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IN RE FVC.COM SECURITIES LITIGATION

February 14, 2000

IN RE FVC.COM SECURITIES LITIGATION THIS DOCUMENT RELATES TO: ALL ACTIONS


The opinion of the court was delivered by: Breyer, United States District Judge

  MEMORANDUM AND ORDER

This consolidated securities fraud class action arises from defendant FVC.COM's revision of its unaudited financial statements for the quarter ending December 31, 1998. As a result of the change, FVC.COM reported $7 million less in revenue for the fourth quarter 1998 than it had previously reported and the value of its stock plunged by nearly 60 percent.

Now before the Court is defendants' motion to dismiss the Consolidated Complaint ("Complaint"). After carefully considering the pleadings filed by parties, and having had the benefit of oral argument on February 11, 2000, the motion to dismiss is GRANTED without leave to amend.

BACKGROUND

A. Factual Allegations

Defendant FVC.COM ("FVC") is the leading provider of broad band network video applications. Complaint ¶ 12. FVC was founded in 1993 by defendants Ralph Ungermann ("Ungermann") and Allwyn Sequeira ("Sequeira") and in April 1998 it completed an initial public offering ("IPO") of stock. Id. ¶¶ 5, 7, 14.

FVC's IPO prospectus disclosed that its future performance would depend in large part on the sales of its products through original equipment manufacturers ("OEMs"), in particular, through Bay Networks and Nortel. Complaint ¶ 14. The prospectus further advised that the "OEM partners generally have no rights of return and historically carried limited amounts of the Company products" Id. ¶ 15. That is, that sales to OEM partners did not include a material risk of loss stemming from product returns. Id. In its third quarter Form 10-Q, FVC disclosed that its two most significant OEM partners. Bay Networks and Nortel, had combined as the result of Nortels acquisition of Bay Networks and that the combination would not have a material adverse effect on [FVC's] future operating results. Id. ¶ 20.

In January 1999, FVC issued two press releases one week apart from each other announcing preliminary, unaudited financial results of the just-completed fourth quarter of 1998. On January 21, FVC issued a press release which announced anticipated fourth quarter revenues of $12 million, a 58% increase over the $7.6 million in revenues reported in the fourth quarter a year earlier. The release added that "actual results" for the fourth quarter would be released a week later. Complaint ¶ 26. The only FVC officer who made a statement in the release was the Chief Executive Officer ("CEO") Richard Bever, who had joined FVC two weeks earlier. Id.

On January 28, as promised, FVC released its actual unaudited fourth quarter results and confirmed the revenue numbers announced in the January 21 press release. The release announced the first ever annual profit in the history of the company, and the first significant quarterly profit. Complaint ¶ 27. The next day FVC's common stock rose $2.625 to $13.625, or 24%, on volume of 1.12 million shares (as compared to the daily average of 221,000). Complaint ¶ 31.

Ten weeks later, on April 6, 1999, FVC issued a press release announcing its first quarter fiscal 1999 financial results, which were significantly below analyst expectations for the quarter. Rather than earning $0.03 per share, FVC posted a loss of $0.20 — $0.22 per share. The release, entitled "FVC.COM Reports Preliminary First Quarter Results as the Company Redefines Relationship with Largest OEM," explained the decline as follows:

The Company attributed the drop in system's to a combination of factors including a significant decline in business through its major OEM partner. Bay Networks, now a part of Nortel Networks. Bay Networks has been FVC.COM's largest customer for the last several years. Negotiations during the quarter to restructure the companies relationship resulted in a significant reduction in joint sales activity. Sales to Bay/Nortel fell to approximately 25 percent in the first quarter, compared with approximately 43 percent as previously reported for the fourth quarter of 1998. In addition, the Company stated that Nortel has indicated its intention to move from stocking inventory to having FVC.COM drop-ship it Nortel's customers.

In light of Nortel's change in its business practice, the April 6 release also announced a revision of FVC's unaudited fourth quarter 1998 results previously announced on January 28, 1999:

In order to reflect this change [the restructuring of the customer relationship with Nortel], CEO Rich Beyer, who joined the Company in January of this year, stated that the Company will now record its sales to Nortel on a sell-through basis and has implemented this change effective December 31, 1998. Therefore, FVC.COM is reducing its previously announced revenues for the quarter ended December 31, 1998 by approximately $7.0 to $7.3 million to defer the revenue on inventory of FVC.COM products held by Nortel on December 31, 1998. Such revenues under the revised policy are now being recognized as and when such products are sold by Nortel. Sales for the fourth quarter 1998 are being revised to approximately $4.7 to $5.2 million; earnings per share will be revised accordingly to a net loss per share of approximately $0.20 and $0.22.

April 6, 1999 Press Release. Instead of the $12.3 in revenues FVC had announced in January, FVC's revenue for the fourth quarter 1998 would be between $4.7 and $5.2 million — a reduction of 57% to 61% from what it had previously reported and a net loss rather than a net profit.

B. The Consolidated Class Action

Within days of FVC's Tuesday, April 6, 1999 announcement several securities fraud class actions were filed against FVC in this District. See 99-1815 (April 9, 1999), 99-1827 (April 12, 1999), 99-1832 (April 12, 1999), 99-1861 (April 14, 1999), 99-1877 (April 15, 1999), 99-1915 (April 19, 1999), 99-2003 (April 27, 1999), 99-2115 (May 5, 2000). The Court consolidated the class actions in accordance with the Private Securities Reform Litigation Act ...


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