SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 COMMISSION FILE NUMBER 0-21114
DCC COMPACT CLASSICS, INC.
-----------------------------------------------------------------
(exact name of registrant as specified in its charter)
COLORADO 84-1046186
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
9301 Jordan Avenue, Suite 105, Chatsworth, California 91311
-----------------------------------------------------------------
(Address or principal executive offices)
(818) 993-8822
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of business of November 11, 1996.
Common Stock - $.005 par value 6,696,725
- ----------------------------- --------------------------------
CLASS Outstanding at November 11, 1996
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
DCC COMPACT CLASSICS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1996 and December 31, 1995
September 30, December 31,
1996 1995
(unaudited) (audited)
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 488,033 $ 531,826
Accounts receivable - net 1,176,819 1,424,481
Note receivable from officer 66,277 -
Notes receivable 125,000 140,975
Inventories 1,403,626 952,801
Advanced royalties 611,143 426,973
---------- ----------
Total current assets 3,870,898 3,477,056
---------- ---------
FIXED ASSETS, Net of accumulated
depreciation of 77,025 and 61,426 740,207 36,782
---------- ----------
OTHER ASSETS
Patent 73,326 -
Deferred taxes 33,100 33,100
Mastering costs, net 790,505 569,566
Receivable from affiliate 32,576 31,577
Other 19,289 51,521
---------- ----------
Total assets $5,559,901 $4,199,602
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1996 and December 31, 1995
September 30, December 31,
1996 1995
(unaudited) (audited)
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 266,709 $ 318,174
Current portion of long-term debt 50,000 -
Accounts payable 882,171 430,914
Royalties payable 1,941,263 2,220,627
Accrued income tax payable 161,774 96,001
Other accrued expenses 66,636 35,359
---------- -----------
Total current liabilities 3,368,553 3,101,075
---------- -----------
NONCURRENT LIABILITIES:
Long term debt 100,000 -
Deferred royalties payable 151,920 -
Deferred revenue 375,000 -
Other noncurrent liabilities 2,495 -
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
6,696,725 shares and 4,960,596,
respectively 33,484 24,803
Additional paid-in capital 951,630 623,397
Retained earnings 599,369 472,877
Less treasury stock, at cost (22,550) (22,550)
----------- -----------
Total stockholders' equity 1,561,933 1,098,527
----------- -----------
Total liabilities and
stockholders' equity $ 5,559,901 $ 4,199,602
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------------------- ----------------------
Sales $1,351,724 $ 939,942 $3,749,592 $3,540,475
Cost of sales 962,724 314,344 2,075,780 1,328,937
---------- ---------- ---------- ----------
Gross profit 389,000 625,598 1,673,812 2,211,538
Selling, adminis-
trative and other
operating expenses 339,252 538,865 1,443,172 1,714,459
---------- --------- ---------- ----------
Operating
income (loss) 49,748 86,733 230,640 497,079
Other:
Interest expense,
net 2,320 (9,249) 9,149 3,028
---------- --------- ---------- ----------
Income (loss)
before
income taxes 47,428 95,982 221,491 494,051
Provision for
income taxes 25,000 36,410 95,000 196,125
---------- --------- ---------- ----------
Net income
(loss) $ 22,428 $ 59,572 $ 126,491 $ 297,926
========== ========= ========== ==========
Earnings (loss)
per share $ .00 $ .01 $ .02 $ .06
========== ========= ========== ==========
Average weighted
number of shares
outstanding 6,696,725 4,960,506 6,120,127 4,950,506
========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 126,491 $ 297,926
--------- ---------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash items included
in net loss:
Depreciation and
amortization 22,000 2,480
Changes in:
Receivable 182,360 (689,121)
Inventories (1,021,280) (6,897)
Mastering costs 343,116 (56,609)
Royalty advances (169,170) (11,501)
Other 31,234 7,284
Accounts payable and
accrued expenses 485,030 (117,585)
Royalties payable (127,444) 262,303
Deferred revenue 375,000 -
Income taxes 65,773 148,365
--------- ---------
Total adjustments 186,619 (461,281)
Net cash used in
operating activities 313,110 (163,355)
--------- ---------
Cash flows from investing activities:
Capital expenditures $ (800,625) $ (17,211)
Intangibles (73,326) -
Common stock issued in purchase 8,681 -
Additional Paid-in capital on stock 409,832 -
--------- ---------
Net cash used in investing activities $ (455,438) $ (17,211)
--------- ---------
The accompanying notes are an integral part of these financial tatements.
5
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1996 1995
--------- ---------
Cash flows from financing activities:
Additional borrowing 150,000 -
Payments on note payable (51,465) (8,196)
--------- ---------
Net cash provided by (used in)
financing activities 98,535 (8,196)
--------- ---------
Net increase (decrease) in
cash and cash equivalents (43,793) (188,762)
Cash and cash equivalents
at beginning of period 531,826 800,952
--------- ---------
Cash and cash equivalents
at end of period $ 488,033 $ 612,190
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid (refunded) $ 29,227 $ -
========= =========
Interest paid $ 13,954 $ 12,277
========= =========
Non-Cash Transactions
Issuance of stock for fixed assets $ 326,400 $ -
========= =========
Stock issued in exchange for services $ 50,000 $ -
========= =========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. In the opinion of the Company's management, the accompanying unaudited
financial statements contain all adjustments necessary to present fairly
its financial position and the results of its operations and cash flows of
the Company for the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The results of operations for the nine month period are not necessarily
indicative of the results to be expected for a full year of operations.
Use of estimates - The Company's management uses estimates and assumptions
in preparing the financial statements. Actual results could vary from
these estimates. Key estimates include the collectibility of the accounts
receivable, the returns of merchandise shipped, inventory valuations and
marketability. In addition, the Company records its liability 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.
2. INVENTORY
---------
Inventory consists of the following:
September 30, Dec. 31,
1996 1995
(unaudited) (audited)
---------- ----------
Raw materials $ 461,919 $ 235,642
Finished goods and components 941,707 717,159
--------- ----------
Total $1,403,626 $ 952,801
========== ==========
7
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
3. CAPITAL STOCK
-------------
In June 1996, the Company issued 300,000 shares of restricted common stock
as partial payment related to the purchase of Photo Dimensions, Inc., a
manufacturer and distributor of single use, specialty camera equipment
used to produce captioned photographs. The shares were valued at $1.08,
the estimated discounted market price at the time of the transaction.
4. MAJOR CUSTOMER
--------------
The company distributes its product through traditional record
distributors as well as through nontraditional distribution channels such
as a network of twenty-two non-exclusive international distributors.
During the quarter ended June 30, 1996, the Company changed its main
distributor from Navarre to Passport Music. Navarre had previously
represented approximately 60% of sales. Passport Music represents less
than 50% of sales. Passport Music paid an advance fee of $750,000 to serve
as a new distributor of certain of the Company's products. The company
recognizes income when goods sold can no longer be returned. At September
30, 1996, the unearned revenue was $375,000.
5. LONG-TERM DEBT
--------------
The Company issued notes for $150,000 as partial payment for a certain
acquisition. The notes bear interest at 8%. Principal of $25,000 plus the
accrued interest is due semi annually commencing December 31, 1996.
The maturity of the debt is as follows:
Due in year ended:
December 31, 1996 $ 25,000
December 31, 1997 50,000
December 31, 1998 50,000
December 31, 1999 25,000
-------
$ 150,000
=======
8
<PAGE>
DCC COMPACT CLASSICS, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Nine Months Ended September 30, 1996 as Compared to
- ---------------------------------------------------
Nine Months Ended September 30, 1995
- ------------------------------------
Sales for the nine months ended September 30, 1996 were up approximately 6% from
the same period of the prior year mainly due to new releases. The Company also
changed its primary distributor during the second quarter without a significant
adverse effect in revenue.
The Company's overall gross profit margins decreased from 63% to 45% for the
nine month period ended September 30, 1996 compared to the same period in the
prior year. Management attributes the decline to a change in the product mix and
some increase in direct costs related to the returns from the former
distributor.
General, administrative and selling expenses decreased by 16% (approximately
$280,000) compared to the nine month period ended September 30, 1995. The
decline was due primarily to a management's continued focus on cost reductions.
Three Months Ended September 30, 1996 as Compared to
- ----------------------------------------------------
Three Months Ended September 30, 1995
- -------------------------------------
The Company enjoyed a significant sales rebound during the quarter ended
September 30, 1996 of 44% over the same quarter in the prior year, largely due
to small price increases and a change in product mix.
During the quarter ended September 30, 1996, gross margins declined to
approximately 29%, due to the additional product returns caused by changing
distributors in the second quarter and the change in product mix.
For the quarter ended September 30, 1996, general, administrative and selling
expenses decreased by 40% (approximately $200,000) from the prior year. This was
caused by a reduction in royalties due based on the returns from the distributor
and cost reduction efforts.
9
<PAGE>
DCC COMPACT CLASSICS, INC.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Liquidity
- ---------
During the nine months ended September 30, 1996, cash and cash equivalents
decreased $43,793. Working capital increased during the nine months ended
September 30, 1996 to $502,000 compared to $370,000 at December 31, 1995. The
increase of $126,000 was due primarily to increases in inventory,and advanced
royalties, offset by decreases in certain receivables and accrued liabilities.
Management believes it has sufficient liquidity to meet the short-term goals of
the Company. Management is seeking expanded capital sources to develop strategic
long-term opportunities in the captioned photo business.
Management expects no significant revenue from its captioned photo efforts until
the first quarter of the 1997 fiscal year.
10
<PAGE>
DCC COMPACT CLASSICS INC.
PART II
OTHER INFORMATION
Item 2. Shareholders Stock Information
- ---------------------------------------
Through November 11, 1996, DCC Compact Classics, Inc.'s stock is traded on
NASDAQ bulletin board or "Pink Sheets".
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Reports on Form 8-K: There were no reports on Form 8-K filed for the three
months ended September 30, 1996.
11
<PAGE>
DCC COMPACT CLASSICS. INC.
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DCC COMPACT CLASSICS, INC.
(Registrant)
BY: /s/Marshall Blonstein
--------------------------
Marshall Blonstein
Chairman of the Board,
Chief Executive Officer,
President
Date: 11/12/96
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DDC COMPACT CLASSICS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 488
<SECURITIES> 0
<RECEIVABLES> 1,176
<ALLOWANCES> 0
<INVENTORY> 1,403
<CURRENT-ASSETS> 3,870
<PP&E> 817
<DEPRECIATION> 77
<TOTAL-ASSETS> 5,560
<CURRENT-LIABILITIES> 3,369
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 1,528
<TOTAL-LIABILITY-AND-EQUITY> 5,560
<SALES> 3,750
<TOTAL-REVENUES> 3,750
<CGS> 2,076
<TOTAL-COSTS> 2,076
<OTHER-EXPENSES> 1,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 221
<INCOME-TAX> 95
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
