in re: petco animal supplies, inc. securities litigation...
TRANSCRIPT
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MILBERG WEISS BERSHADHYNES & LERACH LLP
WILLIAM S . LERACH (68581 )BLAKE M . HARPER (115756)JEFFREY D . LIGHT (159515)MARISA JANINE (199316 )
600 West Broadway, Suite 1800San Diego, CA 92101Telephone : 619/231-105 8
SCHIFFRIN & BARROWAY, LLP
RICHARD S . SCHIFFRINANDREW L . BARROWAY
DAVID KESSLER
Three Bala Plaza EastSuite 40 0
Bala Cynwyd, PA 19004Telephone : 610/667-770 6
Co-Lead Counsel for Plaintiffs
M1 1 Q 2000 I
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
In re PETCO ANIMAL SUPPLIES,INC . SECURITIES LITIGATION
This Document Relates T o
ALL ACTIONS-
Master Fi No .98cv152L (POR)
CLASS ACTION
SECOND AMENDED CLASS ACTIONCOMPLAINT FOR VIOLATION OF THE
SECURITIES EXCHANGE ACT OF
193 4
DEMAND FOR JURY TRIAL
~5~
1 JURISDICTION AND VENUE
2 1. The claims asserted arise under §§10(b) and 20(a) of the
3 Securities Exchange Act of 1934 ("1934 Act") , 15 U .S .C . §§78j (b)
4 and 78t(a), and Rule 10b-5_ Jurisdiction is conferred by §27 of
5 the 1934 Act, 15 U .S .C . §78aa .
6 2 . Venue is proper pursuant to §27 of the 1934 Act . False
7 and misleading statements were issued from San Diego . Petco Animal
8 Supplies, Inc . ("PETCO'r or the "Company") is headquartered in San
9 Diego . The Individual Defendants live in San Diego . Acts giving
10 rise to the violations complained of occurred in San Diego .
11 THE PARTIES
12 Plaintiff s
13 3 . Plaintiffs are members of the Lerner Plaintiffs Group who
14 were appointed as Lead Plaintiffs in this action by order entered
15 December 14, 1998 . Each member of the Lerner Plaintiffs Group
16 purchased or acquired shares of PETCO common stock at artificially
17 inflated prices between 1/30/97 and 7/10/98 (the "Class Period")
18 and was damaged thereby . Appendix A attached hereto identifies the
19 members of the Lerner Plaintiffs Group and details the PETCO stock
20 purchases made by them during the Class Period .
21 Defendants
22 4 . PETCO is headquartered in San Diego . Its common stock
23 trades in an efficient market on the NASDAQ National Market System .
24 5 . (a) Brian K . Devine ("Devine") is President, CEO and
25 Chairman of PETCO . During the Class Period, as part of the scheme,
26 Devine sold 91,350 shares of his PETCO stock at prices as high as
27 $30-1/2 based on inside information, pocketing over $2 .7 million in
28 illegal insider-trading proceeds - thus committing deceptive and
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1 manipulative acts . Devine sold 75% of the stock he actually owned
2 in PETCO, 31% of his total stock and exercisable options, and 100%
3 of the PETCO stock he acquired by option exercise during the Class
4 Period . Devine's stock sales were unusual in timing and
5 inconsistent with his prior trading history as his only previous
6 sale of PETCO stock was in 4/96 and he has not sold any PETCO stock
7 since his sales during the Class Period .
8 (b) Larry D. Asselin ("Asselin") is Senior V .P .-
9 Merchandising and Distribution of PETCO . During the Class Period,
10 as part of the scheme, Asselin sold 8,753 shares of his PETCO stock
11 at prices as high as $30-1/2 based on inside information, pocketing
12 over $262,000 in illegal insider-trading proceeds - thus committing
13 deceptive and manipulative acts . Asselin sold 85% of the stock he
14 actually owned in PETCO, 18 .7% of his total stock and exercisable
15 options, and 100% of the PETCO stock he acquired by option exercise
16 during the Class Period . Asselin's stock sales were unusual in
17 timing and inconsistent with his prior trading history as his only
18 previous sale of PETCO stock was in 4/96 and he has not sold any
19 PETCO stock since his sales during the Class Period .
20 (c) James M . Myers ("Myers") is Senior V .P .-Finance of
21 PETCO and its principal accounting officer . During the Class
22 Period, as part of the scheme, Myers sold 8,835 shares of his PETCO
23 stock at prices as high as $26-3/4 based on inside information,
24 pocketing over $220,000 in illegal insider-trading proceeds - thus
25 committing deceptive and manipulative acts . Myers sold 93% of the
26 stock he actually owned in PETCO, 50% of his total stock and
27 exercisable options, and 100% of the PETCO stock he acquired by
28 option exercise during the Class Period . Myers' stock sales wer e
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unusual in timing and inconsistent with his prior trading history
as he had not previously sold any PETCO stock and has not sold any
PETCO stock since his sales during the Class Period .
(d) Richard C . St . Peter ("St . Peter") is Executive
V .P .-Administration and CFO of PETCO . During the Class Period, as
part of the scheme, St . Peter sold 28,027 shares of his PETCO stock
at prices as high as $30-1/2 based on inside information, pocketing
over $839, 000 in illegal insider-trading proceeds - thus committing
deceptive and manipulative acts . St . Peter sold 100% of the stock
he actually owned in PETCO, 73 .7% of his total stock and
exercisable options, and 100% of the PETCO stock he acquired by
option exercise during the Class Period . St . Peter's stock sales
were unusual in timing and inconsistent with his prior trading
history as his only previous sale of PETCO stock was 4/96 of 1996
and he has not sold any PETCO stock since his sales during the
Class Period .
6 . The individuals named as defendants in ¶5(a)-(d) are
referred to as the "Individual Defendants ." The Individual
Defendants are liable for the false statements pleaded herein at
1130-31, 35, 77-81, 83-87, 89, 91, 93-94, 96-97, 99-06, 109-11,
113, 115, 117-21, 123-25, 127, 128, 129, 131-33, those statements
were each "group-published" information, the result of the
collective action of the Individual Defendants .
7 . By reason of his stock ownership, management position,
and membership on PETCO's Board, Devine was a controlling person of
PETCO . PETCO controlled each of the Individual Defendants . Devine
and PETCO are each liable under §20(a) of the 1934 Act .
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SUMMARY OF THE FRAUD
8 . This is a securities class action on behalf of purchaser s
of the common stock of PETCO, during the Class Period, complaining
of a fraudulent scheme and course of business that operated as a
Ifraud and deceit on them . The defendants are PETCO and th e
(Individual Defendants .
9 . PETCO operates a national chain of retail pet stores ,
selling pet food, small pets and pet supplies and services, mostl y
via large stores known as "Superstores ." PETCO went public in 3/94
and then began to pursue an aggressive growth/expansion program by
opening new stores and by acquiring 17 other retail pet store
chains with 204 stores during 94-97, typically using its commo n
stock as currency to make acquisitions . As PETCO's existing and
acquired stores matured, it became more difficult for PETCO t o
achieve a high rate of internal revenue and earnings per share
("EPS") growth based only on increased sales from those existing
stores . PETCO could achieve really substantial revenue growth ,
i .e ., 30%+ per year, only by achieving 10%+ "same-store" growth and
by constantly acquiring other companies .
10 . PETCO's growth-by-acquisition strategy was dependent on
PETCO continuing to report strong operating earnings . Defendant s
knew that reporting strong EPS and forecasting continuing EPS
growth would lead to an increasing stock price, which would also
make PETCO's stock more attractive to potential acquisition s
targets . This would enable its growth-by-acquisition program to
continue and would enable PETCO to make acquisitions on a les s
dilutive basis - by issuing as few shares as possible .
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1 11 . PETCO's acquisition strategy had four significant
2 impacts . First, it permitted a mechanism by which PETCO could
3 falsely report huge year-to-year revenue growth from ongoing
4 operations . Second, it provided a vehicle for PETCO to falsely
5 report huge double-digit same-store sales growth . Third, it
6 created the opportunity for defendants to manipulate PETCO's
7 expenses to falsely create the appearance of increasing operating
8 profitability . Fourth, it allowed defendants to create the image
9 that PETCO was a high growth company with 30% EPS growth .
10 12 . As long as the Company continued to make acquisitions, it
11 was able to conceal its true level of revenues from ongoing
12 operations, and was able to present a very profitable Superstore
13 operating model and double-digit same-store sales growth to
14 securities analysts and investors . Based on defendants' positive
15 statements and projections, securities analysts and the market
16 placed a high value on PETCO's stock, due to the expectation of
17 future internal revenue growth and increasing operating
18 profitability .
19 13 . The manipulation of PETCO's financial statements began
20 when PETCO started accounting for its acquisitions under the
21 pooling of interest method in late 1996 . Under the pooling of
22 interest method, PETCO was able to restate its historical financial
23 statements to reflect the combined results of the two companies .
24 Pursuant to Securities and Exchange Commission ("SEC") Rules, PETCO
25 could not do a pooling of interest transaction until two years
26 after its initial public offering . Pet Nosh, acquired in late
27 1996, was the first acquisition for which PETCO was able to use the
28 pooling of interest method .
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1 14 . Because most of the companies PETCO acquired were
2 privately held and whose results were not publicly reported, the
3 Individual Defendants were able to and did, understate the
4 historical revenue figures of PETCO'S acquisitions to make PETCO's
5 reported revenues from ongoing operations appear more robust .
6 PETCO would represent to analysts and other market participants
7 that the acquired companies' revenues were lower than they actually
8 were . Then, when PETCO reported combined numbers after the
9 acquisition, analysts and other market participants would attribut e
10 a larger portion of the combined revenues to PETCO, and thus be
11 misled into believing that PETCO had stronger core revenue growth
12 than the Individual Defendants actually knew was the case . Thus,
13 defendants were able to use acquisitions to fuel the appearance of
14 strong internal revenue growth, which made PETCO attractive to
15 investors . As the Individual Defendants knew, analysts and other
16 market participants place emphasis on income from continuing
17 operations and exclude special one-time charges, such as merger and
18 restructuring costs .
19 15 . In addition, when PETCO would make an acquisition, the
20 Individual Defendants would improperly attribute normal operating
21 expenses to the one-time merger charges, thus decreasing normal
22 operating expenses and inflating PETCO's earnings from continuing
23 operations . This practice had the intended effect of reducing
24 current and future operating expenses . For example, defendants
25 would charge off the salaries of certain officers of the Company,
26 including Mike Woodard (Senior V .P . - Store Operations) and
27 St . Peter, as well as all executive bonuses, directly from the
28 merger and restructuring reserves, thereby excluding the salarie s
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1 and bonuses from current operating expenses and overstating merger
2 expenses . As a result, PETCO's reported operating earnings,
3 excluding special charges, were materially inflated and did not
4 properly present PETCO's current results of operations .
5 16 . PETCO also manipulated its publicly reported same-store
6 sales comparisons . PETCO's impressive double-digit same-store
7 sales growth was considered a "joke" inside the Company and was not
8 the result of improving sales, but was a fiction . PETCO was
9 misleadingly comparing converted Superstores to pre-conversio n
10 regular stores . Instead of comparing similar stores, PETCO would
11 compare its Superstores with an older, smaller store that had no
12 advertising, no parking and did not sell groceries .
13 17 . During the Class Period, PETCO would invariably be behind
14 in the projections it had made to analysts and the market for each
15 quarter . As a result, defendants would meet each quarter in
16 Devine's office after they had generated actual financial results
17 for two months of the quarter . There was invariably a roundtable
18 discussion to determine how defendants could manipulate PETCO's
19 financial results to meet the projections defendants had led the
20 market to expect . These discussions included determining which
21 potential acquisitions could be closed before the end of the
22 quarter to enable defendants to manipulate the revenues and
23 expenses associated with the acquisitions to meet PETCO's
24 projections . There was no other reason to acquire many of the
25 companies other than to use the acquisitions to manipulate PETCO's
26 financial results to meet its earning projections and to mask the
27 problems in, and ongoing overstatement of, its core business .
28 PETCO made these acquisitions often times doing little or no du e
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diligence and despite knowing that the companies that it was
acquiring were , more often than not, performing poorly . Thus, in
evaluating acquisition candidates, defendants focused on how th e
I acquisitions could be manipulated to allow PETCO to achieve th e
financial results and appearance of strong growth from ongoing
operations that defendants had led the market to expect, rather
than for a strategic business purpose .
18 . PETCO maintained a list of companies that had called
wanting to be acquired . These acquisition targets were maintained
on a "working deal list" and "open and close list ." Some of the
companies stayed on the lists for over 2 years . As a result, i t
was never a problem for PETCO to find an acquisition to manipulate
its financial results .
19 . PETCO had three separate reserve accounts that it used t o
manipulate the merger and restructuring charges . These were
inventory obsolescence, closed stores, and a catch-all account
that included, among other things, severance pay, salaries, legal
costs, travel, reset team and training costs . The reserve account s
were a dumping ground for any expense whether or not legitimately
related to acquisitions . To meet PETCO's quarterly earnings
projections, Myers, St . Peter and John Morberg W .P . and Controller
since 5/97) would back into the numbers . They would calculate what
the one-time charge for an acquisition would need to be and then
work backwards to justify the charge . They would then prepare the
backup - the specific items justifying the charge - to equal the
amount of the charge . This was documented in schedules that wer e
completed at quarter- and year-end .
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1 20 . The closed-store reserve account was the last account to
2 be considered in backing into the numbers . PETCO had an
3 acquisition reset team that was supposedly responsible for making
4 sure the acquisition went smoothly . The salaries for people
5 working on the reset team would go directly through the reserve
6 account without any consideration of how much of their time was
7 devoted to the acquisition . In addition, salaries of employees who
8 were not involved in the acquisition were improperly put into the
9 merger charges and thereby excluded from operating earnings . The
10 manipulation of PETCO's financial results was well known within the
11 Company . Over time, it became a joke in the accounting department
12 that PETCO had "only exaggerated the one-time charges by 50% . "
13 21 . The information relating to the merger and acquisition
14 charge was deliberately not presented to Peat Marwick, PETCO's
15 outside auditor, to review until the very last minute, so that the
16 auditors would have little time to request or review documentation
17 to substantiate the numbers . Moreover, when the auditors came to
18 PETCO, PETCO deliberately made it uncomfortable for them, so that
19 they would leave . For example, PETCO would turn off the air
20 conditioning in the room they were working in, would not provide
21 food or beverages and would not respond to requests for'
22 information . Even so, the outside auditors required some reduction
23 to be made to PETCO's proposed charge for 4thQ F97 before final
24 results were released, contributing to weak results for that
25 quarter . But the charge was still overstated by 50% .
26 22 . During 1996, 1997 and early 1998 defendants also caused
27 PETCO to manipulate its financial results by recognizing income
28 from advertising cooperatives ("co-ops") prior to earning the co-
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1 ops . In connection with PETCO's manipulation of advertising co-
2 ops, defendant Myers would always ask in roundtable meetings with
3 all defendants present, "are we going to front the co-ops ." It was
4 agreed at these meetings that PETCO would front-load co-ops from
5 advertising that was to take place in later quarters into earlier
6 quarters . The co-ops agreements with vendors, including Nutro,
7 lams and Hills Science Diet, did not provide for payments to PETCO
8 until PETCO did the applicable advertising . PETCO improperly
9 recorded income from the co-op agreements before the advertising
10 had occurred .
11 23 . In 12/96, PETCO acquired Pet Food Warehouse, which
12 operated 32 pet food and supply stores in five states, for
13 2,052,190 shares of PETCO stock . In connection with this
14 acquisition, defendants took a one-time charge of significantly
15 higher amounts than PETCO expected to incur, against which PETCO
16 could improperly charge off normal operating expenses in that
17 quarter and subsequent quarters .
18 24 . In the 2ndQ F97 (ended 8/2/97), when PETCO was a week
19 away from quarter close and needed an acquisition to meet the
20 numbers it had projected to the market, John Morberg, who had just
21 started with the Company said, "there won't be any acquisitions
22 this quarter ." Defendants, however, knew that it was imperative
23 that PETCO make an acquisition or acquisitions so that it would be
24 able to manipulate PETCO's financial results to meet projections .
25 PETCO therefore acquired SuperPets, enabling it to continue to
26 manipulate its financial results . In connection with the SuperPets
27 acquisition, defendants took a one-time charge of significantly
28 higher amounts then PETCO expected to incur, against which PETC O
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1 could improperly charge off normal operating expenses in the 2ndQ
2 and subsequent quarters .
3 25 . In the 3rdQ of PETCO's F97 (ended 11/1/97) , defendants
4 knew they would have to close acquisitions in the quarter of a
5 certain dollar amount in order to meet the revenues and earnings
6 expectations to which they had led the market . Defendants held
7 several meetings in 9/97-10/97 to discuss which of seven or eight
8 possible target companies should be acquired . These meetings were
9 held in Brian Devine's or Richard St . Peter's office and were
10 attended by defendants Devine, Myers, Asselin and St . Peter, and
11 other members of PETCO's senior management, which at times included
12 Mike Woodard, Razia Richter (V .P . of Development), John Morberg,
13 Mike Rocklin (Financial Planner) and Mike Jocelyn (Director/Former
14 Financial Planner) . At the meetings, defendants discussed the
15 fact that PETCO needed to acquire a specific amount of sales to
16 meet its numbers for the quarter . Thus, in evaluating acquisition
17 candidates, defendants focused on how the acquisitions could be
18 manipulated to permit PETCO to achieve the financial results they
19 had led the market to expect .
20 26 . The initial pass at 3rdQ 97 EPS was $ .05, while PETCO hadl
21 projected $ .29 to the market . By this point in the quarter, PETCO
22 was doing forecasts every week . During the meetings, there were
23 discussions regarding making as many acquisitions as possible
24 during the quarter to generate confusion so analysts would not pick
25 up any negatives . Conversations took place between Myers and John
26 Morberg where Morberg indicated that there was no way that PETCO
27 could reach the $ .29 EPS projected to the market . Morberg said,
28 "$ .22 is as far as I can get the auditors to accept . "
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1 27 . During this time, PETCO was attempting to acquire PetCare
2 Inc ., which ultimately became PETCO's largest acquisition . PETCO,
3 however, was in a bidding war with PETsMART to acquire PetCare . In
4 an offer letter to PetCare in 9/97, PETCO gave PetCare an incentive
5 of at least an additional $1 million in stock if it closed the deal
6 prior to the end of PETCO's 3rdQ . Because defendants were not sure
7 that the PetCare acquisition would close prior to the end of the
8 3rdQ, PETCO pursued the acquisitions of SuperPets, Pet Food
9 Supermarket, Petworld, PAWS and Pet Food SaveMart . PAWS wa s
10 especially attractive to PETCO because it had approximately $20
11 million in sales .
12 28 . PETCO ultimately closed the PetCare, as well as the PAWSI
13 and Pet Food SaveMart acquisitions before the end of the 3rdQ . The
14 only reason that PAWS and Pet Food SaveMart were acquired was
15 because defendants were not sure that the PetCare acquisition would
16 close prior to the end of the quarter .
17 29_ The PetCare acquisition was made without looking at
18 PetCare's store-by-store financials . This acquisition was almost
19 completely negative from a business perspective because most of the
20 acquired stores were losing money . PETCO kept two executives of
21 PetCare on as consultants to evaluate transactions . They were paid
22 $200, 000 per year for essentially doing no work . PETCO improperly
23 put their salaries into the one-time acquisition charge . PETCO
24 also gave incentive packages of cash and consulting salaries to the
25 former owners of other acquisitions, including Pet Food SaveMart,
26 which also were improperly placed into the one-time acquisition
27 charge . The merger and acquisition charges for the 3rdQ F97 were
28 overstated by at least 50% .
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30 . In early 12/97, despite manipulating its 3rdQ F97 results
to make 2+2=3 by acquiring PetCare, PAWS and Pet Food SaveMart, and
despite booking an excessive merger and restructuring charge, PETCO
was only able to report operating EPS of $ .22 for the quarter -
well below the $ .29 it had been forecasting to analysts and th e
market . PETCO stock immediately plunged from $30 to $23-5/8 and
then continued to decline to $19-1/2 . This sharp stock decline
alarmed PETCO's top insiders and they were determined to halt it .
PETCO insiders quickly insisted the market had misinterpreted it s
3rdQ EPS report and that PETCO's EPS growth prospects remained
unchanged . PETCO falsely told investors "we would have done 29
cents . . . without the acquisitions ," that the apparent EPS
shortfall was not due to any "operational prob lem" and that the
"fundamentals of the company have not changed ." PETCO insisted
that certain analysts had been confused and that "[t] hose not in
the know were caught by surprise " while "ftlhose familiar wi th the
story knew this was exactly what was expected ." PETCO falsely
blamed the shortfall in earnings on the fact that the PetCar e
acquisition was $ .07 negative, accounting for the drop in earnings .
As is discussed above, the Individual Defendants were only able t o
get to $ .22 EPS, however, by using the PetCare, PAWS and Pet Food
SaveMart acquisitions to manipulate PETCO's financial results .
PETCO's inability to meet its projections had nothing to do with
the fact that the PetCare acquisition was $ .07 dilutive, bu t
instead was indicative of the weakness in, and prior manipulation
of, PETCO's core business . Devine and Myers falsely assure d
analysts that although PETCO would slow its expansion somewhat ,
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1 PETCO was " comfortable " with F98 EPS forecasts of $1 .41--$1 .46 and
2 the "positive trend going forward is still reflected . "
3 31 . During 12/97-1/98 PETCO continued to tell analysts its
4 30%+ EPS growth rate going forward was intact , its PetCare
5 acquisition was yielding " synergies . . . and reduced overhead,"
6 same-store sales gains were running at I0% -12%, the competitive
7 environment had eased significantly, which was benefitting profit
8 margins and PETCO still expected F98 EPS of $1 .40+ . As a result,
9 PETCO's stock decline was halted and the stock recovered to $26-1/4
10 in 1/98 .
11 32 . Meanwhile, during the 4thQ, defendants held numerous
12 meetings in Devine's office concerning PETCO's inability to meet
13 its F98 projections . The Individual Defendants knew that PETCO
14 would not be able to meet the numbers it was projecting for F98
15 (ending 1/31/99) because they had had to manipulate so drastically
16 the 3rdQ F97 numbers just to come close to the targeted levels, and
17 because the 4thQ F97 was also in trouble . The initial pass at F98
18 numbers was $1 .00 instead of the $1 .40+ EPS being projected to the
19 market . Thus, PETCO knew it needed to manipulate $ .40 of earnings .
20 This meant that PETCO was off by $12 million in revenue because
21 every $300,000 in revenue was expected to generate $ .01 of
22 earnings .
23 33 . In 1/98, analysts kept calling PETCO and screaming, "I
24 have a $1 .45 EPS estimate and have doubts that is correct ."
25 Defendants assured them the estimates would be met . Budgets and
26 renegotiation of bank credit lines were being prepared at the same
27 time as the F98 forecasts . Numerous meetings were held . At these
28 meetings a hit list of things to improve PETCO's earnings wa s
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1 prepared and discussed . Rozia Richter was in charge of the hit
2 list to make the 1998 numbers . PETCO was so desperate to seek
3 sources of earnings that defendants were, for example, considering
4 whether PETCO could add $2 million in gross margin by selling Pepsi
5 and Coke in their stores . The hit list also targeted possible ways
6 to ship fish that would save money . In January, more meetings were
7 held in Devine's office to discuss the first run F98 EPS of $1 .00 .
8 During this time, PETCO hired a public relations firm that
9 specialized in damage control, i .e., protecting a corporation' s
10 image when it reported bad news or had bad news to report . PETCO
11 paid the public relations firm $50,000 . The PR firm recommended
12 that PETCO admit its true business and financial condition instead
13 of having to be forced to admit a little now and a little later .
14 Devine, who was known within the Company as the "Spin Master," did
15 not heed this advice because he did not want to be perceived as a
16 liar .
17 34 . On the evening of 2/22/98, another meeting was held in
18 Devine's office attended by at least all defendants, at which it
19 was apparent that PETCO could not make the $1 .40 EPS it had
20 projected . The highest that PETCO could possibly achieve was
21 $1 .05, but Devine insisted that PETCO report $1 .15 to show that
22 PETCO was still a high growth company with 30% EPS growth . The
23 $1 .15 EPS target came from using the F97 number of $ .87 EPS and
24 then adding 30% growth to equal $1 .15 EPS . At the meeting, Devine
25 declared : "I can't say anything less than $1 .15 or else everything
26 I said before is a lie ." PETCO was able to report the $1 .15 by
27 again improperly taking out operating expenses and putting them
28 into one-time merger and integration charges .
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1 35 . But then, on 2/19/98-2/20/98, PETCO's stock fell from
2 $22-3/8 to $19-7/8, as rumors circulated that PETCO would report
3 disappointing results . On 2/23/98, PETCO reported 4thQ F97 results
4 that improperly understated expenses due to PETCO's excessive one-
5 time merger and integration charges of at least 50%, but knew it
6 could not continue to do so . PETCO therefore revealed that its
7 growth rate in F98 would be back-ended into 2ndH F98 and much lower
8 than earlier forecasted and that its F98 EPS would be no more than
9 $1 .13-$1 .15, far below the previously forecasted $1 .40+ per share .
10 PETCO also announced that it would sharply push back to 2ndH F98
11 its expansion plans, opening only four new stores instead of the
12 planned 20, in the lstH F98, and would make no further acquisitions
13 for at least the next six months . PETCO's stock fell to $17-1/2 on
14 2/23/98, on volume of 2 .4 million shares and to $13-1/8 on 2/24/98,
15 on 6 .9 million shares volume .
16 36 . Thus, because PETCO did not have any acquisitions planned
17 for 1stH F98, and was behind schedule for re-opening newly acquired
18 stores, defendants knew they would not be able to continue toy
19 manipulate PETCO's same-store sales comparisons and operating
20 earnings in 1998 to the same extent they had in the past .
21 Nevertheless, defendants continued to issue false financial
22 statements and other false and misleading information to conceal
23 its true business and financial condition and prospects for as long
24 as possible . Thus, defendants blamed PETCO's poor prospects on
25 difficulties in integrating the new acquisitions, even though those
26 stores were, for the most part, performing as expected .
27 37 . PETCO's reported 1stH F98 results still proved to be
28 worse than PETCO had indicated, even though PETCO's operatin g
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1 earnings continued to be inflated via the excessive merger charges .
2 PETCO's F98 EPS forecast was further cut in 7/98 to $ .70-$ .75 - a
3 large decline from its F97 EPS of $ .87, and results much worse than
4 $I .40 + forecast during the Class Period . On 7/10/98, PETCO
5 revealed that it expected net earnings for the 2ndQ, before
6 charges, to be only $ .10 to $ .12 per share - approximately half of
7 the earnings previously expected . PETCO later reported results in
8 line with these figures, but only after extraordinary merger and
9 business integration charges of $10 .9 million and a charge of $4 .5
10 million for the write off of certain assets .
11 38 . Following the revelations on 7/10/98, PETCO's stock price
12 plunged from $19-3/16 to as low as $9-3/4 before closing the day at
13 $11-1/16 . PETCO's stock price continued to decline thereafter,
14 trading for as low as $5-3/8 by 9/8/98 . Analysts were furious as a
15 result of these revelations . They said "[t]he turnaround isn't
16 happening, and this latest news leads me to believe that management
17 has been over optimistic . . . [f]rom now on, I'm going to take their
18 comments with a grain of salt" ; and "this is pretty much a recipe
19 for disaster . "
20 39. Defendants' false and/or misleading statements about the
21 success and profitability of PETCO's business and expected 25%-40%+
22 EPS growth for PETCO artificially inflated its stock to a Class
23 Period high of $33 per share in 10/97 . Capitalizing on PETCO's
24 apparent growing profitability, its prospects of strong EPS growth
25 going forward and inflated stock price, PETCO issued over 2 .3
26 million shares of its stock during the Class Period to complete six
27 acquisitions, including the PetCare acquisition, the largest
28 acquisition in PETCO's history . At the same time, PETCO's top
- 17 - 98cv1521-L(POR)
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insiders, Devine, Myers, Asselin and St . Peter unloaded 136,965
shares of their PETCO stock at as high as $30-1/2 per share for $4+
million in illegal insider-trading proceeds, while they all
obtained large F97 and F98 cash bonuses due to meeting PETCO's
acquisition targets during F97 and F98 .
40 . During the Class Period, PETCO represented that :
• PETCO's aggressive growth-by-acquisition strategy
was succeeding . PETCO was achieving the
operational efficiencies and operating economies
expected from its recent acquisitions, including
PetsUSA, Pet Supply Warehouse, Pet Nosh, SuperPets, Paws, The PetCare Company, Pet Food SaveMart,
Pet Food Warehouse and PetCare, Inc . and was not
encountering any significant difficulties in
integrating those acquisitions into its ongoing
operations .
• PETCO's Superstore model was extremely effectiveand its Superstores were all either meeting orexceeding the operational targets of PETCO'sSuperstore model . The Superstore model resulted instrong ongoing profit growth with new Superstoresreaching profitability in approximately sevenmonths .
• PETCO expected significant ongoing profit margingrowth due to the effectiveness of its Superstoremodel and the continuing strong sales growth of itsexisting stores .
• PETCO expected to add 40-50 stores per year overthe next several years and would contribute to andresult in strong ongoing EPS growth .
• PETCO expected strong comparable-store sales growth
to continue over the next 3-5 years with same-storesales growth between l0%-12% .
• PETCO expected to achieve 30%+ EPS growth going
forward over the next several years without any
acquisitions .
• PETCO expected to achieve 40%+ EPS growth goingforward for the next several years, includingacquisitions .
• As a result of the foregoing, PETCO was forecasting
F97 EPS from ongoing operations of $1 .10+ and F98EPS OF $1 .40+ .
- 18 - 98cvl521-L (POR)
1 41 . Each of these positive statements about PETCO's business
2 during the Class Period was materially false and/or misleading when
3 issued . During the Class Period, defendants knowingly or
4 recklessly failed to disclose the following material information
5 about PETCO's business, disclosure of which was required to make
6 the statements made not misleading, and which information was then
7 known only to defendants due to their access to internal PETCO
8 information and data :
9 (a) PETCO's financial results for 4thQ F96 through 1stQ
10 F98 were falsely reported because defendants caused the Company to
11 improperly inflate merger and acquisition charges, to misclassify
12 normal recurring operating expenses as nonrecurring merger charges
13 and to front-loading cooperative advertising credits from vendors
14 into income before such credits were earned . These improprieties
15 caused the Company's financial statements and other positive
16 representations to be false and misleading and materially misstated
17 in violation of Generally Accepted Accounting Principles ("GAAP")
18 as described in 1146-56 ;
19 (b ) Because most of the companies PETCO acquired were
20 privately held and did not publicly report their revenues, the
21 Individual Defendants were able to, and did, misrepresent the
22 historical revenue figures of the acquired companies to create the
23 false appearance that PETCO's ongoing operating revenues were
24 growing at a more rapid pace than they were . PETCO would represent
25 to analysts and other market participants that the acquired
26 companies' revenues were lower than those acquired companies
27 actually had earned . Then, when PETCO reported combined numbers
28 after the acquisition, analysts and other market participants woul d
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attribute a larger portion of the combined revenues to PETCO's
ongoing operations, believing that PETCO had stronger core revenue
growth than the Individual Defendants actually knew was the case ;
(c) PETCO's acquisitions were not being made for
strategic business purposes, but were being evaluated and made
according to how well they would permit defendants to inflate
PETCO's financial results and manipulate the appearance of stron g
growth in ongoing operations ;
(d) PETCO's core fundamentals were not strong and the
Company's deteriorating cash situation (from $44 million at 2/1/97
to $3 million at 1/31/98) was even worse than disclosed as PETCO
would deliberately not pay invoices from vendors until after
quarter-end in order to show higher cash balances ;
(e) PETCO's key same-store sales comparisons, issued
each quarter during the Class Period, were false and misleadin g
because defendants compared sales from Superstores with sales from
regular stores that were smaller had no advertising, no parking and
did not sell groceries ;
(f) PETCO' s purported Superstore model was a fiction and
did not accurately reflect the financial results PETCO was
achieving . This was due to several negative factors, including the
fact that ordinary expenses were misclassified as nonrecurring
merger costs, making stores appear to be more profitable than they
actually were ;
(g) Due to the problems PETCO was encountering with it s
core business and its acquisitions, it could not continue to expand
nearly as rapidly as it had represented it would and, in fact ,
-- 20 - 98cv1521-L(POR)
1 would have to sharply curtail its expansion program in order to try
2 to obtain control of its operations ;
3 (h) As a result of the foregoing, the Individual
4 Defendants actually knew that PETCO's forecasts of F97 operating
5 EPS of $1 .10+ were false when made as, due to the negative
6 conditions impacting PETCO's business set forth above, those
7 forecasted results could not legitimately be achieved ;
8 (i) As a result of the foregoing, the individual
9 defendants actually knew that PETCO's forecasts for F98 operating
10 EPS of $1 .40-$1 .48 were false when made as, due to the negative
11 conditions inside and impacting PETCO's business set forth above, :
12 those forecasted results could not legitimately be achieved ; and
13 (j) As a result of the foregoing, the Individual
14 Defendants actually knew that PETCO's forecasts of 25%-40%
15 operating EPS growth and of adding 40-50 stores per year were false
16 when made as, due to the negative conditions inside and impacting
17 PETCO's business set forth above, those forecasted results could
18 not be achieved .
19 42 . Public investors, who invested in PETCO stock at prices
20 reflecting PETCO's representations about the success of its growth-
21 by-acquisition expansion plan, continuing strong industry
22 fundamentals, successful Superstore model, successful integration
23 of acquisitions and achievement of acquisition synergies and
24 economies, strong internal sales growth, and increasing margins and
25 forecasts of strong EPS growth in 98-99, paid prices as high as $33
26 for PETCO's stock and have thereby suffered millions in damages .
27 PETCO and PETCO's insiders, however, who knew the truth about its
28 financial condition, overstated same-store sales comparisons, fals e
- 21 - 98cv1521-L(POR)
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Superstore model and diminished growth prospects, did not fare
nearly so poorly . Before the revelations of 2/23/98 and 7/10/98
occurred, and PETCO's stock price collapsed, PETCO's top four
officers took advantage of this inflated stock price , selling
136,965 shares for proceeds exceeding $4 million at artificially
inflated prices as high as $30-1/2 per share . The Individual
Defendants' illegal insider-selling during the Class Period is
summarized below :
Date
Name Sold
Asselin 07/03/9 7
07/03/97
07/03/97
07/07/97
07/07/9707/08/97
07/08/97
07/09/9707/09/97
07/11/97
07/16/9707/17/97
SharesSold
1,50 0
800
80 0
1,20 0
1,6001,6001,20 0
5 38,753
PricePer
Share
$30 .25
$29 .91
$30 .13
$29 .83
$29 .88
$29 .81
$30 .06
$30 .50
Proceeds OptionFrom Sale Shares
$ 45,37 5
23,92 8
24,104
8,753
91,3 $10 .3 3
35,796
Pric e
5,192 $10 .33
800 $10 .3 3
1,200 $10 .33
1, 561 $10 .3 3
47,808
47,696
36, 07 2
1 .61 7$ 262,39 6
Devine 07/03/9 7
07/03/97 31,195 $30 .25 $ 943,64 9
07/03/97 6,300 $29 .91 188,43 307/07/97 6,300 $30 .13 189,81 9
07/08/97 9,450 $29 .83 281,89407/09/97 12,600 $29 .88 376,48 807/11/97 12,600 $29 .81 375,60 607/16/97 9,450 $30 .06 284,06 707/17/97 3,455 $30 .50 105,37 6
91,350 $ 2,745,33 3
Myers 04/04/9 7
04/04/97 5,000 $24 .00 $120,00 0
05/30/97 1,577 $25 .13 39,63 005/30/9 705/30/97 2,258 $26 .75 60,40 2
8,835 $22032
St . Peter 07/03/9 707/03/97 2,900 $29 .91 $ 86,73 9
07/07/9 7
07/07/97 2,900 $30 .13 87,37 7
- 22 -
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3,835 $10 .33
8_,_.8 3 5
2,900 $10 .33
2,900 $10 .0 0
98cv1521-L (POR)
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Pric eDate Shares Per Proceeds Option
Name Sold Sold Share From Sale Shares Pric e
07/08/97 4,350 $10 .3 307/08/97 4,350 $29 .83 129,76 1
07/09/97 4,800 $10 .3 307/09/97 5,800 $29 .88 173,30 4
07/11/97 5,800 $10 .3 307/11/97 5,800 $29 .81 172,89 807/16/97 4,350 $10 .3 307/16/97 4,350 $30 .06 130,76 107/17/97 1,927 $10 .3 307/17/97 1,927 $30 .50 58,77 4
28,027 839,613 28,02 7
TOTALS : 136,965 $ 4,067,374 136,96 5
43 . PETCO also directly benefitted from the fraud . It
acquired six companies during the Class Period including PetCare,
issuing 4 .3 million shares of its stock . Because PETCO's stock was
artificially inflated when these acquisitions were made, PETCO was
able to issue significantly fewer shares to complete them than
would otherwise have been the case .
44 . The artificial inflation of PETCO's stock, the Individual
Defendants' illegal insider-trading during the Class Period,
PETCO's well-timed acquisitions, including PetCare, and the
collapse of PETCO's stock when the previously concealed facts about
PETCO's true financial condition, poor internal growth prospects,
broken Superstore model, deteriorating industry fundamentals and
PETCO's greatly diminished prospects for future EPS growth were
disclosed, are graphically displayed below :
- 23 - 98cv1521-L(POR)
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Petco Animal Supplies, Inc .
December 2,1996 - August 31, 199 8
Daily Stock Prices
35
30
L 25
us
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D1 5
10
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5130/9 7Insider sells 3,835 shares Super pets acquisition -for $100 ,032 PetCare uisition -111,000 shares
12/31/961 . 7 million share s
rPat Food Warehous eacquisiti on - 2,052,000shares
APet Foo dSavemart, Paws,PetCareCompanyacquisitions - -
; 500,000 shares
417Insider sells 5,000 shares 713 1719 7
for $ 120,000 Insiders sell 128,130 shares fo r$3,647,34 1
12/02/96 03/17/97 06/27197 10/09/97 01/23/98 05/07/98 08/20/98
01/23/97 05/07/97 08/19/97 12/01/97 03/17/98 06/29/9 8
45 . The graph below shows the price of PETCO stock while
defendants were issuing their false and misleading statements about
the Company, compared to the stock price action of its principal
competitor, PETsMART, showing how dramatically PETCO's stock
outperformed PETsMART's stock during 1997 while defendants were
issuing false statements to the market, assuring analysts and
investors that PETCO was not encountering the same kind of problems
that were adversely impacting PETsMART's business, and how, when
PETCO finally admitted that its business was also seriously
troubled and suffering from many of the same types of problems that
were affecting PETsMART's business, its stock price returned in
relative performance to the low level of PETsMART's stock .
- 24 - 98cv1521-L(POR)
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02/11/97 05/02197 07/23/97 10/10/97 12/31/97 03/24/98 06/12/9 8
PETCO'S MANIPULATION OF ITS FINANCIAL RESULT S
46 . Despite defendants' representations to the contrary,
PETCO's Class Period financial statements failed to comply with
GAAP, causing PETCO's financial statements to be materially
misleading and not representative of PETCO's underlying
profitability and trends . In addition, during the Class Period,
defendants engaged in several shenanigans to conceal or obfuscate
the deterioration in PETCO's core ongoing operations . As the end
of virtually every quarter during the Class Period approached,
PETCO's actual earnings would be behind market expectations .
Defendants then caused PETCO to complete an acquisition to obscure
- 25 - 98cv1521-L(POR )
PETCO vs. PETsMART
_ mnIinru 9 1007 _ A . .nii * Q 100f1
1 the earnings shortfall . PETCO recorded excessive merger and
2 acquisition charges to report higher earnings from continuing
3 operations . This practice had the intended effect of reducing
4 current and future operating expenses . The excessive one-time
5 merger or restructuring charges were not viewed negatively by Wall
6 Street, as PETCO put emphasis on its results excluding the charge
7 for purposes of comparing its operating results to prior results .
8 Additionally, the defendants caused PETCO to improperly accelerate
9 recognition of advertising co-op payments, thereby overstating
10 reported operating income .
11 47 . GAAP encompass the rules, conventions and practices
12 recognized and employed by the accounting profession for the
13 preparation of financial statements . Financial statements filed in
14 any documents with the SEC are required by Regulation S-X (17
15 C .F .R_ §210 .4-01(a)(1)) to conform to GAAP .
16 48 . During the Class Period, PETCO reported the following
17 quarterly results :
18 2/1/97 5/3/97 8/2/97 11/1/97 1/31/98 5/2/98Sales $142.5 $143 .3M $148 .9M $191 .BM $211 .6M $196 .3M
19
Merger Charges $19 .3M - 0- $ 9 .4M $ 22 .5M $ 6 .8M $ 6 .4M
20 Net Income
(including charges) ($ 7.8M) ($ 1 .9M) ($ 17 .0) $ 5 .3M F$ 1 .IM)
21 Net Income
(excluding charges) $ 5 .6M $ 2 .3M $ 4 .5M $ 9.3M $ 9 .2M $ 3 .0M
22
For the year ended 2/1/97, PETCO reported a loss of $12 .2 million,23
including charges of $37 .2 million, and income of $12 .6 million,
24
excluding the charges . For the year ended 1/31/98, PETCO reported
25
a loss of $13 .2 million, including merger charges of $38 .7 million,26
and net income of $18 .6 million, excluding the charges .27
49 . PETCO's reported income was materially misstated due to28
its practice of inflating merger and business integration costs, s o
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that income excluding charges would be higher than PETCO was
actually experiencing . PETCO would assemble for each acquisition
an "acquisition reset team" which was supposedly occupied in making
sure the acquisition went smoothly . In fact, this team would
include numerous employees not involved in the acquisitio n
transition, whose salaries would be included in the merger charges
and excluded from operating earnings . For instance, PETCO would
almost invariably include St . Peter's salary and all executive
bonuses in the merger charges .
50 . GAAP, as set forth in FASB Statement of Financial
Accounting Standard ("SFAS") No . 5 provides that a loss should not
be recognized unless two conditions are met : the impairment of an
asset or incurrence of a liability is probable and the amount of
the loss can be reasonably estimated . The chief accountant of the
SEC has recently stated :
There is also a viewpoint among some accountants that afocus of financial reporting is to ensure thatliabilities are not understated and therefore, the largera liability is, the more "conservative" the accountingis . The staff certainly believes liabilities should berecorded pursuant to the authoritative literature,including FASB Statement No . 5, on a timely basis-However, recording a larger than necessary liability,especially when that liability is used later to manageearnings, is not conservative accounting .
51 . In 12/96, PETCO acquired Pet Food Warehouse, which
operated 32 pet food and supply stores in five states, for
2,052,190 shares of PETCO stock . In connection with thi s
acquisition , defendants took a one-time charge of significantly
' SFAS No . 5, ¶8 . ("It is implicit in this condition that itmust be probable that one or more future events will occurconfirming the fact of the loss ." )
- 27 - 98cv1521-L(POR)
1 higher amounts than PETCO expected to incur, reducing PETCO's
2 operating expenses in that quarter and subsequent quarters .
3 52 . In the 2ndQ, PETCO acquired SuperPets and again recorded
4 excessive charges . By the 3rdQ of PETCO's F97 ended 11/1/97,
5 defendants knew they would have to close acquisitions in the
6 quarter of a certain dollar amount in order to meet the revenues
7 and earnings expectations to which they had led the market to
8 expect . Defendants held several meetings in 9/97 to discuss which
9 of seven or eight possible target companies should be acquired . At
10 least one of these meetings, which was held in Brian Devine's
11 office and attended by at least defendants Devine, Myers and
12 St . Peter, PETCO's senior management discussed the fact that PETCO
13 needed to acquire a specific amount of sales in order to meet its
14 numbers for the quarter . Thus, in evaluating acquisition
15 candidates, defendants focused on how the acquisitions could be
16 manipulated to permit PETCO to achieve the financial results they
17 had led the market to expect .
28 53 . The merger and acquisition charges for the 3rdQ and 4thQ
19 of F97 were overstated by at least 50% . In fact, the merger and
20 acquisition charge was typically backed into . In other words,
21 Myers, St . Peter and PETCO's controller would decide what the
22 merger and acquisition charge figure would be and would then
23 prepare the back up - the specific items justifying the charge - to
24 equal the amount of the charge . In addition, the information
25 relating to the merger and acquisition charge was deliberately not
26 presented to the outside auditors for their review until the very
27 last minute, so that the auditors would have little time to request
28 or review documentation to substantiate the numbers . Over time, i t
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became a joke in the accounting department that PETCO had "only
exaggerated the one-time charges by 500 . "
54 . PETCO's manipulation of merger charges caused its
reported earnings excluding charges to be materially overstated .
For example, PETCO charged off salaries of all business development
personnel without regard to how much of their time was devoted to
merger activities . PETCO would also inflate the amount of
discontinued inventory written off at the acquired companies .
55 . GAAP, as set forth in FASB Statement of Concepts No . 5,
states that revenues and gains should not be recognized until such
income is both earned and collectible . During 1996, 1997 and early
1998, defendants caused PETCO to violate GAAP and SEC rules by
recognizing income from advertising co-ops prior to earning the
co-ops . PETCO would front-load co-ops from advertising to take
place in later quarters into earlier quarters . The co-op
arrangements with vendors, including Nutro, Lams, and Science Diet
(Hills Science Diet), did not provide for payment to PETCO until
PETCO did the applicable advertising . Thus, PETCO had not earned
the income associated with the co-ops until it did the advertising
and it was a violation of GAAP to record the income from co-ops
before advertising had occurred .
56 . PETCO's financial statements, which were included in its
reports on Forms 10--Q and 10-K, were not prepared in accordance
with GAAP, for inter alia, the following reasons :
(a) The principle that financial reporting should
provide information that is useful to present and potential
investors and creditors and other users in making rationa l
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investment, credit and similar decisions was violated (FASB
Statement of Concepts No . 1, ¶34) ;
(b) The principle that financial reporting should
provide information about the economic resources of an enterprise,
the claims to those resources, and the effects of transactions,
events, and circumstances that change resources and claims to those
resources was violated (FASB Statement of Concepts No . 1, ¶40) ;
(c) The principle that financial reporting should
provide information about how management of an enterprise has
discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated .
To the extent that management offers securities of the enterprise
to the public, it voluntarily accepts wide responsibilities for
accountability to prospective investors and to the public in
general (FASB Statement Concepts No . 1, ¶50) ;
(d) The principle that financial reporting should
provide information about an enterprise's financial performance
during a certain time period was violated . Investors and creditors
often use information about the past to help in assessing the
prospects of an enterprise . Thus, although investment and credit
decisions reflect investors' expectations about future enterprise
performance, those expectations are commonly based at least partly
on evaluations of past enterprise performance (FASB Statement of
Concepts No . 1, ¶42) ;
(e) The principle that financial reporting should be
reliable in that it represents what it purports to represent was
violated . That information should be reliable as well as relevan t
- 30 - 98cvl521--L (POR)
1 is a notion that is central to accounting (FASB Statement of
2 Concepts No . 2, ¶158-59) ;
3 (f) The principle of completeness, which means that
4 nothing is left out of the information that may be necessary to
5 insure that it validly represents underlying events and conditions
6 was violated (FASB Statement of Concepts No . 2, ¶79) ;
7 (g) The principle that conservatism be used as a prudent
8 reaction to uncertainty to try to ensure that uncertainties and
9 risks inherent in business situations are adequately considered wa s
10 violated . The best way to avoid injury to investors is to try to
11 ensure that what is reported represents what it purports to
12 represent (FASB Statement of Concepts No . 2, ¶¶95, 97) ; and
13 (h) The principle that revenue must be realizable
14 (collectible) and earned prior to recognition was violated (FASB
15 Statement of Concepts No . 5, ¶83) .
16 SCIENTER AND SCHEME ALLEGATIONS
17 Actual Knowledge
18 57 . The Individual Defendants had the ability to commit the
19 fraud complained of, and did, as they were the top executives
20 and/or directors of PETCO . Because of the Individual Defendants'
21 positions with the Company, the reports they received and the
22 meetings they participated in, all described herein, they each had
23 access to the adverse non-public information about PETCO's
24 business, finances and future prospects described herein .
25 58 . Devine, Myers, Asselin and St . Peter were the top
26 executives of PETCO and controlled PETCO's publicly issued
27 financial statements and the disclosures made in them, PETCO's
28 public statements and its SEC filings and thus, could falsify them .
- 31 - 98cv1521-L(POR)
I They ran PETCO as "hands-on" managers, dealing with the most
2 important issues facing PETCO's business, i .e ., its growth-by-
3 acquisition program, its financial results, how its recent
4 acquisitions were working out and being integrated into PETCO, the
5 capability of its internal controls to deal with the rapid
6 expansion of its business due to its acquisitions, how PETCO's
7 Superstores were performing compared to PETCO's Superstore model,
8 PETCO's same store sales growth, and how PETCO's business was
9 performing compared to its F97 and F98 plans .
10 59 . Because increased revenues from acquired companies and
11 cost savings and synergies from the integration of them into PETCO
12 were indispensable to PETCO's ability to meet its internally
13 budgeted and publicly forecasted F97 and F98 revenues and EPS, each
14 of the Individual Defendants focused on and constantly monitored
15 each of these key factors affecting PETCO's business, revenues and
16 EPS . Sales reports were prepared and distributed everyday to
17 defendants . The numbers clearly indicated that the new stores that
18 PETCO had acquired were for the most part performing very poorly .
19 Defendant Myers kept a black binder with all the sales reports and
20 forecasts of future sales behind his desk . Not only did defendants
21 learn of the adverse factors affecting PETCO's business, they
22 personally directed the falsification of PETCO's financial results
23 by improperly inflating merger and acquisition charges, by
24 misclassifying normal recurring operating expenses as nonrecurring
25 merger charges, by front-loading cooperative advertising credits
26 from vendors into income before such credits were earned, and by
27 manipulating the revenues of acquired companies to make PETCO's
28 revenues appear more robust .
- 32 - 98cvl521-L(POR)
1 60 . Contrary to their representations about the success of
2 PETCO's Superstores, PETCO's double-digit, same-store growth rate
3 and the ability to successfully integrate its acquisitions, PETCO's
4 financial results were only achieved in 4thQ F96 through 1stQ F98
5 as a result of defendants' manipulation of PETCO's expenses and
6 revenues . Those manipulations, described more fully in ¶ 1 13-20,
7 22-30, 32-34, 46-56, were initiated and directed by the Individual
8 Defendants . Defendants knew at all times the true financial
9 condition of PETCO .
10 61 . During the Class Period, PETCO was always behind in the
11 projections it had made for the quarter . As a result, the
12 defendants would meet in Devine's office after they had the
13 financial results for two months of the quarter . At these meetings,
14 there was a roundtable discussion to determine how defendants could
15 manipulate PETCO's financial results to meet the projections
16 defendants had led the market to expect . This discussion included
17 determining which potential acquisitions could close before the end
18 of the quarter in order to enable defendants to manipulate PETCO's
19 financial results to meet PETCO's EPS projections . PETCO
20 maintained a list of companies that had called wanting to be
21 acquired . These acquisition targets were maintained on a "working
22 deal list" and an "open and close list ." There was no other reason
23 to acquire the companies other than to use the acquisition toi
24 manipulate PETCO's financial statements to meet EPS projections and
25 mask the problems in its core business- From these meetings, each
26 of the Individual Defendants was apprised of the true financial
27 condition of the Company and the Company's progress in meeting its
28 financial targets .
-- 33 - 98cv1521-L(POR)
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62 . Defendants also knew that during 1996, 1997 and early
1998 PETCO improperly recognized income from advertising co-ops
prior to earning the co-ops . In the meetings discussing ways to
meet PETCO's targeted financial results, defendants discussed and
agreed to improperly front-load the co-ops from advertising .
Defendants would front-load co-ops from advertising co-ops prior to
earning the co-ops even though PETCO's co-op agreements with
vendors, including Nutro, Iams, and Science Diet (Hills Science
Diet), did not provide for payment to PETCO until the applicable
advertising was done .
63 . Because of their top executive positions with PETCO, and
involvement in the day-to-day management of its business, the
Individual Defendants each actually knew the adverse non-public
information about the manipulation of expenses and earnings, the
failure of PETCO's Superstores to perform in accordance with its
publicly discussed "store model," the false same-store sales
growth, and its diminished future revenue and EPS prospects, from
internal corporate documents and conversations with other corporate
officers and employees and their attendance at management and Board
meetings .
64 . St . Peter and Myers, as CFO and principal accounting
officer, respectively, oversaw the preparation of PETCO's false
financial statements . They personally decided, with the
concurrence of the other defendants, what the merger and
integration charges and other reserves would be each quarter, and
instructed Finance Department personnel to alter the underlying
data to substantiate the charges they decided to make .
- 34 - 98cv1521-L(POR)
1 65 . PETCO's Finance Department, under the direction of St .
2 Peter and Myers, generated weekly and monthly reports distributed
3 to all the Individual Defendants as part of PETCO's financial
4 forecasting and accounting systems . Because the Finance Department
5 also distributed monthly reports comparing PETCO's actual sales and
6 expenses to projected sales and expenses by store, geographic
7 region and on a company-wide basis, the Individual Defendants also
8 actually knew that PETCO's actual results were in fact well below
9 the levels internally budgeted or forecasted and that many of it s
10 Superstores were performing well below the model . They thus each
11 actually knew that PETCO's publicly forecasted revenues, EPS and
12 ongoing growth for F97, F98 and F99 were false and could not be
13 achieved unless they continued to manipulate the financial results .
14 To conceal the poor quarterly results, the Individual Defendants
15 falsified PETCO's financial results throughout the Class Period by
16 hiding actual operating expenses in one-time merger charges,
17 improperly inflating revenues by falsely restating the revenues of
18 the companies PETCO acquired under the pooling of interest
19 accounting method, and front-loading cooperative advertising
20 credits from vendors into income before such credits were earned
21 and thus inflating PETCO's reported EPS . As a result, defendants
22 did not fairly present PETCO's results in accordance with GAAP and
23 thereby concealed the true nature of the underlying deterioration
24 of PETCO's business and gave credibility to their store model,
25 same-store sales growth and false forecasts of sharply improved
26 F97/F98 results .
27 66. As a result of the foregoing, defendants had actual
28 knowledge of the material, undisclosed, adverse facts about PETCO' s
ID %- 35 - 98cv1521-L(POR)
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false financial statements, misleading same-store sales
comparisons, Superstore performance, acquisition and integration
charge overstatements, and EPS prospects, and thus they each
actually knew that the public statements being made by them about
those subjects were false when made . Thus, each of the Individual
Defendants knew that the adverse facts specified herein had not
been disclosed to and were being concealed from the public and that
the positive representations which were being made were materially
false and misleading .
67 . Also supporting a strong inference of defendants'
scienter is the Individual Defendants' insider-trading . While
defendants were issuing falsely favorable statements about PETCO's
business and financial results and prospects, the Individual
Defendants sold 136,965 shares of PETCO stock for more than $4
million to personally profit from the artificial inflation in
PETCO's stock price that resulted from their fraudulent scheme .
Notwithstanding their access to confidential information as a
result of their status as officer and/or directors of the Company,
and their corresponding duty to disclose adverse material facts
before trading in PETCO stock, the Individual Defendants sold
significant amounts of PETCO stock at artificially inflated prices
in order to profit from the fraud, and did so while in possession
of material non-public information . The Individual Defendants
insider selling during the Class Period is detailed below :
- 36 - 98cv1521-L(POR)
1Shares Sold A s
2 Percent of Shares Sold As
Total Holdings Shares Total Co=n Percent o f
3 Defendant c Time of Sale (1) Sold Stock Holdings Total Holdings (2}
4 B. Devine 287,770 91 , 350 75 .00% 31 .74%
L . Asselin 46,816 8, 753 85.00% 18 .70 %
5 R, St. Peter 38,027 28,027 100 .00% 73 .70%
J. Myers 4,485 2,258 93.00% 50.35%6
7
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9 ( 1) Source : May 1997 Proxy , p . 14 ; includes options exerciseable within 60 days of of 5/9/9 7
(2) Includes options exercisable within 60 days of 5/9/97
1 0
11
12 Motive And Opportunity
13 68 . The Individual Defendants , because of their positions
14 with PETCO , controlled and/or possessed the power and authority to
15 control the contents of PETCO's quarterly and annual reports, press
16 releases and presentations to securities analysts . Each of them
17 was provided with copies of PETCO's reports and press releases
18 alleged herein to be misleading prior to or shortly after their
19 issuance and had the ability and opportunity to prevent their
20 issuance or cause them to be corrected . Because of their positions
21 and access to material non-public information available to them but
22 not to the public, each of these defendants thus had the
23 opportunity to falsify the information given to the investment
24 community and conceal adverse information they knew about PETCO's
25 business and thus manipulate and artificially inflate PETCO's stock
26 price .
27 69. Each of the Individual Defendants also had the motive to
28 inflate PETCO ' s stock price and perpetrate the fraudulent schem e
- 37 - 98cvl521-L(POR)
1 and course of business complained of . During the Class Period,
2 PETCO was operating in an industry in which PETCO and PETsMART were
3 intense competitors - attempting to grow by acquiring other pet
4 store companies . Before and during the Class Period, PETCO was
5 actively engaged in reviewing several potential acquisitions to
6 grow its business, including PetCare, which it had identified as an
7 acquisition target in 1996 . However, PETCO faced special
8 difficulties in making significant acquisitions .
9 70 . Because PETCO needed to conserve its cash to fund its
10 expanding ongoing operations, it had to use stock for acquisitions,
11 especially sizable acquisitions . However, using PETCO stock to pay
12 for acquisitions meant that PETCO's profitability had to bed
13 maintained so that acquisitions would be made on a non-dilutive
14 basis . This put tremendous pressure on PETCO's executives to
15 present PETCO's business and finances in a very favorable light,
16 pressure to which they succumbed when they improperly inflated
17 earnings by recording inflated one-time charges and manipulating
18 the revenue of the acquired company to make PETCO's revenues more
19 robust .
20 71. In 1994, PETCO had revenues of less than $150 million per
21 year and 198 stores . In order to attempt to rapidly grow its
22 business, PETCO went public in 3/94 and created a trading market in
23 its stock . Then, using its publicly traded stock, PETCO went on an
24 acquisition binge, acquiring 14 pet store chains with 186+ stores
25 during 94-97 . By year-end F97, PETCO's annual revenues had
26 ballooned to over $440 million per year and PETCO had over 336
27 stores . Despite this very rapid expansion and growth and its
28 numerous acquisitions in this short period of time, PETCO reporte d
- 38 - 98cv1521-L(POR)
1 growing operating EPS that consistently exceeded analysts'
2 expectations . However, in order for its growth-by-acquisition plan
3 to succeed, PETCO needed to keep its stock price trading at higher
4 levels . Thus, it was of critical importance to PETCO to report
5 profitable growth and show a strong financial condition to keep its
6 stock price at high levels so that PETCO stock would appear
7 attractive to the businesses PETCO was attempting to acquire in
8 exchange for PETCO stock and so that PETCO could make its
9 acquisitions while limiting the dilutive impact of thos e
10 acquisitions . PETCO knew that the only way to keep its stock price
11 trading at high levels was to convince investors that PETCO's rapid
12 expansion plan was working, that PETCO was able to generate and
13 could sustain strong same-store sales growth, that PETCO was
14 successfully integrating the large number of acquisitions it was
15 making while tightly controlling its operating expenses, that
16 PETCO's vaunted "Superstore model" was working well, and that its
17 Superstores were meeting or exceeding the model . Thus, PETCO
18 represented that its current operations were increasingly
19 profitable, that its aggressive growth-by-acquisition program was
20 succeeding and would continue, that it was successfully integrating
21 the acquired businesses into its operations, that it was
22 effectively controlling its operating costs and achieving
23 acquisition economies, synergies and savings - while forecasting a
24 three- to five-year EPS growth rate of 25%-40% - including F97 and
25 F98 EPS of $1 .11 and $1 .40-$1 .48, respectively .
26 72 . PETCO's compensation program for its executives also
27 provided them with a motive to keep its stock price high and thus'
28 continue PETCO's rapid expansion program . PETCO's compensation )
- 39 - 98cv1521-L(POR)
1 program provided that its officers were paid in significant part by
2 incentive bonuses which depended on PETCO meeting its financial
3 targets and continuing its acquisition program . PETCO's Executive
4 Compensation Plan and the criteria it used to reward its top
5 executives thus incentivized the Individual Defendants to commit
6 the fraud complained of because if the fraud was successful they
7 stood to collect millions of dollars personally . In F97 PETCO's
8 executive compensation plan was described as follows :
9 ANNUAL CASH COMPENSATION includes base salary and anannual cash incentive (bonus) . . . . The annual incentive
10 component of pay is . . . tied to specific performanc emeasures . The Committee establishes the annual incentive
11 opportunity for each executive officer in relation to hisor her base salary . Actual incentive awards for 199 7
12 were based primarily on financial performance measuredagainst objectives approved by the Committee for the
13 fiscal year . These objectives were based on financialresults and expansion goals . . . . An executive's bonus
14 may be above or below his or her target incentiveopportunity, depending on the level of overal l
15 performance . In 1997, the Company's performance met theobjectives set by the Committee, resulting in target
16 incentive payouts to the executive officers . . . .
17 73 . At year-end F96, Devine received a cash bonus of $480,000
18 - over 100% of his base pay - his maximum cash bonus . At year-end
19 F96, St . Peter received a cash bonus of $216,000 - over 100% of his
20 base pay - his maximum cash bonus . At year-end F96, Asselin
21 received a cash bonus of $104,000 - equal to 56% of his base pay -
22 his maximum cash bonus . At year-end F96, Myers received a cash
23 bonus of $50,000 - equal to 43% of his base pay - his maximum cash
24 bonus . As a result Devine, Myers, Asselin and St . Peter were
25 determined to cause PETCO to achieve expansion and financial
26 results in F97-F99 that at least met PETCO's internal targets, and
27 to complete several acquisitions, most importantly the PetCare
28 acquisition - the largest acquisition in PETCO's history - so that
- 40 - 98cvl521-L(POR)
i their F97-F99 cash bonuses would be large . Also, as part of the
2 PETCO Executive Compensation Program, Devine, St . Peter, Asselin
3 and Myers were each given large new stock options in 1996 and 1997
4 as a result of PETCO's apparent rapid growth and successful
5 acquisition program . These options had value however only if the
6 Individual Defendants could keep PETCO stock trading above the
7 exercise price of $22 . 50-$23 .17 . These large option grants and
8 their respective exercise prices are shown below :
9 Option Grant/ Exercise
Name Year Price10
Devine 96 - 75,000 $23 .17
11 97 - 100,000 $22 .50
12 St. Peter 96 - 37,500 $23 .1 797 - 50,000 $22 .50
13Asselin 96 - 18,750 $23 .17
14 97 - 25,000 $22 .50
15 Myers 96 - 3,000 $23 .1 797 - 25,000 $22 .50
1 6
17 74 . Thus, PETCO's top insiders - the Individual Defendants -
18 were highly motivated to have PETCO report EPS that met PETCO's
19 budgeted levels and to continue PETCO's rapid growth-by-acquisition
20 program and to keep PETCO's stock trading at artificially inflated
21 levels . If they did this their large new stock option accounts
22 would have real value, they stood to collect hundreds of thousands
23 of dollars each in cash bonuses during F97-F99 as PETCO would be
24 able to continue to make large numbers of acquisitions and the
25 Individual Defendants could also sell off large amounts of the
26 PETCO stock they actually owned and pocket large amounts of illegal
27 insider-selling profits . Indeed, at the end of F97, Devine
28 received a cash bonus of $458,000 - over 100% of his base pay . At
- 41 - 98cv1521-L(POR)
1 year-end F97 St . Peter received a cash bonus of $221,000 - almost
2 90% of his base pay . At year-end F97, Asselin received a cash
3 bonus of $105,000 -- over 50% of his base pay . At year-end F97
4 Myers received a cash bonus of $75,000 - equal to 47% of his base
5 pay .
6 Scheme
7 75 . Each defendant is liable for making false statements
8 and/or for committing manipulative acts by failing to disclose
9 adverse facts while selling PETCO stock and for participating in a
10 fraudulent scheme which permitted Devine, Myers, Asselin and St .
11 Peter to sell 136,965 shares of their PETCO stock at artificially
12 inflated prices for $4+ million in illegal insider-trading proceeds
13 and also allowed PETCO to complete six acquisitions, including
14 PetCare, the largest acquisition it ever made, by issuing over 2 .3
15 million shares of PETCO stock based on its artificially inflated
16 trading price .
17 76. Defendants' scheme succeeded . Based on PETCO's inflated
18 stock price, PETCO made six acquisitions during the Class Period
19 for 2 .3 million shares, issuing at least 2 million fewer shares
20 than it would have issued had PETCO's stock not been artificially
21 inflated . Also, PETCO's top four insiders, Devine, St . Peter,
22 Myers and Asselin got large F97 cash bonuses of $458,000, $221,000,
23 $105,000 and $75,000, respectively, for meeting PETCO's targeted
24 expansion goals for F97 .
25 FALSE AND MISLEADING STATEMENTS
ISSUED DURING THE CLASS PERIOD26
77 . On 1/30/97, PETCO executives Devine and St . Peter27
appeared at the Smith Barney Emerging Growth Stock Conference . In28
a formal presentation and in break-out sessions, they told the
- 42 - 98cvl521-L(POR)
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l assembled security analysts, money and portfolio managers ,
institutional investors, brokers and stock traders :
• PETCO's aggressive growth-by-acquisition strategywas succeeding . PETCO was achieving theoperational efficiencies and operating economiesexpected from its recent acquisitions, includingPetsUSA, Pet Food Warehouse, Pet Nosh and PetSupply Warehouse and was not encountering anysignificant difficulties in integrating thoseacquisitions into its ongoing operations .
• PETCO's Superstore model was extremely effectiveand its Superstores were all either meeting orexceeding the operational targets of PETCO'sSuperstore model . The Superstore model resulted instrong ongoing profit growth with new Superstoresreaching profitability in approximately sevenmonths .
• PETCO expected significant ongoing profit margingrowth due to the effectiveness of its Superstoremodel and the continuing strong sales growth of itsexisting stores .
• PETCO expected to add 40-50 stores per year overthe next several years and would contribute to andresult in strong ongoing EPS growth .
• PETCO expected strong comparable-store sales growthto continue over the next 3-5 years with same-storesales growth between 10%-12% .
• PETCO expected to achieve 30%+ EPS growth going
forward over the next several years without anyacquisitions .
• PETCO expected to achieve 40%+ EPS growth goingforward for the next several years, includingacquisitions .
• As a result of the foregoing, PETCO was forecasting
F97 EPS from ongoing operations of $1 .10+ and F98
EPS OF $1 .40+ .
78 . Several analysts issued reports on PETCO following thi s
conference . For example, on 2/10/97, Smith Barney issued a report
on PETCO, written by Giblen after he had discussions with Devine
and St . Peter, which was based on and repeated information provided
him by them and during their recent presentation at the Smit h
- 43 - 98cv1521-L(POR)
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Barney Conference . Devine or St . Peter reviewed this report before
it was issued and assured Giblen it was accurate . The report
forecast 97 EPS of $1 .13+ and a 30% five-year EPS growth rate for
PETCO . The report also stated :
This presents . . . fresh insights following PETC'spresentation at the Smith Barney Emerging Growth StockConference and time on the road with management .
ACHIEVING ACQUISITION BENEFITS AND SMOOTH INTEGRATION
Smooth Integration of Acquisitions /Benefits Achieved WithMore to Come :
PETC is achieving benefits with more to come via itssmooth integration of past and present acquisitions .
Five Years of +1O % ish Comps , In Our View , TogetherWith Aggressive Expansion Plans .
We conclude that PETC's exemplary merchandisingskills ensure continued strong comp gains into 1997 andbeyond. PETC can sustain 5 years of +10%ish camps, +8-10% minimum , in our view . Coupled with 20%-25% squarefootage growth, excluding acquisitions (40-50 new storesa year) , PETC should easily produce 5 plus years of 30 .0%EPS growth . In addition to aggressive store developmentplans, PETC plans to add 40-50 stores a year for at leastthe next three years , through acquisitions .
79 . On 2/25/97, PETCO executives Devine, Asselin and
St . Peter met with several institutional investors in Minneapolis,
Minnesota during a trip sponsored by Needham & Co ., which was
intended to stimulate interest in PETCO's stock by institutional
investors and thus boost PETCO's stock price . In formal
presentations and in question and answer discussions, these
defendants repeated to the security analysts, money and portfolio
managers and institutional investors they met the same informatio n
- 44 - 98cv1521-L(POR)
1 that they had disseminated at the 1/30/97 Smith Barney Emerging
2 Growth Stock Conference .
3 80 . On 2/26/97, PETCO executives Devine and St . Peter
4 appeared at the Cruttenden Roth Growth Stock Conference . In a
5 formal presentation and in a break-out session, they told the
6 assembled security analysts, money and portfolio managers,
7 institutional investors, brokers and stock traders the same
8 information they had presented at the 1/30/97 Smith Barney Emerging
9 Growth Stock Conference .
10 81 . On 2/27/97, Devine was interviewed by MSNBC at the
11 Cruttenden Roth Growth Stock Conference . During the interview
12 which was broadcast nationally, Devine stated :
13 DEVINE : Our sales and earnings have continued to meet
or exceed expectations, and really with our
14 rapidly growing super store base the sales andearnings will be able to continue .
15* * *
16
PETCO super store economics are compelling .17 . . . Sales growth is projected to be 28% in
the year two, followed by 15% and 10% and 8% ,18 the same as other super store concepts .
Taking us from $110 per square foot to $19919 per square foot in year five . Store
contribution margin expands from 6% to 18% by20 year five . New stores typically turn a profit
within seven months . . . . Sales in a relocated21 store immediately run about 60% ahead of the
old store sales, as well as if it's a new22 store. How have we performed against thi s
model? Very well indeed . We've outperformed23 the model including in markets where we have
strong pet warehouse competition . We are24 definitely a growing company . . . . Excluding
acquisitions, we opened 48 super stores in '9625 and 41 in '95 . We plan to open 40 to 50 pe r
year thereafter . . . . [S]o as you can see, we26 are a super store chain, this is really the
expansion that is going to drive the future27 sales and profitability of the company .
28
- 45 - 98cv1521-L(POR)
1 In summary, we believe we have an excitingstory to tell, and the best is yet to come . . . .
2 We have a low cost, high return super storemodel which is not just compelling on paper,
3 but has been delivering results on the botto mline . Our super store growth . . . will
4 continue to drive our sales and earnings overthe next few years .
582 . The above statements were false and misleading because,
6
as is described herein, defendants improperly inflated merger and7
acquisition charges, front-loaded co-op advertising credits before8
they were earned, manipulated the revenues of acquired companies to9
make PETCO's revenues appear more robust, and compared Superstores10
with regular smaller stores in order to conceal the deterioration11
in PETCO's core operations and to create the false appearance of
12increasing operating profitability and strong revenue growth .
1383 . On 3/1/97, Cruttenden Roth issued a report "initiating
14coverage" on PETCO, written by Healey . Since this was Cruttenden
15Roth's first report on PETCO, it was written only after Healey had
16extensive discussions with Devine and St . Peter, and was based on
17and repeated information provided her by them- Devine or St . Peter
18reviewed this report before it was issued and assured Healey it was
19accurate . The report forecast 97 and 98 EPS of $1 .11 and $1 .43,
20
respectively for PETCO, and also stated :21
* PETCO's management has done an excellent job22 managing expenses and translating the company's growth
into profitability . . . . Absent additional acquisitions ,23 we are looking for EPS growth of 50 .6% to $1 .11 in 1997
and an additional 28 .8% to $1 .43 in 1998 . With
24 additional acquisitions highly likely, we would expec t
EPS to grow at a compound annual growth rate of at least25 45% over the next five years .
26 These statements were false and misleading because, in their
27 communications with Cruttenden Roth analysts, defendants knew but
28 failed to disclose, as is described herein, that PETCO was using
- 46 - 98cvl521-L(POR)
I its acquisitions to bury operating expenses into one-time merger
2 charges and manipulating revenues to obfuscate the deteriorating
3 financial condition of PETCO and create the appearance of
4 increasing operating profitability of strong revenue growth .
5 84 . On 3/27/97, PETCO reported its 4thQ and F96 results . The
6 press release represented that comparable store sales rose 12 .6%
7 during 4thQ F96 . Net earnings, excluding merger and nonrecurring
8 charges, were represented to have increased 44% over the prior year
9 to $ .30 per share . PETCO recorded $19 .3 million in merger and
10 nonrecurring charges in the 4thQ, and $37 .2 million of such charges
11 for F96 . These statements were false and/or misleading because, as
12 is described herein, defendants knew but failed to disclose that
13 same-store sales were not as strong as reported but were the result
14 of PETCO comparing Superstore sales with ordinary smaller stores
15 and that PETCO's 4thQ F96 earnings were false and achieved only by
16 using the Pet Food warehouse acquisition to manipulate its
17 financial results .
18 85 . On 3/27/97, subsequent to the press release announcing
19 its F96 results, PETCO held a conference call for securities
20 analysts, money and portfolio managers, institutional investors,
21 large PETCO shareholders, brokers and stock traders to discuss
22 PETCO's business and its prospects . During the call, Devine and
23 St . Peter made presentations and answered questions . During the
24 call - and in follow-up conversations with key participants,
25 including analysts Hanratty, Giblen, Pak and Bogucki - they
26 directly disseminated important information to the market by
27 stating :
28 • PETCO's aggressive growth-by-acquisition strategywas succeeding . PETCO was achieving th e
- 47 - 98cv1521-L(POR)
1 operational efficiencies and operating economiesexpected from its recent acquisitions, including
2 PetsUSA, Pet Food Warehouse, Pet Nosh and PetSupply Warehouse and was not encountering any
3 significant difficulties in integrating thoseacquisitions into its ongoing operations .
4• PETCO's Superstore model was extremely effective
5 and its Superstores were all either meeting orexceeding the operational targets of PETCO' s
6 Superstore model . The Superstore model resulted instrong ongoing profit growth with new Superstores
7 reaching profitability in approximately sevenmonths .
8• PETCO expected significant ongoing profit margin
9 growth due to the effectiveness of its Superstoremodel and the continuing strong sales growth of its
10 existing stores .
11 • PETCO expected to add 40-50 stores per year overthe next several years and would contribute to and
12 result in strong ongoing EPS growth .
13 • PETCO expected strong comparable-store sales growth
to continue over the next 3-5 years with same-store
14 sales growth between 10%-12% .
15 • PETCO expected to achieve 30%+ EPS growth goingforward over the next several years without any
16 acquisitions .
17 • PETCO expected to achieve 40%+ EPS growth goingforward for the next several years, including
i8 acquisitions .
19 • As a result of the foregoing, PETCO was forecastingF97 EPS from ongoing operations of $1 .10+ and F98
20 EPS OF $1 .40+ .
21 These statements were false and misleading because, as is described
22 herein, defendants knew but failed to disclose that they improperly
23 inflated merger and acquisition charges, front-loaded co-op
24 advertising credits before they were earned, manipulated the
25 revenues of acquired companies to make PETCO's revenues appear more
26 robust, compared Superstores with regular smaller stores in order
27 to conceal the deterioration in PETCO's core operations and
28 improperly manipulated the revenues from the Pet Food Warehous e
- 48 - 98cv1521-L(POR)
1 acquisition to create the false appearance of strong revenue growth
2 from ongoing operations .
3 86 . On 3/27/97, Smith Barney issued a report on PETCO,
4 written by Giblen, which was based on and repeated information
5 provided him in the 3/27/97 conference call and in follow-up
6 conversations with Devine or St . Peter . The report forecast F97
7 EPS of $1 .13 and a 30% five-year EPS growth rate for PETCO .
8 87 . On 4/16/97, Cruttenden Roth issued a report on PETCO,
9 written by Healey after Healey had discussions with Devine and St .
10 Peter, which was based on and repeated information provided him by
11 them . Devine and St . Peter reviewed this report before it was
12 issued and assured Healey it was accurate . The report forecast F97
13 and F98 EPS of $1 .11 and $1 .43, respectively, and a 45% three-year
14 EPS growth rate for PETCO . The report also stated :
15 We are looking for further strong results in 1997, with. . . EPS growth of 50% . With additional acquisitions
16 highly likely, we would expect EPS to grow at a compoundannua l growth rate of at least 45% over the next five
17 years .
18
19 Comparable store sales growth should continue in the lowteens throughout the year as the store base continues t o
20 mature and as the stores come up against 1996's strongresults . Comps in 1997 will also be helped by the
21 conversion of the newly acquired stores into Petco store swith an improved merchandise mix and higher sales
22 volumes .
23 88 . The above statements were false and misleading because,
24 in their communications with Cruttenden Roth and Smith Barney
25 analysts, defendants knew but failed to disclose, as is described
26 herein, that same-store comparisons were false because defendants
27 compared sales from Superstores with smaller regular stores and
28 that PETCO was using its acquisitions to manipulate PETCO' s
- 49 - 98cvl521-L(POR)
1 earnings and as a result PETCO would not be able to meet its EPS
2 estimates for F97 and F98 .
3 89 . On or about 5/1/97, PETCO filed its report on Form 10-K
4 for the year ended 2/1/97, which was signed by, among others,
5 defendants Devine and St . Peter . The report contained the same
6 financial results for the 4thQ and the percentage increase in
7 comparable store sales as were reported in the 3/27/97 press
8 release . These statements were false and/or misleading because as
9 described herein same-store sales were not as strong as reported
10 because defendants were comparing Superstore sales with smaller
11 regular stores and defendants failed to reveal that PETCO's
12 financial results were achieved only by using the Pet Food
13 Warehouse acquisition to manipulate its financial results .
14 90 . During 4/97-5/97, negative information about PETCO's
15 largest competitor, PETsMART, became public, indicating PETsMART's
16 business was performing poorly and well below expectations,
17 resulting in a steep decline in PETsMART stock and concern in the
18 investment community that PETCO was suffering similar business
19 problems . This put pressure on PETCO's stock, which fell to $19-
20 $20 per share . So, PETCO's top insiders falsely reassured
21 investors that PETCO's business was strong and was benefitting from
22 good industry fundamentals, that its acquisitions were succeeding,
23 that its growth/ expansion plan was intact, that its Superstores
24 were doing very well and that whatever problems PETsMART was
25 encountering were unique to PETsMART, not shared by PETCO, and not
26 indicative of any industry problems or deterioration .
27 91 . On 5/29/97, PETCO reported its IstQ F97 results (ended
28 5/3/97) . The press release represented that comparable store sale s
- 50 - 98cv1521-L(POR)
1 rose 14% during the 1stQ . Net earnings increased 53% from to the
2 prior year to $ .13 per share . Operating income was represented to
3 have increased 48% from the prior year to $4 .0 million, or 2 .4% of
4 net sales . The release quoted Devine as stating : "We are very
5 pleased with our strong earnings and record sales performance . "
6 92 . The above statements were false and misleading because as
7 described herein defendants improperly inflated merger and
8 acquisition charges, front-loaded co-op advertising credits before
9 they were earned, manipulated the revenues of acquired companies t o
10 make PETCO's revenues appear more robust, and compared Superstores
11 with regular smaller stores in order to conceal the deterioration
12 in PETCO's core operations and create the appearance of increasing
13 operating profitability and strong revenue growth .
14 93 . On 5/29/97, subsequent to the release of its 1stQ F97
15 results, PETCO held a conference call for securities analysts,
16 money and portfolio managers, institutional investors, large PETCO
17 shareholders, brokers and stock traders to discuss PETCO's business
18 and its prospects . During the call, Devine, Asselin, Myers, St .
19 Peter, Woodard and Bruce Hall (Executive V .P . Operations), made
20 presentations and answered questions . During the call - and in
21 follow-up conversations during 5/29/97-5/30/97 with participants,
22 including analysts Hanratty, Healey and Pak - they directly
23 disseminated important information to the market by stating :
24 • PETCO`s aggressive growth-by-acquisition strategywas succeeding . PETCO was achieving the
25 operational efficiencies and operating economie s
expected from its recent acquisitions, including26 PetsUSA, Pet Supply Warehouse, Pet Nosh, and Pet
Food Warehouse, and was not encountering any
27 significant difficulties in integrating thoseacquisitions into its ongoing operations .
28
- 51 - 98cv1521-L(POR)
1 • PETCO's Superstore model was extremely effectiveand its Superstores were all either meeting or
2 exceeding the operational targets of PETCO'sSuperstore model . The Superstore model resulted in
3 strong ongoing profit growth with new Superstoresreaching profitability in approximately seven
4 months .
5 • PETCO expected significant ongoing profit margingrowth due to the effectiveness of its Superstore
6 model and the continuing strong sales growth of itsexisting stores .
7
• PETCO expected to add 40-50 stores per year over8 the next several years and would contribute to and
result in strong ongoing EPS growth .9
• PETCO expected strong comparable-store sales growth10 to continue over the next 3-5 years with same-store
sales growth between 10%-12% .11
• PETCO expected to achieve 30%+ EPS growth going12 forward over the next several years without any
acquisitions .13
• PETCO expected to achieve 40%+ EPS growth going14 forward for the next several years, including
acquisitions .15
s As a result of the foregoing, PETCO was forecasting
16 F97 EPS from ongoing operations of $1 .10+ and F98
EPS of $1 .40+ .
17• The operational problems of PETsMART which had been
18 disclosed in the spring of 97 were unique toPETsMART, especially the problems PETsMART wa s
19 apparently having with its Superstore model . PETCOwas not encountering or suffering similar problems .
2094 . Analysts responded by repeating the favorable information
21in research reports disseminated to the public . For example, on
225/29/97, PaineWebber issued a report on PETCO, written by Hanratty,
23
which was based on and repeated information provided him in the24
5/29/97 conference call and in follow-up conversations with Devine25
or St . Peter . The report forecast F97 and F98 EPS of $1 .11 and
26
$1 .47, respectively, for PETCO . The report also stated :
27
EPS out performance was due to better than expected28 operating margin from the leveraging of stronger than
expected comps .
- 52 - 98cv1521-L(POR)
1 95 . As a result of defendants' very positive statements,
2 reassurances and forecasts during 5/97, PETCO's stock staged a very
3 strong recovery from its earlier decline, reaching $27 on 5/30/97 .
4 96 . On 6/3/97, PETCO executives Devine and St . Peter appeared
5 at the PaineWebber 8th Annual Aggressive Growth & Technologies
6 Conference in New York City . In a formal presentation and in a
7 break-out session , they told the assembled security analysts, money
8 and portfolio managers, institutional investors, brokers and stock
9 traders the same information they disseminated in the 5/29/97
10 conference call .
11 97 . On 6/4/97, PaineWebber issued a report on PETCO, written
12 by Hanratty . This report was written after Hanratty had
13 discussions with Devine and St . Peter and was based on and repeated
14 information provided him by them and provided during the
15 presentation made by Devine and St . Peter for PETCO at the
16 PaineWebber Aggressive Growth Conference . The report forecast F97
17 and F98 EPS of $1 .11 and $1 .47, respectively, and a 30% secular EPS
18 growth rate for PETCO . The report also stated :
19 PETCO : BULLISH CONFERENCE PRESENTATION
20 KEY POINT S
21 1. PETC management made a bullish presentation to
investors at PaineWebber's Aggressive Growth Stock
22 Conference .
23 2 . PETC reaffirmed comfort with . . . 97E of $1 .11 .
24 98 . The above statements that were made to and repeated by
25 securities analysts were false and misleading because as described
26 herein defendants were improperly comparing sales from Superstores
27 with smaller regular stores in order to report strong same-store
28 sales growth and manipulating PETCO's financial results to mask the
- 53 - 98cv1521-L(POR)
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deterioration in PETCO' s core business and create the appearance of
increasing operating profitability and strong revenue growth .
99 . On or about 6/17/97, PETCO filed its report on Form 10-Q
for the quarter ended 5/3/97, which was signed by defendant Myers .
The report on Form 10-Q contained the same financial information as
was contained in the 5/29/97 press release . The Form 10-Q stated :
"In the opinion of management of Petco Animal Supplies, Inc . . . .
the unaudited consolidated financial statements contain all
adjustments consisting of normal recurring adjustments, necessary
to present the financial position, results of operations and cash
flow as of May 3, 1997 ." These statements were false and
misleading because as described herein defendants improperly
inflated merger and acquisition charges, front loaded co-op
advertising credits before they were earned, manipulated the
revenues of acquired companies to make PETCO's revenues appear more
robust and compared Superstores with regular smaller stores in
order to conceal the deterioration in PETCO's core operations and
create the appearance of increasing operating profitability and
strong revenue growth .
100 . On 6/25/97, Morgan Stanley "initiated coverage" on PETCO
in a report written by Pearson . Because this was Morgan Stanley's
first report on PETCO, it was written only after Pearson had
extensive discussions with Devine and St . Peter and was based on
and repeated information provided to Pearson by them . Devine or
St . Peter reviewed this report before it was issued and assured
Pearson it was accurate . Subsequent to the release of this report,
PETCO copied and distributed it, thus adopting it as its own . The
- 54 - 98cv1521-L(POR)
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report forecast 97 and 98 EPS of $1 .12 and $1 .48, respectively, and
a 25% five-year EPS growth rate for PETCO . The report also stated :
Executing a successful acquisition strategy . . .PETC has been executing a well controlled , nondilutiveacquisition strategy for the past several years (making11 acquisitions over the last two years) . . . .Operationally, following the integration of a petsuperstore acquisition , PETC typically achieves : (1) a2-3% improvement in the acquired chain's gross margin,driven by improved purchasing power (a 7% improvementover a 2-3 year period) ; (2) significantly enhancedefficiencies in advertising, store supervision, etc . ; (3)enhanced sales productivity through rationalization ofthe stores ; and (4) improved comparable store salesdriven by a widening of the acquired chain's mechanizeassortment . The combination of a successful acquisitionstrategy and strong organic growth has translated intorapid CAGR in PETC's sales and square footage, and theenhanced ability to quickly establish a presence in newmarkets .
These statements were false and misleading because, in thei r
communications with Morgan Stanley's analysts, defendants, as is
described herein, knew but failed to disclose that PETCO' s
acquisition strategy was failing and that defendants were
manipulating the revenue figures of PETCO's acquisitions to make
PETCO's revenues appear more robust as well as attributing normal
operating expenses to one-time merger charges to inflate PETCO' s
earnings from continuing operations and create the appearance o f
strong revenue and earning growth .
101 . On 8/20/97, defendant Devine was quoted in an articl e
that appeared in The Wall Street Journal about PETCO as follows :
"We're just at the beginning of our growth curve,"says Chairman, President and Chief Executive Officer[Devine] . . . .
"The strength of our company has been the quality ofour acquisitions," Mr . Devine says .
- 55 - 98cv1521-L(POR)
1 These statements were false as Devine knew but failed to disclose,
2 as described herein, that PETCO was only making acquisitions to
3 manipulate its financial results in order to create the appearance
4 of huge revenue growth and increasing profitability and conceal the
5 deterioration in PETCO's core business .
6 102 . On 8/26/97, PETCO reported its 2ndQ F97 results - EPS of
7 $ .24 . The press release represented that comparable store sales
8 rose 12 .4% during the 2ndQ and that net earnings, excluding merger
9 and integration costs, increased 55% from the prior year to $ .2 4
10 per share . The release represented that PETCO had recorded merger
11 and business integration costs of $9 .4 million in the quarter,
12 including which company incurred a net loss of $1 .9 million . The
13 release quoted defendant Devine as stating :
14 "We are very pleased with our strong sales growthand overall performance i n the second quarter ." Mr .
15 Devine further stated , "We are also very pleased with theperformance of our former Pet Food Warehouse stores in
16 the Midwest market which we grand opened as PETCO at theend of the quarter . "
17103 . On 8/26/97, subsequent to the release of its 2ndQ F97
18results, PETCO held a conference call for securities analysts,
19money and portfolio managers, institutional investors, large PETCO
20
shareholders, brokers and stock traders to discuss PETCO's business
21
and prospects . During the call, Devine, St . Peter, Asselin, Myers22
and Bruce Hall made presentations and answered questions . During23
the call - and in follow-up conversations with participants24
(analysts Healey, Giblen, Hanratty and Bogucki on 8/27/97) -- they
25directly disseminated important information to the market by
26stating :
27• PETCO's aggressive growth-by-acquisition strategy
28 was succeeding . PETCO was achieving theoperational efficiencies and operating economie s
- 56 - 98cv1521-L(POR)
1 expected from its recent acquisitions, includingPet Food Warehouse, PetsUSA, Pet Nosh, Pet Suppl y
2 Warehouse, and Super Pets was not encountering anysignificant difficulties in integrating those
3 acquisitions into its ongoing operations .
4 • PETCO's Superstore model was extremely effectiveand its Superstores were all either meeting or
5 exceeding the operational targets of PETCO' sSuperstore model . The Superstore model resulted in
6 strong ongoing profit growth with new Superstoresreaching profitability in approximately seven
7 months .
8 • PETCO expected significant ongoing profit margingrowth due to the effectiveness of its Superstore
9 model and the continuing strong sales growth of itsexisting stores .
10• PETCO expected to add 40-50 stores per year over
11 the next several years and would contribute to andresult in strong ongoing EPS growth .
12
• PETCO expected strong comparable-store sales growth13 to continue over the next 3-5 years with same-store
sales growth between about 10%-12% .14
• PETCO expected to achieve 30%+ EPS growth going15 forward over the next several years without any
acquisitions .16
• PETCO expected to achieve 40%+ EPS growth going17 forward for the next several years, including
acquisitions .18
• As a result of the foregoing, PETCO was forecasting19 F97 and F98 EPS from ongoing operations of $1 .10+
and $1 .43+ .20
104 . On 8/26/97, Cruttenden Roth issued a report on PETCO,
21
written by Healey, which was based on and repeated information22
provided her in the 8/26/97 conference call and in follow-up23
conversations with Devine and St . Peter . The report forecast F9724
and F98 EPS of $1 .11 and $1 .43, respectively, and a 30% three-year25
EPS growth rate for PETCO . The report also stated :26
We believe these results clearly demonstrate that27 Petco's store model and business strategy works and that
any problems (other than the weak flea and tick business )28 being experienced by PetsMart are internal to that
company and are not an indication of any industry-wid e
- 57 - 98cv1521-L(POR)
1 problems . _ . . We believe both Petco's and the industry'sfundamentals are very attractive and that Petco can gro w
2 its EPS at a 30%+ annual rate over the next few yearsbefore acquisitions .
3
4
Operating margins should continue to improve . . . .5 Gross margin improvement should come from the better
margins rolling through the stores acquired last year,6 especially the Pet Food Warehouse stores ; . . . in Q4/199 7
we are projecting net income and EPS increases of 56% and7 53 .6%, respectively . For the year, we are projecting a
58 .4% increase in net income to $20 .9 million and a 50 .4 %8 increase in EPS to $1 .11 ; for 1998, we are projecting a
30 .8% increase in net income and a 28 .6% increase in EPS9 to $1 .43 .
10 105 . On or about 9/13/97, PETCO filed its report on Form 10-Q
11 for the quarter ended 8/2/97, signed by defendant Myers . This
12 report contained the same false financial information as was
13 contained in the 8/26/97 press release . The Form 10--Q stated : "In
14 the opinion of management of Petco Animal Supplies, Inc . . . . the
15 unaudited consolidated financial statements contain all adjustments
16 consisting of normal recurring adjustments, necessary to present
17 the financial position, results of operations and cash flow as of
18 August 2, 1997 . "
19 106 . On 8/27/97, Needham issued a report on PETCO, written by
20 Bogucki, which was based on and repeated information provided him
21 in the 8/26/97 conference call and in follow-up conversations with
22 Devine or St . Peter . The report forecast F97 and F98 EPS of $1 .12
23 and $1 .48, respectively, for PETCO . The report also stated : "New
24 stores continue to perform above the model . "
25 107 . The above statements were false and misleading because as
26 described herein defendants improperly inflated merger and
27 acquisition charges and manipulated the revenues of acquired
28 companies including SuperPets, front-loaded advertising credit s
- 58 - 98cv1521-D(POR)
1 before they were earned, and compared Superstores with regular
2 smaller stores in order to conceal the deterioration in PETCO's
3 business .
4 108 . On 10/1/97, PETCO completed the acquisition of Paws, The
5 PetCare Company and Pet Food SaveMart . On 10/1/97, PETCO also
6 announced its largest acquisition ever - PetCare, Inc . for 1 .7
7 million shares of PETCO stock .
8 109 . Subsequent to the announcement on 10/1/97 of PETCO's
9 acquisition of PetCare, PETCO spoke to securities analysts, money
10 and portfolio managers, institutional investors, large PETCO
11 shareholders and brokers to discuss the acquisition and its impact
12 on PETCO . During these conversations Devine and St . Peter directly
13 disseminated important information to the market by stating :
14 • PETCO's aggressive growth-by-acquisition strategywas succeeding . PETCO was achieving the
15 operational efficiencies and operating economie sexpected from its recent acquisitions, including
16 PetsUSA, Pet Supply Warehouse, The PetCare Company,
Super Pets, Paws, Pet Food SaveMart, Pet Nosh, Pe t
17 Food Warehouse, PetCare, Inc . and PETCO was notencountering any significant difficulties in
18 integrating those acquisitions into its ongoingoperations .
19• Based on the similarity of the Companies' product
20 offerings, as well as the fact that there was nogeographic overlap of operations, PETCO anticipated
21 a smooth integration of PetCare into PETCO's
system-
22
• PETCO's Superstore model was extremely effective23 and its Superstores were all either meeting or
exceeding the operational targets of PETCO' s24 Superstore model . The Superstore model resulted in
strong ongoing profit growth with new Superstores25 reaching profitability in approximately seven
months .26
• PETCO expected significant ongoing profit margin27 growth due to the effectiveness of its Superstore
model and the continuing strong sales growth of its28 existing stores .
- 59 - 98cv1521-L(POR)
1 • PETCO expected to add 40-50 stores per year overthe next several years and would contribute to and
2 result in strong ongoing EPS growth .
3 • PETCO expected strong comparable-store sales growthto continue over the next 3-5 years with same-store
4 sales growth between 10%-12% .
5 • PETCO expected to achieve 30%+ EPS growth goingforward over the next several years without any
6 acquisitions .
7 • PETCO expected to achieve 40%+ EPS growth goingforward for the next several years, including
8 acquisitions .
9 • As a result of the PetCare acquisition, PETCO's 97operating EPS would be slightly ($ .08-$ .10) lower
10 than earlier forecast, due to short-term EP Sdilution . PETCO was now forecasting 97 EPS from
11 ongoing operations of about $1 .00 .
12 • PETCO was still forecasting 98 EPS of $3 .43+ .
13 110 . On 10/1/97, Morgan Stanley issued a report on PETCO,
14 written by Pearson, which was based on and repeated information
15 provided him in conversations with Devine or St . Peter on 10/1/97 .
16 The report forecast F97 and F98 EPS of $1 .12 and $1 .46,
17 respectively, a 25% five-year EPS growth rate for PETCO .
18 111 . On 11/3/97, PETCO completed the PetCare acquisition . On
19 11/3/97, subsequent to the announcement of PETCO's acquisition of
20 PetCare, PETCO spoke to securities analysts, money and portfolio
21 managers, institutional investors, large PETCO shareholders and
22 brokers to discuss the acquisition and its impact on PETCO . During
23 these conversations Devine and St . Peter directly disseminated the
24 same information discussed in the 10/1/97 conference call .
25 112 . The above statements were false and misleading because,
26 as described herein, the only reason that PetCare Paws and Pet Food
27 SaveMart were acquired was because defendants knew that they would
28 have to close acquisitions in the quarter of a certain dolla r
- 60 - 98cv1521-L(POR)
1 amount in order to be able to manipulate PETCO's financial results
2 to meet the revenue and earnings expectations which they had led
3 the market to expect . This enabled defendants to hide the
4 deterioration in PETCO's business and create the appearance of
5 increasing operating profitability and strong revenue growth .
6 113 . On 12/4/97, PETCO reported its 3rdQ F97 results . PETCO's
7 press release represented that comparable store sales rose 10 .2%
8 during the 3rdQ . Net earnings for the quarter, excluding charges,
9 purportedly increased 45% from the prior year to $ .22 per share .
10 In the quarter, PETCO recorded charges of $33 .5 million, consisting
11 of merger and integration costs of $22 .5 million and $11 million of
12 related costs reflected in selling, general and administrative
13 expenses . Including these charges, PETCO recorded a net loss of
14 $17 million or $ .81 per share for the quarter . The release quoted
15 defendant Devine as stating :
16 "We are very pleased with our record sales and overallperformance . . . . Mr . Devine further stated, "Our
17 acquisitions this quarter have strengthened our positionas the leading consolidator of retail pet food and
18 supplies . "
19 114 . In fact, PETCO's 3rdQ F97 results included the results of
20 PetCare and defendants had offered PetCare's former owners
21 additional shares so as to close the deal in time to include
22 PetCare's results in the 3rdQ F97 results .
23 115 . On 12/4/97, subsequent to the release of its 3rdQ F97
24 results, PETCO held a conference call for securities analysts,
25 money and portfolio managers, institutional investors, large PETCO
26 shareholders, brokers and stock traders to discuss PETCO's business
27 and its prospects . During the call, Devine, Asselin, Myers, St .
28 Peter, Hall and Woodard made presentations and answered questions .
- 61 - 98cv1521-L(POR)
1 During the call - and in follow-up conversations with participants ,
2 including analysts Bogucki and Hanratty, they directly disseminated
3 important to the market by stating :
4 • PETCO's aggressive growth-by-acquisition strategywas succeeding . PETCO was achieving the
5 operational efficiencies and operating economie sexpected from its recent acquisitions, includin g
6 PetsUSA, Pet Supply Warehouse, The PetCare Company ,Super Pets, Paws, Pet Food Savemart, Pet Foo d
7 Warehouse, Pet Nosh and PetCare, Inc . and was no tencountering any significant difficulties in
8 integrating those acquisitions into its ongoingoperations .
9• PETCO's Superstore model was extremely effectiv e
10 and its Superstores were all either meeting o rexceeding the operational targets of PETCO' s
11 Superstore model . The Superstore model resulted i nstrong ongoing profit growth with new Superstore s
12 reaching profitability in approximately seve nmonths .
13• PETCO expected significant ongoing profit margi n
14 growth due to the effectiveness of its Superstoremodel and the continuing strong sales growth of it s
15 existing stores .
16 • PETCO expected strong comparable-store sales growthto continue over the next 3-5 years with same-stor e
17 sales growth between 10%-12% .
18 • PETCO expected to achieve 30%+ EPS growth goingforward over the next several years without any
19 acquisitions .
20 • PETCO expected to achieve 40%+ EPS growth goingforward for the next several years , including
21 acquisitions .
22 • PETCO was going to slow its acquisition growth plan"somewhat" in the 1stH of F98, but still expecte d
23 to gain 40-50 stores per year over the next severa lyears which would contribute to and result in
24 strong ongoing EPS growth .
25 • PETCO was still forecasting F98 EPS of $1 .43+ .
26 116 . The above statements were false and misleading because ,
27 as is described herein, comparable same store sales were not strong
28 and defendants knew that the 3rdQ results were false because, among
-- 62 - 98cvl521-L(POR)
1 other things, they caused PETCO to improperly misclassify normal
2 operating expenses as one-time merger charges and manipulated the
3 revenues of PetCare, Paws and Pet Food SaveMart to make PETCO's
4 revenues appear more robust to create the appearance of increasing
5 revenue and EPS growth and conceal PETCO's true financial
6 condition .
7 117 . PETCO's stock plunged after it announced its 3rdQ F97
8 results, falling from $30-1/4 on 12/3/97 to $23-5/8 on 12/4/97 and
9 to $19-1/2 on 12/19/97 . PETCO immediately claimed that a fe w
10 analysts were confused and had misunderstood the impact of the
11 PetCare acquisition on PETCO's F97 EPS, that the operating EPS
12 PETCO reported was in line with the forecasts it had given to key
13 analysts, that its fundamentals were intact and that it was not
14 suffering from the problems impacting PETsMART's business . Even
15 though its acquisitions and new store openings would slow
16 "somewhat," it still expected 20%-30% EPS growth going forward andl
17 F98 EPS of $1 .40+ .
18 118 . On 12/4/97, the Dow Jones Online News ran an item on
19 PETCO stating :
20 Shares of PETCO Animal Supplies Inc . slid Thursdayafter the company reported operating earnings for its
21 third quarter that seemingly missed Wall Street estimate sby a wide margin . However , company officials said the
22 share slump was unwarranted because the company'searnings were in line with recent revisions of those
23 estimates .
24
25 Commenting on the share-price decline, executives atPETCO said investors are likely reacting to a misleading
26 comparison between the company's actual and expectedearnings - the mean estimate of analysts surveyed by
27 First Call of 29 cents a share didn't account for theeffects of the PetCare acquisition-
28* * *
- 63 - 98cv1521-L(POR)
1 Those not in the know were caught by surprise bywhat appeared to be poor earnings , according to PETCO
2 Chairman Brian Devine, which resulted in the shares'plunge .
3"People don ' t understand we would have done 29 cents
4 (a share ) without the acquisitions ," said James Myers,
PETCO's senior vice president of finance . . . . "Thos e5 familiar with the story knew this is exactly what was
expected ," Myers said .6
119 . On 12/5/97, an article about PETCO appeared in the San7
Diego Union-Tribune :
8
The stock of San Diego's PETCO Animal supplies9 plunged to $23 .75 from $30 on Wednesday on very heavy
(1 .66 million shares) volume, as investors expressed10 disappointment with third quarter earnings announced
after the market closed Wednesday .11
12
Wall Street focuses on earnings excluding such13 expansion-related charges . For the quarter, they came in
at 22 cents a share . First Call, an operation tha t14 publishes analysts' consensus earnings expectations, had
said that analysts expected 29 cents .15
Whammoi Some investors had one thought : dog . The16 stock was pummeled at the opening, and continued
dropping, even though management explained that the 2 917 cents expectation did not take into account PETCO's
acquisition during the quarter of PetCare Plus for $1 .7
18 million in common shares . . . "We would have done 2 9
cents without the acquisitions," says James Myers, senior19 vice president of finance .
20
21 Devine . . . is comfortable with analysts' estimates thatPETCO can earn $1 .41 to $1 .46 a share next year . . . .
22Unless some spectacular bargains come around, the
23 company intends to take a three- or four-quarter pause inits acquisition spree as it digests the big bites it ha s
24 recently taken . "There are only two large acquisitionsout there we would likely make in the next several
25 years," says Devine . Store openings will also slowsomewhat .
26* * *
27"Longer term, we think PETCO can grow at a 30
28 percent rate-plus for several more years," says Boguck i
- 64 - 98cv1521-L(POR)
1 120 . On 12/5/97, Needham issued a report on PETCO, written by
2 Bogucki, which was based on and repeated information from the
3 12/4/97 conference call and follow-up conversations with Devine or
4 St . Peter . The report forecast F98 EPS of $1 .48 for PETCO, 30% EPS
5 growth going forward and stated :
6 We believe yesterday's 20% drop in PETCO's stockprice is unwarranted and view the current valuation as a
7 buying opportunity . We think investors overreacted totwo inter-related issues : near term earnings dilution
8 and the influence of PETsMART's disappointing trackrecord . Below we address investor issues and our
9 investment opinion .
10 Investor Issue s
11 Near term dilution : Because the 3Q acquisitionswere at the end of the quarter, PETCO was unable to give
12 definitive quantitative guidance regarding the impact o fthe acquisitions . However, management clearly stated
13 that there would be historical dilution as well as thepotential for dilution to 2H97 . We expect the impact t o
14 be neutral to F1999 and accretive to F2000 . We think thebenefits of the acquisitions including obtaining dominant
15 market share in several key new markets (when its larges tcompetitor is slowing expansion) outweigh near term
16 dilution .
17 PETM's disappointing performance : PETM's rockytrack record is having a negative impact on PETCO's
18 growth strategy. We believe investors need todifferentiate PETM's strategy from PETCO' s . We believe
19 PETCO's core business is fundamentally intact . in
addition , PETCO has a successful track record integrating
20 acquisitions .
21 Investment O inion
22 PETCOIs core business is intact . . . . New stores
continue to perform at or above the model . PETCO has
23 continually been able to expand margins through gros s
margin improvement and leverage of the expense ratio .
2 4
25
We think PETCO has successfully integrated its acquired26 companies by improving profitability through increased
sales and gross margins and lower expenses . Pet Food27 Warehouse is a good example . PFWA is currently achieving
double-digit sales gains . PETCO previously cut expenses28 and the region's gross margins have improved by over 40 0
basis points with more improvement to come . PETCO plan s
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to convert PetCare in a similar manner which should beaccretive to earnings within a year .
We believe PETCO can grow 30% longer term .
121 . On 12/12/97, Morgan Stanley issued a report on PETCO,
written by Ohmes, after he had discussions with Devine and St .
Peter and was based on and repeated information provided him by
them . The report forecast F98 EPS of $1 .41 and a 20% five-year EPS
growth rate for PETCO . The report also stated :
PETC' s core fundamentals remain on track .
The fundamentals of PETC's core business remainedstrong in 3Q97 . . . . Comparable-store sales rose 10 .2%despite continued weakness in the flea and tick category. . . . PETC continues to have success . . . with grossmargins benefitting from the near-completion of theintegration of several of PETC's previous acquisitions,including Pet Supply Warehouse and Super Pets .
Dilution should be modest in 1998 . For 1998, givenhigher interest expense associated with the acquisitionand our expectation for further modest operating dilutionfrom PetCare Superstores, we have reduced our estimate$0 .05, to $1 .41, still a powerful forecast 62% reboundfrom our pro forma 1997 EPS estimate .
122 . The above positive statements that were made to and s
repeated by analysts were false and misleading because as described
herein defendants knew that without the acquisitions made in th e
3rdQ, including PetCare, that PETCO would have only been able to
report an EPS of $ .05 instead of the $ .29 projected . Even with the
defendants' manipulation of the acquisitions, PETCO was only abl e
to report $ .22 EPS . Defendants knew but failed to disclose that
PETCO's inability to meet the $ .29 EPS projected was not the result
of the fact that the PetCare acquisition was $ .07 dilutive but
instead was indicative of the problems with PETCO's core business .
- 66 - 98cv1521-L(POR)
1 123 . On or about 12/16/97, PETCO filed its report on Form 10-Q
2 for the quarter for its 3rdQ ended 11/1/97, which was signed by
3 defendant Myers . This report contained the same false financial
4 information as had been reported in PETCO's 12/4/97 press release .
5 The Form 10-Q stated : "In the opinion of management of Petco Animal
6 Supplies, Inc . . . . the unaudited consolidated financial statements
7 contain all adjustments consisting of normal recurring adjustments,
8 necessary to present the financial position, results of operations
9 and cash flow as of November 1, 1997 ." These statements were fals e
10 and misleading because as described herein comparable same store
11 sales were not strong and defendants knew that the 3rdQ results
12 were false because they caused PETCO to improperly misclassify
13 normal operating expenses as one-time merger charges and
14 manipulated the revenues of PetCare, Paws and Pet Food SaveMart to
15 make PETCO's revenues appear more robust to create the appearance
16 of increasing revenue and EPS growth and conceal PETCO's true
17 financial condition .
18 124 . On 12/29/97, PaineWebber issued a report on PETCO,
19 written by Hanratty after he had extensive discussions with Devine
20 and St . Peter, which was based on and repeated information provided
21 him by them. The report forecast F97 and F98 EPS of $ .88 and
22 $1 .43, respectively, a 30% EPS growth rate . The report also
23 stated :
24 1 . . . . We continue to feel comfortable with our EPS
growth rate estimate of 30% for PETC for both 1998 and
25 1999 . Drivers of growth in 1998-2000 ; 8-10% comp sales ;
8-10% square footage growth ; 50 basis points operating26 margin improvement per year .
27 125 . In 1/98, PETCO executives Devine and St . Peter appeared
28 at the Smith Barney Growth Stocks Conference and made a
- 67 - 98cv152l-L(POR)
1 presentation to the assembled analysts and money and portfolio
2 managers . During their presentation and in a later break-out
3 session, they told participants that PETCO was comfortable with and
4 endorsed F98 EPS forecasts of $1 .40+ for PETCO, that the
5 competitive environment was improving, PETCO's business
6 fundamentally remained strong, its Superstore model was working
7 well and even with PETCO's somewhat slowed growth program it would
8 still achieve 30% growth going forward . As a result of defendants'
9 positive statements, reassurances and forecasts during 12/97-1/98,
10 PETCO stock rebounded to as high as $26-1/4 on 1/20/98 .
11 126 . The above statements that were made to and repeated to
12 analysts were false and misleading because as described herein
13 defendants knew but failed to disclose that 3rdQ F97 results were
14 false and that defendants' initial forecast of EPS for F98 was
15 $1 .00 instead of the $1 .40+ being projected ,
16 127 . On Thursday, 2/19/98, PETCO's stock traded at $22-3/8 .
17 On Friday, 2/20/98, PETCO stock fell to $19-7/8, as rumors
18 circulated that PETCO would report disappointing 4thQ F97 EPS on
19 Monday, 2/23/98_ On 2/23/98, PETCO announced its results for the
20 4thQ, ended 1/31/98 . Comparable store sales rose 10 .2% during the
21 quarter . The Company did not release earnings figures for the
22 quarter . PETCO also revealed in this release that its growth rate
23 in F98 would be much lower than earlier forecast and its F98 EPS
24 would be no more than $1 .13-$1 .15, much lower than its previously
25 forecasted $1 .40+ per share . PETCO revealed its growth-by-
26 acquisition program was failing and it would sharply curtail its
27 growth, opening only four new stores in the 1stH of 98, and that it
28 would make no further acquisitions for at least the next si x
- 68 - 98cv1521-L(POR)
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months . PETCO's stock fell to $16-3/4 on 2/23/98, on volume of 2 .4
million shares volume and to $13-1/8 on 2/24/98, on 6 .9 million
shares volume . These statements were false and misleading becaus e
as described herein defendants knew that the highest that PETCO
could forecast for F98 EPS was $1 .05, but Devine insisted on
reporting $1 .15 to continue to support PETCO's image as a 30%
growth company and that same-store sales were not growing double-
digits because PETCO was comparing Superstores to smaller regular
stores .
128 . On 3/20/98, PETCO announced sales and earnings for the
4thQ ended 1/31/98 . Net earnings for the 4thQ, excluding merger
and integration costs, purportedly increased 51% from the prior
year to $9 .2 million or $ .44 per share . PETCO recorded merger and
integration costs of $6 .8 million in the quarter . For F97, merger
and integration charges of $38 .7 million were recorded, and an
additional $11 million of related costs were recorded in selling
general and administrative expenses during the 3rdQ .
129 . On or about 5/1/98, PETCO issued its report on Form 10-K
for its F97, which was signed by, among others, defendants Devine,
St . Peter and Myers . The report on Form 10-K contained the same
financial information for the 4thQ as had been contained in the
3/20/98 press release .
130 . These statements were false and misleading because ,
earnings were not strong and defendants failed to reveal tha t
PETCO's quarterly and year-end results were achieved only by using
acquisitions to manipulate PETCO's financial results as describe d
herein .
- 69 - 98cv1521-L (POR)
1 131 . On 5/28/98, PETCO announced its 1stQ F98 results (ended
2 5/2/98) . PETCO announced that comparable store sales rose only 5 .7%
3 during the 1stQ . Net earnings for the quarter, excluding merger
4 and integration costs, more than doubled over the prior year to $3
5 million or $ .14 per share . Merger and integration costs of $6 .4
6 million were recorded in the lstQ . Including these costs, PETCO
7 incurred a net loss for the quarter of $1 .1 million or $ .05 per
8 share .
9 132 . At the PaineWebber Growth & Technology Conference on
10 6/2/98, Devine represented that PETCO's same-store sales were
11 expected to rise between 8% and 10% in its 2ndQ F98 . Devine blamed
12 the poor comparable store sales figures for the 1stQ on poor
13 weather in February . Devine also represented that PETCO should be
14 able to return to its goal of 20% of top line growth and 25% bottom
15 line growth in fiscal year 2000 if it did not make any large
16 acquisitions .
17 133 . On or about 6/12/98, PETCO filed its report on Form 10-Q
18 for its 1stQ ended 5/2/98, which was signed by Myers . This report
19 contained the same financial information as had been reported in
20 PETCO's 5/28/98 press release . The Form 10-Q stated : "In the
21 opinion of management of Petco Animal Supplies, Inc . . . . the
22 unaudited consolidated financial statements contain all adjustments
23 consisting of normal recurring adjustments, necessary to present
24 the financial position, results of operations and cash flow as of
25 May 2, 1998 . 1 "
26 134 . The above statements were false and misleading because
27 defendant knew but failed to disclose that they would not be able
28 to continue to manipulate PETCO's same-store comparisons as the y
- 70 - 98cv1521-L(POR)
1 had in the past and PETCO's quarterly financial results were
2 manipulated as described herein .
3 135 . On 7/10/98, PETCO revealed that it expected to report net
4 sales of approximately $195 million and comparable store sales
5 growth of only 5% for the 2ndQ ended 8/1/98 . The press release
6 revealed that the Company also expected to take a one-time charge
7 of approximately $3 million in connection with the write-off of
8 certain assets, in addition to a previously announced $5 million
9 after-tax charge for merger and integration charges .
10 136_ PETCO's actual F98 results proved to be far worse than
11 PETCO had indicated, and PETCO's F98 EPS forecast was cut to $ .70-
12 $ .75 -- a large decline from F97 EPS of $ .87, and much worse than
13 $1 .40+ forecast during the Class Period . Devine admitted that
14 competitors' sales were growing faster than PETCO's, that PETCO's
15 recent acquisitions were underperforming, that PETCO's same-store
16 sales growth was far below 10%, while Myers said : "We had some
17 negative impact due to competitive things ." PETCO's stock fell to
18 just $11 per share by 7/98 .
19 137 . Analysts were furious as a result of these revelations .
20 They said these announcements " came as a surprise " ; "[c]onsidering
21 the fact that . . . the stock price has gone from the low $30s to
22 $11, 2 definitely think that the acquisition [program ] has not
23 worked " ; "[c]omparable store sales gains . . . are now slowing to 5
24 percent . . . [and] the [pet supply] market looks like it is slowing
25 down , there are problems with the newly acquired stores ; this is
26 pretty much a recipe for disaster " ; "(t]he turnaround isn't
27 happening , and this latest news leads me to believe that management
28 has been over optimistic . . . ( f]rom now on, I'm going to take thei r
- 71 - 98cv1521-L(POR)
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comments with a grain of salt " ; "[p]ricing and promotion in the
industry is definitely a problem ." By 9/7/98, PETCO's stock price
hit $5-3/8 .
STATUTORY SAFE HARBOR
138 . The statutory safe harbor provided for forward-looking
statements ("FLS") does not apply to the false FLS pleaded . The
safe harbor does not apply to PETCO's false financial statements .
None of the FLS were identified as a "forward-looking statements"
when made, it was not stated that actual results "could diffe r
materially from those projected," nor did meaningful cautionary
statements identifying important factors that could cause actual
results to differ materially from those in the FLS accompany any
FLS . None of the particular oral FLS in PETCO's 1/30/97, 2/25/97 ,
2/26/97, 3/27/97, 5/29/97, 6/3/97, 8/26/97, 10/1/97, 11/3/97,
12/4/97 and 1/98 conference calls were so identified as required .
The defendants are liable for the false FLS pleaded because, at th e
time each FLS was made, the speaker knew the FLS was false and the
FLS was authorized and/or approved by an executive officer of PETCO
who knew that the FLS was false . None of the historic or presen t
tense statements made by defendants were assumptions underlying or I
relating to any plan, projection or statement of future economi c
performance, as they were not stated to be such assumptions
underlying or relating to any projection or statement of future
economic performance when made nor were any of the projections or
forecasts made by defendants expressly related to or stated to b e
dependent on those historic or present tense statements when made .
- 72 - 98cv1521-L (POR)
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CLASS ACTION ALLEGATIONS
139 . This is a class action on behalf of those persons who
purchased or acquired PETCO stock during the Class Period (1/30/97
to 7/10/98) and who suffered damage thereby, excluding defendants,
the members of the immediate families of the defendants, and
entities affiliated of the defendants (the "Class") . Class members
are so numerous that joinder of them is impracticable .
140 . Common questions of law and fact predominate and include
whether defendants : (i) violated the 1934 Act ; (ii) omitted and/or
misrepresented material facts ; (iii) knew or recklessly disregarded
that their statements were false ; (iv) artificially inflated
PETCO's stock price ; and (v) the extent of and appropriate measure
of damages .
141 . Plaintiffs' claims are typical of those of the Class .
Prosecution of individual actions would create a risk of
inconsistent adjudications . Plaintiffs will adequately protect the
interests of the Class . A class action is superior to other
available methods for the fair and efficient adjudication of this
controversy .
CLAIM FOR RELIEF
142 . Defendants violated §§10(b) and 20(a) of the 1934 Act and
Rule l 0b-5 by :
(a) Employing devices, schemes and artifices to defraud ;
(b) Making untrue statements of material facts and
omitting to state material facts necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading ; and
- 73 - 98cvl521-L(POR)
1 (c) Engaging in acts, practices and a course of business
2 that operated as a fraud or deceit upon the Class in connection
3 with their purchases of PETCO stock .
4 143 . Class members were damaged . In reliance on the integrity
5 of the market, they paid artificially inflated prices for PETCO
6 stock .
7 PRAYER FOR RELIEF
8 WHEREFORE, plaintiffs pray for judgment as follows : declaring
9 this action to be a proper class action ; awarding damages including
10 interest ; and such other relief as the Court may deem proper .
11 JURY DEMAND
12 Plaintiffs demand a trial by jury .
13 DATED this 14th day of January, 2000 .
14 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
15 WILLIAM S. LERACH
BLAKE M . HARPER16 JEFFREY D. LIGHT
MARISA JANINE17
18
19 KE M. PER
20 600 West Broadway, Suite 1800San Diego, CA 9210 1
21 Telephone: 619/231-1058
22 SCHIFFRIN & BARROWAY, LLP
RICHARD S . SCHIFFRIN
23 ANDREW L. BARROWAYDAVID KESSLER
24 Three Bala Plaza EastSuite 40 0
25 Bala Cynwyd, PA 19004
Telephone : 610/667-7706
26Co-Lead Counsel for Plaintiffs
2 7
2 8 N :\CASES\PETCO\VXR80122 .CPr
- 74 -- 98cv1521-L(POR)
Movants' Purchases, Sales and Losses PETCO Animal Supplies, Inc .
Shares Share Tota lName Date Purchased ! Price LossAderson, Frank & Steiner Profit Sharing Plan 103/06/97 300 $27.00
300 $2,472.00
Althouse, Ron 01/06/97 217 $24 .38217 :::=($1,218.46)
Cisinsky, Jerry 10/02/97 100 $31 .00100 ($1,224 .00)
Comport, Thomas L . 02/07/97 300 $25.50 I300 ($2,022 .00)
Finch, Terry 01/23/98 385 1 $25.25385 ($2,498 .65)
Finkelstein, David 12/04/97 200 $25.88200 $1,423 .00
Forystek, Roger 06/06/97 42 $26.125 142 1 ($309.33)
IGaliej, Madeline 12/04/97 1 .299 $30.00
1,299 +-($14,600 .76)
Gerson, Margot Custodian 12/05/97 25 $25.3125 ($163.81 )
Gerson, Margot 12/05/97 100 1 $25 .56Gerson, Margot 12/05/97 170 $25.3 1
270 ($1,794.18)
Gibbs, Randy 10/30/97 115 .129 $30.750115,129 ($1,380,396 .71 )
Gold, Marilyn 12/05/97 200 $25.375200 ($1,323.00)
Gold, Paul 05/27/97 200 $24.500Gold, Paul 02/17/98 300 $23.125
500 ($209.50 )
PETC.wk4 1 10/16198 02:36 PM
APP13M
Movants' Purchases, Sales and Losse s
Kantor, Jerry
Karsen , MichaelKarsen , Michael
Lee, Brian
Le rner, Fern
Lynqard, Barry C .
PETCO Animal Supplies, In c
Shares Share Tota lDate Purchased Price Loss
07/14/97 137 $29.250137 $1,437.1 3
08/21/97 500 $29.17009/29/97 200 $32.060
700 L$7,865.00
08/25/97 250 $28 .88250 ($2,528.75)
06/09/97 200 $28 .44j 200 ($1,935.40)
10/28/97 81280 i $29 .94 a81280 ($908,466 .56 )
Marks, Suzanne 02/20/98 500 $20 .1 3j 500 $682.50
Mitchell IRA, Patricia 08/26/97 100 $28 .56Mitchell IRA, Patricia 12/05/97 100 $25 .56
200 ($1,660.25)
Moore, Carol 01/21/98 200 $25 .38200 $1,323.00
Sand, Morton 10/20/97 81 .280 $29 .0081,280 $832,307.20
Seward, Scott 09/15/97 340 $29 .50Seward, Scott 09/23/97 328 $30 .50Seward, Scott 10/01/97 323 $30 .75Seward, Scott 10/06/97 324 $30 .88Seward, Scott 10/16/97 331 $30 .25Seward, Scott 10/23/97 336 $29 .75Seward, Scott 10/27197 340 $29 .38Seward, Scott 11/07/97 330 $30.38Seward, Scott 11/07/97 142 $29.25Seward, Scott 11107/97 200 $29.2 5Seward, Scott 11/11/97 345 $29.1 3
PETC.wk4 2 10/16/98 02:36 PM
Movants' Purchases , Sales and Losses PETCO Animal Supplies, Inc .
Shares Share TotalName Date Purchased l Price LossSeward , Scott 11/12/97 351 $28.50Seward , Scott 11/19/97 232 $30.1 3Seward , Scott 1 1119197 100 $30.1 3Seward , Scott 11/24/97 330 $30.3 8
4352 ($49,689.11 )
Young, John 09/05/97 35 $29.62
Seward, IRA Scott 05/29/97 400 $25.50Seward, IRA Scott 06/02/97 370 $27 .00Seward, IRA Scott 06/27/97 175 $28 .50Seward, IRA Scott 08/04/97 360 $27.50Seward , IRA Scott 10/06/97 195 $30.88
1500 $9,655 .63)
Singleton, John { 10/20/97 81280 $29 .8881280 ($903,427.20 )
! I
Sykes, Wilbur 12/05/97 200 $25.50Sykes, Wilbur 12/09/97 200 $22.88Sykes, Wilbur 01/14/98 300 $22 .75Sykes, Wilbur 02/04/98 300 $23 .1 3Sykes, Wilbur 02/19/98 200 $21 .00
1,200 ($5,125.50)
The Naiad Press Pension Plan 06/18/97 200 $29.38200 ($2,123.00)
Vaughan Thompson, Ann J . 09/23/97 300 $30 .50300 ($3,522.00)
Voglis, Marietta 06/23/97 500 $28.500500 ($4,870.00)
35 ($380.10)
Zapf, Eric 01/06/98 250 $23.1 3250 ($1,091 .25)
Totals= 373.331 ($4 , 147,744 .96)
PETC.wk4 3 10/16/98 02:36 PM
1 DECLARATION OF SERVICE BY MAIL
2
3I, the undersigned , declare :
41 . That declarant is and was, at all times herein mentioned,
5a citizen of the United States and a resident of the County of San
6
Diego, over the age of 18 years, and not a party to or interested7
in the within action ; that declarant ' s business address is 600 West8
Broadway , Suite 1800 , San Diego , California 92101 .9
2 . That on January 14, 2000, declarant served the SECOND10
AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE SECURITIES
11
EXCHANGE ACT OF 1934 by depositing a true copy thereof in a United12
States mailbox at San Diego , California in a sealed envelope with13
postage thereon fully prepaid and addressed to the parties listed
14
on the attached Service List .15
3 . That there is a regular communication by mail between the16
place of mailing and the places so addressed .17
I declare under penalty of perjury that the foregoing is true18
and correct . Executed this 14th day of January, 2000, at San
19Diego, California .
2 0
21 t +~ANITA VILLANUEVA
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98cvl521-L (POR)
PETCOService List - 02/11/99Page 1
COUNSEL FOR PLAINTIFF(S )
Richard S. Schiffrin Ann D . WhiteAndrew L. Barroway LIEBENBERG & WHITESCHIFFRIN & BARROWAY, LLP The Pavilio nThree Bala Plaza East, Suite 400 261 Old York Road, Suite 810Bala Cynwyd, PA 19004 Jenkintown, PA 19046610/667-7706 215/481-0272610/667-7056 (fax) 215/481-0271 (fax )
Steven E . CauleyLAW OFFICES OF STEVEN E .
CAULEY, P .A .Suite 218, Cypress Plaza2200 N . Rodney Parham RoadLittle Rock, AR 7220 1
501/312-8500501/312 -8505 (fax)
Blake M . HarperJeffrey D . LightMarisa JanineMILBERG WEISS BERSHAD HYNES &
LER.ACH LLP600 West Broadway, Suite 1800San Diego, CA 92101-5050
619/231-105 8619/231-7423 (fax )
Robert I . HarwoodWECHSLER HARWOOD HALEBIAN &
FEFFER LLP488 Madison Avenue, 8th FloorNew York, NY 10022
212/935-740 0212/753-3630 (fax )
COUNSEL FOR DEFENDANT S
Peter H . BenzianLATHAM & WATKINS701 B Street, Suite 2000
San Diego, CA 92101619/236-1234
619/696-7419 (fax)
Howard D . FinkelsteinJeffrey R . KrinskFINKELSTEIN & KRINSK501 West Broadway, Suite 1250San Diego, CA 92101619/238-133 3619/238-5425 (fax )
* Denotes service by hand delivery .