It’s a Kodak Moment the company probably wasn’t planning on.
When Eastman Kodak Co. announced last week that it would receive a $765 million loan from the government to begin manufacturing generic drugs here and at a plant in Minnesota, it was met with much fanfare. And deservedly so.
After all, Rochester’s onetime largest employer has for many years been on the decline, a shell of its former self. In its heyday, Kodak had more than 60,000 people on its Rochester payroll. The company employs less than one-tenth that amount here now. And company stock for at least the last three years has languished at less than $10 a share. Until last Tuesday.
When Kodak and the U.S. International Development Finance Corp. (DFC) on July 28 announced details of the loan, Kodak shares soared from a July 27 close at $2.62 to more than $16. By Wednesday morning, shares had reached $43.45. Share price has since backed off to the $15 to $17 range due to a dilution of shares.
But on Aug. 4, The Wall Street Journal reported that the U.S. Securities and Exchange Commission is investigating the circumstances surrounding the loan. Congressional leaders also are looking into both the loan and the substantial number of shares picked up by company leaders ahead of the announcement, according to a letter sent to Kodak Executive Chairman James Continenza.
Continenza was issued 1.75 million stock options by the board the day before the loan announcement.
SEC filings show that Continenza purchased 46,700 additional shares of Kodak stock, while board member Philippe Katz purchased 5,000 shares on the same day. In an interview with CNBC following the announcement, Continenza said Kodak had been working on the loan deal for a “few months” prior to the July 28 announcement, according to the congressional letter, which was signed by James Clyburn, chairman of the select subcommittee on the coronavirus crisis; Carolyn Maloney, chairwoman of the committee on oversight and reform; and Maxine Waters, chairwoman of the committee on financial services.
“During the period when Kodak was reportedly engaged in confidential negotiations for the loan award, the company also awarded stock options to you and members of Kodak’s board of directors that are now worth millions of dollars,” the letter states. “On May 20, the company awarded 240,000 stock options to board members, which were reportedly worth approximately $4 million as of July 31.”
The lawmakers are requesting a number of documents and information from Continenza by Aug. 18 including:
• All documents and communications related to DFC’s loan to Kodak, including but not limited to documents and communications regarding:
o Kodak’s interest in obtaining a loan or entering into any agreement with the federal government to manufacture pharmaceutical ingredients;
o discussions or negotiations with DFC, the Department of Defense (DoD), the White House or any other federal agency;
o Kodak’s ability to manufacture or procure pharmaceutical ingredients;
o any solicitation or request for proposals;
o any offer, bid or proposal from your company;
o any possible commitment made by any pharmaceutical company to purchase active pharmaceutical ingredients from Kodak;
o all loan documents;
o any performance contracts associated with the loan; and
o any agreements with subcontractors, vendors, or other third-party sellers and manufacturers.
• All documents and communications related to the issuance of Kodak stock, options, or other securities to any Kodak officer or director, including but not limited to the award of options to members of Kodak’s board of directors on May 20, 2020 and to Continenza on July 27, 2020.
• All documents and communications related to the purchase or exercise of Kodak stock, options, or other securities by any Kodak officer or director, including but not limited to the share purchases by Continenza and Katz on June 23, 2020.
• A list of all meetings or phone conferences with any federal employee, official, agent, representative, or volunteer, including but not limited to any White House, DOD, or DFC employee, regarding the topics described in this letter.
And at least half a dozen law firms have said they are investigating claims against Rochester’s photo giant.
“My suspicion is it’s likely when the dust settles from the Securities and Exchange Commission looking into the matter that they will find that Kodak’s senior execs followed all the rules,” said George Conboy, chairman of Brighton Securities Corp. “I don’t have any evidence for that contention. It’s just that it is such an obvious large purchase immediately prior to a major positive event, and unless Kodak’s senior people are really stupid, they’re not going to buy unless it’s part of a disclosed regular program of purchases.”
Conboy expects the SEC to discover that Continenza’s June purchase of shares is part of a planned series of purchases and complies with all applicable securities regulations. The 1.75 million shares that were granted last week, however, is a little more curious, he said.
“Management has said that he was approved for the options a little over a year ago when they made a borrowing deal with some private equity firms that lent (Kodak) a bunch of money, and because that loan deal involved convertible debt — meaning the lenders could convert some or all of their loan to stock, which we found out a few days ago that they elected to do — the board says that they granted the CEO these options so that his existing position in the shares would not get diluted,” Conboy explained.
That, he said, was unconventional.
“It is not conventional for a board of directors to save senior management from dilution due to capital transactions. And while that’s a little curious, it’s a lot more curious why that grant finally took place Monday morning prior to the press conference,” Conboy said. “If I had to suspect, I would suspect that they said holy smokes, are we going to get around to doing this grant? We better do it. So they did it.”
Conboy also noted that everyone pointing their fingers at management for cashing in on Tuesday’s announcement could have bought the stock themselves at $2 or $3 a share in the last couple of years.
“Further, if statements from the company are correct, and I have no reason to disbelieve them, Continenza has never sold any stock, and some of the early share grants are still under water because people should remember that when Kodak came out of bankruptcy back in 2013, the shares were in the mid $20 (range),” he noted.
The DFC said in its statement last Tuesday that terms of the loan were still being worked out and that Kodak could receive all or a portion of the $765 million. And even if the company gets the full amount and is able to convert its manufacturing facility rather quickly, can they sell the generic drugs at a profit, Conboy wondered.
“How about the idea that China sells this stuff now?” Conboy said. “Kodak may have a higher cost than a Chinese company. So how does Kodak compete profitably? What we don’t know: Are the feds planning to offer some kind of tax break to pharma companies that source their stuff domestically? It might make sense.”
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