<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER 000-21887
CD WAREHOUSE, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 73-1504999
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1204 SOVEREIGN ROW, OKLAHOMA CITY, OKLAHOMA 73108
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 949-2422
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 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
----- -----
The number of shares outstanding of the Issuer's Common Stock, $.01 par value,
as of August 12, 1997 was 1,820,000.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 (unaudited) 3
Condensed Consolidated Statements of Income -
Three months and six months ended June 30, 1996
and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I. FINANCIAL INFORMATION
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 2)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,431 $ 781,177
Accounts receivable, net - 425,116
Merchandise inventory - 1,342,552
Prepaid expenses and other - 57,353
------------ ----------
Total current assets 15,431 2,606,198
Furniture, fixtures and equipment, net - 448,480
Investment in partnerships - 38,885
Intangible and other assets, net 444,993 3,650,757
------------ ----------
$460,424 $6,744,320
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 93,340 $ 942,998
Accrued liabilities 17,382 85,789
Advances and deposits - 70,312
Income taxes payable - 53,750
------------ ----------
Total current liabilities 110,722 1,152,849
Minority interest - 107,277
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 10,000,000 shares
authorized, 350,000 and 1,820,000 issued and outstanding
at December 31, 1996 and June 30, 1997, respectively 3,500 18,200
Additional paid-in-capital 346,500 5,362,043
Retained earnings (deficit) (298) 103,951
------------ ----------
Total stockholders' equity 349,702 5,484,194
------------ ----------
$460,424 $6,744,320
============ ==========
</TABLE>
(See accompanying notes)
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
(Predecessor) (Predecessor)
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $ 63,512 $ 841 913 $ 116,573 $1,030,068
Wholesale merchandise sales 743,367 1,075,994 1,480,983 2,158,454
Software income, net 2,113 10,606 9,398 15,432
Franchise operations:
Royalty income 297,450 340,298 574,517 576,880
Management fees - 34,800 - 61,492
Franchise and development fees 17,000 44,000 31,000 50,000
---------- ---------- ---------- ----------
Total revenues 1,123,442 2,347,611 2,212,471 3,892,326
Operating costs and expenses:
Cost of sales - retail store sales 40,700 502,662 72,174 618,631
Cost of sales - wholesale merchandise sales 703,903 971,512 1,386,078 1,976,428
Retail store operating expenses 14,834 324,790 32,349 408,677
General and administrative 162,938 386,173 382,755 655,655
Depreciation and amortization 3,287 60,869 6,427 95,769
Minority interest in partnership income - 14,875 - 15,573
---------- ---------- ---------- ----------
Total operating costs and expenses 925,662 2,260,881 1,879,783 3,770,733
---------- ---------- ---------- ----------
Operating income 197,780 86,730 332,688 121,593
Other income:
Equity in income of unconsolidated partnerships 17,829 19,642 27,739 32,320
Other income (expense) - (4,570) - 4,086
---------- ---------- ---------- ----------
17,829 15,072 27,739 36,406
---------- ---------- ---------- ----------
Income before income taxes 215,609 101,802 360,427 157,999
Provision for income taxes - 34,640 - 53,750
---------- ---------- ---------- ----------
Net income $ 215,609 $ 67,162 $ 360,427 $ 104,249
========== ========== ========== ==========
Net income per share of common stock $ 0.04 $ 0.07
========== ==========
Weighted average common shares outstanding 1,820,000 1,600,442
========== ==========
</TABLE>
(See accompanying notes)
4
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1996 1997
(Predecessor)
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 360,427 $ 104,249
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 6,427 95,769
Changes in operating assets and liabilities:
Accounts receivable, net 83,210 (352,377)
Inventories (215,249) (903,909)
Prepaid expenses and other (3,070) (57,353)
Accounts payable 143,214 306,429
Accrued liabilities (12,074) 66,734
Advances and deposits 126,738 70,312
Income taxes payable - 53,750
--------- -----------
Total adjustments 129,196 (720,645)
--------- -----------
Net cash provided by (used for) operating activities 489,623 (616,396)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (11,568) (398,342)
Decrease (increase) in investment in unconsolidated partnerships (42,158) 20,077
Decrease (increase) in other assets 1,973 (44,503)
Increase in minority interest in consolidated partnerships - 94,297
Purchase of businesses:
Cost In excess of net assets of companies acquired, net - (3,145,525)
Accounts receivable - (72,739)
Inventory - (398,346)
Furniture, fixtures and equipment - (50,514)
Investment in partnerships - (21,452)
Other assets - (931)
Accounts payable - 543,229
Accrued liabilities - 1,673
Minority interest - 12,980
--------- -----------
- (3,131,625)
--------- -----------
Net cash used for investing activities (51,753) (3,460,096)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net:
Initial public offering - 4,492,238
Collection of stock subscription - 350,000
Distributions to partners (227,063) -
--------- -----------
Net cash provided by (used for) financing activities (227,063) 4,842,238
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 210,807 765,746
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 208,139 15,431
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 418,946 $ 781,177
========= ===========
</TABLE>
5
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION:
For six month period ending June 30, 1997, the Company had the following non-
cash investing and financing activities:
Purchased franchise interests of Company's largest franchisee (See Note 2 -
"MacDonald Acquisition") for 80,000 shares of the Company's common stock
valued at the initial public offering price of $5.00 per share.
<TABLE>
<CAPTION>
<S> <C>
Cost in excess of net assets acquired, net $301,806
Inventory 40,297
Furniture, fixtures and equipment 18,800
Investment in partnerships 37,510
Other assets 1,587
--------
$400,000
========
</TABLE>
(See accompanying notes)
6
<PAGE>
CD WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements for December 31, 1996 and the
six months ended June 30, 1997 include the accounts of CD Warehouse, Inc. (the
"Company"), its wholly-owned subsidiary, Compact Discs Management, Inc. ("CDM"),
and majority owned retail stores. All material intercompany accounts and
transactions have been eliminated in consolidation.
The predecessor's condensed consolidated statements of income for the three
months and six months ended June 30, 1996 and statement of cash flows for the
six months ended June 30, 1996 include the combined historical results of the
acquired assets (the "CDIL Assets") of Compact Discs International, Ltd.
("CDIL") and the equity interests of 36 CD Warehouse stores held by the largest
CDIL franchisee. Since both of these entities are partnerships, the results of
operations do not reflect officer compensation or provision for income taxes
(see Note 2).
The accompanying interim condensed consolidated financial statements of the
Company are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of such condensed consolidated financial
statements have been reflected in the interim periods presented. Such
adjustments consisted only of normal recurring items. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1997. The
significant accounting policies and certain financial information which are
normally included in financial statements prepared in accordance with generally
accepted accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying condensed
consolidated financial statements of the Company should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Form 10-KSB/A.
NOTE 2. INITIAL PUBLIC OFFERING AND BUSINESS ACQUISITIONS
On January 27, 1997, the Company completed an initial public offering (the
"Initial Public Offering") for 1,000,000 shares of its common stock at a price
of $5 per share. On March 6, 1997, the underwriters exercised an over-allotment
option and purchased an additional 40,000 shares of common stock at $5 per
share. The proceeds of the Initial Public Offering, after deducting
underwriting discounts and offering expenses, were approximately $4.5 million.
Simultaneously with the closing of the Initial Public Offering, the Company
purchased the CDIL Assets for $3.2 million. Prior to the acquisition, CDIL
franchised and operated stores throughout the United States and England under
the name "CD Warehouse." In connection with its franchise operations, CDIL also
sold new and preowned compact discs to its franchisees.
In a related transaction, which also was effected simultaneously with the
closing of the Initial Public Offering, the Company and CDM purchased all of the
franchise interests of the largest CDIL franchisee in exchange for 80,000 shares
of the Company's common stock ("MacDonald Acquisition") valued at the initial
public offering price of $5 per share.
The acquisitions were recorded under the purchase method of accounting and
resulted in an excess of purchase price over net assets acquired of
approximately $3.6 million which is amortized on a straight-line basis over 20
years.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was formed in September 1996 to acquire the franchise
operations of CDIL, a Texas limited partnership which franchised and operated
stores throughout the United States and England under the name "CD Warehouse."
The first CD Warehouse store was opened in 1992. Under the CD Warehouse name,
as of June 30, 1997, there were 119 domestic units operating in 26 states and 4
international units operating in England.
Simultaneously with the closing of the Initial Public Offering on January
27, 1997, the Company acquired the CDIL Assets, consisting primarily of CDIL's
rights as franchisor in the various franchise agreements to which it was a
party, for a purchase price of $3.2 million. In a related transaction (the
"MacDonald Acquisition"), which also occurred simultaneously with the closing of
the Initial Public Offering, the Company acquired the equity interests of Bruce
D. MacDonald (together with his affiliates, "MacDonald"), the largest CDIL
franchisee, in 36 franchised CD Warehouse stores. Pursuant to the MacDonald
Acquisition, the Company acquired 100% ownership of MacDonald's Montfort Street
Store and minority equity interests (including MacDonald's interest as a
managing general partner or limited liability company manager) in the other 35
franchised stores in which MacDonald had an interest.
The following discussion and analysis reviews the operating results, as
adjusted below, of CDIL and the MacDonald Acquisition (predecessor) for the
three months and six months ended June 30, 1996, and the operating results of
the Company for the three months and six months ended June 30, 1997, which
includes activity relating to the operations of the CDIL Assets and the
MacDonald Acquisition for the period subsequent to January 27, 1997. Certain
statements contained in this discussion are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions which may ultimately prove to be inaccurate and actual events
and results may materially differ from anticipated results described in such
statements.
COMBINED STATEMENTS OF OPERATIONS
The following table (unaudited) sets forth the Company's results of
operations for the three months and six months ended June 30, 1997 and the
combined historical results of operations for the three months and six months
ended June 30, 1996 of the CDIL Assets and the MacDonald Acquisition purchased
by the Company on January 27, 1997. The historical information has been
adjusted to eliminate operations retained by CDIL and to provide charges for
executive compensation, amortization of goodwill relating to the above
acquisitions and income taxes as explained below. The information should be
read in conjunction with the historical Financial Atatements included elsewhere
in this document.
8
<PAGE>
Combined Statements of Operations (cont.)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1997 1996 1997
(Predecessor) (Predecessor)
(proforma)(1) (proforma)(1)
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues
Retail store sales..................... $ 63,512 $ 841,913 $ 116,573 $1,030,068
Wholesale merchandise sales............ 743,367 1,075,994 1,480,983 2,158,454
Software income, net................... 2,113 10,606 9,398 15,432
Royalty income......................... 297,450 340,298 574,517 576,880
Management fees........................ - 34,800 - 61,492
Franchise and development fees......... 17,000 44,000 31,000 50,000
---------- ---------- ---------- ----------
Total revenues....................... 1,123,442 2,347,611 2,212,471 3,892,326
Operating costs and expenses:
Cost of sales - retail store sales..... 40,700 502,662 72,174 618,631
Cost of sales -wholesale merchandise
sales................................. 703,903 971,512 1,386,078 1,976,428
Retail store operating expenses........ 14,834 324,790 32,349 408,677
General and administrative............. 233,063(2) 386,173 523,005(2) 655,655
Depreciation and amortization.......... 34,037(2) 60,869 83,020(2) 95,769
Minority interest in partnership
income................................ - 14,875 - 15,573
---------- ---------- ---------- ----------
Total operating costs and expenses... 1,026,537 2,260,881 2,096,626 3,770,733
---------- ---------- ---------- ----------
Operating income......................... 96,905 86,730 115,845 121,593
Other income, net........................ 17,829 15,072 27,739 36,406
---------- ---------- ---------- ----------
Income before provision for income taxes. 114,734 101,802 143,584 157,999
Provision for income taxes............... 39,010(2) 34,640 48,819(2) 53,750
---------- ---------- ---------- ----------
Net income............................... $ 75,724(2) $ 67,162 $ 94,765(2) $ 104,249
========== ========== ========== ==========
Net income per share of common stock..... $ .04(3) $ .04 $ .06(3) $ .07
========== ========== ========== ==========
Weighted averaged common shares
outstanding............................. 1,820,000(3) 1,820,000 1,600,442(3) 1,600,442
========== ========== ========== ==========
</TABLE>
- -------------------
Pro forma adjustments to June 30, 1996, historical amounts:
(1) Operations retained by CDIL have been eliminated from the combined
information presented above.
(2) The operations acquired were organized as partnerships and did not
historically include charges for executive compensation or income taxes. The
information presented above includes charges for executive compensation
based on executive compensation paid for the three months and six months
ended June 30, 1997. The amount which is included in general and
administrative expenses above is $70,125 and $140,250 for the three months
and six months ended June 30, 1996, respectively.
The information presented above has been prepared assuming the Initial
Public Offering and resulting acquisition of the CDIL Assets and MacDonald
Assets were completed on January 1, 1996, resulting in additional
amortization of goodwill of $30,750 and $76,593 for the three months and six
months ended June 30, 1996, respectively.
The provisions for income taxes are based on a rate of 34% applied to income
before provision for income taxes in each of the periods presented.
(3) Net income per share of common stock for the three months and six months
ended June 30, 1996 (pro forma) assumes the same weighted average common
shares outstanding as the three months and six months ended June 30, 1997.
9
<PAGE>
RESULTS OF OPERATION
Three months Ended June 30, 1997 compared to Three Months Ended June 30, 1996.
Revenues
Retail store sales increased $778,000 to $842,000 for the three months ended
June 30, 1997, compared to $64,000 for the three months ended June 30, 1996. The
increase in retail store sales is the result of having thirteen Company stores,
of which four were acquired from Franchisees, and three majority owned stores in
operation by June 30, 1997, compared to only one store at June 30, 1996.
Wholesale merchandise sales increased $333,000, or 45%, to $1,076,000 for the
three months ended June 30, 1997, compared to $743,000 for the same period in
1996. The increase is due to the increase in operating stores from 104 at June
30, 1996 to 123 at June 30, 1997. Wholesale merchandise sales for the three
months ended June 30, 1997 includes the sale of opening inventory for thirteen
stores, (four Company stores and nine Franchise stores) compared to only three
Franchise stores for the comparable period in 1996.
Royalty income increased $43,000, or 14%, to $340,000 for the three months
ended June 30, 1997, compared to $297,000 for the same period in 1996. Again,
the increase is due to the greater number of Franchise stores in existence at
June 30, 1997 (110), compared to the number in existence at June 30, 1996 (103).
In addition, same store sales for the three months ended June 30, 1997 increased
9% as monthly average store sales increased from $21,635 for the three months
ended June 30, 1996 to $23,980 for the same period in 1997.
Management fees relate to the Company's management of the franchised
partnership stores in which the Company acquired an interest as a result of the
MacDonald Acquisition discussed herein. No management fees were recognized in
the three months ended June 30, 1996.
Costs and Expenses
Cost of sales for retail store sales increased $462,000 for the three months
ended June 30, 1997, compared to the same period in 1996. This increase is
consistent with the increase of retail store revenue discussed above. Cost of
sales was 60% of sales for the three months ended June 30, 1997, compared to 64%
for the three months ended June 30, 1996.
Cost of sales for wholesale merchandise increased $268,000, or 38%, to
$972,000 for the three months ended June 30,1997, compared to $704,000 in 1996.
This increase is consistent with the increase in sales. Cost of sales was 90% of
sales for the three months ended June 30,1997 compared to 95% for the same
period in 1996.
Retail store operating expenses increased $310,000 to $325,000 for the three
months ended June 30, 1997, compared to the comparable period in 1996. The
increase was due to the increased number of company and majority owned stores
discussed above. Retail store operating expense was 39% of retail store revenue
for the three months ended June 30, 1997, while such operating expense was 23%
of retail store revenue for the three months ended June 30, 1996. This increase
was due primarily to expensed start up costs of the three new company stores
opened during the three months ended June 30, 1997.
General and administrative expenses increased by $153,000, or 66%, to
$386,000 for the three months ended June 30, 1997, compared to $233,000 (on a
pro forma basis) for the three months ended June 30, 1996. This increase
resulted from additional costs associated with the transition of operations and
management after the acquisitions and the Initial Public Offering discussed
above combined with the relocation of the Company's operation from Dallas, Texas
to Oklahoma City, Oklahoma.
10
<PAGE>
Depreciation and Amortization
Depreciation and Amortization increased $27,000 to $61,000 for the three
months ended June 30, 1997 compared to $34,000 (on a pro forma basis) for the
comparable period in 1996 This is primarily due to the addition of twelve
Company stores and three majority owned stores in 1997.
Net Income
Net income decreased $9,000 to $67,000 for the three months ended June 30,
1997, compared to $76,000 (on a pro forma basis) for the same period ended June
30, 1996. The decrease in net income is due to the additional start up costs
relating to opening new Company stores included in retail store operating
expense and additional costs associated with the relocation of the Company's
operations to Oklahoma City, Oklahoma.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
As discussed above, the Company acquired the franchise operations of CDIL
on January 27, 1997. Therefore, the results of operations for six months ended
June 30, 1997 only includes activity relating to CDIL from January 27 through
June 30 compared to January 1 to June 30 for 1996.
Revenues
Retail store sales increased $913,000 to $1,030,000 for the six months
ended June 30, 1997 compared to $17,000 for the six months ended June 30, 1996.
The increase in retail store sales is the result of having thirteen Company and
three majority owned stores in operations during the six months ended June 30,
1997 compared to only one during the same period in 1996.
Wholesale merchandise sales increased $677,000, or 46% to $2,158,000
for the six months ended June 30, 1997 compared to $1,481,000 for the same
period in 1996. The increase is due to the increase in operating stores from 104
at June 30, 1996 to 123 at June 30, 1997. The wholesale merchandise sales for
the six months ended June 30, 1997 also includes approximately $200,000 of "new
catalog" product, which was introduced into the system during this period.
Royalty income increased $2,000 to $577,000 for the six months ended
June 30, 1997 compared to $575,000 for the same period in 1996. However,
comparable royalty income for the period January 27, 1996 to June 30, 1996 would
be $495,000 or an increase of $82,000 or 17%. Again, the increase is due to the
number of operating stores at June 30, 1997 of 123 compared to 104 at June
30, 1996. In addition, same store sales for the six months ended June 30, 1997
increased 9% while monthly average store sales increased from 521,100 for the
six months ended June 30, 1996 to $23,400 for the same period in 1997.
Management fees relate to the Company's management of the franchised
partnership stores, which the Company acquired an interest as a result of the
MacDonald Acquisition discussed herein. No management fees were recognized in
the six months ended June 30, 1996.
Costs and Expenses
Cost of sales for retail store sales increased $546,000 for the six
months ended June 30, 1997 compared to the same period in 1996. This increase
is consistent with the increase of retail store revenue discussed above. Cost of
sales was 60% of sales for the six months ended June 30, 1997 compared to 62%
for the six months ended June 30, 1996.
Costs of sales for wholesale merchandise increased $590,000 or 43% to
$1,976,000 for the six months ended June 30, 1997 compared to $1,386,000 in
1996. The increase is consistent with the increase in sales. Cost of sales was
92% of sales for the six months ended June 30,1997 compared to 94% for the
comparable period in 1996.
11
<PAGE>
Retail store operating expenses increased $377,000 to $409,000 for the six
months ended June 30, 1997 compared to $32,000 for the six months ended June 30,
1996. The increase is due to the increase of Company stores discussed above.
Retail store operating expense was 28% of retail store revenue for the six
months ended June 30, 1996 compared to 40% of retail store revenue for the same
period in 1997. This increase is due primarily to start up costs of the twelve
new Company stores, which were expensed during the six months, ended June 30,
1997.
General and administrative expenses increased by $133,000, or 25%, to
$656,000 for the six months ended June 30, 1997 compared to $523,000 for the six
months ended June 30, 1996. This increase resulted from increased costs
associated with the transition after the acquisitions and initial public
offering discussed above combined with the relocation of the Company to Oklahoma
City, Oklahoma.
Net Income
Net income increased $9,000, or 9%, to $104,000 for the six mouths
ended June 30, 1997 compared to $95,000 for the same period ended June 30, 1996.
The increase to net income is due to the increase in the number of operating
stores discussed above. and the increase in other income of $5,000 which
consists of interest income earned from investment of the proceeds of the
initial public offering during the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $1,453,000 and
cash and cash equivalents aggregating $781,000, compared to a negative working
capital of $95,000 and cash and cash equivalents of $15,000 at December 31,
1996. Net cash used for operating activities was $616,000 for the six months
ended June 30, 1997, compared to net cash provided by operating activities of
$490,000 for the six months ended June 30, 1996. The increased use of cash by
operating activities relates to the opening of twelve new Company stores, (five
new, four acquired from Franchisees, and three acquired from non-franchisee)
increasing inventory and growth of franchise stores in operation.
Net cash used for investing activities was $3,460,000 for the six
months ended June 30, 1997, compared to $52,000 for the same period in 1996. The
significant use of cash for investing activities in 1997 relates to the
acquisition of the CDIL Assets on January 27, 1997 and opening of Company
stores.
Net cash provided from financing activities was $4,842,000 for the six
months ended June 30, 1997 compared to net cash used for financing activities of
$227,000 for the six months ended June 30, 1996. The net cash provided from
financing in 1997 relates to the initial public offering and the collection of a
stock subscription in the amount of $350,000. The net cash used in financing
activities for the six months ended June 30, 1996 were distributions to partners
of CDIL.
In addition to the working capital at June 30, 1997, the Company has
finalized a $2,000,000 Revolving Line of Credit ("Line") with Bank One, Oklahoma
City, Oklahoma ("Bank One"), of which $1,000,000 is available during the first
year ending May 1998. Amounts borrowed under the line will be based on certain
financial criteria outlined by Bank One and will hear an interest rate equal to
.75% over Bank One's base rate, adjusted automatically based upon current prime
rate. As of the date of this Report, no funds had been borrowed under this Line.
It is the Company's opinion that the current working capital at June 30, 1997,
combined with the Line will be sufficient to support the ongoing activities of
the business for the foreseeable future.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
three months ended June 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ------- ----------------------------------------------------------------------
10.1** Bank One, Oklahoma City, Oklahoma Loan Agreement dated May 16, 1997
l0.2** Lease Agreement dated April 17, 1997 by and between Will Rogers Service
Center Phase IV Associates and CD Warehouse, Inc.
27.1* Financial Data Schedule
- -------------------------------------------------------------------------------
*Filed electronic herewith
**To be filed by amendment
(b) Reports on Form S-K
There were no Reports on Form S-K filed for the three months ended
June 30, 1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CD WAREHOUSE, INC.,
a Delaware corporation
Date: August 14, 1997 /s/ Jerry W. Grizzle
--------------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: August 14, 1997 /s/ Doyle B. Motley
---------------------------------------
Doyle E. Motley
Senior Vice-President and
Chief Financial Officer
14
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 781,177 781,177
<SECURITIES> 0 0
<RECEIVABLES> 425,116 425,116
<ALLOWANCES> 0 0
<INVENTORY> 1,342,552 1,342,552
<CURRENT-ASSETS> 2,606,198 2,606,198
<PP&E> 448,480 448,480
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<TOTAL-ASSETS> 6,744,320 6,744,320
<CURRENT-LIABILITIES> 1,152,849 1,152,849
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0 0
0 0
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<OTHER-SE> 5,465,994 5,465,994
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<TOTAL-REVENUES> 2,347,611 3,892,326
<CGS> 1,474,174 2,595,059
<TOTAL-COSTS> 2,260,881 3,770,733
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 101,802 157,999
<INCOME-TAX> 34,640 53,750
<INCOME-CONTINUING> 67,162 104,249
<DISCONTINUED> 0 0
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<NET-INCOME> 67,162 104,249
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