1 consolidated amended class action complaint 06/21/2004
TRANSCRIPT
UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
Judge Whittemore
2.3 0
CATALINA MARKETING CORPORATION CASE NO . 8:03 CV-1582-T-27TBM
SECURITIES LITIGATION
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
TABLE OF CONTENTS
Page
1. NATURE OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
III. THE PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
IV. DEFENDANTS' FRAUDULENT SCHEME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2
A. Defendants' Accounting Fraud : "There Were No Rules, You Just Mad eThem Up As You Go" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
B . Defendants Knew Catalina Could Not Meet Their Estimates for th eCompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 5
C . Defendant McClorey Is Directly Confronted With CHR's Declinin gProfitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 8
V. DEFENDANTS' FALSE AND MISLEADING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
A. The Class Period Begins : Defendants Issue False Financial ResultsDuring Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
B. Reasons for Falsity: Fiscal Year 2000 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
C. Defendants Continue Issuing False and Misleading Financial Statements . . . . . . . . . . .27
D. Fiscal Year Ended March 31, 2001 : Reasons Why These Statements WereFalse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1
E . The Fraud Continues : Fiscal Year 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
F. Fiscal Year Ended March 31, 2002 : Reasons Why These Statements WereFalse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
G. Fiscal Year 2003 : The Fraud Begins to Unravel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
H. Defendan ts ' First Quarter 2003 Statements Were False . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1
VI. THE TRUTH REGARDING CATALINA'S DETERIORATING FINANCIALCONDITION IS SLOWLY REVEALED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
A. CHR's Declining Sales Are Revealed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
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B . Defendants' False Statements Continue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
C. The Belated U.K. Impairment Charge is Announced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
D. Defendants ' Accounting Fraud is Partially Exposed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
E. The Fallout Continues : Ernst & Young Resigns As Catalina's Auditors . . . . . . . . . . . . .50
F. The SEC Formally Investigates and Catalina Executives "Resign" . . . . . . . . . . . . . . . . . . . . . .55
VII. THE MAGNITUDE OF THE RESTATEMENTS IS REVEALED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 7
VIII . DEFENDANTS' FALSE FINANCIAL REPORTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 8
A. Catalina 's False and Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
B . Catalina Failed to Recognize Revenues In Accordance with GAAP . . . . . . . . . . . . . . . . . . . .6 1
C . Understated Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
D. Catalina Improperly Deferred Certain Marketing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
E. Catalina Improperly Recognized Accruals and Prepayments fo rProfessional Services, Compensation and other Operating Expenses . . . . . . . . . . . . . . . . . . .63
F. Improper Purchase Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
G. Incorrect Post Retirement Healthcare Expense Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
H. Failure to Write Down Impaired Assets In Poorly Performing Busines sSegments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
1. Improper Recognition of Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
J. Improper Recognition of Costs Associated With Software Developmen tfor Internal Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
K. Income Tax Expense was Restated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
L. Failure to Disclose Reportable Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
M. Catalina Lacked Adequate Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
IX. DEFENDANTS RECEIVED ENORMOUS FINANCIAL BENEFIT STHROUGH THEIR FRAUDULENT SCHEME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
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A. Defendants Cash Out Before Catalina 's Earn ings Miss is Revealed . . . . . . . . . . . . . . . . . . . . .70
B. Inside Trading Had Occurred Before at Catalina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
C. The Defendants' Compensation, Bonuses, and Other Incentives were . . . . . . . . . . . . . . . . . . . .Highly Dependent on Meeting Catalina's Aggressive Financial Objectivesand Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
X. CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
COUNT I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
COUNT II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
XI. PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
XII. JURY TRIAL DEMANDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
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I. NATURE OF THE ACTION
1 . This securities class action is brought on behalf of purchasers of publicly traded
securities of Catalina Marketing Corporation ("Catalina" or "the Company") between Octobe r
14, 1999 and August 25, 2003, (the "Class Period"), seeking to recover damages caused by
Defendants' violations of federal securities laws and to pursue remedies under the Securitie s
Exchange Act of 1934.
2. In the years leading up to the Class Period, Catalina was an aggressive growth
company, consistently increasing revenues by 30% or more year-over-year . It was a nich e
"targeted marketing" company, whose rapid growth came from placing targeted marketin g
coupons in grocery stores around the country. As a result of its ability to quickly grow it s
business and thereby provide ever-increas ing revenues, analysts consistently rated the company a
"strong buy . "
3. By the summer of 1999, however, market analysts began voicing concerns that
Catalina's core growth driver - the checkout coupon business - was beginning to saturate it s
niche market ("maxing out," in the words of an analyst) and the company would have to fin d
other avenues to fuel growth . Catalina's management told the market that these "new profits"
were going to come from its European operations , the Health Resources Publishing unit, and vi a
its internet presence as Supermarkets Online . At approximately the same time , the Company
hired a new CFO - Joseph Port . Analysts believed in Catalina' plan to continue its growth ,
claiming "New profits appear just around the corner" and maintaining their "strong buy"
recommendations .
4. But the truth was that by the fall of 1999, Catalina's fastest growth was behind it .
Revenues would never increase at the rate they had, and Catalina's publicly proclaimed areas o f
"new profits" would not be profitable for a long time, if ever . Defendants were thus faced with
the problem of having assured the market and investors of continued and even accelerate d
growth - but were unable to deliver on those promises . To make up the difference between wha t
they promised and what they achieved, Defendants began using various accounting machination s
to create the appearance of financial results that met their promises .
5. For a time, Defendants' accounting scheme worked . During the Class Period ,
Defendants continued to portray Catalina to the investing public as a company on the rise . In
Catalina's 2002 Annual Repo rt, Defendants touted Catalina's growth prospects and proclaimed
its financial performance over the past five years as unmatched in the in the industry. The
targeted-marketing company had caught the eye of investors . BusinessWeek named Catalina a
"Hot Growth Company." And Forbes magazine tapped Catalina, which tallied $447 million in
revenue in fiscal 2002, as a top 200 small business .
6. In keeping with its "hot growth" image , Defendants continued issuing highl y
positive statements assuring investors that the Company was growing its earnings and wel l
positioned to continue to generate strong profitability . In particular, Defendants repeatedl y
emphasized the success of its Catalina Health Resource Division ("CHR") which provides
targeted marketing services and programs to pharmaceutical manufacturers and retailers .
Defendants touted CHR as Catalina's "cornerstone" and a strong revenue contributor an d
emphasized continued financial growth rates of 25 % or greater for CHR, quarter after quarter.
7. But Catalina's seemingly robust growth rates were now just a fiction . Defendants
used what former employees characterized as "any means necessary" to meet Defendants '
revenue forecasts . For example, Catalina prematurely recognized revenue and blatantl y
disregarded Generally Accepted Accounting Principles ("GAAP") . According to former
employees, "there were no rules, you just made them up as you went along ."
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8 . In addition, Defendants continued to tout the success of its European division an d
its operations in the United Kingdom ("Catalina U .K."). In fact, in June 1999 Catalina U.K.'s
largest customer, the Asda Group Plc ("Asda") was purchased by Wal -Mart . In connection with
the acquisition, Wal-Mart cancelled the Asda contract with Catalina. Not only did Defendant s
fail to disclose the loss of this material contract until June 2000, but they never wrote-off $16 .9
million of impaired goodwill in connection with the loss of this customer . This manipulation --
by Defendants' own admission - resulted in a 56% overstatement of fiscal year 2000' s earning
per share .
9. Catalina continued to issue rosy growth projections to the investing public, whic h
contradicted internal company data demonstrating materially declining sales, especially at CHR .
Indeed , former employees in Catalina 's research division , finance division, and at CHR
characterized Defendant Granger's public growth forecasts as "arbitrary," a "bunch of bull, "
"highly suspicious," and "not at all consistent with internal numbers ." In summarizing
Defendants' policies for disclosing information to the public, a former Executive Director a t
CHR rhetorically asked: "[w]ere they manipulating information so that people got a picture that
was not quite right or complete? Absolutely."
10. In May 2002 , Ernst & Young, LLP ("E&Y") replaced Andersen LLP as
Catalina's auditor, after Andersen was barred from auditing public companies due to it s
conviction for obstruction of justice in the Enron scandal . Within a month, and before E&Y
could review any of the Company' s accounting practices or results , on June 14, 2002 th e
Company announced that CFO Joseph Port had resigned for "personal reasons ." The Company
quickly and publicly downplayed his departure , and continued to offer the market earnings and
revenues forecasts that Defendants knew they could not deliver .
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11 . But then on October 1, 2002 , just ten weeks after the Company touted it s
projected earnings on July 18, 2002, Catalina issued a press release revising both its quarterl y
and annual expectations . Consolidated revenues for the quarter ending September 30, 2002 now
called for an increase of only 6 to 8 percent , a fraction of the 20 percent announced in July .
Estimated earnings per share for the second quarter also fell from $ .26 to between $.22 and $.23
per share . For the fiscal year ending March 31, 2003, consolidated revenue estimates were
revised from July 18th's 25 percent to between 10 and 13 percent - an enormous reduction that
shocked the market and sent Catalina shares tumbling . By the time the dust settled on October 2 ,
2002, Catalina stock had plunged $10.09 per share, from $27 .97 to $17 .90, on trading volume 2 0
times the class period average, resulting in a 36% reduction in Catalina's market capitalization .
12. The magnitude of the problems within CHR again came pa rtially to light on Jun e
30, 2003. After the close of trading, Defendants revealed that the Company would not be able to
timely file its Annual Report on Form 10-K, because of certain "revenue recognition issues" a t
Health Resource . As a result of Defendants' improper revenue recognition, the press releas e
revealed that Catalina would be forced to restate financial results for fiscal year 2003 .
Consequently, Catalina stock dropped to slightly over $16 per share on unusually large tradin g
volumes - - a far cry from the stock's Class Period high of over $44 .
13 . The bad news was not over. On July 15, 2003, Defendants revealed that th e
accounting issues were not limited to solely Health Resource, announcing that "[t]he company i s
now also reviewing certain other revenue recognition timing matters in its core domesti c
business as well as with CHR ."
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14. Because the company materially overstated earnings for the three year period
ended March 31, 2002, it was forced to admit that its Class Period financial statements were
false, and not prepared in conformity with GAAP, as Defendants previously represented.
15. Defendants' accounting misconduct was ultimately acknowledged by Catalina to
have spanned no fewer than twenty different manipulations in the Company's financia l
statements and disclosures during the Class Period . The Company' s financial results had been
falsely presented by Defendants because they had :
• Improperly failed to defer revenue in these certain cases : when there wasno persuasive evidence of arrangements, nor had delivery occurred, norhad services been rendered, nor was pricing fixed or determinable;
• Improperly understated direct cost expenses ;
• Improperly accrued liabilities and prepayments for certain goods andservices obtained by the Company;
• Improperly understated operating expenses by accounting for payments inconnection with several acquisitions as part of goodwill (rather than asperiod operating expenses) ;
• Failure to write down impaired assets (including goodwill, patents, andfixed assets) in a timely manner during the period in which the Companydiscovered the impairment ;
• Improperly overstated prior service costs relating to the Company'spostretirement healthcare obligation ;
• Improperly recorded the Company's corporate headquarters facilities leaseas an operating lease rather than a capital lease ;
• Improperly accounted for costs incurred in connection with theCompany's software development activities ;
• Required readjustments in the Company ' s tax liabilities as a result of itsaccounting restatements ; and
• Failure to disclose certain reportable segment information regarding theCompany.
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16. On August 25, 2003, Ernst & Young suddenly resigned, without ever issuing a n
auditing opinion on the Company's FY 2002 financial results . Shortly thereafter, Catalin a
revealed that Ernst & Young wasn't prepared to delve further into the company's accountin g
practices. Ernst & Young also informed the company that "it was unwilling to be associated
with any of the company's financial statements until these matters were resolved to thei r
satisfaction and would need to expand significantly the scope of its audit . "
17. On March 5, 2004, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation regarding Catalina 's accounting practices . The SEC has requested
the production of documents and o ther information relating to Catalina's restatement . The SEC
is also investigating whether certain disclosures made by Catalina were compliant with SE C
regulations .
18. As reflected by the chart below, Defendant's accounting fraud enabled Catalina t o
appear as though it was successfully growing and achieving higher EPS during the Class Period .
In fact, just the reverse was true .
THIS SPACE INTENTIONALLY LEFT BLANK
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Actual OverstatementOrigina lly Restated Percentage ofReported Results Actual
Net Income* $61,880 .00 $58,550 .00 6%
Diluted Net IncomePer Share $1 .08 $1 .03 5%
Net Income* $58,135 .00 $47,160 .00 23%
Diluted Net IncomePer Share $1 .00 $0.88 14%
Net Income* $51,348 .00 $32,862 .00 56%
Diluted Net IncomePer Share $0.89 $0.57 56%
* amounts shown in 1000' s
19. It took Catalina's newest auditor Price Waterhouse, its third since it last filed a
financial statement, over seven months to finally sort out Catalina's previously issued fals e
statements and issue restated financials, which was finally done in a May 17, 2004 amended 10-
K. In fact, when the May 17, 2004 10-K was finally filed, it had been an astonishing 15 month s
since investors had received any financial information from Catalina, despite SEC requirement s
to furnish this information every three months .
20. The fallout from Defendants' fraudulent scheme included the resignation of fiv e
directors and/or officers of Catalina, including three of the Individual Defendants (Granger,
Bechtol and Diamond) during 2003 . As noted in a November 4, 2003 Tampa Tribune article
entitled "Catalina's Chief Latest to Leave," discussing Catalina's accounting scandal and
financial problems :
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In addition to accounting problems, several managers have left Catalina in thepast six months .
Michael Bechtol, a longtime Catalina executive who was named the company'spresident and chief operating officer in April, quit after only a few months on thejob. George Neal and David Diamond, two top Catalina executives, also resignedthis year .
In addition, a November 4, 2003 article in the St. Petersburg Times noted that Grange r
resigned "under pressure" as "questions linger about the company's financial reporting and long-
term strategy."
21 . Defendants reaped millions by issuing false projections and manipulating th e
Company's financial results . All told , by the end of the Class Period , Defendants dumped a total
of 1,039,914 Catalina shares at artificially inflated p rices , realizing personal profits o f
$13,347,950 .
22. As a result of Defendants' accounting fraud and failure to inform investors o f
Catalina's true financial condition, the stock price fell from a high of $44 .00 on September 13 ,
2000 to $14.56 on August 13, 2003, a 67 percent decline . In its 2003 Form 10-K, Catalina has
disclosed that it is not currently in compliance with the listing requirements of the New York
Stock Exchange ("NYSE") to file timely periodic financial repo rts and hold annual meetings of
stockholders each fiscal year . For this reason, the NYSE may delist Catalina' s common stock or
take other adverse actions if the Company is unable to comply with NYSE's listing
requirements . Indeed, the full extent of the restatement and investors ' losses will not be revealed
until Catalina belatedly files it Form 10-K for March 31, 2004 and the Quarterly Reports o n
Form 10-Qs for the fiscal quarters ended December 31, 2003, September 30, 2003 and June 30,
2003 .
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II. JURISDICTION AND VENUE
23. This Court has jurisdiction over the subject matter of this action pursu an t to
Section 27 of the Exchange Act (15 U . S.C. § 78aa) and 28 U .S .C . §1331 . The claims asserted
herein arise under Sections 10(b), 20 (a) of the Exchange Act (15 U.S.C. §§ 78j(b), 78t( a)), and
the rules and regulations promulgated thereunder by the SEC, including Rule I Ob-5 (17 C.F.R.
§ 240.10b-5) ; and Section 304 of Sarbanes Oxley (15 U.S .C. § 7243) .
24. Venue is proper in this District pursuant to Section 22 of the Securities Act of
1933 (15 U .S .C. §77v), Section 27 of the Exchange Act and 28 U.S.C. § 1391(b) . Many of the
acts and transactions giving rise to the violations of law complained of herein, including the
preparation and dissemination to the investing public of false and misleading information ,
occurred in this District . In addition, Catalina maintains its principal executive offices in this
District .
25 . In connection with the acts, conduct and other wrongs complained of herein ,
Defendants used the means and instrumentalities of interstate commerce, including the mails ,
telephone communications and the facilities of national securities exchanges .
III. THE PARTIES
A. Lead Plaintiffs
26. The Alaska Electrical Pension Fund and Virginia P . Anderson (collectively
"Plaintiffs") were appointed Lead Plaintiffs by the Court on December 4, 2003 . Plaintiffs
purchased Catalina common stock during the class period and suffered damages thereby .
B. Defendant s
Catalina Marketing
27. Defendant Catalina is a Delaware corporation with its principal offices at 200
Carillon Parkway, St. Petersburg, Flo rida, 33716. Catalina provides a wide range of strategic ,
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targeted marketing solutions for consumer goods companies, pharmaceutical manufacturers and
their respective retailers .
28. During the Class Period, Catalina provided "behavior-based, targeted marketing
serv ices and programs" for various industries , including: consumer goods, pharmaceutical
manufacturers, and their respective retailers . The Company was organized and managed by
"segments," which included Catalina Health Resource (CHR), which generates revenues by
printing ads, coupons, and newsletters for pharmacies and pharmaceutical manufacturers .
Daniel Granger
29. Defendant Daniel Granger, at all times relevant to this action, served as Chairman
of the Board of Catalina, and its Chief Executive Officer until November 3, 2003. Granger
signed the 2000, 2001, and 2002 10-Ks, and certified the second and third quarter 2003 Form 10-
Qs .
Christopher Wolf
30. Defendant Christopher Wolf, who is a Certified Public Accountant, has served a s
Chief Financial Officer ofCatalina since June 14 , 2002 . Prior to that, Mr. Wolf was a Vic e
President of Finance and the Company's Treasurer . Wolf, as Catalina's top financial officer,
was charged with overseeing Catalina' s auditing and financial reporting functions . Prior to
joining Catalina in 1996, he was employed for ten years with Arthur Andersen LLP. Wolf
signed the 2000 and 2003 10-Ks , along with the Form 10-Q for the First Quarter of 2003 . Wolf
also certified the now restated financials, pursuant to Sarbanes Oxley, for the second and third
quarters of 2003 .
10
Michael McClorey
31 . Michael T. McClorey served as President of Health Services Marketing, an
operating unit of the Company, and as a member of the Office of the President from Februar y
2000 and as Chief Executive Officer of Health Resource Publishing Company .
David Diamond
32 . David M. Diamond has served as President of Catalina Marketing Emergin g
Businesses , an operating unit of the Company, and as a member of the Office of the President ,
since February 2000 and as Chief Vision Officer of the Company since October 1998 .
Michael Bechtol
33 . Michael G. Bechtol served as Chief Operating Officer and President of the
Company from April 15, 2003 to September 12, 2003 . Prior to that he served as President ,
Catalina Marketing Services-Manufacturer and International, an operating unit of the Compan y
from January 2002 to April 15, 2003 . Prior to his appointment as President of Catalina
Marketing Services-Manufacturer and International, he served as President of Catalin a
Marketing Services Worldwide from February 2000 to January 2002 .
Joe Port
34. Joseph P. Port, a certified public accountant, served as Executive Vice President
and Chief Financial Officer from July 2000 to June 14, 2002 . Prior to joining the Company in
April 1999 as Senior Vice President and Chief Financial Officer, Defendant Port gained
substantial experience while serving in various financial and accounting positions, including as a
certified public accountan t for KPMG Peat Marwick, LLP. Defendant Port signed the fiscal year
2000, 2001, and 2002 Form 10-K, as well as the interim quarterly Form 10-Q for those periods .
11
IV. DEFENDANTS' FRAUDULENT SCHEM E
A. Defendants' Accounting Fraud : "There Were No Rules, You Just MadeThem Up As You Go"
35. Unable to meet the market's expectations and goals for the Company, Defendants
implemented various accounting schemes to reach their targets . According to a former employee
in the Retail Services Division employed during the Class Period, Catalina engaged in imprope r
revenue recognition and other fraudulent accounting manipulations. Indeed, he summarized
Catalina's policies as "there were no rules, you just make them up as you go ."
36. As Catalina has now admitted in its restated 2003 10-K, Catalina 's financia l
statements for 2000, 2001 and 2002 were materially false and misleading :
• As a result of our investigation of our revenue reco gnition policies andpractices , we identified numerous instances where the timing or amount ofrevenue was not recognized in accord ance with U.S . GAAP . Ourinvestigation identified situations where the customer arrangements werenot available , were not documented or were amended by separate w rittenor verbal agreements. The existence of these separate amended agreementsand arrangements indicated that the original agreement was not bindingand, therefore , the recognition of certain revenue was recordedprematurely at that time and has been deferred until the period whenpersuasive evidence of the arr angement exists .
• Delivery Had Not Occurred or Services Had Not Been Rendered .Generally, we recognize revenue when the earnings process is complete .As a result of our investigation, we identified instances in which werecognized revenue prior to the completion of the earnings process . Forexample, in certain cases, we recognized revenue at CHR prior to CHRcompleting its contractual obligations. Additionally, certain contracts atCHR and one contract at Manufacturer Services were entered into with aprogram performance guarantee. There were instances where theCompany recognized revenue prior to the attainment of the guaranteedlevel of performance and acceptance by the client . At DMS, werecognized revenue prior to mailing direct-marketing materials tocustomers . Also, in certain instances, we recognized revenue at CMRSprior to delivery of the completed research project to the client .
• The Seller's Price to the Buyer was not Fixed or Determinable . Generally,it is our practice to collect revenue from clients based on contractedamounts for our services . As outlined above, we discovered several
12
instances of separate written or verbal agreements that amended theoriginal contract . In these cases, the price for our services was not fixed ordeterminable and, as a result, we have deferred recognition of revenueuntil the period when the purchase price was fixed and determinable .
37. The restated 10-K summarized the impact of the premature revenue recognition a s
follows :
As a result of our investigation of our revenue recognition policies and practicesand the restatement of certain of our financial information described above, ourconsolidated revenue decreased by $4.0 million for the fiscal year ended March31, 2002 and decreased by $4 .8 million for the fiscal year ended March 31, 2001 .
38. Defendants' admitted premature revenue recognition was fraud - not negligence .
According to a former Executive Director at CHR, Catalina pushed ahead contracts in order to
meet quarterly earnings estimates . A former Catalina Senior Director confirmed, "it would be a
rush every quarter to get that number" and Catalina would "fudge" the numbers to meet quarterl y
estimates .
39. One of the fraudulent methods employed by Defendants to boost quarterly
numbers was an "overprint scheme ," which was created by Granger and BechtoL Catalina
executives would inform the sales staff at the end of certain quarters that "the numbers look
bad." The executives would then instruct the sales team to "overprint" ads . That is, they were
directed to print more ads than were required by the specific contracts in order to recognize th e
additional revenue .
40. A former Director of Business Development desc ribed the scheme as one in
which management in St. Petersburg pressured sales staff to inflate their sales numbers by
"pumping up" the number of coupons that would be printed under their contracts . Contracts that
were subject to the overprint scheme included supermarket giant Winn-Dixie . According to a
former Catalina manager, the overprinting was the result of intense pressure on salespeople t o
"make their numbers" by any means necessary . The impact of inflating the number of coupon s
13
enabled Catalina to prematurely recognize revenues which would then have to be subtracted
from later quarters . As the former employee described, " it's all a shell game . . . you project up
based upon the number of coupons you're going to trigger and don't adjust down until later ."
41 . Former employees confirmed that due to Defendants' zeal to have Wall Stree t
perceive Catalina as a growth company, Defendants regularly manipulated Catalina's quarter en d
numbers . According to a former Director of Business Development at Catalina Marketin g
Services : "[w]e always saw the manipulation of a few programs in the last week [of the quarter] .
Defendants kept themselves clean by not having their name on emails telling employees t o
"adjust the numbers" because "they were too smart for that" and instead directed Patrici a
Melanson to "do all the dirty work."
42 . According to a former CHR Account Director . Defendants tracked the number of
prints (coupons) on a daily and weekly basis . The CHR Information Technology group pulle d
the information from the computer systems, and generated a report named the "Log Files" or "H-
Logs." These reports showed the precise time a print was done . The report tracked the number
of prints on a weekly basis, and was able to compare the number of prints generated to the
number of prints required under a given contract. Defendants as well as management of th e
CHR finance group , had access to this data . A former Director of Business Services also
confirmed that monthly sales projections detailed how many prints would be produced for each
program . These projections were sent by email to Catalina headquarters in St . Petersburg t o
Defendant Bechtol and others .
43 . In addition, sales directors at CHR prepared "Distribution Reports" which showed
the distribution by retailers of print ads . These reports were prepared on a weekly basis, and
were dist ributed internally at CHR every two weeks . The report was available to everyone o n
14
Catalina's computer system's "0 Drive ." The report enabled Defendants to see "what wa s
coming and what was booked ." The report showed the names of CHR customers on the lef t
hand side, the contract amount in the next column , a column indicating the number of ads
expected to be printed over the next 12 months, and a corresponding figure showing the amoun t
of revenue projected to be earned from the prints over the next 12 months . Finally, the report
showed the actual number of prints versus the forecast .
44. According to a former Sales Director, Catalina also improperly recogn ized
revenue on free ads given to major customers, including Novartis, Pfizer, and Glaxo-Klin e
Smith. CHR gave a certain quantity of free ads to these customers in order to induce th e
customers to sign contracts with CHR . Catalina recogn ized revenue on the free prints because
the revenue recognition tactic "vas what we had to do to make our numbers . "
45 . Catalina also recognized revenue prematurely before prints were issued to suc h
customers as Unilever, Novartis, and Johnson & Johnson by recognizing the revenue before the
prints had even gone out, because "people were trying to meet goals ." According to a former
employee in CHR's Finance Department, CHR recognized revenue prematurely on contracts for
p rint ads with customers including Novart is , Pharmacia , Wyeth , and Glaxo Smith-Kline.
According to this former employee, "everybody knew" the way CHR timed its revenu e
recognition, and it was Defendant Wolf who established the "timing" policy .
B. Defendants Knew Catalina Could Not Meet Their Estimates for the
Company
46. Catalina' s declining sales were no mystery to Defendants . According to a former
employee in Catalina's retail division , Defendants clearly knew what was going on with the
Company, and could not have been surprised by Catalina 's earn ings miss, or subsequent need to
restate its earnings. According to this former employee, with respect to internal forecasts and th e
15
Company's financial data "all of [the Defendants] were very aware, and it was part of thei r
responsibility . They would know the numbers ."
47. As detailed below, Defendants were regularly con fronted with Catalina' s
declining sales figures through attending regular meetings, by receiving several different types o f
internal forecasting reports, by accessing at will sales information in the computer system,
reviewing Excel spreadsheets which detailed actual sales on a weekly and daily basis, and b y
face-to-face meetings with senior level management employees who personally warned
Defendants of the impending second quarter 2002 earnings miss . By receiving inside
information about Catalina's deteriorating sales trends, Defendants were able to dump million s
of dollars worth of Company stock before disclosing this information to the market and right
before the stock plunged.
48 . In addition, each office held quarterly meetings to discuss internal forecasts and
project expected sales. During the Class Period, CHR's lagging revenue production was th e
topic of regular discussion. Catalina and CHR had experienced rapid growth for several years i n
a row, but from 2001 to 2002, Catalina's growth rate slowed dramatically . Catalina 's slowdown
in growth, which was quantified internally as 20% less than historical growth rates, was
discussed during quarterly meetings.
49. According to a former Direct Marketing Services ("DMS") Director of Retail ,
senior management met monthly, quarterly, and also conducted regular interim conference calls .
Catalina Vice Presidents distributed to the Defendants updated numbers on a weekly basis . The
monthly meetings of Catalina executives in which sales and internal forecasts were discussed
were known as "Camp Dan" after CEO Dan Granger . In addition, Directors from each division
16
--i
were responsible for preparing an Excel spread sheet titled "Weekly Update Report," which was
distributed to certain Catalina executives, and which described the status of client accounts .
50. The fact that Catalina ' s public guidance had little relation to internal financial
data was so well known within the Company that it eventually became a joke among Catalin a
employees . According to a former Director of Business Development, Catalina employees
"were always laughing at the way [ management] would try to send stuff out to Wall Stree t
because it always looked like a bunch of bull ." In discussing Catalina's financials, the witnes s
stated that "it was obvious that A and B wasn 't equaling C . "
51 . For example , Defendants were well aware that CHR's revenue and profitability
were declining during the Class Period. According to a former Vice President of Business
Development employed at Catalina during the Class Period, it was internally known that th e
CHR numbers "didn't pan out" and it was impossible for CHR to increase its revenues by 25%
as Defendants' had publicly represented. Rather than reveal the truth to the public, Catalin a
senior management postponed disclosing the truth in order to maximize their personal financia l
gains .
52. The pressure to falsify projections came from the top levels of the Company . A
former employee in Catalina's Direct Marketing Division was told by a Catalina Director t o
"embellish" the employee' s sales forecasts . The employee was told that the forecasted sale s
numbers would directly affect Catalina' s stock price . The employee responded that Catalina had
to "pay now or pay later" meaning there was no point in falsifying sales forecasts because Wal l
Street would eventually find out they were inflated . The Director responded that he would
"prefer to delay the pain."
17
C. Defendant McClorey Is Directly Confronted With CHR's DecliningProfitability
53 . According to a former Research Director, CHR's revenues were negativel y
impacted during the Class Period because many drugs formerly sold on a prescription basis were
now being sold over the counter, and CHR was losing contracts with pharmacies .
54 . During 2000, a former Research Director at CHR performed a profitabilit y
analysis which revealed that CHR's profitability and growth prospects were far lower than wha t
management was reporting to the public . The declining sales and profitability trends shown in
the analysis were presented orally to CHR management including Defendant McClorey, short ly
after they were prepared in early 2000 . The analysis, which was based on a study of CHR's
existing contracts , projections , and industry data, concluded that CHR could not maintain growth
at the levels projected by the Company to Wall Street .
55 . The CHR profitability analysis identified three material adverse trends. CHR's
revenues were internally forecasted to decline rather than increase by 2000 because: (1)
profitability had been and would continue to be adversely impacted by signing CHR les s
profitable contracts with smaller drugstore chains' ; (2) costly "revenue sharing" agreements wer e
causing CHR's revenues to drop by 11 cent per page; and (3) increasing numbers of Catalina' s
customers began selling their drugs over the counter, which resulted in 95 cents less per ad .
56. The first adverse trend identified through Catalina's inte rnal research indicated
that by 2000, CHR's existing contracts with Walgreens , Rite-Aid and other large retai l
1 Catalina does not operate on a calendar year, but instead on a fiscal year ending each March 31 .Thus fiscal years 2000-2003 occurred in the following time periods :
FY2000 (Apri l 1, 1999 to March 31, 2000)FY2001 (April 1, 2000 to March 31, 2001)FY2002 (April 1, 2001 to March 31, 2002)FY2003 (Apri l 1, 2002 to March 31, 2003)
18
distributors had brought 50% of all pharmacy patients into CHR's net . That degree of coverage
left CHR with very little room for growth at CHR' s distribution end, since certain pharmacy
chains like Costco and Wal-Mart refused to work with CHR. Although there was tremendou s
pressure at Catalina to show that the Company was a "growth" company, the market was alread y
saturated and Catalina had no basis for projecting aggressive future growth . Catalina has
"max[ed] out on the numbers of grocery stores and chains of establishments that they could go
to."
57. According to the former employee who conducted this study based on CHR' s
internally documented data, in order to continue expanding CHR's distribution network, it woul d
have to enter into contracts with smaller pharmaceutical chains . Installing the newsletter systems
in these chains with smaller number of customers made such contracts much less profitable fo r
CHR. CHR's internal data andprofit analysis demonstrated that by 2000 CHR "had topped
out in terms of largepharmacies it could service at historic levels of profitability ."
58. The second adverse trend resulting in CHR's inability to meet Defendants' public
forecasts was the impact of costly "revenue sharing" agreements . CHR's profitability was offse t
by the sharing of revenue per printed newsletter page. CHR's profitability was also internall y
forecasted to decline due to certain major contracts which CHR had entered into withou t
properly analyzing the cost vs . benefit ratio. For example , CHR's contract with Walgreens wa s
very favorable for Walgreens, but was a financial drain for CHR. According to a former
Catalina Research Director: "[w]e distributed a newsletter on every prescription at Walgreens ,
whether the prescription carried an advertisement for which we were being paid or not. Every
time we printed at Walgreens , we owed Walgreens money, whether CHR made money on the
printing or not ." Due to these costly revenue sharing arrangements with pharmacies and
19
unprofitable contracts, CHR's revenue per page dropped dramatically . The revenue per page
was 20 cents per page in 1993, and plummeted to 9 cents per page by early 2000 - resulting in
major revenue and profitability shortfalls at CHR .
59. A third factor forecasted to weigh on CHR's bottom line was the increasing e ase
with which the FDA would allow a drug to be distributed over the counter . Just prior to the
Class Period, the FDA made it easier for pharmaceutical companies to get approval to distribut e
over the counter drugs that had been previously prescription only . CHR had contracts to market
both prescription and OTC drugs, but received a much higher payment for printing prescription
ads than OTC ads ($1 .00 versus 5 cents) . Several big customers' drugs went over the counter ,
like Claritin, which had a negative effect on the revenue that could be expected from thes e
contracts. Despite the material impact on CHR's profits, Defendants did not adjust CHR' s
revenue projections to account for this .
V. DEFENDANTS' FALSE AND MISLEADING STATEMENTS
A. The Class Period Begins: Defendants Issue False Financial Results DuringFiscal Year 2000
60. On October 14, 1999 the Company released its results for the Second Quarter of
Fiscal Year 2000 :
Reported revenue grew 34.7 percent to $86 .8 million compared to$64.4 million in the September 1998 quarter. Quarterly net incomeincreased 24 .4 percent to $11 .7 million, or 60 cents per dilutedshare, from $9.4 million, before the effect of the one-time charge,or 50 cents per diluted share for the prior period . Reported netincome for the September 1998 quarter, after the one-time charge,was $6 .4 million, or 34 cents per diluted share . Earnings beforeinterest, taxes, depreciation and amortization reached $27 .8 millionfor the quarter, up 25 .1 percent over the three-month period endedSeptember 30, 1998 .
For the six months ended September 30, 1999, revenue totaled$159.4 million, up 31 .5 percent compared to $121 .3 million for thefirst six months of the prior year . Net income for the first six
20
months of this year totaled $20 .4 million, up 26 .3 percent over$16 .1 million, before the effect of the one-time charge, for thesame period last year. Correspondingly, earnings per diluted sharewere $1 .05 for the first six months of fiscal year 2000, whileearnings per diluted share were $0 .85, before the effect of the one-time charge, for the same period of fiscal year 1999, an increase of23.5 percent .
61 . Commenting on the results , Defendant Granger stated :
We are extremely pleased with the overall performance of thecompany in the second quarter and the first half of our fiscal year .The outstanding results are a reflection of the strength of ourbusiness in every operating area, particularly in the core domesticbusiness. The core domestic business continues to be a strongdriver of our growth, with revenue increasing approximately 25percent for the quarter over the comparable period last year .
62. Granger added :
With strong performance driven by the efforts of the entiremanagement team, this quarter's outstanding results provide uswith additional confidence that we will meet our business andfinancial expectations for the year .
63. The Company also reported :
The European business, consisting of operations in the UnitedKingdom and France, surpassed the 2,000-installed store baseduring the quarter . There were 62 net installations for the quarter,which raised the total installed base at the end of the quarter to2,004. Revenue growth in the European operations continued at astrong pace with year-over-year growth during the quarter ofapproximately 27 percent .
64. On November 12, 1999, the Company field with the SEC its Form 10-Q for th e
quarterly period ended September 30, 1999, signed by Defendant Port . The Form 10-Q
incorporated the financial results previously announce on October 14, 1999. The 10-Q included
an assurance from management that the financial statements reflected "all adjustments. . .
necessary to present fairly the financial position of the Company as of June 30, 2000. . . , 2 It
2 Catalina's Class period quarterly reports each included a similar false assurance .
21
also stated , "Depreciation and amortization increased to $8 .6 million and $16 .7 million for th e
second quarter and first six months of fiscal 2000 from $6 .6 million and $13 .0 million for the
comparable periods in fiscal 1999 . "
65. On December 2, 1999, Catalina announced expectations for increased earnings for
the third quarter ending December 31, 1999 and fiscal year 2000 . The press release stated:
The impact on the third quarter is anticipated to "improve earnings per shareapproximately $ .03 to $ .05 over current consensus expectations of $.80 pershare ." The Company anticipates the third quarter improvement will not have anegative impact on current expectations for the fourth quarter of the fiscal yearended March 31, 2000. The improvement stems primarily from the continuedstrength of sales in its core domestic business and "further development of theCompany's European operations ."
66. Defendant Port commented in the December 2, 1999 press release "We are very
excited about the continued success of our core business as we look forward to another record
year for fiscal 2000 . "
67. On January 13, 2000, Catalina reported results for the quarter ended Decembe r
31, 1999:
Revenue grew 45 percent to $97 .8 million compared to $67 .6million in the December 1998 quarter. Quarterly net incomeincreased 38 percent to $16 .6 million, or 86 cents per diluted share ,from $12 .0 million, or 64 cents per diluted share for the prior yearperiod. Earnings before interest, taxes, depreciation andamortization reached $36 .4 million for the quarter, up 36 percentcompared to $26 .7 million for the three-month period endedDecember 31, 1998 .
For the nine months ended December 31, 1999, revenue totaled$257.2 million, up 36 percent compared to $188 .9 million for thefirst nine months of the prior year. Net income for the first ninemonths of this year totaled $36 .9 million, up 31 percent over $28 .1million, before the effect of the one-time charge, for the sameperiod last year . Earnings per diluted share were $1 .91 for the firstnine months of fiscal year 2000, while earnings per diluted sharewere $1 .49, before the effect of the one-time charge, for the sameperiod of fiscal year 1999, an increase of 28 percent . Reported net
22
income for the nine months ended December 1998, after the one-time charge, was $25 .1 million, or $1 .33 per diluted share .
68. Defendant Granger commented :
Our performance was outstanding during the quarter . Our recordresults for revenue and earnings were driven by the strength of ourcore domestic business, which experienced quarterly revenuegrowth of 32 percent over last year. I am also extremely pleasedwith the financial performance of our European operations .
69. The Company continued to praise its Europe an operations :
The European business, consisting of operations in the UnitedKingdom and France, experienced strong revenue growth withyear- over-year growth during the quarter of approximately 58percent . There were 131 net installations for the quarter, whichraised the total installed base at the end of the quarter to 2,135stores compared to 1,607 stores at December 31, 1998 . TheEuropean business contributed approximately 5 cents per companycommon diluted share this quarter
70. On, February 14, 2000 the Company filed with the SEC its Form 10-Q for th e
quarterly period ended December 31, 1999, signed by Defendant Port . The Form 10-Q
incorporated the financial results previously announced on January 13, 2000 . It also stated:
Depreciation and amortization increased to $8 .9 million and $25 .6million for the third quarter and first nine months of fiscal 2000from $6.9 million and $20.0 million for the comparable periods infiscal 1999 . Depreciation increased due to additional investment incapital expenditures, during the current and prior periods,associated with new operating units and product lines, dataprocessing equipment and the increase in stores installed .Amortization expense increased due to the additions in goodwilland other intangible assets related to the Company's acquisitions .
Effective April 21, 1999, the Company, through one of its whollyowned subsidiaries, acquired one of its vendors, CompuScan, for$9.1 million in initial cash consideration, net of cash acquired, bymeans of a merger transaction . Terms of the merger agreementcall for the Company to make a series of additional payments,which are based on specified future revenue growth targets of theCheckout Prizes product.
23
71 . On June 16, 2000, Defendants filed Catalina 's Form 10-K for the year ended
March 31, 2000. Defendants Port and Granger signed the 10-K. The 10-K included th e
following selected Consolidated Financial Data for the year :
ms YUW 'Yewt ;~ s-P -$
i
~7777 W"
Iwo t Date: ~r =
Revenues $350,922Costs and Expenses :
Direct Operating expenses 142,229Selling, general and administrative 88,247Depreciation and amortization 35,175
Total costs and expenses $265,651Income from operations 85,271Interest income (expense) and other (595)Income Taxes (34,041)Minority interest in losses of subsidiaries 71 3
Net income $51,348
Dili t.t Mme:
Per common share $.89Diluted weighted average common shares outstanding 57,957
Cash and cash equivalents $13,765Property and equipment, net 115,000Total assets 303,752Long term debt (including current portion of long term debt) 14,144Total stockholders' equity 141,045
B. Reasons for Falsity: Fiscal Year 2000 Statements
72 . Defendants ' statements detailed in ¶160-71 above touting the success of Catalina
U.K as well as the Company' s outstanding financial results during fiscal year 2000 were
materially false and misleading because: (a) Defendants failed to disclose that a material contract
in the U .K which constituted a signific ant portion of Catalina U .K's revenues had been canceled;
24
L
and (b) the financial results detailed in the press releases, quarterly reports and year end 10-K
were overstated .
73 . On June 2, 2000, Catalina finally revealed to investors that its contract with Asda
Group, Plc . had been terminated, albeit long after the company had actually learned the news .
Mixed amongst two supposedly positive partnership developments , the Company announced that
"one of its U.K. based retailers, Asda, has begun the process of changing its entire point-of-sal e
platform, which is functionally incompatible with the current Catalina Marketing system . As a
result, Catalina marketing and Asda have signed a mutual contract to discontinue using the
Catalina marketing Network in Asda's 233 U.K. based stores ." Defendant Bechtol, quoted in the
June 2, 2000 release, paints a bright yet misleading picture: "Our previous contract with Asda
held some restrictions on relationships with other retailers - an obstacle that we no longer face .
We are tremendously excited about the new opportunities that we now have available with othe r
retailers in the U.K. and are confident in our ability to meet our projected fiscal 2001 goals . "
74. As the Company has now admitted, Bechtol 's statements were entirely false and
misleading at the time they were made. Not only did Catalina and the Defendants learn of the
termination of the Asda contract in the previous fiscal year, but the Defendants knew the loss of
Asda was a material blow to their U.K. operations that could not be replaced. As the
Company now admits, Asda was Catalina' s largest U.K. customer. The loss of the Asda contract
severely impaired the goodwill associated with the acquisition of the U.K. operations, requiring a
$16.9 million impairment charge to current earnings -- something Defendants had significant
personal incentive to prevent.
75 . Rather than immediately performing an impairment analysis as GAAP requires,
Defendants masked the financial impact of the contract loss and concealed the immediate
25
reduction of goodwill associated with the Asda contract . The loss of the Asda contract
eliminated one of Catalina 's main sources of revenue in the U.K. which could not be recaptured .
Indeed, according to a former employee in Catalina's research division "Europe was failin g
miserably" and Catalina "immediately had trouble with its international business ." According to
the recently filed Form 10-K for the period ending March 31, 2003, "During fiscal year 2000, th e
UK received a contract termination notice from its largest retail customer due to the acquisitio n
of that retail chain by another retailer . As a result, the Company performed an impairment
analysis of the related store equipment, customer relationship intangible and goodwill associate d
with that retail customer ." What the recently restated 10-K neglects to state is that the retai l
customer in question, the Asda Group Plc ., was purchased by Wal-Mart for $10 .8 billion in June
1999 - a full year before the company announced in its press release dated June 2, 2000 tha t
Asda had terminated its contract . At the time Asda was purchased by Wal-Mart, Defendant s
learned that the contract would be canceled - and therefore the associated goodwill woul d
become impaired . As a former Director of Business Development conceded, "Wal-Mart was not
a customer of Catalina" and did not do business with Catalina. The Company's failure to timel y
take the impairment charge resulted in the overstatement of net income for 2000 by amazing
56%.
76. The financial data detailed in Catal ina 's 2000 Form 10-K w as mate rially false and
misleading. As Defendants later admitted , Catalina 's financial statement included in the 10-K
were overstated . Catalina overstated its actual net income of $32.862 million by more than
half. Catalina 's overstatement of over $18 million, or 56% of the actual net income, deceived
shareholders into believing that the Company's net income was $51 .348 million, but as th e
26
Company now admits, this was never the case . Similarly, the Company also overstated income
from operations by 43% and earnings per share by 56%.
C . Defendants Continue Issuing False and Misleading Financial Statement s
77. On July 17, 2000, Defendants issued a press release announcing financial results
for the first quarter of fiscal year 2000, the quarter ended June 30, 2000 . The press release
stated :
Catalina Marketing Corporation today reported first quarter results for the periodended June 30, 2000. Revenue in the quarter grew 29 percent to $93 .9 million,compared to $72 .6 million in the comparable prior year period. Quarterly netincome increased 35 percent to $11 .7 million, or 61 cents per diluted share, versus$8.7 million, or 45 cents per diluted share for the comparable prior year period .Earnings before interest, taxes, depreciation and amortization reach $29 .5 millionfor the quarter, up 30 percent compared to $22 .6 million in the comparable prioryear period .
78. The press release quoted Defendant Granger as stating :
This was a tremendous start to the new fiscal year, with outstanding quarterlygrowth in earnings, revenue and cash flows accompanied by superb rates ofreturn. The performance was led by the core domestic business, with revenue andearnings growth of over 20 percent compared to the first quarter of the prior year .
79. On August 14, 2000, Defendants filed Catalina's quarterly report on Form 10-Q ,
signed by Defendant Port . The Form 10-Q incorporated the previously announced on July 17,
2000.
80. On October 16, 2000, Defendants issued a press release reporting second quarter
results for the quarter ended September 30, 2000 . The press release stated :
Catalina Marketing Corporation today repo rted second quarter results for theperiod ended September 30, 2000 . Revenue in the quarter grew 17 percent to$ 101 .8 million, compared to $86.8 million in the comparable p rior year period.Quarterly net income increase 29 percent to $15 . 1 million, or 26 cents per dilutedshare, versus $ 11 .7 million, or 20 cents per diluted share for the comparable p rioryear period . Earnings before interest, taxes, depreciation and amo rt ization(EBITDA), reached $33 . 9 million for the quarter , up 22 percent compared to$27.8 million in the comparable p rior year period .
27
For the six months ended September 30, 2000, revenue totaled $195 .8 million, up23 percent compared to $159 .4 million for the first six months of the prior year.Net income for the first six months of the current year totaled $26 .8 million, or 46cents per diluted share, up 32 percent over $20 .4 million, or 35 cents per dilutedshare, for the comparable period last year .
81 . Commenting on the financial results, Granger stated :
We achieved a significant milestone by generating over 100 million dollars inrevenue du ring the quarter.
82 . Finally, with respect to Health Resources , the press release added :
Health Resource - The Health Resource business began the integration of theHealthCare Data Corporation (HDC) acquisition . Year-over-year revenues for thecombined operations grew approximately 58 percent and helped the companydeliver its second EBITDA positive quarter in it history.
83. The October 16, 2000 press releases' results were incorporated in the Form 10- Q
signed by Defendant port and filed on November 13, 2000 .
84. On January 11, 2001, Catalina issued a press release reporting third quarter results
and fourth quarter expectations . The press release stated :
Catalina Marketing Corporation today reported third quarter results for the periodended December 31, 2000. Revenue in the quarter grew 11 percent to $108 .8million, compared to $97.8 million in the comparable prior year period. Quarterlynet income was $16.9 million, or 29 cents per diluted share, versus $16 .6 million,or 29 cents per diluted share for the comparable prior year period . Earningsbefore interest, taxes, depreciation and amortization (EBITDA) reach $39 .0million for the quarter, an increase of 7 percent compared to $36 .4 million in thecomparable prior year period .
For the nine months ended December 31, 2000, revenue totaled $304 .6 million, anincrease of 18 percent compared to $257 .2 million for the first nine months of theprior year. Net income for the first nine months of the current year totaled $43 .7million for the first nine months of the prior year . Net income for the first ninemonths of the current year totaled $43 .7 million, or 75 cents per diluted share, an18 percent increase over $36 .9 million, or 64 cents per diluted share, for thecomparable period last year.
28
85. The press release again touted strong performance in the Health Resourc e
operation, noting that Health Resource had experienced a year-over-year revenue growth
increase of 60%. Granger stated :
Our Health Resource operation turned in another strong performance, achieving itssecond consecutive quarter of positive EBITDA, and making Health Resource EBITDApositive on a year-to-date basis .
86. The June 11, 2001 press release results were repeated in Catalina's quarterly
report on Form 10-Q filed on February 13, 2001, and signed by Defendant Port .
87. On April 19, 2001, Defendants issued a press release report ing Catalina 's fourth
quarter of 2000 and fiscal year ending March 31 , 2001 . The press release stated :
Catalina Marketing Corporation today reported results for its fourth quarter andfiscal year period ended March 31, 2001 . Revenue for the quarter grew 21percent to $113 .4 million, compared to $93 .7 million in the prior year fourthquarter. Net income for the quarter totaled $14 .5 million, or 25 cents per dilutedshare, compared to $14 .4 million, or 25 cents per diluted share, for the prior yearperiod .
88. Commenting on the results, Granger stated :
I am pleased that the performance of our management team enabled us to reachthe top of our range for earnings expectations in the fou rth quarter . In the face ofchallenges we outlined at the end of our last quarter, we made appropriateoperational changes to ensure we would meet our revised ea rnings estimates . Asa result , the core domestic business achieved outstanding revenue growth,increasing approximately 28 percent over last year . Health Resource Publishingachieved a major milestone , reaching quarterly profitability for the first time in itshistory.
89. With respect to the upcoming fiscal year and the first quarter of 2001, Granger
stated :
Based upon our financial results in fiscal year 2001, our estimate for fiscal year2002 is that both revenue and earnings will grow between 20 and 25 percent on anannual basis, which is consistent with our previous guidance . For the first quarter,we expect consolidated revenue to grow approximately 10 percent over the prioryear first quarter. In addition, we estimate consolidated first quarter earnings pershare to be equal to or modestly higher than earnings per share of the first quarterof fiscal year 2001 . Although the growth rates in the first quarter are less than th e
29
annual targets, based on client commitment levels and our analysis of recentselling activity, we believe that we will achieve our objectives for the total year.
The press release also announced increased profitability for the Health Resourcedivision, stating :
Health Resource Publishing produced its first-ever profitable quarter . Revenuefor the quarter increased approximately 40 percent over the comparable prior yearperiod .
90. On June 22, 2001, Defendants filed Catalina's Annual Report on Form 10-K fo r
the year ended March 31, 2001 . The 10-K was signed by Defendants Granger and Port . In a
"results of operations" section, the 10-K stated :
Year Ended March 31, 2001 compared to Year Ended March 31, 200 0
Revenues were $417 .9 million in fiscal 2001, up 19 percent over revenues of$350.9 million in fiscal 2000. The increase in revenues is due to an increase inpromotions printed worldwide, expansion of the Health Resource Network,growth in Checkout Direct(R) programs as well as increases in direct mailmarketing and other loyalty program s
91 . In the Company's Annual Report to Shareholders for the fiscal year ended March
31, 2001, which was distributed to shareholders and the public in 2001, Defendants included th e
following "financial highlights . "
Fiscal years ending March 31us in thousands, except per share amo
1999 . 199$
Revenues $417,881 ' $350,922 $264,773 $217,150Gross Profit 243,644 208,693 154,616 132,959Operating Income 94,019 85,271 67,911 52,892
Interest Income, net (2,081) (595) (2,334) (963)
Provision for Income Taxes 34,945 34,041 27,969 19,058
Net Income $58,135 $51,348 $37,608 $32,87 1
Diluted net income per share* $1 .00 $0.89 $0.66 $0.58Diluted weighted average sharesoutstanding (in thousands)*
$57,919 $57,957 $57,027 $57,078
Total Assets $388,048 $303,752 $221,047 $157,066Total Stockholders' Equity 211,597 141,045 120,933 90,042
*adjusted for 3-for-1 stock split
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92. The Annual Report also reported the "Fiscal Year 2001 Highlights" which
included :
Aggressive Growth Goals
We expect that the Catalina Marketing name will eventually become synonymouswith targeted marketing to consumers wherever and whenever they makepurchase decisions. We also expect to continue the momentum we developed lastyear in expanding our overall sales portfolio delivered from our in-store networkprinters through new direct mail target solution, expanded Internet productservices, enhanced loyalty marketing services products, growth in our attitudinalresearch and continued expansion of Checkout Direct . We remain committed tofinancial performance targets of increasing revenue and earnings 20 to 30 percentannually and achieving a return on equity of 30 percent .
93 . With respect to Health Resources and the inte rnational market, the Report stated :
Health Resource, our division that delivers targeted health-related communicationto consumers at the pharmacy, will continue to leverage the tremendous successachieved this year . While we will focus on our basis newsletter product, we see acontinued opportunity to expand our portfolio of services for the business . Thispast year, we added several new products to our portfolio including ComplianceDirect, Generic Compliance Plus, and a pharmacist information program calledPharmAware . And, we continue to look for new opportunities within thisbusiness . We believe that the combined reach and breadth of services weprovide will enable Health Resource to grow and achieve our goal of full yearprofitability in the new fiscal year.
94. As a direct result of these positive financial repo rt s and forecasts , Catalina's stock
priced was artificially inflated during the fiscal year and reached a high of $44 on September 13 ,
2000. Had the truth been known about Catalina's financial condition and issuance of false
financial results been known, these inflated stock prices could not have been reached .
D. Fiscal Year Ended March 31, 2001 : Reasons Why These Statements WereFalse
95. Defendants ' statements detailed above in ¶177-94 were materially false an d
misleading . As Defendants admitted in the 2003 restated 10-K, the Company overstated net
income for fiscal year 2001 by 23%, claiming it had received $58 .1 million when it had only
received $47 .1 million . Likewise, diluted net income per share was overstated by 14% .
31
96. As Defendants admi tted in the restatement , these financial statements were als o
false and misleading because the Company failed to properly record accelerated depreciating an d
amort ization expenses of $1 .7 million related to the U.K. operations and the Asda termination .
The Company also failed to take a goodwill impairment charge of $5 .7 million associated wit h
the acquisition of CompuScan 3 Marketing, Inc . because CompuScan had failed to achieve its
projected earn ings .
97. In addition, Defendants ' grow th projections were lacking in any reasonable bas is .
As detailed in ¶¶46-59, by 2000, Defendants knew that Catalina's sales were declining and the
company could not legitimately continue to post its strong historical growth rates .
E. The Fraud Continues : Fiscal Year 2002
98. On June 20, 2001, Defendants issued a press release updating Catalina's quarterl y
revenue and earnings outlook for the first quarter ending June 30, 2001 and the fiscal year endin g
March 31, 2002. The press release stated :
Catalina Marketing Corporation today updated its quarterly revenue and earningsoutlook for the first quarter ending June 30, 2001 and the fiscal year endingMarch 31, 2002 . Previous guidance had been given in the company's pressrelease and conference call on April 19, 2001 . Revised estimates for the quarterending June 30, 2001 are for consolidated revenues to approximate prior year firstquarter revenues . Based on those revenues, the company estimates that firstquarter earnings per share will be in the range of $0 .13 to $0.15 per diluted hare .
The company also updated its revenue and earning outlook for the remainder offiscal year 2002 . Revised estimates for the fiscal year ending March 31, 2002 isfor both consolidated revenue and earnings to grow between 10 and 20 percent onan annual basis . For the quarter ending September 30, 2001 consolidated revenueis expected to increase between 3 and 7 percent and earnings per share will be inthe range of $0 .18 and $0.20. For the quarter ending December 31, 200 1
' In April 1999, the Company, through one of its wholly-owned subsidiaries, acquired one of itsvendors, CompuScan Marketing, Inc ., including the technology for the Checkout Prizesapplication, by means of a merger transaction. Certain triggering events in fiscal year 2001,specifically lower than expected cash-generation as compared with the original cash flowforecast, indicated the need to assess for impairment in accordance with SFAS No. 121 .
32
consolidated revenue is expected to increase between 20 and 22 percent andearnings per share will be in the range of $0.33 to $0.36. For the quarter endingMarch 31, 2002 consolidated revenue is expected to increase between 33 and 35percent and earnings per share will be in the range of $0.46 to $0 .49 .
Daniel D . Granger, President and Chief Executive Officer, commented, "Theupdated revenues and earnings outlook for the first qua rter relates primari ly toreduced spending by our m anufacturer clients in our core domestic business . Weexpect this manufacturer spending trend to continue through the second quarter .Looking ahead to the third and fourth quarters , based on client commitments andour analysis of recent selling activity, we expect m anufacturer revenue in the coredomestic business will enable us to meet our revised qua rterly targets . Althoughwe have revised estimates in the manufacturer sales component of our coredomestic business , I remain con fident that our other business units will continueto meet previously stated expectations .
99. After the June 2001 announcement, Catalina's stock price continued to b e
inflated . On July 2, 2001, Catalina was named in the Top 40 of Business Week's "hot growth"
companies for 2001, a list based on three-year averages in reported sales growth, earnings
growth and return on invested capital .
100. On July 18, 2001 , Defendants issued a press release repo rting first quarter results
for the period ended June 30, 2001 . The press release stated :
Catalina Marketing Corporation today reported first quarter results for the periodended June 30, 2001 . Revenue for the quarter was $94 .4 million, compared to$93.9 million in the comparable prior year period .
As described below, the company implemented Statement of FinancialAccounting Standard No . 142, relating to the amortization of goodwill . As aresult of adopting the new standard, the company's net income and dilutedearnings per share were increased during the current quarter by approximately $1million and 1 .7 cents, respectively . Under the new standard, pro forma netincome for the prior period first quarter would have been $12 .3 million, or 21cents per diluted share.
101 . Granger, commenting on the results, stated :
Our results were right in line with our previously announced expectations . As weoutlined in our June 21 press release, we have experienced a near-term reductionin client spending in our core domestic business , which had an adverse affect onrevenue for the quarter. Our consolidated results for the quarter reflect th edecrease in revenue in the core domestic business . In the face of this challenge ,
33
our management team made the appropriate operational changes to ensure that wemet our earnings estimates for the quarter .
I am pleased with the accomplishments in several of our business units thisquarter . Health Resource posted its second consecutive quarter of profitabilityand increased its revenue in the quarter by 98 percent .
102. Granger also provided an update for the second half of the year, stating :
As we have previously discussed, the reduction in tactical spending by our clientsin the core domestic business is expected to continue into the second quarter .Based upon our financial results in the first quarter, client commitments andrecent selling activity, we estimate that consolidated revenue will increasebetween 3 and 7 percent compared to the second quarter of last fiscal year . Whileour previous guidance from the June 21 press release has not changed, we haveupdated our earnings estimates to reflect the new accounting pronouncement .Reflecting the change, we estimate that consolidated second quarter earnings willequal between 20 and 22 cents per share .
We have also updated our earnings estimates for the second half of the year toreflect the new accounting pronouncement . In the third quarter, a on aconsolidated basis, we expect to grow revenue between 20 and 22 percent andproject earnings to be between 35 and 38 cents per share . This will result in totalyear consolidated revenue growth between 10 and 20 percent and consolidatedearnings per share in the range of $1 .19 to $1 .27 .
103. The press release also touted Health Resource, stating :
Health Resource Publishing produced its second consecutive profitable quarter .Revenue for the quarter increased approximately 98 percent over the comparableprior year period . Health Resource Publishing added 2,268 stores on a net basisin the quarter, for a total of 14,442 pharmacy outlets at the end of the quarter,including 3,314 Walgreens stores . Health Resource Publishing contributedapproximately 1 cent per company common diluted share this quarter .
104. On August 14, 2001, Defendants filed Catalina's quarterly report on Form 10-Q
for the quarter ended June 30, 2001, signed by Defendant Port. The 10-Q repeated the financial
results detailed above .
105. On October 18, 2001, Defendants issued a press release announcing financial
results for the second quarter, ended September 30, 2001 . The press release stated :
Catalina Marketing Corporation today reported second quarter results for theperiod ended September 30, 2001 . Revenue for the quarter was $104.0 million,
34
compared to $101 .8 million in the comparable prior year period. Quarterly netincome was $12 .4 million, or 22 cents per diluted share, versus $15 .1 million, or26 cents per diluted share for the comparable prior period .
106. Commenting on the results, Granger stated :
The results for the second quarter were stronger than we had anticipated . Despitea challenging business environment, our management team remained focused anddelivered solid results . Several of our operating units posted strong performancesthat were instrumental in driving our results for the quarter. Health Resourceonce again achieved sold revenue growth by more than doubling it is revenuesover the prior year second quarter . Our search operations produced impressivequarterly year-over-year growth rates of approximately 27 percent in revenue andapproximately 85 percent in earnings .
107. Commenting on the upcoming third and fourth quarters, Granger stated :
As we have outlined in previous announcements, on of the challenges we aremanaging is the softness in client spending in our core domestic business. Thishas had an adverse effect on consolidated revenue and earnings for the first twoquarters . We continue to be challenged by recent restrictions in promotional andadvertising spending activity implemented by our manufacturer clients. Thecontinued economic uncertainty affecting many businesses is also having anegative impact on our manufacturer clients . In light of the current economicenvironment, we have revised our revenue and earnings projections for theremainder of the fiscal year . For the third quarter, on a consolidated basis, weexpect to grow revenue between 4 and 7 percent over the prior year and projectearnings to be between 30 and 33 cents per share . For the fourth quarter, we areprojecting consolidated revenue to grow between 20 and 25 percent over the prioryear and consolidated earnings to equal between 38 and 42 cents per share . Thiswill result in total year consolidated revenue growth between 7 and 9 percent andconsolidated earnings per share in the range of $1 .06 to $1 .13 .
108 . The results released on October 18, 2001 were incorporated in the Form 10-Q
signed by Defendant Port and filed on November 14, 2001 .
109 . On January 17, 2002 , Defendants issued a press release announcing third quarter
results for the period ended December 31, 2001 . With respect to Health Resource, Granger
stated :
Our performance for the quarter was highlighted by Health Resource, whichproduced another quarter of outstanding results . For the quarter, revenueincreased by more than 100 percent over the third quarter of the prior fiscal year,and it recorded its fourth consecutive quarter of profitability . Health Resource
35
added over 3,000 stores to its network this qua rter, giving it a total of more than17,600 pharmacy outlets at quarter end. These are truly exceptional achievements .
Health Resource will continue to build upon the strong foundation of profitabilityin this fiscal year. Based upon our projected financial performance for fiscal 2002,and the expected strength of both the core domestic business and HealthResource, our preliminary estimate for fiscal year 2003 is that both revenue andearnings will grow between 20 and 25 percent on an annual basis . These revenueand earnings growth rates are consistent with our historical growth rates .
110. A quarterly repo rt on Form 10-Q for the third quarter was filed on February 14 ,
2002, which contained the same false information and omissions . The 10-Q was signed by
Defendant Port .
111 . On April 18, 2002 , Defendants issued a press release report ing financial results
for the fourth quarter and fiscal year ended March 31, 2002 . The press release stated :
Revenue for the quarter grew 18 percent to $133 .5 million compared to $113 .4million in the prior year fourth quarter. Net income for the quarter totaled $22 .7million, or 40 cents per diluted share, compared to $14.5 million, or 25 cents perdiluted share for the prior year period.
For the twelve months ended March 31, 2002, revenue totaled $446 .7 million, up7 percent compared to $417 .9 million for the prior year . Net income for thecurrent fiscal year totaled $61 .9 million, compared to $58 .1 million for the annualperiod last year. For fiscal year 2002, earnings per diluted share were $1 .08,compared to earnings per diluted share of $1 .00 in fiscal year 2001 .
112 . Commenting on the quarter, Defendant Granger stated :
The fourth quarter provided a strong finish to our fiscal year . Our results weredriven by the performance of the core domestic business, which posted quarterlyrevenue growth of approximately 18 percent . This is a remarkable achievementin the current uncertain economic environment and when compared to the prioryear fourth quarter, which had experienced quarterly revenue growth o fapproximately 28 percent over the comparable fiscal 2000 quarter . HealthResource was another catalyst, achieving quarterly revenue growth ofapproximately 91 percent and posting its fi fth consecutive quarter and first fullyear of profitability .
113 . Commenting on the upcoming fiscal year, Defendant Granger stated :
As we have previously stated, our expectation is for annual consolidatedrevenue and earnings growth of between 20 and 25 percent of our fiscal 2003
36
year. For the first quarter, we expect consolidated revenue and earnings togrow between and 10 and 15percent over the prior year first quarter. Althoughthe growth rates in the first quarter are less than the annual targets, the firstquarter targeted growth rates are consistent with our previous expectation and weremain committed to our consolidated revenue and earnings growth rate ofobjectives for the fiscal year .
The fourth quarter provided a strong finish to our fiscal year . Our results weredriven by the performance of the core domestic business, which posted quarterlyrevenue growth of approximately 18 percent . This is a remarkable achievementin the current uncertain economic environment and when compared to the prioryear fourth quarter, which had experience quarterly revenue growth o fapproximately 28 percent over the comparable fiscal 2000 quarter . HealthResource was another catalyst, achieving quarterly revenue growth ofapproximately 91 percent and posting its fifth consecutive quarter and first fullyyear of profitability.
114. On May 23, 2002, Defendants filed an Annual Report on Form 10-K, for th e
fiscal year ended March 31, 2002, signed by Defendants Port and Granger. The 10-K reporte d
revenues for the year ended March 31, 2002 of $446,668,000, operating expenses o f
$193,121,000, income from operations of $100,023,000 and net income of $61,880,000 .
115 . At the same time , Catalina 's 2002 Annual Report to Shareholders was mailed to
investors . The Report again depicted a carefully orchestrated scheme to portray steadily risin g
financial results, graphically depicting year-over-year increases in financial growth .
The Annual Report added :
Catalina Marketing as a company responded to our unique challenges during thepast fiscal year as well, delivering both positive growth in revenue and earnings,along with exceptional cash flow. Although our growth was modest whencompared to our past performance, we reacted by finishing the year with one ofthe best quarters we have ever had, with 18% growth in revenue and a 46%growth in earnings for the fourth fiscal quarter . More importantly, we kept ourhistorical focus and strategically positioned our business to delivery 20 to 25%growth in fiscal year 2003 .
116. With respect to Health Resources, the Annual Report stated :
Health Resource Doubles Revenue and Delivers Full Year of Profitability
37
In our Health Serv ices Marketing group , Health Resource produced trulyoutstanding results, doubling revenue and posting profit every quarter for the fullfiscal year. Health Resource has become a cornerstone of Catalina Marketing .We are proud of their accomplishments and excited about their tremendousopportunities in the pharmaceutical adve rt ising serv ices segment. HealthResource added more th an 5,000 stores to extend its consumer access to over17,700 U.S. pharmacies .
Health Resource continues to be an important component for achieving ourambitious growth targets and we believe will become a significant contributor toearnings . Adding new pharmaceutical client products and their advertisingmessages to the Health Resource Newsletter will be the primary driver of 35-45%increases in revenue along with the development of several new product services .
117. The Annual Report provided a strong outlook for 2003, stating:
We enter fiscal year 2003 focused on profitable growth and committed to buildingour position as the leader in targeted marketing services. Our primary fiscal goalsfor 2003 are to improve financial performance, increase the company's overallprofitability and continue to build shareholder value. We affirm our commitmentto increase revenue and earnings by 20-30 percent annually, while targeting areturn on shareholder equity of 30 percent . This will be attained by aggressivelypursuing new clients, providing new services on our existing networks, expandingvertically into new classes of trade and implementing new technology into ourexisting system.
118 . On June 14, 2002, Defendants announced that Christopher Wolf would b e
replacing Port as the Company's Chief Financial Officer .
F. Fiscal Year Ended March 31 .2002: Reasons Why These Statements WereFalse
119. Defendants' statements detailed above in ¶¶98-118 were materially false and
misleading . As Defendants were forced to admit in the restated 10-K, net income for 2002 was
overstated by 6%, and diluted net income per share was overstated by 5% . Furthermore, due to
the "mate rial weaknesses " and "significant deficiencies" in the Company' s internal financial
controls, which it admitted existed in fiscal years 2001, 2002 and 2003, it engaged in imprope r
revenue recognition across many business segments , including CHR. As detailed in ¶1180-18 6
below, Item 9A to the 2003 10-K reveals that Catalina improperly "recognized revenue for
38
services in periods prior to the periods in which such services were performed" As a result of it s
improper revenue recognition, Catalina overstated its fiscal year 2002 revenue by $3 .966 million.
G. Fiscal Year 2003 : The Fraud Begins to Unravel
120. On July 18, 2002, Defendants issued a press release reporting financial results for
the first quarter of 2003, the period ended June 30, 2002. The press release stated :
[Catalina] today reported first quarter results for the period ended June 30, 2002 .Revenue for the quarter grew 16 percent to $109 .1 million, compared to $94 .4million in the first quarter of the prior fiscal year. Quarterly net income was $10 .7million, or 19 cents per diluted share, versus $9 .4 million, or 16 cents per dilutedshare, for the comparable prior year period .
121 . Commenting on the seemingly stellar results , Defendant Granger stated :
I am pleased with our performance this quarter . Our results were at the higher endof the range of our previously announced expectations . The core domesticbusiness had another strong quarter with revenue growth of nineteen percent overthe first quarter of last year . The financial results of the core domestic businesswere achieved primarily as the result of outstanding revenue growth in our retailand direct mail operations .
122. With respect to second quarter and 2003 prospects , Granger stated :
Based upon our financial results in the first quarter, client commitments andrecent selling activity, we estimate that consolidated revenue will increasebetween 15 and 20 percent compared to the second quarter of last fiscal year.As a result of our expected revenue growth, we estimate that consolidatedsecond quarter earnings will fall between 25 and 26 cents per share .
As we have statedpreviously, we expect to grow consolidated revenue andearnings per share between 20 and 25 percent on an annual basis in fiscal2003. After review of our first quarter results and our current estimates for theremainder of the fiscal year, we still expect to achieve those targets.
123. Granger attributed much of the success to Health Resource , stating:
Health Resource posted another solid quarter, with revenue growth of 28 percentover the first quarter of fiscal 2002 . During the quarter, Health Resource signedthe largest contract in its history, a multi-year agreement with a majorpharmaceutical manufacturer, further indicating that our clients believe in thevalue of the patients' right to be informed of their health care choices via the one-to-one communication of the Health Resource(R) Network.
39
124. On July 18, 2002, Defendants held a conference call for analysts and investors t o
discuss first quarter 2003 results, Granger stated:
First, for those of you who have not seen the press release yet, let me start with anoverview of our first-quarter performance. Consolidated revenue for the quartergrew approximately 16 percent to $109.1 million, compared to $94 .4 million inthe prior-year first quarter. Net income equaled $10 .7 million, representingdiluted earning of 19 cents per share, compared to $9 .4 million, or 16 cents pershare, in Q 1 of fiscal 2002 .
These results were at the high end of the guidance, with revenue growth slightlyexceeding the expectation that we had provided at the end of last quarter. Onceagain, I need to thank everyone in the Catalina organization for remaining focusedand delivering on our expected results . It is a true statement to our people that inthis uncertain, economic environment, Catalina has continued to deliver strong,financial results, led by double-digit growth rates in the quarter .
Taking a look at the individual operating units ' quarterly performance, revenue inthe core, domestic business was up a very strong 19 percent, compared to the firstquarter of last year. As we stated in the press release , one of the highlights ofthese results was in the CMS retail sales area , with a strong double-digit increas eyear-over-year.
125 . With respect to the outlook for the second quarter of 2003, Defendant Granger
stated :
Now let's turn to the second quarter of fiscal 2003 . As we have stated earlier, ourfiscal year, 2003 goal is to -just to grow consolidated revenue and earningsbetween 20 and 25 percent on an annual basis. Based on our recentperformance and our latest estimates, we still expect to accomplish these goals.
Heading into the second quarter, we anticipate consolidated, quarterly revenueand earnings growth of 15 to 20 percent . These amounts are consistent with ourearlier, internal estimates and put us on target to achieve our annual growthobjectives .
126. Chris Wolf, the Company' s Chief Financial Officer stated :
In the second quarter, Health Resource is expected to increase revenue by 25 to30 percent and grow revenue between 3 5-45 percent for the full year.
127. Granger concluded the call by stating :
40
The quarter was a solid start for the fiscal year for the entire team, and I'm veryproud of the team - that we've achieved some extraordinary results . What wecommunicated in the last conference session is what we did, and we delivered .
This management team is - as I've stated before - second to none in themarketing services industry . The strength in the two keys areas of our business- the core domestic business , as well as Health Resource - really do provideconfidence, in the expectations and the numbers that we've communicated, forachieving the previously-stated goal of 20 to 25 percent revenue and earningsgrowth, year over year, in thisfiscal year 2003.
128. On August 14, 2002, Defendants filed a quarterly report with the SEC whic h
repeated the Company's first quarter 2003 financial results . In the Company's Form 10-Q fo r
the period ending June 30, 2002 . The 10-Q signed by Defendant Wolf.
H. Defendants' First Quarter 2003 Statements Were Fals e
129. The statements detailed in the July 2002 press rele ase and July 18, 2002
conference call were materially false and misleading. According to a former CHR Director, the
25% growth forecast for CHR "was not at all consistent with the internal numbers . At the rate
they were adding pharmacies and meds to their client/distribution base, growth would be at bes t
10%. But that 10% growth was not consistent with the "growth" message the company wanted
in the marketplace ."
VI. THE TRUTH REGARDING CATALINA'S DETERIORATING FINANCIALCONDITION IS SLOWLY REVEALE D
A. CHR's Declining Sales Are Revealed
130. On October 1, 2002 , Defendants issued a press release announcing shocking
news. Defendants announced that revenue and earnings for the quarter ended September 30 ,
2002 and the fiscal year ending March 31, 2003 were far less than investors had been repeatedl y
assured . The press release stated :
Catalina Marketing Corporation today updated its quarterly revenue and earningsoutlook for the second quarter ending September 30, 2002 and the fiscal yearending March 31, 2003 . This replaces previous guidance given in the company' s
41
press release and conference call on July 18, 2002 . Revised estimates for thequarter ending September 30, 2002 are for consolidated revenues to increasebetween 6 and 8 percent compared to the second quarter of last fiscal year . Basedon those revenues, the company estimates that second quarter earnings will be inthe range of $0 .22 to $0.23 per diluted share, prior to a non-cash charge related tothe write-down of certain cost based investments, in the aggregate amount of $2 .5million, or approximately $0 .04 per diluted share .
The company also updated its revenue and earnings outlook for the remainder ofthe current fiscal year . Revised estimates for the fiscal year ending March 31,2003 is for consolidated revenue to grow between 10 and 13 percent over theprior year with earnings in the range of $1 .12 to $1 .17 per diluted share,excluding the $2 .5 million charge. For the quarter ending December 31, 2003,consolidated revenue is expected to increase between 8 and 12 percent over theprior year comparable period with earnings per share between $0 .30 and $0.32 .For the quarter ending March 31, 2003, consolidated revenue is expected toincrease between 10 and 15 percent over the prior year comparable period withearnings per share in the range of $0.41 and $0.43 .
131 . Commending on the unexpected news , Granger stated :
Our revised revenue and earnings estimates for the second quarter and the fiscalyear reflect primarily the current market conditions affecting Health Resource .We have experienced a decrease in the amount of promotional spending by ourpharmaceutical clients, and retail pharmacies have become more selective in theirprogram participation. While we expect this situation to improve, our currentoutlook is for reduced promotional activity to continue for the remainder of thecurrent fiscal year. While these near term reductions to expectations aredisappointing, we remain confident in the long term prospects of HealthResource .
132. In response to the news , Catalina stock plunged 36% from $27.97 per share to
$17.90 per share on October 2, 2002, trading on unusually large volume of 5,744,300 shares, far
greater than the Company's average daily trading volume du ring the Class Period of 319,74 8
shares .
133 . On October 2, 2002, following Defend ants ' announcement a day prior that
expectations for the fiscal second quarter and full year would fall short, analysts from CIB C
World Markets downgraded Catalina from Sector Outperformer to Sector Underperformer,
stating :
42
We believe this weakness which undermines the company' s most compellinggrowth story, could materially affect the stock' s premium valuation to the market,thus leading to our cautious rating .
B. Defendants' False Statements Continue
134. Defendants' October 1 announcement was only a partial disclosure . While
Defendants had trickled out selected adverse information about Catalina's business declines ,
Defendants continued to conceal the Company's true financial condition and accountin g
manipulations . On October 18, 2002, Defendants issued a press release reporting second quarte r
2002 results . The press release stated :
Catalina Marketing Corporation today reported second quarter results for theperiod ended September 30, 2002. Revenue for the quarter grew 9 percent to$113 .2 million, compared to $104 .0 million in the second quarter of the priorfiscal year . Quarterly net income was $10.5 million, or 19 cents per diluted share,after the effect of a non-cash charge, discussed below. Excluding the effect of thenon-cash charge, net income would have been $13 .0 million, or approximately 23cents per diluted share . Net income for the comparable prior year period was$12 .4 million, or 22 cents per diluted share .
During the quarter, the company recorded a non-cash charge to recognizeimpairment in the carrying value of certain cost-based investments, in theaggregate amount of $2 .5 million, or approximately 5 cents per diluted share .
For the six-month period ended September 30, 2002, total revenue grew 12percent to $222 .2 million, versus $198 .4 million for the comparable prior yearperiod. Net income for the first six months was $21 .1 million, or 38 cents perdiluted share, after the effect of the second quarter charge referenced above .Excluding the effect of the non-cash charge, net income would have been $23 .6million, or approximately 42 cents per diluted share . Net income for thecomparable prior year period was $21 .8 million, or 38 cents per diluted share .
135 . Commenting on the results, Granger stated :
Our results for the quarter were in line with the guidance provided in our October1, 2002 press release . As we described in the earlier release, revenue and earningswere impacted by current market conditions affecting Health Resource . We haveexperienced a decrease in the amount of promotional spending by ourpharmaceutical clients, and retail pharmacies have become more selective in theirprogram participation. While these near term reductions to expectations aredisappointing, we remain confident in the long term prospects of HealthResource .
43
136. On November 13, 2002, Defendants filed a quarterly report on Form 10-Q for th e
quarter ending September 30, 2002, signed by Defendant Wolf . Defendants Granger and Wol f
signed Sarbanes Oxley 906 Certifications for Catalina 's second quarter 2002 results as filed o n
Form 10-Q with the SEC. These Certifications personally affirmed the veracity of th e
information included in the second quarter's Form 10-Q and stated : :
In connection with the Quarterly Report of Catalina Marketing Corporation (the"Company") on Form 10-Q for the period ending September 30, 2002 as filedwith the Securities and Exchange Commission on the date hereof (the "Report"),I, Daniel D. Granger, President, Chief Executive Officer, Chairman of the Boardand Director of the Company, certify, pursuant to 18 U .S.C. §1350, as adoptedpursuant to §906 of the Sarbanes-Oxley Act of 2002, that :
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 ; and
(2) The information contained in the Report fairly presents, in all materialrespects, the financial condition and result of operations of the Company.
137. On January 16, 2003, Defendants issued a press release repo rting third quarter
2002 results. The press release stated :
Catalina Marketing Corporation today reported third quarter results for the periodended December 31, 2002 . Revenue for the quarter grew 4 percent to $119 .1million, compared to $114 .7 million in the third quarter of the prior fiscal year .Quarterly net income was $16.9 million, or 31 cents per diluted share . Net incomefor the comparable prior year period was $17 .4 million, or 31 cents per dilutedshare .
For the nine-month period ended December 31, 2002, total revenue grew 9percent to $341 .3 million, versus $313 .1 million for the comparable prior yearperiod. Net income for the first nine months was $38 .0 million, or 69 cents perdiluted share, after the effect of the second quarter non-cash charge to recognizeimpairment in the carrying value of certain cost-based investments, in theaggregate amount of $2 .5 million. Excluding the effect of the non-cash charge,net income would have been $40 .5 million, or approximately 73 cents per dilutedshare. Net income for the comparable prior year period was $39 .2 million, or 69cents per diluted share .
138 . The press release added :
44
Health Resource -- Revenue for the quarter was approximately 14 percent lowerthan the comparable prior year period. At the end of the quarter, the HealthResource(R) Network was installed in a total of 17,686 pharmacy outlets,compared to 17,622 pharmacy outlets at December 31, 2001 . The companycompleted installations in 62 stores on a net basis during the quarter . HealthResource net loss was nominally dilutive to earnings this quarter .
139 . On February 12, 2003, Catalina filed a quarterly report, signed by Wolf, on Form
10-Q for the period ending December 31, 2003. The false and misleading results announced on
January 16, 2003 were incorporated in the Form 10-Q's financial statements, which wer e
certified by Defendants Wolf and Granger pursuant to § 906 of Sarbanes Oxley .
C. The Belated U.K. Impairment Charge is Announced
140. On April 15, 2003, p rior to the market opening, Defendants issued a press release
disclosing the full extent of the Company's revenue and earnings miss . The press release stated :
Catalina Marketing Corporation today provided an estimate of its revenue andearnings for the fourth quarter and the fiscal year ended March 31, 2003 . Theestimate is based on preliminary fourth quarter results and replaces previousguidance given in the company's press release and Investor Conference on March7, 2003. The company expects to announce the final results for the fourth quarterand full fiscal year on May 8, 2003 .
The company expects fourth quarter earnings of approximately $0 .10 to $0 .12 perdiluted share, after a fourth quarter non-cash charge of $10.5 million , or $0.20 perdiluted share, related to an impairment charge against goodwill and otherintangible assets in Catalina Marketing UK. For the year ended March 31, 2003,earnings are estimated to be in the range of $0 .79 to $0 .81 per diluted share, net ofthe $10.5 million, or $0 .19 per diluted share , fourth quarter non-cash chargedescribed above and the $2.5 million, or $0.05 per diluted share , previouslydisclosed second quarter non-cash charge to recognize impairment in the carryingvalue of certain cost- based investments.
Prior to the impact of the impairment charge, expected earnings for the fourthquarter are projected to be approximately $0 .30 to $0.32 per diluted sharecompared to $0.40 per diluted share in the fourth quarter of the prior year .Excluding the previously disclosed second quarter and current fourth quartercharges, earnings per share estimates for the year ended March 31, 2003 wouldhave been approximately $1 .03 to $1 .05 per diluted share, compared to $1 .08 perdiluted share reported in the prior year.
45
The company had previously provided fourth quarter earnings per diluted shareguidance of $0.41 to $0.43. During the fourth quarter Catalina Health Resourcecontinued to see a reduction in promotional spending and, as a result, revenue inthat business unit is estimated to have declined approximately 28% to 30% versusthe prior year fourth quarter . The shortfall at Catalina Health Resource will reduceearnings by approximately $0 .07 per diluted share from the previous guidance .The company also chose to incur fourth quarter operating costs that were higherthan anticipated at the time of previous guidance . These operating costs areestimated to have a net negative impact on earnings of approximately $0.04 perdiluted share .
Daniel D. Granger, Chairman and Chief Executive Officer, commented, "Thefourth quarter results were disappointing . While most of our business unitsperformed fairly well and in accordance with our previous guidance, CatalinaHealth Resource, our targeted newsletter solution for pharmacies, experienced adisappointing fourth quarter with a significant shortfall in revenue . The businesscontinues to be negatively impacted by a challenging environment in which ourpharmaceutical clients and retail pharmacies remain cautious in their programparticipation. Additionally, our Catalina Marketing UK business model no longersupports its asset carrying value and, accordingly, it was appropriate to recognizean expense for the impairment of assets . While we are disappointed in our resultsin the current quarter, we remain focused and committed to executing our long-term strategic behavior-based targeted marketing initiatives . "
141 . As Catalina revealed in its 2003 10 -K, in fiscal year 2000 it knew its UK
operations were impaired, yet the company failed to timely take the impairment . Defendants '
failure to properly account for the impairment inflated net income by $18.2 million and earn ings
per share by 56% .
142 . On April 15, 2003, in response to the news, Catalina's stock price declined eve n
further, to $15 .51 on a volume of 3,632 ,000 shares from its previous close of $18 .69 .
143. On May 1, 2003, Defendants issued a press release announcing a m anagement
change at Catalina's Health Resource division . The press release announced that Catalina had
accepted the resignation of George Neal, president and chief operating officer . No reason was
given for Neal's sudden departure .
46
D. Defendants' Accounting Fraud is Partially Expose d
144. Between June 30 , 2003 and August 25, 2003, Defendants issued a string of
announcements revealing progressively worsening accounting man ipulations . From April 15 ,
2003, when the belated U .K. impairment charge was taken, to August 26, 2003, Catalina's stoc k
price dropped from $15 .51 to $12.58, and lost an additional 19% of its value . For example, on
June 30, 2003, Defendants issued a press release stating :
Catalina Marketing Corporation announced today that it will delay the filing of itsannual report on Form 10-K for the year ended March 31, 2003 . Catalina has fileda notification of late filing with the Securities and Exchange Commission underRule 12b-25 because it has not yet completed its annual financial statements as aresult of certain issues identified by management of the company related to thetiming of revenue recognition at the company's business unit, Catalina HealthResource ("CHR") . Management of the company is currently engaged in a reviewand evaluation of financial data of CHR relating to fiscal 2003 . The company,through its Audit Committee, has engaged Ernst & Young LLP, which replacedArthur Andersen LLP as its independent auditors in May 2002, to assist in thereview and evaluation of the results . The company believes that the issuesdetected by management exist only at CHR . The company cannot presentlypredict the time required to complete its review or the timing of the associatedaudit of the financial statements by Ernst & Young . However, every effort will bemade to file the company's annual report on Form 10-K within fifteen days .
The company anticipates that upon completion of its review and Ernst andYoung's audit, the company will revise its previously announced financial resultsfor the fiscal year 2003, ended March 31, 2003, and that certain revenuepreviously reported for fiscal 2003 will be recognized in results of operations forfiscal year 2004. Currently, the company estimates that its review will result in ashift in revenues from fiscal 2003 to fiscal 2004 in an amount not likely to exceed$7 million. These changes will affect the previously reported earnings of thecompany for the 2003 fiscal year, as well as the revenues and earnings reportedfor each of the company's fiscal quarters during the year . The anticipated changesto fiscal 2003 will also have an impact on the forecasted results for the currentfiscal year, including the first quarter ended June 30, 2003, but will not impactsubsequent fiscal years . The company is also investigating whether these issuesaffect the CHR revenue recognized in its financial statements for periods prior tofiscal 2003 . The company is not currently able to estimate the amount of anychanges that may result from the review of periods prior to fiscal 2003 . Previouslyfiled financial statements, including the associated audit opinions and reviewreports, of the company should not be relied upon until the review is complete .
47
145 . At the same time, the Company announced that it would delay the filing of it s
annual report on Form 10-K for the year ended March 31, 2003 . The Company filed a
notification of late filing with the SEC under Rule 12b-25 because it had not yet completed its
annual financial statements as a result of certain issues identified by management of the
Company related to the timing of revenue recognition at the Company's business unit , Catalina
Health Resource ("CHR"). The press release stated :
The company anticipates that upon completion of its review and Ernst andYoung's audit, the company will revise its previously announced financial resultsfor the fiscal year 2003, ended March 31, 2003, and that certain revenuepreviously reported for fiscal 2003 will be recognized in results of operations forfiscal year 2004 . Currently, the company estimates that its review will result in ashift in revenues from fiscal 2003 to fiscal 2004 in an amount not likely to exceed$7 million. These changes will affect the previously reported earnings of thecompany for the 2003 fiscal year, as well as the revenues and earnings reportedfor each of the company's fiscal quarters during the year .
146. Then July 15, 2003, Defendants issued another press release stating :
Catalina Marketing Corporation today announced that it is continuing to reviewthe timing of revenue recognition at the company's business unit, Catalina HealthResource ("CHR") . The company is also reviewing certain other revenuerecognition timing issues in other parts of its business, as further described below .The company is continuing to work with its independent auditors, Ernst & YoungLLP, to complete these activities . As a result of these reviews, the company willfurther delay filing its annual report on Form 10-K for the fiscal year 2003, endedMarch 31, 2003 . The company previously filed a notification of late filing withthe Securities and Exchange Commission under Rule 12b-25, but has sincedetermined that it will be unable to comply with the filing deadline of July 15,2003 .
The company anticipates that, upon completion of its review of the financialresults of CHR, certain revenues will shift from fiscal 2003 to fiscal 2004 .However, the company expects these changes will impact only the timing ofrevenues, and not the aggregate amount of revenues reported or to be reported .These changes will affect the previously reported earnings of the company for the2003 fiscal year, as well as the revenues and earnings reported for each of thecompany's fiscal quarters during that year. The anticipated changes to CHRrevenues for fiscal 2003 will also have an impact on the results for the firstquarter of fiscal 2004, ended June 30, 2003, as well as on the forecasted resultsfor the balance of the current fiscal year, but are not expected to impactsubsequent fiscal years . The company also continues to evaluate whether the
48
revenue recognition issues relating to CHR affect the company's financialstatements for periods prior to fiscal 2003 .
The company is now also reviewing ce rtain other revenue recognition timingmatters in its core domestic business and CHR. The company expects thatresulting changes, if any, will not impact aggregate revenue, but may affect thetiming of revenue recogn ition in fiscal year 2003, prior fiscal years or future fiscalyears .
Following the reviews outlined in this press release, Catalina will work with Ernst& Young to complete the current audit of the company's financial statements forthe year ended March 31, 2003 . The company cannot presently predict the timerequired to complete its reviews or the audit of the financial statements by Ernst& Young. However, the company will file its annual report on Form 10-K as soonas practicable after the review and the audit have been completed . Previously filedfinancial statements, including the associated audit opinions and review reports ofthe company, should not be relied upon until the company files its annual reportfor the year ended March 31, 2003 on Form 10-K .
Daniel D. Granger, Chairman and Chief Executive Officer, commented, "We aredisappointed about the additional time that is required for the company tocomplete its review of these revenue recognition timing issues . However, we arecommitted to resolving these issues as soon as possible . Accurately accounting forthese issues is essential, and we simply need more time to ensure that we reviewthese issues and report them correctly . The company continues to coordinate itsefforts with Ernst & Young, and has notified both the Securities and ExchangeCommission and the New York Stock Exchange to apprise them of the company'sactivities and progress ."
147. As news of the expanding scope of Defendants ' accounting manipulations was
revealed, the Company issued a press release on August 13, 2003 announcing Defendant
Bechtol's resignation.
148 . On August 15, 2003, Defendants announced yet another filing delay . The press
release stated :
Catalina Marketing Corporation announced today that it will delay the filing of itsquarterly report on Form 10-Q for first quarter of fiscal 2004, ended June 30,2003. Catalina has filed a notification of late filing with the Securities andExchange Commission under Rule 12b-25 . The company has not yet completedits quarterly financial statements as a result of the previously announced review ofcertain revenue recognition timing matters within its Catalina Health Resource("CHR") business unit and its base business . Previously filed financial statements,including the associated audit opinions and review reports, of the company should
49
not be relied upon until the company files its annual report for the year endedMarch 31, 2003, on Form 10-K, and its quarterly report filed on Form 10-Q forthe first quarter of fiscal 2004 .
As previously announced, management of the company initiated a review relatedto the timing of revenue recognition at CHR, and is continuing to work with itsauditors, Ernst & Young, to evaluate these issues . The company currentlyanticipates that upon completion of its review of the financial results of CHR, thatcertain revenues will shift from fiscal 2003 to fiscal 2004 and will have an impacton the results for the company's first quarter of fiscal 2004, as well as on theforecasted results for the balance of the current fiscal year, but are not expected toimpact subsequent fiscal years . The company also continues to evaluate whetherthe CHR revenue recognition issues affect the company's financial statements forperiods prior to fiscal 2003 .
In addition to the revenue recognition review at CHR, the company, inconjunction with Ernst & Young, is evaluating the method of revenue recognitionin its base business .
E. The Fallout Continues : Ernst & Young Resigns As Catalina's Auditors
149. Catalina's financial statements and information were audited by Arthur Andersen
LLP ("Andersen") from at least 1996 until May 23 , 2002. In Andersen 's place, Catalina engage d
E&Y to serve as the Company's auditor for fiscal year 2003 . Within less than a month of th e
appointment of a new outside auditor, the Company's Chief Financial Officer resigned, citin g
"personal reasons . "
150. Just fifteen months later, on August 20, 2003, E&Y resigned as Catalina's auditor.
At the same time, Catalina informed the public that although E&Y had been retained to audit
Catalina's fiscal year 2003 financial statements, they never completed their work .
151 . Auditor resignations at public companies carry special significance . Under the
rules established by the American Institute of Certified Public Accountants (codified and referre d
to as AU §J, an auditor discovering illegal acts is first directed to make that known in either a
qualified or an adverse opinion . AU § 317 .18. However, if the auditor is precluded by the client
from evaluating whether an illegal act is material to the financial statements, or is likely to have
50
occurred, the auditor generally should disclaim an opinion on the financial statements . AU §
317.19. Once this occurs , and only if the client refuses to accept the auditor's repo rt as modified ,
the auditor then withdraws from the engagement . AU § 317 .20. Upon withdrawing, the auditor
indicates the reasons for withdrawal in writing to the Board's Audit Commi ttee . AU § 317 .20.
Only then, if in the auditor's judgment the Audit Committee does not respond appropriately t o
the accountant 's communication within a reasonable pe riod of time, does the auditor evaluate
whether to resign from the engagement. AU § 722 .31 .
152. Catalina revealed the shocking news of E&Y's resignation on August 26, 2003 .
As a result, the Company's market capitalization plummeted more than 20% . Catalina's stock ,
which had closed at $15 .15 per share on August 25, 2003, opened trading at only $12 .51 per
share on August 26, 2003, and sunk to a low of $12 .01 in trading that day on unusually large
trading volume of 4,984,600 shares .
153. The next day, an August 27, 2003 article in the St. Petersburg Times reported :
After years of cleaning up the funny-money manipulations by Enron, hocus-pocusfinance at MCUWorldcom and the ethical implosion at once-respected ArthurAndersen, U.S . corporations have surely had enough time to clean up theirdubious accounting habits .
After all, a year has passed since the Sarb anes-Oxley Act was signed into law totoughen accounting and governance standards at the nation ' s public companies .Has the trust of cynical investors been restored ?
Not yet. Like a persistent wound, accounting problems continue to seep out ofU.S. businesses, including some in the Tampa Bay area . This week's disclosure offresh accounting troubles at St . Petersburg's Catalina Marketing Corp ., a providerof marketing data and discount coupons, is only the latest signal that corporatecredibility remains on slippery ground .
Catalina disclosed late Monday that independent auditor Ernst & Young resignedafter raising questions about Catalina's recognition and timing of revenue inseveral divisions.
Said Ernst & Young to Catalina (and I paraphrase ) : "We're not about to give youriffy financial statements our Good Housekeeping seal of approval without a muc h
51
more extensive look ." That won't happen now. Ernst & Young quit, and Catalinais shopping for another auditing firm .
In a nutshell, Ernst & Young raised concerns about Catalina's Health Resourcesdivision, a unit already bearing an accounting red flag of recording revenues inadvance of arrival . But Ernst & Young went further, questioning other Catalinadivisions that the company claimed as recently as June 30 were above reproach .
Is this all about pleasing Wall Street? Did the bull market of the 1990s setfinancial expectations so high that the nation's public companies are nowPavlovian corporations geared to meet Wall Street standards at any cost? Or didthe sharp economic downturn since 2000 put unappreciated pressures on U .S.executives to deliver good financial numbers, even if accounting standards had tobe twisted in the process ?
Or maybe the accounting profession, in the wake of collapsed Arthur Andersen,has lost its way and lacks the leadership to re-impose financial integrity on itscorporate clients ?
Or did the SEC and Congress overreact -- as is their style in crisis times -- bytrying to investigate and prosecute hundreds of minor accounting matters as majorfraud?
Yes, yes, yes and yes . All of this is happening . And more .
For sure, companies such as Catalina could take more responsibility . WhenCatalina says it will delay its annual report for the fiscal year ending March 31,and again delay the first-quarter report of June 30, that's a problem . When Ernst& Young quits without pursuing a more thorough audit, that's a problem. Whenlongtime Catalina executive Michael Bechtol quits this month with noexplanation, after he was named company president and chief operating officerjust four months ago, that's a problem . When other executives leave in droves ina matter of months, that's a problem.
154. According to the Company's SEC Form 8-K, E&Y had informed Catalina "tha t
certain matters had come to E&Y 's attention that if further investigated may mate rially impact
the fairness and reliability of previously issued financial statements and the report thereon of
predecessor auditors, the previously filed unaudited interim financial statements and the report s
thereon, and financial statements to be issued covering subsequent periods ." Specifically, E&Y
"raised questions with respect to several matters and whether the accounting for such matter s
was in accordance with generally accepted accounting principles," as follows :
52
1) the timing of the Company's accounting for revenues derived from itscustomer arrangements in the Catalina Health Resource division in lightof the discovery by the Company's management of certain agreementswith customers that were not reflected in the written agreement and/orappropriately considered in connection with the Company'saccounting for the arrangements, and certain other elements of onesignificant multi-year arrangement ,
2) the timing of the Company's accounting with respect to revenuerecognition in the Catalina Health Resource division and the CatalinaManufacturer Services division to the extent that certain customercontracts had not been executed by both parties during the period inwhich the revenue was first recognized for such contracts ,
3) the timing of the Company's accounting treatment of its customerarrangements in the Catalina Manufacturer Services division and in theCatalina Health Resource division with respect to certain exclusivityrights granted to customers for the contractual periods of itsarrangements ,
4) the Company's accounting treatment for certain non-cashtransactions in the Catalina Retail Services division, and
5) the Company' s disclosure of segment information for financialreporting .
155 . In other words, revenues in the Health Resource unit, which produces customized
advertising in drugstore pharmacies, were not being accounted for in accordance with contract
provisions. In addition, other revenues were being improperly counted before contracts had bee n
executed .
156. Nevertheless, in reporting these items, Catalina sought to reassure investors tha t
there were "no `reportable events' as described in Item 304(a)(1)(v) of Regulation S-K, o r
disagreements with E&Y on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure . . . ." Defendants' public attempt to downplay thi s
event resulted in a ve ry unusual public airing of the dispute between the Company and E&Y .
53
L
157. On September 2, 2003, E&Y informed Catalina that there were in fact
disagreements. For example, E&Y told Catalina that it believed that "one of the noted
exceptions in the Company's Form 8-K (accounting for customer contracts with exclusivit y
provisions, hereinafter the "Exclusivity Issue") constituted a disagreement between the Compan y
and E&Y." E&Y demanded that Catalina explain its position on this issue .
158 . In response , on September 5, 2003, Catalina (through Defendant CFO Wolf) ,
responded that it "assumed that E&Y concurred in its view that no disagreement existed ."
Catalina also insisted that the Exclusivity Issue "was appropriately disclosed as a reportable
event," and that it "does not believe that it would be appropriate to characterize the Exclusivit y
Issue as a disagreement between the Company and E&Y ." However, Catalina admitted that i t
believed that "at most, there were initial differences of opinion based on incomplete facts o r
preliminary information, which initial differences were expected to be resolved to E&Y' s
satisfaction . "
159. On September 9, 2003, E&Y informed the SEC by letter that the Exclusivity Issu e
did in fact constitute "both a disagreement and a reportable event under Item 304(a)(1)(v) of
Rule S-K . "
160. Despite E&Y's statement that a disagreement existed , on September 15, 2003 ,
Catalina issued yet another press release stating that, "no `disagreement' existed ." Catalina
claimed that no disagreement was possible since it "had not taken a position with respect to any
of these matters." The company also claimed that "a plan for resolving pending issues wa s
scheduled to be discussed the day that E&Y tendered its resignation ."
161 . After operating for nearly six weeks with no outside auditors, Catalina announce d
on October 2, 2003 that it had retained PricewaterhouseCoopers LLP ("PwC" ) . Catalina stated
54
that PwC would "re-audit Catalina Marketing's results for the years ended March 31, 2001 and
2002, and will also audit fiscal year 2003 . "
F. The SEC Formally Investigates and Catalina Executives "Resign"
162. On March 9, 2004, Defendants revealed that the SEC issued a formal order in
connection with its investigation of certain aspects of the Company's financial revenu e
recognition policies . Previously, Catalina's accounting had been the subject of an informal SE C
inquiry .
163 . An obvious indicator of the internal strife surrounding the accounting
improprieties and the subsequent formal SEC investigation, Company executives fled in drove s
from Catalina during, and immediately after the class period. The suspiciously timed resignation
of former CFO Joseph Port on June 14, 2002 began a flood that ended less than 18 months later
with the resignations of five of the top six officers of the Company, including CEO Granger,
Chief Operating Office Mike Bechtol, President David Diamond, Group President Patt y
Melanson and CHR President George Neal .
164. On May 1, 2003, CHR President George Neal's resignation was accepted by the
Company without explanation as his short year with the Company came to a sudden end . Only
two weeks earlier , on April 15, 2003, President of Emerging Business and Chief Vision Officer
David Diamond tendered his resignation . Just four months after his April 15, 2003 promotion
from President of the Catalina Marketing International to COO, Defendant Bechtol announced
his resignation on August 13, 2003 in what the Company termed "an amicable separation." The
timing of Bechtol's resignation announcement in the midst of the Company' s disagreement with
new independent auditor E &Y, and E&Y 's resignation just days later, is highly illuminating o f
Defendants' knowledge of their accounting misdeeds .
55
165 . Following closely on the heals of Betchol's resignation, Defendant Granger
resigned as CEO and Chairman of the Board on November 3, 2003 , effective immediately . In a
transparent attempt to obscure the obvious, the Company's spin-doctors stated that "Dan' s
departure is not related to the issues surrounding Catalina's financial reporting ." A short time
later, on November 24, 2003, close confidant to Granger and Group President Patrici a
Melanson's resignation was announced . Within a tumultuous 18 month window , nearly 75% of
the Company's senior officers resigned or were forced out .
166. During the reaudit process, the Company announced on March 18, 2004 tha t
Catalina Director Philip B . Livingston, a member of its Audit Committee had resigned .
Livingston had only served on the Board since September 12, 2003, yet just 6 months later he
left the company during the re -audit process .
167 . In fact, when Mr. Livingston joined Catalina , the Company boasted to investors
that "Mr. Livingston (a Certified Public Accountant) was president and chief executive officer of
Financial Executives International ("FEI"), where he had significant participation in th e
formulation and passage of the Sarbanes Oxley Act of 2002 and directly authored sections 406
and 407 of that law regarding ethical codes of conduct for corporate financial officers and audi t
committee financial experts." Defendant Granger said, "We are pleased to welcome Phi l
Livingston to our Board and back to the company . Phil's extensive financial experience, stron g
leadership skills and industry knowledge will be a tremendous resource to our company . Phil is
one of the most outspoken leaders in the area of ethical corporate conduct and we look forward
to working with him in ensuring that Catalina and its Board lead our industry with the highest
ethical standards ."
56
I%--
168 . In stark contrast to his arrival, Catalina did not explain the circumstances behind
the audit committee member's departure, instead choosing to generically state that "[t]he boar d
has accepted Mr . Livingston's resignation and is appreciative of the contribution he made in hi s
tenure as a board member at Catalina ."
VII. THE MAGNITUDE OF THE RESTATEMENTS IS REVEALE D
169 . On May 17, 2004, Catalina filed its Form 10 -K for the year ended March 31, 2003
disclosing the scope and magnitude of its accounting restatements for the years 2001 and 2002 .
The 10 -K stated :
"The adjustments necessary to restate our financial statements in accordancewith U.S . GAAP are summarized below (in millions) :
--- ---- - --- -- -Year Ended March 31 ,
2002 2001
Net income, p reciously reported $61 ,880 $58,135Restatement aclustments
(- Reeenue
~- --(3,966) (4,778)
Direct cost adjustments (1,570) (1,751)Accruals and prepayments (2,185) 776Pretiiousty capitalized bonus compensation (725)
}(1,394)
Postretirement healthcare obligationsAss et impairment and related change in amortizatior~
1,104 0640 (5,660)
Depreciation and amo rtization 876 (643)Capitalized solhnare costs 544 (1,012)Other (343) (161 )Incom e tax impact of adjustments
---2,295 3,64 8
Total Adjustments (3,330) (10,975)
Net income, restated $58,560 $47,160
In addition to the change in net income, we decreased the retained earningbalance at March 31, 2000 by $18 .2 million, which includes a tax benefit of$7.1 million, primarily related to the impairment of intangible assets . "
170. The aggregate effect ofCatalina's restatement decreased previously reported
basic and diluted earnings per share by $0 .06 and $0.05, respectively for 2002 and by $0.20 and
$0.19 for 2001 .
57
171 . The Company's restated net income for fiscal year 2001 from $ 58 .1 million to
$47.1 million revealing that its fiscal year 2001 income was overstated by 19%. Similarly, the
Company's restated net income for fiscal year 2002 from $61 .9 million to $58 .6 million
revealing that Catalina's fiscal year 2002 net income was overstated by 5% .
172. The Company' s most substantial earnings restatement occurred in Fiscal Year
2000 when it reduced its previously reported net income by $18 .2 million . Of this reduction,
$16.9 million (which is 93% of the reduction), stems from the Company's failure to properly
report the impaired int angible goodwill associated with its U .K. operations .
VIII. DEFENDANTS' FALSE FINANCIAL REPORTING
A. Catalina 's False and Misleading Statements
173 . Item 303(a)(ii) to Regulation S-K requires the following discussion in the MD&A
of a company's publicly filed reports with the SEC :
Describe any known trends or uncertainties that have had or thatthe registrant reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income fro mcontinuing operations . If the registrant knows of events that willcause a material change in the relationship between costs andrevenues (such as known future increases in costs of labor ormaterials or price increases or inventory adjustments), the changein relationship shall be disclosed.
174. Paragraph Three of the Instructions to Item 303 states in relevant part :
The discussion and analysis shall focus specifically on materialevents and uncertainties known to management that would causereported financial information not to be necessarily indicative offuture operating results or of future financial condition . Thiswould include descriptions and amounts of (a) matters that wouldhave an impact on future operations and have not had an impact inthe past . . .
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175 . Notwithstanding this requirement, at no time during the Class Period did the
Defendants discuss the existing, known adverse trends in the Company 's public filings with the
SEC as required by the preceding SEC Regulation, including the declining sales detailed above .
176 . In order to inflate the p rice of Catalina 's secu rities , Defendants caused the
Company to falsely report on its Form 10-K its financial results for fiscal years 2000, 2001 an d
2002, its quarterly reports on Form 10-Q, and press rele ases, in violation of Generally Accepte d
Accounting P rinciples ("GAAP") and SEC rules . Defendants did so deliberately , or with severe
recklessness , by employing a host of accounting schemes and manipulations. As the Company
admitted in its restatement, the Company's financial results had been false and misleadin g
because they:
• Improperly failed to defer revenue when there was no persuasive evidence ofsales, no delivery had occurred, services had not been rendered, nor was pricingfixed or determinable; and
• Improperly understated direct cost expenses (including incentive rebates andpostage, among others) ;
• Improperly accrued liabilities and prepayments for certain goods and servicesobtained by the Company (relating to compensation, taxes, legal consulting,allowance for doubtful accounts, and other selling, general, and administrativeexpenses) ;
• Improperly understated operating expenses by accounting for payments inconnection with several acquisitions as part of goodwill (rather than as periodoperating expenses) ;
• Failure to write down impaired assets (including goodwill, patents, and fixedassets) in a timely manner during the period in which the Company discovered theimpairment ;
• Improperly overstated prior service costs relating to the Company's postretirement healthcare obligations ;
• Improperly recorded the Company's corporate headquarters facilities lease as anoperating lease rather than a capital lease ;
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Improperly accounted for costs incurred in connection with the Company'ssoftware development activities ;
Required readjustments in the Company's tax liabilities as a result of itsaccounting restatements; and
Failed to disclose certain reportable segment information regarding the Company .
177 . Catalina' s accounting improprieties detailed herein violated GAAP and SE C
rules . GAAP are p rinciples recognized by the accounting profession as the conventions , rules ,
and procedures necessary to define accepted accounting practice at a particular time . SEC
Regulation S-X (17 C .F.R. §210.4-01(a)(1)) states that financial statements filed with the SE C
that are not prepared in compli ance with GAAP are presumed to be misleading and inaccurate,
despite footnote or other disclosure . Regulation S-X requires that interim financial statement s
must also comply with GAAP. 17 C .F .R. §210 .4-01(a) .
178. As a result of the numerous fraudulent accounting practices employed p rior to and
throughout the Class Period alleged herein , Catal ina' s new outside auditor , PWC, required
Catalina to comply with GAAP and restate its financial statements for 2001 and 2002, and th e
related quarters . The fact that Catalina restated its financial statements is an admission that : (i)
the financial results originally reported during the Class Period and its public statement s
regarding those results were materially false and misleading ; and (ii) the financial statement s
reported during the Class Period were incorrect based on information available to Defendants at
the time the results were originally reported .
179. As recently noted by the SEC, GAAP only allows a restatement of prior financia l
statements based upon information that existed at the time the financial statements were
prepared, "and restatements should not be used to make any adjustments to take into accoun t
subsequent information that did not and could not have existed at the time the original financial
statements were prepared." The Accounting Principles Board ("APB") has defined the kind o f
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"errors" that may be corrected through a restatement : "Errors in financial statements result from
mathematical mistakes, mistakes in the application of accounting principles, or oversight or
misuse of facts that existed at the time that the financial statements were prepared." Catalina's
restatement was not due to a simple mathematical error, honest misapplication of a standard o r
oversight, but instead, due to intentional misuse of the facts known at the time the financial
statements were prepared and reported to the investing public .
B. Catalina Failed to Recognize Revenues In Accordance with GAAP
180. During the Class Period, Catalina's reported operational and financial success wa s
directly related to revenue growth in its worldwide marketing service and product business
segments . Revenue growth was also cited to Defendants in quarterly press releases and analyst
meetings, and fueled the growth in Catalina's stock price . But Defendants revenue recognition
practices during the Class Period violated GAAP .
181 . SEC Staff Accounting Bulletins ("SABs") Nos. 104 and 101 provide the SEC' s
views on applying GAAP for revenue recognition . The SABs state that revenue is generally
realized or realizable and earned when all of the following criteria are met :
a) persuasive evidence of an arrangement exists ,
b) delivery has occurred or services have been rendered ,
c) the seller's price to the buyer is fixed or determinable, and
d) collectability is reasonably assured .
182. Typically, Catalina 's relationship with its customers was documented by a written
contract or purchase order . GAAP precludes the recognition of revenue until strong evidenc e
supporting the existence of a sales arrangement is provided. As reported in the 2003 10-K,
Catalina's investigation found instances where :
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"Customer arrangements were not available, were not documented, orwere amended by separate written or verbal agreements and arrangementsindicated . "
183. The Company concluded that the original agreements with its customers were no t
binding and that as sociated revenues were prematurely recorded . In such situations, GAAP
requires such revenue be deferred because Catalina could not provide persuasive evidence that a
sale had been concluded between Catalina and the customer .
184. Catalina 's business generated revenue from marketing services and products .
GAAP provides that revenue can be recorded only when Catalina completed its contracte d
obligations - products were delivered, services were provided, or contractual performanc e
guarantees were met. In its investigations leading to its restatements , Catalina found instances in
various business segments where revenue had been recognized when services had not been
completed or performance guarantees had not been met .
185. Catalina's typical contractual arrangement established prices for its services .
GAAP provides that revenue c an be recorded only when prices are fixed and determinable .
Catalina's restatements revealed situations where verbal and written agreements had amende d
initial arrangements, and, as a result, Catalina's pricing was not fixed or determinable . As a
result, Catalina had to defer revenue that was previously recognized.
186. Catalina admitted in its restatements for 2001 and 2002 that certain revenue
recognition was improper. By prematurely and improperly recognizing sales arrangements,
Catalina had inflated its revenues by $4 .8 million and $4.0 million in 2001 and 200 2
respectively.
C. Understated Expense s
187. In violation of fundamental accounting rules, Catalina repeatedly devised ways to
artificially inflate net income and earnings by improperly and systematically understating
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expenses throughout the Class Period. GAAP requires expenses to be recorded in the period in
which they were incurred . See CON 5 PP 85-87 . This concept is a basic tenet of accrual
accounting. Defendants violated this principle by improperly timing expense recognition .
Catalina understated its expenses in a current period and/or improperly delayed expens e
recognition .
188. In at least the following ways: (a) by improperly deferring current period
expenses , (b) by improperly capitalizing noncapitalizable expenses as assets and amort izing them
over time rather than correctly expensing them as they were incurred, and (c) by accruing an d
capitalizing certain acquisition costs rather than expensing them as incurred .
D. Catalina Improperly Deferred Certain Marketing Expenses
189. Catalina improperly deferred certain customer related costs (including incentiv e
rebates, postage changes , and inventory adjustments) that should have been expensed as
incurred, thereby allowing it to improperly report higher earnings . GAAP requires such costs to
be recognized as marketing expenses , and expensed in the periods in which the revenue
generating activities are incurred , in accordance with American Institute of Certified Publi c
Accountants ("AICPA") Statement of Position ("SOP") 93-7 . This provision requires
advertising costs to be expensed either as they are incurred or when first time advertising takes
place . According to its restatement, by improperly deferring these costs, Catalina understated its
expenses by $1 .8 million and $1 .6 million in 2001 and 2002, respectively.
E. Catalina Improperly Recognized Accruals and Prepayments for ProfessionalServices, Compensation and other Operating Expense s
190. In its 2003 Form 10-K, Catalina acknowledged that it improperly adjuste d
accruals and prepaid expense for payments involving compensation, taxes, professional services ,
allowances for doubtful accounts , and other operating expenses .
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191 . GAAP requires "(a)n expense or loss (to be) recognized if it becomes evident that
previously, recognized future economic benefits of an asset have been reduced or increased ,
without associated economic benefits ." See CON5, p 87. GAAP also requires expenses to be
recorded in the period they are incurred . See CON5, pp 85-87 .
192. As a result of these improprieties , Catalina overstated its expenses by $0.8 million
in 2001 and understated its expenses by $2 .2 million in 2002 .
F. Improper Purchase Accountin g
193. In 1998 , Catalina acquired the outst anding stock of Direct Marketing Serv ices
("DMS"), formerly known as Market Logic, for $2.9 million in an initial cash considerations and
a contingent purchase price payment of $30.1 million, based on annual operating results of DMS .
The seller, on his own accord, paid DMS employees a portion of the contingent payments an d
did not record these payments as compensation expense .
194. In July 1999, Catalina acquired certain assets and assumed certain liabilities of
Catalina Marketing Research Solutions ("CMRS"), formerly known as Alliance Research, Inc .
Catalina paid $7 .7 million in an initial cash consideration and contingent purchase price
payments totaling $17.2 million. The seller, on his own accord, paid CMRS employees a portion
of these contingent payments and did not record these payments as compensation expense .
195. As a result , Catalina improperly capitalized compensation expenses as acquisition
costs in connection with these acquisitions when such expenses should have been expensed a s
incurred. By capitalizing compensation costs instead of expensing them when incurred, Catalin a
improperly amortized these costs over several years in order to report artificially lower expense s
in the current year. GAAP requires that "indirect and general expense related to acquisition s
(must be) deducted as incurred in determining net income ." See APB 16, Business
Combinations, 76 .
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196 . In its restatement , Catalina admits its failure to properly recognize expenses and
its overstatement of goodwill during the Class Period . As a result of its failure to properly
account for these acquisitions, Catalina understated expenses by $1 .4 million and $0.7 million in
2001 and 2002, respectively. In addition, Catalina has reduced its earnings for the fiscal year
ended March 31, 2000 by $1 .6 million .
G. Incorrect Post Retirement Healthcare Expense Recognition
197 . The amortization of unrecognized p rior serv ice costs represent the related benefit s
attributed to the participants' service in prior years . In fiscal year 2002, the Company
implemented a plan to provide healthcare benefits to certain eligible retirees, active employees ,
and eligible dependents . Catalina violated GAAP by failing to appropriately amo rtize prior
service costs related to the implementation of its post retirement healthcare benefit plan. GAAP
requires that these expenses be recognized over the average remaining years of service to ful l
eligibility for benefits of active plan participants .
198 . As a result of the improper accounting techniques, Catalina's expenses were
overstated by $1 .1 million in 2002 .
H. Failure to Write Down Impaired Assets In Poorly Performing BusinessSegments
199. In April 1999, the Company acquired computer software technology assets from
one of its vendors. In its 2003 Form 10-K, Catalina revealed that although the Company had
experienced less cash generation for 2001 than had originally been forecasted, the Company ha d
ignored the impairment event until 2003 and wrote down the value of the impaired assets as part
of the restatement of 2001 net income .
200. FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of' requires an entity to review long-lived assets for impairmen t
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whenever events or changes in circumstances indicate that the carrying amount on the books may
not be recoverable . FASB 121 further states that an example of such an event is "(a) curren t
period operating or cash flow loss combined with a history of operating or cash flow losses or
with projection forecast that demonstrates continuing losses associated with an asset used for th e
purpose of inducing revenue ." Thus, when an asset is determined to be impaired it should be
written down to its net realizable value and a loss shall be recognized at that time .
201 . Catalina knew that an impairment of its software technology assets occurred i n
2001, and yet failed to write down the impaired assets . Primarily as a result of the failure to
properly account for this impairment, Catalina understated expenses by $5 .7 million in 2001 and
overstated expenses by $0 .6 million in 2002 .
1 . Improper Recognition of Depreciation and Amortization
202. In 1996, the Company acquired the remaining minority interest of Catalina
Marketing , UK, Inc. ("UK"), which included property and equipment , identifiable intangible
assets and goodwill . During fiscal year 2000, UK received a contract termination notice from it s
largest retail customer. The Company failed to account for the impairment of these acquired
assets despite having performed an initial analysis of this impairment .
203 . Under SFAS 121, the Company was required under GAAP to book an impairment
charge and reduce future depreciation and amortization expense due to the impairment of cas h
flows resulting from the contract termination .
204. In addition, in its Restatement the Company also revealed that the headquarter s
facility lease should have been recorded as a capital lease rather than an operating lease i n
accordance with SFAB No. 13, "Accounting for Leases". Under GAAP, the lease should have
been accounted for as an asset and depreciated rather than being considered rent expense. As the
Company's headquarters qualifies for consolidation by Catalina, the Company decided to adopt
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FIN 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51- and
consolidate the entity that solely holds the Company's headquarters as part of Catalina's assets .
This early adoption of FIN 46 negates the need to Catalina to capitalize the lease obligation .
205 . The failure to recognize the impairment of selected UK assets on a timely basis
and the early adoption of FIN 46 to correct the treatment of the Company' s accounting for it s
headquarters ' lease resulted in the understatement of Catalina' s expenses by $0.6 million in 200 1
and the overstatement of expenses by $0 .9 million in 2002. Furthermore, the Company noted in
its restatement that it had recorded an impairment charge of its assets totaling $16 .9 million in
fiscal year 2000 .
J . Improper Recognition of Costs Associated With Software Development forInternal Use
206. Catalina develops software that is used to operate , support, and generate reports
from its own network. Catalina failed to properly recognize consulting and internal softwar e
development costs related for software development in 2001 and 2002.
207. GAAP accounting for software development costs for internal use is established
by Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed o r
Obtained for Internal Use" which requires capitalization of selected consulting costs and internal
payroll costs for efforts directly related to developing software for a company's own internal use .
208. It its 2003 10-K, Catalina restated its improper accounting for software
development costs in 2001 and 2002 . As a result, expense related to software development costs
increased by $1 .0 million in 2001 and decreased by $0.5 million in 2002 , net of depreciation .
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K. Income Tax Expense was Restated
209. As a result of the Company's revenue and expense restatements , the Company' s
income tax required restatement to conform with GAAP . As a result, the Company had
overstated its income tax liabilities by $3 .6 million in 2001 and $2 . 3 million in 2002 .
L. Failure to Disclose Reportable Business Segment s
210. In its public filings, the Company has acknowledged that it operates by multipl e
segments; however, the Company had historically reported only one reportable segment, targete d
marketing services . Catalina had improperly avoided disclosure of segment information that
would have provided transparency into the various operating components of the business to
gauge the veracity of the President' s claims on quarterly analyst calls .
211 . SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" requires information to be reported in a manner consistent with the wa y
management evaluates and operates the business .
212. Catalina was forced to reverse its incorrect conclusion and provide the required
business segment information for seven business segments for fiscal years 2001 and 2002 .
M. Catalina Lacked Adequate Internal Controls
213. Catalina failed to maintain adequate inte rnal accounting controls . In fact ,
Catalina was conceded that its auditor , its audit committee and the audit committee's
investigation concluded that there were significant control deficiencies that constituted material
weaknesses and significant deficiencies in the Company's control environment . Moreover,
Catalina ultimately disclosed in its 2003 Form 10-K that it began implementing numerou s
actions during 2003 and 2004 necessary to bring internal controls to an adequate level .
214. In the AICPA's Auditing Standards, AU 319 .06, "Internal Con trol in a Financial
Statement Audit", defines internal controls as "a process - effected by an entity's board o f
68
directors, management, and other personnel - designed to provide reasonable assurance regardin g
the achievement of objectives in the following catego ries: (a) reliability of financial reporting ,
(b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and
regulations .
215 . In addition, Item 9A to the 2003 Form 10-K reveals that Catalina's Audi t
Committee has concluded that the Company's accounting, financial reporting and interna l
control functions needed significant improvement, including their system of documentin g
transactions .
216 . Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reportin g
company must : "(A) make and keep books, records and accounts which, in reasonable detail ,
accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and (B)
devise and maintain a system of internal controls sufficient to provide reasonable assurances tha t
. transactions are recorded as necessary . . . to permit the preparation of financial statements i n
conformity with [GAAP]." These provisions require an issuer to employ and superv ise reliable
personnel, to maintain reasonable assurances that transactions are executed as authorized, to
properly record transactions on an issuer's books and, at reasonable intervals, to compar e
accounting records with physical assets .
217. Catalina violated § 13(b)(2)(A) of the Exchange Act by failing to maintai n
accurate records concerning its revenues, costs and net income . It failed to record expenses in th e
periods incurred and failed to recognize revenue in accordance with GAAP . Catalina' s
inaccurate and false records were not isolated or unique instances because they were improperly
maintained for multiple reporting periods, from 2000 through 2002 . Accordingly, Catalina
violated § 13(b)(2)(A) of the Exchange Act .
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218. In addition, Catalina violated § 13(b)(2)(B) of the Exchange Act by failing to
implement procedures reasonably designed to prevent accounting irregularities . Catalina failed to
ensure that proper review and checks were in place to ensure that it was recording and reporting
expenses in the proper periods, it was properly recognizing revenue, and making appropriat e
business segment disclosures .
IX. DEFENDANTS RECEIVED ENORMOUS FINANCIAL BENEFITS THROUGHTHEIR FRAUDULENT SCHEME
A. Defendants Cash Out Before Catalina's Earnings Miss is Reveale d
219. At the time the Company was concealing this mate rial information from th e
investing public, Company insiders sold millions of dollars in Catalina holdings . Defendants
also had enormous incentive to falsify their revenue and earnings during fiscal year 2000 in order
to cash in stock options . For example, according to the Company's 1999 Proxy Statement, on
February 17, 1999 the Board granted the Catalina executives over 1 . 1 million stock options in
the Company . These options were scheduled to vest in eight years. However, if "certai n
earnings per share targets" were met, the executives would immediately take ownership of th e
options. Thus, Defendants stood to personally reap millions of dollars in windfall profits simpl y
by meeting (or appearing to meet) these earnings targets . The plan was successful. On April 27 ,
2000, the Board approved the granting of 230,000 performance vesting options pursuant to the
1999 Stock Option Plan .
220. Indeed, notwithstanding their access to confidential information as a result of thei r
status as directors and officers and insiders of the Company and their corresponding duty to
disclose adverse material facts before trading in Catalina stock, Defendants dumped 1,039,914 of
Catalina their own shares at artificially inflated prices in order to profit from the fraud, and did s o
while in possession of material, non-public information .
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221 . On October 1, 2002, it was revealed for the first time that Catalina would no t
meet its earnings guidance for fiscal year 2003 because of a decrease in the amount o f
promotional spending by Catalina's pharmaceutical clients and retail pharmacies . In response to
this announcement , the p rice of Catalina common stock dropped precipitously from $27 .97 per
share to close at $17 .90 per share - a drop of 36% - on extremely heavy trading volume . Indeed,
during 2002 and prior to the public disclosure , Defendants sold 283,104 shares for proceeds o f
$8,385,227. By this time, Defendants had internally acknowledged for some time that sales wer e
down, especially at CHR . As Defendant McClorey admitted in an October 1, 2002 conferenc e
call, Catalina had "a tough summer" and, "[a]t the end of July, we got indications things weren' t
the way we'd like them to be - manifested by retailers turning down switch programs and one of
our larger pharmaceutical clients called us to say they were no longer running it at all . "
222. Subsequently, on June 30, 2003, the Company disclosed that it had been
improperly repo rting revenue at its CHR division since at le ast the beginning of fiscal 2003 and
that it would be delaying the filing of its annual report on Form 10-K for the fiscal year ended
March 31, 2003 until it was able to determine the proper amount of revenue that should hav e
been reported . It was manipulative and deceptive for Catalina's insiders to sell significan t
percentages of their holding while possessing material non-public information regarding th e
Company's slowdown in revenue growth .
223. Defendants' sold stock during the class period at suspicious times and in
suspicious amounts . Defendants sold while the stock traded between approximately $28-$34 pe r
share near its peak , and just p rior to the stock's steep decline from $27.97 on October 1, 2002 to
$17 .90 on October 2, 2002. They sold while Catalina was issuing false and misleading
statements which overstated its earnings .
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224. Defendants knew during fiscal year 2000 that the Asda contract had bee n
canceled, and failed to disclose the contract cancellation to the public . Instead, while in receipt
of the contract cancellation notification from Wal-Mart, and before the contract cancellation was
announced on June 2, 2000, Defendants sold 37,899 shares, for $1,252,794 in proceeds .
225 . From January 1, 1998 through October 19, 1999, Catalina's insiders sol d
relatively few shares of Catalina stock. But they unloaded a significant number of shares as th e
price peaked to the low $40's: Granger sold 452,997 shares of Catalina stock during the Clas s
Pe riod for $12,330,904, for a net profit of $5,889,908. During the Class Pe riod, Bechtol sold
310,222 shares of stock for over $9 . 8 million , for a net profit of $4,771,660. Diamond sold
221,053 shares of stock for over $5 . 3 million during the Class Period, for a profit of $1,696,449 .
During the Class Period, McClorey sold 55,642 shares of stock for over $1 .6 million, for a profi t
of $989,933 . The unusual nature of Defendants' insider selling is illustrated in the chart below :
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100%Percenta9e
0f ~ 50%h0
dIn9s -
s
0 1
d _0
shares
Diamond
Granger Bechtol McClorey
51 .16% 51 .35% 51.65% 66.29%452,997 310,222 55,642 221,053
226. Defendants were also motivated to artificially inflate the price of CHR stock in
connection with a tender offer . CHR employees had been issued internal stock options for CHR
stock. CHR option holders would be able to sell their CHR stock to Catalina in the $33 range a t
the time of the tender offer. McClorey knew it was crucial to maintain the impression that CHR
was in fact Catalina' s "cornerstone" and a strong revenue source in order to justify the tender
offer price of $33 per share . As Defendants announced in Catalina 's August 14 , 2002 10-Q :
On June 19, 2002, the Company extended a tender offer ("Tender Offer") topurchase certain eligible outstanding common stock of Health ResourcePublishing Company, Inc ., a majority-owned subsidiary ("HRPC") at a per sharepurchase price of $33 .00. As of June 19, 2002, the Company held 5,040,000 ofthe total 5,793,346 outstanding shares of common stock . Certain current andformer employees and directors of HRPC held the remaining outstanding shares .There were also outstanding options to acquire 389,044 shares of HRPC on th e
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same date, held by the same current and former employees and directors ofHRPC . The Tender Offer is scheduled to expire on October 16, 2002 unlessotherwise extended by the Company. Outstanding shares of common stock areconsidered eligible for purchase by the Company under the Tender Offer if suchshares were owned prior to April 15, 2002 .
227. Page 5 of Catalina's 2003 Form 10-K notes that CHR's tender offer was made t o
certain current and former employees and directors of CHR . During the fiscal year ended Marc h
31, 2003, the Company purchased 731,921 of the outstanding shares of common stock for $24 .2
million . The tender offer expired October 16, 2002 .
228. Footnote 19, page 92 of Catalina's 2003 Form 10-K, notes that the tender offer
was made for CHR's shares and, a Director tendered 20,625 of CHR 's shares for $33 .00 per
share. The remaining CHR shares sold to other current and former employees and director s
(other than to "the Director") pursuant to this tender offer amounted to 711,296 shares (731,921-
20,625), for $23 .5 million (24.2-.7 = 23.5) .
229 . The tender offer provided CHR insiders, especially Defendant McClorey, wit h
strong motivations to falsify CHR's financial results and projections . According to a former
Executive Director at CHR, McClorey was one of the CHR insiders who sold in connection with
the tender offer. According to this former employee, "when the announcement of the tender
offer was made, "all the financials for CHR were fantastic and the world was great . Immediately
after Mike McClory and a bunch of other people got their stock purchased for $30 the compan y
fell apart." According to this witness, six months prior to the tender offer, Defendant McClore y
told certain Catalina insiders referred to by this witness as "McClorey's cronies" to "go buy
everything that you can buy right now because we're booming and it's at 30 dollars, and gues s
what it's going to f**king fall on its ass after that, you're not going to be able to get it again."
McClorey's warning, issued only to "the right people" generated resentment among lower leve l
Catalina employees who found out about McClorey's actions, since the quarter in whic h
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McClorey and his "cronies" sold "was the very last quarter CHR made a profit." As
summarized by this former employee, McClorey and CHR management sold on "exactly tha t
date when [Catalina] had a profitable quarter and after that it was basically sh*t ."
B. Inside Trading Had Occurred Before at Catalina
230 . Longtime Catalina insiders, who set the culture and tone for compliance with SEC
rules and regulations, were no strangers to improper and suspicious inside trading . For example,
Mr. Tommy D . Greer, who served as a Director, CEO, COO , and President of Catalina
Marketing from as early as 1989 , and who was eventually elevated to Catalina's Chairman of the
Board and finally Chairman Emeritus through 2000, was himself formally charged with insid e
trading. On August 17, 2000, the SEC filed a federal action against Chairman Greer and certai n
members of his immediate family for engaging in insider trading in the securities of Catalina
Marketing Corporation . (See SEC v. Tracie Carpin, Kimberly Davis, Nedene Greer and Tommy
Dalton Greer, 00-Civ-Action No. 01996 (U.S. D.C.))
231 . The SEC revealed that prior to Catalina's announcement on March 31, 1997 o f
disappointing fourth quarter earnings, Greer learned this information and provided it to his wife
and two stepdaughters, who each sold their shares of Catalina. The Greers reaped illegal profits
and avoided losses of at least $129,119 from their inside trading . On September 13, 2000, just a
month after the SEC filed its complaint, Greer and his family, who were caught red-handed ,
consented to the entry of a final judgment permanently enjoining them from violating th e
an ti fraud provisions of the federal securities laws [Section 17(a) of the Securities Act of 193 3
and Section 10(b) of the Securities Exchange Act of 1934 and Rule I Ob-5, thereunder], and
ordering them to pay disgorgement of unjust enrichment of $163,750.58 and civil penalties
totaling $161,181 .03 .
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C. The Defendants' Compensation, Bonuses, and Other Incentives were HighlyDependent on Meeting Catalina 's Aggressive Financial Objectives andEstimates
232. According to Catalina's 2000, 2001, and 2002 Proxy Statements, "the principa l
elements of the executive compensation program are base salary, annual incentive bonuses and
stock options ." These proxies also reveal that Catalina would increase executives' sala ri es
"based on several factors," including "the performance and prospects of the Company."
233 . In addition to tying Defendants ' salaries to the Company' s financial results ,
Catalina set bonuses " as a target percentage of salary . . . based on individual and Company
performance in relation to financial objectives set by the Compensation Committee and non-
financial objectives established by senior management ." According to the proxies and the
Company's 2003 10-K, over the fiscal years 2000-2003, these bonus targets ranged from 12% up
to 125% of base salary, and were paid at levels up to 98% of executives' base salary .
(1) Defendant Granger
234. For example, in 2000, Defendant Granger's bonus of $400,000 nearly equaled hi s
annual salary of $461,941 . In granting this bonus , the Compensation Committee noted that
"increases in revenue, net income and earn ings per share were 33%, 37% and 34% respectively,
over the prior year ." As a result of this bonus, Mr. Granger's annual income "was 39% highe r
than his annual compensation for the prior year ." Thus Mr. Granger 's bonus was directly tied to
the specific financial performance of the Company, and was a significant incentive for him to
deceive investors .
235. In 2001, Mr. Granger ' s bonus was $179,572, which was approximately 36% of
his annual salary. Again Mr. Granger's bonus was specifically tied to the Company's financia l
performance . In 2002 and 2003, Mr. Granger was not awarded a bonus . Instead, he exercised
options on Catalina stock which netted him $5,475,153 in 2002 alone .
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236. Granger was in charge of reviewing Catalina's internal forecasts, and conveying
sales expectations to the public . Granger was characterized by former employees as an over-the-
top leader who imposed unrealistic and arbitrary sales goals on his employees, the same baseles s
goals which were then transmitted to Wall Street in the form of Catalina's earnings guidance .
Catalina former insiders characterized the pressure to perform which came down from Granger
as extreme, and the sales atmosphere as "boiler room ." Underperforming sales representative s
were referred to as "vanishing chairs," because turnover was so high . According to a former
employee in the Retail Services Division, "there was a sense that at any given moment you coul d
be next ."
237. A description of Granger was included in a May 8, 2000 St. Petersburg Time s
article :
Tucked into the most remote corner of Catalina's headquarters, Granger's officeis clearly the lair of someone who works and plays hard .
The bookcase holds a remote control race car, a Super Soaker water gun and adart blowgun (with target) . A Marilyn Monroe cut-out wears a Green BayPackers cheesehead hat draped in Mardi Gras beads . Three movie posters, giftsfrom fellow workers, feature Granger's face superimposed over the image ofHarrison Ford brandishing a whip as Indiana Jones . One refers to Granger asCatalina's Big Kahuna.
Don't be misled, however, by the appearance of informality .
"This is a sales-driven organization," Granger boasts . "And I am the sales leader! "
Executive compensation critic Graef Crystal recently ranked Granger's $9 .9-million compensation package as one of the most lucrative in the country for acompany its size . On top of his $557,000 salary, Granger has stock options andgrants worth $9.4-million spread over the next eight years, if the company meetssome lofty performance goals .
Granger added: "We still have to meet some pretty tall goals of continuing togrow this company at a rate of 25 percent a year to get all those grants andoptions ."
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238. Because of the desire to meet these "lofty" performance goals, Catalina's top
management, led by Granger, dictated sales targets with little or no concern about the historical
performance of Catalina's customer base or internal data which contradicting these arbitrar y
forecasts .
(2) Defendant Bechtol
239. Defendant Bechtol's bonuses were even larger than Granger's, especially in term s
of percentage of his annual salary. In 2000, Bechtol received a bonus of $421,070, nearly
doubling his annual salary of $246,925 . He also exercised stock options upon which he realized
$2,809,632 in value . During 2000, it was also revealed that Bechtol personally borrowed
$1,100,000 from Catalina. In 2001 , he again received bonuses greater than his salary, with a
bonus of $390,515 on a salary of $294,243, and exercising stock options worth $2,396,064 . He
was also granted Options underlying 90,000 shares with an exercise price of 32.7292 and
expiring 4/27/10. Assuming a 5% annual rate of return, the Company valued this grant at
$1,852,489, and if 10% it would be worth $4,694,572 .
240. While Bechtol received no bonus in 2002, he did personally gain $316,181 in
stock option sales. In addition, while Bechtol's bonus in 2003 was smaller than usual ($54,668) ,
he again exercised options valued at $554,450. Although Bechtol left the Company in 2003 ,
Catalina still paid him $117,000 for "consulting" fees in 2004 .
(3) Defendant Diamond
241 . Defendant Diamond's 2000 and 2001 bonuses also exceeded his salary . In 2000,
Diamond received a bonus of $428 ,875, nearly doubling his annual salary of $247,077 .
Although he received no bonus in 2002, he did exercise options valued at $1,598 ,088. Also,
beginning on April 6, 2001, the Company began making "periodic loans to Mr . Diamond in the
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aggregate amount equal to $123,550 ." In 2003, Diamond secured a bonus of $199,992 on a
salary of $285,616, while at the same time exercising stock options $146,635 .
(4) Defendant McClorey
242. Defendant McClorey received a salary of $259,462 in 2000, a bonus of $108,647 ,
and exercised stock options valued at $70 ,688. In 2000, McClorey was also granted options to
purchase 11,250 shares of Health Resource Publishing Company, Inc ., a subsidiary of the
Company in 2000." In 2001 and 2002, McClorey received a bonuses nearly equaling his annual
salary, receiving $277,200 and $235,625 in bonuses on an annual salary of $273,271 and
283,857 respectively.
243 . In addition, in 2002 McClorey exercised options valued at $164,328 . In 2002,
McClorey was also granted Options underlying 165,000 shares with an exercise p rice of 33.46
and expiring 07/26/11 . Assuming a 5% annual rate of return, the Company valued this grant at
$3,471,600 and if 10% it would be worth $8,799,450 . Finally, in 2002, "McClorey [also ]
acquired 65,001 shares in Health Resource Publishing Company, Inc ., a subsidiary of th e
Company." As a result, he received $720,068, and had 55,625 additional shares underlyin g
unexercised options, and in-the-money unexercisable options valued at $1,641,025 .
(5) Defendant Wolf
244. Defendant Wolf's compensation information for 2000 was not reported by the
Company. However, in 2001 his annual compensation was $199,655, for 2002 was $153,279 ,
and for 2003 was $220,004 . In 2003, Wolf was granted Options underlying 100,000 shares with
an exercise price of 26 .31 and expiring 07/25/12 . Assuming a 5% annual rate of return, the
Company valued this grant at $1,654,622, and if 10% it would be worth $4,193,136 .
245 . Wolfwas intimately familiar with proper accounting procedures , as is a seasone d
financial professional with significant accounting, auditing and SEC reporting experience. Prior
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to joining the Company, Wolf was employed by Arthur Andersen LLP . According to a forme r
employee in the Business Development division , Wolf "knew everything" about Catalina' s
accounting.
X. CLASS ACTION ALLEGATIONS
246. Plaintiffs bring this action as a federal class action pursuant to Federal Rules o f
Civil Procedure 23(a) and (b)(3) on behalf of a class (the "Class"), consisting of all those wh o
purchased the securities of Catalina between October 14, 1999 and August 25, 2003 inclusive ,
(the "Class Period") and who were damaged thereby . Excluded from the Class are Defendants ,
the officers and directors of the Company, members of their immediate families and their lega l
representatives, heirs, successors or assigns and any entity in which Defendants have or had a
controlling interest .
247. The members of the Class are so numerous that joinder of all members i s
impracticable. Throughout the Class Period, Catalina securities were actively traded on the
NYSE. While the exact number of Class members is unknown to Plaintiff at this time and can
only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or
thousands of members in the proposed Class .
248. Plaintiffs' claims are typical ofthe claims of the members of the Class, because
plaintiff and all of the Class members sustained damages arising out of Defendants' wrongfu l
conduct complained of herein.
249. Plaintiffs will fairly and adequately protect the interests of the Class members an d
has retained counsel who is experienced and competent in class actions and securities litigation .
250. A class action is superior to all 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 members of the Class may be relatively small, the expens e
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and burden of individual litigation make it impossible for the members of the Class to
individually redress the wrongs done to them . There will be no difficulty in the management o f
this action as a class action .
251 . Questions of law and fact common to the members of the Class predominate ove r
any questions that may affect only individual members, in that Defendants have acted o n
grounds generally applicable to the entire Class. Among the questions of law and fact commo n
to the Class are :
a) Whether the federal securities laws were violated by Defendants ' acts as alleged
herein ;
b) Whether the Company' s publicly disseminated press releases and statement s
during the Class Period omi tted and/or misrepresented mate rial facts ;
c) Whether Defendants breached any duty to convey material facts or to correc t
mate rial acts previously disseminated;
d) Whether the Defendants acted willfully, with knowledge or recklessly, in omittin g
and/or misrepresenting material facts ; and
e) Whether the members of the Class have sustained damages and, if so, what is the
appropriate measure of damages .
COUNT I
VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b 5PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
252. Plaintiffs repeat and reiterate the allegations set forth above as though fully se t
forth herein . This claim is asserted against all Defendants .
253. During the Class Period, Defendants carried out a plan, scheme and course o f
conduct intended to and, throughout the Class Period did : (a) deceive the investing public ,
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including Plaintiffs and other Class members, as alleged herein ; (b) artificially inflate and
maintain the market price of Catalina's publicly traded securities ; and (c) cause plaintiffs and
other members of the Class to purchase Catalina 's publicly traded secu rities at artificiall y
inflated prices . In furtherance of this unlawful scheme, plan and course of conduct, Defendant s
took the actions set forth herein . Defendants are sued as primary participants in the wrongfu l
and illegal conduct charged herein .
254. In addition to the duty of full disclosure imposed on Defend ants as a result of
their making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, they each had a duty to promptly disseminate
truthful information that would be material to investors in compliance with the integrate d
disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F.R. § 210.01 et
seq.), S-K (17 C .F.R. § 229 .10 et seq.) and other SEC regulations , including accurate and
truthful information with respect to Catalina' s operations , financial condition and performance s o
that the market prices of the Company's publicly traded securities would be based on truthful ,
complete and accurate information .
255 . Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business ,
business practices, performance, operations and future prospects of Catalina as specified herein.
256. These Defendants employed devices, schemes and artifices to defraud, while i n
possession of material adverse non public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Catalina's value an d
performance and continued substantial growth, which included the making of, or th e
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participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Catalina and its business operations
and future prospects in the light of the circumstances under which they were made, not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Catalina' s
securities during the Class Period .
257. As a result of the dissemination of the mate rially false and misleading information
and failure to disclose material facts , as set forth above, the market price of Catalina 's securities
were artificially inflated during the Class Period. In ignorance of the fact that market prices o f
Catalina's publicly traded securities were artificially inflated, and relying directly or indirectl y
on the false and misleading statements made by Defendants, or upon the integrity of the market
in which the securities trade, and/or on the absence of material adverse information that was
known to or recklessly disregarded by Defendants but not disclosed in public statements b y
Defendants during the Class Period, Plaintiffs and the other members of the Class acquired
Catalina securities during the Class Period at artificially high prices and were damaged thereby .
258. At the time of said misrepresentations and omissions, Plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true . Had Plaintiffs ,
the other members of the Class and the marketplace known of the true performance, busines s
practices , future prospects and intrinsic value of Catalina stock, which were not disclosed by
Defendants, Plaintiffs and other members of the Class would not have purchased or otherwise
acquired their Catalina publicly traded securities during the Class Period , or, if they had acquired
such securities during the Class Period, they would not have done so at the artificially inflated
prices which they paid.
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259. By virtue of the foregoing , Defendants have each violated Section 10(b) of the
Exchange Act, and Rule I Ob 5 promulgated thereunder .
260. As a direct and proximate result of Defendants ' wrongful conduct, Plaintiffs and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company' s securities during the Class Period .
COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT (AGAINST GRANGERWOLF, McCLOREY, DIAMOND, BECHTOL AND PORT )
261 . Plaintiffs repeat and reiterate the allegations as set forth above as if set forth full y
herein. This claim is asserted against the Individual Defendants .
262. Defendants Granger, Wolf, McClorey, Diamond, Bechtol and Port acted as a
controlling person of Catalina within the meaning of Section 20(a) of the Exchange Act as
alleged herein . By virtue of their high level positions with the Company, participation in and/or
awareness of the Company' s operations and/or intimate knowledge of the Company's actual
performance, these Defendants had the power to influence and control and did influence and
control, directly or indirectly, the decision making of the Company, including the content and
dissemination of the various statements which plaintiff contends are false and misleading . Each
of these Defendants was provided with or had unlimited access to copies of the Company' s
reports, press releases, public filings and other statements alleged by plaintiff to be misleading
prior to and/or shortly after these statements were issued and had the ability to prevent th e
issuance of the statements or cause the statements to be corrected .
263 . In addition, each of these Defendants had direct involvement in the day to da y
operations of the Company and, therefore, is presumed to have had the power to control or
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influence the particular transactions giving rise to the securities violations as alleged herein, an d
exercised the same .
264. As set forth above, Catalina and these Defendants each violated Section 10(b) an d
Rule 10b 5 by their acts an d omissions as alleged in this Complaint . By virtue of their
controlling positions , these Defendants are liable pursuant to Section 20(a) of the Exchange Act .
As a direct and proximate result of these Defendants' wrongful conduct, Plaintiffs and othe r
members of the Class suffered damages in connection with their purchases of the Company' s
securities during the Class Period .
XI. PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment, as follows :
a) Determining that this action is a proper class action, and certifying proposed clas s
representatives under Rule 23 of the Federal Rules of Civil Procedure ;
b) Awarding compensatory damages in favor of Plaintiffs and the other Class
members against all Defendants, jointly and severally, for all damages sustained as a result o f
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
c) Pursuant to Section 304 of the Sarbanes Oxley Act of 2002, 15 U .S .C . §7243 ,
disgorge Defendants Granger and Wolf of all bonuses and profits gained from Catalina stock
sales earned in the twelve month period prior to each restated financial statement;
d) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred i n
this action, including counsel fees and expert fees ;
e) Such other and further relief as the Court may deem just and proper.
XII. JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury .
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Dated: June 21, 2004 Respectfully submitted ,
MILBERG WEISS BERSHAD & SCHULMANLLP "-~ _ _ ~,
By :
msaxena@milbergweiss .comChristopher S . JonesFla. Bar No . [email protected] E . White, IIIFla. Bar No. 0621064jwhite@milbergweiss .com5355 Town Center RoadSuite 900Boca Raton, FL 33486Tel: (561) 361-5000Fax: (561) 367-840 0
LERACH COUGHLIN STOIA & ROBBINSLLPWilliam S. LerachDarren J . RobbinsAndrew J . BrownElizabeth Arleo401 B Street, Suite 1700San Diego , CA 92101Tel: (619) 231-1058Fax : (619) 231-7423
Lead Counsel for Plaintiff
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY a copy of the foregoing was served by U.S . Mail, postage prepaid ,on June 21, 2004 to those par
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Gregory Mark Nespole, Esq .Christopher S . Hinton, Esq .WOLF HALDENSTEIN ADLER FREEMAN &HERZ270 Madison AvenueNew York, NY 10016Tel : (212) 545-4600Fax : (212) 545-465 3Counsel for Plaintiff Richard Burns
Kenneth Vianale, Esq .VIANALE & VIANALE, LLP5355 Town Center Road, Suite 801Boca Raton, FL 3348 6Tel : (561) 391-4900Fax : (561) 368-9274Counsel for Plain tiffs Richard Burns and JosephW. Larese and Philip A. Mike
Richard A. Lockridge, Esq .Karen Hanson Riebel, Esq .LOCKRIDGE GRINDAL NAUEN PLLP100 Washington Avenue, SouthSuite 2200Minneapolis, MN 55401Tel : (612) 339-6900Fax: (612) 339-098 1Counsel for Plaintiff Phillip A . Mike
Paul J . Geller, Esq .
Jack Reise, Esq .GELLER RUDMAN LL P197 S. Federal Highway, Suite 200Boca Raton, FL 3343 2Tel : (561) 750-3000Fax: (561) 750-3364
Samuel H. Rudman, Esq.David A. Rosenfeld, Esq .GELLER RUDMAN LL P200 Broadhollow Road, Suite 406Melville, NY 1174 7Tel : (631) 367-7100Fax: (631) 367-1173Counsel for Plaintiffs E . E llen Roe RevocableLiving Trust and Phillip A. Mike
Marc A. Topaz, Esq .Richard Maniski s
SCHIFFRIN & BARROWAY, LLPThree Bala Plaza East - Suite 400Bala Cynwyd, PA 19004Tel : (610) 667-7706Fax: (610) 667-705 6Counsel for Plaintiff E. E llen Roe RevocableLiving Trust
Marc S. Henzel, Esq .LAW OFFICES OF MARC S. HENZEL273 Montgomery Avenue, Suite 202Bala Cynwyd, PA 19004-2808Tel : (610) 660-8000Fax: (610) 660-8080Counsel for Plaintiff Richard Burns
Mel E. Lifshitz, Esq .BERNSTEIN LIEBHARD & LIFSHITZ, LLP10 E. 400' Street22"d FloorNew York, NY 10016Tel : (212) 779-1414Fax: (212) 779-321 8Counsel for Joseph W. Larese
Michael L . Chapman, Esq .HOLLAND & KNIGHT, LLP100 N. Tampa StreetSuite 4100P.O. Box 128 8Tampa, FL 33601-1288Tel: (813) 227-8500Fax: (813) 229-0134
ANDTracy Nichols, Esq .HOLLAND & KNIGHT, LLP701 Brickell Avenue, Suite 3000Miami, FL 33131-544 1Tel: (305) 789-2240Fax: (305) 789-7799Counsel for Defendants
Jack G. FruchterFRUCHTER & TWERSKYOne Pennsylvania Plaza , Suite 1910New York, NY 1011 9Tel: (212) 279-5050Fax: (212) 279-3655Co-Counsel for Plaintiffs
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William S . LerachDarren J . RobbinsAndrew J. Brow nLERACH COUGHLIN STOIA & ROBBINS LLP401 B Street , Suite 1700San Diego, CA 92101Tel : (619) 231-1058Fax: (619) 231-742 3
Attorneys for Plaintiffs
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