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CASTLEROCK MGMT. LTD v. ULTRALIFE BATTERIES

September 28, 2000

CASTLEROCK MANAGEMENT LTD., CHARLES BURNS, STANLEY OSTERN, SHAMSUDDIN SAJAN, AND BABAK HONARYAR, ON BEHALF OF THEMSELVES AND ALL OTHER 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., AND PENNSYLVANIA MERCHANT GROUP, LTD., DEFENDANTS.



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

OPINION & ORDER

This matter comes before the Court upon motions by Defendants Ultralife Batteries, Inc. (hereinafter "Ultralife" or the "Company"), Individual Defendants Bruce Jagid, Martin G. Rosansky, Joseph N. Barella, Frederick F. Drulard, Joseph C. Abeles, Arthur M. Lieberman, Richard A. Hansen, and Carl H. Rosner (hereinafter the "Individual Defendants"), and Underwriters Lehman Brothers, A.G. Edwards & Sons, Inc. and Pennsylvania Merchant Group, Ltd. (hereinafter "Underwriters" or "Underwriter Defendants"), to dismiss Plaintiffs' Second Amended Complaint in its entirety for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6).*fn1 Having reviewed the submissions of the parties without oral argument, pursuant to Fed.R.Civ.P. 78, and for the following reasons, this Court will grant Defendants' Motions to Dismiss with prejudice.

I. BACKGROUND

Ultralife develops, manufactures and markets primary and advanced rechargeable lithium batteries. Since 1991, Ultralife has manufactured a product line of lithium primary batteries, including a 9-volt battery sold to manufacturers of smoke detectors. In March, 1997, Ultralife refocused its business strategy on the marketing of its advanced rechargeable batteries, for which Ultralife possessed its own proprietary technology; these rechargeable batteries were designed to be used in popular consumer electronic applications such as cellular telephones and portable computers. Since the Company's inception in 1991, Ultralife's primary battery business has been unprofitable. The Company has relied in large part on funds generated through public offerings of its securities to sustain its business and finance the development of its advanced, rechargeable batteries. Ultralife's initial public offering of stock was in December, 1992, with a second offering in December, 1994. In 1998, Ultralife again made a public offering of securities in order to raise the funds necessary to pursue the commercialization of its new advanced rechargeable battery.

The 1998 public offering of securities has spawned this action. Although the primary focus of the securities offering in 1998 was to raise funds for the advanced rechargeable battery, the main thrust of Plaintiffs' Second Amended Complaint is based upon statements made in the public offering documents pertaining to the 9-volt battery products.

In the 1998 Registration Statement and Prospectus (collectively referred to as the "Offering Documents"), Ultralife offered to sell 2.5 million shares of its common stock at $12.50 per share. The Offering was underwritten by a group of ten underwriters, including, inter alia, Lehman Brothers, Inc., A.G. Edwards & Sons, Inc. and Pennsylvania Merchant Group, Ltd., the Underwriter Defendants here. The Offering Documents informed the public that the sole purpose of raising equity was to develop and commercialize the advanced rechargeable battery; Ultralife stated that none of the proceeds were earmarked for any other aspect of the Company's business or operation, including its 9-volt primary battery. Ultralife's Offering Documents included five statements about the 9-volt battery that form the basis for Plaintiffs' Second Amended Complaint, which alleges violations of Sections 11, 12(2) and 15 of the Securities Act of 1933. Plaintiffs' First Amended Complaint, alleging fraudulent misstatements, was dismissed by the Honorable Maryanne Trump Barry, upon findings that: (i) none of the statements made in the Offering Documents was untrue when stated; (ii) that Plaintiffs' allegations sounded in fraud; and (iii) that Plaintiffs had not sufficiently pleaded fraud with the particularity required by Fed.R.Civ.P. 9(b). (See discussion infra). Plaintiffs were given leave to file a Second Amended Complaint to cure the First Amended Complaint's deficiencies, specifically to attempt again to plead fraud with particularity.

Rather than pleading fraud with particularity as instructed, however, Plaintiffs chose to file the Second Amended Complaint upon a theory of negligent misrepresentation or omission. The five statements in the Offering Documents alleged to be negligent misrepresentations all relate to the 9-volt battery division. The alleged misstatements are as follows:

"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 replacement 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." (Sec.Am.Cmplt. ¶ 37)
The Company "anticipates that profit margins from sales of rechargeable batteries will increase as production is automated and that profit margins from sales of 9-volt batteries will increase as production volumes increase." (Sec.Am. Cmplt. ¶ 38).
"The decrease in inventories in the last 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." (Sec.Am.Cmplt. ¶ 39).
"The Company believes that its 9-volt 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 product 9-million 9-volt lithium batteries per year with its existing equipment." (Sec.Am.Cmplt. ¶ 41).

The Offering Documents also contained cautions to investors about the substantial risks inherent in investing in Ultralife's research and development efforts. The Company warned that purchases of its shares "involved a high degree of risk," and included eight pages of detailed risk factors and cautions outlining the risks poised by Ultralife's plan for future success:

"The Company commenced operations in March 1991 and has incurred net operating losses since its inception. Losses have resulted principally from research and development, manufacturing and general and administrative costs. No assurance can be given that the Company will generated an operating profit or achieve profitability in the future."
"Rapid growth of the Company's advanced rechargeable battery business or other segments of its business may significantly strain the Company's management, operations and technical resources . . . There can be no assurance, however, that the Company's business will achieve rapid growth or that its efforts to expand its manufacturing and quality control activities will be successful or that it will be able to satisfy commercial scale production requirements on a timely and cost effective basis. . . . Failure by the Company to management its grow effectively could have an adverse effect on the Company's business, financial condition and results of operations."

(See December 22, 1999 Affidavit of Edward S. Feig, Ex. A [the Prospectus] at 8-10 (hereinafter "Feig Afft."); Sec. Am. Cmplt. ¶ 43.)

The Offering Documents also disclosed the fact that the Company had, the prior year, lowered production levels of its 9-volt battery in order to sell batteries from its inventory of previously produced batteries. Thus, the 9-volt battery production rate was operating below its normal level, which would add further strain on operations as business expanded. (See Feig Aff't, Ex. A at 26.)

On May 12, 1998, just after completion of the public offering of the securities, the Company announced that "[t]he demand for our 9-volt lithium battery from both OEM and retail customers has increased dramatically. . . ." (Sec.Am.Cmplt. ΒΆ 45.) A second press release one month later on June 11, 1998, confirmed that the record demand for its 9-volt battery ...


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