Page 1 of 70 Consolidated Complaint for Violation of the Securities Exchange Act of 1934 Source: Milberg Weiss Date: 04/10/02 Time: 3:08 PM MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH (68581) THOMAS E. EGLER (189871) 401 B Street, Suite 1700 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) - and - PATRICK J. COUGHLIN (111070) RANDI D. BANDMAN (145212) SYLVIA WAHBA (197612) ELI R. GREENSTEIN (217945) 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax) Lead Counsel for Plaintiffs UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION In re APPLE COMPUTER, INC. ) Master File No. C-01-3667-CW SECURITIES LITIGATION ) ________________________________ ) CLASS ACTION ) This Document Relates To: ) CONSOLIDATED COMPLAINT FOR ) VIOLATION OF THE SECURITIES ALL ACTIONS. ) EXCHANGE ACT OF 1934 ________________________________ ) DEMAND FOR JURY TRIAL TABLE OF CONTENTS http://securities.milberg.com/mw-cgi-bin/view_story?uid=filings&conf=/disk22/websites/MW.../1 8/7/02 Page 2 of 70 I. INTRODUCTION II. JURISDICTION AND VENUE III. PARTIES IV. BACKGROUND TO THE CLASS PERIOD V. DEFENDANTS' WRONGFUL COURSE OF CONDUCT AND FALSE AND MISLEADING STATEMENTS A. MacWorld New York 1. July 18-19, 2000: Media and Investor Presentations 2. July 20: Media Reaction 3. July 20: Investment Analyst Reaction 4. July 25-31: Magazine Reaction B. The MacWorld Statements Were False and Misleading When Made 1. Apple's Product Development Problems (a) The G4 Cube (b) The Power Mac G4 Dual Processor (c) The iMac 2. Inventories of Finished Goods and Component Parts 3. The K-12 Education Market Debacle (a) The Role of Apple's Agents (b) Firing Apple's Agents (c) The Aftermath C. After MacWorld: Further False and Misleading Statements 1. August Reports 2. Late August Analyst Conferences 3. August 25-30: Top Apple Executives Bail Out http://securities.milberg.com/mw-cgi-bin/view_story?uid=filings&conf=/disk22/websites/MW.../1 8/7/02 Page 3 of 70 4. Early September Reports 5. September 13, 2000: Jobs in Paris and CNBC 6. September 21, 2000: Questions Start 7. September 28, 2000: Morning - All Is Rosy VII. THE ADVERSE FACTS COME OUT VIII. INSIDER STOCK SALES A. Apple's Senior Officers' Stock Sales Were Unusual and Suspicious B. Options Valuation Provides Additional Evidence of Scienter C. Statistical Analysis Provides Additional Evidence of Scienter IX. CLASS ACTION ALLEGATIONS X. NO SAFE HARBOR XI. CLAIM FOR RELIEF XII. PRAYER FOR RELIEF XIII. JURY DEMAND I. INTRODUCTION 1. This is a class action on behalf of all purchasers of the common stock of Apple Computer, Inc. ("Apple" or the " Company") between 7/19/00 and 9/28/00, inclusive (the "Class Period"), seeking to pursue remedies under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and SEC Rule 10b-5. 2. On July 18 and 19, 2000, defendant Steve Jobs ("Jobs"), CEO of defendant Apple, kicked off a public relations blitz to promote the Company and its newest line of personal computers: the Power Mac G4, a new line of "iMacs" and the Power Mac G4 Cube ("G4 Cube"), a fully-powered computer encased in what Jobs described as a "stunning crystal clear enclosure." 3. Beyond introducing the new computers, however, Jobs and Apple representatives used the product introductions, which followed the announcement of flat 3Q 2000 results, to prop up and encourage investor confidence in Apple. During Jobs' on-stage presentation and in a stock analyst conference call later that day, defendants used the new products as part of a "turnaround story" to position Apple as a "genuine growth company." http://securities.milberg.com/mw-cgi-bin/view_story?uid=filings&conf=/disk22/websites/MW.../1 8/7/02 Page 4 of 70 4. Defendants claimed that sales of the new computers would result in Apple achieving strong revenue and earnings per share ("EPS") growth in its 4Q 2000 (to end 9/30/00) and for its full fiscal year 2001 ("FY 2001"). The Company advised analysts to increase the forecasts for Apple's revenue (and EPS) for these periods to $2.0+ billion ($0.40+ EPS) and $9.7+ billion ($2.10-$2.15 EPS). 5. As Apple's 4Q 2000 unfolded, Apple advised analysts that its new products were being well received and selling very well, that back-to-school sales and sales to its K-12 education market had accelerated as expected, that its vaunted component part and finished goods inventories were under control and that the Company would "hit" its financial forecasts. As a result, Apple's stock climbed to a Class Period high of $64-1/8 in early September 2000. Right at the peak of this PR drive, four top Apple officers unloaded 370,000 shares of their Apple stock for $22 million. 6. Suddenly, just 20-25 trading days later, on September 28, 2000, Apple shocked investors by revealing a huge revenue and EPS shortfall for 4Q 2000 as a result of very poor K-12 education market sales and poor consumer acceptance of its new personal computer products (some of which had been late to market, had defects and lacked features which were essential for market success). The lack of computer sales resulted in Apple accumulating excessive inventories of finished goods in its distribution channel and caused the Company to cancel component part orders and to incur large financial penalties. 7. As rumors of Apple's troubles circulated prior to and then following Apple's shocking disclosure, Apple's stock collapsed from $61-3/64 on 9/20/00 to $25-3/8 on 9/29/00, continuing to fall to as low as $17 and then to $13-5/8, as investors absorbed the full impact of these shocking revelations - a stock decline that wiped out over $10 billion of Apple's market capitalization in just a few days! The Company felt reverberations from this disaster through the entire FY 2001, taking a loss of approximately $250 million in the 1Q 2001 and ultimately losing $37 million for the FY 2001 (a loss of $0.11 per share). 8. When Jobs told the assembled media representatives and Macintosh faithful that the G4 Cube he presented on stage was a "brain in a beaker" hanging in a "stunning crystal clear enclosure," he misrepresented the fact that the G4 Cube he used did not have the noticeable "mold lines" and cracking that plagued the G4 Cubes coming off the Company's manufacturing lines. While Jobs bragged about the parallel processing speeds achieved by the new Power Mac G4 Dual Processor tower computer, he failed to note that Apple's then-current Operating System, O/S 9, could not take advantage of the dual processor architecture. Rather, the products potential would be largely wasted until the next-generation operating system, O/S X caught up with the hardware advance. When Jobs ladled out the thesaurus full of superlatives about the G4 Cube, he failed to mention a known design defect Apple faced with the computer's on/off switch. Jobs also neglected to mention that Apple's new generation of iMacs lacked features demanded by back-to-school and other purchasers that fall: CD- rewritable drives and 17 inch monitors. Finally, while Jobs asserted that Apple expected to start selling the G4 Cube in volume in August 2000, he failed to mention the known problems with the production lines that made the August 2000 ramp-up date impossible. Less than a year later, on July 3, 2001, Apple completely abandoned its attempt to manufacture the G4 Cube. 9. Apart from Apple's product problems, a wholesale change in the Company's key K-12 educational sales process was already taking its toll when Jobs gave his speech on July 19, 2000. Three months earlier, on April 15, 2000, Apple had told its long-standing group of independent K-12 sales agents they would be terminated, in favor of an Apple-only "direct sales" model as of June 30, http://securities.milberg.com/mw-cgi-bin/view_story?uid=filings&conf=/disk22/websites/MW.../1 8/7/02 Page 5 of 70 2000. While Apple, throughout the Class Period, asserted this transition was progressing nicely and education sales had accelerated, this was simply not the case. The terminated agents cannibalized 4Q 2000 sales in favor of the last round of commissions - an impact Apple began to recognize immediately in July 2000. Jobs subsequently acknowledged Apple knew this in July 2000 explaining that the terminated agents "did absolutely nothing to build for sales in the July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start from scratch." 10. Thus, this action involves the dissemination of false and misleading statements by defendants concerning the state of demand for Apple's newest personal computer products - upgraded iMac and Power Mac G4 personal computers and its completely new G4 Cube personal computer - the quality and appearance of the G4 Cube, as well as its availability, the state of Apple's component part and finished goods channel inventories, changes in Apple's product distribution network for its vitally important K-12 education market and the very negative impact the undisclosed adverse conditions relating to these matters were having on Apple's business operations and financial results. 11. As late as two weeks before the end of the 4Q 2000, Apple continued to mislead the market. On 9/13/00 Jobs appeared on CNBC and was questioned about a shortage of the Company's G4 Cube.