Opinion ID: 1776404
Heading Depth: 2
Heading Rank: 1

Heading: The relationship between Quixote, the Disctronics Group, and DMI

Text: Prior to 1987, LaserVideo was a wholly owned subsidiary of Quixote. It had two plants, one in Anaheim, California, which manufactured video discs, and one in Huntsville, Alabama, which manufactured audio discs. During this same period, the Disctronics Group was involved in the production of compact audio discs and had operations in Australia, Asia, and Europe. It was looking to expand into the United States. During 1987, it negotiated with Quixote to buy LaserVideo. The negotiations led to an agreement to sell LaserVideo to LaserVideo Acquisition Corporation (LVAC), which had been formed by the Disctronics Group for the express purpose of purchasing LaserVideo. The total purchase price was $55.5 million; $29 million was paid at closing, and $26.5 million was due when called anytime after January 15, 1989. Closing took place on January 15, 1988, and LaserVideo became Disctronics Manufacturing, Inc. The sale agreement named LVAC as the purchaser, and Disctronics, Ltd., and Quatro, Ltd. (the parent corporation of Disctronics, Ltd.), as the acquiring companies. The Disctronics Group was unable to pay the $26.5 million balance owed on the purchase price when called. On January 17, 1989, Quixote sued LVAC; Disctronics, Ltd.; Quatro, Ltd.; DMI; and Disctronics Australia, Ltd., in the Circuit Court of Cook County, Illinois. On February 3, 1989, all defendants, except DMI, consented to the entry of an agreed order stating that the defendants were to pay Quixote the $26.5 million no later than March 3, 1989; the defendants paid $500,000 for the extension. The balance of $26.5 million was not paid by the March 3 deadline, and a default judgment was entered against the Disctronics Group on March 7, 1989. On March 21, 1989, the judgment was vacated by consent of the parties in favor of a comprehensive settlement agreement; the purpose of the settlement agreement was to provide the Disctronics Group additional time to accomplish financial restructuring in order to raise the cash needed to pay Quixote the balance of the purchase price. The terms of the agreement were as follows: (1) on March 24, 1989, the Disctronics Group was to pay Quixote $1.6 million as advance interest on the $26.5 million from March 3 to October 3; (2) on March 31, 1989, the Disctronics Group was to pay Quixote $1.5 million as a partial payment of principal; and (3) on or by October 3, 1989, the Disctronics Group was to pay $25.2 million, the balance of the obligation. Quixote also received a pledge of 100% of the stock in LVAC and DMI. On October 4, the Disctronics Group, unable to pay the balance owed, defaulted. Following the October 4 default, the Disctronics Group represented that they had no present ability to pay, but that they had engaged First Boston Corporation, a nationally recognized investment brokerage firm, to assist them in refinancing the Disctronics Group's debt structure. Prior to this time, the Disctronics Group had tried to refinance their entire world debt, which was approximately $150 million, through Australia and New Zealand Banking Group Limited (ANZ). In the fall of 1989, the focus had shifted to an attempt to refinance the debt of DMI only, a debt that totalled $54.9 million ($28.3 million under a credit agreement between DMI and ANZ, plus the amount due Quixote). The Disctronics Group bargained with Quixote in order to maintain the corporate structure of DMI so that DMI could obtain financing from First Boston. These negotiations culminated in what the parties refer to as the Work-Out Agreement. The Work-Out Agreement stated that it had been entered into because the Disctronics Group had requested an extension of time in order to obtain additional financing, the proceeds of which would be used to satisfy the indebtedness due Quixote. The agreement also stated that Quixote had determined it was in its best interest under the circumstance in order to maximize the potential for payment, to convert its debt position to that of an equity holder. Under the terms of the Work-Out Agreement, Quixote exchanged the $25.4 million debt of the Disctronics Group for 49% of the common stock in DMI and 12% of the preferred nonvoting stock in DMI and the preferred stock in LVAC. Quixote gave LVAC an option to repurchase the stock just mentioned if a payment schedule set forth in the agreement was complied with. The initial trigger date was April 30, 1990, at which time Quixote was to be paid at least $3.3 million in order to extend the Disctronics Group's option to June 30, 1990. If full payment or the extension payment was not made by April 30, the Work-Out Agreement further provided that Quixote's preferred stock would gain voting rights and the remaining 51% interest in the common stock in DMI would be sold to Quixote for the nominal sum of $1,000, leaving Quixote as the sole owner of DMI. The Work-Out Agreement also provided: The parties further agree that neither this Agreement nor any past or subsequent negotiations or course of dealing shall constitute a partnership or joint venture among the parties, nor do they establish any relationship of principal to agent between the parties. Each party agrees that they are not authorized to represent to any third party that any partnership or agency relationship exists between Quixote and Disctronics Group, nor shall Quixote be obligated to any third party in connection with any expense or other obligation relative to the Disctronics Refinancing. The terms of the agreement also required Donovan to step down as a director of DMI. The trial court found as follows: The design of the `Work-Out Agreement' created a system that was self-enforcing. Quixote acquired DMI stock, and made provisions for LVAC and Disctronics Limited to buy it back if they could raise the monies due Quixote. In turn, the Disctronics Group obtained additional time to pursue their debt restructuring efforts, and, effective control of all DMI operations except those `Outside the Ordinary Course of Business'... and certain `Capital Expenditure Budgets .' (Emphasis supplied.) The Disctronics Group defaulted on April 30, 1990, and Quixote became the sole stockholder of DMI. The corporate name was changed to Disc Manufacturing, Inc.