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 March 31, 1997 COMMISSION FILE NUMBER 0-21114
DCC COMPACT CLASSICS, INC.
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(exact name of registrant as specified in its charter)
COLORADO 84-1046186
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation of organization) Number)
9301 Jordan Avenue, Suite 105, Chatsworth, California 91311
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(Address or principal executive offices)
(818) 993-8822
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(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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of business of May 14, 1997.
Common Stock - $.005 par value 7,051,725
- ------------------------------ --------------------------------
CLASS Outstanding at May 14, 1997
1
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DCC COMPACT CLASSICS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1997 and December 31, 1996
(Unaudited)
March 31, Dec. 31,
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 312,461 $ 155,222
Accounts receivable, net of
bad debt and return
allowances of $318,061
and $233,061, respectively 1,212,838 915,215
Notes receivable 125,000 125,000
Inventories 1,004,888 1,063,563
Advanced royalties 255,679 218,663
Income tax receivable 80,000 80,000
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Total current assets 2,990,866 2,557,663
---------- ----------
FIXED ASSETS, Net 660,662 589,357
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OTHER ASSETS
Deferred taxes 46,864 46,864
Mastering costs, net 615,174 650,761
Receivables from affiliate 49,194 62,031
Intangibles 263,042 270,151
Other 53,639 52,762
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Total assets $4,679,441 $4,229,589
========== ==========
The accompanying notes are an integral part of these financial statements.
2
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DCC COMPACT CLASSICS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 1997 and December 31, 1996
(Unaudited)
March 31, Dec. 31,
1997 1996
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 589,801 $ 710,025
Accounts payable 627,291 472,087
Royalties payable 1,769,354 1,731,134
Other accrued expenses 2,632 3,358
Deferred revenue -- 78,485
Current portion of long-term debt 50,000 75,000
----------- -----------
Total current liabilities 3,080,078 3,070,089
----------- -----------
LONG-TERM DEBT 235,470 75,000
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
7,181,725 shares and 6,746,725
shares, respectively 35,909 33,734
Additional paid-in capital 1,479,647 1,094,322
Accumulated deficit (153,663) (43,556)
----------- -----------
Total stockholders' equity 1,361,893 1,084,500
----------- -----------
Total liabilities and
stockholders' equity $ 4,679,441 $ 4,229,589
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
----------- -----------
Sales $ 957,216 $ 1,175,501
Cost of sales 489,982 431,219
----------- -----------
Gross profit 467,234 744,282
Selling, adminis-
trative and other
operating expenses 610,336 553,816
----------- -----------
Operating
income (loss) (143,102) 190,466
Other:
Interest expense, net (24,005) (3,204)
Other income 70,000 --
----------- -----------
Income (loss)
before
income taxes (97,107) 187,262
Provision for
income taxes 13,000 75,163
----------- -----------
Net income
(loss) $ (110,107) $ 112,099
=========== ===========
Earnings (loss)
per share $ (.02) $ .02
=========== ===========
Average weighted
number of shares
outstanding 6,825,791 5,328,446
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
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DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss) $(110,107) $ 112,099
--------- ---------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash items included
in net loss:
Depreciation and
amortization 31,452 63,804
Changes in:
Receivables (297,624) (154,805)
Inventories 58,675 83,341
Mastering costs 35,587 (79,138)
Royalty advances (37,016) (97,221)
Other 11,960 (5)
Accounts payable and
accrued expenses 145,235 (45,302)
Royalties payable 38,220 70,908
Deferred revenue (78,485) --
Income taxes -- 75,163
--------- ---------
Total adjustments (91,996) (83,255)
Net cash used in
operating activities (202,103) 28,844
--------- ---------
Cash flows from investing activities:
Capital expenditures $ (95,647) $ --
--------- ---------
The accompanying notes are an integral part of these financial statements.
5
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DCC COMPACT CLASSICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1997 1996
--------- ---------
Cash flows from financing activities:
Payments on line of credit $(385,511) (49)
Payments on long-term debt (25,000) --
Additional borrowing 478,000 --
Common stock issued 387,500 --
--------- ---------
Net cash provided by (used in)
financing activities 454,989 (49)
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Net increase (decrease) in
cash and cash equivalents 157,239 28,795
Cash and cash equivalents
at beginning of period 155,222 131,826
--------- ---------
Cash and cash equivalents
at end of period $ 312,461 $ 160,621
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 13,000 $ --
========= =========
Interest paid $ 24,138 $ --
========= =========
The accompanying notes are an integral part of these financial statements.
6
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DCC COMPACT CLASSICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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
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 three 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 is stated at the lower of cost, on a first-in first-out basis,
or market and consists of the following:
March 31, Dec. 31,
1997 1996
(unaudited) (audited)
---------- ----------
Raw materials $ 240,238 $ 206,353
Finished goods and components 764,652 857,210
--------- ----------
Total $1,004,888 $1,063,563
========== ==========
7
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DCC COMPACT CLASSICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
3. CAPITAL STOCK
The Company issued 435,000 shares of stock at $1 per share during the
quarter ended March 31, 1997, and paid related commission costs of
$47,500.
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 prime plus
2.9%.
The maturity of the debt is as follows:
Due in year ended:
March 31, 1998 $ 91,000
March 31, 1999 90,000
March 31, 2000 65,000
March 31, 2001 40,000
March 31, 2002 42,470
--------
$328,470
========
6. OTHER INCOME
During the quarter ended March 31, 1997, a subsidiary of the Company
received a legal settlement of $70,000 relating to a discontinued
distribution agreement.
8
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Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
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Results of Operations
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Overall sales for the three months ended March 31, 1997 were down approximately
19% from the same period of the prior year. The decrease in sales is
attributable to management seeking fewer new releases of compact discs. The
efforts of management to market and sell its new product, the Single-Use Caption
Camera, impinged on the availability of time to seek new releases. Caption
Camera sales were $126,086 for the quarter ended March 31, 1997. Music sales for
the quarter ended March 31, 1997 were down approximately $345,000, or 29% from
the quarter ended March 31, 1996.
The decrease in sales together with the increase in cost of sales, for the three
months ended March 31, 1997, by approximately 14%, from the same period of the
prior year, decreased gross profits for the quarter ended March 31, 1997 by
approximately 37% from the quarter ended March 31, 1996. The decrease in gross
profits relates to management's efforts to exploit the potential of its new
product, and that the sales of Single-Use Caption Cameras for the quarter ended
March 31, 1997 were negligible while start-up costs were relatively high.
For the three months ended March 31, 1997, general, administrative and selling
expenses increased by approximately 10% from the same period of the prior year.
The increase is due primarily to the additional overhead incurred by the Company
as the result of operations of Photo Dimensions, Inc. ("PDI"). PDI is the
Company's North Carolina subsidiary which owns the patent on the Single-Use
Caption Camera. During the quarter ended March 31, 1997, the Company
consolidated certain administrative functions of PDI'S North Carolina operations
with the Company's California headquarters. The consolidation should have the
effect of minimizing any additional overhead costs to maintain PDI's operations
in North Carolina.
The operating loss of $143,102 for the three months ended March 31, 1997
compared with operating income of $190,466 for the same period of the prior
year.
Net interest expenses were $24,005 for the three months ended March 31, 1997
versus $3,204 for the same period of the prior year. The increase was due to the
increase in the outstanding balance of the Company line of credit to $793,271 as
of March 31, 1997 versus $318,125 as of March 31, 1996. Other income of $70,000,
received during the quarter from the Company's ownership interest in Romance
Alive Audio based on the settlement of a lawsuit, reduced the Company's loss
before taxes to $97,107 as compared with income before taxes of $187,262 the
quarter ended March 31, 1996.
9
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Liquidity and Capital Resources
The Company's working capital position as of March 31, 1997 improved as compared
to December 31, 1996, a negative $89,212, versus a negative $512,426,
respectively. Total current assets increased to $2,990,866, as of March 31,
1997, from $2,557,663 as of December 31, 1996, representing an increase of
approximately 17%. The increase in total current assets is primarily due to the
Company receiving $435,000 from the sales of common stock during the quarter.
Total current liabilities of $3,080,078, as of March 31, 1997, were basically
unchanged compared to $3,070,089 as of December 31, 1996.
The Company's long-term debt increased to $237,470, as of March 31, 1997, from
$75,000 as of December 31, 1996, and represents the balance owed on a $250,000
face amount installment note obtained from the Company's primary lender. The
$75,000 balance as of December 31, 1996, was reduced by $25,000 during the
quarter.
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 a total of $520,000 under the commitment
as of April 8, 1997. Management believes the Company will receive the $480,000
balance under the commitment. This is an important source of capital for the
Company. The capital is being used as follows: to purchase additional equipment
related to the laser technology which burns the caption image onto the film used
in the Single-Use Caption Camera; to market and advertise the Single-Use Caption
Camera; establish a reserve related to trade financing for purchase orders of
the Single-Use Caption Camera; and for working capital including the acquisition
of new licensing agreements for new releases of compact discs by the Company.
If the Company fails to receive substantially all of the $480,000 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.
Other Financial Information
The Company is in negotiations with a distributor of cameras who is interested
in initially purchasing 3,000,000 rolls of film from the Company, and purchasing
an additional 4,500,000 rolls of film. The film will contain the Company's laser
technology of burning caption images at the bottom of the film. Management
anticipates that negotiations with the distributor should be completed within
the next thirty days. Production on the initial 3,000,000 unit order would start
10
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immediately after the completion of the negotiations. Management anticipates
that the initial 3,000,000 unit order, and the additional 4,500,000 unit order,
could result in a gross profit margin to the Company of approximately 77% based
on an anticipated sale price of $0.45 per unit and cost of production of $0.10
per unit.
There are, however, no assurances that the negotiations will lead to an
agreement, or if an agreement is reached, that the terms will be the same as the
terms presently being negotiated.
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 May 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
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None
Item 5. Other Information
- --------------------------
The Company, and its joint venture partner, Romance Alive Audio, Inc., made a
strategic decision to find a buyer for Romance Alive Audio, a California general
partnership ("Romance Alive"). Romance Alive specializes in the publishing of
romance novels on audio-cassettes. Romance Alive has entered into preliminary
discussions with a party who is interested in purchasing Romance Alive.
Item 6. Exhibits and Reports
- ------------------------------
(a) The Company filed Form 8-K/A dated February 17, 1997
11
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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: May 20, 1997
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 THREE MONTHS ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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<CASH> 312
<SECURITIES> 0
<RECEIVABLES> 1,600
<ALLOWANCES> 318
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<CURRENT-LIABILITIES> 3,080
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0
<COMMON> 36
<OTHER-SE> 1,480
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<CGS> 490
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