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 June 30, 1997 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 August 9, 1997.
Common Stock - $.005 par value 7,767,725
- ------------------------------ ------------------------------
CLASS Outstanding at August 9, 1997
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1997 and December 31, 1996
(Unaudited)
June 30, Dec. 31,
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,016 $ 155,222
Accounts receivable, net of
bad debt and return
allowances of $318,061
and $233,061, respectively 1,544,631 915,215
Notes receivable 141,056 125,000
Inventories 1,116,334 1,063,563
Advanced royalties 275,164 218,663
Income tax receivable 80,000 80,000
---------- ----------
Total current assets 3,216,201 2,557,663
---------- ----------
FIXED ASSETS, net 650,487 589,357
---------- ----------
OTHER ASSETS
Deferred taxes 46,864 46,864
Mastering costs, net 665,042 650,761
Receivables from affiliate 59,014 62,031
Intangibles 300,950 270,151
Other 65,474 52,762
---------- ----------
Total assets $5,004,032 $4,229,589
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1997 and December 31, 1996
(Unaudited)
June 30, Dec. 31,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 349,798 $ 710,025
Accounts payable 807,286 472,087
Royalties payable 1,838,703 1,731,134
Other accrued expenses 2,634 3,358
Deferred revenue -- 78,485
Current portion of long-term debt 116,000 75,000
----------- -----------
Total current liabilities 3,114,421 3,070,089
----------- -----------
LONG-TERM DEBT 212,116 75,000
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
7,767,725 shares and 6,746,725
shares, respectively 38,839 33,734
Additional paid-in capital 1,822,917 1,094,322
Accumulated deficit (184,261) (43,556)
----------- -----------
Total stockholders' equity 1,677,495 1,084,500
----------- -----------
Total liabilities and
stockholders' equity $ 5,004,032 $ 4,229,589
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 1,419,794 $ 1,222,367 $ 2,377,010 $ 2,397,868
Cost of sales 958,746 681,837 1,448,728 1,113,056
----------- ----------- ----------- -----------
Gross profit 461,048 540,530 928,282 1,284,812
Selling, adminis-
trative and other
operating expense 462,505 550,104 1,070,278 1,103,920
----------- ----------- ----------- -----------
Operating
income (loss) (1,457) (9,574) (141,996) 180,892
Other:
Interest expense, net (29,705) (3,625) (53,710) (6,829)
Other income -- -- 70,000 --
----------- ----------- ----------- -----------
Income (loss)
before
income taxes (31,162) (13,199) (125,706) 174,063
Provision for
income taxes 2,000 (5,163) 15,000 70,000
----------- ----------- ----------- -----------
Net income
(loss) $ (33,162) $ (8,036) $ (140,706) 104,063
=========== =========== =========== ===========
Earnings (loss)
per share $ (.01) $ (.00) $ (.02) $ .02
=========== =========== =========== ===========
Average weighted
number of shares
outstanding 7,292,384 5,343,801 7,059,088 5,334,059
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $(140,706) $ 104,063
--------- ---------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash items included
in net loss:
Depreciation and
amortization 70,059 15,263
Deferred revenue (78,485) 750,000
Changes in:
Receivables (629,417) 222,002
Employee receivable (16,056) --
Inventories (52,771) (238,289)
Mastering costs (14,281) (32,857)
Royalty advances (56,501) (168,496)
Other (54,711) 38,000
Accounts payable and
accrued expenses 334,475 194,528
Royalties payable 107,569 (416,080)
Income taxes -- 45,964
--------- ---------
Total adjustments (390,119) 410,035
Net cash (used in)/provided by
operating activities (530,825) 514,098
--------- ---------
Cash flows from investing activities:
Capital expenditures $(116,970) $(312,007)
--------- ---------
Net cash used in investing
activities $(116,970) $(312,007)
--------- ---------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1997 1996
--------- ---------
Cash flows from financing activities:
Payments on line of credit $(785,111) (50,383)
Payments of long term debt (25,000) --
Additional borrowing 628,000 225,000
Common stock issued 733,700 --
--------- ---------
Net cash provided by (used in)
financing activities 551,589 174,617
--------- ---------
Net increase/(decrease) in
cash and cash equivalents (96,206) 376,708
Cash and cash equivalents
at beginning of period 155,222 531,826
--------- ---------
Cash and cash equivalents
at end of period $ 59,016 $ 908,534
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 15,000 $ --
========= =========
Interest paid $ 51,677 $ 13,954
========= =========
Non-Cash Transactions
Issuance of stock for fixed assets -- $ 408,861
========= =========
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited
financial statements contain all adjustments necessary to present fairly
the Company's financial position and the results of its operations and
cash flows for the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The results of operations for both the three and six month periods 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 is stated at the lower of cost (on a first-in first-out basis)
or market and consists of the following:
June 30, Dec. 31,
1997 1996
---------- ----------
Raw materials $ 370,915 $ 206,353
Finished goods and components 745,419 857,210
--------- ----------
Total $1,116,334 $1,063,563
========== ==========
7
<PAGE>
DCC COMPACT CLASSICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
3. CAPITAL STOCK
The Company issued 190,000 shares of stock at $1 per share and 396,000
shares of stock at $0.50 per share during the quarter ended June 30, 1997,
and 435,000 shares at $1 per share during the quarter ended March 31,
1997. Related commission costs of $89,300 were paid.
4. MAJOR CUSTOMER
The Company has an agreement with Passport Music to be the exclusive
distributor for the Company. Passport represents approximately 70% of
sales. The previous distributor, Navarre, represented approximately 60% of
sales.
5. LONG-TERM DEBT
The Company issued notes for $225,000 in exchange for certain assets. The
notes bear interest at 8%. Principal plus the accrued interest is due semi
annually. The Company also has a term note bearing interest at a bank
reference rate plus 2.9%.
The maturity of the debt is as follows:
Due in year ended:
June 30, 1998 $116,000
June 30, 1999 90,000
June 30, 2000 65,000
June 30, 2001 40,000
June 30, 2002 17,116
--------
328,116
Less current portion 116,000
--------
Long term debt $212,116
========
6. OTHER INCOME
During the six months ended June 30, 1997, a subsidiary of the Company
received a legal settlement of $70,000 relating to a discontinued
distribution agreement.
8
<PAGE>
Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
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Overview
- --------
DCC Compact Classics, Inc. is a specialty entertainment company that seeks to
identify and exploit niches within the entertainment industry. This strategy has
been demonstrated by the Company in the manner in which it identified a niche
with the high-end audio market. It has since fulfilled this niche through the
compilation and distribution of the Company's 24K Gold CD's.
While the audio market niche has provided DCC with a solid core business, growth
aspects within this segment of the market are minimal as demonstrated by the
relatively flat revenues for the company form 1995 through 1996. This being the
case the Company has identified several new niches within the entertainment
industry and is currently in the process of developing the necessary marketing
and production facilities to properly exploit their potential.
In July of 1996, DCC acquired Photo Dimensions, Inc. a privately held company in
Salem, North Carolina. Of particular importance is the patented technology owned
by Photo Dimensions, Inc. (herein referred to as "PDI") which allows for the
pre-exposure of film in a Single-Use Camera thereby creating a phrase, logo, or
image on the bottom of each and every picture developed by the camera.
While the technology of PDI has been patented, the ability to apply this
technology into the mass production of film and single-use caption cameras has
required certain modifications, resulting in delays form the original time line
issued by management. At this time, PDI is accepting orders, marketing the
camera(s) and putting in place the necessary production facilities to enable the
Company to process the volume of orders anticipated.
The Company's operating performance is influence by several factors, the most
significant of which is operating efficiency. Traditionally the Company has been
able to maintain cost of goods sold at approximately 45%. As a result of the
continued ramp up of production related to PDI, cost of goods sold as a
percentage of revenues have increased from the traditional range of 45% to 60%
for the six months ending June 30, 1997.
It is currently estimated that the 2nd half of 1997 should show marked
improvements as a result, in part, of certain efficiencies now being experienced
in the PDI subsidiary.
9
<PAGE>
DCC COMPACT CLASSICS, INC.
Results of Operations
- ---------------------
The following sets forth for the periods indicated the percentage of total
revenues represented by each subsidiary of the Company's statements of
operations:
Three months ended Six months ended
March 31 June 30
1997 % 1997 %
DCC Compact Classics $ 808,851 85% $2,146,747 90%
Romance Alive Audio 22,279 2% 21,874 1%
PDI 126,086 13% 208,389 9%
--------- ---- ---------- ----
Total revenues $ 957,216 100% $2,377,010 100%
DCC Compact Classics $ (75,491) 69% $ (16,480) 12%
Romance Alive Audio 34,250 (32%) 10,057 (7%)
PDI (68,866) 63% (134,282) 95%
--------- ---- ---------- ----
Total net income $(110,108) 100% $ (140,282) 100%
Six months ended June 30, 1997 and June 30, 1996
- ------------------------------------------------
Sales for the six months ended June 30, 1997 were $2,377,010 compared to
$2,397,868, a slight decline of $20,858. This in part can be attributed to the
current focus of management on the establishment and enhancement of the PDI
subsidiary, thereby resulting in less focus on the core music business,
particularly in the first quarter ended March 31, 1997. By comparison music
sales in the second quarter ended June 30, were $1,337,896 compared to sales of
$808,851 for the first quarter ended March 31, 1997. While management continues
to dedicate a large part of their time to the enhancement of the PDI subsidiary,
the second quarter figures reflect a renewed commitment to the basic core
business of the Company.
Cost of goods sold for the six months ended June 30 ,1997 were $1,448,728
compared to $1,113,056 for the same period in 1996, or an increase of $335,672,
or 31%. As a percentage of sales, cost of goods sold for the six months ended
June 30, 1997 were 60% compared to 46% for the six months ended June 30, 1996.
In particular, this increase can be attributed to extraordinary expenses related
to PDI as a result of the current production of marketing units, as well as
higher costs associated with the initial production of camera units.
Selling, administrative and other operating expenses were down $33,642, to
$1,070,278 for the six months ended June 30, 1997 compared to $1,103,920 for the
six months ended June 30, 1996. These savings are, in part, a result of
operating efficiencies being recognized, as well as certain one time expenses
reported during the same period in 1996.
10
<PAGE>
DCC COMPACT CLASSICS, INC.
Net results of operations was a loss of $140,706 or $0.02 per share for the six
months ended June 30, 1997 compared to a income of $104,063 or $0.02 per share
for the same period in 1996. Management attributes this loss to the continued
expenses of establishing the PDI brand name and production facilities. It is
currently anticipated by management that operating results should improve
through the remainder of 1997.
Three months ended June 30, 1997 and June 30, 1996
- --------------------------------------------------
In the second quarter of 1997, the Company reported a loss of $33,162 compared
to a loss of $8,036 for the same period in 1996. Revenues increased $197,427 to
$1,419,794 for the second quarter ending June 30, 1997 compared to $1,222,367
for the same period in 1996. This increase in sales reflects the initial sales
of PDI single use caption camera products. General and administrative costs
dropped 15% to $462,505 for the three months ended June 30, 1997 compared to
$550,104 for the same period in 1996.
Liquidity and capital resources
- -------------------------------
As of June 30, 1997, the Company had positive working capital of $101,780,
compared to a working capital deficit for the same period in 1996. Management
currently believes that the Company has sufficient working capital and cash on
hand to maintain its current business. During the six months ended June 30, 1997
DCC has raised through the private placement of shares $733,700 at prices of
$0.50 per share to be utilized for the purchase of equipment for PDI, as well as
general corporate purposes. Additional expenditures related to PDI have been
funded from the Company's current credit facilities, as well as internally
generated cash flow.
It is anticipated that to continue to grow the PDI business, additional capital
will be required. At its current stage, the Company continues to utilize
internally generated cash flow to fund this growth, which may cause delays in
marketing and the production of cameras.
The Company continues to evaluate alternative financing options in order to
continue the growth of the PDI subsidiary at a rate which will enable the
Company to exploit the currently defined niche.
11
<PAGE>
DCC COMPACT CLASSICS INC.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
There have been no material developments in the legal proceedings which the
Company is involved as reported in the Company's Form 10-KSB for the period
ended December 31, 1996.
Item 2. Shareholders Stock Information
- ---------------------------------------
Through August 14, 1997, DCC Compact Classics, Inc.'s stock is traded on NASDAQ
bulletin board of "Pink Sheets".
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports
- ------------------------------
(a) The Company filed Form 8-K/A dated February 17, 1997.
(b) There were no reports on Form 8-K filed during this period.
12
<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: August 22, 1997
--------------------------
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DDC COMPACT CLASSICS, INC. FOR THE SIX MONTHS ENDED JUNE
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 592
<SECURITIES> 0
<RECEIVABLES> 1,862
<ALLOWANCES> 318
<INVENTORY> 1,116
<CURRENT-ASSETS> 3,216
<PP&E> 823
<DEPRECIATION> 173
<TOTAL-ASSETS> 5,004
<CURRENT-LIABILITIES> 3,114
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 1,549
<TOTAL-LIABILITY-AND-EQUITY> 5,004
<SALES> 2,377
<TOTAL-REVENUES> 2,377
<CGS> 1,449
<TOTAL-COSTS> 1,449
<OTHER-EXPENSES> 1,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (126)
<INCOME-TAX> 15
<INCOME-CONTINUING> (141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
