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Stanford University Law School - Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
___________________________________
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STANLEY ZUCKERMAN on behalf of |
himself and all others similarly, | CASE NO. 3-96CV2258-T
situated |
Plaintiff, | CLASS ACTION COMPLAINT
| FOR VIOLATIONS OF
v. | FEDERAL SECURITIES LAWS
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FOXMEYER HEALTH CORP.; MELVYN J. |
ESTRIN; and ABBEY J. BUTLER, |
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Defendants. | JURY TRIAL DEMANDED
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Plaintiff makes the following allegations upon
information and belief, except as to allegations specifically
pertaining to plaintiff and his counsel, based on the facts
alleged below, predicated upon the investigation undertaken by
and under the supervision of plaintiff's counsel, and plaintiff
believes that further substantial evidentiary support will exist
for the allegations set forth below after a reasonable
opportunity for discovery.
NATURE OF THE ACTION
1. This is a class action on behalf of all persons
who purchased the common stock of FoxMeyer Health Corp.
("FoxMeyer" or the "Company") between July 19, 1995, and July 1,
1996, inclusive (the "Class Period"), seeking to pursue remedies
under the Securities Exchange Act of 1934 (the "Exchange Act").
2. Plaintiff complains of materially false and
misleading statements that injured purchasers of FoxMeyer common
stock. Throughout the Class Period, FoxMeyer made numerous
positive announcements concerning its operations and business
prospects, portraying the Company as rapidly expanding and well-
equipped to handle this expansion. At all relevant times,
however, the Company's rapid expansion and future profitability
depended upon the successful implementation of a variety of new
technologically advanced computer, inventory management, and
distribution systems, and upon the purported cost-savings those
systems were to provide. During the Class Period, defendants
failed to disclose that the implementation of those new systems
was not progressing adequately, thereby jeopardizing the
profitability of the Company's major contractual relationships.
Defendants also failed to disclose that certain major contractual
relationships which had been announced with great fanfare
involved significant risks and contingencies, and that, as a
result, those relationships could only be profitable for the
Company upon successful and timely implementation of those new
systems.
JURISDICTION AND VENUE
3. The claims asserted herein arise under and
pursuant to Sections 10(b) and 20(a) of the Exchange Act [15
U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission ("SEC") [17
C.F.R. § 240.10b-5].
4. This Court has jurisdiction over the subject
matter of this action pursuant to 28 U.S.C. §§1331 and 1337 and
Section 27 of the Exchange Act [15 U.S.C. §78aa].
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5. Venue is proper in this district pursuant to Sec-
tion 27 of the Exchange Act. FoxMeyer maintains its corporate
headquarters and principal place of business in this District at
1220 Senlac Drive, Carrollton, Texas, and the acts charged
herein, including the preparation and dissemination of materially
false and misleading information, occurred in substantial part in
this District.
6. In connection with the acts alleged in this com-
plaint, defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephone communications and
the facilities of the national securities markets.
PARTIES
7. Plaintiff Stanley Zuckerman, as set forth in the
accompanying certification, purchased shares of FoxMeyer common
stock during the Class Period, and suffered damages thereby.
8. Defendant FoxMeyer, A Delaware corporation with
its principal place of business in Texas, is primarily a
distributor of a broad line of pharmaceutical products and health
and beauty aids. The Company also provides information-based
services to the managed care and benefit management industries,
and operates and franchises variety and crafts stores. As of
June 27, 1996, the Company had 16,772,788 shares of common stock
outstanding, which shares are listed and trade on the New York
Stock Exchange ("NYSE") under the ticker symbol "FOX". Defendant
FoxMeyer can be served with process at its principal place of
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business at 1220 Senlac Drive, Carrollton, Texas, 75006, (214)
446-4800.
9. Defendant Melvyn J. Estrin ("Estrin") is, and at
all relevant times was, Co-Chairman of the Board of Directors and
Co-Chief Executive Officer of the Company, capacities in which he
received substantial compensation. Because of defendant Estrin's
positions with the Company, he had access to the adverse non-
public information about its business, finances, markets,
distribution system and present and future business prospects via
access to internal corporate documents (including the Company's
operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management
and Board of Directors meetings and committees thereof and via
reports and other information provided to him in connection
therewith. Defendant Estrin can be served with process at
FoxMeyer's principal place of business at 1220 Senlac Drive,
Carrollton,Texas, 75006, (214) 446-4800.
10. Defendant Abbey J. Butler ("Butler") is, and at
all relevant times was, Co-Chairman of the Board and Co-Chief
Executive Officer of the Company, capacities in which he received
substantial compensation. Because of defendant Butler's
positions with the Company, he had access to the adverse non-
public information about its business, finances, markets,
distribution system and present and future business prospects via
access to internal corporate documents (including the Company's
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operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management
and Board of Directors meetings and committees thereof and via
reports and other information provided to him in connection
therewith. Defendant Butler can be served with process at
FoxMeyer's principal place of business at 1220 Senlac Drive,
Carrollton,Texas, 75006, (214) 446-4800.
11. Defendants Estrin and Butler are sometimes
referred to herein collectively as the "Individual Defendants."
12. It is appropriate to treat the Individual
Defendants as a group for pleading purposes and to presume that
the false and misleading information conveyed in the Company's
public filings, press releases and other publications as alleged
herein are the collective actions of the narrowly defined group
of defendants identified above. Each of the above officers or
directors of FoxMeyer, by virtue of his high-level positions with
the Company, directly participated in the management of the
Company, was directly involved in the day-to-day operations of
the Company at the highest levels and was privy to confidential
proprietary information concerning the Company and its
operations, finances, financial condition, distribution system
and business prospects as alleged herein. Said defendants were
involved in drafting, producing, reviewing and/or disseminating
the false and misleading statements alleged herein, were aware
that the false and misleading statements were being issued
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regarding the Company and approved or ratified these statements,
in violation of the federal securities laws.
13. As officers, directors and/or controlling persons
of a Company which is registered with the SEC under the federal
securities laws, whose common stock is registered with the SEC,
traded on the NYSE, and governed by the provisions of the federal
securities laws, the Individual Defendants, as officers and
directors of a publicly-held company, and as controlling persons
of FoxMeyer, each had a duty to disseminate promptly accurate and
truthful information with respect to the Company's operations,
business, distribution system, markets, management, earnings and
present and future business prospects, to correct any previously
issued statements from any source that had become materially
misleading or untrue, and to disclose any trends that would
materially affect earnings and the present and future operating
results of FoxMeyer, so that the market price of the Company's
publicly traded securities would be based upon truthful and
accurate information. Under rules and regulations promulgated by
the SEC under the Exchange Act, specifically Item 303 of
Regulation S-K, the Individual Defendants also had a duty to
report all trends, demands or uncertainties that were reasonably
likely to impact (i) FoxMeyer's liquidity; (ii) FoxMeyer's net
sales, revenue and/or income; and/or (iii) previously reported
financial information such that it would not be indicative of
future operating results. The Individual Defendants'
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representations during the Class Period violated these specific
requirements and obligations.
14. The Individual Defendants participated in the
drafting, preparation, and/or approval of the various public and
shareholder and investor reports and other communications
complained of herein and were aware of or recklessly disregarded
the misstatements contained therein and omissions therefrom, and
were aware of their materially misleading nature. Because of
their Board membership and/or executive and managerial positions
with FoxMeyer, each of the Individual Defendants had access to
the adverse non-public information about FoxMeyer's distribution
system, business prospects and financial condition as
particularized herein and knew that these adverse facts rendered
the positive statements made by and about FoxMeyer and its
business and future sales materially false and misleading.
15. The Individual Defendants, because of their
positions of control and authority as officers and/or directors
of the Company, were able to and did control the contents of the
various quarterly and annual financial reports, press releases
and presentations to securities analysts pertaining to the
Company. Each Individual Defendant was provided with copies of
FoxMeyer's shareholder and investor reports, press releases and
other disseminations alleged herein to be misleading prior to or
shortly after their issuance and had the ability and opportunity
to prevent their issuance or cause them to be corrected. As a
result, each of the Individual Defendants is responsible for the
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accuracy of the public reports and releases detailed herein and
is therefore primarily liable for the representations contained
therein.
16. Each of the defendants is liable as a participant
in a fraudulent scheme and course of business that operated as a
fraud or deceit on purchasers of FoxMeyer stock, by disseminating
materially false and misleading statements and/or concealing
material, adverse facts. The scheme: (i) deceived the investing
public regarding FoxMeyer's business, its performance and
performance trends and the intrinsic value of FoxMeyer's shares;
and (ii) caused plaintiff and other members of the Class to
purchase FoxMeyer stock at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
17. Plaintiff brings this action as a class action
pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on
behalf of a class (the "Class"), consisting of all persons who
purchased or otherwise acquired shares of FoxMeyer common stock
during the Class Period (as defined in paragraph 1 above), and
who were damaged thereby. Excluded from the Class are defen-
dants, the officers and directors of the Company at all relevant
times, members of their immediate families and their legal repre-
sentatives, heirs, successors or assigns and any entity in which
defendants have or had a controlling interest.
18. The members of the Class are so numerous that
joinder of all members is impracticable. While the exact number
of Class members is unknown to plaintiff at this time and can
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only be ascertained through appropriate discovery, plaintiff
believes that there are hundreds or thousands of members in the
Class. As of June 27, 1996, the Company reported there were
16,772,788 shares of FoxMeyer common stock outstanding.
FoxMeyer's stock was actively traded on the NYSE, an open and
efficient market, during the Class Period. Record owners and
other members of the Class may be identified from records
maintained by FoxMeyer, and/or its transfer agent, and may be
notified of the pendency of this action by mail, using the form
of notice similar to that customarily used in securities class
actions.
19. Plaintiff's claims are typical of the claims of
the members of the Class as all members of the Class are
similarly affected by defendants' wrongful conduct complained of
herein.
20. Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel
competent and experienced in class and securities litigation.
21. Common questions of law and fact exist as to all
members of the Class and predominate over any questions solely
affecting individual members of the Class. Among the questions
of law and fact common to the Class are:
(a) Whether the federal securities laws were vio-
lated by defendants' acts as alleged herein;
(b) Whether other statements made by defendants
to the investing public during the Class Period misrepresented or
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failed to disclose material facts about the business and finances
of FoxMeyer; and
(c) To what extent have the members of the Class
sustained damages, and the proper measure of damages.
22. A class action is superior to all other available
methods for the fair and efficient adjudication of this contro-
versy since joinder of all members is impracticable. Further-
more, as the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation
make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in
the management of this action as a class action.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
23. At all relevant times, the market for FoxMeyer
stock was an efficient market for the following reasons, among
others:
(a) FoxMeyer common stock met the requirements
for listing, and was listed and actively traded, on the NYSE, a
highly efficient market;
(b) As a regulated issuer, FoxMeyer filed
periodic public reports with the SEC;
(c) FoxMeyer regularly communicated with public
investors via established market communication mechanisms,
including through regular disseminations of press releases on the
national circuits of major newswire services and through other
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wide-ranging public disclosures, such as communications with the
financial press and other similar reporting services; and
(d) FoxMeyer was followed by several securities
analysts employed by major brokerage firms who wrote reports
which were distributed to the sales force and certain customers
of their respective brokerage firms. Each of these reports was
publicly available and entered the public marketplace.
24. As a result, the market for FoxMeyer securities
promptly digested current information regarding FoxMeyer from all
publicly available sources and reflected such information in
FoxMeyer's stock price. Under these circumstances, all
purchasers of FoxMeyer shares during the Class Period suffered
similar injury through their purchase of shares at artificially
inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
25. The statutory safe harbor provided for forward-
looking statements under certain circumstances does not apply to
any of the allegedly false statements pleaded in this complaint.
The statements alleged to be false and misleading herein all
relate to then-existing facts and conditions. In addition, to
the extent certain of the statements alleged to be false may be
characterized as forward looking, they were not identified as
"forward-looking statements" when made, there was no statement
made with respect to any of those representations forming the
basis of this complaint that actual results "could differ
materially from those projected," and there were no meaningful
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cautionary statements identifying important factors that could
cause actual results to differ materially from those in the
purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-
looking statements pleaded herein, defendants are liable for
those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular
speaker had actual knowledge that the particular forward-looking
statement was false, and/or the forward-looking statement was
authorized and/or approved by an executive officer of FoxMeyer
who knew that those statements were false when made.
RELEVANT FACTS
Background
26. As described above, FoxMeyer is primarily engaged
in the business of distributing prescription and over-the-counter
drugs and medications and health and beauty care products. In
recent years, there has been intensive price competition in these
markets. In an effort to respond to this price competition,
FoxMeyer sought to achieve certain economies of scale by offering
highly competitive contracts to extremely large customers while
simultaneously reconfiguring and enhancing its computer,
information, and distribution systems. The Company stated that,
by implementing purportedly state-of-the-art systems in these
areas, it was obtaining cost benefits which rendered the
Company's largest contracts highly profitable.
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27. Two of the Company's largest contracts involve
Rite Aid Corporation ("Rite Aid"), one of the country's largest
drug retailers, and the University Hospital Consortium ("UHC"), a
large consortium of hospitals affiliated with major universities
in the United States. Each of these contracts was publicly
announced by FoxMeyer with much fanfare and in highly positive
terms, the UHC contract in July 1994 and the Rite Aid contract in
July 1995.
28. Similarly, the Company proudly unveiled its plans
for the implementation of its new "state-of-the-art" distribution
center and inventory management system in Washington Court House,
Ohio, as well as its new computer systems.
29. The combination of these purportedly positive
developments led the market to an unduly high valuation of the
Company and, as a result, of its stock. Unbeknownst to the
market at all relevant times were the following serious problems
which undermined the Company's positive pronouncements:
a. The Company's contracts with Rite Aid and UHC
contained undisclosed terms which created risks and contingencies
which were unfavorable to the Company. As a result, the success
of those contracts was dependent upon very substantial cost
savings by the Company through the successful establishment and
implementation of the Company's new computer and distribution
system and center, or by other means; and
b. The Company's new inventory information
system and distribution center was experiencing numerous problems
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which seriously impaired the ability of the Company to enjoy the
cost savings which were expected to be associated with the new
system.
False and Misleading Statements
During The Class Period
30. The Class Period commences on July 19, 1995, the
date on which FoxMeyer announced that it had entered into a large
contract with Rite Aid. The Company's press release concerning
this contract described it as follows:
FoxMeyer Corporation has signed a
contract with Rite Aid Corporation that
is expected to generate revenues of $750
million in its first year. FoxMeyer
will serve as the largest supplier of
pharmaceuticals to Rite Aid, the
nation's largest drug store chain with
more than 2,700 stores.
The Rite Aid agreement demonstrates
the success of FoxMeyer's strategy to
improve the efficiency and quality of
its operations through the use of
automation and information management
technologies. Many of the Rite Aid
stores will be served by the new
FoxMeyer National Distribution Center in
Washington Court House, Ohio, which will
begin shipments to customers this month.
FoxMeyer believes that the National
Distribution Center will be the most
highly automated and highest volume
distribution center in the
pharmaceutical industry, shipping $1.2
billion in product in its first year.
In addition, the Company's press release quoted then-President
and Chief Operating Officer, Thomas Anderson, as stating that:
We are very excited about our
partnership with Rite Aid, which will
allow us to leverage our respective
strengths and core competencies to
provide superior service to their
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customers and reduce costs in the health
care delivery system. As our customers
are becoming more sophisticated, we are
looking for mutually beneficial business
solutions to reduce costs and improve
services. We are very pleased that Rite
Aid has given us this opportunity to
work with them.
31. (a) On July 27, 1995, the Company announced its
financial performance results for its first fiscal quarter of
1996, the period ending June 30, 1995. The Company reported that
earnings from continuing operations had increased 41.1 percent to
$7.5 million for the first quarter, or $0.14 per share, compared
with $5.3 million, or $0.05 per share, in the year-earlier
period. According to the Company's press release:
Total revenues for the quarter increased to $1.3
billion, benefitting from the launch of FoxMeyer
Health's contract with the University Hospital
Consortium and an increase in sales to independent
retail customers of almost 10 percent.
Commenting on the Company's first quarter financial results,
defendants Estrin and Butler stated:
Our accomplishments since the beginning
of the fiscal year indicate FoxMeyer
Health's development as a leading
provider of health care services and
products. We have re-established a
significant growth trend in sales which
we expect will be further supported by
our recent contract with RiteAid
Corporation.
The Company also reported that it had reduced operating expenses
as a percent of sales to 3.89 percent versus 4.20 percent in the
prior year. With respect to this claimed improved operating
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efficiency, Thomas Anderson, then President and Chief Operating
Officer of the Company, stated:
We are very pleased with this
performance, particularly in light of
the temporarily higher costs being
absorbed as we roll out our information
systems upgrade and initiate service at
our new National Distribution Center in
Washington Court House, Ohio.
(b) With regard to the National Distribution Center,
the Company's July 27 press release stated:
FoxMeyer Health expects to channel $1.2
billion in orders through the National
Distribution Center in its first year of
operation, taking advantage of automated
systems to pick 80 percent of the lines
each day. With its intensive
integration of automated picking and
information management systems, the
facility will be able to receive product
from manufacturers, and process and ship
customer orders simultaneously.
Operating 24 hours per day, the National
Distribution System is expected to be
the highest volume and most efficient
distribution center in the
pharmaceutical industry.
In addition, Thomas Anderson was quoted as stating:
We expect this [growth] trend in sales
and productivity growth to continue,
supported to a significant extent by the
recent initiation of service from our
new National Distribution Center. This
was the most successful start-up of a
distribution operation that I have ever
seen. We are steadily building up the
volume from the new facility and expect
it to be running at full speed by the
end of August.
32. The foregoing statements in the Company's July 19,
1995 and July 27, 1995 press releases were materially false and
misleading when made because they failed to disclose that:
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(a) The start-up of the Company's new National
Distribution Center was not proceeding as well as anticipated or
stated. In particular, the process was not occurring in a manner
necessary if a number of the Company's major recent contracts
were to be profitable; and
(b) For example, the Company's contracts with Rite
Aid and UHC were not as profitable as publicly stated and could
not contribute to the Company's profitable growth given the
requirements or pricing constraints in them, particularly in
light of the Company's inability to achieve the cost efficiencies
necessary from its implementation of new inventory information
systems, new National Distribution Center, and computerized
information system. These were undisclosed contingencies on
which the profitability of those contracts depended.
33. Rather than correct these materially false and
misleading statements, throughout the Class Period, defendants
failed to disclose that the National Distribution Center, the new
inventory information systems, and the new computer systems were
experiencing significant problems which were materially hindering
the ability of the Company to enjoy the cost savings required to
profit from the Company's largest contracts. Instead, defendants
continued to convey the false or misleading impression of strong
growth, improved operations, and a state-of-the-art
technologically advanced inventory management, distribution, and
computer system which was sufficient to propel the Company's
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profitability. The problems identified above were operative
throughout the Class Period.
34. On October 30, 1995, in connection with announcing
its financial performance results for the second quarter of
fiscal 1996, the quarterly period ending September 30, 1995, the
Company announced that it "continued to strengthen its operating
results ... reporting a significant sales increase and even
greater earnings than in the same period last year." The Company
reported operating earnings of $14.8 million for the second
quarter, a reported 30.7 percent improvement over the same period
in the prior year. Income from continuing operations for the
quarter was $8.1 million, or $0.16 per share, a reported increase
of 18.2 percent over the prior year. The Company also reported
net income of $8.1 million, compared with $6.7 million for the
same period in the prior year. In addition, the Company reported
gross margin of 5.06%. Commenting on these reported results,
defendants Estrin and Butler stated:
We're very pleased with these results
and look for sales to continue this
strong positive trend, supported by new
contracts signed during the quarter with
Rite Aid, Omnicare and Value Health.
More importantly, we expect margins to
continue to benefit from increasing
sales of generics, private label lines
and re-packaged products in the last
half of our fiscal year.
In addition, Thomas Anderson was quoted in the Company's press
release as stating:
We continued to hold gross margins at a
fairly high level in the second quarter,
despite a continued shift in business
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toward retail and hospital chains. We
also maintained our year-over-year
improvement in operating costs as a
percent of revenues -- sales, general
and administrative costs were 3.96
percent of sales, 11 basis points lower
than the second quarter last year.
This is particularly gratifying when you
consider the non-recurring operating and
inventory costs that we absorbed as we
opened up our new National Distribution
Center in Washington Court House, Ohio,
and our gradually curtailed operations
at our Cleveland and Cincinnati
distribution centers. We are rapidly
approaching full capacity at this
industry-leading facility. We expect
the efficiencies from the National
Distribution Center to be reflected in
our overall operating results for the
second half.
Additionally, the press release highlighted certain of the
Company's contracts, -- including the exclusive distribution
contract with Rite Aid -- and quoted Thomas Anderson as stating
that "[m]uch of this new volume will flow through our new
National Distribution Center, capitalizing on its automation and
operating efficiencies."
35. Similarly, the Company's Mid-Year Report,
disseminated to shareholders at or about the same time as the
announcement of financial results for the second quarter of
fiscal 1996, stated in a letter over the signatures of defendants
Estrin and Butler and Thomas Anderson:
We expect the productivity of the
National Distribution Center to be
reflected in our operating results for
the second half. It is, to our
knowledge, the most intensively
automated warehouse in the
pharmaceutical distribution industry,
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which drives both its sales capacity and
its efficiency.
36. On November 21, 1995, market commentator Dan
Dorfman of the CNBC cable television financial network reported
that some investment professionals were skeptical about the
Company's future profitability. The Company's stock declined in
response to this report. In response to this development,
FoxMeyer, by its spokesperson Warren Henry, commented that Mr.
Dorfman was wrong, stating "I don't know where he's getting his
numbers" and attempted to disparage this report stating that
"[h]e didn't even bother to look at our 10Q quarterly financial
statement. ... He is just wrong." The price of FoxMeyer stock
stabilized in the $26 range in response to these developments.
37. In an article about FoxMeyer and its National
Distribution Center appearing in the November/December 1995
edition of Wholesale Drugs Magazine, a leading trade publication,
defendants further promoted the purported efficiencies of their
new facilities and systems. Among other things, the article
stated:
Operating costs as a percentage of sales
are expected to be 40 percent less than
the company's other warehouses, and half
of the industry's average operating
costs.
* * *
FoxMeyer predicts the facility will
process $1.2 billion in sales during its
first year.
* * *
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The center's advanced software system
for warehouse management permits
simultaneous receiving and shipping.
* * *
FoxMeyer says the WMS software
technology was field-proven at the
distribution centers that serve its
contract with University Hospital
Consortium.
* * *
LeMaster [John LeMaster, FoxMeyer's
Operations Director] says the
distribution center's extensive
automation should eliminate human errors
and poor decisions, and the time
required to correct mistakes.
38. Similarly, the January 1, 1996 edition of Chain
Drug Review reiterated the Company's reported second quarter 1996
results and repeated the Company's highly positive remarks
concerning its efficiencies with its new facilities and systems.
39. The statements described at paragraphs 34-38 above
were materially false or misleading because, among other things,
these statements continued to conceal the material risks and
contingencies in major contracts of the Company, while
representing that the cost savings program was proceeding in a
manner consistent with the profitability of such contracts.
40. On February 1, 1996, the Company announced its
financial performance results for the third quarter of fiscal
1996, the period ending December 31, 1995. The Company reported
operating income of $13.6 million for the third quarter, compared
with $20.3 million in the year-earlier period. The Company also
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announced that it was recognizing a "special non-recurring" pre-
tax charge of $59.9 million in the third quarter, which it said
was "related to the implementation of previously announced
strategic and operational initiatives, as well as cost-reduction
measures." After giving effect to the charge, FoxMeyer recorded
a net loss of $40.2 million for the third quarter ended December
31, 1995, compared with net income of $14.7 million in the year-
earlier period. For the nine month period ended December 31,
1995, the Company reported a net loss of $25.9 million, compared
with net income of $26.6 million in the prior year. The Company
also reported gross profit of 4.46%. Commenting on these
results, and explaining the purportedly non-recurring charge,
defendants Estrin and Butler stated:
In the last several months, FoxMeyer
Health has focused on the development
and implementation of several key
strategic initiatives designed to
enhance our distribution network and
information technology capabilities.
Progress in these efforts has enabled us
to reduce our operating costs and
strengthen prospects for the company's
long-term profitability. Competitive
pressures, especially on margins, are
currently making these strategic efforts
even more critical, prompting us to
accelerate their implementation. This
necessitated the special non-recurring
charge.
We regret the need for this special non-
recurring charge, but believe that the
operational and management changes we
are making will improve FoxMeyer
Health's ability to generate cash flow,
enhance margins, and respond with
greater speed and flexibility to the
needs of our customers. Given our
industry's decline in gross margins and
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the tough competitive environment, we
believe the company's best interest is
served by reducing its cost structure as
much as possible and focusing on the
implementation of systems and programs
that will enhance FoxMeyer Health's
competitive advantage as we move
forward.
Specifically, the Company's press release attributed the "special
non-recurring charge" primarily to the following:
Costs associated with the start-up of
the National Distribution Center, the
closing and relocation of other
distribution facilities, and the write-
down of fixed assets and carryover
inventory in older facilities;
The relocation of a data center ... the
write-off of old information systems
being replaced by DELTA;
Personnel reductions ...
And the write-off of certain long-term
assets.
The Company's press release also reported that:
[There was] continued improvement in
operating efficiencies, as reflected by
a reduction in operating costs as a
percent of sales ... .
However, the press release also quoted defendants Estrin and
Butler as stating that:
we have experienced unexpectedly high
costs as we closed old facilities and
moved the volume to the National
Distribution Center in Ohio. In
addition, costs associated with DELTA
have been greater than planned.
The non-recurring charge largely
reflects costs related to these
initiatives, and while perhaps
unpleasant in the short term, we believe
this action significantly improves the
-23-
company's operating prospects and
competitive position going forward.
* * *
We are confident that we have taken the
right steps, and we believe that future
operating periods will reflect the
success of our strategies and actions.
Lastly, the Company reported that it had accepted the resignation
of President and Chief Operating Officer Thomas Anderson.
41. In addition to being materially false and
misleading for the reasons stated above in paragraph 39 the
foregoing announcements relating to the Company's third quarter
results were materially false and misleading because they failed
to disclose that the Company's problems were more severe than
described, and that such problems could not be remedied by a one-
time or non-recurring charge, but reflected a far more pervasive
inability to reduce costs sufficiently to achieve profitability
on major contracts and in other aspects of the business.
The Truth Begins To Emerge
42. On July 1, 1996, FoxMeyer announced its financial
results for the fourth quarter of fiscal 1996, the period ending
March 31, 1996. The Company reported net sales for the quarter
of $1.5 billion, a reportedly 15.2% increase over sales of $1.3
billion in the prior year period. The Company also reported an
operating loss of $33.0 million for the quarter, compared with
operating income of $20.8 million in the year-earlier period.
According to the Company, operating results for the fourth
quarter of fiscal 1996 included approximately $34.0 million in
-24-
pre-tax non-recurring charges related to balance sheet items
affected by the Company's implementation of new accounting and
inventory management systems. For the full year of fiscal 1996
(ending March 31, 1996), the Company reported an operating loss
of $49.9 million, including $81.4 million in "non-recurring pre-
tax" charges, compared with operating income of $64.1 million in
operating income in the prior year. The Company's press release
addressed the additional "non-recurring" charge stating that:
The $34.0 million pre-tax non-recurring
charges in the fourth quarter relate to
the start-up of new systems at
FoxMeyer's new national distribution
center in Washington Court House, Ohio.
FoxMeyer determined that start-up
problems associated with the opening of
the National Distribution Center and
implementation of its new systems had
cause difficulties in the billing and
reconciliation of shipments to customers
and losses of inventory. Of the $34.0
million in charges, $15.5 million is
attributable to an increase in the
allowance for doubtful accounts, with
the remainder related to losses in
inventory. Management believes that all
material problems have been identified
and corrected, and that such adjustments
will not recur.
The Company also stated that operating
losses will continue into fiscal 1997.
... management has identified a number
of initiatives that will be implemented
over the next several months ...
Among the listed "initiatives" were:
The Company is in the process of
recruiting a new Chief Executive Officer
for the distribution business.
The Company intends to better leverage
the National Distribution Center's
-25-
technological and logistical competitive
advantages.
The Company will implement a wage
freeze.
The Company will continue with
anticipated cost reductions as DELTA and
other systems benefits are realized.
43. On July 2, 1996, The Dallas Morning News reported
that Ellen Noe, a company spokesperson, had indicated that the
additional charges taken in the fourth quarter were taken
because:
There were bugs in the system. It was
sending out the orders, but bookkeeping
wasn't capturing them.
According to the article:
When FoxMeyer opened the distribution
center in July 1995, it said it would
reduce operating costs substantially.
About 80 percent of the products shipped
to that center are redistributed by
automated systems, making it the "most
intensely automated warehouse in the
pharmaceutical distribution industry,"
the company said at the time.
44. Also on July 2, 1996, the credit rating agency of
Standard & Poors announced that it was lowering its corporate
credit rating of FoxMeyer, stating pertinently that:
FoxMeyer's recent results have been
affected by disruptions related to the
consolidation of existing distribution
facilities, as well as the opening of
new facilities and the integration of
new systems. ...
... FoxMeyer is burdened with various
unprofitable contracts with certain
large customers, including Rite Aid and
University Hospital Consortium.
-26-
FoxMeyer will attempt to renegotiate all
its unprofitable contracts. However, as
with Rite Aid, they may be forced into
nonrenewal of these contracts.
45. Thereafter, an article appearing in The Dallas
Morning News on July 12, 1996, further explained that:
The company has started trying to right
the ship even before a new chief
executive officer comes aboard. And
that begins with trying to renegotiate
some of its most unprofitable contracts
or dropping them entirely.
One mistake the company said it made was
negotiating contracts with customers
based on the cost savings they expected
from the distribution center. Without
those savings, FoxMeyer had no profit
built into some of its largest
contracts.
For example, the company has decided not
to renew an unprofitable $450 million
annual contract to supply
pharmaceuticals to Rite Aid Corp. This
will eliminate the need to carry about
$28 million in inventory and will reduce
red ink.
46. As a result of the July 1, 1996 disclosures, the
price of FoxMeyer stock declined over the next five trading days
by over 50% from $14.625 per share on July 1, 1996 to $7.25 per
share on July 11 on unusually high volume for the stock. This
decline also represented a $21 decline in market value (an
approximately 75% loss in value) from a Class Period high of
$28.125 per share on December 8, 1995. Some negative reports
after that time, from analysts and other market participants,
held the stock price down. However, the adverse material
information on which this action was based was not meaningfully
-27-
or adequately disclosed to the investing public until the end of
the Class Period.
47. The market for FoxMeyer's securities was open,
well-developed and efficient at all relevant times. As a result
of these materially false and misleading statements and failures
to disclose the full truth about FoxMeyer and its business,
earnings momentum and future prospects, FoxMeyer common stock
traded at artificially inflated prices during the entire Class
Period, reaching a Class Period high of $28.125 per share, until
the time the adverse information described above was finally
provided to and digested by the securities markets. Plaintiff
and other members of the Class purchased or otherwise acquired
FoxMeyer securities relying upon the integrity of the market
price of FoxMeyer stock and market information relating to
FoxMeyer, or in the alternative, upon defendants' false and
misleading statements, and in ignorance of the adverse,
undisclosed information known to defendants, and have been
damaged thereby.
48. During the Class Period, defendants materially
misled the investing public, thereby inflating the price of
FoxMeyer stock, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to
make defendants' statements, as set forth herein, not false and
misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse
information and misrepresented the truth about the Company, its
-28-
financial performance, earnings momentum and future business
prospects, including, inter alia:
(a) that, at all relevant times, the Company's
contracts with certain major customers, including without certain
contingencies and risks, Rite Aid and UHC contained limitations
which were unfavorable to the Company, and that the success of
those contracts was dependent upon the successful establishment
and implementation of the Company's new distribution system
center; inventory management program, and computer systems; and
(b) that the Company's new inventory information
system, computer system, and national distribution center were
experiencing numerous problems which seriously impaired the
ability of the Company to enjoy the cost savings which were
expected to be associated with the new system.
FALSE FINANCIAL STATEMENTS
49. In addition to the foregoing, the Company's
reported financial results and financial statements for the
second and third quarters of fiscal 1996 overstated the Company's
gross profit (bolstering defendants' statements (described above)
regarding the "cost efficiencies" to be obtained through
FoxMeyer's new distribution center). The defendants caused the
Company to violate generally accepted accounting principles
("GAAP") and falsely report its results from operations in the
quarters ended September 30, 1995 and December 31, 1995, by
failing to properly record costs of sales.
-29-
50. FoxMeyer ultimately admitted on July 1, 1996 that
its results for the second and third quarters were misstated due
to the shipment of inventory which was not recorded by the
Company. Assuming the misstatement was proportional to sales in
the quarters, the gross profit for the second and third quarters
were overstated-by the following amounts:
9/30/95 12/31/95
------- --------
Gross Profit Report $66.87M $63.73M
True Gross Profit 61.10M 57.48M
------- -------
Overstatement $ 5.77M $ 6.25M
Reported Gross Margin 5.06% 4.46%
True Gross Margin 4.63% 4.02%
51. FoxMeyer's reports on Form 10-Q filed with the SEC
for the second and third quarters of 1996 each contained a
paragraph representing that, in the opinion of management, the
financial statements contained therein included all adjustments
necessary for a "fair presentation" of FoxMeyer's financial
position and results of operations. FoxMeyer's management knew
or recklessly disregarded that such statements were false
inasmuch as the Company's cost of sales were understated due to
missing inventory and that the Company lacked the internal
accounting controls necessary to provide a reasonable basis for
management to assert that the financial statements were fairly
presented.
52. Numerous red flags existed which informed or were
recklessly disregarded by management that the Company's systems
-30-
were not operating correctly. FoxMeyer's inventory balance was
materially different from the level internally anticipated based
on expected market and industry conditions and the Company's
record of filled purchase orders. In all likelihood, a number of
FoxMeyer's customers inquired as to why their invoices did not
match the amount of product shipped. In so far as the new
systems were being implemented by consultants, the Company
actively reviewed and monitored the adequacy of the new systems
or was reckless in failing to do so.
53. If management did know the explanation for these
red flags (that its inventory system was improperly recording
shipments), it was required by SEC rules to investigate and
enlist the assistance of its outside accountants to accurately
report its interim results. See Accounting Series Release No.
177.
54. Even when FoxMeyer reported its third quarter
results and announced a $60 million charge for its relocation of
its distribution facilities, FoxMeyer did not increase its costs
of sales to reflect the inventory losses it was then suffering,
nor did it disclose the inventory-related problems.
55. Ultimately, however, during the 1996 audit,
FoxMeyer's independent accountants discovered the shortfall and
required that FoxMeyer adjust for the shortfall during the fourth
quarter of 1996.
SCIENTER ALLEGATIONS
-31-
56. As alleged herein, defendants acted with scienter
in that defendants knew that the public documents and statements
issued or disseminated in the name of the Company were materially
false and misleading; knew that such statements or documents
would be issued or disseminated to the investing public; and
knowingly and substantially participated or acquiesced in the
issuance or dissemination of such statements or documents as
primary violations of the federal securities laws. As set forth
elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding
FoxMeyer, their control over, and/or receipt and/or modification
of FoxMeyer's allegedly materially misleading misstatements
and/or their associations with the Company which made them privy
to confidential proprietary information concerning FoxMeyer,
participated in the fraudulent scheme alleged herein. With
respect to non-forward-looking statements and/or omissions,
defendants knew and/or recklessly disregarded the falsity and
misleading nature of the information which they caused to be
disseminated to the investing public. In particular, defendants
Abbey and Estrin knew of the undisclosed conditions to major
contracts, such as the Rite Aid and UHC contracts, and knew or
recklessly disregarded that it would be difficult for the Company
to be profitable on those contracts without great cost savings,
by virtue of the materiality of those contracts to the Company
and its prospective financial condition.
-32-
57. The Individual Defendants engaged in such a scheme
to inflate the price of FoxMeyer securities in order to: (i)
protect and enhance their executive positions and the substantial
compensation and prestige they obtained thereby; and (ii) enhance
the value of their personal FoxMeyer securities.
FIRST CLAIM
(Violations of Section 10(b) Of The
Exchange Act And Rule 10b-5 Promulgated
Thereunder Against All Defendants)
58. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
59. During the Class Period, defendants carried out a
plan, scheme and course of conduct which was intended to and,
throughout the Class Period, did: (i) deceive the investing
public, including plaintiff and other Class members, as alleged
herein; (ii) artificially inflate and maintain the market price
of FoxMeyer securities; and (iii) cause plaintiff and other
members of the Class to purchase FoxMeyer securities at inflated
prices. In furtherance of this unlawful scheme, plan and course
of conduct, defendants, and each of them, took the actions set
forth herein.
60. Defendants (a) employed devices, schemes, and
artifices to defraud; (b) made untrue statements of material fact
and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices,
and a course of business which operated as a fraud and deceit
-33-
upon the purchasers of the Company's stock in an effort to
maintain artificially high market prices for FoxMeyer's
securities in violation of Section 10(b) of the Exchange Act and
Rule 10b-5. Both defendants are sued as primary participants in
the wrongful and illegal conduct charged herein. In addition,
Defendants Abbey and Estrin are sued as controlling persons as
alleged below.
61. In addition to the duties of full disclosure
imposed on defendants as a result of their making of affirmative
statements and reports, or participation in the making of
affirmative statements and reports to the investing public,
defendants had a duty to promptly disseminate truthful
information that would be material to investors in compliance
with the integrated disclosure provisions of the SEC as embodied
in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and
Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC
regulations, including accurate and truthful information with
respect to the Company's operations, financial condition and
earnings so that the market price of the Company's common stock
would be based on truthful, complete and accurate information.
62. Defendants, individually and in concert, directly
and indirectly, by the use, means or instrumentalities of
interstate commerce and/or of the mails, engaged and participated
in a continuous course of conduct to conceal adverse material
information about the business and operations of FoxMeyer as
specified herein. In the course of such activities, they issued
-34-
materially false and misleading statements as alleged.
Defendants employed devices, schemes and artifices to defraud,
while in possession of material adverse non-public information
and engaged in acts, practices, and a course of conduct as
alleged herein in an effort to encourage investors to believe in
FoxMeyer's value and performance and likely substantial growth,
which included the making of, or the participation in the making
of, untrue statements of material facts and omitting to state
material facts necessary in order to make the statements made
about FoxMeyer and its business operations in the light of the
circumstances under which they were made, not misleading, as set
forth more particularly herein, and engaged in transactions,
practices and a course of business which operated as a fraud and
deceit upon the purchasers of FoxMeyer securities during the
Class Period.
63. The Individual Defendants' primary liability, and
controlling person liability, arises from the following facts:
(i) they were high-level executives and directors at the Company
during the Class Period and were members of the Company's
management team; (ii) by virtue of their responsibilities and
activities as a senior officers and directors of the Company, the
Individual Defendants were privy to and participated in the
creation, development and reporting of the Company's internal
budgets, plans, projections and/or reports; (iii) each of the
Individual Defendants enjoyed significant personal contact and
had access to other members of the Company's management team,
-35-
internal reports and other data and information about the nature
of the Company's business and markets, the substance of its major
contracts, the nature of its distribution network and information
systems, and (iv) the Individual Defendants were aware of the
Company's dissemination of information to the investing public
which they knew or recklessly disregarded was materially false
and misleading.
64. The defendants had actual knowledge of the
misrepresentations and omissions of material facts set forth
herein, or acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though
such facts were available to them. Such defendants' material
misrepresentations and/or omissions were done knowingly or
recklessly and for the purpose and effect of concealing
FoxMeyer's operating condition and future business prospects from
the investing public and supporting the artificially inflated
price of its stock. As demonstrated by defendants'
overstatements and misstatements of the Company's business,
operations and earnings throughout the Class Period, defendants,
if they did not have actual knowledge of the misrepresentations
and omissions alleged, were reckless in failing to obtain such
knowledge by deliberately refraining from taking those steps
necessary to discover whether those statements were false or
misleading.
65. As a result of the dissemination of the materially
false and misleading information and failure to disclose material
-36-
facts, as set forth above, the market prices of FoxMeyer
securities were artificially inflated during the Class Period.
In ignorance of the fact that market prices of
FoxMeyer's publicly-traded securities were artificially inflated,
and relying directly or indirectly on the false and misleading
statements made by defendants, or upon the integrity of the
market in which the securities trade, and the truth of any
representations made to appropriate agencies as to the investing
public, at the times at which any statements were made, and/or on
the absence of material adverse information that was known to or
recklessly disregarded by defendants but not disclosed in public
statements by defendants during the Class Period, plaintiff and
the other members of the Class acquired FoxMeyer's securities
during the Class Period at artificially high prices and were
damaged thereby.
66. At the time of said misrepresentations and
omissions, plaintiff and other members of the Class were ignorant
of their falsity, and believed them to be true. Had plaintiff
and the other members of the Class and the marketplace known of
the true financial condition and business prospects of FoxMeyer,
which were not disclosed by defendants, plaintiff and other
members of the Class would not have purchased or otherwise
acquired their FoxMeyer securities during the Class Period, or,
if they had acquired such securities during the Class Period,
they would not have done so at the artificially inflated prices
which they paid.
-37-
67. By virtue of the foregoing, defendants have
violated Section 10(b) of the Exchange Act, and Rule 10b-5
promulgated thereunder.
68. As a direct and proximate result of defendants'
wrongful conduct, plaintiff and the other members of the Class
suffered damages in connection with their purchases of the
Company's securities during the Class Period.
SECOND CLAIM
(Violation Of Section 20(a) Of The
Exchange Act Against The Individual Defendants)
69. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
70. This Claim is brought against the Individual
Defendants with respect to the entire Class Period.
71. The Individual Defendants acted as controlling
persons of FoxMeyer within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level
positions, participation in and/or awareness of the Company's
operations and/or intimate knowledge of the Company's financial
condition, products and the actual progress of its development,
sales and distributional efforts, the Individual Defendants had
the power to influence and control and did influence and control,
directly or indirectly, the decision-making of the Company,
including the content and dissemination of the various statements
which plaintiff contends are false and misleading. The
Individual Defendants were provided with or had unlimited access
-38-
to copies of the Company's reports, press releases, public
filings and other statements alleged by plaintiff to be
misleading prior to and/or shortly after these statements were
issued and had the ability to prevent the issuance of the state-
ments or cause the statements to be corrected.
72. In particular, the Individual Defendants had
direct and supervisory involvement in the day-to-day operations
of the Company and therefore, are presumed to have had the power
to control or influence the particular transactions giving rise
to the securities violations as alleged herein, and exercised the
same.
73. As set forth above in the First Claim, FoxMeyer
violated Section 10(b) and Rule 10b-5 by its acts and omissions
as alleged in this Complaint. By virtue of their positions as
controlling persons, the Individual Defendants are liable
pursuant to Section 20(a) of the Exchange Act. As a direct and
proximate result of defendants' wrongful conduct, plaintiff and
other members of the Class suffered damages in connection with
their purchases of the Company's securities during the Class
Period.
WHEREFORE, plaintiff prays for relief and judgment, as
follows:
(a) Determining that this action is a proper
class action, and certifying plaintiff as a class representative
under Rule 23 of the Federal Rules of Civil Procedure and a lead
-39-
plaintiff pursuant to Section 21D(a)(3)(B) of the Exchange Act
and his counsel as class counsel;
(b) Awarding compensatory damages in favor of
plaintiff and the other Class members against all defendants,
jointly and severally, for all damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial,
including interest thereon;
(c) Awarding plaintiff and the Class their
reasonable costs and expenses incurred in this action, including
counsel fees and expert fees; and
(d) Such other and further relief as the Court
may deem just and proper.
-40-
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury, and has paid
the required fees.
DATED: Dallas, Texas
August 12, 1996
SILBER * PEARLMAN, P.C.
/s/
By: _____________________
E. Lawrence Vincent
State Bar No. 20585590
3110 Webb Avenue
Dallas, TX 75205
(214) 528-2000
(214) 522-7400 - fax
Of Counsel:
Jerome M. Congress
Ralph M. Stone
Samuel H. Rudman
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
One Pennsylvania Plaza
49th Floor
New York, NY 10119
(212) 594-5300
(212) 868-1229 - fax
-41-
3 Aug 1997