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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 (Date of earliest event reported): September 15, 1997
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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)
333-15139 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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On September 15, 1997, Registrant initiated litigation against Grow Biz
International Inc. ("Grow Biz"), a Minnesota corporation, and Clarence Gladden
in the District Court of Dallas County, Texas. Grow Biz offers licenses to
operate retail stores using the service mark "Disc-Go-Round." Disc-Go-Round is
a principal competitor of the Registrant. Registrant alleges, among other
things, that Mr. Gladden, acting for Grow Biz, on or about May 1996,
fraudulently acquired the proprietary information and trade secrets of
Registrant's predecessor-in-interest with the intent of unfairly using such
information to the Registrant's competitive disadvantage. The Registrant is
seeking compensatory and punitive damages.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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(c) Exhibits.
The following documents are filed as part of this Report:
Form of Press Release issued by CD Warehouse, Inc. on September 16, 1997
with respect to the litigation.
Petition filed in the District Court of Dallas County, Texas on September
15, 1997: CD Warehouse, Inc. v. Grow Biz International, Inc., and Clarence
Gladden.
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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: September 15, 1997 BY: /s/ JERRY W. GRIZZLE
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Jerry W. Grizzle, President and Chief
Executive Officer
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INDEX TO EXHIBITS
Appears at
Sequentially
Exhibit Numbered
Number Description Page
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1 Press Release 5
2 Petition 6
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EXHIBIT 1
IMMEDIATE RELEASE
Contact: Bruce W. Day, Counsel. Day, Edwards, Federman, Propester &
Christensen, P.C. (405) 239-2121
CD WAREHOUSE, INC.
FILES LAWSUIT AGAINST
GROW BIZ INTERNATIONAL, INC.
Oklahoma City, OK September 16, 1997 CD Warehouse, Inc. (NASDAQ Small
Cap: CDWI) announces that it has initiated litigation against Grow Biz
International, Inc., (NASDAQ: GBIZ) and Clarence M. Gladden, an executive of
Disc Go Round, a subsidiary of Grow Biz International, Inc., alleging corporate
espionage. The suit alleges that Mr. Gladden who is a franchise sales executive
for Disc Go Round surreptitiously gained access to proprietary information from
CD Warehouse by posing as a prospective franchisee. Grow Biz International,
Inc., franchises five retail concepts: Play It Again Sports, Once Upon a Child,
Computer Renaissance, Music Go Round and Disc Go Round.
CD Warehouse, Inc., alleges that in May of 1996, Mr. Gladden, falsely filed
a CD Warehouse Franchise Candidate Profile and knowingly provided a false resume
stating that he worked for another company, when in fact he was employed by Disc
Go Round, a competitor of CD Warehouse. The company further alleges that Mr.
Gladden, based on false pretenses and through fraudulent means, visited the
company's office posing as a prospective franchisee and gained access to CD
Warehouse's proprietary software which includes a system for buying and selling
new and used compact discs as well as additional franchise and financial
documents.
CD Warehouse, Inc., therefore has caused to be filed a lawsuit in Dallas
County, Texas, alleging fraud, misappropriation of trade secrets and unfair
competition.
CD Warehouse, Inc. franchises and operates over 125 retail music stores in
25 states and England under the name "CD Warehouse".
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EXHIBIT 2
CAUSE NO. 97-08442-I
CD WAREHOUSE, INC., a Delaware )
corporation, )
)
Plaintiff, ) IN THE DISTRICT COURT
) OF DALLAS COUNTY, TEXAS
v. )
)
GROW BIZ INTERNATIONAL, INC., ) 162 JUDICIAL DISTRICT
a Minnesota corporation, and )
CLARENCE GLADDEN, an individual, )
)
Defendants. )
ORIGINAL PETITION
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PARTIES, JURISDICTION & VENUE
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1. Plaintiff, CD Warehouse, Inc. ("CD Warehouse"), is a Delaware
corporation, with its principal place of business currently located in Oklahoma
City, Oklahoma. CD Warehouse is the successor in interest to Compact Discs
International, Ltd. which was a Texas limited partnership with its principal
place of business in Richardson, Texas. CD Warehouse and Compact Discs
International, Ltd. will hereafter be jointly referred to as ("CD Warehouse").
CD Warehouse is actively engaged in business in, and from, Richardson, Dallas
County, Texas. CD Warehouse continues to do business in, and from, numerous
stores in Dallas County, Texas. The acts complained of occurred, in part, in
Richardson, Dallas County, Texas.
2. Defendant Grow Biz International, Inc. ("GBI"), is a Minnesota
corporation, with its principal place of business in Minneapolis, Minnesota.
GBI does not maintain a regular place of business or a designated agent for
service of process in Texas.
1
Original Petition
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Defendant has sufficient contacts with Texas that, under the Texas Long-Arm
Statute, it can be served with process by serving the Texas Secretary of State.
GBI's home office address is 4200 Dahlberg Drive, Minneapolis, Mn., 55422-4837.
GBI is a NASDAQ traded publicly held company, symbol GBIZ.
3. Defendant Clarence Gladden ("Gladden") is a non-resident of Texas,
residing in White Bear Lake, Minnesota. Gladden does not maintain a regular
place of business or a designated agent for service of process in Texas. He has
sufficient contacts with Texas that, under the Texas Long-Arm Statute, he can be
served with process by serving the Texas Secretary of State. Gladden's address
is 4200 Dahlberg Drive, Minneapolis, Mn., 55422-4837.
4. Gladden is believed to be the head of GBI's franchise sales operations.
GBI develops and franchises retail concepts for stores that buy and sell new or
used merchandise. It franchises five retail chains with about 1,100 stores.
GBI has announced its intentions to implement a nationwide franchising system.
GBI's concept stores include sports equipment, children's clothing, musical
instruments, personal computers and compact discs ("CDs"). The CD sales are
through GBI's Disc-Go-Round franchise stores. GBI's strategy has been to
attempt to provide centralized support systems for its franchisees. It built
its sales from approximately $2.3 million in 1991 to over $100 million in 1995,
making it #1 on both "FORTUNE" and "INC."'s lists of fastest-growing U.S.
companies.
5. CD Warehouse has in excess of 125 stores nationwide which compete with
Disc-Go-Round in the sale of new and pre-owned CDs. CD Warehouse is GBI's
2
Original Petition
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primary competitor for the development of franchisee owned stores engaged in the
business of selling pre-owned CDs. CD Warehouse has successfully competed with
GBI for potential franchisees by developing a more competitive franchise
package. The nucleus of the franchise package is a proprietary software and
database system for pricing and maintaining its franchisee's inventory of CDs.
This proprietary system has provided CD Warehouse a competitive advantage over
GBI.
6. Venue is proper before this Court, in that a substantial part of the
events giving rise to the claim occurred within the jurisdictional limits of
this Court.
GENERAL ALLEGATIONS
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7. In late April or early May, 1996, Defendant Gladden telephoned CD
Warehouse's offices located in Dallas County, Texas, asking for information with
regard to obtaining a CD Warehouse franchise.
8. At that time, Gladden was an officer or an employee of Defendant GBI,
whose subsidiary Disc Go Round was a competitor of CD Warehouse. It is believed
that Gladden was acting in the course of his position as the franchise salesman
of GBI, and at the behest of his employer.
9. Defendant Gladden failed to inform, and never disclosed, to CD
Warehouse=s representatives that he worked for CD Warehouse's primary
competitor, with the intent of committing corporate espionage by obtaining trade
secrets and other proprietary information which GBI could use to its competitive
advantage.
3
Original Petition
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10. On, or about, May 8, 1996, Gladden obtained CD Warehouse's Franchise
Candidate Profile. He completed the Franchise Candidate Profile, which he
signed, dated and returned to CD Warehouse, along with a knowingly false
personal resume. See Exhibit A, attached hereto and made a part hereof for all
purposes. Gladden knew that CD Warehouse was maintaining such information in a
confidential manner.
11. In those documents, Gladden falsely stated that he was employed by
Action Moving Services, Inc., when in fact he was employed by GBI.
12. On May 30, 1996, Gladden visited CD Warehouse=s offices in Richardson,
Texas, on the false pretext that he wanted to become a CD Warehouse franchisee.
13. Relying on Gladden=s representation that he wanted to become a CD
Warehouse franchisee, its employees disclosed CD Warehouse=s proprietary system
for operating its franchise stores, including its system for buying and selling
new and used CDs and demonstrated CD Warehouse=s proprietary software to him.
14. Gladden also obtained, under false pretense and through fraudulent
means, CD Warehouse's Uniform Franchise Offering Circular, which included, inter
alia, CD Warehouse's Audited Financial Statements, Development Agreement,
Franchise Agreement and list of franchise outlets. See Exhibit B attached
hereto and made a part hereof for all purposes.
15. CD Warehouse believes that Defendants deceitfully obtained this
information by fraudulent means for the purpose of unfairly competing with CD
Warehouse, and have caused CD Warehouse damages that are within the
jurisdictional limits of the Court.
4
Original Petition
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COUNT ONE
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(FRAUD)
16. Gladden falsely stated to CD Warehouse that he was the National Sales
Manager for Action Moving Services, Inc. as of May 8, 1996.
17. Further, during his discussions with CD Warehouse personnel, he
concealed and did not reveal that he was a principal of and employed by
Defendant GBI, CD Warehouse=s primary competitor.
18. Those misrepresentations and omissions were material and made by
Defendants with the intention that they be acted upon by CD Warehouse.
19. CD Warehouse relied upon those misrepresentations and omissions when
it communicated trade secrets and other proprietary information to Defendants.
20. CD Warehouse has suffered injury by reason of Defendants= deceptions
in an amount within the jurisdictional limits of the Court.
WHEREFORE, Plaintiff prays for judgment against Defendants for fraud, in an
amount sufficient to compensate Plaintiff for its injuries, together with
punitive damages, costs, a reasonable attorney fee and all other relief to which
it is entitled.
COUNT TWO
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(MISAPPROPRIATION OF TRADE SECRETS)
21. CD Warehouse maintained the information which it conveyed to
Defendants as its proprietary and trade secrets.
5
Original Petition
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22. Defendants acquired those trade secrets by taking advantage of a
confidential relationship created through their misrepresentations and
omissions.
23. CD Warehouse believes that Defendants have used the information and
trade secrets they wrongfully acquired from CD Warehouse, to CD Warehouse's
disadvantage.
24. By reason of Defendants= misappropriation of its proprietary
information and trade secrets, CD Warehouse has suffered damages in an amount
within the jurisdictional limit of the Court.
WHEREFORE, Plaintiff prays for judgment against Defendants for
misappropriation of trade secrets in an amount sufficient to compensate
Plaintiff for its injuries, together with punitive damages, costs, a reasonable
attorney fee and all other relief to which it is entitled.
COUNT THREE
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(Unfair Competition)
25. CD Warehouse communicated certain confidential and proprietary
information about its business operations to Defendants with the understanding
and expectation that such information would be kept in confidence.
26. Defendants have utilized the information they obtained from CD
Warehouse in violation of that confidence.
27. By reason of Defendants' unfair competition, CD Warehouse has been
damaged in an amount within the jurisdictional limit of the Court.
6
Original Petition
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WHEREFORE, Plaintiff prays for judgement against Defendants for unfair
competition in an amount sufficient to compensate Plaintiff for its injuries,
together with punitive damages, costs, a reasonable attorney fee and all other
relief to which it is entitled.
Respectfully submitted,
/s/ William B. Federman
________________________________
William B. Federman
(TBN 00794935)
Rodney J. Heggy
(TBN 09374400)
DAY, EDWARDS, FEDERMAN,
PROPESTER & CHRISTENSEN, P.C.
210 Park Avenue, Suite 2900
Oklahoma City, OK 73102-5605
Telephone: (405) 239-2121
Fax: (405) 236-1012
-and-
Raymond P. Harris, Jr.
(TBN 09088050)
Conant Whittenburg French &
Schachter
2300 Plaza of the Americas
600 North Pearl, L.B. 133
Dallas, Texas 75201
Telephone: (214) 999-5700
Fax: (214) 999-5747
ATTORNEYS FOR PLAINTIFF,
CD WAREHOUSE, INC.
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