CD Warehouse Franchisee Association Responds to Lawsuits and Challenges CD Warehouse Statements.

Business Editors

CD Warehouse Franchisee Association President Jim Boushka announced today that the CDWFA will support its members sued by CD Warehouse, Inc. and challenges many of the statements made by CD Warehouse in recent press releases.

Boushka stated, "The CDWFA fully supports its members and other franchisees in forcing CD Warehouse to address its real problems. Franchisees have been writing letters, calling CD Warehouse, meeting with CD Warehouse, and even pleading with CD Warehouse to address these issues for years. After a while, the choices aren't there. Paying salaries, suppliers and landlords are the obvious business decisions that must be made over handing hard-earned money over to a franchisor that we believe provides no value to the operations of its franchisees. There comes a point when the effort becomes so one-sided and so deteriorated that franchisees just want out. We are there. People don't file suits, close stores or want out unless there is a major problem."

"When a franchisor provides real value in its name, growth, networking, unique system, and services, franchisees will gladly pay royalties. That's the reason you join a franchise," said Boushka. "It appears to us that CD Warehouse has decided that it has no responsibility to provide value or a system or the services it promised and has eliminated any worth associated with this franchise. For CD Warehouse to claim that royalties should continue to be paid whether or not it provides value, a system, or services seems strange to us."

Several CD Warehouse franchisees sued by the Oklahoma City-based franchisor filed counter claims against CD Warehouse last week. In addition, Jimick Products, Inc., the largest CD Warehouse franchisee with 23 stores in four states, filed suit in Texas last week seeking a declaratory judgment that CD Warehouse has no right to enforce its franchise agreements. Of the many franchisee claims, the failure of CD Warehouse to provide trademark or brand value, an operating franchise system and an upgrade of their point of sales (POS) software system have been the most contentious issues.

In response to a July 1, 2002 press release by CD Warehouse, in which it announced the completion of the beta version of its Windows-based proprietary software, Douglas Mashkow, a New York franchisee, said, "I find it incredible that they would issue a press release announcing that they still haven't provided the software they've been promising for five years. Franchisees should know that this is not upgraded software, just a move of their old system from DOS to Windows." David Gott, a former CDWFA President and a multi-store operator in Iowa and Missouri, added, "What the CDWFA challenges is the notion that CD Warehouse is upgrading its POS system or addressing the needs of its franchisees as it has promised for years. CD Warehouse has not made any "upgrade" available to franchisees and there was no mention of a rollout date in their announcement. Moving from DOS to Windows doesn't change the underlying functionality and database problems of the POS system which is seriously out of date, provides the franchisees with no competitive edge or value and is often harmful to the operations of franchisees." Doug Olson, a Florida franchisee, added "Just because I put a new engine in my car doesn't mean that it will run without tires. When will CDWI tell us the real story about why they cancelled the development of our new "complete" POS?"

Paul MacDougall, a three-store operator based in Missouri, said "Given their history, I find it ironic that CD Warehouse would claim that state-of-the-art technology remains their top priority. After five years of promises, mere words have done little to replace the antiquated, unstable software that franchisees are forced to tolerate. In 2000 CD Warehouse said the new POS system was moving at a very fast pace. Now in 2002 they claim to have completed beta testing on a Windows conversion. A Windows conversion is not what they promised."

According to Boushka and Gott, the CDWFA has challenged CD Warehouse on issues relating to industry analysis and forecasting for years, including the recent claims by CD Warehouse that sampling and CD burning have not hurt new music sales and that CD Warehouse has discovered the value of games, DVD's and VHS as sales enhancements. Boushka said "Nearly every major industry expert knows that downloading and burning have a huge impact on the marketplace. Billions of dollars of music sales annually are lost to these and other technologies. The management of CD Warehouse should spend a little more time in the stores." MacDougall added "I don't know where CD Warehouse gets their information, but quite obviously they don't spend any time in the stores." "They are completely out of touch with their business when they make press releases about getting into Games, VHS and DVD, since most franchisees have been selling these for years and franchisees were the first to introduce a DVD plan." said Gott.

Don Young, a Georgia based franchisee, said that the CDWFA, like many CD Warehouse franchisees, has doubts about CD Warehouse's ability to survive. "The relationship between CD Warehouse and its franchisees is so damaged that reconciliation is unlikely. Their behavior has galvanized the distrust of the franchisees and their string of broken promises has practically sealed it. In our opinion, the franchise community is their only salvation, and they are doing everything in their power to kill their few remaining shreds of hope. The CDWFA has offered to work with CD Warehouse to seek a solution. The response has been to ignore the problems, cut promised services, and to bring lawsuits. This fight is about the franchisees' right to receive the system, value and services that they were promised. It's about the franchisees' and their families' right to survive."