In Re: Pixar Securities Litigation 05-CV-4290-Supplemental ...securities.stanford.edu/filings-documents/1035/... · Equity Research a- .--May 9, 2005 Pixar has suggested that international

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FOUNG DECL. ISO DEFENDANTS’ MOTION TO DISMISS AMENDED COMPLAINT CASE NO. C 05 4290 JSW

2940309_1.DOC

BORIS FELDMAN, State Bar No. 128838 ([email protected]) DOUGLAS J. CLARK, State Bar No. 171499 ([email protected]) CHERYL W. FOUNG, State Bar No. 108868 ([email protected]) KELLEY E. MOOHR, State Bar No. 216823 ([email protected]) WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 [email protected] Attorneys for Defendants PIXAR, STEVEN P. JOBS, EDWIN E. CATMULL and SIMON T. BAX

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re PIXAR SECURITIES LITIGATION

This Document Relates To All Actions.

))))))))))))))))

CIVIL ACTION NO.: C 05 4290 JSW CLASS ACTION SUPPLEMENTAL DECLARATION OF CHERYL W. FOUNG IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS AMENDED COMPLAINT Date: September 15, 2006 Time: 9:00 a.m. Dept: The Hon. Jeffrey S. White

Case 3:05-cv-04290-JSW Document 81 Filed 08/28/2006 Page 1 of 2

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FOUNG DECL. ISO DEFENDANTS’ MOTION TO DISMISS AMENDED COMPLAINT CASE NO. C 05 4290 JSW

-1- 2940309_1.DOC

I, Cheryl W. Foung, declare as follows:

I am of counsel at the law firm of Wilson Sonsini Goodrich & Rosati, and am counsel for

defendants Pixar, Steven P. Jobs, Edwin E. Catmull and Simon T. Bax (collectively

“defendants”). I am licensed to practice law before the Courts of the State of California and this

Court. I have personal knowledge of the facts set forth herein and, if called as a witness, I could

and would testify competently hereto.

1. Attached hereto as Exhibit 24 is a true and correct copy of the May 9, 2005 report

by Prudential Equity Group. LLC. at 5 (cited at AC ¶ 40).

2. Attached hereto as Exhibit 25 is a true and correct copy of the slip opinion in In re

Portal Software, Inc. Sec. Litig., No. C-03-5138 VRW (N.D. Cal. Aug. 17, 2006).

3. Attached hereto as Exhibit 26 is a true and correct copy of the slip opinion in In re

Juniper Networks, Inc. Sec. Litig., No. C 02-0749 SI (N.D. Cal. Mar. 5, 2003).

I declare under penalty of perjury under the laws of the State of California that the

foregoing is true and correct. Executed this 28th day of August 2006 at Palo Alto, California.

By: /s/ CHERYL W. FOUNG CHERYL W. FOUNG

I, Boris Feldman, am the ECF User whose identification and password are being used to

file this Supplemental Declaration of Cheryl W. Foung in Support of Defendants’ Motion to

Dismiss Amended Complaint. I hereby attest that Cheryl W. Foung has concurred in this filing.

Dated: August 28, 2006 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: /s/ BORIS FELDMAN BORIS FELDMAN Attorneys for Defendants Pixar, Steven P. Jobs, Edwin E. Catmull and Simon T. Bax

Case 3:05-cv-04290-JSW Document 81 Filed 08/28/2006 Page 2 of 2

EXHIBIT 24

PIXR $48.70 OTCStock Rating:

Neutral Weight

Industry Rating:

Favorable

Target: $40.00

1Q05 Results Show That When It Comes ToDVD, Incredibles Is No Shrinking "Violet" AsIt "Dash "es To The Top Of Heap For '05Unit Sales

• Pixar reported 1Q05 results that well exceeded our expectations, Street consensus andthe company' s guidance . EPS came in at $0.67 compared to $0 .23 in the prior year .We were estimating $0.43 versus Street consensus of $0 .48 and m anagement guidanceof $0 .43 to $0.48 .

Stock Risk: High • The reconciliation between management's guidance and actual results included $0 .11of outperformance from The Incredibles DVD sales, $0 .04 from a greater thanMarket Cap:

$5,725 Milexpected contribution from Nemo and another $0 .04 from the library .

All important disclosures can be • Guidance for 2Q05 is $0 .15, which management expects to be primarily driven by

found beginning on page 17. international home video sales of The Incredibles . We think the guidance could beconservative and are currently anticipating $0.26 of EPS .

• We have adjusted our estimates to include stronger than expected sales of TheIncredibles and Finding Nemo home videos and the re-release of Toy Story in 3Q05 .We have also removed stock option expense from 2005 estimates .

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• As a result, our price target rises to $40 .

About The Company: Pixar, Inc. , based in Emeryville, CA, is a digital animation studio that

combines creative, technical, and production innovations and expertise to create animated feature

films and related products. The company also licenses its proprietary animation software to third

parties.

Key Event Timeline 2004A 2005E 2006E Market Profil eEPS $1.19A $1.41 $0.86 Average Volume 1,218,909Prior 0.95 0 .77 Shares Outstanding 117 .55 MPIE 38.9X 32.8X 53.8X 52-Week Range 50 .9-31 .2Prior Dividend/Yield N ARev $273.5 $351 .6 $263 . 6 Book Value/Share 11 .34Prior Float 37.60 MDJIA: 10,345.40/ S&P 500.• 1,171.35 Priced as of May 8, 2005

ar uuues pIouucts auu services are onerea mrougn rruaenuai uquity group, LLL;, a wholly owned subsidiary of Prudential Financial, Inc .

Prudential Equity Group, LLC • One New York Plaza • 15 ' Floor • New York, NY 10292

Equity Research 4-0

Table of Figures

May 9, 200 5

Figure 1 FY 2005 Estimate Changes : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Figure 2 Pixar- Guidance , 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 3 Pixar-Annual Income Statement , 2003-2009E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 4 Pixar-Qua rterly Income Statement , 2004-2006E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Figure 5 Pixar- Balance Sheet , 2003-2010E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Figure 6 Pixar-Cash Flow Statement, 2003-2010E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 7 Pixar-Valuation, 2006E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 8 Finding Nemo - Ultimate Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 9 The Incredibles - Ultimate Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 10 Cars - Ultimate Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Figure 11 Pixar's Project 2007-Ultimate Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 .

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LEquity Research May 9, 200 5

Pixar reported 1Q05 results that well exceeded our expectations, Street consensus and thecompany's guidance . Revenues in the quarter were $161 .2 mil ., an increase of 200% versusthe prior year . We were expecting revenues of $114 mil . Gross profit in the quarter was$133 .8 mil ., a year-over-year increase of 179%, versus our expectation of $90 .1 mil . EPS camein at $0 .67 compared to $0 .23 in the prior year. We were estimating $0.43 versus Streetconsensus of $0 .48 and management guidance of $0 .43 to $0.48 .

First- Quarter 2005 Results:Film revenues included a $127 .5 mil . contribution from The Incredibles, driven by therecognition of 23 .4 mil . home video/DVD units . Finding Nemo contributed $14 .4 mil. torevenues primarily on worldwide home video and merchandise sales . Library titles contributed$14 .8 mil . in the quarter, from video, TV (international broadcast rights for Monsters, Inc. )and consumer product sales .

The reconciliation between management's guidance and actual results included $0 .11 ofoutperformance from Incredibles DVD sales, $0 .04 from a greater than expected contributionfrom Nemo and another $0.04 from the library.

Guidance for the 2Q05 is $0.15, which management expects to be primarily driven byinternational home video sales of The Incredibles. As we suggest below, we think the guidanceis conservative .

Figure 1 1005 Results Compared To Our Estimates and 1004A( Dollars in millions)

Revenue Gross Profi t1004A 1 1105A %Ch 1005E 1 004A 1005A %Ch 1005 E

SoftwareFilm

$2 . 751 .1

$3.3 22%157.9 209

$3 . 2110 .8

$2 . 745.2

$3.3 22%130.5 189

$3 . 187. 0

Total Revenue $ 53 .8 $161 .2 200% $114.0 $47 .9 $133 .8 179% $90. 1source : Company reports and Prudential Equity Group, LLC estimates .

Key Takeaways From The Quarte r

Having reviewed the press release and listened to the conference call, we came away with thefollowing key takeaways :

The Incredibles DVD sales were anything but mediocre . Total unitsrecognized were 23 .4 mil . in the quarter (17 .7 mil . sold domestically, 5 .7 mil . soldinternationally) . Management suggested that the DVD wholesale price and margin on the 22 .1mil . DVD units sold were higher than that of Finding Nemo. Major international markets left tobe released-mostly in the 2Q05-include Germany, France and Japan . We would note thatbecause Pixar typically takes a healthy return reserve on its video units before it recognizesthem, we suspect that a high sell-through rate probably resulted in more than one shipmentduring the quarter. As such, we believe we will see additional follow through in the 2Q fromdomestic sales as well .

Guidance for 2Q05 of $0 . 15 seems low. Our EPS estimate for the 2Q is $0 .26 .The key driver for 2Q05 is expected to be the b alan ce of the inte rnational markets cited above .

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Equity Researcha- .--

May 9, 200 5

Pixar has suggested that international video sales for The Incredibles should closely mirror that

ofMonsters Inc., which sold a little north of 11 mil . units overseas in its first two quarters ofrelease . That would suggest that Pixar expects a more than 5 mil . units to be recognized fromthe remaining international markets in the second quarter . However, as we noted above, wethink we will see some incremental sales follow-through from the initial units shipped lastquarter . Note that management said it did not expect any additional shipments domestically,which does not necessarily mean it doesn't expect to recognize more units from the initialshipment .

Steve Jobs and Bob Iger recent ly had cordial conversations . While notcharacterized as negotiations, Steve jobs characterized his interactions with Bob Iger as "nice."Jobs also suggested that Pixar would have a new distribution agreement in place by the end ofthe year .

Toy Story re-release expected in September 2005 . The re-release is tocommemorate Toy Story's (TS) original release in 1995 . The release is an all-new version ofthe film, and should have a sharper picture than the prior DVD release given the higher bit rateat which it was re-mastered . It should also have better audio as well as bonus scenes andmaterials . Manufacturer's suggested retail price (MSRP) is expected to be $29 .99. While thisrelease is not something that was in our model before now, we would note that TS falls underthe original Pixar/Disney agreement . We estimate that Pixar's profit take under that agreementwas less than half that of the estimated 35% profit take the company currently garners . The lasttime TS was available on DVD was three years ago (both TS and TS 2 have been put in theDisney "vault") . We estimate that about 8 mil . units of TS will be sold-through in the 3Q and4Q05 . While this significantly higher than the 1 .2 mil . DVD units the title sold in its initialrelease three years ago, DVD penetration was at a much lower rate than the current 60%+penetration . Additionally, the title was not marketed aggressively at the time . Management alsosuggested that TS2 might be re-released before the end of the year as well . We would note thatour model does not currently incorporate such a release . At this juncture, there are no theother plans to re-release other Pixar films when their ten-year anniversary comes up .

Production on Cars should be finished in October 2005; next threefilms to be announced soon. Animation is two-thirds of the way done on Cars . CEOSteve jobs suggested that it will be the most "detailed animated movie ever made ." Cars isbeing directed by creative genius john Lasseter . Pixar is also set to announce its next threefilms some time in the near future (likely to be on their next earnings conference call) . A llthree films are in various stages of production and/or development . Film 2007 is farthestalong, and management sees no issues with finishing this film on time .

Pixar is focused on producing one film per year . We would note thatmanagement did not dismiss the potential to ramp up film production at some point, only thatthey want to get to a point where they are producing at least one film per year .

Video game units for Pixar movies are exceeding our originalexpectations. THQ Inc. recently announced that it has sold over 7 mil . FindingNemogame units so far while The Incredibles have sold 4 .5 mil . units so far. Our "lifetime" estimatefor our average box office scenario has typically been 5 .0 mil . units .

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Equity Research - . .

Estimate Changes

Figure 2 FY 2005 Estimate Changes( Dollars in millions)

OldFY 200 5

New S Ch .Software $12 .6 $12 .9 $0 . 3Film 265 .4 338 .8 73 .4Total Revenue $278 .1 $351 .6 $73 . 5Total Costs 57 .9 61 .9 4 . 0Gross Profit $220 .2 $289 .7 $69 . 5

Source : Prudential Equity Group, LLC estimates .

May 9, 200 5

We have made several changes to our estimates based on information provided by the companyduring the call . We have raised our total estimate for Finding Nemo home video unit forecastto 55 mil . from 50 mil. reflecting the film's success to date . likewise, we have raised our TheIncredibles home video unit forecast to 45 mil . from 42 mil . We also raised our worldwidebox office numbers for The Incredibles approximately $6 mil based on actual results .

We added incremental revenue of approximately $8 .4 mil . in the year to account for the re- .release of Toy Story home video in 3Q05 . This is based on the information detailed above inthe section "Key Takeaways From The Quarter . "

We have eliminated stock option expense from our 2005 estimates, as we now believe that SECrequirements will not take effect until 1Q06 . We have also reduced our estimated tax rate to37 .5% to reflect our expectation of continued benefit of international tax credits .

PIXR Shares Are Rated Neutral Weigh t

Our price target on the PIXR shares is $40. Our estimates anticipate relatively low growth in

years following the anticipated establishment of a new distribution agreement as well as a risinginterest rate environment in the near term . Our $40 target represents 15 .7% downside from

current levels . Despite this downside we maintain our Neutral Weight rating as numerous

potential strategy changes including the establishment of a new distribution deal with Disney, achange in the decision not to participate in the release of sequels, or the decision to producemore than one film per year could result in positive changes to the company's economics .

The valuation method we use to determine our p rice target is based on a ten-year discountedfree cash flow model . We've assumed three scenarios (average, above average , below average)for box office receipts for the next four films, and assigned a probabi lity to each scenario-55% probability for the average scenario; 25% for below average ; 20% for the above average) .Our average scenarios are based on achieving box office receipts similar to that of Disney'smore successful films an d/or Toy Story. We examine our average scenario on a case-by-casebasis . Our average scenario for domestic box office gross for P ixar's fo llowing films is between$165 mi ll ion (Bug's Life achieved domestic box office gross of $163 mil li on) and $200 million(Toy Story did $192 million ; Toy Story 2 achieved over $245 mi ll ion ; Monsters, Inc. grossed$256 mi ll ion ) . Our below- and above-average scenarios typically have a 20% to 40% variancefrom our average scenarios . Our DCF assumes an 11 .3% discount rate .

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Equity Research May 9, 200 5

We also "back test" our DCF model by looking at other valuation methodologies . Because we

believe Pixar is on its way to building diversity in its revenue stream and long-term value thatwill ultimately allow it to decrease its revenue and stock volatility, we feel it is appropriate tolook at the earnings stream a little further out into the future . By 2008, we assume Pixar shouldhave at least ten films under its belt, with at least two pictures resulting in better economicsthan the company enjoys under its current deal with Disney. Applying a 30 multiple to our

FY08 EPS estimate and adding the cash per share on the balance sheet in that year, and thendiscounting both by the firm's WACC of 11 .3% yields a $37 price target . A 25 multiple yields aprice target of $31 .

On a P/E basis, the stock currently trades at 32 .8 times our 2005 EPS estimate . Since its IPO inNovember 1995, the stock has traded from a low of 17 .8 times forward earnings, to a high of177 .2 times . Our price target suggests that the stock should trade to 28 .4 times our 2005 EPSestimate .

Investment Risks:

• Earnings Volatility Contributes To A Trading Range . With only one film release every 12to 18 months, the shares could continue to be event driven and trade flat to down shortlyafter a film is released, no matter how strong the first weekend box office results .

• Uncertainty SurroundingA New Distribution Partner . We believe that Pixar will haveenough leverage to secure attractive terms from another distributor besides Disney, but theuncertainty of the process could increase volatility in the stock and could keep sharesrange bound in the near term .

• Reliance On A Small Number OfKey Leadership And Creative Personnel . We note thesignificant contribu ti ons by key personnel, including CEO Steve Jobs and Creative EVP JohnLasseter. Loss of a key contributor could have materi al negative impact on both fin anci alperformance and share perform ance .

Other Companies Mentioned:

The Walt Disney Company (DIS, $26 .89, rated Overweight )

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Equity Research I STYPONIAS May 9, 2005

Figure 3 Pixar- Guidance, 2005(Company guidance versus PEG estimates)

2005 GuidancePEG PIXR

Growth Estimates Guidance Comparison Last UpdatedEPS $0.26 $0.15 Above 5151200 5

Source : Company reports, Prudential Equity Group, LLC estimates .

Figure 4 Pixar-Annual Income Statement, 2003-2009 E(Dollars in millions, except per-share data)

CAGR2003 2004 2005E 2006E 2007E 2008E 2009E 2010E '05 .10

Revenue sSoftware $12.1 $12 .6 $12 .9 $12 .9 $12 .9 $12 .9 $12.9 $12 . 9Film 250.4 260 .8 338 .8 250 .8 335 .9 446 .3 453.3 457 . 1Total Revenues $262 .5 $213 . 5 $351 .6 $263 .6 $348 . 8 $459 .1 $466.1 $469 .9 6 %

Cost sSoftware $0.0 $0 .0 $0 .3 $0 .3 $0.3 $0 .3 $0.3 $0 .3Film 38 .0 29 .9 61 .6 56 .5 83 .9 106 .2 108 .0 109. 1Total Costs $38.1 $29 .9 $61 .9 $56 .7 $84.2 $106 .5 $108 .2 $109 .4 12 %

Gross Profit $224.4 $243. 6 $289 .7 $206 .9 $264.6 $352 .7 $357 .9 $360 .5 4 %

Operating Expense sResearch And Development $15.3 $17 .4 $16 .3 $16 .8 $17 .3 $17 .8 $18 .3 $18.9Sales And Marketing 2 .4 2.5 3 .0 3 .2 3 .6 4 .0 4 .4 4.9General And Administrative 12 .8 15 .0 16 .9 17 .9 19 .4 20 .3 21 .3 22 .4Stock Option Expense 0 .0 0.0 0 .0 26 .4 26 .4 26 .4 26 .4 26 .4Total Operating Expenses $30 .5 $34.9 $36 .2 $64 .3 $66 .7 $68 .5 $70 .5 $72.5 15 %

Income From Continuing Operations $ 193 .9 $208.7 $253 .6 $142 .6 $197 .9 $284 .1 $287 .4 $288 .0 0%Other Income, Net 10 .5 12 .4 21 .6 30 .0 37 .1 47 .0 59 .8 74.6Income Before Taxes 204 .4 221 .1 275 .2 172.7 235 .0 331 .1 347 .2 362. 6

Income Taxes ($79 .7) ($79 .4) ($102 .9) ($66 .5) ($90 .5) ($127.5) ($133 .7) ($139.6)Tax Rate 39% 36% 37% 39% 39% 39% 39% 39 %Net Income $124 .8 $141 .7 $172 .2 $106.2 $144 .5 $203 .6 $213 .5 $223 . 0

Net Income Per Share $ 1 .09 $1 .19 $1 .41 $0 . 86 $1 .15 $1 .59 $1 .65 $1 .69 4%Diluted Average Shares Outstanding 114 .8 119 .2 122 .3 123 .7 125 .7 127 .7 129.8 131 . 9

Source : Company reports, Prudential Equity Group, LLC estimate s


Equity Research - .

Figure 5 Pixar- Quarterly Income Statement, 2004-2006E(Dollars in millions, except per-share data )

RevenuesSoftwareFil mTotal Revenue s

CostsSoftwareFilmTotal Costs

Gross ProfitSoftwareFilmGross Profit

Operating ExpensesResearch And DevelopmentSales And MarketingGeneral And AdministrativeStock Option ExpenseTotal Operating Expense s

Income From Continuing OperationsOther Income, NetIncome Before Taxe s

Income TaxesTax RateNet Incom e

Net Income Per ShareDiluted Average Shares Outstanding

May 9, 200 5

1004 2Q04 3Q04 4004 2004 1005 2Q05 3005 4005 2005E 2006 E$2.7 $2.6 $4 .0 $3 .3 $12.6 $3.3 $3.2 $3 .2 $3 .2 $12 .9 $12 . 951 .1 63.7 40 .4 105.6 260 .8 157 .9 61 .4 49.4 70 .1 338 .8 250 . 8$53.8 $66 . 3 $44 .5 $108 . 9 $273 . 5 $161 .2 $64 .5 $52.6 $73 .3 $351 .6 $263 . 6

$0.0 $0 .0 $0 .0 $0 .0 $0 .0 $0.1 $0 .1 $0 .1 $0 .1 $0 .3 $0 . 35 .9 6.4 4 .2 13 .3 29.9 27.4 11 .6 9.6 13 .1 61 .6 56 . 5

$5.9 $6.4 $4 . 2 $13 .3 $29.9 $27 .5 $ 11 .6 $9.7 $13 .1 $61 .9 $56 . 7

$2.7 $2 .6 $4 .0 $3 .3 $12.6 $3.3 $3.1 $3 .1 $3 .1 $1 .6 $12 . 645 .2 57.3 36 .2 92 .3 231 .0 130.5 49.8 39.8 57 .0 277 .1 194. 3$47.9 $59 .9 $40 .3 $ 95 .6 $243 .6 $133 .8 $52.9 $42.9 $60 .2 $289 .7 $206 . 9

$3 .4 $4 .2 $4 .2 $5 .6 $17 .4 $2 .8 $4 .5 $4 .5 $4.5 $16 .3 $16. 80.4 0 .6 0 .7 0 .7 2.5 0 .8 0.7 0 .8 0.8 3 .0 3. 23 .1 3 .0 3 .8 5 .1 15 .0 4 .4 3.2 4 .0 5.3 16 .9 17 . 90 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0.0 0 .0 26 . 4$6 .8 $7 .8 $8 .8 $11 .4 $34 . 9 $8 .0 $8 . 3 $9 .3 $10.6 $36 .2 $64. 3

$41 .1 $52 .0 $31 . 5 $84 .1 $208 .7 $125 .8 $ 44 .6 $33 .6 $49 .5 $253 . 6 $142 . 62.9 2 .5 3 .1 3 .9 12 4 .8 5 .4 5 .4 6.0 22 3 0

44 .0 54 .5 34 .6 88 .1 221 130 .6 50 .0 39 .0 55 .6 275 173

(17 .2) (17 .2) (12 .1) (32 .9) (79) (48 .7) 118 .71 (14 .6) (20.8) (103) (66 )39% 31% 35% 35% 36% 37% 38% 38% 38% 37% 39%

$26 .7 $37 .4 $22 .4 $55 .2 $141 .7 $81 .9 $31 .2 $24 .4 $34.7 $172 .2 $106 .2

$0 .23 $0 .32 $0 .19 $0 . 46 $1 .19 $0 . 67 $0 .26 $0 .20 $0. 28 $1 .41 $0 .8 6117 .2 118 .0 119 .3 121 .5 119 .2 122 .5 122 .0 122 .3 122.5 122 .3 123. 7


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Equity Research ,: STYPONIAS

Figure 6 Pixar-Balance Sheet, 2003-2010E( Dollars in millions )

Cash And Short-Term InvestmentsTrade And Other Accts. Rec ., Ne tPrepaid Expenses And Other Current AssetsDeferred income taxesTotal Current AssetsPP&E, Ne tCapitalized Film Prod . Costs, Net Of CurrentTotal Assets

Accounts PayableIncome Taxes PayableAccrued LiabilitiesUnearned RevenuesTotal Liabilities

2003 2004 2005E$522 $855 $999

204 82 821 2 251 70 67$778 $1,009 $1,149115 126 153108 140 182

$1,001 $1 ,275 $1,484

$2 $5 $538 14 013 27 20

8 9 9$60 $55 $34

$547 $687 $7170 (2) 26393 535 707$941 $1 ,220 $1,450

2006E

$1,12284

16 4

$1,272171234

$1,676

$40159$28

$741

9381 3

$1,647

2007E$1,28 8116

1

6 0$1,466169255

$1,890

$50119

$26

$746

16095 8

$1,864

2008E 2009E 2010E$1,534 $1,808 $2,08 5148 159 1

1 1 157 57 57

$1,740 $2 ,025 $2,319168 167 175

256 256 256$2,164 $2,448 $2,751

$6 $7 $70 0 09 6 510 10 10$24 $23 $22

$751 $756 $761227 294 3691,162 1,375 1,598$2,139 $2,425 $2,72 9

Common Stoc kAccumulated Other Comprehensive IncomeRetained Earnings (Accumulated Deficit)Total Shareholders' Equit y

Total Liabilities, And Shareholders' Equity $1,001 $1 ,275 $1,484 $1,676 $1 ,890 $2,164 $2,448 $2,75 1


May 9, 2005


Equity Researc h

Figure 7 Pixar-Cash Flow Statement, 2003-2010E( Dollars in millions)

May 9, 200 5

2003 2004 2005E 2006E 2007E 2008E 2009E 2010 ECash Flows From Operating Activities :Net Income $124 .8 $141 .7 $172 .2 $106 .2 $144.5 $203 .6 $213.5 $223. 0Adjustments to reconcile net income to net cash provided by operating activities :Amort . Of Purchased Technology 0 .0 0 .0 0.5 0 .5 0 .5 0.5 0 .5 0 . 5Depreciation And Amort . 7 .8 7.8 8.1 8 .3 8 .5 8 .6 8 .6 8 . 7Capitalized film costs (53 .2) (60.9) (90.0) (90.0) (90.0) (90.0) (90.0) (90.0 )Amort . Of Capitalized Film Prod . Costs 37 .6 28.5 47 .7 38.8 68 .9 88.7 90.0 90. 0Loss On Disposition Of PP&E (1 .3) 0.0 0.0 0.0 0 .0 0 .0 0.0 0 .0Tax Benefit From Stock option exercise 39 .4 56.7 40 .0 40.0 40.0 40.0 40.0 40. 0Deferred Income Taxes (17 .6) (17 .3) 0.0 0.0 0.0 0 .0 0.0 0. 0Non-Cash Option Expense 0 .0 0.0 0.0 26.4 26.4 26.4 26.4 26. 4Net Changes In Working Capital (13 .8) 102 .9 (17 .1) (4 .1) (31 .1) (29.7) (12.1) (18.4 )Net Cash From Operating Activities $123.6 $271 . 4 $161 .4 $126 .0 $167 .6 $248.1 $277 .0 $280 . 2

Cash Flows From Investment Activities :Purchase Of PP&E ($5.4) ($18 .4) ($35 .0) ($26 .3) ($6.8) ($7 .31 ($7.9) ($8.6 )Sale Of Short-Term Sec . 727.0 572 .5 0 .0 0.0 0.0 0 .0 0.0 0 .0Purchase Of Short-Term Sec . (906.6) (928.9) 0 .0 0 .0 0.0 0.0 0.0 0 .0Net Cash From Investment Activities ($184.9) ($374. 8) ( $35 .0) ($ 26 .3) ($6 .8) ($7 .3) ($7 . 9) ($8 .6)

Cash Flows From Financing Activities :Proceeds From Stock Options $65 .2 $83.7 $17.5 $24 .0 $5 .0 $5 .0 $5 .0 $5 .0Net Cash From Finance Activities $ 65.2 $83.7 $17.5 $24 .0 $5 .0 $5 . 0 $5 .0 $5 .0

Beginning Cash $44 .4 $48.3 $28.7 $172.5 $296.2 $462 .0 $707.8 $981 .9Changes In Cash 3.9 (19 .7) 143.9 123 .7 165.8 245 .8 274 .1 276 .6Ending Cash $48 .3 $28.7 $172.5 $ 296.2 $462.0 $707 .8 $981 .9 $1,258. 5Short-Term Investments 473 .9 826.1 826.1 826 .1 826.1 826 .1 826 .1 826. 1Total Cash And Cash Equivalents $522 .2 $854.8 $998 .6 $1,122.3 $1 ,288.1 $1,533.9 $1,808.0 $2,084. 6

Free Cash Flow:Cash From Operating Activities $123 .6 $271 .4 $161 .4 $126.0 $167 .6 $248.1 $277.0 $280. 2Maintenance Capex (5 .4) (18 .4) (35 .0) (26.3) (6.8) (7 .3) (7.9) (8.6 )Free Cash Flow $118 .3 $253 .0 $126 .4 $99 . 7 $160 .8 $240.8 $269 .1 $271 . 6


10 Prudential Equity Group, LLC • One New York Plaza • 15 " Floor • New York, NY 10292

Equity Researc h

Figure 8 Pixar- Valuation, 2006E( Dollars in millions , except per- share data )

Average Films 2006 EPresent Value Of Free Cash Flows $1,53 9Perpetual Growth Rate 4 .0 %Terminal Year Cash Flow 34 4Terminal Value 4,74 1PV Of Terminal Value 2,24 8Enterprise value 3,78 7Plus : Cash 1,12 2Plus : Option Proceeds 2 4Equity value 4,93 3Shares Outstanding 124. 4Investment Value Of Equity Per Share $40

Below Average FilmsPresent Value Of Free Cash Flows $57 3Perpetual Growth Rate 3.0%Terminal Year Cash Flow 140Terminal Value 1,699PV Of Terminal Value 80 5Enterprise value 1,37 9Plus : Cash 1,122Plus : Option Proceeds 24Equity value 2,525Shares Outstanding 124.4Investment Value Of Equity Per Share $20

Above Average FilmsPresent Value Of Free Cash Flows $2,380Perpetual Growth Rate 4 .5 %Terminal Year Cash Flow 53 1Terminal Value 8,843PV Of Terminal Value 4,193Enterprise value 6,572Plus : Cash 1,122Plus : Option Proceeds 24Equity value 7,71 9Shares Outstanding 124 .4Investment Value Of Equity Per Share $6 2

Probability Of Each Scenari oAverage 55 %Below Average 25 %Above Average 20%Price Target $4 0


May 9, 200 5

11 Prudential Equity Group, LLC • One New York Plaza • 15' Floor • New York, NY 10292

Equity Research - .

Figure 9 Finding Nemo -Ultimate Revenue Analysis( Dollars in millions )

Finding NemoRelease: May 30, 200 3Revenues Averag eBox Office Revenues - Domestic $340Box Office Revenues - International 52 5Total Box Office Revenue 86 5Studio Share 50 %Studio Theatrical Revenues 432Less : Distribution Fee (blended 12.5%) (54)Less : Marketing Costs (241 )Net Theatrical Revenues 13 7Net Theatrical Revenues - Pixar $69

Video Game SalesUnits 7.0Avg. License/Royalty Fee Per Unit $5 .7Total Video Game License Fees 40 .Net Video Game Revenues - Pixar $20. 0

Home Video SalesUnits 5 5Wholesale Revenue Per Cassette $18 .3 3Total Home Video Revenues 1,00 8Home Video Costs 41 3Less: Distribution Fee (blended 12 .5%) 12 6Net Home Video Revenues 46 9Net Home Video Revenues - Pixar $234 . 7

Pay TV, Broadcasting An dOther Ancillary Revenues $84.9Less: Distribution Fee (blended 12.5%) 10.6Net Ancillary Revenues 74 .3Net Ancillary Revenues - Pixar $37 . 2

Wholesale Merchandise Sales $700 . 0Merchandise Licensing Revenues (10%) 7 0Less : Distribution Fee (blended 12 .5%) 9Net Merchandise Revenues 6 1Net Merchandise Revenues Due Pixar $30 .6

Negative Costs $110.0

Economics For Pixa rPixar Repo rted Revenues $391 .2Pixar's Share Of Negative Costs (55 .0 )Pixar Profits $336 . 2


May 9, 2005


Equity Researc h

Figure 10 The Incredibles-Ultimate Revenue Analysis(Dollars in millions )The Incredible sRelease: November 5, 2004Theatrical Performance Averag eBox Office Revenues - Domestic $26 1Box Office Revenues - International 37 0Total Box Office Revenue 63 1Studio Share 50 %Studio Theatrical Revenues 31 6Less: Distribution Fee (blended 12 .5%) (39 )Less: Marketing Costs (205)Net Theatrical Revenues 7 1Net Theatrical Revenues - Pixar $3 5

Video Game SalesUnits 8. 0Avg . License/Royalty Fee Per Unit $5 . 0Total Video Game License Fees 40Net Video Game Revenues - Pixar $20 . 0

Home Video Sales (Release: March 15, 2005 )Units 4 5Wholesale Revenue Per Unit $19 .1 5Total Home Video Revenues 86 2Home Video Costs 33 8Less : Distribution Fee (blended 12 .5%) 10 8Net Home Video Revenues 41 7Net Home Video Revenues - Pixar $208 . 3

Pay Television, Broadcasting , And Ancillar yRevenues $65 . 3Less: Distribution Fee (blended 12 .5%) 8 .2Net Television and Ancillary Revenues 57 . 1Net Television and Ancillary Revenues - Pixar $28. 5

MerchandiseWholesale Merchandise Sales 65 0Merchandise Licensing Revenues (10%) 6 5Less: Distribution Fee (blended 12 .5%) 8Net Merchandise Revenues $56 . 9

Negative Costs $110. 0

Economics For Pixa rPixar Report ed Revenues $320 . 6Pixar's Share Of Negative Costs (55 )Pixar Profits $265 . 6


May 9, 200 5

13 Prudential Equity Group , LLC • One New York Plaza • 15" Floor • New York, NY 10292

Equity Researc h

Figure 11 Cars - Ultimate Revenue Analysis(Dollars in millions )

Car sRelease : Summer 2006 Below Abov eTheatrical Performance Average Average Averag e

Box Office Revenues - Domestic $90 $200 $27 5Box Office Revenues - International 95 250 33 0Total Box Office Revenue 185 450 60 5Studio Share 50% 50% 50 %Studio Theatrical Revenues 92 225 30 3Less : Distribution Fee (blended 12 .5%) (14) (28) (30 )Less : Marketing Costs (115) (115) (115 )Net Theatrical Revenues (37) 82 15 7Net Theatrical Revenues - Pixar ($18) $41 $7 9

Video Game SalesUnits 8 .0 8 .0 10. 0Avg . License/Royalty Fee Per Unit $5 .0 $5 .0 $5. 0Total Video Game License Fees 40 .0 40 .0 50. 0Net Video.Game Revenues - Pixar $20 .0 $20 .0 $25 . 0

Home Video SalesUnits 15 28 36Wholesale Revenue Per Cassette $16 .99 $16 .99 $16 .9 9Total Home Video Revenues 254.9 475 .8 611 . 8Home Video Costs 112 .5 210 .0 270. 0Less : Distribution Fee (blended 12 .5%) 38 .2 59 .5 61 .2Net Home Video Revenues 104.2 206 .3 280. 6Net Home Video Revenues - Pixar $52 .1 $103 .2 $140.3

Pay Television, Broadcasting, And Ancillar yRevenues $9.0 $50 .0 $68 .8Less: Distribution Fee (blended 12 .5%) 1 .4 6 .3 6 . 9Net Television and Ancillary Revenues 7 .7 43 .8 61 . 9Net Television and Ancillary Revenues • Pixar $3 .8 $21 .9 $30 . 9

Merchandis eWholesale Merchandise Sales $450.0 $650 .0 $1,375 .0Merchandise Licensing Revenues (10%) 45.0 65 .0 137 . 5Less: Distribution Fee (blended 12 .5%) 6 .8 8 .1 13 . 8Net Merchandise Revenues 38 .3 56 .9 123 . 8Net Merchandise Revenues Due Pixar $19 .1 $28 .4 $61 . 9

Negative Costs $90 .0 $90.0 $90 . 0

Economics For Pixa rPixar Reported Revenues $76 .7 $214.4 $336 . 7Pixar 's Share Of Negative Costs (45 .0) (45.0) (45 .0 )Pixar Profits $ 31 .7 $169.4 $291 . 7


May 9, 2005

14 Prudential Equity Group, LLC • One New York Plaza • 151° Floor • New York, NY 10292

Equity Research STYPONIA S

Figure 12 Pixar's Project 2007- Ultimate Revenue Analysis(Dollars in millions )

Project 2007 (Film 8) ; first fully financed by Pixa rRelease: SpringlSummer 2007 Below Abov eTheatrical Performance Average Average Average

Box Office Revenues - Domestic $99 $200 $31 0Box Office Revenues - International 104 220 37 2Total Box Office Revenue 203 420 68 2Studio Share 50% 50% 50 %Studio Theatrical Revenues 101 210 34 1Less: Distribution Fee (8%) (8) (17) (27 )Less: Marketing Costs (90) (90) (90 )Net Theatrical Revenues - Pixar $ 3 $103 $22 4

Video Game Sale sUnits 5.0 5 .0 6 . 0Avg . License/Royalty Fee Per Unit $5.0 $5.0 $5.0Net Video Game Revenues - Pixar $25.0 $25 .0 $30. 0

Home Video Sale sUnits 16 21 33Wholesale Revenue Per Cassette $16 .49 $16 .49 $16 .49Total Home Video Revenues 257 .4 346 .4 544 .3Home Video Costs 117 .0 157 .5 247. 5Less : Distribution Fee (8% ) (9 .4) 27 .7 (19 .8 )Net Home Video Revenues - Pixar $149 .7 $161 .2 $316. 6

Pay Television , Broadcasting , And AncillaryRevenues $9 .9 $50 .0 $77 . 5Net Television and Ancillary Revenues - Pixar $9 .8 $49 .5 $76 . 8

MerchandiseWholesale Merchandise Sales $494 .8 $550.0 $900 . 0Merchandise Licensing Revenues (10%) 49 .5 55.0 90 . 0Net Merchandise Revenues Due Pixar $49 .0 $54 .5 $89 . 1

Negative Costs $90 .0 $90 .0 $90 . 0

Economics For Pixa rPixar Reported Revenues $ 236 .8 $393.3 $736 . 3Pixar's Share Of Negative Costs (90 .0) (90.0) (90 .0 )Pixar Profits $146.8 $303.3 $646 . 3

Source : Company reports, Prudential Equity Group, LLC estimates.


Equity ■ STYPONIAS May9,2005

Additional In formation

To view charts associated with the stocks mentioned in .,iis report, please visit http://cml prusec.com. Inaddition, the applicable disclosures can be obtained by writing to : Prudential Equity Group, LLC, One New YorkPlaza -17' floor, New York, NY 10292 Attention : Equity Research .

Analyst Universe Coverage :Katherine Styponias covers Comcast Corp., Cablevision Systems, The Walt Disney Company, EchoStarCommunications, The DirecTV Group, Dreamworks Animation SKG, Liberty Media, Pixar, Six Flags, TimeWarner, Viacom Inc .

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If you did not receive this research report directly from Prudential Equity Group, LLC ("PEG") or BacheFinancial Limited, your access to, and receipt of, this report does not by itself operate to establish a client-broker relationship between you and PEG or Bache Financial Limited, as the case may be . Accordingly, pleasedirect any questions you may have regarding this report to the registered representative employed by thesecurities firm at which your account is held who is assigned to service your account, and not to PEG or anyPEG analyst whose name appears above . Please note that PEG or Bache Financial Limited, as the case maybe, bears no responsibility for any recommendation(s) or advice that such securities firm or its registeredrepresentatives may provide to you, regardless of whether any such recommendation or advice is based inwhole or in part on this report .


JEquity Researc h

Important Disclosures

Pixar

10I r,vuu n~&o'rtULq 111

May-02 Aug-02 Nov-02 Feb-03 May-0 3

Source : Factset and Prudential Equity Group , LLC estimates.

3

Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05

May 9, 200 5

Katherine Stvoonias

Date From To01130104 Underweight Neutral Weigh t09108103 Hold Underweigh t09111102 Buy Ho1d36 .50 '07117102 Hold31 .00' Buy32.50'05105105 39 .0032.00' 40 .0031 .00 '0411910508 SPLIT 2 : 132 .00'31 . 50'108131 . 50'0328 .5 0

28.50 '


Equity Research - .

Ratina Distribution

May 9, 200 5

Prudential Equity Group, LLC Prudential Equity Group, LL CResearch Universe Consumer Discretionary Coverag e

05/06/05Overweight(Buy)* 33 .00% 33.00 %Neutral Weight(Hold)* 44.00% 40.00%Underweight(Sell)* 23 .00% 26.00%Excludes Closed End Fund s03/31/05 Consolidated Consolidate dOverweight(Buy)* 32.00% 29 .00 %Neutral Weight(Hold)* 45 .00% 45.00 %Underweight(Sell)* 23 .00% 26 .00 %Excludes Closed End Fund s12/31/04 Consolidated ConsolidatedOverweight(Buy)* 31 .00% 29 .00 %Neutral Weight(Hold)* 45.00% 45.00%Underweight(Sell)* 24.00% 25.00%Excludes Closed End Fund s09/30/04 Consolidated Consolidate dOverweight(Buy)* 31 .00% 28.00 %Neutral Weight(Hold)* 48 .00% 42.00%Underweight(Sell)* 21 .00% 30 .00 %Excludes Closed End Fund s

* In accordance with applicable rules and regulations, we note above parenthetically that our stock ratings of"Overweight," "Neutral Weight," and "Underweight" most closely correspond with the more traditional ratingsof "Buy," "Hold," and "Sell," respectively; however, please note that their meanings are not the same. (Seethe definitions below.) We believe that an investor's decision to buy or sell a security should always take intoaccount, among other things, the investor's particular investment objectives and experience, risk tolerance,and financial circumstances . Rather than being based on an expected deviation from a given benchmark (asbuy, hold, and sell recommendations often are), our stock ratings are determined on a relative basis .

When we assign an Overweight rating, we mean that we expect that the stock's total return will exceed theaverage total return of all of the stocks covered by the analyst (or analyst team) . Our investment time frame is12-18 months except as otherwise specified by the analyst in the report.When we assign a Neutral Weight rating, we mean that we expect that the stock's total return will be in linewith the average total return of all of the stocks covered by the analyst (or analyst team) . Our investment timeframe is 12-18 months except as otherwise specified by the analyst in the report .When we assign an Underweight rating, we mean that we expect that the stock's total return will be belowthe average total return of all of the stocks covered by the analyst (or analyst team)- . Our investment timeframe is 12-18 months except as otherwise specified by the analyst in the report .

Prior to September 8, 2003, our ratings were Buy, Hold, and Sell . A Buy rating meant that we believed that astock of average or below-average risk offered the potential for total return of 15% or more over the following12 to 18 months . For higher-risk stocks, we may have required a higher potential return to assign a Buy rating .When we reiterated a Buy rating, we were stating our belief that our price target was achievable over thefollowing 12 to 18 months. A Sell rating meant that we believed that a stock of average or above-average riskhad the potential to decline 15% or more over the next 12 to 18 months . For lower risk stocks, a lower potentialdecline may have been sufficient to warrant a Sell rating . When we reiterated a Sell rating, we were statingour belief that our price target was achievable over the following 12 to 18 months . A Hold rating signified ourbelief that a stock did not present sufficient upside or downside potential to warrant a Buy or a Sell rating,either because we viewed the stock as fairly valued or because we believed that there was too muchuncertainty with regard to key variables for us to rate the stock a Buy or a Sell .


Equity ResearchMay 9, 200 5

When we assign an industry rating of Favorable, we mean that generally industry fundamentals/stockprospects are improving .When we assign an industry rating of Neutral, we mean that generally industry fundamentals/stock prospectsare stable .When we assign an industry rating of Unfavorable, we mean that generally industryfundarr ntals/stockprospects are deteriorating .

The methods used to determine the price target generally are based on future earning estimates, productperformance expectations, cash flow methodology, historical and/or relative valuation multiples . The risksassociated with achieving the price target generally include customer spending, industry competition andoverall market conditions . Additional risk factors as they pertain to the analyst's specific investment thesiscan be found within the note/report .

Prudential Equity Group, LLC makes a market in the shares of PIXR .

The research analyst, a member of the team, or a member of the research analyst's household does not have afinancial interest in any of the stocks mentioned in this reportPrudential Equity Group, LLC has no knowledge of any material conflict of interest involving the companiesmentioned in this report and our firm .

Any analyst principally responsible for the analysis of any security or issuer included in this report certifiesthat the views expressed accurately reflect such research analyst's personal views about subject securitiesor issuers and certifies that no part of his or her compensation was, is, or will be directly or indirectly related tothe specific recommendation or views contained in the research report .

©Prudential Equity Group, LLC, 2005, all rights reserved . One New York Plaza, New York, NY 10292Information contained herein is based on data obtained from recognized statistical services, issuer reports orcommunications, or other sources, believed to be reliable . Any statements nonfactual in nature constitute onlycurrent opinions, which are subject to change .

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EXHIBIT 25

,ase 3:03-cv-05138-VRW Document 155 Filed 08/17/2006 Page 1 of 3 5

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281 I

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE PORTAL SOFTWARE, INC

SECURITIES LITIGATION .

No C-03-5138 VRW

ORDER

Plaintiffs John Romeo and Pipefitters Local 522 & 63 3

Pension Trust Fund ("Pipefitters") sue under the Securities Act of

1933 (the ` 33 Act") and the Securities Exchange Act of 1934 (the

"134 Act") on behalf of investors who purchased securities o f

Portal Software, Inc, between May 20, 2003, and November 13, 2003,

inclusive (the "class period") . Plaintiffs allege that defendants

Portal, John E Little, Howard A Bain III and Arthur C Patterso n

violated generally accepted accounting principles (GAAP) by

artificially inflating the price of Portal's stock and making false

and misleading statements on which plaintiffs relied, thereby

incurring substantial financial losses from purchasing Portal stoc k

at fraudulently inflated prices .

On August 10, 2005, the court dismissed plaintiffs' third

consolidated amended complaint (TCAC (Doc #111)) because plaintiffs

did not plead with the particularity required by FRCP 9(b) and the

se 3:03-cv-05138-VRW Document 155 Filed 08/17/2006 Page 2 of 3 5

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Private Securities Litigation Reform Act (PSLRA), an amendment to

the `34 Act . Doc #133 (Order) at 3 . The court also concluded that

plaintiffs' allegations did not support a strong inference of

scienter and that defendants ' forward-looking statements were

protected by a safe harbor provision in the PSLRA. Id . Finally ,

the court determined that plaintiffs' `33 Act claims sounded i n

fraud and hence failed along with plaintiffs' 134 Act claims . Id .

The court granted plaintiffs leave to amend to fix these pleading

deficiencies . Id at 34 .

After plaintiffs filed a fourth consolidated amended

complaint (Doc #135 (FCAC)), defendants moved to dismiss (Doc #138

(Mot Dis)), once again alleging that plaintiffs did not plead with

sufficient particularity to satisfy FRCP 9(b) and the PSLRA. In

opposition, plaintiffs contend that their claims under sections 11,

12(a)(2) and 15 of the 133 Act do not sound in fraud and that the

FCAC states sufficiently particularized claims under sections 10(b)

and 20(a) of the `34 Act . Doc #144 (Opp) .

The court heard argument on these motions on March 23 ,

2006 . For the reasons discussed below, the court DENIES

defendants' motion to dismiss plaintiffs' claims under sections 11 ,

12(a)(2) and 15 of the 133 Act and GRANTS defendants ' motion to

dismiss plaintiffs' claims under sections 10(b) and 20(a) of the

`34 Act .

//

2

3 :03-cv-05138-VRW Document 155 Filed 08 /17/2006 Page 3 of 3 5

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I

The factual and procedural history is derived from the

FCAC and is presumed to be true for purposes of this motion .

Gompper v VISX, Inc , 298 F3d 893, 895 (9th Cir 2002) . Portal

provides billing and subscriber management solutions to its clients

primarily through its "Infranet" software, for which Portal charge s

companies "license fees ." FCAC 1 68 . Portal also charges

customers "service fees" for system implementation, consulting,

maintenance and training . Id. Following the "dot-com" market

crash of 2001, Portal lost many of its dot-com startup customers

and incurred financial losses that wiped out more than 96% of its

equity . Id Q 69 .

Portal subsequently began to market its Infranet product

to more established and sophisticated business customers, including

telecommunications providers . Id. Portal's new clients required

greater software customization than had the dot-com startups, which

in turn affected how Portal could recognize license fee revenues .

Id . Plaintiffs contend that under GAAP, a software provider canno t

I recognize licensing revenues for software that require s

customization for a client until a substantial portion of the

modification has been completed. Id 19[ 4, 44(e), 69 . Although

Portal historically could recognize revenue when it delivered it s

Infranet product to its dot-com clients, the greater customization

required by Portal 's new , more established clients required the

company to defer recognizing revenue from many of its contracts

until customization was complete . Id 1 153 . Plaintiffs allege

that during the class period , Portal began to manipulate its

license fees to recognize more revenue "up-front ." Id 9[9[ 70-71 .

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On September 12, 2003, Portal completed a secondary

offering to the public at a price of $13 .25 per share, thereby

generating $60 million in net proceeds . Id Q 9 . On November 13,

2003, defendants announced that due to contract delays, revenue

recognition deferrals and service execution issues, Portal expected

net losses of $0 .36 to $0 .40 per share for the third quarter of

fiscal year (FY) 2004 . Id 9[ 10 . These losses contrasted with the

$0 .04 net profits per share that Portal had previously projected

for the quarter . Id. After this announcement, Portal's common

share price plummeted more than 42 .5% to $8 .77 in after-hours

trading . Id 1 113 . Plaintiffs allege, "Defendants' inaccurate

statements and omissions proximately caused damages to Plaintiffs

and other members of the Class who purchased the Company's shares

at artificially inflated prices, and suffered loss * * * as th e

truth began to be publicly revealed about the Company's previously

undisclosed adverse business and financial condition ," causing

share prices to fall . Id 1 13 .

//

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Plaintiffs brought claims under sections 11, 12(a)(2) and

15 of the 1 33 Act, alleging that Portal made negligen t

overstatements in connection with its September 12, 2003, secondary

public offering . Id 19[ 16-64 . The court examines in turn

defendants' motion to dismiss these claims .

A

As with the claims in the TCAC, defendants conten d

plaintiffs' instant section 11 claim does not satisfy the

particularity requirement of FRCP 9(b) . Not Dis at 17-19 .

According to defendants, FRCP 9(b) applies here because "the core

allegations underpinning plaintiffs' 134 Act [section 10] and `33

Act [sections 11 and 12] claims remain the same" as in the TCAC .

Id at 3 .

FRCP 9(b) only applies to allegations sounding in fraud

or mistake ; a section 11 claim based on a negligent or innocen t

misstatement or omission does not require particularized pleading .

See In re Stac Electronics Securities Litigation , 89 Fad 1399, 1405

n3 (9th Cir 1996) . As described below, plaintiffs' present section

11 claim sounds in negligence not in fraud ; hence, the claim need

not meet FRCP 9(b)'s heightened pleading standard .

Plaintiffs explicitly state that their section 11 claim

"does not contain any allegations sounding in fraud * * * [and that

plaintiffs] do not claim that Defendants committed intentional or

reckless misconduct or that Defendants acted with scienter or

fraudulent intent ." FCAC 9[ 32 . This disclaimer is borne out by

the factual allegations supporting plaintiffs' instant section 1 1

5

;ase 3 :03-cv-05138-VRW Document 155 Filed 08/17/2006 Page 6 of 3 5

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claim, which unlike its predecessor in the TCAC, does not allege

that defendants committed fraud or recklessly and deliberately made

false or misleading statements to the investing public . Compare

TCAC 11 40-153 with FCAC 11 16-52 . Plaintiffs no longer allege

that defendants actively concealed material information, compare

TCAC 1 19 with FCAC Q 31, or participated in a fraudulent scheme .

And rather than allege that Portal's license revenues "were

materially overstated due to Defendants' artificial manipulation"

(TCAC 164(a)), plaintiffs now allege that these same license

revenues were "negligently overstated" (FCAC $ 44(e)) .

Accordingly, plaintiffs have successfully amended their section 11

claim such that it does not sound in fraud .

Moreover, plaintiffs' allegations of fraud in their

section 10 claim have no impact on their section 11 claim .

FRCP 8(e)(2) permits plaintiffs to "set forth two or more

statements of a claim * * * alternately or hypothetically, either

in one count * * * or in separate counts ." Hence, contrary to

defendants' contention, plaintiffs can allege that defendant s

committed fraud for purposes of the section 10 claim while relying

on a negligence theory for the section 11 claim .

Defendants further suggest that plaintiffs have not even

met the more lenient pleading standard of FRCP 8 . Mot Dis at 1 9

nil . But FRCP 8(a) only requires "a short and plain statement of

the claim showing that the pleader is entitled to relief," which

plaintiffs have provided . Section 11 creates a private remedy for

a purchaser of a security if "any part of the registration

statement * * * contained an untrue statement of a material fact or

omitted to state a material fact required to be stated therein o r

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necessary to make the statement therein not misleading ." 15 USC §

77k(a) . Paragraphs 35 through 43 of the FCAC highlight specific

statements defendants made in Portal's registration statement and

paragraph 44 alleges facts indicating that these statements were

inaccurate .

Defendants also allege that plaintiffs' section 11 claim

fails "to plead the requisite loss causation element ." Mot Dis at

3 . But defendants' argument belies the plain language of tha t

provision : "[I]f the defendant proves that any portion or all of

such damages represents other than the depreciation in value

resulting from such part of the registration statement, with

respect to which his liability is asserted, * * * such portion of

or all such damages shall not be recoverable ." 15 USC § 77k(e )

(emphasis added) . Accordingly, the statute provides that loss

causation is an affirmative defense on which "[t]he defendant has

the burden of proof * * * ." In re Worlds of Wonder Securities

Litigation , 35 Fad 1407, 1422 (9th Cir 1994) . And because the

complaint on its face does not foreclose the possibility that

defendants caused plaintiffs' losses, a failure to plead loss

causation cannot sink plaintiffs' claims on the present motion to

dismiss . Contrast In re DNAP Securities Litigation , 2000 WL

1358619, at *3 (ND Cal 2000) ("Although loss causation is an

affirmative defense, * * * in this case it is evident on the face

of the complaint [that loss causation cannot be established] and

thus may be raised on a motion to dismiss * * * .") .

Accordingly, the court DENIES defendants ' motion to

dismiss plaintiffs' section 11 claim .

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B

Turning to plaintiffs' claim under section 12(a)(2), tha t

provision " imposes civil liability on a person who offers or sell s

securities by means of a prospectus or oral communicatio n

containing material misrepresentations or omissions ." Moore v

Kayport Package Express, Inc , 885 F2d 531, 535 (9th Cir 1989) ; 15

USC § 771(a)(2) . Plaintiffs must allege facts indicating that

defendants actually sold or otherwise solicited the purchase of the

securities at issue here and hence were " sellers " within the

meaning of section 12 . See id at 535-36 (noting that the section

12(a)(1) analysis of "seller" in Pinter v Dahl , 486 US 622, 639-53

(1988), applies to section 12(a)(2)) .

Plaintiffs have alleged the individual defendants wer e

"sellers and offerors and/or solicitors of purchasers of the shares

offered pursuant to the Prospectus ." FCAC 1 55 . A mere assertion

that defendants are solicitors or sellers is a legal conclusion and

therefore insufficient to withstand a motion to dismiss . See, e g,

Shaw v Digital Equipment Corp , 82 F3d 1194, 1216 (1st Cir 1996 )

(superceded in part by PSLRA) ; In re Westinghouse Securities

Litigation , 90 F3d 696, 717 (3d Cir 1996) (Alito, J) . But here,

plaintiffs have pled sufficient facts to demonstrate defendants '

seller status for purposes of the present motion . For example,

plaintiffs allege defendants issued "materially false and

misleading written statements to the investing public" and

defendants' solicitation activity "included participating in, and

signing, the preparation of the false and misleading Prospectus ."

FCAC 19[ 49, 56 . Moreover, the court agrees "whether an individual

is a seller under section 12 is a question of fact, not properl y

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decided on a motion to dismiss ." In re Stratosphere Corp

Securities Litigation , 1 F Supp 2d 1096 (D Nev 1998) . Hence,

plaintiffs' allegations of defendants' seller status are adequate

to survive the present motion .

Defendants also attack the section 12(a)(2) claim by

arguing, as they did with the section 11 claim, that plaintiffs

failed adequately to allege fraud and causation . But "fraud is not

a necessary element of a claim under section 12[a](2) * * * ." In

re Westinghouse , 90 F3d at 717 . Because the section 12(a)(2) claim

alleges the same facts as the section 11 claim and specifically

disclaims any allegation of fraud or intentional or reckless

misconduct, FCAC 19[ 53-60, the section 12(a)(2) claim need not meet

any heightened pleading standards and satisfies FRCP 8's

requirements . Moreover, as with the section 11 claim, "[c]ausation

* * * is not a necessary element of a prima facie case under

section 12 of the Securities Act ." In re Daou Systems, Inc,

Securities Litigation , 411 F3d 1006, 1029 (9th Cir 2005) . Hence,

any failure to plead "loss causation" is not fatal to the section

12(a)(2) claim .

Accordingly, the court DENIES defendants' motion to

dismiss plaintiffs' section 12(a)(2) claim .

//

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C

Turning to plaintiffs' section 15 claim, defendants

contend that "controlling person" liability under that section is

conditioned on liability under either sections 11 or 12 . Not Dis

fiat 20 n12 ; 15 USC § 77o . Because the court has determined that

plaintiffs' claims under sections 11 and 12 are sufficient t o

survive the instant motion to dismiss, this argument is moot .

Defendants also object in passing to the section 15 clai m

against individual defendant Patterson, arguing plaintiffs have not

pled sufficient facts to indicate that Patterson was a "controlling

person ." Not Dis at 20 n12 . Plaintiffs have alleged that

Patterson was a director of Portal and that his signature appears

on the registration statement at issue . FCAC 9[9[ 23, 34 . While a

director is not liable merely by virtue of his position, "[i]t i s

not uncommon for control `to rest with a group of persons, such as

the members of the corporation's management ."' Arthur Children's

Trust v Keim , 994 F2d 1390, 1396 (9th Cir 1993) (quoting 4 Loss &

Seligman, Securities Regulation 1722 (1990)) . In any event ,

determining whether Patterson is a controlling person is a highly

factual question that should not be decided on the instant motion

to dismiss . Compare id ("[T]he determination of who is a

controlling person for purposes of liability under [a different

securities provision, 15 USC § 78t,] is an intensely factual

question .") .

Accordingly, the court DENIES defendants' motion t o

dismiss plaintiffs' section 15 claim .

//

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II I

Plaintiffs also assert claims under sections 10(b) and

20(a) of the 134 Act, contending that Portal prematurely recognized

revenue in violation of GAAP . Plaintiffs contend that Portal

disseminated false and misleading statements to the investing

public, both during and after the class period, via SEC filings and

press releases . FCAC 11 90-197 . To support these allegations,

plaintiffs rely in part on information from five unnamed former

Portal employees : (1) a controller ; (2) a senior business analyst ;

(3) an accounts receivable and revenue assurance assistant ; (4) a

senior marketing manager and (5) a vice -president of services . Id

11 69-85 , 99, 124 , 150-162 .

The court now examines in turn defendants ' motion to

(dismiss plaintiffs' claims under sections 10(b) and 20(a) .

A

Section 10(b) of the `34 Act and SEC Rule lOb-5,

promulgated thereunder, make it unlawful for any person, in

connection with the purchase or sale of any security, (1) to engage

in fraud, (2) to make an untrue statement regarding a material fact

or (3) to make a misleading statement by omitting a material fact .

15 USC § 78j(b) ; 17 CFR § 240 .10b-5 . Consequently, the elements of

a Rule 10b-5 claim are : (1) a material misrepresentation or

omission of fact, (2) scienter, (3) a connection with the purchase

or sale of a security, (4) transaction and loss causation and (5)

economic loss . See Dura Pharmaceuticals, Inc v Broudo , 125 SCt

1627, 1631 ( 2005) .

11

ase 3:03-cv-05138-VRW Document 155 Filed 08/17/2006 Page 12 of 3 5

1 Claims brought under section 10(b) and Rule lOb-5 mus t

2 first meet the particularity requirements of FRCP 9(b) . In re

3 Stac , 89 F3d at 1404 . FRCP 9(b) requires a plaintiff allegin g

4 fraud to "set forth what is false or misleading about [the ]

5 statement, and why it is false ." In re GlenFed, Inc, Securities

6 Litigation , 42 Fad 1541, 1548 (9th Cir 1994) (superceded by the

7 PSLRA on other grounds) .

8 Second, a complaint must satisfy the more stringen t

9 requirements imposed on securities fraud pleadings by the PSLRA .

10 Specifically, the PSLRA requires that a complaint : (1) "specify

t 11 each statement alleged to have been misleading [and] the reason o r

12 reasons why the statement is misleading" (15 USC § 78u -~• w 13 4 (b) (1)) ; (2) for any such allegations based on information and

o

14 belief, "state with particularity all facts on which that belief isQn Q

15 formed" (15 USC § 78u-4(b)(1)) and (3) "with respect to each act o r

s 16 omission * * * state with particularity facts giving rise to a

a~ o17 strong inference that the defendant acted with the required state

18 of mind" (15 USC § 17u-4(b)(2)) . The required state of mind, or

19 scienter, is met when the complaint alleges "that the defendant s

20 made the false or misleading statements either intentionally o r

21 with deliberate recklessness ." In re Daou , 411 Fad at 1015 (citing

22 In re Silicon Graphics, Inc, Securities Litigation , 183 F3d 970 ,

23 974 (9th Cir 1999)) . In securities cases , falsity and scienter

24 "are generally strongly inferred from the same set of facts and the

25 two requirements may be combined into a unitary inquiry under th e

26 PSLRA ." In re Vantive Corp, Securities Litigation , 283 Fad 1079 ,

27 1091 (9th Cir 2002) (internal citations omitted) .

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To demonstrate falsity and scienter, plaintiffs rely on

testimony from several confidential witnesses, all former Portal

employees . Confidential sources can be used to satisfy the PSLRA's

heightened pleading requirements only if the complaint describes

the sources "with sufficient particularity to support the

probability that a person in the position occupied by the source

would possess the information alleged ." Nursing Home Pension Fund,

Local 144 v Oracle Corp , 380 F3d 1226, 1233 (9th Cir 2004) (quoting

Novak v Kasaks , 216 F3d 300, 314 (2d Cir 2000)) . The unnamed

sources must provide information that is adequately corroborated by

other facts . In re Silicon Graphics , 183 F3d at 985 .

The Ninth Circuit has recently adopted the Firs t

Circuit's "suggested criteria for assessing reliability of

confidential witnesses ." In re Daou , 411 Fad at 1015 . These

criteria include "the level of detail provided by the confidential

sources, the corroborative nature of the other facts alleged

(including from other sources), the coherence and plausibility of

the allegations, the number of sources, the reliability of the

sources, and similar indicia ." In re Cabletron Sys, Inc , 311 F3d

11, 29-30 (1st Cir 2002) . Moreover, when a complaint relies on

unnamed employees, courts generally look for specific descriptions

of the employee's relevant duties and responsibilities to evaluate

the reliability of their information . See, e g, In re Daou , 411

F3d at 1016 (finding that confidential witnesses were describe d

with a "large degree of specificity" where the complaint provided

the witnesses' job descriptions and responsibilities and identified

for some of the witnesses the executive to whom the witness

reported) ; see also In re Northpoint Communications Group, Inc ,

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Securities Litigation , 221 F Supp 2d 1090, 1097 (ND Cal 2002)

(holding that a second amended complaint cured some specificity

problems of the original complaint where it set out, in addition to

job titles and tenures of confidential witnesses, their

I responsibilities at the company) .

The PSLRA also carves out a safe harbor from liability if

the allegedly false or misleading statements were forward-looking

and accompanied by meaningful "cautionary statements ." 15 USC §

78u-5©) ; see also In re Splash Technology Holdings , Inc Securities

Litigation , 2000 WL 1727377, at *5 (ND Cal 2000) . An analogous

doctrine that predates the PSLRA's enactment is the "bespeaks

caution" doctrine , which allows a court to rule as a matter of law

that defendant ' s forward-looking statements contained enough

cautionary language or risk disclosure to protect against

liability . See, e g, Provenz v Miller , 102 F3d 1478, 1493 (9th Cir

1996) . If a defendant's statements are immunized under eithe r

doctrine , dismissal of the complaint is appropriate . See id ; In re

Splash , 2000 WL 1727377, at *5-6 .

B

Plaintiffs contend that on four separate occasions

defendants made a total of seventeen false statements, each of

which allegedly supports their claims under sections 10(b) and

20(a) . These statements include : (1) two false statements in a

May 20, 2003, press release ; (2) seven false statements in a June

16, 2003, form 10-Q filing with the SEC for the first quarter of FY

2004 (1Q04) ; (3) one false statement in an August 19, 2003, press

release and (4) seven false statements in a September 12, 2003 ,

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form 10-Q filing with the SEC for the second quarter of FY 200 4

(2Q04) .

1

May 20, 2003, and August 19, 2003, press releases

Plaintiffs allege that on May 20, 2003, Portal issued a

press release falsely reporting that Portal's revenue for the first

quarter of FY 2004 was $32 .1 million, with a net loss of $2 .0

million . FCAC 1 90 . Portal issued the press release under the

headline, "Third Consecutive Quarter of Revenue and Business

Growth ." Id. Plaintiffs contend that the May 20 press release

included a false statement from defendant Little, who said ,

"[Portal is] the only company in [its] market reporting increasing

revenues and quarter-to-quarter product license growth ." Id .

Plaintiffs also assert that the May 20 press release falsely state d

that Portal expected 10-12% growth , a "return to pro forma

profitability " and "positive cash flow operations within the

current fiscal year ." Id $ 91 .

On August 19, 2003, Portal issued another press release,

which plaintiffs contend falsely reported that Portal' s revenue for

the second quarter of FY 2004 was $33 .2 million, with a net loss of

$2 .5 million . Id 1 101 . Portal issued this press release under

the headline, "Fourth Consecutive Quarter of Revenue and Busines s

Growth ." Id .

Plaintiffs rely on substantially the same allegations in

contending that the two press releases included false statements

and that defendants acted with scienter in making these statements .

Accordingly, the court considers the statements in these pres s

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releases together in determining whether plaintiffs' allegations

I satisfy the PSLRA's pleading requirements for falsity and scienter .

a

In contending that the press releases include false

statements that defendants made with scienter, plaintiffs rely on

the testimony of a former controller employed by Portal from April

1997 to June 2002 . Id 9[ 69 . The controller alleges that during

the class period (May 20, 2003, to November 13, 2003, inclusive),

Portal prematurely recognized license revenues prior to delivering

software to customers . Id 19[ 71, 99(a) .

Plaintiffs' TCAC included substantially the same

testimony from the former controller . TCAC 1 43 . In dismissing

that complaint, the court found that the controller lacked inherent

indicia of reliability because his employment with Portal

terminated before the class period even began . Order at 19 .

Moreover, the controller's testimony was especially unreliable

because his entire account of the allegedly fraudulent activity

during the class period was based on second-hand reports from

unnamed Portal insiders . TCAC 1 43 .

The only change in the FCAC as compared to the TCAC i s

that the controller now expresses "confidence" in his sources '

"accuracy" and believes they are "in a position to know [Portal's

accounting practices] ." FCAC 9[ 71 . But the controller does not

provide the particularized detail necessary to convince the court

that his sources are reliable . Because the controller is a

confidential source who relies on other confidential sources fo r

his information, the controller's "allegations attributed t o

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unnamed sources must be accompanied by enough particularized detail

to support a reasonable conviction in the informant's basis of

knowledge ." See In re Northpoint , 221 F Supp 2d at 1097 . And as

previously explained, "plaintiffs must describe the job title, job

description, duties, and dates of employment for the controller's

sources before this information can be deemed reliable ." Order at

19 . Plaintiffs' failure to provide this information in the FCAC

renders the controller's testimony unreliable .

b

Plaintiffs also rely on the testimony of a former senior

business analyst employed by Portal from May 2001 through July

2003 . FCAC 1 72 . Plaintiffs contend Portal could not legitimately

recognize revenue for partial performance on certain contracts

before demonstrating vendor specific objective evidence (VSOE) .

According to the witness, defendant Bain personally instructed him

to fabricate studies demonstrating the necessary VSOE, so that the

results for financial analyses of six contracts were prematurely

recognized, I e, "cooked ." Id ¶11 75-76 . The senior business

analyst identifies one customer by name for whom he created fals e

revenue recognition studies ("Columbia [sic] Mobile") , states that

he was "required to perform analyses that matched management' s

predetermined results for work performed in * * * Greece, Italy,

Columbia [sic] and Spain in connection with at least six of

Portal's major contracts" and opines that Portal booked $5 . 0

million in revenue from these contracts . Id 11 76, 162 .

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Based on his personal involvement in fraudulent activity

at the behest of Bain, the court concludes, as it did when

evaluating the TCAC, that the senior business analyst's allegations

potentially support a claim under the `34 Act . Moreover, the court

finds the specificity of the analyst's account provides a certai n

degree of reliability .

Nonetheless, as with the TCAC, the analyst's testimony

again fails to indicate how the alleged manipulations affected the

public statements made by Portal . "[T]he plaintiff must show with

particularity how the [improper revenue] adjustments affected the

company's financial statements and whether they were material in

light of the company's overall financial position ." In re Daou ,

411 F3d at 1018 . Here, such particularity is lacking . For

example, while the analyst asserts that on "six to ten" contracts

worth "approximately $5 million" he "prepared falsified employee

billing rates," neither the analyst nor plaintiffs state how much

of this $5 million was improperly recognized . The FCAC does not

even state whether the allegedly manipulated billing rates led to

any increase in recognized revenue . Accordingly, the confidential

business analyst's testimony is insufficient to demonstrate falsity

and scienter under the pleading requirements of the PSLRA .

c

Plaintiffs also rely on the testimony of an accounts

receivable and revenue assurance assistant employed by Portal

"until early 2004 ." FCAC 9[ 77 . This witness was "responsible for

billing, contract review, and reconciling accounts receivable with

the general ledger" and apparently has at least twelve year s

18

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1 experience working with revenue recognition . Id. The witnes s

2 asserts Portal engaged in improper , accelerated recognition o f

3 revenue , identifying one customer by name ("Onstar") . Id. As with

4 the TCAC , the court is satisfied that the unnamed witness's accoun t

5 in the FCAC self-identifies the witness's duties and basis fo r

6 knowledge and bears sufficient indicia of reliability .

7 Nonetheless , in its previous order dismissing the TCAC ,

8 the court discounted this witness's testimony because, "[a]lthough

9 the accounts receivable assistant allegedly reclassified improperl y

10 booked revenues, [he did ] not indicate how much revenue was

11 reclassified or how this affected Portal's financial statements . "

12 Order at 22 . Plaintiffs have not remedied this lack o f

• w 13 particularity in the FCAC . See In re Daou , 411 Fad at 1018 .

14 Accordingly , the court again finds this witness ' s testimony to be

v~ Q15 insufficiently particularized to support a claim under section

c~ c

16 10(b) .^C Y

1 7

18 d

19 Plaintiffs also rely on the testimony of a former vice -

2 0 president of services, who was employed throughout the class

21 period . FCAC 1 79 . The former vice-president describes thre e

22 instances of allegedly fraudulent activity .

23 First , the vice-president asserts (as paraphrased by

24 plaintiffs ) that "Portal had represented that revenues associated

25 with Portal ' s work for Vodaphone Japan was [sic] ìn the bucket '

26 when , in fact , the `contract was no where [sic ] close to being

27 signed ."' Id 1 79 . The vice-president began working directly o n

28 the Vodaphone Japan contract near the start of the class period and

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apparently reported early on to Portal' s senior management that

several contract issues could not be resolved by the end of FY

2004 . Id 1 80 . Plaintiffs assert that "Portal nonetheless

recognized revenue associated with this unsigned contract ." Id Q

80 .

This testimony is insufficient to satisfy the PSLRA's

pleading requirements . Plaintiffs have not identified any

particular revenue that was associated with the Vodaphone Japan

contract and was improperly recognized during the class period .

Hence, plaintiffs have not tied the alleged fraud to the

purportedly false public statements made by Portal .

Next, the former vice-president asserts that Porta l

"pretended" that $2 .0 million in revenue for a contract with Enabil

Solutions would be recordable in the third quarter of FY 2004, even

though required milestones had not been met . Id Q 81 . Defendants

apparently acknowledged this information at an October 2003 meeting .

attended by the witness . Id 1 81 .

This testimony also is insufficient . As a preliminary

matter, neither plaintiffs nor the vice-president have explained

precisely what is meant by "pretending" that certain revenue would

be recordable at a given time . More importantly, the vice-

president only learned about the alleged fraud on Enabil Solutions

at an October 2003 meeting, which occurred after Portal had made

its allegedly false statements in its press releases and 10-Q

filings with the SEC . Hence, the vice-president's testimony has no

bearing on whether defendants acted with scienter when those

statements were made .

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Finally, the former vice-president states that Portal

sold software with "product problems" to Colombia Mobile,

necessitating further expenditures by Portal to "fix the problem ."

Id 1 87 . This witness therefore asserts that Portal's revenue

projections were "pipe dreams " and "unrealistic ." Id 9[ 88 .

As with the Vodaphone Japan contract, the FCAC does not

indicate how these alleged problems with Colombia Mobile affecte d

Portal's financial earnings statements . And the former vice-

president's seemingly off-the-cuff remarks that Portal's revenue

projections were "pipe dreams" and "unrealistic" are not

sufficiently particularized to support a claim of fraud under

section 10(b) .

Accordingly, because the facts provided by the former

vice-president are not tied to any particular allegedly fraudulent

statement, these facts are insufficient to meet the heightened

pleading requirements of the PSLRA .

e

Plaintiffs also contend Portal's form 10-Q for the third

quarter of FY 2004 presented a "percentage-of-completion"

accounting method that "differed" from the previous quarter .

Instead of calculating percentage-of-completion based on hours,

plaintiffs allege the statement indicates Portal began calculating

whether a project was complete based on costs . Id 11 121-22 . But

again, plaintiffs do not tie this information to any particular

allegedly false statement . And plaintiffs never "link the decline

in share price to any purported improper revenue recognition ." In

re Daou , 411 F3d at 1026 . Rather, plaintiffs appear to mention

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these points merely to create an aura of fraud, which is an

unfortunate technique that plagues plaintiffs' entire FCAC . The

PSLRA mandates greater particularity than what plaintiffs hav e

provided here .

f

As noted above, defendants' May 20, 2003, press release

claimed that Portal expected 10-12% growth, a "return to pro forma

profitability" and "positive cash flow operations within the

current fiscal year ." Id $ 91 . Contending that these predictions

were fraudulent, plaintiffs proffer the testimony of a senior

marketing manager, employed by Portal during the first two months

of the class period . Id 1 83 . The marketing manager states that

portions of Portal's billing software were being rendered obsolete

by Customer Relationship Management (CRM) applications sold by

vendors like SAP and Siebel . Id . Moreover, Portal's Infranet

product was having difficulty interfacing with these CR M

applications, resulting in unexpected costs and delays for Portal .

Id 1 86 . Plaintiffs allege that the allegedly false statements

belied the true state of Portal's financial health, including these

technical difficulties and the declining demand for Portal' s

product during the class period .

As a "senior marketing manager," this employee plausibly

has knowledge of the market for Portal's product and could

conceivably provide evidence of the "shrinking market and role for

billing software applications ." Id 1 84 . In addition, the

employee identifies two vendors, SAP and Siebel, that offered

products that "displaced the role previously provided" by aspect s

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11 of Portal's billing software . Id 1 83 .

But that is all this witness provides . The employee

fails to identify any of "Portal's large telecommunications

customers," id, for whom customer service applications were no

longer required as part of Portal's billing software . And although

the marketing manager alleges Portal was spending too much time and

money due to "excessive bugs and/or interface problems with other

applications," id 1 86, these allegations fail to identify any

specific problems, customers, contracts or dates . "Without any

corroborating facts, it is impossible to conclude that such

allegations rest on more than hind-sight speculation ." In re

Vantive , 283 F3d at 1089 .

Moreover, the statements challenged here concern "future

economic performance" and "projection[s] of revenues" and therefore

were forward-looking statements under the PSLRA . 15 USC §

78u-5(I) ; In re Copper Mountain Securities Litigation , 311 F Supp

2d 857, 880 (ND Cal 2004) . As described below, these

forward-looking statements were accompanied by cautionary language

that was sufficiently specific and meaningful to warn investors of

the risks that actually materialized .

First , defendants ' May 20 and August 19 press releases

each included "safe harbor " warnings regarding forward-looking

statements and noted that their predictions were subject to

uncertainties and risk . Doc #106, Exs H , I . These press releases

specified a number of factors that could affect the projections,

including the migration to "larger , multi-year deals , which * * *

may dampen near-term growth * * * and add[] to the volatility of

license revenues ," ( id, Ex H) and the possibility that Portal' s

23

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"customers will continue to constrain their capital spending due to

their on-going soft market outlook for an extended period of time,"

(id, Ex I) .

In addition to those warnings, the press releases

referred investors to a form 10-K for additional warnings . Doc

#106, Exs H, I ("These and other factors are described in detail in

our Annual Report on Form 10-K for the fiscal year ended January

31, 2003 * * * .") . Hence, the information in the form 10-K was

incorporated into the "total mix of information in the document "

available to reasonable investors, even though the form 10-K did

not actually accompany the press releases . In re Copper Mountain ,

311 F Supp 2d at 876 (citing Fecht v The Price Co , 70 F3d 1078,

1082 (9th Cir 1995)) . The form 10-K contained several pages of

detailed and explicit warnings regarding Portal's dependence on a

few large customers, the risks associated with long implementation

periods and the numerous variables that could adversely affect

revenue recognition for any quarter . Doc #106 , Ex C . Also, the

form 10-K warned that Portal would begin offering "products and

services for a `bundled' price, such that a separate price would

not be identified for the product and service components . Such a

change may significantly delay the timing of our revenue

recognition ." Id at 33 . Because these warnings hew to the actual

deficiencies that caused Portal's earnings shortfall - "contract

delays and revenue recognition deferrals" with existing large

customers - they provided sufficiently specific and material

warnings to immunize defendants' forward-looking statements . See

In re Copper Mountain , 311 F Supp 2d at 882 .

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Plaintiffs nonetheless assert defendants are liable for

their forward-looking statements because they knew the statements

were false and misleading when made . FCAC 9[ 193 . This argument,

however, ignores that the relevant statutory language provides that

a person generally shall not be liable for a forward-looking

statement "identified [as such and] accompanied by meaningful

cautionary statements identifying important factors that could

cause actual results to differ materially from those in th e

forward-looking statement ; or * * * the plaintiff fails to prove

that the forward-looking statement[,] * * * if made by a business

entity ;[,] was * * * false or misleading ." 15 USC § 78u-5(c )

(emphasis added) . Because the statute is disjunctively phrased,

"if a statement is accompanied by meaningful cautionary language,

the defendants' state of mind is irrelevant ." Harris v Ivax Corp ,

182 F3d 799, 803 (11th Cir 1999) (internal punctuation omitted) ;

see also In re SeeBeyond Technologies Corp Securities Litigation ,

266 F Supp 2d 1150, 1163-67 (CD Cal 2003) (plain statutory language

is disjunctive) . Accordingly, because the forward looking

statements at issue were accompanied by meaningful cautionary

language, these forward-looking statements are within the statutory

safe harbor .

CONCLUSION

Plaintiffs have strenuously argued that the court should

apply a so-called "totality" standard in assessing their section

10(b) claims . See Oracle , 380 F3d at 1230 (court must consider

"the total of plaintiffs' allegations" in assessing claims of

scienter) (quoting No 84 Employer-Teamster Joint Council Pensio n

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Trust Fund v America West Holding Corp , 320 F3d 920, 938 (9th Cir

2003)) . But as discussed above, plaintiffs have not set forth any

allegations that are sufficiently particularized to demonstrate the

May 20, 2003, and August 19, 2003, press releases contained

materially false statements or to raise a strong inference that

defendants acted with scienter when making those statements .

Accordingly, even if plaintiffs' allegations are taken

collectively, plaintiffs have failed to state a claim under section

10(b) and Rule lOb-5 regarding statements in the press releases .

2

June 16, 2003, and September 12, 2003, form 10-Q reports

Plaintiffs also allege that Portal's form 10-Q quarterl y

reports filed during the class period contained materially false

statements that support plaintiffs' section 10 claims . On or about

June 16, 2003, Portal filed with the SEC its form 10-Q quarterly

report for the period ended May 2, 2003 (the "1Q 2004 10-Q") . FCAC

1 93 . On or about September 12, 2003, Portal filed with the SEC

its form 10-Q quarterly report for the period ended August 1, 2003

(the "2Q 2004 10-Q") . Id q 104 . The court now examines the

allegations that plaintiffs contend demonstrate that the form 10-Q

filings contained false information and that defendants acted with

scienter .

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a

As a preliminary matter, the court notes the 1Q 2004 10-Q

and the 2Q 2009E 10-Q apparently repeated the same allegedly false

financial information that was provided in the May 20, 2003, and

August 19, 2003, press releases, respectively . Id 9111 93, 104 . As

discussed in section III(B)(1), supra, plaintiffs did not provide

sufficiently particularized allegations to demonstrate falsity an d

scienter regarding the statements in the press releases . Hence,

these same allegations are also insufficient to demonstrate falsit y

and scienter for corresponding statements in the form 10-Q reports .

b

Plaintiffs allege that Portal's 1Q 2004 10-Q and 2Q 2004

10-Q falsely stated that, pursuant to SOP 97-2, "Portal uses the

residual method to recognize revenue when a license agreement

includes one or more elements to be delivered at a future date and

vendor specific: objective evidence of the fair value (`VSOE') of

all undelivered elements exists ." Id 11 94, 105 .

Beginning with Portal's 1Q 2004 10-Q, plaintiffs rely on

the same formes: senior business analyst's testimony that the cour t

already addressed in connection with defendants' press releases .

See supra III(B)(1)(b) ; FCAC q9[ 72-76 . Because the court already

found this witness's account to be unreliable and plaintiffs point

to no other specific allegations of falsity and scienter, this

fraud claim fails .

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Turning to Portal's 2Q 2004 10-Q, plaintiffs point to a

conversation that defendants Bain and Little conducted wit h

financial analysts during a November 13, 2003, conference call,

which occurred on the same day that Portal's 3Q04 financial result s

were announced and the class period ended . Id 9[$ 112, 136 . In

that conference, Little stated that while service revenue coul d

generally be recognized on an "ongoing basis," revenue on license

contracts "may not be recognizable" until customer acceptance is

secured . Id 9[ 136 . When questioned further whether licence

contract revenue was accounted for based on milestones or project

completion, Little stated that "[d]ifferent projects are done in

different ways ." Id .

Plaintiffs fail to explain how Little's statements in the

conference cal]. demonstrate that Portal's 2Q 2004 10-Q contained

false information or that defendants acted with scienter whe n

submitting the 2Q 2004 10-Q . There is no necessary inconsistency

between Portal's description of its "residual method" of accounting

in the 2Q 2004 10-Q and Little's subsequent statement that some

license revenue "may" not be recognizable until Portal had secure d

customer acceptance . For example, the allegedly false statements

in the 2Q 2004 10-Q apply only to license agreements that include

(1) "one or more elements to be delivered at a future date" and (2)

VSOE "of all undelivered elements ." But neither of these aspects

of license revenue recognition was mentioned during the phone

conference relied on by plaintiffs, suggesting that Little might

have been referring to other types of license agreements .

Accordingly, plaintiffs have not sufficiently pled a section 10(b)

claim for this allegedly false statement .

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PlairLtiffs also allege that Portal's 1Q 2004 10-Q

contained the following false statement : "If a services agreement

includes milestones, Portal does not recognize revenue until

customer acceptance has occurred ." Id 1 95 . Plaintiffs allege

that Portal's 2Q 2004 10-Q contained essentially the same false

statement : "If' a services agreement includes milestones, Portal

does not recognize revenue until customer acceptance of the

milestone has occurred ." Id 9[ 106 . Plaintiffs contend that in

reality, Portal. would recognize revenue prior to customer

acceptance of milestones .

To demonstrate falsity and scienter, plaintiffs rely on

the testimony of the former vice-president of services . The court

has already rejected this testimony, see supra III(B)(1)(d), which

is not sufficiently particularized or tethered to an allegedl y

false statement . .

Plaintiffs also rely on Portal's fiscal 2004 form 10-K,

filed April 14, 2004, which stated that revenue reporting for th e

fourth quarter of FY 2004 (and therefore, the net revenue reported

for FY 2004) would exclude previously reported revenue of $700,000 .

FCAC 1 126 . Apparently this exclusion of revenue was due to a

customer's failure to accept contractual milestones . Id . But

these allegations speak to Portal ' s activities after the class

period had ended on November 13, 2003 . A public filing by

defendants indicating that revenue would be restated for a period

after the class period had ended neither demonstrates that revenue

statements made by defendants during the class period were false

nor raises a strong inference that defendants acted with scienter

29

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1 when making those statements . Accordingly , these kinds of

2 allegations do not bear on the allegedly false statements at issu e

3 here .

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5 d

6 Plaintiffs further contend that Portal's 1Q 2004 10- Q

7 falsely stated that "both the license revenues and service s

8 revenues are recognized under the percentage -of-completion contrac t

9 method in accordance with the provisions of SOP 81-1[ .] * * * The

10 Company estimates the percentage-of-completion on contracts

6 11 utilizing hours; incurred to date as a percentage of the tota l

V E 12 estimated hours at project completion ." Id 1[ 96 . Plaintiffs

• w 13 assert that Portal's 2Q 2004 10-Q contained the following

14 substantially similar statement : " Portal follows the percentage-

15 of-completion method where reasonably dependable estimates of,

16 progress toward completion of a contract can be made . The Company

17 estimates the percentage-of-completion on contracts utilizing hours

18 incurred to date as a percentage of the total estimated hours at

19 project completion, subject to meeting agreed milestones . In the

20 event that a milestone has not been reached , the associated cost is

21 deferred and revenue is not recognized until the milestone has been

22 accepted by the customer ." Id 9[ 107 .

23 Once again, plaintiffs rely on the November 13, 2003 ,

24 conference call . in which defendants Bain and Little talked with

25 securities analysts . See supra 111(B) ( 2) (b) ; FCAC (1 136 . And once

26 again , plaintiffs fail to explain how defendants' statements during

27 this conference demonstrate that Portal ' s description in its form

28 10-Qs of the SOP 81 -1 accounting method or of the percentage o f

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completion accounting method was false . Plaintiffs summarily point

to Portal's disclosure in its FY 2004 SEC filings that "[t]o date,

Portal has had no contracts accounted for under SOP 81-1 ." Id $

137 . But this statement means nothing unless plaintiffs

particularly allege that Portal did in fact have some contracts

that should have been accounted for under SOP 81-1 . Accordingly,

these statements do not support a claim under section 10(b) .

e

Plaintiffs also point to Portal 's statements to the SEC

in late 2005 in which Portal claims to be "currently evaluating"

whether accounting deficiencies "could have impacted its quarterly

financial statements in Fiscal 2004 ." Doc #146 (Request for

Judicial Notice) at 3 (form 8-K) . Based on this statement,

plaintiffs ask the court to infer that "Portal acknowledged

accounting errors during the Class Period." Id. But no such

inference is warranted. Even if Portal had made accounting errors

affecting its quarterly financial statements, which is not clear

based on the language on which plaintiffs rely, plaintiffs have not

created a strong inference that defendants acted with scienter whe n

making those statements . The court cannot make this inferentia l

leap without further particularized allegations .

//

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f

Finally, plaintiffs contend that Portal's 1Q 2004 10- Q

and 2Q 2004 10-Q each contained three separate false statements

relating to Bain's and Little's certifications of the information

contained in the 10-Q' s and of the general soundness of Portal' s

business . First, the form 10-Q's included the following language,

as required by the Sarbanes -Oxley Act : "[T]he Company's

management , including its chief executive officer and chief

financial officer, has evaluated the effectiveness of the Company's

disclosure controls and procedures . * * * Based on that

evaluation, the! Company's chief executive officer and chief

financial officer concluded that the Company's disclosure controls

and procedures were effective * * * to ensure that information

required to be disclosed * * * is recorded, processed, summarized

and reported * * * ." FCAC 9[ 140 . Second, the form 10-Qs each

stated that they do "not contain any untrue statement of a materia l

fact or omit to, state a material fact necessary to make the

statements made , in light of the circumstances under which such

statements were made, not misleading with respect to the period

covered by this quarterly report" and that the "financial

information" included in each form 10-Q "fairly present[s] in all

material respects the financial condition, results of operations

and cash flows" of Portal for the reported quarter . Id 9[ 141 .

Finally, the form 10-Qs both stated : "The information contained in

the Report fairly presents, in all material respects, the financial

condition and result of operations of the Company ." Id 1 142 .

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Plaintiffs allege that each of these certifications wa s

(false when made because defendants were aware or recklessly

disregarded that Portal's financial statements were not created in

accordance with GAAP and that Portal's internal controls wer e

ineffective . Id 1 143 . To support this allegation, plaintiffs a t

oral argument noted a September 2, 2004, conference call in which

Little stated to securities analysts that some work had been

performed on an existing contract with Vodaphone Japan without

first obtaining signed customer approval of the extra cost .

Plaintiffs allege that defendants' failure to disclose earlier tha t

it was performing work before obtaining customer signatures, as

required by GAAP, made the three contested certifications fals e

when made . Id 1 147 . But the FCAC makes clear that this

conversation addresses only "results for the quarter ended July 31 ,

2004 ;" indeed, plaintiffs present this phone conversation as

evidence that "Portal's internal control deficiencies existed even

well after the end of the class period ." Id q 144 (emphasis

added) . Hence , it does not appear that this allegation bears on

the allegedly fraudulent statements that Portal made earlier and

that form the basis of plaintiffs' claims . And in any event,

plaintiffs again have failed to allege with particularity how these

allegedly fraudulent acts affected Portal's bottom line or

specifically caused any decline in stock price . Accordingly, the

allegedly fraudulent certifications do not form a basis for a

section 10(b) claim .

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CONCLUSION

As with the press releases , plaintiffs have not put forth

sufficiently particularized allegations , even when viewed in

combination, to demonstrate that Portal's 1Q 2004 10-Q and 2Q 2004

10-Q contained materially false statements and that defendants

acted with scienter when making those statements . Accordingly,

plaintiffs have failed to state a claim under section 10(b) and

Rule 10b-5 regarding statements in the 10-Q reports .

Because plaintiffs have not stated a claim under section

10(b) for any of the allegedly fraudulent statements, the court

GRANTS defendants' motion to dismiss on plaintiffs' section 10(b )

Iclaim .

C

Section 20(a) provides for "controlling person"

liability . 15 USC § 78t . To establish such liability, plaintiffs

must first demonstrate a "primary " violation under section 10(b) .

In re Copper Mountain , 311 F Supp 2d at 883 . "[I]n the absence of

a viable claim under Section 10(b), any remaining Section 20(a)

claims must be dismissed ." Id. Because plaintiffs have failed to

state a claim under section 10(b), plaintiffs have "no basis upo n

which to premise a Section 20(a) claim ." Id . Accordingly, the

court GRANTS defendants' motion to dismiss plaintiffs' section

20(a) claim .

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In sum, the court DENIES defendants' motion to dismis s

plaintiffs' claims under sections 11, 12(a)(2) and 15 of the 1 33

Act and GRANTS defendants' motion to dismiss plaintiffs' claims

under sections 10(b)and 20(a) of the 134 Act . Because plaintiffs

have amended their claims four times but still have not satisfied

the PSLRA's heightened pleading requirements, plaintiffs' claims

under the 134 Act are hereby DISMISSED with prejudice . The parties

are instructed to appear before the court to discuss what issues,

if any, remain in this litigation on October 3, 2006, at 9 :00 AN .

IT IS SO ORDERED .

VAUGHN R WALKER

United States District Chief Judge

35

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MAR X 5 ?00 3

RICHARD W . V,IEKAGCLERK, U .S . DISTRICT COUR T

NORTHERN DISTRICT OF CALIFORNI A

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNI A

In re JUNIPER NETWORKS, INC. No. C 02-0749 SI

SECURITIES LITIGATION ORDER GRANTING DEFENDANTS'MOTION TO DISMISS WITH LEAVE

I TO AMEND

On January 10, 2003, this Court heard argument on the motion by defendants Juniper Networks,

Inc., Scott K riens, Marcel Gani , Steven Haley and Peter Wexler to dismiss the [corrected ] consolidated

complaint . Having carefully considered the arguments of counsel and the papers submi tted , the Court

hereby GRANTS the motion with leave to amend for the reasons set fo rth below .

BACKGROUND

This is a securities class action lawsuit against Juniper Networks ("the Company") and certain

of its officers and directors under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

"Exchange Act") . The case is brought on behalf of all persons who purchased Juniper's publicly traded

securities on the open market between April 12, 2001 and June 7, 2001 .

Juniper is a provider of Internet infrastructure solutions and develops routers that forward data

packets between different points in a network . Complaint ¶ 1 . Plaintiffs allege that defendants reported

false and misleading information about the revenue of the Company on April 12, 2001 . Complaint ¶

2. Plaintiffs also contend that the Company reached its revenue target for the 1Q01 by improperly

recognizing over $65 million in revenue that should have been deferred, engaging in a $20 million

bogus swap transaction with Qwest Communications International Inc, and delaying taking at least a

$20 million charge to earnings for excess inventory . Complaint ¶ 3 . Plaintiffs further contend that the

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Company's M160 router had such functionality problems that the Company knew that it could not

possibly reach its projected 2Q01 or year 2001 numbers as then projected . Complaint ¶ 3 . Plaintiffs

state that the Company publicly denied that it was lowering targets, but then, three weeks later,

announced that it expected revenues down 30% from the original guidance, and that, contrary to recent

assurances, that customer acceptance cycles were much longer than in the past, information which

caused Juniper shares to drop more than 45% lower than the Class Period high . Complaint ¶¶ 5-7 .

The plaintiffs' specific information, about why the defendants' 1Q01 numbers and subsequent

statements concerning invento ries and 2Q01 results throughout the Class Period were false an d

misleading, primarily comes from confidential witnesses . Complaint ¶¶ 44-58, ¶¶ 60-122 .

The lead plaintiffs in this case are Hallam, LLC, an institutional investor, and Raymond D . Baldi ,

An Nguyen and Ian Kideys, individual investors . The defendants are Juniper Networks Inc .; Scott

Kriens, Juniper's Chairman, Chief Executive Officer and President during the Class Period ; Marcel

Gani, Juniper's Chief Financial Officer during the Class Period ; Steven Haley, Juniper's Vice President

of Worldwide Sales and Service during the Class Period; and Peter L . Wexler, Juniper's Vice President

of Engineering during the Class Period. Now before the Court is defendants' motion to dismiss the

consolidated complaint .

LEGAL STANDARD

A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintif f

can prove no set of facts which would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-46,

(1957) ; Fidelity Fin . Corp . v. Federal Home Loan Bank , 792 F.2d 1432, 1435 (9th Cir . 1986). All

material allegations in the complaint will be taken as true and construed in the light most favorable to

the plaintiff. NL Indus ., Inc . v. Kaplan , 792 F .2d 896, 898 (9th Cir. 1986) . The two circumstances in

which 12(b)(6) dismissal is approp riate are : (1) where there is "a lack of a cognizable legal theory" or

"the absence of sufficient facts alleged under a cognizable legal theory . Balistreri v . Pacifica Police

Dep't , 901 F .2d 696, 699 (9th Cir . 1990) . Even if the face of the pleadings suggests that the chance of

recovery is remote, the Court must allow the plaintiff to develop the case at this stage of th e

proceedings . See United States v . City of Redwood City , 640 F.2d 963, 966 (9th Cir . 1981) .

2

Generally, when considering a motion to dismiss a district court must consider only the fact s

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2 stated in the plaintiffs ' complaint, or in documents attached to the complaint as exhibits or incorporated

into the complaint by reference . Under certain circumstances , the court may also consider ma tters that

are appropriate subjects of judicial notice under Fed .R.Evid. 201 . Kramer v . Time Warner, 937 F .2d

767, 773 (2d Cir. 1991) . While the general rule is that, "[m]atters outside the pleadings are not to be

considered by the court in ruling on a 12(b)(6) motion to dismiss ," in a securities action a court may also

consider documents that the defendant has a ttached to its motion to dismiss either as exhibits or

accompanied by a request for judicial notice . Weiner v . Klais and Co ., Inc . , 108 F.3d 86, 88 (6th Cir .

1997) .

DISCUSSIO N

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Defendant argues that the Complaint does not satisfy the pleading requirements of the Privat e

Securities Litigation Reform Act of 1995 (PSLRA) for allegations based on information and belief, that

plaintiffs do not allege an actionable false statement, that plaintiffs fail to allege facts supporting a

strong inference of fraudulent intent, and that "non-speaking" defendants cannot be liable under Rule

I Ob-5 .

1 A. Section 10(b) Pleading Requirements

Section 10(b) of the Exchange Act makes it unlawful for any person :

To use or employ, in connection with the purchase or sale of any security registered on anational securities exchange or any security not so registered, any manipulative or deceptivedevice or contrivance in contravention of such rules and regulations as the Commission mayprescribe as necessary or appropriate in the public interest or for the protection of investors .

15 U.S .C . §78j(b) . Rule lOb -5, codified at 17 C.F.R. § 240.10b-5, provides :

It shall be unlawful for any person, directly or indirectly, by the use of any means orinstrumentality of interstate commerce, or of the mails or of any facility of any nationalsecurities exchange ,(a) To employ any device, scheme, or artifice to defraud ,(b) To make any untrue statement of a material fact or to omit to state a material fact necessaryin order to make the statements made, in the light of the circumstances under which they weremade, not misleading, or(c) To engage in any act, practice, or course of business which operates or would operate as afraud or deceit upon any person, in connection with the purchase or sale of any security .

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To state a claim under § 10(b) of the Exchange Act, plaintiffs must allege (1) a misrepresentatio n

or omission (2) of material fact (3) made with scienter (4) on which the plaintiff justifiably relied (5 )

that proximately caused the alleged loss . Binder v. Gillespie , 184 F.3d 1059, 1063 (9th Cir . 1999) .

A securities class action alleging violation of § 10(b) of the Exchange Act must satisfy th e

pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the heightened pleading

requirements of the PSLRA. In order to comply with Rule 9(b) in a securities action, a plaintiff must

allege the time, place, and content of the alleged fraud, as well as the "circumstances indicating

falseness" or "the manner in which [the] representations [or omissions at issue] were false and

misleading ." In re GlenFed Sec . Litig . , 42 F.3d 1541, 1544 (9th Cir . 1994) (en banc) (alterations in the

original) .

The PSLRA was enacted in 1995 as an amendment to the Exchange Act. See In re Silicon

Graphics Inc. Sec . Litig . , 183 F.3d 970, 973 n .2 (9th Cir . 1999). Under the PSLRA, a complaint must :

specify each statement alleged to have been misleading, the reason or reasons why thestatement is misleading, and, if an allegation regarding the statement or omission is madeon information and belief, the complaint shall state with particularity all facts on whichthat belief is formed .

15 U.S .C . § 78u-4(b)(1) . This means that plaintiffs must provide corroborative facts supporting their

belief that defendants knew the statements were false at the time they were made . In re Silicon

Graphics , 183 F .3d at 985. The complaint must also "state with particularity facts giving rise to a strong

inference that the defendant acted with the required state of mind ." 15 U.S .C. § 78u-4(b)(2) . The

required state of mind under § 10(b) is "at a minimum, deliberate recklessness ." In re Silicon Graphics ,

183 F.3 at 983 . Scienter may be pled and proven by reference to circumstantial evidence . However,

when pleading on information and belief, a plaintiff must plead with "particularity" by "provid[ing] all

facts forming the basis for [plaintiff's] belief in great detail." Id. at 983 ; see also 15 U.S .C . §

78u-4(b)(1) .

Where, as here, scienter and falsity are being inferred from the same set of facts, "these tw o

requirements may be combined into a unitary inquiry under the PSLRA ." Ronconi v . Larkin , 253 F,3 d

423, 429 (9th Cir . 2001) ("Because falsity and scienter in private securities fraud cases are generally

strongly inferred from the same set of facts, we have incorporated the dual pleading requirements of 1 5

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U.S .C. §§78u-4(b)(1) and (b)(2) into a single inquiry ."). The Ninth Circuit has explained that the

stricter standard for pleading scienter under the PSLRA results in a stricter standard for pleading falsity .

In re Vantive Corp . Sec . Litig . , 283 F.3d 1079, 1091 (9th Cir . 2002) . The question on a motion to

dismiss, then, is whether particular facts in the complaint, taken as a whole, raise a strong inference that

defendants intentionally or with deliberate recklessness made false or misleading statements to

investors . In re Silicon Graphics , 183 F.3d at 979 . "Where pleadings are not sufficiently particularized

or where, taken as a whole, they do not raise a `strong inference' that misleading statements were

knowingly or [with] deliberate recklessness made to investors, a private securities fraud complaint i s

properly dismissed under Rule 12(b)(6) ." Ronconi , 253 F .3d at 429 .

B. Analysis of the complaint under the PSLRA requirements for pleading the sources ofinformation and belief

Defendants assert that the confidential witness summaries in plaintiffs' complaint fail to provid e

the corroborating details required by the PSLRA and that the complaint does not identify any negativ e

internal reports that contradict defendants' public statements . See In re Silicon Graphics 183 F.3d at

984-85 . Plaintiffs, however, assert that In re Silicon Graphics requires the Complaint to plead "all the

relevant facts" in support of plaintiffs' information and belief, and that plaintiffs complied with this

requirement . 183 F.3d at 985 .

The complaint alleges that Juniper's M 160 router was "riddled with functionality problems," tha t

there was a slowdown in business, and that defendants made extensive false and misleading statements

about the company, relying on the report of confidential witnesses, identified as former employees of

Juniper and its contract manufacturers Solectron and Celestica . Complaint ¶ 59(a) . Defendants dispute

the sufficiency of the information from these witnesses, arguing that plaintiffs do not explain why the

information provided by these confidential witnesses is reliable, or where they obtained their

information. Defendants assert that confidential witness summaries must provide specific information

and corroborating details, which these do not . See Vantive 283 F .3d at 1091 ; Coble v. Broadvision 20D2

WL 31093589, at *6 ; In re Northpoint Communications Group . Inc . Sec. Litig . , 184 F .Supp. 2d 991,

1000 (N.D.Cal . May 28, 2002) .

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For instance, defendants dispute the information provided by CW 1, identified as a regional sale s

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hiring manager . CW 1 alleges defects with the functionality of the M160 router, but does not explain

why the knowledge of a regional sales hiring manager would be reliable regarding this technical issue .

Plaintiffs give no information about how, from whom, or when CW I obtained this knowledge, or what

specifically CW 1 was told about these alleged problems with the CW1 router .

With regard to plaintiffs' claim that Juniper's April 12, 2001 revenue guidance was false ,

defendants claim that none of the confidential witnesses purport to have personal knowledge of what

Juniper was internally forecasting for company-wide revenues . Defendants state that although CW 10

states that he or she "considered the Denver sales personnel quota of $150-5200 million for the first half

of 2001 to be 'astronomical,"' the Complaint does not allege how, from whom, or when CW 10 learned

what this quota was, or how there could be a quota with such a large spread . Complaint ¶ 104 .

Defendants criticize the vagueness of the summary of CW2, stating that CW2's testimony that

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he or she felt a "sense of imminent doom," that he or she "organized customer briefings and attended

sales meetings," and that it was "`known' within Juniper that there was a marked decrease in both the

size number and of product orders," does not meet the specificity requirements of the PSLRA .

Complaint ¶¶45, 73 . Defendants assert that these are conclusory allegations, which are not a substitute

for personal knowledge, and that there are no allegations of fact.

Plaintiffs dispute all of these contentions of defendants . Plaintiffs argue that Silicon Graphics ,

183 F .3d at 984-985, only requires pleading the specific contents of negative internal reports if such

reports are relied upon in the complaint . Here, since plaintiffs did not rely on any internal negative

reports, plaintiffs assert that the specificity-of-content language from In re Silicon Graphics does not

apply. Plaintiffs also argue that the Complaint provides detailed witness descriptions and information

showing that the confidential witnesses had actual knowledge, pointing to the description of CW l's

duties and tenure during the Class Period as sufficient to demonstrate the information provided by CW 1

was reliable . However, as noted in In re Northpoint Communs . Group, Inc . , 2002 U.S. Dist . LEXIS

13242 at * 18-19 , "where the nexus between a witness's duties and his or her allegations is less evident,

the absence of specific detail going to a basis of knowledge is more troublesome -- and saps the

allegations of their strength ."

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The Complaint does list some instances where the confidential witnesses had persona l

knowledge about the problems in the Company . However, the Complaint relies heavily on "common

knowledge" and speculation, rather than specific facts, to support the allegations of the confidential

witnesses ; and there is often a tenuous, at best, link to the job titles and descriptions of the confidential

witnesses and the information that they provide . In addition, there are numerous instances, pointed to

by defendants, where the Complaint makes no showing of how, where, or from whom the confidential

witnesses obtained such information.

Therefore, the Court GRANTS defendants ' motion to dismiss the complaint for insufficiency

to plead the sources of information and belief, but gives plaintiffs leave to amend to plead with mor e

specificity . As the Court has granted the motion to dismiss on these grounds, the Court need not address

the further arguments of the parties .

C . Requests for Judicial Notice

In ruling on a motion to dismiss, a court may take judicial notice of a document if it is relied o n

in the complaint (whether or not it is expressly incorporated therein) and its authenticity is not disputed .

Parrino v . FHP Inc . , 146 F .3d 699 at 706 (9th Cir. 1988) . The Court may also consider SEC filings

relied upon in the complaint . See In re Silicon Graphics 183 F .3d at 986 . In their original Request for

Judicial Notice, defendants ask this Court to take notice of 18 documents : (1) Excerpts from Juniper's

SEC Form 10-K (for fiscal year ended December 31, 2000) filed on March 27, 2001 ; (2) Excerpts from

Juniper's SEC form 10-K filed on March 29, 2002 ; (3) Juniper's Form 10-Q (for quarter ended March

31, 2001) filed on May 8, 2001 ; (4) Juniper's Form 10-Q (for quarter ended June 30, 2001) filed on

August 6, 2001 ; (5) Juniper's Proxy Statement filed on April 13, 2000 ; (6) Juniper's Proxy Statement

filed on March 31, 2001 ; (7) Juniper's Proxy Statement filed on April 11, 2002 ; (8) SEC Forms 3 and

4 for Scott Kriens; (9) SEC Forms 3 and 4 for Marcel Gani; (10) SEC Forms 3 and 4 for Steven Haley ;

(11) SEC Forms 3 and 4 for Peter Wexler ; (12) June 8, 2001 Juniper press release ; (13) April 12, 2001

Bloomberg News transcript of an interview with Scott Kriens ; (14) April 12, 2001 transcript of Juniper's

conference call ; (15) April 12, 2001 UBS Warburg analyst report ; (16) April 12, 2001 CIBC Worl d

Markets analyst repo rt ; (17) April 16, 2001 Lazard Freres & Co . LLC analyst report ; and (18) April 24 ,

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2001 McDonald Investments Morning Call Daily analyst report . In Defendants' Further Request for

Judicial Notice, defendants ask this Court to take notice of Declarations of Confidential Witnesses,

namely the Declarations of Robert Gregory Frazier, Catherine Wright, Antonio Albo, Charles Redden

and William Kirk. Defendants further request this Court to take judicial notice of Juniper's common

stock daily closing prices on NASDAQ from January 2, 2001 through January 30, 2001 .

With respect to the defendants' original request for Judicial Notice, the Court grants the request,

as they are types of document for which the accuracy cannot reasonably be questioned . With regard to

defendants' further request for judicial notice, the Court denies the requests with regard to the

declarations, as taking notice of these declarations, and the opposing declarations of the plaintiff's

investigators would necessarily turn this motion to dismiss into a motion for summary judgment, an d

the Court finds this to be inapprop riate at this time .

CONCLUSION

For the foregoing reasons, the Court GRANTS defendants ' motion to dismiss , and gives

plaintiffs leave to amend the Complaint on or before March 24, 2003 .

IT IS SO ORDERED .

Dated: March 4, 2003

SUSAN ILLSTONUnited States District Judg e

8

UNITED STATES DISTRICT COUR'FOR THE

NORTHERN DISTRICT OF CALIFORNIA

Zumpano, Case Number: 02-0749 S I

Plaintiff, CERTIFICATE OF SERVIC E

V.

Juniper Networks ,

Defendant .

I, the undersigned , hereby certify that I am an employee in the Office of the Clerk, U .S .District Court, Northern District of California .

That on March 5, 2003 , I SERVED a true and correct copy(ies) of the attached, byp lacing said copy(ies) in a postage paid envelope addressed to the person (s) hereinafterlisted , by depositing said envelope in the U .S. Mail , or b placing said copy(ies) into aninter-office delivery receptacle located in the Clerk's office .

Alfred G. YatesLaw Offices of Alfred G . Yates519 Allegheny Building429 Forbes AvenuePittsburgh, PA 1521 9

Darren J . Robbin sMilberg Weiss Bershad Hynes & Lerach LLP401 B StreetSuite 1700San Diego, CA 9210 1

Reed R. KathreinMilberg Weiss Bershad Hynes & Lerach100 Pine StreetSuite 2600San Francisco , CA 9411 1

Gregory L . Watts

Nina F . LockerWilson Sonsini Goodrich & Rosati650 Page Mill RoadPalo Alto, CA 94304-105 0

Francis M. GregorekWolf Haldenstein Adler Freeman & HerzSymphony Towers750 B StreetSuite 2770San Diego , CA 9210 1

Dated: March 5, 2003 Richard W. Wiek' , Clerk

By: Cg,a

147y~Deputy Clerk

Documents

In Re: Pixar Securities Litigation 05-CV-4290-Supplemental ...securities.stanford.edu/filings-documents/1035/... · Equity Research a- .--May 9, 2005 Pixar has suggested that international