<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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 November 13, 2000 was 3,660,295.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 2000 (unaudited)...................................................... 3
Condensed Consolidated Statements of Operations - Three months and nine months
ended September 30, 1999 and 2000 (unaudited)....................................... 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 2000 (unaudited)............................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited) ................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation........................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 15
Signatures................................................................................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 2000 is unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, 1999 September 30, 2000
------------------ --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,069,560 $ 894,710
Accounts receivable, net 948,252 603,470
Notes receivable 87,159 37,714
Merchandise inventory 8,908,331 8,166,025
Prepaid expenses and other 237,915 266,332
Income taxes refundable 780,229 --
----------- -----------
Total current assets 12,031,446 9,968,251
Furniture, fixtures and equipment, net 4,911,287 2,338,682
Notes receivable, due after one year 51,112 31,785
Intangible and other assets, net 11,883,905 8,131,435
----------- -----------
$28,877,750 $20,470,153
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,615,705 $ 444,427
Accrued liabilities 787,186 542,033
Advances and deposits 137,000 179,500
Current portion of long-term debt -- 179,803
----------- -----------
Total current liabilities 2,539,891 1,345,763
Long-term debt 4,475,977 4,774,637
Deferred income taxes 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 (7,445,008)
----------- -----------
Total stockholders' equity 21,814,882 14,349,753
----------- -----------
$28,877,750 $20,470,153
=========== ===========
</TABLE>
(See accompanying notes)
3
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
-------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
--------------- --------------- ------------------------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $6,978,882 $ 6,264,135 $18,913,660 $20,257,051
Wholesale merchandise sales 141,454 233,251 365,437 664,747
Software income, net 14,271 16,500 61,940 28,500
Franchise operations:
Royalty income 948,634 884,517 2,810,718 2,781,760
Franchise and development fees 51,000 72,500 104,000 148,000
---------- ----------- ----------- -----------
Total revenues 8,134,241 7,470,903 22,255,755 23,880,058
Operating costs and expenses:
Cost of sales - retail store sales 4,209,442 3,754,805 11,100,892 12,374,968
Cost of sales - wholesale merchandise sales 120,981 292,927 244,994 627,193
Retail store operating expenses 2,921,459 2,342,296 7,187,992 7,255,267
General and administrative 1,114,422 1,155,121 3,386,925 3,201,323
Depreciation and amortization 387,835 496,164 1,062,090 1,509,874
Provision for impairment -- 6,033,885 -- 6,033,885
---------- ----------- ----------- -----------
Total operating costs and expenses 8,754,139 14,075,198 22,982,893 31,002,510
---------- ----------- ----------- -----------
Operating loss (619,898) (6,604,295) (727,138) (7,122,452)
Interest and other expense, net (68,332) (132,000) (83,008) (342,677)
---------- ----------- ----------- -----------
Loss before income taxes (688,230) (6,736,295) (810,146) (7,465,129)
Provision (credit) for income taxes (257,700) 128,800 (304,400) --
---------- ----------- ----------- -----------
Net loss $ (430,530) $(6,865,095) $ (505,746) $(7,465,129)
========== =========== =========== ===========
Net loss per share-basic and diluted $ (.12) $ (1.88) $ (.14) $ (2.04)
========== =========== =========== ============
Weighted average diluted common shares 3,660,295 3,660,295 3,636,425 3,660,295
========== =========== =========== ============
</TABLE>
(See accompanying notes)
4
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------------
September 30, 1999 September 30, 2000
-------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (505,746) $ (7,465,129)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 1,062,090 1,509,874
Loss (gain) on disposal of assets 27,529 (4,421)
Provision for impairment -- 6,033,885
Deferred income taxes -- (47,000)
Changes in operating assets and liabilities:
Accounts receivable, net 163,278 344,087
Inventories (1,743,674) 278,574
Prepaid expenses and other (51,166) (197,179)
Refundable income taxes (487,140) 653,552
Other assets (91,057) 113,878
Accounts payable 1,666,357 (1,095,118)
Accrued liabilities 165,334 (145,373)
Advances and deposits 45,000 42,500
Income taxes payable (398,385) --
------------- -------------
Total adjustments 358,166 7,487,259
------------- -------------
Net cash provided (used) by operating activities (147,580) 22,130
CASH FLOW FROM INVESTING ACTIVITIES:
Notes receivable:
Advances (10,000) --
Collections 60,784 68,772
Purchase of furniture, fixtures and equipment (3,014,053) (285,806)
Proceeds from disposals of assets -- 554,505
Acquisition of businesses (3,900,541) (396,164)
------------- -------------
Net cash used for investing activities (6,863,810) (58,693)
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 14,502,324
Repayments (410,608) (14,640,611)
------------- -------------
Net cash provided (used) by financing activities 3,276,892 (138,287)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,734,498) (174,850)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,442,454 1,069,560
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 707,956 $ 894,710
============= =============
</TABLE>
5
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CD WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Supplemental Cash Flow Information:
For the nine months ending September 30, 1999 and 2000, 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:
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
=============
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:
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
=============
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
September 30, 2000 and for the nine months ended September 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 nine months ended September 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 nine months ended
September 30, 1999 assuming the acquisition occurred on January 1, 1999 (in
thousands, except for per share data):
1999
-------------
Total revenues $ 23,308,705
Net loss $ (428,608)
Net loss per share-basic and diluted $ (.12)
Weighted average diluted common shares 3,652,877
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. IMPAIRMENT OF CERTAIN ASSETS
During the third quarter of 2000, the Company recognized a provision for
impairment of certain assets of $6,033,885.
The Company identified several under-performing Company retail stores whose
operating results indicated that certain assets of these Company retail stores
might be impaired. As a result of analysis performed, the Company determined
that thirty-five Company retail stores were partially impaired and, as a result,
recorded a $1,760,748 impairment loss related to goodwill and leasehold
improvements. Four of these thirty-five Company retail stores have been closed
as of September 30, 2000. Management's current estimate of undiscounted future
cash flows
7
<PAGE>
indicates that the remaining carrying amounts as of September 30, 2000 are
expected to be recovered. However, future changes in the estimate of
undiscounted cash flows may result in further impairment and the need to write
down one or more of the identified assets to fair value. The Company will
continue monitoring the operating results of Company retail stores during the
fourth quarter of 2000 and may undertake plans to close or sell any under-
performing stores in 2001.
The Company ceased operating its E-commerce site, cdwarehouse.com, which
sold new and used CDs on the web. Based on management's analysis of the current
market, it was very unlikely that sale volume would cover current operating
costs. As a result of discontinuing E-commerce operations, the Company recorded
an impairment of all assets associated with E-commerce of $1,697,758 in the
third quarter of 2000.
In June 1998, the Company acquired the franchise rights for 134 franchisees
of Disc Go Round, a competing retailer of new and pre-owned compact discs. The
acquisition was accounted for under the purchase method of accounting and
resulted in an allocation of excess of purchase price over net assets acquired
of $6,830,992. The Company analyzed its original evaluation of this acquisition
and, based on the subsequent decline in number of stores operating as Disc Go
Round, either by conversion to CD Warehouse or closures, determined an
impairment of approximately 45% of the remaining intangibles related to the
acquisition, or $2,575,379, as of September 30, 2000.
NOTE 4. 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.
8
<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 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 operations.
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
----------------------- ---------------------
1999 2000 1999 2000
------- ----- ------- -----
<S> <C> <C> <C> <C>
Revenues:
Retail store sales 85.8% 83.8% 85.0% 84.8%
Wholesale merchandise sales 1.7 3.1 1.6 2.8
Software income, net .2 .2 .3 .1
Royalty income 11.7 11.9 12.6 11.7
Franchise and development fees .6 1.0 .5 .6
------- ------ ------ ------
100.0% 100.0% 100.0% 100.0%
======= ====== ====== ======
Operating costs and expenses:
Cost of sales-retail stores sales (1) 60.3% 59.9% 58.7% 61.1%
Cost of sales-wholesale merchandise sales (2) 85.5 125.6 67.0 94.4
Retail store operating expenses (1) 41.9 37.4 38.0 35.8
General and administrative 13.7 15.5 15.2 13.4
Depreciation and amortization 4.7 6.6 4.8 6.3
Provision for impairment -- 80.8 -- 25.3
Operating loss (7.6) (88.4) (3.3) (29.8)
Interest and other expense, net (.8) (1.8) (.4) (1.4)
Net loss (5.3)% (91.9)% (2.3)% (31.3)%
</TABLE>
(1) As percentage of retail store sales.
(2) As percentage of wholesale merchandise sales.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
1999 2000 1999 2000
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Sales Data:
System wide sales:
CD Warehouse $20,567,700 $21,995,303 $56,247,335 $67,758,682
Disc Go Round 6,299,566 2,501,812 21,624,817 10,077,209
----------- ----------- ----------- -----------
$26,867,266 $24,497,115 $77,872,152 $77,835,891
=========== =========== =========== ===========
Percentage increase (decrease):
CD Warehouse 50% 7% 48% 20%
Disc Go Round (23)% (60)% * (53)%
Average monthly sales per store:
CD Warehouse $ 30,518 $ 27,951 $ 30,111 $ 28,994
=========== =========== ============ ===========
Disc Go Round $ 23,370 $ 23,063 $ 22,271 $ 22,245
=========== =========== ============ ===========
Change in comparable retail store sales (1)
CD Warehouse 8% (6)% 13% -%
Disc Go Round 6% (5)% * (1)%
</TABLE>
* Since Disc Go Round Stores were acquired in June 1998, percentage increase
for Disc Go Round stores, showing changes from the comparable period in the
prior year, cannot be computed for the nine months ended September 30,
1999.
(1) 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 nine months ended September 30, 2000.
<TABLE>
<CAPTION>
December 31, September 30,
1999 Open Close Transfer 2000
--------------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Franchise Stores
Domestic - CD Warehouse 174 19 (12) 4 185
Domestic - Disc Go Round 73 - (20) (6) 47
----- ---- ----- ---- ----
247 19 (32) (2) 232
International - CD Warehouse 11 -- (1) 3 13
International - Disc Go Round 6 - (1) (3) 2
----- ---- ----- ---- ----
17 -- (2) -- 15
Company-owned Stores
Domestic - CD Warehouse 75 4 (8) 2 73
Domestic - Disc Go Round -- -- -- -- --
----- ---- ----- ---- ----
75 4 (8) 2 73
----- ---- ----- ---- ----
Total 339 23 (42) -- 320
===== ==== ===== ==== ====
</TABLE>
10
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Three Months Ended September 30, 2000 compared to Three Months Ended September
30, 1999 (all numbers rounded to the nearest thousand)
Revenues
Retail store sales decreased $715,000 to $6,264,000 for the three months
ended September 30, 2000, compared to $6,979,000 for the three months ended
September 30, 1999. The decrease in retail store sales was the result of having
73 company stores in operation during the three months ended September 30, 2000,
compared to 76 company stores during the comparable period in 1999. Same store
sales for company retail stores also declined 8% for the three months ended
September 30, 2000 compared to the comparable period in 1999.
Wholesale merchandise sales increased 65% to $233,000 for the three months
ended September 30, 2000, compared to $141,000 for the same period in 1999. The
increase relates to sale of overstock product to the franchise system with a
marginal markup. The Company also sold excess accessories to an outside customer
for $50,000 during the three months ended September 30, 2000.
Royalty income decreased $64,000 to $885,000 for the three months ended
September 30, 2000, compared to $949,000 for the same period in 1999. The
decline was due to a decrease of 13 franchised stores operating during the three
months ended September 30, 2000, compared to the same period in 1999. Same store
sales for franchised stores also declined 4% during this period.
Costs and Expenses
Cost of sales for retail store sales decreased $455,000 for the three
months ended September 30, 2000, compared to the same period in 1999. The 11%
decrease is consistent with the decrease in retail store sales discussed above.
Cost of sales as a percentage of sales remained constant at 60%.
Cost of sales for wholesale merchandise increased $172,000 to $293,000 for
the three months ended September 30, 2000, compared to $121,000 in 1999. The
increase in cost of sales is due primarily to write-off of obsolete accessories
of approximately $90,000. The remainder of the increase is consistent with the
increase in wholesale merchandise sales discussed above. Excluding the write-
off, cost of sales was 87% for the three months ended September 30, 2000,
compared to 86% for the same 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 $579,000 to $2,342,000 for the
three months ended September 30, 2000, compared to $2,921,000 for the three
months ended September 30, 1999. Retail store operating expense was 37% of
retail store revenue for the three months ended September 30, 2000, compared to
42% of retail store revenue for the same period in 1999. The 5% decrease was due
to the cost saving measures implemented during 2000, primarily in payroll and
advertising.
General and administrative expenses increased by $41,000 to $1,155,000 for
the three months ended September 30, 2000, compared to $1,114,000 for the three
months ended September 30, 1999. This increase can be primarily attributed to
increase in reserve for bad debts.
Depreciation and Amortization
Depreciation and amortization increased $108,000 to $496,000 for the three
months ended September 30, 2000, compared to $388,000 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.
Impairment of Assets
The Company recorded impairment of certain assets of $6,034,000 during the
three months ended September 30, 2000. The impaired assets included assets of
under-performing company retail stores of $1,761,000,
11
<PAGE>
goodwill of $2,575,000 associated with the Disc Go Round acquisition and assets
of $1,698,000 associated with the Company's E-commerce website. See Note 3 to
the Condensed Consolidated Financial Statements (unaudited), included elsewhere
in this Report. No impairment of assets was recognized for the three months
ended September 30, 1999.
Net Loss
The Company experienced a net loss of $6,865,000 for the three months ended
September 30, 2000, compared to a net loss of $431,000 during the same period in
1999. The increase in net loss was due primarily to the impairment of certain
assets of $6,034,000, discussed above. The Company also recorded a provision for
income taxes of $129,000 during the three months ended September 30, 2000 to
eliminate tax credits previously recorded in 2000, compared to a credit for
income taxes of $258,000 recorded for the three months ended September 30, 1999.
Nine months ended September 30, 2000 compared to Nine months ended September 30,
1999 (all numbers rounded to the nearest thousand)
Revenues
Retail store sales increased $1,343,000 to $20,257,000 for the nine months
ended September 30, 2000, compared to $18,914,000 for the nine months ended
September 30, 1999. The 7% increase in retail store sales was the result of
having the 16 Music Trader stores in operation for the nine months ended
September 30, 2000 compared to only 7 months in 1999 (Music Trader stores were
acquired in February, 1999). The increase in retail store sales attributable to
the inclusion of the Music Trader stores was reduced by the net decrease of 3
company retail stores.
Wholesale merchandise sales increased to $665,000 for the nine months
ended September 30, 2000, compared to $365,000 for the same period in 1999. The
increase was attributable primarily to sale of overstock product to the
franchise system with a marginal markup. The Company also sold excess
accessories to an outside customer for $50,000 during the nine months ended
September 30, 2000.
Royalty income remained fairly constant at $2,782,000 for the nine months
ended September 30, 2000, compared to $2,811,000 for the same period in 1999.
Although the number of franchise stores decreased by 13, same store sales for
franchised stores increased 2% during this period.
Costs and Expenses
Cost of sales for retail store sales increased $1,274,000 for the nine
months ended September 30, 2000, compared to the same period in 1999. A portion
of this 11% 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 nine months ended September 30, 2000, compared to 59% for the nine
months ended September 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 $382,000 to $627,000 for
the nine months ended September 30, 2000, compared to $245,000 in 1999. The
increase in cost of sales was due to write-off of obsolete accessories of
approximately $90,000 and reduced markup on supplies and accessories offered to
the system. Excluding the write-off, cost of sales was 81% for the nine months
ended September 30, 2000 compared to 67% for the same period in 1999.
Retail store operating expenses increased $67,000 to $7,255,000 for the
nine months ended September 30, 2000, compared to $7,188,000 for the nine months
ended September 30, 1999. The increase was due to the increase of retail store
sales discussed above. Retail store operating expense was 36% of retail store
revenue for the nine months ended September 30, 2000, compared to 38% of retail
store revenue for the same period in 1999. The decrease in retail store
operating expense as a percentage of retail store revenue was attributable to
cost saving measures implemented during the nine months ended September 30,
2000.
12
<PAGE>
General and administrative expenses decreased by $186,000 to $3,201,000 for
the nine months ended September 30, 2000, compared to $3,387,000 for the nine
months ended September 30, 1999. This decrease can be attributed primarily to
reduction in legal fees and travel expenses offset by increase in reserve for
bad debts. The nine months ended September 30, 1999 also included the one-time
application fee for listing on Nasdaq National Market System.
Depreciation and Amortization
Depreciation and amortization increased $448,00 to $1,510,000 for the nine
months ended September 30, 2000, compared to $1,062,000 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.
Impairment of Assets
The Company recorded impairment of certain assets of $6,034,000 during the
nine months ended September 30, 2000. The impaired assets included assets of
under-performing company retail stores of $1,761,000, goodwill of $2,575,000
associated with the Disc Go Round acquisition and assets of $1,698,000
associated with the Company's E-commerce website. See Note 3 to the Condensed
Consolidated Financial Statements (unaudited), included elsewhere in this
Report. No impairment of assets was recognized for the nine months ended
September 30, 1999.
Net Loss
The Company experienced a net loss of $7,465,000 for the nine months ended
September 30, 2000, compared to a net loss of $506,000 during the same period in
1999. The increase in net loss was due primarily to the impairment of certain
assets of $6,034,000, as well as an increase in other expense of $260,000
relating to interest expense. The increase in net loss for the comparable nine
month periods was also affected by the fact that the net loss for the 1999
period reflected a tax credit of $304,000.
Liquidity and Capital Resources
At September 30, 2000, the Company had working capital of $8,622,000 and
cash and cash equivalents aggregating $895,000, compared to working capital of
$9,492,000 and cash and cash equivalents of $1,070,000 at December 31, 1999. The
decrease of $175,000 in cash and cash equivalents reflects net cash used in
investing activities of $59,000, as well as net cash used by financing
activities of $138,000, partially offset by net cash provided by operating
activities of $22,000. The net cash provided by operations for the nine months
ended September 30, 2000 relates to the net loss of $7,465,000 offset by
depreciation and amortization of $1,510,000 and impairment of assets of
$6,034,000. During this period, the Company also reduced accounts receivable by
$344,000, inventory by $279,000 and refundable income taxes by $654,000, which
increased cash by $1,277,000. This increase was reduced by a decrease of
accounts payable of $1,095,000 and an increase in prepaid expense of $197,000.
The net cash used by operations for the nine months ended September 30, 1999
relates principally to an increase in inventory of $1,744,000, resulting from
both an increase in company stores as well as continued planned growth of per
store inventory quantities. This increase was offset by an increase in accounts
payable of $1,666,000 consisting primarily of amounts due to E-commerce related
vendors.
Net cash used for investing activities was $59,000 for the nine months
ended September 30, 2000, compared to $6,864,000 for the same period in 1999.
Cash used for investing activities during the nine months ended September 30,
2000 related to the acquisition of four stores, which was offset by the sale of
five stores and the purchase of furniture, fixtures and equipment of $286,000.
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 by financing activities was $138,000 for the nine months
ended September 30, 2000, compared to net cash provided from financing
activities of $3,277,000 for the same period in 1999. Cash used by
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financing activities in 2000 related to note payments of $437,000, offset by an
increase in borrowings of $299,000 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 September
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.
In addition to its working capital at September 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. Proceeds of the
Facility were used to repay existing indebtedness, including $3.5 million to
retire the Company's existing credit facility. As of September 30, 2000, the
Company had $4,775,000 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 September 30, 2000 were approximately $306,000. 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.
As a result of settling various legal proceedings in the first quarter of
2000, the Company acquired four franchised stores and was 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 September 30, 2000,
the balance of these obligations was $180,000.
The Company implemented certain cost saving measures during 2000 and
recorded impairment charges of $6,034,000 relating to underperforming stores,
the Company's E-commerce efforts and its previous acquisition of Disc Go Round.
However, some company retail stores are still under-performing, which caused the
fixed coverage ratio to fall below the requirement imposed by the Facility. The
Lender waived this covenant until the end of 2000, when it is expected that
fourth quarter results should enable the Company to be in compliance with such
covenant. The Company is reviewing all under-performing stores and will
implement a plan to improve, sell or close these stores during 2001. It is the
Company's opinion that the current working capital at September 30, 2000,
combined with the Facility, will be sufficient to support ongoing activities of
the Company for the foreseeable future.
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Part II - Other Information
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 October 4, 2000, the Company filed a Form 8-K dated August 25,
2000, reporting various changes in management and directors. The Form 8-K also
noted the move, effective September 12, 2000, of the Company's common stock from
the Nasdaq National Market System to the Nasdaq SmallCap Market, as well as the
issuance of various press releases announcing the following:
-- a restructuring of the royalty rate each of the Company's
franchisees pays to the Company;
-- the dismissal of litigation commenced by the Company on September
8, 2000 against five of its franchisees; and
-- the cessation of operations of the Company's E-commerce website.
No financial statements were filed as a part of the Report.
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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: November 13, 2000 /s/ Christopher M. Salyer
-------------------------------------
Christopher M. Salyer
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: November 13, 2000 /s/ 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 18
17
