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, 1998 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 May 29, 1998.
Common Stock - $.005 par value 8,927,725
- ------------------------------ --------------------------------
CLASS Outstanding at May 29, 1998
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(UNAUDITED)
March 31, December 31,
1998 1997
---------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,497 $ 98,320
Accounts receivable, net of
bad debt and return
allowances of $323,400 and
$380,670 at March 31, 1998 and
December 31, 1997, respectively 1,412,752 1,254,343
Notes receivable 113,694 125,000
Officer receivable 11,250 15,000
Inventories 1,370,467 1,342,253
Advanced royalties 254,439 258,453
Prepaid expenses 10,000 53,435
Income taxes receivable 51,363 51,363
---------- ----------
Total current assets 3,244,462 3,198,167
---------- ----------
PROMISSORY NOTES RECEIVABLE, net 230,000 -
FIXED ASSETS, net 604,816 628,039
OTHER ASSETS
Deferred taxes 46,864 46,864
Mastering costs, net 657,689 686,259
Intangibles, net 234,603 241,713
Other 51,521 51,521
---------- ----------
Total assets $5,069,955 $4,852,653
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(UNAUDITED)
March 31, December 31,
1998 1997
--------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 702,902 $ 770,202
Accounts payable 1,006,854 1,082,205
Royalties payable 2,192,258 2,110,475
Other accrued expenses 14,130 37,661
Income taxes payable 1,600 -
Current portion of long-term debt 153,814 150,000
----------- -----------
Total current liabilities 4,071,558 4,150,543
LONG-TERM DEBT 166,667 191,250
PROMISSORY NOTES PAYABLE 335,804 -
DEFERRED COMPENSATION PAYABLE 240,000 -
----------- -----------
Total liabilities 4,814,029 4,341,793
----------- -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 10,000,000
shares, issued and outstanding
8,927,725 shares 44,639 44,639
Additional paid-in capital 2,105,617 2,105,617
Accumulated deficit (1,894,330) (1,639,486)
----------- -----------
Total stockholders' equity 255,926 510,770
----------- -----------
Total liabilities and
stockholders' equity $ 5,069,955 $ 4,852,563
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
---------- -----------
Sales $1,024,956 $ 957,216
Cost of sales 768,072 489,982
---------- -----------
Gross profit 256,884 467,234
Selling, adminis-
trative and other
operating expense 481,977 610,336
---------- -----------
Operating
loss (225,093) (143,102)
Other income (expense):
Interest expense, net (29,434) (24,005)
Other income 1,283 70,000
---------- -----------
Loss
before
income taxes (253,244) (97,107)
Provision for
income taxes 1,600 13,000
---------- -----------
Net loss $ (254,844) $(110,107)
========== ===========
Loss per share - basic $ (.03) $ (.02)
========== ===========
Weighted-average number of
shares outstanding - basic 8,927,725 6,825,791
========== ===========
Loss per share - diluted $ (.03) $ (.02)
========== ===========
Weighted-average number of
Shares outstanding - diluted 8,927,725 6,825,791
========== ===========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
-------- ----------
Cash flows from operating
activities:
Net loss $ (254,844) $ (110,107)
---------- ----------
Adjustments to reconcile net loss
to net cash used in
operating activities:
Non-cash items included
in net loss:
Depreciation and
amortization 36,936 31,452
Stock compensation expense 10,000 -
Changes in:
Receivables (143,353) (297,624)
Inventories (28,214) 58,675
Mastering costs 28,570 35,587
Royalty advances 4,014 (37,016)
Prepaid expenses 43,435 -
Other - 11,960
Accounts payable and
accrued expenses (98,882) 145,235
Royalties payable 81,783 38,220
Deferred revenue - (78,485)
Income taxes 1,600 -
---------- ---------
Total adjustments (64,111) (91,996)
Net cash used in
operating activities (318,955) (202,103)
---------- ----------
Cash flows from investing
activities:
Capital expenditures (6,603) (95,647)
---------- ----------
Net cash used in investing
activities (6,603) (95,647)
---------- ----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
---------- ----------
Cash flows from financing activities:
Payments on line of credit $ (260,000) $ (385,511)
Payments of long term debt (24,583) (25,000)
Promissory notes issued 335,804 -
Additional borrowing 196,514 478,000
Common stock issued - 387,500
---------- ----------
Net cash provided by
financing activities 247,735 454,989
---------- ----------
Net increase/(decrease) in
cash and cash equivalents (77,823) 157,239
Cash and cash equivalents
at beginning of period 98,320 155,222
---------- ----------
Cash and cash equivalents
at end of period $ 20,497 $ 312,461
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
During the three months ended March 31, 1998 the Company recognized a deferred
compensation liability of $240,000 as evidenced by an agreement with the
members of the Board of Directors.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ - $ 13,000
========== ==========
Interest paid $ 29,442 $ 24,138
========== ==========
The accompanying notes are an integral part of these financial statements.
6
<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 the three-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:
March 31, December 31,
1998 1997
--------- ------------
Raw materials $ 637,682 $ 632,069
Finished goods and components 762,785 740,184
Reserve for obsolescence (30,000) (30,000)
------------ ------------
Total $ 1,370,467 $ 1,342,253
============ ============
7
<PAGE>
3. CAPITAL STOCK
The Company issued 870,000 shares of common stock at $0.50 per share
during the quarter ended March 31, 1997. Related commission costs of
$47,500 were paid to a corporation. A (now former) director of the
Company is an officer of the corporation and its affiliate, which acted
as managing dealer on this private placement. Total shares issued under
the private placement (effectively completed in September 1997)
amounted to 2,131,000 and total commissions paid were $91,800. In
addition, the corporation was granted 97,000 warrants, each convertible
into one share of the Company's common stock, commencing January 1,
1998 through December 31, 2000, at a conversion price of $.50 per
share.
4. MAJOR CUSTOMERS
DNA Music represented approximately 31% of sales during the quarter
ended March 31, 1998 and is the Company's largest customer. Cisco Music
accounted for approximately 15% of sales during the same quarter.
Previously, Passport Music was the Company's largest customer and
exclusive distributor and represented approximately 70% of Company
sales for the first three 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 inventory returns.
5. 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 are shareholders of record on
or about April 9, 1998. The convertible preferred stock is to be
offered on a 1,000,000 share minimum - 2,500,000 share maximum basis.
Each convertible preferred stock shall pay an 8% per annum dividend on
a quarterly basis. The dividend shall be paid in cash and shall be
cumulative. The offering price shall be $.40 per share. Each holder of
one share of convertible preferred stock shall 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. It is anticipated that the net proceeds from the Offering
8
<PAGE>
5. PROMISSORY NOTES PAYABLE (continued)
will be utilized to help fund operations based on working capital needs
(depending upon future conditions and business opportunities), to
purchase additional property and equipment, and to pay down debt. The
terms and conditions of the offerings, including the record date,
are subject to change.
In satisfaction of the $400,000 (1,000,000 share) minimum Offering,
certain members of the Board of Directors of DCC, and one other
accredited individual (the "Standby Parties"), have irrevocably
committed to purchase $630,000 (1,575,000 shares) of the convertible
preferred stock, no par value, Offering which is 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 at quarter-end. The remaining $300,000 commitment was loaned
to DCC in April 1998. Additionally, the Company's president has
irrevocably committed to exercising stock options equaling $30,000 in
contributed capital.
6. 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:
March 31, 1999 $153,814
March 31, 2000 75,000
March 31, 2001 50,000
March 31, 2002 41,667
--------
320,481
Less current portion 153,814
--------
Long-term debt $166,667
========
9
<PAGE>
7. 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 continously for the 12 months preceeding each of
the four anniversary dates will be the services performed. A deferred
compensation liability for $240,000 (corresponding to six directors at
$40,000 each) has been recorded at the March 31, 1998 balance sheet
date.
8. OTHER INCOME
During the three months ended March 31, 1997, a subsidiary of
the Company received a legal settlement of $70,000 relating to
a discontinued distribution agreement.
9. BASIS OF PRESENTATION
The Company increased sales of the Photo Dimensions camera by
approximately $88,000 during the quarter ended March 31, 1998 from the
comparable quarter 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
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.
10
<PAGE>
Item 2. Management's Discussion 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. 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 70% in the first quarter over year-ago levels 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 anticipates the fourth 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
- ---------------------
Three months ended March 31, 1998 and March 31, 1997
- ----------------------------------------------------
The three months ended March 31, 1998 had an increase in sales of almost
$68,000. This 7% increase is primarily attributable to the increased captioned
camera sales. Gross profit was down approximately $210,000 as the Company felt
the effects of higher- than-expected initial unit costs associated with
transforming its captioned camera manufacturing to its Chatsworth facility, as
well as the virtual shut-down of its Romance Alive audio division while a
distribution deal is being negotiated. Selling, general and administrative
expenses were lower by approximately 21% due to the temporary shift in
managerial resources toward overhead involving the Photo Dimensions segment of
the Company. Overall operating income was down approximately $82,000 due to the
aforementioned production inefficiencies in the captioned camera division,
although the Company's CD distribution division now appears to have successfully
turned the corner after having its principal distributor file for chapter 11
bankruptcy protection late last year. Net interest expense increased by
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Three months ended March 31, 1998 and March 31, 1997 (continued)
- ----------------------------------------------------
approximately $5,000 (23%) due to interest accrued on recently issued promissory
notes, the proceeds of which are being utilized predominantly to finance the
expansion of the Company's Photo Dimension subsidiary.
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 Three months ended
March 31, March 31,
1998 % 1997 %
DCC Compact Classics $ 811,325 79% $ 808,851 85%
Romance Alive Audio (307) 0% 22,279 2%
PDI 213,938 21% 126,086 13%
---------- ---- ---------- ----
Total revenues $1,024,956 100% $ 957,216 100%
========== ==== ========== ====
DCC Compact Classics $ (11,494) (4)% $ (75,491) (69)%
Romance Alive Audio (16,734) (7)% 34,250 31 %
PDI (226,616) (89)% (68,866) (62)%
---------- ---- ----------- ----
Total net income (loss) $ (254,844)(100)% $ (110,107)(100)%
========== ==== =========== ====
Liquidity and capital resources
- -------------------------------
The Company has a working capital deficit of approximately $827,000 at March 31,
1998, as opposed to a working capital deficit of approximately $952,000 at
December 31, 1997. The $125,000 improvement is largely due to a cash infusion by
management and other investors totaling $330,000 during the most recent quarter,
net of the loss generated in the period of approximately $208,000 (before
depreciation). The cash infusion is in the form of standby promissory notes,
which are to be converted to equity as part of a convertible preferred stock
offering. An additional $300,000 in promissory notes was issued in April 1998.
Management continues to pursue additional outside financing to support the
growth of its captioned camera business.
12
<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, 1997.
Item 2. Shareholders Stock Information
- ---------------------------------------
Through May 29, 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.
13
<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:_____________________________
Marshall Blonstein
Chief Executive Officer,
President
Date:_________________
14
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,497
<SECURITIES> 0
<RECEIVABLES> 1,912,459
<ALLOWANCES> (323,400)
<INVENTORY> 1,370,467
<CURRENT-ASSETS> 3,244,462
<PP&E> 860,258
<DEPRECIATION> (255,442)
<TOTAL-ASSETS> 5,069,955
<CURRENT-LIABILITIES> 4,071,558
<BONDS> 166,667
0
0
<COMMON> 44,639
<OTHER-SE> 211,287
<TOTAL-LIABILITY-AND-EQUITY> 5,069,955
<SALES> 1,024,956
<TOTAL-REVENUES> 1,026,239
<CGS> 768,072
<TOTAL-COSTS> 768,072
<OTHER-EXPENSES> 481,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,434
<INCOME-PRETAX> (253,244)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (254,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (254,844)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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