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NIVRAM CORP. v. HARCOURT BRACE JOVANOVICH

December 8, 1993

NIVRAM CORP., on behalf of itself and all those similarly situated, Plaintiff,
v.
HARCOURT BRACE JOVANOVICH, INC., WILLIAM JOVANOVICH, RALPH D. CAULO, MARGARET MARY MCQUILLAN, JOHN F. BERARDI, and RANDALL E. KRIZEK, Defendants.


CANNELLA


The opinion of the court was delivered by: JOHN M. CANNELLA

CANNELLA, D.J.:

 Defendants' motion to dismiss the complaint is denied. Fed. R. Civ. P. 12(b)(6).

 BACKGROUND

 Plaintiff Nivram commenced the instant action on March 10, 1992, on behalf of a purported class of purchasers of Harcourt Brace Jovanovich ["HBJ"] preferred stock during the period March 30th through November 13, 1989. Nivram claims that the defendants misrepresented HBJ's ability to meet its current and future obligations in contravention of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and section 20 of the 1934 Act. The defendants now move for the dismissal of these claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, interposing the statute of limitations as an affirmative defense. In brief, the defendants argue that the plaintiff had been put on inquiry notice, as a matter of law, of the facts underlying its claims for a duration in excess of the applicable statutory period, and that therefore, the plaintiff's claims are time-barred. For the reasons stated herein, the defendants' motion is denied.

 The facts, as set forth in the public filings pertinent to this action, are as follows. *fn1" In May 1987, HBJ's board of directors adopted a recapitalization plan [the "Recapitalization Plan"]. *fn2" There were three principal components of this plan. First, a special dividend was paid to the holders of common stock and to some holders of HBJ's 6 3/8% Convertible Subordinated Debentures Due 2011. This special dividend consisted, on a per share basis, of $ 40 in cash and one share of a new series of preferred stock, par value $ 1.00 per share, designated 12% Preferred Stock. In the aggregate, this special dividend distributed 1.6 billion dollars in cash and 40.5 million shares of 12% Preferred Stock.

 Second, HBJ repurchased 4.3 million shares of its common stock and 18.8 million dollars in principal amount of its convertible debentures for 264.3 million dollars. As a result of this, in the second quarter of 1987, HBJ reported an extraordinary charge to income, net of taxes, of 11.2 million dollars.

 Third, HBJ issued to its Employee Stock Ownership Plan Trust ["HBJ ESOP"] *fn3" ten shares of a new series of preferred stock, designated as Ten Year Convertible Preferred Stock. These shares were later converted into 4.7 million shares of common stock. In June 1987, the HBJ ESOP purchased 4.8 million shares of common stock from HBJ for an aggregate purchase price of 49.3 million dollars. This transaction was financed by a loan from Southeast Bank, N.A. that was guaranteed by HBJ. In September 1987, funded by the cash proceeds that it had received in connection with the aforementioned special dividend, the HBJ ESOP purchased 10 million newly-issued shares of HBJ common stock for 99 million dollars.

 In June 1987, HBJ issued 40,000 shares of a new series of preferred stock, designated as "Redeemable Exchangeable Escalating Rate Preferred Stock," to First Boston Securities Corp. ["First Boston"] for 83.6 million dollars.

 In September 1987, in connection with the Recapitalization Plan, HBJ issued the following high-yield subordinated debentures: (1) 500 million dollars worth of 13 3/4% Senior Subordinated Debentures Due 1999, (2) 507.5 million dollars worth of 14 3/4% Subordinated Discount Debentures Due 2002, and (3) 250 million dollars worth of 14 3/4% Subordinated Pay-in-Kind Debentures Due 2002.

 The cash outlay for the Recapitalization Plan was, in turn, funded by a series of credit transactions and equity issuances. These transactions included the following: (1) a credit agreement entered into on July 27, 1987, as amended from time to time, under which 1.6 billion dollars of credit was ultimately extended to HBJ (excluding borrowings under the revolving credit facility), (2) a 901.4 million dollar bridge loan from First Boston, which was later repaid through the net proceeds from the sale of three separate issues of high-yield subordinated debentures, *fn4" (3) the sale of the Exchangeable Preferred Stock to First Boston for 83.6 million dollars, and (4) the sale of common stock to the HBJ ESOP for 148.3 million dollars.

 For the year ended December 31, 1987, HBJ charged to income 98.9 million dollars in expenses relating to the Recapitalization Plan, including (1) the accounting adjustments attributable to the write-down to market value of 4.7 million shares of common stock that had been contributed to the HBJ ESOP, and (2) the costs and fees relating to the procurement of bridge financing, including the associated legal, accounting, and investment banking costs.

 In the fourth quarter of 1987, in accordance with the performing-assets sale requirement under the credit agreements, HBJ sold several of its subsidiaries. Included among the subsidiaries sold were businesses engaged in the production of business periodicals, trade shows, and the distribution of school supplies, for a total of $ 334,120,000. HBJ also sold two television stations for a total of $ 10,750,000. *fn5"

 Under the aforementioned credit agreements, HBJ had available a 1.45 billion dollar term-loan facility, a 250 million dollar revolving credit facility for working capital requirements, and a 200 million dollar bridge-loan facility. As of December 31, 1987, there was no outstanding indebtedness under the revolving credit facility, the bridge-loan facility had been retired, and there was outstanding indebtedness of 1.3 billion dollars under the term-loan facility.

 In the fourth quarter of 1988, HBJ modified its capital structure through the implementation of a refinancing plan [the "Refinancing Plan"]. The Refinancing Plan had four principal components: (1) the issuance and sale through a public offering of 10.5 million shares of common stock for gross proceeds of 100 million dollars, the net proceeds of which were applied to reduce the indebtedness outstanding under the revolving credit facility, (2) the issuance and sale through a public offering of 200 million dollars in principal amount of Senior Notes Due 1997 and 200 million dollars in principal amount of 14 1/4% Subordinated Debentures Due 2004, the gross proceeds of which were used to repay the 400 million dollar principal amount under the term-loan credit facility, (3) the issuance and sale through a privately-negotiated transaction of 53.6 million dollars in principal amount of Convertible Subordinated Notes Due 1999, the proceeds of which were used to redeem all then-outstanding shares of the Exchangeable Preferred Stock, *fn6" and (4) the amendment of the credit agreement governing the revolving credit facility to extend the loan maturity and amortization schedule, to ease certain covenants, to reduce the term-loan principal amount, and to extend the maturity of and to increase the amount of the revolving credit facility.


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