BRUCE G. VANYO (060134)
JEROME F. BIRN, JR. (128651)
REBECCA A. MITCHELLS (151683)
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100

Attorneys for All Defendants

NOTICE OF MOTION AND MOTION FOR PARTIAL SUMMARY JUDGMENT

INTRODUCTION

ALLEGATIONS IN THE COMPLAINT

ARGUMENT

I. The Reform Act's Safe Harbor Provision Creates Blanket Immunity For Forward-Looking Statements Accompanied By Meaningful Cautionary Language

II. SGI's Alleged Forward-Looking Statements Are Immunized From Liability By The Safe Harbor Provision

A. The Alleged Statements Are "Forward-Looking."

B. The Alleged Statements Were Accompanied By Meaningful Cautionary Language

CONCLUSION

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)

Celotex Corp. v. Catrett, 477 U.S. 317 (1986)

Harris v. IVAX Corp., 182 F.3d 799 (11th Cir. 1999)

In re Home Health Corp. of Am. Inc. Sec. Litig., [Current Binder], Fed. Sec. L. Rep.
     (CCH) ¶ 90,414 (E.D. Pa. Jan. 29, 1999)

In re PLC Systems, Inc. Sec. Litig., 41 F. Supp. 2d 106 (D. Mass. 1999)

Karacand v. Edwards, 53 F. Supp. 2d 1236 (D. Utah 1999)

P. Schoenfeld Asset Mgmt LLC v. Cendant Corp., 47 F. Supp. 2d 546 (D.N.J. 1999)

15 U.S.C. § 78u-5

15 U.S.C. § 78u-5(c)(1)(B)

15 U.S.C. § 78u-5(c)(2)

15 U.S.C. § 78u-5(i)(1)

H.R. Conf. Rep. No.104-369 (1995)

Please take notice that on December 3, 1999, at 9:30 a.m., before the Hon. Charles A. Legge, in Courtroom 10 of the U.S. District Court for the Northern District of California, located at 450 Golden Gate Avenue, San Francisco, California, all defendants shall move for partial summary judgment pursuant to Fed. R. Civ. P. 56. Defendants move for partial summary judgment on grounds that certain statements alleged in the complaint are precluded from liability under the Safe Harbor provision of the Private Litigation Securities Reform Act of 1995, 15 U.S.C. § 78u-5.

This is a shareholder securities class action against Silicon Graphics, Inc. ("SGI") and certain of its officers and directors. Plaintiffs allege that defendants made false and misleading statements during the class period, July 24, 1997 - October 6, 1997, about SGI's prospects for the first fiscal quarter of 1998, ending September 30, 1997. Plaintiffs allege that defendants knew that their statements about SGI's first quarter prospects were false because demand for SGI products was insufficient.

Although plaintiffs admit that results for the fourth quarter of 1997, ending June 30, 1997, were spectacular--SGI for the first time achieved $1 billion in revenue--plaintiffs allege that SGI pulled into the fourth quarter sales that originally were scheduled to ship in the first quarter. Plaintiffs do not allege that any fourth quarter sales were other than legitimate sales. Plaintiffs fail to identify any specific legitimate sales "pulled into" the fourth quarter, the total amount of such sales, the specific impact on first quarter results, or when or how defendants allegedly knew of the alleged pulled-in sales. The accompanying motion to dismiss addresses the failure of plaintiffs' allegations to satisfy the pleading requirements of the Private Litigation Securities Reform Act.

This motion demonstrates that defendants are entitled to summary judgment as to two of the allegedly false statements because SGI complied with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-5. At issue in this motion are the July 24 market analyst conference call discussing fourth quarter results and expected first quarter results, and the analyst conference at SGI on September 5, 1997. Complaint ¶¶ 69, 86. Plaintiffs allege that in each statement SGI made false predictions about its expected first quarter results. Id. ¶ 95. As to each statement, however, SGI complied with the Reform Act's Safe Harbor. SGI identified each statement as a forward-looking statement. SGI stated that actual results could vary. Each statement was accompanied by meaningful cautionary language warning of factors that realistically could cause actual results to vary. Therefore, each statement is immunized from liability under the Reform Act's Safe Harbor provision.

SGI is a worldwide leading supplier of high-performance interactive computing systems, including desktop workstations, servers and supercomputers. Complaint ¶¶ 3, 7. Plaintiffs allege that SGI came upon "hard times" in 1996 and 1997, reporting disappointing results for seven consecutive fiscal quarters. Id. ¶ 60. SGI's fourth quarter of 1997, however, was spectacular as the Company recorded its first billion dollar quarter, with $1.2 billion in revenue Id. ¶ 68. As reported by market analysts, SGI introduced new products in the second and third quarters of 1997 but was unable to ship them because of execution problems, which increased the backlog of orders. Id. ¶ 76. As the press widely reported, those problems were largely resolved by the fourth quarter, allowing SGI to ship the backlogged orders and get backlog down to "a more manageable level." Id. But the spectacular fourth quarter 1997 results were not solely the result of shipping backlogged orders. As market analysts reported, new orders in the fourth quarter increased sequentially by $125 million to about $975 million. Id. The gain in new orders, and SGI's resolution of its execution problems and control over its operating expenditures, encouraged analysts to raise cautiously their projections for SGI's fiscal year 1998. Id.

Plaintiffs allege that the fourth quarter results were not the result of effective execution or demand for SGI's products, but were caused by defendants' decision to fraudulently induce customers to accept shipment of product in the fourth quarter that was originally scheduled for shipment in the first quarter of 1998. Id. ¶ 95. Plaintiffs allege that SGI offered "special sales incentives including price discounts, extended payment terms and the right to return the products if they did not want them or could not resell them." Id. Plaintiffs do not allege that these were not legitimate sales to customers. Plaintiffs simply aver that it was fraudulent for SGI to induce customers to accept shipment in the fourth quarter 1997 instead of the first quarter 1998. Defendants' accompanying motion to dismiss shows that these allegations are insufficient under the Reform Act because plaintiffs fail to identify any customer, shipment, amount of sale or "special terms" involved, and also fail to allege particular facts showing that SGI's first quarter forecasts failed to consider the effect of orders allegedly pulled-in from the fourth quarter.

In moving for summary judgment, defendants have the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions" of the record showing the absence of a genuine issue of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to plaintiffs to present evidence sufficient to support a verdict in their favor on every element of their claim for which they carry the burden of proof at trial. Id. at 322-23. Summary judgment is proper if plaintiffs' evidence is not "significantly probative." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986) (citation omitted).

I. The Reform Act's Safe Harbor Provision Creates Blanket Immunity For Forward-Looking Statements Accompanied By Meaningful Cautionary Language.

The Reform Act's Safe Harbor provision is a significant change to the federal securities laws. Congress found that the existing system of private securities litigation had a "muzzling effect" on "the willingness of corporate managers to disclose information to the marketplace," and harmed shareholders by creating a "chilling effect . . . on the robustness and candor of disclosure," because companies and their officers would be subjected to potentially limitless liability if they disclose projections that later turn out to be inaccurate. See H.R. Conf. Rep. No. 104-369, at 42-43 (1995), ("Conf. Rep."), attached as Exhibit A to the Declaration of Rebecca A. Mitchells ("Mitchells Decl."). In response, Congress created a statutory "safe harbor" for forward-looking statements, "to enhance market efficiency by encouraging companies to disclose forward-looking information" without fear of liability. The goal of the safe harbor is "to provide certainty that forward-looking statements will not be actionable by private parties . . . if they are accompanied by a meaningful cautionary statement." Id. at 44 (emphasis added); 15 U.S.C. § 78u-5.

The Safe Harbor protects statements that are "forward-looking." A statement is "forward-looking" if it contains a "projection of revenues," the "plans and objectives of management for future operations, including plans or objectives relating to the products or services" of the company, discussion of "future economic performance" that includes management analyses required by the SEC, or the "assumptions underlying or relating to" the foregoing types of statements. Id. § 78u-5(i)(1).

The Safe Harbor creates blanket immunity from liability for both written and oral forward-looking statements that are accompanied by meaningful cautionary language.¹ For oral forward-looking statements, such as the two statements at issue here, the Safe Harbor precludes liability if the company identifies the statement as forward-looking and states that "actual results might differ materially from those projected in the forward-looking statement." When making an oral forward looking statement, the company is not required to state all of the cautionary factors. The company may refer to "readily available written document[s]" identifying the factors that could cause results to differ. Id. § 78u-5(c)(2).

"Cautionary statements" are "meaningful" if they "convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statement, such as, for example, information about the issuer's business." Conf. Rep. at 43. The company is not required, however, to identify the exact factor that eventually caused results to vary from its forward-looking statement. Congress expressly stated that the "[f]ailure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor." Id. at 44 (emphasis added); see Harris v. IVAX Corp., 182 F.3d 799, 807 (11th Cir. 1999).

The forward-looking statements at issue here are anchored within the statutory safe harbor. Accordingly, SGI is entitled to summary judgment as to these statements.

II. SGI's Alleged Forward-Looking Statements Are Immunized From Liability By The Safe Harbor Provision

A. The Alleged Statements Are "Forward-Looking."

The two oral statements are not direct quotes; rather, plaintiffs merely paraphrase what they believe defendants said. The first statement is a list of paraphrased comments attributed to defendants McCracken and Kelly during a July 24, 1997 conference call with market analysts. Complaint ¶ 69. Plaintiffs allege that McCracken and Kelly said that SGI's fourth quarter 1997 results exceeded expectations due to strong demand for server and graphics workstation products, backlogged orders in the fourth quarter were reduced by $172 million to $537 million, and first quarter 1998 revenues would be between $900 - $950 million and an EPS of at least 20¢. Id.

Plaintiffs also paraphrase what they speculate McCracken, Kelly, Lauer and Orton said at an analyst conference held at SGI on September 5. Id. ¶ 86. Plaintiffs allege that these defendants stated the following: SGI's fourth quarter results showed that SGI's product transition and restructuring were complete so that SGI's revenues in the future would be less dependent on revenues generated during the third month of the quarter; SGI had implemented a new and more accurate forecasting system "to allow SGI to deliver consistent growth"; server sales were "sufficient to maintain EPS going forward"; SGI would "achieve mid-teens growth going forward"; SGI was "positioned for consistent annual revenue and EPS growth going forward"; and, SGI had one-third of its forecasted first quarter sales in backlog which made the first quarter forecast of $900 million in revenues and EPS of 20-22¢ a certainty. Id.

These statements obviously include forward-looking projections about expected first quarter results. Indeed, nearly all of the statements plaintiffs allege concern SGI's future business and financial performance. The handful of supposed comments that, in isolation, appear to concern historical or then-present facts, such as the statement that fourth quarter results were due to demand for server and graphics products, does not change the conclusion that the entire statement should fairly be read as forward-looking.

The Eleventh Circuit's decision in Harris v. IVAX is the only Circuit Court decision discussing the cautionary statement part of the Safe Harbor in a meaningful way. The court addressed the issue of whether a statement as a whole is "forward-looking" if a parts of it have historical or present information. 182 F.3d at 806. The Eleventh Circuit viewed the press release at issue as a "mixed bag, with some sentences that are forward-looking and some that are not." The court concluded that "it makes no sense to slice the list into separate sentences" because the release as a whole allegedly misled the market about the company's projections. Id. The court stated:

Forward looking conclusions often rest on both historical observations and assumptions about future events. Thus, were we to banish from the safe harbor lists that contain both factual and forward-looking factors, we would inhibit corporate officers from fully explaining their outlooks. Indeed, liability-conscious officers would be relegated to citing only the factors that could individually be called forward-looking. That would hamper the communication that Congress sought to foster.

Id. at 806-07. The court held that a statement that includes a mix of forward and non-forward looking statements "will only qualify for this treatment if it contains assumptions underlying a forward looking statement." Id. at 807.

The "mixed bag" of paraphrased representations during the July 24 conference call and September 5 analyst conference fall squarely within IVAX's treatment of statements containing both forward-looking and non-forward-looking components. By far most of the alleged representations directly anticipate first quarter or fiscal year 1998 results. Thus, the remaining handful of statements discussing fourth quarter results merely "underlie" the first quarter projections.

The Eleventh Circuit also held that the following statement was forward-looking: "the challenges unique to this period in our history are now behind us." Id. at 805. The court stated that the sentence must be viewed in the context of the rest of the press release. The statement was preceded by two paragraphs describing problems that had contributed to second quarter losses that were being resolved. The press release concluded with the CEO's view that things were looking up. The Eleventh Circuit held that the CEO's hopeful conclusion "is a prediction of economic performance." Id. The present-tense statement about challenges behind the company was "discernible only after it is made" and therefore "necessarily refers only to future performance." Id.

Likewise, the alleged statements that "SGI's problems with execution were over" and that "SGI had successfully completed its production transition and turned itself around" are only discernible after they are made. Whether these problems were truly behind SGI is a matter verifiable only after the statements were made; therefore, as in IVAX, such statements are forward-looking.

The IVAX approach makes even more sense in this case. Plaintiffs do not allege that fourth quarter reported results were wrong, i.e., that defendants did not reduce backlog during the fourth quarter or that server and graphics revenues did not in fact increase in the fourth quarter. Plaintiffs do not allege that sales in the fourth quarter were not legitimate sales to legitimate customers. Rather, plaintiffs claim that SGI's "spectacular" fourth quarter adversely impacted the first quarter and, therefore, defendants' forecasts for the first quarter were false. Thus, plaintiffs' allegations about the fourth quarter relevant only to plaintiffs' claim that defendants made false forecasts about first quarter results. Such statements satisfy the definition of "forward-looking" under the Safe Harbor.

B. The Alleged Statements Were Accompanied By Meaningful Cautionary Language.

The statements began with a Safe Harbor warning given by Marilyn Lattin, SGI's then Director of Investor Relations. Ms. Lattin opened the July 24 conference call and the September 5 analyst conference by stating that the matters being discussed that day contained "forward-looking statements" that were "subject to the risk and uncertainties described in our SEC reporting, including our Form 10-K for June 30, 1996 and Form 10-Q for March 31, 1997. Actual results may vary." See Declaration of Marilyn Lattin, ¶ 3; Mitchells Decl., Ex. D. Thus, in complete accordance with the Safe Harbor for oral forward-looking statements, 15 U.S.C. § 78u-5(c)(2), Ms. Lattin cautioned that the discussion would contain forward looking statements, that actual results might vary and identified the specific SGI SEC filings containing additional information about the factors relating to the forward-looking statements.

SGI's Form 10-Q for the period ending March 31, 1997 and Form 10-K for fiscal year 1996 are replete with detailed risk disclosures. The Form 10-Q discloses that the Company had problems in the third quarter with the Octane family of workstations because of "release to manufacturing late in the quarter . . . ." Mitchells Decl., Ex. B at 9. Backlog for the third quarter was $709 million, the majority of which was scheduled to be shipped in the fourth quarter. Id. at 10. Thus, the Company disclosed that it had backlogged orders due to execution problems and that most of the $709 million backlog was expected to be shipped in the fourth quarter.

SGI also disclosed at length the risks associated with its new products including the O2, Origin (server) and Octane (graphics) products. Id. at 12. The best demonstration of the extensiveness of SGI's risk disclosure is simply to reprint it here:

Product transitions are a recurring part of the Company's business cycle. A number of risks are inherent in this process. The development of new technology and products is increasingly complex and uncertain, which increases the risk of delays. The introduction of a new computer system requires close collaboration and continued technological advancement involving multiple hardware and software design and manufacturing teams within the Company as well as teams at outside suppliers of key components such as semiconductor and storage products. The failure of any one of these elements could cause the Company's new products to fail to meet specifications or to miss the aggressive timetables that the Company establishes. As the variety and complexity of the Company's product families increase, the process of planning production and inventory levels also becomes more difficult. In addition, the extent to which a new product gains rapid acceptance is strongly affected by the availability of key software applications optimized for the new systems. There is no assurance that acceptance of the Company's new systems will not be affected by delays in this process.

Short product life cycles place a premium on the Company's ability to manage the transitions from current products to new products. . . . The Company's results could be adversely affected by such factors as development delays, the release of products to manufacturing late in any quarter, quality or yield problems experienced by suppliers, variations in product costs, delays in customer purchases of existing products in anticipation of the introduction of new products, and excess inventories of older products and components. The operating results for the third quarter and first nine months of fiscal 1997 were strongly influenced by product transition issues. These issues may also affect the Company's results for the fourth quarter as the Company ramps up volume manufacturing of its new Octane workstation line.

Id. (emphasis added); see also 1996 Form 10-K, Mitchells Decl., Ex. C at 41 (setting out similar risk disclosures regarding development of the new products to be introduced in the first half of 1997).

SGI also warned that it "has short delivery cycles and derives each quarter's revenue predominately from orders booked and shipped during the third month, and disproportionately in the latter half of that month which makes the forecasting of revenue inherently uncertain. Form 10-Q, Mitchells Decl., Ex. B at 12. Because operating expenses are fixed, "even a relatively small revenue shortfall may cause a period's results to be substantially below expectations." Id. Such a revenue shortfall could come from a variety of factors, including "lower than expected demand," and the "timing of customer acceptance of large Cray systems [server products] . . . ." Id. SGI also disclosed its corporate restructuring commenced in May 1997 and that "there is no assurance that the Company's business will not be disrupted in the current quarter." Id. at 13.

SGI disclosed that the "computer industry is highly competitive, with rapid technological advances and constantly improving price/performance." Id. "In particular, the Company is experiencing increasing competition in its desktop [graphics] business from workstations based upon the Intel Pentium microprocessor, Microsoft's Windows NT operating system, and a variety of 3-D graphics accelerations cards." Id. Thus, "[c]ompetition may result in significant discounting and lower gross margins." Id.

SGI identified and discussed a variety of other risks that could affect results, including volume strategy specifically associated with graphics workstation products, the Company's dependency of government orders, global financial market risks, intellectual property risks, dependency on certain employees and other business disruptions. Id. at 13-14. SGI disclosed that it results followed a "seasonal pattern, with stronger sequential growth in the second and fourth fiscal quarters, reflecting the buying patterns of the Company's customers." Id. at 12; see also 1996 Form 10-K, Mitchells Decl., Ex. C at 40-43. Thus, first quarter results were expected to be comparatively lower that the fourth quarter due to customer buying patterns.

These SEC filings, specifically identified by Ms. Lattin during the July 24 conference call and September 5 analyst conference, detail the risks associated with SGI's new product lines and multiple factors affecting results and forecasts of such results. These risk disclosures fully satisfy the Safe Harbor's meaningful cautionary statement provision.

SGI's cautionary statements are more detailed than the cautionary statements held to satisfy the Safe Harbor in Karacand v. Edwards, 53 F. Supp. 2d 1236 (D. Utah 1999). In Karacand, the court dismissed the complaint because the allegedly false statements were precluded from liability in part under the Safe Harbor provision. At issue were several oral and written statements that backlog had increased and strong product demand. Id. at 1249. With a warning nearly identical to the caution given by Ms. Lattin in this case, the Karacand defendants began their conference call stating that the discussion would include forward-looking statements, actual results might differ due to factors disclosed in the company's 1996 annual report, Form 10-K and recent Form 10-Q. Id. at 1250 n.4. The Form 10-Q stated that results for the third quarter "are not necessarily indicative of the results to be expected for the entire year or any future periods" and that sales of new products "may not be indicative of long-term demand for such products" and that "sales growth experienced" in the past "should not be assumed to be an indication of future sales." Id. at 1251. The Form 10-K stated that "backlog as of any particular date should not be relied upon as an indication of the Company's sales for any future period." Id. at 1250 n.5. The court held that these were meaningful cautionary statements satisfying the Safe Harbor provision.

The Karacand plaintiffs also challenged oral statements during a conference call and press releases about Iomega's expected ship date for its new Jaz product. Id. at 1247. The press release referenced its risk disclosures in the company's prospectus filed with the SEC. Id. at 1248 n.3. The prospectus stated that there "can be no assurance that the Company will not experience problems or delays as it begins to manufacture and ship Jaz products in higher volume," the "Company's future operating results will depend in part on its success in introducing enhanced and new products in a timely and competitively effective manner," and "product availability . . . problems . . . could have an adverse effect on the Company's sales . . . ." Id. at 1248-49. The court held that these disclosures sufficiently warned of risks associated with the shipment of the new products and the potential impact on revenues, which satisfied the Safe Harbor's cautionary statement provision. See also In re PLC Systems, Inc. Sec. Litig., 41 F. Supp. 2d 106, 118 (D. Mass. 1999) (statements forecasting FDA approval protected under Safe Harbor provision because of cautionary statements in company's Form 10-Q about uncertainties of FDA approval); In re Home Health Corp. of Am. Inc. Sec. Litig., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,414 (E.D. Pa. Jan. 29, 1999) (statements in press release that growth reflected customer strategy were protected by Safe Harbor provision in part because release directed reader to Form 10-K for risk factors, which in turn warned that the company was experiencing payment problems with some of its customers); P. Schoenfeld Asset Mgmt LLC v. Cendant Corp., 47 F. Supp. 2d 546, 556 (D.N.J. 1999) (statements about likelihood of merger protected by Safe Harbor provision because of cautionary statement that merger agreement subject to several conditions and terminable at any time upon the parties agreement).

SGI's risk disclosures in its SEC filings are at least as detailed, if not more so, than those held sufficient in these cases. SGI disclosed at length the risks associated with its new products including the impact on revenues, the volume selling strategy and backlog, and a variety of other factors affecting results. These cautionary statements meaningfully disclose the risks associated with SGI's new product transition, backlog and future success in the first quarter. Accordingly, the defendants' statements are protected by the Safe Harbor provision.

For the foregoing reasons, defendants' alleged statements in the July 24 conference call and at the September 5 analyst conference are protected from liability under the Safe Harbor provision of the Reform Act. Accordingly, defendants respectfully request that the Court grant their motion for summary judgment.

¹ The Safe Harbor also provides that even if the forward-looking statement has no accompanying cautionary language, the plaintiff must prove that the defendant made the statement with "actual knowledge" that it was "false or misleading." 15 U.S.C. § 78u-5(c)(1)(B). This prong of the Safe Harbor is not at issue in this motion for summary judgment, but is grounds supporting the accompanying motion to dismiss.

Source: File to director from Wilson Sonsini Goodrich & Rosati