with an extension of your WCMA Line of Credit and would enjoy discussing additional business services with you in greater detail. If you have any questions, please contact Ed Lanchantin at (213) 236-2077. Sincerely, /s/ Denise M. Glab - --------------------- Denise M Glab Credit Analyst jc cc Marianne Youngkheerre - MLPF&S - Los Angeles, CA (LA) Ed Lanchantin - MLBFS - Los Angeles, CA EX-10 7 EXHIBIT 10.6 - -------------------------------------------------------------------------------- $250,000 Term Loan Documents with Merrill Lynch Business Financial Services, Inc. - -------------------------------------------------------------------------------- MERRILL LYNCH NO.9612340201 - -------------------------------------------------------------------------------- TERM WCMA(R) LOAN AND SECURITY AGREEMENT TERM WCMA LOAN AND SECURITY AGREEMENT ("Loan Agreement") dated as of December 6, 1996, between DCC COMPACT CLASSICS, INC., a corporation organized and existing under the laws of the State of Colorado having its principal office at 9301 Jordan Avenue, Suite 105, Chatsworth, CA 91311 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 33 West Monroe Street, Chicago, IL 60603 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO.230-07137 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof. In conjunction therewith, Customer has requested that MLBFS make the Term WCMA Loan hereinafter described (the "Loan"); and, subject to the terms and conditions herein set forth, MLBFS has agreed to make the Loan to Customer. The Loan combines the equivalent of five successive one-year term loans, each equal to that portion of the Loan that will be fully amortized in the ensuing year, with a line of credit under the WCMA Program ("WCMA Line of Credit") equal to that portion of the Loan that will not be amortized in the ensuing year. Subject to the terms hereof, each year after the initial funding there will be an additional funding on account of the term portion of the Loan, with the proceeds deposited into Customer's WCMA Account concurrently with a corresponding reduction in the Maximum WCMA Line of Credit. This structure provides Customer with substantially the same initial funding and loan amortization as a conventional term loan. However, unlike most conventional term loans, it permits both a prepayment in whole or in part at any time without penalty, and, subject to the terms and conditions herein set forth, a re-borrowing on a revolving basis of any such amounts prepaid on account of the WCMA Line of Credit portion of the Loan. The structure of the Loan therefore enables Customer at its option to use any free cash balances that it may have from time to time to reduce interest expense on the line of credit portion of the Loan without impairing its working capital. Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: Article I. DEFINITIONS 1.1 Specific Terms. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (a) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (b) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon the Collateral or any other collateral for the Obligations, and shall include, without limitation, the Term WCMA Note. 1 (c) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (d) "Closing Date" shall mean the date upon which all conditions precedent to MLBFS' obligation to make the Loan shall have been met to the satisfaction of MLBFS. (e) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents and Instruments of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 4.6 (b) hereof. (f) "Commitment Expiration Date" shall mean January 5,1997. (g) "Commitment Fee" shall mean a fee of $625.00 due to MLBFS in connection with this Loan Agreement. (h) "General Funding Conditions" shall mean each of the following conditions to any loan or advance by MLBFS hereunder: (i) no Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing or would result from the making of such loan or advance hereunder by MLBFS; (ii) there shall not have occurred and be continuing any material adverse change in the business or financial condition of Customer; (iii) all representations and warranties of Customer herein or in any Additional Agreements shall then be true and correct in all material respects; (iv) MLBFS shall have received this Loan Agreement and all Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (v) the Commitment Fee shall have been paid in full; (vi) MLBFS shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS' liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (vii) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (viii) any additional conditions specified in the "Term WCMA Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (i) "Interest Rate" shall mean a variable per annum rate equal to the sum of (i) 2.90%, and (ii) the 30-Day Commercial Paper Rate. The "30-Day Commercial Paper Rate" shall mean, as of the date of any determination, the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal for 30-day high-grade unsecured notes sold through dealers by major corporations. The Interest Rate will change as of the date of publication in The Wall Street Journal of a 30-Day Commercial Paper Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the 30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (1) "Loan Amount" shall mean an amount equal to the lesser of (i) 100% of the aggregate cost to Customer of satisfying or fulfilling the Loan Purpose, (ii) the aggregate amount which Customer shall request be advanced by MLBFS on account of the Loan Purpose, or (iii) $250,000.00. (k) "Loan Purpose" shall mean the purpose for which the proceeds of the Loan will be used; to wit: To provide permanent working capital. (l) "Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (m) "Maximum WCMA Line of Credit" shall mean the maximum aggregate line of credit which MLBFS will extend to Customer subject to the terms and conditions hereof, as the same shall be reduced from time to time in accordance with the terms hereof. 2 (n) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement and the Term WCMA Note. (0) "Permitted Liens" shall mean with respect to the Collateral: (i) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (ii) liens in favor of MLBFS; (iii) liens which will be discharged with the proceeds of the initial WCMA Loan; and (iv) any other liens expressly permitted in writing by MLBFS. (p) "Term WCMA Note" shall mean and refer to the Term WCMA Note executed by Customer and dated as of the date hereof which incorporates both a WCMA Note evidencing amounts owing on account of the WCMA Line of Credit portion of the Loan, and a Term Note evidencing amounts owing on account of the term portion of the Loan. (q) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as WCMA Account No. 230-07137. (r) "WCMA Loan" shall mean each advance made by MLBFS pursuant to the WCMA Line of Credit. (s) "WCMA Loan Balance" shall mean an amount equal to the aggregate unpaid principal balance of all WCMA Loans. 1.2 Other Terms. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meaning set forth in the WCMA Agreement. Article II. THE LOAN 2.1 Commitment. Subject to the terms and conditions hereof, MLBFS hereby agrees to make the Loan to Customer, and Customer hereby agrees to borrow the Loan from MLBFS. Unless otherwise hereafter agreed by MLBFS, the entire proceeds of the Loan will be disbursed either directly to the applicable third party or parties on account of the Loan Purpose or to reimburse Customer for amounts directly expended by it; all as directed by Customer in a Closing Certificate to be executed and delivered to MLBFS prior to the date of funding. 2.2 Operation of Loan. (a) Term WCMA Note. The Loan will be evidenced by and shall be repayable in accordance with the terms of the Term WCMA Note and this Loan Agreement. The Term WCMA Note combines two promissory notes, one evidencing the term portion of the Loan (the "Term Note") and the other evidencing the WCMA Line of Credit portion of the Loan (the "WCMA Note"). The balance owing by Customer on account of the Loan at any time shall be an amount equal to the sum of the then outstanding balances under the WCMA Note and the Term Note included in the Term WCMA Note. The Term WCMA Note is hereby incorporated as a part hereof. (b) Term Note Principal. The principal balance owing under the Term Note at any time shall be an amount equal to the difference between (i) the Loan Amount less the aggregate principal paid by Customer on account of the Term Note; and (ii) the Maximum WCMA Line of Credit. So long as there shall be any moneys owing by Customer to MLBFS hereunder or there shall be a WCMA Line of Credit, no 3 reduction in the unpaid principal balance of the Term Note to zero shall be deemed a payment of the Term Note in full or an extinguishment of any of the obligations of Customer thereunder or hereunder. (c) Term Note Funding. Subject to the terms hereof, the Term Note will be funded by MLBFS in five annual installments, each equal to one-fifth of the Loan Amount. The first one-fifth installment funded by MLBFS will be funded on the Closing Date and applied on account of the Loan Purpose, as aforesaid. Subsequent installments will be funded on a date chosen by MLBFS in its sole discretion which will be on or within two weeks before or after each subsequent anniversary of the last day of the calendar month in which the Closing Date occurs (each, a "Subsequent Funding Date"). Each Term Note funding after the first shall be deposited into Customer's WCMA Account. (d) Activation of WCMA Line. On the Closing Date, MLBFS will activate and make available as an integral part of the Loan a WCMA Line of Credit equal to four-fifths of the Loan Amount, all of which will be immediately disbursed on account of the Loan Purpose as part of the Loan in accordance with the directions of Customer set forth in the Closing Certificate, as aforesaid. (e) Subsequent Fundings. On the first Subsequent Funding Date, concurrently with MLBFS' funding of the second installment of the debt evidenced by the Term Note into the WCMA Account, the Maximum WCMA Line of Credit will be reduced to an amount equal to three-fifths of the Loan Amount. On the second Subsequent Funding Date, the Maximum WCMA Line of Credit will be reduced to an amount equal to two-fifths of the Loan Amount; and on the third Subsequent Funding Date the Maximum WCMA Line of Credit will be reduced to an amount equal to one-fifth of the Loan Amount. (f) WCMA Maturity Date. On the fourth Subsequent Funding Date (the "WCMA Maturity Date"), the WCMA Line of Credit will be terminated and the WCMA Account, at the option of Customer, will either be converted to a WCMA Cash Account (subject to any requirements of MLPF&S) or terminated. 2.3 Conditions of MLBFS' Obligation. The Closing Date and MLBFS' obligation to make the Loan on the Closing Date are subject to the prior fulfillment of each of the following conditions: (a) MLBFS shall have received a written request from Customer that the Loan be funded in accordance with the terms hereof, together with a written direction from Customer as to the method of payment and payee(s) of the proceeds of the Loan, which request and direction shall have been received by MLBFS not less than two Business Days prior to any requested funding date; (b) MLBFS shall have received a copy of invoices, bills of sale, payoff letters or other applicable evidence reasonably satisfactory to it that the proceeds of the Loan will satisfy or fulfill the Loan Purpose; (c) the Commitment Expiration Date shall not then have occurred; and (d) each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. 2.4 Conditions of Subsequent Fundings. The obligation of MLBFS to fund installments of the term portion of the Loan on any Subsequent Funding Date shall be subject to each of the conditions specified in Section 2.3 hereof being met at such date, and the further condition that all payments due under the Term Note on or prior to any Subsequent Funding Date shall have been paid in full; provided, however, that notwithstanding the failure of any such conditions to have been met, MLBFS may in its sole discretion fund such installment and/or any other installments, and no such funding shall constitute a waiver by MLBFS of any of its rights hereunder or under any of the Additional Agreements. Without limiting the foregoing, it is understood that no funding by MLBFS of any sum hereunder while an Event of Default shall have occurred and is continuing shall under any circumstances be deemed a waiver by MLBFS of such Event of Default, or a waiver of any of MLBFS' rights hereunder. 2.5 Commitment Fee. In consideration of the agreement by MLBFS to extend the Loan to Customer in accordance with and subject to the terms hereof, Customer has paid or shall, on or before the Closing Date pay, the Commitment Fee to MLBFS. Customer acknowledges and agrees that the Commitment Fee has been fully earned by MLBFS, and that it will not under any circumstances be refundable. 2.6 Acknowledgments of Customer. Customer acknowledges, covenants and agrees that: 4 (a) Payment of WCMA Interest; Additional Deposits. Under the terms of this Loan Agreement, interest accrued on amounts outstanding on the WCMA Line of Credit each month will, subject to the terms hereof, ordinarily be paid from the proceeds of a borrowing of an additional sum under the WCMA Line of Credit. Because all or substantially all of the Maximum WCMA Line of Credit will ordinarily be drawn on the Closing Date, Customer agrees that it will, without demand, invoicing or the request of MLBFS, from time to time make sufficient deposits into the WCMA Account in order to assure that the Maximum WCMA Line of Credit is not exceeded. Installments of principal and interest under the Term Note shall be paid directly to MLBFS in accordance with the terms of the Term Note. (b) Additional Interest Charges. SUBJECT TO THE TERMS HEREOF, ON EACH SUBSEQUENT FUNDING DATE MLBFS WILL DEPOSIT THE AMOUNT FUNDED INTO THE WCMA ACCOUNT. DUE TO POSSIBLE DELAYS IN POSTING AS WELL AS CERTAIN DELAYS IN RECOGNITION OF DEPOSITS INHERENT IN THE WCMA PROGRAM, CUSTOMER WILL NOT RECEIVE CREDIT FOR THE AMOUNT DEPOSITED FOR UP TO SEVERAL DAYS THEREAFTER, RESULTING IN AN INTEREST CHARGE FOR THAT PERIOD OF TIME ACCRUING AND CHARGED IN THE WCMA ACCOUNT. ON THE OTHER HAND, BECAUSE MLBFS BORROWS ALL OR SUBSTANTIALLY ALL OF THE FUNDS THAT IT LENDS ON THE DATE OF FUNDING, IT MUST CHARGE INTEREST ON THE AMOUNT FUNDED ON EACH SUBSEQUENT FUNDING DATE FROM THE DATE OF ITS DEPOSIT INTO THE WCMA ACCOUNT, WHETHER OR NOT SUCH DEPOSIT IS IMMEDIATELY RECOGNIZED. THE TIMING DIFFERENCES BETWEEN THE DATE OF DEPOSIT AND DATE OF RECOGNITION OF THE DEPOSIT IN THE WCMA ACCOUNT WILL THEREFORE RESULT IN EXTRA INTEREST CHARGES TO CUSTOMER, WHICH CUSTOMER ACKNOWLEDGES ARE AN ADDITIONAL COST OF THE LOAN AND HEREBY UNCONDITIONALLY AGREES TO PAY. Article III. THE WCMA LINE OF CREDIT 3.1 WCMA Note. All amounts owing under the WCMA Line of Credit shall be deemed owing under and evidenced by the WCMA Note included in the Term WCMA Note. 3.2 WCMA Loans. (a) Loan Commitment and Requests. Subject to the terms and conditions hereof: (i) on the Closing Date, MLBFS will make a WCMA Loan to Customer in an amount equal to the Maximum WCMA Line of Credit, the entire proceeds of which will be disbursed on account of the Loan Purpose, as aforesaid; and (ii) during the period from and after the Closing Date to the WCMA Maturity Date: (x) Customer may repay said WCMA Loan and any other WCMA Loans in whole or in part at any time without premium or penalty, and request a re-borrowing of amounts repaid on a revolving basis, and (y) MLBFS will make such additional WCMA Loans as Customer may from time to time request in accordance with the terms hereof. Customer may request WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result in an overdraft, shall be deemed a request by Customer for a WCMA Loan. (b) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) an event shall have occurred and is continuing which shall have caused any of the General Funding Conditions to not then be met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Event 5 of Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (c) Force Majeure. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLPF&S or any of their affiliates in connection with the WCMA Line of Credit or this Loan Agreement. (d) Interest. The WCMA Loan Balance shall bear interest at the Interest Rate. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Notwithstanding any other provision in this Loan Agreement or any Additional Agreements to the contrary, in no event shall the Interest Rate exceed the highest rate permissible under any applicable law. In the event that any court having jurisdiction determines that MLBFS has received excess interest hereunder, MLBFS will promptly refund such excess interest to Customer, without charge or penalty. Except as otherwise provided herein, accrued and unpaid interest on the WCMA Loan Balance shall be payable monthly on the last Business Day of each calendar month, commencing with the last Business Day of the calendar month in which the Closing Date shall occur. Customer hereby irrevocably authorizes and directs MLPF&S to pay MLBFS such accrued interest from any available free credit balances in the WCMA Account, and if such available free credit balances are insufficient to satisfy any interest payment due, to liquidate any investments in the Money Accounts (other than any investments constituting any Minimum Money Accounts Balance under the WCMA Directed Reserve program) in an amount up to the balance of such accrued interest, and pay to MLBFS the available proceeds on account thereof. If available free credit balances in the WCMA Account and available proceeds of the Money Accounts are insufficient to pay the entire balance of accrued interest, and Customer otherwise fails to make such payment when due, MLBFS may, in its sole discretion, make a WCMA Loan in an amount equal to the balance of such accrued interest and pay the proceeds of such WCMA Loan to itself on account of such interest. The amount of any such WCMA Loan will be added to the WCMA Loan Balance. If MLBFS declines to extend a WCMA Loan to Customer under these circumstances, Customer hereby authorizes and directs MLPF&S to make all such interest payments to MLBFS from any Minimum Money Accounts Balance. If there is no Minimum Money Accounts Balance, or it is insufficient to pay all such interest, MLBFS will invoice Customer for payment of the balance of the accrued interest, and Customer shall pay such interest as directed by MLBFS within 5 Business Days of receipt of such invoice. (e) Payments. All payments required or permitted to be made pursuant to this Loan Agreement shall be made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for investment in the Money Accounts in accordance with the terms of the WCMA Agreement. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the Loan and WCMA Line of Credit are subject to final collection. (f) Exceeding the Maximum WCMA Line of Credit. In the event that the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit, Customer shall 6 within 1 Business Day of the first to occur of (i) any request or demand of MLBFS, or (ii) receipt by Customer of a statement from MLPF&S showing a 6 WCMA Loan Balance in excess of the Maximum WCMA Line of Credit, deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit. (g) Statements. MLPF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. Article IV. GENERAL PROVISIONS 4.1 Representations and Warranties. Customer represents and warrants to MLBFS that: (a) Organization and Existence. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of Colorado and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) Execution, Delivery and Performance. The execution, delivery and performance by Customer of this Loan Agreement and such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer of such of this Loan Agreement, the Term WCMA Note and the other Additional Agreements to which it is a party. (d) Enforceability. This Loan Agreement, the Term WCMA Note and such of the other Additional Agreements to which it is a party are the legal, valid and binding obligations of Customer, enforceable against it in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Collateral. Subject to Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. (f) Financial Statements. Except as expressly set forth in Customer's financial statements, all financial statements of Customer furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended; and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. (g) Litigation. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or the continued operations of Customer. 7 (h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by Customer have been filed with the appropriate governmental agencies and all taxes due and payable by Customer have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer, or the continued operations of Customer). (i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral. Each of the foregoing representations and warranties: (i) has been relied upon as an inducement to MLBFS to make the Loan, and (ii) is continuing and shall be deemed remade by Customer on the Closing Date, on each Subsequent Funding Date and concurrently with each request for a WCMA Loan. 4.2 Financial and Other Information. Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (a) Annual Financial Statements. Within 120 days after the close of each fiscal year of Customer, Customer shall furnish or cause to be furnished to MLBFS: (i) a copy of the annual audited financial statements of Customer consisting of at least a balance sheet as at the close of such fiscal year and related statements of income, retained earnings and cash flows, certified by its current independent certified public accountants or other independent certified public accountants reasonably acceptable to MLBFS; and (ii) a copy of the 10K report of Customer, when and as filed with the SEC. (b) Interim Financial Statements. Within 45 days after the close of each fiscal quarter of Customer, Customer shall furnish or cause to be furnished to MLBFS: (i) a statement of profit and loss for the fiscal quarter then ended, (ii) a balance sheet as at the close of such fiscal quarter; all in reasonable detail and certified by its chief financial officer, and (iii) a copy of the 10Q report of Customer, when and as filed with the SEC. (c) Aging of Accounts. Within 45 days after the close of each fiscal quarter of Customer, Customer shall furnish or cause to be furnished to MLBFS an aging of its Accounts and any Chattel Paper, certified by its chief financial officer. (d) Other Information. Customer shall furnish or cause to be furnished to MLBFS such other information as MLBFS may from time to time reasonably request relating to Customer or the Collateral. 4.3 Other Covenants. Customer further covenants and agrees during the term of this Loan Agreement that: (a) Financial Records; Inspection. Customer will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real or personal), operations, books and records. (b) Taxes. Customer will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or the continued operations of Customer. (c) Compliance With Laws and Agreements. Customer will not violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS 8 hereunder or under any of the Additional Agreements, or the financial condition or the continued operations of Customer. (d) Use of Loan Proceeds; Securities Transactions. The proceeds of the Loan (including the initial WCMA Loan) shall be used by Customer solely for the Loan Purpose, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. The proceeds of each WCMA Loan other than the initial WCMA Loan shall be used by Customer solely for working capital in the ordinary course of Customer's business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will the Loan or funds borrowed from MLBFS through the WCMA Line of Credit be used: ((i) for personal, family or household purposes of any person whatsoever, or (ii) to directly or indirectly purchase, carry or trade in securities, or repay debt incurred to purchase, carry or trade in securities, whether in or in connection with the WCMA Account, another account of Customer with MLPF&S or an account of Customer at any other broker or dealer in securities. (e) Notification By Customer. Customer shall provide MLBFS with prompt written notification of: (i) any Event of Default, or event which with the giving of notice, passage of time, or both, would constitute an Event of Default; (ii) any materially adverse change in the business, financial condition or operations of Customer; and (iii) any information which indicates that any financial statements of Customer fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (f) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) Customer will not be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets or stock of, or any material partnership or joint venture interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets if any such action causes a material change in its control or principal business, or a material adverse change in its financial condition or operations; (ii) Customer will preserve its existence and good standing in the jurisdictions of establishment and operation, and will not operate in any material business other than a business substantially the same as its business as of the date of application by Customer for credit from MLBFS; and (iii) Customer will not cause or permit any material change in its controlling ownership, controlling senior management or, except upon not less than 30 days prior written notice to MLBFS, its name or principal place of business. 4.4 Collateral (a) Pledge of Collateral. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. (d) Sales and Collections. So long as no Event of Default shall have occurred and is continuing, Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS, in addition to the 9 other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to each Location of Tangible Collateral, except for any such obligations being contested by Customer in good faith by appropriate proceedings. (g) Location. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability insurance naming MLBFS as an additional party insured. Customer shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or prepay the Loan by an amount equal to the actual cash value of such Collateral as determined by either the insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or prepayment, as aforesaid, an Event of Default shall occur hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or prepay the Loan, as aforesaid. Any prepayment of the Loan pursuant to this Section shall be applied first to installments on account of the then "Term Note Balance" (as defined in the Term WCMA Note) in inverse order of maturity; with any prepayment in excess of the then Term Note Balance applied on account of the WCMA Note concurrently with: (i) a like permanent reduction in the Maximum WCMA Line of Credit, and (ii) a like reduction in the obligation of MLBFS to fund future installments on account of the Term Note in inverse order of funding. No amount prepaid pursuant to this Section may be re-borrowed by Customer. (j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. 10 (k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 4.5 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) Failure to Pay. Customer shall fail to pay to MLBFS or deposit into the WCMA Account when due any amount owing or required to be paid or deposited by Customer under this Loan Agreement or the Term WCMA Note, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than 5 Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) Failure to Perform. Customer shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for 10 Business Days after written notice thereof shall have been given by MLBFS to Customer. (c) Breach of Warranty. Any representation or warranty made by Customer or any other party providing collateral for the Obligations contained in this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (d) Default Under Other Agreement. A default or Event of Default by Customer shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) Bankruptcy, Etc. A proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed by Customer, or any such proceeding shall be filed against Customer and shall not be dismissed or withdrawn within 60 days after filing, or Customer shall make an assignment for the benefit of creditors, or Customer shall become insolvent or generally fail to pay, or admit in writing its inability to pay, its debts as they become due. (f) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of payment or performance by Customer has been materially impaired. (g) Acceleration of Debt to Other Creditors. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer to another creditor under any indenture, agreement, undertaking, or otherwise. (h) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within 10 Business Days. 4.6 Remedies. (a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: 11 (i) Termination. MLBFS may without notice terminate its obligation to make the Loan (if the Loan has not then been funded),), or fund any further amount on account of the Term WCMA Note, or make or continue to make the WCMA Line of Credit available to Customer, or otherwise extend any credit to or for the benefit of Customer; and upon any such termination MLBFS shall be relieved of all such obligations. (ii) Acceleration. MLBFS may declare the principal of and interest on the Term Note and WCMA Note included in the Term WCMA Note, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived. (iii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer remaining liable for any amount remaining unpaid after such application. (vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S, including, without limitation, all securities accounts with MLPF&S and all cash and securities and other financial assets therein or controlled thereby, and all proceeds thereof. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional Collateral. (c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its 12 attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer and included in the Collateral. (d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Term WCMA Note, the other Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (e) Notices. To the fullest extent permitted by applicable law, Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 4.7 Miscellaneous. (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements and any consent to any departure by Customer from the terms thereof shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. (c) Communications. All notices and other communications required or permitted hereunder or in connection with any of the Additional Agreements shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) Costs, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS for: (i) all Uniform Commercial Code and other filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; and (iii) all reasonable fees and out-of-pocket expenses (including, 13 but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the enforcement of this Loan Agreement or any of the Additional Agreements and the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and expenses of MLBFS' employees. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 Business Days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Event of Default. (f) Late Charge. Any payment required to be made by Customer pursuant to this Loan Agreement or any of the Additional Agreements not paid within 10 days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand, or, without demand, may in the sole discretion of MLBFS be paid by a WCMA Loan and added to the WCMA Loan Balance in the same manner as provided herein for accrued interest with respect to the WCMA Line of Credit. (g) Further Assurances. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement, the Term WCMA Note or any the other Additional Agreements, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (h) Binding Effect. This Loan Agreement, the Term WCMA Note and the other Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements. (i) Headings. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (1) Governing Law. This Loan Agreement, the Term WCMA Note and, unless otherwise expressly provided therein, each of the other Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (k) Severability of Provisions. Whenever possible, each provision of this Loan Agreement, the Term WCMA Note and the other Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement, the Term WCMA Note or any of the other Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement, the Term WCMA Note and the other Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. 14 (l) Term. This Loan Agreement shall become effective on the date accepted by MLBFS at its offices in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as either MLBFS shall be obligated to make the Loan, or, after the Closing Date, there shall be any moneys outstanding under the Term Note or WCMA Note included in the Term WCMA Note or under this Loan Agreement, or there shall be any other Obligations outstanding. (m) Counterparts. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement (n) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE TERM WCMA NOTE AND THE OTHER ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. Without limiting the foregoing, Customer acknowledges that: (i) no promise or commitment has been made to it by MLBFS, MLPF&S or any of their respective employees, agents or representatives to make the Loan on any terms other than as expressly set forth herein and in the Term WCMA Note, or to make any other loan or otherwise extend any other credit to Customer or any other party; and (ii) except as otherwise expressly provided herein, this Loan Agreement supersedes and replaces any and all proposals, letters of intent and approval and commitment letters from MLBFS to Customer, none of which shall be considered an Additional Agreement. No amendment or modification of this Agreement or any of the Additional Agreements to which Customer is a party shall be effective unless in a writing signed by both MLBFS and Customer. (o) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT, THE TERM WCMA NOTE AND THE OTHER ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE LOAN, THIS LOAN AGREEMENT, THE TERM WCMA NOTE, ANY OTHER ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. 15 IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. DCC COMPACT CLASSICS, INC. By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS --------------------------------------------- Signature Signature (2) Marshall Blonstein - ------------------------------------------------- Printed Name Printed Name President - ------------------------------------------------- Title Title Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: ____________________________________ 16 MERRILL LYNCH NO.9612340201 - -------------------------------------------------------------------------------- $250,000.00 December 6, 1996 TERM WCMA(R) NOTE FOR VALUE RECEIVED, DCC COMPACT CLASSICS, INC., a corporation organized and existing under the laws of the State of Colorado ("Customer"), hereby promises to pay to the order of MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware ("MLBFS"), in lawful money of the United States, the principal sum of $250,000.00, or, if more or less, an amount equal to the sum of the balances from time to time outstanding under the "Term Note" and "WCMA Note" included herein, as follows: DEFINITIONS In addition to terms defined elsewhere in this Note, as used herein, the following terms shall have the following meanings: (i) "Closing Date" shall mean the date of advancement of funds hereunder. (ii) "Excess Interest" shall mean any amount of interest in excess of the maximum amount of interest permitted to be charged by law. (iii) "Interest Rate" shall mean a variable per annum rate equal to the sum of (i) 2.90% per annum, and (ii) the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal for 30- day high-grade unsecured notes sold through dealers by major corporations (the "30-Day Commercial Paper Rate"). The Interest Rate will change as of the date of publication in The Wall Street Journal of a 30-Day Commercial Paper Rate that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the 30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (iv) "Loan Agreement" shall mean that certain TERM WCMA LOAN AND SECURITY AGREEMENT NO. 9612340201 between Customer and MLBFS, as the same may have been or may hereafter be amended or supplemented. (v) "Note" shall mean this TERM WCMA NOTE. Capitalized terms used herein and not defined herein shall have the meaning set forth in the Loan Agreement. Without limiting the foregoing, the terms "Additional Agreements", "Event of Default" and "WCMA Loan Balance" shall have the respective meanings set forth in the Loan Agreement. TERM NOTE FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, in lawful money of the United States, an amount equal to the difference between (i) the principal sum of $250,000.00 or, if more or less, the aggregate amount advanced by MLBFS to Customer pursuant to the Loan Agreement (the "Loan Amount"), and (ii) the sum of (x) the aggregate amount paid by Customer on account of the principal hereof, and (y) the Maximum WCMA Line of Credit (said difference being herein called the "Term Note Balance"); together with interest on the Term Note Balance, from the date of advancement of funds hereunder until payment, at the Interest Rate. Said indebtedness shall be payable in 60 consecutive monthly installments commencing on the first day of the second calendar month following the Closing Date, and continuing on the first day of each calendar month thereafter until this Note shall be paid in full. Each such installment shall be in an amount equal to the sum of (i) accrued and unpaid interest at the Interest Rate (with the first such installment including interest accrued from the Closing Date), and (ii) 1/60th of the Loan Amount. All sums payable hereunder shall be payable at the office of MLBFS at 33 West Monroe Street, Chicago, Illinois 60603, or at such other place or places as the holder hereof may from time to time appoint in writing. Customer may prepay this Term Note at any time in whole or in pant without premium or penalty. Any partial prepayment shall be applied to installments of the Loan Amount in inverse order of maturity. Customer shall not have the right to re-borrow amounts prepaid on account of this Term Note. WCMA NOTE FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in the Loan Agreement, or in such other manner and at such place as MLBFS may hereafter designate in writing, the following: (a) on the WCMA Maturity Date, the then WCMA Loan Balance; and (b) interest at the Interest Rate on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full. Interest shall be payable in the manner and on the dates specified in, or determined in accordance with, the Loan Agreement. PROVISIONS APPLICABLE TO BOTH TERM NOTE AND WCMA NOTE Any part of the principal hereof or interest hereon not paid within 10 days of the applicable due date shall be subject to a late charge equal to the lesser of (i) 5% of the overdue amount, or (ii) the maximum amount permitted by law. All interest shall be computed on the basis of actual days elapsed over a 360-day year. This Term WCMA Note constitutes and includes both the "Term Note" and the "WCMA Note" referred to in, and is entitled to all of the benefits of the Loan Agreement. The Loan Agreement is by this reference hereby incorporated as a part hereof. If Customer shall fail to pay when due any installment or other sum due hereunder, and any such failure shall continue for more than 5 Business Days after written notice thereof from the holder hereof to Customer, or if any other Event of Default shall occur and be continuing, then at the option of the holder hereof, and in addition to all other rights and remedies available to such holder under the Loan Agreement and otherwise, an amount equal to the sum of the WCMA Loan Balance and the Term Note Balance at such time remaining unpaid, together with all accrued and unpaid interest thereon and all other sums then owing by Customer under the Loan Agreement, may be declared to be and thereby become immediately due and payable. It is expressly understood, however, that nothing contained in the Loan Agreement, any other agreement, instrument or document executed by Customer, or otherwise, shall affect or impair the right, which is unconditional and absolute, of the holder hereof to enforce payment of all sums due under this Term WCMA Note at or after maturity, whether by acceleration or otherwise, or shall affect the obligation of Customer, which is also unconditional and absolute, to pay the sums payable under this Term WCMA Note in accordance with its terms. Except as otherwise expressly set forth herein or in the Loan Agreement, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this Term WCMA Note. Wherever possible each provision of this Term WCMA Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Term WCMA Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Term WCMA Note. Notwithstanding any provision to the contrary in this Term WCMA Note, the Loan Agreement or any of the Additional Agreements, no provision of this Term WCMA -2- Note, the Loan Agreement or any of the Additional Agreements shall require the payment or permit the collection of any Excess Interest. If any Excess Interest is provided for, or is adjudicated as being provided for, in this Term WCMA Note, the Loan Agreement or any of the Additional Agreements, then: (a) Customer shall not be obligated to pay any Excess Interest; and (b) any Excess Interest that MLBFS may have received under this Term WCMA Note, the Loan Agreement or any of the Additional Agreements shall, at the option of MLBFS, be: (i) applied as a credit against the then unpaid principal balance of this Term WCMA Note, or accrued and unpaid interest hereon not to exceed the maximum amount permitted by law, or both, (ii) refunded to the payor thereof, or (iii) any combination of the foregoing. This Term WCMA Note shall be construed in accordance with the laws of the State of Illinois and may be enforced by the holder hereof in any jurisdiction in which the Loan Agreement may be enforced. IN WITNESS WHEREOF, this Term WCMA Note has been executed by Customer as of the day and year first above written. DCC COMPACT CLASSICS, INC. By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS --------------------------------------------- Signature Signature (2) Marshall Blonstein - ------------------------------------------------- Printed Name Printed Name President - ------------------------------------------------- Title Title -3- MERRILL LYNCH NO.9612340201 - -------------------------------------------------------------------------------- CLOSING CERTIFICATE The undersigned, DCC COMPACT CLASSICS, INC., a corporation organized and existing under the laws of the State of Colorado ("Customer"), as a primary inducement to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to make a loan to Customer (the "Loan") pursuant to that certain TERM WCMA LOAN AND SECURITY AGREEMENT No.9612340201 between Customer and MLBFS dated as of December 6,1996 (the "Loan Agreement") DOES HEREBY REPRESENT, WARRANT AND AGREE AS FOLLOWS: 1. All of Customer's representations and warranties in the Loan Agreement are true and correct and remade as of the date hereof, and, without limiting the foregoing: (i) subject only to "Permitted Liens" (as defined in the Loan Agreement), MLBFS has a first lien and security interest upon all of the "Collateral" under the Loan Agreement (including any Collateral financed or refinanced with the proceeds of the Loan), and (ii) the Loan is being applied on account of and will satisfy the "Loan Purpose" under the Loan Agreement. 2. There has not occurred any event which constitutes an "Event of Default" under the Loan Agreement, or any event which with the giving of notice, passage of time, or both would constitute such an Event of Default. 3. There has not occurred any material adverse change in the business or financial condition of Customer since the date of the last financial statements submitted to MLBFS. 4. MLBFS is hereby authorized and directed to disburse the proceeds of the Loan, as follows: Wire to WCMA Acct. No. 230-07N09. Dated this 12 of 11 , 1996 ---- ---- DCC COMPACT CLASSICS, INC. By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS --------------------------------------------- Signature Signature (2) Marshall Blonstein - ------------------------------------------------- Printed Name Printed Name President - ------------------------------------------------- Title Title MERRILL LYNCH - -------------------------------------------------------------------------------- Certificate of Secretary (Term WCMA Loan) The undersigned hereby certifies that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of DCC COMPACT CLASSICS, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado; and that the following is a true, accurate and compared transcript of resolutions duly, validly and lawfully adopted on the day of , 1996 by the Board of Directors of said corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said corporation: "RESOLVED, that it is advisable and in the best interests of this Corporation that in connection with the Working capital Management Account that this corporation is subscribing from Merrill Lynch, Pierce, Fenner & Smith Incorporated it obtain from MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") a combination term loan and line of credit referred to by MLBFS as a "Term WCMA Loan"; and "FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered for and on behalf of this Corporation to; (a) execute and deliver to MLBFS: (i) a Term WCMA Loan and Security Agreement, Term WCMA Note, and all other agreements, instruments and documents required by MLBFS in connection with said Term WCMA Loan, and (ii) any present or future amendments to any of the foregoing; all in such form as such officer shall approve, as conclusively evidenced by his signature thereon; (b) grant to MLBFS such liens and security interests on any of the assets of this Corporation as collateral for said Term WCMA Loan and/or the other obligations of this Corporation to MLBFS as may be required by MLBFS; and (c) do and perform all such acts and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation in connection therewith; and all prior acts of said officers in these premises are hereby ratified and confirmed; and "FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFS." The undersigned further certifies that the foregoing resolutions have not been rescinded, modified or repealed in any manner and are in full force and effect as of the date of this Certificate, and that the following individuals are now the duly elected and acting officers of said corporation: President: /S/ Marshall Blonstein ------------------------------------------- Vice President: Sam Passamano -------------------------------------- Secretary: Bob Siner ------------------------------------------- Treasurer: ------------------------------------------- IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said corporation hereto, pursuant to due authorization, all as of this 12 day of DECEMBER, 1996. (Corporate Seal) /S/ Marcia Mcgovern -------------------------- Secretary Marcia Mcgovern -------------------------- Printed Name MERRILL LYNCH - -------------------------------------------------------------------------------- PAYMENT AUTHORIZATION The undersigned hereby authorizes and directs MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to charge to and pay out of the undersigned's WCMA Account No. 230-07N09 all amounts necessary to pay the sum of $ 625.00, representing the fees due to MLBFS in connection with the extension or continuance of one or more credit facilities. Dated as of December 11, 1996. DCC COMPACT CLASSICS, INC. By: /S/ Marshall Blonstein / DCC COMPACT CLASSICS --------------------------------------------- Signature Signature (2) Marshall Blonstein - ------------------------------------------------- Printed Name Printed Name President - ------------------------------------------------- Title Title EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF DDC COMPACT CLASSICS, INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 155 0 1,148 233 1,064 2,558 707 117 4,230 3,070 0 0 0 34 1,051 4,230 4,666 4,666 2,184 3,093 2,142 0 40 (596) (80) (516) 0 0 0 (516) (.08) (.08)
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