<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996
REGISTRATION NO. 333-15139
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CD WAREHOUSE, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5735 73-1504999
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
</TABLE>
722 N. BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-2797
(Address and Telephone Number of Principal Executive Offices)
JERRY W. GRIZZLE, PRESIDENT
CD WAREHOUSE, INC.
722 N. BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102
(405) 232-2797
(Name, Address and Telephone Number of Agent for Service)
------------------------
COPIES TO:
JEANETTE C. TIMMONS, ESQ. DOUGLAS A. BRANCH, ESQ.
Day Edwards Federman Propester & Phillips McFall McCaffrey McVay &
Christensen, P.C. Murrah, P.C.
210 Park Avenue, Suite 2900 211 North Robinson
Oklahoma City, Oklahoma 73102 Oklahoma City, Oklahoma 73102
(405) 239-2121 (405) 235-4100
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
1,000,000 SHARES
CD WAREHOUSE, INC.
COMMON STOCK
All of the 1,000,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by CD Warehouse,
Inc. (the "Company"). Prior to this Offering, there has been no public market
for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $5.00 and $6.25 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Company has applied for inclusion of the Common Stock
on the Nasdaq SmallCap Market under the trading symbol "CDWI."
THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)(3)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses in connection with this Offering payable by the
Company, including the Representatives' nonaccountable expense allowance in
the amount of $ ($ if the Underwriters' over-allotment option is
exercised in full), estimated at $ . See "Use of Proceeds" and
"Underwriting."
(3) The Company has granted the Underwriters an option, exercisable within 30
business days from the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to the approval of certain legal matters by counsel and to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment therefor at the offices of Capital
West Securities, Inc., Oklahoma City, Oklahoma, on or about , 1996.
CAPITAL WEST SECURITIES, INC.
NUTMEG SECURITIES, LTD.
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
The date of this Prospectus is , 1996.
<PAGE>
The picture on the inside front cover of the Prospectus depicts a CD Warehouse,
Inc., storefront. On the top half of the inside back cover is a map with
pinpoint markings which represent CD Warehouse, Inc., store locations
nationwide, and on the bottom half of the inside back cover is depicted the
interior of a CD Warehouse Store.
------------------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES AN INITIAL
OFFERING PRICE OF $5.00 PER SHARE (THE MINIMUM OF THE RANGE APPEARING ON THE
COVER OF THIS PROSPECTUS); (II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED; AND (III) GIVES EFFECT TO THE CDIL ACQUISITION AND THE
MACDONALD ACQUISITION (AS DESCRIBED ELSEWHERE IN THIS PROSPECTUS). EXCEPT FOR
THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS REGARDING THE COMPANY'S BUSINESS AND PROSPECTS THAT
ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE CONDITIONS WHICH MAY ULTIMATELY
PROVE TO BE INACCURATE AND ACTUAL EVENTS AND RESULTS MAY MATERIALLY DIFFER FROM
ANTICIPATED RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO
ACHIEVE SUCH RESULTS IS SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, SUCH AS
THOSE INHERENT GENERALLY IN THE RETAIL AND FRANCHISING INDUSTRIES, THE IMPACT OF
COMPETITION AND PRICING, CHANGING MARKET CONDITIONS, THE RISKS DETAILED IN THE
SECTIONS ENTITLED "RISK FACTORS" AND "LEGAL PROCEEDINGS," AND OTHER RISKS
DETAILED THROUGHOUT THIS PROSPECTUS. THESE FORWARD-LOOKING STATEMENTS REPRESENT
THE COMPANY'S JUDGMENT AS OF THE DATE OF THE FILING OF THIS PROSPECTUS. THE
COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS. AS A RESULT, THE READER IS CAUTIONED NOT TO PLACE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. AS USED IN THIS PROSPECTUS, THE
WORD "COMPANY" MEANS CD WAREHOUSE, INC. AND ITS WHOLLY OWNED SUBSIDIARY, CD
MANAGEMENT, INC., UNLESS THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
The Company was formed in September 1996 to acquire the assets of Compact
Discs International, Ltd. ("CDIL"), a Texas limited partnership which franchises
and operates stores throughout the United States and England under the name "CD
Warehouse." CD Warehouse stores sell, trade and buy new and preowned compact
discs ("CD's") and related products. According to the January 1996 issue of
ENTREPRENEUR MAGAZINE, CDIL was ranked among the top 30 new franchises in the
United States. At September 30, 1996, there were 109 franchised CD Warehouse
stores in 26 states and England.
CD Warehouse stores sell CD's, take customers' CD's in trade or buy
customers' CD's for cash. The CD Warehouse concept capitalizes on the emergence
of CD's as the prevailing form of prerecorded music. Because the CD is encased
in plastic and read by a laser, the playing of CD's, and even the occasional
careless handling of CD's, rarely cause damage that will impair performance or
result in any degradation of sound quality. In the absence of pronounced abuse,
CD's may reasonably be expected to last for decades. The CD Warehouse
remarketing concept emphasizes consumer value by offering quality preowned CD's
at substantial savings and responding to consumers' desire to recycle
merchandise they no longer want or use but which has intrinsic value. The CD
Warehouse marketing slogan, "selling compact discs at compact prices," embodies
this concept.
A typical CD Warehouse store, located in a high traffic strip shopping
center, will occupy between 1,000 and 2,000 square feet and offer between 8,000
and 12,000 selections, with approximately 80% of the dollar sales volume being
preowned selections and the balance being new releases from the major music
categories. At each CD Warehouse store, a customer selects from a number of new
and preowned CD's and may listen to preowned CD's before purchase. Typically,
each CD Warehouse store carries the majority of the Billboard Top 100 selections
as "new" inventory, filling out its inventory selection with preowned CD's which
are purchased for $1 to $4 and remarketed for $6 to $9.
The Company believes that a growing consumer willingness to purchase
preowned CD's provides an expanding market niche in the retail music industry
for CD remarketers. The Company's business strategy is to establish itself as
the recognized industry leader in the domestic buy-sell-trade retail CD
marketplace by pursuing a three-fold approach: (1) offering quality, preowned
CD's at exceptional value; (2) selling new releases at competitive prices; and
(3) offering to accept as a trade, or buy for cash, selected CD's from
customers.
3
<PAGE>
The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Management believes that, in addition to
the Company, Disc-Go-Round-Registered Trademark- and The Wherehouse are the only
national chains engaged in the sale of preowned CD's. Based on the Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1996 of GrowBiz
International, the parent corporation of Disc-Go-Round-Registered Trademark-,
and the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996 of The
Wherehouse, the Company believes that the 109 stores in the CD Warehouse system
currently account for approximately 23% of the estimated 480 chain-based CD
reseller stores that operate throughout the United States. Management believes
that the market for CD remarketers is fragmented and underserved, and that the
Company can capitalize on the demand by expanding the CD Warehouse concept in
targeted markets.
Simultaneously with the closing of the Offering, the Company will acquire
substantially all of the assets of CDIL (the "CDIL Assets") for a purchase price
of $3.2 million (the "CDIL Acquisition"). See "Certain Transactions--CDIL
Acquisition." In a related transaction (the "MacDonald Acquisition"), which also
will occur simultaneously with the closing of the Offering, the Company's wholly
owned subsidiary, CD Management, Inc. ("CD Management") will acquire the equity
interests of Bruce D. MacDonald (together with his affiliates, "MacDonald") with
respect to 36 franchised CD Warehouse stores. Pursuant to the MacDonald
Acquisition, the Company will acquire 100% ownership of an existing store in
Dallas, Texas (the "Montfort Street Store") and minority equity interests
(including MacDonald's interest as a managing general partner or limited
liability company manager) in 35 other existing stores (the "MacDonald Equity
Interests"). The Company has formed CD Management to act as the successor
general partner or manager of, respectively, 15 partnerships and two limited
liability companies originally organized by MacDonald to fund, own and operate
the 35 franchised stores in which MacDonald holds a minority equity interest.
Upon acquisition of the Montfort Street Store and the MacDonald Equity Interests
(collectively, the "MacDonald Assets"), the Company will manage and have an
interest in 36 of the 109 stores in the CD Warehouse system. Pursuant to the
MacDonald Acquisition, the Company will issue to MacDonald 80,000 shares of the
Company's Common Stock. See "Certain Transactions-- MacDonald Acquisition." The
Offering will not be closed unless there is a simultaneous closing of the CDIL
Acquisition and the MacDonald Acquisition. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will acquire the rights
to the CD Warehouse name, assume CDIL's role as franchisor under the franchise
agreements to which CDIL is a party and manage and have an interest in the CD
Warehouse Stores in which MacDonald has an interest.
During the year ended December 31, 1995, and the nine months ended September
30, 1996, on a pro forma basis taking into account the CDIL Acquisition and the
MacDonald Acquisition, the Company had pro forma total revenues of approximately
$4,153,000 and $3,545,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $140,000, respectively. There can be no assurance
that the historical level of the Company's revenues and net income will continue
to be achieved in the future. See "Risk Factors," "Business" and "Certain
Transactions."
The Company was incorporated under the laws of the State of Delaware in
September 1996. The Company's principal office is located at 722 N. Broadway,
Oklahoma City, Oklahoma 73102, and its telephone number is (405) 232-2797.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 1,000,000 shares
Shares of Common Stock to be
outstanding after the
Offering.................... 1,780,000 shares (1)(2)
Use of Proceeds............... To purchase the CDIL Assets, open new Company
stores and remodel existing stores in which the
Company owns an interest and manages and for
working capital and general corporate purposes
Nasdaq SmallCap Market
Symbol...................... CDWI (proposed)
</TABLE>
- ------------------------
(1) Includes 350,000 shares of Common Stock for which Mark E. Kane, the founder
of CDIL, previously has subscribed, but the payment for which is conditioned
upon the consummation of the Offering, and 80,000 shares of Common Stock to
be issued to Bruce D. MacDonald in connection with the MacDonald
Acquisition.
(2) Excludes 400,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan. See "Management--1996 Stock Option
Plan" and "Description of Securities."
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of risk
and immediate substantial dilution. See "Risk Factors" and "Dilution."
5
<PAGE>
SUMMARY--FINANCIAL AND OPERATING DATA
The following table sets forth historical financial information, on a
combined basis, of the operations of CDIL, as well as historical financial
information attributable to the MacDonald Assets to be acquired by the Company
upon successful completion of this Offering. The information is derived from the
audited financial statements of CDIL and CD Acquisitions (a joint venture which
was acquired by CDIL effective January 1, 1996), for each of the two years in
the period ended December 31, 1995 and from the internally-prepared financial
statements of such entities for the year ended December 31, 1993 and the nine
months ended September 30, 1995 and 1996 appearing elsewhere in this Prospectus,
and should be read in conjunction with such Financial Statements including the
Notes thereto. See "Combined Statements of Operations," "Pro Forma Combined
Condensed Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The historical information and
pro forma disclosures are further explained in the accompanying notes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, ------------------------
--------------------------------------------
AS AS AS
HISTORICAL COMBINED(1) ADJUSTED(2) ADJUSTED(2) ADJUSTED(2)
------------------------------- ----------- ----------- -----------
1993 1994 1995 1995 1995 1996
--------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $ 719 $ 2,627 $ 4,153 $ 4,153 $ 2,772 $ 3,545
Operating income (1)........................... 85 126 370 206 120 166
Pro forma net income (1)(2).................... 67 110 277 168 104 140
Pro forma net income per share (2)............. .09 .06 .08
Shares used in computation..................... 1,780,000 1,780,000 1,780,000
</TABLE>
- --------------------------
(1) The operations to be acquired were organized as partnerships. Salaries for
the partners were not reflected as salary expense but rather as a reduction
of partnership equity. In addition, no provisions were included for income
taxes since the earnings were distributed directly to the partners.
Historical results have been adjusted to reflect the cash distributions to
partners as compensation expense in the determination of operating and net
income and to provide for income taxes in each of the periods.
(2) The amounts presented "as adjusted" are calculated as if the CDIL
Acquisition, the MacDonald Acquisition and the Offering were completed as of
January 1, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
STORE DATA:
System-wide sales............................................. $ 2,778 $ 11,550 $ 20,868 $ 15,119 $ 18,891
Store Count:
Beginning................................................... 2 19 67 67 96
Open........................................................ 17 51 36 28 16
Close....................................................... -- 3 7 4 3
Ending...................................................... 19 67 96 91 109
</TABLE>
6
<PAGE>
RISK FACTORS
An investment in the securities being offered hereby involves substantial
risk. Prospective investors should carefully consider the following factors, in
addition to the other information set forth in this Prospectus.
NO OPERATING HISTORY. Although CD Warehouse stores have operated since late
1992, the Company is only recently formed and will commence its operations upon
the acquisition of CDIL's franchise operations and the concurrent MacDonald
Acquisition. Although members of the Company's management have extensive
experience in the franchise industry, only Mr. MacDonald has any experience in
the retail music industry or in CD Warehouse franchises, and the Company itself
has no operating history upon which investors may base their evaluation of the
Company's performance. As a result of the Company's lack of operating history,
period-to-period comparisons of operating results may not be meaningful and
results of operations from prior periods may not be indicative of future
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
EXPANSION. The Company's growth will depend in part on its ability to open
and operate new stores on a profitable basis. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will have an interest in
109 stores, 35 of which will be managed by its subsidiary, CD Management. By the
end of 1997, the Company contemplates having approximately 45 to 48 Company-
owned or managed stores and 91 to 97 franchised stores in operation. There can
be no assurance that the Company will achieve these goals for 1997. The opening
and success of new stores will depend on various factors, including customer
acceptance of the Company's buy-sell-trade concept in new markets, the
availability of suitable store sites, the negotiation of acceptable lease or
purchase terms for new locations, the financial and other capabilities of the
Company and its franchisees, the ability of the Company to manage the
anticipated expansion and hire and train personnel and general economic and
business conditions. Some of the foregoing factors are not within the control of
the Company or its franchisees. See "Business--Expansion Strategy" and
"--Government Regulation."
The Company's expansion will also require the implementation and integration
of enhanced operational and financial systems and additional management,
operational and financial resources. Failure to implement and integrate these
systems and add these resources could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate the growth of its
predecessor, CDIL. On a pro forma basis, the Company experienced growth in
revenues and net income in 1995 and for the nine months ended September 30,
1996. There can be no assurance that the Company will continue to experience
growth in, or maintain the present level of, revenues or net earnings.
DEPENDENCE ON FRANCHISEES. Prior to the implementation of the Company's
plan to own and open new stores, the Company will be primarily reliant upon its
revenues from initial franchise fees, continuing royalty payments from its
franchisees and wholesale CD sales throughout the current store system. If the
Company's franchisees encounter business or operational difficulties, the
Company's revenues from royalties will be adversely affected. Such difficulties
may also negatively impact the Company's ability to sell new franchises.
Consequently, the Company's financial prospects are significantly related to the
success of its franchised stores, over which the Company has limited operational
control. There can be no assurance that the Company will be able to successfully
attract new franchises or that the Company's franchisees will be able to
successfully operate existing or develop and operate additional CD Warehouse
stores. See "Business--Expansion Strategy" and "Business--Franchise Program."
GOVERNMENT REGULATION. The Company is subject to federal regulation and
certain state laws which govern the offer and sale of franchises. Many state
franchise laws impose substantive requirements on franchise agreements,
including limitations on non-competition provisions and termination or
non-renewal of a franchise. Some states require that certain franchise offering
materials be registered before franchises
7
<PAGE>
can be offered or sold in that state. The failure to obtain or retain any
requisite licenses or approvals to sell franchises could adversely affect the
Company's results of operations. CDIL is subject to a currently effective cease
and desist order as a result of CDIL's failure to register its franchise in the
State of South Dakota. See "Legal Proceedings." Additionally, while royalty
payments are required to be paid on the sale of new CD's, no such payments are
currently required on the sale of preowned CD's. The future enactment, adoption
or amendment of laws or regulations, such as establishing basic franchisee
rights, or the imposition of royalties on the sales of preowned CD's, could
adversely affect the Company's results of operations. See "Business--Franchise
Program" and "Business--Government Regulation."
COMPETITION. The prerecorded music market is highly competitive. The
Company competes with other chain retailers who specialize in prerecorded music,
discounters and other mass merchandisers, direct mail programs such as record
clubs, and local operators. In the Company's judgment, small operators may be
well located, but usually have significant disadvantages in inventory selection
and cost relative to chain retailers. The Company is aware of, and competes
with, one franchisor of stores which sell preowned and new CD's,
Disc-Go-Round-Registered Trademark-, and one national music and video retail
chain, The Wherehouse, which in recent years has begun selling preowned CD's. An
increase in the number of competitors, particularly the large chains, selling
preowned CD's in the Company's territories could have an adverse impact on the
Company's results of operations and expansion plans. See "Business--
Competition."
TECHNOLOGICAL ADVANCEMENT. The advent of the CD as the prevailing form of
prerecorded music is less than 15 years old. The CD has during this period
surpassed vinyl records and subsequently audio cassette tapes as the dominant
form of music reproduction. Subsequent technological advancements in music
reproduction media may occur which may adversely affect the CD marketplace as it
exists today. Further refinement in size and capacity of CD's is currently
anticipated. The Company's strategy is to adapt the CD Warehouse concept to
compete effectively as the industry changes. However, the evolution of music
reproduction media could occur in such a manner, or at a pace, that would
adversely affect the Company's results of operations and profitability.
POSSIBLE ACQUISITIONS. The Company's growth strategy includes possible
acquisitions of CD music retailers specializing in preowned CD titles. However,
no assurance can be given that the Company will be able to find attractive
acquisition candidates, consummate additional acquisitions or that it will
successfully integrate, convert or operate any acquired business. In the event
that the Company makes acquisitions, there can be no assurance that any such
acquisition and resulting conversion expenses, including loss of unit sales
during the remodel period, will not have a material adverse effect upon the
Company's operating results, particularly during the period in which such
operations are being integrated into the Company. Furthermore, the Company's
ability to make acquisitions may depend upon its ability to obtain financing.
There can be no assurance that the Company will be able to obtain financing or,
if available, that such financing will be on acceptable terms. See
"Business--Expansion" and "--Possible Need for Additional Funds." The Company
has no plan, proposal, agreement, understanding or arrangement to acquire or
merge with any specific business or company, nor has it identified any specific
business or company for investigation and evaluation.
LACK OF INDEPENDENT APPRAISALS OF PURCHASE PRICE OF CDIL ASSETS AND
MACDONALD ASSETS. No independent appraisals were obtained in determining the
purchase price of the CDIL Assets and the MacDonald Assets. Although the terms
of the purchase prices were negotiated at arm's-length by the respective
parties, no assurance can be given that the consideration paid by the Company
with respect to the CDIL Assets and the MacDonald Assets accurately reflects the
fair market value of such assets. See "Certain Transactions."
RISKS OF LEVERAGE. There are currently no limitations relating to the
Company's ability to borrow funds to increase the amount of capital available to
the Company to effect a business combination or otherwise finance the operations
of any acquired business. The amount and nature of any borrowings by
8
<PAGE>
the Company will depend on numerous considerations, including the Company's
capital requirements, the Company's perceived ability to meet debt services on
any such borrowings, and then-prevailing conditions in the financial markets, as
well as general economic conditions. There can be no assurance that debt
financing, if required or otherwise sought, will be available on terms deemed to
be commercially acceptable and in the best interest of the Company. The
inability of the Company to borrow funds required to effect or facilitate a
business combination, or to provide funds for an additional infusion of capital
into an acquired business, may have a material adverse effect on the Company's
financial condition and future prospects. Additionally, to the extent that debt
financing ultimately proves to be available, any borrowings may subject the
Company to various risks traditionally associated with incurring of
indebtedness, including (i) if the Company's operating revenues after the
business combination were to be insufficient to pay debt service, there would be
a risk of default and foreclosure on the Company's assets; (ii) if a loan
agreement contains covenants that require the maintenance of certain financial
ratios or reserves, and any such covenant is breached without a waiver or
renegotiation of the terms of that covenant, then the lender could have the
right to accelerate the payment of the indebtedness even if the Company has made
all principal and interest payments when due; (iii) if the interest rate on a
loan fluctuated or the loan was payable on demand, the Company would bear the
risk of variations in the interest rate or demand for payment; and (iv) if the
terms of a loan did not provide for amortization prior to maturity of the full
amount borrowed and the "balloon" payment could not be refinanced at maturity on
acceptable terms, the Company might be required to seek additional financing
and, to the extent that additional financing is not available on acceptable
terms, to liquidate its assets. Furthermore, an acquired business may have
previously incurred debt financing and, therefore, may already be subject to the
risks inherent thereto, as discussed above.
DEPENDENCE ON KEY PERSONNEL; NO KEY MAN INSURANCE. The Company's future
success will be highly dependent on the continued efforts of Jerry W. Grizzle,
President and Chief Executive Officer; Gary D. Johnson, Chief Operating Officer
and Executive Vice President; Bruce D. MacDonald, Vice President-- Company Store
Operations; and Doyle E. Motley, Senior Vice President and Chief Financial
Officer. Although the Company has employment agreements with all of its senior
management, the Company presently does not own any key man life insurance
policies with respect to any of such individuals, and the loss of the services
of one or more of such key personnel could have a material adverse effect upon
the Company's results of operations. The Company is presently reviewing the
desirability of obtaining key man life insurance policies with respect to the
Chief Executive Officer and the Chief Operating Officer. The Company's success
is also dependent upon its ability to attract and retain skilled retail managers
and employees who are also knowledgeable in music and the ability of its key
personnel to manage the Company's growth and integrate its operations. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company
expects to experience fluctuations in future quarterly operating results that
may be caused by many factors, including variations in the number and timing of
store openings, the quality of release titles available for sale, additional and
existing competition, marketing programs, weather, special or unusual events and
national, regional and local economic conditions that may affect retailers in
general. Any concentration of new store openings and the related new store
pre-opening costs near the end of a fiscal quarter could have an adverse effect
on the financial results for that quarter and could, in certain circumstances,
lead to fluctuations in quarterly financial results. The retail music business
is somewhat seasonal, with revenues in September and October generally being
lower compared to other months of the year. The Company anticipates that its
revenues will track traditional consumer music-buying habits. Therefore,
revenues are expected to decline during the fall months of the third fiscal
quarter and increase during the late fourth-quarter peak holiday season. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not and will not necessarily be meaningful, and should not be
relied upon, as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
9
<PAGE>
CONTROL BY MANAGEMENT. The Company's executive officers and directors and
their respective affiliates will beneficially own an aggregate of approximately
24.1% of the Company's outstanding shares of Common Stock after the Offering
(approximately 22.3% if the Underwriters' over-allotment option is exercised in
full). Additionally, Mark E. Kane, the founder of CDIL, will own approximately
19.7% of the Company's outstanding shares of Common Stock after the Offering
(approximately 18.1% if the Underwriters' over-allotment option is exercised in
full). Such stockholders, if voting together, may, as a practical matter, have
sufficient voting power to elect the board of directors of the Company (the
"Board of Directors"), exercise significant control over the business, policies
and affairs of the Company and, in general, determine the outcome of any
corporate transaction or other matters submitted to the stockholders for
approval, such as any amendment to the certificate of incorporation of the
Company (the "Certificate of Incorporation"), any merger, consolidation, sale of
all or substantially all of the Company's assets or "going private" transactions
and prevent or cause a change in control of the Company, all of which may
adversely affect the market price of the Common Stock. See "Principal
Stockholders."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Delaware General
Corporation Law (the "DGCL") may delay, discourage or prevent a change in
control of the Company. Such provisions may discourage bids for the Common Stock
at a premium over the market price of the Common Stock and may adversely affect
the market price and the voting and other rights of the holders of Common Stock.
In addition, the Board of Directors has the authority without action by the
Company's stockholders to fix the rights, privileges and preferences of and to
issue shares of the Company's preferred stock, par value $.01 per share (the
"Preferred Stock"), which may have the effect of delaying, deterring or
preventing a change in control of the Company. See "Description of Capital
Stock--Preferred Stock" and "--Anti-Takeover Effects of Delaware Law."
In addition to the authorization of Preferred Stock, the Company's
Certificate of Incorporation and Bylaws include several other provisions which
may have the effect of inhibiting a change of control of the Company. These
include a classified Board of Directors, no stockholder action by written
consent and advance notice requirements for stockholder proposals and director
nominations. The provisions may discourage a party from making a tender offer
for or otherwise attempting to obtain control of the Company.
SUBSTANTIAL DILUTION. On the basis of an assumed offering price of $5.00
per share (the minimum of the range set forth on the cover of this Prospectus),
and assuming the consummation of the CDIL Acquisition and the MacDonald
Acquisition, this Offering involves an immediate dilution of approximately $4.04
per share of Common Stock (approximately 81% of the offering price per share)
between the offering price per share and the pro forma net tangible book value
per share of the Common Stock immediately after the completion of this Offering.
See "Dilution."
LIMITED UNDERWRITING EXPERIENCE. Capital West Securities, Inc., one of the
Representatives of the Underwriters, was first registered as a broker-dealer in
May 1995 and has participated in only four public equity offerings as an
underwriter. Prospective purchasers of the securities offered hereby should
consider this limited experience in evaluating this Offering. See
"Underwriting."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public market for the Common Stock. The
Company has applied for listing of the Common Stock on the Nasdaq SmallCap
Market under the trading symbol "CDWI." There can be no assurance, however, that
an active public market will develop for the Common Stock. The initial public
offering price will be determined through negotiations between the Company and
the Representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after the completion of the Offering. Among the
factors to be considered in such negotiations are prevailing market conditions,
the pro forma results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives of the Underwriters believe to be
10
<PAGE>
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors, if any, deemed
relevant. See "Underwriting."
Moreover, the trading price of the Company's Common Stock could be subject
to fluctuations in response to quarterly variations in results of operations,
announcements of technological innovations or new services or products by the
Company or its competitors, changes in financial estimates by securities
analysts and other events or factors. See "Business and Properties." Recent
history relating to the market prices of other newly public companies indicates
that the market price of the Company's Common Stock following the Offering may
be highly volatile. At various times, the stock market has experienced
volatility that has particularly affected the market prices for stock of
particular industry groups, such as retail-oriented companies, often without
regard to a particular company's operating results.
POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET; DISCLOSURE RELATING TO LOW
PRICED STOCKS. Although the Company has applied for listing the Common Stock on
the Nasdaq SmallCap Market, there can be no assurance that a trading market will
develop or, if developed, that it will be maintained. In addition, there can be
no assurance that the Company will in the future meet the maintenance criteria
for continued quotation of the securities on the Nasdaq SmallCap Market. The
maintenance criteria for the Nasdaq SmallCap Market include, among other things,
$2,000,000 in total assets, $1,000,000 in capital and surplus, a public float of
100,000 shares with a market value equal to $200,000, two market makers and a
minimum bid price of $1.00 per share of common stock. If an issuer does not meet
the $1.00 minimum bid price standard, it may, however, remain on the Nasdaq
SmallCap Market if the market value of its public float is at least $1,000,000
and the issuer has at least $2,000,000 in equity. If the Company were removed
from the Nasdaq SmallCap Market, trading, if any, in the Common Stock would
thereafter have to be conducted in the over-the-counter market in the so-called
"pink sheets" or, if then available, the NASD's OTC Electronic Bulletin Board.
As a result, an investor would find it more difficult to dispose of, and to
obtain accurate quotations as to the value of, such securities.
In addition, if the Common Stock is delisted from trading on the Nasdaq
SmallCap Market and the trading price of the Common Stock is less than $5.00 per
share at a time when the net tangible assets of the Company are less than
$5,000,000, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Commission, any equity security not traded on
an exchange or quoted on the Nasdaq SmallCap Market that has a market price of
less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Common Stock and
the ability or purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
SHARES ELIGIBLE FOR FUTURE SALE. After the completion of the Offering and
the MacDonald Acquisition, 1,780,000 shares of Common Stock will be outstanding.
See "Certain Transactions." Of such shares, the 1,000,000 shares sold pursuant
to the Offering will be tradeable without restriction by persons other than
"affiliates" of the Company. The remaining 780,000 shares of Common Stock to be
outstanding after the Offering are "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and
may not be publicly resold, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 promulgated under the
Securities Act.
11
<PAGE>
The directors and executive officers of the Company (including Bruce D.
MacDonald), as well as Mark E. Kane, collectively will hold 780,000 shares, or
approximately 43.8%, of the outstanding shares of Common Stock after the
Offering. Such individuals have agreed not to, directly or indirectly, offer,
sell, assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of any Common Stock for a period of 24 months
after the date of this Prospectus without the prior written consent of Capital
West Securities, Inc., as one of the Representatives of the Underwriters. Upon
expiration of the 24-month period, 780,000 shares of Common Stock will be
eligible for immediate resale without restriction under the Securities Act,
subject, in certain cases, to certain volume, timing and other requirements of
Rule 144 promulgated under the Securities Act, with 430,000 of such shares
entitled to piggyback registration rights for a period of two years thereafter.
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect the prevailing market price of the Common
Stock. See "Shares Eligible for Future Sale" and "Underwriting."
ABSENCE OF DIVIDENDS. The Company has never declared or paid any dividends
on the Common Stock and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
POSSIBLE NEED FOR ADDITIONAL FUNDS. Bank of Oklahoma, N.A., Oklahoma City,
Oklahoma has agreed to provide the Company a $2,000,000 credit facility (the
"Credit Facility") upon completion of the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Based on current
pro forma levels of operations and the Company's current plans for expansion,
the Company anticipates that its existing capital resources, including the
Credit Facility, together with the proceeds of the Offering, will enable it to
maintain its operations for the foreseeable future. However, the Company may
require additional funds to sustain and expand its sales and marketing
activities, particularly if a well-financed competitor emerges. Adequate funds
for these and other purposes on terms acceptable to the Company, whether through
additional equity financing, debt financing or other sources, may not be
available when needed or may result in significant dilution to existing
stockholders. The inability to obtain sufficient funds from operations or
external sources would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock being offered hereby are estimated to be approximately $4,175,000
(approximately $4,801,250 if the Underwriters' over-allotment option is
exercised in full), assuming an initial offering price of $5.00 per share (the
minimum of the range appearing on the cover of this Prospectus).
Of the net proceeds, $3,100,000 will be used to purchase the CDIL Assets.
See "Business and Properties--General" and "Certain Transactions." Approximately
$800,000 of the net proceeds will be used to open or remodel Company stores,
with the remaining balance of the estimated net proceeds providing approximately
$275,000 of additional working capital to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The CDIL Acquisition will be completed immediately upon consummation of the
Offering. Pending any other use of the proceeds, the Company intends to invest
the remaining proceeds from the Offering in investment grade short-term,
interest-bearing securities.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Company
does not expect to declare or pay any dividends on Common Stock in the
foreseeable future.
12
<PAGE>
DILUTION
At October 15, 1996, the pro forma, as adjusted, net tangible book value of
the Company's Common Stock was approximately $1,714,000, or $.96 per share. Net
tangible book value per share of Common Stock is defined as total tangible
assets of the Company less total liabilities, divided by the total number of
shares of Common Stock outstanding. The combination of this Offering and the
consummation of both the CDIL Acquisition and the MacDonald Acquisition
represent an immediate dilution of $4.04 per share to new investors purchasing
shares of Common Stock in this Offering, assuming an initial public offering
price of $5.00 per share (the minimum of the range set forth on the cover of
this Prospectus).
The following table summarizes the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by existing or subscribed stockholders and new
investors purchasing shares in this Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C>
Existing or subscribed stockholders (cash)............... 700,000(1) 39.3% $ 700,000 11.5% $ 1.00
MacDonald stock subscription............................. 80,000 4.5% 400,000(2) 6.6% $ 5.00
New investors............................................ 1,000,000 56.2% 5,000,000 81.9% $ 5.00
------------- ------- ------------- -------
Total.................................................. 1,780,000 100.0% $ 6,100,000 100.0%
------------- ------- ------------- -------
------------- ------- ------------- -------
</TABLE>
- ------------------------
(1) Includes 350,000 shares of Common Stock for which Mark E. Kane, the founder
of CDIL, previously has subscribed, but the payment for which is conditioned
upon the consummation of the Offering. See "Certain Transactions--CDIL
Acquisition."
(2) Represents the purchase price paid for the MacDonald Assets. See "Certain
Transactions--MacDonald Acquisition."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at October
15, 1996 and as adjusted to give effect to the sale of the 1,000,000 shares of
Common Stock offered hereby at an assumed per-share price of $5.00 (the minimum
of the range appearing on the cover of this Prospectus) and the application of
the estimated net proceeds as described under "Use of Proceeds." This table
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
OCTOBER 15, 1996
------------------------
ACTUAL AS ADJUSTED
---------- ------------
<S> <C> <C>
Stockholders' Equity:
Common Stock; $.01 par value, 10,000,000 shares authorized; 350,000 shares issued and
outstanding; 1,780,000 shares as adjusted (1)(2).................................... $ 3,500 $ 17,800
Preferred Stock; $.01 par value, 5,000,000 shares authorized, no shares issued and
outstanding, actual or adjusted..................................................... -- --
Additional paid-in capital............................................................ 346,500 5,257,200
Retained earnings..................................................................... -- --
---------- ------------
Total capitalization................................................................ $ 350,000 $ 5,275,000
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) Includes 350,000 shares of Common Stock for which Mark E. Kane, the founder
of CDIL, previously has subscribed, but the payment for which is conditioned
upon the consummation of the Offering, and 80,000 shares of Common Stock to
be issued to Bruce D. MacDonald in connection with the MacDonald
Acquisition. See "Certain Transactions."
(2) Excludes 400,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan. See "Management--1996 Stock Option
Plan" and "Description of Securities."
14
<PAGE>
COMBINED STATEMENTS OF OPERATIONS
The following table (unaudited) sets forth the combined historical results
of operations of CDIL, CD Acquisitions and the MacDonald Assets to be acquired
by the Company. The historical information has been adjusted to eliminate
operations to be retained by CDIL and to provide charges for executive
compensation and income taxes as explained below. The information should be read
in conjunction with the historical Financial Statements and the Pro Forma
Combined Condensed Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Retail store sales............................................... $ 372 $ 316 $ 281 $ 213 $ 178
Wholesale merchandise sales...................................... 139 1,568 2,717 1,746 2,442
Software income, net............................................. 10 62 24 1 8
Royalty income................................................... 112 527 947 670 856
Franchise and development fees................................... 86 154 184 142 61
--------- --------- --------- --------- ---------
Total revenues................................................. 719 2,627 4,153 2,772 3,545
Costs and expenses:
Cost of sales--retail store sales................................ 272 196 180 134 109
Cost of sales--wholesale merchandise sales....................... 139 1,539 2,511 1,584 2,298
Retail store operating expenses.................................. 88 79 68 51 51
General and administrative (2)................................... 135 681 1,015 782 972
Depreciation and amortization.................................... -- 6 9 8 9
--------- --------- --------- --------- ---------
Total costs and expenses....................................... 634 2,501 3,783 2,559 3,439
--------- --------- --------- --------- ---------
Operating income................................................... 85 126 370 213 106
Other income....................................................... 16 40 49 39 47
--------- --------- --------- --------- ---------
Income before pro forma provision for income taxes................. 101 166 419 252 153
Pro forma provision for income taxes (2)........................... 34 56 142 86 52
--------- --------- --------- --------- ---------
Pro forma net income (2)........................................... $ 67 $ 110 $ 277 $ 166 $ 101
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Operations to be retained by CDIL have been eliminated from the combined
information presented above.
(2) The operations to be acquired were organized as partnerships and did not
historically include charges for executive compensation or income taxes. The
information presented above includes charges for executive compensation
based on the cash distribution to partners in each of the periods presented.
Such amounts, which are included in general and administrative expenses are:
<TABLE>
<S> <C>
Years ended December 31, Nine months ended September 30,
1993--$ 82,000 1995--$252,000
1994--$227,000 1996--$405,000
1995--$296,000
</TABLE>
The pro forma provisions for income taxes are based on a rate of 34% applied
to pro forma income before income tax in each of the periods presented.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in September 1996 to acquire the assets of CDIL, a
Texas limited partnership which franchises and operates stores throughout the
United States and England under the name "CD Warehouse." The first CD Warehouse
store was opened in 1992. Under the CD Warehouse name, there are currently 106
domestic units operating in 26 states and 3 international units operating in
England.
Simultaneously with the closing of the Offering, the Company will acquire
the CDIL Assets for a purchase price of $3.2 million. See "Certain
Transactions--CDIL Acquisition." In a related transaction, which also will occur
simultaneously with the closing of the Offering, the Company will acquire the
equity interests of MacDonald in 36 franchised CD Warehouse stores. Pursuant to
the MacDonald Acquisition, the Company will acquire 100% ownership of
MacDonald's Montfort Street Store and minority equity interests (including
MacDonald's interest as a managing general partner or limited liability company
manager) in the other 35 existing stores in which MacDonald has an interest.
Upon acquisition of the Montfort Street Store and the MacDonald Equity
Interests, the Company will manage and have an interest in 36 of the 109 stores
in the CD Warehouse system. The Offering will not be closed unless there is a
simultaneous closing of the CDIL Acquisition and the MacDonald Acquisition. Upon
consummation of the CDIL Acquisition and the MacDonald Acquisition, the Company
will acquire the rights to the CD Warehouse name, assume CDIL's role as
franchisor under the franchise agreements to which CDIL is a party and manage
and have an interest in the CD Warehouse stores in which MacDonald has an
interest.
The following discussion and analysis reviews the operations to be acquired
by the Company in connection with the CDIL Acquisition and the MacDonald
Acquisition for the years ended December 31, 1993, 1994 and 1995 and for the
nine months ended September 30, 1996. All of such periods reflect the historical
operations of CDIL and financial information attributable to the MacDonald
Assets. The following discussion and analysis should be read in conjunction with
the discussion about risk factors and the financial statements of the Company,
CDIL and CD Acquisitions and notes related thereto and "Combined Statements of
Operations" included elsewhere in this Prospectus.
CDIL previously conducted its business through two separate entities, CDIL
and CD Acquisitions. CD Acquisitions was formed to support the inventory needs
of the CD Warehouse franchise system and engaged in the wholesale supply of new
and preowned CD's to the franchise system, as well as sales of computer hardware
and proprietary software to franchisees. CDIL and CD Acquisitions were merged
effective January 1, 1996 as a Texas limited partnership.
Historically, CDIL has had only a limited involvement in direct retail
operations. The assets acquired from CDIL include minority interests in three
partnerships which operate stores in Memphis, Tennessee, Edmond, Oklahoma and
Tulsa, Oklahoma. The earnings from such partnerships are reflected as other
income and the investment in those partnerships is reflected as an asset on
CDIL's balance sheet. The retail store sales relate to the earnings attributable
to the Montfort Street Store being acquired from MacDonald.
On a pro forma basis, the Company's revenues are derived from three
principal sources: (1) franchise fees and royalties from franchised stores; (2)
sales of CD's and proprietary software to stores in the franchise system; and
(3) revenues attributable to the Montfort Street Store. Franchise and
development fees are initially recorded as deferred revenue until each
franchised store opens, at which time such fees are recorded as revenue.
Cost of sales include the cost for CD's sold at retail and those sold at
wholesale to franchised stores. Operating expenses consist primarily of labor
costs, rent and advertising. General and administrative
16
<PAGE>
expenses include corporate and administrative salaries, accounting, legal and
direct costs associated with franchise operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Retail store sales.............................. 51.7% 12.0% 6.8% 7.7% 5.0%
Wholesale merchandise sales..................... 19.3% 59.7% 65.4% 63.0% 68.9%
Software income, net............................ 1.4% 2.4% .6% --% .2%
Royalty income.................................. 15.6% 20.1% 22.8% 24.2% 24.2%
Franchise and development fees.................. 12.0% 5.8% 4.4% 5.1% 1.7%
----- ----- ----- ----- -----
Total revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of sales--retail store sales (1)........... 73.1% 62.0% 64.1% 62.9% 61.2%
Cost of sales--wholesale merchandise sales
(2)........................................... 100.0% 98.2% 92.4% 90.7% 94.1%
Retail store operating expenses (1)............. 23.7% 25.0% 24.2% 23.9% 28.7%
General and administrative...................... 18.8% 25.9% 24.4% 28.2% 27.4%
Depreciation and amortization................... -- % .2% .2% .3% .3%
OPERATING INCOME.................................. 11.8% 4.8% 8.9% 7.7% 3.0%
PRO FORMA NET INCOME.............................. 9.3% 4.2% 6.7% 6.0% 2.8%
</TABLE>
- ------------------------
(1) As a percentage of sales from the majority owned retail store.
(2) As a percentage of wholesale merchandise sales.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES
Total revenues increased by $773,000, or 28%, to $3,545,000 for the nine
months ended September 30, 1996 compared to $2,772,000 for the nine months ended
September 30, 1995. This increase resulted primarily from the 16 franchised
stores opened during the nine months ended September 30, 1996, as well as from
the 36 stores opened periodically throughout 1995 (which contributed revenues
for the entire period in 1996), and the resulting increases in royalties and
merchandise sales to more stores.
Wholesale sales to franchised stores increased $696,000, or 40%, to
$2,442,000 for the nine months ended September 30, 1996 compared to $1,746,000
for the nine months ended September 30, 1995. This increase resulted primarily
from the opening inventory packages purchased by the 16 new franchised stores
opened during the nine months ended September 30, 1996.
Royalties from franchised stores increased $186,000, or 28%, to $856,000 for
the nine months ended September 30, 1996 compared to $670,000 for the nine
months ended September 30, 1995. This increase resulted primarily from the 16
new franchised stores opened during the nine months ended September 30, 1996, as
well as from the 36 stores opened periodically throughout 1995 (which
contributed revenues for the entire period in 1996).
17
<PAGE>
COSTS AND EXPENSES
Cost of sales for wholesale sales to franchised stores increased $714,000,
or 45%, to $2,298,000 for the nine months ended September 30, 1996 compared to
$1,584,000 for the nine months period September 30, 1995. This increase is
primarily the result of greater volume due to the increased number of stores
opened during the period, as well as higher product cost from suppliers.
General and administrative expenses increased by $190,000, or 24%, to
$972,000 for the nine months ended September 30, 1996 compared to $782,000 for
the nine months ended September 30, 1995. This increase resulted from the 16 new
franchised stores opened during the nine months ended September 30, 1996 and the
increase of executive salaries taken by the previous officers of $405,000 for
the nine months ended September 30, 1996 compared to $252,000 for the same
period of 1995.
NET INCOME
Net income decreased $65,000, or 39%, to $101,000 for the nine months ended
September 30, 1996 compared to $166,000 for the same period ended September 30,
1995. This decrease was primarily due to the additional $153,000 in salary taken
by CDIL's owners compared to the prior period.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
REVENUE
Total revenues increased by $1,526,000, or 58%, to $4,153,000 for the year
ended December 31, 1995 compared to $2,627,000 for the year ended December 31,
1994. This increase was attributable primarily to the effect of 36 new
franchised stores opened during 1995, as well as from the 51 stores opened
periodically throughout 1994 (which contributed revenues for the entire period
in 1995), and the resulting increase in royalties and merchandise sales.
Wholesale sales to franchised stores increased by $1,149,000, or 73%, to
$2,717,000 for the year ended December 31, 1995 compared to $1,568,000 for the
year ended December 31, 1994. This increase was primarily the result of the 50%
increase in the number of stores as well as increasing sales to all stores.
Royalties from franchised stores increased $420,000, or 80%, to $947,000 for
the year ended December 31, 1995 compared to $527,000 for the year ended
December 31, 1994. This increase resulted primarily from the 36 new franchised
stores opened during 1995, as well as from the 51 stores opened periodically
throughout 1994 (which contributed revenues for the entire period in 1995).
COSTS AND EXPENSES
Cost of sales for wholesale sales to franchised stores increased by
$972,000, or 63%, to $2,511,000 for the year ended December 31, 1995 compared to
$1,539,000 for the year ended December 31, 1994. This increase is primarily the
result of greater volume due to the increased number of stores opened during the
period, as well as higher product cost from suppliers.
General and administrative expenses increased by $334,000, or 49%, to
$1,015,000, for the year ended December 31, 1995 compared to $681,000 for the
year ended December 31, 1994. This increase was due primarily to greater
franchise activity and support for the 36 new franchised store openings in 1995,
as well as from the 51 stores opened periodically throughout 1994 (the full
effects of which were recognized for the entire period in 1995).
The Company recognized approximately $113,500 as bad debt expense for the
year ended December 31, 1995 compared to no bad debt expense for the previous
year. The increase was due to the closing of seven franchised stores during
1995, as well as to royalty revenues previously recognized which were deemed
uncollectible in 1995 because of the operating status of certain franchised
stores.
18
<PAGE>
NET INCOME
Net income increased $167,000, or 152%, to $277,000 for the year ended
December 31, 1995 compared to $110,000 for the same period ended December 31,
1994. This increase was attributable primarily to the higher royalty income from
the 36 new franchised stores opened during 1995, as well as from the 51 stores
opened periodically throughout 1994 (which contributed revenues for the entire
period in 1995)
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
CDIL began franchising stores in 1993, and had 19 stores open at year end
1993. During 1994, 51 stores opened. All items of revenue, costs and expenses
and net income increased significantly in 1994 as compared to 1993, due almost
entirely to the 168% increase in franchised stores open.
REVENUES
Total revenues increased by $1,908,000 to $2,627,000 for the year ended
December 31, 1994 compared to $719,000 for the year ended December 31, 1993.
Wholesale sales to franchised stores increased by $1,429,000 to $1,568,000
for the year ended December 31, 1994 compared to $139,000 for the year ended
December 31, 1993.
Royalties from franchised stores increased $415,000 to $527,000 for the year
ended December 31, 1994 compared to $112,000 for the year ended December 31,
1993.
COSTS AND EXPENSES
Cost of goods sold for wholesale sales to franchised stores increased by
$1,400,000 to $1,539,000 for the year ended December 31, 1994 compared to
$139,000 for the year ended December 31, 1993.
General and administrative expenses increased by $546,000 to $681,000
compared to $135,000 for the year ended December 31, 1993. This increase was due
primarily to the increased franchise activity and administrative support
necessary for the 51 new franchised store openings as well as the increased
wholesale merchandise operations.
NET INCOME
Net income increased by $43,000, or 64%, to $110,000 for the year ended
December 31, 1994 compared to $67,000 for the year ended December 31, 1993 as a
result of the growth in the number of stores discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, CDIL has required capital primarily for the development of the
franchise system and to fund inventory purchases for CD Acquisitions. CDIL has
historically funded such expenditures with cash provided by operations. Net cash
provided by operating activities of CDIL was $279,000 and $316,000 for the years
ended December 31, 1994 and December 31, 1995, respectively, and $587,000 for
the nine months ended September 30, 1996.
The Company will have available approximately $1,500,000 in working capital
from the proceeds of the Offering and the stock subscription of Mark E. Kane in
connection with the CDIL Acquisition. This available capital will be used to
support an aggressive Company store development program. In addition, the
Company will be developing a standard decor package to establish the identity of
the system through its appearance. Once the decor package is developed, the
Company will evaluate the need to remodel the 36 stores in which the Company
will have an equity interest as a result of the MacDonald Acquisition.
19
<PAGE>
The Company will also use its capital resources to take advantage of any
suitable acquisition opportunities. The preowned CD market consists of numerous
single store operators that the Company believes may be candidates for
acquisition and conversion to the CD Warehouse concept.
The Company and Mr. Grizzle are parties to a Finders and Release Agreement
(the "Finders' Agreement"), pursuant to which the Company has agreed to pay
certain unaffiliated parties a finder's fee of $100,000 for their assistance in
identifying CDIL for potential acquisition or investment. The Company has made a
nonrefundable payment of $20,000 in partial satisfaction of this obligation and
is required to pay the balance of $80,000 at the closing of the CDIL
Acquisition. None of the proceeds of the Offering will be used to pay the
remaining obligation under the Finders' Agreement.
In addition to the working capital expected to be available from the
proceeds of the Offering after completion of the CDIL Acquisition, Bank of
Oklahoma, N.A., Oklahoma City, Oklahoma has agreed to provide the Company a
$2,000,000 credit facility upon completion of the Offering. The Credit Facility
will bear an interest rate equal to .75% over Chase Manhattan's prime rate,
adjusted semi-annually. No funds have been borrowed under this Credit Facility.
It is the Company's opinion that the excess proceeds generated from the
Offering, combined with the Credit Facility, will be sufficient to support the
ongoing activities of the business for the foreseeable future.
20
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying Pro Forma Combined Condensed Financial Statements reflect
the historical financial position and results of operations of the Company
adjusted for the acquisitions, using the purchase method of accounting, to be
completed upon the successful completion of this Offering.
The Pro Forma Combined Condensed Balance Sheet as of September 30, 1996
assumes capitalization of the Company by such date and the completion of this
Offering and resulting acquisition of the CDIL Assets and the MacDonald Assets.
The Pro Forma Combined Condensed Statements of Operations for the year ended
December 31, 1995 and for the nine months ended September 30, 1995 and September
30, 1996 have been prepared assuming the Offering and resulting acquisition of
the CDIL Assets and the MacDonald Assets were completed on January 1, 1995.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The Pro
Forma Combined Condensed Financial Statements do not purport to represent the
financial position or results of operations which would have occurred had such
transactions been consummated on the dates indicated or the Company's financial
position or results of operations for any future date or period. These Pro Forma
Combined Condensed Financial Statements and notes thereto should be read in
conjunction with the historical financial statements and notes included
elsewhere herein.
21
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
COMPACT PRO FORMA
CD DISCS ADJUSTMENTS--
WAREHOUSE, INTERNATIONAL, MACDONALD OFFERING & AS
INC. LTD. ASSETS ACQUISITIONS ADJUSTED
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 250,000 $ 220,343 $ 457 $ 4,219,364(1)
(220,343)(2)
(3,100,000)(2)
(80,000)(3)
350,000(5) $ 1,639,821
Accounts receivable, net.............. -- 361,677 -- (178,736)(2) 182,941
Merchandise inventory................. -- 579,169 46,762 (47,291)(2) 578,640
Prepaid expenses and other............ -- 12,423 2,345 (12,423)(2) 2,345
----------- ------------- ------------- ------------- -------------
Total current assets.................... 250,000 1,173,612 49,564 930,571 2,403,747
Furniture, fixtures and equipment,
net................................... -- 40,893 824 (4,860)(2) 36,857
Investment in partnerships.............. -- 70,219 39,329 (18,290)(2) 91,258
Intangible and other assets, net........ 206,394 4,946 -- (44,364)(1)
(1,474)(2)
3,001,791(2)
80,000(3)
313,234(4) 3,560,527
----------- ------------- ------------- ------------- -------------
Total assets............................ $ 456,394 $ 1,289,670 $ 89,717 $ 4,256,608 $ 6,092,389
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 55,394 $ 636,822 $ -- $ (27,082)(2) $ 665,134
Accrued liabilities................... -- 4,017 2,951 (6,813)(2) 155
Advances and deposits................. 51,000 101,100 -- -- 152,100
----------- ------------- ------------- ------------- -------------
Total current liabilities............... 106,394 741,939 2,951 (33,895) 817,389
Minority interest....................... -- 905 -- (905)(2) --
Stockholders' equity:
Common stock.......................... 3,500 -- -- 10,000(1)
800(4)
3,500(5) 17,800
Additional paid-in capital............ 346,500 -- -- 4,165,000(1)
399,200(4)
346,500(5) 5,257,200
Partners' capital..................... -- 546,826 86,766 (546,826)(2)
(86,766)(4) --
----------- ------------- ------------- ------------- -------------
350,000 546,826 86,766 4,291,408 5,275,000
----------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity................................ $ 456,394 $ 1,289,670 $ 89,717 $ 4,256,608 $ 6,092,389
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>
22
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET (NOTE)
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE: The Company was formed in September 1996. For purposes of this Pro Forma
Combining Balance Sheet, it is assumed capitalization occurred at
September 30, 1996. The Company has not had any operations to date.
Combining and Pro Forma Adjustments:
<TABLE>
<C> <S> <C>
(1) To record the issuance of 1,000,000 shares of Common Stock of the Company in
connection with this Offering:
Estimated Offering proceeds..................................................... $ 5,000,000
Estimated expenses of Offering (including $44,364 incurred to date)............. 825,000
------------
Estimated net proceeds of Offering.............................................. 4,175,000
Offering expenses previously incurred........................................... 44,364
------------
Estimated net cash proceeds..................................................... $ 4,219,364
------------
------------
(2) Acquisition of specified assets of CDIL and assumption of specified liabilities:
Net assets at September 30, 1996................................................ $ 546,826
Less net assets retained by CDIL:...............................................
Retail store.................................................................... (56,264)
Investment in partnership....................................................... (18,290)
Cash and accounts receivable, net of accounts payable and accrued liabilities... (374,063)
------------
Net assets acquired............................................................. 98,209
Acquisition price............................................................... 3,200,000
------------
Excess of purchase price over assets acquired................................... 3,101,791
Escrow deposit--to be paid to CDIL.............................................. (100,000)
------------
$ 3,001,791
------------
------------
(3) Payment of balance of finder's fee.............................................. $ 80,000
------------
------------
(4) Acquisition of MacDonald Assets for 80,000 shares of Common Stock:
Purchase price.................................................................. $ 400,000
Less net assets at September 30, 1996........................................... 86,766
------------
Excess of purchase price over assets acquired................................... $ 313,234
------------
------------
(5) Payment of Common Stock subscription by initial stockholders.................... $ 350,000
------------
------------
</TABLE>
23
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------------------------
COMPACT DISCS
INTERNATIONAL, CD MACDONALD
LTD. ACQUISITIONS ASSETS
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Company operations:
Retail store sales.................. $ 291,948 $ -- $ 281,144
Wholesale merchandise sales......... -- 2,717,043 --
Software income, net................ 23,683 -- --
Franchise operations:
Royalty income...................... 946,640 -- --
Franchise and development fees...... 184,250 -- --
------------- ------------- -------------
Total revenues........................ 1,446,521 2,717,043 281,144
Operating costs and expenses:
Cost of sales-retail store sales.... 181,312 -- 179,568
Cost of sales-wholesale merchandise
sales............................. -- 2,511,032 --
Retail store operating expenses..... 71,253 -- 67,800
General and administrative.......... 641,191 77,918 --
Depreciation and amortization....... 9,645 -- --
Minority interest................... 7,293 -- --
------------- ------------- -------------
910,694 2,588,950 247,368
------------- ------------- -------------
Operating income...................... 535,827 128,093 33,776
Other income.......................... 2,987 -- 45,707
------------- ------------- -------------
Income before income taxes............ 538,814 128,093 79,483
Pro forma provision for income
taxes............................... -- -- --
------------- ------------- -------------
Pro forma net income.................. $ 538,814 $ 128,093 $ 79,483
------------- ------------- -------------
------------- ------------- -------------
Pro forma net income per share........
Shares used in computation............
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales.................. $ (291,948)(1) $ 281,144 $ 281,144
Wholesale merchandise sales......... 2,717,043 2,717,043
Software income, net................ 23,683 23,683
Franchise operations:
Royalty income...................... 946,640 946,640
Franchise and development fees...... 184,250 184,250
------------- ------------- -------------
Total revenues........................ (291,948) 4,152,760 4,152,760
Operating costs and expenses:
Cost of sales-retail store sales.... (181,312)(1) 179,568 179,568
Cost of sales-wholesale merchandise
sales............................. 2,511,032 2,511,032
Retail store operating expenses..... (71,253)(1) 67,800 67,800
General and administrative.......... 296,277(3) 1,015,386 $ (15,777)(5) 999,609
Depreciation and amortization....... (487)(1) 9,158 180,000(6) 189,158
Minority interest................... (7,293)(1) -- --
------------- ------------- ------------- -------------
35,932 3,782,944 164,223 3,947,167
------------- ------------- ------------- -------------
Operating income...................... (327,880) 369,816 (164,223) 205,593
Other income.......................... 48,694 48,694
------------- ------------- ------------- -------------
Income before income taxes............ (327,880) 418,510 (164,223) 254,287
Pro forma provision for income
taxes............................... 142,000(4) 142,000 (56,000)(7) 86,000
------------- ------------- ------------- -------------
Pro forma net income.................. $ (469,880) $ 276,510 $ (108,223) $ 168,287
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share........ $ .09
-------------
-------------
Shares used in computation............ 1,780,000
-------------
-------------
</TABLE>
24
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) ASSETS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 220,887 $ 213,080
Wholesale merchandise sales.............. 1,745,403 --
Software income, net..................... 1,242 --
Franchise operations:
Royalty income........................... 670,401 --
Franchise and development fees........... 142,250 --
------------- -------------
Total revenues............................. 2,780,183 213,080
Operating costs and expenses:
Cost of sales--retail store sales........ 137,551 133,843
Cost of sales--wholesale merchandise
sales.................................. 1,583,822 --
Retail store operating expenses.......... 53,275 50,738
General and administrative............... 530,410
Depreciation and amortization............ 8,555
Minority interest........................ 5,637
------------- -------------
2,319,250 184,581
------------- -------------
Operating income........................... 460,933 28,499
Other income............................... 89 38,637
------------- -------------
Income before income taxes................. 461,022 67,136
Pro forma provision for income taxes....... -- --
------------- -------------
Pro forma net income....................... $ 461,022 $ 67,136
------------- -------------
------------- -------------
Pro forma net income per share.............
Shares used in computation.................
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ (220,887)(1) $ 213,080 $ 213,080
Wholesale merchandise sales.............. -- 1,745,403 1,745,403
Software income, net..................... -- 1,242 1,242
Franchise operations:
Royalty income........................... -- 670,401 670,401
Franchise and development fees........... -- 142,250 142,250
------------- ------------- -------------
Total revenues............................. (220,887) 2,772,376 2,772,376
Operating costs and expenses:
Cost of sales--retail store sales........ (137,551)(1) 133,843 133,843
Cost of sales--wholesale merchandise
sales.................................. 1,583,822 1,583,822
Retail store operating expenses.......... (53,275)(1) 50,738 50,738
General and administrative............... 251,997(3) 782,407 $ (41,622)(5) 740,785
Depreciation and amortization............ 8,555 135,000(6) 143,555
Minority interest........................ (5,637)(1) -- --
------------- ------------- ------------- -------------
55,534 2,559,365 93,378 2,652,743
------------- ------------- ------------- -------------
Operating income........................... (276,421) 213,011 (93,378) 119,633
Other income............................... -- 38,726 -- 38,726
------------- ------------- ------------- -------------
Income before income taxes................. (276,421) 251,737 (93,378) 158,359
Pro forma provision for income taxes....... 86,000(4) 86,000 (32,000)(7) 54,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (362,421) $ 165,737 $ (61,378) $ 104,359
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share............. $ .06
-------------
-------------
Shares used in computation................. 1,780,000
-------------
-------------
</TABLE>
Note: CD Acquisitions included with CDIL as though a combined entity. Such
entities were merged January 1, 1996.
25
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL--ACQUIRED OPERATIONS
-------------------------------
COMPACT DISCS
INTERNATIONAL, MACDONALD
LTD. (NOTE) ASSETS
------------- -------------
<S> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ 200,329 $ 178,399
Wholesale merchandise sales.............. 2,442,442
Software income, net..................... 8,057
Franchise operations:
Royalty income........................... 856,175
Franchise and development fees........... 60,500
------------- -------------
Total revenues............................. 3,567,503 178,399
Operating costs and expenses:
Cost of sales--retail store sales........ 125,419 109,255
Cost of sales--wholesale merchandise
sales.................................. 2,297,730
Retail store operating expenses.......... 58,517 50,597
General and administrative............... 567,102
Depreciation and amortization............ 9,218
Minority interest........................ 3,165
------------- -------------
3,061,151 159,851
------------- -------------
Operating income........................... 506,352 18,547
Other income............................... 31,965 27,270
------------- -------------
Income before income taxes................. 538,317 45,817
Pro forma provision for income taxes....... --
------------- -------------
Pro forma net income....................... $ 538,317 $ 45,817
------------- -------------
------------- -------------
Pro forma net income per share.............
Shares used in computation.................
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA FOR THE
COMBINING PRO FORMA OFFERING AND
ADJUSTMENTS COMBINED ACQUISITIONS AS ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales....................... $ (200,329)(1) $ 178,399 $ 178,399
Wholesale merchandise sales.............. 2,442,442 2,442,442
Software income, net..................... 8,057 8,057
Franchise operations:
Royalty income........................... 856,175 856,175
Franchise and development fees........... 60,500 60,500
------------- ------------- -------------
Total revenues............................. (200,329) 3,545,573 3,545,573
Operating costs and expenses:
Cost of sales--retail store sales........ (125,419)(1) 109,255 109,255
Cost of sales--wholesale merchandise
sales.................................. 2,297,730 2,297,730
Retail store operating expenses.......... (58,517)(1) 50,597 50,597
General and administrative............... 405,184(3) 972,286 $ (194,809)(5) 777,477
Depreciation and amortization............ 9,218 135,000(6) 144,218
Minority interest........................ (3,165)(1) -- --
------------- ------------- ------------- -------------
218,083 3,439,085 (59,809) 3,379,276
------------- ------------- ------------- -------------
Operating income........................... (418,412) 106,487 59,809 166,296
Other income............................... (12,290)(2) 46,945 -- --
------------- ------------- ------------- -------------
Income before income taxes................. (430,702) 153,432 59,809 213,241
Pro forma provision for income taxes....... 52,000(4) 52,000 21,000(7) 73,000
------------- ------------- ------------- -------------
Pro forma net income....................... $ (482,702) $ 101,432 $ 38,809 $ 140,241
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income per share............. $ .08
-------------
-------------
Shares used in computation................. 1,780,000
-------------
-------------
</TABLE>
Note: Effective January 1, 1996, CD Acquisitions was merged into CDIL and is
included in consolidated CDIL amounts.
26
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------- ------------- -------------
<C> <S> <C> <C> <C>
(1) Eliminate retail store operations of majority-owned store of
CDIL--to be retained by CDIL:
Retail store sales.......................................... $ 291,948 $ 220,887 $ 200,329
Cost of sales............................................... 181,312 137,551 125,419
Retail store operating expense.............................. 71,253 53,275 58,517
Depreciation and amortization............................... 487 -- --
Minority interest........................................... 7,293 5,637 3,165
------------- ------------- -------------
260,345 196,463 187,101
------------- ------------- -------------
Net......................................................... $ 31,603 $ 24,424 $ 13,228
------------- ------------- -------------
------------- ------------- -------------
(2) Eliminate equity in earnings of investment in partnership of
retail store located in Orange Park, Florida--to be
retained by CDIL.......................................... $ -- $ -- $ 12,290
------------- ------------- -------------
------------- ------------- -------------
(3) Allocate partner cash distributions as salaries of officers
of CDIL................................................... $ 296,277 $ 251,997 $ 405,184
------------- ------------- -------------
------------- ------------- -------------
(4) Provide for income taxes at statutory rate on income of
partnership entities after above adjustments:
Combined pre-tax combined income before pro forma
adjustment................................................ $ 746,390 $ 528,158 $ 584,134
Adjustments, net--above..................................... (327,880) (276,421) (430,702)
------------- ------------- -------------
$ 418,510 $ 251,737 $ 153,432
------------- ------------- -------------
------------- ------------- -------------
Pro forma income taxes...................................... $ 142,000 $ 86,000 $ 52,000
------------- ------------- -------------
------------- ------------- -------------
(5) Adjust executive compensation as a result of employment
arrangements with new officers of the Company:
New officers' compensation.................................. $ 280,500 $ 210,375 $ 210,375
Pro forma adjustment for partners' cash draws............... (296,277) (251,997) (405,184)
------------- ------------- -------------
Net......................................................... $ (15,777) $ (41,622) $ (194,809)
------------- ------------- -------------
------------- ------------- -------------
(6) Amortization of estimated goodwill on purchase transaction
over twenty-year period................................... $ 180,000 $ 135,000 $ 135,000
------------- ------------- -------------
------------- ------------- -------------
(7) Pro forma income tax effect of adjustments for the offering
and acquisition........................................... $ (56,000) $ (32,000) $ 21,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
27
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company was formed in September 1996 to acquire the assets of CDIL, a
Texas limited partnership which franchises stores throughout the United States
and England under the name "CD Warehouse." CD Warehouse stores sell, trade and
buy new and preowned CD's and related products. According to the January 1996
issue of ENTREPRENEUR MAGAZINE, CDIL was ranked among the top 30 new franchises
in the United States. At September 30, 1996, there were 109 CD Warehouse stores
in 26 states and England.
The CD is a digital storage medium developed by Phillips Electronics of the
Netherlands and Sony Corporation of Japan and introduced commercially in the
U.S. in 1983. The pronounced freedom from surface noise, the absence of tape
hiss, and the large dynamic range of the CD (i.e., the ability to play very
quiet and very loud passages without excessive distortion) have made the
digitally-recorded CD a success in the music industry. Moreover, improved
mechanical isolation of CD players, information buffering and rapid random
access have made CD playing acceptable for automobile as well as home use.
According to the Recording Industry Association of America (the "RIAA"), CD
sales in the United States were over 700 million units in 1995, generating
annual sales exceeding $9 billion. The lack of any audible difference between
new and preowned CD's, durability of the medium, cost savings and the
accumulating stock of available CD's for resale, suggest the possibility for
rapid market growth in the preowned CD market.
CD Warehouse stores sell CD's, take customers' CD's in trade or buy
customers' CD's for cash. The CD Warehouse concept capitalizes on the emergence
of CD's as the prevailing form of prerecorded music. Because the CD is encased
in plastic and read by a laser, the playing of CD's, and even the occasional
careless handling of CD's, rarely cause damage that will impair performance or
result in any degradation of sound quality. In the absence of pronounced abuse,
CD's may reasonably be expected to last for decades; premium (gold-plated) CD's
may last significantly longer. Such extraordinary durability, coupled with the
standard error-correction circuitry in CD players, means that preowned CD's are
essentially indistinguishable from new CD's in terms of audible performance. By
offering quality preowned CD's at substantial savings and responding to
consumers' desire to recycle merchandise they no longer want or use but which
has intrinsic value, the CD Warehouse remarketing concept emphasizes consumer
value. The CD Warehouse marketing slogan, "selling compact discs at compact
prices," embodies this concept.
A typical CD Warehouse store, located in a high traffic strip shopping
center, will occupy between 1,000 and 2,000 square feet and offer between 8,000
and 12,000 selections, with approximately 80% of the dollar sales volume being
preowned selections and the balance being new releases from the major music
categories. At each CD Warehouse store, a customer selects from a number of new
and preowned CD's and may listen to preowned CD's before purchase. Typically,
each CD Warehouse store carries the majority of the Billboard Top 100 selections
as "new" inventory, filling out its inventory selection with preowned CD's which
are purchased for $1 to $4 and remarketed for $6 to $9.
The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Simultaneously with the closing of the
Offering, the Company will acquire the CDIL Assets for a purchase price of $3.2
million. See "Certain Transactions--CDIL Acquisition." In a related transaction,
which also will occur simultaneously with the closing of the Offering, the
Company will acquire the equity interests of MacDonald in 36 franchised CD
Warehouse stores. See "Certain Transactions-- MacDonald Acquisition." The
Offering will not be closed unless there is a simultaneous closing of the CDIL
Acquisition and the MacDonald Acquisition. Upon consummation of the CDIL
Acquisition and the MacDonald Acquisition, the Company will acquire the rights
to the CD Warehouse name, assume CDIL's role as franchisor under the franchise
agreements to which CDIL was a party and manage and have an interest in the CD
Warehouse Stores in which MacDonald had an interest.
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<PAGE>
During the year ended December 31, 1995 and the nine months ended September
30, 1996, on a pro forma basis taking into account the CDIL Acquisition and the
MacDonald Acquisition, the Company had pro forma total revenues of approximately
$4,153,000 and $3,545,000, respectively, and pro forma net income, as adjusted,
of approximately $168,000 and $140,000, respectively. There can be no assurance
that the historical level of the Company's revenues and net income will continue
to be achieved in the future. See "Risk Factors," "--Business Strategy" and
"Certain Transactions."
Certain statements contained herein relating to the Company's proposed
business strategy and expansion plans are not based on historical facts, but are
forward-looking statements that are based upon numerous assumptions about future
conditions which may ultimately prove to be inaccurate and actual events and
results may materially differ from anticipated results described in such
statements. The Company's ability to achieve such results is subject to certain
risks and uncertainties, such as those inherent generally in the retail and
franchising industries, the impact of competition and pricing, changing market
conditions, the risks detailed in the sections entitled "Risk Factors" and
"Legal Proceedings," and other risks detailed throughout this Prospectus. These
forward-looking statements represent the Company's judgment as of the date of
this Prospectus. The Company disclaims, however, any intent or obligation to
update these forward-looking statements. As a result, the reader is cautioned
not to place reliance on these forward-looking statements.
BUSINESS STRATEGY
The Company believes that a growing consumer willingness to purchase
preowned CD's, provides an expanding market niche in the retail music industry
for CD remarketers. The Company's business strategy is to establish itself as
the recognized industry leader in the domestic buy-sell-trade retail CD
marketplace by pursuing a three-fold approach: (1) offering quality, preowned
CD's at exceptional value; (2) selling new releases at competitive prices; and
(3) offering to accept as a trade, or buy for cash, selected CD's from
customers.
The Company's expansion strategy for 1997 is to open 9 to 12 Company-owned
stores and 18 to 24 franchised stores. Management believes that, in addition to
the Company, Disc Go Round and The Wherehouse are the only national chains
engaged in the sale of preowned CD's. Based on publicly available information
regarding such companies, the Company believes that CD Warehouse stores
currently account for approximately 23% of the estimated 480 chain-based CD
reseller stores that operate throughout the United States. Management believes
that the market for CD remarketers is fragmented and underserved, and that the
Company can increase its market share by expanding the CD Warehouse concept in
targeted markets. To accomplish this objective, the Company intends to employ a
business strategy that includes the following elements:
INVENTORY MANAGEMENT SYSTEM. The Company considers its inventory management
system, which is a proprietary software program, to be essential to the success
of its business strategy and the CD Warehouse concept. The program, which has a
database in excess of 60,000 titles and includes catalogs from all the major
record labels, assists each store in selectively procuring preowned CD's by
supplying buying guidelines for every CD offered. The ability to access this
data instantly gives store operators the capability to make an informed decision
on every CD presented by a customer for purchase or trade, by reviewing the
title's historic store sales data, as well as the recommended purchase price
that the CD has been assigned by the Company. By scanning each CD (utilizing bar
coding capability), the program also records point-of-sale data for all
transactions, including customer profiles with which mailing lists may be
created. Additionally, as each transaction is entered, the program prints
customer receipts and compiles inventory by title, including respective costs,
selling price and gross profit results. Accordingly, the program can generate
reports of comprehensive data for any selected period or any facet of store
operations, including sales by title, sales by dollar volume, inventory by
title, individual transaction summaries, acquisitions for any period, system
adjustments, cash register reconciliation and other pertinent financial
information.
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<PAGE>
The Company believes that its inventory management system contributes to
more efficient system-wide management of inventory by reducing the need to
purchase new titles from music distributors for new store inventories and
affording existing stores the opportunity to sell excess inventory. See
"--Operations--Acquisition of Preowned CD's."
CUSTOMER SERVICE. The Company emphasizes excellent customer service and
seeks to employ, and to sell franchises to, motivated and energetic people.
Management has adopted an owner/operator principle in which the store manager
has a vested interest in increasing sales and profitability. It is management's
intent to encourage this same philosophy to its multi-unit franchises. The
Company also intends to foster enthusiasm for its customer service philosophy
and the CD Warehouse concept through annual franchise conventions, regional
meetings and other frequent contacts with its franchisees and store managers.
TARGETED EXPANSION. The Company believes that its existing core and
developing markets offer significant growth opportunity for both Company-owned
and franchised store development. During 1997, the Company intends to
concentrate its expansion of Company-owned stores in markets where it can
cluster stores, thereby expanding consumer awareness and creating significant
operating, distribution and advertising efficiencies. To increase its
penetration of core markets, the Company intends to co-develop markets with
franchisees, divide markets among franchisees or divide markets among the
Company and franchisees. The Company also intends to cluster its Company-owned
stores and franchised stores through the use of area development agreements and
its site selection approval process. The Company believes that this approach
will result in increased average store sales.
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STORE LOCATIONS
The table below illustrates the location by state of all CD Warehouse retail
stores in the United States and England as of September 30, 1996:
DOMESTIC
ALABAMA
Decatur
Huntsville
ARKANSAS
Little Rock*
COLORADO
Colorado Springs
Denver*
Ft. Collins*
FLORIDA
Ft. Myers
Jacksonville*
Lake Park
Naples
Neptune Beach*
Orange Park*
Tallahassee
Tampa*
Venice
GEORGIA
Atlanta
Martinez
IDAHO
Idaho Falls
ILLINOIS
Carol Stream
Lombard
Streamwood
Wheaton
IOWA
Des Moines
KANSAS
Overland Park*
Shawnee*
Wichita*
LOUISIANA
Baton Rouge*
Bossier City
Lafayette*
Metarie*
Shreveport
Slidell
MARYLAND
Laurel
MISSOURI
Ballwin
Branson*
Cape Girardeau
Gladstone*
Springfield*
St. Louis
MONTANA
Bozeman
NEBRASKA
Omaha*
NEW MEXICO
Albuquerque
OHIO
Cincinnati--Beechmont Ave
Cincinnati--Montgomery
Columbus
Mayfield Heights
Miamisburg
Parma Heights
Toledo
OKLAHOMA
Edmond*
Oklahoma City--N May*
Oklahoma City--NW Expressway*
Tulsa--S Sheridan*
Tulsa--S Peoria
OREGON
Portland--SW Washington St.
Portland--NE Broadway
SOUTH CAROLINA
Columbia
Greenville
SOUTH DAKOTA
Rapid City
TENNESSEE
Jackson
Memphis*
TEXAS
Abilene
Arlington--Cooper Street*
Arlington--N Collins
Austin--Research Blvd
Austin--Guadalupe
Beaumont*
Carrollton
College Station*
Dallas--Montfort**
Dallas--Oak Lawn
Dallas--Preston
Dallas--Skillman
Dallas--Walnut Hill
Denton*
El Paso
Ft. Worth--Berry Street
Ft. Worth--S. Hulen
Garland
Houston--FM 1960
Houston--Shepherd*
Irving*
Lewisville*
Lubbock
Mesquite*
Midland
N. Richland Hills
Plano
San Angelo
San Antonio--NW Military
San Antonio--Thousand Oaks
San Antonio--Evers
San Antonio--Broadway
Sherman
Temple
Waco*
Webster
Wichita Falls
UTAH
Provo
St. George
Taylorsville*
VIRGINIA
Alexandria*
WASHINGTON
Seattle
WISCONSIN
Appleton
Brookfield
Kenosha
INTERNATIONAL/UK
Ealing
Leeds
London
- ------------------------------
* Franchise store operations managed by CD Management, a wholly-owned
subsidiary of the Company, which also owns a minority equity interest in the
indicated store.
** To be acquired as a Company-owned store upon completion of the Offering.
EXPANSION STRATEGY
The first CD Warehouse store opened in Dallas, Texas in August 1992 and by
September 30, 1996 there were a total of 109 CD Warehouse stores in 26 states
and England, all but two of which were
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franchised. In 1997, the Company expects to open between 12 and 24 new
franchised stores and 9 to 12 new Company-owned stores. Key elements of the
Company's expansion strategy include:
AGGRESSIVE, BALANCED GROWTH. The Company's expansion strategy is to balance
the growth of its Company-owned and franchised stores by increasing its emphasis
on Company-owned store expansion. A Company-owned store provides a greater
potential economic return to the Company than does a franchised store. The
Company believes that, in many cases, the Company will be able to take advantage
of a promising new location by establishing a Company-owned store when a delay
in finding a qualified franchisee might jeopardize the Company's ability to
secure the site. Company-owned stores also provide a training ground for
Company-owned store and district managers and a controllable testing ground for
new products and promotions, operating and training methods and merchandising
techniques. The Company also plans to open additional franchised stores, which
will enable the Company to expand its system more quickly with no capital
investment. Proceeds from the Offering and the Credit Facility will be used to
support this growth.
NAME RECOGNITION AND NEW MARKET PENETRATION. The Company believes the
visibility of its stores at high traffic strip shopping centers has generated
good name recognition in the areas in which stores currently are located. CD
Warehouse stores historically have been concentrated in the Southwest United
States, but recent growth has generated a gradual shift outward into adjoining
states and scattered parts of the Midwestern and Southeastern United States. The
Company's expansion strategy involves initially the building-out of these
existing markets and subsequently the further penetration of developing markets
through the clustering of both Company-owned and franchised stores. This
expansion strategy is designed to take advantage of operational and advertising
efficiencies through store clustering within television and other advertising
markets, thereby increasing market penetration and consumer awareness. To
accelerate penetration of larger markets, the Company intends to co-develop
markets with franchisees or divide markets among franchisees, and intends to
utilize market co-development where appropriate. In determining which new
markets to develop, the Company considers many factors, including the size of
the market, demographics and population trends, competition and real estate
availability and pricing.
INTERNATIONAL FRANCHISE EXPANSION. There are three franchised stores
currently operating in England. In connection with the CDIL Acquisition, the
Company has entered into a master franchise agreement (the "Worldwide Area
Development Agreement") with the founder of CDIL, Mark E. Kane. The Worldwide
Area Development Agreement provides for a period of ten years for development of
franchise operations worldwide, excluding the United States, Canada and Mexico,
and includes a provision which allows the Company, at its option, to purchase
Mr. Kane's interest in any franchised operations developed pursuant to the
Worldwide Area Development Agreement. The development schedule under the
agreement requires that Mr. Kane open 100 stores over the ten year period. There
is no assurance that Mr. Kane will be successful in opening these stores. The
Company's intent is to focus its own efforts on developing the CD Warehouse
franchise system domestically, and it considers the Worldwide Area Development
Agreement an attractive vehicle to utilize the expertise of Mr. Kane to develop
the international franchise system. See "Certain Transactions--Worldwide Area
Development Agreement."
CONSIDERATION OF ACQUISITIONS. Concurrently with the Offering, the Company
will acquire the interests of MacDonald, the largest CD Warehouse franchisee.
The Company intends to pursue the acquisition of other local and regional
preowned music retailers to implement its strategy of building out current
markets and establishing itself in new target markets that may be concurrently
developed by the Company as well as franchised stores.
NEW STORE CONCEPT. The Company intends to examine the need for a new,
consistent appearance, both externally and internally, for all stores. A
prototype unit has opened in August 1996, in Plano Texas. This particular store
carries slightly more inventory (16,000 titles) and utilizes updated decor and
lighting schemes. The Company believes that by offering a larger variety in both
new and preowned titles, the Company will improve store sales; however, the
opportunities for greater sales must be balanced against
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<PAGE>
the increased inventory costs. A component of developing the new store concept
is to devise a uniform, low cost remodel plan for the system as a whole. The
cost of remodeling non-Company-owned stores will be borne by the respective
franchisees.
OPERATIONS
ACQUISITION OF PREOWNED CD'S. A key component of the CD Warehouse concept
is to accept as a trade or buy for cash selected CD's from customers;
accordingly, the Company anticipates that it will obtain its preowned CD
inventory primarily from within the system itself. Additionally, utilizing its
inventory management system, which is a proprietary program, the Company affords
existing stores the opportunity to sell excess inventory. As new stores are
developed, opening packages of inventory are assembled by the Company and sold
to franchisees. The demand for inventory by new stores allows existing stores to
sell excess inventory. The Company has a policy of buying available inventory
directly from the retail locations and, with modem and Internet capability, the
Company compiles real-time inventory information. If, for example, it is
determined that a store may be overstocked on a particular selection, the
Company may purchase the selection and resell it to another unit or as part of
the opening inventory of a new store. The Company believes that this is a
significant advantage in comparison to its competitors since the Company can
review all titles available and source its own system for inventory. Management
anticipates, based on CDIL's operational history, that as much as 75% of the
opening inventory for a new store can be purchased from the current system of CD
Warehouse stores. This constant inventory turnover allows existing stores to
make a reasonable profit and provide a source of capital while providing an
opportunity for the Company to acquire quality inventory to open new stores or
update an existing location's inventory.
PURCHASING OF NEW CD'S, OTHER POINT-OF-SALE ITEMS AND STORE FIXTURES. For
new music releases, the Company will contract with six major industry CD
suppliers (Sony Music; Warner/Electra/Atlantic Corp. (subsidiary of Time
Warner); BMG Music (subsidiary of Bertelsman); UNI (subsidiary of Seagrams);
PolyGram (subsidiary of Philips); and EMI (subsidiary of Thorn-EMI)) to provide
the necessary access to new titles. As these new releases become available, the
Company reviews all titles and determines what specific releases will be
acquired for sale to the system. The Company then provides franchisees and
Company-owned stores with a weekly sales program which lists new releases,
catalog titles (i.e., Elvis Presley, Pink Floyd, movie soundtracks, etc.),
preowned titles and various point of sale and merchandising items. The Company
negotiates with vendors on behalf of the system for inventory display racks,
lighting and related products which are then shipped directly from the
manufacturers to the individual stores.
As the system grows, the Company believes that additional quantity discounts
can be negotiated with the respective equipment and product suppliers. The
Company maintains its own distribution facility to provide its franchise and
Company-owned stores with available new and preowned CD's. Additionally, the
Company is reviewing the possibility of forward warehousing inventory in
specific regions to reduce the shipping time and related shipping costs.
MARKETING AND ADVERTISING
Historically, CDIL has had only a limited involvement in direct retail
operations, and therefore has not conducted significant advertising or marketing
programs. Although the Company provides new stores with certain pre-opening
items and point-of-sale materials (additional point-of-sales materials are
available to all stores at no cost from the record companies), CD Warehouse
franchisees currently conduct marketing and advertising activities independently
through newspapers and radio, the funds for which are reserved pursuant to the
franchise agreement, which provides for each store to reserve 1.5% of sales to
spend specifically on advertising. It is the Company's intent, as markets reach
relative points of saturation, to develop an advertising cooperative managed by
the Company to support enhanced advertising (i.e., television, direct mail,
etc.). Additionally, the Company is considering making preowned CD's available
for sale through Internet access.
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<PAGE>
FRANCHISING PROGRAM
GENERAL. The Company's predecessor, CDIL, commenced franchising the CD
Warehouse concept in 1993. Upon completion of the Offering and the concurrent
closings of the CDIL Acquisition and the MacDonald Acquisition, the Company will
have 36 Company-owned or controlled stores and 73 franchised stores in 26 states
and England. The Company expects that 18 to 24 franchised stores will open by
the end of 1997. However, there can be no assurance that all of these stores
will be opened or that the development schedule set forth in each area
development agreement will be achieved.
The Company's franchise agreement entitles the franchisee to use the
Company's trade names, service marks and trademark. Additionally, pursuant to
the franchise agreement, the Company provides franchisees with design plans,
color schemes, signs and fixtures for store premises; buying and selling
guidelines; computerized inventory management system; initial inventory,
operations and financial control guidelines; initial management training; and
advertising assistance.
The following table sets forth the number of CD Warehouse stores opened and
closed since the inception of the CD Warehouse franchise system:
<TABLE>
<CAPTION>
PERIOD ENDING
1992 1993 1994 1995 SEPTEMBER 30, 1996 TOTAL
----- ----- ----- ----- ------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Opened.................................... 2 17 51 36 16 122
Closed.................................... 0 0 3 7 3 13
---
109
</TABLE>
FRANCHISE SOURCING AND SELECTION. The majority of new franchises are
awarded to persons referred by existing franchisees, interested consumers who
have visited CD Warehouse stores and existing franchisees. Franchisees are
approved by the Company on the basis of the applicant's net worth and liquidity,
together with an assessment of work ethic and personality compatibility with the
Company's operating philosophy. Currently, 19 franchisees own two or more CD
Warehouse stores and 16 franchisees own a single store. The largest number of
stores owned or managed by a single franchisee is 36 which, upon completion of
the Offering and the MacDonald Acquisition, will become Company-owned or managed
stores.
FRANCHISE MARKETING PROGRAM. The Company's franchise marketing program
seeks to attract prospective franchisees with management experience, a minimum
level of net worth and strong interest in the retail music business. The Company
markets its franchise opportunities by advertising in selected business
magazines and franchise-oriented publications. Each inquiry is responded to and
an initial determination is made as to the prospects' qualifications to become a
CD Warehouse franchisee. Once initially qualified, the prospect is mailed the
Company's brochure and marketing materials. The inquiry is then followed up on
within a period of two weeks. In June 1996, CDIL implemented an enhanced
advertising strategy utilizing ENTREPRENEUR MAGAZINE. The Company believes that
the new marketing program has resulted in heightened awareness of CD Warehouse
as a franchise opportunity.
The Company also intends to establish a home page via the Internet (World
Wide Web) that will provide information concerning CD Warehouse franchise
opportunities.
TRAINING AND SUPPORT. The Company's philosophy is one of service and
commitment to its franchise system and it intends to implement a plan to enhance
franchise support services. Each franchise owner/ operator and each franchised
store manager is required to complete a comprehensive training program in store
operation and management. Topics covered in the training course include the
Company's philosophy of store operation and management, customer service,
merchandising, marketing, pricing, inventory and cost control, record keeping,
labor scheduling and personnel management. Training is based on standard
operating policies and procedures contained in an operations manual provided to
all franchisees, which the franchisee is required to follow by terms of the
franchise agreement. Additionally, trainees are provided
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<PAGE>
with a complete orientation to Company operations by meeting with members of the
senior management of the Company. Training continues through the opening of the
store, where Company field personnel assist and guide the franchisee in all
areas of operation.
THE FRANCHISE AGREEMENT; TERMS AND CONDITIONS. The domestic offer and sale
of CD Warehouse franchises is made by its Uniform Franchise Offering Circular
prepared in accordance with federal and state laws and regulations. States that
regulate the sale and operation of franchises require a franchisor to register
or file certain notices with the state authorities prior to offering and selling
franchises in those states.
Under the current form of domestic franchise agreement, franchisees pay the
Company an initial franchise fee of $6,000 and royalties equal to 5% of monthly
gross sales. It is expected that the initial fee will increase as the Company
enhances franchise services. Franchisees are generally granted exclusive
territory with respect to the operation of CD Warehouse stores only in the
immediate vicinity of their stores.
The franchise agreement requires franchisees to purchase from the Company
certain proprietary software and the store's initial inventory, and to comply
with the Company's procedures of operation, to permit inspections and audits by
the Company and to remodel stores to conform with standards in effect from time
to time for the CD Warehouse system. The Company may terminate the franchise
agreement upon the failure of the franchisee to comply with the conditions of
the agreement and upon the occurrence of certain events, such as insolvency or
bankruptcy of the franchisee or the commission by the franchisee of any unlawful
or deceptive practice, which in the judgment of the Company is likely to
adversely affect the CD Warehouse system. The Company's ability to terminate
franchise agreements pursuant to such provisions is subject to applicable
bankruptcy and state laws and regulations. See "--Regulation."
The franchise agreement prohibits the transfer or assignment of any interest
in a franchise without the prior written consent of the Company. The agreement
also gives the Company a right of first refusal to purchase any interest in a
franchise if a proposed transfer would result in a change of control of that
franchise. The refusal right, if exercised, would allow the Company to purchase
the interest proposed to be transferred under the same terms and conditions and
for the same price as offered by the proposed transferee.
The term of each franchise agreement is ten years, and franchisees generally
have the right to renew for an additional ten-year term. All of the franchise
agreements to be assigned to the Company in connection with the CDIL Acquisition
will expire between 2002 and 2006.
UNIT ECONOMICS. The Company believes that future CD Warehouse stores can be
opened for an initial investment of approximately $100,000. The estimated
initial investment is comprised of the following:
<TABLE>
<S> <C>
Franchise fee............................................. $ 6,000
Inventory................................................. 50,000
Leasehold improvements.................................... 11,500
Proprietary software and related hardware................. 4,500
Signage (exterior and interior)........................... 5,500
Fixtures and equipment.................................... 10,000
Lease and utility deposits................................ 2,500
Initial working capital................................... 10,000
---------
$ 100,000
---------
---------
</TABLE>
Management believes that a key indicator of the success of a franchise
location is the sales to capitalization ratio. That ratio is defined as the
annual sales revenue generated by the business divided by
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<PAGE>
the capitalization costs to open the business. For the year ended December 31,
1995, average unit sales on a comparable basis were $276,338. Based on an
initial estimated capitalization of $100,000, the sales to capitalization ratio
to open a new CD Warehouse store is 2.76 to 1.
FRANCHISE FINANCING. The Company's predecessor did not provide prospective
franchisees with financing for its stores. Typically, franchisees have obtained
their own sources of such financing and have not required the Company's
assistance. The Company plans to develop relationships with sources of franchise
financing which will serve both franchised and Company-owned store development.
COMPANY STORE PROGRAM
As a result of the MacDonald Acquisition, the Company will have interests in
and will manage 36 CD Warehouse stores and intends to open 9 to 12 Company-owned
stores in 1997. Although Company-owned stores require an initial capital outlay
by the Company, they also provide a greater potential economic return to the
Company than franchised stores. The Company estimates that the cost of opening a
new Company-owned store is approximately $84,000, excluding franchise fee and
initial working capital applicable to franchisees.
Company-owned stores also permit market penetration, or seeding, in the
absence of an immediately-viable multi-location franchise operator. Company
stores provide an opportunity to continually refine the Company's standard store
model in order to respond to market dynamics. Variations in inventory mix,
ancillary product offerings, and marketing and sales techniques can be tested
and refined before implementation throughout the system.
The Company believes in the owner-operator concept. It is the intent that
each Company-owned store will be operated by an owner-manager. The Company
believes that this relationship provides operators with an incentive to perform
with a higher degree of commitment to the store's business. As a market is
developed, owner-managers will be given opportunities to progress into
multi-unit management. A typical multi-unit supervisor will own up to 20% of
each unit under his supervision. With the exception of the 35 franchised stores
in which the Company will acquire a minority ownership interest pursuant to the
MacDonald Acquisition, the Company will always retain a majority ownership in
the operating partnerships.
Managers of Company-owned stores are required to comply with all Company
operating standards and undergo training and receive support from the Company
similar to the training and support provided to franchisees. See "--Franchising
Program--Training and Support." The Company's Vice President-- Company Store
Operations and his staff intend to regularly visit Company-owned stores to
ensure compliance with Company standards and procedures and to provide advice
and support.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's stores is subject to licensing and
regulation by a number of governmental authorities, which include taxing, zoning
and building agencies in the state or municipality in which the store is
located. Difficulties in obtaining or failures to obtain required licenses or
approvals could delay or prevent the opening a new store in a particular area.
The Company is subject to Federal Trade Commission ("FTC") regulation and
various state laws which regulate the offer and sale of franchises. The FTC has
adopted a rule that requires franchisors to make certain disclosures to
prospective franchise owners prior to the offer or sale of franchises. This rule
requires the disclosure of information necessary for a franchise owner to make
an informed decision as to whether to enter into a franchise relationship and
delineates the circumstances in which franchisors may make predictions on future
sales, income and profits. Failure to comply with this rule constitutes an
unfair or deceptive act or practice under the Federal Trade Commission Act.
Additionally, numerous states have
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<PAGE>
in recent years adopted laws regulating franchise operations and the
franchisor-franchisee relationship, and similar legislation is pending in
Congress and several other states. Existing laws and pending proposals vary from
filing and disclosure requirements in the offer and sale of franchises to the
application of statutory standards regulating the establishment and termination
of franchise relationships. These laws generally apply to both area and
individual franchises. Although the foregoing matters may result in some
modification in the Company's franchising activities and some delays or failures
in enforcing certain of its rights and remedies under certain area or individual
franchise agreements, such modifications, delays or failures have not had a
material adverse effect on the Company's operations or business. However, the
law applicable to franchise operations and relationships is still developing,
and the Company is unable to predict the effect, if any, on its operations of
additional requirements or restrictions that may be enacted or promulgated or of
court decisions that may be adverse to the franchise industry. While it is
difficult to assess potential effects of federal and state legislation in the
U.S. or new international laws that may impact the industry, the Company does
not anticipate any material adverse effects from such legislation or laws at
this time.
The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions and overtime.
COMPETITION
The Company competes in the retail music industry, which is highly
competitive in price, selection, service and location and is often affected by
changes in consumer trends, economic conditions, demographics, traffic patterns
and technological innovations. The following profile provides an overview and
comparison of how the retail "new release" CD industry and the emerging retail
"remarketing" or "buy-sell-trade" CD industry are currently structured and
segmented.
According to the RIAA, CD sales in the United States were over 700 million
units in 1995, generating annual sales exceeding $9 billion. The Company has
various competitors in the industry who sell new recordings and music related
merchandise. These companies vary from those who are specialty music stores in
malls (such as Musicland, Camelot) and those who utilize free-standing buildings
(such as Blockbuster Music, The Wherehouse). Empirical studies conducted by the
Company indicate that companies in mall locations typically charge $15.99 to
$17.99 for their front-line CD products. Those in free-standing buildings
generally have much larger facilities (between 12,000 to 20,000 square feet).
Their selling price for front-line items range between $13.99 and $15.99, with
the latest top 20 releases on sale for $11.99 to $13.99 per CD. None of these
"superstores" sell preowned music except for The Wherehouse, which has generally
offered an inventory of preowned CD's in less than 500 square feet of space with
limited selections.
Other retailers offering pre-recorded music include major national discount
stores, such as Wal-Mart, K-Mart and Target stores. These national discounters
maintain a very small number of new music titles while offering no preowned
music. Their pricing will typically vary from $11.99 to $13.99 per item in
approximately 1,000 square feet of space. In another category are the
multi-media electronic stores (such as Best Buy, Circuit City), which have
generally utilized approximately 1,000 square feet of space and discount their
new releases at prices which range generally from $9.99 to $12.99 per item. The
Company believes that, while many of its competitors in the new CD market offer
a greater number of selections, the Company competes favorably with such
competitors on the basis of price. Additionally, while many competitors selling
new releases are located in more desirable locations, the Company believes that
its focus on preowned CD's offers a competitive advantage in attracting
purchasers of both new and preowned CD's.
The CD Warehouse system competes currently with one other national company
specializing in the sale of preowned CD's. Disc-Go-Round-Registered Trademark-
is a Minneapolis-based company owned by GrowBiz International, a franchisor of
several other concepts including Play It Again Sports.
Disc-Go-Round-Registered Trademark- maintains
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smaller quantities of preowned inventory than does CD Warehouse. Both CD
Warehouse and Disc-Go-Round-Registered Trademark- sell preowned CD's at $6.00 to
$9.00 and new releases at $10.99 to $12.99, as compared to Best Buy and Circuit
City prices of new CD's which range generally from $9.99 to $12.99 per
selection. GrowBiz International's Form 10-Q for the quarter ended June 1996
indicates that there are currently 107 units in the
Disc-Go-Round-Registered Trademark- system, as compared to 109 units in the CD
Warehouse system.
The Company believes that CD Warehouse stores compete favorably with its
competition in the preowned CD market in terms of price, selection, service and
location.
The Company also competes in the franchise industry for prospective
franchisees. With respect to the only other franchisor known to the Company to
engage in a business similar to that of the Company, the Company believes that
it competes favorably.
TRADEMARKS AND SERVICE MARKS
In connection with the CDIL Acquisition, the Company will acquire all right,
title and interest in the name "CD Warehouse" which is registered with the
United States Patent and Trademark Office. The Company believes that the
trademark has significant value and is important to its marketing efforts.
PROPERTIES
The Company's principal executive offices currently are located at 722 N.
Broadway, Oklahoma City, Oklahoma 73012, where it leases from a director of the
Company approximately 800 square feet under a month-to-month lease with a
monthly lease payment of $600. See "Certain Transactions."
CDIL maintains its offices and warehouse operations at 1710 Firman, Suite
300, Richardson, Texas 75081. The total facility is approximately 4,500 square
feet and is held under a lease expiring in March 1997 with a monthly lease
payment of $2,087. Approximately 2,500 square feet consists of office space and
the remainder is utilized as a warehouse. Upon completing the CDIL Acquisition,
the Company will share offices with CDIL during a transition period anticipated
to last approximately four months. The transition period will allow the Company
to plan an orderly move of the CD Warehouse system operations to Oklahoma City.
Upon the expiration of the CDIL lease, the Company anticipates that it will
relocate its principal offices to a larger facility in Oklahoma City. The
Company has solicited the services of the largest commercial realtor in Oklahoma
City to assist in locating suitable facilities. None of the proceeds from this
Offering will be used in connection with the establishment of the Company's
office and warehouse facility in Oklahoma City.
EMPLOYEES
Upon commencement of operations, the Company will employ 13 employees, 11 on
a full-time basis. None of the Company's employees are represented by a labor
union and the Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its normal business operation. The Company is not now
engaged in any legal proceedings.
CDIL is subject to a currently effective order from the State of South
Dakota, issued by the South Dakota Division of Securities, to cease and desist
and refrain from offering or selling franchises in the State of South Dakota
until CDIL has complied with the South Dakota franchise registration laws. The
basis for the cease and desist order was that CDIL sold a franchise to two South
Dakota residents and had not registered the franchise in South Dakota. The
Company intends to seek registration of its franchise in South Dakota as soon as
practicable after completion of the Offering and the CDIL Acquisition.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
Jerry W. Grizzle.............. 44 Chairman of the Board of Directors, President and Chief Executive
Officer
Gary D. Johnson............... 37 Chief Operating Officer, Executive Vice President and Director
Bruce D. MacDonald............ 41 Vice President-Company Store Operations
Doyle E. Motley............... 42 Senior Vice President and Chief Financial Officer
Christopher M. Salyer......... 44 Director
Ronald V. Perry............... 47 Director
</TABLE>
JERRY W. GRIZZLE founded the Company in September 1996 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company since that time. From 1984 to 1991, Mr. Grizzle was Vice President and
Treasurer of Sonic Corporation, a publicly held fast food franchisor with over
1,500 units operating in 26 states, and from 1991 to 1994, he owned and operated
Orbit Finer Foods, a privately owned Mexican food product manufacturer. For a
four-month period in 1994, Mr. Grizzle served as President of Skolniks, Inc., a
publicly held bagel manufacturer ("Skolniks"). Mr. Grizzle resigned from
Skolniks in October 1994 as a result of significant disagreements with the Board
of Directors over Skolniks' corporate practices; subsequent to Mr. Grizzle's
resignation, Skolniks was the subject of an involuntary Chapter 11 proceeding.
Mr. Grizzle received his B.S. degree in Accounting from Southwestern Oklahoma
State University in 1976 and received an M.B.A. in 1983 from the University of
Central Oklahoma. He is currently completing his Ph.D. in Marketing at Oklahoma
State University, and holds the rank of Colonel in the Oklahoma Army National
Guard.
GARY D. JOHNSON has been Executive Vice President, Chief Operating Officer
of the Company and a director of the Company since the Company's inception in
September 1996. For the past nine years, from 1987 to 1996, Mr. Johnson served
as Vice President of Purchasing and Distribution for Sonic Corp. In such
capacity, Mr. Johnson was responsible for cooperative purchasing and management
of all procurement functions and distribution for the Sonic system. Mr. Johnson
received his B.S. degree in Business Management from Southwestern Oklahoma State
University in 1981.
BRUCE D. MACDONALD will be appointed to Vice President-Company Store
Operations upon completion of the offering. Prior to the Company's acquisition
of CDIL, Mr. MacDonald owned an interest in and managed 36 CD Warehouse retail
stores. Mr. MacDonald is a certified public accountant and began his career at
Arthur Andersen in 1977, after graduating with a B.B.A. degree from Southern
Methodist University in 1977. For at least the last five years, Mr. MacDonald
has been self-employed as a certified public accountant, in addition to his
activities as a CD Warehouse franchisee.
DOYLE E. MOTLEY will be appointed to Senior Vice President and Chief
Financial Officer of the Company upon completion of the Offering. For the past
two years, Mr. Motley has served as an internal auditor for Bob Moore Financial
Group, a multi-state auto dealership. Prior to that, from 1991 to 1994, Mr.
Motley served as Chief Financial Officer of Orbit Finer Foods. For a four-month
period in 1994, Mr. Motley served as Chief Financial Officer of Skolniks. Mr.
Motley resigned from Skolniks in October 1994 as a result of significant
disagreements with the Board of Directors over Skolniks' corporate practices;
subsequent to Mr. Motley's resignation, Skolniks was the subject of an
involuntary Chapter 11 proceeding.
CHRISTOPHER M. SALYER has been a member of the Board of Directors since
October 1996. Mr. Salyer is currently serving as the Chairman and Chief
Executive Officer of Accounting Principals, Inc., a company
39
<PAGE>
specializing in the placement of accounting personnel. From February 1984
through December 1994, Mr. Salyer served as the Chairman and Chief Executive
Officer of National Check Cashers Corporation, a retail financial services
company. He received his B.B.A. degree from Southern Methodist University in
1973 and received an M.B.A. in 1974 from Babson College in Boston,
Massachusetts. Mr. Salyer is a certified public accountant.
RONALD V. PERRY has been a member of the Board of Directors since October
1996. Mr. Perry has served as the President and Chief Operating Officer of Prime
Time Travel, Inc., a travel agency specializing in providing services to a
corporate client base since August 1986. During this same period of time Mr.
Perry has also served as the President and Chief Operating Officer of Prime Cut
Restaurants, Inc. which owns and operates four restaurants. Mr. Perry received
his B.B.A. degree from Oklahoma State University in 1971.
THE BOARD OF DIRECTORS
The Company's Bylaws authorize a maximum of nine directors and a minimum of
five directors. The Bylaws also provide that the directors shall be divided into
three classes, as nearly equal in number as possible, with each class serving
staggered three-year terms. Currently, the Board of Directors consists of four
directors. The Board of Directors is continuing to search for additional
qualified and available nominees to fill the remaining vacant Board of Directors
seats which, when filled, will have a term expiring in 1999.
The Company has agreed with the Representative that it will recommend and
use its best efforts to cause a designee of the Representative who is reasonably
satisfactory to the Company to be elected as a full voting member of its Board
of Directors. As of the date of this Prospectus, the Representative has not
named a nominee for election to board membership.
EXECUTIVE COMPENSATION
The Company was formed in September 1996 and has not paid any executive
compensation. The Company has entered into employment agreements with each of
the executive officers of the Company, the terms of which are set forth under
"--Employment Agreements."
DIRECTORS' COMPENSATION
Directors who are not officers of the Company are to be paid $1,000 for each
Board of Director's meeting attended.
1996 STOCK OPTION PLAN
The Company's Board of Directors and stockholders have approved the 1996
Stock Option Plan. The description in this Prospectus of the principal terms of
the 1996 Option Plan is a summary, does not purport to be complete, and is
qualified in its entirety by the full text of the 1996 Option Plan, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to the 1996 Option Plan, employees, officers, directors,
consultants and advisers of the Company are eligible to receive awards of stock
options. The 1996 Stock Option Plan provides for grants of "incentive stock
options" ("ISO's") meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and "non-qualified stock options"
("NQSO's").
Under the 1996 Option Plan, the Company has reserved 400,000 shares of
Common Stock for issuance of awards under the 1996 Option Plan (subject to
antidilution and similar adjustments).
The 1996 Option Plan will be administered by a Compensation Committee (the
"Committee") composed of two or more directors of the Company who are
"Non-Employee Directors" as such term is
40
<PAGE>
used in Rule 16b-3 promulgated under the Exchange Act. Subject to the provisions
of the 1996 Option Plan, the Committee will determine the type of award, when
and to whom awards will be granted, the number of shares covered by each award
and the terms, provisions and kind of consideration payable with respect to
awards. The Committee may interpret the 1996 Option Plan and may at any time
adopt such rules and regulations for the 1996 Option Plan as it deems advisable.
The Committee may, additionally, cancel or amend awards.
In determining the persons to whom awards shall be granted and the number of
shares covered by each award the Committee shall take into account the duties of
the respective persons, their present and potential contribution to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the 1996 Option Plan.
An option may be granted on such terms and conditions as the Committee may
approve, and generally may be exercised for a period of up to 10 years from the
date of grant. Generally, both NQSO's and ISO's will be granted with an exercise
price equal to the "Fair Market Value" (as defined in the 1996 Option Plan) on
the date of grant. In the case of ISO's, certain limitations will apply with
respect to the aggregate value of option shares which can become exercisable for
the first time during any one calendar year, and certain additional limitations
will apply to ISO's granted to an employee who possesses more than 10% of the
total combined voting power of all classes of stock of the Company. The
Committee may provide for the payment of the option price in cash, by delivery
of other Common Stock having a Fair Market Value equal to such option price, by
a combination thereof or by such other manner as the Committee shall determine.
Options granted under the 1996 Option Plan will become exercisable at such times
and under such conditions as the Committee shall determine. Other than in the
case of death, options generally may not be exercised more than three months
after an employee terminates employment with the Company for any reason other
than termination for cause or voluntary termination without the consent of the
Company (in which event options shall terminate immediately, unless the
Committee shall otherwise determine). Each year that a director is elected or
reelected to his position at the Company, an option to purchase 6,000 shares of
Common Stock will be granted with an exercise price equal to the Fair Market
Value on the date of grant. No options have been granted to date. Pursuant to
the terms of the 1996 Stock Option Plan, directors elected prior to the closing
of the Offering shall be granted 6,000 shares of Common Stock on the effective
date of the registration statement to which this Offering relates, with an
exercise price equal to the Offering price per share on the effective date,
subject to pro-rata vesting over a three-year period.
The Board may at any time and from time to time suspend, amend, modify or
terminate the 1996 Option Plan; provided, however, that, to the extent required
by Rule 16b-3 promulgated under the Exchange Act or any other law, regulation or
stock exchange rule, no such change shall be effective without the requisite
approval of the Company's stockholders. In addition, no such change may
adversely affect any award previously granted, except with the written consent
of the grantee.
No awards may be granted under the 1996 Option Plan after the tenth
anniversary of the approval of the 1996 Option Plan.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Jerry W. Grizzle, Gary D.
Johnson, Bruce D. MacDonald and Doyle E. Motley (each an "Employee" and
collectively, the "Employees"). Each of these agreements, other than that of Mr.
Grizzle, runs for a term of one year and automatically renews for additional
one-year terms unless terminated by either the Company or Employee. Mr.
Grizzle's agreement runs for a term of five years and automatically renews for
additional five-year terms unless terminated by either the Company or Mr.
Grizzle. Under the respective agreements, Mr. Grizzle will receive an annual
salary of $100,000, Mr. Johnson will receive an annual salary of $90,000, Mr.
MacDonald will receive an annual salary of $100,000 upon commencement of his
employment, and Mr. Motley will receive an annual salary of $65,000 upon
commencement of his employment. In addition, each Employee may be entitled to
41
<PAGE>
receive incentive compensation. Such incentive compensation consists of an
annual bonus if certain individual and Company objectives are achieved. "Cause"
for termination of an Employee includes: the conviction of a felony; the
perpetration of a fraud, or misappropriation or embezzlement of property of the
Company; willful misconduct with respect to the duties or obligations of the
Employee under his employment agreement; or intentional or continual neglect of
duties. For two years following the termination of an Employee, the Employee is
prohibited from engaging in or assisting in any business which is identical,
competitive with, or comparable to, the Company's business within any area in
which Employee rendered services to the Company. Each agreement contains a
provision prohibiting the Employees subsequent to termination of employment from
disclosing to third parties proprietary information relating to the Company.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the DGCL, the Company's Certificate of
Incorporation eliminates, in certain circumstances, the monetary liability of
directors of the Company for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director (i) for a breach
of a director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions by a director not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for liability arising under
Section 174 of the DGCL (relating to the declaration of dividends and purchase
or redemption of shares in violation of the DGCL); or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, these
provisions do not eliminate the liability of a director for violations of
federal securities laws or limit the rights of the Company or its stockholders,
in appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in all
cases.
The Company's Certificate of Incorporation provides that the Company shall
indemnify all directors and officers of the Company to the full extent permitted
by the DGCL. Under such provisions, any director or officer, who in his capacity
as such, is made or threatened to be made, a party to any suit or proceeding,
may be indemnified if the Board of Directors determines such director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company. The Certificate and the DGCL
further provide that such indemnification is not exclusive of any other rights
to which such individuals may be entitled under the Certificate of
Incorporation, the Bylaws, any agreement, vote of stockholders or disinterested
directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
CDIL ACQUISITION
At the closing of the Offering, the Company will acquire for a purchase
price of $3,200,000 (of which $100,000 has previously been paid in the form of
an earnest money deposit) substantially all of the assets of CDIL pursuant to
the CDIL Acquisition. The assets being acquired consist of all of CDIL's: (a)
rights as the franchisor under existing franchise agreements and existing area
development agreements; (b) inventory of new and used CD's; (c) accounts, notes
and warranty receivables; (d) trademarks and other intellectual property rights;
(e) business records, including but not limited to CDIL's customer lists, vendor
lists, prospective franchisee lists, franchise files, accounting and tax records
concerning the same, sales literature and promotional materials; (f) software
programs; (g) furniture, equipment, files and other assets located at CDIL's
corporate offices; and (h) the equity interests of CDIL in CD Warehouse Stores
in Tulsa (two), Oklahoma, Edmond, Oklahoma and Memphis, Tennessee. The Company
will be entitled to all
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<PAGE>
franchise fees and royalties accruing to CDIL after the closing date of the CDIL
Acquisition. As part of the CDIL Acquisition, the Company will assume CDIL's
accounts payable for the inventory being acquired as of the closing date, as
well as CDIL's obligations under the franchise agreements and franchise and area
development agreements. If the aggregate value of the inventory and the amount
of receivables as of the closing date of the CDIL Acquisition is less than the
amount of payables as of such date, the purchase price shall be reduced by an
amount equal to such difference.
Pursuant to the CDIL Acquisition, Mark E. Kane, the founder and manager of
CDIL, will be granted a World Wide Area Development Agreement at the closing of
that transaction. Under the terms of the Worldwide Area Development Agreement,
Kane will be granted the right to develop, as a franchisee of the Company, on a
worldwide basis (excluding the United States, Mexico and Canada) CD Warehouse
franchise operations for a ten year period. The development schedule requires
that Mr. Kane open 100 stores during the term of the Worldwide Area Development
Agreement, in accordance with an agreed schedule. Failure to open the requisite
number of stores pursuant to the schedule could result in termination of the
World Wide Area Development Agreement, although such termination would not
affect any rights of Mr. Kane to operate CD Warehouse stores already opened and
operating under an existing franchise agreement. The Worldwide Area Development
Agreement provides that the Company may, at its option for a period of seven
years beginning three years from the date of the grant thereof, purchase Mr.
Kane's interest in any franchised operations developed pursuant to the
agreement. The Worldwide Area Development Agreement provides that Mr. Kane will
pay the Company an amount to be jointly determined by the Company and Mr. Kane
on a country-by-country basis, provided that the Company will receive a
franchise fee of not less than $3,000 per store, a minimum royalty of 1% of
gross sales based on individual store sales volume and 20% of the total fee
received by Mr. Kane from each subfranchisee. Additionally, at the closing of
the CDIL Acquisition, the Company will grant Mr. Kane, with no initial franchise
fee payable by Mr. Kane, ten domestic CD Warehouse franchise license agreements,
pursuant to which Mr. Kane may develop and install, as a franchisee, up to ten
separate CD Warehouse franchise stores, subject to the Company's approval as to
the location of such stores. Mr. Kane will pay a royalty of 2% of net sales for
any CD Warehouse store opened by him pursuant to these franchise agreements. Mr.
Kane will also be granted two franchise agreements by the Company for CD
Warehouse Stores currently owned and operated by Mr. Kane in Ft. Worth, Texas
and Plano, Texas pursuant to which Mr. Kane will not be required to pay to the
Company any royalties or franchise fee.
In connection with the CDIL Acquisition, Mr. Kane has subscribed for 350,000
shares of Common Stock, at a subscription price of $1.00 per share. Payment of
the subscription is conditioned upon the successful completion of the Offering
and the CDIL Acquisition.
MACDONALD ACQUISITION
Simultaneously with the closing of the Offering, the Company will acquire
the CD Warehouse franchise interests of Bruce D. MacDonald, Vice
President-Company Store Operations. Mr. MacDonald acts as franchisee, either on
his own account or as general partner or manager of entities which themselves
act as franchisees, of 36 CD Warehouse stores. Pursuant to the MacDonald
Acquisition the Company will acquire 100% ownership of the Montfort Street Store
and minority equity interests (including MacDonald's interest as a managing
general partner or limited liability company manager), in the 35 other
franchised stores. The Company has formed CD Management as a wholly owned
subsidiary to act as the successor general partner or manager of the 15
partnerships and two limited liability companies originally organized by
MacDonald to fund, own and operate the 35 franchised stores in which MacDonald
holds an equity interest. Upon acquisition of the Montfort Street Store and the
MacDonald Equity Interests, the Company upon consummation of the MacDonald
Acquisition will manage and own an interest in 36 of the 109 stores in the CD
Warehouse system. The MacDonald Equity Interests to be acquired by the Company
range from 1% to 50%, although certain percentages of ownership are earned only
after partnership payout, as defined in the respective partnership agreement.
Upon consummation of the MacDonald
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<PAGE>
Acquisition, the Company will be vested with equity interests ranging from 1% to
50%. Pursuant to the MacDonald Acquisition, the Company will issue to MacDonald
80,000 shares of the Company's Common Stock.
ACCOUNTING SERVICES
Bruce D. MacDonald has ownership in an accounting firm with which the
Company has contracted to provide services for the Company's stores. This
agreement provides that each store will be charged $150 per store, per month for
certain accounting and bookkeeping services rendered.
OFFICE LEASE
The Company has entered into a lease agreement with an affiliate of
Christopher M. Salyer, a director of the Company, for its temporary executive
offices at 722 North Broadway, Oklahoma City, Oklahoma 73102. The total office
space is approximately 800 square feet and is held under the lease on a month to
month basis with monthly lease payment of $600. Additionally, upon completing
the CDIL Acquisition, the Company will share operational facilities with CDIL
during a transitional period anticipated to last approximately four months. CDIL
is owned or controlled by Mark E. Kane, who will be a principal stockholder of
the Company upon completion of the Offering. The Company and CDIL have agreed
that the Company will not incur any lease payment for sharing the CDIL facility
during the transition period. The Company intends to consolidate its executive
and operational offices into a larger facility in Oklahoma City, Oklahoma
following the transition period.
FUTURE TRANSACTIONS
All future and ongoing transactions between the Company and its directors,
officers, principal stockholders or affiliates will be on terms no less
favorable to the Company than may be obtained from unaffiliated third parties,
and any such transactions will be approved by a majority of the disinterested
directors of the Company.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 15, 1996, and as
adjusted to reflect the sale of the 1,000,000 shares of Common Stock offered
hereby, concerning the beneficial ownership of Common Stock by each of the
Company's directors, each executive officer named in the table under the heading
"Management-Directors, Executive Officers and Key Employees," and all directors
and executive officers of the Company as a group, and by each person who is
known by the Company to own more than 5% of the outstanding shares of Common
Stock. Unless otherwise indicated, the beneficial owner has sole voting and
investment power with respect to such stock.
<TABLE>
<CAPTION>
PERCENT OF
CLASS PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES BEFORE NUMBER OF SHARES CLASS
OF BENEFICIAL HOLDER(1) BEFORE OFFERING OFFERING AFTER OFFERING AFTER OFFERING
- ------------------------------------------- ----------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Jerry W. Grizzle* (2)(3)................... 250,000 71.43% 250,000 14.04%
Gary D. Johnson* (2)....................... 75,000 21.43% 75,000 4.21%
Bruce D. MacDonald (4)..................... (5) 0% 80,000(5) 4.49%
Doyle E. Motley (2)........................ 25,000 7.14% 25,000 1.40%
Mark E. Kane (4)........................... (6) 0% 350,000(6) 19.66%
All executive officers and directors as a 350,000 100.00% 430,000 24.14%
group (7 persons)........................
</TABLE>
- ------------------------
* Director
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such person.
(2) Address is c/o CD Warehouse, Inc., 722 N. Broadway, Oklahoma City, Oklahoma
73102.
(3) 230,000 shares are held in the name of the Jerry W. Grizzle and Shawn L.
Grizzle Revocable Living Trust, dtd. 1/6/94, and 10,000 shares each are held
in the names of Mr. and Mrs. Grizzle's children, Brittany and Matthew.
(4) Address is c/o CDIL, 710 Firman Drive, Suite 300, Richardson, Texas.
(5) The shares shown as owned by Mr. MacDonald after the Offering will be issued
in connection with the MacDonald Acquisition. See "Certain
Transactions--MacDonald Acquisition."
(6) Mr. Kane has subscribed for 350,000 shares of Common Stock, the payment of
which is conditioned upon the consummation of the Offering.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of (i) 10,000,000
shares of Common Stock, having a par value of $.01 per share, and (ii) 5,000,000
shares of Preferred Stock, having a par value of $.01 per share. Immediately
prior to this Offering, 350,000 shares of Common Stock were issued and
outstanding, and no shares of Preferred Stock were issued and outstanding. A
total of 400,000 shares of Common Stock has been reserved for grants of options
under the 1996 Stock Option Plan.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of
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<PAGE>
preferred stock, the holders of Common Stock are entitled to receive such
dividends, if any, as may be declared by the Board of Directors from time to
time out of legally available funds. Upon liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets of the Company that are legally available for distribution, after payment
of all debts and other liabilities and subject to the prior rights of holders of
any class of preferred stock then outstanding. The holders of Common Stock have
no preemptive, subscription, redemption or conversion rights. The rights,
preferences and privileges of holders of Common Stock are subject to the rights
of the holders of shares of any series of preferred stock that the Company may
issue in the future.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company. Currently, the Company has no shares of Preferred Stock outstanding.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and By-laws
may be deemed to have anti-takeover effects and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
CLASSIFIED BOARD. The Company's By-laws provide that (i) the Board of
Directors is divided into three classes of as equal size as possible, (ii) the
number of directors is to be fixed from time to time by the Board of Directors,
and (iii) the term of office of each class expires in consecutive years so that
each year only one class is elected. These provisions may render more difficult
a change in control of the Company or the removal of incumbent management.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS. The Company's
Certificate of Incorporation provides that no action shall be taken by
stockholders except at an annual or special meeting of stockholders, and
prohibits action by written consent in of lieu of a meeting. The Company's
By-laws provides that, unless otherwise proscribed by law, special meetings of
stockholders can only be held pursuant to a resolution of the Board of
Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.
Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or Directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of the
Company not less than 40 days before the meeting, or, if on the day notice of
the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals, and (ii) 10 days after
notice is given in the case of director nominations.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about that
person as would be required to be included
46
<PAGE>
in a proxy statement soliciting proxies for the election of the proposed nominee
(including such person's written consent to serve as a Director if so elected)
and certain information about the stockholder proposing to nominate that person.
Stockholder proposals must also include certain specified information.
These limitations on stockholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
SECTION 203 OF THE DGCL. Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, or (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
effect of such statute may be to discourage certain types of transactions
involving an actual or potential change in control of the Company.
TRANSFER AGENTS, WARRANT AGENT AND REGISTRAR
The transfer agent for the Common Stock is Liberty Bank & Trust Company of
Oklahoma City, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
POSSIBLE RULE 144 SALES. Upon completion of the Offering described in this
Prospectus, the Company will have outstanding 1,780,000 shares of Common Stock.
Of these shares all of the 1,000,000 shares sold in the Offering (assuming no
exercise of the Underwriters' over-allotment option) will be freely transferable
by persons other than affiliates (as defined in regulations under the Securities
Act), without restriction or further registration under the Securities Act.
The remaining 780,000 shares of Common Stock outstanding are "Restricted
Securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act, unless an
exemption from registration is available, including the exemption provided by
Rule 144. Under Rule 144 as currently in effect, none of such shares are
currently eligible for sale. Additionally, the holders of the aforementioned
Restricted Securities have agreed not to sell their shares until twenty-four
months after the date of this Prospectus without obtaining the prior written
approval of Capital West Securities, Inc, as one of the Representatives of the
Underwriters. Upon expiration of the 24-month period, 780,000 shares of Common
Stock will be eligible for immediate resale without restriction under the
Securities Act, subject, in certain cases, to certain volume, timing and other
requirements of Rule 144, with 430,000 of such shares entitled to piggyback
registration rights for a period of two years thereafter. See "Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
Restricted Securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions
and notice requirements, and to the availability of current public information
about the Company. A person who is not an affiliate,
47
<PAGE>
has not been an affiliate within 90 days prior to sale and who beneficially owns
Restricted Securities with respect to which at least three years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell such shares under Rule 144(k)
without regard to any of the volume limitations or other requirements described
above.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this Offering, there has been
no trading market for the Common Stock. The Company anticipates that the trading
market in the Common Stock, if any, will be limited based upon the number of
shares currently outstanding and anticipated to be sold in this Offering.
48
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Capital West Securities, Inc.,
Nutmeg Securities, Ltd. and Berthel Fisher & Company Financial Services, Inc.
(the "Representatives") have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock set forth opposite their respective names
below. The nature of the obligations of the Underwriters is such that if any of
such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Capital West Securities, Inc. ..............................
Nutmeg Securities, Ltd......................................
Berthel Fisher & Company Financial Services, Inc............
----------
Total..................................................... 1,000,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock offered hereby to the public at
the price to public set forth on the cover page of this Prospectus. The
Underwriters may allow a concession to selected dealers who are members of the
National Association of Securities Dealers, Inc. ("NASD") not in excess of
$ per share, and the Underwriters may allow, and such dealers may
reallow, to members of the NASD a concession not in excess of $ per
share. After the public offering, the price to public, the concession and the
reallowance may be changed by the Representatives.
Capital West, one of the Representatives, was first registered as a
broker-dealer in May 1995. Capital West has participated in only four public
equity offerings as an underwriter, although certain of its employees have had
experience in underwriting public offerings while employed by other
broker-dealers. Prospective purchasers of the securities offered hereby should
consider this limited experience in evaluating this Offering.
The Company has granted an option to the Underwriters, exercisable within 30
business days after the date of this Prospectus, to purchase up to an aggregate
of 150,000 additional shares of Common Stock, at the initial price to public,
less the underwriting discount, set forth on the cover page of this Prospectus.
The Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
the Company on a pro rata basis that number of additional shares of Common Stock
which is proportionate to such Underwriter's initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed to pay to the Representatives a nonaccountable
expense allowance of 3% of the gross proceeds derived from the sale of the
shares of Common Stock underwritten (including the sale of any shares of Common
Stock subject to the Underwriters' over-allotment option), $50,000 of which has
49
<PAGE>
been paid as of the date of this Prospectus. The Company also has agreed to pay
all expenses in connection with qualifying the Common Stock offered hereby for
sale under the laws of such states as the Representatives may designate and
registering the Offering with the NASD, excluding filing fees and fees and
expenses of counsel retained for such purposes by the Representatives (which
shall be paid by the Representatives from the nonaccountable expense allowance).
In connection with this Offering, the Company has agreed to sell to the
Representatives, for a price of $.001 per warrant, warrants (the
"Representatives' Warrants") to purchase shares of Common Stock equal to 10% of
the total number of shares sold pursuant to this Offering, excluding shares
subject to the over-allotment option. The Representatives' Warrants are
exercisable at a price equal to 150% of the initial public offering price ($7.50
assuming an initial public offering price of $5.00 per share) for a period of
four years commencing one year from the date of this Prospectus. The
Representatives' Warrants grant to the holders thereof certain registration
rights with respect to the registration under the Securities Act of the
securities directly and indirectly issuable upon exercise of the
Representatives' Warrants. The Company, its executive officers and directors,
and all of its stockholders have agreed that for a period of 24 months after the
date of this Prospectus, they will not offer, sell or otherwise dispose of any
shares of Common Stock beneficially owned or controlled by them (including
subsequently acquired shares) without the prior written consent of Capital West
Securities, as one of the Representatives of the Underwriters.
The Company has agreed with the Representatives to use its best efforts to
cause a designee of the Representatives who is reasonably satisfactory to the
Company to be elected as a full voting member of its Board of Directors. As of
the date of this Prospectus, the Representatives have not named a nominee for
election to board membership.
Prior to this Offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this Offering. The initial public offering price was determined by
negotiations between the Company and the Representatives. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business and the industry in which the Company
competes, market valuation of comparable companies, market conditions for public
offerings, the prospects for future earnings of the Company, an assessment of
the Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.
The Representatives have advised the Company that the Underwriters do not
expect any sales by the Underwriters to accounts over which they exercise
discretionary authority.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Day Edwards Federman Propester &
Christensen, P.C., Oklahoma City, Oklahoma. Phillips McFall McCaffrey McVay &
Murrah, P.C., Oklahoma City, Oklahoma, has served as counsel to the Underwriters
in connection with this Offering.
EXPERTS
The consolidated balance sheet of CD Warehouse, Inc. at October 15, 1996,
appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Compact Discs International, Ltd.
and the financial statements of CD Acquisitions at December 31, 1995 and for
each of the two years in the period then ended, appearing in this Prospectus and
Registration Statement have been audited by Huselton & Morgan, P.C.,
50
<PAGE>
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 (the
"Registration Statement") with the Commission under the Securities Act with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and in the exhibits and
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus concerning the
provisions of documents filed with the Registration Statement as exhibits and
schedules are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge and copied upon payment
of the charges prescribed by the Commission at the Public Reference Room of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENT OF CD WAREHOUSE, INC.
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheet at October 15, 1996.......................... F-4
Notes to Consolidated Balance Sheet..................................... F-5
FINANCIAL STATEMENTS OF COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
Independent Auditors' Report............................................ F-8
Consolidated Balance Sheet at December 31, 1995......................... F-9
Consolidated Statements of Income for the years ended December 31, 1994
and 1995.............................................................. F-10
Consolidated Statements of Partners' Capital for the years ended
December 31, 1994 and 1995............................................ F-11
Consolidated Statements of Cash Flows for the years ended December 31,
1994 and 1995......................................................... F-12
Notes to Consolidated Financial Statements.............................. F-13
FINANCIAL STATEMENTS OF CD ACQUISITIONS
Independent Auditors' Report............................................ F-18
Balance Sheet at December 31, 1995...................................... F-19
Statements of Income and Venturers' Capital for the years ended December
31, 1994 and 1995..................................................... F-20
Statements of Cash Flows for the years ended December 31, 1994 and
1995.................................................................. F-21
Notes to Financial Statements........................................... F-22
UNAUDITED COMBINED FINANCIAL STATEMENTS OF COMPACT DISCS INTERNATIONAL,
LTD. AND SUBSIDIARY AND CD ACQUISITIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND CONSOLIDATED FINANCIAL STATEMENTS OF COMPACT
DISCS INTERNATIONAL, LTD. AND SUBSIDIARY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Consolidated Balance Sheet at September 30, 1996........................ F-24
Statements of Income for the nine months ended September 30, 1995 and
1996.................................................................. F-25
Statements of Partners' Capital for the nine months ended September 30,
1995 and 1996......................................................... F-27
Statements of Cash Flows for the nine months ended September 30, 1995
and 1996.............................................................. F-28
Notes to Financial Statements........................................... F-29
</TABLE>
F-1
<PAGE>
CONSOLIDATED BALANCE SHEET
CD WAREHOUSE, INC.
OCTOBER 15, 1996
WITH REPORT OF INDEPENDENT AUDITORS
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders
CD Warehouse, Inc.
We have audited the accompanying consolidated balance sheet of CD Warehouse,
Inc. as of October 15, 1996. This consolidated balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of CD
Warehouse, Inc. at October 15, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Oklahoma City, Oklahoma
October 26, 1996
except for the second paragraph of Note 2 as to which the date is
December 10, 1996
F-3
<PAGE>
CD WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEET
OCTOBER 15, 1996
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents....................................................... $ 250,000
Organization costs................................................................ 2,431
Cash in escrow (NOTE 3)........................................................... 100,000
Deferred acquisition costs (NOTE 3)............................................... 59,599
Deferred offering costs (NOTE 3).................................................. 44,364
-------------
$ 456,394
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 55,394
Advances by stockholder (NOTE 3)................................................ 51,000
-------------
Total current liabilities......................................................... 106,394
Commitments (NOTE 3)
Stockholders' equity (NOTE 2):
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued....... --
Common stock, $.01 par value; 10,000,000 shares authorized, 350,000 shares
issued and outstanding........................................................ 3,500
Paid-in capital................................................................. 346,500
-------------
Total stockholders' equity........................................................ 350,000
-------------
$ 456,394
-------------
-------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CD WAREHOUSE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
OCTOBER 15, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CONSOLIDATION
The consolidated balance sheet includes the accounts of CD Warehouse, Inc.
(the "Company") and its wholly-owned subsidiary, CD Management, Inc. ("CDM").
The Company was formed in Delaware on September 5, 1996. The Company has had no
operations during the period from September 5, 1996 to October 15, 1996.
CASH EQUIVALENTS
Cash equivalents include money-market investments with maturities of three
months or less when purchased.
ORGANIZATION COSTS
Organization costs will be amortized on a straight-line basis over five
years.
DEFERRED ACQUISITION COSTS
Costs incurred related to a proposed business acquisition (NOTE 3) have been
deferred and will be capitalized upon completion of the acquisition or charged
to expense if the acquisition is not completed.
DEFERRED OFFERING COSTS
Specific incremental costs directly attributable to a proposed initial
public offering of common stock (NOTE 3) have been deferred and will be charged
against the gross proceeds of the offering or charged to expense if the offering
is aborted.
2. STOCKHOLDERS' EQUITY
Effective September 5, 1996 and October 1, 1996, the Company obtained stock
subscription agreements for the sale of an aggregate of 700,000 shares of common
stock at $1 per share. During October 1996, the Company received $250,000 in
cash and the assignment of $100,000 cash in escrow (NOTE 3) in exchange for the
issuance of 350,000 shares of common stock. The subscription agreement for the
remaining 350,000 shares provides for payment to the Company concurrently with
the closing of the Company's proposed initial public offering of common stock
(NOTE 3).
On December 10, 1996, the Company adopted the 1996 Stock Option Plan which
provides for grants of up to 400,000 shares of common stock to certain
employees, officers, directors and others. Generally, the purchase price of
stock issuable upon exercise of the options will be at least equal to the fair
market value of the stock on the dates of grant. Generally, options are
exercisable no longer than ten years from the dates of grant. No options have
been granted to date. The Company has agreed to grant options to purchase 6,000
shares annually, subject to pro-rata vesting over a three-year period, to each
director.
3. COMMITMENTS
On October 1, 1996, the Company entered into an Asset Purchase Agreement
(the "Agreement") which provides for the purchase of substantially all of the
assets of Compact Discs International, Ltd. ("CDIL") for $3.2 million, subject
to downward adjustment, in cash. CDIL is engaged principally in the
F-5
<PAGE>
CD WAREHOUSE, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
OCTOBER 15, 1996
3. COMMITMENTS (CONTINUED)
business of selling new and preowned audio compact discs to its franchisees. On
October 4, 1996, $100,000 in earnest money was placed in escrow pursuant to the
Agreement.
The Agreement also provides for the Company to enter into an area
development agreement (the "ADA") with the principal owner of CDIL. The ADA
provides for the right to develop franchise operations worldwide, except for the
United States, Canada and Mexico. The Company has the right, during a specified
period of time, to cancel the ADA and to acquire any franchise developed under
the ADA at a specified multiple of earnings. In addition, the Company has agreed
to grant to the principal owner of CDIL (1) ten domestic franchises with no
initial franchise fee and royalties of 2% of net sales and (2) two renewal
franchises with no franchise fee or royalty payments. Except as provided for in
the above mentioned franchise agreements, CDIL and the principal owner of CDIL
have entered into covenants not to compete with the Company for a period of ten
years.
In connection with the Agreement and the proposed initial public offering, a
stockholder has incurred costs of $51,000 (including $20,000 relating to a
finder's fee contingent upon the closing of the purchase) through October 15,
1996, on behalf of the Company, for payment of services related to such
transactions. Upon closing of the purchase, the Company will be liable for the
balance of the finder's fee in the amount of $80,000.
On October 10, 1996, the Company and CDM entered into agreements which
provide for the purchase of all of the franchise interests of the largest CDIL
franchisee in exchange for 80,000 shares of the Company's common stock.
Closings of the above mentioned purchases are subject to the satisfaction of
several conditions precedent, including the Company's completion of an initial
public offering of its common stock, or closing of another financing
arrangement, by February 28, 1997 for at least $3.5 million.
The Company has entered into employment agreements with the four existing or
committed officers of the Company, effective after the Company's completion of
an initial public offering. The employment agreements are for terms of one and
five years with renewal options of one and five years and total $355,000
annually for the four individuals.
F-6
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the General Partner
Compact Discs International, Ltd. and Subsidiary
We have audited the accompanying consolidated balance sheet of Compact Discs
International, Ltd. (A Texas Limited Partnership) and Subsidiary as of December
31, 1995, and the related consolidated statements of income, partners' capital,
and cash flows for each of the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Compact Discs International, Ltd. and Subsidiary as of December 31, 1995, and
the consolidated results of its operations and its cash flows for each of the
two years then ended in conformity with generally accepted accounting
principles.
/s/ HUSELTON & MORGAN, P.C.
Dallas, Texas
March 6, 1996, except for Note 2,
as to which the date is October 10, 1996
F-8
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Current assets
Cash............................................................................ $ 48,495
Accounts receivable (net of allowance of $70,171)............................... 228,887
Due from CD Acquisitions........................................................ 111,316
Inventory....................................................................... 50,275
Prepaid expenses................................................................ 1,179
---------
Total current assets.......................................................... 440,152
---------
Furniture, fixtures and equipment (net of accumulated depreciation)............... 39,108
---------
Investment in partnerships........................................................ 25,231
Other assets (net of amortization)................................................ 5,288
---------
Total investment and other assets............................................. 30,519
---------
Total assets.................................................................. $ 509,779
---------
---------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable................................................................ $ 4,075
Sales tax payable............................................................... 2,219
Payroll taxes payable........................................................... 744
Development fees advanced....................................................... 60,521
---------
Total current liabilities..................................................... 67,559
---------
Minority interest................................................................. 11,981
Partners' capital................................................................. 430,239
---------
Total liabilities and partners' capital....................................... $ 509,779
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Revenue
Royalty income........................................................................ $ 526,714 $ 946,640
Retail sales.......................................................................... 272,119 291,948
Franchise fees........................................................................ 146,428 109,750
Development fees...................................................................... 7,500 74,500
Software income....................................................................... 62,400 23,683
----------- -----------
Total revenue....................................................................... 1,015,161 1,446,521
----------- -----------
Expenses
Salaries.............................................................................. 215,712 332,333
Cost of goods sold--retail sales...................................................... 183,344 181,312
Bad debts............................................................................. 0 113,539
Travel................................................................................ 33,819 44,029
Telephone & utilities................................................................. 20,774 43,208
Rent.................................................................................. 37,188 41,027
Taxes................................................................................. 21,734 29,289
Professional fees..................................................................... 53,798 19,006
Office expense........................................................................ 8,323 18,487
Advertising........................................................................... 31,266 14,745
Depreciation.......................................................................... 14,065 9,189
Miscellaneous......................................................................... 0 8,666
Printing.............................................................................. 11,208 7,927
Insurance............................................................................. 884 5,768
Auto expense.......................................................................... 4,229 5,314
Entertainment......................................................................... 3,220 4,974
Postage............................................................................... 3,226 4,578
Promotion............................................................................. 1,369 4,218
Licenses.............................................................................. 0 4,136
Supplies.............................................................................. 2,706 4,011
Contract labor........................................................................ 1,780 2,542
Repairs & maintenance................................................................. 3,673 1,594
Security.............................................................................. 0 1,355
Bank charges.......................................................................... 408 820
Amortization.......................................................................... 285 456
Dues & subscriptions.................................................................. 195 455
Photography........................................................................... 69 356
Interest expense...................................................................... 621 46
Fees.................................................................................. 0 21
Litigation settlement................................................................. 39,793 0
Penalty............................................................................... 452 0
Commissions........................................................................... 8,500 0
----------- -----------
Total expenses...................................................................... 702,641 903,401
----------- -----------
Operating income........................................................................ 312,520 543,120
Other income
Equity in income of partnerships...................................................... 0 2,898
Interest income....................................................................... 0 89
Miscellaneous......................................................................... 3,405 0
----------- -----------
Net income before minority interest..................................................... 315,925 546,107
Minority interest....................................................................... (2,632) (7,293)
----------- -----------
Net income.......................................................................... $ 313,293 $ 538,814
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Beginning balance....................................................................... $ 101,613 $ 187,702
Net income.............................................................................. 313,293 538,814
Distributions........................................................................... (227,204) (296,277)
----------- -----------
Ending balance.......................................................................... $ 187,702 $ 430,239
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 313,293 $ 538,814
Noncash items
Bad debt expense.................................................................... 0 70,171
Depreciation and amortization....................................................... 14,350 9,645
Minority interest................................................................... 1,227 7,293
Equity in income of partnerships.................................................... 0 (2,898)
Adjustments to reconcile net income to cash provided by operating activities
Increase in accounts receivable................................................... (38,946) (224,071)
Increase in due from CD Acquisitions.............................................. (64,023) (69,791)
Increase in inventory............................................................. (8,811) (11,327)
Increase in prepaid expenses...................................................... (2,087) (1,179)
Increase in organization cost..................................................... (1,400) 0
Increase in development fees advanced............................................. 57,000 13,521
Increase (decrease) in accrued liabilities........................................ 5,976 (11,829)
Increase (decrease) in accounts payable........................................... 2,163 (1,997)
----------- -----------
Net cash provided by operating activities....................................... 278,742 316,352
Cash flows from investing activities
Purchase of fixed assets.............................................................. (37,044) (17,355)
Distributions from partnership--Memphis store......................................... 0 167
Distribution to minority interest owner............................................... 0 (5,040)
----------- -----------
Net cash used by investing activities........................................... (37,044) (22,228)
Cash flows from financing activities
Distributions to partners............................................................. (227,204) (296,277)
Repayment of loan to Leo Kane......................................................... (8,979) (2,842)
Loan from Leo Kane.................................................................... 11,821 0
----------- -----------
Net cash used by financing activities........................................... (224,362) (299,119)
Net increase (decrease) in cash......................................................... 17,336 (4,995)
Cash at beginning of year............................................................... 36,154 53,490
----------- -----------
Cash at end of year..................................................................... $ 53,490 $ 48,495
----------- -----------
----------- -----------
</TABLE>
Supplemental information:
1994-- A note payable in the amount of $11,821 was given for the purchase of
two automobiles.
1995-- Trade receivables in the amount of $22,500 are exchanged for a minority
interest in a general partnership.
-- Development fees advanced in the amount of $22,500 are used to satisfy
various trade receivables.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION
THE COMPANY
Compact Discs International, Ltd. (the "Company") is a Texas limited
partnership which conducts business under the name "CD Warehouse" and maintains
its principal office in Richardson, Texas.
The Company offers and sells single-unit franchises and development rights
for multi-unit franchises for the operation of retail sales outlets which buy,
sell and trade new and used compact discs and related items (Note 8). As of
December 31, 1994 and 1995, the Company has executed 73 and 112 franchise
agreements respectively for the operation of stores, of which 67 were
operational in 1994 and 96 are operational in 1995. The Company has 11
development agreements in place as of December 31, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and CD Warehouse - Fort Worth, an 81.25% owned subsidiary; the remaining 18.75%
is owned by an unrelated third party investor. All significant intercompany
accounts and transactions have been eliminated in consolidation. Minority
interest in the consolidated subsidiary represents the minority owner's
proportionate share of the equity of CD Warehouse - Fort Worth.
INVENTORY
Inventory consists primarily of both new and used compact discs. All
inventory is valued at the lower of cost or market using the first-in, first-out
(FIFO) method. The inventory is located for resale at the subsidiary's location
in Fort Worth, Texas.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. The provision for
depreciation has been calculated using the straight-line method. Useful lives
range from 3 to 7 years.
OTHER ASSETS
Organization costs and the Company's trademark are being amortized using the
straight-line method over five and fifteen years, respectively.
INVESTMENT IN PARTNERSHIPS
The Company records its ownership in two minority-owned partnerships that
own CD Warehouse stores using the equity method of accounting.
REVENUE RECOGNITION
Franchise fees are non-refundable. Franchise fee income is recognized upon
the opening of the related store. The Company's commitment and obligations to
franchisees are not significant after the store is opened. Development right
fees paid are recognized as income on a prorated basis as the franchise units
within a development agreement are opened. Development fees are non-refundable,
but can be applied
F-13
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION (CONTINUED)
against future franchise fees and royalty fees due from development franchisees.
Royalties are based on a percentage of franchisees' monthly gross sales and are
recognized when earned. Specially designed software and computer equipment are
sold to the franchisees, and the related income is recognized when earned.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
2. CHANGE IN METHOD OF ACCOUNTING
Subsequent to the original audit date of these financial statements, March
6, 1996, management of the Company changed its method of accounting for
development fee income. In the prior financial statements, the total amount
deposited for development rights was recognized as income upon the opening of
the first franchise within a development agreement. As Note 1 indicates, these
financial statements recognize development fee income on a prorated basis as the
franchise units within a development agreement are opened. The change increased
income $4,095, increased development fee advances $50,321, and decreased
partners' capital $50,321, from what was originally reported in the financial
statements audited March 6, 1996.
3. FURNITURE, FIXTURES AND EQUIPMENT
Components of furniture, fixtures and equipment at December 31, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Equipment....................................................................... $ 15,708 $ 28,861
Furniture and fixtures.......................................................... 19,339 23,541
Automobiles..................................................................... 12,386 12,386
Leasehold improvements.......................................................... 10,102 10,101
---------- ----------
Total....................................................................... 57,535 74,889
Accumulated depreciation........................................................ (26,592) (35,781)
---------- ----------
Total....................................................................... $ 30,943 $ 39,108
---------- ----------
---------- ----------
</TABLE>
F-14
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
4. OTHER ASSETS
Components of other assets at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deposits............................................................................. $ 3,561 $ 3,560
Organization costs................................................................... 2,150 2,150
Trademark............................................................................ 394 394
--------- ---------
Total............................................................................ 6,105 6,104
Accumulated amortization............................................................. (360) (816)
--------- ---------
Total............................................................................ $ 5,745 $ 5,288
--------- ---------
--------- ---------
</TABLE>
5. INVESTMENT IN PARTNERSHIPS
In the latter part of 1995 the Company entered into two partnership
agreements to own and operate retail CD outlets in Tulsa, Oklahoma and Memphis,
Tennessee. At December 31, 1995, the Company has the following investments in
general partnerships:
<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP OWNED
- -------------------------------------------------------------------------------------------- -----------
<S> <C>
CD Warehouse--Tulsa......................................................................... 50
CD Warehouse--Memphis....................................................................... 25
</TABLE>
At December 31, 1995, the Company's investment in partnerships and equity in
the income of these partnerships for the year then ended consist of the
following:
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP
PARTNERSHIP INCOME
------------- -----------
<S> <C> <C>
CD Warehouse--Tulsa......................................................... $ 22,853 $ 353
CD Warehouse--Memphis....................................................... 2,378 2,545
------------- -----------
$ 25,231 $ 2,898
------------- -----------
------------- -----------
</TABLE>
The following summarizes the activity of the CD Warehouse--Tulsa and the CD
Warehouse-- Memphis partnerships for the year ended December 31, 1995:
<TABLE>
<CAPTION>
CD WAREHOUSE CD WAREHOUSE
TULSA MEMPHIS
-------------- --------------
<S> <C> <C>
Total assets...................................................................... $ 65,157 $ 58,722
Total liabilities................................................................. 5,388 3,210
------- -------
Net assets.................................................................... $ 59,769 $ 55,512
------- -------
------- -------
Revenues.......................................................................... $ 24,683 $ 98,734
------- -------
------- -------
Net income........................................................................ $ 707 $ 10,180
------- -------
------- -------
</TABLE>
F-15
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a non-cancelable operating lease
agreement. The agreement expires in 1997. The Company also leases retail space
for its store operation. This agreement expires in 1996. Total rent expense for
the years ended December 31, 1994 and 1995 was $37,188 and $41,027,
respectively.
The following is a schedule of future minimum lease payments for the above
leases as of December 31, 1995:
<TABLE>
<S> <C>
Year ending December 31, 1996.............................................. $ 27,426
Year ending December 31, 1997.............................................. 5,694
---------
$ 33,120
---------
---------
</TABLE>
7. INCOME TAXES
Taxable income of the Company is includable in the income returns of the
individual partners; therefore, no provision for income taxes has been made in
the accompanying financial statements.
8. RELATED-PARTY TRANSACTIONS
In 1994 the Company purchased from Mr. Leo Kane, a limited partner, two
automobiles for a total of $11,821. Mr. Leo Kane received a note for the
purchase. In 1994, the Company was making note payments of $800 per month. For
the year ended December 31, 1994, the Company had reduced the note by $8,979 and
paid Mr. Leo Kane interest of $621. The note was fully paid in 1995, reducing
the note by $2,842. Interest paid to Mr. Leo Kane in 1995 is $44.
The partners of the Company own, through a joint venture, CD Acquisitions,
"CDA." CDA sells new and used merchandise to franchisees. The franchisees
included CD Warehouse--Fort Worth, Tulsa and Memphis. Sales to these three
franchisees amounted to $31,000 and $108,800 in the years ending December 31,
1994 and 1995, respectively. CDA operates out of the Company's location with no
contribution to overhead expenses.
CDA owes the Company $64,023 and $111,316 at December 31, 1994 and 1995,
respectively.
F-16
<PAGE>
CD ACQUISITIONS
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
WITH
INDEPENDENT AUDITORS' REPORT
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Venturers
CD Acquisitions
We have audited the accompanying balance sheet of CD Acquisitions (A Joint
Venture) as of December 31, 1995, and the related statements of income,
venturers' capital, and cash flows for each of the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CD Acquisitions as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years then ended in conformity with generally accepted accounting
principles.
/s/ HUSELTON & MORGAN, P.C.
Dallas, Texas
October 5, 1996
F-18
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Current assets
Cash............................................................................ $ 159,444
Accounts receivable, net of allowance of $12,859................................ 194,441
Inventory....................................................................... 305,757
Prepaid insurance............................................................... 7,913
---------
Total current assets.......................................................... 667,555
---------
---------
Total assets.................................................................. $ 667,555
---------
---------
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities
Accounts payable................................................................ $ 411,805
Due to Compact Discs International, Ltd......................................... 111,316
Advances from CD Stores......................................................... 7,997
Accrued insurance............................................................... 6,430
Sales tax payable............................................................... 1,911
---------
Total current liabilities..................................................... 539,459
---------
Venturers' capital................................................................ 128,096
---------
Total liabilities and venturers' capital...................................... $ 667,555
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)
STATEMENTS OF INCOME AND VENTURERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Net Sales........................................................................... $ 1,567,566 $ 2,717,043
Cost of goods sold.................................................................. (1,539,006) (2,511,032)
------------- -------------
Gross profit on sales............................................................... 28,560 206,011
------------- -------------
Administrative and selling expenses................................................. 18,694 77,918
------------- -------------
Net income........................................................................ 9,866 128,093
Venturers' capital (deficit), beginning of year..................................... (9,863) 3
------------- -------------
Venturers' capital, end of year..................................................... $ 3 $ 128,096
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 9,866 $ 128,093
Adjustments to reconcile net income to cash provided by operating activities
Bad debt expense..................................................................... 0 12,859
(Increase) decrease in:
Accounts receivable.................................................................. (203,677) 10,342
Inventory............................................................................ (131,205) (145,948)
Prepaid insurance.................................................................... 0 (7,913)
----------- -----------
Increase in:
Accounts payable..................................................................... 350,636 90,412
Accrued expenses..................................................................... 0 12,522
----------- -----------
Net cash provided by operating activities............................................ 25,620 100,367
Cash at beginning of year................................................................ 33,457 59,077
----------- -----------
Cash at end of year...................................................................... $ 59,077 $ 159,444
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
CD ACQUISITIONS
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ACCOUNTING AND FINANCIAL REPORTING POLICIES
CD Acquisitions (the "Company") is a joint venture among two individuals and
a limited liability company owned by one of the same individuals and his spouse.
The principal office of operations is located in Richardson, Texas. The Company
is a wholesale distributor of new and used compact discs.
The significant accounting policies utilized in the preparation of the
financial statements are as follows:
INVENTORY
Inventory of the Company consists of compact discs for sale to franchisees
of an affiliate (Note 2). Inventory is stated at the lower of cost or market.
Cost is determined by using a moving average method.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
2. RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1995, the Company has the following balance owed to
related parties:
<TABLE>
<CAPTION>
1994 1995
--------- ----------
<S> <C> <C>
Due to Compact Discs International, Ltd................................ $ 64,023 $ 111,316
--------- ----------
--------- ----------
</TABLE>
Owners of the joint venture also own an interest in Compact Discs
International, Ltd. ("CDIL"). CDIL offers and sells single-unit franchises and
development rights for multi-unit franchises for the operation of retail outlets
which buy, sell and trade new and used compact discs. All of the Company's 1994
and 1995 sales were to franchisees of CDIL. The Company operates out of the
office and warehouse of CDIL at no charge to the Company.
3. INCOME TAXES
Taxable income or loss of the Company is includable in the income tax
returns of the venturers; therefore, no provision for income taxes has been made
in the accompanying financial statements.
F-22
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS (A JOINT VENTURE)
UNAUDITED COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
F-23
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1996
ASSETS
<TABLE>
<S> <C>
Current assets
Cash.......................................................................... $ 220,343
Accounts receivable (net of allowance of $107,158)............................ 361,677
Inventory..................................................................... 579,169
Prepaid expenses.............................................................. 12,423
--------------
Total current assets........................................................ 1,173,612
--------------
Furniture, fixtures and equipment (net of accumulated depreciation)............. 40,893
--------------
Investments in partnerships..................................................... 70,219
Other assets (net of amortization).............................................. 4,946
--------------
Total investments and other assets............................................ 75,165
--------------
Total assets................................................................ $ 1,289,670
--------------
--------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable.............................................................. $ 636,822
Sales tax payable............................................................. 3,868
Payroll taxes payable......................................................... 149
Development fees advanced..................................................... 41,100
Advances from CD stores....................................................... 60,000
--------------
Total current liabilities................................................... 741,939
--------------
Minority interest............................................................... 905
Partners' capital............................................................... 546,826
--------------
Total liabilities and partners' capital..................................... $ 1,289,670
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
COMBINED STATEMENT OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue
Retail sales........................................................................ $ 1,966,290 $ 2,642,771
Royalty income...................................................................... 670,401 856,175
Computer/Software income............................................................ 96,814 53,295
Franchise fees...................................................................... 61,250 53,000
Development fees.................................................................... 81,000 7,500
------------ ------------
Total revenue....................................................................... 2,875,755 3,612,741
------------ ------------
Expenses
Cost of goods sold--retail sales.................................................... 1,721,373 2,423,149
Salaries............................................................................ 274,935 255,886
Bad debts........................................................................... 87,210 106,213
Cost of goods sold--computer........................................................ 95,572 45,238
Professional fees................................................................... 9,557 35,408
Rent................................................................................ 31,298 32,841
Telephone & utilities............................................................... 39,286 26,395
Travel.............................................................................. 30,775 25,978
Taxes............................................................................... 25,664 22,303
Commissions......................................................................... 0 21,478
Insurance........................................................................... 1,761 20,031
Office expense...................................................................... 15,481 15,588
Advertising......................................................................... 25,487 9,054
Promotion........................................................................... 800 9,015
Depreciation........................................................................ 8,184 8,876
Printing............................................................................ 6,393 7,966
Postage............................................................................. 3,075 6,496
Supplies............................................................................ 3,093 4,849
Auto expense........................................................................ 3,142 4,105
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
COMBINED STATEMENT OF INCOME (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expenses (continued)
Repairs & maintenance............................................................... 1,289 3,929
Entertainment....................................................................... 3,141 3,783
Licenses............................................................................ 4,136 3,770
Miscellaneous....................................................................... 10,929 3,750
Contract labor...................................................................... 1,792 2,400
Security............................................................................ 884 1,879
Dues & subscriptions................................................................ 455 1,382
Bank charges........................................................................ 992 939
Amortization........................................................................ 371 342
Photography......................................................................... 288 140
Interest expense.................................................................... 44 41
Litigation settlement............................................................... 1,778 0
------------ ------------
Total expenses.................................................................... 2,409,185 3,103,224
------------ ------------
Operating income...................................................................... 466,570 509,517
Other income
Equity in income of partnerships.................................................... 0 31,962
Interest income..................................................................... 89 3
------------ ------------
Net income before minority interest................................................... 466,659 541,482
Minority interest..................................................................... (5,637) (3,165)
------------ ------------
Net income........................................................................ $ 461,022 $ 538,317
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
COMBINED STATEMENT OF PARTNERS' CAPITAL
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Beginning balance....................................................................... $ 187,705 $ 558,335
Net income.............................................................................. 461,022 538,317
Distributions:
Cash.................................................................................. (251,997) (405,184)
Noncash............................................................................... 0 (144,642)
----------- -----------
Ending balance.......................................................................... $ 396,730 $ 546,826
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 461,022 $ 538,317
Noncash items
Bad debt expense.................................................................... 87,210 106,213
Depreciation and amortization....................................................... 8,555 9,218
Equity in income of partnerships.................................................... 0 (31,962)
Minority interest................................................................... 5,637 3,165
Adjustments to reconcile net income to cash provided by
operating activities
(Increase) in accounts receivable................................................... (45,516) 53,728
Increase (decrease) in accounts payable............................................. (14,146) 109,626
(Increase) in inventory............................................................. (233,287) (223,137)
Increase in accrued liabilities..................................................... 5,015 25,295
(Increase) in prepaid expenses...................................................... 0 (3,332)
----------- -----------
Net cash provided by operating activities......................................... 274,490 587,131
Cash flows from investing activities
Purchase of fixed assets.............................................................. (14,306) (10,660)
----------- -----------
Net cash used by investing activities............................................. (14,306) (10,660)
Cash flows from financing activities
Distributions to partners............................................................. (251,997) (549,826)
Minority interest distributions....................................................... (4,610) (14,241)
----------- -----------
Net cash used by financing activities............................................. (256,607) (564,067)
----------- -----------
Net increase in cash.................................................................... 3,577 12,404
Cash at beginning of period............................................................. 112,567 207,939
----------- -----------
Cash at end of period................................................................... $ 116,144 $ 220,343
----------- -----------
----------- -----------
</TABLE>
SUPPLEMENTAL INFORMATION:
Accounts receivable due from partners of the Company in the amount of
$144,642 were discharged and recognized as a distribution to the partners.
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
THE COMPANY
Compact Discs International, Ltd. (the "Company") is a Texas limited
partnership which conducts business under the name "CD Warehouse" and maintains
its principal office in Richardson, Texas.
Effective January 1, 1996, CD Acquisitions ("CDA"), a joint venture owned
and operated by CDIL's partners, was merged into CDIL. The financial information
at August 31, 1995 is comprised of combined figures of the Company and CDA in
order to provide comparative totals for September 30, 1996.
The Company offers and sells single-unit franchises and development rights
for multi-unit franchises for the operation of retail sales outlets which buy,
sell and trade new and used compact discs and related items. As of September 30,
1995 and 1996, the Company has executed 104 and 114 franchise agreements,
respectively, for the operation of stores, of which 91 were operational in 1995
and 109 are operational in 1996. The Company has 11 development agreements in
place as of September 30, 1995 and 3 as of September 30, 1996.
FINANCIAL STATEMENTS
These financial statements are unaudited and reflect all adjustments,
consisting only of adjustments of a normal recurring nature, which are, in the
opinion of management, necessary for a fair presentation of the interim periods.
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and CD Warehouse-- Fort Worth, an 81.25% owned subsidiary; the remaining 18.75%
is owned by an unrelated third party investor. All significant intercompany
accounts and transactions have been eliminated in consolidation. Minority
interest in the consolidated subsidiary represents the minority owner's
proportionate share of the equity of CD Warehouse--Fort Worth.
INVENTORY
Inventory consists primarily of both new and used compact discs. All
inventory is valued at the lower of cost or market using the first-in, first-out
(FIFO) method.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. The provision for
depreciation has been calculated using the straight-line method. Useful lives
range from 3 to 7 years.
F-29
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
1. ORGANIZATION (CONTINUED)
OTHER ASSETS
Organization costs and the Company's trademark are being amortized using the
straight-line method over five and fifteen years, respectively.
INVESTMENT IN PARTNERSHIPS
The Company records its ownership in four minority-owned partnerships that
own CD Warehouse stores using the equity method of accounting.
REVENUE RECOGNITION
Franchise fees are non-refundable. Franchise fee income is recognized upon
the opening of the related store. The Company's commitment and obligations to
franchisees are not significant after the store is opened. Development right
fees paid are recognized as income on a prorated basis as franchise units within
a development agreement are opened. Development fees are non-refundable, but can
be applied against future franchise fees and royalty fees due from development
franchisees. Royalties are based on a percentage of franchisees' monthly gross
sales, and are recognized when earned. Specially designed software and computer
equipment are sold to the franchisees, and the related income is recognized when
earned.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
2. FURNITURE, FIXTURES AND EQUIPMENT
Components of furniture, fixtures and equipment at September 30, 1996 are as
follows:
<TABLE>
<S> <C>
Equipment......................................................... $ 31,607
Furniture and fixtures............................................ 24,537
Automobiles....................................................... 16,528
Leasehold improvements............................................ 10,101
---------
Total..................................................... 82,773
Accumulated depreciation.......................................... (41,880)
---------
Total..................................................... $ 40,893
---------
---------
</TABLE>
F-30
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
3. OTHER ASSETS
Components of other assets at September 30, 1996 are as follows:
<TABLE>
<S> <C>
Deposits........................................................... $ 3,560
Organization costs................................................. 2,150
Trademark.......................................................... 394
---------
Total...................................................... 6,104
Accumulated amortization........................................... (1,158)
---------
Total...................................................... $ 4,946
---------
---------
</TABLE>
4. INVESTMENTS IN PARTNERSHIPS
In the latter part of 1995 and in 1996, the Company entered into partnership
agreements to own and operate retail CD outlets in Tulsa, Oklahoma; Memphis,
Tennessee; Orange Park, Florida; and Edmond, Oklahoma. At September 30, 1996,
the Company has the following investments in general partnerships:
<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP OWNED
- ---------------------------------------------------------------------------------- ---------------
<S> <C>
CD Warehouse--Tulsa............................................................... 50
CD Warehouse--Memphis............................................................. 25
CD Warehouse--Orange Park......................................................... 50
CD Warehouse--Edmond.............................................................. 50
</TABLE>
The Company held no investments prior to September 30, 1995.
At September 30, 1996, the Company's investments in partnerships and equity
in the income of these partnerships for the nine months ended September 30, 1996
consist of the following:
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP
PARTNERSHIP INCOME
------------- -----------
<S> <C> <C>
CD Warehouse--Tulsa............................................... $ 27,888 $ 9,285
CD Warehouse--Memphis............................................. 3,389 10,386
CD Warehouse--Orange Park......................................... 18,290 12,291
CD Warehouse--Edmond.............................................. 20,652 0
------------- -----------
$ 70,219 $ 31,962
------------- -----------
------------- -----------
</TABLE>
F-31
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
AND CD ACQUISITIONS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995
AND
COMPACT DISCS INTERNATIONAL, LTD. AND SUBSIDIARY
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
4. INVESTMENTS IN PARTNERSHIPS (CONTINUED)
The following summarizes the activity of the CD Warehouse equity investments
of the Company for the nine months ending September 30, 1996:
<TABLE>
<CAPTION>
CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE CD WAREHOUSE
EDMOND ORANGE PARK TULSA MEMPHIS
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total assets...................................... $ 32,716 $ 85,608 $ 64,208 $ 66,912
Total liabilities................................. 32,630 2,425 321 2,193
-------------- -------------- -------------- --------------
Net assets...................................... $ 86 $ 83,183 $ 63,887 $ 64,719
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Revenues.......................................... $ 36,001 $ 176,381 $ 192,094 $ 283,702
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income........................................ $ 86 $ 24,580 $ 18,570 $ 41,545
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a non-cancelable operating lease
agreement. The agreement expires in 1997. The Company also leases retail space
for its store operation. This agreement expires in 1996. Total rent expense for
the nine months ending September 30, 1995 and 1996 was $31,298 and $32,841,
respectively.
The following is a schedule of future minimum lease payments for the above
leases as of September 30, 1996:
<TABLE>
<S> <C>
1996............................................................... $ 6,857
1997............................................................... 5,694
---------
$ 12,551
---------
---------
</TABLE>
6. INCOME TAXES
Taxable income of the Company is includable in the income tax returns of the
individual partners; therefore, no provision for income taxes has been made in
the accompanying financial statements.
7. RELATED-PARTY TRANSACTIONS
The Company sells new and used merchandise to franchisees. The franchisees
include the investee stores of CD Warehouse--Fort Worth, Tulsa, Memphis, Orange
Park, and Edmond. Sales to these five franchisees amounted to $77,644 and
$145,267 for the nine months ending September 30, 1995 and 1996.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER,
TO, OR A SOLICITATIONOF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Combined Statements of Operations......................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Pro Forma Combined Condensed Financial Statement.......................... 21
Business and Properties................................................... 28
Management................................................................ 39
Certain Transactions...................................................... 42
Principal Stockholders.................................................... 45
Description of Securities................................................. 45
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 49
Legal Matters............................................................. 50
Experts................................................................... 50
Additional Information.................................................... 51
Financial Statements...................................................... F-1
</TABLE>
1,000,000 SHARES
CD WAREHOUSE, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CAPITAL WEST
SECURITIES, INC.
NUTMEG SECURITIES, LTD.
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CD WAREHOUSE, INC.
REGISTRATION STATEMENT ON FORM SB-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware grants every
corporation the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The Delaware statute also grants every corporation the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
The Delaware statute provides that to the extent that a director, officer,
employee, or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in the
statute, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually incurred by
him in connection therewith.
Articles Nine and Eleven of the Registrant's Certificate of Incorporation
indemnify and exculpate the directors, officers, employees, and agents of the
Registrant from and against certain liabilities. Article Nine provides that the
Registrant shall indemnify to the full extent permitted under the General
Corporation Law of the State of Delaware any director, officer, employee, or
agent of the Registrant. Article Eleven provides that a director of the
Registrant shall have no personal liability to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
Registrant or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) for acts
or omissions specified in Section 174 of the General Corporation Law of the
State of Delaware regarding the unlawful payment of dividends and the unlawful
purchase or redemption of the Registrant's stock, and (d) for any transaction
from which the director derived an improper personal benefit.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All expenses of registration of the
Shares will be borne by the Company. All of the amounts shown are estimates,
except the registration fee, and assume exercise of the underwriter's
over-allotment option.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 3,108.94
NASD fees...................................................... $ 1,300.00
Underwriter's non-accountable expense allowance................ $215,625.00
Legal fees and expenses........................................ $80,000.00
Accounting fees and expenses................................... $40,000.00
Printing and engraving expenses................................ $25,000.00
Nasdaq application fees........................................ $ 6,780.00
----------
TOTAL EXPENSES............................................... $371,813.94
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of securities
of the Company issued within the past three years, which were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
The Company was organized as a Delaware corporation in September 1996. The
initial subscribing stockholders, who each subscribed on September 5, 1996, were
Jerry W. Grizzle for 230,000 shares of Common Stock, Mathew Grizzle (Mr.
Grizzle's son) under the Uniform Transfers to Minors Act ("UTMA") for 10,000
shares of Common Stock, Brittany Grizzle (Mr. Grizzle's daughter) under the UTMA
for 10,000 shares of Common Stock, Gary D. Johnson for 75,000 shares of Common
Stock and Doyle E. Motley for 25,000 shares of Common Stock. Each of such
stockholders paid a purchase price of $1.00 per share for the Common Stock thus
purchased. No sales commissions were paid in connection with such issuance. The
securities were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
The Company entered into a subscription agreement on October 1, 1996 with
Mark E. Kane for the sale to him of 350,000 shares of Common Stock, at a
purchase price of $1.00 per share. Payment of the subscription price is
conditioned upon the successful completion of the offering of Common Stock to
which this Registration Statement relates. Additionally, the Company entered
into subscription agreements on October 10, 1996 with Bruce D. MacDonald for the
aggregate issuance to him of 80,000 shares of Common Stock, in exchange for the
assignment to the Company of certain equity interests owned by MacDonald or his
affiliates in 36 CD Warehouse franchise stores (the "MacDonald Acquisition").
Issuance of the 80,000 shares, and completion of the MacDonald Acquisition, is
conditioned upon the successful completion of the offering of Common Stock to
which this Registration Statement relates. No sales commissions were paid in
connection with the subscription agreements. The securities, when issued, will
be issued in reliance on the exemption from registration provided by Section
4(2) of the Securities Act.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1.1** Underwriting Agreement between the Company and Capital West Securities, Inc., Nutmeg Securities,
Ltd. and Berthel Fisher & Company Financial Services, Inc.
2.1* Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Mark E. Kane ("Kane") and the Company
2.2* Asset Purchase Agreement, dated as of October 10, 1996, by and between Bruce D. MacDonald
("MacDonald") and the Company
2.3* Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and
the Company
2.4* World-Wide Area Development Agreement, dated as of October 10, 1996, by and between Kane and the
Company
3.1 Amended and Restated Certificate of Incorporation (filed electronically herewith)
3.2 Amended and Restated Bylaws (filed electronically herewith)
4.1 Specimen Certificate of the Common Stock (filed electronically herewith)
4.2 See Articles IV and VIII of the Company's Certificate of Incorporation and Article II of the
Company's Bylaws (included herein as Exhibits 3.1 and 3.2, respectively)
4.3** Form of Warrant Agreement between the Company and the Representatives
4.4** Bank of Oklahoma, N.A. Credit Facility Commitment Letter
4.5 1996 Stock Option Plan (filed electronically herewith)
5.1 Opinion of Day Edwards Federman Propester & Christensen, P.C. as to the legality of the securities
being registered (filed electronically herewith)
10.1* Employment Agreement by and between the Company and Grizzle
10.2* Employment Agreement by and between the Company and Johnson
10.3* Employment Agreement by and between the Company and MacDonald
10.4* Employment Agreement by and between the Company and Motley
10.5* Finders and Release Agreement, dated as of September 3, 1996, by and among the Company; Grizzle;
CDI Acquisition JV, a Texas joint venture; and CD Partners JV, a Texas joint venture
10.6* Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Kane and the Company (included herein as Exhibit 2.1)
10.7* Asset Purchase Agreement, dated as of October 10, 1996, by and between MacDonald and the Company
(included herein as Exhibit 2.2)
10.8* Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and
the Company (included herein as Exhibit 2.3)
10.9 Bank of Oklahoma, N.A. Credit Facility Term Sheet (included herein as Exhibit 4.4)
10.10 Form of Franchise Agreement (filed electronically herewith)
10.11 Form of Lock-up Agreement (filed electronically herewith)
10.12* Form of Partnership Agreement
10.13* Form of Development Agreement
10.14* Lease Agreement dated October 28, 1996 by and between the Company and Magnolia Enterprises, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
21.1* List of subsidiaries
23.1 Consent of Huselton & Morgan, P.C., Independent Accountants (filed electronically herewith)
23.2 Consent of Ernst & Young LLP., Independent Accountants (filed electronically herewith)
23.3 Consent of Day Edwards Federman Propester & Christensen, P.C. (included in Exhibit 5.1)
24.1* Powers of Attorney
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(c) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii) include any additional or changed material information on the plan
of distribution.
(d) That, for the purpose of determining liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration statement
of the securities offered, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
(e) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination or end of the offering.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this Amendment No. 1
to the Registration Statement on Form SB-2, File No. 333-15139, to be signed on
its behalf by the undersigned, thereon duly authorized in the City of Oklahoma
City, State of Oklahoma, on December 11, 1996.
CD WAREHOUSE, INC.
a Delaware corporation
By: /s/ *GARY D. JOHNSON
-----------------------------------------
Gary D. Johnson
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
Pursuant to the requirement of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ *GARY D. JOHNSON Chairman of the Board of
- ------------------------------ Directors; President and December 11, 1996
Jerry W. Grizzle Chief Executive Officer
/s/ GARY D. JOHNSON Executive Vice President;
- ------------------------------ Chief Operating Officer; December 11, 1996
Gary D. Johnson Director
/s/ *GARY D. JOHNSON
- ------------------------------ Vice President--Company December 11, 1996
Bruce D. MacDonald Store Operations
/s/ DOYLE E. MOTLEY
- ------------------------------ Sr. Vice President, Chief December 11, 1996
Doyle E. Motley Financial Officer
/s/ *GARY D. JOHNSON
- ------------------------------ Director December 11, 1996
Christopher M. Salyer
/s/ *GARY D. JOHNSON
- ------------------------------ Director December 11, 1996
Ronald V. Perry
*By: /s/ GARY D. JOHNSON
- ------------------------------
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
1.1** Underwriting Agreement between the Company and Capital West Securities, Inc., Nutmeg Securities,
Ltd. and Berthel Fisher & Company Financial Services, Inc.
2.1* Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Mark E. Kane ("Kane") and the Company
2.2* Asset Purchase Agreement, dated as of October 10, 1996, by and between Bruce D. MacDonald
("MacDonald") and the Company
2.3* Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and
the Company
2.4** World-Wide Area Development Agreement, dated as of October 10, 1996, by and between Kane and the
Company
3.1 Amended and Restated Certificate of Incorporation (filed electronically herewith)
3.2 Amended and Restated Bylaws (filed electronically herewith)
4.1 Specimen Certificate of the Common Stock (filed electronically herewith)
4.2 See Articles IV and VIII of the Company's Certificate of Incorporation and Article II of the
Company's Bylaws (included herein as Exhibits 3.1 and 3.2, respectively)
4.3** Form of Warrant Agreement between the Company and the Representatives
4.4** Bank of Oklahoma, N.A. Credit Facility Commitment Letter
4.5 1996 Stock Option Plan (filed electronically herewith)
5.1 Opinion of Day Edwards Federman Propester & Christensen, P.C. as to the legality of the securities
being registered (filed electronically herewith)
10.1* Employment Agreement by and between the Company and Grizzle
10.2* Employment Agreement by and between the Company and Johnson
10.3* Employment Agreement by and between the Company and MacDonald
10.4* Employment Agreement by and between the Company and Motley
10.5* Finders and Release Agreement, dated as of September 3, 1996, by and among the Company; Grizzle;
CDI Acquisition JV, a Texas joint venture; and CD Partners JV, a Texas joint venture
10.6* Asset Purchase Agreement, dated as of October 1, 1996, by and among Compact Discs International,
Ltd., Kane and the Company (included herein as Exhibit 2.1)
10.7* Asset Purchase Agreement, dated as of October 10, 1996, by and between MacDonald and the Company
(included herein as Exhibit 2.2)
10.8* Assignment and Assumption Agreement, dated as of October 10, 1996, by and between MacDonald and
the Company (included herein as Exhibit 2.3)
10.9 Bank of Oklahoma, N.A. Credit Facility Term Sheet (included herein as Exhibit 4.4)
10.10 Form of Franchise Agreement (filed electronically herewith)
10.11 Form of Lock-up Agreement (filed electronically herewith)
10.12* Form of Partnership Agreement
10.13* Form of Development Agreement
10.14* Lease Agreement dated October 28, 1996 by and between the Company and Magnolia Enterprises, Inc.
21.1* List of subsidiaries
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Huselton & Morgan, P.C., Independent Accountants (filed electronically herewith)
23.2 Consent of Ernst & Young LLP., Independent Accountants (filed electronically herewith)
23.3 Consent of Day Edwards Federman Propester & Christensen, P.C. (included in Exhibit 5.1)
24.1* Powers of Attorney
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CD WAREHOUSE, INC.
CD Warehouse, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware does hereby amend the Certificate of Incorporation of the Corporation,
which was originally filed on September 5, 1996.
ARTICLE I
The name of the corporation is CD Warehouse, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
Section 1. The amount of total authorized capital stock of the
Corporation is 15,000,000 shares, of which 10,000,000 shares shall be Common
Stock, having a par value of $.01 per share ("Common Stock"), and 5,000,000
shares shall be Preferred Stock, having a par value $.01 per share ("Preferred
Stock").
Section 2. Except for and subject to those rights expressly granted to
the holders of Preferred Stock, or any series thereof, by the Board of Directors
of the Corporation (the "Board of Directors"), pursuant to the authority hereby
vested in the Board of Directors or as provided by the laws of the State of
Delaware, the holders of the Corporation's Common Stock shall have exclusively
all rights of stockholders and shall possess exclusively all voting power. Each
holder of Common
<PAGE>
Stock of the Corporation shall be entitled, on each matter submitted for a
vote to holders of Common Stock, to one vote for each share of Common Stock
standing in such holder's name on the books of the Corporation.
Section 3. The Board of Directors is hereby expressly authorized, at
any time and from time to time by a resolution or resolutions, to divide the
shares of Preferred Stock into one or more series, to issue from time to time in
whole or in part the shares of Preferred Stock or the shares of any series
thereof, and to fix and determine in the resolution or resolutions providing for
the issue of shares of Preferred Stock of a particular series the voting rights,
if any, of the holders of shares of such series, the designations, preferences
and relative, participating, optional and other special rights of such series,
and the qualifications, limitations and restrictions thereof, to the fullest
extent now or hereafter permitted by the laws of the State of Delaware. The
voting rights, if any, of each such series and the preferences and relative,
participating, optional and other special rights of each such series, and the
qualifications, limitations and restrictions thereof, if any, may differ from
those of any and all other series. Unless otherwise provided in the resolution
or resolutions of the Board of Directors providing for the issuance thereof,
shares of any series of Preferred Stock that shall be issued and thereafter
acquired by the Corporation through purchase, redemption, exchange, conversion
or otherwise shall return to the status of authorized but unissued Preferred
Stock.
Without limiting the generality of the foregoing authority of the Board of
Directors, the Board of Directors from time to time may (if otherwise permitted
under the General Corporation Law of the State of Delaware):
(a) designate a series of Preferred Stock, which may be distinguished by
number, letter or title from other Preferred Stock of the Corporation;
(b) fix and thereafter increase or decrease (but not below the number of
shares thereof then outstanding) the number of shares of Preferred Stock
that shall constitute such series;
(c) provide for dividends on shares of Preferred Stock of such series and,
if provisions are made for dividends, determine the dividend rate and the
times at which holders of shares of Preferred Stock of such series shall be
entitled to receive the dividends, whether the dividends shall be
cumulative and, if so, from what date or dates, and the other conditions,
if any, including rights of priority, if any, upon which the dividends
shall be paid;
(d) determine the rights, if any, to which holders of the shares of
Preferred Stock of such
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series shall be entitled in the event of any liquidation, dissolution or
winding up of the Corporation; provided, however, that in the event of
any such liquidation, dissolution or winding up of the Corporation, the
holders of the shares of Preferred Stock of such series shall not be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or
earnings, an amount in cash greater than $100.00 per share, plus accrued
and unpaid dividends to the date fixed for liquidation, dissolution or
winding up, whether or not declared;
(e) provide for the redemption or purchase of shares of Preferred Stock of
such series and, if provisions are made for redemption, determine the time
or times and the price or prices at which the shares of Preferred Stock of
such series shall be subject to redemption in whole or in part, and the
other terms and conditions, if any, on which shares of Preferred Stock of
such series may be redeemed or purchased;
(f) provide for a sinking fund or purchase fund for the redemption or
purchase of shares of Preferred Stock of such series and, if any such fund
is so provided for the benefit of such shares of Preferred Stock, the
amount of such fund and the manner of its application;
(g) determine the extent of the voting rights, if any, of the shares of
Preferred Stock of such series, including but not limited to the right of
the holders of such shares to vote as a separate class acting alone or with
the holders of one or more other series of Preferred Stock and the right to
have more (or less) than one vote per share;
(h) provide for whether or not the shares of Preferred Stock of such
series shall be convertible into, or exchangeable for, shares of any other
class or classes of capital stock, or any series thereof, of the
Corporation and, if so convertible or exchangeable, determine the
conversion or exchange price or rate, the adjustments thereof and the other
terms and conditions, if any, on which such shares of Preferred Stock shall
be so convertible or exchangeable; and
(i) provide for any other preferences, any relative, participating,
optional or other special rights, any qualifications, limitations or
restrictions thereof, or any other terms or provisions of shares of
Preferred Stock of such series as the Board of Directors may deem
appropriate or desirable.
Section 4. Shares of Common Stock or Preferred Stock may be issued by
the Corporation
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from time to time for such consideration, having a value of not less than the
par value, if any, thereof, as is determined from time to time by the Board
of Directors. Any and all shares issued and for which full consideration has
been paid or delivered shall be deemed fully paid stock and the holder
thereof shall not be liable for any further payment thereon.
Section 5. The Corporation may issue rights and options to purchase
shares of Common Stock or Preferred Stock of the Corporation to directors,
officers or employees of the Corporation or any affiliate thereof, and no
shareholder approval or ratification of any such issuance of rights and options
shall be required.
ARTICLE V
The name and mailing address of the incorporator is as follows:
Jeanette C. Timmons, Esq.
Day, Edwards, Federman, Propester & Christensen, P.C.
210 Park Ave., Ste. 2900
Oklahoma City, Oklahoma 73102
ARTICLE VI
The number of directors which shall constitute the whole Board of Directors
of the Corporation shall be as specified pursuant to the By-Laws of the
Corporation and may be altered from time to time as may be provided therein;
provided, however, the name and mailing address of the person who is to serve as
the initial director until the first annual meeting of the stockholders or until
his successors are elected and qualified are as follows:
Jerry Grizzle
210 Park Avenue, Ste. 2900
Oklahoma City, Oklahoma 73102
Members of the Board of Directors may be removed with or without cause by
the affirmative vote of stockholders holding a majority of the capital stock of
the Corporation outstanding and entitled to vote.
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ARTICLE VII
The Board of Directors of the Corporation is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation. The stockholders of the
Corporation may not adopt, amend or repeal the By-Laws of the Corporation other
than by the affirmative vote of 66 2/3% of the combined voting power of all
outstanding voting securities of the Corporation entitled to vote generally in
the election of directors of the Board of Directors of the Corporation ("Voting
Power"), voting together as a single class. In addition to any affirmative vote
required by applicable law and in addition to any vote of the holders of any
series of Preferred Stock provided for or fixed pursuant to the provisions of
Article IV of this Certificate of Incorporation, any alteration, amendment or
repeal relating to this Article VII must be approved by the affirmative vote of
the holders of at least 66 2/3% of the Voting Power, voting together as a single
class.
ARTICLE VIII
No action that is required or permitted to be taken by the stockholders of
the Corporation at any annual or special meeting of stockholders may be effected
by written consent of stockholders in lieu of a meeting of stockholders, unless
the action to be effected by written consent of stockholders and the taking of
such action by such written consent have expressly been approved in advance by
the Board.
In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article IV of this Certificate of
Incorporation, any alteration, amendment or repeal relating to this Article VIII
must be approved by the affirmative vote of the holders of at least 66 2/3% of
the Voting Power, voting together as a single class.
ARTICLE IX
Section 1. Any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is or was
a director or officer of the Corporation or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director
or officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall be indemnified by the Corporation
(funds paid or required to be paid to any person as a result of the provisions
of this
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Article IX shall be returned to the Corporation or reduced, as the case may
be, to the extent that such person receives funds pursuant to an
indemnification from any such other corporation or organization) against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
the defense or settlement of such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Any such person who could be indemnified pursuant to the preceding
sentence except for the fact that the subject action or suit is or was by or
in the right of the Corporation shall be indemnified by the Corporation
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit,
except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to
the Corporation unless and only to the extent that the Court of Chancery of
the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper. As used herein, the term
"proceeding" means any threatened, pending, or completed action, suit,
hearing or other matter, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, hearing or
other matter, and any inquiry or investigation that could lead to such an
action, suit, hearing or other matter.
Section 2. To the extent that a director or officer of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1 of this Article IX, or in defense of any
claim, issue or matter therein, including the dismissal of an action without
prejudice, he shall be indemnified by the Corporation against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith without the necessity of any action being taken by the
Corporation other than the determination, in good faith, that such defense has
been successful. In all other cases wherein indemnification is provided by this
Article IX, unless ordered by a court, indemnification shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper under the circumstances
because he has met the applicable standard of conduct specified in this Article
IX. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the holders of a majority of the
shares of capital stock of the Corporation entitled to vote thereon.
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Section 3. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person seeking
indemnification did not act in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful. Entry of a judgment by consent as part
of a settlement shall not be deemed a final adjudication of liability for
negligence or misconduct in the performance of duty, nor of any other issue or
matter.
Section 4. Expenses (including attorneys' fees) incurred by an officer
or director in defending any action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the specific case upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article IX.
Section 5. The indemnification and advancement of expenses hereby
provided shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director or officer, and shall inure to the benefit of the heirs, executors
and administrators of such person.
Section 6. By action of the Board of Directors, notwithstanding any
interest of the directors in the action, the Corporation, at its expense, may
purchase and maintain insurance, in such amounts as the Board of Directors deems
appropriate, on behalf of any person who is or was a director or officer of the
Corporation, or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent (including trustee) of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article IX or under the provisions
of the General Corporation Law of the State of Delaware.
Section 7. All rights to indemnification and advancement of expenses
under this Article IX shall be deemed to be provided by contract between the
Corporation and the director or officer
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who serves in such capacity at any time while this Article IX and other
relevant provisions of the General Corporation Law of the State of Delaware
and other applicable law, if any, are in effect.
Section 8. Any repeal or modification of the foregoing paragraphs by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director or officer of the Corporation existing at the time of
such repeal or modification.
Section 9. The Corporation may additionally indemnify any employee or
agent of the Corporation to the fullest extent permitted by law.
ARTICLE X
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of the General Corporation Law of the State of Delaware or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of the General
Corporation Law of the State of Delaware, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agrees to any compromise
or arrangement and to any reorganization of this Corporation as consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all of the creditors or class of creditors, and/or
on all of the stockholders or class of stockholders, of this Corporation, as the
case may be, and also on this Corporation.
ARTICLE XI
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law,
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under Section 174 of the General Corporation Law of the State of Delaware, as
the same exists at the time this Certificate of Incorporation becomes
effective or as the same hereafter may be amended, or (d) for any transaction
from which the director derived an improper personal benefit. If the General
Corporation Law of the State of Delaware is amended after the date of filing
of this Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be limited to the fullest
extent permitted by the amended General Corporation Law of the State of
Delaware. Any repeal or modification of this Article XI by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect
any limitation on the personal liability of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE XII
The Corporation reserves the right to amend and repeal any provision
contained in this Certificate of Incorporation in the manner from time to time
prescribed by the laws of the State of Delaware. All rights herein conferred
are granted subject to this reservation.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation,
having been duly adopted by the written consent of the stockholders of the
Corporation in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware, has been executed this 9th
day of December 1996.
CD WAREHOUSE, INC.
By:
-----------------------------------------
Title:
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Date:
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AMENDED AND RESTATED BYLAWS
OF
CD WAREHOUSE, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
shall be in the State of Delaware, address C.T. Corporation, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine as the business of the Corporation may
require. The corporate headquarters of the Corporation shall be in Oklahoma
City, Oklahoma.
ARTICLE II
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. An annual meeting of stockholders for the
purpose of electing directors and of transacting such other business as may come
before it shall be held each year at such date, time, and place, either within
or without the State of Delaware, as may be specified by the Board of Directors.
SECTION 2. SPECIAL MEETINGS. Unless otherwise proscribed by law,
special meetings of stockholders for any purpose or purposes may be held at any
time only upon call of a majority of the Board of Directors, at such time and
place either within or without the State of Delaware as may be stated in the
notice (as described herein at Section 3 of this Article II).
SECTION 3. NOTICE OF MEETINGS. (a) Unless waived, a notice of each
annual or special meeting, stating the date, hour and place and the purpose or
purposes for which the meeting is called, shall be given to each stockholder of
record entitled to vote or entitled to notice, not more than sixty (60) days nor
less than ten (10) days before the date of any such meeting, unless a different
period is proscribed by law. If mailed, such notice shall be directed to a
stockholder at his or her address as the same appears on the records of the
Corporation. If a meeting is adjourned to another time or place and such
adjournment is for 30 days or less and no new record date is fixed for the
adjourned
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meeting, no further notice as to such adjourned meeting need be given if the
time and place to which it is adjourned are fixed and announced at such
meeting. In the event of a transfer of shares after notice has been given
and prior to the holding of the meeting, it shall not be necessary to serve
notice on the transferee. If the adjournment is for more than 30 days, or
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person
entitled thereto, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person
attends the meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is
not lawfully called or convened. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the
notice.
SECTION 4. LIST OF STOCKHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make available, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 5. QUORUM. Except as otherwise provided by law or in the
Certificate of Incorporation or these Bylaws, at any meeting of stockholders,
the holders of a majority of shares issued and outstanding of each class
entitled to vote, shall be present or represented by proxy in order to
constitute a quorum for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, a
majority in voting interest of the stockholders present in person or represented
by proxy, or, in the absence of a decision by the majority, any officer entitled
to preside at such meeting, shall have power to adjourn the meeting from time to
time, without notice other than an announcement at the meeting of the time and
place of the adjourned meeting, until a quorum shall be present or represented.
At any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record
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entitled to vote at the meeting.
SECTION 6. ORGANIZATION. The Chairman of the Board, if any, or, in his
absence, the Vice Chairman, if any, or, in their absence, the President, shall
call to order meetings of stockholders and shall act as Chairman of such
meetings. The Board of Directors or, if the Board fails to act, the
stockholders may appoint any stockholder, director, or officer of the
Corporation to act as Chairman of any meeting in the absence of the Chairman of
the Board, the Vice Chairman, or the President. The Secretary of the
Corporation, or, if the Secretary of the Corporation not be present, the
Assistant Secretary, or if the Secretary and the Assistant Secretary not be
present, any person whom the Chairman of the meeting shall appoint, shall act as
Secretary of the meeting.
SECTION 7. ORDER OF BUSINESS AND PROCEDURE. The order of business at
all meetings of the stockholder and all matters relating to the manner of
conducting the meeting shall be determined by the Chairman of the meeting.
Meetings shall be conducted in a manner designed to accomplish the business of
the meeting in a prompt and orderly fashion and to be fair and equitable to all
stockholders, but it shall not be necessary to follow any manual of
parliamentary procedure.
SECTION 8. VOTING. Except for the election of directors, at any
meeting duly called and held at which a quorum is present, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any questions brought before such meeting,
unless the question is one upon which by express provision of law or of the
Certificate of Incorporation or these Bylaws, a greater vote is required in
which case such express provision shall govern and control the decision of such
question. At any meeting duly called and held for the election of directors at
which a quorum is present, directors shall be elected by a plurality of the
votes cast by the holders (acting as such) of shares of stock of the Corporation
entitled to elect such directors.
SECTION 9. INSPECTORS. The Board of Directors in advance of any
stockholders' meeting may appoint one or more inspectors to act at the meeting
or any adjournment thereof. If inspectors are not so appointed, the person
presiding at a stockholders' meeting may, and on the request of any stockholder
entitled to vote thereat shall, appoint one or more inspectors. In case any
person appointed as inspector fails to appear or act, the vacancy may be filled
by the Board of Directors in advance of the meeting or at the meeting by the
person present thereat. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to discharge the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.
SECTION 10. PROXIES. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless
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the proxy provides for a longer period.
SECTION 11. NO ACTION BY CONSENT. No action that is required or permitted
to be taken by stockholders of the Corporation at any annual or special meeting
of stockholders may be effected by written consent of stockholder in lieu of a
meeting of stockholders, unless the action to be effected by written consent of
stockholders and the taking of such action by such written consent have
expressly been approved in advance by the Board of Directors. Except as
otherwise provided herein, no action shall be taken by stockholders except at an
annual or special meeting of stockholders.
SECTION 12. ADVANCE NOTICE OF STOCKHOLDERS' PROPOSALS. (a) At an annual
or special meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be (i) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(ii) brought before the meeting by or at the direction of the Board of
Directors, (iii) properly brought before an annual meeting by a stockholder or
(iv) if, and only if, the notice of a special meeting provides for business to
be brought before the meeting by stockholders, properly brought before the
meeting by a stockholder. For business to be properly brought before the
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed by first class United States mail, postage
prepaid, and received at the principal executive offices of the Corporation not
less than forty (40) days prior to the meeting; provided, however, that in the
event less than forty-five (45) days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received no later than the tenth day following the day
on which such notice of the date of the meeting was mailed or such disclosure
was made, but not less than five (5) days prior to the meeting.
(b) A stockholder's notice to submit business to a meeting of
stockholders shall set forth (i) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business, (ii)
the class and number of shares of the Corporation which are beneficially
owned by the stockholder, (iii) a representation that the stockholder
intends to appear at the meeting in person or by proxy to submit the
business specified in such notice, (iv) any material interest of the
stockholder in such business, and (v) a brief description of the business
desired to be brought before the meeting and the reasons for conducting
such business at the meeting, including the complete text of any
resolutions to be presented at the annual meeting, and the reasons for
conducting such business at the meeting. In addition, the stockholder
making such proposal shall promptly provide any other information
reasonably requested by the Corporation. Notwithstanding anything in the
Bylaws to the contrary, no business shall be conducted at a meeting except
in accordance with the procedures set forth in this
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Section 12. The Chairman of a meeting shall, if the facts warrant,
determine that business was not properly brought before the meeting and in
accordance with the provisions of this Section 12, and, if he should so
determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
(c) In addition to the information required above to be given by a
stockholder who intends to submit business to a meeting of stockholders, if
the business to be submitted is the nomination of a person or persons for
election to the Board of Directors then such stockholder's notice must also
set forth, as to each person whom the stockholder proposes to nominate for
election as a director, (i) the name, age, business address and, if known,
residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of stock of
the Corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors or is otherwise required
by the rules and regulations of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended, (v) the
written consent of such person to be named in the proxy statement as a
nominee and to serve as a director if elected and (vi) a description of all
arrangements or understandings between such stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by such stockholder.
Nominations other than those made by the Board of Directors or its
designated committee must comply with the procedures set forth in this
Section 12, and no person nominated by a stockholder shall be eligible for
election as a director unless nominated in accordance with the terms of
this Section 12. The Chairman of a meeting shall, if the facts warrant,
determine that a nomination was not properly made in accordance with the
foregoing procedures of this Section 12, and, if he should so determine, he
shall so declare to the meeting and the defective nomination disregarded.
(d) Notwithstanding the foregoing provisions of this Section 12, a
stockholder who seeks to have any proposal included in the corporation's
proxy statement shall comply with the requirements of Regulation 14A under
the Securities Exchange Act of 1934, as amended.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS OF BOARD. The business of the Corporation
shall be managed by or under the direction of its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or
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by the Certificate of Incorporation or by these Bylaws directed or required
to be exercised or done by the stockholders.
SECTION 2. NUMBER OF DIRECTORS AND TERM OF OFFICE. The Board of
Directors shall consist of at least five (5) and not more than nine (9)
directors; provided, however, that the Board of Directors, by resolution
adopted by vote of a majority of the then authorized number of directors, may
increase or decrease the number of directors within such minimum and maximum
limitations. The Board of Directors shall be divided into three classes, as
nearly equal in number as reasonably possible, with the terms of office of
the first class to expire at the 1997 annual meeting of stockholders, the
term of office of the second class to expire at the 1998 annual meeting of
stockholders and the term of office of the third class to expire at the 1999
annual meeting of stockholders. At each annual meeting of stockholder
following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. Directors need not be stockholders nor residents of the
United States or the State of Delaware.
SECTION 3. ELECTION OF DIRECTORS. The directors shall be elected by
the holders of shares entitled to vote thereon at the annual meeting of
stockholders, and each shall serve as provided herein and until his
respective successor has be elected and qualified. At each meeting of the
stockholders for the election of directors, the persons receiving the
greatest number of votes shall be the directors.
SECTION 4. NOMINATIONS OF DIRECTORS. Nomination of persons for election
to the Board of Directors may be made by the Board of Directors or any committee
designated by the Board of Directors or by any stockholder entitled to vote for
the election of directors at the applicable meeting of stockholders. Such
nominations, if not made by the Board of Directors, shall be made by timely
notice in writing to the Secretary of the Corporation and comply with the
provisions of Article II, Section 12.
SECTION 5. CHAIRMAN OF THE BOARD. The Board of Directors may elect
one of their members to be Chairman of the Board. The Chairman of the Board
shall be subject to the control of and may be removed by the Board of
Directors. If he is present, the Chairman of the Board shall preside at all
meetings of the Board of Directors and of the stockholders, and he shall have
and perform such other duties as from time to time may be assigned to him by
the Board of Directors.
SECTION 6. RESIGNATIONS. Any director of the Corporation may resign
at any time by giving written notice to the Chairman of the Board, if any, or
the Secretary of the Corporation. Such resignation shall take effect at the
time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
6
<PAGE>
SECTION 7. VACANCIES. In the event that any vacancy shall occur in
the Board of Directors, whether because of death, resignation, removal, newly
created directorships resulting from any increase in the authorized number of
directors, the failure of the stockholders to elect the whole authorized
number of directors, or any other reason, such vacancy may be filled by the
vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director, and the directors so chosen shall
hold office until the next annual election or until their successors are duly
elected and shall qualify, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute.
SECTION 8. REMOVAL OF DIRECTORS. Any director may be removed at any
annual or special stockholders' meeting with or without cause and shall
receive a copy of the notice of such meeting, delivered to him personally or
by mail at his last known address at least ten (10) days prior to the date of
the stockholders' meeting.
SECTION 9. REGULAR MEETINGS. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time
to time be determined by the Board of Directors. After such determination
and notice thereof has been once given to each person then a member of the
Board of Directors, regular meetings may be held at such intervals and time
and place without further notice being given.
SECTION 10. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President or by a majority of
directors then in office and shall be held at such time and place as shall be
designated in the notice of the meeting.
SECTION 11. NOTICE. Notice of each special meeting or, where required,
each regular meeting, of the Board of Directors shall be given to each
director either by being mailed on at least the third day prior to the date
of the meeting or by being telegraphed, faxed or given personally or by
telephone on at least 24 hours notice prior to the date of meeting. Such
notice shall specify the place, date and hour of the meeting and, if it is
for a special meeting, the purpose or purposes for which the meeting is
called. At any meeting of the Board of Directors at which every director
shall be present, even though without such notice, any business may be
transacted. Any acts or proceedings taken at a meeting of the Board of
Directors not validly called or constituted may be made valid and fully
effective by ratification at a subsequent meeting which shall be legally and
validly called or constituted. Notice of any regular meeting of the Board of
Directors need not state the purpose of the meeting and, at any regular
meeting duly held, any business may be transacted. If the notice of a
special meeting shall state as a purpose of the meeting the transaction of
any business that may come before the meeting, then at the meeting any
business may be transacted, whether or not referred to in the notice thereof.
A written
7
<PAGE>
waiver of notice of a special or regular meeting, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein shall be deemed the equivalent of such notice, and attendance of a
director at a meeting shall constitute a waiver of notice of such meeting
except when the director attends the meeting and prior to or at the
commencement of such meeting protests the lack of proper notice.
SECTION 12. QUORUM AND ORGANIZATION OF MEETINGS. At all meetings of the
Board of Directors, a majority shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specially provided by statute or by the Certificate of
Incorporation. If a quorum shall not be present at the meeting of the Board of
Directors, a majority of the directors present may adjourn the meeting to
another time and place, and the meeting may be held as adjourned without further
notice or waiver other than an announcement at the meeting, until a quorum shall
be present. Meetings shall be presided over by the Chairman of the Board, if
any, or, in his absence, by the Vice Chairman, if any, or, in the absence of
both, the President. The Secretary of the Corporation shall act as secretary of
the meeting, but, in his absence, the, the Chairman of the meeting may appoint
any person to act as secretary of the meeting.
SECTION 13. ACTION BY UNANIMOUS CONSENT. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
SECTION 14. TELEPHONIC PARTICIPATION. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors
may participate in a meeting of the Board of Directors, or any committee, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
SECTION 15. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise
8
<PAGE>
all the power or authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless the resolution or the Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board of Directors.
SECTION 16. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required.
SECTION 17. COMPENSATION OF DIRECTORS. No stated salary shall be paid
directors as such for their services, but by resolution of the Board of
Directors, a fixed sum may be allowed for attendance at regular or special
meetings of the Board of Directors; provided, however, that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. The
Corporation may reimburse directors for out-of-pocket expenses for attendance at
regular or special meetings of the Board of Directors.
ARTICLE IV
NOTICES
SECTION 1. METHOD. Whenever, unless the provisions of any statutes or
of the Certificate of Incorporation or of these Bylaws provide otherwise, notice
is required to be given to any director or stockholder, it shall be construed to
mean personal notice, but such notice may be given in writing, by mail,
addressed to such director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail or delivered to the custody of a commercial courier service. Notice
to directors may also be given by telephone or facsimile.
SECTION 2. WAIVER. Whenever any notice is required to be given under
the provisions of any statute or of the Certificate of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. ELECTION. The officers of the Corporation shall be chosen
by the Board
9
<PAGE>
of Directors. Each officer shall hold office for such term as may be
prescribed by the Board of Directors from time to time. It shall not be
necessary for any officer to be a director, and any number of offices may be
held by the same person.
SECTION 2. PRESIDENT. The President shall be the chief executive
officer of the Corporation, shall preside at all meetings of the stockholders
and the Board of Directors (unless the Chairman of the Board shall attend
such meeting, in which event the Chairman of the Board shall preside), shall
have general and active management of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
SECTION 3. VICE PRESIDENTS. In the absence of the President or in the
event of his inability or refusal to act, the Vice President, if any (or in
the event there be more than one Vice President, the Vice Presidents in the
order designated by the Board of Directors, or in the absence of any
designation, then in the order of their election), shall perform the duties
of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Vice Presidents
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
SECTION 4. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the same and to the credit
of the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the President and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, he shall give the Corporation a bond
(which shall be renewed every six years) in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
SECTION 5. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors
in a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall
10
<PAGE>
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or president, under
whose supervision he shall be. He shall have custody of the corporate seal
of the Corporation and he, or an assistant secretary, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such assistant secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the Corporation and to attest the affixing by his signature.
SECTION 6. COMPENSATION. The salaries and other compensation of all
officers and agents of the Corporation shall be fixed by the Board of
Directors.
ARTICLE VI
CAPITAL STOCK
SECTION 1. CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman or Vice-Chairman of the Board of Directors, or
the President or a Vice President and the Treasurer, or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation,
certifying the number of shares owned by him in the Corporation. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, option or other special rights of each class of
stock or series thereof and the qualification, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on
the face or back of the certificates which the Corporation shall issue to
represent such class or series of stock, provided that, except as otherwise
provided under the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
SECTION 2. FACSIMILE SIGNATURES. The signatures of the officers upon
the certificate may be facsimiles if the certificate is countersigned by a
Transfer Agent or registered by a registrar other than the Corporation or its
employee. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
SECTION 3. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
in its discretion, appoint one or more banks or trust companies in such city
or cities as the Board
11
<PAGE>
of Directors may deem advisable, from time to time, to act as Transfer Agents
and Registrars of the shares of stock of the Corporation; and, upon such
appointments being made, no certificate representing shares shall be valid
until countersigned by one of such Transfer Agents and registered by one of
such Registrars.
SECTION 4. LOST CERTIFICATES. In case any certificate representing
shares shall be lost, stolen or destroyed, the Board of Directors, or any
officer or officers authorized by the Board of Directors, may authorize the
issue of a substitute certificate in place of the certificate so lost, stolen
or destroyed, and, if the Corporation shall have a Transfer Agent and
Registrar, may cause or authorize such substitute certificate to be
countersigned by the appropriate Transfer Agent and registered by the
appropriate Registrar. In each such case, the applicant for a substitute
certificate shall furnish to the Corporation and to such of its Transfer
Agents and Registrars as may require the same, evidence to their
satisfaction, in their discretion, of the loss, theft or destruction of such
certificate and of the ownership thereof, and also such security or indemnity
as may by them be required.
SECTION 5. TRANSFER OF SHARES. Transfers of shares shall be made on
the books of the Corporation only by the person named in the certificate or
by his attorney lawfully constituted in writing, and upon surrender and
cancellation of a certificate or certificates of a like number of shares,
with duly executed assignment and power of transfer endorsed thereon or
attached thereto, and with such proof of the authenticity of the signatures
as the Corporation or its agents may reasonably require. Upon the surrender
to the Corporation or the transfer agent of the Corporation of a certificate
for shares duly endorsed or accompanied by proper evidence of succession,
assignation, or authority to transfer, it shall issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 6. FIXING RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or to receive payment of any dividend or
other distribution or allotment of any rights, or to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new date
for the adjourned meeting.
SECTION 7. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares (a) to receive dividends, (b) to vote as such owner, and
(c) to be held liable for calls and assessments. The Corporation shall not be
bound to recognize any equitable or other
12
<PAGE>
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the law.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors as and when they deem
expedient at any regular or special meeting, out of funds legally available
thereof pursuant to law. Dividends may be paid in cash, in property, or in
shares of the Corporation's capital stock, subject to the provisions of the
Certificate of Incorporation.
SECTION 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meeting contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation,
or for such other purpose as the directors shall think conducive to the
interest of the Corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
SECTION 3. CHECKS. All checks or demands for money, notes or other
evidence of indebtedness of the Corporation shall be signed by such officer
or officers or such other person or persons as the Board of Directors may
from time to time designate by resolution.
SECTION 4. EXECUTION OF PROXIES. The Chairman of the Board or the
President, or in the absence or disability of the Chairman of the Board and
the President, a Vice President, may authorize from time to time the
signature and issuance of proxies to vote upon shares of stock of other
corporations standing in the name of the Corporation or authorize the
execution of consents to action taken or to be taken by such other
corporation. All such proxies and consents shall be signed in the name of
the Corporation by the Chairman of the Board or the President or a Vice
President and by the Secretary or an Assistant Secretary.
ARTICLE VIII
AMENDMENTS
SECTION 1. AMENDMENTS. These Bylaws may be altered, amended or
repealed, and new Bylaws may be adopted by the Board of Directors. The
stockholders of the Corporation may not adopt, amend or repeal these Bylaws
other than by the affirmative vote of sixty-six and two thirds of one percent
(66 2/3%) of the combined voting power of all outstanding voting securities
of the Corporation entitled to vote generally in the election of directors of
the Board of Directors of the Corporation, voting together as a single class.
13
<PAGE>
IN WITNESS WHEREOF, this amended and Restated Bylaws, having been duly
adopted by the written consent of the Board of Directors of the Corporation
in accordance with the provisions of the General Corporation Law of the State
of Delaware, has been executed this 9th day of December, 1996.
CD WAREHOUSE, INC.
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
14
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NUMBER [Logo] SHARES
CD
CD WAREHOUSE, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 12512W 10 5
---------------------------------------------------------------------
This Certifies that
is the registered owner of
---------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01, OF
------------------- CD WAREHOUSE, INC. --------------------
---------------------------------------------------------------------
-----------------------------------------------------------
CERTIFICATE OF STOCK
(herein referred to as the "Corporation"), transferable on the books of
the Corporation by the holder hereof in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed. This
Certificate and the shares represented hereby are issued and shall be
subject to all of the bylaws, terms, conditions and limitations of the
Certificate of Incorporation and Bylaws of the Corporation including
---illegible--- made to such Certificate of Incorporation or Bylaws,
to all of which reference is made hereby and to all of which the holder
asserts by acceptance hereof.
This Certificate is not valid unless countersigned by the transfer
agent and registered by the registrar of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused facsimile signatures
of its duly authorized officers and its facsimile seal to be hereunto
affixed.
Dated:
/s/ JERRY W. GRIZZLE /s/ DAVE E. MOTLEY
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER SECRETARY
[SEAL]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COUNTERSIGNED AND REGISTERED:
LIBERTY BANK & TRUST COMPANY OF OKLAHOMA CITY, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
CD WAREHOUSE, INC.
The Corporation will furnish without charge to each shareholder who so
requests a full statement of the designations, preferences, limitations and
relative rights of each class of stock or series thereof of the Corporation
and the variations in the relative rights and preferences between the shares
of any series of preferred stock, so far as the same have been fixed and
determined, and the authority of the board of directors to fix and determine
the relative rights and preferences of any series of preferred stock. Such
requests may be made to the Corporation or to the transfer agent.
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -- ...............Custodian...............
(Cust) (Minor)
Under Uniform Gifts to Minors
Act ...................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
| |
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated Signature(s):
------------------------------
----------------------------------------
----------------------------------------
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed:
By
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION,
(BANKS, STOCK BROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
CD WAREHOUSE, INC.
1996 STOCK OPTION PLAN
PART I
DEFINITIONS AND ADMINISTRATIVE MATTERS
1. PURPOSE. The purpose of the 1996 Stock Option Plan (the "Plan") of CD
Warehouse, Inc. (the "Company") is to advance the interests of the Company and
its shareholders by encouraging and providing for the acquisition of an equity
interest in the Company by employees, officers, directors, consultants and
advisers, by providing additional incentives to such persons, and by enabling
the Company to attract and retain the services of such persons who make
substantial contributions to the Company through their ability, loyalty and
efforts.
2. DEFINITIONS. The following definitions are applicable to the Plan.
2.1 "ADVISER" means any adviser or other consultant selected by the
Committee, who is neither an Employee of the Company or a Subsidiary
nor a Director.
2.2 "'BOARD" means the Board of Directors of the Company.
2.3 "'CODE" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
2.4 "COMMITTEE" means the entire board of directors or any committee
thereof consisting of two or more directors of the Company who are
"Non-Employee Directors" as such term is used in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or such number of directors or Non-Employee Directors
as is required by Rule 16b-3 or any successor rule.
2.5 "COMMON STOCK" means the Common Stock, par value $.01 per share, of
the Company.
2.6 "EFFECTIVE DATE" means December 10, 1996.
2.7 "EMPLOYEE" means any person, including a director who is employed by
the Company (or by any Subsidiary) and is compensated for such
employment by a regular salary.
2.8 "FAIR MARKET VALUE" means the closing sales price of the Common Stock
as reported on the Nasdaq interdealer quotation system or, if
applicable, the exchange on which the Common Stock is traded, on the
date of grant of a stock option, or if no sale of the Common Stock was
made on such system or exchange on such date then on the next
preceding day on which such a sale was made.
2.9 "SUBSIDIARY" means any corporation owned, in whole or in part, by the
Company.
3. ADMINISTRATION.
3.1 The portion of the Plan with respect to the grant of options pursuant
to Part II shall be administered by the Committee. Subject to the terms of
the Plan, with respect to the grant of options pursuant to Part II, the
Committee is authorized to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to it; to determine the Employees to
whom options will be granted; to determine the type of option and the
amount, size, timing and terms of each such grant; and to make all other
determinations, including factual determinations, necessary or advisable
for the Plan's administration, provided that the Committee may delegate to
the Chief Executive Officer of the Company, or such other officer as may be
designated by the Committee, the authority, subject to guidelines
prescribed by the Committee, to grant options to Employees, and Advisers
who are not then subject to the provisions of Section 16 of the Exchange
Act and to determine the number of
<PAGE>
shares to be covered by any such option and the Committee may authorize
any one or more of such persons to execute and deliver documents on behalf
of the Committee, provided that no such delegation may be made that would
cause grants of options to persons subject to Section 16 of the Exchange
Act to fail to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. Determinations, interpretations or
other actions made or taken by the Committee pursuant to the provisions of
the Plan shall be final and binding and conclusive for all purposes and
upon all persons.
3.2 The Committee may grant new options to an optionee to replace
outstanding options and condition the grant upon the surrender and
cancellation of all or a portion of any outstanding options granted under
Section II of the Plan. Subject to the provisions of the Plan, such new
options shall be exercisable at such price, during such period and on such
other terms and conditions as are specified by the Committee at the time of
the grant of the new options. Upon surrender, the outstanding options
shall be canceled and the share of Common Stock previously subject thereto
shall again be available for grant under the Plan. The Committee may also
amend or modify outstanding options with the consent of the optionee
affected thereby.
3.3 The portion of the Plan with respect to the grant of options pursuant
to Part III shall be administered by the Board of Directors. Grants of
stock options under Part III of the Plan and the amount, price and timing
of the awards to be granted will be automatic, as described in Part III
hereof. All questions of interpretation of the Plan with respect to the
grant of options pursuant to Part III will be determined by the Board, and
such determination shall, unless otherwise determined by the Board, be
final and conclusive on all persons having any interest hereunder.
4. SHARES SUBJECT TO PLAN.
4.1 Subject to adjustment as provided in Sections 14 and 22, the total
number of shares of Common Stock that may be issued upon exercise of
options granted under this Plan shall not exceed 400,000. If any options
expires, is terminated unexercised or is canceled, the shares subject to
such options, to the extent of any such expiration, termination or
cancellation, shall again be available for grant under the Plan.
4.2 In any fiscal year of the Company, the maximum number of shares of
Common Stock with respect to which options may be granted to any optionee
shall not exceed 10% of the Common Stock outstanding as of the first
business day of such fiscal year, as adjusted for stock splits, stock
dividends or other similar changes affecting the Common Stock.
5. DESIGNATION OF OPTIONEES.
5.1 Optionees under Part II of the Plan shall be selected, from time to
time, by the Committee from among those Employees and Advisers who, in the
opinion of the Committee, occupy responsible positions and who have the
capacity to contribute materially to the continued growth, development and
long-term success of the Company and its Subsidiaries.
5.2 All Directors on the date of grant shall be eligible to receive
options under Part III of the Plan.
PART II
GRANTS TO EMPLOYEES AND ADVISERS
6. GRANT OF OPTIONS. The Committee shall have complete discretion in
determining the number of shares of Common Stock subject to options granted to
each optionee. The Committee may grant any type of option to purchase Common
Stock that is permitted by law on the date of grant, including but not limited
to, an "incentive stock option" ("ISO") within the meaning of Section 422 of the
Code or a "non-statutory stock option." ISO's may be granted only
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to Employees. In no event, however, shall the aggregate Fair Market Value
(determined at the time the option is granted) of Common Stock with respect
to which ISOs are exercisable for the first time by an optionee in any
calendar year under the Plan and all other plans of the Company and its
"parent" and "subsidiary" corporations (within the meaning of Sections 424(e)
and (f) of the Code), if any, exceed $100,000. Nothing in this Section shall
be deemed to prevent the grant of non-statutory stock options in amounts
which exceed the maximum established by Section 422(d) of the Code.
Each option shall be evidenced by an option agreement that shall specify
the type of option granted, the option price, the duration of the option, the
number of shares of Common Stock to which the option pertains, the conditions
upon which such options shall become exercisable and such other provisions as
the Committee shall determine. Each option which is intended to qualify as an
ISO shall be clearly designated as such and shall comply with the applicable
provisions of the Code pertaining to ISOs.
No ISO may be granted hereunder after the expiration of the earlier of 10
years from (i) the date of the adoption of the Plan, or (ii) the date the Plan
was approved by the stockholders of the Company.
7. OPTION PRICE. Except as hereinafter provided, the purchase price of each
share of Common Stock issuable upon exercise of each option shall be not less
than 100% of the Fair Market Value of the Common Stock on the date of grant, as
determined by the Committee, provided, however, in the event that as ISO is
granted to an Employee who possesses more than 10% of the total combined voting
power of all classes of stock of the Company, taking into account the
attribution rules of Code Section 422(d), the purchase price of each share of
Common Stock issuable upon exercise of each ISO shall be determined by the
Committee on the date of grant and shall not be less than 110% of the Fair
Market Value of the Common Stock on the date of grant.
8. EXERCISE OF OPTIONS. The period during which options shall be exercisable
shall be fixed by the Committee, but in no event shall an option be exercisable
after the expiration of ten (10) years from the date such option is granted.
Subject to the foregoing, options shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall in each
instance determine, which restrictions and conditions need not be the same for
all options. In the event an ISO is granted to an Employee who possesses more
than 10% of the total combined voting power of all classes of stock of the
Company, taking into account the attribution rules of Code Section 422(d), the
period during which such ISOs shall be exercisable shall be fixed by the
Committee, but in no event shall such ISOs be exercisable
after the expiration of five (5) years from the date such option is granted.
9. PAYMENT OF OPTION PRICE. No shares of Common Stock shall be issued upon
exercise of an option until full payment of the option price therefor has been
made. To the extent permitted by the Committee, payment of the option price may
be made: (i) in cash; (ii) by exchange of Common Stock valued at its Fair Market
Value on the date of exercise; (iii) by requesting that the Company withhold
from the number of shares of Common Stock otherwise issuable upon exercise of
the option that number of shares of Common Stock having an aggregate fair market
value on the date of exercise (the difference between the exercise price and the
fair market value on the date of exercise) equal to the exercise price for all
of the shares of Common Stock as to which the option is being exercised; (iv) by
means of a brokers' cashless exercise procedure; or (v) by any combination of
the foregoing. Where payment of the option price is to be made with shares of
Common Stock acquired under any compensation plan of the Company, such shares
will not be accepted as payment unless the optionee has acquired such shares at
least six months prior to such payment.
10. RIGHTS OF STOCKHOLDERS. Neither an optionee nor his or her legal
representatives or beneficiaries shall have any of the rights of a stockholder
with respect to any shares subject to any option until such shares shall have
been issued upon the proper exercise of such option.
11. NON-TRANSFERABILITY OF OPTIONS. No option may be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated otherwise than by will
or by the laws of descent and distribution or, with respect to non-qualified
stock options, pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act, or the rules
thereunder. Except as otherwise specifically provided herein, all options
granted to
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an optionee under the Plan shall be exercisable during the lifetime of such
optionee only by such optionee. When an optionee dies, the personal
representative or other person entitled to succeed to the rights of the
optionee (the "Successor Optionee") may exercise such rights, subject to
furnishing to the Company proof satisfactory to the Company of his or her
right to receive the option under optionee's will or under the applicable
laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT OR SERVICE OF OPTIONEE. Subject to the condition
that no option shall be exercisable after the expiration of the period fixed by
the Committee in accordance with Section 8 hereof:
12.1 In the event that (i) an Employee ceases to be an Employee of the
Company or its Subsidiaries by reason of a discharge for cause or a
voluntary separation of the optionee from the Company without the consent
of the Company or its Subsidiary or (ii) an Adviser ceases to be an Adviser
to the Company by reason of a termination for cause or a voluntary
termination without the consent of the Company, any options granted to such
optionee under the Plan shall terminate immediately, unless the Committee
shall otherwise determine.
12.2 In the event that an optionee shall die while employed by the Company
or while serving as an Adviser or within three months after (i) termination
of employment or service of an optionee due to disability or (ii)
retirement of an optionee who is an Employee on the Employee's Retirement
Date, any option granted to such optionee under the Plan shall be
exercisable to the extent then exercisable or on such accelerated basis as
the Committee may determine, by his successor in interest, within one year
after the death of the optionee, unless the Committee shall otherwise
determine.
12.3 In the event that the employment or service of the optionee terminates
for any reason (other than as described in Section 12.1 or Section 12.2),
including due to disability (within the meaning of Code Section 422(e)(3))
and, with respect to an Employee, retirement on the Employee's Retirement
Date (as hereinafter defined), any option granted to such optionee under
the Plan shall be exercisable to the extent then exercisable or on such
accelerated basis as the Committee may determine, within a period of three
months after such termination, unless the Committee shall otherwise
determine.
12.4 For purposes of this Section 12, "Retirement Date" shall mean any date
an Employee is otherwise entitled to retire under the Company's retirement
plans and shall include normal retirement at age 65, early retirement at
age 62 and retirement at age 60 after 30 years of service.
13. RIGHTS OF EMPLOYEES. Nothing in the Plan shall interfere with or limit in
any way the right of the Company or any Subsidiary to terminate any optionee's
employment at any time, nor confer upon any optionee any right to continue in
the employ of the Company or any Subsidiary. No optionee shall have the right
to be selected as an optionee, or having been so selected, to be selected again
as an optionee. No grant of an option shall constitute a part of the base
salary or any other compensation of any Employee under any other benefit plan of
the Company or any Subsidiary unless expressly so provided in such other benefit
plan.
14. ADJUSTMENTS IN SHARES SUBJECT TO PLAN. If the Company shall at any time
change the number of issued shares of Common Stock without new consideration to
the Company (such as by stock dividend or stock split), the total number of
shares available under the Plan, the number of shares to be granted to each
optionee pursuant to the Plan, hereof, and the number and price of shares of
Common Stock subject to outstanding options, shall be adjusted so that the
aggregate consideration payable to the Company and the value of each option
shall not be changed. If, during the term of any option granted under this
Plan, the Common Stock shall be changed into another kind of stock or into
securities of another corporation, whether as a result of a reorganization,
recapitalization, sale, merger, consolidation, or other similar transaction, or
if additional rights shall be offered with respect to the Common Stock, the
Board shall cause adequate provision to be made so that the optionees shall
thereafter be entitled to receive, upon the due exercise of any outstanding
options, the securities or rights that the optionees would have been entitled to
receive had they owned the Common Stock acquired on the exercise of such options
on the effective date of any such transaction.
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PART III
GRANTS TO DIRECTORS
15. GRANT OF OPTIONS. On the first business day immediately following the
date that an individual is first elected or appointed to serve as a member of
the Board of Directors, such Director shall be granted an option to purchase
6,000 shares of the Common Stock, subject to adjustment as provided in
Section 22; provided, however, that with respect to Directors elected prior
to the effective date of the registration statement covering the Company's
initial public offering of Common Stock (the "IPO Effective Date"), each such
Director shall be granted an option to purchase 6,000 shares of Common Stock
on the IPO Effective Date. Thereafter, each year on the first business day
immediately following the date of the Company's Annual Meeting of
Stockholders, each individual reelected or continuing as a Director shall
automatically receive an option to acquire 6,000 shares of the Company's
Common Stock, subject to adjustment as provided in Section 22 (collectively,
the "Director Options").
16. TYPES OF OPTIONS. All options granted under Part III of the Plan shall be
non-statutory options for purposes of the Code.
17. OPTION PRICE. The purchase price of each share of Common Stock issuable
upon exercise of an option will be equal to the Fair Market Value of the
Common Stock on the date of grant; provided, however, that the purchase price
of the Director Options granted on the IPO Effective Date shall be the public
offering price of the Common Stock on such date.
18. PERIOD OF OPTION AND RIGHTS TO EXERCISE.
18.1 Except as set forth herein, each Director who receives options under
this Plan must continue to hold office as a Director of the Company for one
year from the date that the Director Option is granted before he can
exercise any part thereof. Thereafter, subject to the provisions of the
Plan, Director Options will vest and be exercisable, on a cumulative basis,
as to 2,000 shares beginning on the first anniversary of the date of grant,
2,000 additional shares beginning on the second anniversary of the date of
grant, and 2,000 additional shares beginning on the third anniversary of
the date of grant.
18.2 The right to exercise a Director Option will expire on the tenth
anniversary of the date on which the option was granted.
18.3 Once each installment of a Director Option has become exercisable,
such installment may be exercised in whole at any time or in part from time
to time until the expiration of the option, whether or not any option
granted previously to the optionee remains outstanding at the time of such
exercise.
19. PAYMENT OF OPTION PRICE. Payment or provision for payment of the purchase
price shall be made as follows:
(a) In cash;
(b) By exchange of Common Stock valued at its Fair Market Value on the
date of exercise;
(c) By means of a brokers' cashless exercise procedure by the delivery to
the Company of an exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Company the amount of proceeds
necessary to pay the purchase price of the shares of Common Stock as to
which such exercise relates; or
(d) By any combination of the foregoing.
Where payment of the purchase price is to be made with shares of Common
Stock acquired under any
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compensation plan of the Company, such shares will not be accepted as payment
unless the Director has acquired such shares at least six months prior to
such payment.
20. TERMINATION OF SERVICE. Upon cessation of service as a Director (for
reasons other than retirement or death), including cessation of service due
to physical or mental disability that prevents such person from rendering
further services as a Director, only those options exercisable at the date of
cessation of service shall be exercisable by the Director. Such options
shall be exercisable until the first to occur of: (i) the expiration of the
remaining term of the option or (ii) three months after cessation of service
of the Director.
Upon the retirement or death of a Director, options shall be exercisable
as follows:
(a) Upon retirement as a Director pursuant to a retirement plan
maintained by the Company, all options shall continue to be exercisable
during their terms as if such person had remained a Director.
(b) In the event of the death of a Director while a member of the Board,
or within the period after termination of service during which the options
are exercisable by the Director in accordance with Sections 18 and 20, the
options granted to him shall be exercisable until the first to occur of:
(i) the expiration of the remaining term of the option or (ii) one year
after the date of the Director's death, but only to the extent that the
Director would have been entitled to exercise the options had he lived
during such period.
21. NO GUARANTEED TERM OF OFFICE. Nothing in this Plan or any modification
thereof, and no grant of an option, or any term thereof, shall be deemed an
agreement or condition guaranteeing to any Director any particular term of
office or limiting the right of the Company, the Board of Directors or the
stockholders to terminate the term of office of any Director under the
circumstances set forth in the Company's Certificate of Incorporation or
Bylaws, or as otherwise provided by law.
22. ADJUSTMENTS IN SHARES SUBJECT TO PLAN. If the Company shall at any time
change the number of issued shares of Common Stock without new consideration to
the Company (such as by stock dividend or stock split), the total number of
shares available under the Plan, the number of shares to be granted to each
optionee pursuant to the Plan, hereof, and the number and price of shares of
Common Stock subject to outstanding options, shall be adjusted so that the
aggregate consideration payable to the Company and the value of each option
shall not be changed. If, during the term of any option granted under this
Plan, the Common Stock shall be changed into another kind of stock or into
securities of another corporation, whether as a result of a reorganization,
recapitalization, sale, merger, consolidation, or other similar transaction, or
if additional rights shall be offered with respect to the Common Stock, the
Board shall cause adequate provision to be made so that the optionees shall
thereafter be entitled to receive, upon the due exercise of any outstanding
options, the securities or rights that the optionees would have been entitled to
receive had they owned the Common Stock acquired on the exercise of such options
on the effective date of any such transaction.
23. OTHER RESTRICTIONS. Sections 10 and 11 of the Plan shall apply to options
granted pursuant to Part III of the Plan.
PART IV
MISCELLANEOUS
24. LEGAL COMPLIANCE. All certificates for Common Stock delivered under the
Plan shall be subject to such transfer and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements
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<PAGE>
of the Securities and Exchange Commission, any stock exchange or quotation
system upon which the Common Stock is then listed or quoted and any
applicable federal or state securities law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
references to such restrictions. The Committee may suspend the exercise of
any option so long as it determines that registration or qualification under
any federal or state securities laws is required in connection therewith and
has not been completed.
25. CHANGE IN CONTROL. A "Change in Control" for purposes of this Plan shall
mean any one of the events described below:
25.1 At any time during a period of two (2) years, at least a majority of
the Board shall not consist of Continuing Directors. "Continuing
Directors" shall mean directors of the Company at the beginning of such
two-year period and directors who subsequently became such and whose
selection or nomination for election by the Company's stockholders was
approved by a majority of the then Continuing Directors; or
25.2 Any person or "group" (as determined for purposes of Regulation 13D-G
promulgated by the Commission under the Exchange Act or under any successor
regulation), but excluding any majority-owned subsidiary or any employee
benefit plan sponsored by the Company or any subsidiary or any trust or
investment manager for the account of such a plan, shall have acquired
"beneficial ownership"(as determined for purposes of such regulation) of
the Company's securities representing fifty percent (50%) or more of the
combined voting power of the Company's then outstanding securities unless
such acquisition is approved in advance by a majority of the directors of
the Company who were in office immediately preceding such acquisition and
any individual selected to fill any vacancy created by reason of the death
or disability of any such director; or
25.3 The Company becomes a party to a merger, consolidation or share
exchange in which either (i) the Company will not be the surviving
corporation or (ii) the Company will be the surviving corporation and any
outstanding shares of Common Stock will be converted into shares of any
other company (other than a reincorporation or the establishment of a
holding company involving no change in ownership of the Company or other
securities or cash or other property (excluding payments made solely for
fractional shares)); or
25.4 The Company's stockholders (i) approve any plan or proposal for the
disposition or other transfer of all, or substantially all, of the assets
of the Company, whether by means of a merger, reorganization, liquidation
or dissolution or otherwise or (ii) dispose of, or become obligated to
dispose of, 50% or more of the outstanding capital stock of the Company by
tender offer or otherwise.
If a Change in Control has occurred, all outstanding options granted under
the Plan shall be immediately exercisable by the holder of the option for the
total remaining number of Shares covered by the option and shall survive any
such event for the balance of their term.
26. AMENDMENTS AND TERMINATION. The Board shall have the right at any time
to amend, suspend or terminate this Plan in any respect which it may deem to
be in the best interests of the Company; provided, however, that it may not,
without the approval of the stockholders of the Company: (i) except as
provided in Sections 14 and 22 hereof, increase the maximum number of shares
reserved for issuance under the Plan; (ii) except as provided in Sections 14
and 22 hereof, change the provisions of the Plan relating to the
establishment of the option price; (iii) change the class of persons eligible
to participate in the Plan; or (iv) make any change that would result in any
Non-Employee Director losing his status as a "disinterested administrator"
under Rule 16b-3 with respect to any employee benefit plan of the Company or
result in transactions under the Plan not qualifying for an exemption under
Rule 16b-3 or any successor rule.
Except as provided in Sections 14 and 22 hereof, no amendment, modification
or termination of the Plan shall in any manner adversely affect any grant of
options theretofore granted under the Plan, without the consent of the
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optionee affected thereby.
27. TAX WITHHOLDING. The Company shall have the authority, with respect to
options granted after the Effective Date, to withhold, or to require an
Employee to remit to the Company, prior to the issuance or delivery of any
shares hereunder, an amount sufficient to satisfy federal, state and local
withholding requirements on any exercise of an option, provided that such
withholding does not result in the loss of the availability of the exemption
under Rule 16b-3. Notwithstanding the last sentence of Section 9 hereof, the
Committee may, in its sole discretion, permit the holder of an option to
elect to satisfy withholding taxes, if any, arising in connection with the
exercise of an option either (i) by delivering to the Company shares of
Common Stock then held by such holder or (ii) by directing the Company to
retain shares of Common Stock otherwise issuable upon the exercise of such
option. Any such election shall be irrevocable and shall be subject to such
rules as the Committee may, from time to time, prescribe.
28. ADDITIONAL RESTRICTIONS. All options shall be subject to and shall
contain such provisions, limitations and restrictions as may be required on
the date of grant to permit the grant of the options to comply with or
qualify for the exemptions with respect to grants of options and stock
provided by regulations under Section 16 of the Exchange Act and other
applicable provisions of federal and state securities laws, and to satisfy
the requirements of other applicable regulatory authorities.
29. TERMINATION OF THE PLAN. The Plan shall terminate ten (10) years after
the Effective Date, subject to earlier termination by the Board pursuant to
Section 25.
30. COMPLIANCE WITH RULE 16b-3. With respect to persons subject to Section
16 of the Exchange Act, transactions under this plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the plan or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
31. SUBSTITUTION OF OPTIONS IN A MERGER, CONSOLIDATION OR SHARE EXCHANGE.
In the event that the Company becomes a party to a merger, consolidation or
share exchange (a "Business Combination") and in connection therewith
substitutes options under the Plan for options of another party to such
Business Combination, notwithstanding the provisions of the Plan, the terms
of such substituted options may have the same terms and conditions (provided
that the number of shares issuable and the exercise prices are adjusted in
accordance with the terms of the Business Combination) as the former options
of such other party to the Business Combination, provided, however, that the
exercise price of the options to be granted under the Plan shall be lawful
consideration as determined by the Committee.
32. EFFECTIVE DATE; AUTOMATIC TERMINATION OF PLAN. The Plan shall become
effective on December 10, 1996, provided it has been approved by the
stockholders of the Company. The Plan shall automatically terminate on
December 10, 2006, unless it is earlier terminated by the Board pursuant to
the provisions of Section 26 hereof. Termination of the Plan shall not
affect awards previously granted under the Plan.
8
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December 10, 1996
CD Warehouse, Inc.
722 N. Broadway
Oklahoma City, Oklahoma 73102
Gentlemen:
We have acted as counsel to CD Warehouse, Inc., a Delaware corporation
(the "Company"), in connection with the filing by the Company with the
Securities and Exchange Commission of a Registration Statement on Form SB-2
(File No. 333-15139) (the "Registration Statement") (certain terms
capitalized herein and not otherwise defined having the meaning given them in
the Registration Statement), for the purpose of registering under the
Securities Act of 1933, as amended (the "Act"):
(1) 1,000,000 shares of the common stock, par value $.01 per share, of
the Company (the "Common Stock"), plus up to 150,000 additional shares of
Common Stock which may be issued pursuant to the Underwriters' over-allotment
option (collectively, the "Shares"); and
(2) 100,000 shares of Common Stock which may be issued to the
Representatives of the Underwriters upon exercise of warrants to purchase
such Common Stock (the "Representatives' Warrants").
<PAGE>
DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.
December 10, 1996
Page 2
We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents and corporate and public records as we
deemed necessary as a basis for the opinions hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents presented to us as originals, the conformity to the originals
of all documents presented to us as copies, and the authenticity of the
originals of such latter documents. In rendering such opinions, we have relied
as to factual matters upon certificates of officers of the Company and
certificates of public officials.
Based upon the foregoing, we are of the opinion that:
(1) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware;
(2) Upon issuance, delivery, and payment for the Shares in accordance with
the terms of the Underwriting Agreement, the shares of Common Stock
so issued shall be validly issued, fully paid, and nonassessable; and
(3) Upon issuance, delivery, and payment for the Representatives'
Warrants in accordance with the terms of the Underwriting Agreement
and upon exercise of any of the Representatives' Warrants in
accordance with its terms, the shares of Common Stock so issued shall
be validly issued, fully paid, and nonassessable.
We are attorneys licensed to practice law in the State of Oklahoma. The
opinions expressed herein are limited solely to the laws of the State of
Oklahoma and we express no opinion under the laws of any other jurisdiction
other than federal law and the corporate law of the State of Delaware.
<PAGE>
DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.
December 10, 1996
Page 3
This opinion is delivered to you solely in connection with the filing of
the Registration Statement with respect to the Securities, and this letter and
the opinions stated herein may not be relied upon for any other purpose or by
any persons other than the directors and officers of the Company.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the prospectus which is included in the Registration
Statement.
Very truly yours,
/s/ DAY, EDWARDS, FEDERMAN, PROPESTER & CHRISTENSEN, P.C.
BWD/JCT
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD.
d/b/a CD WAREHOUSE
FRANCHISE AGREEMENT
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD.
FRANCHISE AGREEMENT
TABLE OF CONTENTS
ITEM PAGE
1. Franchise Grant.................................................... 1
2. Term and Renewal................................................... 2
3. Franchise Fee...................................................... 3
4. Royalty Fee........................................................ 3
5. Software License Fee............................................... 4
6. Advertising........................................................ 4
7. Corporate or Partnership Franchisees............................... 6
8. Development Obligations; Plans and Construction.................... 7
9. Duties of Franchisor............................................... 8
10. Training........................................................... 9
11. Store Operations................................................... 10
12. Insurance.......................................................... 14
13. Taxes, Permits and Indebtedness.................................... 15
14. Records and Reports................................................ 16
15. Proprietary Marks.................................................. 17
16. Confidential Manuals............................................... 19
17. Confidential Information........................................... 20
18. Default and Termination............................................ 21
19. Obligations Upon Termination or Expiration......................... 24
20. Transfer of Interest............................................... 26
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21. Covenants.......................................................... 30
22. Independent Contractor and Indemnification......................... 32
23. Entire Agreement, Modification..................................... 34
24. Waiver of Obligations.............................................. 34
25. Force Majeure...................................................... 35
26. Rights and Remedies are Cumulative................................. 35
27. Injunctive Relief.................................................. 36
28. Arbitration........................................................ 36
29. Payments of Amounts Owed to Franchisor; Costs and Attorney's Fees.. 37
30. Governing Law and Consent to Jurisdiction.......................... 37
31. Notices and Payments............................................... 37
32. Severability and Construction...................................... 38
33. Acknowledgments.................................................... 39
GUARANTY
Attachment A - Approved Territory
Attachment B - Statement of Ownership Interests
Attachment C - Confidentiality and Non-Compete Agreement
Attachment D - Confidentiality Agreement
ii
<PAGE>
COMPACT DISCS INTERNATIONAL, LTD.
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT is entered into by and between COMPACT DISCS
INTERNATIONAL, LTD., a Texas limited partnership ("Franchisor") and the
Franchisee Owner identified on the signature page of this Agreement
("Franchisee").
W I T N E S S E T H:
WHEREAS, Franchisor, as the result of the expenditures of time, skill,
effort and money, has developed a system for the operation of businesses
which specialize in the sale of new and used compact discs;
WHEREAS, the distinguishing characteristics of the System include,
without limitation, distinctive exterior and interior design, exterior and
interior signage, color scheme and fixtures; uniform standards, know-how and
procedures for the acquisition and sale of new and used compact discs;
inventory, management and financial control methods; and training and
assistance, all of which may be changed, improved and further developed by
Franchisor from time to time;
WHEREAS, Franchisor identifies the System by means of certain trade
names, service marks, trademark and logos, including, without limitation, the
mark "C.D. Warehouse" and such other trade names and trademark as Franchisor
may develop in the future for the purpose of identifying for the public the
source of services and products marketed under such marks and the System and
representing the System's high standards of quality, appearance and service
(collectively, "Proprietary Marks"); and
WHEREAS, Franchisee desires to use the System in connection with the
operation of a C.D. Warehouse Store, at the location specified herein, upon
the terms and subject to the conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and of the mutual
undertakings, obligations and commitments contained herein, it is agreed
between the parties as follows:
1. FRANCHISE GRANT
A. Franchisor hereby grants to Franchisee the right, and Franchisee
hereby undertakes the obligation, upon the terms and subject to the
conditions hereinafter set forth, to develop and operate one C.D. Warehouse
Stores (a "Store") and to use solely in connection therewith the Proprietary
Marks and the System, as such may be changed, improved and further developed
from time to time, only at the approved location described in Attachment A
hereto.
B. Franchisee shall not relocate the Store without the express prior
written consent of Franchisor. This Agreement does not grant to Franchisee
the right to franchise or operate a Store or to offer or sell any products or
services described hereunder at or from any other location.
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C. Franchisee shall be assigned a specific geographic area (the
"Territory") by Franchisor. A description of Franchisee's Territory shall be
set forth on Attachment A. During the term of this Agreement, so long as
Franchisee is in full compliance with the terms and conditions of this
Agreement, Franchisor shall not establish or grant others the right to
establish a C.D. Warehouse Store in the Territory.
D. Franchisee shall use its best efforts to advertise and promote the
Store in its Territory in accordance with Section 5 below.
2. TERM AND RENEWAL
A. Except as otherwise provided herein, the term of this Agreement
shall expire ten (10) years from the date of execution.
B. Franchisee may, at its option, renew this Agreement for an
additional term of ten (10) years, subject to the following conditions, which
must, unless waived by Franchisor in writing, be met prior to renewal:
(1) Franchisee shall give Franchisor written notice of Franchisee's
election to renew not less than eight (8) nor more than twelve (12) months
prior to the expiration of the initial term;
(2) Franchisee shall renovate and modernize the facilities and
equipment used in the Stores to Franchisor's then-current standards for C.D.
Warehouse Stores under the System, the cost of such renovation and modernization
to be borne by Franchisee;
(3) Franchisee shall not be in default under any provision of this
Agreement, any amendments hereto or any other agreement between Franchisee and
Franchisor or any of its subsidiaries or affiliates; and Franchisee shall have
substantially and timely complied with all terms and conditions of such
agreements during the term thereof;
(4) Franchisee shall have satisfied all monetary obligations owed by
Franchisee to Franchisor and its subsidiaries and affiliates and shall have
timely met those obligations throughout the term of this Agreement;
(5) Franchisee shall execute Franchisor's then-current form of
franchise agreement for the renewal term prescribed herein, which agreement
shall supersede this Agreement in all respects and the terms of which may differ
from the terms of this Agreement and may include, without limitation, a higher
service fee and advertising fee; provided that Franchisee shall pay in lieu of
an initial franchise fee a renewal fee equal to no more than four percent (4%)
of the initial franchise fee then being charged to new franchisees under the
System;
(6) Franchisee shall comply with Franchisor's then-current
qualification and training requirements;
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(7) Franchisee shall present evidence satisfactory to Franchisor
that Franchisee has the right to remain in possession of the approved
location for the duration of the renewal term of this Agreement; and
(8) Franchisee shall execute a general release, in a form
prescribed by Franchisor, of any and all claims against Franchisor, its
subsidiaries, affiliates, successors and assigns and their respective
officers, directors, shareholders, partners, agents, employees, and
representatives, in their corporate and individual capacities, including,
without limitation, claims arising under this Agreement or under federal,
state or local laws, regulations, rules or orders.
3. FRANCHISE FEE
Upon execution of this Agreement, Franchisee shall pay to Franchisor a
franchise fee of six thousand dollars ($6,000.00) which shall be deemed fully
earned and non-refundable upon execution of this Agreement in consideration
of the administrative and other expenses incurred by Franchisor in granting
the franchise hereunder and for Franchisor's lost or deferred opportunity to
franchisee at the specified location to any other party.
4. ROYALTY FEE
A. During the term of this Agreement, Franchisee shall pay to Franchisor
a continuous nonrefundable fee (the "Royalty Fee") equal to five percent (5%) of
the Gross Sales (as defined below) of the Store. The obligation to pay the
Royalty Fee shall commence on the first day the Store is open for business.
Payment of the Royalty Fee shall be due and payable on the tenth day of each
month. Royalty Fees shall be calculated based on Gross Sales for the period of
the first day through the last day of the preceding month. Franchisee shall not
be entitled to withhold any payments due to Franchisor on grounds of alleged
nonperformance by Franchisor under this Agreement. Any payment not actually
received by Franchisor on or before such due date and any payment made by a
check that is returned by the bank upon which it is drawn for insufficient funds
or for any other reason shall be deemed overdue. All payments required under
this Section 4.A may be made by personal delivery or regular mail; provided,
however, that Franchisor reserves the right, in the event any payment is overdue
more than once within any thirteen (13) consecutive weeks, to require Franchisee
to pay all future Royalty Fees by electronic transfer, certified check, or in
such other manner as Franchisor deems appropriate. In the event Franchisee's
Royalty Payment becomes overdue as stated above, late royalty payments shall
bear interest after the respective due date at a rate equal to the lesser of:
(i) 1.5% per month; or (ii) the highest legal rate permitted by applicable law.
This provision shall not prevent Franchisor from exercising any other remedy
herein provided in the event of any default by Franchisee. In the event any
check of Franchisee is returned by the bank due to non-sufficient funds in
Franchisee's account, Franchisor shall charge Franchisee a fee of twenty-five
dollars ($25.00) for each such returned check as a charge for Franchisor's
administrative costs.
B. As used in this Agreement, "Gross Sales" shall include all revenues
from the sale of any and all services and products by Franchisee (whether for
cash, credit, or in exchange for
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other goods and services and regardless of collection in the case of credit)
and all trades of product accepted by Franchisee. A trade shall be included
in Gross Sales at the aggregate value of the incoming product accepted by the
Franchisee (i.e., trade one compact disc for two incoming discs - Gross Sale
equals the aggregate value of the two incoming discs, or $4.00 times two
discs = $8.00 Gross Sale). Gross Sales shall not include any interstore
transfers of product, purchases of product by the Franchisor from any Store,
or any sales taxes or other taxes collected from customers by Franchisee for
transmittal to the appropriate taxing authority.
5. SOFTWARE LICENSE FEE
Franchisee shall pay to Franchisor a one-time software license fee of
$1,200.00, payable upon execution of this Agreement, for the point-of sale
computer software developed by Franchisor for use in Stores (the "POS
Software System"). This software license fee includes the cost of all
upgrades, modifications, improvements, extensions and other changes to the
POS Software System.
6. ADVERTISING
In order to promote the goodwill and public image of the System, Franchisor
and Franchisee agree as follows:
A. MARKETING FUND
(1) Franchisor may institute and Franchisee agrees that Franchisor or its
designee shall maintain and administer a marketing fund (the "Marketing Fund")
for such advertising, marketing and public relations programs, research and
related activities as Franchisor, in its sole discretion, may deem necessary or
appropriate to promote the Stores. The Marketing Fund may be instituted by
Franchisor upon written notice to Franchisee at any time after there are least
two hundred (200) Stores open and operating. Franchisee shall contribute to the
Marketing Fund one half percent (1/2%) of the Store's Gross Sales, payable on
the tenth of each month together with and in the same manner as Franchisee's
royalty fees due hereunder. Store units which are owned by Franchisor or its
subsidiaries or affiliates, to the extent Franchisor has the right to require
such subsidiaries and affiliates to do so, shall contribute to the Marketing
Fund on the same basis as Franchisee.
(2) Franchisor shall direct all advertising, marketing and public
relations programs and activities financed by the Marketing Fund, with sole
discretion over the creative concepts, materials and endorsements used therein,
and the geographic, market and media placement and allocation thereof.
Franchisee agrees that the Marketing Fund may be used to pay various costs and
expenses, including, by way of example and without limitation: preparing and
producing video, audio and written advertising materials; sponsorship of
sporting, charitable or similar events; reasonable salaries of employees of
Franchisor or its subsidiaries or affiliates working for or on behalf of the
Marketing Fund and administrative costs and overhead of Franchisor or its
subsidiaries or affiliates incurred in activities reasonably related to the
administration of the Marketing Fund; administering advertising programs,
including without limitation, purchasing
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direct mail and other media advertising and employing advertising agencies to
assist therewith; and supporting public relations, market research and other
advertising, promotional and marketing activities.
(3) The Marketing Fund shall furnish Franchisee with reasonable quantities
of marketing, advertising and promotional formats and sample materials at cost.
(4) The Marketing Fund shall be accounted for separately, but shall not be
required to be segregated, from the other funds of Franchisor and shall not be
used to defray any of Franchisor's general operating expenses, except for such
reasonable salaries, administrative costs and overhead as Franchisor my incur in
activities reasonably related to the administration of the Marketing Fund and
creation or conduct of its marketing programs including, without limitation,
conducting market research, preparing advertising and marketing materials and
collecting and accounting for contributions to the Marketing Fund. Franchisor
may spend in any fiscal year an amount greater or less than the aggregate
contribution of all Stores to the Marketing Fund in that year. The Marketing
Fund may borrow from Franchisor or other lenders at standard commercial rates to
cover deficits of the Marketing Fund or cause the Marketing Fund to invest any
surplus for future use by the Marketing Fund. All interest earned on monies
contributed to the Marketing Fund will be used to pay costs of the Marketing
Fund before other assets of the Marketing Fund are expended. A summary
statement of monies collected and costs incurred by the Marketing Fund for
Franchisor's immediately preceding fiscal year shall be made available,
beginning ninety (90) days after the preceding fiscal year, to Franchisee upon
Franchisee's written request. Franchisor will have the right to cause the
Marketing Fund to be incorporated or operated through an entity separate from
Franchisor at such time as Franchisor deems appropriate, and such successor
entity shall have all rights and duties of Franchisor pursuant to this Section
5.A.
(5) Franchisee understands and acknowledges that the Marketing Fund is
intended to maximize recognition of the Proprietary Marks and patronage of
Stores generally. Although Franchisor will endeavor to utilize the Marketing
Fund to develop advertising and marketing materials and programs, and to place
advertising in order to benefit all Stores, Franchisor undertakes no obligation
to ensure that expenditures by the Marketing Fund in or affecting any geographic
area are proportionate to the contributions to the Marketing Fund by Stores
operating in that geographic area or that any Stores will benefit directly or in
proportion to its contribution to the Marketing Fund from the development of
advertising and marketing materials or the placement of advertising. Franchisee
acknowledges that its failure to derive any such benefit will not serve as a
basis for a reduction or elimination of its obligation to contribute to the
Marketing Fund. Except as expressly provided in this Section 5.A, Franchisor
assumes no direct or indirect liability or obligation to Franchisee with respect
to the maintenance, direction or administration of the Marketing Fund.
(6) Franchisor reserves the right, in its sole discretion, to suspend
contributions to and operations of the Marketing Fund for such periods that it
determines to be appropriate and to terminate the Marketing Fund upon written
notice to Franchisee. All unspent monies on the date of termination shall be
distributed to Franchisor and franchise owners in proportion to their
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respective contributions to the Marketing Fund during the preceding twelve
(12) month period. Franchisor has the right to reinstate the Marketing Fund
upon the same terms and conditions set forth herein upon thirty (30) days
prior written notice to Franchisee.
B. ADVERTISING BY FRANCHISE OWNER
(1) Franchisee agrees to spend during each calendar quarter not less than
one and one half percent (1 1/2%) of the Store's Gross Sales to advertise and
promote the Store locally. Costs Franchisee incurs to create, produce and run
media advertisements, to purchase promotional materials, merchandise, and to
sponsor local promotional programs will be considered qualifying advertising and
promotional expenditures. However, the cost of merchandise Franchisee
gratuitously distributes or in redemption of discount coupons or any other
discount of pricing will not qualify. These advertising funds are not to be
paid to Franchisor, but are to be spent directly by Franchisee.
(2) Prior to their use by Franchisee, samples of all advertising materials
not prepared or previously approved by Franchisor shall be submitted to
Franchisor for approval, in the form and manner prescribed by Franchisor from
time to time. Franchisor shall be deemed to have approved of the submitted
materials if Franchisor does not give written notice of its disapproval within
ten (10) days from the date of receipt by Franchisor of such materials.
Franchisee shall not use any advertising materials that Franchisor has
disapproved or that do not include the copyright registration notices or
trademark registration notices designated by Franchisor. Franchisor, in its
sole discretion, may disapprove on a prospective basis materials that Franchisor
had previously approved. Franchisor shall be deemed to have approved all sample
advertisements in the Advertising Manual provided by Franchisor.
7. CORPORATE OR PARTNERSHIP FRANCHISEES
A. In the event Franchisee is a corporation or a partnership, Franchisee
represents, warrants, and covenants that:
(1) Franchisee is duly organized and validly existing under the state
law of its formation;
(2) Franchisee is duly qualified and is authorized to do business in
each jurisdiction in which its business activities or the nature of the
properties owned by it require such qualification;
(3) The execution of this Agreement and the transactions contemplated
hereby are within Franchisee's corporate power if Franchisee is a
corporation, or if Franchisee is a partnership, are authorized under
Franchisee's written partnership agreement; and
(4) The ownership interests in Franchisee are accurately and
completely described in Attachment B.
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B. If Franchisee is a corporation, copies of Franchisee's articles of
incorporation, bylaws, other governing documents, any amendments to the
foregoing, and resolutions of the Board of Directors authorizing entry into
and performance of this Agreement shall, upon request, be furnished to
Franchisor prior to the execution of this Agreement; or, if Franchisee is a
partnership, copies of the written partnership agreement, other governing
documents, and any amendments to the foregoing, shall, upon request, be
furnished to Franchisor prior to the execution of this Agreement, including
evidence of consent or approval of the entry into and performance of this
Agreement by the requisite number or percentage of partners, if such approval
or consent is required by Franchisee's written partnership agreement.
C. If Franchisee is a corporation, Franchisee shall maintain at all
times a current list of all owners of record and all beneficial owners of any
class of voting securities in Franchisee or, if Franchisee is a partnership,
all current owners of an interest in the partnership. In the event there is
a change in the information contained in Attachment B, Franchisee agrees to
provide such information to Franchisor within five (5) days subsequent to any
such change and to execute any documents deemed necessary by Franchisor to
amend Attachment B in order to reflect such changes. Franchisee shall make
its listings available to Franchisor upon request.
D. If Franchisee is a corporation, Franchisee shall maintain
stop-transfer instructions against the transfer on its records of any of its
equity securities and each stock certificate of the corporation shall have
conspicuously endorsed upon it a statement in a form satisfactory to
Franchisor that it is held subject to and that the further assignment or
transfer thereof is subject to all restrictions imposed upon assignments by
this Agreement; provided, however, that the requirements of this Section 7.D
shall not apply to the transfer of equity securities of a publicly-held
corporation. If Franchisee is a partnership, its written partnership
agreement shall provide that ownership of an interest in the partnership is
held subject to and that further assignment or transfer is subject to all
restrictions imposed upon assignments by this Agreement.
E. Franchisee acknowledges and agrees that the representations,
warranties, and covenants set forth above in this Sections 6 are continuing
obligations of Franchisee and that any failure to comply with such
representations, warranties, and covenants shall constitute a material event
of default under Section 18.B(5).
F. Such holders of equity interests in Franchisee, as determined by
Franchisor, shall personally, jointly and severally, guarantee Franchisee's
performance under this Agreement and shall bind themselves to the terms of
this Agreement. Franchisee may, in its sole discretion, exempt certain
individuals and/or classes of individuals from providing such a guarantee.
8. DEVELOPMENT OBLIGATIONS; PLANS AND STORE FINISH-OUT
A. Subject to Franchisee's compliance with the pre-opening obligations
described in Sections 8 and 10, Franchisee shall open the Store and commence
business within sixty (60) days following the date of execution of this
Agreement unless Franchisee obtains an extension of such time period from
Franchisor. Franchisee acknowledges that time is of the essence in
developing
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and opening the Store. Franchisor shall have the right to prohibit
Franchisee from commencing operation of the Store in the event Franchisee
fails to comply with such pre-opening obligations.
B. Franchisee shall be responsible for obtaining all zoning
classifications and clearances which may be required by state, provincial, or
local laws, ordinances, or regulations or which may be necessary or advisable
as a result of any restrictive covenants relating to the Store's premises.
Franchisee shall obtain all permits, licenses, and certifications required
for the lawful construction and operation of the Store. In addition, prior
to the commencement of the finish-out of the Store, Franchisee shall, upon
request, certify in writing to Franchisor that the insurance coverage
specified in Section 12 is in full force and effect and that all required
approvals, clearances, permits, and certifications have been obtained. Upon
request, Franchisee shall provide to Franchisor additional copies of
Franchisee's insurance policies or certificates of insurance and copies of
all such approvals, clearances, permits, and certifications.
C. Franchisor shall provide Franchisee with specifications and
standards for the design and finish-out of the Store. The finish-out of the
Store shall substantially and materially conform to such standards and
specifications. If the finish-out of the Store will substantially deviate
from Franchisor's specifications and standards, Franchisee shall submit its
design plans to Franchisor for its approval. Franchisor shall notify
Franchisee within fifteen (15) days of receiving design plans for review that
it objects to such plans. In the event Franchisor objects to any such plans,
it shall provide Franchisee with a reasonably detailed list of changes
necessary to make the plans acceptable. Franchisor shall, upon a resubmission
of the plans with such changes, notify Franchisee within fifteen (15) days of
receiving the resubmitted plans whether the plans are acceptable. Finish-out
of the Store shall be at Franchisee's expense. Franchisee shall diligently
pursue finish-out of the Store. Within a reasonable time after the completion
of Store finish-out, Franchisor shall, at its option, conduct an inspection
of the completed Store and its premises. Franchisee acknowledges and agrees
that Franchisee will not open the Store for business without the
authorization of Franchisor.
9. DUTIES OF FRANCHISOR
A. Franchisor shall provide Franchisee with store specifications for
the design and finish-out of a C.D. Warehouse Store.
B. Franchisor will provide Franchisee with one copy of the POS
Software System and associated manual, as well as all upgrades,
modifications, extensions and other changes to the POS Software System as
they become available.
C. Franchisor shall provide an initial training program for
Franchisee, if Franchisee is an individual, or if Franchisee is a corporation
or partnership, for one of Franchisee's Principals (as defined in Section
32.E) and the General Manager in accordance with Section 10 and shall make
available such other training programs as it deems appropriate.
D. In connection with the opening of the Store, Franchisor's field
representative shall provide on-site pre-opening and opening training,
supervision and assistance to Franchisee
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during the initial two days the Store is open for business. The field
representative shall be provided at no expense to Franchisee.
E. In addition to the assistance rendered Franchisee prior to opening,
Franchisor shall provide advisory assistance in the management and operation
of the Stores as requested by Franchisee. Franchisor shall provide such
assistance by means of telephone service and, at the request and expense of
Franchisee or, if Franchisor deems necessary, through on-site visits by
Franchisor's field representative.
F. Franchisor shall provide Franchisee advertising assistance in the
form of an Advertising Manual and a general discussion of advertising during
the initial training program.
G. Franchisor shall provide Franchisee, on loan, one copy of the
Manuals (as defined in Section 16.A) for Franchisee's sole use during the
term of this Agreement.
H. Franchisor may, from time to time, conduct meetings, seminars and
other related activities regarding the System for franchisees generally,
which Franchisee is highly encouraged to attend. Except as approved by
Franchisor, any costs incurred by Franchisee, Franchisee's Principals or
Store personnel in attending such events shall be the responsibility of
Franchisee. Franchisor is not obligated by this Agreement or any other
agreement to provide these meetings, seminars or activities.
I. Franchisor shall provide Franchisee with the terms and conditions
applicable to the purchase of its point-of-sale computer system and for other
fixtures, signs, equipment, supplies and merchandise Franchisor makes
available for sale to franchisees for use at a Store.
J. Franchisor shall acquire, on behalf of Franchisee, the opening
inventory for the Store. If Franchisee owns one or more other Stores,
Franchisee shall have the option of acquiring the Store's initial inventory
without the assistance of Franchisor.
10. TRAINING
Franchisee acknowledges that it is necessary to the continued operation
of the System and the Store that Franchisee and Store personnel receive such
training as specified in the Manuals or as Franchisor may require, and,
accordingly, agrees as follows:
A. Prior to the opening of the Store, Franchisee, if Franchisee is an
individual, or a Franchisee's Principal (with not less than a twenty-five
percent (25%) interest in Franchisee, or a controlling interest if less than
twenty-five percent (25%) and the General Manager (as defined in Section
11.B) shall attend and complete, to Franchisor's satisfaction, Franchisor's
initial training program. Franchisee may, upon Franchisor's approval, permit
other Store personnel to attend the initial training program. Training shall
be for such period of time as Franchisor deems reasonably necessary and shall
be conducted at Franchisor's corporate offices or such other location
determined by Franchisor. This initial training shall be provided at no cost
to Franchisee other than the transportation, meals and lodging expenses
associated with attendance at the initial
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training program (see Section 10.C). If the training program is not
satisfactorily completed by Franchisee, the Franchisee's Principal attending
training or the General Manager, Franchisee shall designate a replacement to
satisfactorily complete such training. Franchisor shall have the right to
prevent Franchisee from opening the Store for business until the persons
designated herein successfully complete the initial training program. During
the remaining term of this Agreement, any successor General Manager shall,
and any other personnel employed by Franchisee may be required by Franchisor
to, attend and complete to Franchisor's satisfaction, Franchisor's initial
training program. Franchisor reserves the right to impose a reasonable
training fee for such additional training, including training for any
replacement General Manager.
B. Franchisee, Franchisee's Principals and the General Manager may
attend such additional training programs as Franchisor may offer from time to
time. At Franchisor's discretion, such additional training shall be
mandatory. For all such programs, Franchisor will provide the instructors
and training materials; however, Franchisor reserves the right to impose a
reasonable fee for such additional training programs.
C. Franchisee shall be solely responsible for all costs and expenses
incurred by Franchisee, Franchisee's Principals or personnel attending any
training programs and any other meetings including, without limitation, costs
of travel, lodging, meals and wages.
11. STORE OPERATIONS
A. Franchisee shall use the Store premises solely for the operation of
the Store, shall maintain business hours as provided in the Manuals (as
defined in Section 16.A) or as Franchisor shall specify from time to time in
writing, and shall refrain from using or permitting the use of the Store
premises for any other purpose or activity at any time without first
obtaining the written consent of Franchisor. The basic requirements provide
that a Store be open during normal business hours at least ten (10) hours per
day, Monday through Saturday, and a minimum of six (6) hours on Sunday,
provided such hours of operation do not violate any law.
B. Franchisee, if Franchisee is an individual, or a Franchisee's
Principal (with not less than a twenty-five percent (25%) interest in
Franchisee, or a controlling interest, if less than twenty-five (25%)), or
Franchisee's General Manager, shall supervise the Store and devote his time,
best efforts and personal attention to the day-to-day operations of the
Store. Franchisee shall designate, in writing, an individual (the "General
Manager") who will assist Franchisee or the Franchisee's Principal, as the
case may be, in the management of the Store (and/or who will devote his time,
best efforts and personal attention to the day-to-day operations of the Store
in the event Franchisee or Franchisee's Principal does not participate in the
full-time operation of the Store). The General Manager may be any of
Franchisee's Principals or an employee of Franchisee. Franchisee shall
designate the initial General Manager prior to the commencement of
Franchisor's initial training program described in Section 10.A. The General
Manager shall satisfactorily complete Franchisor's initial training program;
shall satisfy Franchisor's educational or business experience criteria in
effect for General Managers in the System as of the time the General Manager
is designated; and shall otherwise be an individual acceptable to Franchisor.
If at any time during the term of this Agreement the General Manager is not
able to continue to
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serve in such capacity or no longer qualifies to act as such in accordance
with this Section 11.B, Franchisee shall promptly notify Franchisor and shall
designate a replacement General Manager within fourteen (14) days after the
General Manager ceases to serve, such replacement being subject to the same
qualifications listed above. Franchisee shall provide for interim management
of the Store until the replacement is designated, such interim management to
be conducted in accordance with the terms of this Agreement.
C. Franchisee shall maintain competent, conscientious and trained
personnel to operate the Store in accordance with this Agreement and the
Manuals and shall take such steps as are necessary to ensure that its
employees maintain good customer relations.
D. Franchisee understands that compliance by all franchisees operating
under the System with Franchisor's training and operational requirements is
an essential and material element of the System and that Franchisor and
franchisees operating under the System consequently expend substantial time,
effort, and expense in training management personnel. Accordingly,
Franchisee agrees that if during the term of this Agreement, Franchisee shall
designate as its General Manager any individual who is at the time or was at
any time during the prior six (6) months employed in a managerial position by
Franchisor or any of its subsidiaries or affiliates, or by any other
franchisee in the System, such former employer shall be entitled to be
compensated for the reasonable costs and expenses incurred by such employer
in connection with the training of such individual. The parties agree that
such expenditures may be uncertain and difficult to ascertain and therefore
agree that the compensation specified herein reasonably represents such
expenditures and is not a penalty. An amount equal to four (4) times the
General Manager's monthly salary at the time of the termination of his
employment with such former employer shall be paid by Franchisee prior to
such individual assuming the position of General Manager. In seeking an
individual to serve as General Manager, Franchisee shall not discriminate in
any manner whatsoever against any individual, the employment of whom by
Franchisee is subject to the provisions of this Section 11.D, on the basis of
the compensation required to be paid by Franchisee hereunder in the event of
the employment by Franchisee of such individual. The parties hereto
expressly acknowledge and agree that no current or former employee of
Franchisor, its subsidiaries and affiliates, or of any franchisee under the
System shall be a third party beneficiary of this Agreement or any provision
hereof, excluding only the covenant of Franchisee set forth in the preceding
sentence. Franchisor hereby expressly disclaims any representations and
warranties regarding the performance of any employee or former employee of
Franchisor or its subsidiaries and affiliates, or any franchisee operating
under the System, who is designated as General Manager or employed by
Franchisee in any other capacity, and Franchisor shall not be liable for any
losses, of whatever nature or kind, incurred by Franchisee in connection
therewith.
E. To ensure that the highest degree of quality and service is
maintained, Franchisee shall operate the Store in strict conformity with such
methods, standards and specifications as Franchisor may from time to time
prescribe in the Manuals or otherwise in writing. Franchisee further agrees:
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(1) To offer for sale and sell at the Store all products and services
required by Franchisor and to provide such products and services in the
manner and style prescribed by Franchisor;
(2) To offer for sale and sell only products and services expressly
approved for sale in writing by Franchisor; to refrain from deviating from
Franchisor's standards and specifications without Franchisor's prior
written consent; and to discontinue offering for sale and selling any
product or service which Franchisor disapproves in writing at any time;
(3) To purchase the point-of-sale computer hardware and POS Software
System from Franchisor or its designated supplier and install such
equipment and items, at Franchisee's expense, at the Store; and to purchase
or lease and install, at Franchisee's expense, all other fixtures,
furnishings, equipment, decor items, and signs which conform to
Franchisor's standards and specifications as Franchisor may reasonably
direct from time to time in the Manuals or otherwise in writing and refrain
from installing or permitting to be installed on or about the Store
premises, without Franchisor's prior written consent, any fixtures,
furnishings, equipment, decor, signs, or other items not previously
approved by Franchisor. If any of the property described above is leased
by Franchisee from a third party, such lease must be approved by
Franchisor, in writing, prior to execution. Franchisor's approval shall be
conditioned upon such lease containing a provision which permits any
interest of Franchisee in the lease to be assigned to Franchisor upon the
termination or expiration of this Agreement and which prohibits the lessor
from imposing an assignment or related fee upon Franchisor in connection
with such assignment;
(4) To purchase the opening inventory order from Franchisor, except
as Franchisee is permitted to acquire the opening inventory in accordance
with Section 9.J, and to obtain all products, equipment, signs, interior
and exterior decor items, fixtures, furnishings, supplies and other
materials required for operation of the Store solely from suppliers
(including manufacturers, distributors and other sources) who demonstrate,
to Franchisor's continuing reasonable satisfaction, the ability to meet
Franchisor's then-current standards and specifications for such items and
who possess adequate quality controls and capacity to supply Franchisee's
needs promptly and reliably, and who have been approved in writing by
Franchisor and not thereafter disapproved; and
(5) If Franchisee desires to purchase, lease or use products from a
supplier who has not been previously approved by Franchisor, Franchisee
shall submit to Franchisor a written request for such approval or may
request the supplier to do so. Franchisee shall not purchase or lease from
any supplier until and unless such supplier has been approved in writing by
Franchisor. Franchisor's representatives shall be permitted to inspect the
supplier's facilities, and to require that samples from the supplier be
delivered to Franchisor for evaluation. Franchisor reserves the right, at
its option, to reinspect the facilities and products from time to time and
to revoke its approval upon the supplier's failure to continue to meet any
of Franchisor's then-current criteria.
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Notwithstanding the foregoing, Franchisor shall not be required to
approve any particular supplier.
F. Franchisee shall require all advertising and promotional materials,
signs, decorations, paper goods (including forms, stationery and business
cards) and other items which may be designated by Franchisor to bear the
Proprietary Marks in the form, color, location and manner prescribed by
Franchisor.
G. Franchisee shall, at Franchisee's sole cost and expense, maintain
the Store in the highest degree of repair and condition and in conformity
with the standards, specifications, and requirements of the System, as the
same may be designated by Franchisor from time to time. Franchisee
specifically agrees to repair or replace, at Franchisee's cost, equipment,
signs, interior and exterior decor items, fixtures, furnishings, supplies,
and other products and materials required for the operation of the Store as
necessary or desirable, and to obtain, at Franchisee's cost, any new or
additional equipment, fixtures, supplies, and other products and materials
which may be reasonably required by Franchisor in order for Franchisee to
offer and sell products or services from the Store. Except as may be
expressly provided in the Manuals, no alterations or improvements, or changes
of any kind in design, equipment, signs, interior, or exterior decor items,
fixtures or furnishings shall be made in or about the Store or Store premises
without the prior written approval of Franchisor in each instance.
H. In order to assure the continued success of the Store, Franchisee
shall, upon the request of Franchisor, modernize the Store premises,
equipment, signs, interior, and exterior decor items, fixtures and
furnishings required for the operation of the Store, to Franchisor's
then-current standards and specifications; however, Franchisee shall not be
required to modernize the Store more than one (1) time every three (3) years
during the term of this Agreement. Franchisee's obligations under this
Section 10.H are in addition to, and shall not relieve Franchisee from, any
of its other obligations under this Agreement, including those contained in
the Manuals.
I. Franchisee shall grant Franchisor and its representatives and
agents the right to enter upon the Store premises at any time for the purpose
of conducting inspections of the Store and its operations, and Franchisee
shall cooperate with Franchisor's representatives and agents in such
inspections by rendering such assistance as they may reasonably request and,
upon notice from Franchisor or its representatives and agents and without
limiting Franchisor's other rights under this Agreement, Franchisee shall
take such steps as may be necessary to correct immediately any deficiencies
detected during any such inspection. Should Franchisee, for any reason, fail
to correct such deficiencies within a reasonable time as determined by
Franchisor, Franchisor shall have the right and authority (without, however,
any obligation to do so), to correct such deficiencies and to charge
Franchisee a reasonable fee for Franchisor's expenses in so acting, payable
by Franchisee immediately upon demand.
J. Franchisee shall (1) continuously maintain on the exterior of the
Store an approved C.D. Warehouse sign, and (2) continuously maintain on the
inside of a front window of the Store an approved neon "Buy, Sell, Trade
Compact Discs" sign.
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K. Franchisee shall be required to have an initial inventory on the
first day the Store is open of not less than three thousand (3,000) used
compact discs. Franchisee shall be required to increase the initial inventory
to four thousand (4,000) used compact discs within a sixty (60) day period of
the opening of the Store. After this sixty (60) day period, Franchisee shall
maintain, at a minimum, four thousand (4,000) used compact discs. Franchisor
recommends an increase in the initial inventory at a rate of 500-1,000 units
per month until the Store has an inventory of approximately 6,000-10,000
units. Franchisee shall permit Franchisor's operations personnel to conduct
periodic inspections of the Store's inventory during normal business hours or
at any time after reasonable notice. Franchisee must promptly correct any
condition as to the inventory quantity or quality noted as "unsatisfactory"
in the inspection report.
L. Franchisee shall ensure that the General Manager be required to
sign a non-compete and confidentiality agreement provided by Franchisor, a
copy of which is Attachment C hereto.
M. Franchisee shall ensure that all of the Store's employees (other
than the General Manager), full time and part time, Store's contract
laborers, and Store's assistants, paid or unpaid, be required to sign a
confidentiality agreement provided by Franchisor, a copy of which is
Attachment D hereto.
N. Franchisee shall display beside the Store's computer and in public
view a "franchise opportunity" display furnished by Franchisor at its expense
for the purpose of increasing public awareness of the availability of C.D.
Warehouse franchises.
O. Unless provided by Franchisor in consideration of Franchisee's
advertising fees, Franchisee shall purchase, at a reasonable price, all (1)
wall posters, photos, graphics, signs, or banners, (2) point of purchase
promotional material, and (3) any other advertising and marketing materials
developed from time to time by Franchisor.
P. Franchisee shall comply with all other requirements set forth in
this Agreement.
12. INSURANCE
A. Franchisee shall procure, prior to commencing construction of the
Store, and shall maintain in full force and effect during the term of this
Agreement, and any renewal hereof, at Franchisee's expense, an insurance
policy or policies protecting Franchisee and Franchisor and its subsidiaries,
affiliates, successors and assigns, and their respective directors, officers,
shareholders, partners, employees, agents and representatives, against any
demand or claim relating to personal injury, death, property damage or any
loss, liability or expense whatsoever arising or occurring upon or in
connection with the Store or by reason of the construction, operation or
occupancy of the Store, as well as such other insurance applicable to such
other special risks, if any, as Franchisor may reasonably require for its own
and Franchisee's protection.
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B. Such policy or policies shall be written by an insurance company
approved by Franchisor and shall include, at a minimum (except as additional
coverage and higher policy limits may reasonably be specified for all
franchisees, from time to time, by Franchisor in the Manuals or otherwise in
writing), the following insurance coverage and policy limits:
(1) Comprehensive general liability insurance, including personal
injury coverage, property damage coverage, products liability coverage and
fire and storm damage coverage, with primary and excess limits of not less
than Five Hundred Thousand Dollars ($500,000);
(2) Employer's liability and workers' compensation, in amounts as
required by statute or rule of the state in which the Store is located; and
(3) Other insurance which may be required by statute or rule of the
state or locality in which the Store is located.
C. Franchisee's obligation to obtain and maintain the policy or
policies in the amounts specified in Section 12.B shall not be limited in any
way by reason of any insurance which may be maintained by Franchisor, and
each such insurance policy shall provide that the proceeds thereof shall not
be reduced by any amount payable or paid to Franchisor under any policy
procured and maintained by Franchisor, nor shall Franchisee's performance of
that obligation relieve it of liability under the indemnity provisions set
forth in Section 22 hereof.
D. All public liability, property damage, and motor vehicle liability
policies shall contain a provision that Franchisee's insurance coverage shall
be primary to any coverage maintained by Franchisor and Franchisor shall be
entitled to recover under Franchisee's policies for any loss occasioned to
Franchisor, its subsidiaries, affiliates, successors and assigns, and their
respective officers, directors, shareholders, employees, servants, agents, or
representatives for whatever reason.
E. Should Franchisee, for any reason, fail to procure and maintain the
insurance coverage required by this Agreement or fail to provide proof of
such insurance upon request by Franchisor, Franchisor shall have the right,
at its option, to procure such insurance and to charge same to Franchisee,
which charges, together with a reasonable fee for Franchisor's expenses in so
acting, shall be payable by Franchisee immediately upon notice. The
foregoing rights and remedies shall be in addition to any other remedies
Franchisor may have.
13. TAXES, PERMITS AND INDEBTEDNESS
A. Franchisee shall promptly pay when due all taxes levied or assessed,
including, without limitation, unemployment and sales taxes, and all trade and
other accounts and indebtedness of every kind incurred by Franchisee in the
conduct of the business franchised under this Agreement.
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B. Franchisee shall pay to Franchisor an amount equal to any sales tax,
gross receipts tax, excise tax or any license or tax similar thereto, directly
or indirectly imposed on Franchisor with respect to any payment to Franchisor
required under this Agreement. The preceding sentence shall not apply to any
franchise tax or income, war profits or excess profits tax for any tax in lieu
thereof, imposed on Franchisor with respect to the aforesaid payments.
C. In the event of any BONA FIDE dispute as to Franchisee's liability for
taxes assessed or other indebtedness, Franchisee may contest the validity or the
amount of the tax or indebtedness in accordance with the procedures of the
taxing authority or applicable law; however, in no event shall Franchisee permit
a tax sale or seizure by levy of execution or similar writ or warrant, or
attachment by a creditor, to occur against the premises of the Store, or any
improvements thereon.
D. Franchisee shall comply with all federal, state and local laws, rules
and regulations, and shall timely obtain any and all permits, certificates, or
licenses necessary for the full and proper conduct of the Store, including,
without limitation, licenses to do business, fictitious name registrations,
sales tax permits and fire clearances and shall promptly provide Franchisor with
copies of the same in accordance with Section 8.B and promptly thereafter as new
or modified permits, licenses or certificates are obtained.
E. Franchisee shall notify Franchisor in writing within five (5) days of
the commencement of any action, suit, or proceeding, and of the issuance of any
order, writ, injunction, award, or decree of any court, agency, or other
governmental instrumentality, which may adversely affect the operation or
financial condition of the Store.
14. RECORDS AND REPORTS
A. Franchisee shall maintain during the term of this Agreement full,
complete and accurate books, records and accounts including, without limitation,
sales slips, purchase orders, invoices, payroll records, bank statements, and
cash receipts and disbursements journals and ledgers in accordance with
generally accepted accounting principles. Franchisee shall preserve such books,
records and accounts for not less than seven (7) years following the date of
their preparation.
B. Franchisee, at its expense, shall submit to Franchisor a weekly report
of Gross Sales of the Store and such other data or information as Franchisor may
reasonably require. Such report shall be delivered each week during the term of
this Agreement and shall be in the form prescribed by Franchisor.
C. In addition to the sales report described in Section 14.B, Franchisee,
at its expense, shall, upon request by Franchisor, submit to Franchisor a
monthly and year-to-date financial statement of Franchisee and the business
franchised hereunder. Such statement shall be delivered within thirty (30) days
following the conclusion of each calendar month during the term of this
Agreement and shall be prepared in accordance with generally accepted accounting
principles and certified as true, complete and accurate by Franchisee or
Franchisee's treasurer or
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chief financial officer. In addition, upon the request of Franchisor, within
ninety (90) days following the conclusion of Franchisee's fiscal year,
Franchisee shall, at Franchisee's expense, deliver year-end financial
statements of Franchisee and the Store that have been prepared in accordance
with generally accepted accounting principles and reviewed for completeness
and lack of material misstatements or omissions by an independent certified
public accountant or bookkeeping service approved by Franchisor.
D. Franchisee shall file all federal, state and local reports and
returns as may be required by law in connection with the operation of the
Store.
E. Franchisee shall also submit to Franchisor, for review or audit,
such other forms, reports, tax returns, records, information and data as
Franchisor may reasonably designate, in the form and at the times and places
reasonably required by Franchisor, upon request and as specified from time to
time in the Manuals or otherwise in writing.
F. Franchisor or its designated agents shall have the right during
normal business hours and after reasonable written notice to examine, copy or
electronically poll all of Franchisee's books, records, tax returns and
correspondence. Furthermore, Franchisor shall have the right at all times to
electronically poll any and all information generated by the POS Software
System including, but not limited to, all inventory information, all
accounting information, all sales volume information, and any information
relevant to the collection of royalty payments. Franchisor shall also have
the right, after reasonable written notice, to have an independent audit
performed on the books and records of Franchisee and the Store. If any such
examination discloses a deficiency in any payment to Franchisor, Franchisor
shall give notice of the deficiency to Franchisee, and Franchisee shall pay
the amount of the deficiency within ten (10) days after receipt of the
notice, together with a service and handling charge equal to five percent
(5%) of the total amount then due. If any inspection discloses an
understatement of Gross Sales for any period of more than two percent (2%) of
Gross Sales, Franchisee shall, in addition, reimburse Franchisor for all
costs in connection with the examination or audit. The foregoing remedies
shall be in addition to any other remedies Franchisor may have under this
Agreement.
G. Franchisee shall grant Franchisor or its agents, upon request of
Franchisor, the right to contact and obtain information from third parties
doing business with Franchisee regarding Franchisee's financial condition or
business practices or policies. Franchisee agrees that any third party,
including, without limitation, clients, vendors, suppliers, financial
institutions, lessors and financiers, may release any and all information
requested by Franchisor without obtaining any further permission from
Franchisee.
15. PROPRIETARY MARKS
A. Franchisor hereby grants to Franchisee a license to use the
Proprietary Marks during the term of this Agreement in accordance with the
System and the standards and specifications attendant thereto, as prescribed
by Franchisor from time to time which underlie the goodwill associated with
and symbolized by the Proprietary Marks.
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B. With respect to Franchisee's licensed use of the Proprietary Marks
pursuant to this Agreement, Franchisee agrees that:
(1) Franchisee shall use only the Proprietary Marks designated by
Franchisor and shall use them only in the manner authorized and permitted
by Franchisor. Any unauthorized use of the Proprietary Marks shall
constitute an infringement of Franchisor's rights and a material event of
default under this Agreement. Franchisee shall not use the name C.D.
Warehouse or any other Proprietary Mark in the corporate or other legal
name of any corporation or other entity formed by or affiliated with
Franchisee;
(2) Franchisee shall use the Proprietary Marks only for the operation
of the Store or in advertising for the Store. Franchisee shall permanently
cease all use of the Proprietary Marks immediately upon termination or
expiration of this Agreement and take appropriate action to remove the
Proprietary Marks from the premises upon which the Store is located and to
cancel any advertising relating to Franchisee's use of the Proprietary
Marks;
(3) Franchisor shall have the right to approve any materials
containing any of the Proprietary Marks, including, without limitation,
signs, stationery, business cards, forms and other materials and supplies
used by Franchisee;
(4) During the term of this Agreement, Franchisee shall identify
itself as the owner of the Store (i) in conjunction with any use of the
Proprietary Marks, including without limitation, uses on invoices, order
forms, receipts and contracts, and (ii) in a notice of such content and
form and at such conspicuous locations at the Store premises as Franchisor
may require;
(5) Franchisee shall not use the Proprietary Marks to incur any
obligation or indebtedness on behalf of Franchisor or any of its
affiliates;
(6) Unless otherwise authorized or required by Franchisor, Franchisee
shall operate and advertise the Store only under the mark C.D. Warehouse
without prefix or suffix;
(7) Franchisee shall comply with Franchisor's instructions in filing
and maintaining the requisite trade name or fictitious name registrations,
and shall execute any documents deemed necessary by Franchisor or its
counsel to obtain protection for the Proprietary Marks or to maintain their
continued validity and enforceability, and upon request of Franchisor,
Franchisee shall provide it with a copy of such document(s); and
(8) Franchisee shall immediately notify Franchisor of any
infringement of the Proprietary Marks or challenge to its use of any of the
Proprietary Marks or claim by any person of any rights in any of the
Proprietary Marks. Franchisee and Franchisee's Principals agree that
Franchisee will not communicate with any person other than Franchisor and
Franchisor's counsel in connection with any such infringement, challenge,
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or claim. Franchisor shall have sole discretion to take such action as it
deems appropriate and the right to exclusively control and conduct any
litigation, or Patent and Trademark Office or other proceeding arising out
of any infringement, challenge, or claim relating to any of the Proprietary
Marks. Franchisee agrees to execute any and all instruments and documents,
render such assistance, and perform such acts as may, in the opinion of
Franchisor's counsel, be necessary or advisable to protect and maintain
Franchisor's interests in any such litigation or Patent and Trademark
Office or other proceeding or to otherwise protect and maintain
Franchisor's interest in the Proprietary Marks.
C. Franchisee expressly acknowledges and agrees that:
(1) Franchisor is the owner of all right, title and interest in and
to the Proprietary Marks and the goodwill associated with and symbolized by
them;
(2) The Proprietary Marks are valid and serve to identify Franchisor
as the source of origin of goods and services provided under them;
(3) Franchisee shall not directly or indirectly contest the ownership
or validity of the Proprietary Marks;
(4) Franchisee's use of the Proprietary Marks pursuant to this
Agreement does not give Franchisee any ownership or other interest in or to
the Proprietary Marks, except the limited license granted pursuant to this
Agreement;
(5) Any and all goodwill and improvements to the System arising from
Franchisee's use of the Proprietary Marks shall inure solely and
exclusively to the benefit of Franchisor, and upon expiration or
termination of this Agreement and the license herein granted, no monetary
amount shall be assigned as attributable to any goodwill associated with
Franchisee's use of the System or the Proprietary Marks; and
(6) Franchisor reserves the right to substitute different Proprietary
Marks for use in identifying the System and the businesses operating
thereunder if the Proprietary Marks no longer can be used or such use is
restricted, or if Franchisor, in its sole business judgment, determines
that substitution of different marks will be beneficial to the System. Any
costs incurred by Franchisee to comply with any change or modification of
the Proprietary Marks shall be paid solely by Franchisee; provided that
Franchisor shall reimburse Franchisee for reasonable expenses incurred
which are directly related to such change or modification upon receipt of
documentation satisfactory to Franchisor, such reimbursement to be limited
to fifty percent (50%) of Franchisee's total expenses or $2,000.00,
whichever is less.
16. CONFIDENTIAL MANUALS
A. Franchisee shall receive on loan from Franchisor several manuals
including, without limitation, the Operations Manual, Site Selection Manual,
Store Specifications Manual,
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Computer Manual, and the Advertising Manual (collectively, the "Manuals")
concerning the operation, merchandising, desing, advertising, and other
aspects of the System. Franchisee and all other employees shall at all times
treat the Manuals, any other manuals created for or approved for use in
operation of the Store, and the information contained therein as confidential
and shall maintain such information as secret and confidential. One set of
the Manuals shall be provided at no expense to Franchisee. Franchisor also
reserves the right to impose a reasonable fee for the replacement of any
Manual provided to Franchisee. Franchisee shall not at any time copy,
duplicate, record or otherwise reproduce the foregoing materials in whole or
in part, nor otherwise disclose or make the same available to an unauthorized
person.
B. In order to protect the reputation and goodwill of Franchisor and to
maintain high standards of operation under Franchisor's Proprietary Marks,
Franchisee shall conduct its business in accordance with the Manuals, other
written directives which Franchisor may issue to Franchisee from time to time
whether or not such directives are made part of the Manuals, and any other
manuals and materials created or approved for use in the operation of the
Store.
C. Franchisee and each of Franchisee's Principals acknowledge and agree
that it will abide by the specifications, standards and procedures contained
in each of the Manuals.
D. The Manuals, written directives, other manuals and materials, and
any other confidential communications provided or approved by Franchisor
shall at all times remain the sole property of Franchisor, shall at all times
be kept in a secure place on the Store premises and shall be returned to
Franchisor immediately upon request or upon termination or expiration of this
Agreement.
E. Franchisor may from time to time revise the contents of the Manuals
and the contents of any other manuals and materials created or approved for
use in the operation of the Store. Franchisor shall promptly send all such
changes to Franchisee and Franchisee expressly agrees to insert all changes
and additions into the correct Manual upon receipt of the same and agrees to
comply with each new or changed standard.
F. Franchisee shall at all times ensure that the Manuals are kept
current and up to date. In the event of any dispute as to the contents of
the Manuals, the terms of the master copy of the Manuals maintained by
Franchisor at Franchisor's office shall be controlling.
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17. CONFIDENTIAL INFORMATION
A. Franchisee and each of Franchisee's Principals shall not, during the
term of this Agreement or any time thereafter, communicate, divulge, or use
for the benefit of any other person, partnership, association, corporation or
other entity any confidential information, trade secrets, knowledge,
know-how, or techniques concerning the methods of operation of the Store
which, in addition to the Manuals described above, may be communicated or
provided to Franchisee or Franchisee's Principals or of which they may be
apprised by virtue of Franchisee's operation of the Store under the terms of
this Agreement. Franchisee and Franchisee's Principals shall divulge such
confidential information only to the General Manager and such of Franchisee's
employees as must have access to such confidential information in connection
with the operation of the Store. Franchisee and Franchisee's Principals
shall not divulge any confidential information to any holder of a beneficial
interest in Franchisee other than Franchisee's Principals unless that holder
has executed a confidentiality agreement substantially in the form of
Attachment D. Any and all information, trade secrets, knowledge, know-how,
and techniques which Franchisor designates as confidential shall be deemed
confidential for purposes of this Agreement. All information collected,
stored, processed, or generated by the POS Software System shall be
considered confidential information. Neither Franchisee nor any of
Franchisee's Principals shall, at any time, copy, duplicate, record or
otherwise reproduce such materials or information, in whole or in part, or
otherwise make the same available to any unauthorized person, without the
prior written consent of Franchisor.
B. Franchisee shall require and obtain execution of covenants
concerning the confidentiality of the information described in Sections 16
and 17.A from Franchisee's General Manager and other Store personnel. Such
covenants shall be substantially in the form of Attachment C for the General
Manager, and in the form of Attachment D for other Store personnel.
Franchisor may, in its sole discretion, modify Attachments C with respect to
the General Manager to remove the covenant-not-to-compete provisions if,
pursuant to Section 21, Franchisor does not require execution of such
covenants by Franchisee's personnel.
C. If Franchisee or any of Franchisee's Principals develops any new
concepts, processes, or improvements in the operation or promotion of the
Store, Franchisee agrees to promptly notify Franchisor and provide Franchisor
with all necessary information concerning the same, without compensation.
Franchisee and Franchisee's Principals acknowledge that any such concept,
process or improvement shall become the property of Franchisor, and
Franchisor may utilize or disclose such information to its developers,
franchisees and other parties as it deems appropriate.
D. Franchisee and each of Franchisee's Principals acknowledge that any
failure to comply with the requirements of this Section 17 shall constitute a
material event of default under this Agreement; that such failure will cause
Franchisor irreparable injury and that money damages will not adequately
compensate Franchisor; and that Franchisor may obtain specific performance
of, or an injunction against a violation of, the requirements of this Section
17 without the necessity of posting bond. Franchisee agrees to pay all court
costs and reasonable attorneys' fees incurred by Franchisor in enforcing its
rights under this Section 17.
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18. DEFAULT AND TERMINATION
A. Franchisee shall be deemed to be in default under this Agreement,
and all rights granted herein shall automatically terminate without notice to
Franchisee if Franchisee shall become insolvent or shall have made a general
assignment for the benefit of creditors; or a petition under any section or
chapter of federal bankruptcy laws or under any similar law or statute of the
United States or any state thereof shall have been filed by Franchisee or
such a petition shall have been filed against and not opposed by Franchisee;
or Franchisee admits in writing its inability to pay its debts when due; or
Franchisee shall have been adjudicated bankrupt or insolvent in proceedings
filed against Franchisee under any section or chapter of federal bankruptcy
law or any similar law or statute of the United States or any state thereof;
or a bill in equity or other proceeding for the appointment of a receiver of
Franchisee or other custodian for Franchisee's business or assets shall have
been filed and not opposed by Franchisee; or a receiver or other custodian
(permanent or temporary) of Franchisee's assets or property, or any part
thereof, shall have been appointed by any court of competent jurisdiction; or
proceedings for a composition with creditors under any state or federal law
shall have been instituted by or against Franchisee; or a final judgment
against Franchisee shall have remained unsatisfied or of record for thirty
(30) days or longer (unless supersedeas bond shall have been filed); or if
Franchisee is dissolved; or execution shall have been levied against
Franchisee, Franchisee's Store or property; or suit to foreclose any lien or
mortgage against the premises or equipment shall have been instituted against
the premises or equipment of any business operated hereunder and not
dismissed within thirty (30) days; or the real or personal property of any
business operated hereunder shall be sold after levy thereupon by any
sheriff, marshall or constable.
B. Franchisee shall be in default and Franchisor may, in its sole
discretion, immediately terminate this Agreement and all rights granted
hereunder, without affording Franchisee any opportunity to cure the default
(except as otherwise required by law) effective upon notice to Franchisee,
upon the occurrence of any of the following events, each of which shall be
deemed to be a material event of default:
(1) If Franchisee operates the Store or sells any products or
services authorized by Franchisor for sale at the Store at a location which
has not been approved by Franchisor;
(2) Franchisee knowingly shall have made a false representation to
Franchisor in any of the reports or statements which Franchisee may be
required to furnish to Franchisor pursuant to this Agreement or pursuant to
the Manuals;
(3) Franchisee or any of Franchisee's Principals shall have been
convicted of or shall have entered a plea of NOLO CONTENDERE to a felony,
a crime involving moral turpitude, or any other crime or offense that
Franchisor shall believe reasonably likely to have an adverse effect on the
System, the Proprietary Marks, the goodwill associated therewith or
Franchisor's interest therein;
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(4) If Franchisee shall have ceased to do business at any of the
Stores for seven (7) consecutive days, or shall have lost the right to
possession of the premises, or otherwise shall have forfeited the right to
do or transact business in the jurisdiction where the Store is located;
provided, however, this provision shall not apply in cases of Force Majeure
(as defined in Section 25.A) if, through no fault of Franchisee, the
premises shall have been damaged or destroyed and Franchisee, within thirty
(30) days after such damage or destruction has occurred, applies for
Franchisor's approval to relocate or reconstruct the Store premises, which
approval shall not be unreasonably withheld, but may be conditioned upon
the payment of an agreed minimum Royalty Fee to Franchisor during the
period in which the Store is not in operation;
(5) If Franchisee breaches or is in default under any of the
representations, warranties and covenants contained in Section 7;
(6) If a transfer or attempt to transfer any rights or obligations
under this Agreement or any interest in Franchisee or any of the Stores to
any third party is made without Franchisor's prior written consent, or
without offering Franchisor a right of first refusal with respect to such
transfer, contrary to the terms of Section 20 of this Agreement;
(7) If Franchisee fails to comply with the covenants in Section 17.A
or 21.B hereof or if Franchisee fails to obtain the execution of the
covenants required under Section 17.B or 21.I hereof within thirty (30)
days following Franchisor's request that Franchisee obtain the execution of
such covenants;
(8) If an approved transfer upon death or permanent disability is not
effected within the time period prescribed by Section 20.E hereof;
(9) If Franchisee fails to open and operate a Store within sixty (60)
days after the date of execution of this Agreement, or within any
additional time period approved by Franchisor pursuant to Section 8.A of
this Agreement;
(10) If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or otherwise materially impairs the goodwill associated
therewith or with the System, or Franchisor's rights therein and does not
cure such default within twenty-four (24) hours following notice thereof
from Franchisor;
(11) If Franchisee fails to procure and maintain such insurance
policies as required by Section 11 and Franchisee fails to cure such
default within seven (7) days following notice thereof from Franchisor;
(12) If Franchisee fails, refuses, or neglects to promptly pay any
monetary obligation owing to Franchisor or its subsidiaries or affiliates
when due, or to submit the
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financial or other information required by Franchisor under this Agreement,
and does not cure such default within ten (10) days following notice
thereof from Franchisor;
(13) If Franchisee is in default for more than ten days with respect
to the payment of any monetary obligation due to Franchisor hereunder more
than two (2) times during any immediately preceding twelve (12) month
period of time, whether or not cured by Franchisee after notice by
Franchisor; or
(14) Except as provided in Section 18.B(13), if Franchisee repeatedly
is in default under Section 18.C hereof for failure to comply with any of
the requirements imposed by this Agreement, whether or not cured after
notice by Franchisor.
C. Except as provided in Section 18.B above, upon any default by
Franchisee which is susceptible of being cured, Franchisor may terminate this
Agreement only by giving written notice of termination stating the nature of
such default to Franchisee at least thirty (30) days prior to the effective
date of termination; provided, however, that Franchisee may avoid termination
by immediately initiating a remedy to cure such default and curing it to
Franchisor's satisfaction within the thirty (30) day period, and by promptly
providing proof thereof to Franchisor. If any such default is not cured
within the specified time, or such longer period as applicable law may
require, this Agreement shall terminate without further notice to Franchisee
effective immediately upon the expiration of the thirty (30) day period or
such longer period as applicable law may require. Defaults which are
susceptible of cure hereunder may include, but are not limited to, the
following illustrative events:
(1) If Franchisee fails to comply with any of the requirements
imposed by this Agreement, as it may from time to time be amended or
reasonably be supplemented by the Manuals, or fails to carry out the terms
of this Agreement in good faith;
(2) If Franchisee fails to maintain or observe any of the standards
or procedures prescribed by Franchisor in this Agreement, the Manuals, or
otherwise in writing;
(3) If Franchisee fails, refuses or neglects to obtain Franchisor's
prior written approval or consent as required by this Agreement; or
(4) If Franchisee engages in any business or markets any service or
product under a name or mark which, in Franchisor's opinion, is confusingly
similar to the Proprietary Marks.
19. OBLIGATIONS UPON TERMINATION OR EXPIRATION
Upon termination or expiration of this Agreement, all rights granted
hereunder to Franchisee shall forthwith terminate, and each of the following
provisions apply:
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A. Franchisee shall immediately and permanently cease to use in any
manner whatsoever any equipment, methods, procedures and techniques
associated with the System, the name C.D. Warehouse and all Proprietary Marks
and distinctive trade dress and devices associated with the System, and
Franchisee shall not thereafter, directly or indirectly, represent to the
public or hold itself out as a present or former franchisee of Franchisor.
Franchisee shall take such action as may be necessary to cancel any assumed
name or equivalent registration which contains the mark C.D. Warehouse or any
other trademark or service mark of Franchisor, and Franchisee shall furnish
Franchisor with evidence satisfactory to Franchisor of compliance with this
obligation within five (5) days after termination or expiration of this
Agreement.
B. Franchisee shall promptly pay all sums owing to Franchisor and its
subsidiaries and affiliates. Such sums shall include all damages, costs and
expenses, including reasonable attorneys' fees, incurred by Franchisor as a
result of the termination or expiration of this Agreement (including damages,
expenses and attorneys' fees incurred in obtaining injunctive or other relief
for the enforcement of any provision of this Section 19), which obligation
shall, until paid in full, give rise to and remain a lien in favor of
Franchisor against any and all of the personal property furnishings,
fixtures, equipment, signs and inventory owned by Franchisee and on the
premises at the time of the termination or expiration. Franchisor shall have
the right to file this Agreement as a financing statement with the proper
offices to perfect its lien hereunder.
C. Franchisee shall immediately deliver to Franchisor all manuals,
including the Manuals, records, files, instructions, correspondence, and any
and all other materials relating to the System and the operation of the
business franchised hereunder in Franchisee's possession, and all copies
thereof (all of which are acknowledged to be Franchisor's property), and
Franchisee shall retain no copy or record of any of the foregoing, except
Franchisee's copy of this Agreement and any correspondence between the
parties, and any other documents which Franchisee reasonably needs for
compliance with any provision of law.
D. Franchisee, at Franchisor's option, shall assign to Franchisor all
rights to the telephone number for the Store and any related Yellow Pages
listing and execute any documents which may be necessary or desirable to
effect the transfer and appoint Franchisor its agent to effect such transfer
with the telephone company. Franchisee does hereby appoint Franchisor its
true and lawful agent and attorney-in-fact with full power and authority, for
the sole purpose of taking such action as is necessary to complete such
assignment. Franchisee shall use different telephone numbers at or in
connection with any subsequent business conducted by Franchisee.
E. Franchisee shall, at Franchisor's option, assign to Franchisor any
interest which Franchisee has in any lease or sublease for the premises or
with respect to any equipment used in the operation of the Store. Franchisor
may exercise such option at or within thirty (30) days after either
termination or (subject to any existing right to renew) expiration of this
Agreement. In the event Franchisor does not elect to exercise its option to
acquire the lease or sublease for the premises of the Store, Franchisee shall
make such modifications or alterations to the premises operated hereunder
immediately upon termination or expiration of this Agreement as may be
necessary to distinguish the appearance of such premises from that of other
C.D. Warehouse
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Stores under the System, and shall make such specific additional changes
thereto as Franchisor may reasonably request for that purpose. In the event
Franchisee fails or refuses to comply with the requirements of this Section
19, Franchisor shall have the right to enter upon the premises where
Franchisee's Store was operated, without being guilty of trespass or any
other tort, for the purpose of making or causing to be made such changes as
may be required, at the expense of Franchisee, which expense Franchisee
agrees to pay upon demand.
F. Franchisor shall also have the option, but not the obligation, which
it may exercise by providing written notice thereof within thirty (30) days
after termination or expiration of this Agreement, to purchase any or all
inventory, fixtures, equipment, furnishings and any and all other items
bearing the Proprietary Marks, at Franchisee's cost or fair market value,
whichever is less. If the parties cannot agree on a fair market value within
thirty (30) days from Franchisor's notice, a qualified independent appraiser
shall be designated by Franchisor, the determination of such appraiser to be
binding on the parties. No value will be given to goodwill. If Franchisor
elects to exercise any option to purchase items as herein provided, it shall
have the right to set off all amounts due from Franchisee and the cost of the
appraisal, if any, against any payment therefor. In the event Franchisor
exercises this option, Franchisee shall deliver to Franchisor, in a form
satisfactory to Franchisor, such bills of sale, assignments, releases of
liens and other such documents which Franchisor deems reasonably necessary.
The closing for such purchase shall be within thirty (30) days following the
date the purchase price for such goods and items is determined, or such other
date as the parties may mutually agree upon.
G. Franchisee and each of Franchisee's Principals agree, in the event
any such party continues to operate or subsequently begins to operate any
other business, not to use any reproduction, counterfeit, copy, or colorable
imitation of the Proprietary Marks, either in connection with such other
business or the promotion thereof, which is likely to cause confusion,
mistake, or deception, or which is likely to dilute Franchisor's rights in
and to the Proprietary Marks, and further agree not to utilize any
designation of origin or description or representation which falsely suggests
or represents an association or connection with Franchisor constituting
unfair competition.
H. Franchisee and Franchisee's Principals shall comply with the
restrictions on confidential information contained in Sections 16 and 17.A
and the covenants contained in Section 21.B of this Agreement. Any other
person required to execute similar covenants pursuant to Section 17.B or 21.I
shall also comply with such covenants.
20. TRANSFER OF INTEREST
A. TRANSFER BY FRANCHISOR
Franchisor shall have the right to transfer or assign this Agreement and
all or any part of its rights or obligations hereunder to any person or legal
entity and all rights hereunder shall inure to the benefit of Franchisor and
its successors and assigns.
B. TRANSFER BY FRANCHISEE
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(1) Franchisee and Franchisee's Principals acknowledges and agrees that
the rights and duties set forth in this Agreement are personal to Franchisee,
and that Franchisor has granted the franchise rights hereunder in reliance on
the business skill, financial capacity and personal character of Franchisee.
Accordingly neither this Agreement (or any interest herein), any part or all
of the ownership of Franchisee, the Store (or any interest therein), may be
transferred without the prior written approval of Franchisor, and any such
transfer without such approval shall constitute a breach hereof and a
material event of default under Section 18.B(6) of this Agreement, and shall
convey no rights to or interests in this Agreement, Franchisee, or the Store.
(2) As used in this Agreement, the term "transfer" shall mean and
include the voluntary, involuntary, direct or indirect assignment, sale, gift
or other transfer by Franchisee or any of Franchisee's Principals of any
interest in: (1) this Agreement, (2) the ownership of Franchisee, (3) the
Store, or (4) the assets of the Store (other than in the ordinary course of
business). An assignment, sale, gift or other transfer shall include the
following events: (1) the transfer of ownership of capital stock or
partnership interests, (2) merger or consolidation, or issuance of additional
securities representing an ownership interest in Franchisee, (3) any sale of
voting stock of Franchisee or any security convertible to voting stock of
Franchisee, (4) transfer of interest in this Agreement, Franchisee, or the
Store or any of its assets in a divorce, insolvency, corporate or partnership
dissolution proceeding, or otherwise by operation of law, or (5) transfer of
an interest in this Agreement, Franchisee, or the revenue, profits, rights or
assets of the Store, in the event of the death of Franchisee or a Franchisee
Principal by will, declaration of or transfer in trust, or under the laws of
intestate succession.
C. CONDITIONS FOR APPROVAL OF TRANSFER
If Franchisee and Franchisee's Principals are in full compliance with
this Agreement, Franchisor shall not unreasonably withhold its approval of a
transfer that meets all of the applicable requirements of this Section 20.C.
If the transfer is of this Agreement, or of any Franchisee's Principal's
interest, or a controlling interest in Franchisee, or is one of a series of
transfers which in the aggregate constitute the transfer of a controlling
interest in Franchisee, Franchisor may in its sole discretion require, as
conditions of its approval, any or all of the following conditions to be met
prior to, or concurrently with, the effective date of the transfer:
(1) Franchisee must pay all amounts owed to Franchisor and its
subsidiaries and affiliates which are then due and unpaid;
(2) Franchisee or Franchisee's Principals shall not be in default under
any provision of this Agreement, any amendment or supplement hereto or any
other agreement between Franchisee or any of Franchisee's Principals and
Franchisor or any of its subsidiaries and affiliates;
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(3) Franchisee or the transferring Franchisee's Principal(s) must
execute a general release, in a form prescribed by Franchisor, of any and all
claims, of whatever kind or nature, against Franchisor, its Affiliates,
successors and assigns and their respective officers, directors,
shareholders, partners, employees, agents and representatives, including,
without limitation, claims arising under this Agreement or any other
agreement between Franchisee and Franchisor or its subsidiaries and
affiliates and federal, state and local laws, regulations, rules or orders;
(4) The transferee and its principals shall have demonstrated to
Franchisor's satisfaction that transferee meets the then current criteria
considered by Franchisor when reviewing a prospective franchisee of Stores,
including Franchisor's educational, managerial and business standards,
transferee's character, business reputation, credit rating and financial
capability, and transferee's aptitude and ability to conduct the business
contemplated hereunder (as may be evidenced by prior related business
experience or otherwise);
(5) The transferee shall have entered into a written agreement, in a
form prescribed by Franchisor, assuming full, unconditional, joint and
several liability for, and agreeing to perform from the date of the transfer,
all obligations, covenants and agreements contained in this Agreement;
(6) The transferee (or, if transferee is a corporation or a partnership,
one of transferee's shareholders, partners or investors, as designated by
Franchisor) and transferee's personnel must agree to complete Franchisor's
training program to Franchisor's satisfaction;
(7) If transferee is a corporation or a partnership, transferee shall
make and will be bound by any or all of the representations, warranties, and
covenants set forth in Section 6 as Franchisor requests. Transferee shall
provide to Franchisor evidence satisfactory to Franchisor that the terms of
Section 6 have been satisfied and are true and correct on the date of
transfer;
(8) Transferee, at its expense, shall renovate and modernize the
facilities and equipment used in the Store to Franchisor's then-current
standards for C.D. Warehouse Stores under the System, as Franchisor may
require; and
(9) Except in the case of a transfer to an entity formed solely for the
convenience of ownership, Franchisee or its transferring Franchisee's
Principals or the transferee shall have paid a transfer fee of Two Thousand
Dollars ($2,000.00) or such greater amount as is reasonably necessary to
reimburse Franchisor for its expenses in connection with the approval of the
transfer of this Agreement.
Franchisee shall not grant a security interest in this Agreement or the
rights hereunder without Franchisor's prior written consent, which consent
shall not be unreasonably withheld. In connection therewith, the secured
party shall be required by Franchisor to agree that in the event of any
default by Franchisee under any documents related to the security interest,
Franchisor shall have the right and option (but not the obligation) to be
substituted as obligor to the secured party and to cure any default of
Franchisee.
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Franchisee and its Principal Owners acknowledge and agree that each
condition which must be met by the transferee is reasonable and necessary to
assure such transferee's full performance of the obligations hereunder.
D. TRANSFER FOR CONVENIENCE OF OWNERSHIP
In the event that the proposed transfer is to a business entity formed by
Franchisee solely for the convenience of ownership, Franchisor's consent to
such transfer shall be conditioned upon the requirements set forth in this
Section 20 except for the requirements of Sections 20.C(3), (4), (6), and
(7); and provided that Franchisee shall pay a transfer fee of Five Hundred
Dollars ($500.00), or such greater amount as is reasonably necessary to
reimburse Franchisor for its expenses in connection with the approval of the
transfer and shall deliver to Franchisor the documents described in Section
7.B with respect to such business entity. Franchisee shall be the owner of
all the voting stock or equity interest of the entity and if Franchisee has
more than one owner, each owner shall have the same proportionate ownership
interest in the entity as he had in Franchisee prior to the transfer.
E. FRANCHISOR'S RIGHT OF FIRST REFUSAL
(1) Any party holding a twenty-five percent (25%) or more interest in
Franchisee, or this Agreement, or a controlling interest if less than
twenty-five percent (25%), who desires to accept any BONA FIDE offer from a
third party to purchase such interest shall promptly notify Franchisor in
writing of each such offer and shall provide such information and
documentation relating to the offer as Franchisor may require including,
without limitation, the name and address of the prospective purchaser, the
terms of the offer and a copy of any letter of intent or proposed purchase
contract. Franchisor shall have the right and option, exercisable for thirty
(30) days after receipt of such written notification, to send written notice
to the seller that Franchisor intends to purchase the seller's interest on
the same terms and conditions offered by the third party. In the event
Franchisor elects to purchase the seller's interest, closing on such purchase
must occur within sixty (60) days from the date of notice to the seller of
the election to purchase by Franchisor or such later date as may be provided
in the third party offer. Any material change in the terms of any offer
prior to closing shall constitute a new offer subject to the same rights of
first refusal by Franchisor as in the case of an initial offer. Failure of
Franchisor to exercise the option afforded by this Section 20.E shall not
constitute a waiver of any other provision of this Agreement, including all
of the requirements of this Section 20, with respect to a proposed transfer.
(2) In the event an offer from a third party provides for payment of
consideration other than cash or involves certain intangible benefits,
Franchisor may elect to purchase the interest proposed to be sold for the
reasonable equivalent in cash. If the parties cannot agree within a
reasonable time on the reasonable equivalent in cash of the non-cash part of
the offer, an independent appraiser, qualified by training and experience to
appraise such non-cash consideration, shall be designated by Franchisor and
Franchisee to determine such amount, and his determination shall be binding
on the parties. If the parties cannot agree on an independent appraiser in a
reasonable time, an independent appraiser shall be designated by each party
and
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the two (2) independent appraisers so designated shall select a third
independent appraiser. the determination of a reasonable equivalent in cash
by a majority of the appraisers so chosen shall be binding. Franchisor and
Franchisee shall each bear an equal share of the costs of the appraisal.
F. TRANSFER UPON DEATH OR PERMANENT DISABILITY
(1) Upon the death of Franchisee (if Franchisee is an individual) or, if
Franchisee is a corporation or partnership, upon the death of any person with
a 25% or more interest in Franchisee, the Store, or this Agreement (the
"Deceased"), the executor, administrator or other personal representative of
the Deceased will have six (6) months from the date of death to transfer such
interest to a third party approved by Franchisor. If Franchisee is a
corporation or other entity and the Deceased's interest will be transferred
to any of Franchisee's Principals, the transfer is permitted and requires no
approval by Franchisor. If no personal representative is designated or
appointed or no probate proceedings are instituted with respect to the estate
of the Deceased, then the distributee of such interest must be approved by
Franchisor. If the distributee is not approved by Franchisor, then the
distributee must transfer such interest to a third party approved by
Franchisor within six (6) months after the death of the Deceased.
(2) Upon the permanent disability of Franchisee (if Franchisee is an
individual) or, if Franchisee is a corporation or partnership, upon the
permanent disability of any person with a 25% or more interest in Franchisee,
Franchisor may, in its sole discretion, require such interest to be
transferred to a third party approved by Franchisor within six (6) months
after notice to Franchisee. If Franchisee is a corporation or other entity
and the Deceased's interest will be transferred to any of Franchisee's
Principals, the transfer is permitted and requires no approval by Franchisor.
"Permanent disability" means any physical, emotional, or mental injury,
illness, or incapacity which would prevent a person from performing the
obligations set forth in the Agreements for at least 90 consecutive days and
from which condition recovery within ninety days from the date of
determination of disability is unlikely. Permanent disability will be
determined upon examination of the person by a licensed practicing physician
selected by Franchisor; or if the person refuses to submit to an examination,
then such person will be automatically deemed permanently disabled as of the
date of such refusal. The cost of any examination required by the Agreements
will be paid by Franchisor.
(3) Upon the death or claim of permanent disability of any person
described in Sections 20.F(1) and (2), Franchisee must promptly notify
Franchisor of such death or claim of permanent disability. Any transfer upon
death or permanent disability shall be subject to the same terms and
conditions as described in Section 20.C for any INTER VIVOS transfer. If an
interest is not transferred upon death or permanent disability as required in
this Section 20.F, and in accordance with the terms and conditions of Section
20, such failure shall constitute a material event of default under Section
18.B(6).
G. NON-WAIVER OF CLAIMS
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Franchisor's consent to a transfer of this Agreement, or any Franchise
Agreement entered into pursuant to this Agreement, or any interest in
Franchisee subject to the conditions of this Section shall not constitute a
waiver of any claims it may have against the transferring party, nor shall it
be deemed a waiver of Franchisor's right to demand exact compliance with any
of the terms of this Agreement by the transferee.
H. OFFERINGS BY FRANCHISEE
If securities or partnership interests in Franchisee are offered to the
public by Franchisee after the date hereof, Franchisor shall require
Franchisee's offering materials to contain a written statement prescribed by
Franchisor stating that Franchisor has not approved or reviewed the offering
materials. Franchisee shall give Franchisor written notice at least thirty
(30) days prior to the date of commencement of any offering or other
transaction covered by this Section 20.H.
21. COVENANTS
A. Franchisee and Franchisee's Principals specifically acknowledge
that, pursuant to this Agreement, Franchisee and Franchisee's Principals will
receive valuable specialized training, trade secrets, and confidential
information, including, without limitation, information regarding the
management, operational and marketing methods and techniques of Franchisor
and the System which are beyond the present skills and experience of
Franchisee and Franchisee's Principals and Franchisee's managers and
employees. Franchisee and Franchisee's Principals acknowledge that such
specialized training, trade secrets, and confidential information provide a
competitive advantage and will be valuable to them in the operation of the
Store, and that gaining access to such specialized training, trade secrets,
and confidential information is, therefore, a primary reason why they are
entering into this Agreement.
B. In consideration for such specialized training, trade secrets,
confidential information and exclusive rights described in Section 21.A
above, Franchisee and Franchisee's Principals covenant as follows: With
respect to Franchisee, during the term of this Agreement, or with respect to
each of Franchisee's Principals, during the term of this Agreement for so
long as such individual or entity satisfies the definition of "Franchisee's
Principal" (as described in Section 32.E) and for a continuous uninterrupted
period commencing upon the expiration or termination of this Agreement or
with respect to each of Franchisee's Principals, for a continuous
uninterrupted period commencing upon the earlier of: (i) the expiration or
termination of this Agreement or (ii) the time such individual or entity
ceases to satisfy the definition of "Franchisee's Principal" and for two (2)
years thereafter, except as otherwise approved in writing by Franchisor,
neither Franchisee nor any of Franchisee's Principals shall, either directly
or indirectly, for themselves, or through, on behalf of, or in conjunction
with any person, persons, partnership, or corporation:
(1) divert or attempt to divert any business or customer of the Store
to any competitor, by direct or indirect inducement or otherwise, or do or
perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with Franchisor's Proprietary Marks and the System;
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(2) except as permitted by Section 11.D, employ or seek to employ any
person who is at that time employed by Franchisor or by any other
franchisee of Franchisor, or otherwise directly or indirectly induce such
person to leave his or her employment;
(3) own, maintain, operate, engage in, or have any interest in any
business in the United States which is the same as or similar to the Store
including, but not limited to, any business which offers for sale of new or
used compact discs (a "Competitive Business");
(4) own, maintain, operate, engage in, or have any direct or indirect
interest in any business in the United States which is granting franchises
or licenses to others to operate a Competitive Business; or
(5) perform services as a director, officer, manager, employee,
consultant, representative, agent, or otherwise for any Competitive
Business or any entity which is granting franchises or licenses to others
to operate Competitive Businesses.
C. It is the express intention of the parties to this Agreement to
comply with all laws applicable to the covenants contained in this Agreement.
If any of the covenants contained in this Section 21 are found to exceed in
duration, geography or scope those permitted by applicable law, it is
expressly agreed that such restrictive covenant may be reformed or modified
by the final judgment of a court of competent jurisdiction or other lawful
constituted authority to reflect a lawful and enforceable duration, geography
or scope, and such covenant automatically shall be deemed to be amended and
modified so as to comply with the judgment or order of such court or
authority. If any one or more of the provisions contained in this Section 21
shall for any reason be held invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provisions had never been contained
herein.
D. Franchisee and Franchisee's Principals understand and acknowledge
that Franchisor shall have the right, in its sole discretion, to reduce the
scope of any covenant set forth in Section 21.B in this Agreement, or any
portion thereof, without their consent, effective immediately upon notice to
Franchisee; and Franchisee and Franchisee's Principals agree that they shall
comply forthwith with any covenant as so modified, which shall be fully
enforceable notwithstanding the provisions of Section 23 hereof.
E. Franchisee and Franchisee's Principals expressly agree that the
existence of any claims they may have against Franchisor, whether or not
arising from this Agreement, shall not constitute a defense to the
enforcement by Franchisor of the covenants in this Section 21.
F. Franchisee and Franchisee's Principals understand and agree that the
restrictions contained in Section 21.B are reasonable and necessarily protect
the legitimate interests of Franchisor.
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G. Nothing contained in this Agreement shall prevent Franchisee or
Franchisee's Principals from owning less than a one percent (1%) interest in
any publicly traded equity or stock listed on a recognized national stock
exchange or NASDAQ.
H. Franchisee and each of Franchisee's Principals acknowledge that any
failure to comply with the requirements of this Section 21 shall constitute a
material event of default under this Agreement; that such failure will cause
Franchisor irreparable injury and that money damages will not adequately
compensate Franchisor; and that Franchisor may obtain specific performance
of, or an injunction against a violation of, the requirements of this Section
21 without the necessity of posting bond. Franchisee and Franchisee's
Principals agree to pay all court costs and reasonable attorneys' fees
incurred by Franchisor in enforcing its rights under this Section 21.
I. At Franchisor's request, Franchisee shall require and obtain
execution of covenants similar to those set forth in this Section 21
(including covenants applicable upon the termination of a person's
relationship with Franchisee) from Franchisee's General Manager. Such
covenants shall be substantially in the form set forth in Attachment C.
Failure by Franchisee to obtain execution of a covenant required by this
Section 21.I shall constitute a material event of default under Section
18.B(7) hereof.
22. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
A. It is understood and agreed by the parties hereto that this
Agreement does not create a fiduciary relationship between them; that
Franchisee shall be an independent contractor; and, that nothing in this
Agreement is intended to constitute either party an agent, legal
representative, subsidiary, affiliate, joint venturer, partner, employee,
employer, joint employer, or servant of the other for any purpose whatsoever.
B. During the term of this Agreement, Franchisee shall hold itself out
to the public as an independent contractor operating the business pursuant to
a franchise from Franchisor. Franchisee agrees to take such action as shall
be necessary to that end, including, without limitation, exhibiting a notice
of that fact in a conspicuous place in the franchised premises, the content
and form of which Franchisor reserves the right to specify in the Manuals or
otherwise in writing.
C. Franchisee and Franchisee's Principals understand and agree that
nothing in this Agreement authorizes Franchisee or Franchisee's Principals to
make any contract, agreement, warranty, or representation on Franchisor's
behalf, or to incur any debt or other obligation in Franchisor's name; and
that Franchisor shall in no event assume liability for, or be deemed liable
hereunder as a result of, any such action; nor shall Franchisor be deemed
liable by reason of any act or omission of Franchisee or Franchisee's
Principals in the conduct of business at the Store or for any claim or
judgment arising therefrom.
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D. (1) Franchisee and each of Franchisee's Principals shall, at all
times, indemnify and hold harmless to the fullest extent permitted by law
Franchisor, its subsidiaries, affiliates, successors, and assigns and their
respective directors, officers, shareholders, partners, servants, employees,
agents, and representatives from all "losses and expenses" (as defined in
Section 22.D(2)) incurred in connection with any action, suit, proceeding,
claim, demand, investigation or inquiry (formal or informal), or any
settlement thereof (whether or not a formal proceeding or action has been
instituted) which arises out of or is based upon any of the following:
(a) The infringement, alleged infringement, or any other violation or
alleged violation by Franchisee or any of Franchisee's Principals of any
patent, mark or copyright or other proprietary right owned or controlled by
third parties (except as such may occur with respect to any rights in the
Proprietary Marks or copyrights granted hereunder);
(b) The violation, breach or asserted violation or breach by
Franchisee or any of Franchisee's Principals of any contract, federal,
state or local law regulation, ruling, standard or, directive or any
industry standard;
(c) Libel, slander or any other form of defamation of Franchisor or
the System, by Franchisee or by any of Franchisee's Principals;
(d) The violation or breach by Franchisee or by any of Franchisee's
Principals of any warranty, representation, agreement or obligation in this
Agreement or other agreement between Franchisee and Franchisor or its
subsidiaries or affiliates; and
(e) Acts, errors or omissions of Franchisee or any of Franchisee's
Principals, or any of Franchisee's subsidiaries or affiliates or the
officers, directors, shareholders, partners, agents, servants, employees,
or representatives of Franchisee, its subsidiaries or affiliates in
connection with the performance of the operation of the Store.
(2) All losses and expenses incurred under this Section 22.D shall be
chargeable to and paid by Franchisee or any of Franchisee's Principals
pursuant to its obligations of indemnity under this Section 22.D, regardless
of any actions, activity or defense undertaken by Franchisor or the
subsequent success or failure of such actions, activity or defense. As used
in this Section 22.D, the phrase "losses and expenses" shall include, without
limitation, all losses, compensatory, exemplary or punitive damages, fines,
charges, costs, expenses, lost profits, attorney's fees, court costs,
settlement amounts, judgment, compensation for damages to Franchisor's
reputation and goodwill, costs of or resulting from delays, financing, costs
of advertising material and media time/space, and costs of changing,
substituting or replacing the same, and any and all expenses of recall,
refunds, compensation, public notices and other such amounts incurred in
connection with the matters described.
(3) Franchisee and each of Franchisee's Principals agree to give
Franchisor notice of any such action, suit, proceeding, claim, demand,
inquiry or investigation. At the expense and risk of Franchisee and each of
Franchisee's Principals, Franchisor may elect to assume (but under
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no circumstance is obligated to undertake), the defense and/or settlement of
any such action, suit, proceeding, claim, demand, inquiry or investigation.
Such an undertaking by Franchisor shall, in no manner or form, diminish the
obligation of Franchisee and each of Franchisee's Principals to indemnify
Franchisor and to hold it harmless.
(4) In order to protect persons or property, or its reputation or
goodwill, or the reputation or goodwill of others, Franchisor may, at any
time and without notice, as it, in its judgment deems appropriate, consent or
agree to settlements or take such other remedial or corrective action as it
deems expedient with respect to the action, suit, proceeding, claim, demand,
inquiry or investigation if, in Franchisor's sole judgment, there are
reasonable grounds to believe that:
(a) any of the acts or circumstances enumerated in Section 22.D(1)
above have occurred; or
(b) any act, error, or omission of Franchisee or any of Franchisee's
Principals or Franchisee's subsidiaries or affiliates may result directly
or indirectly in damage, injury or harm to any person or any property.
(5) The persons indemnified pursuant to Section 22.D do not assume any
liability whatsoever for acts, errors, or omissions of those with whom
Franchisee, any of Franchisee's Principals or Franchisee's subsidiaries and
affiliates may contract, regardless of the purpose. Franchisee and each of
Franchisee's Principals shall hold harmless and indemnify the persons
indemnified pursuant to this Section 22.D for all losses and expenses which
may arise out of any acts, errors or omissions of Franchisee, Franchisee's
Principals, any of Franchisee's subsidiaries or affiliates or the officers,
directors, shareholders, partners, agents, servants, employees or
representatives of Franchisee, its subsidiaries or affiliates and any such
third parties without limit and without regard to the cause or causes thereof
or the negligence of Franchisor or any other party or parties arising in
connection therewith, and whether such negligence be sole, joint or
concurrent, active or passive.
(6) Under no circumstances shall the persons indemnified pursuant to
this Section 22.D be required or obligated to seek recovery from third
parties or otherwise mitigate their losses in order to maintain a claim
against Franchisee or any of Franchisee's Principals. Franchisee and each of
Franchisee's Principals agree that the failure to pursue such recovery or
mitigate loss will in no way reduce the amounts recoverable from Franchisee
or any of Franchisee's Principals by the persons indemnified pursuant to this
Section 22.D.
23. ENTIRE AGREEMENT, MODIFICATION
This Agreement, the documents referred to herein and the Attachments
hereto, set forth all of the promises, covenants, agreements and conditions
between the parties hereto and supersedes all prior and contemporaneous
agreements and understandings, express or implied, oral or written. Except
as otherwise provided herein, this Agreement may be amended, modified
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or canceled and any of the terms, covenants or conditions hereof may be
waived only in writing and signed by both Franchisor and Franchisee.
24. WAIVER OF OBLIGATIONS
A. Franchisor and Franchisee may by written instrument unilaterally
waive or reduce any obligation or restriction upon the other under this
Agreement, effective upon delivery of written notice thereof to the other or
such other effective date stated in the notice of the waiver. Whenever this
Agreement requires the prior approval or consent of Franchisor, Franchisee
shall make a timely written request to Franchisor therefor, and such approval
or consent granted shall be in writing. Franchisor makes no warranties or
guarantees upon which Franchisee may rely and assumes no liability or
obligation to Franchisee or any third party to which it would not otherwise
be subject, by providing any waiver, approval, advice, consent, or suggestion
to Franchisee in connection with this Agreement, or by reason of any neglect,
delay, or denial of any request therefor.
B. Franchisor shall not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation,
the right to demand exact compliance with every term, condition and covenant
herein, or to declare any breach thereof to be a default and to terminate
this Agreement prior to the expiration of its term), by virtue of any (i)
custom or practice of the parties at variance with the terms hereof; (ii) any
failure, refusal, or neglect of Franchisor to exercise any right under this
Agreement or to insist upon exact compliance by Franchisee with its
obligations hereunder, including, without limitation, any mandatory
specification, standard or operating procedure; (iii) any waiver,
forbearance, delay, failure, or omission by Franchisor to exercise any right,
power, or option, whether of the same, similar or different in nature, with
respect to any Store under any other development or franchise agreement
therefor; (iv) any grant of a Franchise Agreement to Franchisee; or (v) the
acceptance by Franchisor of any payment from Franchisee after any breach of
this Agreement.
25. FORCE MAJEURE
A. As used in this Agreement, the term "Force Majeure" shall mean any
act of God, strike, lock-out or other industrial disturbance, war (declared
or undeclared), riot, epidemic, fire or other catastrophe, act of any
government and any other similar cause not within the control of the party
affected thereby.
B. If the performance of any obligation by any party under this
Agreement is prevented, hindered or delayed by reason of Force Majeure, which
cannot be overcome by use of normal commercial measures, the parties shall be
relieved of their respective obligations to the extent the parties are
respectively necessarily prevented, hindered or delayed in such performance
during the period of such Force Majeure; provided, however, that a party
shall not be released of its obligation to pay amounts then owing hereunder.
The party whose performance is affected by an event of Force Majeure shall
give prompt notice of such Force Majeure event to the other party by
telephone or telegram (in each case to be confirmed in
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writing), setting forth the nature thereof and an estimate as to its
duration, and shall be liable for failure to give such timely notice only to
the extent of damage actually caused.
26. RIGHTS AND REMEDIES ARE CUMULATIVE
All rights and remedies of the parties hereto shall be cumulative and not
alternative, in addition to and not exclusive of any other rights or remedies
which are provided for herein or which may be available at law or in equity
in case of any actual or threatened breach, failure or default of any term,
provision or condition of this Agreement or any other agreement between
Franchisee and Franchisor or its subsidiaries and affiliates. The rights and
remedies of the parties hereto shall be continuing and may be exercised at
any time or from time to time. The expiration, earlier termination, or
exercise of Franchisor's rights pursuant to Section 18 of this Agreement
shall not discharge or release Franchisee or any Franchisee Principal from
any liability or obligation then accrued, or any liability or obligation
continuing beyond, or arising out of, the expiration, the earlier
termination, or the exercise of such rights under this Agreement.
27. INJUNCTIVE RELIEF
Nothing in this Agreement shall bar Franchisor's right to seek specific
performance of the provisions of this Agreement and injunctive relief against
threatened conduct that will cause it loss or damages under customary equity
rules, including applicable rules for obtaining restraining orders and
preliminary injunctions. Franchisee agrees that Franchisor may seek such
injunctive relief in addition to such further or other relief as may be
available at equity or law. Franchisee agrees that Franchisor will not be
required to post a bond to obtain any injunctive relief and that Franchisee's
only remedy if an injunction is entered against Franchisee will be the
dissolution of that injunction, if warranted, upon due hearing (all claims
for damages by reason of the wrongful issuance of such injunction being
expressly waived hereby).
28. ARBITRATION
A. Franchisor and Franchisee agree that any claim, controversy or
dispute arising under, or in connection with, this Agreement including,
without limitation, those occurring subsequent to the termination or
expiration of this Agreement, which cannot be amicably settled shall, except
for those claims, controversies and disputes which as a matter of law or
public policy cannot be submitted to arbitration, be referred to arbitration
in accordance with the rules of the American Arbitration Association, as
amended. If such rules are in any way contrary to or in conflict with this
Agreement, the terms of this Agreement shall control. Only claims,
controversies or disputes involving Franchisee and no claims for or on behalf
of any other franchisee may be brought by Franchisee hereunder. The law of
the state of Texas (except for Texas choice of law and conflict of law rules)
shall govern the construction and interpretation of this Agreement in
arbitration.
B. Franchisor and Franchisee shall each select one independent
arbitrator. If the party upon whom the demand for arbitration is served
fails to select an arbitrator within fifteen (15) days after the receipt of
the demand for arbitration, then the arbitrator so designated by the party
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requesting arbitration shall act as the sole arbitrator to resolve the
controversy at hand. The two arbitrators designated by the parties shall
select a third arbitrator. If the two arbitrators designated by the parties
fail to select a third arbitrator within fifteen (15) days, the third
arbitrator shall be selected by the American Arbitration Association or any
successor thereto, upon application by either party. Arbitration shall take
place at Franchisor's principal place of business. The award of the
arbitrators shall be final and judgment upon the award rendered in
arbitration may be entered in any court having jurisdiction thereof. The
costs and expenses of arbitration, including compensation and expenses of the
arbitrators, shall be borne by the parties as the arbitrators determine.
C. In proceeding with arbitration and in making determinations
hereunder, the arbitrators shall not extend, modify or suspend any terms of
this Agreement or the reasonable standards of business performance and
operation established by Franchisor in good faith. Notice of or request to
or demand for arbitration shall not stay, postpone or rescind the
effectiveness of any termination of this Agreement.
29. PAYMENT OF AMOUNTS OWED TO FRANCHISOR; COSTS AND ATTORNEYS FEES
Franchisee shall, during the term of this Agreement and thereafter,
promptly pay all sums owing to Franchisor and its subsidiaries and
affiliates. If a claim for amounts owed by Franchisee to Franchisor is
asserted in any judicial proceeding, or Franchisor or Franchisee is required
to enforce this Agreement in a judicial or arbitration proceeding, the party
prevailing in such proceeding shall be entitled to reimbursement of its costs
and expenses, including, but not limited to, reasonable accountants',
attorneys' attorneys assistants', arbitrators' and expert witness fees, cost
of investigation and proof of facts, and court costs, whether incurred prior
to, in preparation for or in contemplation of the filing of any such
proceeding. If Franchisor is required to engage legal counsel in connection
with any failure by Franchisee to pay when due all monies owed hereunder or
submit when due any reports, information or supporting records, in connection
with any failure to otherwise comply with this Agreement, Franchisee shall
reimburse Franchisor for any of the above-listed costs and expenses incurred
by it.
30. GOVERNING LAW; CONSENT TO JURISDICTION
Except to the extent governed by federal law, this Agreement, the
franchise rights granted herein and the relationship of the parties hereto
shall be governed by the internal laws of the state of Texas (without
reference to its choice of law and conflict of law rules). All claims which,
as a matter of law or public policy cannot be submitted to arbitration in
accordance with Section 28 shall be brought within the State of Texas in the
judicial district in which Franchisor has its principal place of business;
provided, however, with respect to any action which includes injunctive
relief, Franchisor may bring such action in any court in any state which has
jurisdiction. Franchisee irrevocably submits to the jurisdiction of such
courts and waives any objection he may have to either the jurisdiction or
venue of such court.
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31. NOTICES AND PAYMENTS
A. Any and all written notices and reports required or permitted to be
delivered under this Agreement shall be in writing and shall be personally
delivered or mailed by expedited delivery service or certified or registered
mail, return receipt requested, first-class postage prepaid, or sent by
prepaid telex, or facsimile (provided that the sender confirms the telex or
facsimile by sending an original confirmation copy thereof by certified or
registered mail or expedited delivery service within three (3) business days
after transmission thereof) to the respective parties at the following
addresses unless and until a different address has been designated by written
notice to the other party:
If to Franchisor:
Compact Discs International, Ltd.
1710 Firman Drive, Suite 300
Richardson, Texas 75081
(214) 437-3559
If to Franchisee:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
B. Any notice or report given hereunder by certified or registered mail
shall be deemed to have been delivered five (5) business days after the date
of mailing, and any notice given hereunder by telex or facsimile shall be
deemed to have been given upon receipt thereof, provided that the telex or
facsimile is confirmed as provided in this Section. Business days for the
purpose of this Section exclude Saturday, Sunday, and the following national
holidays: New Year's Day, Martin Luther King Day, Washington's Birthday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving, and Christmas.
C. All payments required by this Agreement shall be directed to
Franchisor at the above address or such other place as Franchisor may direct
from time to time. Any required payment not actually received by Franchisor
during regular business hours on the date due (or postmarked at least two (2)
days prior thereto) shall be deemed delinquent.
32. SEVERABILITY AND CONSTRUCTION
A. Except as expressly provided to the contrary herein, each portion,
section, part, term, and provision of this Agreement shall be considered
severable and if, for any reason, any portion, section, part, term, or
provision herein is determined to be invalid and contrary to, or in conflict
with, any existing or future law or regulation by a court or agency having
valid jurisdiction, such shall not impair the operation of, or have any other
effect upon, such other
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portions, sections, parts, terms, or provisions of this Agreement as may
remain otherwise enforceable, and the latter shall continue to be given full
force and effect and bind the parties hereto and said invalid portions,
sections, parts, terms, or provisions shall be deemed not to be part of this
Agreement.
B. Except as expressly provided to the contrary herein, nothing in this
Agreement is intended, nor shall be deemed, to confer upon any person or
legal entity other than Franchisee, Franchisor, Franchisor's officers,
directors, and employees, and such of Franchisee's and Franchisor's
respective successors and assigns as may be contemplated (and, as to
Franchisee, permitted) by Section 19 hereof, any rights or remedies under or
by reason of this Agreement.
C. All captions in this Agreement are intended solely for the
convenience of the parties, and shall not affect the meaning or construction
of any provision hereof.
D. All references herein to the masculine, neuter, or singular shall be
construed to include the masculine, feminine, neuter or plural, where
applicable and, without limiting the obligations individually undertaken by
Franchisee's Principals hereunder, all acknowledgments, promises, covenants,
agreements and obligations herein made or undertaken by Franchisee shall be
deemed jointly and severally undertaken by all Principal Owners.
E. The term "Franchisee's Principals" as used in this Agreement shall
include, collectively or individually, Franchisee's spouse, if Franchisee is
an individual; all officers and directors, and holders of a beneficial
interest in excess of five percent (5%) or more of the securities of
Franchisee and any corporation directly or indirectly controlling Franchisee,
if Franchisee is a corporation; and the general partners of Franchisee and
officers and directors, and holders of a beneficial interest of five percent
(5%) or more of securities of a corporate general partner and any corporation
which controls, directly or indirectly any general partner, if Franchisee is
a partnership.
F. This Agreement may be executed in counterparts, and each copy so
executed shall be deemed an original.
33. ACKNOWLEDGMENTS
Franchisee and Franchisee's Principals hereby represent, warrant,
covenant and acknowledge to Franchisor that:
A. Franchisee has read this Agreement and Franchisor's Uniform
Franchise Offering Circular, including the copy of the current form of
Franchise Agreement contained therein, and that he understands and accepts
the terms, conditions, and covenants contained in this Agreement as being
reasonably necessary to maintain Franchisor's standards for the System and
the uniformity of those standards at all Stores in order to protect and
preserve the goodwill of the Proprietary Marks;
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B. Neither Franchisee nor any of Franchisee's Principals had any part
in the creation or development of the System or the Proprietary Marks
provided by Franchisor;
C. Franchisor has made no representations or promises to or with
Franchisee or a Franchisee Principal which are not contained in this
Agreement;
D. Franchisee has conducted an independent investigation of the
business venture contemplated by this Agreement and understands that the
nature of the business conducted by Stores may evolve and change over time,
that this business venture involves substantial financial risks and that the
success of this venture largely depends upon the abilities and efforts of
Franchisee;
E. FRANCHISEE HAS NOT RELIED UPON, NOR HAS FRANCHISOR MADE, ANY
REPRESENTATIONS, WARRANTIES OR GUARANTEES, EXPRESSED OR IMPLIED, AS TO THE
ACTUAL OR POTENTIAL VOLUME, PROFITS OR EARNINGS OF THE BUSINESS VENTURE
CONTEMPLATED HEREIN;
F. Franchisee has the full right and authority to enter into this
Agreement without joinder of any other person;
G. All information and materials provided to Franchisor by Franchisee
and Franchisee's Principals, individually or collectively, are true and
correct and complete to the best of their knowledge, information and belief;
H. Franchisee has received, read and understood this Agreement, the
Attachments hereto, and all agreements relating hereto, if any, and
Franchisor has accorded Franchisee ample time and opportunity to consult with
advisors of Franchisee's own choosing about the potential benefits and risks
of entering into this Agreement; and
I. Franchisor's obligations and Franchisee's rights pursuant to this
Agreement are expressly conditioned upon the continued truth of the
representations and warranties set forth above at the time of execution
hereof and throughout the term hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the ___ day of ___________, 1995.
COMPACT DISCS INTERNATIONAL, LTD.
By Markshare, L.C.,
Its General Partner
By: -------------------------------------
Mark E. Kane
President, Markshare, L.C.
FRANCHISEE:
-------------------------------------
By: -------------------------------------
Name: -------------------------------------
Title: ------------------------------------
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GUARANTY
Each of the undersigned acknowledges and agrees as follows:
1. Each has read the terms and conditions of this Agreement;
2. Each are included in the term "Franchisee's Principals" as described
in Section 32.E of this Agreement;
3. Each individually, jointly and severally makes all the covenants,
representations and agreements of Franchisee's Principals set forth in this
Agreement and is obligated to perform thereunder;
4. Each individually, jointly and severally, unconditionally and
irrevocably guarantees to Franchisor and its successors and assigns that all
of Franchisee's obligations under this Agreement will be punctually paid and
performed during the term of this Agreement and thereafter, as applicable.
Upon default by Franchisee or notice from Franchisor, Franchisee's Principals
will immediately make each payment and perform each obligation required of
Franchisee under this Agreement. Without affecting the obligations of any of
Franchisee's Principals under this guaranty Franchisor may, without notice to
Franchisee's Principals, waive, renew, extend, modify amend or release any
indebtedness or obligation of Franchisee or any Franchisee's Principal, or
settle, adjust or compromise any claims against Franchisee or any
Franchisee's Principal. Franchisee's Principals waive all demands and notices
of every kind with respect to enforcement of this guaranty including, without
limitation, notice of presentment, demand for payment or performance by
Franchisee, any default by Franchisee or any guarantor, and any release of
any guarantor or other security for this Agreement or the obligations of
Franchisee. Franchisor may pursue its rights against any of Franchisee's
Principals without first exhausting its remedies against Franchisee and
without joining any other guarantor hereto and no delay on the part of
Franchisor in the exercise of any right or remedy shall operate as a waiver
of such right or remedy, and no single or partial exercise of such right or
remedy shall preclude the further exercise of such right or remedy. Upon
receipt by Franchisor of notice of the death of one Franchisee's Principals,
the estate of the deceased shall be bound by the foregoing guaranty, but only
for defaults and obligations under this Agreement existing at the time of
death; the obligations of the other of Franchisee's Principals shall continue
in full force and effect.
FRANCHISEE'S PRINCIPALS
-------------------------------------------
Name:--------------------------------------
-------------------------------------------
Name:--------------------------------------
<PAGE>
Attachment A
Approved Location and Territory
1. Approved Location
Pursuant to Section 1.A. of the Franchise Agreement, the Store shall be
located at the following approved location:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2. Territory
Pursuant to Section 1.C of the Franchise Agreement, the "Territory"
shall be a two (2) mile radius about the location described above in
Attachment A.1. During the term of this Agreement, as long as Franchisee is
in full compliance with the terms and conditions of this Agreement,
Franchisor shall not establish or grant others the right to establish a CD
Warehouse Store in the Territory. Notwithstanding the above, Franchisor may
establish or grant others the right to establish one or more CD Warehouse
Stores at any location outside the Territory, and in such cases, Franchisee
may share parts of the Territory with one or more non-related Franchisees.
<PAGE>
Attachment B
Statement of Ownership Interest
NAME PERCENTAGE
---- ----------
<PAGE>
Attachment C
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
This Agreement is made and entered into ________________, 199__, between
Compact Discs International, Ltd., a Texas limited partnership ("CDI"),
__________________________ ("Franchisee") and ____________________________
("Employee").
RECITALS
WHEREAS, CDI has developed, is using and is the owner of all rights in a
unique system (the "System") for the development and operation of stores under
the name and mark C.D. Warehouse ("Stores"); and
WHEREAS, the System includes but is not limited to certain trade names,
trademark, and logos including, but not limited to, the mark C.D. Warehouse and
such other trade names and trademarks as CDI may develop in the future for the
purposes of identifying the System, and such other distinguishing
characteristics of the System including, without limitation, distinctive
exterior and interior design, interior and exterior signage, color scheme and
fixtures; know-how and procedures for the sale of new and used compact discs;
inventory, management and financial control methods; and training and
assistance, all of which may be changed, improved and further developed by
Franchisor from time to time ("Trade Secrets"); and
WHEREAS, CDI's Trade Secrets provide economic advantages to CDI and are not
generally known to nor readily ascertainable by proper means by CDI's
competitors who could obtain economic value from knowledge and use of CDI's
Trade Secrets; and
WHEREAS, CDI has taken and intends to take all reasonable steps to maintain
the confidentiality and secrecy of CDI's Trade Secrets; and
WHEREAS, CDI has granted Franchisee a limited right to operate the Store
using the System and CDI's Trade Secrets for the period defined in the franchise
agreement made and entered into _____________________, 19___ ("Franchise
Agreement") between CDI and Franchisee; and
WHEREAS, CDI and Franchisee have agreed in the Franchise Agreement on the
importance to CDI and to the Franchisee and other licensed users of the System
of restricting use, access and dissemination of CDI's Trade Secrets; and
WHEREAS, it will be necessary for certain employees of Franchisee to have
access to and to use some or all of CDI's Trade Secrets in the development and
operation of Franchisee's Stores using the System; and
<PAGE>
WHEREAS, Franchisee has agreed to obtain from certain key employees
written agreements protecting CDI's Trade Secrets and the System against
unfair competition; and
WHEREAS, Employee wishes to remain, or wishes to become, an employee of
Franchisee; and
WHEREAS, Employee wishes and needs to receive and use CDI's Trade Secrets
in the course of his employment in order to effectively perform his services for
Franchisee;
NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, the parties agree as follows:
1. CDI and/or Franchisee shall disclose to Employee some or all of CDI's
Trade Secrets relating to the System.
2. Employee shall receive CDI's Trade Secrets in confidence, maintain
them in confidence, and use them only in the course of his employment by
Franchisee and then only in connection with the development and/or operation by
Franchisee of Stores using the System for so long as Franchisee is licensed by
CDI to use the System.
3. Employee shall not at any time make copies of any documents or
compilations containing some or all of CDI's Trade Secrets without the express
written permission of CDI.
4. Employee shall not disclose or permit the disclosure of CDI's Trade
Secrets except to other employees of Franchisee and only to the limited extent
necessary to train or assist other employees of Franchisee in the operation or
development of a Store using the System.
5. That all information and materials, including without limitation,
drawings, specifications, techniques and compilations of data which CDI shall
designate as confidential shall be deemed CDI's Trade Secrets for the purposes
of this Agreement.
6. Employee shall surrender the Operations Manuals and any other material
containing some or all of CDI's Trade Secrets to Franchisee or to CDI, upon
request, or upon termination of employment by Franchisee, or upon conclusion of
the use for which Manuals or other information or material may have been
furnished to Employee.
7. Employee shall not, directly or indirectly, do any act or omit to do
any act, which would or would likely to be injurious or prejudicial to the
goodwill associated with the System.
8. In order to protect the goodwill and unique qualities of the System
and the confidentiality and value of CDI's Trade Secrets, and in consideration
for the disclosure to Employee of CDI's Trade Secrets, Employee further
undertakes and covenants that, during the time he is employed by Franchisee, he
will not:
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(a) Directly or indirectly, for himself or through, on behalf of or
in conjunction with any person, partnership or corporation, engage in or
acquire any financial or beneficial interest in (including interest in
corporations, partnerships, trusts, unincorporated associations or joint
ventures), advise, help or make loans to any entity involved in business
which is the same as or similar to that conducted at the Store including,
but not limited to, any business which offers for sale used compact discs
which business is, or is intended to be located, within the United States;
(b) Divert or attempt to divert, directly or indirectly, any
business, business opportunity or customer of Franchisee's Store(s) to any
competitor; or
(c) Employ or seek to employ any person who is at the time employed
by CDI or any franchisee or developer of CDI, or otherwise directly or
indirectly induce such persons to leave his or her employment.
9. In further consideration for the disclosure to Employee of CDI's Trade
Secrets and to protect the uniqueness of the System, Employee agrees that for
two (2) years following the termination of his employment by Franchisee,
Employee will not without the prior written consent of CDI:
(a) Directly or indirectly, for himself or through, on behalf of or
in conjunction with any person, partnership or corporation, engage in or
acquire any financial or beneficial interest in (including interest in
corporations, partnerships, trusts, unincorporated associations or joint
ventures), advise, help or make loans to any entity involved in business
which is the same as or similar to that conducted at the Store including,
but not limited to, any business which offers for sale used compact discs
which business is, or is intended to be located, within the United States;
(b) Divert or attempt to divert, directly or indirectly, any
business, business opportunity or customer of Franchisee's Store(s) to any
competitor; or
(c) Employ or seek to employ any person who is at the time employed
by CDI or any franchisee or developer of CDI or otherwise directly or
indirectly induce such persons to leave his or her employment.
10. Franchisee undertakes to use its best efforts to ensure that Employee
acts as required by this Agreement.
11. Employee agrees that in the event of a breach of this Agreement, CDI
would be irreparably injured and be without an adequate remedy at law.
Therefore, in the event of such a breach, or threatened or attempted breach of
any of the provisions thereof, CDI shall be entitled to enforce the provisions
of this Agreement and may seek, in addition to any other remedies which are made
available to it at law or in equity, including the right to terminate the
Franchise
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Agreement, a temporary and/or permanent injunction and a decree for the
specific performance of the terms of this Agreement, without being required
to furnish a bond or other security.
12. If any Court or other tribunal having jurisdiction to determine the
validity or enforceability of this Agreement determines that it would be
unenforceable as written, its provisions shall be deemed to be withheld,
modified or limited to such extent or in such manner as is necessary for it to
be valid and enforceable to the greatest extent possible.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as
witnessed by their signatures below.
FRANCHISEE
By: -------------------------------------
Name: -------------------------------------
Title: ------------------------------------
COMPACT DISCS INTERNATIONAL, LTD.
By: -------------------------------------
Name: -------------------------------------
Title: ------------------------------------
EMPLOYEE
-------------------------------------
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Attachment D
CONFIDENTIALITY AGREEMENT
This Agreement is made and entered into ________________, 199__, between
Compact Discs International, Ltd., a Texas limited partnership ("CDI"),
__________________________ ("Franchisee") and ____________________________
("Employee").
RECITALS
--------
WHEREAS, CDI has developed, is using and is the owner of all rights in a
unique system (the "System") for the development and operation of stores
under the name and mark C.D. Warehouse ("Stores"); and
WHEREAS, the System includes but is not limited to certain trade names,
trademark, and logos including, but not limited to, the mark C.D. Warehouse
and such other trade names and trademarks as CDI may develop in the future
for the purposes of identifying the System, and such other distinguishing
characteristics of the System including, without limitation, distinctive
exterior and interior design, interior and exterior signage, color scheme and
fixtures; know-how and procedures for the sale of new and used compact discs;
inventory, management and financial control methods; and training and
assistance, all of which may be changed, improved and further developed by
Franchisor from time to time ("Trade Secrets"); and
WHEREAS, CDI's Trade Secrets provide economic advantages to CDI and are
not generally known to nor readily ascertainable by proper means by CDI's
competitors who could obtain economic value from knowledge and use of CDI's
Trade Secrets; and
WHEREAS, CDI has taken and intends to take all reasonable steps to
maintain the confidentiality and secrecy of CDI's Trade Secrets; and
WHEREAS, CDI has granted Franchisee a limited right to operate the Store
using the System and CDI's Trade Secrets for the period defined in the
franchise agreement made and entered into _____________________, 19___
("Franchise Agreement") between CDI and Franchisee; and
WHEREAS, CDI and Franchisee have agreed in the Franchise Agreement on
the importance to CDI and to the Franchisee and other licensed users of the
System of restricting use, access and dissemination of CDI's Trade Secrets;
and
WHEREAS, it will be necessary for certain employees of Franchisee to
have access to and to use some or all of CDI's Trade Secrets in the
development and operation of Franchisee's Stores using the System; and
<PAGE>
WHEREAS, Franchisee has agreed to obtain from certain key employees
written agreements protecting the confidentiality of CDI's Trade Secrets and
the System; and
WHEREAS, Employee wishes to remain, or wishes to become, an employee of
Franchisee; and
WHEREAS, Employee wishes and needs to receive and use CDI's Trade
Secrets in the course of his employment in order to effectively perform his
services for Franchisee;
NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, the parties agree as follows:
1. CDI and/or Franchisee shall disclose to Employee some or all of CDI's
Trade Secrets relating to the System.
2. Employee shall receive CDI's Trade Secrets in confidence, maintain
them in confidence, and use them only in the course of his employment by
Franchisee and then only in connection with the development and/or operation by
Franchisee of Stores using the System for so long as Franchisee is licensed by
CDI to use the System. Employee shall not use such information for his own
benefit.
3. Employee shall not at any time make copies of any documents or
compilations containing some or all of CDI's Trade Secrets without the express
written permission of CDI.
4. Employee shall not disclose or permit the disclosure of CDI's Trade
Secrets except to other employees of Franchisee and only to the limited extent
necessary to train or assist other employees of Franchisee in the operation or
development of a Store using the System.
5. That all information and materials, including without limitation,
drawings, specifications, techniques and compilations of data which CDI shall
designate as confidential shall be deemed CDI's Trade Secrets for the purposes
of this Agreement.
6. Employee shall surrender the Operations Manuals and any other material
containing some or all of CDI's Trade Secrets to Franchisee or to CDI, upon
request, or upon termination of employment by Franchisee, or upon conclusion of
the use for which Manuals or other information or material may have been
furnished to Employee.
7. Employee shall not, directly or indirectly, do any act or omit to do
any act, which would or would likely to be injurious or prejudicial to the
goodwill associated with the System.
8. Franchisee undertakes to use its best efforts to ensure that Employee
acts as required by this Agreement.
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9. Employee agrees that in the event of a breach of this Agreement, CDI
would be irreparably injured and be without an adequate remedy at law.
Therefore, in the event of such a breach, or threatened or attempted breach of
any of the provisions thereof, CDI shall be entitled to enforce the provisions
of this Agreement and may seek, in addition to any other remedies which are made
available to it at law or in equity, including the right to terminate the
Franchise Agreement, a temporary and/or permanent injunction and a decree for
the specific performance of the terms of this Agreement, without being required
to furnish a bond or other security.
10. If any Court or other tribunal having jurisdiction to determine the
validity or enforceability of this Agreement determines that it would be
unenforceable as written, its provisions shall be deemed to be withheld,
modified or limited to such extent or in such manner as is necessary for it to
be valid and enforceable to the greatest extent possible.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as
witnessed by their signatures below.
FRANCHISEE
By: -------------------------------------
Name: -------------------------------------
Title: ------------------------------------
COMPACT DISCS INTERNATIONAL, LTD.
By: -------------------------------------
Name: -------------------------------------
Title: ------------------------------------
EMPLOYEE
-------------------------------------
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<PAGE>
FORM OF LOCK-UP AGREEMENT
December __, 1996
Capital West Securities, Inc.
16th Floor, One Leadership Square
211 N. Robinson
Oklahoma City, OK 73102
As One of the Representatives of the Several Underwriters
Re: Public Offering of Common Stock Par Value
$.01 Per Share ( the "Common Stock") of
CD Warehouse, Inc. (the "Company")
___________________________________
Gentlemen:
Pursuant to Section 2(s) of the Underwriting Agreement, dated
December __, 1996 (the "Underwriting Agreement"), by and among you and the
Company, the undersigned (a holder of Common Stock) hereby agrees not to
sell, contract to sell, transfer or otherwise dispose of any shares of Common
Stock without prior written consent for a period of 24 months after the date
of the initial public offering of the Common Stock. All communications to you
hereunder shall be sent to the address set forth above, attention: Gregory M.
Jones.
Sincerely,
--------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1996, except for Note 2, as to which the
date is October 10, 1996, with respect to the financial statements of Compact
Discs International, Ltd. and to our report dated October 5, 1996 with respect
to the financial statements of CD Acquisitions included in Amendment No. 1 to
the Registration Statement (Form SB-2 No. 333-15139) and related Prospectus of
CD Warehouse, Inc. for the registration of 1,000,000 shares of its common stock.
/S/ HUSELTON & MORGAN, P.C.
Dallas, Texas
December 10, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 26, 1996, except for the second paragraph of
Note 2 as to which the date is December 10, 1996, in Amendment No. 1 to the
Registration Statement (Form SB-2 No. 333-15139) and related Prospectus of CD
Warehouse, Inc. for the registration of 1,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Oklahoma City, Oklahoma
December 10, 1996
