<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 SEPTEMBER 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 October 28, 1997 was 1,820,000.
Transitional Small Business Disclosure Format (check one): YES____ NO X
----
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1996 3
and September 30, 1997 (unaudited)
Condensed Consolidated Statements of Income - Three months and 4
nine months ended September 30, 1996 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows - Nine months 5
ended September 30, 1996 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 2)
(INFORMATION AT SEPTEMBER 30, 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,431 $ 410,929
Accounts receivable, net - 466,929
Merchandise inventory - 1,714,088
Prepaid expenses and other - 56,153
------------------- ---------------
Total current assets 15,431 2,648,099
Furniture, fixtures and equipment, net - 483,436
Investment in partnerships - 51,876
Intangible and other assets, net 444,993 3,608,570
------------------- ---------------
$ 460,424 $ 6,791,981
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts payable $ 93,340 $ 753,560
Accrued liabilities 17,382 74,814
Advances and deposits - 149,890
Income taxes payable - 114,000
------------------- ---------------
Total current liabilities 110,722 1,092,264
Minority interest - 110,517
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 September 30, 1997, respectively 3,500 18,200
Additional paid-in-capital 346,500 5,348,543
Retained earnings (deficit) (298) 222,457
------------------- ---------------
Total stockholders' equity 349,702 5,589,200
------------------- ---------------
$ 460,424 $ 6,791,981
=================== ===============
</TABLE>
(See accompanying notes)
3
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
(PREDECESSOR) (PREDECESSOR)
--------------- --------------- ---------------------------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $ 61,826 $1,099,985 $ 178,399 $ 2,130,054
Wholesale merchandise sales 961,459 876,913 2,442,442 3,035,367
Software income, net (1,341) 18,418 8,057 33,850
Franchise operations:
Royalty income 281,658 352,102 856,175 928,982
Management fees - 23,648 - 85,140
Franchise and development fees 29,500 55,000 60,500 105,000
---------- ---------- ------------ -----------
Total revenues 1,333,102 2,426,066 3,545,573 6,318,393
Operating costs and expenses:
Cost of sales - retail store sales 37,081 653,200 109,255 1,271,833
Cost of sales - wholesale merchandise sales 911,652 777,392 2,297,730 2,753,819
Retail store operating expenses 18,248 421,364 50,597 830,041
General and administrative 184,347 376,648 567,102 1,032,303
Depreciation and amortization 2,791 65,317 9,218 161,086
Minority interest in partnership income - 12,827 - 28,400
---------- ---------- ------------ -----------
Total operating costs and expenses 1,154,119 2,306,748 3,033,902 6,077,482
---------- ---------- ------------ -----------
Operating income 178,983 119,318 511,671 240,911
Other income:
Equity in income of unconsolidated partnerships 19,206 60,359 46,945 92,679
Other income (expense) - (921) - 3,165
---------- ---------- ------------ -----------
19,206 59,438 46,945 95,844
----------- ---------- ------------ -----------
Income before income taxes 198,189 178,756 558,616 336,755
Provision for income taxes - 60,250 - 114,000
---------- ---------- ------------ -----------
Net income $ 198,189 $ 118,506 $ 558,616 $ 222,755
========== ========== ============ ===========
Net income per share of common stock $ 0.07 $ 0.13
========== ===========
Weighted average common shares outstanding 1,820,00 1,674,432
========== ===========
</TABLE>
(See accompanying notes)
4
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
(PREDECESSOR)
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558,616 $ 222,755
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 9,218 161,086
Loss on disposal of assets - 30,778
Changes in operating assets and liabilities:
Accounts receivable, net 61,652 (394,190)
Inventories (232,146) (1,275,445)
Prepaid expenses and other (5,676) (56,153)
Accounts payable 277,875 116,992
Accrued liabilities (16,218) 55,759
Advances and deposits 91,579 149,890
Income taxes payable - 114,000
--------------- --------------
Total adjustments 186,284 (1,097,283)
--------------- --------------
Net cash provided by (used for) operating activities 744,900 (874,528)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (10,978) (483,470)
Decrease (increase) in investment in unconsolidated partnerships (66,027) 7,086
Increase in other assets (204,536) (48,239)
Increase in minority interest in consolidated partnerships - 97,536
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 (281,541) (3,558,712)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net:
Initial public offering - 4,478,738
Collection of stock subscription 350,000 350,000
Distributions to partners (555,298) -
--------------- --------------
Net cash provided by (used for) financing activities (205,298) 4,828,738
--------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 258,061 395,498
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 208,139 15,431
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 466,200 $ 410,929
=============== ==============
</TABLE>
5
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION:
For the nine month period ending September 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>
<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 nine months ended September 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 nine months ended September 30, 1996 and statement of cash flows for
the nine months ended September 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 nine months ended September 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 September 30, 1997, there were 124 domestic units operating in 28 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 nine months ended September 30, 1996, and the operating results
of the Company for the three months and nine months ended September 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 nine months ended September 30, 1997 and the
combined historical results of operations for the three months and nine months
ended September 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 Statements included elsewhere
in this document.
8
<PAGE>
COMBINED STATEMENTS OF OPERATIONS (CONT.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ---------------------------------------
1996 1997 1996 1997
(PREDECESSOR) (PREDECESSOR)
(PROFORMA) (1) (PROFORMA) (1)
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> C>
Revenues:
Retail store sales.......................... $ 61,826 $1,099,985 $ 178,399 $2,130,054
Wholesale merchandise sales................. 961,459 876,913 2,442,442 3,035,367
Software income, net........................ (1,341) 18,418 8,057 33,850
Royalty income.............................. 281,658 352,102 856,175 928,982
Management fees............................. - 23,648 - 85,140
Franchise and development fees.............. 29,500 55,000 60,500 105,000
----------- ---------- ---------- ----------
Total revenues........................ 1,333,102 2,426,066 3,545,573 6,318,393
Operating costs and expenses:
Cost of sales - retail store sales.......... 37,081 653,200 109,255 1,271,833
Cost of sales-wholesale merchandise sales... 911,652 777,392 2,297,730 2,753,819
Retail store operating expenses............. 18,248 421,364 50,597 830,041
General and administrative.................. 254,472 (2) 376,648 777,477 (2) 1,032,303
Depreciation and amortization............... 61,198 (2) 65,317 144,218 (2) 161,086
Minority interest in partnership income..... - 12,827 - 28,400
----------- ---------- ---------- ----------
Total operating costs and expense..... 1,282,651 2,306,748 3,379,277 6,077,482
----------- ---------- ---------- ----------
Operating income................................. 50,451 119,318 166,296 240,911
Other income, net................................ 19,205 59,438 46,945 95,844
----------- ---------- ---------- ----------
Income before provision for income taxes......... 69,656 178,756 213,241 336,755
Provision for income taxes....................... 24,181 (2) 60,250 73,000 (2) 114,000
----------- ---------- ---------- ----------
Net income....................................... $ 45,475 (2) $ 118,506 $ 140,241 (2) $ 222,755
=========== ========== ========== ==========
Net income per share of common stock............. $ .02 (3) $ .07 $ .08 (3) $ .13
=========== ========== ========== ==========
Weighted average common shares outstanding....... 1,820,000 (3) 1,820,000 1,674,432 (3) 1,674,432
=========== ========== ========== ==========
</TABLE>
________________________________
Pro forma adjustments to September 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 nine months
ended September 30, 1997. The amount, which is included in general and
administrative expenses above, is $70,125 and $210,375 for the three months
and nine months ended September 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 $58,407 and $135,000 for the three months and
nine months ended September 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 nine months
ended September 30, 1996 (pro forma) assumes the same weighted average
common shares outstanding as the three months and nine months ended
September 30, 1997.
9
<PAGE>
RESULTS OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996.
Revenues
Retail store sales increased $1,038,000 to $1,100,000 for the three months
ended September 30, 1997, compared to $62,000 for the three months ended
September 30, 1996. The increase in retail store sales is the result of having
sixteen Company stores (one existing store in 1996, five new start-up stores,
four stores acquired from franchisees, three stores acquired from non-
franchisees, and three majority owned stores which must be included in operating
results) in operation by September 30, 1997, compared to only one store at
September 30, 1996.
Wholesale merchandise sales decreased $84,000, or 9%, to $877,000 for the
three months ended September 30, 1997, compared to $961,000 for the same period
in 1996. The decrease is due to the elimination of $267,000 of wholesale
merchandise sales relating to the consolidation of three majority owned stores
for the three months ended September 30,1997. These stores were not majority
owned stores for the three months ended September 30,1996. This decreased was
offset by an increase in operating stores from 109 at September 30, 1996 to 128
at September 30, 1997.
Royalty income increased $70,000, or 25%, to $352,000 for the three months
ended September 30, 1997, compared to $282,000 for the same period in 1996.
Again, the increase is due to the greater number of Franchise stores in
existence at September 30, 1997 (112), compared to the number in existence at
September 30, 1996 (108). In addition, same store sales for the three months
ended September 30, 1997 increased 19% as monthly average franchise store sales
increased from $21,697 for the three months ended September 30, 1996 to $26,115
for the same period in 1997.
Management fees relate to the Company's management of the partnership stores
in which the Company acquired a minority interest as a result of the MacDonald
Acquisition discussed herein. No management fees were recognized in the three
months ended September 30, 1996.
Franchise and development fees increased $25,000 to $55,000 for the three
months ended September 30,1997 compared to $30,000 for the comparable period in
1996. The increase is due to an additional franchise store opened in the three
months ended September 30,1997 compared to 1996 and the increase in franchise
fees from $6,000 to $15,000 implemented by the Company after the acquisition of
CDIL discussed above.
Costs and Expenses
Cost of sales for retail store sales increased $616,000 for the three months
ended September 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 59% of sales for the three months ended September 30, 1997, compared
to 60% for the three months ended September 30, 1996.
Cost of sales for wholesale merchandise decreased $135,000, or 15%, to
$777,000 for the three months ended September 30, 1997, compared to $912,000 in
1996. This decrease is consistent with the decrease in sales discussed above.
Cost of sales was 89% of sales for the three months ended September 30, 1997
compared to 95% for the same period in 1996. The reduced cost of sales for the
three months ended September 30, 1997 can be attributed to additional discounts
on merchandise purchases associated with the Company's growth in stores
discussed above.
Retail store operating expenses increased $403,000 to $421,000 for the three
months ended September 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 38% of retail store revenue
for the three months ended September 30, 1997, while such operating expense was
30% of retail store revenue for the three months ended September 30, 1996. This
increase was due to additional costs associated with the new fifteen stores in
operations for the three months ended September 30, 1997 compared to the one
established store operating during the comparable period in 1996.
10
<PAGE>
General and administrative expenses increased by $123,000, or 48%, to $377,000
for the three months ended September 30, 1997, compared to $254,000 (on a pro
forma basis) for the three months ended September 30, 1996. This increase
resulted from the additional costs associated with being a public company,
operating expenses associated with a larger facility in Oklahoma City, OK (175%
larger than the previous facility maintained in Dallas, TX) and costs relating
to managing the franchised partnership stores which are offset by the management
fees discussed above.
Depreciation and Amortization
Depreciation and amortization increased $4,000 to $65,000 for the three months
ended September 30, 1997 compared to $61,000 (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 increased $74,000 to $119,000 for the three months ended September
30, 1997, compared to $45,000 (on a pro forma basis) for the same period ended
September 30,1996. The increase in net income is due to an increase of
franchise and development fees of $25,000 to $55,000 for the three months ended
September 30, 1997 compared to $30,000 for the comparable period in 1996. The
three months ended September 30, 1997 also has management fees of $24,000 which
were not applicable for the same period in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996.
As discussed above, the Company acquired the franchise operations of CDIL on
January 27, 1997. Therefore, the results of operations for nine months ended
September 30, 1997 only includes activity relating to CDIL from January 27
through September 30 compared to January 1 to September 30 for 1996.
Revenues
Retail store sales increased $1,952,000 to $2,130,000 for the nine months
ended September 30, 1997 compared to $178,000 for the nine months ended
September 30, 1996. The increase in retail store sales is the result of having
thirteen Company and three majority owned stores in operations during the nine
months ended September 30, 1997 compared to only one during the same period in
1996.
Wholesale merchandise sales increased $593,000, or 24% to $3,035,000 for the
nine months ended September 30, 1997 compared to $2,442,000 for the same period
in 1996. The increase is due to the increase in operating stores from 109 at
September 30, 1996 to 128 at September 30, 1997. The wholesale merchandise
sales for the nine months ended September 30, 1997 also includes approximately
$200,000 of "new catalog" product, which was introduced into the system during
this period. Wholesale merchandise sales for the nine months ended September 30,
1997 also includes the sales of the opening inventory, if applicable, of 28 new
stores compared to only sixteen new stores opened during the comparable period
in 1996
Royalty income increased $73,000 to $929,000 for the nine months ended
September 30, 1997 compared to $856,000 for the same period in 1996. Again, the
increase is due to the number of operating franchise stores at September 30,
1997 of 112 compared to 108 at September 30, 1996. In addition, same store
sales for the nine months ended September 30, 1997 increased 12% while monthly
average store sales increased from $21,329 for the nine months ended September
30, 1996 to $24,370 for the same period in 1997.
Management fees relate to the Company's management of the partnership stores,
which the Company acquired a minority interest as a result of the MacDonald
Acquisition discussed herein. No management fees were recognized in the nine
months ended September 30, 1996.
11
<PAGE>
Franchise and development fees increased $44,000 to $105,000 for the nine
months ended September 30,1997 compared to $61,000 for the comparable period in
1996. The increase is due to three additional franchise stores opened in the
nine months ended September 30,1997 compared to 1996 and the increase in
franchise fees from $6,000 to $15,000 implemented by the Company after the
acquisition of CDIL discussed above.
Costs and Expenses
Cost of sales for retail store sales increased $1,163,000 for the nine months
ended September 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 nine months ended September 30, 1997 compared to
61% for the nine months ended September 30, 1996.
Costs of sales for wholesale merchandise increased $456,000 or 20% to
$2,754,000 for the nine months ended September 30, 1997 compared to $2,298,000
in 1996. The increase is consistent with the increase in sales. Cost of sales
was 91% of sales for the nine months ended September 30, 1997 compared to 94%
for the comparable period in 1996.
Retail store operating expenses increased $779,000 to $830,000 for the nine
months ended September 30, 1997, compared to $51,000 for the nine months ended
September 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 nine months ended September 30, 1996 compared to 39% 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 nine
months ended September 30, 1997 compared to the one established store opened
during the comparable period in 1996.
General and administrative expenses increased by $255,000, or 33%, to
$1,032,000 for the nine months ended September 30, 1997 compared to $777,000 (on
a pro forma basis) for the nine months ended September 30, 1996. This increase
resulted from increased costs associated with the transition after the
acquisitions and initial public offering discussed above, relocation of the
Company to Oklahoma City, Oklahoma, additional costs of operating the new
facility which is 175% larger than the facility previously occupied in Dallas,
TX and expenses relating to the management of the partnership stores discussed
above.
Depreciation and Amortization
Depreciation and amortization increased $17,000 to $161,000 for the nine
months ended September 30, 1997 compared to $144,000 (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 increased $83,000, or 59%, to $223,000 for the nine months ended
September 30, 1997 compared to $140,000 (on a pro forma basis) for the same
period ended September 30, 1996. The increase in net income is due to the
increase in the number of operating stores discussed above, cost savings
associated with increased purchasing power and the increase in franchise and
development fees for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $1,556,000 and cash
and cash equivalents aggregating $411,000, 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 $875,000 for the nine months
ended September 30, 1997, compared to net cash provided by operating activities
of $745,000 for the nine months ended September 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 stores in operation.
12
<PAGE>
Net cash used for investing activities was $3,559,000 for the nine months
ended September 30, 1997, compared to $282,000 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 $4,829,000 for the nine months
ended September 30, 1997 compared to net cash used for financing activities of
$205,000 for the nine months ended September 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 nine months ended September 30, 1996 were
distributions of $555,000 to partners of CDIL offset by sale of common stock to
founders of CD Warehouse, Inc.
In addition to the working capital at September 30, 1997, the Company has 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 bear 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 September 30,
1997, combined with the Line, will be sufficient to support the ongoing
activities of the business for the foreseeable future.
13
<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 September 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ----------- ----------------------------------------------------------------
27.1* Financial Data Schedule
_______________________________________________________________________________
*Filed electronic herewith
(b) Reports on Form 8-K
The Company filed a Form 8-K dated September 15,1997 regarding
litigation initiated by the Company against Grow Biz International Inc.("Grow
Biz"), a Minnesota Corporation, and Clarence Gladden. The Company alleges that
Mr. Gladden, acting for and on behalf of Disc-Go-Round (subsidiary of Grow Biz),
fraudulently acquired proprietary information and trade secrets of the Company
with the intent of unfairly using such information to the Company's competitive
disadvantage.
14
<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: November 3, 1997 /s/ Jerry W. Grizzle
--------------------------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: November 3, 1997 /s/ Doyle E. Motley
--------------------------------------------------
Doyle E. Motley
Senior Vice-President and Chief Financial Officer
15
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
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