r-- I P t: tO T ASS. - Stanford Universitysecurities.stanford.edu/filings-documents/1024/PKI02-01/2003113_r… · Case 1:02-cv-11314-GAO Document 18 Filed 01/13/03 Page 1 of 55 r--)

Case 1:02-cv-11314-GAO Document 18 Filed 01/13/03 Page 1 of 55

r-- )

•

UNITED STATES DISTRICT COURT I P t: tO FOR THE DISTRICT OF MASSACHUSETTS

J T cou- IN RE PERKINELMER, INC. )

U N ASS.

SECURITIES LITIGATION ) C.A. No. 02-11314-GAO

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Plaintiffs BMC Fund, Inc., the Youngman Family Group, and Steven P. Kadner

(collectively, "Plaintiffs"), by and through their undersigned attorneys, individually and on

behalf of the Class described below, bring this consolidated class action complaint (the

"Complaint") against the Defendants named herein, in connection with Plaintiffs' purchases of

common stock of PerkinElmer, Inc. ("PerkinElmer or the "Company"), and make the allegations

set forth below, on the basis of, inter alia, the investigation of Plaintiffs' counsel, which included

a review of the Company's Securities and Exchange Commission ("SEC") filings; press releases

and other public statements issued by the Company; securities industry analysts' reports and

advisories about the Company; and media reports and interviews of persons employed by

PerkinElmer during the Class period, as defined below. Plaintiffs have also referenced

authoritative accounting literature and consulted with forensic accounting experts. Plaintiffs

believe that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery. Plaintiffs allege as follows:

NATURE OF THE ACTION

1. Plaintiffs bring this class action for violations of the Securities Exchange Act of

1934, 15 U.S.C. § 78, et seq. (the "Exchange Act") against PerkinElmer and two of its senior 10

çJ\


4

executives, Gregory L. Summe ("Summe") and Robert F. Friel ("Friel" and together, the

"Individual Defendants"), on behalf of a proposed class of persons who purchased the common

stock of PerkinElmer on the open market during the period of July 15, 2001 through April 11,

2002, inclusive (the "Class Period") and who suffered damages, as a result (the "Class").

2. During the course of the Class Period, Defendants, knowingly or with reckless

disregard of the truth, engaged in a concerted scheme to inflate the Company's reported earnings

by, inter alia, improperly recognizing revenue on sales of certain products, where the amount of

future returns and the costs of honoring warranties could not be reasonably determined, in

violation of Generally Accepted Accounting Principles ("GAAP"). Even where recognition of

revenue on particular transactions was permissible, the Company violated GAAP by failing to

adequately reserve for returns on those products. These, as well as other GAAP violations

alleged below, rendered the Company's financial statements during the Class Period materially

false and misleading, and ultimately resulted in a $23.5 million inventory adjustment to write off

excess, obsolete, defective and otherwise unsaleable inventory.

3. Further, Defendants made false and misleading statements and concealed adverse

information during the Class Period as follows:

The seemingly positive earnings information announced for the second quarter of 2001 was not the result of aggressive cost-cutting measures, as represented, but was the result of the Company's improper revenue recognition methods and failure to reserve for product returns and warranty costs, in violation of GAAP.

• Defendants' announcement on August 1, 2001 that the Optoelectronics division was engaged in the "volume production" of "revolutionary" digital flat panel cardiac x-ray products (the "X-Ray Panels") for General Electric Medical Systems ("GE") created the impression that these were commercially available, workable and quality products, when, in reality, the products were defective and unreliable and returns of the product from GE and others were extremely high.

• Defendants did not disclose that the X-Ray Panels were sold to GE with an absolute right of return.

2


• The statements in the Company's Form 10-Q's during the Class Period stated that, for recognized sales revenue, the Company provided for "estimated cost of product warranties," when the Company neither set up a reserve for product returns or repairs nor took a charge for loss contingencies against income, despite knowing that a substantial number of the X-Ray Panels, at $100,000 each, were being returned to the Company by GE and others.

• The Company's third quarter 2001 results were overstated by a one-time sham "sale" of approximately $1 million.

4. Defendants were motivated to conceal and delay disclosure of the adverse facts

detailed herein in order to maintain and inflate the price of PerkinElmer common stock so that

the Company could use its common stock as currency to effect a major corporate acquisition. At

the beginning of the Class Period, PerkinElmer announced that it would acquire Packard

Bioscience Company ("Packard"), touted by management as an important strategic acquisition

for the Company, for $650 million in PerkinElmer shares. The acquisition required a majority of

the vote of Packard shareholders, who were to become PerkinElmer shareholders, giving

Defendants a strong incentive to conceal the Company's problems until the strategically

important merger was consummated and irreversible.

5. In addition, the Individual Defendants were further motivated to commit the fraud

alleged herein so that they could sell their PerkinElmer common stock at artificially inflated

prices. Indeed, the Individual Defendants, and other PerkinElmer insiders, sold a total of 595,000

shares of PerkinElmer common stock during the Class Period, reaping gross proceeds of

$18,440,732. Of this amount, Defendant Summe sold a total of 300,000 shares for gross

proceeds of $9,012,000 and Defendant Friel sold 150,000 shares for gross proceeds of

$4,965,000. As detailed below, these sales of Company stock were clearly motivated by the

Individuals Defendants' knowledge of the actual conditions at the Company, in contrast to the

falsely optimistic statements they were making to the marketplace with the intent of inflating the


Company's share price, and were unusual compared to prior sales patterns. These insider sales,

at artificially high prices, occurred immediately after Defendant Summe made optimistic

statements, on December 5, 2001, about the Company's prospects in 2002, and shortly after the

consummation of the Packard acquisition on November 13, 2001, but, not surprisingly, prior to

the Company's announcement, in March 2002, that significantly lower results were expected for

the Company in 2002.

JURISDICTION AND VENUE

6. Plaintiffs bring this action pursuant to the Exchange Act, as amended (15 U.S.C.

§§ 78j(b) and 78t(a)) and Rule lOb-5 promulgated thereunder (17 C.F.R. § 240.10b-5).

7. This Court has jurisdiction over the subject matter of this action pursuant to the

Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.

8. Venue is proper in this District pursuant to § 27 of the Exchange Act, 15 U.S.C. §

78aa, and 28 U.S.C. § 1391(b) because many of the acts and transactions giving rise to the

violations of law complained of herein, including the preparation and dissemination to the

investing public of false and misleading information, occurred in this District.

9. In connection with the acts, conduct and other wrongs complained of herein,

Defendants used the means and instrumentalities of interstate commerce.

PARTIES

10. Lead Plaintiffs BMC Fund, Inc., the Youngman Family Group and Steven P.

Kadner purchased PerkinElmer common stock at artificially inflated prices during the Class

Period, as set forth in their certifications previously filed with this Court in connection with their

motion for appointment as Lead Plaintiffs, and were damaged thereby. Plaintiffs' certifications

are incorporated herein by reference.


11. During the Class Period, Plaintiffs purchased shares of the Company's common

stock on the open market, without knowledge of the falsity of the Company's reported financial

results, as specified below, or that the price of the Company's common stock was artificially

inflated. During the Class Period, Plaintiffs directly or indirectly relied upon Defendants' public

reports, press releases, filings with the SEC and other public statements, as more fully described

below, and the fact that the Company's common stock was fairly priced and/or upon the integrity

of the market for its shares. As a result, Plaintiffs have been damaged by Defendants' wrongful

conduct as specified herein.

12. Defendant PerkinElmer is organized under the laws of Massachusetts and

maintains its principal executive offices at 45 William Street, Wellesley, Massachusetts 02481.

PerkinElmer is a diversified technology company, operating in four segments: Life Sciences,

Analytical Instruments, Optoelectronics, and Fluid Sciences. At all times relevant to this

Complaint, PerkinElmer was actively and openly traded on the New York Stock Exchange

("NYSE") under the symbol "PM", in a well-developed and efficient market, as that phrase is

construed under the federal securities law.

13. The Company's four business units engage in the following business:

(a) Life Sciences: The Life Sciences division operates in the life sciences and

healthcare markets. Approximately 80% of the division's sales are systems and solutions

for drug discovery and academic research with the remaining 20% of revenues generated

from sales of genetic disease screening products. The Company's push to become a high

technology company with a concentration in healthcare-related products was

accomplished, in large part, through acquisitions which were integrated into the Life

Sciences division, including its acquisition of New England Nuclear, which occurred in


t

2000, and Packard Biosciences Company ("Packard"), which occurred in November

2001. The Life Sciences segment accounted for approximately 35% of the Company's

2001 revenues.

(b) Analytical Instruments: The Analytical Instruments business unit sells

instruments used for industrial detection and measurement, environmental testing and

pharmaceutical quality control and assurance. The division, which was formed, in large

part, from PerkinElmer's May 1999 purchase of PE Corp.'s analytical instruments unit,

accounted for approximately 37% of the Company's 2001 revenues.

(c) Optoelectronics: The Optoelectronics business unit sells specialty lighting

and sensor systems for industrial applications, medical systems and telecommunications

equipment. The division accounted for approximately 27% of the Company's 2001

revenues. The Optoelectronics unit, in turn, has three business segments: (i) Telecom

and Optical Testing, which accounts for 21% of Optoelectronics' revenue; (ii) Specialty

Lighting, which accounts for 55% of Optoelectronics' revenue; and (iii) Digital Imaging,

which accounts for 24% of Optoelectronics' revenue. As set forth in detail below,

General Electric Co. ("GE") was the main customer of X-ray panels from

Optoelectronics' Digital Imaging segment.

(d) Fluid Sciences: Fluid Sciences primarily sells fluid containment

technologies to the aerospace, semiconductor, medical implant and power generation

industry. In October 2001, The Company decided to sell the Fluid Sciences unit because

it wanted to exit the aerospace industry and narrow its focus to the Life Sciences,

Analytical Instruments and Optoelectronics units. The sale never took place and Fluid

Sciences remains in operation.


4

14. Defendant Gregory L. Summe was PerkinElmer's Chief Executive Officer,

President and Chairman of the Board throughout the Class Period. Summe was named Chief

Executive Officer of the Company effective January 1, 1999 and Chairman effective April 27,

1999. He was appointed President and Chief Operating Officer of the Company and elected to

the Company's Board of Directors in February 1998.

15. Defendant Robert F. Friel was PerkinElmer's Chief Financial Officer and Senior

Vice President throughout the Class Period. Friel joined the Company in February 1999 as

Senior Vice President and Chief Financial Officer.

16. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false or misleading information conveyed in the Company's

public statements and press releases as alleged herein, is the collective action of this narrowly

defined group of Defendants. Each of the Individual Defendants, by virtue of his executive and

managerial positions with, and directorship of, the Company, directly participated in the daily

management of the Company, was directly involved in the day-to-day operations of the

Company at the highest level, and was privy to confidential proprietary information concerning

the Company and its business and operations. The Individual Defendants were involved or

participated in drafting, producing, reviewing and/or disseminating the false and misleading

statements alleged herein.

17. The statements made by the Individual Defendants, as outlined below, were

materially false and misleading when made. During the Class Period, each of the Individual

Defendants, as senior executive officers and directors of PerkinElmer, was privy to confidential

and proprietary information concerning PerkinElmer, its operations, finances, financial

condition, present and future business prospects. The Individual Defendants also had access to

7


'4

material adverse non-public information concerning PerkinElmer, as set forth in detail below.

Because of their positions with PerkinElmer, the Individual Defendants had access to non-public

information about its business, finances, products, markets and present and future business

prospects via access to internal corporate documents, conversations and connections with other

corporate officers and employees, attendance at management and Board of Directors meetings

and committees thereof and via reports and other information provided to them in connection

therewith. Because they possessed such information, the Individual Defendants knew or

recklessly disregarded the fact that adverse facts specified herein had not been disclosed to, and

were being concealed from, the investing public.

18. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press releases and

presentations to securities analysts and through them, to the investing public. The Individual

Defendants were provided with copies of the Company's reports and press releases alleged

herein to be misleading, prior to or shortly after their issuance and had the ability and

opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants had the opportunity to commit the fraudulent acts alleged herein.

19. Each of the Individual Defendants is liable as a direct participant in and a

co-conspirator with respect to the wrongs complained of herein. In addition, the Individual

Defendants, by reason of their status as senior executive officers and directors were each a

"controlling person" within the meaning of Section 20 of the Exchange Act and had the power

and influence to cause the Company to engage in the unlawful conduct complained of herein.

Because of their position of control, the Individual Defendants were able to and did, directly or

indirectly, control the conduct of PerkinElmer's business.

n.


PLAINTIFFS' CLASS ACTION ALLEGATIONS

20. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons who purchased the

securities of PerkinElmer during the Class Period (July 15, 2001 - April 11, 2002) and who were

damaged thereby. Excluded from the Class are Defendants, the officers and directors of the

Company, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest.

21. The members of the Class are so numerous that joinder of all members is

impracticable. As of March 25, 2002, PerkinElmer had approximately 125 million shares of

common stock outstanding, which were actively traded on the NYSE. While the exact number of

Class members is unknown to Plaintiff at this time and can only be ascertained through

appropriate discovery, Plaintiffs believe that there are thousands of persons in the proposed

Class. Record owners and other members of the Class may be identified from records maintained

by PerkinElmer or its transfer agent and may be notified of the pendency of this action by mail,

using the form of notice similar to that customarily used in securities class actions.

22. Plaintiffs' claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants' wrongful conduct in violation of

federal law that is complained of herein.

23. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class action and securities

litigation.


24. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants' acts as

alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business and operations of

PerkinElmer; and

(c) the extent to which the members of the Class have sustained damages and

the proper measure of damages.

25. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

CLASS PERIOD MISREPRESENTATIONS AND OMISSIONS

26. The Class Period commenced on July 15, 2001. On that date, PerkinElmer

announced over the Business Wire "Record Second Quarter 2001 Income; Earnings Reach

Consensus Expectations." According to this release, "net income from continuing operations of

$39 million [was] up 34% - over the second quarter of last year. Second quarter cash earnings

per share were $0.38, a 31% increase over the same period in 2000." Defendant Summe

10


I

explained that the "announced" positive results demonstrated the Company's ability to deliver in

a tough economic environment. In this regard, Summe stated, in part:

"Aggressive actions starting earlier in the year are allowing us to deliver our financial commitments in spite of this difficult economic environment," said Gregory L. Summe, Chairman and Chief Executive Officer.

27. With respect to the results in the Optoelectronics unit, the release stated, in

pertinent part:

Optoelectronics sales were $108 million for the quarter, down 6% organically. Double-digit growth in Telecom and Digital Imaging was offset by severe declines in sales to the Photography and Semiconductor markets. Operating margins grew 310 basis points as aggressive cost actions more than offset revenue softness.

28. Further touting the Company's results and emphasizing the importance of the

Packard acquisition, Mr. Summe stated:

"Our excellent financial results this quarter are a testament to our management and organization development processes and gives us confidence as we enter the next phase of the Company's transformation with our acquisition of Packard BioScience." (Emphasis added).

29. As indicated above, on July 15, 2001, PerkinElmer also announced that it had

entered into a definitive agreement to acquire Packard, a Connecticut-based company selling

drug discovery tools to the global market. The acquisition was important to the Company's

strategy of repositioning itself to operate primarily in the healthcare industry. Commenting on

the strategic importance and benefits of the acquisition, defendant Summe stated that Packard's

business would complement PerkinElmer's Life Sciences division and would allow the

Company to offer more to its drug delivery customers:

"Packard BioScience represents an excellent strategic fit as a leading supplier of automated liquid handling, sample preparation tools and advanced biochip technologies," said Gregory L. Summe, Chairman and CEO of PerkinElmer. "Liquids handling is a critical, enabling step in both proteomics and genomics workflow, and increases the productivity of our customers' drug discovery

11


processes. Packard BioScience's core capabilities in this area, its complementary range of products, its impressive new product development pipeline, and its well-respected team of field sales and service experts will enable us to provide more powerful solutions to our expanding base of life sciences customers."

* * * *

Including the assumption of debt, the purchase price announced in the release was $650 million. The acquisition was structured as an all-stock merger "with an exchange ratio of 0.311 share of PerkinElmer common stock for each share of Packard BioScience common stock."

30. Following the release of its second quarter financial results, the Company hosted

a conference call on July 16, 2001 for analysts, money and portfolio managers, large

PerkinElmer shareholders, brokers and stock traders, to discuss, inter alia, the prior day's

earnings report, the announcement of the Packard acquisition and to provide guidance for

analysts regarding PerkinElmer' s forecasts of earnings, revenue growth and gross margins. The

text of the conference call was reported on a Form 425 that was filed with the SEC on July 17,

2001.

31. The Report on Form 425 quoted Mr. Summe as having stated the following

during the conference:

In spite of difficult economic conditions, PerkinElmer delivered a very strong earnings growth in the second quarter. Specifically, our cash EPS was 38 cents a share, which beats the consensus street estimate and represent a 31-percent increase over the EPS for the second quarter of 2000. This marks our 15th consecutive quarter of delivering double-digit earnings growth and meeting or beating expectations.

Operating margins for the quarter are expanded by 300 basis points, to 16 percent, driven by the success products and a continued productivity and quality. All of our businesses expanded operating margins by 170 basis points or more. Revenue for the quarter grew six percent to $391 million. Strong sales in Life Sciences, which (added) organic growth to 12 percent, Digital Imaging, Aerospace and Analytical Instruments were partially offset by sharp declines in the semiconductor and the photography markets.

12


In summary, it was a quarter where the economic conditions held back some revenue productivity and quality and new products enabled us to meet our financial commitments. (Emphasis added).

32. Defendant Friel echoed and elaborated on Summe's comments, as follows:

Overall, we are very pleased with our results for the second quarter. In the midst of a very difficult business environment, we have once again exceeded our earnings commitment, making this the 15th consecutive quarter we have achieved double-digit earnings per share growth. Our ability to achieve these results is due to improving portfolio businesses, our relentless focus on improving our operations and an aggressive approach to quality control.

Operating margins in the quarter stand at 300 basis points as our gross margins expanded by 400 basis points, due to volume leverage in our Life Sciences and Instrument businesses and significant cost factors in our Optoelectronics and Fluid Sciences businesses. All the (SCUs) increased operating margins by at least 170 basis points.

Now turning to Optoelectronics, revenue was 108 million, with 20 percent-plus growth in telecom and digital imaging offset by softness in photography and semiconductor markets, yielding an overall organic decline of six percent.

Operating margins expanded 310 basis points as the revenue contractions occurred in our lower margin businesses and the impact of aggressive cost and productivity actions, which have been implemented during the previous three quarters, more than offset the revenue.

The Digital Imaging business continues to perform well, with revenues up over 20 percent in the quarter. We recently produced our 100th (raz) panel and shipped our first cardiac panel to (GE Med Systems) ...

*****

For guidance for the rest of the year, we believe organic revenue growth will look similar to Q2, but with higher growth in Life Sciences, slower growth in Telecom, but a recovery in Lighting. In addition, we anticipate Instruments to grow in the three to five-percent range for the remainder of the year.

Operating margins should continue to see good year-over-year improvement and we would expect to achieve our consensus EPS of $1.52, excluding the impact of the two strategic actions we announced today. (Emphasis added).

13


33. Following the July 16, 2001 earnings release and concomitant conference call,

securities industry analysts issued research reports regarding PerkinElmer' s results and they

repeated the statements made by PerkinElmer representatives during the conference call. The

reports commented favorably on the Company's second quarter results, the Company's seeming

ability to control costs during a downturn in the economy and on the Packard acquisition. For

example, on July 16, 2001, Merrill Lynch Capital Markets analyst P.K. Young issued a report on

PerkinElmer stating, in part, that PerkinElmer's cash EPS of $0.38 beat the consensus estimates

by $0.02, even in the face of slightly disappointing revenues "due to the pressures of the slower

economy." The report stated that, despite the economic downturn, "PerkinElmer did a very good

job of lowering costs as they boosted operating margins 300 bps to 16.1%." Regarding

PerkinElmer' s announced acquisition of Packard, the report stated the following:

We think that Packard Bioscience would be a good addition to the Life Sciences segment, which is expected to have sales of over $300 in 2001. We view the announced purchase of Packard Bioscience and the likely divestiture of the security and detection unit favorably as PerkinElmer continues to upgrade the portfolio to higher growth platforms.

34. The report concluded that "In our view, the shares offer good upside potential and

believe they are undervalued relative to its healthy prospects." Other analysts similarly rated

PerkinElmer stock as a "Strong Buy." At the time of the reports, PerkinElmer's common stock

was trading at $27.50 per share.

35. Defendants' press release and positive analyst coverage had the effect intended by

Defendants and the stock price of PerkinElmer common shares climbed steadily thereafter. By

July 27, 2001, the stock had climbed as high as $34.48 per share, up 23% from the close on

July 16, 2001 of $27.93 per share.

14


I

36. On August 1, 2001, the Company issued a press release announcing the

"milestone" "volume production" of X-Ray Panels for GE, declaring that the first deliveries

occurred during the second quarter of 2001. The press release stated in relevant part:

PerkinElmer Launches Volume Production of Digital Cardiac Flat Panel X-Ray Detectors for GE Medical Systems, First Deliveries in Q2 2001

PerkinElmer, Inc. (NYSE: PM) today announced another milestone in its alliance with General Electronic Medical Systems (GEMS) in the initial production deliveries of what is expected to be the industry's first fully digital cardiac detector. The new system has the potential to replace conventional cardiac x-ray systems, based on image intensifiers, with high-resolution, digital systems based on amorphous silicon, flat panel technology.

This revolutionary advance in the imaging of the human heart is the product of an ongoing cooperation between PerkinElmer and GEMS. "We are very excited to launch the cardiac detector," noted John J. Engel, President of PerkinElmer Optoelectronics. "This product is on the leading edge for image resolution and quality, and follows on our successful radiography product which went into production early this year. This is another product that will make a dramatic difference in people's lives."

PerkinElmer is the exclusive supplier of digital x-ray detectors to General Electric Medical Systems. The amorphous silicon cardiac detector is the engine behind the recently introduced GE Innova (TM) 2000 product, which has been called "a quantum leap forward in cardiac x-ray image quality." (Emphasis added).

37. On August 15, 2001, the Company filed its Form 10-Q for the quarter ended

July 1, 2001 (the "Second Quarter 2001 Form 10-Q"). Defendant Friel signed the document, in

his capacity as CFO, and reported financial results which were substantially identical to the

results reported in the July 15, 2001 press release.

38. The Form 10-Q also detailed the results of operations within the Optoelectronics

Unit:

Revenues for the second quarter were $108.0 million versus $120.9 million for the prior period, resulting in a decrease of 11%. For the first six months, revenues were $228.9 million versus $235.4 million for the prior period, resulting in a decrease of 3%. Higher revenues in telecom and digital imaging were offset by

15


lower revenues in the photography and semiconductor markets which accounted for the decreases in both the quarter and the six month periods.

Operating profit for the second quarter was $16.2 million compared to $22.5

million for the prior period, decreasing 28%, and for the first six months was $34.7 million compared to $42.6 million for the prior period, decreasing 19%. The decline in operating profit for both periods is due to lower revenues, the cost of moving production facilities to lower cost locations and the beneficial impact of nonrecurring credits recorded in the prior year.

Operating profit before net nonrecurring items and goodwill and intangibles amortization for the second quarter was $20.7 million versus $19.4 million for the prior period, increasing 7%, and for the first six months was $40.9 million versus $35.0 million for the prior period, increasing 17%. In the prior year, significant nonrecurring items for the second quarter included restructuring credits and for the six month period, certain nonrecurring pre-tax gains.

The July and August Misrepresentations

39. The earnings information announced in the July 15, 2001 release, and repeated in

the Second Quarter 2001 Form 10-Q, was materially false and misleading because the reported

income from continuing operations and the purportedly improved operating margins were not

derived through aggressive cost actions, as represented.

40. As set forth in detail below, the allegedly improved net income and operating

margins, instead, were materially overstated because the Company employed improper revenue

recognition methods and failed to appropriately provide for warranty costs, product returns,

write-offs of excess, obsolete, defective or otherwise non-saleable inventory as mandated by

GAAP and other applicable accounting pronouncements.

41. Moreover, Defendants' statement during the July 16, 2001 conference call that X-

Ray Panels were now commercially available and were being sold to GE, as well as the August

1, 2001 press release touting the GE contract, were materially misleading when made. These

statements created the impression that the manufacturing process for the X-Ray Panels had been

refined to produce workable, quality products, when, in reality, the X-Ray Panels were defective

and unreliable and were being returned in droves by GE and other customers. Moreover, the

16


p

Company's statements concerning sales of X-Ray Panels to GE were false and misleading

because the Company omitted the very material fact that GE had an absolute right to return the

products - a right, as detailed below, of which GE and other entities took copious advantage.

Information Provided By Former Employees

42. The Company's failure to comply with GAAP and its issuance of false financial

results is demonstrated by information provided to counsel by a number of the Company's

former employees who were employed by the Company during the Class Period and who

possessed material information concerning the issues that are central to Plaintiffs' claims.

43. In particular, a document control specialist who worked at PerkinElmer's Santa

Clara, California Optoelectronics facility (the "Santa Clara Facility") from May 2000 to

February 2002 ("CW-1")' stated that, during the Class Period, the Santa Clara Facility was

dedicated to manufacturing X-Ray Panels, primarily for GE.

44. CW-1 stated that the X-Ray Panels were expensive - about $100,000 each - and

took about six months to produce due to a 700 step process performed in completely "clean"

rooms. The Santa Clara Facility shipped X-Ray Panels to GE, one by one, upon completion and

billed for each X-Ray Panel upon shipment. Further, according to CW-1, when production

began, it became clear that the Santa Clara Facility was having problems with the production and

quality of the X-Ray Panels, but these problems were never sufficiently addressed or remedied.

45. Throughout the Class Period, GE regularly returned defective X-Ray Panels to the

Company. Specifically, by year end 2001, CW- 1 reported that GE had returned at least forty

defective panels, at approximately $100,000 per panel. Moreover, while GE was the Santa Clara

1 Former employees who provided details that are alleged in the Complaint are referred to herein as

"Cw- .,,

17


Facility's main customer, CW-2 reported that GE was not its only customer and other customers

also returned defective X-Ray Panels to PerkinElmer as well.

46. According to the North American sales manager for PerkinElmer, as detailed

below, who also worked in the Santa Clara Facility from 2000 to February 2002 ("CW-2"),

Defendant Summe personally negotiated and supervised the Company's contract to supply X-

Ray Panels to GE. Defendant Summe was, at one time, the general manager of commercial

motors at GE. He procured the contract for the X-Ray Panels based on his relationship with

members of GE's management.

47. CW-2 stated that Defendant Summe and PerkinElmer's top management were

well aware of the ongoing problems with the defective X-Ray Panels and the large number of

returns because the GE contract was treated as a "house [corporate headquarters] account"

personally handled by Defendant Summe. CW-2 knew this because, as North American Sales

Manager, CW-2 worked in Boston at the Company's headquarters, as well as at the Santa Clara

Facility.

48. Indeed, CW-2 reported that Defendant Summe's role was discussed by

management during senior staff meetings at the Santa Clara Facility. Accordingly, it was well

known by all members of senior management that Defendant Summe had a special interest in the

GE contract and that he was aware of the defective X-Ray Panels supplied to GE and others.

49. Given these serious production and quality control problems, according to CW-2,

PerkinElmer billed for "a lot of defective panels." CW-1 reported that as a result, GE

complained about problems with the X-Ray Panels it had received, notably deterioration in the

microlayers of glass and chemicals that made up the panels, and that these problems continued

unabated throughout the Class Period.

II


GAAP Violations

50. Given the problems experienced at the Company's Optoelectronics unit in

connection with the GE contract for X-Ray Panels - the production and quality control problems,

the defective products and the substantial number of returns - Defendants' statements in the July

15, 2001 press release concerning the seemingly positive results for the second quarter, that were

touted during the July 16, 2001 conference call and republished in the Company's Second

Quarter 2001 Form 10-Q, violated Statement No. 5 of the Financial Accounting Standards

Board, Accounting For Contingencies ("FASB Statement No. 5"), which states, in pertinent part:

FASB Statement No. 5 provides (in paragraph 8) that an estimated loss from a loss contingency shall be accrued by a charge to income if information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and the amount of loss can be reasonably estimated.

51. FASB Statement No. 5 further provides that such loss contingencies include:

"obligations related to product warranties and product defects." This GAAP states that:

A warranty is an obligation incurred in connection with the sale of goods or services that may require further performance by the seller after the sale has taken place. Because of the uncertainty surrounding claims that may be made under warranties, warranty obligations fall within the definition of a contingency. Losses from warranty obligations shall be accrued when conditions in paragraph 8 are met. Those conditions may be considered in relation to individual sales made with warranties or in relation to groups of similar types of sales made with warranties.

52. Accounting Principles Board Opinion No. 28, Interim Financial Reporting, states

(in paragraph 13) that:

Those costs and expenses that are associated directly with or allocated to the product sold or to the services rendered for annual reporting purposes (including.. . warranties) should be similarly treated for interim reporting purposes.

19


S

53. Accordingly, pursuant to GAAP, PerkinElmer at all relevant times was required

to accrue a reasonable estimate of the costs involved in honoring its warranty obligations to

customers at the time of the sale of X-Ray Panels to GE and other customers.

54. GAAP (Statement No. 48 of the Financial Accounting Standards Board, Revenue

Recognition When The Right Of Return Exists —"FASB Statement No. 48") provides that

revenue can be recognized at the time of sale if future returns can be reasonably estimated::

If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if. The amount of future returns can be reasonably estimated (paragraph 8). . . If

sales revenue is recognized. . . any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB Statement No. 5, Accounting for Contingencies. Sales revenue and cost of sales reported in the income statement shall be reduced to reflect estimated returns. (Emphasis added).

55. FASB statement No. 48 further provides that recognition of revenue must be

"postponed" until the return privilege has substantially expired where, at the time of sale, the

amount of future returns cannot be reasonably estimated.

56. Providing guidance with regard to the reasonableness of estimates of returns,

FASB Statement No. 48 notes that the "absence of historical experience" with a given product

"may impair the ability to make a reasonable estimate."

57. As stated by the Company in its August 1, 2001 press release, the X-Ray Panels

were a "revolutionary" new product, with the first shipment to GE occurring in the second

quarter of 2001. Accordingly, the Company had no historical experience regarding the level of

returns of the X-Ray Panels. The Company, however, did know of the X-Ray Panels' production

and quality control problems and that a substantial number of defective X-Ray Panels were being

returned during the Class Period. Thus, PerkinElmer, in contravention of GAAP, improperly

recognized revenue on sales of the X-Ray Panels to GE (and others) because, in all instances, the

20


amount of future returns could not have been reasonably estimated and Defendants knew that

returns were more than probable.

58. If the Company could not reasonably estimate the cost of returns at the time it

issued its financial statements but, as is the case here, knew that there would be substantial

returns of the defective X-Ray Panels, GAAP required the Company to provide for the returns by

establishing a reserve. The Company's financial statements, however, show that PerkinElmer did

not "reserve for returns" or otherwise comply with FASB statement No. 48. Alternatively, if the

Company could reasonably estimate the cost of the returns of the X-Ray Panels at the time it

issued its financial statements, the Company was required to take a charge against income for the

loss contingency, in accordance with FASB Statement No. 5.

59. In the Company's Form 10-K for the year ended December 31, 2000 (filed on

March 26, 200 1) (the "2000 Form 10-K"), signed by Defendants Summe and Friel, the Company

represented that it complied with GAAP, stating in pertinent part:

The majority of the Company's product sales are recorded at the time of shipment and when persuasive evidence of an arrangement exists, the seller's price to the buyer is fixed or determinable and collectibility is reasonably assured. Provision is made at the time the related revenue is recognized for the estimated cost of product warranties. (Emphasis added).

60. Each of the Company's Forms 10-Q which were filed with the SEC during the

Class Period (including the Second Quarter 2001 Form 10-Q) stated that the "statements should

be read in conjunction with the Company's Annual Report for the fiscal year ended December

31, 2000." Accordingly, the above representation from the 2000 Form 10-K was incorporated by

reference into each of the Company's Forms 10-Q that were filed with the SEC during the Class

Period.

21


61. At all relevant times, the foregoing representation was materially false and

misleading because the Company had no basis for stating in the 2000 Form 10-K, as

incorporated by reference into the Form 10-Q's during the Class Period, that it "estimated [the]

cost of product warranties." Instead, the 2000 Form 10-K, at Schedule II in a section entitled

"Valuation and Qualifying Accounts," clearly stated that the Company maintained "Reserves For

Doubtful Accounts," but did not maintain reserves for returns as required by GAAP and FASB

Statement No. 48. Nor did it take a charge against income for a reasonable estimate of returns

and/or warranty obligations in contravention of GAAP and FASB Statement No. 5, if the

Company could estimate such amounts. In either case, these intentional GAAP violations

rendered the Company's financial statements during the Class Period false and misleading, given

the number of returns experienced by the Company.

62. Accounting Principles Board Opinion No. 22, Disclosure Of Accounting Policies

("APB Opinion No. 22") provides authoritative mandates with respect to financial statement

disclosures. This authoritative literature states:

Disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the determination of financial position, changes in financial position, or results of operations. In general, the disclosure should encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods...

63. In contravention of APB Opinion No. 22, PerkinElmer failed to disclose the fact

that it recognized material amounts of revenue on sales subject to the right of return.

64. Because the "sales" of X-Ray Panels to GE and others were subject to the right of

return, and this right was routinely exercised, these "sales" were, at best, contingent sales: They

were contingent upon the acceptance of the product - i.e., its non-return - by GE and other

22


customers. Furthermore, since revenue was recognized on "sales" which were, in effect,

contingent sales, PerkinElmer' s financial statements violated GAAP FASB Statement No. 5

which states:

Contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization.

Adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization. (Emphasis added).

65. By recognizing revenue and related receivables on the contingent sales of X-Ray

Panels and other products, the Company's July 15, 2001 earnings release and concomitant Form

10-Q (as well as the Company's other financial statements during the Class Period) materially

overstated revenue, receivables, earnings and net worth, and violated the following GAAP,

which rendered the Company's financial statements materially misleading:

a. Profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that the collection of the sale price is not reasonably assured. Chapter 1A of Accounting Research Bulletin No. 43, paragraph 1.

b. Revenue should ordinarily be accounted for at the time a transaction is completed, with appropriate provision for uncollectible accounts. Accounting Principles Board Opinion No. 10, paragraph 12.

C. Revenues and gains generally are not recognized until realized or realizable, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Statement of Financial Accounting Concepts No. 5, paragraph 82.

d. The quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form. Statement of Financial Accounting Concepts No. 2, paragraph 160.

e. GAAP provide that revenue should not be recognized until an exchange has occurred, the earnings process is complete, and the collection of the

23


sales price is reasonably assured. These conditions ordinarily are met when products are exchanged for cash or claims to cash, and when the entity has substantially performed the obligations which entitle it to the benefits represented by the revenue. SEC Accounting and Auditing Enforcement Release No. 812.

66. As set forth above, former PerkinElmer employees with knowledge recounted the

high failure rate and the inordinate volume of returns experienced with the X-Ray Panels.

Accordingly, the Company's inventory of this returned and non-saleable product accumulated

and required a write-down or related charge to earnings that was not taken or reflected in the

Company's earnings releases or the company's SEC filings during the Class Period.

67. GAAP (Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing)

provides that: "The primary basis of accounting for inventories is cost."

A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as the costs. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than costs, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference should be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. (Emphasis added).

68. Accordingly, inventory is required to be recorded at the lower of cost or market

value, with losses in its worth recognized in the financial statements.

69. During the Class Period, the Company represented it complied with GAAP by

issuing financial statements that recorded inventory values at either the lower of cost (primarily

on the first-in, first-out basis) or market value. These representations concerning the Company's

compliance with GAAP were materially false and misleading because, during the Class Period,

the financial statements failed to reflect the write-down of inventory and associated losses in the

Optoelectronics unit which, as the Company ultimately disclosed in its Form 10-Q for the first

quarter of 2002, totaled no less than $23.5 million.

24


70. Moreover, the positive statements made by Defendant Summe during the July 16,

2001 conference call were materially false and misleading because, but for the Company's

improper recognition of revenue, failure to provide for product returns and to write off excess,

obsolete, defective or otherwise non-saleable inventory as mandated by GAAP, PerkinElmer

would not have reported:

a. Delivery of a very strong earnings growth in the second quarter.

b. Achievement of its "15th consecutive quarter of delivering double-digit earnings growth. . . meeting or beating expectations."

C. Expansion of operating margins by 300 basis points, to 16 percent.

d. Expansion of all of its businesses operating margins by 170 basis points or more.

e. That it had met its financial commitments by driving productivity and quality.

71. The statements made by Defendant Friel during the July 16, 2001 conference call

were similarly materially false and misleading because, but for the Company's improper

recognition of revenue, failure to provide for product returns and to write off excess, obsolete,

defective or otherwise non-saleable inventory as mandated by GAAP, PerkinElmer's financial

statements would not have supported the assertion that the Company had:

a. Exceeded its earnings commitment.

b. Achieved its "15th consecutive quarter of delivering double-digit earnings per share growth."

C. Relentlessly focused on improving operations and taken an aggressive approach to quality control.

d. Expanded gross margins by 400 basis points, due to volume leverage in Life Sciences and Instrument businesses and significant cost factors in the Company's Optoelectronics and Fluid Sciences businesses.

25


e. Expanded operating margins in the Optoelectronics segment of the Company's operations through "aggressive cost and productivity actions."

72. Moreover, the August 1, 2001 press release was materially false and misleading

because it indicated to the investment community and led them to believe and report that the

Company had perfected its manufacturing processes for its X-Ray Panel and ramped up

production of this new product for GE and other customers when, in fact, production processes

were imperfect, haphazard and unreliable, rendering the product subject to massive returns. The

press release was also materially false and misleading because it failed to state that this new

product had been sold to GE subject to the right of return.

October 2001 Misrepresentations

73. On October 17, 2001, the Company issued a press release which reported its third

quarter 2001 financial results. This press release reported that: (i) earnings per share from

continuing operations had increased 37%; (ii) the Company had achieved its 16th consecutive

quarter of double-digit earnings growth; and (iii) operating margins had expanded 220 basis

points. The press release stated, in relevant part:

PerkinElmer, Inc. (NYSE: P1<1) today reported that third quarter net income grew 15% to $40 million versus the same period in 2000. Net income from continuing operations was nearly $30 million, up 29% over the third quarter of last year. Third quarter earnings per share were $0.38 compared to $033 for the same period in 2000. EPS from continuing operations increased 37% year-over-year.

"PerkinElmer has again delivered double-digit earnings growth - our 16th consecutive quarter - despite a slow economy," said Gregory L. Summe, Chairman and Chief Executive Officer. "The third quarter was also pivotal in the transformation of PerkinElmer. Consistent with the goal of shifting our portfolio to higher growth, we announced over $1 billion of acquisitions and divestitures. We are now well positioned for growth in our three core businesses - Life Sciences, Optoelectronics and Instruments

•,,2

2 As set forth above, in October 2001, the Company had decided to sell its Fluid Sciences business, but was ultimately unsuccessful in this endeavor.

26


a

*****

Optoelectronics - The Company announced another milestone in its alliance with General Electric Medical Systems in the initial production deliveries of the industry's first fully digital cardiac detector. The new system has the potential to replace conventional cardiac x-ray systems, based on image intensifiers, with high-resolution, digital systems based on amorphous silicon, flat panel technology. PerkinElmer also entered into a strategic partnership with Elekta, developer of cancer therapies, to supply its amorphous silicon panels for advanced imaging in cancer treatments. (Emphasis added).

74. According to the release, the Optoelectronics unit was maintaining favorable

operating margins even in the face of declining revenues due to "aggressive cost action":

Optoelectronic sales were $97 million for the quarter, down 16%. Double-digit growth in Digital Imaging was offset by continued declines in sales to the photography and semiconductor end markets. Operating margins were 19% reflecting aggressive cost actions begun earlier in the year and continued benefits from low-cost manufacturing operations. (Emphasis added).

75. Continuing to highlight the Company's resiliency, Defendant Summe explained

that the Company was well prepared to meet the expected continuing slowdown and counter a

bad market with effective cost controls:

"Our actions taken in anticipation of changing market conditions have delivered favorable results. We are also well prepared to meet the challenges ahead, ' said Summe. Demand for our Drug Discovery, Genetic Disease Screening and Digital Imaging solutions remains strong. Aggressive cost controls will continue to support our earnings growth targets and will position us for rapid growth when the market rebounds. (Emphasis added).

76. Despite focusing on its purported cost controls, in the Optoelectronics unit the

Company did not even keep track of its warranty expenses by product or product line. Indeed,

the Agreement and Plan of Merger between PerkinElmer and Packard, which was attached to the

Form 8-K that the Company filed with the SEC, provided (at 3.18) that:

The Company has no reason to believe that the warranty costs of it and its Subsidiaries will materially increase as a percentage of their consolidated revenues in the future (assuming that management of the Company and its Subsidiaries following the Closing will be undertaken in a manner consistent with

27


I

past practice). To the Company's knowledge, since January 1, 1998, the Company and its Subsidiaries have not performed warranty service with respect to any particular product or product line materially in excess of the warranty service typically required to be performed with respect to the products and product lines of the Company and its Subsidiaries taken as a whole (the Buyer acknowledging that the Company and its Subsidiaries do not track or record warranty service on a product or product line basis.) (Emphasis added).

77. Further, because warranty (rework/repair) costs were not tracked on a product by

product basis, these costs were commingled with unit production costs. Therefore, the Company

could not know the true cost of its X-Ray Panels, for example. Thus, the North American sales

manager for the Company's Santa Clara Facility, CW-2, stated that management asked him what

competitors were selling these panels for, and based the Company's prices on the competitors'

prices.

78. With sales prices based upon competitors' prices and costs unknown, during the

Class Period, the Company did not know whether it was selling its X-Ray Panels at a profit or at

a loss. The Company did not disclose this fact to the investing public and, despite not knowing

product warranty costs, continued to tout its purported cost reduction in the Optoelectronics unit.

79. Following the issuance of the October 17, 2001 press release, analysts published

research reports on the Company. The analysts repeated the Company's statements that its

"aggressive" cost controls were working. For example, on October 17, 2001, Merrill Lynch

Capital Markets issued a research note, authored by analyst P.K. Young, which stated, in

pertinent part:

PerkinElmer's 3Q01 sales declined 11% to $302.1M vs. $340.1M a year ago due to softness in the semiconductor (down 65%), photography (down 40%) and communications (down 20%) markets, and a tough comparison at Instruments. Organic sales were down 7%. EBITA were $46.3M vs. $44.5 M, up 4%, and EBITA margins improved 220 bps to 15.3 due to gains in two out of three segments. Optoelectronics EBITA declined due to lower volume.[. . .] Pretax income increased 17% to $38.5M vs. $32.9M in 2000. (Emphasis added).


80. The October 17, 2001 press release was materially false and misleading because

the purportedly improved third quarter net income and operating margins were materially

overstated due to the Company's improper recognition of revenue, failure to provide for product

returns and to write off excess, obsolete, defective or otherwise non-saleable inventory, as

particularized in paragraphs 50-69 above.

81. The October 17, 2001 press release was also materially false and misleading

because it further led the investment community to believe that the Company had perfected its

X-Ray Panel manufacturing processes when this was not true. In addition, the press release was

materially false and misleading because it failed to state that the X-Ray Panels were sold to GE

with an absolute right of return and, significantly, that returns of the product from GE and others

were extremely high.

82. Moreover, the reported growth in third quarter net income was false and

misleading because it was fraudulently overstated by a one-time sham "sale" of no less than

$1 million.

83. According to a former employee of the Company's Lighting Division (a segment

of the Optoelectronics unit) during the Class Period with knowledge of the pertinent facts ("CW-

3"), PerkinElmer, during the third quarter, subcontracted out manufacturing functions that

involved placing bulbs in frames and chassis. PerkinElmer held approximately $1 million worth

of these frames and chassis in inventory.

84. To artificially boost reported revenues, instead of paying for the assembly

services provided by this subcontractor, PerkinElmer purported to "sell" its $1 million inventory

of its frames and chassis to the subcontractor, and agreed to buy back the assembled products at a

29


price that included the assembly service fee plus the price paid by the subcontractor to

"purchase" the inventory.

85. The "sale" was a sham and recognition of revenue on this sham "sale" violated

GAAP because the subcontractor only held nominal title to the inventory of frames and chassis

and the earnings process had not been completed upon transfer of title to the subcontractor. APB

Opinion No. 29, paragraph 21, SEC Staff Accounting Bulletin No. 101, Statement of Financial

Accounting Concepts No. 5, paragraphs 83-84 and footnote 51, Chapter 1A of Accounting

Research Bulletin No. 43, paragraph 1, Accounting And Auditing Enforcement Release No. 812,

and Accounting And Auditing Enforcement Release No. 817.

86. On October 29, 2001, the Company filed its Form 10-Q for the third quarter of

2001 with the SEC (the "Third Quarter 2001 Form l0-Q"). This filing, which was signed by

Defendant Friel, reported financial results that were substantially the same as the financial results

that were reported in the October 17, 2001 press release. These financial results were materially

false and misleading for the same reasons that the financial results which were reported in the

October 17, 2001 press release were materially false and misleading, as specified in paragraphs

80-85 above.

December 2001 - February 2002 Misrepresentations

87. The Packard acquisition was completed on November 13, 2001. In a press release

issued that day, the Company reiterated the benefits of the acquisition, stating that "The

acquisition extends PerkinElmer's capabilities in automated liquid handling and sample

preparation, and strengthens the company's position as a global provider of comprehensive drug

discovery solutions."

88. On December 5, 2001, Defendant Summe was interviewed by a reporter from

Bloomberg L.P., which published a transcript of the interview. After discussing the upcoming

30


sale of its Detection business, a part of the Analytical Instruments unit, the conversation turned

to the effect that the Packard acquisition would have on the Company's earnings in 2002.

Deflecting concerns that the acquisition would materially and negatively impact 2002 earnings,

Summe stated that the Company would nevertheless increase its 2002 earnings by 15% over

2002 and that the Company would offset the acquisition related costs through improvements in

productivity:

Campion: OK. Let me ask you about the acquisition of Packard BioScience. You say it won't be accretive until 2003. In the meantime, what will it detract from your earnings next year?

Summe: Well, our earnings are going to be-well, we're projecting them to be $1.25. We had our investor conference today. We'll finish up this year around $1.10 or $1.09. So it's about-it's 15 percent earnings growth. Next year, even with the dilution of some of the divestitures.

Campion: I'm sure you thought about how much, though, this acquisition takes off the earnings.

Summe: Yes. It's [SIC] takes off about 10 cents. You know, so we call it 9 percent of the earning for next year. And, of course, we're offsetting that through driving productivity and quality improvements throughout the business, and that's really been our strategy. We're changing the portfolio as we've been aggressive at selling business that don't fit with where we've been and we've also been aggressive at acquiring higher growth business. [SIC]. Both of these tend to be dilutive, either because it's higher growth in your average, therefore it's dilutive. And we've offset the dilution through improving our cost productivity, and that's what allows us to still deliver to the investors a reasonable rate of return while improving the portfolio. (Emphasis added).

89. The interview ended with Summe's representation that "we have a strong balance

sheet. We intend to keep to that. And we have a strong consistent record of earnings, and we

intend to keep that."

90. Also on December 5, 2001, Dow Jones Newswires reported over its news service

that Thomas Weisel Partners LLC, a merchant banking concern that provided analyst coverage

of the Company, had reiterated its pending "Buy" recommendation on the Company.

31


91

The Company's stock price reacted positively to both the Bloomberg interview

and the "Buy" recommendation. Specifically, from a closing price of $29.60 per share on

December 4, 2001, the Company's stock reached a high of $33.50 per share on December 6,

2001 (a 10% increase) and closed at $32.33 per share on December 7, 2001 (a 9.2% increase

over the December 4, 2001 close).

92. On December 5, 2001 the very same day that Defendant Summe touted the

Company's expected earnings in 2002 causing the Company's stock price to soar - Defendant

Summe availed himself of the price increase and sold a total of 300,000 shares of PerkinElmer

common stock for $30.04 per share, for gross proceeds of $9,012,000. The following day,

December 6, 2001, Defendant Friel did the same and sold 150,000 common shares at $33.10 per

share, for gross proceeds of $4,965,000. On December 7, 2001, Terrance Carlson

(PerkinElmer's General Counsel) sold 26,000 shares at prices between $32.8 to $33 per share,

grossing $855,940.

93. On January 24, 2002, the Company issued a press release reporting the expansion

of operating margins in 2001 by 200 basis points. The press release stated, in relevant part, that:

Operating profit in 2001 grew 16% to $192 million on revenue of $1.3 billion, which was flat on a year-over-year basis. Operating margins for the year expanded by 200 basis points to 14.4%... For the fourth quarter of 2001, revenue was $361 million, down 4% versus the same period in the previous year. Operating margins in Q4 expanded basis points to 14.8%.

94. Discussing the Optoelectronics portion of the Company's business, the January

24, 2002 press release stated:

In Optoelectronics, strong double-digit growth in digital imaging and sensors was offset by continued weakness in the photography and semiconductor markets, which drove revenue contraction of 22% organically to $90 million, negatively affecting operating margins, which decreased to 11%. Operating profit for 2001 was down 18% to $69 million on revenue of $416 million, which contracted 10% organically. Operating margins for the full year were 16.5% compared to 16.8%

32


for 2000. During the year, the unit implemented aggressive cost and structural actions that position it for future growth in the high potential biomedical and telecommunications markets. (Emphasis added).

95. The January 24, 2002 press release quoted Defendant Summe as stating:

Our ability to deliver strong, consistent earnings growth, particularly in this difficult economic environment, is a testament to the effectiveness of our management and operational process ... We enter 2002 ideally positioned to accelerate the growth of our three core businesses - Life Sciences, Optoelectronics and Analytical Instruments.

96. The January 24, 2002 press release was materially false and misleading because

the reported "strong, consistent earnings growth" was not the result of the effectiveness of the

Company's management and operational processes, as represented, nor of the "aggressive cost

and structural actions" in the Optoelectronics Unit. It was the result of the Company's improper

recognition of revenue, failure to provide for product returns and to write off excess, obsolete,

defective or otherwise non-saleable inventory, as mandated by GAAP and as particularized in

paragraphs 50-69 above, as well as the sham $1 million "sale" by the Lighting Division, as

detailed in paragraphs 82-85 above.

97. On February 7, 2002, just two months before the end of the Class Period (April

11, 2002), the Company issued a press release stating that "PerkinElmer, Inc. (NYSE:PKI)

confirmed 2002 earning guidance of $1.24-$1.26 per share during its presentation at the 2002

Merrill Lynch Pharmaceutical, Biotechnology & Medical Device Conference, held earlier today

at the Grand Hyatt in New York City."

98. The February 7, 2002 press release was materially false and misleading because,

as subsequent events would reveal, there was no reasonable basis for the earnings guidance of

$1.24-$1.26 per share. The positive earnings guidance was based, at least in part, on the

Company's reported earnings during the Class Period, which, as detailed in paragraphs 5 0-69

33


above, were artificially inflated due to the Company's improper recognition of revenue, failure to

provide for returns of defective Optelectronics' products and to write off excess, obsolete,

defective inventory, as required by GAAP.

The Truth Begins To Emerge

99. On March 1, 2002, only three weeks after the February 7 press release,

PerkinElmer issued a surprising press release stating that it would reorganize the Optoelectronic

unit "as a single business organized by function, bringing added clarity, accountability and

simplicity to the unit." According to the release, the reorganization was undertaken to "reduce

costs and better position the business for growth in key markets." The Company also warned that

the reorganization would result in a charge, of an undisclosed amount, to first quarter 2002

earnings. According to Defendant Summe, the Optoelectronic unit was reorganized to de-

emphasize its telecommunications, semiconductor and photography operations:

"We see long-term growth potential for Optoelectronics' products and services in the biomedical and broadband communications segments," said Gregory L. Summe, chairman and chief executive officer of PerkinElmer. "However, we have taken aggressive actions in light of the effects of the recession on several of our served markets, notably telecommunications, semiconductors and photography. These actions will allow us to manage lower volumes in these soft markets in the short term, while positioning us for market recovery."

100. The Company's cost problems extended well beyond the Optoelectronics

division, as PerkinElmer announced that it would take another charge relating to company-wide

operations and, in addition, terminate 500 employees company-wide:

Due to the significantly reduced volume in Optoelectronics, coupled with lower than anticipated growth in Life Sciences and Analytical Instruments end markets, the Company announced plans to take an additional restructuring charge of approximately $10-$15 million to further enhance its cost position and will reduce its workforce by approximately 500 employees from across the corporation.

101. Excluding the charges, PerkinElmer now, only three weeks after the February 7,

press release, anticipated cash earnings of $0.16-$O. 17 per share for the first quarter of 2002 and


$1.05 to $1.10 per share for the year 2002. That figure was significantly lower than the $1.25

Defendant Summe stated that the Company would earn in 2002 during the December 5

Bloomberg L.P. interview, after which he and defendant Friel sold hundreds of thousands of

their personally held PerkinElmer common stock at above $30 per share, and the Company's

$1.24-$1.26 earnings per share guidance, only three weeks earlier, in the February 7, 2002 press

release.

102. Moreover, even the March 1, 2002 press release was materially false and

misleading because it failed to state that the downwardly revised earnings guidance was due to

recognition of belated catch-up adjustments, including a catch-up adjustment to write off $23.5

million of excess, obsolete, defective and otherwise unsaleable inventory in the Optoelectronics

unit, as discussed above.

103. In response to the March 1 announcement, the price of PerkinElmer common

stock fell by 31%, falling from a February 28, 2002 close of $23 per share to close at $15.75 on

March 1, 2002, on trading volume of 16,194,000 shares - 18 times its average daily trading

volume of 888,667. The March 1, 2002 earnings release, however, was only a partial revelation

since it continued to conceal the true extent of the problems at PerkinElmer.

104. On March 28, 2002, the Company filed its Form 10-K for the year ended

December 31, 2001 (the "2001 Form 10-K"), signed by Defendants Friel and Summe, with the

SEC.

105. The financial statements which were contained within the Company's 2001 Form

10-K were materially false and misleading because the reported net income and operating

margins for the year 2001, including the third and fourth quarters at issue here, were materially

overstated due to the Company's improper recognition of revenue and failure to provide for

35


product returns and to write off excess, obsolete, defective or otherwise non-saleable inventory,

as particularized in paragraphs 50-69 above. These financial statements were also materially

false and misleading because they failed to disclose, as required by GAAP, that the Company

recognized material amounts of revenue on sales which were subject to the right of return, as

detailed in paragraphs 62-65 above.

106. The Company's 2001 Form 10-K stated:

The Company's product sales are recorded at the time when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. A provision is made at the time the related revenue is recognized for the cost of any installation obligations and the estimated cost of product warranties.

107. The foregoing representation was materially false and misleading because the

Company had no basis for stating that it had "estimated [the] cost of product warranties" for the

reasons particularized in paragraphs 59-6 1 above.

The Truth Is Revealed

108. On April 11, 2002, Defendants finally came clean. PerkinElmer issued a press

release reporting the Company's outlook for the first quarter of 2002. Revenues for the quarter

would be between $300-$305 million and earnings per share would be breakeven instead of

$0.16-$0.17 per share as the Company said it expected to earn in its March 1, 2002 press

release. The dramatic shortfall in earnings and revenue was primarily due to "weakness' in the

Company's Optoelectronics business which had sustained an operating loss:

The company attributed the shortfall primarily to weakness in its Optoelectronics end markets, the deferral of capital spending by Analytical Instruments and Life Sciences customers, and sales force integration activities related to the merger with Packard BioSciences. The company projects cash EPS for the first quarter of 2002 of approximately breakeven, as a result of an operating loss in the Optoelectronics business. These results exclude any asset write-down or restructuring charges. (Emphasis added).


109. In response to this second negative announcement in six weeks, the price of

PerkinElmer common stock dropped further, falling from $16.70 per share on April 10, 2002 to

$12.01 by the close of April 11, a decline of 28%, and representing a drop of 66.8% from the

Class Period high of $36.22, reached on January 4, 2002.

Subsequent Revelations

110. The Company's press releases and financial statements that post-dated April 11,

2002, the end of the Class Period, confirmed that the Company's pre-April 11, 2002

representations were materially false and misleading when made. Moreover, the Company

continued its misrepresentations by failing to disclose the true reasons for the sharp downturn in

its earnings in the first quarter of 2002 and the $23.5 million write-down of inventory in the

Optoelectronics unit.

111. On April 25, 2002, PerkinElmer issued a press release announcing its financial

results for the first quarter of 2002. The Company reported that it took a charge of $10.7 million,

supposedly "for restructuring actions to further improve its cost position." In addition, the

Company took a charge of $23.5 million to write down Optoelectronics inventory. Instead of

reporting earnings of $0.16 - $ 0.17 per share as the Company represented on March 1, 2002, the

Company's cash earnings - excluding charges - was $0.01 per share. Including the charges, the

Company lost $0.26 per share for the quarter.

112. In the April 25, 2002 press release, the Company also announced that it was

placing its telecom component and entertainment lighting business, which were part of the

Optoelectronics unit, under strategic review.

113. On May 15, 2002, the Company filed its Form 10-Q for the quarter ended March

31, 2002 with the SEC. The document, which was signed by Defendant Friel, reported financial

37


results that were substantially the same as the results which were reported in the April 25, 2001

press release.

114. The Form 10-Q disclosed the negative results in the Optoelectronics unit,

emphasizing the effect of the $23.5 million inventory write-down:

Revenues for the first quarter of 2002 were $72.8 million versus $120.9 million for the first quarter of 2001, resulting in a decrease of 40%. The decrease reflects the disposals of the Voltarc business and certain product lines subsequent to the first quarter of 2001. In addition, industry-wide declines in sales to the telecom, semiconductor and selective lighting markets more than offset sales growth in the Company's sensors products. On an organic basis, revenues for the first quarter of 2002 decreased 24% versus that of the comparable period in prior year.

The reported operating loss for the first quarter was $34.1 million compared to a profit of $18.5 million for the first quarter of 2002, decreasing $52.6 million. The decrease in operating profit reflects the $23.5 million inventory adjustment taken as a result of significantly lower volumes experienced in several key markets, as well as the lower revenues and associated lower utilization of production capacity.

The adjusted operating loss before the $23.5 million inventory write-down, net nonrecurring items and goodwill and intangibles amortization for the first quarter of 2002 was $5.0 million versus an adjusted operating profit of $20.2 million for the first quarter of 2001. The decline in adjusted operating profit is due to lower revenues and associated lower utilization of production capacity. Intangible amortization totaled $0.4 million for the first quarter of 2002 and $0.3 million for the first quarter of 2001. For the first quarter of 2001, goodwill amortization totaled $1.7 million. Pursuant to the adoption of SFAS No. 142, the amortization of goodwill ceased at the beginning of 2002. For the first quarter of 2002, non-recurring charges with comprised of a $5.2 million restructuring charge associated with the closure of two sites and a workforce reduction. During the first quarter of 2001, non-recurring gains, net were $0.3 million resulting from a $0.8 million gain previously deferred from the sale of the IC Sensors business and an expense of $0.5 million related to production moves to lower-cost geographies.

115. The Company has never disclosed any specific information concerning the $23.5

million inventory adjustment other than that it occurred in the Optoelectronics unit. In the

absence of any explanation of the nature of, or the reasons for, the inventory adjustment, it is a

reasonable inference that the inventory adjustment was the result of the Company's scheme to

inflate its revenue by shipping defective X-Ray Panels and failing to reserve adequately for

W.


[1

returns, as set forth above in paragraphs 50-69. Thus, the inventory write down corroborates and

supports the allegations, inter alia, of the Company's failure to comply with GAAP by

recognizing revenues on sales of defective X-Ray Panels that were subject to return, by failing to

reserve for returns and by failing to write down the value of the returned X-Ray Panels in a

timely manner.

116. Defendants were required to disclose the existence of the material facts described

herein and to appropriately recognize and report revenue, expenses and earnings in conformity

with GAAP. During the Class Period, Defendants failed to cause the Company to make the

disclosures that are particularized above and to account for and to report revenue, expenses and

earnings in conformity with GAAP.

117. As a result of the pervasive mosaic of non-disclosures, deceptive disclosures, and

non-GAAP accounting, the Company's publicly disseminated documents (and the financial

statements contained therein) particularized above, including those which the Defendants caused

the Company to file with the SEC during the Class Period, were materially false and misleading.

118. The Defendants knew and ignored, or were reckless in not knowing, that the

Company's filings with the SEC, its financial statements, press releases, and public statements

particularized above, which were disseminated to the investing public during the Class Period,

were materially false and misleading for the reasons set forth above.

119. During the Class Period, the financial statements included in the Company's

filings with the SEC were audited by Arthur Andersen LLP ("Arthur Andersen"). The Company

issued a press release on June 18, 2002 announcing that it was terminating Arthur Andersen as

its independent auditors. On June 21, 2002, the Company issued a release stating that in it had

Me


appointed Deloitte & Touche LLP as its new auditors, as of June 20, 2002, in place of Arthur

Andersen.

120. The undisclosed adverse information concealed by Defendants during the Class

Period is the type of information which, because of SEC regulations, rules of the national stock

exchanges and customary business practices, is expected by investors and securities analysts to

be disclosed to the investing public. This information is known by corporate officials and their

legal and financial advisors to be the type of information which is expected to be and must be

disclosed. For example, under Item 303 of Regulation S-K, promulgated by the SEC under the

Exchange Act, there is a duty to disclose in periodic reports filed with the SEC "known trends or

any known demands, commitments, events or uncertainties" that are reasonably likely to have a

material impact on a company's sales revenues, income or liquidity, or cause previously reported

financial information not to be indicative of future operating results." 17 C.F.R. § 229.303(a)(1)-

3(3) and Instruction 3. In addition to the periodic reports required under the Exchange Act,

management of a public company has a duty promptly "to make full and prompt announcements

of material facts regarding the company's financial condition." Timely Disclosure of Material

Corporate Developments, Exchange Act Release No. 34-8995, 17 C.F.R. § 241.8995 (1970).

The SEC has emphasized that "[i]nvestors have legitimate expectations that public companies

are making, and will continue to make, prompt disclosure of significant corporate

developments." Report of Investigation in the Matter of Sharon Steel Corp. as it Relates to

Prompt Corporate Disclosure, Exchange Act Release No. 34-18271, [1981-1982 Transfer

Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,049, at 84,618.

121. SEC Regulation SX requires that financial statements filed with the SEC conform

with GAAP. Financial statements filed with the SEC which are not prepared in conformity with

Eul


GAAP are presumed to be misleading or inaccurate. 17 C.F.R. § 210.401(a)(1). The Company's

financial statements that were disseminated to the investing public during the Class Period,

which represented that the Company's financial position and results of operations were prepared

in conformity with GAAP, were false and misleading because they constituted an extreme

departure from GAAP, as set forth above. These financial statements violated the principles of

fair financial reporting and the following GAAP concepts and principles, in addition to the others

particularized above:

a. The concept that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions. FASB Statement of Financial Accounting Concepts No. 1.

b. The concept that financial reporting should provide information about an enterprise's financial performance during a period. FASB Statement of Financial Accounting Concepts No. 1.

C. The concept that financial reporting should be reliable in that it represents what it purports to represent. FASB Statement of Financial Accounting Concepts No. 2.

d. The concept of completeness, which means that nothing material is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions. FASB Statement of Financial Accounting Concepts No. 2.

e. The concept that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. FASB Statement of Financial Accounting Concepts No. 2.

122. Each of the Forms 1O-Q which were disseminated to the investing public during

the Class Period contained a disclosure which stated:

The information [in the Company's financial statements] reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company's results of operations, financial position and cash flows for the periods indicated.

41


123. The financial statements which were contained within the Second Quarter 2001

Form 10-Q and the Third Quarter 2001 Form 10-Q were not prepared in accordance with GAAP

and did not "present fairly" the Company's results of operations and financial position due to the

GAAP violations set forth above and because the financial statements also violated the AU

411.04 principle that the:

a. Accounting method applied should be appropriate in the circumstance.

b. Financial statements, including the related notes, should be informative of matters that affect their use, understanding, and interpretation.

C. Financial statements should reflect the underlying events and transactions in a manner that present the financial position and the results of operations within a range of acceptable limits that were reasonable and practicable to attain accuracy in financial statements.

124. Defendants knew or recklessly disregarded the facts set forth herein concerning

the Company's non-disclosures, misleading disclosures, non-GAAP accounting and materially

misleading sales, margins, profitability and earnings figures.

125. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a

system of internal accounting controls sufficient to provide reasonable assurances that

transactions are recorded as necessary to permit preparation of financial statements in conformity

with GAAP.

126. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly

circumvent or knowingly fail to implement a system of internal accounting controls or

knowingly falsify any book, record, or account required by Section 13(b)(2).

127. PerkinElmer violated the foregoing provision of the Exchange Act, at least in part,

by failing to track or record warranty service on a product or product line basis.

ADDITIONAL SCIENTER ALLEGATIONS

42


128. As alleged herein, Defendants acted with scienter in that Defendants knew or

recklessly disregarded that the public statements or documents issued or disseminated in the

name of the Company were materially false and misleading; knew or recklessly disregarded that

such statements or documents would be issued or disseminated to the investing public; and

knowingly and substantially participated or acquiesced in the issuance or dissemination of such

statements or documents as primary violations of the federal securities laws. As set forth

elsewhere herein in detail, Defendants, by virtue of their receipt of information reflecting the true

facts regarding PerkinElmer, their control over, and/or receipt and/or modification of the

Company's allegedly materially misleading misstatements and/or their associations with the

Company which made them privy to confidential proprietary information concerning

PerkinElmer, participated in the fraudulent scheme alleged herein. Defendants knew and/or

recklessly disregarded the falsity and misleading nature of the information which they caused to

be disseminated to the investing public. The ongoing fraudulent scheme described herein could

not have been perpetrated during the Class Period without the knowledge and complicity or, at

least, the reckless disregard of the personnel at the highest levels of the Company, including

Defendants.

129. As particularized herein, Defendants' public statements regarding the Company's

sales, revenue, earnings and financial position lacked a reasonable basis at all relevant times.

During the Class Period, Defendants issued a series of public statements announcing strong

sales, revenue and positive earnings. In truth, however, the Company's reported results were

artificially inflated because the Company:

a. improperly recognized revenue from sales of, inter alia, the X-Ray Panels, despite the purchasers' right of return (and warranty costs);

43


b. improperly failed to take a charge against earnings, if the Company could reasonably estimate the cost of purchasers' returns of the X-Ray Panels;

C. improperly failed to reserve for returns of the X-Ray Panels; and

d. improperly failed to write down excess, obsolete, defective or otherwise non-saleable inventory of, inter alia, the X-Ray Panels.

130. Defendant Summe, who negotiated and took special interest in the GE contract

for the X-Ray Panels, was unquestionably aware of the production problems and the defects in

the X-Ray Panels, as well as the very high rate of return by GE and other purchasers. Defendant

Friel, as the CFO of the Company, was similarly aware of these problems and attended meetings

with Summe at which these matters were discussed. Nonetheless, in publicly disseminated

statements and the Company's SEC filings signed by either or both of Summe and Friel,

Defendants, knowingly or with reckless disregard of the truth, reported artificially inflated

financial results that were not prepared in accordance with GAAP, as set forth above, and which

included revenue from the sale of X-Ray Panels that were returned, ultimately resulting in a huge

inventory write-down in the Optoelectronics unit.

131. The Defendants possessed substantial motives for misrepresenting PerkinElmer's

financial status, revenue, operations, and future prospects throughout the Class Period. For

example, Defendants were motivated to commit the fraud alleged herein so that the Company

could complete the $650 million Packard acquisition, which was critically important to its long-

term plans, using millions of shares of PerkinElmer common stock as currency. At a special

meeting held on September 27, 2001, Packard's shareholders voted in favor of the $650 million

PerkinElmer/Packard merger. Had the shareholders known the truth about PerkinElmer's

financial condition, they no doubt would have voted to reject the merger.

I Case 1:02-cv-11314-GAO Document 18 Filed 01/13/03 Page 45 of 55

132. In addition, Defendants were motivated to commit and further the fraud alleged

herein to artificially inflate the price of PerkinElmer securities so that insiders, including the

Individual Defendants, could sell their personally held PerkinElmer common stock at prices that

were significantly higher than if the truth regarding the Company had been known by the market.

During the Class Period, PerkinElmer insiders sold a total of 595,000 of their personally held

PerkinElmer shares for gross proceeds of $18,440,732, as follows:

Gregory L. Summe, Chairman and CEO

Date No. of Shares Price/Share Total

Dec. 7, 2001

Dec. 7, 2001

Dec. 7, 2001

15,900

9,100

1,000

$30.04

Price/Share

$33.1

Price/Share

$33

$32.8

$32.76

Dec. 5, 2001 300,000

Robert Friel, Chief Financial Officer

Date No. of Shares

Dec. 6, 2001 150,000

Terrance L. Carlson, General Counsel

Date No. of Shares

$9,012,000

Total

$4,965,000

Total

$524,700

$298,480

$32,760

$855,940

45


a

John Engel, Executive Vice President of PerkinElmer, President of PerkinElmer Life Sciences

Date No. of Shares Price/Share Total

Jan. 28, 2002 65,000

$30.56

$1,986,400

Robert A. Barrett, Officer, Vice President

Date No. of Shares

Price/Share

Total

Sep. 6, 2001

$29.94

$1,437,120

Sep. 6, 2001

5,700

$30.71

$175,047

Sep. 6, 2001

300

$30.75

$9,225

$1,621,392

133. In sum, in the course of a 4.5 month period (from September 6, 2001 to January

28, 2002) during the Class Period, PerkinElmer insiders, including the Individual Defendants,

had engaged in 9 transactions selling off 595,000 shares of common stock for $18,440,732 in

gross proceeds. The same insiders, including the Individual Defendants, had engaged in only 7

sale transactions (involving only 364,500 shares of common stock) during the three year period

prior to the Class Period.

134. As recounted in the Company's Definitive Proxy for 2002, filed with the SEC on

April 1, 2002, Summe had additional financial motivations to engage in the fraud detailed herein,

including the GAAP violations that resulted in inflated earnings: Summe participated in an

incentive compensation program that was linked to earnings performance. As detailed in the

Proxy:

Eno


The Company's Performance Incentive Plan (PIP) provides incentive compensation to certain key employees. Mr. Summe and the other executive officers named in the Summary Compensation Table are participants in the PIP. Although the PIP is the primary source of cash incentives for officers, the Committee may award additional incentives to selected officers outside of the PIP in circumstances in which the Committee determines that an additional incentive established on a different basis is appropriate.

Under the plan:

In 2001, Mr. Summe's target bonus was 100% of base salary. His target PIP was based on consolidated performance. For 2001, the actual EPS and cash measures exceeded targets. As a result, he received a PIP award of $1,360,000, which represents 160% of his target incentive. In addition, the Board awarded Mr. Summe an additional bonus of $815,000 under the CEO Incentive Plan based on the CEO evaluation by the Compensation Committee of his accomplishments against additional performance measures under three categories: strategic - 40%; operational - 30%; and organizational - 30%.

In February 2000, the Company provided Mr. Summe with a full recourse interest free loan of $875,000, which included a forgiveness feature whereby the loan would be forgiven based on Mr. Summe meeting or exceeding significant performance goals. The loan was forgiven on December 31, 2001 based upon the Company having exceeded the performance goal of 50% growth in EPS over 1999 in two years or less (adjusted for the impact of acquisitions and divestitures).

135. Thus, the inflated financial results reported by the Company during the Class

Period resulted in Summe receiving additional, undeserved compensation of $2,235,000 and the

forgiveness of an $875,000 interest free loan.

UNDISCLOSED ADVERSE INFORMATION

136. The market for PerkinElmer's common stock was open, well-developed and

efficient at all relevant times. As a result of these materially false and misleading statements and

failures to disclose, PerkinElmer common stock traded at artificially inflated prices during the

Class Period. The artificial inflation continued until the time PerkinElmer revealed the truth

regarding the operational problems facing its Optoelectronics unit and the entire Company and

the $23 million in obsolete inventory carried by the Company's Optoelectronics unit. Plaintiffs

and other members of the Class purchased or otherwise acquired PerkinElmer's common stock

47


4

relying upon the integrity of the market price of the Company's common stock and market

information relating to PerkinElmer, and have been damaged thereby.

137. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of PerkinElmer common stock, by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make Defendants'

statements, as set forth herein, not false and misleading. Said statements and omissions were

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about the Company, its business and operations, as detailed herein.

138. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiffs and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false or misleading

statements about PerkinElmer's earnings and financial condition. These material misstatements

and omissions created in the market an unrealistically positive assessment of PerkinElmer and its

prospects and operations, thus causing the Company's common stock to be overvalued and

artificially inflated at all relevant times. Defendants' materially false and misleading statements

during the Class Period resulted in Plaintiffs and other members of the Class purchasing the

Company's common stock at artificially inflated prices, thus leading to their losses when the

illusion was revealed, and the market was able to accurately value the Company.

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

139. At all relevant times, the market for PerkinElmer's securities was an efficient

market for the following reasons, among others:


b

(a) PerkinElmer's stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, PerkinElmer filed periodic public reports with the

SEC and the NYSE;

(c) PerkinElmer regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press

releases on the national circuits of major newswire services and through other

wide-ranging public disclosures, such as communications with the financial press and

other similar reporting services; and

(d) PerkinElmer was followed by several securities analysts employed by

major brokerage firms who wrote reports which were distributed to the sales force and

certain customers of their respective brokerage firms. Each of these reports was publicly

available and entered the public marketplace.

140. As a result of the foregoing, the market for PerkinElmer's securities promptly

digested current information regarding PerkinElmer from all publicly available sources and

reflected such information in PerkinElmer's stock price. Under these circumstances, all

purchasers of PerkinElmer's securities during the Class Period suffered similar injury through

their purchase of PerkinElmer's securities at artificially inflated prices and a presumption of

reliance applies.

NO SAFE HARBOR

141. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as "forward-looking

Wt


statements" when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, defendants are liable for those false forward-looking statements because at the time each

of those forward-looking statements was made, the particular speaker knew that the particular

forward-looking statement was false, and/or the forward-looking statement was authorized

and/or approved by an executive officer of PerkinElmer who knew that those statements were

false when made.

COUNT I Violation Of Section 10(b) Of

The Exchange Act And Rule lOb-5 Promulgated Thereunder Against All Defendants

142. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

143. During the Class Period, PerkinElmer and the Individual Defendants, and each of

them, carried out a plan, scheme and course of conduct which was intended to and, throughout

the Class Period, did: (i) deceive the investing public, including Plaintiffs and other Class

members, as alleged herein; (ii) artificially inflate and maintain the market price of

PerkinElmer's securities; and (iii) cause Plaintiffs and other members of the Class to purchase

PerkinElmer's securities at artificially inflated prices. In furtherance of this unlawful scheme,

plan and course of conduct, Defendants, and each of them, took the actions set forth herein.

144. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

50


V

operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to

maintain artificially high market prices for PerkinElmer's securities in violation of Section 10(b)

of the Exchange Act and Rule lOb-S. All Defendants are sued either as primary participants in

the wrongful and illegal conduct charged herein or as controlling persons, as alleged below.

145. PerkinElmer and the Individual Defendants, individually and in concert, directly

and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material

information about the business, operations and future prospects of PerkinElmer as specified

herein.

146. These Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct, as alleged herein, in an effort to assure investors of PerkinElmer's value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about PerkinElmer and its business

operations and future prospects in the light of the circumstances under which they were made,

not misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of PerkinElmer's

securities during the Class Period.

147. The Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives and/or

directors at the Company during the Class Period; (ii) the Individual Defendants were privy to

and participated in the creation, development and reporting of the Company's internal budgets,

51


plans, projections and/or reports; and (iii) the Individual Defendants were aware of the

Company's dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

148. The Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants' material misrepresentations and/or omissions were done knowingly or recklessly

and for the purpose and effect of concealing PerkinElmer's operating condition and future

business prospects from the investing public and supporting the artificially inflated price of its

securities. As demonstrated by Defendants' overstatements and misstatements of the Company's

business, operations and earnings throughout the Class Period, Defendants, if they did not have

actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

149. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of PerkinElmer's

securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of PerkinElmer's publicly-traded securities were artificially inflated, and relying directly

or indirectly on the false and misleading statements made by defendants, or upon the integrity of

the market in which the securities trade, and/or on the absence of material adverse information

that was known to or recklessly disregarded by Defendants but not disclosed in public statements

by Defendants during the Class Period, Plaintiffs and the other members of the Class acquired

52


PerkinElmer securities during the Class Period at artificially high prices and were damaged

thereby.

150. At the time of said misrepresentations and omissions, Plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs

and the other members of the Class and the marketplace known of the true financial condition

and business prospects of PerkinElmer, which were not disclosed by Defendants, Plaintiff and

other members of the Class would not have purchased or otherwise acquired their PerkinElmer

securities, or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

151. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule lOb-5 promulgated thereunder.

152. As a direct and proximate result of Defendants' wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company's securities during the Class Period.

COUNT II Violation Of Section 20(a) Of

The Exchange Act Against the Individual Defendants

153. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

154. Each of the Individual Defendants acted as a controlling person of PerkinElmer

within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their

high-level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company's operations and/or intimate knowledge of the statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had

53


the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which Plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company's reports, press releases, public

filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

155. In particular, the Individual Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, are presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

156. As set forth above, PerkinElmer and the Individual Defendants each violated

Section 10(b) and Rule lOb-S by their acts and omissions as alleged in this Complaint. By virtue

of their position as a controlling person, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of PerkinElmer's and the Individual

Defendants' wrongful conduct, Plaintiffs and other members of the Class suffered damages in

connection with their purchases of the Company's securities during the Class Period.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

(a) Declaring this action to be a proper class action under Rule 23 of the

Federal Rules of Civil Procedure;

(b) Declaring and determining that Defendants violated the federal securities

laws by reason of their conduct, as alleged herein;

54


-1

(c) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a

result of Defendants' wrongdoing, in an amount to be proven at trial, including interest

thereon;

(d) Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(e) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: January 13, 2003

By their attorneys,

,2 4417~== -

Thomas G. Shapiro B 0 No. 454680 Theodore M. Hess-Mahan BBO No. 557109 Shapiro Haber & Urmy LLP 75 State Street Boston, MA 02109 (617) 439-3939

Gregory Mark Nespole Demet Basar Wolf Haldenstein Adler Freeman & Herz 270 Madison Avenue New York, NY 10016 (212) 545-4600

Andy Zivitz Schiffrin & Barroway, LLP Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 (610) 667-7706

55

Documents

r-- I P t: tO T ASS. - Stanford Universitysecurities.stanford.edu/filings-documents/1024/PKI02-01/2003113_r… · Case 1:02-cv-11314-GAO Document 18 Filed 01/13/03 Page 1 of 55 r--)