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 September 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
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1, Financial Statements
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DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS: Sept. 30, Dec. 31,
'1998 '1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 68,740 $ 98,320
Accounts receivable, net of
bad debt and return
allowances of $305,000 and
$380,670 December 31, 1997, respectively 831,823 1,254,343
Notes receivable 115,871 125,000
Officer receivable - 15,000
Inventories 1,523,178 1,342,253
Advanced royalties 486,488 258,453
Prepaid expenses 10,000 53,435
Income taxes receivable - 51,363
----------- -----------
Total current assets $ 3,036,100 $ 3,198,167
PROMISSORY NOTES RECEIVABLE, net 200,000 -
FIXED ASSETS, net 582,638 628,039
OTHER ASSETS
Deferred taxes 46,864 46,864
Mastering costs, net 598,150 686,259
Intangibles, net 220,385 241,713
Other 16,943 51,521
----------- -----------
Total assets $ 4,701,080 $ 4,852,563
=========== ===========
<PAGE>
(table continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 925,000 $ 770,202
Accounts payable 908,627 1,082,205
Royalties payable 1,148,608 2,110,475
Other accrued expenses 52,439 37,661
Deferred revenue 80,000
Convertible debenture payable 630,000
Note Payable - Officer 240,000
Income taxes payable
Current Portion long term Debt 165,000 150,000
----------- -----------
Total current liabilities $ 4,149,674 $ 4,150,543
LONG-TERM DEBT 40,000 191,250
PROMISSORY NOTES PAYABLE -
DEFERRED COMPENSATION PAYABLE 240,000 -
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock, par value $.005 per
share; authorized 20,000,000
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) (1,878,850) (1,639,486)
----------- -----------
Total stockholders' (deficit) equity 271,406 510,770
----------- -----------
Total liabilities and
stockholders' (deficit) equity $ 4,701,080 $ 4,852,563
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Sales $ 871,381 $1,406,665 $ 2,777,963 $ 3,783,675
Cost of sales 655,127 790,769 2,008,359 2,239,494
----------- ----------- ----------- -----------
Gross profit 213,254 615,896 769,604 1,544,181
----------- ----------- ----------- -----------
Selling, administrative
And other operating
Expenses 712,941 619,372 1,762,056 1,742,548
----------- ----------- ----------- -----------
Operating (loss) (499,687) (3,476) (992,452) (198,367)
Other income(expenses):
Interest expense, net (40,063) (29,116) (112,269) (83,296)
Other income 1,095,568 1,111,865 123,369
----------- ----------- ----------- -----------
Loss before income taxes 555,818 (32,592) 7,144 (158,294)
Provision for income taxes 1600 15,000
Net profit (loss) $ 555,818 $ (32,592) $ 5,544 $ (173,294)
----------- ----------- ----------- -----------
Loss per share - basic $ 0.06 ($ 0.00) $ 0.00 ($ 0.02)
Weighted-average number of
Shares outstanding 8,927,725 8,768,842 8,927,725 7,813,740
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DCC COMPACT CLASSICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating
Activities:
Net profit (loss) $ 5,544 ($173,297)
--------- ---------
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-cash items included
In net loss:
Depreciation and
Amortization 87,988 106,534
Deferred Revenue 40,000 (78,485)
Compensations
Changes in:
Receivables 422,520 (564,947)
Employee Receivables 15,000 (22,500)
Notes Receivables 9,129
Inventories (180,925) (357,246)
Mastering costs 88,109 1,129
Royalty advances (228,035) (129,900)
Prepaid expenses 43,435 (21,591)
Other 34,578 (13,790)
Accounts payable and
accrued expenses (185,878) 440,881
Royalties payable (961,867) (5,603)
Deferred revenue 80,000
Income taxes 51,363
--------- ---------
Total adjustments (684,583) (645,518)
Net cash used in
Operating activities (679,039) (818,815)
Cash flows from investing
Activities:
Capital expenditures 19,863 ($189,403)
--------- ---------
Net cash used in investing
Activities $ 21,259 $(189,403)
<PAGE>
(table continued)
Cash flows from financing activities:
Payment of line of credit $ 154,798 $(948,310)
Payments of long term debt (136,250) (25,000)
Promissory notes issued
Additional borrowing 657,028 918,000
Common stock issued 959,200
Net cash provided by (used in)
financing activities 675,576 903,890
Net increase/(decrease) in
Cash and cash equivalents 17,796 (104,328)
Cash and cash equivalents
at beginning of period 50,894 155,222
Cash and cash equivalents
at end of period $ 68,690 $ 50,894
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid --
Interest paid $ 53,900 $ 43,950
The accompanying notes are an integral part of these financial statements
</TABLE>
<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 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:
<TABLE>
<CAPTION>
September 30, Dec. 31,
1998 1997
------------------- -----------------------
<S> <C> <C>
Raw Materials $685,430 $632,069
Finished goods and components 837,748 710,184
Reserve for obsolescence
Total $1,523,178 $1,342,253
=================== =======================
</TABLE>
3. Major Customers
DNA Music represented approximately 38% of sales during the nine months
ended September 30, 1998, and is the Company's largest customer. Cisco
Music accounted for approximately 13% 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 nine 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.
<PAGE>
4. Promissory Notes Payable
The Board of Directors of the Company had authorized the offering (the
"offering") of preferred stock, convertible into common stock on a 1 to
1 ratio, to all shareholders of the Company 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 and 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 the Company's
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.
In late June of 1998, management suspended the offering of the
preferred stock due to the market conditions of the Company's stock
price.
Certain members of the Board of Directors of the Company, and one other
accredited individual (the "Standby Parties"), had committed to
purchase $630,000 (1,575,000 shares) of the convertible preferred
stock, no par value, offering which would not otherwise have been
purchased by the shareholders of the Company pursuant to a prospectus.
The Standby Parties loaned the Company the full amount of their
respective commitments. The loans were 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 Standby Parties. Approximately $27,028 in
accrued interest on the promissory notes was recorded through September
30, 1998. The remaining $300,000 commitment was received by the Company
in April 1998. The May 8, 1998 maturity dates of the $630,000
convertible debentures have not been formally extended. During January
1999, Photo Dimensions, Inc. ("PDI"), the Company's wholly owned camera
subsidiary, entered into an agreement with Foto Technology LLC, a
Nevada Limited Liability Company ("FTLLC"). The Standby Parties are the
members of FTLLC. Under the agreement, FTLLC is purchasing all of the
assets of PDI and assuming most of the liabilities of PDI. The purchase
price to be paid by FTLLC to PDI for the purchase of the assets,
together with the assumption of certain liabilities, is $630,000. The
$630,000 is to be paid at the closing by the Standby Parties assigning
their respective promissory notes to FTLLC, and the FTLLC will
terminate the $630,000 of debt, plus accrued interest, owed by the
Company.
5. Long-Term Debt
Long-Term Debt consists of four quarterly $10,000 installments to a
former vendor.
Due year ended September 30, 1999 $40,000
Adjustments have been made much to DCC's long-term debt to reflect a
settlement agreement entered into with Re-Pac and the Company, and
certain other parties. Under the Re-Pac settlement agreement $150,000
debt owed to Re-Pac and Robert Craig by the Company shall be deemed
"paid and satisfied in full" in consideration of the Company issuing
300,000 shares of its common stock to Robert Craig. (see the discussion
under Overview, below)
<PAGE>
6. STOCK COMPENSATION AGREEMENT
In accordance with the stock compensation agreements entered into with
the Company, each of the six directors have 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 nine month period ended September 30,
1998 from the comparable period of the previous year. The increased
working capital needed to prepare the film and load the film into the
single use caption cameras, and to carry the accounts receivable
related to this increased sales volume, has been a severe strain on the
Company's liquidity. As a result, the Company seeks to obtain
additional outside financing to meet its obligations. No adjustments
have been made to the carrying value of the assets should the
additional outside 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 CDs.
Sales of the captioned camera product by Photo Dimensions, Inc. ("PDI"), the
Company's wholly Owned camera subsidiary increased by 61% for the first nine
months of the year over year-ago Levels. The company's core business of high
quality compact discs' gross revenues were off by 35% compared with the nine
months ended September 30, 1997. This decline is primarily decline is primarily
due to management's attention to the caption camera business. due to the
management's attention to the caption camera business.
Although captioned camera sales for the first nine months increased by more than
61 percent compared to that of the prior year, management anticipates continued
Losses through the fiscal year ended 1998. The development of the caption camera
on a mass production basis has exerted a severe strain on the Company's
financial and managerial resources. The recognition by management of the
severity of the strain led to the decision by management to sell PDI. During
January, 1999 PDI entered into an agreement with Foto Technology LLC ("FTLLC")
to sell all of the assets of PDI to FTLLC. The assets include the patents for
the captioned camera held by PDI. Certain of the liabilities of PDI , and of the
Company's, are to be assumed by FTLLC. (see the discussion under Promissory
notes Payable, above.) The cash advances made by the Company to PDI during the
last two and one-half years, of approximately $1,500,000, are to be written off.
The effective date of the agreement is January 14, 1999. The closing is to occur
once California's bulk sales law has been satisfied.
The Company has been talking with a third party about the purchase of
substantially all of the assets of a transaction is necessary to maintain the
Company as a viable entity by, hopefully, infusing some much-needed cash into
the Company. In essence, the Company is seeking a "fresh-start" without
resorting to a bankruptcy. If a transaction is consummated, management would
then seek an investment partner so that the Company would be in the position to
refocus on its core music business.
<PAGE>
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:
Three months ended Nine Months ended
September 30 September 30
1998 1998
Revenues:
DCC Compact Classics $ 678,911 78% $ 2,162,245 78%
Romance Alive Audio 6,583 1% 9,329 0%
Photo Dimensions 182,886 21% 606,389 22%
----------- ----------- ----------- -----------
Total revenues $ 868,380 100% $ 2,777,963 100%
Net Income (Loss):
DCC Compact Classics $ 784,918 141% $ 666,742 12027%
Romance Alive Audio (22,497) -4% (22,322) -403%
Photo Dimensions (206,626 -37% (638,876) -11524%
----------- -----------
Total Net Income $ 555,795 100% $ 5,544 100%
Nine months ended September 30, 1998 and September 30, 1997
- ----------------------------------------------------------------------------
Sales for the nine months ended September 30, 1998 were $2,777,963 compared to
$3,783,675, a decline of $1,005,712 or 26 percent. This primarily is
attributable to the devotion of Management in an attempt to establish PDI, the
Company's wholly owned camera subsidiary, thereby Resulting in less focus on the
core music business.
Cost of goods sold for the nine months ended September 30, 1998 were $2,008,359
compared to $2,239,494 for the same period in 1997, or a decrease of $231,135,
or 10%. As a percentage of sales, cost of goods sold for the nine months ended
September 30, 1998 were 72% compared to 59 percent for the nine months ended
June 30, 1997. This increase can be attributed primarily to extraordinary
expenses related to PDI in the arduous process of developing better cost
effective techniques in production and quality control of the caption camera.
Selling, administrative and other operating expenses were up $19,508, to
$1,762,056 for the nine months ended September 30, 1998 compared to $1,742,548
for the nine months ended September 30, 1997. This increase is primarily due to
the increased effort to develop the business of PDI.
Results of operations was a net loss of $5,544 or $.00 per share for the nine
months Ended September 30, 1998 compared to a loss of $173,294 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. However, the
writedown of royalties payable by $1,095,568, booked as "other income" during
the quarter ended September 30, 1998, reduced the company's net loss to $5,544
for the nine month period ended September 30, 1998.
<PAGE>
Three months ended September 30, 1998 and September 30, 1997
- ----------------------------------------------------------------------------
In the third quarter of 1998, the Company reported a net profit of $555,818
compared to a loss of $(32,592) for the same period in 1997. However, the net
profit was attributable to the writedown of royalties payable by $1,095,568
during the third quarter. The adjustment was booked as "other income" and was a
non-cash item. Without the adjustment, there Would have been a net loss of
$539,750 for the third quarter of 1998.
Revenues decreased $535,284 to $871,381 for the third quarter ending September
30, 1998 compared to $1,406,665 for the same period in 1997. The decline in
sales reflects sales returns for the quarter of $102,278 and a decline in new
releases in the music division. Selling and administrative costs increased 15%
to $712,941 for the three months ended September 30, 1998 compared to $619,372
for the same period in 1997.
Liquidity and capital resources
- --------------------------------------
The Company had a working capital deficit of approximately $1,114,000 at
September 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 nine months ended September 30, 1998. In July
1998, the Company was notified by Merrill Lynch Financial Services, Inc. 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 has been
in discussions with Merrill Lynch to work out a payment arrangement.
The Company is experiencing severe short-term liquidity problems. The Company
does not have the ability to generate the operating income needed to meet its
short-term cash requirements. The Company must find external sources to meet its
cash requirements. The Company has entered into an agreement to sell the assets,
and the assumptions of certain liabilities, of Photo Dimensions, Inc., the
Company's wholly owned caption camera company. The sale will eliminate a major
drain on the Company's liquidity sources. Also, the Company is in talks to sell
its assets involving the assumption of certain liabilities of the Company. If
the talks result in a binding agreement, the Company anticipates receiving some
cash. Otherwise, the Company may have no alternative but to file for protection
under the Federal bankruptcy laws.
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 $80,000. $25,000 has been paid in September, with the balance to be
paid $10,000 quarterly. In addition VRG must purchase all of the inventory
Navarre Corporation has returned to the Company at $2.50 per CD and $2.00 per
cassette up to 15,000 units each.
During December 1998, the Company entered into a settlement agreement with
Re-Pac Corporation ("Re-Pac") and Robert Craig ("Craig"). Photo Dimensions, Inc.
("PDI") was a part of the settlement. Craig is the inventor of the caption
camera and Re-Pac was the company which sold 100% of the common stock of PDI to
the Company. Under the settlement, all parties have released each other from all
claims. The Company is to transfer 300,000 shares of DCC's common stock to
Craig. The $150,000 debt owed to Re-Pac by the Company, which represents part of
the purchase price of PDI, shall be deemed "paid and satisfied in full".
<PAGE>
The Company anticipates entering into a confession of judgment as part of a
settlement of a lawsuit brought by Navarre Corporation ("Navarre"). In the
lawsuit Navarre claims that the Company and Sandstone Music, a label division of
the Company, owed Navarre $106,000 under a wholesale distribution agreement. In
settlement of Navarre's claim, the Company would pay Navarre $80,000. $15,000 is
to be paid within ten days of the execution of the settlement agreement. The
$65,000 balance, together with interest at 9.00% per annum, is to be paid in
monthly installments of principal and interest over a two year period.
Item 2. Shareholders Stock Information
- ---------------------------------------------------------
Through January 18, 1999, 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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 68,740
<SECURITIES> 0
<RECEIVABLES> 947,694
<ALLOWANCES> 305,000
<INVENTORY> 1,523,178
<CURRENT-ASSETS> 3,036,100
<PP&E> 874,915
<DEPRECIATION> 275
<TOTAL-ASSETS> 4,701,080
<CURRENT-LIABILITIES> 4,149,694
<BONDS> 0
0
0
<COMMON> 44,639
<OTHER-SE> 226,767
<TOTAL-LIABILITY-AND-EQUITY> 4,701,080
<SALES> 871,381
<TOTAL-REVENUES> 1,966,949
<CGS> 655,127
<TOTAL-COSTS> 655,127
<OTHER-EXPENSES> 712,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,063
<INCOME-PRETAX> 555,818
<INCOME-TAX> 0
<INCOME-CONTINUING> 555,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,818
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
