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Stanford University Law School - Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
___________________________________
)
RBI, AN ALASKAN LIMITED )
PARTNERSHIP, on behalf of itself )
and all others similarly situated, ) CASE NO. 96-11207MLW
)
Plaintiff, ) CLASS ACTION COMPLAINT
) FOR VIOLATIONS OF
v. ) FEDERAL SECURITIES LAWS
)
ANDREW NAJDA; STANLEY W. BIALEK; )
NUMBER NINE VISUAL TECHNOLOGY )
CORPORATION; COWEN & CO.; )
UNTERBERG HARRIS; AND ROBERTSON, )
STEPHENS CO., )
)
Defendants. )
___________________________________)
Plaintiff makes the following allegations upon
information and belief, except as to allegations specifically
pertaining to plaintiff and its counsel, based on the facts
alleged below, predicated upon the investigation undertaken by
plaintiff's counsel, and plaintiff believes that further
substantial evidentiary support will exist for the allegations
set forth below after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a class action on behalf of all purchasers
of the common stock of Number Nine Visual Technology Corporation
("Number Nine" or the "Company") between May 26, 1995 and January
31, 1996, inclusive, (the "Class Period"), seeking to pursue
remedies under the Securities Act of 1933 (the "Securities Act")
and the Securities Exchange Act of 1934 (the "Exchange Act").
Plaintiff complains of materially false and misleading statements
that injured purchasers of Number Nine stock in or traceable to
its initial public offering (the "IPO") and thereafter in the
aftermarket during the Class Period.
JURISDICTION AND VENUE
2. The claims asserted herein arise under and
pursuant to Section 10(b) and 20(a) of the Exchange Act [15
U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission ("SEC") [17
C.F.R. § 240.10b-5] and pursuant to Sections 11, 12(a)(2) and 15
of the Securities Act [15 U.S.C. § 77k, 77(a)(2) and 77o].
3. This Court has jurisdiction over the subject
matter of this action pursuant to 28 U.S.C. §§1331 and 1337,
Section 27 of the Exchange Act [15 U.S.C. §78aa], and Section 22
of the Securities Act [15 U.S.C. § 77v].
4. Venue is proper in this district pursuant to Sec-
tion 27 of the Exchange Act, Section 22 of the Securities Act and
28 U.S.C. §1391(b). Number Nine maintains its corporate
headquarters and principal place of business in this District at
18 Hartwell Avenue, Lexington, Massachusetts, and the acts
charged herein, including the preparation and dissemination of
materially false and misleading information, occurred in
substantial part in this District.
5. In connection with the acts alleged in this com-
plaint, defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including, but not
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limited to, the mails, interstate telephone communications and
the facilities of the national securities markets.
PARTIES
6. Plaintiff RBI, An Alaskan Limited Partnership, as
set forth in the accompanying certification, purchased Number
Nine common stock at artificially inflated prices during the
Class Period, and has been damaged thereby.
7. (a) Defendant Number Nine describes itself as a
leading innovator and supplier of high-performance visual
technology solutions, including video/graphics accelerator
subsystems, chips and productivity-enhancing software. According
to the Company, its products enable desktop PC's to generate and
display the increasingly sophisticated visual content of today's
computing environment with greater speed, photo realistic color,
high resolution and full-motion video. Among the Company's
products is a 128-bit accelerator chip family, the "Imagine 128"
family of products, and two 64-bit families, the older 64-bit
"GXE" family and the more recent 64-bit "9FX" family.
(b) Number Nine is organized under the laws of
the state of Delaware and maintains its principal executive
offices at 18 Hartwell Avenue, Lexington, Massachusetts. At all
relevant times, the Company's stock was traded on the NASDAQ
National Market System under the symbol "NINE."
8. Defendant Andrew Najda is, and at all relevant
times was, President, Chief Executive Officer and Chairman of the
Board of Directors of the Company, in which capacities he
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received substantial compensation. Defendant Najda signed the
Registration Statement filed by the Company in connection with
the IPO and the Company's report on Form 10-Q for the quarterly
period ending July 1, 1995. Because of defendant Najda's
positions with the Company, he had access during the Class Period
to the adverse non-public information about Number Nine's
business, finances, products, markets and present and future
business prospects via access to internal corporate documents
(including the Company's operating plans, budgets and forecasts
and reports of actual operations compared thereto), conversations
and connections with other corporate officers and employees,
attendance at management and Board of Directors meetings and
committees thereof and via reports and other information provided
to him in connection therewith. Defendant Najda sold 200,000
shares of Number Nine common stock in the IPO (pursuant to the
Underwriter Defendants' exercise of an overallotment option),
yielding defendant Najda total proceeds of $2,790,000.
9. Defendant Stanley W. Bialek is, and at all
relevant times was, a member of the Company's Board of Directors.
In addition, defendant Bialek was Chairman of the Board of
Directors of the Company until April 1995 and was Chief Operating
Officer of the Company until January 1995. Defendant Bialek
signed the Registration Statement filed by the Company in
connection with the IPO. Because of defendant Bialek's positions
with the Company, he had access during the Class Period to the
adverse non-public information about Number Nine's business,
finances, products, markets and present and future business
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prospects via access to internal corporate documents (including
the Company's operating plans, budgets and forecasts and reports
of actual operations compared thereto), conversations and
connections with other corporate officers and employees,
attendance at management and Board of Directors meetings and
committees thereof and via reports and other information provided
to him in connection therewith. Defendant Bialek sold 650,000
shares of Number Nine common stock in the IPO, yielding total
proceeds of $9,067,500.
10. The individual defendants identified above
(defendants Najda and Bialek) are sometimes referred to herein
collectively as the "Individual Defendants."
11. (a) Cowen & Co. is a registered securities
broker-dealer which acted as one of the lead underwriters of
Number Nine's IPO. Cowen & Co. maintains its executive offices
at Financial Square, New York, New York, 10005.
(b) Unterberg Harris is a registered securities
broker-dealer which acted as one of the lead underwriters of
Number Nine's IPO. Unterberg Harris maintains its executive
offices at 275 Battery Street, San Francisco, California, 94111.
(c) Robertson, Stephens & Co. is a registered
securities broker-dealer which acted as one of the lead
underwriters of Number Nine's IPO. Robertson, Stephens & Co.
maintains its executive offices at 555 California Street, San
Francisco, California, 94104.
(d) Defendants Cowen & Co., Unterberg Harris and
Robertson, Stephens & Co. (collectively, the "Underwriter
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Defendants") each substantially participated in the wrongs
alleged herein through their involvement in the Number Nine IPO.
The Underwriter Defendants were at all relevant times entities
engaged in the business of investment banking, underwriting and
selling securities to the public. As co-lead underwriters of the
IPO, the Underwriter Defendants received substantial fees. Prior
to the IPO, the Underwriter Defendants conducted an investigation
into the business, operations, prospects, financial condition and
accounting, inventory and management control systems of Number
Nine, known as a "due diligence investigation". In the course of
such investigation, the Underwriter Defendants would have
obtained knowledge of the facts alleged herein if they had acted
with reasonable care. At all relevant times, defendants had a
duty to promptly disseminate truthful and accurate information
with respect to Number Nine.
12. In connection with the preparation and
dissemination of information about the Company in the IPO, all
defendants had a strong affirmative duty to disclose a broad
range of material information. Each defendant -- the corporate
issuer, the inside controlling persons who were also selling
shareholders and the Underwriter Defendants -- was under an
obligation to disclose the material information that was not
disclosed and which is described herein, or otherwise refrain
from implementing the sales of stock in the IPO. Particularly
with respect to an IPO, the federal securities laws are intended
to ensure that issuers not cut corners in preparing registration
statements and that all material information be disclosed.
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PLAINTIFF'S CLASS ACTION ALLEGATIONS
13. Plaintiff brings this action as a class action
pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on
behalf of a Class, consisting of (1) all persons who purchased
shares of Number Nine common stock in or traceable to the IPO
which became effective on May 26, 1995 or in the aftermarket, and
(2) all persons who purchased or otherwise acquired shares of
Number Nine common stock from May 26, 1995 through January 31,
1996, inclusive (the "Class Period"), and who were damaged
thereby. Excluded from the Class are defendants, any
underwriters in the IPO, the officers and directors of the
Company at all relevant times, members of their immediate
families and their legal representatives, heirs, successors or
assigns and any entity in which defendants have or had a control-
ling interest.
14. The members of the Class are so numerous that
joinder of all members is impracticable. While the exact number
of Class members is unknown to plaintiff at this time and can
only be ascertained through appropriate discovery, plaintiff
believes that there are hundreds or thousands of members in the
Class. As of November 10, 1995, there were approximately 8.7
million shares of Number Nine common stock outstanding and
actively traded on the NASDAQ National Market System, an open and
efficient market in which millions of shares of the Company's
stock were traded during the Class Period. Record owners and
other members of the Class may be identified from records
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maintained by Number Nine or its transfer agent and may be
notified of the pendency of this action by mail, using the form
of notice similar to that customarily used in securities class
actions.
15. Plaintiff's claims are typical of the claims of
the members of the Class as all members of the Class are
similarly affected by defendants' wrongful conduct in violation
of federal law that is complained of herein.
16. Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel
competent and experienced in class and securities litigation.
17. Common questions of law and fact exist as to all
members of the Class and predominate over any questions solely
affecting individual members of the Class. Among the questions
of law and fact common to the Class are:
(a) Whether the federal securities laws were vio-
lated by defendants' acts as alleged herein;
(b) Whether the Registration Statement and
Prospectus for the IPO misrepresented material facts about the
business, management, products, sales, markets, financial
condition, and business prospects of Number Nine; and
(c) Whether statements made by defendants to the
investing public during the Class Period misrepresented material
facts about the business and finances of Number Nine; and
(d) To what extent the members of the Class have
sustained damages and the proper measure of damages.
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18. A class action is superior to all other available
methods for the fair and efficient adjudication of this contro-
versy since joinder of all members is impracticable. Further-
more, as the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation
make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in
the management of this action as a class action.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
19. At all relevant times, the market for Number Nine
stock was an efficient market for the following reasons, among
others:
(a) Number Nine common stock met the requirements
for listing, and was listed and actively traded, on the
NASDAQ/National Market System, a highly efficient and automated
market;
(b) As a regulated issuer, Number Nine filed
periodic public reports with the SEC and the NASD;
(c) Number Nine regularly communicated with
public investors via established market communication mechanisms,
including through regular disseminations of press releases on the
national circuits of major newswire services and through other
wide-ranging public disclosures, such as communications with the
financial press and other similar reporting services; and
(d) Number Nine was followed by several
securities analysts employed by major brokerage firms who wrote
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reports which were distributed to the sales force and certain
customers of their respective brokerage firms. Each of these
reports was publicly available and entered the public
marketplace. Among the brokerage firms which issued research
reports on Number Nine during the Class Period were those
identified in this Complaint.
20. As a result, the market for Number Nine securities
promptly digested current information regarding Number Nine from
all publicly available sources and reflected such information in
Number Nine's stock price. Under these circumstances, all
purchasers of Number Nine shares during the Class Period suffered
similar injury through their purchase of shares at artificially
inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
21. The statutory safe harbor provided for forward-
looking statements under certain circumstances does not apply to
any of the allegedly false statements pleaded in this complaint.
Many of the statements alleged to be false and misleading herein
were made in connection with an initial public offering. In
addition, none of the statements pleaded herein were identified
as "forward-looking statements" when made. Nor was it stated
with respect to any of the statements forming the basis of this
complaint that actual results "could differ materially from those
projected." To the extent there were any forward-looking
statements, there were no meaningful cautionary statements
identifying important factors that could cause actual results to
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differ materially from those in the purportedly forward-looking
statements. Alternatively, to the extent that the statutory safe
harbor does apply to any forward-looking statements pleaded
herein, defendants are liable for those false forward-looking
statements because at the time each of those forward-looking was
made the particular speaker knew that the particular forward-
looking statement was false, and/or the forward-looking statement
was authorized and/or approved by an executive officer of Number
Nine who knew that those statements were false when made.
CLASS PERIOD ALLEGATIONS
22. In the IPO and throughout the Class Period,
defendants caused Number Nine to be portrayed as a successful
computer high-technology firm specializing in video graphics
hardware, graphics accelerator systems, computer memory chips and
related software. Defendants portrayed the Company as one which
was experiencing and would continue to experience rapidly rising
sales and profits on its core products and new product offerings.
Defendants issued (or caused or approved the issuance of)
positive public statements to the effect that Number Nine was the
leader in its market niche, enjoying strong demand for all of its
products and reporting steadily increasing earnings, while
forecasting that it would continue to achieve sustained and
substantial growth in profits throughout 1995 and into 1996.
This case involves defendants' dissemination in connection with
the IPO and thereafter of materially false and misleading
statements and omissions regarding the demand for and market
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acceptance of Number Nine's products, the strength of its
technologies, its competitiveness, the trends in its business,
and its reported financial results, all of which allowed the
shares to be publicly sold and distributed at $15.00 per share
and thereafter drove Number Nine's stock price to a Class Period
high of $25.00 per share (on July 19, 1995), enabling defendants
to make sales of Number Nine common stock at artificially
inflated prices in connection with the IPO.
The Materially False And Misleading Prospectus
23. The Company's IPO commenced on May 26, 1995, the
date on which the Registration Statement and the Prospectus
incorporated therein (collectively the "Prospectus") for the IPO
became effective. In the IPO, the Company and certain selling
shareholders offered 2,650,009 shares at a price of $15.00 per
share. Defendant Bialek sold 650,000 shares in the IPO.
Defendant Najda sold 200,000 shares in the IPO pursuant to an
over-allotment agreement with the Underwriters Defendants. In
addition, the Company sold an additional 197,500 shares pursuant
to an over-allotment agreement with the Underwriter Defendants.
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The Misleading Claims Of
Broad Product Offerings
24. In the Prospectus, defendants made numerous
materially false and misleading statements, as specifically
alleged herein. For example, defendants portrayed the Company's
product offerings as broad and diverse and thus able to appeal to
a disparate range of consumer tastes, conveying the impression
that the Company's fortunes were not excessively bound to a
single product line or narrow range of customers. Thus,
defendants stated in the Prospectus (at page 2):
OEM customers such as Dell Computer use
Number Nine's products to differentiate their
system's performance. The Company's broad
product line allows OEMs to streamline the
procurement of visual technology solutions.
[Emphasis added.]
25. The Prospectus also included (at page 33) the
following chart which misleadingly purported to show the breadth
of the Company's product offerings:
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26. The Prospectus further suggests at page 31 that
the Company was, at the time of the IPO, employing a dynamic
strategy which had built and would maintain market leadership,
stating:
Strategy
Number Nine's goal is to become the leading
supplier of high-performance visual
technology solutions for the expanding PC and
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emerging multimedia markets. The Company's
strategy includes the following key elements:
Maintain Performance Leadership in Graphics Speed and
Functionality for Desktop PCs
The Company dedicates significant resources
to the development of high-performance
proprietary technology in order to
differentiate its products in the PC
marketplace. The Company has established
itself as a leader in graphics speed and
functionality through the introduction of the
first, and the Company believes the only,
128-bit graphics accelerator technology in
the desktop PC market today. Imagine 128's
proprietary architecture, coupling a 128-bit
graphics engine with a 128-bit data path
between the chip and graphics memory, allows
the graphics engine to receive and process
twice as much information per clock cycle as
64-bit accelerator chips. Imagine 128 also
provided advanced functionality such as
complex clipping that give it additional
performance under multitasking operating
systems....
Offer Broad Product Line
The Company's product line is targeted at
mainstream and high-end segments of the PC
video/graphics accelerator market across a
range of functionality and price points. The
Company intends to continue to offer a wide
array of products by developing successive
generations of proprietary technology and
incorporating and optimizing new generations
of leading-edge merchant technology. There
can be no assurance, however, that the
Company will succeed in these efforts to
develop and optimize new technologies.
[Emphasis added.]
27. The Prospectus reiterated at page 30:
Broad Product Line
The Company's product line addresses both
mainstream and high-end segments of the PC
video/graphics accelerator subsystem market.
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A broad product line not only allows the
Company to serve as a single-source supplier
for OEMs seeking to streamline the
procurement of video/graphics solutions, but
also facilitates the penetration of the
retail channel by spanning a range of prices,
beginning at $150 and extending to $2,000.
False And Misleading Portrayal Of Continuing
Growth And A Dynamic Business Strategy
28. The Prospectus contains a lengthy discussion of
past operations which emphasizes the significant growth and
expansion of Number Nine's operations. In an effort to create
the impression of steadily increasing future demand for the
Company's products, the Prospectus stated at page 29:
The Company believes that demand for high-
performance accelerators will increase as
advanced operating systems and other emerging
standards for video and 3-D functionality
foster the development of new applications
that incorporate more multimedia features.
Commenting further, the Prospectus states:
For example, new multitasking operating
systems, such as Windows 95, are expected to
create increased demand for graphics
processing due to the incorporation of
additional functionality, such as the ability
to simultaneously display and update multiple
application windows. In addition, the
Intel/Microsoft Windows DCI standard for
full-motion video playback and real-time
games display, and Microsoft's 3-D DDI
standard for 3-D rendering, are anticipated
to encourage software applications developers
to incorporate advanced video and 3-D
graphics into Windows applications. The
Company believes that these increasingly
sophisticated multimedia-aware operating
systems and applications will place greater
processing demands on the CPU. As a result,
increasingly higher-performance
video/graphics accelerators will be needed to
optimize PC performance. [Emphasis added.]
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29. Similarly, in an effort to bolster the misleading
impression that the Company's main product offerings would
enhance profitability, the Company stated in the section of the
Prospectus entitled "Management's Discussion And Analysis of
Financial Condition and Results of Operations" (at pages 18-19)
that:
In 1994, increasing penetration of Pentium-
based PCs incorporating high-performance PCI
buses created a demand for even higher
performance accelerator subsystems. Number
Nine advanced from 32-bit to 64-bit VRAM
products, introduced 128-bit products based
on Imagine 128, and added its first DRAM
products. DRAM products generally sell at
lower average selling prices and lower gross
margins than VRAM products. The Company's
Imagine 128 products were marketed at higher
average selling prices and generate higher
gross margins. Unit growth, led by volume
OEM sales to Dell, more than offset the
decline in gross margins, allowing Number
Nine to achieve record net income in 1994.
The Company believes it now has an
opportunity to increase margins through (i)
potential cost reductions from manufacturing
efficiency gains and volume purchasing; (ii)
potential changes in product mix reflecting a
greater proportion of sales from higher-
margin products incorporating Imagine 128
technology, which began volume shipments in
the fourth quarter of 1994; and (iii)
potential changes in channel mix reflecting
increased sales through the two-tier and
retail distribution channel. There can be no
assurance, however, that the Company will be
able to increase or even maintain current
margin levels.
Changes in the Company's markets and products
have been accompanied by dramatic growth in
the Company's business. Net sales increased
to $66.2 million in 1994 from $17.1 million
in 1992. The Company's sales to OEMs as a
percentage of net sales have also grown
substantially, to 66.3% in 1994 from 28.1% in
1992. Number Nine expects to continue
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selling high volumes of products to strategic
OEMs including Dell, which has to date been
its largest OEM customer. As part of the
Company's diversified distribution strategy,
it is pursuing additional OEMs along with
increased sales in two-tier and retail
distribution, where it has recently launched
an advertising and marketing campaign
directed to the retail market. Two-tier and
retail distribution sales typically provide
higher gross margins than OEM sales but
require greater marketing, sale and product
support expenditures. The Company's net
sales, gross margins and profits may vary
significantly in future periods, depending on
the proportion of its sales to OEMs and other
distribution channels, as well as the mix of
products sold in each channel. [Emphasis
added.]
30. In the Prospectus, the Company also claimed to be
well-equipped and focused in responding to the competitive
challenges confronting Number Nine's rapidly expanding
operations. Defendants characterized Number Nine's purported
strategy as a "solution," stating at page 30:
The Number Nine Solution
Number Nine has developed considerable
expertise in system-level engineering,
integrated circuit design and software
engineering. The Company has applied these
capabilities to produce successive
generations of innovative, high-performance
visual technology subsystems that render and
control the increasingly demanding graphics
and video images displayed on desktop PCs.
Number Nine has focused its efforts to
address the needs of system OEMs.
Specifically, the Company offers its OEM
customers a variety of benefits including the
ability to differentiate their systems on the
basis of enhanced performance provided by
128-bit video/graphics accelerator technology
and optimized drivers, a broad product line
spanning a range of functionality and prices,
and a common user interface provided by
HawkEye. Similarly, an end-user may improve
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the performance of his or her system by
selecting a high-performance Number Nine
product from a variety of price points.
31. The Prospectus also referred positively to an
advanced second generation product ("Imagine II") which
defendants claimed would be shipped in the second half of 1995,
stating at page 34:
In late 1995, the Company plans to introduce
a second generation of video/graphics
products based on enhancements to the Imagine
128 architecture. ... The Company has
completed the product design phase of the
second generation of Imagine 128 chip
technology and is currently in final
simulation and verification of the design.
Guarded And Incomplete Disclosures
Concerning Memory Supply
32. The Prospectus includes within its discussion of
"Risk Factors," at pages 8-9, the following disclosure relating
to the possibility of raw material memory shortages:
In addition, the Company purchases a variety
of other components from multiple suppliers.
Worldwide shortages of DRAM have from time to
time required the Company to obtain memory
from distributors or on the "spot market" at
higher than anticipated prices, resulting in
additional costs that generally cannot be
fully passed along to customers. Due to
strong PC demand, an increase in per-system
utilization of DRAM by PCs and a delay in
increased capital spending by DRAM suppliers,
the Company anticipates future shortages of
DRAM, which are likely to be exacerbated by
the introduction of Windows 95 due to its
increased memory requirements. Any shortage
of specialized VRAM or DRAM or other
components in the future could materially
adversely affect the Company's business and
operating results. [Emphasis added.]
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The Prospectus Is Materially False And Misleading
33. The Prospectus is materially false and misleading
because it wrongly conveys the erroneous impression that Number
Nine was producing and marketing a wide range of products as part
of a dynamic and successful ongoing business strategy
characterized as a "solution". In truth, the Company's primary
business strategy depended upon broad market acceptance of Number
Nine's high-end more technologically advanced and costly products
to engender a strong and widely accepted brand name and
application of which was expected to increase demand for lower
priced mass-market products as well. Yet, by the time of the
Number Nine IPO in May 1995, Number Nine's ability to market
these high-end products was deteriorating in the face of superior
and less expensive products from competitors.
(a) The Company's products had not, by the time
of the IPO, and could not, achieve widespread market acceptance,
because, despite claims of offering a broad range of products to
satisfy the diverse requirements and preferences of the
marketplace, Number Nine's product offerings were limited in a
manner which hindered its ability to compete, particularly
because Number Nine's older 64-bit VL bus products were, by the
time of the IPO, increasingly being rendered obsolete (causing
the Company to later write-off some or all of its inventory of
these products) and because its Imagine 128 (128-bit) products
were too expensive to be attractive to ordinary and mass-market
consumers which the Company insisted represented the market to
which its products were addressed;
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(b) The "Imagine 128 for PowerMac" products,
which were "announced" in August 1995, were experiencing
developmental and manufacturing problems which hindered the
ability of the Company to timely deliver these products;
(c) The second generation Imagine II line of
products, which was discussed and promoted in the Prospectus for
the IPO, and throughout the Class Period, and which was to be
shipped by the second half of 1995, was, by the time of the IPO,
experiencing numerous technical problems in development which
necessarily precluded the ability of the Company to deliver these
products in a timely manner as publicly stated;
(d) The Company's technical support and customer
service facilities were inadequate to respond to consumer demands
for information concerning proper installation and use of the
Company's products. This deficiency, which was operative at all
relevant times, had the effect of damaging the Company's
reputation and further retarding sales growth. As a result of
inadequate staffing and other weaknesses in the customer service
area, the Company was unable to timely respond to consumer
inquiries and thus unable to provide routine assistance expected
by customers and necessary to prevent costly product returns, and
rendering the Company's products less attractive and less
competitive than the products of better equipped and adequately
staffed firms; and
(e) Moreover, the Company's problems with its 64-
bit products were impairing and ultimately led to a restructuring
of the Company's only substantial original equipment manufacturer
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(OEM) relationship, the relationship with Dell Computer
Corporation. Although the Company had enjoyed certain exclusive
selling relationships with Dell which provided a significant
portion of the Company's revenues at the time of the IPO, by that
time, the Company's products were experiencing, and falling
victim to, the competitive pressures described above. Thus, Dell
Computer Corp. was dissatisfied with Number Nine's products and
service, and, comparing them to the offerings and services of
competitors, Dell was increasingly evaluating and seeking
purchases from alternative suppliers of graphics components.
34. Thus, the Company's numerous representations
concerning purportedly broad product offerings and the chart
contained within the Prospectus purporting to show a diverse
range of product offerings were each materially false and
misleading because the Company's products did not satisfy a broad
range of consumer tastes and, in fact, the Company's products
were very limited inasmuch as there was very little market
acceptance for certain products, and several such products were
directly competitive with and hurt the sales of other company
products.
35. Although the Company included certain vague
boilerplate disclaimers relating to its "rapid growth" such as
that it might not be able to "recruit, train and retain
sufficient additional customer service employees ... " (in the
discussion of "Expansion of Operations and Management of
Growth"), these remarks were couched in highly conditional terms
and were characterized as routine aspects of such "rapid growth"
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rather than then-present factors materially impairing the
Company's ability to succeed. Likewise, the Company's disclosure
that "the Company's customer service and technical support staff
is currently unable to respond to some requests from customers on
a timely basis ...," only hinted at but did not fully or fairly
disclose the longstanding and pervasive problems the Company was
suffering in this area. In addition, such language was
surrounded by positive statements about the Company's
capabilities to respond to customer inquiries through numerous
means, nullifying any cautionary language elsewhere in the
Prospectus.
36. Moreover, and notwithstanding certain highly
conditional and hedged language, the Prospectus did not make
clear and actually obscured the fact that the Company (contrary
to the practice of other producers) was at all relevant times
exposed to material risks and uncertainties in securing necessary
raw materials and inputs because it had refrained from entering
into long-term requirements or forward contracts by which supply
problems could have been eased or eliminated. Despite
defendants' representations in connection with the IPO, at all
relevant times, and not merely "from time to time," Number Nine
was experiencing serious problems that undermined its ability to
acquire necessary VRAM and DRAM memory raw materials, or acquire
them at reasonable prices which were necessary for the Company's
supposedly dynamic business strategy to succeed. These problems,
which were undisclosed prior to and throughout the Class Period,
consisted of at least the following:
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(a) The Company's failure to secure long-term,
forward commitments for the supply of crucial memory chips
subjected the Company and its operating performance to frequent
and potentially wide fluctuations in the prices for necessary
memory chips at all relevant times, which had several negative
impacts:
(i) The Company was unable to secure
adequate supplies of memory chips to manufacture its products for
timely delivery to customers;
(ii) The Company was forced to identify and
locate on short notice alternative sources of memory chips on
repeated occasions before and during the Class Period, which
created uncertainty as to the ability of the Company to fulfill
outstanding orders, and which ultimately resulted in the
Company's failure to satisfy certain customer orders;
(iii) The Company was forced to incur
significant costs associated with securing supplies of memory
chips from the marketplace at far higher prices than if Number
Nine had secured long-term commitments; and
(iv) As a result, the Company was forced to
raise prices for some products, experience lower margins on other
products and delay manufacturing and shipment, leading customers
to cancel orders and ultimately forcing crucial OEM customers,
such as Dell Computer Corp. (the Company's largest customer), to
turn to competitors for their supply of graphics-related computer
components to satisfy their short- and long-term requirements.
- 24 -
(b) The Company's undisclosed failure to secure
long-term memory chip supplies exacerbated its financial and
operational difficulties at all relevant times. At the same time
that Number Nine was forced to reduce prices in an effort to sell
products in a harsh competitive environment, the Company was
facing severely constrained supplies of necessary raw materials
and was required to locate alternative sources of supply and to
pay much higher prices for memory chips than if the Company had
secured adequate supplies and located appropriate sourcing on a
continuing basis, contrary to what was represented or implied.
Materially Misleading And
Incomplete Risk Disclosures
37. Although the Registration Statement and Prospectus
filed with the SEC and disseminated to investors in connection
with the IPO included a discussion of "Risk Factors" which
purported to caution investors as to the susceptibility of the
Company to various risk factors, the Registration Statement and
Prospectus were materially false and misleading and the "Risk
Factors" described therein were entirely insufficient because
these disseminations failed to describe the severe market and
operating pressures which -- at the time of the IPO -- were
impairing the ability of the Company to achieve sales and
earnings growth in line with market expectations cultivated by
defendants, as set forth herein.
38. In addition, the financial statements contained
within the Prospectus were materially false and misleading for
- 25 -
the reasons set forth below in the section of this complaint
entitled "Materially False And Misleading Financial Statements."
Post-IPO Disclosures
39. The Company received a major "booster shot" (i.e.,
a well-timed and favorable analyst report from one of the IPO
underwriters) from Cowen & Co. on June 19, 1995. The Cowen
report stated that Number Nine "IS RATED STRONG BUY." Cowen's
report also included a table of estimated results for the Company
which forecasted that it would earn $0.17 per share in the second
quarter of 1995, $0.27 per share in the third quarter of 1995,
$0.39 per share in the fourth quarter. Cowen thus estimated that
Number Nine would earn $0.96 per share in fiscal 1995 and $1.47
per share in fiscal 1996.
40. Robertson, Stephens & Co. followed Cowen with its
own "booster shot" report on June 20, 1995, "initiating, coverage
with a buy". The Robertson Stephens report included a table of
estimated results for the Company which forecasted that it would
earn $0.15 per share in the second quarter of 1995, $0.28 per
share in the third quarter, and $0.40 per share in the fourth
quarter. The Robertson Stephens report also estimated that the
Company would earn $0.90 per share in fiscal 1995 and $1.48 per
share in fiscal 1996. The report stated in pertinent part that:
Business for high performance PCs continues
at a blazing rate, and NINE is continually
challenged to deliver the volumes ordered by
OEMs and distributors. The company is still
young, and is in the midst of moving
manufacturing to an outside partner. In our
opinion, once this transition is completed,
NINE should have no problem delivering higher
quantities.
- 26 -
Due to shortages of DRAM chips, costs are
going up. Traditionally, NINE has purchased
a majority of its components in the spot
market rather than directly from
manufacturers -- this has left the company
paying higher prices than its competitors, as
most of them do purchase direct. Once the
company completed its first round of private
financing in December, it was able to begin
negotiating the direct purchase of
components. As this transition is still
underway, the company has not yet yielded the
total cost savings available to it, but has
had the advantage of beginning to purchase
some directly. While NINE is not seeing
increased costs for DRAMs, due to its
transition to direct sourcing, it is also not
seeing prices come down significantly because
some manufacturers, in light of serious
shortages, are raising prices of these
critical components. In our opinion, this is
a particularly good time for NINE to be going
through this transition, as its competitors
are reporting increased costs of DRAM chips.
Another area of component shortages is
graphics accelerator chips. Some add-in-
board manufacturers have reported problems in
getting sufficient quantities of these chips
to satisfy demand. NINE has so far been able
to procure more than enough, even to the
extent that in the March quarter, the company
was able to sell some to a customer.
41. Thereafter, on July 27, 1995, the Company
announced its financial performance results for the second
quarter of fiscal year 1995. The Company reported that revenues
for the quarter were $31.1 million, up 229% from $9.5 million
reported in the second quarter of 1994 and up 21% from $25.7
million reported in the first quarter of 1995. Net income for
the quarter was $1.4 million compared to a net loss of ($165,000)
in the second quarter of 1994 and up 54% from $751,000 in the
first quarter of 1995. Reported earnings per share were $.17 on
8.4 million weighted average shares outstanding, compared with
- 27 -
($.02) per share on 7.3 million weighted shares outstanding in
the second quarter 1994 and $.10 on 7.5 million weighted average
shares outstanding in the first quarter of 1995. Reported
operating income increased to $2.2 million from ($252,000) in the
second quarter of 1994 and $1.2 million in the first quarter of
1995. The Company also reported inventories $23 million and
receivables of $20.5 million as of July 1, 1995. These financial
statements were materially false and misleading for the reasons
set forth below in the section of the complaint entitled
"Materially False And Misleading Financial Statements."
42. On July 28, 1995, Cowen & Co. issued a report on
the Company reiterating its "strong buy" rating and stating in
pertinent part that:
Gross Margins Up 70 b.p. Q/Q, But Higher DRAM
Prices Slow Rate Of Expected Gains -- Gross
margins in Q2 were 19.1%, vs. 18.4% in Q1:95
and our forecast of 21.8% Prices for DRAM
increased above expectations in June and the
Company was unable to adjust pricing before
the end of the quarter. However, NINE has
entered into new agreements with its OEM
customers that will give it protection
against price fluctuations in the future, and
it is continuing to seek stronger
relationships with memory suppliers. There
were no other component supply issues in the
quarter, and management indicates that its
supply of merchant accelerator chips is
adequate. [Emphasis added.]
43. Also on July 28, 1995, Robertson Stephens & Co.
disseminated a report on Number Nine, likewise noting that:
While we think the stock may trade off on the
gross margin concerns, we recommend purchase,
as this may be the best chance we get to own
what we think will be a long-term winner in
the graphics marketplace.
- 28 -
The company experienced significantly higher
VRAM and DRAM prices later in the quarter
than had been expected. While showing
consistently lower VRAM and DRAM prices for
the first two months of the quarter, NINE was
surprised by the move in June, and the
limited availability of chips. As a result,
with a heavily back-end-loaded quarter, NINE
had no time to react to the increasing
prices, and the impact was totally absorbed
by the company's gross profits. Since memory
prices began to increase, NINE has been
searching for innovative ways to reduce the
impact on its profits. Late in June, NINE
came to an agreement with its largest OEM,
Dell Computer Corporation (DELL $67-5/8) that
we believe will protect NINE from any further
increases in DRAM prices. As the gross
margins on products sold to Dell are the
lowest that NINE has, this should have a
significant impact on future business. We
are therefore comfortable with our projected
improvements in gross margins over the next
few quarters.
Demand for NINE's products continued to
outpace the company's ability to manufacture.
44. (a) On or about August 16, 1995, the Company
filed a report on Form 10-Q for the quarterly period ended July
1, 1995 substantially reiterating the Company's previously
reported financial results. In the Notes to the Financial
Statements contained within the Form l0-Q, the Company stated
that:
The accompanying condensed unaudited
financial statements have been prepared ...
in accordance with generally accepted
accounting principles for interim financial
information and pursuant to the applicable
rules and regulations of the Securities and
Exchange Commission. ...
In the opinion of management, the
accompanying financial statements contain all
adjustments (consisting of normal and
recurring accruals) necessary to present
fairly all financial statements.
- 29 -
(b) The financial statements contained within
this report on Form 10-Q and these statements were materially
false and misleading for the reasons set forth below in the
section of the complaint entitled "Materially False And
Misleading Financial Statements."
45. On August 25, 1996, the Company disseminated a
press release "unveiling significant price reductions on all
models" of its Imagine 128 graphics and video accelerator. In an
effort to suggest that this decision was motivated by something
other than competitive pressures which were severely hampering
sales, the Company claimed that the price reductions were
"[t]imed with the worldwide unveiling of Microsoft Windows 95"
and that "the price cuts are targeted to appeal to Windows 95
users..."
46. On October 4, 1995, Robertson Stephens issued a
report recommending that investors "Buy" Number Nine stock and
commenting:
NEWS: Number Nine will be reporting third
quarter results later this month, and we
continue to warn investors of a potential
shortfall to estimates. [in fact, there were
no prior warnings] But the reason for the
shortfall is explainable: shortages of
critical components, mainly VRAM. Demand for
the products continues to be strong, with
several orders having gone unfilled in the
past week.
But the company is working on this issue, and
has done several things to help alleviate the
shortages in the coming December quarter.
* * *
Even though there is risk to the September
quarter numbers, things are looking pretty
- 30 -
bright for Number Nine. December has the
prospects for beating our revenue. We will
have to reevaluate our gross margin
assumptions for the December quarter, once
October quarter results are announced. But
with the potential for upside on the
revenues, we are currently comfortable with
our estimates for December, and would not be
inclined to lower them.
47. On October 6, 1995, the Company announced that
sales and earnings for the third quarter of fiscal year 1995,
ending September 30, 1995, would be less than forecasted by
analysts. The Company reported that:
Lower than expected OEM sales more than
offset continued increases in two-tier and
retail distribution sales, and delays in
delivery to the company of VRAM memory
components resulted in significant order
volume being deferred into October. While
final results for the quarter are expected to
be announced during the second half of
October, the company estimated that sales for
the three months would be approximately $23.5
million, a 24% increase from the third
quarter of 1994. The company also estimated
that earnings per share would approximate
break-even, compared to $.09 in the year-
earlier period. In making this announcement,
defendant Najda, stated
"There were two principal factors impacting
third quarter sales. One was lower sales to
the company's largest OEM customer. The
second factor was delayed delivery to the
company of VRAM components. As a result, a
significant amount of September orders are
now scheduled to ship in October." "While
this was disappointing, we currently expect
that OEM sales will increase significantly in
the fourth quarter, based on initial orders
and discussions with customers. The volume
and timing of orders during a quarter is very
difficult to forecast, however, and attaining
a specific sales level can not be assured.
Our policy is to not discuss order backlog.
In this instance, however, we are making an
- 31 -
exception to demonstrate the strength of
orders on hand, which exceeded $22 million at
the end of September.
In addition, Kevin Hanks, the Company's then-CFO, stated:
Number Nine's year-to-year growth and future
prospects remain strong. Two-tier and retail
distribution sales increased sequentially and
should exceed 60% of sales for the quarter.
We achieved this growth despite limitations
on memory component availability, which may
have prevented reorders due to unfilled
backlog earlier in the quarter. A key factor
affecting fourth quarter sales growth will be
our ability to obtain sufficient VRAM
supplies, and we are executing several steps
to address the issue. [Emphasis added.]
Regarding the impact on quarterly earnings resulting from the
sales shortfall, Hanks stated in an effort to dissuade the market
that the Company was experiencing long-term and severe problems:
We have kept operating expenses low relative
to the underlying growth in sales and the
investments required to sustain that growth.
As a result, there are limits to short-term
expense reduction when revenues fall short of
expectations, which can magnify the earnings
impact in a particular quarter.
Commenting on VRAM constraints, defendant Najda stated that, "To
alleviate our dependence on VRAM, we are designing several new
products based on high-density, advanced memory technology.
These 8- and 16-megabit memory chips replace traditional 2- and
4-megabit VRAM, delivering high-performance graphics while
requiring fewer memory chips per board. These products could
generate revenues by the first quarter of 1996."
48. The truth about Number Nine's diminishing value
was thus partially disclosed on or about October 6, 1995, when
the Company announced, among other things, that it would report
- 32 -
lower than anticipated earnings in the fiscal third quarter of
1995, and that the Company had experienced serious memory supply
problems. Yet, despite this news, defendants continued to
perpetuate the image of Number Nine as a growing Company,
characterizing the third quarter earnings disappointment as an
unusual and non-recurring situation, and they continued to
disseminate materially false and misleading information about the
Company and continued to fail to disclose material information,
at all times during the Class Period continuing to fail to
correct previously disclosed false and misleading information.
49. On October 25, 1995, the Company announced its
third quarter 1995 financial results. The Company announced that
revenues for the quarter were $23.5 million, a reported increase
of 24% from $18.9 million in the third quarter of 1994. The
company reported a net loss of $292,000 for the recent quarter
compared to reported net earnings of $638,000 in the year-earlier
period. The company lost $.03 per share on 8.6 million weighted
average shares outstanding, compared with earnings of $.09 per
share on 7.4 million weighted shares outstanding in the same
quarter of 1994. The Company also reported inventories of $27
million, accounts receivable of $20.6 million, and an additional
"receivable from manufacturing contractor and other" of $6.3
million. These financial statements were materially false and
misleading for the reasons set forth below in the section of the
complaint entitled "Materially False And Misleading Financial
Statements."
- 33 -
50. (a) On or about November 14, 1995, the Company
filed a report on Form 10-Q for the quarterly period ending
September 30, 1995 substantially reiterating the Company's
financial results described above. In the Notes to the Financial
Statements contained within the Form 10-Q, the Company stated
that:
The accompanying condensed unaudited
financial statements have been prepared...in
accordance with generally accepted accounting
principles for interim financial information
and pursuant to the applicable rules and
regulations of the Securities and Exchange
Commission. ...
In the opinion of management, the
accompanying financial statements contain all
adjustments (consisting of normal and
recurring accruals) necessary to present
fairly all financial statements.
(b) The financial statements contained within
this report on Form 10-Q and these statements were materially
false and misleading for the reasons set forth below in the
section of the complaint entitled "Materially False And
Misleading Financial Statements."
51. (a) On January 31, 1996, the Company announced
that it would report a net loss in the fourth quarter of fiscal
year 1995, ending December 31, 1995. According to the Company,
it had achieved sales of approximately $36 million but would
report $8 million of charges "primarily for excess inventory."
The Company reported, with respect to the write-off of inventory,
that:
A majority of the charges relate to VL-bus
versions of the Company's 64-bit products and
to excess printed circuit boards. These
- 34 -
products are not expected to represent
significant sales during 1996. The Company
currently expects to report a fourth quarter
loss in the range of $6.5 million to $7.0
million, or between $.75 and $.80 per share.
The Company expects to announce final results
for the fourth quarter and full fiscal year,
as previously scheduled, during the week of
February 19, 1996 upon completion of the
annual audit. (Emphasis added.]
(b) The Company also announced in the same press
release that the Company's Chief Operating Officer, Michael P.
Casey, had resigned.
52. (a) On February 21, 1996, the Company announced
its fourth quarter and full year operating results for fiscal
1995. According to the Company, revenues for the quarter were
approximately $36.5 million, an increase of 29% from
approximately $28.2 million reported in the fourth quarter of
1994. Revenues for the year were $116.8 million, an increase of
76% from $66.2 million reported in 1994. The Company reported a
net loss of $(6.9) million or $(.79) per share for the fourth
quarter compared to reported net earnings of $1.1 million or $.14
per share for the fourth quarter 1994. For the year, the
reported net loss was $(5.l) million or $(.64) per share compared
to reported net earnings of $1.7 million, or $.23 per share, for
1994. The Company also reported inventories at year-end of $26.4
million, accounts receivable of $27.6 million and a "receivable
from manufacturing contractor and other" of $9.2 million. In
addition, the Company announced that the net loss for the quarter
included approximately $8 million of charges primarily related to
- 35 -
excess inventory, as well as sales and operating results which
were below management expectations.
(b) The Company also announced the resignation of
its CFO, Kevin M. Hanks.
53. (a) The Company reiterated in a letter to
shareholders included within the Company's 1995 Annual Report,
that:
In the fourth quarter of 1995 the Company
incurred a charge of approximately $8 million
as a result of obsolete and excess inventory
resulting in a net loss for fiscal 1995 of
approximately $5 million. A majority of this
charge related to VL-bus versions of the
Company's 64 bit products and to excess
printed circuit boards which are not expected
to represent substantial sales in 1996.
[Emphasis added.]
(b) In addition, in the "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations"
section of the Report on Form 10-K, the Company disclosed that
the Company was utilizing monies available to it under its
revolving credit line, that at December 30, 1995, $8.7 million
was outstanding under this arrangement, and that "[t]he Company
has been out of compliance with certain terms of its Loan
Agreement with its Lender from time to time."
54. As a result of the October 6, 1995, January 31,
1996, and subsequent disclosures, the price of Number Nine stock
declined precipitously. On October 6, 1995, Number Nine common
stock declined $4.50 per share from $14.25 per share to $9.75 per
share (a one-day decline of 31%) on volume of more than 1.7
million shares. On January 31, 1996, the stock price plunged
- 36 -
$2.375 per share (a one-day decline of 32%) to close at $5.125
per share on that date on volume of over 1.4 million shares.
This decline also represented a $19.875 decline in market value
(an approximately 80% loss in value) from a Class Period high of
$25.00 per share. On April 30, 1996 -- ninety days after
defendants' disclosures of January 31, 1996 -- the price of
Number Nine common stock closed at a price of $7.50 per share.
55. Following the Company's adverse financial
performance reports, the Company terminated or otherwise
discharged a large number of employees, many of whom had been
hired only shortly before the IPO and who thus appeared to have
been hired in conjunction with and in support of the false
expectation of profitable growth generated and fostered by
defendants before and in the IPO and thereafter during the Class
Period.
Materially False And Misleading Financial Statements
56. When Number Nine prepared its Prospectus for the
IPO, the Company was beginning to accumulate excess and obsolete
inventory of VL-Bus versions of the Company's products. The
defendants caused the Company to fail to adequately reserve for
this excess and obsolete inventory as required by GAAP. Any such
timely recognition would have resulted in a loss in the Company's
then-recently completed quarterly results for the period ending
April 1, 1995.
57. In the consolidated financial statements contained
within the Prospectus, the Company reported net income of
- 37 -
$751,000 for the quarter ended April 1, 1995, total assets of
$35,677,000 as of April 1, 1995, and inventories of $17,333,000
as of April 1, 1995. The Company also reported total
stockholders' equity of $5,148,000 as of April 1, 1995. In the
Notes To Consolidated Financial Statements, the Company states
that "[a]ll adjustments (consisting only of normal recurring
adjustments) have been made which, in the opinion of management
are necessary for a fair presentation." In addition, the Company
made the following representation with regard to inventory:
Inventories
Inventories are stated at the lower of cost
or market, with cost determined under the
first-in, first-out method. Provision for
estimated excess and obsolete inventories are
accrued on a quarterly basis. In providing
for excess and obsolete inventories, the
Company considers the effects of planned new
product introductions, anticipated stock
rotations and sales activity.
58. The net income reported for the quarter ended
April 1, 1995, was materially overstated and the statement
regarding the Company's provisions for excess and obsolete
inventory was false as applied to the Company's results at April
1, 1995, as the Company had failed to adequately reserve for
excess and obsolete inventory as required by GAAP.
59. As a result of the increasing obsolescence of the
Company's older VL-bus 64-bit products, which the Company was
carrying on its balance sheets as inventory but did not and could
not reasonably expect to sell, the Company's reported inventories
were overstated by at least $8 million during the Class Period
and in connection with the IPO. As a result, the Company's
- 38 -
financial statements contained within the Prospectus materially
overstated the Company's financial position and results and did
not reflect all adjustments necessary to present fairly the
financial position and net worth, results of operations and
changes in financial position of Number Nine for the period or
periods presented, in violation of generally accepted accounting
principles (GAAP). In accordance with GAAP as set forth in
Accounting Research Bulletin No. 43 (ARB No. 43): "Where there
is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost, whether due
to physical deterioration, obsolescence, changes in price levels,
or other causes, the difference should be recognized as a loss of
the current period."
60. Number Nine's excess and obsolete inventories were
accumulating rapidly, in part because the introduction of PCI-bus
products had greatly reduced the attractiveness of VL-bus
products, which resulted in excessive returns and/or inventory
accumulations. Further, Number Nine's introduction of the 9FX
Family of products had rendered certain of its existing inventory
of GXE Family products virtually worthless, as the 9FX products
were superior and less expensive. Despite these problems, the
Company accrued only what it termed an "immaterial" provision for
excess and obsolete inventory at April 1, 1995. As a result, the
first quarter financial statements issued by defendants in the
Prospectus for the IPO were materially false and misleading --
reporting inflated inventories, assets and earnings per share.
As a result of this improper financial reporting, the Company's
- 39 -
financial statements for the first fiscal quarter violated GAAP.
If the Company had properly and adequately accrued a provision
for excess and obsolete inventory as required by GAAP, it would
have reported a material loss instead of the $751,000 in net
income which it reported.
61. The Company also reported false financial
statements for the second and third quarters of fiscal 1995. In
the second quarter of 1995 (ending July 1, 1995), and the third
quarter of 1995 (ending September 30, 1995), the Company reported
net income of $1.3 million and a net loss of $292,000,
respectively. In each of the reports on Form 10-Q for the second
and third quarters of 1995, the Company represented that the
financial statements, "in the opinion of management," fairly
presented the Company's results. The financial results were
materially false, misleading and overstated because Number Nine
was, at all relevant times, accumulating excess and obsolete
inventory and failed to adequately reserve for such inventory.
62. Number Nine's reported inventory increased from
$17,333,000 at April 1, 1995 to $27,458,000 at September 30,
1995; an increase of $9,797,000 or 55% in only six months.
Moreover, the $27,458,000 in inventory as of September 30, 1995
did not include at least $6.2 million in inventory shipped to a
contractor for assembly into finished goods. Thus, Number Nine's
inventory levels were rising sharply at the same time that demand
for its products and the prices at which Number Nine could sell
those products were weakening. Inventory levels began
dramatically increasing at the time of the IPO, and prices were
- 40 -
being eroded for the older 64-bit VL-bus and other products,
thereby decreasing the value and utilization of reported
inventories. In spite of this, Number Nine did not disclose any
reserve for excess or obsolete inventory before the IPO, in the
Prospectus, or in the reports on Form 10-Q for the second and
third quarters of fiscal 1995.
63. By overstating its inventories and failing to take
any reserves in the financial statements issued by Number Nine
during the Class Period, defendants overstated Number Nine's net
income and shareholer [sic] equity by millions of dollars in the first,
second and third quarters of 1995.
64. Number Nine's misleading accounting practice was
ultimately unveiled when Number Nine was forced to record an $8
million write down of inventory during the fourth quarter of
fiscal 1995 for excess and obsolete 64-bit VL-Bus product
inventory. The charge resulted in a net loss to Number Nine
which exceeded the Company's cumulative net income for at least
the previous five years!
65. As a result of Number Nine's improper and
misleading accounting practices, the financial statements issued
by the Company in the Prospectus, and in the reports on Form 10-Q
for the second and third quarters of fiscal 1995, did not fairly
present Number Nine's financial condition and results from
operations in conformity with GAAP. In fact, each of these
reports was materially false and misleading because assets,
inventories, net income and shareholder equity as reported and
- 41 -
set forth in the financial statements were artificially,
improperly and materially inflated.
66. Number Nine's financial statements included within
the Prospectus, and issued during the Class Period, violated GAAP
for the following reasons, among others:
(a) The principle that financial reporting should
provide information that is useful to present to investors,
potential investors, creditors and other users in making rational
investment, credit and similar decisions was violated. (FASB
Statement of Concepts No. 1 ¶ 34);
(b) The principle that conservatism be used as a
prudent reaction to uncertainty to try to ensure that
uncertainties and risks inherent in business situations are
adequately considered was violated. The best way to avoid the
injury to investors that imprudent reporting creates is to try to
ensure that what is reported represents what it purports to
represent. The aim must be to put the users of financial
information in the best possible position to form their own
opinion of the probable outcome of the events reported. Prudent
reporting based on a healthy skepticism builds confidence in the
results and, in the long run, best serves all of the divergent
interests that are represented by the [Financial Accounting
Standards] Board's constituents. (FASB Statement of Concepts No.
2 ¶¶ 95 and 97);
(c) The principle of materiality was violated.
The omission or misstatement of an item in a financial report is
material if, in the light of surrounding circumstances, the
- 42 -
magnitude of the item is such that it is probable that the
judgment of a reasonable person relying upon the report would
have been changed or influenced by the inclusion or correction of
the item. (FASB Statement of Concepts No. 2 ¶ 132);
(d) The principle of recognition was violated.
An item or information about it should be recognized in financial
reports when it has met the following four criteria: (i) the
item meets the definition of an element of financial statements;
(ii) it has a relevant attribute measurable with sufficient
reliability; (iii) the information about it is capable of making
a difference in user decisions; and (iv) the information is
representationally faithful, verifiable and neutral. (FASB
Statement of Concepts No. 5 ¶ 63); and,
(e) The principle that inventory should be
carried at the lower of cost or market was violated. (Accounting
Research Bulletin 43, Chapter 4).
67. In addition, during the Class Period, Number Nine
was caused by the Individual Defendants to engage in irregular
patterns of sales and orders which compressed disproportionate
amounts of such transactions into the final week or month of a
financial quarter. For example, such channel stuffing
effectively stole sales from the fiscal third quarter to benefit
and cosmetically improve the reported results in the second
quarter. The underlying weakness of the Company's business
precluded the Company from subsequently catching up in later
periods to maintain the trajectory of revenues and earnings, with
- 43 -
corresponding disastrous results, totally contrary to Company-
generated expectations.
68. As a result of the improper and misleading
accounting practices set forth above, Number Nine's financial
statements included in the Prospectus were materially false and
misleading because Number Nine's financial statements contained
within the Prospectus were not prepared in accordance with GAAP
and were not prepared pursuant to applicable SEC accounting rules
and regulations. These financial statements did not reflect all
adjustments necessary to present fairly the financial condition
of Number Nine. As a result, Number Nine's assets and
inventories were overstated in material amounts for the periods
presented.
FIRST CLAIM
[For Violations Of Section 11 Of
The Securities Act Against All Defendants]
69. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
70. This Count is brought by plaintiff pursuant to
Section 11 of the Securities Act, 15 U.S.C. § 77k, on behalf of
the Class against all defendants, and it does not sound in fraud.
71. The Registration Statement, which contained the
Prospectus for the Initial Public Offering, was inaccurate and
misleading, contained untrue statements of material facts,
omitted to state other facts necessary to make the statements
made not misleading, and concealed and failed adequately to
disclose material facts as described above.
- 44 -
72. Number Nine is the registrant for the shares sold
to plaintiff and other members of the Class. Number Nine issued,
caused to be issued and participated in the issuance of
materially false and misleading written statements to the
investing public which were contained in the Registration
Statement, which misrepresented or failed to disclose, inter
alia, the facts set forth above. As an issuer of the shares,
Number Nine is strictly liable to plaintiff and the Class for the
material misstatements or omissions.
73. The Individual Defendants either personally or
through an attorney-in-fact signed the Registration Statement for
the IPO and were directors and senior executives of Number Nine
at the time of the IPO. As such, these Individual Defendants
were responsible for the contents and dissemination of the
Registration Statement and Prospectus. The Individual Defendants
failed to make a reasonable investigation or possess reasonable
grounds for believing that each of the statements contained in
the Registration Statement and Prospectus was true, and did not
omit any material facts and was not materially misleading.
74. Defendants Cowen & Co., Robertson, Stephens & Co.
and Unterberg Harris were each underwriters of the Number Nine
IPO.
75. Plaintiff acquired shares of Number Nine issued
pursuant to, or traceable to, the Registration Statement.
76. Plaintiff and the Class have sustained damages.
The value of the Company's shares has declined substantially
subsequent to and due to defendants' violations.
- 45 -
77. At the times they purchased the Company's shares,
plaintiff and other members of the Class were without knowledge
of the facts concerning the wrongful conduct alleged herein and
could not have reasonably discovered those facts. Less than one
year elapsed from the time that plaintiff discovered or
reasonably could have discovered the facts upon which this
complaint is based to the time that plaintiff filed his
Complaint. Less than three years elapsed from the time that the
securities upon which this Count is brought were bona fide
offered to the public to the time plaintiff filed his Complaint.
SECOND CLAIM
[For Violations Of Section 12(a)(2) Of
The Securities Act Against All Defendants]
78. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
79. This Count is brought by plaintiff pursuant to
Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77l(a)(2), on
behalf of the Class against all defendants, and it does not sound
in fraud.
80. The statements identified above in paragraphs 24-
32, 37, 38 and 56, were each made in a "prospectus" as that term
is defined in Section 2(a)(10) of the Securities Act, contained
untrue statements of material facts, omitted to state other facts
necessary to make the statements made not misleading, and
concealed and failed to disclose material facts. The actions of
the defendants named in this Count solicited the sale of shares
of Number Nine common stock in the Initial Public Offering for
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their personal financial gain. Those actions included
participating in the preparation of the materially false and
misleading Prospectus and other materials used in the sale of
Number Nine common stock identified above.
81. The defendants owed to the purchasers of the
Company's shares, including plaintiff and other members of the
Class, the duty to make a reasonable and diligent investigation
of the statements contained in the offering materials and
prospectuses to insure that such statements were true and that
there was no omission to state a material fact required to be
stated in order to make the statements contained therein not
materially misleading.
82. The defendants named in this Count sold and/or
solicited the sale of the Company's common stock offered pursuant
to the Prospectus and Registration Statement for their individual
financial gain, including the following:
(a) The Company received net proceeds of
approximately $27.9 million from the successful completion of the
IPO; and
(b) Bialek received net proceeds of $9,067,500
from the sale of Number Nine stock in the IPO;
(c) Najda received net proceeds of $2,790,000
from the sales of Number Nine stock in the IPO.
83. Plaintiff and other members of the Class purchased
or otherwise acquired the Company's common stock pursuant to and
traceable to the Prospectus. Plaintiff did not know, or in the
exercise of reasonable diligence could not have known, of the
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untruths and omissions contained in or made in connection with
the Prospectus.
84. Plaintiff and other members of the Class have
sustained injury and suffered damages.
85. By reason of the conduct alleged herein, the
defendants named in this Count violated Section 12(a)(2) of the
Securities Act. Accordingly, plaintiff and members of the Class
who hold the Company's shares have the right to rescind and
recover the consideration paid for the Company's shares and
hereby elect to rescind and tender their shares of the Company to
the defendants sued herein. Plaintiff and Class members who have
sold their shares of Number Nine are entitled to rescissory
damages.
86. Less than three years elapsed from the time that
the securities upon which this Count is brought were sold to the
public to the time of the filing of this action. Less than one
year elapsed from the time when plaintiff discovered or
reasonably could have discovered the facts upon which this Count
is based to the time of the filing of this action.
THIRD CLAIM
[For violation of Section 15 Of
The Securities Act Against The Individual Defendants]
87. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
88. This Count is brought by plaintiff pursuant to
Section 15 of the Securities Act, 15 U.S.C. § 77o, on behalf of
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the Class against the Individual Defendants, and it does not
sound in fraud.
89. Number Nine is liable as an issuer under
Section 11 of the Securities Act and as a seller under
Section 12(a)(2) of the Securities Act as set forth in the first
and second claims herein.
90. Each of the Individual Defendants was a control
person of the Company with respect to the IPO by virtue of their
positions as senior executives and/or directors with Number Nine
as alleged above.
91. In addition, each of the Individual Defendants was
a control person of the Company with respect to the IPO by virtue
of their collective beneficial ownership at the time of the
Initial Public Offering of a controlling block of the outstanding
common shares of Number Nine and their relationships with other
large holders of Number Nine common stock. In particular,
immediately after the time of the IPO, the Individual Defendants
had the following beneficial ownership interest in the Company's
common stock:
Percentage of
Defendant Number of Shares Outstanding Shares
Najda 2.2 million 27.1%
Bialek 1.02 million 12.3%
92. As a result, the Individual Defendants named in
this Count are liable under Section 15 of the Securities Act for
Number Nine's primary violations of Sections 11 and 12(a)(2) of
the Securities Act.
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FOURTH CLAIM
(Violations Of Section 10(b) of The Exchange Act
And Rule 10b-5 Promulgated Thereunder Against
Number Nine And The Individual Defendants)
93. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
94. During the Class Period, Number Nine and the
Individual Defendants, and each of them, carried out a plan,
scheme and course of conduct which was intended to and,
throughout the Class Period, did: (i) deceive the investing
public, including plaintiff and other Class members, as alleged
herein; (ii) artificially inflate and maintain the market price
of Number Nine securities; (iii) cause plaintiff and other
members of the Class to purchase Number Nine securities at
inflated prices; and (iv) permit the defendants to engage in
heavy and profitable insider sales. In furtherance of this
unlawful scheme, plan and course of conduct, defendants, and each
of them, took the actions set forth herein.
95. By failing to properly and timely write-off excess
and obsolete inventory by the time of the IPO, and throughout the
Class Period, defendants knowingly or recklessly caused or
allowed Number Nine's financial statements and reported financial
condition to be materially overstated, as alleged in detail above
in paragraphs 55-66.
96. Defendants (a) employed devices, schemes, and
artifices to defraud; (b) made untrue statements of material fact
and/or omitted to state material facts necessary to make the
- 50 -
statements not misleading; and (c) engaged in acts, practices,
and a course of business which operated as a fraud and deceit
upon the purchasers of the Company's stock in an effort to
maintain artificially high market prices for Number Nine's
securities in violation of Section 10(b) of the Exchange Act and
Rule 10b-5. All defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein
or as controlling persons as alleged below.
97. In addition to the duties of full disclosure
imposed on defendants as a result of their making of affirmative
statements and reports, or participation in the making of
affirmative statements and reports to the investing public, and
by virtue of their insider sales of Number Nine stock at
artificially inflated prices, the Individual Defendants had a
duty to promptly disseminate truthful information that would be
material to investors in compliance with the integrated
disclosure provisions of the SEC as embodied in SEC Regulation S-
X (17 C.F.R. Sections 210.01 et seq.) and Regulation S-K (17
C.F.R. Sections 229.10 et seq.) and other SEC regulations,
including accurate and truthful information with respect to the
Company's operations, financial condition and earnings so that
the market price of the Company's common stock would be based on
truthful, complete and accurate information.
98. Number Nine and the Individual Defendants,
individually and in concert, directly and indirectly, by the use,
means or instrumentalities of interstate commerce and/or of the
mails, engaged and participated in a continuous course of conduct
- 51 -
to conceal adverse material information about the business,
operations and future prospects of Number Nine as specified
herein. Number Nine and the Individual Defendants employed
devices, schemes and artifices to defraud, while in possession of
material adverse non-public information and engaged in acts,
practices, and a course of conduct as alleged herein in an effort
to assure investors of Number Nine's value and performance and
continued substantial growth, which included the making of, or
the participation in the making of, untrue statements of material
facts and omitting to state material facts necessary in order to
make the statements made about Number Nine and its business
operations and future prospects in the light of the circumstances
under which they were made, not misleading, as set forth more
particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the
purchasers of Number Nine securities during the Class Period.
99. Each of the Individual Defendants' primary
liability, and controlling person liability, arises from the
following facts: (i) each of the Individual Defendants was a
high-level executive and/or director at the Company during the
Class Period and was a member of the Company's management team;
(ii) each of the Individual Defendants, by virtue of his
responsibilities and activities as a senior officer and/or
director of the Company, was privy to and participated in the
creation, development and reporting of the Company's internal
budgets, plans, projections and/or reports; (iii) each of the
Individual Defendants enjoyed significant personal contact and
- 52 -
familiarity with the other Individual Defendant and was advised
of and had access to other members of the Company's management
team, internal reports and other data and information about the
Company's finances, operations, sales and technology at all
relevant times; and (iv) each of the Individual Defendants was
aware of the Company's dissemination of information to the
investing public which they knew or recklessly disregarded was
materially false and misleading.
100. The defendants had actual knowledge of the
misrepresentations and omissions of material facts set forth
herein, or acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though
such facts were available to them. Such defendants' material
misrepresentations and/or omissions were done knowingly or
recklessly and for the purpose and effect of concealing Number
Nine's operating condition and future business prospects from the
investing public and supporting the artificially inflated price
of its stock. As demonstrated by defendants' overstatements and
misstatements of the Company's business, operations and earnings
throughout the Class Period, defendants, if they did not have
actual knowledge of the misrepresentations and omissions alleged,
were reckless in failing to obtain such knowledge by deliberately
refraining from taking those steps necessary to discover whether
those statements were false or misleading.
101. In addition, defendants' insider selling in the
IPO is highly probative of defendants' scienter and is part of
defendants' scheme, artifice to defraud or acts, practices or
- 53 -
course of business in violation of Section 10(b) and Rule 10b-5.
As set forth above, while defendants were issuing false favorable
statements about the Company's business prospects, and concealing
or obscuring negative information and trends, each of the
Individual Defendants and Number Nine, all of whom had access to
confidential information and were aware of the truth about the
Company and its products, were benefitting from the illegal
course of business or course of conduct described in this
complaint by selling large blocks of the Company's stock at
artificially inflated prices without disclosing the material
adverse facts about the Company to which they were privy. The
insider sales of Number Nine stock by the Individual Defendants
and by the Company in the IPO imposed upon them duties of full
disclosure of all of the material facts alleged in this
complaint.
102. As a result of the dissemination of the materially
false and misleading information and failure to disclose material
facts, as set forth above, the market prices of Number Nine
securities were artificially inflated during the Class Period.
In ignorance of the fact that market prices of Number Nine's
publicly-traded securities were artificially inflated, and
relying directly or indirectly on the false and misleading
statements made by defendants, or upon the integrity of the
market in which the securities trade, and the truth of any
representations made to appropriate agencies as to the investing
public, at the times at which any statements were made, and/or on
the absence of material adverse information that was known to or
- 54 -
recklessly disregarded by defendants but not disclosed in public
statements by defendants during the Class Period, plaintiff and
the other members of the Class acquired Number Nine's securities
during the Class Period at artificially high prices and were
damaged thereby.
103. At the time of said misrepresentations and
omissions, plaintiff and other members of the Class were ignorant
of their falsity, and believed them to be true. Had plaintiff
and the other members of the Class and the marketplace known of
the true financial condition and business prospects of Number
Nine, which were not disclosed by defendants, plaintiff and other
members of the Class would not have purchased or otherwise
acquired their Number Nine securities during the Class Period,
or, if they had acquired such securities during the Class Period,
they would not have done so at the artificially inflated prices
which they paid.
104. By virtue of the foregoing, defendants have
violated Section 10(b) of the Exchange Act, and Rule 10b-5
promulgated thereunder.
105. As a direct and proximate result of defendants'
wrongful conduct, plaintiff and the other members of the Class
suffered damages in connection with their purchases of the
Company's securities during the Class Period.
- 55 -
FIFTH CLAIM
(Violation Of Section 20(a) of The Exchange Act
Against The Individual Defendants
106. Plaintiff repeats and realleges each of the
foregoing paragraphs as if fully set forth herein.
107. The Individual Defendants acted as controlling
persons of Number Nine within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level
positions, participation in and/or awareness of the Company's
operations and/or intimate knowledge of the Company's financial
condition, products and the actual progress of its development,
sales and marketing efforts, the Individual Defendants had the
power to influence and control and did influence and control,
directly or indirectly, the decision-making of the Company,
including the content and dissemination of the various statements
which plaintiff contends are false and misleading. Each of the
Individual Defendants was provided with or had unlimited access
to copies of the Company's reports, press releases, public
filings and other statements alleged by plaintiff to be
misleading prior to and/or shortly after these statements were
issued and had the ability to prevent the issuance of the state-
ments or cause the statements to be corrected.
108. In particular, each of the defendants had direct
and supervisory involvement in the day-to-day operations of the
Company and therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to
- 56 -
the securities violation as alleged herein, and exercised the
same.
109. As set forth above, Number Nine and the Individual
Defendants each violated Section 10(b) and Rule 10b-5 by their
acts and omissions as alleged in this Complaint. By virtue of
their positions as controlling persons, the Individual Defendants
are liable pursuant to Section 20(a) of the Exchange Act. As a
direct and proximate result of defendants' wrongful conduct,
plaintiff and other members of the Class suffered damages in
connection with their purchases of the Company's securities dur-
ing the Class Period.
WHEREFORE, plaintiff prays for relief and judgment, as
follows:
(a) Determining that this action is a proper
class action, certifying plaintiff as class representative under
Rule 23 of the Federal Rules of Civil Procedure and his counsel
as class counsel;
(b) Awarding compensatory damages in favor of
plaintiff and the other Class members against all defendants,
jointly and severally, for all damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial,
including interest thereon;
(c) Awarding plaintiff and the Class their
reasonable costs and expenses incurred in this action, including
counsel fees and expert fees; and
- 57 -
(d) Such other and further relief as the Court
may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: Boston, Massachusetts
June 10, 1996
MOULTON & WELBURN
/s/
By: ____________________________
Stephen Moulton, BBO #358480
99 Summer Street, Suite 1420
Boston, Massachusetts 02110-1200
(617) 737-8383
- and -
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
/s/
By: _____________________________
David J. Bershad
Steven G. Schulman
Ralph M. Stone
One Pennsylvania Plaza
49th Floor
New York, NY 10119
(212) 594-5300
Attorneys for Plaintiff
- 58 -
CERTIFICATION OF RBI, AN ALASKAN LIMITED PARTNERSHIP
IN SUPPORT OF CLASS ACTION COMPLAINT
RBI, An Alaskan Limited Partnership ("plaintiff"), by
its General Partner, Marilyn A. Crace, declares, as to the claims
asserted under the federal securities laws, that:
1. Plaintiff has reviewed the complaint prepared by
counsel in the above-captioned case and has authorized its
filing.
2. Plaintiff did not purchase the security that is
the subject of the complaint at the direction of plaintiff's
counsel or in order to participate in any private action arising
under the federal securities laws.
3. Plaintiff is willing to serve as a representative
party on behalf of a class, including providing testimony at
deposition and trial, if necessary.
4. During the proposed Class Period, plaintiff
executed the following transactions relating to Number Nine
Software common stock: See Attachment A
5. In the past three years, plaintiff has not sought
to serve nor has served as a representative party on behalf of a
class in an action filed under the federal securities laws.
6. Plaintiff will not accept any payment for serving
as a representative party on behalf of a class beyond plaintiff's
pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly relating to the
representation of the Class as ordered or approved by the Court.
- 1 -
I declare under penalty of perjury that the foregoing
is true and correct. Executed this 5th day of June, 1996.
RBI, AN ALASKAN LIMITED
PARTNERSHIP
/s/
By:_________________________
MARILYN A. CRACE
General Partner
- 2 -
ATTACHMENT A
RBI, An Alaskan Limited Partnership Transactions
In Number Nine Stock
Date Action Amount Price
---- ------ ------ -----
6/5/95 Bought 5000 $20.25
6/8/95 Bought 4000 $17.25
7/24/96 Sold 4000 $21.25
8/2/95 Bought 2000 $23.00
8/11/95 Sold 4000 $19.00
10/2/95 Bought 2000 $16.00
10/6/95 Bought 2500 $14.00
10/10/95 Bought 500 $13.75
10/10/95 Bought 1000 $13.50
10/10/95 Bought 1000 $13.25
12/22/95 Sold 2000 $ 8.75
1/5/96 Sold 100 $ 8.50
1/9/96 Sold 400 $ 8.00
1/9/96 Sold 1000 $ 8.00
1/9/96 Sold 900 $ 8.00
1/9/96 Sold 1100 $ 8.00
1/9/96 Sold 1100 $ 8.00
1/9/96 Sold 1000 $ 8.00
1/9/96 Sold 1000 $ 8.25
1/9/96 Sold 400 $ 8.00
1/9/96 Sold 1000 $ 8.00
- 3 -
3 Aug 1997