<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 March 31, 2000
[ ] 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 May 5, 2000 was 3,660,295.
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, 1999
and March 31, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations - Three
months ended March 31, 1999 and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 1999 and 2000 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 2000 is unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1999 2000
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,069,560 $ 704,688
Accounts receivable, net 948,252 699,940
Notes receivable 87,159 71,001
Merchandise inventory 8,908,331 8,696,527
Prepaid expenses and other 237,915 345,679
Income taxes refundable 780,229 910,379
------------------ ------------------
Total current assets $ 12,031,446 $ 11,428,214
------------------ ------------------
Furniture, fixtures and equipment, net 4,911,287 4,759,896
Note receivable, due after one year 51,112 44,830
Intangible and other assets, net 11,883,905 12,307,894
------------------ ------------------
$ 28,877,750 $ 28,540,834
================== ==================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,615,705 $ 888,972
Accrued liabilities 787,186 538,556
Advances and deposits 137,000 137,909
Notes payable - 613,000
------------------ ------------------
Total current liabilities 2,539,891 2,178,437
Long-term debt 4,475,977 4,717,888
Deferred income tax 47,000 47,000
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 10,000,000 shares
authorized, 3,660,295 issued and outstanding
at December 31, 1999 and March 31, 2000, respectively 36,603 36,603
Additional paid-in-capital 21,758,158 21,758,158
Retained earnings (accumulated deficit) 20,121 (197,252)
------------------ ------------------
Total stockholders' equity 21,814,882 21,597,509
------------------ ------------------
$ 28,877,750 $ 28,540,834
================== ==================
</TABLE>
(See accompanying notes)
3
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------
March 31, March 31,
1999 2000
--------------- ---------------
<S> <C> <C>
Revenues:
Company Operations:
Retail store sales $5,321,108 $7,189,928
Wholesale merchandise sales 140,316 228,507
Software income, net 26,720 4,500
Franchise operations:
Royalty income 925,759 925,622
Franchise and development fees 23,000 37,500
--------------- ---------------
Total revenues 6,436,903 8,386,057
Operating costs and expenses:
Cost of sales - retail stores sales 3,050,508 4,443,513
Cost of sales - wholesale merchandise sales 89,513 175,197
Retail store operating expenses 1,704,753 2,523,142
General and administrative 1,158,821 996,591
Depreciation and amortization 317,068 496,549
--------------- ---------------
Total operating costs and expenses 6,320,663 8,634,992
Operating income (loss) 116,240 (248,935)
Other income (expense), net (5,768) (97,238)
--------------- ---------------
Income (loss) before income taxes 110,472 (346,173)
Provision (credit) for income taxes 41,600 (128,800)
--------------- ---------------
Net income (loss) $ 68,872 $ (217,373)
=============== ===============
Net income (loss) per share-basic and diluted
Basic $ .02 $ (.06)
=============== ===============
Diluted $ .02 $ (.06)
=============== ===============
Shares used in computations:
Basic 3,587,890 3,660,295
=============== ===============
Diluted 3,836,948 3,660,295
=============== ===============
</TABLE>
(See accompanying notes)
4
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31, March 31,
1999 2000
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 68,872 $ (217,373)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 317,068 496,549
Gain on disposal of assets - (6,291)
Changes in operating assets and liabilities:
Accounts receivable, net 151,185 247,617
Inventories (476,894) 78,514
Prepaid expenses and other (152,628) (137,241)
Refundable income taxes (27,715) (130,150)
Other assets (21,101) 5,724
Accounts payable 318,301 (725,573)
Accrued liabilities 156,068 (149,234)
Advances and deposits 17,500 909
Income taxes payable (398,385) -
-------------- --------------
Total adjustments (116,601) (319,176)
-------------- --------------
Net cash used for operating activities (47,729) (536,549)
CASH FLOW FROM INVESTING ACTIVITIES:
Note receivable - collections 19,617 22,440
Purchase of furniture, fixtures and equipment (537,206) (118,265)
Proceeds from disposal of assets - 425,505
Acquisition of businesses (3,300,541) (396,164)
-------------- --------------
Net cash used for investing activities (3,818,130) (66,484)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 187,500 -
Notes Payable:
Advances 3,000,000 5,442,058
Repayments - (5,203,897)
-------------- --------------
Net cash provided by financing activities 3,187,500 238,161
NET DECREASE IN CASH AND CASH EQUIVALENTS (678,359) (364,872)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,442,454 1,069,560
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,764,095 $ 704,688
============== ==============
</TABLE>
5
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Supplemental Cash Flow Information:
For the three months ending March 31, 1999 the Company acquired the assets
of Music Trader, Inc. for cash of $3,000,000 and 84,745 shares of the Company's
common stock valued at $11.80 per share. The noncash portion of this
transaction is as follows:
<TABLE>
<S> <C>
Costs in excess of net assets acquired, net $ 966,880
Prepaid expenses and other 9,780
Inventory 2,837,312
Furniture, fixtures and equipment 160,000
Other assets 26,028
-----------
4,000,000
Less cash paid (3,000,000)
-----------
$ 1,000,000
===========
</TABLE>
6
<PAGE>
CD WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of December 31, 1999 and
March 31, 2000 and for the three months ended March 31, 1999 and 2000, include
the accounts of CD Warehouse, Inc. (the "Company"), its wholly owned
subsidiaries, Compact Discs Management, Inc. ("CDM"), and CD Warehouse Finance
Company ("CDF"). 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 three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2000. 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. BUSINESS ACQUISITION
In February 1999, the Company acquired the assets of Music Trader, Inc., a
16-store retail music chain based in Southern California, for cash of $3,000,000
and 84,745 shares of the Company's common stock for a total purchase price of
approximately $4,000,000. The acquisition was recorded under the purchase
method of accounting and resulted in an allocation of excess of purchase price
over net assets acquired of $966,880, which is amortized on a straight-line
basis over ten years.
The acquisition described above was accounted for by the purchase method of
accounting for business combinations. Accordingly, the accompanying
consolidated statements of income do not include any revenues or expenses
related to this acquisition prior to the closing date. The cash portion of the
acquisition was financed through proceeds from the operating cash flows.
Following are the Company's unaudited pro forma results for the three months
ended March 31, 1999 assuming the acquisition occurred on January 1, 1999 (in
thousands, except for per share data):
<TABLE>
<CAPTION>
1999
-------------------
<S> <C>
Total revenues $7,489,853
Net income $ 146,010
Net income per common share:
Basic $ .04
Diluted $ .04
Weighted average common shares:
Basic 3,637,795
Diluted 3,886,853
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, including amortization of
goodwill as a result of the acquisition and do not purport to be indicative of
the results of operations which would have actually resulted had the combination
been in effect on January 1, 1999 or of future results of operations.
NOTE 3. EARNINGS PER SHARE
Shares used in the computation of diluted earnings per share include
dilutive outstanding stock options and warrants after giving effect to the
treasury stock method for assumed exercise.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Certain forward-looking statements contained herein 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. Such statements are based upon numerous assumptions about future
conditions that may ultimately prove to be inaccurate and actual events and
results may materially differ from anticipated results described in such
statements. Important factors that could cause actual results to differ
materially from the Company's expectations ("cautionary statements") include the
risks inherent generally in the retail and franchising industries, the impact of
competition and pricing, changing market conditions, and other risks disclosed
in the Company's Annual Report on Form 10-KSB for the Year Ended December 31,
1999 under "ITEM 6--MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,"
as well as the risks disclosed in this Report. 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 subsidiaries, Compact
Discs Management, Inc., and CD Warehouse Finance Company unless the context
indicates otherwise.
Statements of Operations
The following table sets forth the Company's results of operations for the
three months ended March 31, 2000 and 1999. The information should be read in
conjunction with the historical Financial Statements included elsewhere in this
document.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 2000
---------- ----------
(in thousands except share data)
<S> <C> <C>
Revenues:
Retail store sales.............................................. $ 5,321 $ 7,190
Wholesale merchandise sales..................................... 140 228
Software income, net............................................ 27 4
Royalty income.................................................. 926 926
Franchise and development fees.................................. 23 38
---------- ----------
Total revenues.............................................. $ 6,437 $ 8,386
Operating costs and expenses:
Cost of sales - retail store sales.............................. 3,050 4,443
Cost of sales - wholesale merchandise sales..................... 90 175
Retail store operating expenses................................. 1,705 2,523
General and administrative...................................... 1,159 997
Depreciation and amortization................................... 317 497
---------- ----------
Total costs and expenses............................................. 6,321 8,635
---------- ----------
Operating income (loss).............................................. 116 (249)
Other income (expense), net.......................................... (6) (97)
---------- ----------
Income (loss) before income taxes.................................... 110 (346)
Provision (credit) for income taxes.................................. 41 (129)
---------- ----------
Net income (loss).................................................... $ 69 $ (217)
========== ==========
Net income loss per share-basic...................................... $ .02 $ (.06)
========== ==========
Net income loss per share-diluted.................................... $ .02 $ (.06)
========== ==========
Shares used in computation-basic..................................... 3,587,890 3,660,295
========== ==========
Shares used in computation-diluted................................... 3,836,948 3,660,295
========== ==========
</TABLE>
8
<PAGE>
Results of Operations
The Company derives its revenues primarily from retail sales of its
company-owned stores, wholesale merchandise sales to franchisees of the Company
and royalty fees from franchisees. The Company also receives revenues from
initial franchise fees, area development fees and software income. Retail store
cost of sales and operating expenses relate directly to company-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-owned
store operations, as well as the Company's franchising operations. The number
and sales volumes of company-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 franchised
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:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 2000
----- -----
<S> <C> <C>
Revenues:
Retail store sales................................... 82.7% 85.7%
Wholesale merchandise sales.......................... 2.2% 2.7%
Software income, net................................. .4% .1%
Royalty income....................................... 14.4% 11.0%
Franchise and development fees....................... .3% .5%
----- -----
Total revenues.................................. 100.0% 100.0%
Cost and expenses:
Cost of sales - retail store sales (1)............... 57.3% 61.8%
Cost of sales - wholesale merchandise sales(2)....... 63.8% 76.7%
Retail store operating expenses (1).................. 32.0% 35.1%
General and administrative........................... 18.0% 11.9%
Depreciation and amortization........................ 4.9% 5.9%
Operating income (loss).................................. 1.8% (3.0)%
Net income (loss)........................................ 1.1% (2.6)%
</TABLE>
(1) As a percentage of retail store sales.
(2) As a percentage of wholesale merchandise sales.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Sales Data:
System wide sales:
CD Warehouse $16,890,120 $22,497,181
Disc Go Round 7,727,158 4,005,536
----------- -----------
$24,617,278 $26,502,717
=========== ===========
Percentage increase (decrease):
CD Warehouse 42% 33%
Disc Go Round (1) (48)%
Average monthly sales per store:
CD Warehouse $ 29,222 $ 29,877
Disc Go Round 21,346 22,008
Change in comparable retail store sales (2)
CD Warehouse 14% 4%
Disc Go Round (1) 5%
</TABLE>
(1) Since Disc Go Round stores were acquired in June 1998, percentage increase
for Disc Go Round stores only applies to the three months ended March 31,
2000.
(2) Represents percentage increase only for stores open in both periods
reported.
9
<PAGE>
The following table sets forth the number of stores opened and closed
throughout the CD Warehouse System for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
December 31, March 31,
1999 Opened Closed Transfers 2000
------------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Franchised Stores
Domestic-CD Warehouse 174 4 -- 2 180
Domestic-Disc Go Round 73 -- (6) (4) 63
--- --- --- -- ----
247 4 (6) (2) 243
International-CD Warehouse 11 -- -- -- 11
International-Disc Go Round 6 -- -- -- 6
--- --- --- -- ----
17 -- -- -- 17
Company-owned Stores
Domestic-CD Warehouse 75 2 (5) 2 74
Domestic-Disc Go Round -- -- -- -- --
--- --- --- -- ----
75 2 (5) 2 74
--- --- --- -- ----
Total 339 6 (11) -- 334
=== === === == ====
</TABLE>
Three months ended March 31, 2000 compared to three months ended March 31, 1999.
Revenues
Retail store sales increased $1,869,000 to $7,190,000 for the three months
ended March 31, 2000, compared to $5,321,000 for the three months ended March
31, 1999. The 35% increase in retail store sales is the result of having the 16
Music Trader stores in operations for the three months ended March 31, 2000
compared to only 1 month in 1999 (Music Trader stores were acquired in February,
1999).
Wholesale merchandise sales increased 63% to $228,000 for the three months
ended March 31, 2000, compared to $140,000 for the same period in 1999. The
increase is due to the addition of 54 CD Warehouse stores in operation during
the three months ended March 31, 2000 compared to the same period in 1999.
Royalty income remained constant at $926,000 for the three months ended
March 31, 2000 and 1999. Although the number of stores operating as CD
Warehouse increased by 54, the net increase of stores was only 3 due to
conversion and closures of stores operating as Disc Go Round. The Company also
had a net increase of 3 new stores between March 31, 1999 and March 31, 2000.
Costs and Expenses
Cost of sales for retail store sales increased $1,393,000 for the three
months ended March 31, 2000 compared to the same period in 1999. This 46%
increase is consistent with the increase of retail store revenue discussed
above. However, cost of sales as a percentage of sales was 62% of sales for the
three months ended March 31, 2000 compared to 57% for the three months ended
March 31, 1999. The increase of cost of sales can be attributed to two factors:
1) increased competition which caused the stores to buy used product at a higher
cost and 2) increased percentage of sales being new product, which carriers a
higher cost than used product.
Cost of sales for wholesale merchandise increased $85,000 to $175,000 for
the three months ended March 31, 2000, compared to $90,000 in 1999. The
increase is consistent with the increase in wholesale merchandise sales. Cost
of sales was 77% of sales for the three months ended March 31, 2000 compared to
64% for the comparable period in 1999. The increased cost of sales relates to
the Company reduction of its markup on supplies and accessories offered to the
system.
10
<PAGE>
Retail store operating expenses increased $818,000 to $2,523,000 for the
three months ended March 31, 2000, compared to $1,705,000 for the three months
ended March 31, 1999. The 48% increase is due to the increase of company-owned
stores discussed above. Retail store operating expense was 35% of retail store
revenue for the three months ended March 31, 2000, compared to 32% of retail
store revenue for the same period in 1999. The increase in retail store
operating expense as a percentage of retail store revenue is attributable
principally to a 2% increase in payroll costs. The Company has implemented cost
saving measures during the three month ended March 31, 2000 to bring this
expense in line with March 31, 1999.
General and administrative expenses decreased by $162,000 to $997,000 for
the three months ended March 31, 2000, compared to $1,159,000 for the three
months ended March 31, 1999. This decrease can be primarily attributed to
reduction in legal fees and travel expenses. The three months ended March 31,
1999 also included the one time application fee for listing on NASDAQ National
Market System.
Depreciation and Amortization
Depreciation and amortization increased $180,000 to $497,000 for the three
months ended March 31, 2000, compared to $317,000 for the same period in 1999.
The increase was attributable to the addition of company-owned stores, costs
associated with E-commerce and the amortization of goodwill associated with
various acquisitions (discussed in the financial statements) effected during
1999.
Net Income (loss)
The Company experienced a net loss of $217,000 for the three months ended
March 31, 2000, compared to net income of $69,000 during the same period in
1999. The net loss was due primarily to the increase in cost of sales and
operating expenses of retail stores described above. Net loss was also affected
by the increase in other expenses of $91,000. This was caused by the increase
of interest expense of approximately $95,000.
Liquidity and Capital Resources
At March 31, 2000, the Company had working capital of $9,250,000 and cash
and cash equivalents aggregating $705,000, compared to working capital of
$9,492,000 and cash and cash equivalents of $1,070,000 at December 31, 1999.
Net cash used by operating activities was $537,000 for the three months ended
March 31, 2000, compared to net cash used for operating activities of $48,000
for the three months ended March 31, 1999. The net cash used by operations for
the three months ended March 31, 2000 relates principally to the reduction of
accounts payable of $726,000 offset by a reduction in accounts receivable of
$248,000. The net cash used for operating activities for the three months ended
March 31, 1999 relates to an increase in accounts receivable offset by a similar
increase in accounts payable.
Net cash used for investing activities was $66,000 for the three months
ended March 31, 2000, compared to $3,818,000 for the same period in 1999. The
net cash used for investing activity for three months ended March 31, 2000
relates to the acquisition of 4 stores offset by the sale of 3 stores. The
significant uses of cash for investing activities in 1999 relate to the
acquisition of Music Trader, Inc. in February 1999, development costs relating
to E-Commerce, and continued company store growth.
Net cash provided from financing activities was $238,000 for the three
months ended March 31, 2000, compared to $3,188,000 for the same period in 1999.
The net cash provided from financing in 2000 relates to the net increase in
borrowings under the Company's revolving credit facility with an asset-based
lender. The net cash provided from financing in 1999 relates to debt used to
acquire Music Trader, Inc. and open new company stores, as well as proceeds from
the exercise of stock warrants issued in connection with the Company's initial
public offering.
In October 1998, the Company formed a wholly owned subsidiary, CD Warehouse
Finance Company, to finance the growth of qualified franchisees. As of March
31, 2000, the financing subsidiary had funded $228,000 for the development or
remodel of three new franchised stores. In connection with the Company's new
credit facility obtained in December 1999, an affiliate of the Company's asset-
based lender is now offering financing to the Company's qualified franchisees,
and the Company no longer offers financing services.
11
<PAGE>
The Company is continuing the implementation of its Internet E-commerce
website (http://www.cdwarehouse.com/). The website "went live" in December 1998
----------------------------
and offers both new and used CDs. As previously reported, the Company has
experienced difficulties in the process of expanding its Internet website to
include all used inventory of its company stores. During 1999, the Company's
principal E-Commerce partner and project developer worked with the Company to
resolve these difficulties, and the majority of the company stores have now
uploaded their used inventory on-line. However, since its implementation, the
Company has not marketed or advertised its website, and sales from the website
are minimal. The Company intends to seek strategic alliances and partnerships
that will allow it to effectively market its website and to generate sufficient
revenue to cover the costs associated with operating the site. To date, the
Company has incurred costs in excess of $2,000,000 in development of the
website, and it is expected that additional costs will be incurred in further
project development. A significant portion of the Company's accounts payable
during 1999 related to amounts owed to its principal E-Commerce vendors;
however, as a result of funding obtained by the Company in December 1999 under a
new $15,000,000 revolving credit facility, described below, the Company has paid
or entered into installment payment agreements with its principal E-commerce
vendors with respect to the outstanding balance. The Company expects to have
all such installments paid by July 2000.
In addition to its working capital at March 31, 2000, the Company has a
$15,000,000 revolving credit facility (the "Facility") with an asset-based
lender. The Facility, obtained in December 1999, replaced the Company's
$7,000,0000 credit facility with Bank One Oklahoma, N.A. As of March 31, 2000
the Company had $4,718,000 outstanding under the Facility. The term of the
Facility expires in December 2002, at which time the principal and unpaid
interest are due. Amounts borrowed under the Facility bear a variable rate of
interest equal to an index rate (of thirty-day commercial paper) plus 2.75%.
Borrowings under the Facility are limited to a borrowing base calculation as
determined by stated percentages of compact discs in inventory. Available
borrowings under the Facility as of March 31, 2000 were approximately $566,000.
All assets of the Company are pledged as collateral under the Facility. The
Facility requires the Company to maintain certain financial convenants including
fixed charge coverage, minimum tangible net worth, and limits on capital
expenditures.
As a result of the recent settlement of various legal proceedings, the
Company acquired four franchised stores and is obligated to make payments
totaling approximately $613,000 over the next twelve months. The Company
anticipates that it will be able to make the scheduled payments from working
capital and/or borrowings from the Facility.
In response to the net loss reported for 1999, the Company implemented
certain cost saving measures during January and February of 2000. However,
since these savings were not realized in January 2000, operating results for
this period caused the fixed coverage ratio to fall below the requirement
imposed by the Facility. The asset-based lender waived this covenant until
March 2000, when operating results reflected these cost savings. Proceeds of
the Facility were used to repay existing indebtedness, including $3.5 million to
retire the Company's existing credit facility. It is the Company's opinion that
the current working capital at March 31, 2000, combined with the Facility, will
be sufficient to support ongoing activities of the Company for the foreseeable
future.
Year 2000 Issues
During 1999, the Company took various initiatives intended to ensure that
its computer equipment and software would function properly with respect to
dates in the year 2000 and thereafter. For this purpose, the term "computer
equipment and software" includes accounting, data processing, and telephone/PBX
systems, cash registers, hand-held terminals, scanning equipment, and other
miscellaneous systems, as well as systems that are not commonly thought of as IT
systems, such as alarm systems, fax machines, or other miscellaneous systems.
Year 2000 problems were the result of computer programs being written using two
digits (rather than four) to define the applicable year. Computer equipment and
software and devices with imbedded technology that are time-sensitive could have
recognized a date using "00" as the year 1900 rather than the year 2000. This
could have resulted in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
12
<PAGE>
Utilizing internal resources for Year 2000 identification, assessment,
remediation and testing by December 31, 1999, the Company had completed 100
percent of the initiatives necessary to fully address potential Year 2000 issues
relating to its computer equipment and software. The Company also surveyed its
significant vendors and service providers to determine the extent to which
interfaces with such entities were vulnerable to Year 2000 issues and whether
the products and services purchased from such entities were Year 2000 compliant.
The Company funded its Year 2000 efforts primarily with internal resources
and does not anticipate making any future expenditures in connection therewith.
Although the Company did not separately track its internal costs related to Year
2000 efforts, which included compensation of employees working on Year 2000
projects, it believes that such costs did not exceed $50,000.
The Company believes that the Year 2000 issue did not pose significant
operational problems for the Company. However, if all Year 2000 issues were not
properly identified, or assessment, remediation and testing were not fully
effected, there can be no assurance that the Year 2000 issue will not materially
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, suppliers or franchisees. Additionally,
there can be no assurance that the Year 2000 issues of other entities will not
have a material adverse impact on the Company's systems or results of
operations.
As of May 8, 2000, management is not aware of any significant Year 2000
issues with the Company's computer equipment and software.
13
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------------------------------------------------
27.1* Financial Data Schedule
99.1* Press Release dated May 8, 2000
* Filed electronically herewith
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended March 31,
2000.
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: May 8, 2000 /s/ Jerry W. Grizzle
-----------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: May 8, 2000 /s/ Doyle E. Motley
-----------------------------------
Doyle E. Motley
Senior Vice-President and Chief Financial
Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 704,688
<SECURITIES> 0
<RECEIVABLES> 699,940
<ALLOWANCES> 0
<INVENTORY> 8,696,527
<CURRENT-ASSETS> 11,428,214
<PP&E> 4,759,896
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,540,834
<CURRENT-LIABILITIES> 2,178,437
<BONDS> 0
0
0
<COMMON> 36,603
<OTHER-SE> 21,560,906
<TOTAL-LIABILITY-AND-EQUITY> 28,540,834
<SALES> 7,422,935
<TOTAL-REVENUES> 8,386,057
<CGS> 4,618,710
<TOTAL-COSTS> 8,634,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,565
<INCOME-PRETAX> (346,173)
<INCOME-TAX> (128,800)
<INCOME-CONTINUING> (217,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217,373)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Contact: Doyle E. Motley Jerry W. Grizzle
Senior Vice President Chairman & CEO
Chief Financial Officer CD Warehouse, Inc.
CD Warehouse, Inc., 405-949-2422
405-949-2422
CD WAREHOUSE, INC. POST 30% INCREASE IN TOTAL REVENUES
INCURS NET LOSS FOR THE FIRST QUARTER
OKLAHOMA CITY, OK May 8, 2000 - CD Warehouse, Inc. (NASDAQ: CDWI) announced
that the Company's primary financial indicators, including system-wide sales,
same store sales, store count, total revenue and revenue from company-owned
stores, increased for the first quarter ended March 31, 2000 when compared with
the first quarter 1999. However, despite the positive trends reflected in the
line items mentioned above, the Company reported a first quarter loss of
$217,000.
"We have made tremendous strides in our effort to return CD Warehouse to
profitability," stated Jerry W. Grizzle, the Company's Chairman and CEO. "As I
discussed during the release of our fourth quarter and year-end results for
1999, we have focused on two primary objectives: profitability of the company-
owned stores and a reduction of general and administrative expenses. I am
pleased to report that we have made tremendous progress in attaining each of
these goals during this first quarter. Grizzle continued, "All of our
improvements have had a direct impact on our EBITDA. For the fourth quarter of
1999, EBITDA was a negative $313,000. For the first quarter of 2000, EBITDA was
a positive $248,000. As a percent of sales, corporate G&A was 16.88% during the
fourth quarter of 1999. I am very pleased to report that we ended the first
quarter of 2000 with G&A at 11.88% of sales."
Grizzle will host a teleconference at 9 a.m. EDT, 8 a.m. CDT on Wednesday,
May 10, to further explain first quarter results. Interested parties may call
the Teleconference Center at 1-800-937-6563 to join the conference call.
Instructions for listening to a replay of the conference call is posted on the
Company's website, ttp://www.cdwi.com.
------------------
System-wide sales for the first quarter of 2000, which include sales from
the franchised stores, were $26,503,000 compared to $24,617,000 for the first
quarter of 1999, a 7.66% increase. The increase in the company's system-wide
sales is attributable to the development of new stores and the same store sales
increases for those stores opened during the same period in 1999.
Same store sales are reported at $19,369,000, an increase of 3.74% compared
to the first quarter of 1999. The increase marks the thirteenth consecutive
quarter of same store sales increases.
Total revenue for the first quarter was $8,386,000, an increase of 29.74%
above the $6,464,000 reported for the same period in 1999.
<PAGE>
Total retail sales for the company store group increased to $7,190,000, or
35.12%, compared to the $5,321,000 reported for the same period in 1999. During
the first quarter of 1999, the Company acquired the Music Trader chain based in
San Diego, California. This acquisition, along with the acquisition of 4
franchised stores during the first quarter, brought the company store total to
71 at March 31, 1999. As of March 31, 2000 the Company operated 74 retail
stores.
The Company reported a net loss for the first quarter ended March 31, 2000
of $217,000, compared to a profit of $69,000 for the same period in 1999.
Grizzle continued, "We are focused on day to day improvement. We have
conducted an in-depth analysis of our results from 1999 and created an action
plan on how to impact those factors that required improvement. Company stores
have been focused on improving margins and reducing operating expenses. At the
corporate level we are focused on reducing General and Administrative expenses."
"We ended the fourth quarter of 1999 with a 63.12% cost of goods in company
stores. We ended the first quarter of 2000 by reducing that to 61.8%. It is
important to note the month-to-month improvement that was made during the 1st
quarter. In January cost of sales were at 63.57%, by February we had lowered
the number to 60.97% and ended March at 60.91%."
Similarly, the Company realized improvement in operating expenses for the
company-owned stores. "We ended the fourth quarter of 1999 at 35.27%. For the
first quarter of 2000, we lowered the percentage to 35.09%," continued Grizzle.
"Again, on a month-to-month basis, improvements were realized. In January,
operating expenses totaled 35.93%. In February we improved to 35.1% and
achieved 34.24% in March."
"In January and February, management met with every company store district
manager and implemented operating standards for company store performance," said
Grizzle. "We completed the meetings in late February. The numbers above
reflect that our policies are working," Grizzle said.
"We continued to be encouraged by the progress of our Internet site,
http://cdwarehouse.com. Despite the challenges we faced with the website in
- ----------------------
1999, we were able to generate approximately $55,000 in Internet sales, the
majority of those in the fourth quarter. During the first quarter of 2000, we
have generated over $40,000 in sales and we have had 577,375 visits to out
Internet site with 103,877 of those being unique or first time visits. We are
experiencing a 2% conversion of unique visits to orders," said Grizzle.
"The Company has always approached the Internet as a logical extension of
our core retail operations. Recent reports by Forrester Research, Inc. and
Jupiter Communications, suggesting that brick-and-mortar stores offer an
advantage over Web-only merchants, confirm our belief that our business strategy
will prove to be the correct way to combine a successful retail operation with
the opportunity that exists on the Web," Grizzle stated.
<PAGE>
Grizzle concluded, "With our new relationship with Half.com, we expect
Internet sales to increase significantly. We are currently beta-testing the
site link and expect to go live with our over 1.0 million piece inventory during
May."
The Company franchises and operates retail music stores in 38 states, the
District of Columbia, England, France, Guatemala, Canada and Venezuela under the
name "CD Warehouse, Disc Go Round, CD Exchange and Music Trader." CD Warehouse
stores buy, sell and trade pre-owned CDs, DVDs and Games with their customers.
CD Warehouse stores sell a full complement of new release CDs.
Statements made in this press release, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
on management's belief as well as assumptions made by, and information currently
available to, management pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors, including those contained in the
Company's periodic reports filed with the Securities and Exchange Commission.
<PAGE>
First Quarter Ended
March 31, 2000
2000 1999 $ CHANGE % CHANGE
---- ---- -------- --------
SYSTEMWIDE SALES - CDW $22,497,181 $16,890,120 $ 5,607,061 33.20%
SYSTEMWIDE SALES - DGR $ 4,005,536 $ 7,727,158 ($3,721,622) -48.16%
----------- ----------- ------------
TOTAL SYSTEMWIDE SALES $26,502,717 $24,617,278 $ 1,885,439 7.66%
SAME STORE SALES - CDW $16,034,521 $15,482,128 $ 552,393 3.57%
SAME STORE SALES - DGR $ 3,334,730 $ 3,189,209 $ 145,521 4.56%
----------- ----------- ------------
TOTAL SAME STORE SALES $19,369,251 $18,671,337 $ 697,914 3.74%
STORE COUNT - CDW 265 211 54 25.59%
STORE COUNT - DGR 69 120 (51) -42.50%
----------- ----------- ------------
TOTAL STORE COUNT 334 331 3 0.91%
TOTAL CORPORATE REVENUE $ 8,386,057 $ 6,463,903 $ 1,922,154 29.74%
COMPANY RETAIL STORE SALES $ 7,189,928 $ 5,321,108 $ 1,868,820 35.12%
ROYALTY REVENUE $ 925,622 $ 925,759 ($137) -0.01%
NET INCOME (LOSS) ($217,373) $ 68,872 ($286,245) -415.62%
NET INCOME (LOSS) PER SHARE ($0.06) $ 0.02 ($0.08) -400.00%
BASIC
NET INCOME (LOSS) PER SHARE ($0.06) $ 0.02 ($0.08) -400.00%
DILUTED
SHARES USED IN COMPUTATION 3,660,295 3,587,890 72,405 2.02%
BASIC
SHARES USED IN COMPUTATION 3,660,295 3,836,948 (176,653) -4.60%
DILUTED
SOURCE: CD Warehouse, Inc.
