UNITED STATES
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, 1998 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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Common Stock - $.005 par value 8, 927,725
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CLASS Outstanding at September 30, 1998
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1, Financial Statements
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DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS: June 30, Dec. 31,
'1998 '1997
---------------------------
<S> <C> <C>
Cash and cash equivalents $ 260,713 $ 98,320
Accounts receivable, net of
bad debt and return
allowances of $380,670 and
$380,670 December 31, 1997, respectively 1,012,296 1,254,343
Notes receivable 117,694 125,000
Officer receivable 11,250
15,000
Inventories 1,423,420 1,342,253
Advanced royalties 361,424 258,453
Prepaid expenses 10,000
53,435
Income taxes receivable
51,363
----------- -----------
Total current assets 3,196,797 3,198,167
PROMISSORY NOTES RECEIVABLE, net 215,000 --
FIXED ASSETS, net 593,189 628,039
OTHER ASSETS
Deferred taxes 46,864
46,864
Mastering costs, net 613,993 686,259
Intangibles, net 227,494 241,713
Other 51,521
51,521
----------- -----------
Total assets $ 4,944,858 $ 4,852,563
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of $ 750,000 $ 770,202
credit
Accounts payable 662,527 1,082,205
Royalties payable 2,253,575 2,110,475
Other accrued expenses 49,966
37,661
Deferred revenue 80,000
Convertible debenture payable 630,000
Income taxes payable
1,600
Current portion of long-term debt 150,000 150,000
----------- -----------
Total current liabilities 4,577,668 4,150,543
LONG-TERM DEBT 166,667 191,250
PROMISSORY NOTES PAYABLE --
DEFERRED COMPENSATION PAYABLE 240,000 --
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
8,927,725 shares respectively 44,639
44,639
Additional paid-in capital 2,105,617 2,105,617
Accumulated deficit (2,189,733) (1,639,486)
----------- -----------
Total stockholders' (deficit) equity (39,477) 510,770
----------- -----------
Total liabilities and
stockholders' (deficit) equity 4,944,858 $ 4,852,563
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Sales $ 884,626 $ 1,419,794 $ 1,909,582 $ 2,377,010
Cost of sales 585,160 958,746 1,353,232 1,448,728
----------- ----------- ----------- -----------
Gross profit 299,466 461,048 556,350 928,282
Selling, administrative
and other operating
expenses 567,138 462,505 1,049,115 1,070,278
----------- ----------- ----------- -----------
Operating (loss) (267,672) (1,457) (492,765) (141,996)
Other income (expenses):
Interest expense, net (42,772) (29,705) (72,206) (53,710)
Other income 15,014 -- 16,297 70,000
----------- ----------- ----------- -----------
Loss before income taxes (295,430) (31,162) (548,674) (125,706)
Provision for income taxes 2,000 1,600 15,000
Net loss $ (295,430) $ (33,162) $ (550,274) $ (140,706)
----------- ----------- ----------- -----------
Loss per share - basic $ (0.03) $ (0.00) $ (0.06) $ (0.02)
----------- ----------- ----------- -----------
Weighted-average number of
Shares outstanding 8,927,725 7,292,384 8,927,725 7,059,088
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DCC COMPACT CLASSICS, INC.
CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
Cash flows from operating Activities:
<S> <C> <C>
Net loss $(550,274) $(140,706)
Adjustments to reconcile net loss
to net cash used in operating
Activities:
Non-cash items included
In net loss:
Depreciation and
amortization 61,820
70,059
Deferred revenue 25,000
(78,485)
Changes in:
Receivables 242,047 (645,473)
Inventories (81,167)
(52,771)
Mastering costs 72,266
(14,281)
Royalty advances (102,971)
(56,501)
Prepaid expenses 43,435
Other 62,446
(54,711)
Accounts payable and
accrued expenses (407,373) 334,475
Royalties payable 143,100 107,569
Deferred revenue 80,000 --
Income taxes 1,600 --
----------------------
Total adjustments 140,203 (390,119)
Net cash used in
operating activities (410,071) (530,825)
Cash flows from investing activities:
Capital expenditures (12,751) (116,970)
Net cash used in investing
activities (12,751) (116,970)
Cash flows from financing activities:
Payment of line of credit (20,202) (785,111)
Payments of long term debt (25,000)
Promissory notes issued (24,583)
Additional borrowing 630,000 628,000
Common stock issued 733,700
Net cash provided by (used in)
financing activities 585,215 551,589
Net increase/ (decrease) in
cash and cash equivalents 162,393 (96,206)
Cash and cash equivalents
at beginning of period 98,320 155,222
Cash and cash equivalents
at end of period $ 260,713 $ 59,016
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid -- $ 15,000
Interest paid $ 53,900 $ 51,667
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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 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 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:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1998 1997
-------------- ----------------
<S> <C> <C>
Raw Materials $654,773 $632,069
Finished goods and components 798,647 740,184
Reserve for obsolescence (30,000) (30,000)
-------------- ----------------
Total $1,423,420 $1,342,253
============== ================
</TABLE>
3 Major Customers
DNA Music represented approximately 47% of sales during the six months
June 30, 1998 and is the Company's largest customer. Cisco Music accounted
for approximately 18% of sales during the same period. 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 received
approximately $470,000 in returned merchandise from Passport, subsequently
shipped out approximately $300,000 of the returned product To other
distributors, and recorded approximately $70,000 in net returns.
4 Promissory Notes Payable
The Board of Directors of DCC has authorized the offering (the "offering")
of preferred stock, convertible into common stock on a 1 to 1 ratio, to
all shareholders of DCC who were shareholders of record on or about April
9, 1998. The convertible preferred stock was to be offered on a 1,000,000
share minimum and a 2,500,000 share maximum basis. Each convertible
preferred stock was to pay an 8% per annum dividend on a quarterly basis.
The dividend was to be paid in cash was to be cumulative. The offering
price was to be $.40 per share. Each holder of one share of convertible
preferred stock was to have the right to convert each such share into 1
share of DCC common stock, on a fully-paid, non-assessable basis, up to
and including September 1, 2001, unless extended by the Company's Board of
Directors to September 1, 2003.
<PAGE>
In late June of 1998, management suspended the offering of the preferred
due to the market conditions of DCC's stock price.
In satisfaction of the $400,000 (1,000,000 shares) minimum offering,
certain members of the Board of Directors of DCC, and one other accredited
individual (the "Standby Parties"), irrevocably committed to purchase
$630,000 (1,575,000 shares) of the convertible preferred stock, no par
value, offering which was not otherwise purchased by the shareholders of
DCC pursuant to a prospectus. These Standby Parties have loaned DCC the
full amount of their respective commitments, evidenced by promissory notes
bearing interest at 8% per annum until the maturity date of May 15, 1998.
During the quarter ended March 31, 1998, $330,000 in promissory notes had
been issued to the above individuals, with approximately $5,804 in accrued
interest recorded for the first quarter and $12,502.56 accrued for the
second quarter ended June 30, 1998. The remaining $300,000 commitment was
received by DCC in April 1998. Maturity of the $630,000 convertible
debentures have not been formally extended. Additionally, the Company's
president has irrevocably committed to exercising Stock options equaling
$30,000 in contributed capital.
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:
<TABLE>
<CAPTION>
Due year ended:
<S> <C>
June 30, 1999 $150,000
June 30, 2000 75,000
June 30, 2001 50,000
June 30, 2002 41,667
----------------
316,667
Less: current portion 150,000
----------------
Long-term Debt $ 166,667
================
</TABLE>
6 STOCK COMPENSATION AGREEMENT
In accordance with stock compensation agreements the six directors of the
Company have each been granted rights to purchase up to 100,000 shares of
the Company's common stock at $.40 per share over the next four years. The
consideration for the shares for each director who has served as a
director continuously for the 12 months preceding each of the four
anniversary dates will be the services performed. A deferred compensation
liability for $230,000 (corresponding to six directors at $40,000 each)
has been recorded at the March 31, 1998 balance sheet date.
7 BASIS OF PRESENTATION
The Company increased sales of the Photo Dimensions camera by
approximately $218,000 during the six month period ended June 30, 1998
from the comparable period of the previous year. 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 seeks
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 outside financing not be obtained.
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's
strategies continues to identified new niches within the entertainment industry
and is currently developing the necessary marketing and production facilities to
properly exploit their potential.
<PAGE>
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 106% in the first half of the year over year-ago levels as the marketplace
accepts this new product. The company's core business of high quality compact
discs gross revenues were off by 31% compared with the six months ended June 20,
1997. This decline is primarily due to management's attention to the caption
camera business.
Although captioned camera sales for the first six months increased by more then
100 percent compared to that of the prior year, management anticipates continued
losses through the end of the year and anticipates that Photo Dimensions will
achieve profitability in the first quarter of 1999. Management is re-focusing on
the music business and anticipates that the compact discs business will get back
to the gross levels of 1997 in the fourth quarter of this year with improvement
for the year 1999.
Result 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:
<TABLE>
<CAPTION>
Three months ended Six Months ended
March 31 June 30
1998 1998
Revenues:
<S> <C> <C> <C> <C>
DCC Compact Classics $811,325 79% $1,483,334 78%
Romance Alive Audio (307) 0% 3,053 0%
Photo Dimensions 213,938 21% 423,502 22%
---------- ---- ---------- ----
Total revenues $1,024,956 100% $1,909,889 100%
Net Income (Loss):
DCC Compact Classics ($11,494) 5% ($118,177) 21%
Romance Alive Audio (16,734) 7% 177 0%
Photo Dimensions (226,616) 89% (432,274) 79%
Total Net Income ($254,844) 100% ($550,274) 100%
</TABLE>
Six months ended June 30, 1998 and June 30, 1997
- ------------------------------------------------
Sales for the six months ended June 30, 1997 were $1,909,889 compared to
$2,377,010, a decline of $467,121 or 19.65 percent. This in part can 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.
While management continues to dedicate time to the enhancement of the PDI
subsidiary, it is now devoted to its core music business and expects this part
of the business to get back to growth and profitability.
Cost of goods sold for the six months ended June 30, 1998 were $1,353,232
compared to $1,448,738 for the same period in 1997, or a decrease of $95,506, or
7%. As a percentage of sales, cost of goods sold for the six months ended June
30, 1998 were 71% compared to 61 percent for the six months ended June 30, 1997.
This increase can be attributed primarily to extraordinary expenses related to
PDI in the continuing process in developing better techniques in production and
quality control.
Selling, administrative and other operating expenses were down $46,163, to
$1,024,115 for the six months ended June 30, 1998 compared to $1,070,278 for the
six months ended June 30, 1997. These savings are operating efficiencies being
recognized and continued cost cutting measures being implemented by management.
Results of operations was a net loss of $525,274 or $.06 per share for the six
months ended June 30, 1998 compared to a loss of $140,706 or $.02 per share for
the same period in 1997. Management attributes this loss primarily to the
decline in gross revenues in the music division and continued expenses of
establishing the PDI brand name and production facilities. It is anticipated by
management that operating results in both the music and caption camera divisions
should improve through the remainder of 1998.
<PAGE>
Three months ended June 30, 1998 and June 30, 1997
- --------------------------------------------------
In the second quarter of 1998, the Company reported a loss of $295,430 compared
to a loss of $33,162 for the same period in 1997. Revenues decreased $534,861 to
$884,933 for the second quarter ending June 30, 1998 compared to $1,419,794 for
the same period in 1997. The decline in sales reflects a sales return for the
quarter of $275,694 and a decline in new releases in the music division. Selling
and administrative costs increased 4% to $481,977 for the three months ended
June 30, 1998 compared to $462,505 for the same period in 1997.
Liquidity and Capital Resources
- -------------------------------
The Company has a working capital deficit of approximately $1,380,871 at June
30, 1998, as opposed to a working capital deficit of approximately $952,000 at
December 31, 1997. The decline in working capital is primarily due to the
operating loss for the six months ended June 30, 1998. In July 1998, the Company
was notified that its line of credit in the amount of $750,000 would not be
renewed. The line of credit is a revolving line which matured on June 30, 1998.
The company intends to meet with the holder of the note in the near future and
to work out a payment arrangement.
$150,000 of long-term debt is maturing during the calendar year ending December
31, 1998. Contribution to the capital deficit mentioned above is $2,253,575 in
estimated royalties payable. Management for some time has felt that estimates
made for the royalty liability were too high and as a result, retained a
royalties expert to examine the royalty accrual for the period July 1, 1994 thru
June 30, 1998. The examination should be completed during the month of October
1998, however, preliminary results indicate that a material adjustment should be
made to this liability. It appears that the Company has materially over
estimated its liability. Accordingly, any such adjustment will be made in the
third quarter on 1998.
Management continues to pursue additional outside financing to support the
growth of its captioned camera and music business.
Item 1. Legal Proceedings
- --------------------------
In September 1998, The Company settled the lawsuit filed against VRG Records and
the cross-complaint against the Company. The settlement provides for the Company
to pay VRG $125,000. $25,000 has been paid in September, with the balance to be
paid $10,000 quarterly. In addition VRG must purchase all inventory the Company
has from Navarre of their product at $2.50 per CD and $2.00 per cassette up to
15,000 units each.
There have been no other material development in the legal proceeding which the
Company is involved as reported in the Company's Form 10-KSB for the period
ended December 31, 1997.
Item 2. Shareholders Stock Information
- ---------------------------------------
Through October 2, 1998, 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.
<PAGE>
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
Chief Executive Officer,
President
Date: October 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 260,713
<SECURITIES> 0
<RECEIVABLES> 1,893,334
<ALLOWANCES> (380,670)
<INVENTORY> 1,423,420
<CURRENT-ASSETS> 3,196,797
<PP&E> 866,407
<DEPRECIATION> (273,218)
<TOTAL-ASSETS> 4,944,858
<CURRENT-LIABILITIES> 4,577,668
<BONDS> 0
0
0
<COMMON> 44,639
<OTHER-SE> (84,116)
<TOTAL-LIABILITY-AND-EQUITY> 4,944,858
<SALES> 884,626
<TOTAL-REVENUES> 899,640
<CGS> 585,160
<TOTAL-COSTS> 585,160
<OTHER-EXPENSES> 567,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,772
<INCOME-PRETAX> (295,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (295,430)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (295,430)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
