Duane Read, Inc. Securities Litigation 02-CV-6478-Consolidated

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE DUANE READE, INC. ) CIVIL ACTION NO.: SECURITIES LITIGATION ) 1:02cv6478(NRB) ) CONSOLIDATED AMENDED ) COMPLAINT Lead Plaintiff, individually and on behalf of all other persons similarly situated, alleges upon personal knowledge as to itself and its own acts, and upon information and belief as to all other matters, based upon, inter alia, the investigation made by and through its attorneys, which investigation included, without limitation, communications with persons with first hand knowledge of the allegations herein, including former employees of Duane Reade ("Duane" or the "Company"), who are knowledgeable about Duane's business, operations, accounting and business practices and/or about the industry and markets in which Duane operated, and review and analysis of various accounting literature and public statements, including documents filed by or on behalf of Duane with the Securities and Exchange Commission ("SEC"), news and media reports, press releases, and reports by securities analysts. Plaintiff believes that, after a reasonable opportunity for discovery, further substantial evidentiary support for the allegations set forth herein will be shown to exist. NATURE OF THE ACTION 1. This is a federal class action on behalf of purchasers of the common stock of Duane between April 1, 2002 and July 24, 2002 inclusive (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants are the Company, Tony Cuti, Duane's President, Chief Executive Officer and Chairman of the Board of Directors, Gary Charboneau, Duane's Senior Vice President of Sales and Marketing, and John K. Henry, Senior Vice President and Chief Financial Officer who were responsible for the public dissemination of materially false and misleading statements made during the Class Period. Cuti, Charboneau, and Henry will be collectively referred to herein as the "Individual Defendants." 2. As alleged in detail below, during the Class Period, Defendants knowingly issued to the investing public materially false and misleading financial statements, press releases, and other information concerning Duane's overall financial condition. Moreover, Defendants' failed to correct their false and misleading statements throughout the Class Period. Defendants were motivated to issue materially false and misleading statements and omissions to conceal the true financial condition of the Company. Having inflated the price of Duane common stock artificially, Defendants were able to retire certain of the Company's high cost debt and to acquire assets using far fewer shares of the Company's stock. 3. By 2000, the Company was involved in a campaign to open a Duane Reade drugstore on virtually every corner in Manhattan. By the end of 2001, the Company was operating more than 200 stores in the New York City area and the Company was setting its sights even higher — Duane announced its intention to open 35 new stores in 2002. 4. To effectuate its 2002 expansion plan, Defendants had to rid the Company of its 9 114 % senior convertible notes coming due in 2008 and obtain an infusion of capital. As a result, between April 10, 2002 and June 21, 2002 the Company commenced and completed a $381 million convertible note offering due in 2022 and corresponding retirement of its 9 1/4 % senior convertible notes due in 2008. The convertible note offering depended on the issuance of 5.389 . million shares of Company stock. Additionally, the Company continued its practice of acquiring 2 pharmacy assets using common stock as currency and orchestrated at least one such acquisition during the Class Period. 5. As the 2001 fiscal year came to a close, the Company's business seemed to be thriving. Despite the "temporary dampening" of revenues caused by the terrorist attacks on September 11, 2001, the Company on February 19, 2002 announced record sales and earnings for fiscal year ending December 29, 2001. The Company attributed its ability to meet expectations in the post-September 11 environment to its self-proclaimed "expertise" as an urban-retailer. On various occasions throughout the first quarter 2002, The Company's purported expertise led Company officials to announce that the New York sales trends were improving. 6. The Company's claimed ability to predict sales trends after the September 11th attacks appeared to be substantiated as the Company, on April 25, 2002, announced that Duane had achieved "record sales and earnings" for the first quarter 2002. Additionally, the Company reiterated that sales, both pharmacy and non-pharmacy sales (referred to as "front-end sales") were continuing to improve post-9/11. Taking advantage of this purported trend to push ahead with its expansion plan, Company officials again touted their self-proclaimed "urban retailing knowledge" and assured investors that the Company officials would achieve sales and earnings estimates of $335 million and $.40 - $.44 for the second quarter 2002, respectively. 7. The improvement in front-end sales was vitally important to Defendants because the Company carried 33 percent more front-end merchandise than the national average and the gross margins on the front-end merchandise are two times higher than those on prescription drugs. 8. Unbeknownst to investors, however, with a month of the second quarter already 3 behind the Company, Defendants knew on April 25, 2002, but failed to disclose, that the Company's front-end sales business was trending downwards and that they would not achieve the previously announced sales and earnings estimates. 9. In fact, Defendants knew that their April 25, 2002 statements were materially false and misleading when made as they misrepresented the financial condition of the Company and failed to disclose the following information, which they monitored on a daily basis: a. The Company's front-end sales were declining; and b. Costs associated with already planned new store openings would contribute to lower earnings. 10. Moreover, despite repeated statements by analysts and members of the press recommending that investors purchase stock in the Company based on the April 25, 2002 false and misleading statements, Defendants made no statements during the Class Period to update and/or correct them. 11. Additionally, within the Class Period, Defendants learned that theft and vendor errors (referred to as "shrink") were cutting into earnings, but failed to timely disclose such to investors. 12. As mentioned above, Defendants were motivated to make and conceal the aforementioned false and misleading statements throughout the second quarter 2002 to consummate the convertible note offering and corresponding stock issuance and to finalize the pharmacy asset acquisition using artificially inflated Company stock as currency. 13. Had the Company's true financial condition been disclosed at the outset of the 4 second quarter, Duane would not have been able to consummate the aforementioned transactions on the same favorable terms. 14. On July, 25, 2002, Defendants revealed that they missed earnings by more than 50 percent. The news of Duane's disappointing results caused the price of its common shares to fall 38 percent from a closing price on July 24, 2002 of $23.55 to a closing price on July 25, 2002 of $14.60 per share on abnormally heavy trading volume of 5.463 million shares compared to a 52 week volume average of nearly 282,000 shares per day. Defendants blamed the earnings shortfall on slow front-end sales, increased shrink and costs associated with new store openings — issues Defendants had been monitoring on a daily basis since the inception of the Class Period. JURISDICTION AND VENUE 15. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated under Section 10(b) by the SEC [17 C.F.R. § 240.10b-5]. 16. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [IS U.S.C. § 78aa]. 17. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28 U.S.C. § 1391(b). In addition, Duane maintains its principle executive offices at 440 Ninth Avenue, New York, New York in this District. Many of the acts and practices complained of herein occurred in this District. 18. In connection with the acts alleged in this complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not 5 limited to, the mails, interstate telephone communications and the facilities of the national securities markets. PARTIES 19. Lead Plaintiff Capstone Asset Management Company purchased the common stock of Duane at artificially inflated prices during the Class Period and has been damaged thereby. 20. The Court appointed Capstone Asset Management Company to serve as Lead Plaintiff on November 26, 2002. 21. Defendant Duane, incorporated in Delaware, is the largest drug store chain in the metropolitan New York City area which, as of December 28, 2002, operated 228 stores, offering a wide variety of prescription and over-the-counter drugs, health and beauty care items, cosmetics, hosiery, greeting cards, photo supplies and photo finishing. Duane maintains its headquarters and executive offices at 440 Ninth Avenue, New York, NY 10001. 22. Defendant Anthony J. Cuti is and was, at all relevant times, Chairman of the Board of Directors and Chief Executive Officer

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