II. The Factual Allegations
The following factual allegations in the consolidated Complaints
are accepted as true for the purposes of this motion.
ABN is a holding company, which through several subsidiaries in
the United States, Brazil, Australia and New Zealand, operates in
a single industry — secured products and systems. It has three
principal product lines: transaction cards and systems; printing
services and document management; and security printing
solutions. In ABN's Security Printing Solutions Group, the
company designs and prints counterfeit-resistant documents, such
as checks, passports, visas, birth certificates, Social Security
cards, stock and bond certificates and currency.
Until July 1998, Holographics was a wholly owned subsidiary of ABN.
During the fiscal years 1996 and 1997 and the first two quarters of 1998
(ending on June 30, 1998), the revenues of Holographics
represented approximately 9.5 % of ABN's total revenues.
Holographics manufactures mass-produced holograms and holographic
material for use in security and counterfeiting-protection
applications, such as credit cards, and for non-secure uses such
as magazine advertisements and specialized packaging.
In 1996 and 1997, ABN was highly leveraged, and was looking to
expanding its foreign presence to grow sales. To fuel its growth
and pay for overseas acquisitions, ABN issued a series of debt
securities (junk bonds), including 10 3/8% Senior Notes due June
1, 2002 ("10 3/8 Notes") "secured by a pledge of all the issued
and outstanding shares of capital stock" of ABN and its then
wholly-owned subsidiary Holographics, as well as 65% of the
shares of American Banknote Brazil (its Brazilian subsidiary).
Through this offering, ABN raised approximately $126.5 million.
(ABN Compl. ¶ 35.) Other ABN efforts at financing were less
successful. For example, as a result of concerns over the
volatility of the economy in Brazil, where ABN derived 40% of its
total revenues, ABN was forced to postpone a November 1997 $225
million bond offering. By the end of 1997, ABN's long-term debt
had reached $293 million, 43% of which represented the 10 3/8 Notes.
During the period from May 1996 through January 1999, the Class
Period alleged by the ABN Plaintiffs, ABN filed annual Form 10-K
and quarterly Form 10-Q reports with the SEC as required. Each of
the filings contained, among other things, a consolidated
financial statement for ABN that combined the results of its
subsidiaries. ABN issued press releases that coincided with each
filing, which discussed or quoted from the financial statements.
These financial statements included the financial reports of
ABN's subsidiary, Holographics. In its form 10-K for fiscal year
1997, filed with the SEC on March 31, 1998, ABN admitted that its
was highly leveraged; its long-term debt of approximately $293
million represented 84% of its total capitalization.
ABN viewed the spin-off and initial public offering of
Holographics as a way to resolve its own debt problems. In a May
5, 1998 press release announcing the registration of the
Holographics public offering, ABN noted that it intended to use a
large portion of the proceeds to retire its senior secured debt,
specifically, the 10 3/8 Notes. As ABN CEO Morris Weissman stated
in the release: "[W]e intend to de-leverage and are taking the
necessary steps to insure the success of the program. In
addition, we hope to raise capital for our subsidiaries so that
they can continue to grow, unencumbered by the burden of heavy
On July 13, 1998, Holographics filed Amendment 4 to its
Registration Statement. On July 15, 1998, it filed its final
Prospectus. The final Registration Statement and Prospectus
contained financial statements for the years ended December 31,
1996 and 1997, as reported from audited financial statements by
and the three-month periods ending March 31, 1997 and March 31,
1998, as reported from unaudited financial statements. In those
financial statements, Holographics reported sales of $28,649,000
for the year ended December 31, 1996, as compared with sales of
$30,915,000 for the year ended December 31, 1997. Net income was
reported to be $4,820,000 for 1996 and $7,539,000 for 1997. In
comparing year-end sales figures in the Registration Statement
and Prospectus, Holographics stated:
Sales increased by $2.3 million, or 7.9%, from $28.6 million in
1996 to $30.9 million in 1997. The increase in sales was due
primarily to an increase in sales volume of security holograms,
including a $6.9 million order from a major customer which was
received and completed in December 1997 and which goods were
transferred to the Company's on-site secured facility.
(Holographics Compl. ¶ 37.)
For the three-months ending March 31, 1997 and March 31, 1998,
sales were reported as $5,241,000 and $7,035,000 respectively,
with net income reported as $657,000 for the quarter ended March
31, 1997, and $1,793,000 for the quarter ended March 31, 1998. In
comparing these figures, the Prospectus stated:
Sales increased by $1.8 million, or $34.2%, from $5.2
million for the three months ended March 31, 1997 to $7.0
million for the three months ended March 31, 1998.
The increase in sales was due primarily to increased
sales volume of transaction cards and product
authentication holograms. The increase in transaction
card hologram volume was dues to the growth in loyalty
programs, competition among financial institutions
resulting in increased multi-card issuance and the
increased use of automated teller machine and debit
cards. The increase in product authentication hologram
sales volume was due to higher demand for this product
and new product authentication customers . . . Cost of
goods sold decreased by $0.2 million . . . This decrease
reflects the Company's focus on controlling costs,
improving production yields and the higher margins earned
on security holograms. (Holographics Compl. ¶ 38)
The initial public offering of Holographics was commenced on July
15, with an offering of 13,636,000 shares at $8.50 per share.