STULL, STULL & BRODY
EDWARD P. DIETRICH (Cal. Bar No. 176118)
10940 Wilshire Boulevard
Suite 2300
Los Angeles, CA 90024
(310) 209-2468

JULES BRODY
AARON BRODY
6 East 45th Street
New York, NY 10017
212) 687-7230

MORRIS and MORRIS
KAREN L. MORRIS
SETH D. RIGRODSKY
JAMES A. MCSHANE
1105 North Market Street
Suite 1600
Wilmington, DE 19801
(302) 426-0400

WEISS & YOURMAN
JOSEPH H. WEISS
JACK I. ZWICK
551 Fifth Avenue
Suite 1600
New York, NY 10176
(212) 682-3025

LAW OFFICES OF
JEFFREY S. ABRAHAM
JEFFREY S. ABRAHAM
60 East 42nd Street
Suite 4700
New York, NY 10165
(212) 692-0555

Attorneys for Plaintiffs

Plaintiffs, by their attorneys, allege, upon personal knowledge as to those matters which pertain to themselves, and as to all other matters upon information and belief based upon the investigation of their attorneys, which included, inter alia, examination of public filings with the Securities and Exchange Commission ("SEC") made by Children's Wonderland, Inc., and pleadings filed in an action pending before this Court known as Children's Wonderland, Inc. v. Royce Investment Group, Inc., Case No. 97-356 JGD (the "CWI Action"), including the Complaint filed therein on May 14, 1997, by Children's Wonderland, Inc. (the "CWI Complaint"), as follows:

2. First, as detailed below, Plaintiffs allege that all of the defendants caused CWI's IPO to be effected pursuant to a Registration Statement and Prospectus which contained untrue statements of material fact concerning the Company's financial condition and prospects and/or failed to state material facts necessary to make the statements made therein not misleading in the light of the circumstances under which they were made.

3. Second, Plaintiffs allege that throughout the Class Period, the defendant directors and officers of CWI (collectively with CWI, the "CWI Defendants") schemed to drive up the price of CWI securities by causing CWI to issue a series of positive and optimistic statements about the Company's financial health and ability to access needed capital which the CWI Defendants knew at the time were untrue or failed to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

4. The pleadings in the CWI Action (which was brought by CWI against, inter alia, the Underwriter Defendants), including the allegations made by CWI in the CWI Complaint (portions of which are cited herein as "CWI Compl. ¶ __"), show that at the time the CWI Defendants made these statements, they knew what investors could not know: that contrary to the defendants' public representations, CWI lacked sufficient capital to sustain its business plan or even its continued listing on NASDAQ, was experiencing continuing undisclosed material problems with obtaining necessary financing which adversely affected its business, and had no prospects for further financing. In brief, and as detailed herein, the CWI Defendants knew during the Class Period that:

(a) CWI's business plan of aggressive expansion and its continued listing on NASDAQ were entirely dependent upon the Company's receipt of steady and massive infusions of outside capital;

(b) The Company's failure to secure needed capital on a timely basis had already, even before the IPO, caused CWI numerous and substantial injuries, and prevented the Company's stock from being listed on the Boston Stock Exchange;

(c) CWI was dependent upon a single source of obtaining financing, Royce Investment Group, Inc. ("Royce"), a co-lead underwriter of CWI's initial public offering; and

(d) the funds raised for CWI by Royce were not nearly sufficient to sustain CWI's business plan or even its NASDAQ listing.

7. Venue is proper in this District pursuant to §22 of the Securities Act, §27 of the Exchange Act and 28 U.S.C. §1391(b). Many of the acts giving rise to the violations complained of, including the offer and sale of CWI securities and the dissemination of false and misleading information, occurred in this District.

8. In connection with the wrongs complained of, the defendants used the instrumentalities of interstate commerce, the U.S. mails and the facilities of the national securities markets.

(i) On May 7, 1996, in the IPO, 1,300 Units (each Unit consisting of one share of CWI common stock and a warrant to purchase a share of CWI common stock for $5.00) at $4 per Unit;

(ii) on May 8, 1996, 1,300 shares of CWI common stock at $8 3/4;

(iii) on May 8, 1996, 1,300 CWI warrants at $3 per warrant;

(iv) on May 28, 1996, 350 Units at $12 per Unit;

(v) on May 29, 1996, 250 Units at $12 per Unit; and

(vi) on June 13, 1996, 2,700 warrants at $4 ´ per warrant.

(c) Plaintiff Shaya Ilowitz purchased 500 shares of CWI common stock on January 27, 1997 at $7.75 per share and was thereby damaged.

10. Defendant CWI is incorporated under the laws of the State of California and maintains its principal executive offices at 28310 Roadside Drive, Suite 220, Agoura, California 91301. The Company owns and operates full service family care centers which provide educational, counseling and health care services for children and elderly individuals. Prior to its delisting, the Company's common stock traded on the NASDAQ Small Cap Market.

11. Defendant Debby S. Bitticks ("Debby Bitticks") has been the Chief Executive Officer of the Company since September 1993. In addition, she has been President of the Company since January 6, 1997. Debby Bitticks together with Kenneth Bitticks beneficially owned 22.3% of the Company's common stock at the time of the IPO and 12.0% after completion of the IPO.

12. Defendant Kenneth W. Bitticks ("Kenneth Bitticks") has been a director of CWI since September 1993 and Chairman of the Board of Directors of CWI since September 1994. Kenneth Bitticks together with Debby Bitticks beneficially owned 22.3% of the Company's outstanding common stock at the time of the IPO and 12.0% after completion of the IPO.

13. Defendant Robert M. Wilson ("Wilson") has been a director of CWI since June 1995, and was President, Chief Financial Officer and Secretary of the Company from June 1995 until January 6, 1997. Wilson beneficially owned 3.6% of the Company's outstanding common stock at the time of the IPO and 1.9% after completion of the IPO.

14. Debby Bitticks, Kenneth Bitticks and Wilson, together with CWI, are collectively referred to herein as the "CWI Defendants."

15. Defendant Royce is a registered broker-dealer which maintains its principal executive offices at 199 Crossways Park Drive, Woodbury, New York, 11797. Royce served as a co-lead underwriter for the IPO and actively participated in maintaining a market and soliciting members of the investing public following completion of the IPO to purchase CWI securities. Royce derived substantial profits from these activities.

16. Defendant John Higgins ("Higgins") is Senior Vice President and Director of Corporate Finance of defendant Royce.

17. Paul LaRosa ("LaRosa") is a Vice President of Royce.

18. John Marciano ("Marciano") is President and a director of Royce.

19. Royce, Higgins, LaRosa and Marciano are collectively referred to herein as the "Underwriter Defendants."

21. There is a well-defined community of interest in the questions of law and fact affecting the members of the Class and/or the IPO Subclass.

22. Common questions of law and fact exist as to all Class and/or IPO Subclass members and predominate over any questions affecting solely individual members of the Class and/or the IPO Subclass. Among the questions of law and fact common to the Class and/or the IPO Subclass are:

(a) Whether defendants' acts as alleged herein violated the federal securities laws;

(b) Whether documents, releases and/or statements disseminated to the investing public and the Company's shareholders during the Class Period, including the Registration Statement and Prospectus issued in connection with the Company's IPO, contained untrue statements of material fact and/or omitted to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading;

(c) With respect to claims asserted under §10(b) of the Exchange Act, whether the CWI Defendants knowingly or recklessly made such untrue statements or omissions of material fact about the Company;

(d) With respect to claims asserted under §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, whether the market prices of the Company's common stock during the Class Period were artificially inflated due to the non-disclosures, misrepresentations and/or manipulations complained of herein;

(e) With respect to claims asserted under §12(2) of the Securities Act, whether the defendants did not know, and in the exercise of reasonable care could not have known, of the untruths or omissions alleged herein; and

(f) Whether Plaintiffs and other members of the Class have suffered damages, and if so, the proper measure thereof.

24. Plaintiffs will fairly and adequately protect the interests of the other members of the Class and the IPO Subclass and have chosen counsel experienced in class and securities litigation.

25. The members of the Class and the IPO Subclass are so numerous that the joinder of all members is impractical. While the exact number of Class and/or IPO Subclass members is unknown to Plaintiffs at this time, and can only be ascertained through appropriate discovery, there were 89 CWI shareholders of record as of June 30, 1996, and Plaintiffs believe that there are many more beneficial holders of CWI stock and warrants. As of May 5, 1997, 3,985,037 shares of CWI common stock were outstanding, at least 2,012,500 of which were sold in connection with the IPO. The Company's common stock traded in a well developed and efficient market, namely, the NASDAQ Small Cap Market, at all times relevant hereto.

26. A class action is superior to other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class and/or IPO Subclass members may be relatively small, the expense and burden of individual litigation makes it impossible for the Class and/or IPO Subclass members to individually redress the wrongs done to them. Plaintiffs anticipate no difficulty in managing this action as a class action.

General Background

28. According to the CWI Complaint, the CWI Defendants knew and informed the Underwriter Defendants before the beginning of the Class Period that their objective of making CWI the first national operator of intergenerational care facilities could succeed only if CWI expanded very rapidly by acquiring existing facilities and opening new centers. Further, the CWI Defendants knew and told the Underwriter Defendants that this rapid expansion would be very expensive because, among other things, it would require CWI to maintain a much larger infrastructure than was warranted by its existing facilities, and to open and operate a large number of centers to justify this corporate overhead. The defendants thus understood from the outset that the health and future of the Company depended upon its ability to access a great deal of outside capital over a relatively short time period. CWI Compl. ¶ ¶ 10,12, 16.

29. Thus, at the time they took CWI public, defendants knew that information concerning CWI's financial condition, and particularly its ability to obtain capital, was highly material to investors, as a reasonable investor determining whether to purchase CWI stock would consider this information important.

30. As detailed herein, however, all of the defendants in connection with the IPO or thereafter made numerous public statements of material fact regarding the Company's financial health and its ability to access capital which were untrue or omitted material facts necessary to make the statements made not misleading, in that they misrepresented or did not disclose the precarious true state of the Company's financing.

Company Financing And The IPO

32. As a result of these early meetings, in August 1995, Royce agreed to act as placement agent for a private placement of CWI convertible preferred stock. Royce further agreed to act as underwriter for an IPO of CWI common stock and warrants, subject to certain conditions, one condition being that CWI file with the SEC a registration statement covering the intended public offering as soon as possible following the closing of the private placement.

33. On or about August 25, 1995, Kenneth Bitticks and Debby Bitticks, on behalf of CWI, signed a non-binding letter of intent by which Royce confirmed its intention to act as management underwriter in a firm commitment underwriting for the IPO. According to the CWI Complaint, Kenneth and Debby Bitticks signed this letter of intent "based, in material part, on Higgins' representation that Royce could and would complete the IPO by year-end [1995]." Higgins repeated this representation to Kenneth and Debby Bitticks "on numerous occasions during 1995." CWI Compl. ¶ ¶ 17-18.

34. In fact, the IPO did not commence until May 6, 1996, more than four months behind schedule. According to the CWI Complaint, Royce did not offer the CWI Defendants any explanation for its failure to complete the IPO by year-end 1995 as promised. CWI Compl. ¶ 19. Thus, according to the CWI Defendants, they were aware long before the May 6, 1996 IPO that their only source of obtaining financing had already shown itself to be unreliable, resulting in a material delay in their ability to obtain capital, a delay which CWI admits had "materially adverse" effects upon the conduct of CWI's business. CWI Compl. ¶ 23.

35. Moreover, the Underwriter Defendants, in papers they filed with the court in the CWI Action, confirm the existence of material delays in their ability to effectuate the IPO. The Underwriter Defendants, however, attribute the delay to the CWI Defendants having provided materially false financial statements to private investors in connection with Royce's November 1995 private placement of CWI preferred stock. According to the Underwriter Defendants, in November 1995, only days after Royce closed on a $750,000 tranche of the private placement, CWI sent Royce updated financial statements, prepared in connection with the filing of CWI's Registration Statement, which showed a loss to the Company of $1,859,000. The financial statement already provided by defendants to investors as part of the private placement memorandum, however, showed a loss of only $850,789. According to the Underwriter Defendants, CWI told Royce that this million dollar-plus overstatement of Company finances was caused by CWI's accounting misstatement of its May 1994 acquisition of two family care centers from D&D Child Development Corporation, which was 52% owned by Debby Bitticks.

36. According to Underwriter Defendant Higgins, "[a]s a result of the material change in CWI's financial statements and the resultant misrepresentations contained in the private placement memorandum, CWI was obligated to and did extend to all participants in the private placement an offer either to rescind their purchase of CWI stock or to receive an additional warrant... ." According to Higgins, "the problems and delay attendant to the faulty financial statements provided by CWI, alone, would have prevented an IPO by year-end 1995."

37. In all events, all of the defendants admit that there was an undisclosed material delay in effectuating the IPO which was caused either by the unreliability of Royce, CWI's sole source of obtaining financing, or by the CWI Defendants' having made materially false and misleading financial statements in effecting CWI's private placement. The Registration Statement and Prospectus, however, failed to disclose the reasons for or even the existence of this delay, or, as set forth below, the fact that the delay had a disastrous effect upon CWI's business and finances even before the IPO was effected.

38. When the IPO finally got underway in May 1996, with Royce serving as co-lead underwriter, the Company offered 1,750,000 units ("Units"), each consisting of one share of CWI common stock and one redeemable warrant to purchase CWI common stock at $5.00 per share, for a price of $4.00 per Unit, with total proceeds of $7,000,000. In addition, the underwriters had an over-allotment option to purchase an additional 262,500 units which could be and were resold to members of the investing public for proceeds of $1,050,000. The IPO thus raised a total of $8,050,000.

39. The IPO proceeds actually available to the Company, however, totaled only $4.2 million after payment of short-term loans and other obligations. CWI admits in the CWI Complaint that "[t]he expenses were higher, and the net amount available to CWI was less, than would have been the case had the IPO been completed by year-end 1995" as planned. CWI Compl. ¶ 21. The defendants thus knew by the time of the IPO, but did not disclose in the accompanying Registration Statement or Prospectus, that the financing arrangements that the Company had made with Royce were unreliable, and that this unreliability had already substantially adversely impacted the availability to CWI of the capital which was critical to its business plans.

40. Furthermore, the defendants also knew at the time of the IPO, but did not disclose to the public, that their failure to complete the IPO by year-end 1995 as planned had numerous other effects which CWI admits in the CWI Complaint were "materially adverse" to CWI (CWI Compl. ¶ 23):

(a) CWI was forced to procure short-term financing, at the expense of "substantial additional financing fees and costs", CWI Compl. ¶ 23(a);

(b) CWI's stated business plan of aggressive expansion was dealt a substantial setback when the IPO's delay rendered CWI unable to complete two separate acquisitions of a total of eight facilities in Florida. According to CWI in the CWI Complaint:

CWI indicated to the acquisition candidates that the acquisitions could be funded when CWI's IPO was completed. However, with the delays in the IPO, the owners lost confidence in CWI and were unwilling to sell the facilities to CWI. They were sold to a competitor.

CWI Compl. ¶ 23(b);

(c) "[i]n anticipation of the IPO being completed by the end of 1995, CWI drew down $250,000 on [a] line of credit" with a finance company "and agreed to commence payments in January 1996". When the IPO was delayed, CWI was unable to make the payments, causing the lender to call the loan upon completion of the IPO, CWI ¶ 23(c), and thus necessitating an additional cash outlay for which CWI had not planned;

(d) CWI could not afford to purchase equipment for its Sacramento, California facility, and therefore was forced to lease needed equipment, "at a substantially greater cost", CWI Compl. ¶ 23(e);

(e) the Sacramento facility's operations were further impaired by the IPO delay in that CWI "was unable to pay for the cost of a marketing campaign and, in particular, was unable to advertise in the yellow pages on a timely basis, the effect of which was to impair its ability to 'get up to capacity' as quickly as would otherwise have been the case", CWI Compl. ¶ 23(e);

(f) CWI was forced to renew its lease of the expensive and unprofitable Agoura facility, "rather than closing it, and incurred substantial expenses in renovating it and in attempting to keep it open during the renovations", CWI Compl. ¶ 23(f); and

(g) the renewal of the lease for the Agoura facility forced CWI to make substantial expenditures "in addition" to those cited above, in that "the owner of the property on which CWI's Agoura center was located demanded, as a condition to providing CWI with an extension of a lease that was scheduled to terminate on May 31, 1996, that CWI provide it with a $300,000 letter of credit and a cash payment of $150,000, whereas the original deposit was only $50,000." CWI Compl. ¶ ¶ 23(d), 23(f).

False And Misleading Statements In The Prospectus

43. (a) The Prospectus stated at page 12, under the heading "USE OF PROCEEDS," that the Company would receive net proceeds from the IPO "estimated to be $5,726,000 ($6,534,000 if the Underwriters' over-allotment option is exercised in full). Of such proceeds, approximately $879,000 will be used to repay outstanding indebtedness of the Company." The Prospectus thus represented that after payment of outstanding debts, the IPO would net CWI more than $5.6 million if the underwriters fully exercised their over-allotment option.

(b) This statement was untrue when made because the defendants knew that CWI's outstanding debts were actually much greater than $879,000, so the IPO in fact would generate net proceeds to CWI, after payment of debts, of only $4.2 million, even though the Underwriter Defendants did exercise their over allotment option in full. CWI Compl. ¶ 21.

44. (a) On page 7, under a heading titled "Accumulated Deficit; Need for Additional Financing; Acquisition of Centers," the Prospectus stated that:

At various times since July 1993, the Company has experienced severe cash flow shortfalls from operations and as a result of its inability to secure financing on a timely basis. During these times the Company used funds otherwise payable to state and federal governments for payroll taxes to satisfy its current obligations. Since September 1995, the Company has remained current in its payment of payroll taxes, and in January 1996 the Company paid all delinquent payroll taxes. The Company is currently involved in negotiations with the Internal Revenue Service as to remaining amounts due for interest and penalties; such amount is not expected to have a material impact on the financial statements.

(c) This statement was also misleading because the Registration Statement and Prospectus failed to disclose the material fact that, as defendants knew, by letter dated March 6, 1996, two months before the IPO, the Boston Stock Exchange precluded listing of CWI, citing among other things, the poor financial condition of the Company. This omitted fact was highly material, in that a reasonable investor would want to know of this development, which represented a significant restriction upon the future market for CWI securities, and a telling assessment, by an unbiased source, of CWI's true financial condition.

(d) Moreover, this statement was misleading because the Registration Statement and Prospectus failed to disclose the material fact, as defendants knew, that the Company's failure to complete the IPO in time to avoid the materially adverse consequences recited at ¶ ¶ 39-41 above, was caused, in substantial part, by delays engendered by the CWI Defendants' material misrepresentations concerning Company finances contained in CWI's private placement memorandum and accompanying financial statements. This omitted fact was highly material, as a reasonable investor would consider it important that CWI's only previous attempt to attract investment had been effected by means of false and misleading statements regarding fundamental aspects of the Company's financial condition.

45. (a) The Prospectus also stated at page 7 that "[b]ased on its current operating plan, the Company anticipates that its existing capital resources, including the proceeds of this offering, will be adequate to satisfy its capital needs for the next twelve months...".

(b) This statement was untrue when made because defendants knew that the Company's capital resources, including the proceeds from the IPO, were not nearly sufficient to fund for a year the Company's plan of aggressive expansion. Specifically:

(i) only two months after the IPO, in July 1996, defendants Kenneth and Debby Bitticks were already meeting with defendants Higgins and LaRosa of Royce in an attempt to raise additional capital for CWI, CWI Compl. ¶ 26;

(ii) by October 1996, defendants Kenneth Bitticks and Debby Bitticks, in an attempt to secure a more reliable source of financing, met with, James Somes of Ambient Capital Group ("Ambient") and Jess Ravitch of Libra Investments, Inc. ("Libra"). Ambient and Libra developed an offering of CWI securities and, in further evidence of CWI's imminent cash shortage, agreed in October 1996, only five months after the IPO, to provide CWI with $1 million immediately, pending completion of the offering, CWI Compl. ¶ 27; and

(iii) by December 1996, the Company's lack of cash had become so acute that defendant Higgins had to loan the Company $50,000 in personal funds to help CWI meet a payroll.

(b) The Prospectus emphasized the purported importance of this increase in revenues by stating at page 17 that:

In the fiscal year ended June 30, 1995, the Company experienced substantial growth, with revenue increasing 73% to $3,655,188, as compared to $2,107,311 for the fiscal year ended June 30, 1994. . . . The Company is now positioned to take advantage of a perceived need for full service, multi-location, elder/child day care. This was largely achieved by establishing in 1995 a detailed strategy, infrastructure, and operational system to facilitate an aggressive, sustained growth program.

47. As a result of these material misrepresentations and omissions, the IPO was completed with 1,750,000 Units (each Unit consisting of one share of CWI common stock and a warrant to purchase a share of CWI common stock for $5.00) being sold at $4.00 per Unit for proceeds of $7,000,000, and 262,500 Units being sold in an over-allotment for proceeds of $1,050,000, or combined total proceeds of $8,050,000.

48. Following the IPO, CWI's common stock and warrants began trading on the NASDAQ Small Cap Market at prices artificially inflated by the material misrepresentations and omissions made in the Registration Statement and Prospectus.

The CWI Defendants Continue To Make False And
Misleading Statements After The IPO

50. (a) On June 19, 1996, the Company issued a press release concerning the Company's third quarter earnings which quoted defendant Debby Bitticks as stating that "[d]uring the next six to eight quarters, management will continue to implement its expansion and acquisition strategy to reinforce the Company's position as a full service intergenerational provider."

(b) This statement was materially false and misleading when made because defendant Debby Bitticks had no factual basis for her claim that the Company would continue for six to eight quarters its planned program of expansion and acquisitions. Indeed, as set forth above, she and Kenneth Bitticks were already searching for additional financing just after the IPO, and negotiated a $1 million short-term loan only a few months after the IPO. Clearly, Debby Bitticks knew that the Company's IPO proceeds were insufficient to fund even a single year's operations, much less six to eight quarters. Moreover, she knew that CWI could not count on future financing because, as set forth above, the Company was dependent upon Royce as its only source of financing, and that Royce could not and/or would not satisfy CWI's financial needs.

51. Also on June 19, 1996, CWI filed with the SEC a Form 10-QSB, signed by defendant Wilson, for the fiscal quarter ended March 31, 1996. The Form 10-QSB also sought to portray the Company as being well-financed as a result of the completion of the IPO, by stating under a heading titled "LIQUIDITY AND CAPITAL RESOURCES" on page 13 that:

In May 1996, the Company successfully completed an initial public offering of its common stock and common stock purchase warrants, which netted the Company $6,852,200. The Company's management believes that the proceeds of this initial public offering, along with cash internally generated from operations and existing cash balances will allow it to continue to operate at planned levels for the next twelve months.

(a) the CWI Defendants' attempts in "mid-1996," just after the IPO, to raise additional capital;

(b) their negotiation in October 1996 of an immediate $1 million advance against proceeds from future public offerings; and

(c) CWI's inability in December 1996 to meet its payroll obligations absent a $50,000 personal loan from defendant Higgins.

(b) This statement was materially misleading in the light of the circumstances under which it was made because it omitted to disclose the material fact that, as set forth in ¶ 46(c) above, the CWI Defendants had planned to close the unprofitable Agoura center but instead kept it open at great expense only because Royce "strongly urged" them to do so to avoid reporting to investors the closure of the Agoura center and the resultant decrease in revenues.

54. (a) On or about September 27, 1996, the Company filed a Form 10-KSB with the SEC for the fiscal year ended June 30, 1996, which was signed either individually or through an attorney-in-fact by defendants Wilson, Kenneth Bitticks and Debby Bitticks.

(b) The Form 10-KSB sought to portray the Company as being well-positioned to capitalize on opportunities within the family care industry by stating on pages 4-5 that:

. . .industry fragmentation, coupled with an increasing push for stricter regulations and licensing requirements, provides significant growth opportunities for well-managed and well-capitalized professional child care providers with a solid business plan that meets the needs of the marketplace.

In May 1996, the Company completed an initial public offering of Common Stocks and Warrants to Purchase Common Stock, raising $8,050,000 in gross proceeds before deducting related fees and commissions.

. . .management plans to expand its markets by establishing five to eight centers within a given geographic region.

(d) This suggestion that CWI was "well-capitalized" was further false and misleading because Kenneth and Debby Bitticks already, "during the mid-1996 period," had "becom[e] increasingly skeptical about Royce's ability to provide CWI with the necessary financial services" and were seeking without success to attract other sources of financing. CWI Compl. ¶ 27.

55. In October 1996, because of CWI's precarious financial situation, Kenneth Bitticks and Debby Bitticks met in New York with Kenneth Orr of First Cambridge Securities Corp. ("First Cambridge") in an attempt to secure additional financing. CWI Compl. ¶ 22. At this meeting, Kenneth Bitticks told Orr of his and Debby Bitticks' dissatisfaction with Royce, and of their recent meetings with Ambient and Libra, and proposed that First Cambridge work with Ambient and Libra, independently of Royce, to raise capital for CWI. CWI Compl. ¶ 28.

56. The Underwriter Defendants, however, moved swiftly to frustrate this plan. First, in or about late October 1996, when James Somes of Ambient called Orr at Kenneth Bitticks' request, Orr conferenced in Underwriter Defendant Marciano of Royce, who "told Somes, in words or substance, that Ambient and Libra should stay away from his, i.e., Royce's client." CWI Compl. ¶ 29.

57. Then, in or about the first week of November 1996, Underwriter Defendant LaRosa of Royce summoned Kenneth and Debby Bitticks to a meeting with Royce and First Cambridge in Royce's New York office. In this meeting, LaRosa told Kenneth Bitticks about a company, Iatros Health Network, Inc. ("Iatros"), for whom Royce had acted as underwriter and market maker, just as it was doing for CWI. According to the CWI Complaint, LaRosa told Kenneth Bitticks that when Iatros later employed an alternate source of financing, "Royce responded by causing the price of Iatros' stock to drop from $13 per share to about $1 per share." CWI Compl. ¶ 30. Kenneth Bitticks understood this to be a clear threat "that if CWI followed through with the proposed financing with Ambient and Libra, Royce would bankrupt the company and destroy its value." CWI Compl. ¶ 30. Defendant Higgins also allegedly made this same threat later in the same meeting in the presence of Kenneth Bitticks, Debby Bitticks, LaRosa, Orr and Marciano. CWI Compl. ¶ 31.

58. According to the CWI Complaint, the Underwriter Defendants' threats had the effect of preventing CWI from securing other financing from a source other than Royce. Following this meeting in New York, Somes advised Kenneth Bitticks that:

neither Ambient nor Libra could go forward with the financing under these circumstances and that they could not sell securities to their institutional clients in light of the threat and the possibilities that Royce could withdraw support for CWI's stock at any moment and/or take other retaliatory action against CWI.

59. (a) These developments, however, were not disclosed to investors. Instead, on November 14, 1996, the Company issued a press release announcing that its first fiscal quarter revenues were up by 6%. The press release quoted defendant Debby Bitticks as stating that:

Management continues to implement our aggressive expansion strategy while maintaining firm control of the costs associated with such growth. We have minimized the rate of increase in operating expenses and even managed to reduce payroll and related costs during the period. One new center was opened in the first quarter of 1997. Lease negotiations are underway for several more centers.

(i) the defendants' failure to complete CWI's IPO by year-end 1995 had caused numerous "materially adverse" effects upon CWI, CWI Compl. ¶ 23;

(ii) the CWI Defendants "during the mid-1996 period [were] increasingly skeptical about Royce's ability to provide CWI with the necessary financial services," CWI Compl. ¶ 27;

(iii) in or about late October 1996, Kenneth and Debby Bitticks met in New York with defendant Orr, expressed their displeasure with Royce, and discussed possible financing for CWI from First Cambridge, Ambient and Libra; shortly thereafter, at Kenneth Bitticks' request, James Somes of Ambient called Orr to discuss such an arrangement, but Orr conferenced in defendant Marciano of Royce, who, according to the CWI Complaint, "told Somes, in words or substance, that Ambient and Libra should stay away from his, i.e., Royce's, client", CWI Compl. ¶ 28-29;

(iv) in or about the first week of November 1996, Kenneth and Debby Bitticks attended a meeting with Royce and First Cambridge at Royce's office in New York, in which defendant LaRosa told Kenneth Bitticks about a company, Iatros, who, as CWI was proposing to do, had secured different sources of financing following an IPO underwritten by Royce. LaRosa told Kenneth Bitticks that Royce had responded by causing Iatros' stock to plunge in value from $13 per share to about $1 per share, and Kenneth Bitticks understood this statement to be a threat that Royce would "bankrupt [CWI] and destroy its value" if CWI secured financing from other sources, CWI Compl. ¶ 30; and

(v) at this same November 1996 meeting, defendant Higgins repeated LaRosa's threats concerning Iatros to Kenneth and Debby Bitticks in the presence of defendants Orr and Marciano, CWI Compl. ¶ 31; and

(vi) Royce's threats caused Ambient and Libra to abandon their proposal for a $5-12 million CWI stock offering, as well as their offer to provide CWI with a $1 million advance immediately, as evidenced by Somes' statement to Kenneth Bitticks following this meeting that "neither Ambient nor Libra could go forward with the financing under these circumstances, and that they could not sell CWI securities to their institutional clients in light of the threat and the possibilities that Royce could withdraw support for CWI's stock at any moment and/or take other retaliatory action against CWI," CWI Compl. ¶ 32.

(b) This statement was materially false and misleading when made because, as admitted in CWI Compl. ¶ ¶ 30-31, the CWI Defendants had already, only a week or so before, explored CWI's financing options, and had discovered that none of these options was likely to provide anywhere near $3-4 million in financing. Indeed, the CWI Defendants knew at the time they filed this Form 10-QSB that Royce could not be depended upon to provide adequate financing, and further intended to preclude CWI from obtaining financing from any other source. Specifically, the CWI Defendants at this time knew all of the adverse information set forth in ¶ ¶ 39-41, 59(b).

61. According to the CWI Defendants, the Underwriter Defendants' threats, and the resultant unwillingness of Ambient and Libra to help CWI, caused the CWI Defendants to abandon their efforts to secure alternate financing. CWI Compl. ¶ 37. Instead, the CWI Defendants, despite their knowledge of the unreliability of their arrangement with Royce, were in fact relying wholly upon Royce to underwrite a $2.5 million private placement which, according to CWI, Underwriter Defendant Higgins told Kenneth Bitticks would be completed by year-end 1996 and underwritten by Royce. CWI Compl. ¶ ¶ 35, 37.

62. According to the CWI Complaint, Royce further injured CWI in the first week of December 1996 by ruining CWI's plan to acquire four assisted-living facilities which would have provided CWI with $14-15 million in revenues, $1 million in cash flow, and $500,000 in net income the first year. According to the CWI Complaint, Underwriter Defendant Higgins changed the terms of the deal, unilaterally and at the last moment, to offer the seller of the facilities $500,000 less cash than agreed, and further indicated that these new terms were non-negotiable. CWI Compl. ¶ 33.

63. At this time, CWI's inability to obtain adequate financing created a likelihood that CWI stock would be delisted by NASDAQ due to insufficient shareholder equity. CWI Compl. ¶ 36.

64. Not surprisingly, Royce again proved undependable in late 1996, when Higgins told Kenneth Bitticks that Royce could complete only a $1 million portion of the proposed $2.5 million private placement by year-end 1996 as promised. CWI Compl. ¶ 38. Royce in fact did not even provide this $1 million, but instead provided CWI with a mere $150,000 in December 1996. CWI Compl. ¶ 40. Further, on January 10, 1997, Higgins reported to CWI that Royce would not go through with the $2.5 million placement at any time, and that only $250,000 cash would be provided to CWI at that time, despite Kenneth Bitticks' statement reminding Higgins that CWI as of December 31, 1996 was in violation of NASDAQ's minimum shareholder's equity requirements. CWI Compl. ¶ ¶ 43-44.

65. (a) On February 13, 1997, the Company filed with the SEC its Form 10-QSB for the fiscal quarter ending December 31, 1996. This Form 10-QSB started at page 12: "the Company has engaged an underwriter [Royce] in connection with an $800,000 minimum to $1,500,000 maximum private placement . . . [t]he net proceeds . . . are expected to be sufficient to fund the Company's operations through the completion of the proposed secondary public offering . . . estimated to be completed by March 31, 1997. . . ."

(b) These statements were false and misleading because they created the impression that CWI had secured a binding agreement from Royce to conduct a private placement commencing on or about March 31, 1997, when in reality, as to the CWI Defendants knew but failed to disclose, CWI and Royce did not have a binding agreement to commence the private placement or the secondary public offering by March 31, 1997. Moreover, the CWI Defendants knew in the light of their experience with the delayed IPO, and subsequent difficulties with respect to the private placement and/or secondary offering, that Royce could not be depended upon to underwrite either the private placement or the secondary public offering at any time, much less by the date promised. The CWI Defendants further knew, but did not disclose, that Royce could and would prevent CWI from obtaining desperately needed capital from other sources. Specifically, the CWI Defendants knew all of the adverse information set forth in ¶ ¶ 39-41, 59(b), and also knew at this time that:

(i) Royce's threats caused the CWI Defendants to abandon their efforts to secure alternate financing, and instead to agree to a $2.5 million private placement which Higgins told Kenneth Bitticks would be completed by year-end 1996 and underwritten by Royce, despite the CWI Defendants' knowledge of Royce's unreliability, CWI Compl. ¶ ¶ 35, 37;

(ii) in the first week of December 1996, Royce ruined CWI's plan to acquire four assisted-living facilities which would have provided CWI with $14-15 million in revenues, $1 million in cash flow, and $500,000 in net income the first year, in that defendant Higgins changed the terms of the deal, unilaterally and at the last moment, to offer the seller of the facilities $500,000 less cash than agreed, and indicated that these new terms were non-negotiable, CWI Compl. ¶ 33;

(iii) CWI's inability to obtain adequate financing created a likelihood that CWI stock would be delisted by NASDAQ due to insufficient shareholder equity, CWI Compl. ¶ 36;

(iv) Royce again proved undependable in late 1996, when Higgins told Kenneth Bitticks that Royce could complete only a $1 million portion of the proposed $2.5 million private placement by year-end 1996 as promised, CWI Compl. ¶ 38;

(v) Royce in fact did not even provide this $1 million, but instead provided CWI with a mere $150,000 in December 1996, CWI Compl. ¶ 40; and

(vi) on January 10, 1997, Higgins reported to CWI that Royce would not go through with the $2.5 million placement at any time, and that only $250,000 cash would be provided to CWI at that time, despite Kenneth Bitticks' statement reminding Higgins that CWI as of December 31, 1996 was in violation of NASDAQ's minimum shareholder's equity requirements. CWI Compl. ¶ ¶ 43-44.

The Company's Stock Crashes

67. On April 5, 1997, CWI signed the letter of intent; the CWI Defendants did not, however, issue a press release as agreed or otherwise publicly disclose that CWI had signed the letter of intent, even though they had a duty to disclose these highly material developments to correct their previous misleading disclosures regarding CWI's financial condition.

68. The funds promised by Royce and First Cambridge never arrived and on April 10, 1997, CWI's securities began a precipitous decline in price which over the course of the next few days resulted in the Company's stock being traded for as little as $.02 per share.

69. On April 29, 1997, the Company announced that, because of insufficient capital, its stock had been delisted from the NASDAQ Small Cap Market.

72. Pursuant to the specific provisions of Section 11 of the Securities Act, the IPO Subclass is entitled to recover its damages jointly and severally, from the defendants sued under this Count as follows:

(a) Defendants Kenneth Bitticks, Debby Bitticks and Wilson, as signatories to the Registration Statement and as directors of CWI;

(b) Defendant CWI as issuer; and

(c) Defendant Royce, as co-lead underwriter.

74. All of the defendants named in this Count were responsible for the contents of the Registration Statement referred to herein and for its dissemination. None of the defendants named in this Count made a reasonable investigation and none possessed reasonable grounds for belief concerning the materially false and misleading statements and omissions contained in the Registration Statement.

75. The defendants named in this Count owed to the members of the IPO Subclass a duty to make a reasonable and diligent investigation of the statements contained in the Registration Statement at the effective date, for the purpose of ensuring that these statements were true and that there were no omissions to state material facts required to be stated in order to make the statements contained therein not misleading.

76. Plaintiff Kilik and other members of the IPO Subclass purchased or otherwise acquired CWI securities issued pursuant to and in reliance on the Registration Statement.

77. Neither Plaintiff Kilik nor any member of the IPO Subclass sought to be represented, at the time of their acquisition of CWI securities, knew, or by the exercise of reasonable care could have known, of the aforesaid misstatements and omissions.

78. As a direct and proximate result of defendants' wrongful conduct, the price of CWI securities was artificially inflated, and Plaintiff Kilik and members of the IPO Subclass suffered substantial damages in connection with their acquisition of said securities during the Class Period. The value of CWI securities has declined substantially subsequent to and due to all defendants' violations.

79. This action was commenced within one year from the time when Plaintiff Kilik discovered or should have discovered the misstatements and omissions alleged herein, and within the time provided for in the appropriate statute of limitations.

80. By reason of the foregoing, the defendants named above have violated Section 11 of the Securities Act and are liable to the members of the IPO Subclass.

82. The Underwriter Defendants, as firm commitment underwriters of CWI's IPO, actively solicited the sale of CWI securities pursuant to the Prospectus for their own financial gain, and thus were "sellers" of CWI securities within the meaning of Section 12(2) of the Securities Act.

83. As alleged herein, the Prospectus contained untrue statements of material fact and/or omitted to state material facts necessary in order to make the statements made therein, in the light of the circumstances in which they were made, not misleading.

84. Plaintiff Kilik and the other members of the IPO Subclass purchased or otherwise acquired CWI securities pursuant to and traceable to the Prospectus. They did not know and, in the exercise of reasonable care, could not have discovered, the existence of these untruths and/or omissions.

85. By virtue of their wrongful conduct, the Underwriter Defendants violated §12(2) of the Securities Act, 15 U.S.C. 77l(2).

86. Plaintiff Kilik, individually and representatively, hereby offers to tender to defendants those CWI securities which Plaintiff Kilik and other IPO Subclass members continue to own, on behalf of all members of the IPO Subclass who continue to own such securities, in return for the consideration paid for those securities together with interest thereon.

87. Plaintiff Kilik and the other members of the IPO Subclass have sustained damages as a result of the false and misleading statements and omissions contained in the Prospectus. The value of the Company's shares has declined substantially subsequent to and as a result of the wrongful acts of the Underwriter Defendants. Plaintiff Kilik and the other members of the IPO Subclass are thus entitled to rescind their purchases made pursuant to the Prospectus, or to recover from the Underwriter Defendants damages in an amount to be proved at trial, plus interest thereon.

88. This action was commenced within one year from the time when Plaintiff Kilik discovered or should have discovered the misstatements and omissions alleged herein, and within the time provided for in the appropriate statute of limitations.

90. Defendant Debby Bitticks was the Chief Executive Officer of CWI at all times relevant hereto.

91. Defendant Kenneth Bitticks was a director of CWI and Chairman of the Board of Directors of CWI at all times relevant hereto.

92. Defendant Wilson was a director of CWI at all times relevant hereto, and was President, Chief Financial Officer and Secretary of the Company from June 1995 until January 6, 1997.

93. Defendants Kenneth Bitticks, Debby Bitticks and Wilson were control persons of CWI with respect to the IPO by virtue of their positions as directors and/or senior executives, and had the power to influence and control and did influence and control, directly or indirectly, the decision making of the Company, including the dissemination of the false and misleading statements and/or omissions contained in the Registration Statement.

94. As a result, Defendants Kenneth Bitticks, Debby Bitticks and Wilson are liable under Section 15 of the Securities Act for CWI's primary violations of §11 of the Securities Act.

95. Defendant Higgins was Senior Vice President and Director of Corporate Finance of defendant Royce at all times relevant hereto.

96. Defendant LaRosa was a Vice President of Royce at all times relevant hereto.

97. Defendant Marciano was President and a director of Royce at all times relevant hereto.

98. Defendants Higgins, LaRosa and Marciano were control persons of Royce by virtue of their positions as directors and/or senior executives and had the power to influence and control and did influence and control, directly or indirectly, the decision making of Royce, including the dissemination of the false and misleading statements and/or omissions contained in the Registration Statement and Prospectus.

99. As a result, Defendants Higgins, LaRosa and Marciano are liable under Section 15 of the Securities Act for Royce's primary violations of Sections 11 and 12(2) of the Securities Act.

101. Each of the CWI Defendants: (a) knew or had access to the material adverse non-public information about CWI's financial condition and prospects, which was not disclosed; and (b) participated in drafting, reviewing and/or approving some or all of the misleading statements, releases, reports and other public representations of and about CWI.

102. During the Class Period, the CWI Defendants, with knowledge of or reckless disregard for the truth, disseminated or approved the statements specified above, which were untrue or were misleading in that they failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

103. By reason of such wrongful conduct, the CWI Defendants violated §10(b) of the Exchange Act, 15 U.S.C. §§78j(b), and Rule 10b-5 promulgated thereunder.

104. Plaintiffs and the Class have suffered damage in that, in reliance on the integrity of the market, they paid artificially inflated prices for CWI stock. Plaintiffs and the Class would not have purchased CWI stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' false and misleading statements.

106. Kenneth Bitticks, Debby Bitticks and Wilson acted as controlling persons of CWI within the meaning of §20 of the Exchange Act. By reason of these defendants' positions as directors and/or senor executives of CWI, they had the power and authority, and exercised the same, to cause CWI to engage in the wrongful conduct complained of herein.

107. By reason of such wrongful conduct, Kenneth Bitticks, Debby Bitticks and Wilson are liable pursuant to §20(a) of the Exchange Act for CWI's primary violations of §10(b). As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of CWI stock during the Class Period.

A. Declaring this action to be a Plaintiff class action properly maintained pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure and certifying Plaintiffs as representative of the Class and Plaintiff Kilik as representative of the IPO Subclass;

B. Awarding Plaintiffs and the other members of the Class and the IPO Subclass damages;

C. Awarding Plaintiff Kilik and the other members of the IPO Subclass rescission on Count II to the extent they still hold their CWI securities, or, if said securities have been sold, awarding damages in accordance with Section 12(2) of the Securities Act;

D. Awarding Plaintiffs and the other members of the Class their costs and expenses of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other costs and disbursements; and

E. Awarding Plaintiffs and the other members of the Class such other and further relief as may be just and proper under the circumstances.

Source: Diskette file and paper copy from Morris and Morris