As reported by the Company’s Form 10-K for the fiscal year ended December 31, 2003, in November 2003, the Company received court approval for the settlement and release of claims against the Company and certain former officers that were assessed in a Consolidated Amended Class Action Complaint filed on June 4, 2002, in the United States District Court for the Middle District of Florida. This litigation consolidated substantially similar shareholders’ lawsuits filed against the Company and certain of its former officers beginning on November 30, 2001, following its restatement of the financial results for the 2001 third quarter. The total settlement amount was $1,900,000, all of which was covered by insurance.
According to the docket, on June 5, 2002, a Consolidated Amended Class Action Complaint was filed. On August 5, 2002, the defendants filed a motion to dismiss the complaint. On May 12, 2003, the Court entered the Order signed by U.S. District Judge Steven D. Merryday dismissing the case without prejudice. All pending motions were terminated and the case was closed. In addition, the Order stated that if the case was not reopened or a final judgment was not filed within 60 days, the dismissal would be with prejudice. On July 18, 2003, a Stipulation and Agreement of Settlement was filed, and on August 1, 2003, the Court entered the Preliminary Order preliminarily approving the settlement of the class action, certifying a settlement class, approving the form of notice to the settlement class, and scheduling a final approval hearing.
The original complaint charges SRI and certain of its officers and directors with issuing a series of material misrepresentations to the market before and during the Class Period, thereby artificially inflating the price of SRI common stock. Specifically, the complaint alleges that defendants issued a series of press
releases touting SRI's new customer contracts such as the HealthTrust Purchasing Group contract announced on May 1, 2001, as well as "record" financial results for the third quarter of fiscal year 2001. In response, the price of SRI stock soared to over $41 per share in September 2001, and SRI was named to the Forbes magazine list of the best small companies in the country. The complaint also states that, unbeknownst to the investing public who purchased SRI stock during the Class Period at artificially inflated prices, SRI's business and financial conditions were rapidly deteriorating. Indeed, on November 27, 2001, defendants revealed that the Company's previously issued financial statements for the third quarter of 2001 were false and that the Company's revenues and earnings were actually $1,034,000 and $262,000 less, respectively, than previously reported, and $.04 less per diluted share. As alleged in the complaint, these "newly" issued results did not meet analysts' estimates. In addition, the Company revealed that the outlook for the fourth quarter was far worse than investors had been led to believe. Defendants reported for the first time that the "pricing impact of new group purchasing organization arrangements on existing hospital customers," among other previously undisclosed problems detailed in the complaint, contributed to the third quarter shortfall and expected fourth quarter 2001 shortfall. According to the complaint, in response to the news that SRI would not meet third or fourth quarter analyst estimates and had improperly recognized revenue in the third quarter of 2001, SRI stock plunged over 40%,
closing at $14.63 on November 28, 2001, on unusually high volume of 2.7 million shares. The impact of defendants' improper accounting practices was devastating to SRI investors.