<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, 1998
[ ] 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, 1998 was 3,550,550.
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, 1997
and June 30, 1998 (unaudited).................................. 3
Condensed Consolidated Statements of Income - Three
months and six months ended June 30, 1997
and 1998 (unaudited)........................................... 4
Condensed Consolidated Statements of Cash Flows - Six
months ended June 30, 1997 and 1998 (unaudited)................ 5
Notes to Condensed Consolidated Financial
Statements (unaudited)......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............. 15
Item 4. Submission of Matters to a Vote of Security Holders.... 15
Item 6. Exhibits and Reports on Form 8-K....................... 16
Signatures..................................................... 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(INFORMATION AT JUNE 30, 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,122,233 $ 7,604,032
Accounts receivable, net 517,248 761,032
Merchandise inventory 1,725,699 2,321,205
Prepaid expenses and other 53,816 110,712
----------- -----------
Total current assets 3,418,996 10,796,981
Furniture, fixtures and equipment, net 499,845 893,204
Investment in unconsolidated partnerships 6,009 3,441
Intangible and other assets, net 3,438,299 10,417,897
----------- -----------
$ 7,363,149 $22,111,523
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,107,669 $ 228,249
Accrued liabilities 85,438 211,395
Advances and deposits 90,000 189,500
Income taxes payable 205,000 146,885
----------- -----------
Total current liabilities 1,488,107 776,029
Deferred income taxes 25,000 25,000
Minority interest 97,398 77,607
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 10,000,000 shares
authorized, 1,820,000 and 3,550,550 issued and
outstanding at December 31, 1997 and June 30, 1998,
respectively 18,200 35,506
Additional paid-in-capital 5,348,543 20,575,735
Retained earnings 385,901 621,646
----------- -----------
Total stockholders' equity 5,752,644 21,232,887
----------- -----------
$ 7,363,149 $22,111,523
=========== ===========
</TABLE>
(See accompanying notes)
3
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $ 841,913 $ 1,832,074 $ 1,030,068 $ 3,487,775
Wholesale merchandise sales 1,075,994 397,010 2,158,454 1,466,528
Software income, net 10,606 18,054 15,432 26,649
Franchise operations:
Royalty income 340,298 478,502 576,880 957,042
Management fees 34,800 18,725 61,492 37,450
Franchise and development fees 44,000 44,500 50,000 77,500
----------- ----------- ----------- -----------
Total revenues 2,347,611 2,788,865 3,892,326 6,052,944
Operating costs and expenses:
Cost of sales - retail store sales 502,662 1,063,990 618,631 2,026,225
Cost of sales - wholesale merchandise sales 971,512 372,434 1,976,428 1,338,975
Retail store operating expenses 324,790 641,768 408,677 1,210,748
General and administrative 386,173 590,284 655,655 1,033,636
Depreciation and amortization 60,869 80,467 95,769 153,582
Minority interest in partnership income 14,875 9,193 15,573 18,073
----------- ----------- ----------- -----------
Total operating costs and expenses 2,260,881 2,758,136 3,770,733 5,781,239
----------- ----------- ----------- -----------
Operating income 86,730 30,729 121,593 271,705
Other income:
Equity in income of unconsolidated partnerships 19,642 12,967 32,320 30,240
Other income (expense) (4,570) 76,757 4,086 75,300
----------- ----------- ----------- -----------
15,072 89,724 36,406 105,540
----------- ----------- ----------- -----------
Income before income taxes 101,802 120,453 157,999 377,245
Provision for income taxes 34,640 45,500 53,750 141,500
----------- ----------- ----------- -----------
Net income $ 67,162 $ 74,953 $ 104,249 $ 235,745
=========== =========== =========== ===========
Net income per share - basic $ 0.04 $ 0.03 $ 0.07 $ .10
=========== =========== =========== ===========
Net income per share - diluted $ 0.04 $ 0.03 $ 0.07 $ .10
=========== =========== =========== ===========
Shares used in computation - basic 1,820,000 2,646,446 1,600,442 2,285,230
=========== =========== =========== ===========
Shares used in computation - diluted 1,820,000 2,879,363 1,600,442 2,429,158
=========== =========== =========== ===========
</TABLE>
(See accompanying notes)
4
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------
JUNE 30, 1997 JUNE 30,1998
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 104,249 $ 235,745
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 95,769 153,582
Loss on disposal of assets -- 1,031
Changes in operating assets and liabilities:
Accounts receivable, net (352,377) (158,784)
Inventories (903,909) (106,241)
Prepaid expenses and other (57,353) (46,896)
Investment in partnership 20,077 (61,396)
Other assets (44,503) 18,021
Accounts payable 306,429 (875,983)
Accrued liabilities 66,734 75,175
Advances and deposits 70,312 (500)
Income taxes payable 53,750 (58,115)
Minority interests 94,297 (19,791)
------------- -------------
Total adjustments (650,774) (1,079,897)
------------- -------------
Net cash used for operating activities (546,525) (844,152)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (398,342) (246,763)
Proceeds from disposal of assets -- 115,030
Acquisition of businesses:
Cost in excess of net assets of companies acquired, net (3,145,525) (6,845,785)
Accounts receivable (72,739) (85,000)
Inventory (398,346) (441,529)
Prepaid expenses and other -- (10,000)
Furniture, fixtures and equipment (50,514) (134,500)
Investment in partnerships (21,452) --
Other assets (931) (7,500)
Accounts payable 543,229 --
Accrued liabilities 1,673 --
Advances and deposits -- 100,000
Minority interest 12,980 --
------------- -------------
(3,131,625) (7,424,314)
------------- -------------
Net cash used for investing activities (3,529,967) (7,556,047)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net:
Initial public offering 4,492,238 --
Private placement -- 14,858,560
Collection of stock subscription 350,000 23,438
------------- -------------
Net cash provided by financing activities 4,842,238 14,881,998
NET INCREASE IN CASH AND CASH EQUIVALENTS 765,746 6,481,799
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,431 1,122,233
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 781,177 $ 7,604,032
============= =============
</TABLE>
5
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION:
For the six month period ending June 30, 1998 the Company had the
following non-cash investing and financing activities:
Purchased assets of a franchisee for $573,530 which was paid $211,030
in cash and $362,500 in restricted common stock of the Company, valued
for purposes of the acquisition at $3.625 per share, which represented
the market value of the stock on the acquisition date. The following
table outlines the non-cash portion of this transaction:
Cost in excess of net assets accrued, net $ 281,412
Inventory 47,737
Furniture, fixtures and equipment 70,080
Other assets 10,616
Accounts payable 3,437
Accrued liabilities (50,782)
-----------
$ 362,500
===========
6
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CD WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of December 31, 1997
and June 30, 1998 and for the six months ended June 30, 1997 and 1998, 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 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, 1998 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1998. 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.
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 assets of Compact Disc International, LTD. ("CDIL") 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 $3.5 million which is amortized on a straight-line basis over 20
years.
NOTE 3. PRIVATE PLACEMENT OFFERING AND BUSINESS ACQUISITION
On May 25, 1998, the Company closed a private placement of 1,624,300
shares of the Company's common stock at a price of $10 per share. The proceeds
of the private placement, after deducting discounts and offering expenses, were
approximately $14.9 million.
On June 26, 1998, the Company completed the acquisition of the franchise
rights for 134 Disc Go Round(R) retail music stores, as well as the assets of 3
Disc Go Round(R) stores owned and operated by its parent company, from Grow Biz
International, Inc. (NASDAQ: GBIZ) for $7.0 million.
7
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CD WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following unaudited pro forma combined information presents a summary
of the consolidated results of operations of the Company and the acquired
business for the six months ended June 30, 1997 and 1998, as if the acquisition
and the private placement of the Company had occurred January 1, 1997:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Revenues $ 4,933,226 $ 7,444,444
Net income $ 122,599 $ 331,095
Net income per share-basic and diluted $ .04 $ .09
Shares used in computation-diluted 3,224,742 3,689,368
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is qualified in its entirety by the more
detailed information in the Company's 1997 Annual Report to Stockholders (which
includes its Form 10-KSB for the fiscal year ended December 31, 1997 and the
financial statements contained therein, including the notes thereto), and the
Company's other periodic reports and all Current Reports on Form 8-K filed with
the Securitieis and Exchange Commission since December 31, 1997 (collectively
are referred to as the "Disclosure Documents"). Certain forward-looking
statements contained herein and in such Disclosure Documents regarding the
Company's business and prospects 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. The Company's ability to achieve such results is subject to certain
risks and uncertainties, such as those inherent generally in the retail and
franchising industries, the impact of competition and pricing, changing market
conditions, and other risks. Any forward-looking statements contained herein
represent the Company's judgment as of the date hereof. The Company disclaims,
however, any intent or obligation to update these forward-looking statements. As
a result, the reader is cautioned not to place undue reliance on these
forward-looking statements. As used in herein, the word "Company" means CD
Warehouse, Inc. and its wholly owned subsidiary, Compact Discs Management, Inc.,
unless the context indicates otherwise.
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, 1998, there were 156 domestic units operating in 30 states and 7
international units operating in England, France, Guatemala and Venezuela.
Simultaneously with the closing of the Initial Public Offering on January
27, 1997, the Company acquired the assets of CDIL, 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 Offering, the Company acquired the equity interest of MacDonald, the then
largest CD Warehouse franchisee, in 36 franchised CD Warehouse stores. Pursuant
to the MacDonald Acquisition, the Company acquired 100% ownership of one 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. Effective December 30, 1997, the
Company sold back to MacDonald the Company's various ownership interests in nine
partnerships, for an aggregate consideration of $169,807. The partnerships,
which act as franchisees of the Company, operate nine CD Warehouse stores.
Pursuant to the sale, MacDonald assumed the Company's interest in the
partnerships, which continue to operate as CD Warehouse franchisees
On June 26, 1998 the Company completed the acquisition, for an
aggregate purchase price of $7 million, of the franchise rights to 134 Disc Go
Round(R) retail music stores from Grow Biz International, Inc. ("Grow Biz"), as
well as the acquisition of the assets of three Disc Go Round(R) stores owned and
operated by Grow Biz. Considering the above acquisition, as of June 30, 1998,
the Company had 300 stores operating in 40 states domestically and in 5
different countries.
RESULTS OF OPERATION
The Company derives its revenues primarily from retail sales by Company
and majority-owned stores, wholesale merchandise sales to franchisees of the
Company and royalty fees from franchisees. The Company also
9
<PAGE>
receives revenues from initial franchise fees, area development fees, management
fees and software income. Retail store cost of sales and operating expenses
relate directly to Company and majority-owned retail store sales. Wholesale
merchandise sales and associated cost of sales relate to the Company's
franchising operations. Other expenses, such as depreciation, amortization, and
general and administrative expenses, relate to Company and majority-owned store
operations, as well as the Company's franchising operations. The number and
sales volumes of Company and majority-owned retail stores directly affect the
Company's revenues and expenses. The Company's revenues and, to a lesser extent,
expenses also are affected by the number and sales volumes of franchise stores.
Initial franchise fees are directly affected by the number of franchised store
openings.
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the Company's
statement of income.
PERCENTAGE RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Retail store sales 35.9% 65.7% 26.5% 57.6%
Wholesale merchandise sales 45.8 14.2 55.4 24.2
Software income, net .4 .6 .4 .5
Royalty income 14.5 17.2 14.8 15.8
Management fees 1.5 .7 1.6 .6
Franchise and development fees 1.9 1.6 1.3 1.3
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Operating costs and expenses:
Cost of sales-retail stores sales (1) 59.7% 58.1% 60.0% 58.1%
Cost of sales-wholesale merchandise sales (2) 90.3 93.8 91.6 91.3
Retail store operating expenses (1) 38.6 35.0 39.7 34.7
General and administrative 16.4 21.2 16.8 17.1
Depreciation and amortization 2.6 2.9 2.5 2.5
Minority interest in partnership income .6 0.3 .4 .3
Operating Income 3.7 1.1 3.1 4.5
Other income net .6 3.2 .9 1.7
Net income 2.9% 2.7% 2.7% 3.9%
</TABLE>
(1) As percentage of retail store sales.
(2) As percentage of wholesale merchandise sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------------
1997 1998 1997 1998
------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales Data:
System wide sales $8,248,085 $ 12,306,441 $15,705,179 $24,187,695
Percentage increase (1) 24% 49% 22% 54%
Average monthly sales per store $ 23,979 $ 26,984 $ 23,441 $ 27,025
========== ============ =========== ==========
Change in comparable retail store sales (2) 9% 15% 9% 18%
== == == ==
</TABLE>
(1) Represents percentage increase from comparable period in prior year.
(2) Represents percentage increase for stores open in both periods reported.
10
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STORE COUNT
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 OPEN CLOSE TRANSFER 1998
--------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Franchise
Domestic - CDW 131 10 -- (7) 134
Domestic - DGR -- 126* -- -- 126
------ ------ ------ ------ ------
131 136 -- (7) 260
International - CDW 6 1 -- -- 7
International - DGR -- 8* -- -- 8
------ ------ ------ ------ ------
6 9 -- -- 15
Company
Domestic - CDW 13 2 -- 7 22
Domestic - DGR -- 3* -- -- 3
------ ------ ------ ------ ------
13 5 -- 7 25
------ ------ ------ ------ ------
Total 150 150 -- -- 300
====== ====== ====== ====== ======
</TABLE>
CDW - CD Warehouse
DGR - Disc Go Round
* Acquired June 26, 1998
RESULTS OF OPERATION
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues
Retail store sales increased $990,000 to $1,832,000 for the three months
ended June 30, 1998, compared to $842,000 for the three months ended June 30,
1997. The increase in retail store sales is the result of having twenty-two
stores (twenty Company and two majority-owned) in operation by June 30, 1998
compared to only thirteen stores at June 30, 1997.
Wholesale merchandise sales decreased $679,000, or 63%, to $397,000 for the
three months ended June 30, 1998, compared to $1,076,000 for the same period in
1997. The decrease is due to the Company discontinuing its "one-stop" warehouse
operations in May 1998, which acquired new CD releases from the major record
labels and sold them to the franchise system with minimal mark up. The Company
has determined to focus its efforts on warehousing used product to open new
stores and eventually sell used product to the franchise system.
Royalty income increased $139,000, or 41%, to $479,000 for the three months
ended June 30, 1998, compared to $340,000 for the same period in 1997. The
increase is due to the greater number of CD Warehouse franchise stores in
operation at June 30, 1998 (141) compared to the number operating at June 30,
1997 (110). Additionally, same store sales for the three months ended June 30,
1998 increased 15% and monthly average store sales increased from $23,979 for
the three months ended June 30, 1997 to $26,984 for the same period in 1998.
11
<PAGE>
Costs and Expenses
Cost of sales for retail store sales increased $561,000 for the three
months ended June 30, 1998, compared to the same period in 1997. This increase
is consistent with the increase of retail store revenue discussed above. Cost of
sales was 58% of sales for the three months ended June 30, 1998, compared to 60%
for the three months ended June 30, 1997.
Cost of sales for wholesale merchandise decreased $600,000, or 62%, to
$372,000 for the three months ended June 30, 1998, compared to $972,000 in 1997.
This decrease is consistent with the decrease in sales discussed above. Cost of
sales was 94% of sales for the three months ended June 30, 1998 compared to 90%
for the same period in 1997. The increased cost of sales for the three months
ended June 30, 1998 can be attributed to increased restocking charges associated
with discontinuing warehouse operations relating to new CDs.
Retail store operating expenses increased $317,000 to $642,000 for the
three months ended June 30, 1998, compared to the comparable period in 1997. The
increase was due to the increased number of Company-owned and majority-owned
stores discussed above. However, retail store operating expense was 35% of
retail store revenue for the three months ended June 30, 1998, while such
operating expense was 39% of retail store revenue for the three months ended
June 30, 1997. This decrease resulted from better operating results of
Company-owned and majority- owned stores, which began operations during 1997.
The results for the three months ended June 30, 1997 reflect the Company's
initial development of Company stores, which included start up costs for four
new stores. The Company acquired two new Company stores during the three months
ended June 30, 1998.
General and administrative expenses increased by $204,000 to $590,000 for
the three months ended June 30, 1998, compared to $386,000 for the three months
ended June 30, 1997. This increase resulted from the continued growth of the
Company in both Company stores (increase of 9 stores) and franchise stores
(increase of 31 stores). The three months ended June 30, 1998 also included
costs associated with the Company's initial annual shareholders meeting,
franchise convention and development cost of a new store design.
Depreciation and Amortization
Depreciation and Amortization increased $19,000 to $80,000 for the three
months ended June 30, 1998 compared to $61,000 for the comparable period in
1997. This is primarily due to the increase of nine Company stores in 1998.
Other Income
Other income increased $75,000 to $90,000 for the three months ended June
30, 1998 compared to $15,000 for comparable period in 1997. This is primarily
due to interest earned of approximately $75,000 on the net proceeds of the
private placement completed in May 1998.
Net Income
Net income increased $8,000 to $75,000 for the three months ended June 30,
1998, compared to $67,000 for the same period ended June 30, 1997. The increase
in net income is due to improved retail store operations, as indicated by
reduced percentage of cost of sales and operating expenses, increase in
royalties generated by the increased number of stores and same store sales and,
finally, an increase in other income of $75,000, offset by increase in general
and administrative expense.
12
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
Revenues
Retail store sales increased $2,458,000 to $3,488,000 for the six months
ended June 30, 1998 compared to $1,030,000 for the six months ended June 30,
1997. The increase in retail store sales is the result of having twenty Company
and two majority owned stores in operations during the six months ended June 30,
1998 compared to only thirteen during the same period in 1997.
Wholesale merchandise sales decreased $691,000, or 32% to $1,467,000 for
the six months ended June 30, 1998 compared to $2,158,000 for the same period in
1997. The decrease is due to the Company discontinuing its "one-stop" warehouse
operations is May 1998 which acquired new CD releases from the major record
labels and sold them to the franchise system with minimal mark up. The Company
has determined to focus its efforts on warehousing used product to open new
stores and eventually sell used product to the franchise system.
Royalty income increased $380,000 to $957,000 for the six months ended June
30, 1998 compared to $577,000 for the same period in 1997. Again, the increase
is due to the greater number of franchise CD Warehouse franchise stores in
operation at June 30, 1998 (141) compared to the number operating at June 30,
1997 (110). In addition, same store sales for the six months ended June 30, 1998
increased 18% while monthly average store sales increased from $23,441 for the
six months ended June 30, 1997 to $27,025 for the same period in 1998.
Costs and Expenses
Cost of sales for retail store sales increased $1,408,000 for the six
months ended June 30, 1998 compared to the same period in 1997. This increase is
consistent with the increase of retail store revenue discussed above. Cost of
sales was 58% of sales for the six months ended June 30, 1998 compared to 60%
for the six months ended June 30, 1997.
Costs of sales for wholesale merchandise decreased $637,000 or 32% to
$1,339,000 for the six months ended June 30, 1998 compared to $1,976,000 in
1997. The decrease is consistent with the decrease in sales. Cost of sales was
91% of sales for the six months ended June 30, 1998 compared to 92% for the
comparable period in 1997.
Retail store operating expenses increased $802,000 to $1,211,000 for the
six months ended June 30, 1998, compared to $409,000 for the six months ended
June 30, 1997. The increase is due to the increase of Company stores discussed
above. Retail store operating expense was 35% of retail store revenue for the
six months ended June 30, 1998 compared to 40% of retail store revenue for the
same period in 1997. The decrease resulted from better operating results of
Company and majority owned stores that began operations during 1997. The result
for six months ended June 30, 1997 includes start up costs relating to eight new
Company stores compared to five Company stores for the same period in 1998.
General and administrative expenses increased by $378,000 to $1,034,000 for
the six months ended June 30, 1998 compared to $656,000 for the six months ended
June 30, 1997. This increase resulted from the continued growth of the Company
in both Company stores (increase of 9 stores) and franchise stores (increase of
31 stores). The six months ended June 30, 1998 also included costs associated
with the Company's initial annual shareholders meeting, franchise convention and
development cost of a new store design.
Other Income
Other income increased $70,000 to $106,000 for the six months ended June
30, 1998 compared to $36,000 for the comparable period in 1997. This is
primarily due to interest earned of approximately $75,000 on the net proceeds of
the private placement completed in May 1998.
13
<PAGE>
Net Income
Net income increased $132,000 to $236,000 for the six months ended June 30,
1998 compared to $104,000 for the same period ended June 30, 1997. The increase
in net income is due to improved retail store operations, as indicated by
reduced percentage of cost of sales and operating expenses, increase in
royalties generated by increase number of stores and same store sales and
finally, an increase in other income of $75,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had working capital of $10,021,000 and cash
and cash equivalents aggregating $7,604,000, compared to working capital of
$1,931,000 and cash and cash equivalents of $1,122,000 at December 31, 1997. Net
cash used for operating activities was $844,000 for the six months ended June
30, 1998, compared to net cash used for operating activities of $547,000 for the
six months ended June 30, 1997. The increased use of cash by operating
activities for the six months ended June 30, 1998 was due principally to the
reduction of amounts due the major labels because of the Company's decision to
discontinue its warehouse operations relating to new CDs.
Net cash used for investing activities was $7,556,000 for the six months
ended June 30, 1998, compared to $3,530,000 for the same period in 1997. The
significant use of cash for investing activities in 1998 and 1997 relates to the
acquisition of Disc Go Round in May 1998 and the acquisition of the assets of
CDIL in January 1997 combined with opening of Company stores.
Net cash provided from financing activities was $14,882,000 for the six
months ended June 30, 1998 compared to $4,842,000 for the same period in 1997.
The net cash provided from financing in 1998 relates primarily to the private
placement of 1,624,300 shares of common stock in May 1998. The net cash provided
from financing in 1997 relates to the initial public offering and collection of
a stock subscription in the amount of $350,000.
In addition to the working capital at June 30, 1998, the Company has a
$500,000 Line of Credit and $500,000 Term Loan Agreement ("Credit Facilities")
with Merrill Lynch Business Financial Services, Inc. Amounts borrowed under the
Credit Facilities will bear an interest rate equal to the sum of 3.1% and the
thirty-day Commercial Paper Rate. As of the date of this Report, no balance is
outstanding under these Credit Facilities. It is the Company's opinion that the
current working capital at June 30, 1998, combined with the Credit Facilities
will be sufficient to support the ongoing activities of the business for the
foreseeable future.
14
<PAGE>
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 28, 1998, CD Warehouse, Inc. (the "Company") closed a private
placement (the "Offering") of an aggregate 1,624,300 shares (the "Shares") of
the Company's common stock, par value $.01 per share (the "Common Stock"). The
Shares, which were sold for a purchase price of $10.00 per share, for gross
offering proceeds of $16,243,000, were sold in the United States to certain
"accredited investors" (as such term is defined in Regulation D of the
Securities Act of 1933 (the "Act")) in reliance on Rule 506 of Regulation D of
the Act, and outside the United States to certain non-U.S. persons (who also are
accredited investors) in reliance on Regulation S of the Act.
Placement agents for the Offering were Capital West Securities, Inc. and
ComVest Partners, Inc., who received in connection with the Offering (i)
discounts and commissions of 8.0% of the gross proceeds of the Offering (an
aggregate $1,299,440), and (ii) an aggregate 162,430 Common Stock purchase
warrants, which entitle the holders thereof to purchase Common Stock at an
exercise price of $10.00 per share on and after the first anniversary of the
closing of the Offering (the "Closing") and expiring on the fifth anniversary of
the Closing. Neither the Company nor any of its affiliates, directors or
officers has any material relationship with any of the investors in the private
placement.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual stockholders' meeting on May 1, 1998. Three
proposals were voted on by the Company's stockholders: 1) election of directors,
2) amendment of the Company's 1996 stock option plan, and 3) ratification of the
appointment of Ernst & Young LLP as independent auditors. All proposals were
approved by a majority of the votes cast at the meeting, as follows:
(a) Two directors were elected to each serve three year terms:
Ronald V. Perry was elected as a Class 2 director for a term
expiring at the 2001 annual meeting, with 1,369,656 shares voted in
favor and 382,487 voted against; and Robert O. McDonald was elected
as a Class 3 director for a term expiring at the 1999 annual
meeting, with 1,369,856 voted in favor and 382,287 voted against.
Jerry W. Grizzle, who is a Class 1 director with a term expiring at
the 2000 annual meeting; Gary D. Johnson, who is also a Class 1
director; and Christopher M. Salyer, who is a Class 3 director with
a term expiring at the 1999 annual meeting, were not up for
reelection and continued on as directors.
(b) Amendment of the Company's 1996 Stock Option Plan to (i) increase
the maximum aggregate number of shares of common stock available
for the grant of stock options under the 1996 Plan from 400,000
shares to 600,000 shares, (ii) change the vesting period of stock
options granted under the 1996 Plan so that options may be
exercised one year from date of grant, as opposed to the vesting
schedule currently provided for in the Plan, which provides for
incremental vesting in one-third increments over three years from
date of grant; (iii) increase the number of shares of common stock
covered under the automatic annual grant of options to directors of
the Company from 6,000 to 10,000; and (iv) provide that the number
of shares of common stock covered under options granted to a
director newly appointed by the Board of Directors to fill a
vacancy or new Board seat shall be pro-rated for the number of
months elapsed since the last annual meeting of stockholders:
15
<PAGE>
In favor: 677,010
Against: 401,946
Abstain: 28,550
Broker non-votes: 644,637
(c) Ratification of the appointment of Ernst & Young LLP as independent
auditors:
In favor: 1,730,693
Against: 2,200
Abstain: 19,250
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
----------- -----------------------------------------------------------
10.1 Asset Purchase Agreement (filed as exhibit 10.1 to
Registrant's Current Report on Form 8-K filed June 26, 1998
and incorporated herein by reference)
27.1* Financial Data Schedule
99.1* Pro Forma Combined Statements of Operations of Registrant
for the six months ended June 30, 1998
----------------------
*Filed electronically herewith
(b) Reports on Form 8-K
The Company filed a Form 8-K dated May 22, 1998 concerning the private
placement of 1,624,300 shares of the Company's common stock, par value $.01 per
share. The shares, which were sold for a purchase price of $10.00 per share, for
gross proceeds of $16,243,000, were sold largely to institutional and accredited
investors in accordance with Regulation D and Regulation S of the Securities Act
of 1933.
The Company filed a Form 8-K dated June 16, 1998 announcing the
completion of an asset acquisition agreement dated June 16, 1998 between the
Company and Grow Biz.
16
<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 11, 1998 /S/ JERRY W. GRIZZLE
--------------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: August 11, 1998 /S/ DOYLE E. MOTLEY
--------------------------------------
Doyle E. Motley
Senior Vice-President and Chief
Financial Officer
(Chief Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 7,604,032 7,604,032
<SECURITIES> 0 0
<RECEIVABLES> 761,032 761,032
<ALLOWANCES> 0 0
<INVENTORY> 2,321,205 2,321,205
<CURRENT-ASSETS> 10,796,981 10,796,981
<PP&E> 893,204 893,204
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 22,111,523 22,111,523
<CURRENT-LIABILITIES> 776,029 776,029
<BONDS> 0 0
0 0
0 0
<COMMON> 35,506 35,506
<OTHER-SE> 21,197,381 21,197,381
<TOTAL-LIABILITY-AND-EQUITY> 22,111,523 22,111,528
<SALES> 2,247,138 4,980,952
<TOTAL-REVENUES> 2,788,865 6,052,944
<CGS> 1,436,424 3,365,200
<TOTAL-COSTS> 2,758,136 5,781,239
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 120,453 377,245
<INCOME-TAX> 45,500 141,500
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 74,953 235,745
<EPS-PRIMARY> .03 .10
<EPS-DILUTED> .03 .10
</TABLE>
<PAGE>
EXHIBIT 99.1
CD WAREHOUSE, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------
CD PRO FORMA
WAREHOUSE, DISC GO ACQUISITION PRO FORMA
INC. ROUND ADJUSTMENTS TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $3,487,775 $ 330,700 $ -- $3,818,475
Wholesale merchandise sales 1,466,528 197,200 -- 1,663,728
Software income, net 26,649 -- -- 26,649
Franchise operations:
Royalty income 957,042 719,000 -- 1,676,042
Management fee 37,450 -- -- 37,450
Franchise and development fees 77,500 144,600 -- 222,100
---------- ---------- ----------- ----------
Total revenues 6,052,944 1,391,500 -- 7,444,444
Operating costs and expenses:
Cost of sales - retail store sales 2,026,225 170,400 -- 2,196,625
Cost of sales - wholesale merchandise sales 1,338,975 177,500 -- 1,516,475
Retail store operating expenses 1,210,748 -- 162,700 (A) 1,373,448
General and administrative 1,033,636 973,100 (162,700) (A)
(326,250) (C) 1,517,786
Depreciation and amortization 153,582 138,900 104,000 (B) 396,482
Minority interest in partnerships' income 18,073 -- -- 18,073
---------- ---------- ----------- ----------
Total cost & expenses 5,781,239 1,459,900 (222,250) 7,018,889
---------- ---------- ----------- ----------
Operating income (loss) 271,705 (68,400) 222,250 425,555
Other income:
Equity in income of unconsolidated partnerships 30,240 -- -- 30,240
Other income 75,300 -- -- 75,300
---------- ---------- ----------- ----------
105,540 -- -- 105,540
---------- ---------- ----------- ----------
Income (loss) before income taxes 377,245 (68,400) 222,250 531,095
Provision for income taxes 141,500 -- 58,500 (D) 200,000
---------- ---------- ----------- ----------
Net income (loss) $ 235,745 $ (68,400) $ 163,750 $331,095
========== ========== =========== ==========
Net income per share - basic $ 0.09
==========
Net income per share - diluted $ 0.09
==========
Shares used in computation - basic 3,545,440
==========
Shares used in computation - diluted 3,689,368
==========
</TABLE>
<PAGE>
ADJUSTMENTS TO PRO FORMA FINANCIAL STATEMENTS
(A) Reclassify retail store operating expenses of Disc Go Round to conform to
Company's presentation:
Six months ended June 30, 1998 $162,700
========
(B) Record amortization of additional carrying value of intangibles acquired
for the six months ended June 30, 1998:
Amortization of intangible assets
acquired over 15 year life $225,000
Historical amortization of
Disc Go Round $121,000
--------
Incremental amortization $104,000
========
(C) Reduce historical allocated administrative charges to Disc Go Round by its
prior parent for corporate and divisional personnel and facilities charges
not acquired nor retained by the Company for the six months ended
June 30, 1998:
Divisional officers and managers $152,500
Corporate officers 94,750
Warehouse facility 79,000
--------
$326,250
========
(D) Pro forma income tax effect at 37.5% of adjustments:
Six months ended June 30, 1998 $ 58,500
========
