The opinion of the court was delivered by: Michael A. Telesca United States District Judge
This Document Relates to: ALL ACTIONS
This is a class action lawsuit brought on behalf of individuals ("class members" and/or "plaintiffs") who purchased or otherwise acquired Kodak securities between April 23, 2003 and September 25, 2003. Plaintiffs claim that Eastman Kodak Company ("Kodak"), CEO, Daniel A. Carp ("Carp"), CFO, Robert H. Brust ("Brust") and Controller, Robert P. Rozek ("Rozek") (all three referred to collectively as "Individual Defendants," and in combination with Kodak as "defendants") violated federal securities laws by issuing false statements and/or misrepresenting the financial condition and economic prospects of Kodak because they failed to disclose that: (1) Kodak was experiencing significant financial pressure from competitors; (2) Kodak's core film and paper business was declining (and as a consequence of the foregoing, Kodak was forced to make significant cuts to its dividend to pay for substantial restructuring expenses); (3) Kodak's future profits would decline due to the switch from the high-margin film products to the less profitable digital technology; and (4) Kodak's statements regarding its growth and progress lacked all reasonable basis when made.
Kodak denies plaintiffs' claims and moves to dismiss the Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, as well as the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. For the reasons set forth below, I hereby grant defendants' motion and dismiss plaintiffs' complaint with prejudice.
Plaintiffs are a class of Kodak's shareholders between April 23 and September 25, 2003 (the "Class Period"). Plaintiffs claim that during the Class Period, defendants issued false and misleading statements and press releases to the investing public concerning the Company's efforts with respect to the conversion from film photography to digital photography. Plaintiffs claim that several confidential witnesses have confirmed that Kodak's depiction of its prospects going forward made during the class period were without reasonable basis because it's core product (film) would not sell in the second quarter of 2003. Specifically, plaintiffs claim that Kodak had over loaded its retail market with "multi-packs" of film toward the end of 2002. The situation was so serious that Kodak sustained a $184 million loss at the end of 2002 due to customer rebates.
According to plaintiffs, Kodak's April 2003 earning's projection was further inflated because it assumed the receipt of revenues from the sales of "mini-labs" (and embedded Series 3200 software). However, it was allegedly widely understood that these mini-labs were not ready for use by Kodaks retail customers because of persistent problems with the software program. Plaintiffs claim that Kodak was well aware that the Series 3200 software was fatally flawed ten months before the start of the Class Period, yet decided to bring it to market anyway. Further, plaintiffs contend that due to the software defects from the Kodak mini-labs, certain retailers such as Walgreen's cancelled all of its orders and instead purchased mini-labs from Fuji. Consequently, plaintiffs claim that Kodak was on the losing end of the competition with Fuji since Fuji was taking over a good portion of Kodak's business at the retail level. But, according to plaintiffs, Kodak failed to deal with the increased competition with Fuji.
Kodak, on the other hand, asserts that it repeatedly warned of the competitive reality facing the Company by stating publicly that "[p]rice competition continues to exists in all marketplaces [and Kodak] faces competition from other electronics manufacturers in this market space [consumer digital products], particularly on price and technological advances." See Ex. A, p. 4.
Plaintiffs claim that on April 23, 2003 defendants forecasted in a press release and again on a conference call with analysts that "if current trends continued," second-quarter earnings would increase per share. Moreover, in response to a question regarding whether "everything is on track" relative to the roll-out of Kodak's series 3200 photo mini-lab system, defendant Carp claimed "Yeah, its gone fine. Everything will be rolling out through the U.S. in May this year ... the customer reception has been good."
Plaintiffs cite examples in their Complaint of allegedly false and misleading statements made by the defendants. Plaintiffs claim that in a press release entitled "Kodak Reports 1st Quarter Net Income of 4 Cents Per Share; Sales Rise 1 Percent to $2.740 Billion," Carp commented on the results stating in part as follows:
In these difficult times, Kodak continues to deliver on its commitment to shareholders by managing well those things within our control and We contained costs and strengthened the by pursuing our strategies for growth, ... financial position of the company by paying down debt, compared with the year-ago level, and by driving money-saving operational improvements through our Kodak Operating System. We also benefitted from the company's broad-based product portfolio, as solid demand for Health Imaging and Entertainment Imaging products and services helped offset the reduced demand for consumer film caused by the weak economy. [Emphasis added].
At the earnings conference held the same day, Carp assured investors that:
If current trends in the consumer business continue into the second quarter, it is possible that the second quarter operating earnings could fall in a range of 60 to 80 cents per share. However, we saw a pick up in consumer film consumption, we would see an upside to this . . .
Consistent with this view, our full year outlook is now falling at the low end of our $2.95 to $2.35 per share operational earnings range that we provided you in January. It is interesting and also encouraging to note that our second quarter out look, if one excludes the traditional consumer business from the analysis, is actually forecasted to grow revenues in the 5 to 9% range. While our traditional consumer markets are experiencing challenging times, I am pleased with our share performance. Our focus on cost and cash and the results of our nontraditional consumer business. Our digital portfolio continues to gain traction in the market with consumer digital cameras continuing their journey toward profitability.
Plaintiffs assert that contrary to Kodak's assurances that all was well, Kodak had already begun formally considering cutting its dividend in April 2003. Nevertheless, according to plaintiffs, defendants sought to appease shareholders rights before asking them to veto attempts to control the compensation structure of Kodak's senior executives. On May 7, 2003 the shareholders' proposal to place a check on executive compensation was defeated. However, Kodak claims that the executive compensation program, which includes three components: base salary, short-term variable pay and long-term incentive, was set forth in its 2003 Annual Proxy Statement. One month later, on June 18, 2003, defendants publicly cut Kodak's second quarter earnings guidance in half, attributing the reduction to poor film sales in the U.S. and China. This announcement caused Kodak's stock to drop 10%. On September 25, 2003, Kodak announced that it would cut its dividend by 72% and that the film sales would continue to decline by 7% per year for the foreseeable future.
Plaintiffs claim that Kodak knew or recklessly disregarded the fact that the misleading statements and omissions set out in the Complaint would adversely affect the integrity of the market for Kodak's stock and would cause the price of Kodak's common stock to become artificially inflated. Further, plaintiffs allege that the defendants acted with scienter in that defendants, by and through their employees, knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of Kodak were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities ...