Updated Lawsuit charges on TLC exec's filed mar/01 (if anyone cares ):
30. The statements in ¶29 were materially false and misleading. In fact, under Perik and OLearys direction, and with their
actual knowledge:
(a) TLC artificially inflated 3rdQ 1998 revenue, net income and EPS b by recognizing revenue on contingent "sales" which
could be returned and which would adversely affect future results as detailed in ¶¶110-129;
(b) Large TLC customers purchased with an unlimited right of return - including CompUSA, Wal-Mart, Best-Buy and Costco.
CompUSA was an example of "stuffing the distribution channel" in 1998-1999 and C0mpUSA returned substantial amounts
of inventory after the Company had recorded the revenue;
(c) TLCs return policy was devised to allow TLC to inflate its revenues by delaying the time in which a product return was
recorded on TLCs books - if it ever was recorded. The time absorbed by TLCs process for obtaining a return merchandise
authorization was critical at the end of the a quarter, because it was used by TLC defendants to shift the recording of a
credit return into a future quarter;
(d) TLC used the BMG warehouse in South Carolina to store returned merchandise, often without creating any record that
the merchandise was returned, and record keeping was so poor that no one knew at any particular time what software was
available at this warehouse;
(e) TLC also manipulated its financials by using liquidators, such as TAB to dispose of inventory. Large quantities of
product which had been previously "sold" to retailers and returned was sold by TLC to these liquidators for "pennies on the
dollar." The original sale to the retailer, however, would frequently not get reversed on TLCs books and records thereby
overstating its revenues and income;
(f) TLCs two most senior officers, defendants Perik and OLeary, placed heavy emphasis on booking revenue improperly to
drive up the price of TLC stock. Perik and OLearys modus operandi was to "make a big effort to make quarterly numbers."
TLC managements xnodus operandi was well known at TLC. A sales manager in TLCs California operation, Jim Havranek,
told employees at or about the time of the merger that he suspected that "Learning Company is broke" and is "cooking the
books";
(g) TLC also increased revenue improperly by selling products to foreign customers and then reneging on their localization
obligations. A number of sales were made to foreign companies in Asia, Sweden, Spain and Australia, where TLC "booked
the revenue" all at once at the end of a quarter and then tried to renege on their obligations to avoid the localization costs.
For example, following the consummation of an exclusive $2 million deal with the Japanese company Infynisis, TLC
personnel were told to do the bare minimum for Infynisis because the revenue had been booked
and TLC had nothing more to gain. An exclusive, multi-million deal with Anaya, a Spanish company, was similarly treated;
(h) TLC had largely stopped producing new software titles, and was merely repackaging old titles in new boxes, knowing
that customers would later return the unsatisfactory outdated products; TLCs balance sheet was not strong but in fact
included millions in uncollectible receivables and TLC had millions of dollars worth of product in the channel which was
returnable; |
