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, 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 November 7, 1997.
Common Stock - $.005 par value 9,407,725
- ------------------------------ --------------------------------
CLASS Outstanding at November 7, 1997
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,894 $ 155,222
Accounts receivable, net of
bad debt and return
allowances of $98,299
and $233,061, respectively 1,480,162 915,215
Notes receivable 147,500 125,000
Inventories 1,420,809 1,063,563
Advanced royalties 348,563 218,663
Prepaid expenses 21,591 --
Income tax receivable 80,000 80,000
---------- ----------
Total current assets 3,549,519 2,557,663
---------- ----------
FIXED ASSETS, net 650,788 589,357
---------- ----------
OTHER ASSETS
Deferred taxes 46,864 46,864
Mastering costs, net 649,632 650,761
Receivables from affiliate 63,109 62,031
Intangibles 291,589 270,151
Other 65,474 52,762
---------- ----------
Total assets $5,316,975 $4,229,589
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 479,715 $ 710,025
Accounts payable 906,163 472,087
Royalties payable 1,725,531 1,731,134
Other accrued expenses 10,163 3,358
Deferred revenue -- 78,485
Current portion of long-term debt 125,000 75,000
----------- -----------
Total current liabilities 3,246,572 3,070,089
----------- -----------
LONG-TERM DEBT 200,000 75,000
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
8,862,725 shares and 6,746,725
shares, respectively 44,314 33,734
Additional paid-in capital 2,042,942 1,094,322
Accumulated deficit (216,853) (43,556)
----------- -----------
Total stockholders' equity 1,870,403 1,084,500
----------- -----------
Total liabilities and
stockholders' equity $ 5,316,975 $ 4,229,589
=========== ===========
</TABLE>
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $ 1,406,665 $ 1,351,724 $ 3,783,675 $ 3,749,592
Cost of sales 790,769 884,591 2,239,497 2,075,780
----------- ----------- ----------- -----------
Gross profit 615,896 467,133 1,544,178 1,673,812
Selling, adminis-
trative and other
operating expense 619,372 417,385 1,689,650 1,443,172
----------- ----------- ----------- -----------
Operating
income (loss) (3,476) 49,748 (145,472) 230,640
Other:
Interest expense, net (29,116) 2,320 (82,825) 9,149
Other income -- -- 70,000 --
----------- ----------- ----------- -----------
Income (loss)
before
income taxes (32,592) 47,428 (158,297) 221,491
Provision for
income taxes -- 25,000 15,000 95,000
----------- ----------- ----------- -----------
Net income
(loss) $ (32,592) $ 22,428 $ (173,297) $ 126,491
=========== =========== =========== ===========
Earnings (loss)
per share $ (.00) $ .00 $ (.02) $ .02
=========== =========== =========== ===========
Average weighted
number of shares
outstanding 8,768,842 6,696,725 7,813,740 6,120,127
=========== =========== =========== ===========
</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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (173,297) $ 126,491
----------- -----------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash items included
in net loss:
Depreciation and
amortization 106,534 22,000
Deferred revenue (78,485) 375,000
Changes in:
Receivables (564,947) 182,360
Employee receivable (22,500) --
Inventories (357,246) (1,021,280)
Mastering costs 1,129 343,116
Royalty advances (129,900) (169,170)
Prepaid expenses (21,591) --
Other (13,790) 31,234
Accounts payable and
accrued expenses 440,881 485,030
Royalties payable (5,603) (127,444)
Income taxes -- 65,773
----------- -----------
Total adjustments (645,518) 186,619
Net cash (used in)/provided by
operating activities (818,815) 313,110
----------- -----------
Cash flows from investing activities:
Capital expenditures $ (189,403) $ (800,625)
----------- -----------
Net cash used in investing
activities $ (189,403) $ (800,625)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Payments on line of credit $(948,310) $ --
Payments of long term debt (25,000) (51,465)
Additional borrowing 918,000 150,000
Common stock issued 959,200 345,187
--------- ---------
Net cash provided by (used in)
financing activities 903,890 443,732
--------- ---------
Net increase/(decrease) in
cash and cash equivalents (104,328) (43,793)
Cash and cash equivalents
at beginning of period 155,222 531,826
--------- ---------
Cash and cash equivalents
at end of period $ 50,894 $ 488,033
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ -- $ 29,227
========== ========
Interest paid $ 43,950 $ 13,954
========== ========
Non-Cash Transactions
Issuance of stock for fixed assets -- $326,400
========== ========
Stock issued in exchange for services -- $ 50,000
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DCC COMPACT CLASSICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine 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:
September 30, December 31,
1997 1996
------------ ------------
Raw materials $ 271,119 $ 206,353
Finished goods and components 1,149,690 857,210
------------ ------------
Total $ 1,420,809 $ 1,063,563
============ ============
7
<PAGE>
DCC COMPACT CLASSICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
3. CAPITAL STOCK
The Company issued 470,000 shares of stock at $0.50 per share during the
quarter ended September 30, 1997, 776,000 shares at $0.50 per share during
the quarter ended June 30, 1997, and 870,000 shares at $0.50 per share
during the quarter ended March 31, 1997. Related commission costs of
$98,800 were paid.
4. MAJOR CUSTOMER
DNA Music represents approximately 21% of sales and is the Company's
largest customer. Previously, Passport Music was the Company's largest
customer and exclusive distributor and represented approximately 70% of
Company sales for the first six months of 1997. In the third quarter of
1997, Passport Music filed for bankruptcy under Chapter 11. As a result,
the Company reduced net accounts receivable by $400,000 ($600,000 in
aggregate less $200,000 previously reserved), wrote down $200,000 in
related royalties, and recorded $150,000 in inventory returns. The Company
has limited future financial exposure by electing not to appoint an
exclusive distributor, but instead diversify distribution.
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:
September 30, 1998 $125,000
September 30, 1999 100,000
September 30, 2000 50,000
September 30, 2001 50,000
September 30, 2002 -
--------
325,000
Less current portion 125,000
--------
Long-term debt $200,000
========
8
<PAGE>
DCC COMPACT CLASSICS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
6. OTHER INCOME
During the nine months ended September 30, 1997, a subsidiary of the
Company received a legal settlement of $70,000 relating to a discontinued
distribution agreement.
7. BASIS OF PRESENTATION
The Company has increased sales of the Photo Dimensions camera by $219,642
during the quarter ended September 30, 1997. The increased working capital
needed to prepare the film and load the film into cameras, and to carry
the accounts receivable related to this increased sales volume, has
utilized most of the Company's liquidity. As a result, the Company plans
to obtain additional outside financing to meet its obligations, to expand
production capabilities, and to increase marketing activities. No
adjustments have been made to the carrying value of the assets should the
additional financing not be obtained.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
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. The Company has
identified new niches within the entertainment industry and is currently
developing the necessary marketing and production facilities to properly exploit
their potential.
The Company continues to exploit its patent on a captioned camera within the
Photo Dimensions division. Sales of the captioned camera product have increased
by 110% in the third quarter as the marketplace accepts this new product. The
Company's core business of high quality compact discs remains relatively steady
despite the loss of a major distributor.
Management expects the next quarter to reflect the first operating profit for
the captioned camera segment of the business if the shipping volume can catch up
with the current sales backlog. A new assembly agreement with an offshore
company should speed up the delivery process and reduce the cost of sales per
unit now that the volume warrants such a strategic alliance.
Results of Operations
- ---------------------
Nine months ended September 30, 1997 and September 30, 1996
- -----------------------------------------------------------
The nine months ended September 30, 1997 reflects a loss from operation of
$173,000 compared to income of $126,000 from the prior year reflecting the loss
of volume and write off of receivables from Passport Music, the Company's
largest distributor. Management was able to diminish the loss by recovering some
inventory and reducing related royalties. Sales for the nine months ended
September 30, 1997 was up 1% from the same period in 1996 because the increased
Caption Camera sales were mostly offset by the reduced disc sales caused by the
loss of the distributor. Operating income was down approximately $376,000 due to
the high costs of producing the first production runs of the captioned camera,
the losses incurred on the uncollectible receivables and the period expenses of
the captioned camera operation incurred without significant related revenues.
10
<PAGE>
The following sets forth for the periods indicated the percentage of total
revenues represented by each subsidiary of the Company's statements of
operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
1997 % 1997 %
<S> <C> <C> <C> <C>
DCC Compact Classics $1,168,187 83% $3,314,934 88%
Romance Alive Audio 12,567 1% 34,441 1%
PDI 225,911 16% 434,300 11%
--------- ---- ---------- ----
Total revenues $1,405,665 100% $3,783,675 100%
DCC Compact Classics $ 92,281 (283%) $ 75,801 (44%)
Romance Alive Audio (13,651) 42% (3,594) 2%
PDI (111,222) 341% (245,504) 142%
---------- ---- ---------- ----
Total net income $ (32,592) 100% $ (173,297) 100%
========== ==== ========== ====
</TABLE>
Three months ended September 30, 1997 and September 30, 1996
- ------------------------------------------------------------
The three months ended September 30, 1997 had an increase in sales of almost
$55,000. This 4% increase in attributable to the increased captioned camera
sales. The gross profit was up almost $149,000 as the captioned camera costs
become more in line with projections as the initial production startup costs are
absorbed and the Company moves forward on the learning curve. Selling, general
and administrative expense were higher due to the bad debt loss on the
distributor and the expenses incurred by the Photo Dimensions segment of the
Company.
Liquidity and capital resources
- -------------------------------
The Company has working capital of approximately $300,000 at September 30, 1997.
Management believes that the growth of the captioned camera business will
require additional working capital to exploit this technology and, accordingly,
is pursuing additional outside financing. During the nine months ended September
30, 1997, the Company raised $939,000 from the sale of common stock and has used
those funds to support the growth of captioned camera market penetration and
production capability and the related increase in working capital requirements.
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 November 7, 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) 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: November 25, 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 NINE MONTHS ENDED
SEPTEMBER 30, 1997, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 1,578
<ALLOWANCES> 98
<INVENTORY> 1,421
<CURRENT-ASSETS> 3,550
<PP&E> 853
<DEPRECIATION> 202
<TOTAL-ASSETS> 5,317
<CURRENT-LIABILITIES> 3,247
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 1,826
<TOTAL-LIABILITY-AND-EQUITY> 5,317
<SALES> 3,784
<TOTAL-REVENUES> 3,784
<CGS> 2,239
<TOTAL-COSTS> 2,239
<OTHER-EXPENSES> 1,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> (158)
<INCOME-TAX> 15
<INCOME-CONTINUING> (173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (173)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
