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UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION
______________________________ Case No.ROBERT J. BORDEAUX, :
:Plaintiff, :
:vs. :
:PSS WORLD MEDICAL, INC., :DAVID A. SMITH; and :PATRICK C. KELLY; :
:Defendants. :
______________________________:
PLAINTIFF'S CLASS ACTION COMPLAINT
Plaintiff ROBERT BORDEAUX makes the following allegations upon information and
belief, except as to allegations specifically pertaining to Plaintiff and his counsel, based on the facts
alleged below, which are predicated upon the investigation undertaken by Plaintiff's counsel, which
investigation included analysis of publicly-available news articles and reports, public filings, press
releases and other matters of public record. Plaintiff believes that further substantial evidentiary
support will exist for the allegations set forth below after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a class action on behalf of all purchasers of the common stock of PSS World
Medical, Inc. ("PSSI" or the "Company") between October 26, 1999 and September 1, 2000,
inclusive, (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of
1934 (the "Exchange Act").
2
JURISDICTION AND VENUE
2. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
§§ 1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).
3. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.
§ § 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5).
4. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15 U.S.C.
§ 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged fraud and/or
its effects have occurred within this District and PSSI maintains its principal executive offices in this
District.
5. In connection with the acts and omissions alleged in this complaint, Defendants,
directly or indirectly, used the means and instrumentalities of interstate commerce, including, but
not limited to, the mails, interstate telephone communications, and the facilities of the national
securities markets.
PARTIES
6. Plaintiff purchased PSSI common stock during the Class Period, as set forth in the
accompanying certification which is incorporated herein by reference, and was damaged thereby.
7. Defendant PSSI is a Florida corporation with its principal place of business at 4345
Southpoint Boulevard, Jacksonville, Florida 32216. PSSI describes itself as the country's largest
provider of medical supplies to the physician market through its commitment to fast service and the
belief that "The customer is everything."
8. (a) The individual Defendants, at all times relevant to this action, served in the
capacities listed below and received substantial compensation:
3
Name Position
David A. Smith Executive Vice President and Chief Executive Officer
Patrick C. Kelly Chairman and Chief Executive Officer
(b) The Individual Defendants, as senior officers and/or directors of PSSI were
controlling persons of the Company. Each exercised his power and influence to cause PSSI to
engage in the fraudulent practices complained of herein.
9. Each of the Defendants is liable as a participant in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of PSSI common stock, by disseminating
materially false and misleading statements and/or concealing material adverse facts. The scheme:
(i) deceived the investing public regarding PSSI's business, its finances and the intrinsic value of
PSSI common stock; and (ii) caused Plaintiff and other members of the Class to purchase PSSI
common stock at artificially inflated prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
10. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased or otherwise
acquired PSSI common stock between October 26, 1999 through September 1, 2000, inclusive (the
"Class Period"), and who were damaged thereby. Excluded from the Class are Defendants, members
of the immediate family of each of the individual Defendants, any subsidiary or affiliate of PSSI and
the directors, officers and employees of PSSI or its subsidiaries or affiliates, or any entity in which
any excluded person has a controlling interest, and the legal representatives, heirs, successors and
assigns of any excluded person.
4
11. The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to Plaintiff at this time and
can only be ascertained through appropriate discovery, Plaintiff believes that there are thousands of
members of the Class located throughout the United States. As of June 2001, there were reportedly
more than 71 million shares of PSSI common stock outstanding. Throughout the Class Period, PSSI
common stock was actively traded on the NASDAQ National Market System. Record owners and
other members of the Class may be identified from records maintained by PSSI and/or its transfer
agents and may be notified of the pendency of this action by mail, using a form of notice similar to
that customarily used in securities class actions.
12. Plaintiff's claims are typical of the claims of the other members of the Class as all
members of the Class were similarly affected by Defendants' wrongful conduct in violation of federal
law and state law that is complained of herein.
13. Plaintiff will fairly and adequately protect the interests of the members of the Class
and have retained counsel competent and experienced in class and securities litigation.
14. 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:
i) whether the federal securities laws were violated by Defendants' acts and
omissions as alleged herein;
ii) whether Defendants participated in and pursued the common course of
conduct complained of herein;
5
iii) whether documents, press releases, and other statements disseminated to the
investing public and the Company's shareholders during the Class Period misrepresented material
facts about the business, finances, financial condition and prospects of PSSI;
iv) whether statements made by Defendants to the investing public during the
Class Period misrepresented and/or omitted to disclose material facts about the business, finances,
value, performance and prospects of PSSI;
v) whether the market price of PSSI common stock during the Class Period was
artificially inflated due to the material misrepresentations and failures to correct the material
misrepresentations complained of herein; and
vi) to what extent the members of the Class have sustained damages and the
proper measure of damages.
15. 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 suit as a class action.
SUBSTANTIVE ALLEGATIONS
16. On October 26, 1999, the Individual Defendants caused the Company to issue a press
release with a headline which read: "PSS World Medical Reports Record Results; Operational
Improvements Lead to Revenue and Profit Increases." This press release quoted Kelly as stating:
"Not only are we on track to accomplish our goals this year, but we are seeing very good future
trends in all of our businesses. . .We have strengthened the Company operationally. . .We made solid
progress in all of our businesses, and we are still on track to achieve our stated objective of a 17%
6
increase in earnings per share for fiscal 2000." Moreover, this press release reported that net income
for the three months ended September 30, 1999 totaled $14.8 million, an increase of $1.5 million,
or 11.3%, over the $13.3 million reported for the three months ended September 30, 1998.
17. The October 26, 1999 press release was materially false and misleading because:
a. there was no basis for the statement that the Company could achieve a 17%
increase in earnings per share for fiscal 2000.
b. it reported net income which was materially overstated by no less than $7
million due to the Company's failure to appropriately provide for uncollectible receivables through
a charge to earnings in compliance with GAAP (FASB Statement No. 5).
c. Kelly's report of operational improvements were a complete fiction as
evidenced by the fact that, at or about the time Kelly was touting such improvements, the Company
had lost business records which rendered it unable to pursue collection of $2.6 million of receivables
and, as later admitted, the Company's internal controls over inventory, accounts payable, sales, and
accounts receivable were materially deficient.
18. On or about November 15, 1999, the Individual Defendants caused the Company to
file its Form 10-Q for the quarter ended September 30, 1999 with the SEC ("the September 30, 1999
Form 10-Q"). This document, which was signed by Defendant Smith, repeated the financial results
which were reported in the October 26, 1999 press release and also reported that accounts receivable,
net of allowances, were $302,979,000.
19. The September 30, 1999 Form 10-Q and the financial statements contained therein
were materially false and misleading for the reason set forth in item "b" of paragraph 2 above,
because the reported accounts receivable was materially overstated by no less than $12 million and
because they failed to comply with disclosure requirements of GAAP and the SEC. In particular,
7
they failed to provide commentary relating to the effects of significant events upon the interim
financial results, in violation of APB Opinion No. 28.
20. The SEC has stated, in Securities Act Release No. 6349 (September 8, 1981), that:
...it is the responsibility of management to identify and address thosekey variables and other qualitative and quantitative factors which arepeculiar to and necessary for an understanding and evaluation of theindividual company.
21. In addition, as noted by the SEC in Accounting Series Release 173:
...it is important that the overall impression created by the financialstatements be consistent with the business realities of the company'sfinancial position and operations.
22. The September 30, 1999 Form 10-Q and the financial statements contained therein,
in contravention of GAAP, failed to (i) disclose the foregoing facts, (ii) provide those disclosures
which were required by GAAP, and (iii) identify and address those key variables and other
qualitative and quantitative factors which were peculiar to and necessary for an understanding and
evaluation of the Company. Consequently, the overall impression created by the financial statements
was not consistent with the business realities of the Company's reported financial position and
operations.
23. The undisclosed adverse information concealed by Defendants was the type of
information which, because of SEC regulations, rules of the national stock exchanges and customary
business practice, 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
8
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.
24. On January 24, 2000, the Individual Defendants caused the Company to issue a press
release announcing third quarter results and the engagement of Donaldson, Lufkin & Jenrette
Securities Corporation to advise the Company's Board "in considering various strategic alternatives
to maximize shareholder value, including alternatives which may involve the entire Company or its
separate operating divisions." Announcing results for the third quarter ended December 31, 1999,
the press release reported the following results "before special items":
For the three months ended December 31, 1999, net sales increased15.7% to $462.1 million compared with $399.5 million for the sameperiod last year. Net income for the quarter was $12.9 million, or$0.18 per diluted share, on 71.3 million weighted average sharesoutstanding versus $15.9 million, or $0.22 per diluted share, on 72.1million weighted average shares outstanding for the prior year period.Net income including special items for the quarter ended December31, 1999, was $11.9 million, or $0.17 per diluted share.
During the quarter ended December 31, 1999, the Companyexperienced a shortfall of shipments from several of its equipmentsuppliers which negatively impacted revenues of its physician andimaging businesses by approximately $15.0 million during thequarter.
Mr. Kelly added, "Problems with suppliers materially impacted ourquarterly results..."
25. The January 24, 2000 press release was materially false and misleading because it:
a. failed to disclose the material fact that, the "problems with suppliers" which
"materially impacted" the Company's results were caused by the Company's woefully deficient
internal controls over inventory and accounts payable (deficiencies which were later admitted to by
Defendants) and not with the suppliers' inability to deliver products;
9
b. reported net income which was materially overstated by no less than $12
million and $7 million, respectively, due to the Company's failure to appropriately provide for
uncollectible receivables through a charge to earnings in compliance with GAAP (FASB Statement
No. 5); and
c. failed to disclose the material fact that, during the third quarter, there was a
loss of business records which resulted in the Company's inability to collect approximately $2.6
million of receivables and that such uncollectible receivables were not written off in compliance with
GAAP (FASB Statement No. 5).
26. On or about February 14, 2000, the Individual Defendants caused the Company to file
its Form 10-Q for the quarter ended December 31, 1999 with the SEC ("the December 31, 1999
Form 10-Q"). This document, which was signed by Defendant Smith, repeated the financial results
which were reported in the January 24, 2000 press release and also reported that accounts receivable,
net of allowances, were $322,289,000. In addition, the December 31, 1999 Form 10-Q stated:
. . .accounts receivable increased approximately $20 millionprimarily due to disruptions caused by the transition of the Gulf Southadministrative offices and functions to Jacksonville, FL. TheCompany expects normalization of these balances by March 31, 2000.
27. The December 31, 1999 Form 10-Q and the financial statements contained therein
were materially false and misleading for the reasons set forth in items "b" and "c" of paragraph 2
above, the reasons set forth in paragraph 7 above, and because the reported accounts receivable were
materially overstated by no less than $12 million. In particular, they failed to provide commentary
relating to the effects of significant events upon the interim financial results, in violation of APB
Opinion No. 28.
10
28. On June 22, 2000, the Individual Defendants caused the Company to issue a press
release announcing year end results and the fact that it had entered into a definitive merger agreement
with Fisher Scientific International, Inc. ("Fisher"). According to this press release, Fisher would
acquire PSSI in a tax-free stock-for-stock exchange transaction wherein Fisher would exchange
0.3121 of a share of its stock for each share of PSSI. As stated in the press release, which described
Defendant Smith as the Company's "contact" person, the acquisition was anticipated to occur in the
fourth quarter of 2000 and was subject to approval by regulatory agencies and both companies'
shareholders, and satisfaction of certain other conditions. Commenting on the merger agreement,
Defendant Kelly stated:
We are delighted to join forces with Fisher Scientific. We believe ourshareholders will be able to participate in the upside potential createdby this strategic combination, and that our customers will see anenhanced range of products and services with better access to FisherScientific world-class technology. Finally, employees will be part ofa larger company that is well-positioned to be the industry leader.
29. The announced results for the fourth quarter and year ended March 31, 2000 reflected
the belated recognition of a $12.1 million reserves for uncollectible receivables ($2.6 million of
which was due to the Company's "a loss of records") and, therefore, these reported results drastically
missed Wall Street's expectations. As a result of the poor earnings announcement, the price of the
Company's stock dropped. The drop, however, was artificially softened by the fact that PSSI's stock
(due to the 0.3121 to 1.0 exchange value) began to trade in tandem with the stock of Fisher. This
tandem pricing continued to materially and artificially inflate the Company's stock price throughout
the Class Period.
30. The June 22, 2000 press release was materially false and misleading because the
Individual Defendants knew and concealed the fact that Fisher's consummation of the merger
11
pursuant to the announced terms (i.e. an exchange of 0.3121 of a share of Fisher stock for each share
of PSSI) was contingent upon the Individual Defendants' ability to (i) fraudulently report and conceal
inflated EBITDA for the quarter ended June 30, 2000 and to (ii) conceal the fact that there existed
material weaknesses in the Company's inventory, accounts payable, sales, and accounts receivable
procedures which permeated and adversely impacted the very core of the Company's operating and
financial reporting processes.
31. On June 23, 2000, the Individual Defendants caused PSSI to file its Form 10-K for
the fiscal year ended March 31, 2000 with the SEC ("the fiscal 2000 Form 10-K"). This document,
which was signed by the Individual Defendants, repeated the financial results which were reported
in the June 22, 2000 press release and it stated:
The [Fisher] merger is subject to various conditions. . .In particular,the transaction is conditioned upon our meeting a minimumEBITDA threshold for our quarter ended June 30, 2000, retainingcustomers and suppliers that are material to our business and thesuccessful rollout of our new technology systems.
32. On June 27, 2000, the Company filed a Form 8-K with the SEC which contained an
appended copy of the June 22, 2000 press release and other documents, including the merger
agreement, which further led the investment community to believe that Fisher would be acquiring
PSSI in a tax-free stock-for-stock exchange transaction wherein Fisher would exchange 0.3121 of
a share of its stock for each share of PSSI. The appended merger agreement, in relevant part, stated
that:
The amount of the Company 2000 First Quarter EBITDA (asdefined in the following sentence) shall have been in excess of$23.0 million. The "Company 2000 First Quarter EBITDA"means the Company's EBITDA (earnings before interest expense,income taxes, depreciation and amortization) for the quarterended June 30, 2000 as reported in Company's Quarterly Reporton Form 10-Q for such quarter, which shall be calculated by (i)
12
taking the Company's operating income for such period, calculated ona basis consistent with the calculation of the Company's operatingincome for prior periods reflected in the Company FinancialStatements and Company SEC Reports, and without including anyreversal of reserves or provisions, and (ii) adding back one-timemerger and restructuring charges relating to existing mergers andrestructuring plans (including those related to the transactionscontemplated by this Agreement), financing income relating to tradeaccounts, and depreciation and amortization expenses during suchperiod accounted for on a basis consistent with past practice to theextent reported in the Company Financial Statements and CompanySEC Reports.
33. Significantly, the merger agreement also provided (Section 7.7, "Investigation and
Confidentiality") that Fisher was granted access to all financial and operating data and other
information regarding the Company, its Subsidiaries and their businesses, and had the right to make
an investigation of PSSI prior to closing. In this regard, Fisher was granted access to the property,
books and records, and officers and employees of PSSI.
34. The June 27, 2000 Form 8-K was materially false and misleading for the reasons set
forth in paragraph 30 above.
35. On August 8, 2000, Fisher issued a press release which stated that Fisher had
completed its review of PSSI's results of operations for the quarter ended June 30, 2000, and that:
PSS exceeded Fisher's requirement to report adjusted EBITDA(earnings before interest, taxes, depreciation and amortization) of notless than $23 million. This satisfies a significant closing conditionrelating to Fisher's previously announced proposal to acquirePSS World Medical via the exchange of .3121 of a Fisher sharefor each outstanding share of PSS common stock.
36. The August 8, 2000 Fisher press release also quoted Paul M. Montrone, chairman and
chief executive officer of Fisher as stating: "We're very pleased that PSS exceeded the $23 million
EBITDA requirement, confirming our belief that it is an attractive acquisition for Fisher."
13
37. On August 8, 2000, the Company issued a press release reporting financial results for
the quarter ended June 30, 2000 and announcing that it had "exceeded its requirement to report
EBITDA, as defined in the Merger Agreement, of not less than $23 million for the quarter." The
press release stated, among other things, that:
PSS World Medical, Inc. (Nasdaq/NM:PSSI) announced today thatit achieved $470.2 million in net sales for the quarter ended June 30,2000, a 7.6% increase compared with $437.0 million in the sameperiod last year. The following PSS World Medical results for thefirst quarter refer to results from operations before special itemsunless otherwise noted. Special items include costs and expensesrelated to mergers, merger-related activities, and restructuringcharges.
The Company also announced that it exceeded its requirement toreport EBITDA, as defined in the Merger Agreement, of not lessthan $23 million for the quarter. This satisfies a significantclosing condition relating to Fisher Scientific International's(NYSE:FSH) previously announced proposal to acquire PSSWorld Medical via the exchange of .3121 of a Fisher share foreach outstanding share of PSS common stock. PSS WorldMedical generated $23.6 million of EBITDA during the quarter,as defined in the Merger Agreement with add backs for: (i)depreciation and amortization, (ii) merger, nonrecurring andrestructuring charges and expenses, and (iii) interest income ontrade receivables.
In commenting on the first quarter results, Patrick C. Kelly, chairmanand chief executive officer of PSS World Medical, said, "Our firstquarter results indicate a very strong recovery from our fourth quarter.We have not yet fully recovered to our previous levels of profitability,but we are making steady progress. Our customers' loyalty to ourenterprise remains strong because of our dedication to service, first-in-class products and our highly skilled and empowered employees."
For the three months ended June 30, 2000, net sales increased 7.6%to $470.2 million compared with $437.0 million for the same periodlast year. Net income for the quarter decreased to $8.3 million, or$0.12 per diluted share, on 71.3 million weighted average sharesoutstanding versus $12.6 million, or $0.18 per diluted share, on 71.2million weighted average shares outstanding for the prior year period.
14
Net income including special items for the quarter ended June 30,2000, was $5.6 million, or $0.08 per diluted share.
38. The August 8, 2000 press release, which described Defendant Smith as the Company's
"contact" person, was materially false and misleading for the reasons set forth in paragraph 30 above,
because the Company's true EBITDA as defined in the Merger Agreement amounted to less than $22
million for the quarter ended June 30, 2000 and not $23.6 million as reported, and because this press
release reported:
a. Operating income of $13.9 million when, in fact, the Company's operating
income was $12.268 million;
b. Net income of $5.6 million when, in fact, the Company's net income was
$4.62 million.
39. On August 10, 2000, the Company filed its Form 10-Q for the quarter ended June 30,
2000 with the SEC ("the fiscal 2001 first quarter Form 10-Q"). (PSSI’s fiscal year begins on April
1.) This document, which was signed by David A. Smith (in his capacity as Executive Vice
President and Chief Financial Officer), presented financial results which were consistent with those
previously announced in the Company's August 8, 2000 press release. In addition, it contained the
following calculation of EBITDA, "as defined in the Merger Agreement with Fisher Scientific
International, Inc.":
Quarter Ended June 30, 2000
(In Thousands)
Operating income $ 13,911Plus: Depreciation and amortization 5,474Merger, nonrecurring and restructuring charges and expenses 3,601Interest income on trade receivables 606EBITDA, as defined $ 23,592
15
40. The fiscal 2001 first quarter Form 10-Q was materially false and misleading for the
reasons set forth in paragraph 38 above.
41. On September 1, 2000, the Company issued a press release reporting that the merger
agreement had been terminated. Upon the release of this information, the market no longer valued
the price of each share of PSSI's stock as equivalent to 0.3121 of a share of Fisher's stock (the factor
which buoyed the price of the Company's stock during the Class Period) and, accordingly, the price
of the Company's stock collapsed. Shares of PSSI's stock, which closed at $6 3/8 prior to
announcement of the merger termination, closed at $4 13/16 on an inordinate volume of 5,730,200
shares upon dissemination of the news. As the sell-off continued, the price of the Company's stock
settled into the range of approximately $2 3/4 - $3 3/4.
42. Unbeknownst to the investing public, the merger had been terminated because Fisher
had, through its investigation of the Company's books and records, learned of the facts which were
only disclosed to the investing public on June 27, 2001.
43. On June 27, 2001, PSSI filed its Form 10-K for the fiscal year ended March 31, 2001
with the SEC ("the fiscal 2001 Form 10-K"). This document, for the first time, disclosed the fact
that the Company's internal controls over inventory, accounts payable, sales, and accounts receivable
were, at all relevant times, materially deficient and that the Company had previously issued financial
statements for the quarter ended June 30, 2000 which were materially misleading. In this regard, the
fiscal 2001 Form 10-K disclosed the following:
16
Three Months EndedJune 30, 2000 ($ In Thousands)
Originally Percentage Reported Restated Difference
Income from operations 13,911 12,268 13.4%Pre-Tax Income 10,388 8,745 18.8%Provision for income taxes 4,764 4,125 15.5%Net income 5,624 4,620 21.7%
44. Based upon the above restated financial data, the correct (non-fraudulent)
EBITDA as defined in the Merger Agreement with Fisher would not have been reported as presented
in paragraph 27 above. Instead, it would have been reported as being materially below the critical
$23 million threshold as follows:
Quarter Ended June 30, 2000 (In Thousands)
Operating income $ 12,268Plus: Depreciation and amortization 5,474Merger, nonrecurring and restructuring charges and expenses 3,601Interest income on trade receivables 606**EBITDA, as defined $ 21,949
45. In addition, the fiscal 2001 Form 10-K stated that:
The Company's independent auditors, ArthurAndersen, advised the Company in writing that theynoted certain matters involving internal controls thatthey considered to be material weaknesses. Thesematters involved inventory, accounts payable, sales,and accounts receivable procedures. In order toremedy this situation, the Company has implementedor is in the process of implementing the correctivepolicies and procedures recommended by ArthurAndersen as well as additional policies andprocedures identified by management.
*****
17
During the fourth quarter of fiscal 2001, the Companyrestated its previously issued consolidated financialstatements for the quarters ended June 30, 2000,September 30, 2000, and December 29, 2000.
As a result of an analysis of the Company's accountsreceivable records during the fourth quarter of fiscal2001, the Company recorded adjustments to reducesales and accounts receivable by $1.6 million, $1.9million, and $0.5 million during the first, second, andthird quarters of fiscal 2001, respectively.
46. 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
GAAP are presumed to be misleading or inaccurate. [17 C.F.R. §210.401 (a)(1)]. The Company's
financial statements which were disseminated to the investing public during the Class Period, which
represented that the Company's financial position and results of operations were in conformity with
GAAP, were false and misleading for the reasons alleged herein and because they constituted an
extreme departure from GAAP. Said financial statements violated the principles of fair financial
reporting and the following GAAP concepts and principles, among 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).
18
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).
f. The principle that the accounting method applied should be appropriate in the
circumstance (AU 411.04).
g. The principle that the financial statements, including the related notes, should
be informative of matters that affect their use, understanding, and interpretation (AU 411.04).
h. The principle that the 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 (AU 411.04).
i. The principle that 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 financial statements (APB Opinion No. 22).
j. The principle that management should provide commentary relating to the
effects of significant events upon the interim financial results (APB Opinion No. 28).
k. The principle that profit is deemed to be realized when a sale in the ordinary
course of business is effected (Chapter 1A of Accounting Research Bulletin No. 43).
19
l. The principle that revenue should ordinarily be accounted for at the time a
transaction is completed (Accounting Principles Board Opinion No. 10).
m. The principle that 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).
n. The principle that 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).
47. The Individual Defendants knew or recklessly disregarded the facts set forth herein
concerning falsification of the Company's assets, expenses and earnings. Defendants further knew
or recklessly disregarded the fact that the method of accounting used by the Company to account for
the Company's revenues, assets, expenses and earnings constituted a material departure from GAAP,
and that such departure resulted in material misstatements of the Company's financial position and
results of operation. None-the-less, they permitted the Company to disseminate materially
misleading financial statements and, moreover, they failed to make disclosure of or to require the
Company to disclose this fact to the investing public.
48. The September 30, 1999 Form 10-Q, the December 31, 1999 Form 10-Q, and the
fiscal 2001 first quarter Form 10-Q each contained a management representation which stated that:
The condensed consolidated financial statements ofPSS World Medical, Inc. ("PSS" or the "Company")reflect, in the opinion of management, all adjustmentsnecessary to present fairly the financial position andresults of operations for the periods indicated.
20
49. The foregoing statements were materially false and misleading because the financial
statements which were contained within the September 30, 1999 Form 10-Q, the December 31, 1999
Form 10-Q, and the fiscal 2001 first quarter Form 10-Q did not reflect "present fairly the financial
position and results of operations for the periods indicated" due to the violations of GAAP cited
above and because the financial statements also violated (AU 411.04) the 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.
THE COMPANY'S FINANCIAL STATEMENTSAND RELATED REPRESENTATIONS
WERE MATERIALLY FALSE AND MISLEADING
50. All of the reported financial statements and the related discussions contained therein,
which the Individual Defendants caused the Company to file and issue during the Class Period, and
in public reports about and press releases issued by the Company were false products of financial
manipulations which deceived members of the investing public who purchased PSSI securities based
upon those representations.
51. During the Class Period, Defendants materially misled the investing public, thereby
inflating the price of PSSI securities 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
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to disclose material adverse information and misrepresented the truth about the Company, its
financial performance, accounting, reporting and condition, including, inter alia:
a. During the Class Period, the Company reported revenues, income and earnings
per share that were materially overstated;
b. The Company's financial statements did not present, in all material respects,
the Company's true financial condition, and did not reflect all adjustments which were necessary for
a fair statement of the interim and full year period presented;
c. The Company's internal controls were inadequate and, as a result, the
Company improperly and prematurely recognized revenues; and
d. The Company's interim financial statements for at least the quarterly periods
ending September 30, 2000 were not presented in conformity with GAAP or principles of fair
reporting.
52. In addition, the Defendants falsely and materially overstated the Company's net
income and earnings per share for each of the Company's quarterly periods during the Class Period.
Moreover:
a. Defendants failed to disclose the existence of known trends, events or
uncertainties that it reasonably expected would have a material unfavorable impact on net revenues
or income or that were reasonably likely to result in the Company's liquidity decreasing in a material
way, in violation of Item 303 of Regulation S-K under the federal securities laws (17 C.F.R.
229.303), and that failure to disclose rendered the statements that were made during the Class Period
materially false and misleading; and
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b. By failing to file financial statements with the SEC which conformed to the
requirements of GAAP, such financial statements were presumptively misleading and inaccurate
pursuant to Regulation S-X, 17 CFR 210.4-01(a)(1).
53. As a result of its accounting improprieties, particularly with respect to the Company's
revenue recognition practices, the Company's reported financial results (and all Defendants) also
violated at least the following provisions of GAAP for which each Defendant is responsible:
a. The principle that financial reporting should provide information that is useful
to present to potential investors and creditors and other users in making rational investment, credit
and similar decisions was violated (FASB Statement of Concepts No. 1, ¶ 34);
b. The principle that financial reporting should provide information about the
economic resources of an enterprise, the claims to those resources, and the effects of transactions,
events and circumstances that change resources and claims to those resources was violated (FASB
Statement of Concepts No. 1, ¶ 40);
c. The principle that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated. To the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general (FASB Statement of Concepts
No. 1, ¶ 50);
d. The principle that financial reporting should provide information about an
enterprise's financial performance during a period was violated. Investors and creditors often use
information about the past to help in assessing the prospects of an enterprise. Thus, although
investment and credit decisions reflect investors' expectations about future enterprise performance,
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those expectations are commonly based at least partly on evaluations of past enterprise performance
(FASB Statement of Concepts No. 1, ¶ 42);
e. The principle that financial reporting should be reliable in that it represents
what it purports to represent was violated. That information should be reliable as well as relevant
to a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶ 58-59);
f. The principle of completeness, which means that nothing is left out of the
information that may be necessary to ensure that it validly represents underlying events and
conditions, was violated (FASB Statement of Concepts No. 2, ¶ 79); and
g. The principle 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
was violated. The best way to avoid injury to investors is to try to ensure that what is reported
represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶ 95, 97).
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
54. At all relevant times, the market for PSSI common stock was an efficient market for
the following reasons, among others:
a. PSSI common stock met the requirements for listing, and was listed and
actively traded, on the NASDAQ National Market System, a highly efficient market;
b. As a regulated issuer, PSSI filed periodic public reports with the SEC and the
NASD;
c. PSSI stock was followed by securities analysts employed by major brokerage
firms who wrote reports which were distributed to the sales force and certain customers of their
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respective brokerage firms. Each of these reports was publicly available and entered the public
marketplace.
d. PSSI regularly issued press releases which were carried by national
newswires. Each of these releases was publicly available and entered the public marketplace.
55. As a result, the market for PSSI securities promptly digested current information with
respect to PSSI from all publicly-available sources and reflected such information in PSSI 's stock
price. Under these circumstances, all purchasers of PSSI common stock during the Class Period
suffered similar injury through their purchase of stock at artificially inflated prices and a presumption
of reliance applies.
NO SAFE HARBOR
56. 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. The
specific statements pleaded herein were not identified as "forward-looking statements" when made.
Nor was it stated with respect to any of the statements forming the basis of this complaint that actual
results "could differ materially from those projected." 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 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 PSSI who knew that those statements were false when made.
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SCIENTER ALLEGATIONS
57. As alleged herein, Defendants acted with scienter in that they knew or recklessly
disregarded the fact that the public documents and statements, issued or disseminated by or 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 violators 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 PSSI and its
business practices, their control over and/or receipt of PSSI's allegedly materially misleading
misstatements and/or their associations with the Company which made them privy to confidential
proprietary information concerning PSSI were active and culpable participants 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.
FIRST CLAIM
(Violations Of Section 10(b) Of The Exchange ActAnd Rule 10b-5 Promulgated Thereunder Against
All Defendants)
58. Plaintiff repeats and realleges each and every allegation contained above.
59. Each of the Defendants: (a) knew or recklessly disregarded material adverse non-
public information about PSSI's financial results and then existing business conditions, which was
not disclosed; and (b) participated in drafting, reviewing and/or approving the misleading statements,
releases, reports and other public representations of and about PSSI.
60. During the Class Period, Defendants, with knowledge of or reckless disregard for the
truth, disseminated or approved the false statements specified above, which were misleading in that
26
they contained misrepresentations and failed to disclose material facts necessary in order to make
the statements made, in light of the circumstances under which they were made, not misleading.
61. Defendants have violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder in that they: (a) employed devices, schemes and artifices to defraud; (b) made untrue
statements of material facts or omitted to state material facts necessary in order to make statements
made, in light of the circumstances under which they were made, not misleading; or (c) engaged in
acts, practices and a course of business that operated as a fraud or deceit upon the purchasers of PSSI
stock during the Class Period.
62. Plaintiff and the Class have suffered damage in that, in reliance on the integrity of the
market, they paid artificially inflated prices for PSSI stock. Plaintiffs and the Class would not have
purchased PSSI stock at the prices they paid, or at all, if they had been aware that the market prices
had been artificially and falsely inflated by Defendants' false and misleading statements.
SECOND CLAIM
(Violation Of Section 20(a) Of The Exchange Act Against Individuals Defendants)
63. Plaintiff repeats and realleges each and every allegation contained above.
64. The Individual Defendants acted as controlling persons of PSSI within the meaning
of Section 20(a) of the Exchange Act. By reason of their senior executive and/or Board positions
they had the power and authority to cause PSSI to engage in the wrongful conduct complained of
herein.
65. By reason of such wrongful conduct, PSSI and the Individual Defendants are liable
pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these Defendants'
wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with
their purchases of PSSI stock during the Class Period..
27F:\POSSIBLE\dar00981.wpd
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
i. Determining that this action is a proper class action, designating Plaintiff as Lead
Plaintiff and certifying Plaintiff as class representative under Rule 23 of the Federal Rules of Civil
Procedure and their counsel as Lead Counsel;
ii. Awarding compensatory damages in favor of Plaintiff 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;
iii. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees; and
iv. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: July 13, 2001 MILBERG WEISS BERSHAD HYNES & LERACH LLP
By: ___________________________Kenneth J. Vianale(Fla. Bar No. 169668)5355 Town Center RoadSuite 900Boca Raton, Florida 33486Telephone: (561) 361-5000Facsimile: (561) 367-8400
FRUCHTER & TWERSKYJack G. Fruchter60 East 42nd Street, Suite 4700New York, NY 10022Tel: (212) 687-6655Fax: (212) 557-6151
Attorneys for Plaintiff