Opinion ID: 672055
Heading Depth: 3
Heading Rank: 2

Heading: The Seven Allegedly False or Misleading Statements

Text: 5 The appellants have claimed that the first of the seven statements was essentially forward-looking but lacked any reasonable basis and thus was false and misleading. The other six statements, they have claimed, were false or misleading because they omitted critical facts and violated generally accepted accounting principles. Specifically, Microdyne (1) booked and reported NAS transactions as final sales even though the distributors to whom NAS products were shipped had the right to return the products if they could not sell them; and (2) failed to disclose the actual return of more than forty percent of the NAS products reportedly sold to distributors. We briefly summarize each of the seven challenged statements. 6 1. The Comfort Statement--February 12. On February 12, 1992, 2 Cunningham said in response to an inquiry from a Dow Jones reporter that he was comfortable with the earnings estimates for fiscal 1992 and 1993 prepared by Hancock Institutional Equity Services analyst William B. Becklean. The day before, Becklean had publicly predicted that Microdyne would earn 80 cents per share in fiscal year 1992 and $1.05 the following year, an increase from the 76 cents per share that the company had earned in fiscal year 1991. Cunningham also was quoted in the Dow Jones report as saying, The data communications market is booming and it's exciting. 7 2. The Second-Quarter Press Release--April 23. In a press release dated April 23, Microdyne reported its second-quarter financial performance, including $21,515,000 in total company revenues. Although the press release did not separately report revenues from NAS, that product accounted for about $2.9 million, or 13%, of the total reported revenues. The release made no mention of the fact that Microdyne had granted some distributors the right to return NAS units that they could not sell, with no obligation to purchase an equal amount of other Microdyne products. 3 8 3. The Second-Quarter Form 10-Q--May 15. Microdyne's Form 10-Q for the second quarter, filed with the Securities and Exchange Commission (SEC) on May 15, stated that $2.9 million [in revenues] was associated with sales of the Company's new NetWare Access Server (NAS). The Form 10-Q made no mention of the distributors' rights of return. 9 4. The Earnings Preview Press Release--June 15. On June 15 Microdyne issued a press release entitled MICRODYNE SEES REVENUE, EARNINGS SHORTFALL IN THIRD QUARTER. The opening paragraph explained that the company's third-quarter revenues and earnings would fall short of analyst expectations and that slower than expected initial sales of two major new products [NAS and NACS] would cause the shortfall. The release continued: 10 Philip T. Cunningham, Chairman and President of Microdyne, said a preliminary forecast indicated that the shortfall would result in quarterly earnings of from 8 cents to 12 cents for the third quarter versus analyst estimates [i.e., Becklean's February estimate] of 26 cents. Previously, Mr. Cunningham had said he was comfortable with Street estimates. 11 The new products ... were expected to generate $7 million of Microdyne's anticipated $27 + million of revenues for the quarter. Instead, [NAS] and [NACS] are expected to have sales of less than $2 million. 12