Trial looms over upbeat Dataproducts statements; investor suit alleges firm's optimism was misleading.

Dataproducts Corp., partly stung by an appellate court decision Sept. 28, must now gird for a possible trial in federal court in Los Angeles on securities-fraud charges. The allegations concern whether the big Woodland Hills manufacturer hid from the public technical problems that company officials discovered in 1988 in one of their latest-technology printers.

The fraud lawsuit was filed in 1989 by a stockholder who owned just 10 shares. All of the charges were dismissed previously by the U.S. District Court in Los Angeles but, on appeal, the Ninth Circuit Court of Appeals reinstated a few charges late last month.

That appellate court said valid questions still linger concerning whether the big printer maker made unreasonably optimistic statements in a quarterly report and in a statement to the news media. It sent those issues of fraud back to L.A. federal court. No trial date has been set.

The legal issues are ones that bedevil attorneys and public-affairs personnel at many high-tech companies as they mature and sell shares to the public.

Computer companies seem especially at risk because their super-competitive market prods many to roll out new products before all the minor defects, or "bugs," are ironed out.

In the galloping world of computer-printer manufacturing, printing speed roughly doubles every four years.

"These companies are under tremendous pressure to compete with not only U.S. companies, but foreign as well," noted Thomas Loo, securities law attorney at Bryan, Cave in Santa Monica. Loo did not comment directly on the Dataproducts lawsuit, but he noted that many other high-tech companies seem compelled to put out new products with less than full reliability-testing, and so become aware of shortcomings only after the roll-out and public statements.

"People should realize that information about products has a very short life in this industry," he said.

Dataproducts officials said they would not comment on a pending lawsuit. Moreover, the once-public company has become rather press-shy since it was taken private in May 1990 when it was bought by two Japanese companies, Hitachi Koki Co. Ltd. and Nissei Sangyo Co. Ltd. In 1989 it reported a $3.8 million profit on $353 million in revenue.

Joseph H. Weiss, attorney for the stockholder suing Dataproducts, said he and client David Hanon, both of New York City, will now pursue the Dataproducts case in L.A. court. Weiss said he was happy with the appellate judges' opinion on Dataproducts' public statements.

"They said you can't just say all the good, and not point out the negative, too," Weiss summed up.

"High-tech companies are coming to the point where they can't say anything," lamented a source close to the litigation who asked not to be named.

Hanon originally sued Dataproducts over allegedly misleading the market about one of its new product lines, and concealing strategic decisions to discontinue two printers and close a production facility. He faulted many company documents, and he also sued to gain "class certification" to represent other shareholders in a class action suit.

But all claims were dismissed, except those concerning possible fraud existing in a press release dated May 20, 1988, and Dataproducts' first-quarter report, dated June 15, 1988.

The press release said Dataproducts' then-new SI 480 solid-ink printer "had received strong interest and high acclaim from users and analysts" since sales began five months earlier. (Solid ink technology relies on melting crayon-like

ink onto paper, rather than on impact printing.)

In fact, company officials considered the printer troubled, according to several court documents. Production was halted several times in 1988, and it was ceased altogether the next year, according to a company statement in September 1989.

In court filings, Dataproducts officials argued that the market in those years was aware of the problems and risks with the printer, and they pointed to reports by some industry analysts who tested it and found problems.

The appeals court did not buy that. It cited its own 1989 ruling in a similar shareholder case against Apple Computer Inc. That concerned Apple's optimistic assessment on its troubled disk drive called Twiggy.

The Apple ruling determined that "corporate insiders are not relieved of their duty to disclose material information where that information has received only brief mention in a few poorly-circulated or lightly-regarded publications." All significant, or "material" information, must be disclosed to the public under the Securities Exchange Act of 1934 and related rules.

Potentially damaging to Dataproducts' case are disclosures from Robert Kilcullen, its senior vice president and business manager for line printers. According to the circuit-court opinion, Kilcullen wrote in his corporate diary, two months before the press release was issued, "SI 480 -- cannot build it reliable."

Six months later he wrote, "SI 480 -- reputation in field bad." And later he listed details of a "cold start problem" and an ink-durability problem that caused the ink on printed pages to crack and fall off when the page was folded -- problems that senior executives at Dataproducts testified they knew about in early 1988.

In Dataproducts' first-quarter report that year, the solid-ink technology was called "superior" to laser printers and able to handle all types of papers "with virtually no variation in print quality."

Solid-ink technology has not caught on with users, compared with laser printers, which put characters on a page using lasers, or matrix printers, which pound out a pattern of dots.

In the $6.7 billion-a-year printer market, solid-ink still represents less than 1 percent of sales, and less than 10,000 units have ever sold, estimated Angele Boyd, director of printer research at International Data Corp. in Massachusetts.