Hillson Partners Ltd. Partnership v. Adage, Inc.

• Citation: 42 F.3d 204
• Decision Date: 13 December 1994
• Docket Number: No. 94-1186,94-1186
• Parties: , Fed. Sec. L. Rep. P 98,474 HILLSON PARTNERS LIMITED PARTNERSHIP, Plaintiff-Appellant, v. ADAGE, INCORPORATED; Donald F.U. Goebert; Robert H. Cahill; Robert T. Holland; Robert L. MacDonald; Philip B. Ryan; Buck Scott; Ralph R. Whitney, Jr., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 204

42 F.3d 204

63 USLW 2460, Fed. Sec. L. Rep. P 98,474

HILLSON PARTNERS LIMITED PARTNERSHIP, Plaintiff-Appellant, v. ADAGE, INCORPORATED; Donald F.U. Goebert; Robert H Cahill; Robert T. Holland; Robert L. MacDonald Philip B. Ryan; Buck Scott; Ralph R Whitney, Jr., Defendants-Appellees.

No. 94-1186.

United States Court of Appeals Fourth Circuit.

Argued Sept. 29, 1994.

Decided Dec. 13, 1994.

ARGUED: Susan B. Bovee, Finkelstein, Thompson & Loughran, Washington, DC, for appellant. Joseph O. Click, Dryer, Ellis, Joseph & Mills, Washington, DC, for appellees. ON BRIEF: Burton H. Finkelstein, Lisa E. Boehley, Finkelstein, Thompson & Loughran, Washington, DC, for appellant. Michael Joseph, Richard A. Kirby, Dryer, Ellis, Joseph & Mills, Washington, DC, for appellees.

Before MICHAEL and MOTZ, Circuit Judges, and MICHAEL, United States District Judge for the Western District of Virginia, sitting by designation.

Affirmed by published opinion. Judge MOTZ wrote the opinion, in which Circuit Judge MICHAEL and District Judge MICHAEL joined.

OPINION

MOTZ, Circuit Judge:

In this case we are again called upon to determine whether a company's statements as to its business prospects constitute false statements or omissions of material fact actionable under the securities laws. Because we conclude that the statements at issue here neither misstated nor omitted material facts, we affirm the district court's dismissal of the complaint.

I.

Adage, Inc. is a publicly traded Pennsylvania corporation; its stock is listed on the NASDAQ National Market System. Through its subsidiaries, including Allister Access Controls, Inc. and Fort Orange Paper Company, Adage is involved in the businesses of specialty manufacturing, including electronics, steel processing, and recycled paper manufacturing, and real estate development and management. The president and chief executive officer of Adage at all times relevant to this lawsuit was Robert H. Cahill. The statements at the heart of this dispute were made during the period from April, 1992 through December, 1992 and concern Adage, Allister, and Fort Orange.

In an April 30, 1992 press report, Cahill was quoted as telling a group of security analysts that Adage "expects to report revenue increases" for its first quarter, ending March 31, 1992. Cahill was further quoted as attributing the increases in first quarter revenues in part to "improved performance in the Allister electronic access controls division."

On May 5, 1992, Adage issued its first quarter report in which it reported net income from continuing operations for the first quarter of 1992 of $505,000, a 45% increase over the first quarter of 1991. It attributed this increase to decreased expenses because of restructuring, "attention to detail in quality at all levels of operations," and the acquisition of a new subsidiary, RELM Communications, that increased working capital by $9.5 million. With regard to the Allister subsidiary, the report noted that:

Allister Access Controls has reduced costs and improved its gross margins. Significant sales gains should be seen as the year progresses. Additionally, as Allister's electronic components are produced by RELM, Adage's financial situation will improve.

As to Fort Orange, the report stated:

Fort Orange Paper Company continues its excellent performance. We expect these results only to improve with the savings from the cogeneration plant expected to begin this summer, the rebuilding of the forming end of the paper machine which will increase capacity by 14%, and the increased efficiency and capacity of the new 8 color press which will enhance our quality.

In a press release also issued on May 5, 1992, Cahill was quoted as saying that he was "pleased to see the current year get off to the good start we had previously forecast. This strengthens our conviction that 1992 will produce excellent results for Adage." Cahill again attributed positive first quarter earnings to decreased expenses and noted that "[i]n addition, the results reflect improvement at the Allister electronic access controls subsidiary as well as net income from RELM."

In a May 19, 1992 press release, Cahill is quoted as telling shareholders attending the company's annual meeting that Adage "is on target toward achieving the most profitable year in its history and expects to exceed, by a comfortable margin, its previous net income record of $1.7 million set in 1990;" this result was attributed to the acquisition of RELM. The May 19 press release also stated:

Later this year we are expecting the cogeneration plant at our Fort Orange Paper Company subsidiary to begin operating and yield annual savings on steam costs of $1 million pre-tax. Additional improvements to the mill scheduled for August will increase capacity by 14% adding another $1.8 million in pre-tax profits. On an annualized basis these two events will generate an additional $.32 per share to our bottom line.

On August 11, 1992, Adage released its report for the second quarter, ending June 30, 1992. The report noted that "Adage is in the midst of an excellent year. We are on track to exceed 1990, our record year for net income." It further stated that although "this profitability is in the face of dire economic conditions facing the housing industry upon which [Allister's] sales of residential garage door openers are dependent. With improvement in the housing segment, Allister's operation should significantly improve." The quarterly report also stated that "[t]he rebuilding of the Fort Orange paper machine, that will result in a 14% increase in capacity, is on schedule...." That same day Adage issued a press release in which it stated that the record second quarter and first half results kept the company "on track toward reaching its previously forecast goal of record full year profits." Adage reported net income of $506,000 for the second quarter of 1992, an enormous increase over the $435,000 net loss for the second quarter of 1991, bringing its net income for the first six months of 1992 to $1.01 million, a 617% increase over the $141,000 net income for the first six months of 1991.

On November 4, 1992, Adage announced in a press release that during the previous week it had dismissed the president and six high ranking executives of Allister. Cahill is quoted as explaining:

The termination of these executives will result in annual savings of approximately $750,000 for Allister which lost $1.2 million on revenues of $6.7 million for the six months ended June 30, 1992. Returning Allister to profitability is an important priority for Adage at this time. This reduction in personnel along with other cost saving measures we have implemented should significantly improve Allister's performance.

Eleven days later, on November 13, 1992, Adage released its report for the third quarter, ending September 30, 1992, in which it reported a net loss of $153,000, against $153,000 in net income for the third quarter of 1991; this loss was despite third quarter revenues in excess of $24 million, a 31% increase in revenues over the $18 million reported for the same quarter in 1991. The report explained that Adage's "plan for steady progress in revenues and earnings this year was briefly interrupted due to a decision to postpone short term gains in favor of long term benefits" at Fort Orange:

Unfortunately the installation [of the forming section for the paper machine] took longer than planned and we were not only out of operation at the paper mill for two weeks in August but also only running at half capacity during the month of September. Without Fort Orange's usual contribution to profit, we were only marginally profitable and did not make our plan.

In the third quarter report, Cahill also attributed Adage's "disappointing" third-quarter performance to "continued unsatisfactory performance at the Allister Access Controls subsidiary." He noted that Allister "has been underperforming for more than two years," that "nine recently appointed senior and middle management personnel" had been removed as of October 30, and that this "management change will produce annual savings of $825,000." The report concluded that "[w]ith Fort Orange back operating at improved rates ... [and] reduced costs at Allister we should have an excellent fourth quarter and see significant improvements during 1993."

Two weeks before the end of the fourth quarter, on December 15, 1992, the Wall Street Journal reported in an article headlined "Adage Expects Quarter and Year to Improve Upon 1991 Results":

Adage Inc. expects to have a better fourth quarter and year in sales and overall net income than a year ago, said Robert H. Cahill, president. Calling 1992 a transition year, Mr. Cahill said 1993 would be "a very good year" for Adage.

The article further stated that "[t]he executive is looking for 1992 sales of about $100 million, and 1993 sales of about $110 million." On March 5, 1993, Adage issued its fourth quarter and year end reports. For the fourth quarter, in fact, Adage reported net income of $231,000, an increase of $384,000 over the third quarter of 1992, but a decrease of $97,000 over that reported during the fourth quarter of 1991. For the year, it reported sales of $97,863,000 as against $75,044,000 in sales in 1991; and net income of $1,089,000, a 75% increase over the net income of $622,000 for 1991, but $700,000 less than the net income for 1990.

On August 9, 1993, Hillson Partners Limited Partnership filed this class action against Adage, Cahill, and other officers of Adage, on behalf of those who purchased Adage common stock between April 30, 1992 and March 9, 1993. The complaint alleges that the statements described above concerning Adage and its subsidiaries were materially false and misleading, and so violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (Exchange Act), ¹ 15 U.S.C. Secs. 78j(b), 78t(a); Rule 10b-5 promulgated thereunder, ...