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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: June 26, 1998
CD Warehouse, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
000-21887 73-1504999
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(Commission File Number) (I.R.S. Employer
Identification No.)
1204 Sovereign Row, Oklahoma City, OK 73108
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(Address of principal executive offices) (Zip Code)
(405) 949-2422
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(Registrant's telephone, including area code)
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ITEM 5. OTHER EVENTS.
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(a). In connection with the Registrant's June 1998 acquisition from Grow
Biz International, Inc. ("Grow Biz") of the franchise rights to Grow Biz's Disc
Go Round(R) retail music business, the Registrant and Grow Biz agreed to dismiss
all causes of action and claims related to the litigation between the parties
filed by Registrant on September 15, 1997, in the District Court of Dallas
County, Texas.
(b). On or about August 12, 1998, the Registrant mailed to its
shareholders, together with its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, the "Letter to Shareholders" included herein as Exhibit
99.1.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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(c) Exhibits. The following exhibits are filed with this Report:
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99.1 Letter to Shareholders dated August 12, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CD WAREHOUSE, INC.
(Registrant)
Date: August 20, 1998 BY: /s/ Jerry W. Grizzle
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Jerry W. Grizzle,
President and Chief Executive Officer
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EXHIBIT 99.1
[CD Warehouse, Inc. Letterhead]
August 12, 1998
Dear Shareholder,
We are pleased with our accomplishments during the second quarter of 1998.
During the quarter we completed a private placement offering that netted
approximately $15 million in capital for the Company. With the capital infusion
we successfully acquired our largest competitor, Disc Go Round, which now makes
CD Warehouse, Inc., the largest retail music chain specializing in the sale of
pre-owned CD's. Since the acquisition occurred at the end of the quarter, the
results of the combined operations will not be reflected until subsequent
periods. With working capital in excess of $10 million, the Company is postured
to be responsive to our growth needs, possible acquisition opportunities and our
proposed entry into Internet marketing."
In fact, the single most asked question I receive is "What are CD
Warehouse's plans concerning its participation on the Internet?" As a result of
these repeated inquiries, I wanted to take this opportunity to discuss our
Internet strategy with our shareholders.
Currently less than one-half of one percent of all music sold in the world
is sold over the Internet. Worldwide sales exceeded $37 billion in 1997. Some
analyst's, however, predict that as much as 25% of worldwide sales will occur
over the Internet by 2002. We have determined that CD Warehouse will be
prepared to receive its fair share of this Internet sales opportunity.
The companies that sell CD's on the Internet today are, for the most part,
"virtual" companies. They do not have offices, from which salesmen go forth and
sell or warehouses where merchandise (CD's) is stored and orders filled when
they are received. Instead, these wholly Web Site companies have only an
electronic internet interface with their customers. A customer identifies a CD
for purchase, the order is place and the sale is acknowledged. After the order
has been received and the credit card charge confirmed, the Web Site company's
third party vendor, that is a wholesale CD supplier, will ship the order. It is
simply a pass through transaction. Used CD's are, for the most part, a very
insignificant part of this market. The margins for this type of business are
necessarily narrow due to the relatively broad field of competition and the
limited value added role of the Web Site company.
Our Company's strategy will differ substantially. While we will sell new
CD's as described above, we intend to concentrate on the offer and sale of used
CD's. We are upgrading our proprietary database management system to
accommodate two-way communication with our stores. This will give us the
capability for stores to talk to stores and for the corporate office to talk to
all stores. When this software upgrade is completed and in installed at our
various company owned and franchisee stores, we will then have the capability to
download the inventory file from every store onto one master
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server. The master file will record the barcode from each piece in the
inventory, the quantity and the store location. The database created in this
manner will reflect all of the stores' pre-owned inventories. The database will
then function as a system-wide order point for Internet sales.
A potential Internet customer will log on to the CD Warehouse web site and
after reviewing the selections, place an order for a particular CD. If the
customer prefers a new CD instead of one from our stores' pre-owned inventories,
or the desired selection simply does not exist in our pre-owned inventories, as
stated above, our system will work in a similar manner to the virtual companies
system. The CD will be shipped directly from a new CD wholesaler that our
company will contract with. The sale will be processed by our company and the
sale credited to the franchisee or company owned store located closest to the
point of sale by zip code.
If a potential Internet customer selects a CD that is in our systems new or
pre-owned inventory, the master server will look into the system-wide inventory
file and identify the location of the piece of music. The zip code of the
customer will be used to decide which store receives the order. Every store in
the system that chooses to participate will have the opportunity to make these
Internet sales. The closest store to the point of order, that has the desired CD
in inventory will receive the sale. Once the store is selected, the transaction
will be completed and a transaction file will be mailed to the selling store.
The store will take the desired CD from its inventory and mails it per the
customer's instructions.
Our massive system-wide inventory of pre-owned CD's provides us the same
strategic advantage over our Internet competitors that we have over our retail
competitors. As I indicated above, if a customer should ask for a piece of
music that can not be found in our system's pre-owned or new inventory we will
rely on our wholesaler supplier to fill the order. We will not enjoy the price
advantage that we have with pre-owned CD's, when we sell new CD's but we will
take care of our customers' needs.
Our objective is for the CD Warehouse Internet site to be known as "The
Site" for the music industry. We intend to have links to many other music
related sites. You will be able to obtain concert information, ticket
information, sound clips of songs, profiles of artists, information about local
artists and concerts. Additionally, we will link to music related items such as
headphones, posters and CD carrying cases.
In order to accomplish the foregoing, we have hired James Lee, as the Vice
President of Internet Marketing. Mr. Lee is currently completing the
requirements for his Ph.D. in marketing at Oklahoma State University. Mr. Lee
is currently negotiating with several of the country's leading service providers
of e-commerce (internet commerce) software/hardware development, to assist him
in his efforts. Mr. Lee's objective is to make our commercial web site a
reality in the shortest time period possible. Our first step will be to
activate our web site by selling music from our wholesale suppliers catalog as
well as all of the related links to other music related web pages. Our second
step will be to complete the system wide software upgrade, which will allow the
pre-owned product to be marketed over the Internet Our timetable calls for step
one to be completed during the fourth fiscal/ calendar quarter 98. The second
phase is scheduled
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for completion prior to the end of FY 1999.
We are extremely excited about the possibilities that exist by establishing
our presence on the internet. We are currently a true retailer of music with
over 300 stores producing revenue from traditional retail sales. The Internet
will be a strategic addition to our primary source of revenue and profits. It
is a logical and exciting addition to our concept.
Sincerely,
Jerry W. Grizzle
Chairman and Chief Executive Officer
