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ORROCK HIGSON & KURTA, P.C. DANIEL A. HIGSON (71212) 1835 Knoll Drive Ventura, CA 93003 Telephone: 805/642-6405 MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) ALAN SCHULMAN (128661) 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 LAW OFFICES OF ALFRED G. YATES, JR. ALFRED G. YATES, JR. 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PA 15219 Telephone: 412/391-5164 Attorneys for Plaintiffs SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF VENTURA NORMAN YOURISH and KENNETH YOURISH, ) Case No. CIV173569 On Behalf of Themselves and All ) [filed Jun. 11, 1997] Others Similarly Situated, ) CLASS ACTION ) Plaintiffs, ) COMPLAINT FOR DAMAGES BASED ) UPON: vs. ) (1) VIOLATION OF CAL. ) CORP. CODE §§25400 AND CALIFORNIA AMPLIFIER, INC., IRA ) 25500; CORON, DAVID NICHOLS, MICHAEL ) (2) VIOLATION OF CAL. CIV. FERRON, ARTHUR HAUSMAN and WILLIAM ) CODE §§1709-1710; AND McKENNA, ) (3) VIOLATION OF CAL. BUS. ) & PROF. CODE §§17200, Defendants. ) ET SEQ. ___________________________________ ) Plaintiffs Demand A Trial By Jury
SUMMARY OF ACTION 1. This is a class action on behalf of purchasers of the common stock of California Amplifier, Inc. ("California Amplifier" or the "Company"), which sells products used in conjunction with the delivery of multi-channel television, between Sept. 12, 1995 and Aug. 8, 1996 (the "Class Period"). During the Class Period, defendants artificially inflated California Amplifier stock1 by making false representations that California Amplifier was effectively competing in a rapidly growing industry, was enjoying very strong demand for its products, especially its international products, had successfully introduced its basic MultiCipherTM product which was enjoying strong sales (including a major sale in Thailand that would result in millions of dollars of follow-on business), was successfully developing its MultiCipher PlusTM product for introduction during Fiscal 1997, and expected large orders from wireless cable systems in Australia and Saudi Arabia -- all of which would result in California Amplifier achieving substantial sequential gross profit margin, revenue and earnings per share ("EPS") growth throughout Fiscal 1997 ("F97") and Fiscal 1998 ("F98"), to end Mar. 1, 1997 and Feb. 28, 1998. As California Amplifier stock soared upward from $8-1/2 per share on Sept. 11, 1995, to its Class Period high of $48 per share, California Amplifier's insiders sold 305,000 shares of California Amplifier stock into the open market at prices as high as $18-7/8 per share, pocketing $4.1 million, while otherwise disposing of 396,658 more ______________________ 1 Unless otherwise noted, all share and per-share amounts are adjusted to reflect California Amplifier's 2-for-1 stock split in March 1996. - 1 -
shares worth $13.8 million -- total sales and other dispositions of 701,658 shares for $17.9 million. However, after reporting slightly declining sales, net income and EPS in mid-June 1996, in early Aug. 1996, California Amplifier shocked the market by admitting that it was suffering losses due to weakening demand and poor sales, long delays in receiving orders from Australia and Saudi Arabia, delays in introducing its updated MultiCipher PlusTM scrambling product and no follow-on orders for MultiCipherTM from Thailand. Upon these revelations, California Amplifier's stock collapsed to just $7-7/8 per share from its Class Period high of $48 per share just seven weeks earlier -- a stunning 83% collapse, thereafter continuing to fall to as low as $3-1/2 per share as California Amplifier continued to report sharply declining revenues and losses! 2. For many years California Amplifier concentrated on the sale of C-band satellite TV reception equipment. However, as technology advanced and C-band equipment became outmoded, California Amplifier's growth slowed, its EPS growth stopped and its stock performed very poorly. New management was installed under the leadership of Ira Coron, the Company's new Board Chairman and Chief Executive Officer. 3. In the Fall of 1995, California Amplifier's stock price was still a very poor performer, even though California Amplifier had managed to again report increasing EPS. California Amplifier's insiders were very disappointed with the performance of California Amplifier's stock. They wanted to drive the stock price higher for several reasons. Some of them owned significant amounts of California Amplifier stock and knew that if the stock price could - 2 -
be driven higher, they could sell off some of their shares and pocket large amounts of cash. In addition, if California Amplifier stock could be pushed to, and maintained at, higher levels, it would be possible for California Amplifier to raise the capital it needed to expand its business through a public offering of its stock, or to grow the Company by using California Amplifier stock to make acquisitions of other businesses on a non-dilutive basis, using California Amplifier stock as the currency for the acquisition. 4. However, California Amplifier's insiders' desires to unload their own California Amplifier stock positions, use California Amplifier's shares to make acquisitions or accomplish a California Amplifier stock offering were inhibited by California Amplifier's low stock price. While California Amplifier reported EPS growth during F95 and the first half of F96, California Amplifier stock was still a very average performer and sold at $6- $8 per share. California Amplifier's insiders realized that to push California Amplifier stock up to the much higher levels they desired, they had to manipulate California Amplifier's stock price by distributing favorable but false information about California Amplifier's business and its prospects which would attract investor interest to California Amplifier and its stock. 5. Thus, in the Fall of 1995, the defendants were determined to push California Amplifier stock higher by bombarding the market with highly positive, but false, statements about the state of California Amplifier's business, its growth in international markets, it ability to achieve sales growth of its wireless cable products, despite that industry's transition from analog to digital - 3 -
technology, via its satellite TV receiver business by developing successful high-margin Ku-band technology products to replace its outmoded C-band technology products, to successfully develop and introduce its MultiCipherTM and MultiCipher PlusTM product lines of broadcast signal scrambling devices, to achieve growth consistently in gross profit margins and strong revenue and EPS growth throughout F96, F97 and F98 and a 25%-40% growth rate. 6. During the Class Period, with respect to California Amplifier's MultiCipherTM and MultiCipher PlusTM product lines, defendants represented that demand for MultiCipher was "very strong" and California Amplifier was enjoying "high demand . . . around the world," that its MultiCipher PlusTM had been successfully Beta tested, that that product "will reinforce California Amplifier's position as a leader" and "will ship," and then later that it had been successfully introduced and was being sold to several wireless cable TV companies. With respect to California Amplifier's wireless cable product sales, defendants represented that demand from domestic markets continued "very strong" and that California Amplifier was experiencing "strong demand" worldwide for its "appealing and expanding product line." With respect to sales of California Amplifier's satellite TV receiver products, defendants represented that California Amplifier's sales of Ku-band products would lead to growth in sales in this area throughout F97- F98. With respect to California Amplifier's international business, defendants represented it was enjoying "increased international demand" and expected large sales of Direct Broadcast Satellite ("DBS") downconverter products in Australia and Saudi Arabia as well as strong follow-on sales of MultiCipher products in - 4 -
Asia to International Broadcasting Corp. in F97-F98. With respect to California Amplifier's gross profit margins, defendants represented they expected continued gross margin expansion, and expected margin expansion over the next two years. With respect to California Amplifier's revenue and EPS prospects, defendants represented that California Amplifier would achieve strong revenue growth in F97 to over $73-$83 million with F97 EPS of $.48-$.66, followed by EPS of $.90 in F98. 7. None of these representations were true when made. The true facts about California Amplifier's business which were actually known to each of the defendants and actively concealed and misrepresented by them were that: (a) California Amplifier was encountering slowing growth in the sales of its wireless products because its customers were deferring purchases due to a transition from analog to digital products; (b) California Amplifier's competitive position was being seriously impaired by the switch from C-band satellite TV receiver products to Ku-band satellite receiver products because California Amplifier had only a very few Ku-band products to sell, which were insufficient to offset the decline in C-band sales, which was penalizing California Amplifier's revenue and EPS growth; (c) Sales of California Amplifier's original MultiCipherTM products were much less than expected, in large part because it permitted the scrambling of only one channel and thus was not in demand by wireless cable TV systems that wanted to scramble multiple channels; - 5 -
(d) California Amplifier's original MultiCipherTM product had a very limited market consisting of those few wireless cable TV systems that only wanted to scramble one channel and for California Amplifier to achieve significant revenue and EPS growth, it had to successfully introduce in the near term MultiCipher PlusTM, a product which permitted the scrambling of up to five channels and thus had a much broader potential market; (e) The International Broadcasting Corp. in Thailand had told California Amplifier that despite its $7 million order for MultiCipher, it would not be ordering any additional equipment from California Amplifier; (f) California Amplifier's MultiCipher PlusTM product was months behind schedule in its development and California Amplifier had encountered serious and persistent problems with that product during Beta testing which indicated that the product needed to be redesigned and that it would likely encounter a high rate of failure in the field; (g) In order to push MultiCipher PlusTM products out into the market to meet competitive pressures, California Amplifier had released that product for commercial production and sale, even though the serious problems encountered in Beta testing had not been resolved or fixed and it was virtually certain that the MultiCipher PlusTM problems would lead to a high rate of field failures; (h) California Amplifier knew that it would not be receiving follow-on orders from its Southeast Asian customers and that the lack of repeat or follow-on business from those sources - 6 -
would hurt California Amplifier's business, revenue and orders very badly during F97; (i) Two of California Amplifier's customers, Heartland Wireless and American Telecasting, had advised California Amplifier that due to their financial problems, they would be ordering only limited quantities of MultiCipher PlusTM scramblers from California Amplifier, well below levels earlier indicated; (j) California Amplifier would not be obtaining any significant orders for DBS products from the Australian cable consortium it was talking to as that consortium was encountering serious financial difficulty and was unable to raise sufficient capital to further build out its system and make significant orders with California Amplifier; (k) California Amplifier had been informed by its potential customer in Saudi Arabia that, due to delays in negotiating the relocation of existing microwave equipment that would cause significant interference with the signal transmission of California Amplifier's equipment, the Saudi Arabian order would be delayed for many months at a minimum; and (l) As a result of the foregoing, defendants knew that California Amplifier's forecasts of sequentially increasing gross profit margins through F97 and F98, a 25%-40% growth rate during F97 and F98, and F97 EPS of $.48-$.66 and 1stq, 2ndQ, 3rdQ and 4thQ F97 EPS of $.11-$.14, $.12-$.16 $.12-$.17 and $.14-$.18, respectively, and F98 EPS of $.90, were false and misleading when made, as they were contradicted by the above-described adverse conditions affecting California Amplifier's business which made obtainment of those forecasts impossible. - 7 -
8. The charts below demonstrate the price action of California Amplifier's shares during the Class Period, the collapse of California Amplifier's share price as the previously concealed facts about California Amplifier's business emerged and the performance of California Amplifier stock compared to an index of similar companies, which shows that the action of California Amplifier shares was due largely to company-specific events and not market forces: California Amplifier, Inc. September 1, 1995 - April 25, 1997 Daily Stock Prices
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California Amplifier vs. Nasdaq Telecommunications Group September 1, 1995 - May 28, 1997
9. California Amplifier's insiders personally profited from their wrongdoing by selling off large amounts of the California Amplifier stock they owned at artificially inflated prices, as the stock soared higher, driven by defendants' false statements. The stock sales were unusual in timing and amount as shown by the following tables and graphs: Shares % of Shares Defendant/Position Sold Prices Proceeds Owned Sold ------------------ ------ ------ -------- ---------- Coron/Chairman of Board-CEO 35,000 $10-3/4-$13-5/8 $ 419,375 20% Ferron/CFO 50,000 $13-3/8 $ 667,000 100% Hausman/Director 70,000 $11-1/4-$18-7/8 $1,010,950 100% McKenna/Director 70,000 $11-1/4-$13-5/8 $ 906,850 34% Nichols/Exec.VP 80,000 $10-7/8-$16-3/8 $1,090,0002 17% TOTALS: 305,000 $10-3/4-$18-7/8 $4,094,175 31% ____________________ 2 During the Class Period, Nichols also disposed of another 396,658 shares of California Amplifier stock worth $13.8 million, in a manner that economically benefited him and took advantage of California Amplifier's artificially inflated stock price. - 9 -
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10. However, on June 12, 1996, when California Amplifier reported slightly declining revenues and EPS for the 1stQ F97, and reported that it had accumulated increasing inventories of MultiCipherTM products and that its new MultiCipher PlusTM product was encountering minor technical problems, California Amplifier's stock price began to decline. Then on Aug. 8, 1996, California Amplifier admitted that shipment of the MultiCipher PlusTM would be delayed indefinitely due to design and operational defects exposed by consistent high rates of field failures, that it would not be getting orders for Australia or Saudi Arabia any time soon, and that its revenues for the second quarter would decline sharply and it would suffer a loss. California Amplifier's stock collapsed to as low as $6-1/2 per share on Aug. 8, 1996, compared to its Class Period high of $48-3/4 on June 4, 1996 -- just two months earlier. A few weeks later, David Nichols, a co-founder of California Amplifier and its Executive Vice President, resigned. Then, California Amplifier reported a 2ndQ F97 loss of $.02 per share, due to delays in the "roll out" of MultiCipherTM-related products and the failure to close sales in Australia and Saudi Arabia. California Amplifier later reported very poor 3rdQ F97 results with EPS of only $.01. Then, for the 4thQ F97, California Amplifier reported a loss of $.08 and total F97 revenues of $49 million and EPS of just $.05, sharp declines from F96, and way below the levels forecast during the Class Period, due to, inter alia, weak domestic and international demand, the failure of the Company to ship significant MultiCipherTM products and obtain significant sales from Australia and Saudi Arabia. - 11 -
11. Coron admitted that California Amplifier's horrible results were due to significant delays in domestic and international orders, "softness in the domestic market," and delays in major international orders. In Oct. 1996, Coron discussed the reasons for California Amplifier's poor results: [W]e ended last fiscal year [96] and through the first quarter with some very heavy shipments to Southeast Asia on new systems that were being launched, and we knew that was not going to repeat. We felt we have enough time to replace that with other new systems in Australia, Saudi Arabia, and a variety of other places. For different reasons, each of those has been delayed. . . . Australia is not [progressing]. They're having some financial problems in funding the growth of the Australia system. * * * The Saudi system which is pretty well-known, I mean, that's the only reason I would talk about it so openly, is a very large planned system throughout Saudi Arabia, and that finally seems to be progressing. They are now taking some steps towards defining the frequencies at which they can transmit, and we are working pretty closely with the Saudis. We're counting on a small increment of sales in the fourth quarter out of Saudi Arabia, but nothing significant. * * * MultiCipher PlusTM . . . was late in introduction after some false starts, and that also had the impact on the second quarter. 12. The chart below shows the collapse in California Amplifier's business in F97 compared to the strong increases forecast during the Class Period: - 12 -
California Amplifier, Inc. Quarterly Results* (in thousands) Fiscal 1996 06/03/95 09/02/95 12/02/95 03/02/96 Year ---------------------------------------------------------- Revenues $12,665 $14,505 $16,314 $18,106 $61,590 Gross margin 33% 34% 34% 35% 34% Operating Income 1,255 1,666 2,043 2,533 7,497 Net Income 852 1,071 1,357 1,678 4,958 EPS $0.07 $0.09 $0.11 $0.14 $0.41 Fiscal 1997 06/01/96 08/31/96 11/30/96 03/01/97 Year ---------------------------------------------------------- Revenues $17,275 $11,463 $11,702 $ 8,850 $49,290 Gross margin 35% 30% 29% 18% 29% Operating Income 2,353 (415) 128 (1,378) 688 Net Income 1,623 (209) 127 (908) 633 EPS $0.13 ($0.02) $0.01 ($0.08) $0.05 * All EPS amounts reflect a 2-for-1 stock split in 3/96. JURISDICTION AND VENUE 13. This Court has jurisdiction over all causes of action asserted in this Complaint pursuant to the California Constitution, Article VI, § 10, because this case is a cause not given by statute to other trial courts. The claims asserted herein arise under §§25400 and 25500 of the Cal. Corp. Code, §§ 1709-1710 of the Cal. Civ. Code. and §§ 17200, et seq. of the Cal. Bus. & Prof. Code. 14. Each of the individual defendants resides in and is a citizen of the State of California. California Amplifier has its principal place of business in Camarillo, California. The false and misleading statements by the defendants and the sales of the defendants' California Amplifier stock all took place in this state -- California. The amount in controversy of each of the named plaintiffs' claims is less than $75,000, exclusive of interest and costs. This action is not removable to federal court. - 13 -
THE PARTIES 15. (a) Plaintiff Kenneth Yourish purchased 500 shares of California Amplifier stock on June 6, 1996 at $41-3/4 per share and was damaged thereby. (b) Plaintiff Norman Yourish purchased 200 shares of California Amplifier stock on June 4-5, 1996 at $46-3/4 and $47-1/2 per share and was damaged thereby. 16. Defendant California Amplifier, Inc. has its headquarters and principal place of business in Camarillo, California. The stock of California Amplifier was traded in an efficient market on the NASDAQ National Market System during the Class Period. California Amplifier sold stock to the Individual Defendants during the Class Period when these individuals exercised stock options to acquire California Amplifier stock, which they then sold to the public. 17. (a) Defendant Ira Coron ("Coron") is California Amplifier's Chairman and Chief Executive Officer. Based on inside information, Coron, through his IRA, sold 35,000 shares of his California Amplifier stock in California during the Class Period for proceeds of $419,375 -- 20% of his holdings. (b) Defendant David Nichols ("Nichols") is Executive Vice President of Operations of California Amplifier. During the Class Period, based on inside information, Nichols sold 80,000 shares of California Amplifier stock in California -- 17% of his California Amplifier holdings -- for approximately $1,090,000. During the Class Period, Nichols also disposed of another 396,658 shares of California Amplifier stock in California worth $13.8 million in a manner that economically benefited him and took - 14 -
advantage of California Amplifier's artificially inflated stock price. (c) Defendant Michael Ferron ("Ferron") is Chief Financial Officer and Vice President of Finance of California Amplifier. During the Class Period, based on inside information, Ferron sold 50,000 shares of California Amplifier stock in California -- 100% of his California Amplifier holdings -- for approximately $667,000. (d) Defendant Arthur Hausman ("Hausman") is a director of California Amplifier. During the Class Period, based on inside information, Hausman sold 70,000 shares of California Amplifier stock in California -- 100% of his California Amplifier holdings -- for approximately $1,010,950. (e) Defendant William McKenna ("McKenna") is a director of California Amplifier. During the Class Period, based on inside information, McKenna sold 70,000 shares of California Amplifier stock in California -- 34% of his California Amplifier holdings -- for approximately $906,850. (f) The defendants identified in ¶17(a)-(e) are referred to herein as the Individual Defendants. Because of their positions with California Amplifier, the Individual Defendants each knew the adverse non-public information about California Amplifier's business, finances, products, markets 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/or Board of Directors meetings and committees - 15 -
thereof and via reports and other information provided to them in connection therewith. 18. The Individual Defendants, i.e., Coron, Nichols, Ferron, Hausman and McKenna, were each aware of and approved the false statements issued by or on behalf of California Amplifier during the Class Period. Coron was a controlling person of California Amplifier due to his executive and Board positions and stock ownership. 19. As officers, directors and/or controlling persons of a publicly-held company and as sellers of California Amplifier stock, the Individual Defendants had a duty to disseminate accurate and truthful information promptly with regard to California Amplifier and to correct any previously issued statements that had become untrue and to disclose any adverse trends known to them that would materially affect the operating results of California Amplifier, so that the market price of California Amplifier's stock would be based upon truthful and accurate information. Notwithstanding their duty to refrain from selling California Amplifier stock while in the possession of material, adverse, non-public information concerning California Amplifier, the Individual Defendants sold 305,000 shares of the Company stock, pocketing over $4.1 million, while otherwise disposing of another 396,658 shares worth $13.8 million, thus personally profiting from their deliberate and dishonest acts. 20. The Individual Defendants controlled the contents of California Amplifier's SEC filings, corporate reports and press releases. Each of the Individual Defendants participated in writing or reviewing California Amplifier's corporate reports, - 16 -
press releases and SEC filings alleged to be misleading and thus had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. Thus, each of the Individual Defendants is legally responsible for the falsifying of California Amplifier's public reports, statements and releases detailed herein as "group-published" information and for willfully participating in the violations of law alleged. DEFENDANTS' FRAUDULENT SCHEME 21. Each of the defendants is liable for making false and misleading statements and failing to disclose material adverse facts and as a participant in a fraudulent scheme which: (i) deceived the investing public regarding California Amplifier; (ii) artificially inflated the price of California Amplifier stock; (iii) caused class members to purchase California Amplifier stock at inflated prices; and (iv) permitted the Individual Defendants to sell 305,000 shares of their California Amplifier stock at inflated prices, pocketing $4.1 million, and otherwise dispose of 396,658 shares for $13.8 million. MOTIVE AND OPPORTUNITY 22. Each defendant had the opportunity to commit and partici- pate in the violations of law described herein. The Individual Defendants were top officers and directors of California Amplifier and they controlled its press releases, corporate reports, SEC - 17 -
filings and its communications with analysts. Thus, the defendants controlled the public dissemination of, and could falsify, the information about California Amplifier's business products and finances that reached the public and impacted the price of California Amplifier stock. 23. Each of the Individual Defendants also had the motive to commit and participate in the violations of law described herein. These defendants wanted to and did cover up the problems with and deterioration in California Amplifier's business resulting in part from their mismanagement of that business, to make it appear that California Amplifier's business was succeeding and growing, so that its stock would trade at artificially inflated levels and they could insider trade by selling off large amounts of their California Amplifier stock at artificially inflated prices, pocketing large sums for themselves. They also hoped California Amplifier could accomplish an offering of new shares of its stock by which it would raise millions in needed capital, before the truth about the problems with and decline in California Amplifier's business became known. AIDING AND ABETTING, CONSPIRACY AND WILLFUL PARTICIPATION 24. Each of the defendants is liable for negligently, recklessly or intentionally making false and misleading statements, and willfully participating in a scheme and/or conspiracy and/or aiding and abetting the violations of California law that damaged class members while selling their shares of California Amplifier stock at artificially inflated prices while knowing of material adverse information regarding California Amplifier. In committing - 18 -
the wrongful acts alleged, the defendants acted willfully and pursued a scheme and conspiracy in order to inflate the price of California Amplifier stock and deceive the investing public regarding demand for California Amplifier's products, the success and competitive position of its business and its future prospects. FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD 25. On Sept. 12, 1995, California Amplifier reported its 2ndQ F96 results via a release that stated: Ira Coron, Chairman and Chief Executive Officer, commented, "During the second quarter, sales of Wireless Cable products continued to show strong growth, increasing 112% as compared to the second quarter of the preceding year. The increases in Wireless Cable sales were generated from increased international demand for both subscriber reception equipment and our new scrambling system, MultiCipherTM. We are seeing continued demand from domestic markets as Wireless operators are increasing their subscriber base after a period of acquisitions and consolidations. . . ." California Amplifier ... manufactures and markets MultiCipherTM, a broadband scrambling technology used for encoding and decoding of multichannel television signals. 26. On Sept. 12, 1995, California Amplifier held a telephone conference call with securities analysts, money and portfolio managers, institutional investors, large California Amplifier stockholders and brokers to discuss California Amplifier's results and prospects. During that call, and in subsequent one-on-one conversations with analysts, Coron and Ferron directly disseminated important information to the market by stating: • Demand for California Amplifier's wireless cable equipment was very strong. • Customer acceptance of and demand for California Amplifier's MultiCipherTM product was very strong. • While California Amplifier's sales of satellite products had declined slightly due to product transitions, California - 19 -
Amplifier expected sales of those products to grow throughout F96 and F97 due to increased sales of its Ku satellite receiver products. • California Amplifier was successfully developing its MultiCipher PlusTM product, a proprietary broadband scrambling system, and would have that product to market within months, which would benefit sales and EPS in F97. • California Amplifier's international business was doing very well and California Amplifier expected to receive large orders from Saudi Arabia and Australia during F97. • Because of the strength of its business, California Amplifier now forecasted higher F97 revenues than earlier, forecasting revenues of at least $73 million with EPS as follows: 1st Q. $.11 2nd Q. $.12 3rd Q. $.12-$.13 4th Q. $.14-$.15 FY 97 $.48-$.50 • California Amplifier expected to achieve 25%-30% EPS growth over the next few years. Analysts repeated some of this information to the market in reports issued over the next few days. 27. On Sept. 15, 1995, California Amplifier appeared at the Robertson Stephens Consumer Retail Conference in New York City. Coron and Ferron spoke to the analysts, money and portfolio managers, institutional investors, brokers and stock traders in attendance and directly disseminated important information to the market by stating: • Demand for California Amplifier's wireless cable equipment was extremely strong, especially in the domestic market. • Customer acceptance of and demand for California Amplifier's MultiCipherTM product was very strong. • While California Amplifier's sales of satellite products had slowed slightly due to product transitions, sales of those products would grow throughout F96 and F97 due to increased sales of its Ku satellite receiver products. - 20 -
• California Amplifier was successfully developing its MultiCipher PlusTM product, a proprietary broadband scrambling system, and would have that product to market within months, which would fuel California Amplifier's revenues and EPS growth in F97 and F98. • California Amplifier expected to receive large orders from Saudi Arabia and Australia during F97. • Because of the strength of its business, California Amplifier now expected higher F97 revenues than earlier forecast. It now expected revenues of at least $73 million with EPS of $.48-$.50. • California Amplifier expected its gross profit margins to expand sequentially in F96 and F97 and to achieve 25%-30% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. 28. On Sept. 12 and 15, 1995, Robertson Stephens issued reports on California Amplifier, written by Steven Deluca, with the assistance of Coron and Ferron based on conversations between Deluca and Coron and Ferron, in which a two-way flow of information occurred between them and they agreed on the contents of the report. The Sept. 15, 1995 report also repeated information from the Sept. 15, 1995 conference call. The reports forecast a three- year secular growth rate of 25% for California Amplifier and the following F96 and F97 revenue and EPS for California Amplifier: FY96E FY97E EPS : 1Q $0.08A $0.11 2Q $0.09A $0.12 3Q $0.09 $0.13 4Q $0.10 $0.14 Year $0.36 $0.48 Revs ($MM) FY96E FY97E 1Q 12.7A 16.7 2Q 14.5A 17.7 3Q 14.7 18.8 4Q 15.7 20.0 Year $57.6 $73.1 - 21 -
The report also stated: We . . . [are] raising our FY96 revenue and EPS estimates to $57.6 million and $0.36, from $56.9 million and $0.35 respectively. . . . California Amplifier's wireless cable equipment sales continue to expand at over 50% growth rates . . . maintained through FY96 due to (1) international market growth, (2) product-line expansion and (3) new customer acceptance of MultiCipher - CAMP's proprietary scrambling system. Sales of California Amplifier's satellite products dropped . . . slightly below our estimate of $4.2 million. In our opinion, this should be the trough of the downward satellite sales trend due to an improvement in the sales trend late in the quarter continuing thus far into Q3. * * * As the largest supplier of wireless cable receive antennas, California Amplifier is well positioned to benefit from the market's worldwide growth. . . . [T]he company recently began shipping its proprietary broadband scrambling system known as MultiCipher, a product that further lowers the cost of wireless cable by eliminating the need for multiple set-top boxes. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 29. California Amplifier's stock climbed from $8-1/2 per share on Sept. 11, 1995, to $14-5/8 per share on Oct. 31, 1995. 30. On Nov. 15, 1995, Montgomery Securities issued a report on California Amplifier, written by Robinson, with the assistance of Coron and Ferron, based on conversations between Robinson and Coron and Ferron in which a two-way flow of information occurred between them and they agreed upon the contents of the report. Coron and Ferron reviewed and approved the report before it was issued. The report forecast a 30% secular EPS growth rate and F97 EPS of $.50 for California Amplifier and stated: - 22 -
We believe new overseas customers are driving wireless cable downconverter activity that is particularly strong in the quarter. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 31. On Nov. 30, 1995, California Amplifier announced a large contract with International Broadcasting Corp. ("IBC"), a wireless cable system operator in Thailand, which stated: California Amplifier, Inc. announced today that it has received a $7.0 million order to provide its MultiCipher products to International Broadcasting Corporation, PLC (IBC), a Wireless Cable system operator in Thailand. The MultiCipher product is a broadband whole-house scrambling system that provides signal security to a wireless cable operator. Signal security systems enable wireless cable operators to control the delivery of broadcasted television programming to only those subscribers authorized to receive it. Security also helps prevent signal piracy by unauthorized individuals. The $7.0 million contract represents product requirements for IBC to outfit its current installed subscriber base in Bangkok and other parts of Thailand with MultiCipher product. Currently, IBC transmits multichannel television programming "in the clear" without scrambling. MultiCipher will be used to scramble IBC's wireless cable broadcasts. Ira Coron, Chairman and Chief Executive Officer of California Amplifier, Inc., commented, "IBC is a very significant wireless cable operator, and its selection of MultiCipher demonstrates the advantages of MultiCipher in specific wireless markets. Headend equipment and a significant number of decoders will ship during the fourth quarter of fiscal year 1996 with the remaining decoders in fiscal year 1997 as IBC adds to its current subscriber base. This contract along with other recent agreements, solidifies our operating plan for our fiscal year 1996, ending March 2, 1996." 32. On Nov. 30, 1995, California Amplifier held a telephone conference call with securities analysts, money and portfolio managers, institutional investors, large California Amplifier - 23 -
stockholders and brokers to discuss California Amplifier's business and prospects and the IBC contract. During that call, and in subsequent one-on-one conversations with analysts, Coron and Ferron directly disseminated the following important information to the market: • Customer acceptance of California Amplifier's MultiCipherTM was very strong. This product was a tremendous success, especially in international markets. The large-IBC contract was likely to result in significant follow-along business for California Amplifier of $1-$2 million per year during the next two years. • California Amplifier was successfully developing its MultiCipher PlusTM product, a proprietary broadband scrambling system, which it expected to introduce during early F97 and which would drive revenue and EPS growth in F97 and F98. • California Amplifier expected higher F97 revenues than earlier forecast, now to reach at least $78 million with EPS as follows: 1st Q $.ll-$.12 2nd Q $.12-$.13 3rd Q $.13-$.14 4th Q $.14-$.16 FY 97 $.50-$.55 • California Amplifier expected to achieve 25%-30% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. 33. On Nov. 30, 1995, Robertson Stephens issued a report on California Amplifier, written by Deluca, which repeated information from the Nov. 30, 1995 conference call, forecast a 25% three-year secular growth rate for California Amplifier and increased its F96 and F97 revenue and EPS estimates as follows: FY96E FY97E EPS : 1Q $0.08A $0.12 2Q $0.09A $0.14 3Q $0.11 $0.14 4Q $0.12 $0.15 Year $0.39 $0.53 - 24 -
* * * Revs ($MM) FY96E FY97E 1Q 12.7 A 17.9 2Q 14.5 A 19.5 3Q 16.0 20.1 4Q 17.8 21.1 Year $60.9 $78.6 The report also stated: NEWS: California Amplifier announced the receipt of a $7.0 million order from International Broadcasting Corporation (IBC) -- a wireless cable system operator in Bangkok Thailand... for its proprietary, whole house scrambling system called Multicipher. A large portion of the order is slated to ship during CAMP's Q4 FY96 (approximately $3.0 million), with the balance shipping throughout FY97. IBC operates one of the two major systems located in Bangkok. The other is Thai-Sky Cable already a current MultiCipher user. We estimate that the $7.0 million contract meets IBC's needs up to 100,000 subscribers, which they have currently. As the subscriber base expands beyond 100,000, IBC should order incremental antennas from CAMP. We estimate the follow- on opportunity over the next two years with IBC could be an additional $1 to $2 million per year. * * * [I]n response to CAMP's latest contract win and the accelerating pace of business . . . [o]ur new FY97 revenue and EPS estimates increase to $78.6 million and $[.53] from $73.1 and $[.48] previously. * * * The IBC contract further establishes CAMP's Multicipher scrambling system as a proprietary product with potential add-on revenues and a viable competitive product versus . . . wireless scrambling system products. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 34. On Dec. 1, 1995, Montgomery Securities issued a report on California Amplifier, written by Robinson, which repeated informa- tion from the Nov. 30, 1995 conference call. The report forecast - 25 -
a 30% secular EPS growth rate and F97 EPS of $.50 for California Amplifier and stated: Yesterday CAMP announced that its activity with International Broadcasting Corporation, PLC (IBC) will materialize with production level deployment in the current quarter. . . . The addition of IBC as a major customer is a compelling case for MultiCipher. * * * CAMP's overseas opportunities continue to expand at a rapid rate in terms of volume, customer and product breadth. Given these trends we view it likely that the company will achieve revenue in excess of $105 million and generate earnings of $[.70] during FY:98.... Company Highlights/Investment Thesis CAMP has recently begun shipping proprietary MultiCipher technology which eliminates the need for wireless cable TV networks to provide set-top boxes in order to protect their signals from unauthorized use. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 35. On Dec. 6, 1995, California Amplifier appeared at the Montgomery Securities conference and made a presentation to the assembled securities analysts, money and portfolio managers, institutional investors, large California Amplifier stockholders and brokers to discuss California Amplifier's business and prospects and the IBC contract. During that presentation, and in subsequent one-on-one conversations with participants, Coron directly disseminated the following important information to the market by stating: - 26 -
• Demand for California Amplifier's wireless cable equipment was very strong, especially in the domestic market, and its sales of these products were accelerating. • Customer acceptance of California Amplifier's MulticipherTM product was very strong, especially in the international market. The IBC contract would likely result in millions in follow-on revenue for sales of MultiCipherTM in F97 and F98. • California Amplifier's sales of satellite products would grow throughout F97, due to sales of Ku satellite products. • California Amplifier was successfully developing its Multicipher PlusTM product, a proprietary broadband scrambling system, which was being successfully Beta tested. • California Amplifier expected to receive large orders from Saudi Arabia and Australia during F97. • California Amplifier expected higher F97 revenues than earlier forecast, with EPS now to reach at least $.50-$.55. • California Amplifier expected to achieve sequentially improving gross profit margins and 25%-30% EPS growth over the next few years. 36. On Dec. 7, 1995, Montgomery Securities issued a report on California Amplifier, written by Robinson with the assistance of Coron, based on conversations between Robinson and Coron in which a two-way flow of information occurred between them and they agreed upon the contents of the report. Coron reviewed and approved the report before it was issued. The report also repeated information from Coron's presentation to the Montgomery Securities Technology Conference and forecast a 30% secular EPS growth rate, F97 EPS of $.50-$.55 and stated: Highlights from Montgomery Securities 13th Annual Technology Conference CEO Ike Coron . . . delivered an upbeat presentation highlighting overseas growth and new product initiatives. Management described the tone of business positively implying numerous overseas prospects and continuing "deal flow" for new networks, both for basic wireless and MultiCipher. In addition to production networks in - 27 -
Thailand, MultiCipher has now been seeded in Argentina, Iceland, Nigeria and Uruguay. Current revenue mix was described as 70% international. Several product and technology initiatives were discussed including: • Tiered MultiCipher for premium and pay-per-view (suited for more mature markets); • MultiCipher for non-wireless apps (expansion to multiple dwelling units and CATV); • Integrated MultiCipher (system cost reduction implying value pricing and higher margin); • Digital Ku sat. receivers (products to serve the DirecTV-type mkt. - due by Feb.). . . . Discussion of both MultiCipher for non-wireless applications and transceiver products was incremental to CAMP's corporate presentation and suggest new dimensions for the company's long term revenue prospects. Management described the wireless cable market as accelerating while the Ku satellite receiver market is growing. The promising implications of the new digital Ku product suggest the potential for a turn around in CAMP's sat. receiver business as Ku growth offsets the obsolescence of C-band products. . . . Company indicated expectations for continued gross margin expansion and operating leverage. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 37. On Dec. 12, 1995, California Amplifier issued a release reporting its 3rdQ F96 results, which stated: Ira Coron, Chairman and Chief Executive Officer, commented, "We continue to experience strong demand for our Wireless Cable products worldwide." 38. On Dec. 13, 1995, California Amplifier held a telephone conference call with securities analysts, money and portfolio managers, institutional investors, large California Amplifier stockholders and brokers to discuss California Amplifier's results - 28 -
and prospects. During that call, and in subsequent one-on-one conversations with analysts, Coron and Ferron directly disseminated the following important information to the market by stating: • Demand for California Amplifier's wireless cable equipment was very strong, leading to accelerating sales of those products. • Customer acceptance of California Amplifier's MultiCipherTM product was very strong. • California Amplifier's sales of satellite products would grow throughout F97. • California Amplifier was successfully developing its MultiCipher PlusTM product, a proprietary broadband scrambling system, which was succeeding in its Beta testing and would be introduced in F97, leading to strong revenue and EPS growth in F97 and F98. • California Amplifier expected to receive large orders from Saudi Arabia and Australia during F97. • California Amplifier now expected even higher F97 revenues than earlier forecast, with revenues of at least $80 million with EPS as follows: 1st Q $.13 2nd Q $.14 3rd Q $.14 4th Q $.15 FY 97 $.55 • California Amplifier expected to achieve sequential gross profit margin growth and 25%-30% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. 39. On Dec. 13, 1995, Robertson Stephens issued a report on California Amplifier, written by Deluca, that repeated information from the Dec. 13, 1995 conference call, forecast a three-year secular growth rate of 25% for California Amplifier and the following F97 revenues and EPS: - 29 -
FY97E EPS: 1Q $0.13 2Q $0.14 3Q $0.14 4Q $0.15 Year $0.55 * * * Revs ($MM) FY97E 1Q 18.5 2Q 19.5 3Q 20.6 4Q 21.6 Year $80.2 The report also stated: [W]e are raising our . . . FY97 estimates to $80.2 million and $[.55] from $78.6 million and $[.53], respectively.... California Amplifier's wireless cable equipment sales continue to expand at well over a 50% growth rate (73.0% of total sales). We believe that a quarter over quarter growth rate of 35%-plus could be maintained for the next four quarters due to 1) international market growth, 2) faster new product development, and 3) the continued acceptance of MultiCipher - the company's proprietary scrambling system. We have also factored in modest improvement for the company's satellite component business which appears to have bottomed in Q2 FY96, ended August 1995. * * * [T]he Company recently began shipping its proprietary broadband scrambling system known as MultiCipher, a product that further lowers the cost of wireless cable by eliminating the need for multiple set-top boxes. 40. On Dec. 13, 1995, Montgomery Securities issued a report on California Amplifier, written by Robinson, which repeated information from the Dec. 13, 1995 conference call, forecast a 30% secular EPS growth rate for California Amplifier and F97 EPS of $.55. The report also stated: We have increased our estimates based on an improving outlook for satellite receiver demand, gross margin expansion and operating expense leverage. - 30 - * * * Wireless cable demand continues to grow, with management indicating continuing strength in Southeast Asia and emerging demand in Australia and Eastern Europe. The company recently began shipping Ku-band satellite receivers to Australia for DBS (direcTV-type) service. Management indicated that this business should accelerate when new satellite receivers for DBS begin to ship in early calendar 1996. On the basis of emerging demand for new satellite receiver applications combined with increased gross margin expectations, we have increased our estimates as follows: FY97E ----- ($ 000s) Current Previous Estimate Estimate -------- -------- Wireless Cable (Including Multicipher) $65,500 $65,410 Satellite Receivers 18,000 14,590 Total Revenue $83,500 $80,000 Gross Margin 34.4% 34.0% Operating Margin 12.8% 12.0% EPS $[.55] $[.50] * * * California Amplifier is a direct beneficiary of the demand for wireless as the economic substitute for copper in emerging nations: More than 60% of California Amplifier's sales come from outside the U.S., where cable infrastructure for pay TV is uncommon. * * * The company recently began shipping proprietary MultiCipher technology, which eliminates the need for wireless cable TV networks to provide set-top boxes in order to protect their signals from unauthorized use. During the current calendar year the company plans to introduce products for Direct Broadcast Satellite (DBS) applications which will enable it to participate in the growth of direct-to-home video delivery by networks such as DirecTV. California Amplifier stock reached a then all-time high of $16-1/8 per share on Dec. 13, 1995. - 31 -
41. The foregoing positive statements issued by the defendants between Sept. 12, 1995 and Dec. 13, 1995 concerning California Amplifier's business were each false and misleading when made. The true facts, which were known only to defendants due to their access to confidential non-public information about California Amplifier and which they concealed from the public, were: (a) That California Amplifier was encountering slowing growth in the sales of its wireless products because its customers were deferring purchases due to a transition from analog to digital products; (b) That California Amplifier's competitive position was being seriously impaired by the switch from C-band satellite TV receiver products to Ku-band satellite receiver products because California Amplifier had only a very few Ku-band products to sell, which were insufficient to offset the decline in C-band sales, which was penalizing California Amplifier's revenue and EPS growth; (c) That sales of California Amplifier's original MultiCipherTM products were much less than expected, in large part because it permitted the scrambling of only one channel and thus was not in demand by wireless cable TV systems that wanted to scramble multiple channels; (d) That California Amplifier's original MultiCipherTM product had a very limited market consisting of those few wireless cable TV systems that only wanted to scramble one channel and for California Amplifier to achieve significant revenue and EPS growth, it had to successfully introduce in the near term MultiCipher - 32 -
PlusTM, a product which permitted the scrambling of up to five channels and thus had a much broader potential market; (e) That California Amplifier's MultiCipher PlusTM product was months behind schedule in its development and California Amplifier had encountered serious and persistent problems with that product during Beta testing which indicated that the product needed to be redesigned and that it would likely encounter a high rate of failure in the field; (f) That in order to push MultiCipher PlusTM products out into the market to meet competitive pressures, California Amplifier had released that product for commercial production and sale, even though the serious problems encountered in Beta testing had not been resolved or fixed and it was virtually certain that the MultiCipher PlusTM problems would lead to a high rate of field failures; (g) That California Amplifier knew that it would not be receiving follow-on orders from its Southeast Asian customers and that the lack of repeat or follow-on business from those sources would hurt California Amplifier's business, revenue and orders very badly during F97; (h) That two of California Amplifier's customers, Heartland Wireless and American Telecasting, had advised California Amplifier that due to their financial problems, they would be ordering only limited quantities of MultiCipher PlusTM scramblers from California Amplifier, well below levels earlier indicated; (i) That California Amplifier would not be obtaining any significant orders for DBS products from the Australian cable consortium it was talking to as that consortium was encountering - 33 -
serious financial difficulty and was unable to raise sufficient capital to further build out its system and make significant orders with California Amplifier; (j) That California Amplifier had been informed by its potential customer in Saudi Arabia that, due to delays in negotiating the relocation of existing microwave equipment that would cause significant interference with the signal transmission of California Amplifier's equipment, the Saudi Arabian order would be delayed for many months at a minimum; and (k) That as a result of the foregoing, defendants knew that California Amplifier's forecasts of sequentially increasing gross profit margins through F97 and F98, a 25%-30% growth rate during F97 and F97 EPS of $.55 and 1stQ, 2ndQ, 3rdQ and 4thQ F97 EPS of $.13, $.14, $.14 and $.16, respectively, were false and misleading when made, as they were contradicted by the above- described adverse conditions affecting California Amplifier's business which made obtainment of those forecasts impossible. 42. On or about Feb. 12, 1996, California Amplifier appeared at the Cruttenden Roth 8th Annual Growth Stock Conference and Coron and Ferron made a presentation to the assembled institutional and industry investors, money and portfolio managers, analysts, brokers and stock traders, directly disseminating important information to the market by stating: • California Amplifier was in the process of closing large sales of DBS downconverter products in Australia. • California Amplifier had successfully developed its Multicipher PlusTM product, had successfully Beta tested that product and had successfully introduced its new MultiCipherTM proprietary broadband scrambling system. - 34 -
• California Amplifier expected to receive large orders from Saudi Arabia and Australia within the next few months. • California Amplifier was increasing its revenues and EPS forecast due to the strength of its business. It now expected F97 revenues of at least $83 million with EPS as follows: 1st Q $.13 2nd Q $.14 3rd Q $.15 4th Q $.17 FY 97 $.60 • California Amplifier expected to achieve sequential growth in its gross profit margins and 30%-40% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. California Amplifier stock hit a then all- time high of $24-3/16 on Feb. 16, 1996. 43. On Mar. 7, 1996, Montgomery Securities issued a report on California Amplifier, written by Robinson, with the assistance of Coron and Ferron, based on conversations between Robinson and Coron and Ferron in which a two-way flow of information occurred between them and they agreed upon the contents of the report. Coron or Ferron reviewed and approved the report before it was issued. The report forecast a 25% secular EPS growth rate and F97 EPS of $.55 for California Amplifier and stated: New Products Consumer Ku band downconverters for digital satellite reception began shipping last month. MultiCipher Plus will ship in the current quarter. MultiCipher Plus supports different levels of scrambling, which enables carriers to offer premium and pay-per view service. It is an upgrade path overseas and a cost reduction path (elimination of analog settop box) domestically where tiered service is a requirement. - 35 -
Overseas First quarter of 1997: Australia for Ku band satellite receivers (a la DirecTV) as well as wireless cable); Mid-year: Wireless cable opportunities are emerging with new countries in the Middle East, Asia and South America. Domestic Checks with management indicate that interest in MultiCipher Plus is developing in the U.S., with potential for sales mid-year. * * * . . . Management's demonstrated operating prowess positions the company for margin expansion as these new revenue streams materialize. We expect positive overseas developments to continue as digital wireless cable and telco driven demand develops domestically. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 44. On Mar. 15, 1996, California Amplifier appeared at the Robertson Stephens & Company Technology '96 Conference in San Francisco. Coron appeared for the Company and directly disseminated important information to the market by telling the assembled individual and institutional investors, money and portfolio managers, analysts, brokers and stock traders that: • California Amplifier was in the process of closing large sales of DBS downconverter products in Australia. • California Amplifier had successfully developed its Multicipher PlusTM product, had successfully Beta tested that product and had successfully introduced its new MultiCipherTM proprietary broadband scrambling system. • California Amplifier expected to receive large orders from Saudi Arabia and Australia within the next few months. - 36 -
• California Amplifier was increasing its revenues and EPS forecast due to the strength of its business. It now expected F97 revenues of at least $83 million with EPS as follows: 1st Q $.13 2nd Q $.14 3rd Q $.15 4th Q $.17 FY 97 $.60 • California Amplifier expected to achieve sequential growth in its gross profit margins and 30%-40% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. On Mar. 22, 1996, California Amplifier's stock was split 2-for-1. On Mar. 25, 1996, California Amplifier's stock advanced to a new all-time high of $28-1/8 per share. 45. On Apr. 10, 1996, California Amplifier reported its fourth quarter F96 and F96, ended Mar. 2, 1996, results via a press release: . . . "The growth in Wireless Cable sales reflects our continued efforts to broaden the Wireless Cable product line and identify new opportunities around the World. Especially gratifying was the successful introduction of MultiCipherTM, our proprietary broadband scrambling system used by Wireless Cable operators. The international markets, primarily Asia and Latin America, were the primary areas of our Wireless sales growth." "In each of the sequential quarters throughout fiscal year 1996, we continued to meet our objective to increase product gross margins. Fiscal year 1996 fourth quarter gross margins increased to 34.9% and gross margins for the entire 1996 fiscal year were 34%, compared to 31.2% for fiscal year 1995. We achieved the improvement as a result of increased productivity, new product designs, cost reduction programs and the sales mix shift from Satellite Television to Wireless Cable reception products and MultiCipher." 46. On Apr. 10, 1996, California Amplifier held a telephone conference call with securities analysts, money and portfolio managers, institutional investors, large California Amplifier stockholders and brokers to discuss California Amplifier's results - 37 -
and prospects. During that call, and in subsequent one-on-one conversations with analysts, Coron and Ferron stated the following information which entered the market: • California Amplifier was in the process of closing large sales of a DBS downconverter product in Australia. • California Amplifier had successfully developed its MultiCipher PlusTM product, had successfully Beta tested that product and was successfully introducing its new MultiCipherTM proprietary broadband scrambling system which was proving itself in the field. • Three major domestic wireless companies, including Heartland and American Telecasting, had placed large MultiCipher PlusTM orders. • California Amplifier expected to receive large orders from Saudi Arabia and Australia within the next few months. • Due to the strength of its business, demand for its products and the anticipated success of its MultiCipher PlusTM product, California Amplifier anticipated continuing growth in gross profit margins during F97-F98. • California Amplifier expected F97 revenues of at least $83 million with EPS as follows: 1st Q $.14 2nd Q $.15 3rd Q $.16 4th Q $.18 FY 97 $.63 • While California Amplifier expected a "flat" 1stQ F97 due to the expenses of new product introduction, it expected strong revenue and EPS growth in F97 as a whole and in F98, even stronger than earlier forecast. • California Amplifier now expected to achieve 30%-40% EPS growth over the next few years with F98 revenues and EPS of $106 million and $.85, respectfully. Analysts repeated some of this information to the market in reports over the next few days. 47. On Apr. 10, 1996, Cruttenden Roth issued a report on California Amplifier, written by D. L. Wardwell, which repeated information from the Apr. 10, 1996 conference call and stated: - 38 -
FY96 EPS RESULTS. On 4/10/96, CAMP reported an 86% increase in FY96 EPS to $0.41 from $0.22. The $0.01 better-than-expected report can be attributed to slightly higher FY4Q96 gross margin of 34.9% vs. our estimate of 34.5%. FISCAL 1Q97 EPS OUTLOOK. In fiscal lQ97, CAMP does not expect any gross margin improvement relative to its fiscal 4Q96 margin because of costs associated with the rollout of two new products: 1) MultiCipher Plus in the U.S.; and 2) a DBS downconverter product in Australia. * * * [T]here is no change to our 1Q97 EPS estimate of $0.13 vs. $0.07. Although 1Q97 sales will be up sequentially from 4Q96 sales, net income and EPS are expected to be flat to slightly down from 4Q96 results. FY97 EPS REFINED UPWARD. We are refining upward our FY97 EPS estimate to $0.60 from $0.58 because CAMP's gross margin in fiscal 2H97 is expected to be somewhat better than we had modeled. * * * [T]he macro-trends within the cable wireless industry are overwhelmingly favorable. Worldwide wireless cable is expected to grow 50% in FY97. In the U.S., the market for wireless cable reception products is nonexistent with 1995 sales of $30 million. The U.S. introduction of digital wireless TV beginning in 1997 could mean significant business for wireless equipment manufacturers such as CAMP. With new product introductions, CAMP could gain market share and grow faster than the projected growth rate of 50% for the wireless cable industry. 48. On Apr. 11, 1996, Robertson Stephens issued a report on California Amplifier, written by Deluca, which repeated information from the Apr. 10, 1996 conference call, increased the forecasted three-year secular growth rate for California Amplifier to 27% and forecast the following FY97 and F98 revenues and EPS for California Amplifier: FY97E FY98E EPS: 1Q $0.14 $0.18 2Q $0.15 $0.20 3Q $0.16 $0.22 4Q $0.18 $0.24 Year $0.63 $0.85 - 39 -
* * * Revs ($MM) FY97E FY98E 1Q 19.0 24.1 2Q 20.2 25.7 3Q 21.4 27.3 4Q 23.0 29.5 Year $83.6 $106.6 The report also stated: CAMP: REPORTS STRONG Q4 FY96 RESULTS . . . SHIPPING NEW PRODUCTS IN Q1 . . . RAISING ESTIMATES KEY POINTS: . . . Revenue growth is being driven by international demand for wireless cable equipment along with initial Multicipher acceptance. * * * . . . These significant estimate boosts include new products and two of five-plus "major" opportunities that we expect the company to "win" in CY96. * * * The company is currently qualifying its new Multicipher-Plus scrambling system with three domestic wireless system operators. California Amplifier is negotiating follow-on orders to the operators' initial "qualifying" purchases. We believe the product is proving itself in the field and expect the company to land at least one of these domestic system follow-on orders for Multicipher-Plus in the first half of FY97. Multicipher-Plus is the next generation of CAMP's Multicipher scrambling system. Multicipher-Plus permits channel line-up tiering - a feature that is in high demand in domestic and other "mature" multichannel television markets. We believe the original Multicipher should still enjoy its appeal in many international markets where the price premium for tiering cannot be justified. Thus, we anticipate that Multicipher-Plus should have limited cannibalization impact on the original Multicipher and rather provides a viable upgrade path for single-tier systems. Along with these significant opportunities the company is currently in the running for several "major" market opportunities including; Saudi Arabia [and] Australia . . . . Finally, the company is also shipping initial quantities of a new DBS product targeted at international markets. Its first customer is based in Australia and - 40 -
should help to improve the margin contribution from the companies satellite business. . . . It appears that CAMP is on the verge of 5+ potential significant revenue opportunities that were not previously in our estimates. These large potential orders range from $2-3 million MultiCipher orders with potential follow-on revenues to $5+ million initial orders with significant follow-on potential - the largest of which are . . . Saudi Arabia's multichannel television service. We believe that current demand is strong and that the company can achieve its goal of sequential growth of revenues and net income along with improving margins. Management had stated that its gross margin goal was 35%. Having nearly attained that in Q4 FY96, management now believes that the high 30s to 40% gross margins are its new goal. Despite the start-up costs associated with the initial manufacture of new products (Multicipher-Plus and a satellite DBS product for international markets), we believe gross margins should continue to improve in Q1 and Q2 with potential to dramatically improve in Q3 and Q4. 49. On Apr. 11, 1996, Montgomery Securities issued a report on California Amplifier, written by Robinson. The report repeated information from the Apr. 10, 1996 conference call, raised the forecasted secular EPS growth rate for California Amplifier to 40% and forecast F97 and F98 EPS of $0.60 and $0.90, respectively, for California Amplifier. The report also stated: MultiCipher Gathers Steam; Positive Gross Margin Implications; EPS Estimates Increased * * * • We have increased our estimates based on an improved outlook for MultiCipher demand and continued seeding of overseas networks. MultiCipher is now being adopted by domestic carriers. In addition to enhancing the domestic revenue stream, domestic operators promise to be strong reference accounts for penetration of overseas networks. Success with MultiCipher means a technology franchise that could significantly extend the company's ability to deliver improving gross margin. Unlike the downconverter business, where high margins could eventually invite market entrants, MultiCipher is a proprietary technology that has intrinsically higher barriers to competition. - 41 -
. . . During the next two quarters the company is positioned to address significant new business opportunities in Australia and Saudi Arabia . . . . Forecast Update FY97 (Current) FY97 (Previous) EPS $0.60 $0.55 * * * New Products Ku-band satellite receivers are now shipping in volume for DBS (DirecTV-type) service. The first major customer is the Galaxy system in Australia. MultiCipher Plus began shipping in the quarter. MultiCipher Plus is a significant enhancement to CAMP's scrambling technology in that it supports multiple levels of scrambling so that premium channels and pay-per-view content can be offered by carriers. Previously, wireless cable operators had to provide set top boxes to deliver premium service because first-generation MultiCipher had only one level of scrambling. Production deliveries of MultiCipher Plus had been the gating item for adoption of CAMP's scrambling technology in the domestic market, where premium content offerings are a competitive mandate for operators. Management indicated that three domestic wireless carriers will be deploying MultiCipher Plus in the next few months. Although initial domestic usage will be in new, smaller networks, adoption of MultiCipher Plus in the domestic market promises to be a powerful endorsement of the technology and a compelling reference for prospective customers. * * * . . . In addition, shipments to a large new operator in Saudi Arabia could begin during the next 60 days. Management commented that the increase in gross margin during the quarter occurred despite the ramp of MultiCipher Plus, for which cost objectives have yet to be achieved due to early-stage production issues. MultiCipher Plus production efficiency is expected to reach near-term target levels during 2Q97. We expect margins to accelerate in 3Q97. 50. On Apr. 19, 1996, J.C. Bradford & Co. issued a research report on California Amplifier, written by D.L. Crider. Crider - 42 -
obtained the information in this report about California Amplifier from California Amplifier, specifically Coron and Ferron, who Crider met and talked with while authoring this report. During these conversations with Coron and Ferron, they spoke to Crider and Crider spoke to them in a two-way exchange of information, as a result of which they agreed on what Crider's report would say about California Amplifier. Coron and Ferron reviewed the report before it was issued and approved its content and issuance. Thereafter, California Amplifier made copies of the J.C. Bradford report and distributed copies of the report to potential investors and others, thus adopting and endorsing the report. The report forecast the following F97 and F98 EPS for California Amplifier: EPS 1997E 1998E 1Q $0.15 $0.20 2Q $0.16 $0.22 3Q $0.17 $0.23 4Q $0.18 $0.25 Full Year $0.66 $0.90 The report also stated: The combination of strong earnings momentum, an impressive management team, and an appealing and expanding product line make [California Amplifier) an attractive investment... Wireless Cable Is Experiencing Explosive Growth * * * Paradigm Shift to Digital Wireless Cable Bodes Well For Equipment Suppliers * * * Exceptional Revenue and Earnings Growth Potential We currently project revenue growth of 37% year over year in FY1997 and 31% in FY1998. With margin expansion in each of the next two fiscal years, we believe EPS can grow even faster. Our expectations for high growth are based in part on California Amplifier's new MultiCipher Plus tiered scrambling system. This new five-channel - 43 -
conditional access product was introduced in the F1Q97 and is expected to begin shipping in quantity by the 2Q. Longer-term, we expect [California Amplifier] will introduce products that will compete in the fast-growing direct broadcast satellite segment. We estimate the company can earn revenues of $84.5 million in fiscal 1997 and exceed the $100 million mark by the end of fiscal 1998. * * * The MultiCipher, a broadband whole-house scrambling system currently is California Amplifier's fastest- selling product. A cost-effective solution that provides signal security against broadcast programming piracy, the MultiCipher has been in high demand among wireless cable operators around the world since its introduction to the market in January 1995. . . . Following the commercial introduction of the MultiCipher Plus, which will satisfy a wireless cable operator's need to protect broadcast signals while meeting various levels of television programming subscriptions, we believe [California Amplifier] will be well positioned to gain incremental market share. After this report was issued, California Amplifier copied and distributed this report, thus endorsing it and adopting it as its own. 51. On or about June 2, 1996, California Amplifier issued its F96 Annual Report for the year ended Mar. 2, 1996. The report contained a letter, signed by Coron, which stated: During fiscal year 1996, Wireless Cable sales accounted for 70 percent of the Company's overall sales total of $61.6 million.... Much of the increase was generated by the growth of wireless cable markets overseas, particularly in Latin America and Asia, where demand for pay television is just emerging and wireless cable has proven to be an economical means of delivery. Based on our own sales trends and the projections of market experts, we expect to see continued growth in these markets. The U.S. wireless cable industry experienced some market softness during the Company's fiscal year 1996, as many multiple system operators deferred their growth plans, awaiting the availability of digital system equipment in late 1996 or 1997. We expect the intro- duction later this year of the new digital wireless cable - 44 -
technology to stimulate growth in the domestic wireless cable industry. MultiCipherTM, our proprietary broadband scrambling system for wireless cable operators, also contributed to the increase in Wireless Cable sales. With 11 installa- tions already in place, sales of this product continue to be strong, particularly in the international markets. During the past fiscal year, we also successfully completed Beta testing of MultiCipher PlusTM, which provides the added ability to differentiate programming between households, and sales should commence in early fiscal year 1997. This product addition, aimed at the domestic analog wireless cable market, will reinforce California Amplifier' s position as a leader in innovative wireless cable technology. * * * We are carefully evaluating the business oppor- tunities for California Amplifier in the rapidly expanding KU-DBS market. During fiscal year 1996, we designed our first new KU-DBS product, a high-quality downconverter, which was recently introduced for sale. This is an extremely price competitive mass market in which our most profitable opportunities may be in niche markets, where we can develop solid market share while keeping product gross margins at an acceptable level. 52. Elsewhere, California Amplifier's F96 Annual Report stated: California Amplifier has proven its competitive advantage in both markets, offering wireless cable operators and satellite television distributors the most complete lines of video reception equipment, competitive pricing packages and an exceptional level of engineering and technical after-sale support. The Company will continue to set standards of performance and excellence in these industries in the years to come, building on its reputation for product innovation, quality service and customer loyalty. 53. On June 6, 1996, California Amplifier appeared at an Oppenheimer Wireless Communications Equipment Conference in New York City. Coron and Ferron made presentations for California Amplifier and met with the investors, analysts, money managers and traders who were present in break-out sessions, during which they - 45 -
directly disseminated important information to the markets by stating: • California Amplifier was in the process of closing large sales of DBS downconverter products in Australia. • California Amplifier had successfully developed its Multicipher PlusTM product, had successfully Beta tested that product and had successfully introduced its new MultiCipherTM proprietary broadband scrambling system. • California Amplifier expected to receive large orders from Saudi Arabia and Australia within the next few months. • California Amplifier expected F97 revenues of at least $83 million with EPS as follows: 1st Q $.15 2nd Q $.16 3rd Q $.17 4th Q $.18 FY 97 $.66 • California Amplifier expected to achieve 30%-40% EPS growth over the next few years. Analysts repeated some of this information to the market in reports over the next few days. 54. Fueled by this positive information, California Amplifier soared to a Class Period and all-time high of $48-3/4 per share on June 4, 1996, from $7-1/4 per share in early Sept. 1995. 55. On June 6-12, 1996, rumors circulated that California Amplifier's 1stQ F97 results would be worse than earlier forecast and that California Amplifier was encountering problems with its newest products. California Amplifier's stock fell sharply from $44-1/4 per share on June 6, 1996, to $32-1/2 per share on June 12, 1996. On June 12, 1996, California Amplifier reported its revenues and EPS for the 1stQ F97, ended June 1, 1996, which were slightly less than previously forecast, indicating it had accumulated larger - 46 -
than anticipated inventories of MultiCipher PlusTM and KU-DBS products. 56. After this June 12, 1996 release, California Amplifier's stock fell sharply to as low as $25-3/8 per share on June 13, 1996. The defendants desperately wanted to stem the sharp decline in California Amplifier's stock. Thus, California Amplifier held a conference call on June 13, 1996, with securities analysts, money and portfolio managers, institutional investors, large California Amplifier stockholders and brokers to discuss California Amplifier's business and prospects. During that call, and in subsequent one-on-one conversations with analysts, Coron and Ferron admitted there was softness in the domestic wireless analog equipment market and there were temporary delays in the Australia and Saudi Arabia contracts. However, they reassured those they talked with that: • California Amplifier's forecasts for F97 remained essentially unchanged, with revenues of $80+ million and EPS of at least $.55-$.60, and F98 EPS of $.90. • California Amplifier was still expecting to receive large contracts in Saudi Arabia and Australia in the near term. • California Amplifier's MultiCipher PlusTM product had been successfully developed and would be shipped in volume as soon as some minor performance and production issues were resolved. The product had thus far performed well in the field and sales of the product had picked up, and California Amplifier expected to ship and recognize $7 million in MultiCipher PlusTM revenues in the current quarter. • The increase in California Amplifier's inventories during the 1stQ were as expected and were not a problem. The increases were due to increases in MultiCipher PlusTM inventories in anticipation of volume shipment of that product. Because of these false reassurances, which Coron and Ferron repeated to analysts throughout July 1996, while California - 47 -
Amplifier's stock continued to plummet, falling to as low as $14- 3/4 by early July 1996, it still traded at artificially inflated prices throughout the balance of the Class Period. 57. The foregoing positive statements issued by the defendants between Feb. 12, 1996 and the end of the Class Period concerning California Amplifier's business were each false and misleading when made. The true facts, which were known only to defendants due to their access to confidential non-public information about California Amplifier and which they concealed from the public, were: (a) That California Amplifier was encountering slowing growth in the sales of its wireless products because its customers were deferring purchases due to a transition from analog to digital products; (b) That California Amplifier's competitive position was being seriously impaired by the switch from C-band satellite TV receiver products to Ku-band satellite receiver products because California Amplifier had only a very few Ku-band products to sell, which were insufficient to offset the decline in C-band sales, which was penalizing California Amplifier's revenue and EPS growth; (c) That sales of California Amplifier's original MultiCipherTM products were much less than expected, in large part because the product permitted the scrambling of only one channel and thus was not in demand by wireless cable TV systems that wanted to scramble multiple channels; (d) That California Amplifier's original MultiCipherTM product had a very limited market consisting of those few wireless cable TV systems that only wanted to scramble one channel and for - 48 -
California Amplifier to achieve significant revenue and EPS growth, it had to successfully introduce in the near term MultiCipher PlusTM, a product which permitted the scrambling of up to five channels and thus had a much broader potential market; (e) California Amplifier's MultiCipher PlusTM product was months behind schedule in its development and California Amplifier had encountered serious and persistent problems with that product during Beta testing which indicated that the product needed to be redesigned and that it would likely encounter a high rate of failure in the field; (f) That in order to push MultiCipher PlusTM products out into the market to meet competitive pressures, California Amplifier had released that product for commercial production and sale, even though the serious problems encountered in Beta testing had not been resolved or fixed and it was virtually certain that the MultiCipher PlusTM problems would lead to a high rate of field failures; (g) That California Amplifier knew that it would not be receiving follow-on orders from its Southeast Asian customers and that the lack of repeat or follow-on business from those sources would hurt California Amplifier's business, revenue and orders very badly during F97; (h) That two of California Amplifier's customers, Heartland Wireless and American Telecasting, had advised California Amplifier that due to their financial problems, they would be ordering only limited quantities of MultiCipher PlusTM scramblers from California Amplifier, well below levels earlier indicated; - 49 -
(i) That California Amplifier would not be obtaining any significant orders for DBS products from the Australian cable consortium it was talking to as that consortium was encountering serious financial difficulty and was unable to raise sufficient capital to further build out its system and make significant orders with California Amplifier; (j) That California Amplifier had been informed by its potential customer in Saudi Arabia that, due to delays in negotiating the relocation of existing microwave equipment that would cause significant interference with the signal transmission of California Amplifier's equipment, the Saudi Arabian order would be delayed for many months at a minimum; and (k) As a result of the foregoing, defendants knew that California Amplifier's forecasts of sequentially increasing gross profit margins through F97 and F98, at 25%-40% growth rate during F97 and F98, F97 EPS of $.55-$.66, F97 1stQ, 2ndQ, 3rdQ and 4thQ EPS of $.13-$.14, $.14-$.16, $.15-$.17 and $.17-$.18, respectively, and F98 EPS of $.85-$.90, were false and misleading when made, as they were contradicted by the above-described adverse conditions affecting California Amplifier's business which made obtainment of those forecasts impossible. 58. On Aug. 8, 1996, California Amplifier admitted that shipment of the MultiCipher PlusTM would be delayed indefinitely due to design and operational defects exposed by consistent high rates of field failures and its revenues for the 2ndQ would decline sharply and it would suffer a loss. California Amplifier's stock collapsed to as low as $6-1/2 per share on Aug. 8, 1996, compared to its Class Period high of $48-3/4 on June 4, 1996 -- just two - 50 -
months earlier. A few weeks later, Nichols, a co-founder of California Amplifier and its Executive Vice President, resigned. Then, California Amplifier reported 2ndQ F97 sales of just $11.4 million and a loss of $.02 per share, due to delays in the "roll out" of MultiCipherTM-related products and the failure to close sales in Australia and Saudi Arabia. California Amplifier later reported very poor 3rdQ F97 results with revenues of just $11.7 million and EPS of only $.01, sharp declines from the prior year. Then, for the 4thQ F97, California Amplifier reported sales of just $8.8 million and a net loss of $.08 and F97 revenues of $49 million and EPS of just $.05, sharp declines from F96, due to, inter alia, the failure of the Company to ship significant MultiCipherTM products or obtain significant sales from Australia and Saudi Arabia. 59. Coron admitted that California Amplifier's horrible results were due to significant delays in domestic and international orders, "softness in the domestic market," and delays in major international orders. On Aug. 20, 1996, Nichols "resigned" from California Amplifier. In Oct. 1996, Coron discussed the reasons for California Amplifier's poor results: [W]e ended last fiscal year and through the first quarter with some very heavy shipments to Southeast Asia on new systems that were being launched, and we knew that was not going to repeat. We felt we have enough time to replace that with other new systems in Australia, Saudi Arabia, and a variety of other places. For different reasons, each of those has been delayed. . . . Australia is not [progressing]. They're having some financial problems in funding the growth of the Australia system. * * * The Saudi system which is pretty well-known, I mean, that's the only reason I would talk about it so openly, is a very large planned system throughout Saudi Arabia, - 51 -
and that finally seems to be progressing. They are now taking some steps towards defining the frequencies at which they can transmit, and we are working pretty closely with the Saudis. We're counting on a small increment of sales in the fourth quarter out of Saudi Arabia, but nothing significant. * * * MultiCipher PlusTM . . . was late in introduction after some false starts, and that also had the impact on the second quarter. 60. The chart below shows the collapse in California Amplifier's business compared to the strong increases forecast during the Class Period: California Amplifier, Inc. Quarterly Results* (in thousands) Fiscal 1996 06/03/95 09/02/95 12/02/95 03/02/96 Year ---------------------------------------------------------- Revenue $12,665 $14,505 $16,314 $18,106 $61,590 Gross margin 33% 34% 34% 35% 34% Operating Income 1,255 1,666 2,043 2,533 7,497 Net Income 852 1,071 1,357 1,678 4,958 EPS $0.07 $0.09 $0.11 $0.14 $0.41 Fiscal 1997 06/01/96 08/31/96 11/30/96 03/01/97 Year ---------------------------------------------------------- Revenue $17,275 $11,463 $11,702 $ 8,850 $49,290 Gross margin 35% 30% 29% 18% 29% Operating Income 2,353 (415) 128 (1,378) 688 Net Income 1,623 (209) 127 (908) 633 EPS $0.13 ($0.02) $0.01 ($0.08) $0.05 * All EPS amounts reflect a 2-for-1 stock split in 3/96. DEFENDANTS' INSIDER TRADING 61. During the Class Period, while California Amplifier's insiders were issuing false and misleading statements about California Amplifier, California Amplifier's insiders named as defendants sold or otherwise disposed of over 701,658 million shares of the California Amplifier stock they owned worth over $17.9 million, to profit from the artificial inflation in California Amplifier's stock price their violation of law had - 52 -
created before the truth became known and California Amplifier's stock price crashed. These stock sales all occurred in this state -- California. Notwithstanding their access to material non-public information as a result of their positions with the Company, the California Amplifier insiders sold the following amounts of California Amplifier shares at artificially inflated prices throughout the Class Period while in possession of material non- public information: SHARES SHARES SHARE PURCHASED SHARE % INSIDER DATE SOLD PRICE PROCEEDS BY OPTION PRICE SOLD ------- ---- ------ ----- -------- --------- ----- ---- Coron, I. 09/26/95 20,000 $10.75 $ 215,000 01/02/96 15,000 $13.63 204,375 15,000 $2.57 04/12/96 17,500 $2.44 04/12/96 17,500 $1.75 ------ ---------- ------ Subtotals: 35,000 $ 419,375 50,000 ====== ========== ====== Percentage of Shares Sold: 20% === Ferron, M. 12/19/95 50,000 $13.34 $ 667,000 ------ ---------- Subtotals: 50,000 $ 667,000 ====== ========== Percentage of Shares Sold: 100% ==== Hausman, A. 09/22/95 20,000 $11.28 $ 225,600 20,000 $1.69 01/02/96 30,000 $13.63 408,750 20,000 $1.69 02/09/96 20,000 $18.83 376,600 20,000 $1.69 ------ ---------- ------ Subtotals: 70,000 $1,010,950 60,000 ====== ========== ====== Percentage of Shares Sold: 100% ==== McKenna, W. 09/22/95 20,000 $11.28 $ 225,600 5,000 $0.63 09/22/95 15,000 $1.13 01/02/96 30,000 $13.63 408,750 30,000 $0.69 01/02/96 20,000 $13.63 $ 272,500 20,000 $0.69 ------ ---------- ------ Subtotals: 70,000 $ 906,850 70,000 ====== ========== ====== Percentage of Shares Sold: 34% === Nichols, D. 09/25/95 40,000 $10.85 $ 434,000 01/25/95 40,000 $16.40 $ 656,000 ------ ---------- Subtotals: 80,000 $1,090,000 ====== ========== Percentage of Shares Sold: 17%3 === GRAND TOTALS 305,000 $4,094,175 31% ======= ========== === 62. California Amplifier's insiders personally profited from their wrongdoing by selling off large amounts of California ___________________ 3 During the Class Period, Nichols also disposed of another 396,658 shares of California Amplifier stock worth $13.8 million, in a manner that economically benefitted him and took advantage of California Amplifier's artificially inflated stock price. - 53 -
Amplifier stock at artificially inflated prices. The stock sales were unusual in timing and amount as shown by the following graphs:
- 54 -
CLASS ACTION ALLEGATIONS 63. Plaintiffs bring this action as a class action pursuant to California Code of Civil Procedure §382 on behalf of all persons who purchased or otherwise acquired California Amplifier stock (the "Class") during the Class Period. Excluded from the Class are the defendants, members of their families and any entity in which a defendant has an interest. 64. The Class is composed of numerous residents of California, as well as persons dispersed throughout the United States, the joinder of whom is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court. During the Class Period, California Amplifier had millions of shares of stock outstanding, owned by hundreds of shareholders. 65. There is a well-defined community of interest in the questions of law and fact involved in this case. The questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include the following: (a) Whether Cal. Corp. Code §§25400 and 25500 were violated by defendants; (b) Whether Cal. Civ. Code §§1709-1710 and Bus. & Prof. Code §§17200, et seq. were violated by defendants; (c) Whether defendants omitted and/or misrepresented material facts in or emanating from California which were disseminated to the general public; (d) Whether defendants failed to disclose or conspired, directly and indirectly, with one another in not disclosing - 55 -
material facts necessary to make the statements made not misleading; (e) Whether defendants knew or recklessly disregarded that their statements were false and misleading or failed to have a reasonable basis for those statements; (f) Whether the price of California Amplifier stock was artificially inflated during the Class Period; and (g) The extent of damage sustained by Class members and the appropriate measure of damages. 66. Plaintiffs' claims are typical of those of the Class because plaintiffs and the Class sustained damages from defendants' wrongful conduct. 67. The prosecution of separate actions by individual Class members would create a risk of inconsistent and varying adjudications. 68. Plaintiffs will adequately protect the interests of the Class. They have retained counsel who are experienced in class action securities litigation. Plaintiffs have no interests which conflict with those of the Class. 69. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. FIRST CAUSE OF ACTION Violation Of §§25400 And 25500 Of The California Corporations Code Against All Defendants 70. Plaintiffs incorporate ¶¶1-69. 71. Acting individually and pursuant to a scheme and conspiracy, defendants, directly and indirectly, induced the purchase of California Amplifier stock by plaintiffs and members of - 56 -
the Class by circulating or disseminating, in or from California, information to the effect that the price of California Amplifier stock would or was likely to rise because of market operations of defendants, conducted for the purpose of artificially raising the price of California Amplifier stock. Defendants made, for the purpose of inducing the purchase of California Amplifier stock by plaintiffs and other members of the Class, statements which were, at the time and in light of the circumstances under which they were made, false or misleading with respect to such material facts, or which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and which defendants knew or had reasonable grounds to believe were false and misleading. 72. Plaintiffs and the members of the Class purchased California Amplifier stock at prices which were affected by defendants' scheme and sustained substantial damages as a result of defendants' acts, because, in reliance on the integrity of the market, they paid artificially inflated prices for California Amplifier stock. Plaintiffs and the members of the Class would not have purchased California Amplifier stock at the prices they paid, or at all, if they had been aware that the market price had been artificially and falsely inflated by defendants' misleading statements and concealments. At the time of the purchases by plaintiffs and the members of the Class of California Amplifier stock, the fair market value of said stock was substantially less than the prices paid by them. - 57 -
73. By reason of the foregoing, defendants violated §25400 of the Cal. Corp. Code, thereby entitling the members of the Class to recover damages pursuant to §25500. SECOND CAUSE OF ACTION Violation Of §§1709-1710 Of The California Civil Code Against All Defendants 74. Plaintiffs incorporate ¶¶1-69. 75. Defendants willfully deceived plaintiffs and other members of the Class, and intentionally induced them to purchase or otherwise acquire California Amplifier stock at artificially inflated prices, by employing a scheme and conspiracy to defraud plaintiffs and the Class members in violation of California law. As part of their scheme, defendants knowingly suppressed true material facts and/or gave information of other facts which was likely to mislead, for want of communications of the true facts, as set forth above. Said representations and statements were not true and defendants either did not believe them to be true or had no reasonable grounds for believing them to be true. Said acts by defendants were made negligently, without any reasonable grounds and/or were fraudulent, oppressive and malicious. 76. Plaintiffs and the Class members each relied on one or more of the false statements alleged herein and were damaged thereby. 77. By reason of the foregoing, defendants violated §§1709- 1710 of the California Civil Code. - 58 -
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(a) Misrepresented the quality of the solicited investment; and (b) Failed to disclose material facts necessary to make the statements which were made not misleading. 83. Defendants' use of various forms of marketing to falsely advertise, call attention to, or give publicity to the sale of shares of California Amplifier's common stock by, inter alia, untrue and/or deceptive representations as to the nature and quality of the investment and California Amplifier's business and business prospects constitutes false or misleading advertising within the meaning of Business & Professions Code §§17500, et seq. because defendants either knew or reasonably should have known that such advertising was untrue and/or misleading. Necessarily, defendants violation of §§17500, et seq. also constitutes a violation of Business & Professions Code §§17200, et seq. 84. Accordingly, because defendants have committed unlawful, unfair and/or fraudulent business acts or practices in violation of Business & Professions Code §17200, and engaged in false and misleading advertising in violation of Business & Professions Code §§17500, et seq., plaintiffs, the members of the Class and the general public are entitled to relief under §17203 and §17535 which may include (1) orders or judgments enjoining defendants from engaging in further unlawful, unfair or fraudulent acts or practices, or (2) orders of disgorgement or restitution to prevent defendants from retaining any money or property -- including profits from insider trading -- obtained by means of their unlawful, unfair or fraudulent acts or practices. Plaintiffs additionally request that such money or property be impounded by - 60 -
[page 61 missing from paper copy] - 61 -
JURY DEMAND Plaintiffs demand a trial by jury. DATED: June 10, 1997 ORROCK HIGSON & KURTA, P.C. DANIEL A. HIGSON 1835 Knoll Drive Ventura, CA 93003 Telephone: 805/642-6405 MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH ALAN SCHULMAN /s/ _____________________________ WILLIAM S. LERACH 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 LAW OFFICES OF ALFRED G. YATES, JR. ALFRED G. YATES, JR. 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PA 15219 Telephone: 412/391-5164 Attorneys for Plaintiffs - 62 -
Source: Scanned paper copy of court-stamped document.