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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CD WAREHOUSE, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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CD WAREHOUSE, INC.
1204 SOVEREIGN ROW
OKLAHOMA CITY, OKLAHOMA 73108
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 1, 1998
TO OUR STOCKHOLDERS:
The 1998 Annual Meeting of Stockholders of CD Warehouse, Inc., a Delaware
corporation (the "Company"), will be held at The Westin Hotel, One N. Broadway,
Oklahoma City, Oklahoma, on May 1, 1998, at 2:00 p.m., local time, for the
following purposes:
1. To elect two directors;
2. To consider a proposal to amend the Company's 1996 Stock Option
Plan;
3. To consider a proposal to ratify the appointment of Ernst & Young
LLP as independent auditors of the Company for 1998; and
4. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Stockholders of record at the close of business on March 25, 1998 are
entitled to notice of and to vote at the Annual Meeting. A complete list of the
stockholders entitled to vote at the Annual Meeting will be available for
examination by any stockholder at the Company's executive offices, during
ordinary business hours, for a period of at least ten days prior to the Annual
Meeting.
The accompanying Proxy Statement contains information regarding the matters
to be considered at the Annual Meeting. For reasons outlined therein, the Board
of Directors recommends a vote "FOR" the matters being voted upon.
YOUR PROXY IS IMPORTANT TO ASSURE A QUORUM AT THE ANNUAL MEETING. WHETHER
OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE BE SURE THAT THE ENCLOSED
PROXY IS PROPERLY COMPLETED, DATED, SIGNED AND RETURNED WITHOUT DELAY IN THE
ENCLOSED ENVELOPE. IT REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS,
Jerry W. Grizzle,
President and Chief Executive Officer
Oklahoma City, Oklahoma
April 1, 1998
<PAGE>
CD WAREHOUSE, INC.
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PROXY STATEMENT
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ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 1, 1998
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of CD Warehouse, Inc., a Delaware corporation
(the "Company"), for use at the Annual Meeting of Stockholders of the Company
(the "Annual Meeting") to be held on the date, at the time and place and for the
purposes set forth in the accompanying Notice of Annual Meeting of Stockholders,
and any adjournment of the Annual Meeting.
This Proxy Statement and accompanying form of proxy, along with the
Company's Annual Report for its fiscal year ended December 31, 1997, are first
being mailed to holders of the Company's $.01 par value common stock ("Common
Stock") on or about April 1, 1998. Stockholders are referred to the Annual
Report for financial information concerning the activities of the Company.
The Board of Directors has established March 25, 1998 as the record date
(the "Record Date") to determine stockholders entitled to notice of and to vote
at the Annual Meeting. At the close of business on the Record Date, 1,920,000
shares of Common Stock were outstanding. Each share is entitled to one vote.
The holders of a majority of the outstanding Common Stock, present in person or
by proxy, will constitute a quorum for the transaction of business at the Annual
Meeting.
Each proxy which is properly signed, dated and returned to the Company in
time for the Annual Meeting, and not revoked, will be voted in accordance with
instructions contained therein. If no contrary instructions are given, proxies
will be voted "FOR" each of the proposals submitted to a vote of the
stockholders. Proxies may be revoked at any time prior to their being exercised
by delivering a written notice of revocation or a later dated proxy to the
Secretary of the Company. In addition, a stockholder present at the Annual
Meeting may revoke his or her proxy and vote in person.
Election of the director nominees will be by plurality vote. The Company's
Secretary will appoint an inspector of election to tabulate all votes and to
certify the results of all matters voted upon at the Annual Meeting. Votes
withheld from nominees for director, abstentions and broker non-votes will be
counted for purposes of determining whether a quorum has been reached. Votes
withheld from nominees for director and abstentions on proposals have the same
effect as votes against them. Broker non-votes have no effect on the outcome of
the election of directors or other proposals.
The cost of soliciting proxies in the enclosed form will be borne by the
Company. In addition to solicitation by mail, officers, employees or agents of
the Company may solicit proxies personally, or by telephone, telegraph,
facsimile transmission or other means of communication. The Company will
request banks and brokers or other similar agents or fiduciaries to transmit the
proxy material to the beneficial owners for their voting instructions and will
reimburse them for their expenses in so doing.
1
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ELECTION OF DIRECTORS
(PROXY ITEM NO. 1)
Pursuant to provisions of the Company's Certificate of Incorporation and
Bylaws, the Board of Directors has fixed the number of directors at five. The
Company's Certificate of Incorporation and Bylaws provide for three classes of
directors serving staggered three-year terms, with each class to be as nearly
equal in number as possible. Currently, the Board of Directors consists of four
directors: Jerry W. Grizzle, who is a Class 1 director with a term expiring at
the 2000 annual meeting, Gary D. Johnson, who is also a Class 1 director, Ronald
V. Perry, who is a Class 2 director with a term expiring at the 1998 annual
meeting, and Christopher M. Salyer, who is a Class 3 director with a term
expiring at the 1999 annual meeting. The fifth board seat, which currently is
vacant, exists in Class 3. The Board of Directors has nominated (i) Ronald V.
Perry for re-election as a Class 2 director for a term expiring at the 2001
annual meeting, and until his successor is elected and qualified, and (ii)
Robert O. McDonald for election as a Class 3 director for a term expiring at the
1999 annual meeting. Proxies cannot be voted for a greater number of persons
than the number of nominees named. Other directors who are remaining on the
Board will continue in office in accordance with their previous elections until
the expiration of their terms at the 1999 or 2000 annual meeting, as the case
may be.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES FOR ELECTION TO
THE BOARD OF DIRECTORS FOR THE TERMS SO SPECIFIED.
It is the intention of the persons named in the enclosed form of proxy to
vote such proxy for the election of the nominees. The Board of Directors
expects that the nominees will be available for election but, in the event that
nominee are not so available, proxies received will be voted for substitute
nominees to be designated by the Board of Directors or, in the event no such
designation is made by the Board, proxies will be voted for a lesser number of
nominees.
INFORMATION REGARDING NOMINEES AND DIRECTORS
The following information is furnished for each person who is nominated for
election as a director or who is continuing to serve as a director of the
Company after the Annual Meeting.
NOMINEE FOR ELECTION AS DIRECTOR FOR TERM EXPIRING IN 1999
ROBERT O. MCDONALD, age 60, has served as Chairman of the Board of
Directors and Chief Executive Officer of Capital West Securities, Inc., an
investment banking firm ("Capital West"), since May 1995. Capital West was the
managing underwriter for the Company's initial public offering in January 1997.
See "Certain Transactions." From June 1994 to May 1995, Mr. McDonald was
engaged in managing his personal investments. Prior to June 1994, Mr. McDonald
was employed by Stifel Nicolaus & Co., Inc., where he served as Municipal
Syndicate Manager. Mr. McDonald also serves as a director of Avalon Community
Services, Inc., an Oklahoma based corporation providing private correctional
services. Mr. McDonald received his BBA from the University of Oklahoma in
1960.
NOMINEE FOR RE-ELECTION AS DIRECTOR FOR TERM EXPIRING IN 2001
RONALD V. PERRY, age 48, a Director of the Company since October 1996, has
served since August 1986 as President and Chief Operating Officer of Prime Time
Travel, Inc., a travel agency specializing providing services to a corporate
client base. He has also served since 1985 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.
2
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DIRECTOR WHOSE TERM EXPIRES IN 1999
CHRISTOPHER M. SALYER, age 45, 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 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.
DIRECTORS WHOSE TERMS EXPIRE IN 2000
JERRY W. GRIZZLE, age 44, 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 has completed the curriculum
requirements for, and expects to receive, a Ph.D. in Marketing at Oklahoma State
University in 1998, and holds the rank of Brigadier General in the Oklahoma Army
National Guard.
GARY D. JOHNSON, age 38, 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.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors held five meetings during the Company's fiscal year
ended December 31, 1997. The Board of Directors has a standing compensation
committee. It does not have a standing nominating committee.
The duties of the Compensation Committee are to determine the salaries,
bonuses and other remuneration of the executive officers. The Compensation
Committee may make recommendations to the Board of Directors with respect to the
Company's compensation policy. Mr. Salyer serves as Chairman of the
Compensation Committee and Mr. Perry comprises the remaining Committee member.
The Compensation Committee was formed in October 1997 and held no meetings
during the fiscal year ended December 31, 1997.
Each director attended at least 75% of the total number of Board and
committee meetings held while serving as a director or committee member during
fiscal year 1997.
3
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below sets forth as of the Record Date (i) the name and address
of each person known by management to own beneficially more than 5% of the
Company's outstanding Common Stock, the number of shares beneficially owned by
each such stockholder and the percentage of outstanding shares owned and (ii)
the number and percentage of outstanding shares of Common Stock beneficially
owned by each of the Company's nominees, directors, executive officers listed in
the Summary Compensation Table below and by all directors and executive officers
of the Company as a group. Unless otherwise noted, the persons named below have
sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------
BENEFICIAL OWNERS NUMBER OF SHARES PERCENT OF CLASS/(1)/
----------------- ---------------------- -----------------------
<S> <C> <C>
Jerry W. Grizzle*(2)(3) 269,113 14.00%
Gary D. Johnson*(2)(4) 98,600 5.13%
Christopher M. Salyer*(2)(5) 13,000 .68%
Ronald V. Perry*(2)(6) 2,800 .15%
Robert O. McDonald**(2)(7) 40,606 2.09%
Mark E. Kane (8) 350,000 18.23%
All executive officers and
directors as a group(3)(4)(5)(6) 420,513 21.81%
</TABLE>
_____________________________
* Director
** Nominee for director
(1) Percent of class for any stockholder listed is calculated without regard to
shares of Common Stock issuable to others upon exercise of outstanding stock
options or subscriptions for Common Stock. Any shares a stockholder is
deemed to own by having the right to acquire by exercise of an option or by
subscription are considered to be outstanding solely for the purpose of
calculating that stockholder's ownership percentage.
(2) Address is c/o 1204 Sovereign Row, Oklahoma City, Oklahoma 73108.
(3) Includes options to purchase 2,000 shares of Common Stock which are
currently exercisable by Mr. Grizzle and which were granted pursuant to the
Company's 1996 Stock Option Plan.
(4) Includes options to purchase 2,000 shares of Common Stock which are
currently exercisable by Mr. Johnson and which were granted pursuant to the
Company's 1996 Stock Option Plan.
(5) Includes options to purchase 2,000 shares of Common Stock which are
currently exercisable by Mr. Salyer and which were granted pursuant to the
Company's 1996 Stock Option Plan.
(6) Includes options to purchase 2,000 shares of Common Stock which are
currently exercisable by Mr. Perry and which were granted pursuant to the
Company's 1996 Stock Option Plan.
(7) Includes 4,356 shares of Common Stock held by Capital West, currently
exercisable warrants to purchase 7,350 shares of Common Stock which are held
by Mr. McDonald and currently exercisable warrants to purchase 18,900 shares
of Common Stock which are held by Capital West. See "Executive
Compensation-Certain Transactions."
(8) Address is 1017 N. Central Expressway, Suite 200, Plano, Texas 75075.
COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers and any persons who own more than 10%
of a registered class of the Company's equity securities to file with the
Securities and Exchange Commission and Nasdaq reports of ownership and
subsequent changes in ownership of Common Stock and other securities of the
Company. Officers, directors and greater than 10% stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on review of the copies of such reports furnished to
the Company or written representations that no other reports were required, the
Company believes that, during 1997, all filing requirements appplicable to its
officers, directors and greater than 10% beneficial owners were met.
4
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid by the Company to
its Chief Executive Officer in fiscal 1997. The Company did not pay
compensation to any executive officer prior to the consummation of the Company's
initial public offering in January 1997. No executive officer received salary
and bonus in excess of $100,000 in 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------------------------------
AWARDS OF ALL
OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (# OFSHARES)(2) COMPENSATION
---- --------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Jerry W. Grizzle, 1997 $93,462 $ -0- 56,000
Chairman of the Board, President
and Chief Executive Officer
</TABLE>
___________________
(1) Represents Mr. Grizzle'salary for the period commencing January 27, 1997 to
December 31, 1997.
(2) Options are granted with an exercise price equal to the fair market value
of the Common Stock on the date of the grant.
STOCK OPTIONS GRANTED IN FISCAL 1997
The following table contains information concerning the grant of stock
options during the year ended December 31, 1997 to Jerry W. Grizzle.
OPTION GRANTS DURING LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
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NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR BASE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME Granted FISCAL YEAR ($/SH) DATE
- ---------------- ----------- --------------- --------- ----------
<S> <C> <C> <C> <C>
Jerry W. Grizzle 56,000 23.73% (1)(2) (1) (1)
</TABLE>
________________
(1) Mr. Grizzle received two separate grants of nonqualified stock options
in, respectively, January 1997 and October 1997. Options granted in
January 1997 expire in January 2007, vest over three years in 33 1/3%
annual increments, beginning on the anniversary of the date of grant, and
have an exercise price of $5.00 per share, which was equal to the per
share public offering price of the Company's Common Stock on the grant
date. Options granted in October 1997 expire in October 2007, vest over
three years in 33 1/3% annual increments, beginning on the anniversary of
the date of grant, and have an exercise price of $3.75 per share, which
was equal to the fair market value per share of the Company's Common
Stock on the grant date.
(2) All options granted under the 1996 Stock Option Plan are nonqualified
stock options. During 1997, an aggregate of 236,000 options were granted
under such plan. These options become exercisable 33 1/3% per year over a
four-year period with the first 33 1/3% vesting on the first anniversary
of the date of grant and the remaining 66 2/3% becoming exercisable in
equal amounts on and after, respectively, the second and third
anniversary of the grant date. Options also become exercisable in the
event of a change of control of the Company. Options generally have a
term of ten years following the date of grant, unless sooner terminated
in accordance with the terms of such plan.
5
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FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding outstanding
options granted under the 1996 Stock Option Plan held by Jerry W. Grizzle on
December 31, 1997. During 1997, Mr. Grizzle did not exercise any options, nor
were any outstanding options repriced by the Company. For the purposes of this
table, the "value" of an option is the difference between the market value at
December 31, 1997 of the shares of Common Stock subject to the option and the
aggregate exercise price of such option.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Jerry W. Grizzle, Chairman, President and
Chief Executive Officer 2,000 54,000 -- $3,150
</TABLE>
______________________
(1) Based on the December 31, 1997 closing price of the Company's Common Stock
of $3.813 per share.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Grizzle. Mr. Grizzle's
agreement, which was originally executed on October 26, 1996, had an initial
five-year term commencing on the closing date of the Company's initial public
offering. Under the terms of the Grizzle employment agreement, the contract
automatically renews for additional five-year terms unless terminated by either
the Company or Mr. Grizzle. Under the agreement, Mr. Grizzle receives an annual
salary of $100,000. In addition, Mr. Grizzle may be entitled to receive
incentive compensation. Such incentive compensation consists of an annual bonus
if certain individual and Company objectives are achieved. "Cause" for
termination under the agreement 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 Mr. Grizzle's duties or obligations
under his employment agreement; or intentional or continual neglect of duties.
For two years following Mr. Grizzle's termination, 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 Mr.
Grizzle rendered services to the Company. The agreement contains a provision
prohibiting Mr. Grizzle subsequent to termination of employment from disclosing
to third parties proprietary information relating to the Company.
DIRECTORS' COMPENSATION
During the fiscal year ended December 31, 1997, directors who were not
officers of the Company were paid $1,000 for each meeting attended.
Additionally, all directors received an automatic grant of 6,000 options under
the Company's 1996 Stock Option Plan. The Board of Directors has proposed that
the 1996 Stock Option be amended to increase the automatic grant of options to
directors from 6,000 to 10,000. See "Approval of Amendment of 1996 Stock Option
Plan." Plan options are granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant. See "Stock Options Granted in
Fiscal 1997."
CERTAIN TRANSACTIONS
At the closing of the Company's initial public offering in January 1997,
the Company acquired for a purchase price of $3,200,000 substantially all of the
assets of Compact Discs International, Ltd. ("CDIL"), a Texas limited
partnership which franchised stores throughout the United States and England
under the name "CD Warehouse." A portion of the proceeds of the Company's
initial public offering was used to fund the $3.2 million acquisition (the "CDIL
Acquisition"), which was consummated simultaneously with the closing of the
offering. The assets acquired consisted 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
6
<PAGE>
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, Oklahoma, Edmond, Oklahoma and Memphis, Tennessee.
Pursuant to the CDIL Acquisition, Mark E. Kane, the founder and manager of
CDIL, was granted a World Wide Area Development Agreement at the closing of that
transaction. Under the terms of the Worldwide Area Development Agreement, Kane
was 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 granted 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 was also granted two franchise agreements by the Company for two CD
Warehouse Stores operated by Mr. Kane in Ft. Worth, Texas and Plano, Texas
pursuant to which Mr. Kane was not be required to pay to the Company any
royalties or franchise fee.
In connection with the CDIL Acquisition, Mr. Kane subscribed for 350,000
shares of Common Stock, at a subscription price of $1.00 per share. Payment of
the subscription was conditioned upon the successful completion of the Company
initial public offering and the CDIL Acquisition.
In 1997, the Company was party to 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 of approximately 800 square feet was held under the lease on a month to
month basis with monthly lease payment of $600. The Company terminated the
lease agreement in May 1997, when it moved to its current location.
Since May 1995, Robert O. McDonald, a nominee for director of the Company,
has served as Chairman of the Board of Directors and Chief Executive Officer of
Capital West. Capital West acted as managing underwriter for the Company's
initial public offering, completed in January 1997. In connection with the
offering, Capital West received approximately $208,000 in discounts,
commissions, and non-accountable expense allowances. In addition, Capital West
received warrants to purchase 50,000 shares of Common Stock. The warrants are
exercisable at a price equal to150% of the initial public offering price for a
period of four years commencing January 22, 1998. The warrants, which are
assignable, grant to the holders thereof, with respect to the registration under
the Securities Act of the securities directly and indirectly issuable upon
exercise of the warrants, one demand registration right during the Exercise
Period, as well as piggyback registration rights at any time. Of the 50,000
warrants received by Capital West, an aggregate of 31,100 warrants have been
assigned to third parties, including 7,350 warrants to Mr. McDonald.
7
<PAGE>
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.
APPROVAL OF AMENDMENT OF 1996 STOCK OPTION PLAN
(PROXY ITEM NO. 2)
The Board has approved, subject to stockholder approval, an amendment of
the Company's 1996 Stock Option Plan (the "1996 Plan") which would (i) increase
the maximum aggregate number of shares of Common Stock available for the grant
of stock options under the 1996 Plan from 400,000 shares to 600,000 shares, (ii)
change the vesting period of stock options granted under the 1996 Plan so that
options may be exercised one year from date of grant, as opposed to the vesting
schedule currently provided for in the Plan, which provides for incremental
vesting in one-third increments over three years from date of grant; (iii)
increase the number of shares of Common Stock covered under the automatic annual
grant of options to directors of the Corporation from 6,000 to 10,000; and (iv)
provide that the number of shares of Common Stock covered under options granted
to a director newly appointed by the Board of Directors to fill a vacancy or new
Board seat shall be adjusted so that the number of shares covered thereby shall
be equal to the number obtained by multiplying 10,000 shares by a fraction, the
denominator of which is 12 and the numerator of which shall be the estimated
number of months remaining until the next annual stockholders meeting.
The following is a brief summary of the material features of the 1996 Plan
and is qualified in its entirety by express reference to the 1996 Plan, a copy
of which will be sent without charge prior to the Annual Meeting to any
stockholder requesting it from the Secretary of the Company.
Options may currently be granted under the 1996 Plan covering a maximum of
400,000 shares of Common Stock. If the proposed amendment is approved by the
stockholders, the maximum number of shares covered by the 1996 Plan will
increase from 400,000 shares to 600,000 shares. Shares covered by options which
terminate without exercise are available for issuance upon the grant of
additional options. The number and kind of shares subject to the 1996 Plan and
any outstanding options under the 1996 Plan will be appropriately adjusted in
the event of a stock split, stock dividend, reorganization or other specified
changes in the capitalization of the Company. The 1996 Plan allows for the
grant of either incentive stock options or nonstatutory stock options.
At December 31, 1997, options to purchase 236,000 shares of the Company's
Common Stock were outstanding under the 1996 Plan with exercise prices ranging
from $3.125 to $5.00 per share, 8,000 of which were exercisable. As of the same
date, no options had been exercised, and 164,000 options remained available for
grant. The expiration date for outstanding options granted under the 1996 Plan
range from January 27, 2007 to October 10, 2007. These options vest in equal
annual installments over three years.
The 1996 Plan is administered by the Company's Board of Directors, which
has the sole authority to determine which eligible persons shall receive options
and the terms and provisions of the options. The Board also has the full power
and authority to interpret the provisions of the 1996 Plan and any option
granted under the 1996 Plan. The Board may delegate administration of the 1996
Plan to a committee of not less than two members of the Board. The Board has
delegated administration of the Plan to the Compensation Committee of the Board.
Employees, directors and consultants of the Company and any subsidiary of
the Company are eligible to receive options under the 1996 Plan, with only
employees eligible to receive incentive stock options. At December 31, 1997,
approximately 40 persons were eligible to receive grants under the 1996 Plan.
The Board has the discretion to set the exercise price for options granted under
the 1996 Plan, provided that the exercise
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price per share for each incentive stock option cannot be less than the fair
market value on the date of grant. The Board also has broad discretion as to the
other terms and conditions upon which options granted shall be exercisable, but
under no circumstances will an option have a term exceeding ten years from the
date of grant. On March 25, 1998, the closing price of the Company's Common
Stock on the Nasdaq SmallCap Market was $6.625 per share.
The purchase price for shares issued under the 1996 Plan may be paid by
cash or such other means deemed acceptable by the Board, including the payment
of all or part of the exercise price with shares previously acquired by the
optionee. The Company also facilitates the cashless exercise of options through
customary brokerage arrangements.
Each option expires on the date established by the Board for that option,
except that no option may be exercised later than ten years after the date of
grant and no incentive stock option granted to a person owning greater than 10%
of the total combined voting power of all classes of stock of the Company may be
exercised later than five years after the date of grant. Options generally
terminate upon the termination of the optionee's employment, except as otherwise
determined by the Board, and for up to one year after termination in the event
of death or three months in the event of disability. The Board also has the
authority to extend the post-termination exercise period, although not beyond
the original option expiration date, and to accelerate unvested portions of an
option upon the termination of employment. Options are not transferable by the
optionee other than by will or the laws of descent and distribution.
The 1996 Plan provides that in the case of certain reorganizations, mergers
or consolidations of the Company with one or more corporations, or the sale of
substantially all of the Company's assets, all outstanding options, including
unvested installments, shall be accelerated and be exercisable in full beginning
immediately prior to the consummation of the transaction unless such options are
assumed in some manner as part of the transaction or new options or securities
are substituted for them.
The 1996 Plan provides that the Board may at any time amend or terminate
the 1996 Plan, although no amendment or termination may adversely affect any
previously granted option without the consent of the holder of the option.
Unless sooner terminated by the Board, the 1996 Plan will terminate in December
2006.
Under currently applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), an optionee will not be deemed to receive any income
for federal tax purposes upon the grant of an option under the 1996 Plan, nor
will the Company be entitled to a tax deduction at that time. However, upon the
exercise of an option the tax consequences are as follows:
1. Upon the exercise of a nonstatutory option, the optionee will be
deemed to have received ordinary income in an amount equal to the
difference between the option price and the market price of the shares
on the exercise date. The Company will be allowed an income tax
deduction equal to the excess of the market value of the shares on the
date of exercise over the cost of such shares to the optionee subject
in certain circumstances to a $1 million ceiling on the deductibility
by the Company of certain executive officers' compensation during any
year; and
2. Upon the exercise of an incentive stock option, there is no income
recognized by the optionee at the time of exercise. If the stock is
held at least one year following the exercise date and at least two
years from the date of grant of the option, the optionee will realize
a long-term capital gain or loss upon sale, measured as the difference
between the option exercise price and the sale price. If both of
these holding period requirements are not satisfied, ordinary income
tax treatment will apply to the amount of gain at sale or exercise,
whichever is less. If the actual gain exceeds the amount of ordinary
income, the excess will be considered short-term
9
<PAGE>
or long-term capital gain depending on how long the shares are
actually held. No income tax deduction will be allowed the Company
with respect to shares purchased by an optionee upon the exercise of
an incentive stock option, provided such shares are held for the
required periods as described above.
There is no charge against income required by the Company in connection
with the grant of an option or exercise of an option for cash.
Under the Code, an option will generally be disqualified from receiving
incentive stock option treatment if it is exercised more than three months
following termination of employment. However, if the optionee is disabled, such
statutory treatment is available for one year following termination. If the
optionee dies while employed by the Company or within three months thereafter,
the statutory time limit is waived altogether. In no event do these statutory
provisions extend the optionee's right to exercise an option beyond its term.
The foregoing summary of the 1996 Plan is qualified in its entirety by the
1996 Stock Option Plan, a copy of which is attached hereto as Exhibit A.
At the Annual Meeting, stockholders will be asked to approve the amendment
of the 1996 Plan. Such approval will require the affirmative vote of a majority
of the voting power of all outstanding shares of the Company's Common stock
present or represented and entitled to vote at the Annual Meeting. The Board of
Directors recommends a vote "FOR" the proposal.
RATIFICATION OF INDEPENDENT AUDITORS
(PROXY ITEM NO. 3)
The Board of Directors has selected the firm of Ernst & Young LLP as
auditors to make an examination of the consolidated financial statements of the
Company for the year ending December 31, 1998. The Company has been informed
that Ernst & Young LLP will have representatives at the Annual Meeting who will
have an opportunity to make statements if they desire to do so and who will be
available to respond to appropriate questions.
The Board of Directors recommends you vote FOR the ratification of the
selection of Ernst & Young LLP as independent auditors for the ensuing year.
STOCKHOLDER PROPOSALS
At the annual meeting each year, the Board of Directors submits to
stockholders its nominees for election as directors. In addition, the Board of
Directors may submit other matters to the stockholders for action at the annual
meeting.
Stockholders of the Company also may submit proposals for inclusion in the
proxy material. These proposals must meet the stockholder eligibility and other
requirements of the Securities and Exchange Commission. In order to be included
in the Company's 1999 proxy material, a stockholder's proposal must be received
not later than January 31, 1999 by the Company at 1204 Sovereign Row, Oklahoma
City, Oklahoma 73108, Attention: Secretary.
10
<PAGE>
In addition, the By-Laws provide that in order for business to be brought
before a stockholders' meeting, a stockholder must deliver written notice to or
mailed and received at the principal executive offices of the Company not less
than forty (40) days prior to the Annual Meeting; provided, however, that in the
event less than forty-five (45) days' notice or prior public disclosure of the
date of the Annual Meeting is given or made to stockholders, notice by the
stockholder must be so received not later than the fifth day following the day
on which such notice of the date of the Annual Meeting was mailed or such
disclosure was made, but not less than five days prior to the Annual Meeting. A
stockholder's notice to the Secretary shall set forth (a) a brief description of
the business to be brought before the Annual Meeting and the reasons for
conducting such business at the Annual Meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder proposing such business,
(c) the class and number of shares of the Company which are beneficially owned
by the stockholder, (d) any material interest of the stockholder in such
business, and (e) a representation that the stockholder intends to appear at the
meeting in person or by proxy to submit the business specified in such notice,.
Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at a meeting except in accordance with the procedures set forth in the
By-Laws. The chairman of the Annual Meeting shall, if the facts warrant,
determine that business was not properly brought before the Annual Meeting and
in accordance with the provisions of Article II, Section 12 of the By-Laws, and
if he should so determine, he shall so declare to the Annual Meeting and any
such business not properly brought before the Annual Meeting shall not be
transacted.
In addition, nominations for the election of directors shall be made by the
Board of Directors or by any stockholder entitled to vote in the election of
directors generally. However, any stockholder entitled to vote in the election
of directors generally may nominate one or more persons for election as
directors at a meeting only if timely notice of such stockholder's intent to
make such nomination or stockholder's notice is delivered to or mailed and
received at the principal executive offices of the Company not fewer than forty
(40) days prior to the Annual Meeting, provided, however, that in the event that
less than forty-five (45) days' notice or prior public disclosure of the date of
the Annual Meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received no later than the close of business on the
tenth day following the day on which such notice of the date of the Annual
Meeting was mailed or such public disclosure was made. Each notice shall set
forth (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Company entitled to
vote for the election of directors on the date of such notice and intends to
appear in person or by proxy at the Annual Meeting to nominate the person or
persons specified in the notice; (c) a description of all arrangements or
understandings between the 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 the stockholder; (d) such other information
regarding each nominee proposed by such stockholders as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (e) the consent of each nominee
to serve as a director of the Corporation if so elected.
If the chairman of the Annual Meeting for the election of directors
determines that a nomination of any candidate for election as a director at such
meeting was not made in accordance with the applicable provisions of Article
III, Section 4 of the By-Laws, such nomination shall be void.
11
<PAGE>
OTHER MATTERS
The Company's management does not know of any matters to be presented at the
Annual Meeting other than those set forth in the Notice of Annual Meeting of
Stockholders. However, if any other matters properly come before the Annual
Meeting, the persons named in the enclosed proxy intend to vote the shares to
which the proxy relates on such matters in accordance with their best judgment
unless otherwise specified in the proxy.
BY ORDER OF THE BOARD OF DIRECTORS
April 1, 1998
/s/ BRUCE W. DAY
---------------------------------
Bruce W. Day, Secretary
12
<PAGE>
CD WAREHOUSE, INC ---------
OKLAHOMA CITY, OKLAHOMA | SEE |
|REVERSE|
PROXY/VOTING INSTRUCTION CARD | SIDE |
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS ---------
FOR THE ANNUAL MEETING ON MAY 1, 1998.
The undersigned hereby appoints Jerry W. Grizzle and Doyle E. Motley, or
either of them, as proxies, each with full power of substitution, to attend
the Annual Meeting of Stockholders of CD WAREHOUSE, INC., to be held on May
1, 1998, at 2:00 p.m., local time, and at any adjournments thereof, and to
vote as specified in this Proxy all the shares of stock of the Company
which the undersigned would be entitled to vote if personally present.
P 1. Your vote for the election of Class 3 Director (nominee Robert O.
McDonald) and Class 2 Director (nominee Ronald V. Perry) may be
indicated on the reverse.
R
2. Your vote for the proposal to amend the Company's 1996 Stock Option
Plan to (i) increase the maximum aggregate number of shares of common
O stock available for the grant of stock options under the 1996 Plan from
400,000 shares to 600,000 shares, (ii) change the vesting period of
stock options granted under the 1996 Plan so that options may be
X exercised one year from date of grant, as opposed to the vesting
schedule currently provided for in the Plan, which provides for
incremental vesting in one-third increments over three years from date
Y of grant; (iii) increase the number of shares of common stock covered
under the automatic annual grant of options to directors of the Company
from 6,000 to 10,000; and (iv) provide that the number of shares of
common stock covered under options granted to a director newly
appointed by the Board of Directors to fill a vacancy or new Board seat
shall be pro-rated for the number of months elapsed since the last
annual meeting of stockholders, may be indicated on the reverse.
3. Your vote to ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for 1998 may be indicated on the reverse.
YOUR VOTE IS IMPORTANT! Please sign and date on the reverse and return
promptly in the enclosed postage paid envelope.
Comments:
------------------------------------------------------------------
---------------------------------------------------------------------------
(If you have written in the above space, please mark the "Comments" box on
the reverse of this card.)
<PAGE>
- -----
| X | Please mark your
- ----- votes as in this example.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2 AND 3.
The Board of Directors recommends a vote FOR Proposals 1, 2, and 3
1. Election of Directors (see reverse) FOR WITHHELD
For all nominee(s) except vote [ ] [ ]
withheld from the following:
-----------------------------------
2. Amend 1996 Stock Option Plan (see reverse) FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Ratify appointment of Ernst & Young LLP FOR AGAINST ABSTAIN
(see reverse) [ ] [ ] [ ]
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
[ ] Change of Address and Comments on Reverse Side
NOTE: Please sign exactly as name appears on this card. Joint
Owners should each sign personally. Corporation proxies should
be signed by an authorized officer. Executors, administrators,
trustees, etc. should so indicate when signing.
-----------------------------------------------
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SIGNATURE(S) DATE
