<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, 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
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(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 11, 2000 was 3,660,295.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000 (unaudited)............................................... 3
Condensed Consolidated Statements of Operations - Three months
and six months ended June 30, 1999 and 2000 (unaudited)................. 4
Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 2000 (unaudited)...................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................... 13
Item 6. Exhibits and Reports on Form 8-K........................................ 13
Signatures........................................................................ 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 2000 is unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
December 31, 1999 June 30, 2000
----------------- ----------------
Current assets:
Cash and cash equivalents $ 1,069,560 $ 803,194
Accounts receivable, net 948,252 664,573
Notes receivable 87,159 54,695
Merchandise inventory 8,908,331 8,636,124
Prepaid expenses and other 237,915 302,746
Income taxes refundable 780,229 304,308
----------- -----------
Total current assets 12,031,446 10,765,640
Furniture, fixtures and equipment, net 4,911,287 4,578,856
Notes receivable, due after one year 51,112 38,388
Intangible and other assets, net 11,883,905 12,026,926
----------- -----------
$28,877,750 $27,409,810
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,615,705 $ 548,238
Accrued liabilities 787,186 429,428
Advances and deposits 137,000 129,773
Current portion of long-term debt -- 386,155
----------- -----------
Total current liabilities 2,539,891 1,493,594
Long-term debt 4,475,977 4,654,368
Deferred income taxes 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 36,603 36,603
Additional paid-in-capital 21,758,158 21,758,158
Retained earnings (accumulated deficit) 20,121 (579,913)
----------- -----------
Total stockholders' equity 21,814,882 21,214,848
----------- -----------
$28,877,750 $27,409,810
=========== ===========
</TABLE>
(See accompanying notes)
3
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $ 6,613,670 $ 6,802,988 $11,934,778 $13,992,916
Wholesale merchandise sales 83,667 202,989 223,983 431,496
Software income, net 20,948 7,500 47,668 12,000
Franchise operations:
Royalty income 936,325 971,621 1,862,084 1,897,243
Franchise and development fees 30,000 38,000 53,000 75,500
----------- ----------- ----------- -----------
Total revenues 7,684,610 8,023,098 14,121,513 16,409,155
Operating costs and expenses:
Cost of sales - retail store sales 3,840,942 4,176,650 6,891,450 8,620,163
Cost of sales - wholesale merchandise sales 34,500 159,069 124,013 334,266
Retail store operating expenses 2,561,780 2,389,829 4,266,533 4,912,971
General and administrative 1,113,683 1,049,611 2,272,503 2,046,202
Depreciation and amortization 357,187 517,161 674,255 1,013,710
----------- ----------- ----------- -----------
Total operating costs and expenses 7,908,092 8,292,320 14,228,754 16,927,312
----------- ----------- ----------- -----------
Operating loss (223,482) (269,222) (107,241) (518,157)
Other expense, net (8,906) (113,439) (14,675) (210,677)
----------- ----------- ---------- -----------
Loss before income taxes (232,388) (382,661) (121,916) (728,834)
Credit for income taxes (88,300) -- (46,700) (128,800)
----------- ----------- ---------- -----------
Net loss $ (144,088) $ (382,661) $ (75,216) $ (600,034)
=========== ----------- ---------- -----------
Net loss per share-basic and diluted $ (.04) $ (.10) $ (.02) $ (.16)
=========== =========== ========== ===========
Weighted average diluted common shares 3,660,295 3,660,295 3,624,292 3,660,295
=========== =========== ========== ===========
</TABLE>
(See accompanying notes)
4
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------------
June 30, 1999 June 30, 2000
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITES:
<S> <C> <C>
Net loss $ (75,216) $ (600,034)
Adjustments to reconcile net loss to net cash
Used for operating activities:
Depreciation and amortization 674,255 1,013,710
Gain on disposal of assets -- (5,221)
Changes in operating assets and liabilities:
Accounts receivable, net (43,290) 282,984
Inventories (1,152,225) 111,617
Prepaid expenses and other (117,259) (127,790)
Refundable income taxes (229,440) 475,921
Other assets (38,610) 25,942
Accounts payable 1,685,577 (1,066,307)
Accrued liabilities 159,181 (257,978)
Advances and deposits 52,500 (7,227)
Income taxes payable (398,385) --
----------- -----------
Total adjustments 592,034 445,651
----------- -----------
Net cash provided (used) by operating activities 516,818 (154,383)
CASH FLOW FROM INVESTING ACTIVITIES:
Notes receivable:
Advances (10,000) --
Collections 39,731 45,188
Purchase of furniture, fixtures and equipment (2,516,468) (209,308)
Proceeds from disposals of assets -- 500,505
Acquisition of businesses (3,300,541) (396,164)
----------- -----------
Net cash used for investing activities (5,787,278) (59,779)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net:
Proceeds from exercise of stock options 187,500 --
Notes payable:
Advances 3,500,000 10,064,155
Repayments (246,118) (10,116,359)
----------- ------------
Net cash provided (used) by financing activities 3,441,382 (52,204)
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,829,078) (266,366)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,442,454 1,069,560
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,613,376 $ 803,194
=========== ============
</TABLE>
5
<PAGE>
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Supplemental Cash Flow Information:
For the six months ending June 30, 1999 the Company had the following
noncash investing and financing activities:
In February, 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 non-cash 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>
In March, 2000 the Company acquired the assets of four retail stores for
cash of $396,164 and notes payable of $616,750. The non-cash portion of this
transaction is as follows:
<TABLE>
<S> <C>
Costs in excess of net assets acquired, net $ 776,233
Inventory 127,100
Furniture, fixtures and equipment 95,600
Other assets 13,981
--------------
1,012,914
Less cash paid (396,164)
--------------
$ 616,750
==============
</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
June 30, 2000 and for the six months ended June 30, 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 six months ended June 30, 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 for 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 these acquisitions prior to the closing date. The cash portion of
the acquisition was financed through proceeds from operating cash flows.
Following are the Company's unaudited pro forma results for the six months ended
June 30, 1999 assuming the acquisition occurred on January 1, 1999 (in
thousands, except for per share data):
<TABLE>
<CAPTION>
1999
-------------------
<S> <C>
Total revenues $15,174,463
Net income $ 1,922
Net income per common share:
Basic $ .00
Diluted $ .00
Weighted average common shares:
Basic 3,649,107
Diluted 3,861,613
</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 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.
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 relates 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 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 operations.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 2000 1999 2000
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Retail store sales 86.0% 84.8% 84.5% 85.3%
Wholesale merchandise sales 1.1 2.5 1.6 2.6
Software income, net .3 .1 .3 .1
Royalty income 12.2 12.1 13.2 11.6
Franchise and development fees .4 .5 .4 .4
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Operating costs and expenses:
Cost of sales-retail stores sales (1) 58.1% 61.4% 57.7% 61.6%
Cost of sales-wholesale merchandise sales (2) 41.2 78.4 55.4 77.5
Retail store operating expenses (1) 38.7 35.1 35.7 35.1
General and administrative 14.5 13.1 16.1 12.5
Depreciation and amortization 4.6 6.4 4.8 6.2
Operating loss (2.9) (3.4) (.8) (3.2)
Other income (expense), net (.1) (1.4) (.1) (1.3)
Net loss (1.9)% (4.8)% (.5)% (3.7)%
</TABLE>
(1) As percentage of retail store sales.
(2) As percentage of wholesale merchandise sales.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales Data:
System wide sales:
CD Warehouse $18,789,515 $23,011,882 $35,679,635 $45,509,063
Disc Go Round 7,672,969 2,821,193 15,400,127 6,826,729
----------- ----------- ----------- -----------
$26,462,484 $25,833,075 $51,079,762 52,335,792
=========== =========== =========== ===========
Percentage increase (decrease):
CD Warehouse 53% 22% 48% 28%
Disc Go Round (1) (63)% (1) (56)%
Average monthly sales per store:
CD Warehouse $ 30,598 $ 29,130 $ 29,933 $ 29,494
Disc Go Round $ 22,112 $ 21,832 $ 21,735 $ 21,951
Change in comparable retail store sales (2)
CD Warehouse 17% 1% 16% 3%
Disc Go Round (1) (4)% (1) -%
</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 and six months
ended June 30, 2000.
(2) Represents percentage increase only for stores open in both periods
reported.
The following table sets forth the number of stores opened and closed
throughout the CD Warehouse System for the six months ended June 30, 2000.
<TABLE>
<CAPTION>
December 31, Open Close Transfer June 30,
1999 2000
---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Franchise Stores
Domestic - CD Warehouse 174 13 (4) 2 185
Domestic - Disc Go Round 73 - (20) (4) 49
--- -- --- -- ---
247 13 (24) (2) 234
International - CD Warehouse 11 - (1) 3 13
International - Disc Go Round 6 - - (3) 3
--- -- --- -- ---
17 - (1) - 16
Company-owned Stores
Domestic - CD Warehouse 75 3 (6) 2 74
Domestic - Disc Go Round -- - - - -
--- --- --- -- ---
75 3 (6) 2 74
--- -- --- -- ---
339 16 (31) - 324
Total === == === == ===
</TABLE>
9
<PAGE>
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
(all numbers rounded to the nearest thousand)
Revenues
Retail store sales increased $189,000 to $6,803,000 for the three months
ended June 30, 2000, compared to $6,614,000 for the three months ended June 30,
1999. The increase in retail store sales was the result of having 74 company
stores in operation during the three months ended June 30, 2000, compared to 71
company stores during the comparable period in 1999.
Wholesale merchandise sales increased 141% to $203,000 for the three months
ended June 30, 2000, compared to $84,000 for the same period in 1999. The
increase was due to the addition of 10 new CD Warehouse franchised stores during
the three months ended June 30, 2000, compared to only 7 during the same period
in 1999.
Royalty income remained fairly constant at $972,000 for the three months
ended June 30, 2000, compared to $936,000 for the same period in 1999. Although
the number of franchised stores operating decreased by 12, the increase in store
sales offset the decrease in store count.
Costs and Expenses
Cost of sales for retail store sales increased $336,000 for the three
months ended June 30, 2000, compared to the same period in 1999. A portion of
this 9% increase was offset by the increase in retail store revenue discussed
above. However, cost of sales as a percentage of sales was 61% of sales for the
three months ended June 30, 2000, compared to 58% for the three months ended
June 30, 1999. The increase in 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
carries a higher cost than used product.
Cost of sales for wholesale merchandise increased $124,000 to $159,000 for
the three months ended June 30, 2000, compared to $35,000 in 1999. The
increase is consistent with the increase in wholesale merchandise sales. Cost
of sales was 78% of sales for the three months ended June 30, 2000, compared to
41% for the comparable period in 1999. The increased cost of sales relates to
the Company's reduction of its markup on supplies and accessories offered to the
system and reduction in equipment sales.
Retail store operating expenses decreased $172,000 to $2,390,000 for the
three months ended June 30, 2000, compared to $2,562,000 for the three months
ended June 30, 1999. Retail store operating expense was 35% of retail store
revenue for the three months ended June 30, 2000, compared to 39% of retail
store revenue for the same period in 1999. The 7% decrease was due to the cost
saving measures implemented during the 1st quarter of 2000, primarily in payroll
and advertising.
General and administrative expenses decreased by $64,000 to $1,050,000 for
the three months ended June 30, 2000, compared to $1,114,000 for the three
months ended June 30, 1999. This decrease can be primarily attributed to
reduction in legal fees and travel expenses.
Depreciation and Amortization
Depreciation and amortization increased $160,000 to $517,000 for the three
months ended June 30, 2000, compared to $357,000 for the same period in 1999.
The increase was attributable to the addition of company-owned stores, costs
associated with the Company's E-commerce operations and the amortization of
goodwill associated with various acquisitions effected during 1999 and 2000.
Net Loss
The Company experienced a net loss of $383,000 for the three months ended
June 30, 2000, compared to a net loss of $144,000 during the same period in
1999. The increase in net loss was due primarily to the increase in cost of
sales offset by a reduction in operating expenses of retail stores described
above. Net loss was also affected by the increase in other expenses of
$105,000. This was caused by the increase of interest expense of approximately
$70,000.
10
<PAGE>
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
(all numbers rounded to the nearest thousand)
Revenues
Retail store sales increased $2,058,000 to $13,993,000 for the six months
ended June 30, 2000, compared to $11,935,000 for the six months ended June 30,
1999. The 17% increase in retail store sales was the result of having the 16
Music Trader stores in operation for the six months ended June 30, 2000 compared
to only 4 months in 1999 (Music Trader stores were acquired in February, 1999).
Wholesale merchandise sales increased to $431,000 for the six months ended
June 30, 2000, compared to $224,000 for the same period in 1999. The increase
was due to the addition of 54 stores operating as CD Warehouse during the six
months ended June 30, 2000 compared to the same period in 1999.
Royalty income remained fairly constant at $1,897,000 for the six months
ended June 30, 2000, compared to $1,862,000 for the same period in 1999.
Although the number of stores operating as CD Warehouse increased by 54, the
Company had a net decrease of 9 stores, primarily due to conversions and
closures of stores operating as Disc Go Round.
Costs and Expenses
Cost of sales for retail store sales increased $1,729,000 for the six
months ended June 30, 2000, compared to the same period in 1999. A portion of
this 25% increase was offset by the increase in retail store revenue discussed
above. However, cost of sales as a percentage of sales was 62% of sales for the
six months ended June 30, 2000, compared to 58% for the six months ended June
30, 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 carries a
higher cost than used product.
Cost of sales for wholesale merchandise increased $210,000 to $334,000 for
the six months ended June 30, 2000, compared to $124,000 in 1999. The increase
is consistent with the increase in wholesale merchandise sales. Cost of sales
was 78% of sales for the six months ended June 30, 2000, compared to 55% for the
comparable period in 1999. The increased cost of sales relates to the Company's
reduction of its markup on supplies and accessories offered to the system and a
reduction in equipment sales.
Retail store operating expenses increased $646,000 to $4,913,000 for the
six months ended June 30, 2000, compared to $4,267,000 for the six months ended
June 30, 1999. The 15% increase was due to the increase of company-owned stores
discussed above. Retail store operating expense was 35% of retail store revenue
for the six months ended June 30, 2000, compared to 36% of retail store revenue
for the same period in 1999. The decrease in retail store operating expense as
a percentage of retail store revenue is attributable to a cost saving measures
implemented during the six months ended June 30, 2000.
General and administrative expenses decreased by $226,000 to $2,046,000 for
the six months ended June 30, 2000, compared to $2,273,000 for the six months
ended June 30, 1999. This decrease can be primarily attributed to reduction in
legal fees and travel expenses. The six months ended June 30, 1999 also
included the one-time application fee for listing on Nasdaq National Market
System.
Depreciation and Amortization
Depreciation and amortization increased $340,00 to $1,014,000 for the six
months ended June 30, 2000, compared to $674,000 for the same period in 1999.
The increase was attributable to the addition of company-owned stores, costs
associated with the Company's E-commerce operations and the amortization of
goodwill associated with various acquisitions effected during 1999 and 2000.
Net Loss
The Company experienced a net loss of $600,000 for the six months ended
June 30, 2000, compared to net loss of $75,000 during the same period in 1999.
The increase in net loss was due primarily to the increase in cost of sales of
retail stores described above. Net loss was also affected by the increase in
other expenses of $196,000. This was caused by the increase in interest expense
of approximately $166,000.
11
<PAGE>
Liquidity and Capital Resources
At June 30, 2000, the Company had working capital of $9,272,000 and cash
and cash equivalents aggregating $803,000, 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 $154,000 for the six months ended June
30, 2000, compared to net cash provided for operating activities of $517,000 for
the six months ended June 30, 1999. The net cash used by operations for the six
months ended June 30, 2000 related principally to the reduction of accounts
payable of $1,066,000 offset by a reduction in refundable income taxes of
$476,000 and an increase in accounts receivables of $283,000 and inventory of
$112,000. The net cash provided by operations for the six months ended June 30,
1999 included an increase in accounts payable of $1,686,000, consisting
primarily of amounts due to E-commerce related vendors. The increase in cash
provided by operating activities during the six months ended June 30, 1999 was
reduced in part by increased inventory purchases during this period, resulting
from the increase in company stores, as well as the continued planned growth of
per-store inventory quantities.
Net cash used for investing activities was $60,000 for the six months ended
June 30, 2000, compared to $5,787,000 for the same period in 1999. The net cash
used for investing activity for the six months ended June 30, 2000 related to
the acquisition of 4 stores offset by the sale of 3 stores and the purchase of
furniture, fixtures and equipment of $209,000. The significant uses of cash for
investing activities in 1999 related to the acquisition of Music Trader, Inc. in
February 1999, development costs relating to E-commerce, and continued company
store growth.
Net cash used from financing activities was $52,000 for the six months
ended June 30, 2000, compared to net cash provided from financing activities of
$3,441,000 for the same period in 1999. The net cash used by financing in 2000
related to the net increase in borrowings under the Company's revolving credit
facility. The net cash provided from financing in 1999 related 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 June 30,
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.
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 has entered into a strategic alliance with Half.com,
and intends to continue to seek other 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
its principal E-commerce vendors.
In addition to its working capital at June 30, 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 June 30, 2000,
the Company had $4,654,000 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 June 30, 2000 were approximately $600,000.
All assets of the Company are pledged as collateral under the Facility. The
Facility requires the Company to maintain certain financial covenants including
fixed charge coverage, minimum tangible net worth, and limits on capital
expenditures.
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As a result of settling 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. As of June 30, 2000, the balance of these obligations was
$386,000.
In response to the net loss reported for 1999, the Company implemented
certain cost saving measures during the first quarter of 2000. However, since
these savings were not fully realized until the second quarter, operating
results for this period caused the fixed coverage ratio to fall below the
requirement imposed by the Facility. The lender waived this covenant until the
third quarter of 2000, when the operating results should reflect 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 June 30, 2000,
combined with the Facility, will be sufficient to support ongoing activities of
the Company for the foreseeable future.
Part II - Other Information
Item 4. Submission of Matters to Vote of Security Holders
The Company held its annual stockholders' meeting on May 12, 2000. Two
proposals were voted on by the Company's stockholders: 1) election of director,
and 2) 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) One director was elected to serve a three-year term.
Jerry W. Grizzle was elected as a Class 1 director for a term expiring
at the 2003 annual meeting, with 2,353,875 shares voted in favor and 0
voted against and 808,566 abstained. Ronald V. Perry, who is a Class 2
director with a term expiring at the 2001 annual meeting, and Robert
O. McDonald and Christopher M. Salyer who are Class 3 directors with
terms expiring at the 2002 annual meeting, were not up for reelection
and continued on as directors.
(b) Ratification of the appointment of Ernst & Young LLP as independent
auditors:
In favor: 3,152,950
Against: 4,291
Abstain: 5,200
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------------- -------------------------------------------------
27.1* Financial Data Schedule
* Filed electronically herewith
(b) Reports on Form 8-K
On June 28, 2000, the Company filed a Form 8-K reporting the First
Amendment to the Asset Purchase Agreement dated May 31, 2000, between
Compact Discs Management, Inc., a wholly owned subsidiary of Registrant,
Music Trader, Inc., Jeffrey D. Clark and Debbi McGill-Clark. On February
24, 1999, the Registrant had filed a Form 8-K reporting the consummation of
the Asset Purchase Agreement between the parties.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CD WAREHOUSE, INC.,
a Delaware corporation
Date: August 14, 2000 /s/ JERRY W. GRIZZLE
----------------------------------------------
Jerry W. Grizzle
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: August 14, 2000 /s/ DOYLE E. MOTLEY
----------------------------------------------
Doyle E. Motley
Senior Vice-President and Chief Financial
Officer
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INDEX TO EXHIBITS
Exhibit
Number Name of Exhibit Page
--------- ------------------- ------
*27.1 Financial Data Schedule *
*Filed electronically herewith
15
