Opinion ID: 571326
Heading Depth: 3
Heading Rank: 1

Heading: Disclosures Regarding the AWS/IWS Product Line

Text: 34
35 The plaintiffs first contend the defendants misled the market by overstating the demand for Convergent's AWS/IWS workstation. 2 The plaintiffs begin by pointing to two statements made in the March Prospectus: 36 Burroughs Corporation accounted for approximately 48% of the total revenue of the Company in 1982. While the level of the Company's future revenues from sales to Burroughs cannot be predicted with any certainty, the Company believes that Burroughs may continue to account for a similar percentage of revenue in 1983. 37 In view of the Company's anticipated orders of its existing products, the Company believes it will be required to increase inventories, to carry increased levels of receivables and to acquire additional capital equipment. 38 These statements were true. Convergent did in fact expect a large increase in orders, and that increase materialized as sales grew in 1983. Moreover, Convergent increased inventories and receivables and acquired substantial capital equipment in 1983. Likewise, Burroughs accounted for 46% of Convergent revenues in 1983. 39 The plaintiffs contend the statements in the March Prospectus, while true as far as they go, did not reveal the entire picture. More specifically, the plaintiffs contend the two statements misled the market because they (1) implied growth would continue at the torrid pace Convergent had set in the past, and (2) failed to reveal that Burroughs had decreased its orders for 1983. The district court properly rejected these contentions. 40
41 The challenged statements do not imply any comparison between the rate of past and future growth. They simply report past performance and assert specific limited predictions for the future. 42 Moreover, the market clearly understood that Convergent could not maintain the growth it had enjoyed in the past. In Apple Computer, we noted that, in a fraud on the market case, see Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), an omission is materially misleading only if the information has not already entered the market. If the market has become aware of the allegedly concealed information, the facts allegedly omitted by the defendant would already be reflected in the stock's price and the market will not be misled. Apple Computer, 886 F.2d at 1114. We concluded: [I]n a fraud on the market case, the defendant's failure to disclose material information may be excused where that information has been made credibly available to the market by other sources. Id. at 1115. 43 The market clearly knew demand for the AWS/IWS workstation would decrease as Convergent began to make NGEN available to its customers. As a general matter, investors know of the risk of obsolescence posed by older products forced to compete with more advanced rivals. See, e.g., In re Seagate Technology II Sec. Litig., [1989 Tr. Binder] Fed.Sec.L.Rep. (CCH) p 94,502 at 93,202, 1989 WL 222969 (N.D.Cal.1989) (technical obsolescence of computer [equipment] in a field marked by rapid technological advances is information within the public domain ...) 44 More specifically, securities analysts knew that NGEN posed just such a risk to sales of the AWS/IWS workstation. As early as February 1983, analysts reported the major product transition on the horizon, and noted that [i]n anticipation of the next generation of products, it is possible that ... major new customers may defer taking delivery of current products in favor of the new line. (Robertson, Colman, Stephens & Woodman's Feb. 3, 1983 research report at 12). Additional information on this situation was reported to the market after the March Prospectus: [A]s Convergent introduces and readies new products, customers will prolong the decision-making procedure for ordering the current workstations.... (Woodman, Kirkpatrick & Gilbreath's May 6, 1983 research report at 4). Other analysts echoed this refrain: [T]he product cycle of the current line of workstations is beginning to crest ... new workstation customers will want to wait for NGEN to be available in quantity ... current customers probably will start to work down their IWS/AWS inventories in anticipation of volume availability of N-GEN early next year. (Cowen Institutional Services' May 23, 1983 research report at 3). 45 In all, the district court considered more than 60 analyst reports and articles in the trade and financial press discussing Convergent's prospects for 1983. There can be no doubt that the market was aware AWS/IWS demand would not increase at the same rate it had in the past. 46
47 The plaintiffs also contend the statements in the March Prospectus misled the public because Convergent did not disclose the alleged decrease in Burroughs' orders from 30,000 units to 7,500 units. In making this argument, the plaintiffs do not contend Convergent was obligated to disclose the 30,000-unit figure or the existence of negotiations with Burroughs or the result of those negotiations. They argue instead that even though the 30,000 figure was not disclosed, when Burroughs decided to decrease this figure to 17,500, this should have been disclosed. Of course, if there was no decrease in committed orders, the plaintiffs' argument fails. 48 There was no such decrease. Undisputed evidence in the record shows that in the computer industry generally, an agreement to purchase has far different consequences than an actual purchase order. Deposition of Allen Michels at 75-76. While the former represents a mere forecast of anticipated product demand, the latter is an actual obligation to buy. Id. Burroughs and Convergent never incorporated into their master Agreement the 30,000-unit figure, and it never became part of Burroughs' contractual obligation. The July 29 letter agreement, which contained the 30,000-unit figure, specifically provided that its terms remained subject to Burroughs' internal approval cycle, and that internal approval was never obtained. Finally, the defendants demonstrated that neither Burroughs nor Convergent viewed the 30,000-unit figure as binding on Burroughs. The plaintiffs, other than pointing to the July 29 letter, offer no evidence disputing this characterization. The plaintiffs' argument, therefore, fails because it mischaracterizes the 17,500 purchase commitment as a decrease in existing orders. The 30,000 figure never was a commitment to buy. The 17,500 figure, which was such a commitment, amounted to nearly a 100% increase over Burroughs' previous purchase commitment. 49
50 The plaintiffs next point to a statement made in Convergent's May 18, 1983 First Quarter Report to Shareholders: Our growth in the [first] quarter [of 1983] was the result of increases in shipments to our large OEM customers. This statement purports to describe only the first quarter of 1983. The plaintiffs take no exception to the accuracy of its factual description. The plaintiffs instead contend the statement misled investors by implying that Convergent expected the upward first quarter trend to continue throughout the year. We reject this contention. Although in its annual Form 10-K filing a company must discuss factors that would cause reported financial information not to be necessarily indicative of future financial operating results, no such obligation exists in the quarterly report at issue here. See 17 C.F.R. § 229.303. 51
52 The plaintiffs also challenge Convergent's August 8, 1983 press release. In this release, Convergent stated: 53 [N]et sales for the third quarter of 1983 will be approximately equal to its net sales for the second quarter because of customer anticipation of deliveries of its new generation of products, which are expected to be available for volume shipments in the first half of calendar 1984. Fourth quarter revenues cannot be predicted with certainty, but could be below third quarter revenues. Because of price reduction on existing products and startup costs associated with three new product lines, the Company anticipates that until volume shipment of its new products begins there will be a decrease in gross profit margin, and may be a substantial decrease in net income. 54 The plaintiffs contend this statement misstated the demand for Convergent's AWS/IWS workstation because Convergent knew at the time that third and fourth quarter revenues for 1983 would actually decline, not just remain flat. 55 The plaintiffs made no such showing. Convergent's revenues for the second half of 1983 were pretty much what the August press release predicted. Third quarter revenues, rather than being merely flat, declined in relation to second quarter revenues, but only by approximately 10%. For the fourth quarter, Convergent actually posted revenues greater than those recorded in the second and third quarters. Thus, while Convergent was somewhat optimistic regarding the third quarter, it actually underestimated fourth quarter revenues. 56 Plaintiffs also contend that if Convergent had excluded from its year-end financial statements one-time software license sales, it would not have shown a profit for the fourth quarter. That may be so. But plaintiffs do not explain why Convergent would want to exclude such sales. Plaintiffs suggest Convergent made the sales in the fourth quarter to post better numbers on its year-end financials and thus further the scheme to inflate its stock price. Plaintiffs provide no evidence to support this suggestion.