SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 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 (IRS Employer Identification
incorporation or organization) Number)
9301 Jordan Ave Suite 105
Chatsworth, California 91311
- --------------------------------------- ---------------------------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number : (818) 993-8822
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
----- -----
The registrant had 5,328,446 shares of its $.005 par value common stock
issued and outstanding as of April 30, 1996.
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned there unto duly authorized.
DCC COMPACT CLASSICS, INC.
(Registrant)
By:/s/ Marshall Blonstein Date: May 29, 1996
----------------------------- ---------------------
Marshall Blonstein
President
2
<PAGE>
DCC COMPACT CLASSICS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
- -------- --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets- March 31,1996 and Dec 31,1995 4
Consolidated Statements of Operation - For the Three Months
Ended March 31, 1996 and 1995 and the Year ended December 31,
1995 5
Statements of Cash Flow- For the Three Months Ended March 31,
1996 and the Year ended December 31, 1995 6
Notes to unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
- --------- -----------------
Not Applicable
3
<PAGE>
DCC COMPACT CLASSICS INC
Balance Sheet
Unaudited
ASSETS March 31 December 31
1996 1995
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents 160,621 131,826
Receivables, net 1,579,936 1,424,481
Notes receivable 140,325 140,975
Trading Securities 400,000 400,000
Inventory 869,460 952,801
Advanced Royalties 524,194 426,973
---------- ----------
Total Current Assets 3,674,536 3,477,056
Fixed assets net of depreciation
of 64,425 and 61,426 33,783 36,782
Other Assets
Deferred Tax Asset 33,100 33,100
Mastering Costs net of amortization of 587,899 569,566
Receivable from Affiliate 32,666 31,577
Other 51,521 51,521
========== ==========
Total Assets 4,413,505 4,199,602
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Line of credit 318,125 318,174
Accounts payable and accrued expenses 385,612 430,914
Royalties payable 2,291,535 2,220,627
Accrued Expense officer 35,359 35,359
Taxes payable 171,164 96,001
---------- ----------
Total Current Liabilities 3,201,795 3,101,075
Stockholders Equity
Common Stock $.005 par value authorized
10,000,000 shares; issued and outstanding
4,960,506 shares 24,803 24,803
Paid-in Capital 623,397 623,397
Retained earnings 586,060 472,877
Less Treasury Stock, at cost (22,550) (22,550)
---------- ----------
Total Shareholders Equity 1,211,710 1,098,527
---------- ----------
Total Liabilities and
Shareholders equity 4,413,505 4,199,602
========== ==========
See Notes to Financial Statements
4
<PAGE>
DCC COMPACT CLASSICS, INC
Statement of Operations
<TABLE>
<CAPTION>
Three Monthes Ended:
Year Ended:
March 31, 1996 March 31, 1995 Dec 31, 1995
(Unaudited) (Unaudited) (Audited)
<S> <C> <C> <C>
Sales, net of returns
and allowances 1,175,501 1,517,482 4,200,596
---------- ---------- ----------
Net Sales 1,175,501 1,517,482 4,200,596
Cost of Sales 431,219 692,579 1,730,639
---------- ---------- ----------
Gross profit 744,282 824,903 2,469,957
Operating Expenses 553,816 524,116 2,327,628
---------- ---------- ----------
Operating Income 190,466 300,787 142,329
Other Income and Expense:
Interest Income 3,384 1,676 41,316
Interest, expense (6,588) (13,641) (34,488)
---------- ---------- ----------
Income before Income Tax 187,262 288,822 149,157
Provision for Income Tax 75,163 118,806 49,900
---------- ---------- ----------
Net Income 112,099 170,016 99,257
========== ========== ==========
Per share data:
net income 0.02 0.03 0.02
========== ========== ==========
Weighted average
outstanding shares 5,328,446 5,326,446 5,328,446
========== ========== ==========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
DCC COMPACT CLASSICS INC
Statements of Cash Flow
for the Three Months ended March 31, 1996
and for the Year ended December 31,1995
<TABLE>
<CAPTION>
Three Months Twelve Months
March 31, 1996 December 31,1995
unaudited audited
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income 112,099 99,257
Adj to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 63,804 217,585
Changes in assets and liabilities
(Increase) decrease in:
Trade accounts receivable (155,455) (360,360)
Notes receivable 650 77,540
Inventories 83,341 101,134
Advance royalties (97,221) 133,573
Due from affiliate (1,089)
Other Assets 1,084 (28,273)
(Decrease) increase in:
Trade accounts payable (45,302) (483,276)
Royalties payable 70,908 198,868
Due to officers 35,359
Income tax net of refund 75,163 49,900
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 107,982 41,307
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Acquistion of Marketable Securities (400,000)
Purchase of fixed assets (17,211)
Increase in Mastering (79,138) (294,496)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES (79,138) (711,707)
CASH FLOW FROM FINANCING ACTIVITIES
Borrowing under line of credit (49) 1,274
-------- --------
Net Cash provided by Financing (49) 1,274
-------- --------
NET INCREASE (DECREASE) IN CASH 28,795 (669,126)
CASH AT BEGINNING OF PERIOD 131,826 800,952
-------- --------
CASH AT END OF PERIOD 160,621 131,826
======== ========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO FINANCIAL STATEMENTS"
For the Period Ended March 31, 1996
Note 1 Summary of Significant Accounting Policies
- -------------------------------------------------
A. Organization and Operations
DCC Compact Classics, Inc. (the Company), formerly Dunhill Compact Classics,
Inc., was incorporated in February 1986 in the State of Colorado. The Company is
engaged primarily in the wholesale marketing of compact discs.
B. Basis of Consolidation
The Consolidated financial statements include the accounts of the Company and
its 70% owned partnership, Romance Alive Audio ("the partnership"), a California
General Partnership. All material intercompany accounts and transactions have
been eliminated in consolidation (see note 3).
C. Inventories
Inventories are stated at the lower of cost or market using the first in, first
out method. Inventory consists of the following at March 31, 1996:
Raw Materials $ 79,149
Finished Goods 790,311
--------
$869,460
--------
D. Property and Equipment
Property and Equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets of five
years. When assets are retired or otherwise disposed of, the cost and the
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in operations for the period. Depreciation
charged to operations was $2,999 and $1,498 for the quarters ended March 31,
1996 and 1995 and $9,613 for the year ended December 31, 1995.
E. Mastering Costs
Costs incurred for mastering, including recording and artwork costs, are
capitalized and charged to expense over the estimated period of benefit,
generally four years.
7
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO FINANCIAL STATEMENTS"
For the Period Ended March 31, 1996
F. Advanced Royalties
Advanced Royalties paid to artists are capitalized and charged to expense at the
time the royalties are earned.
G. Revenue Recognition
The Company recognizes revenue on the sales of its product upon shipment.
H. Cash
Cash and cash equivalents, consist of deposits and highly liquid debt
instruments with original maturities of less than 90 days.
I. Per Share Data
Per share data is based upon the weighted average number of common shares
outstanding for the period.
J. Use of Estimates
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Management estimates the amount of possible returns of merchandise
shipped and the allowance for uncollectable receivables based upon its past
experience. Should amounts of merchandise be returned that exceed these
estimates it could have a material negative impact on the Company's financial
statements. In addition, the Company records the amounts of license and royalty
fees due based upon contractual obligations. These computations are subject to
audit by independent agencies. Should the results of these independent audits
produce license and royalty fees due which are in excess of the amounts computed
by the Company, it could have a negative impact on the Company's financial
statements.
Note 2 - Notes Payable
- ----------------------
Notes payable - credit line consists of outstanding indebtedness pursuant to the
Company's $500,000 line of credit expiring in February, 1997 with an outstanding
balance of $318,125 and unused balance of $181,875 at March 31, 1996 and
$318,174 and $181,826 at December 31, 1995. The credit line bears interest at
Prime plus.7% per annum and is secured by substantially all of the Company's
assets.
8
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO FINANCIAL STATEMENTS"
For the Period Ended March 31, 1996
Note 3. Related Party Transactions
- ----------------------------------
During 1993 the Company formed a California General Partnership with Romance
Alive Audio, Inc. ("RAAI") a California Corporation that is 100% owned by the
spouse of the Company's president. Under the terms of the partnership agreement,
the Company and RAAI share profits and losses 70% to the Company and 30% to
RAAI. Through March 31, 1996 the Company made capital contributions to the
partnership aggregating $345,641.
RAAI is acting as the managing partner, providing time and expertise required to
handle the day to day operations of the partnership. Beginning in 1995 RAAI is
entitled to compensation of 6% of gross revenues for these services.
Note 4 Description of Leasing Arrangements
- ------------------------------------------
The Company leases its office and warehouse space pursuant to an operating lease
expiring in April 2000 which calls for base rent payments of $5,521 per month.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of March 31, 1996 are as follows:
Year ended December 31, 1996 $66,252
1997 66,252
1998 66,252
1999 66,252
2000 22,084
------
$287,092
--------
Rent was $66,252 for the year ended December 31, 1995.
Note 5 Income Taxes
- -------------------
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different tax periods. Deferred taxes are classified as current or non-current,
depending on the classifications of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or non-current
9
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO FINANCIAL STATEMENTS"
For the Period Ended March 31, 1996
depending on the periods in which the temporary differences are expected to
reverse. Temporary differences giving rise to the deferred tax asset consist of
accrued salary due to an officer of the Company. The amount of the deferred tax
asset is $33,100.
Note 6. Commitments and Contingencies
- -------------------------------------
The Company entered into a three year employment contract with its President on
January 1, 1993. The agreement provides for a salary of $150,000 during 1993,
$160,000 during 1994 and $170,000 during 1995. In February 1996 the contract was
extended for an additional three years at $170,000 per year.
10
<PAGE>
INTRODUCTION
DCC Compact Classics, Inc (the Company) was incorporated as a Colorado
corporation on February 20, 1986, and on October 19, 1987, completed the
acquisition of Dunhill Compact Classics, Inc., a privately-held California
Corporation. The focus of the Company's operations following such acquisition
was to establish a specialized niche in the then emerging market for compact
discs ("Cds"). The emergence of compact disc technology in the early 1980's led
to segments of the consuming public replacing their collections of vinyl and
audio cassettes with the superior quality and convenience of compact discs.
Classical music listeners were the first segment to accept compact disc
technology and the initial discs made available were comprised of classical
albums. Since that time there has been substantial acceptance of compact discs
for all types of music, including classical, jazz, rock and oldies. Sales of
compact discs are growing rapidly and by the end of 1994 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
CD's, 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 exportation of 24K
gold CD albums by such artists as Frank Sinatra, Ray Charles, Bob Dylan, The
Doors, The Eagles, Paul McCartney, Cream, Miles Davis, Creedence Clearwater
Revival, Joni Mitchell, The Steve Miller Band, and Bob Seger. 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, exploitation and sale of catalogs of music masters and by
licensing rights from others to music masters for exploitation. The Company's
basic concept has been to provide the listening public a compact disc 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
"Collection" series which feature the best of certain performance era or type of
music.
Since formation of the Company in February 1986, the Company has entered into
licensing agreements with major record labels throughout the industry, including
Sony, MCA, Warner, Electra, 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
11
<PAGE>
grant the Company the exclusive or non-exclusive right to make master recordings
of many top artists for the purpose of enhancing the sound quality through
digital sound recording process and then to market under the Company's trade
label the individual recordings or compilations in the form of a compact disc.
At the present time, most of the major music recording companies are not seeking
to develop this specialized niche on a proprietary basis and rely on specialty
operations such as the Company for the development of the reissue market. 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 the services.
Commencing in 1994, the Company formed a strategic alliance with Romance Alive
Audio, Inc. to enter into the emerging market for audio books with a focus on
romantic novels. Romance Alive Audio operates out of the same facilities as the
Company, specializes in publishing romance novels on audio cassettes and markets
such audio cassettes through chain stores, supermarkets and traditional book
outlets. The Company has completed signings with numerous well-known authors in
this field and has the potential to become a recognized publisher of womens
romance novels on audio cassettes in the United States.
The Company's officers are located at 9301 Jordan Avenue, Suite 105, Chatsworth,
California 91311, the telephone number of the Company is (818) 993-8822.
BACKGROUND
The Company was incorporated as Total Capital Corporation under the laws of the
State of Colorado on December 5, 1986, for the purpose of seeking potential
business ventures. The Company successfully completed its initial public
offering in June 1987, with the sale of 25,000,000 Units, at $.02 per Unit, each
Unit consisting of one share of common stock, one Class A Warrant, one Class B
Warrant and one Class C Warrant.
On October 19, 1987, the shareholders of the Company approved an Agreement and
Plan of Merger (the "Agreement") between the Company and Dunhill Compact
Classics, Inc., a privately held California Corporation ("Dunhill"). Pursuant to
the Agreement, Dunhill was merged with and into the Company and the shareholders
of Dunhill received a total of 143,000,000 shares of the Company's common stock.
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." herein
referred to as the Company or DCC. DCC is continuing the business of Dunhill.
12
<PAGE>
The Company was incorporated on February 20, 1986, with the initial mission 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 open. The niche markets that are presently being exploited are
reissues of catalogs of music masters, 24K gold CD's and more recently a joint
venture in the emerging market for Audio Books. The Company is currently
preparing to launch a line of mid-priced CD-ROM's.
RESULTS OF OPERATIONS
Comparison of quarter ended March 31,1996 to the quarter ended March 31, 1995
Net sales decreased 22.6% to $1.18 million in the quarter ended March 31, 1996
from $1.52 million in the quarter ended March 31, 1995. The decrease was due to
less releases of new product compared to the similar period of the prior year.
The Company's gross margin for the quarter ended March 31, 1996 decreased to
$.74 million from $.82 million for the quarter ended March 31, 1995. As a
percentage of net sales, the gross margin increased to 63.4% in the quarter
ended March 31, 1996 from 54.4% in the quarter ended March 31, 1995. The
increase in gross margin percentage can be attributed to the product mix whereby
less acquisition cost included the artist royalties in the manufacturing cost.
Operating expenses increased 5.7% to $.55 million for the quarter ended March
31, 1996 from $.5.2 million for the quarter ended March 31, 1995. As a
percentage of net sales, operating expenses increased to 47.2% of net sales in
the quarter ended March 31, 1996 from 34.6% in the quarter ended March 31, 1995.
This significant increase was primarily due to a higher artist royalty rate on
the VRG product. Significant changes occurred in the following areas. Wages
increased to 14.7% of sales for the quarter ended March 31, 1996 from 9.5% in
the quarter ended March 31, 1995. This decrease was due primarily to the smaller
sales base. Accounting and Legal increased to 5.8% of net sales in the quarter
ended March 31, 1996 from 2.9% for the quarter ended March 31, 1995. This
decrease was due primarily to the reduced sales base. In 1995, the company
reached a settlement in a lawsuit whereby the receipt of the procedes in the
quarter ended March, 1995 helped to lower the operating costs by 5.8%. There was
no similar amount in the quarter ended March 31, 1996. This was the single
greatest change in overall operating costs.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As the Company grows and expands into new market niches, DCC must add to its
working capital in order to develop and market new product. During 1994, the
Company's operations were funded through a combination of profits and the sale
of the Shelter catalog master tapes. During the first quarter of 1995, the
Company's working capital was increased solely through the profits of the
Company. Cash on hand at March 31, 1996 amounted to $.16 million and the line of
credit remained unchanged during the quarter.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DDC COMPACT CLASSICS, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 161
<SECURITIES> 400
<RECEIVABLES> 1,840
<ALLOWANCES> 120
<INVENTORY> 869
<CURRENT-ASSETS> 3,675
<PP&E> 98
<DEPRECIATION> 64
<TOTAL-ASSETS> 4,414
<CURRENT-LIABILITIES> 3,202
<BONDS> 0
<COMMON> 25
0
0
<OTHER-SE> 1,187
<TOTAL-LIABILITY-AND-EQUITY> 4,414
<SALES> 1,176
<TOTAL-REVENUES> 1,176
<CGS> 431
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<OTHER-EXPENSES> 554
<LOSS-PROVISION> 0
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</TABLE>
