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CASTLEROCK MANAGEMENT v. ULTRALIFE BATTERIES

September 28, 1999

CASTLEROCK MANAGEMENT, LTD., CHARLES BURNS, STANLEY OSTERN, SHAMSUDDIN SAJAN AND BABAK HONARYAR ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
ULTRALIFE BATTERIES, INC., BRUCE JAGID, MARTIN G. ROSANSKY, JOSEPH N. BARELLA, FREDERICK F. DRULARD, JOSEPH C. ABELES, ARTHUR M. LIEBERMAN, RICHARD A. HANSEN, CARL H. ROSNER, LEHMAN BROTHERS, A.G. EDWARDS & SONS, INC., PENNSYLVANIA GROUP, LTD., DEFENDANTS.



The opinion of the court was delivered by: Barry, District Judge.

OPINION

This matter comes before the court on a motion to dismiss plaintiffs' two count amended complaint filed by Ultralife Batteries, Inc. ("ULBI"), Bruce Jagid, Martin G. Rosansky, Joseph N. Barella, Frederick F. Drulard, Joseph C. Abeles, Arthur M. Lieberman, Richard A. Hansen, Carl H. Rosner (collectively as "the Individual Defendants"),*fn1 Lehman Brothers, A.G. Edwards & Sons, Inc., Pennsylvania Group, Ltd. (collectively as "the Underwriter Defendants") pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b). For the reasons which follow, the motion will be granted as to all defendants.*fn2

I. Statement of Facts

The factual underpinnings of this case are not in dispute. Before turning to the specific facts relevant here, however, some background information is necessary. ULBI "develops, manufactures and markets primary and rechargeable lithium batteries". Am. Compl. ¶ 8. ULBI's lithium batteries allegedly "are ultra-thin, light-weight and [] generally achieve longer operating time than competing batteries". Id. The advanced rechargeable batteries are "integrated into consumer electronic applications such as portable computers and cellular telephones" while the primary batteries, specifically the 9-volt battery at issue here, are "marketed to the consumer retail, security and safety equipment, medical device and specially [sic] instrument market, and [are] currently used in devices such as smoke detectors, home security devices and medical infusion pumps." Id.

On February 27, 1998, ULBI filed a Registration Statement with the Securities and Exchange Commission ("SEC"), offering to sell 2,500,000 shares of its common stock at $12.50 per share and intending to use the proceeds of the sale to "increase production capacity of its advanced rechargeable batteries." Am. Compl. ¶ 39. The Registration Statement was amended on April 3, 1998 and April 30, 1998 and incorporated a Prospectus that became effective May 4, 1998 (Registration Statements, amendments and Prospectus collectively as "the Offering documents"). See id. The Offering was a "firm commitment underwriting agreement" by several firms, including the Underwriter Defendants who represented the group of underwriters. See Feig Decl., Exh A.

Although the Offering documents primarily address the advanced rechargeable batteries, reference to the 9-volt lithium battery is made as well:

  The Company's primary battery products are based on
  its proprietary lithium-manganese dioxide technology.
  The materials used in, and the chemical reactions
  inherent to, the Company's lithium batteries provide
  significant advantages over currently available
  primary battery technologies, including lighter
  weight, longer operating time, longer shelf life, and
  a wider operating temperature range. The Company's
  primary batteries also have relatively flat voltage
  profiles which provide stable power. Conventional
  primary batteries, such as alkaline batteries, have
  sloping voltage profiles, which result in decreased
  power during discharge. While the price for the
  Company's lithium batteries is

  generally higher than commercially available alkaline
  batteries, the Company believes that the increased
  energy per unit of weight and volume of its batteries
  allows longer operating time and less frequent
  battery replacements for the Company's targeted
  applications. Therefore, the Company believes that
  its primary batteries are price competitive with
  other battery technologies on a price per watt hour
  basis.

Am. Compl. ¶ 40. The Offering documents, furthermore, state that ULBI anticipates that "profit margins from sales of 9-volt batteries will increase as production volumes increase" (id. ¶ 41) and declare that "the decrease in inventories during the six months ended December 31, 1997 is the result of continued improvement in the turnover of 9-volt battery inventories and the completion of the Company's contract to produce BA-5372 batteries for the U.S. Army." Id. ¶ 42.

Also mentioned in the Offering documents is the recently enacted Oregon law, and its impact upon the 9-volt battery market:

  The Company expects that its 9-volt lithium battery
  market has expanded as a result of a state law
  recently enacted in Oregon. The Oregon statute
  requires that, as of January 1, 1998, all
  battery-operated smoke detectors sold in that state
  must include a 10-year battery. Similar legislation
  has been recently proposed in New York State that
  would also require all smoke alarms operated solely
  by a battery to include a battery warranted to last
  10-years. The Company manufactures the only standard
  size 9-volt battery warranted to last 10-years.

Id. ¶ 43 With respect to the production facility for the 9-volt lithium battery, the Offering documents state:

  The Company believes that its 9-volt lithium battery
  production facility based in Newark, New York, is one
  of the most automated and efficient lithium battery
  production facilities of its kind currently
  operating. The Company's production facility
  currently has the capacity to produce 9-million
  9-volt lithium batteries per year with its existing
  equipment.

Id. ¶ 44.

The Offering was consummated on May 4, 1998. On May 12, 1998, ULBI announced the results "for the third quarter and first nine months of fiscal year 1998 for the period ended March 31, 1998" (the "Release") which "continued to tout its growth in the 9-volt lithium battery business". Id. ¶ 47. Noting a decline in sales, ULBI attributed the losses to a manufacturing plant fire in the United Kingdom. See id. The Release went on to note that "[p]artially offsetting the shortfall for the UK operations were a gain in 9-volt lithium battery sales, up 58% during the quarter over the last year, and higher technology contract revenues from programs that advanced both primary and rechargeable battery technology." Id. The Release further stated that:

  The demand for our 9-volt lithium battery from both
  OEM and retail customers has increased dramatically
  and with our current level of booked orders we expect
  to achieve record ...

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