UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
------------------
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 13,542,452 shares of common stock
outstanding, net of 727,250 treasury shares, as of November 1, 2003.
ULTRALIFE BATTERIES, INC.
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 27, 2003 and December 31, 2002...........................3
Condensed Consolidated Statements of Operations -
Three and nine months ended September 27, 2003
and September 28, 2002..........................................4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 27, 2003
and September 28, 2002..........................................5
Notes to Consolidated Financial Statements............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................16
Item 3. Quantitative and Qualitative Disclosures
About Market Risks................................................26
Item 4. Controls and Procedures..............................................26
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................27
Item 6. Exhibits and Reports on Form 8-K.....................................28
Signatures...........................................................30
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
September 27, December 31,
ASSETS 2003 2002
---- ----
Current assets:
Cash and cash equivalents $ 877 $ 1,322
Available-for-sale securities 2 2
Restricted cash 50 50
Trade accounts receivable (less allowance for doubtful accounts
of $210 at September 27, 2003 and $297 at December 31, 2002) 15,842 6,200
Inventories 7,572 5,813
Prepaid expenses and other current assets 2,383 968
-------- --------
Total current assets 26,726 14,355
-------- --------
Property, plant and equipment, net 17,783 15,336
Other assets:
Investment in UTI 1,550 1,550
Technology license agreements (net of accumulated
amortization of $1,393 at September 27, 2003 and $1,318 at December 31, 2002) 58 133
-------- --------
1,608 1,683
-------- --------
Total Assets $ 46,117 $ 31,374
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 6,391 $ 816
Accounts payable 7,472 4,283
Other current liabilities 2,951 2,045
-------- --------
Total current liabilities 16,814 7,144
Long-term liabilities:
Debt and capital lease obligations 87 1,354
Grant -- 633
-------- --------
87 1,987
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding -- --
Common stock, par value $0.10 per share, authorized 40,000,000 shares
issued - 14,050,002 at September 27, 2003 and 13,579,519 at December 31, 2002) 1,405 1,358
Capital in excess of par value 117,990 115,251
Accumulated other comprehensive loss (1,066) (1,016)
Accumulated deficit (86,735) (90,972)
-------- --------
31,594 24,621
Less -- Treasury stock, at cost -- 727,250 shares 2,378 2,378
-------- --------
Total shareholders' equity 29,216 22,243
-------- --------
Total Liabilities and Shareholders' Equity $ 46,117 $ 31,374
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
Three Months Ended Nine Months Ended
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
---- ---- ---- ----
Revenues $19,874 $ 6,847 $55,412 $ 24,287
Cost of products sold 15,981 6,718 43,629 22,151
------- ------- ------- --------
Gross margin 3,893 129 11,783 2,136
Operating expenses:
Research and development 652 477 1,883 2,614
Selling, general, and administrative 2,098 1,569 6,247 5,305
Impairment of long-lived assets -- -- -- 14,318
------- ------- ------- --------
Total operating expenses 2,750 2,046 8,130 22,237
------- ------- ------- --------
Operating income (loss) 1,143 (1,917) 3,653 (20,101)
Other income (expense):
Interest income 1 33 6 39
Interest expense (144) (115) (386) (322)
Equity loss in UTI -- (959) -- (2,138)
Gain from forgiveness of debt/grant 781 -- 781 --
Miscellaneous (4) 221 183 486
------- ------- ------- --------
Income (loss) before income taxes 1,777 (2,737) 4,237 (22,036)
------- ------- ------- --------
Income taxes -- -- -- --
------- ------- ------- --------
Net income (loss) $ 1,777 $(2,737) $ 4,237 $(22,036)
======= ======= ======= ========
Earnings (loss) per share - basic $ 0.13 $ (0.21) $ 0.33 $ (1.72)
======= ======= ======= ========
Earnings (loss) per share - diluted $ 0.12 $ (0.21) $ 0.31 $ (1.72)
======= ======= ======= ========
Weighted average shares outstanding - basic 13,229 13,137 13,004 12,807
======= ======= ======= ========
Weighted average shares outstanding - diluted 14,361 13,137 13,701 12,807
======= ======= ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
Nine Months Ended
Sept 27, Sept 28,
2003 2002
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 4,237 $(22,036)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,292 2,805
Loss on asset disposal -- 4
Foreign exchange gains (188) (423)
Equity loss in UTI -- 2,138
Non-cash stock-based compensation 26 --
Non-cash gain from forgiveness of debt/grant (781) --
Impairment of long-lived assets -- 14,318
Changes in operating assets and liabilities:
Accounts receivable (9,642) (721)
Inventories (1,759) 224
Prepaid expenses and other current assets (1,415) 72
Accounts payable and other current liabilities 4,126 (414)
------- --------
Net cash used in operating activities (3,104) (4,033)
------- --------
INVESTING ACTIVITIES
Purchase of property and equipment (4,542) (893)
Proceeds from sale leaseback -- 451
Proceeds from asset disposal -- 8
Purchase of securities -- 666
Sales of securities -- 1,399
------- --------
Net cash (used in) provided by investing activities (4,542) 1,631
------- --------
FINANCING ACTIVITIES
Change in revolving credit facilities 4,908 --
Proceeds from issuance of common stock 2,260 2,350
Proceeds from issuance of debt 500 600
Principal payments on long-term debt and capital lease obligations (600) (813)
Proceeds from grant 117 395
------- --------
Net cash provided by financing activities 7,185 2,532
------- --------
Effect of exchange rate changes on cash 16 93
------- --------
(Decrease)/Increase in cash and cash equivalents (445) 223
------- --------
Cash and cash equivalents at beginning of period 1,322 706
------- --------
Cash and cash equivalents at end of period $ 877 $ 929
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 238 $ 378
======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Transition
Report on Form 10-K for the six-month period ended December 31, 2002.
As of July 1, 2002, the Company changed its monthly closing
schedule, moving to a weekly-based cycle as opposed to a calendar month -
based cycle. While the actual dates for the quarter-ends will change
slightly each year, the Company believes that there will not be any
material differences when making quarterly comparisons.
Effective December 31, 2002, the Company changed its fiscal year-end
from June 30 to December 31.
Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year
presentation.
2. IMPAIRMENT OF LONG-LIVED ASSETS
In June 2002, the Company reported a $14,318 impairment charge. This
impairment charge related to a writedown of long-lived assets in the
Company's rechargeable production operations, reflecting a change in the
Company's strategy. Changes in external economic conditions culminated in
June 2002, reflecting a slowdown in the mobile electronics marketplace and
a realization that near-term business opportunities utilizing the high
volume rechargeable production equipment had dissipated. These changes
caused the Company to shift away from high volume polymer battery
production to higher value, lower volume opportunities. The Company's
redefined strategy eliminates the need for its high volume production line
that had been built mainly to manufacture Nokia cell phone replacement
batteries. The new strategy is a three-pronged approach. First, the
Company will manufacture in-house for the higher value, lower volume
polymer rechargeable opportunities. Second, the Company will utilize its
affiliate in Taiwan, Ultralife Taiwan, Inc., as a source for both polymer
and liquid lithium cells. And third, the Company will look to other
rechargeable cell manufacturers as sources for cells that the Company can
then assemble into completed battery packs.
The impairment charge was accounted for under Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", which requires evaluating the
assets' carrying value based on future cash flows. As a result of the
impairment of the Company's fixed assets, depreciation charges were
reduced by approximately $1,800 per year.
6
3. EARNINGS (LOSS) PER SHARE
Basic earnings per share are calculated by dividing net income by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share are calculated by dividing net income,
adjusted for interest on convertible securities, by potentially dilutive
common shares, which include stock options, warrants and convertible
securities.
Net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
The impact of conversion of dilutive securities, such as stock options and
warrants, are not considered where a net loss is reported as the inclusion
of such securities would be anti-dilutive. As a result, basic loss per
share is the same as diluted loss per share.
The computation of basic and diluted earnings per share is
summarized as follows:
(In thousands, except per share data) Three Months Ended Nine Months Ended
------------------ -----------------
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
------------------------------------------------------
Net Income (a) $ 1,777 ($ 2,737) $ 4,237 ($22,036)
Effect of Dilutive Securities:
Stock Options / Warrants -- -- 44 --
Convertible Note -- -- 9 --
------------------------------------------------------
Net Income - Adjusted (b) $ 1,777 ($ 2,737) $ 4,290 ($22,036)
======================================================
Average Shares Outstanding - Basic (c) 13,229 13,137 13,004 12,807
Effect of Dilutive Securities:
Stock Options / Warrants 1,132 -- 614 --
Convertible Note -- -- 83 --
------------------------------------------------------
Average Shares Outstanding - Diluted (d) 14,361 13,137 13,701 12,807
======================================================
EPS - Basic (a/c) $ 0.13 ($ 0.21) $ 0.33 ($ 1.72)
EPS - Diluted (b/d) $ 0.12 ($ 0.21) $ 0.31 ($ 1.72)
The Company also had the equivalent of 19,000 and 2,556,000 options
and warrants outstanding for the three-month periods ended as of September
27, 2003 and September 28, 2002, respectively, and 285,000 and 2,455,000
options and warrants outstanding for the nine-month periods ended as of
September 27, 2003 and September 28, 2002, respectively, which were not
included in the computation of diluted EPS because these securities would
have been anti-dilutive for the periods presented.
4. STOCK-BASED COMPENSATION
The Company has various stock-based employee compensation plans. The
Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
which require compensation costs to be recognized based on the difference,
if any, between the quoted market price of the stock on the grant date and
the exercise price. As all options granted to employees under such plans
had an exercise price at least equal to the market value of the underlying
common stock on the date of grant, and given the fixed nature of the
equity instruments, no stock-based employee compensation cost is reflected
in net income (loss). The
7
effect on net income (loss) and earnings per share if the Company
had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment
of SFAS No. 123" (as discussed below in Note 12 - Recent Accounting
Pronouncements), to stock-based employee compensation is as follows:
Three Months Ended Nine Months Ended
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
-------------------------------------------------
Net income (loss), as reported $1,777 $(2,737) $4,237 $(22,036)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects -- -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (296) (273) (839) (926)
-------------------------------------------------
Pro forma net income (loss) $1,481 $(3,010) $3,398 $(22,962)
Earnings (loss) per share:
Basic - as reported $0.13 $(0.21) $0.33 $(1.72)
Basic - pro forma $0.11 $(0.23) $0.26 $(1.79)
Diluted - as reported $0.12 $(0.21) $0.31 $(1.72)
Diluted - pro forma $0.10 $(0.23) $0.25 $(1.79)
5. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive income (loss)
were:
Three Months Ended Nine Months Ended
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
-----------------------------------------------------
Net income (loss) $1,777 $(2,737) $4,237 $(22,036)
Foreign currency translation adjustments 15 (63) (50) (84)
-----------------------------------------------------
Total comprehensive income (loss) $1,792 $(2,800) $4,187 $(22,120)
======================================================
8
6. INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined under the first-in, first- out (FIFO) method. The composition
of inventories was:
September 27, 2003 December 31, 2002
---------------------------------------
Raw materials $6,291 $3,259
Work in process 1,437 1,882
Finished goods 1,038 1,207
---------------------------------------
8,766 6,348
Less: Reserve for obsolescence 1,194 535
---------------------------------------
$7,572 $5,813
=======================================
7. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the
following:
September 27, 2003 December 31, 2002
---------------------------------------
Land $123 $123
Buildings and leasehold improvements 1,625 1,619
Machinery and equipment 31,706 28,772
Furniture and fixtures 339 319
Computer hardware and software 1,557 1,405
Construction in progress 1,972 291
---------------------------------------
37,322 32,529
Less: Accumulated depreciation 19,539 17,193
---------------------------------------
$17,783 $15,336
=======================================
8. DEBT
In November 2001, the Company received approval for a $750
grant/loan from a federally sponsored small cities program. The grant/loan
has assisted in funding capital expansion plans that the Company expected
would lead to job creation. The Company has been reimbursed for approved
capital as it incurred the cost. In August 2002, the $750 small cities
grant/loan documentation was finalized and the Company was reimbursed
approximately $400 for costs it had incurred to date for equipment
purchases applicable under this grant/loan. During the first quarter of
2003, $117 under this grant/loan was reimbursed as the Company incurred
additional expenses and submitted requests for reimbursement. By the end
of March 2003, all $750 had been advanced to the Company. If the Company
were to meet its employment quota requirements by April 1, 2005, the loan
and all associated accrued interest would be forgiven. If the Company did
not meet its employment quota requirements, then the funds advanced and
the associated interest would be converted into a loan that will be repaid
over a seven-year period. The Company had initially recorded the proceeds
from this grant/loan as a long-term liability. In September 2003, the
Company fulfilled its obligations and had met its employment quota
requirements, and the loan was forgiven. As a result, the Company
reclassified this liability and associated accrued interest from the
Consolidated Balance Sheet and has recorded miscellaneous income of $781
in the September 2003 quarter. Interest had been accrued at a rate of 5%
per year.
On March 4, 2003, the Company completed a short-term financing to
help it meet certain working capital needs as the Company was growing
rapidly. The three-month, $500 note, which
9
accrued interest at 7.5% per annum, was converted into 125,000 shares of
common stock at $4.00 per share on June 4, 2003, at the option of the note
holder. Accrued interest was paid to the note holder on the maturity date.
On March 25, 2003, the Company's primary lending bank agreed to
amend the Company's credit facility. Among other things, this amendment
included an extension of the credit agreement through June 30, 2004, a
release of accounts receivable at the Company's U.K. subsidiary in order
to allow that subsidiary to obtain its own revolving credit facility with
a U.K. bank, and a formula adjustment in the borrowing base that enhanced
the eligible receivables related to the U.S. military in recognition of
the increasing business with the U.S. Army. Since this credit facility is
currently scheduled to expire in less than one year from the September 27,
2003 balance sheet date, all liabilities associated with this facility as
of this date have been reflected as a current liability.
On April 29, 2003, Ultralife Batteries (UK) Ltd., the Company's
wholly-owned U.K. subsidiary, completed an agreement for a revolving
credit facility with a commercial bank in the U.K. Any borrowings against
this credit facility are collateralized with that company's outstanding
accounts receivable balances. The maximum credit available to that company
under the facility is approximately $700. This credit facility provides
the Company's U.K. operation with additional financing flexibility for its
working capital needs. At September 27, 2003, the outstanding borrowings
under this revolver were $340.
9. INCOME TAXES
The liability method, prescribed by SFAS No. 109, "Accounting for
Income Taxes", is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that may be in effect
when the differences are expected to reverse. The Company recorded no
income tax benefit or expense relating to the operating results generated
during the nine-month periods ended September 27, 2003 and September 28,
2002, as such income tax benefit or expense was offset by changes in the
valuation allowance. A valuation allowance is required when it is more
likely than not that the recorded value of a deferred tax asset will not
be realized.
10. COMMITMENTS AND CONTINGENCIES
As of December 31, 2002, the Company had foreign and domestic net
operating loss carryforwards totaling approximately $78,816 that are
available to reduce future taxable income. If it is determined that a
change in ownership as defined under Internal Revenue Code Section 382 has
occurred, the net operating loss carryforwards will be subject to an
annual limitation. Such a limitation could result in the possibility of a
cash outlay for income taxes for the year ended December 31, 2003.
As of September 27, 2003, the Company had $50 in restricted cash in
support of a corporate credit card account.
As of September 27, 2003, the Company had open capital commitments
to purchase approximately $2,584 of production machinery and equipment, of
which $1,416 is expected to be reimbursed to the Company and owned by the
U.S. Army / CECOM in conjunction with the agreement announced in September
2003. Pursuant to that agreement, the U.S. Army will pay approximately
$3,100 for the installation of machinery and equipment through the end of
the first quarter of 2004, increasing the production capacity for military
batteries. As of September 27, 2003,
10
the Company had incurred expenditures of approximately $1,400 on behalf of
the U.S. Army / CECOM, which was included in other current assets on the
Consolidated Balance Sheet because the Company will invoice the U.S. Army
/ CECOM for reimbursement of these funds.
In March 1998, the Company received a $500 grant from the Empire
State Development Corporation to fund certain equipment purchases. The
grant was contingent upon the Company achieving and maintaining minimum
employment levels for a period of five years. If annual levels of
employment were not maintained, a portion of the grant might have become
repayable. Through the first four years of the grant period, the Company
met the requirements. The Company believes that it has also met the
requirements in the fifth and final year, and it has recognized this
portion of the grant into income during 2002. However, there is some
uncertainty with the interpretation of the grant agreement, and it is
possible that the Company may be required to repay $100 of the grant. The
Company believes that the likelihood of a repayment is remote, and it is
discussing its position with the Empire State Development Corporation
accordingly. At September 27, 2003, there is no balance pertaining to this
grant on the balance sheet.
The Company estimates future costs associated with expected product
failure rates, material usage and service costs in the development of its
warranty obligations. Warranty reserves, included in other current
liabilities on the Company's Consolidated Balance Sheet, are based on
historical experience of warranty claims and generally will be estimated
as a percentage of sales over the warranty period. In the event the actual
results of these items differ from the estimates, an adjustment to the
warranty obligation would be recorded. Changes in the Company's product
warranty liability during the first nine months of 2003 were as follows:
Balance at December 31, 2002 $236
Accruals for warranties issued 78
Settlements made (46)
-----
Balance at September 27, 2003 $268
=====
The Company is subject to legal proceedings and claims which arise
in the normal course of business. The Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
In conjunction with the Company's purchase/lease of its Newark, New
York facility in 1998, the Company entered into a payment-in-lieu of tax
agreement which provides the Company with real estate tax concessions upon
meeting certain conditions. In connection with this agreement, a
consulting firm performed a Phase I and II Environmental Site Assessment
which revealed the existence of contaminated soil and ground water around
one of the buildings. The Company retained an engineering firm which
estimated that the cost of remediation should be in the range of $230.
This cost, however, is merely an estimate and the cost may in fact be much
higher. In February, 1998, the Company entered into an agreement with a
third party which provides that the Company and this third party will
retain an environmental consulting firm to conduct a supplemental Phase II
investigation to verify the existence of the contaminants and further
delineate the nature of the environmental concern. The third party agreed
to reimburse the Company for fifty percent (50%) of the cost of correcting
the environmental concern on the Newark property. The Company has fully
reserved for its portion of the estimated liability, reflected as a part
of other current liabilities on the Company's Consolidated Balance Sheet.
Test sampling was completed in the spring of 2001, and the engineering
report was submitted to the New York State Department of Environmental
Conservation (NYSDEC) for review. NYSDEC reviewed the report and, in
January 2002, recommended additional testing. The Company responded by
submitting a work plan to NYSDEC, which was approved in April 2002. The
Company has sought proposals from environmental remediation firms to
complete the remedial work contained in the work plan, but it is unknown
at this time whether the final cost to remediate will be in the range of
the original estimate, given the passage of time. Because this is a
11
voluntary remediation, the Company does not have a specified time frame in
which to complete the project. The ultimate resolution of this matter may
have a significant adverse impact on the results of operations in the
period in which it is resolved. Furthermore, the Company may face claims
resulting in substantial liability which could have a material adverse
effect on the Company's business, financial condition and the results of
operations in the period in which such claims are resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein
it is asserted that the Customer's product, which is powered by an
Ultralife battery, does not operate according to the Customer's product
specification. No claim has been filed against Ultralife. However, in the
interest of fostering good customer relations, in September 2002,
Ultralife agreed to lend technical support to the Customer in defense of
its claim. The claim between the end-user and the Customer has now been
settled. Ultralife has renewed its commitment to the Customer to honor its
warranty by replacing any batteries that may be determined to be
defective. In the event a claim is filed against Ultralife and it is
ultimately determined that Ultralife's product was defective, replacement
of batteries to this Customer or end-user may have a material adverse
effect on the Company's financial position and results of operations.
11. BUSINESS SEGMENT INFORMATION
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable
batteries. The Technology Contracts segment includes revenues and related
costs associated with various government and military development
contracts. The Corporate segment consists of all other items that do not
specifically relate to the three other segments and are not considered in
the performance of the other segments.
Effective January 1, 2003, the Company revised its definition of
segment contribution for each of its segments to be defined as gross
margin (excluding the Corporate segment). Previously, segment contribution
included applicable research and development costs. The Corporate segment
now includes all of the Company's operating expenses, including research
and development costs. This change in presentation was made to be
consistent with the manner in which the Company's management views its
results from operations. Certain amounts in the prior year's segment
information have been reclassified to conform to the current year
presentation.
Three Months Ended September 27, 2003
- -------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------
Revenues $19,450 $ 293 $131 $ -- $19,874
Segment contribution 4,125 (318) 86 (2,750) 1,143
Interest expense, net (143) (143)
Equity loss in UTI -- --
Miscellaneous 777 777
Income taxes -- --
-------
Net income (loss) $ 1,777
Total assets $35,529 $3,379 $ 99 $ 7,110 $46,117
12
Three Months Ended September 28, 2002
- -------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------
Revenues $6,678 $169 $0 $ -- $6,847
Segment contribution 421 (292) 0 (2,046) (1,917)
Interest expense, net (82) (82)
Equity loss in UTI (959) (959)
Miscellaneous 221 221
Income taxes -- --
--------
Net income (loss) $(2,737)
Total assets $20,428 $4,076 $0 $8,747 $33,251
Nine Months Ended September 27, 2003
- ------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------
Revenues $53,652 $931 $829 $ -- $55,412
Segment contribution 12,297 (914) 400 (8,130) 3,653
Interest expense, net (380) (380)
Equity loss in UTI -- --
Miscellaneous 964 964
Income taxes -- --
--------
Net income (loss) $4,237
Total assets $35,529 $3,379 $99 $7,110 $46,117
Nine Months Ended September 28, 2002
- ------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------
Revenues $23,717 $327 $243 $ -- $24,287
Segment contribution 3,424 (1,310) 22 (22,237) (20,101)
Interest expense, net (283) (283)
Equity loss in UTI (2,138) (2,138)
Miscellaneous 486 486
Income taxes -- --
--------
Net income (loss) $(22,036)
Total assets $20,428 $4,076 $0 $8,747 $33,251
12. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Others
Indebtedness." This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without
change, the guidance in FASB Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others." The initial recognition
and measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantor's fiscal year-end. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The only
material guarantees that the Company has in accordance with FASB
Interpretation No. 45 are product warranties. All such guarantees have
been appropriately recorded in the financial statements.
13
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 does not permit the use of
the original SFAS No. 123 prospective method of transition for changes to
the fair value based method made in fiscal years after December 15, 2003.
The Company currently applies the intrinsic value method and has no plans
to convert to the fair value method.
In December 2002, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities." This Interpretation
requires companies to reevaluate their accounting for certain investments
in "variable interest entities." A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. A variable
interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may
be essentially passive or it may engage in research and development or
other activities on behalf of another company. Variable interest entities
are to be consolidated if the Company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The
disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements of this Interpretation have been deferred and are effective
for all periods ending after December 15, 2003. The Company has no
investments in variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The standard amends
and clarifies financial reporting for derivative instruments and for
hedging activities accounted for under SFAS No. 133 and is effective for
contracts entered into or modified, and for hedges designated, after June
30, 2003. The Company has no derivative instruments and adoption of the
standard is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." The
standard establishes how an issuer classifies and measures certain
freestanding financial instruments with characteristics of liabilities and
equity and requires that such instruments be classified as liabilities.
The standard is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of
the first interim period beginning after June 15, 2003. Adoption of the
standard has not had a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In May 2003, the Emerging Issues Task Force (EITF) issued Issue No.
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables".
EITF Issue No. 00-21 provides guidance on how to determine when an
arrangement that involves multiple revenue-generating activities or
deliverables should be divided into separate units of accounting for
revenue recognition purposes, and if this division is required, how the
arrangement consideration should be allocated among the separate units of
accounting. The guidance in this Issue is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Adoption of this Issue has not had a material impact on the Company's
consolidated financial position, results of operations or cash flows.
14
In May 2003, the EITF issued Issue No. 01-08, "Determining Whether
an Arrangement Contains a Lease". EITF Issue No. 01-08 provides guidance
on how to determine whether an arrangement contains a lease that is within
the scope of SFAS No.13, "Accounting for leases". The guidance in this
Issue is effective for arrangements agreed or committed to, or modified
after July 1, 2003. Adoption of the standard has not had a material impact
on the Company's consolidated financial position, results of operations or
cash flows.
13. SUBSEQUENT EVENTS
On October 7, 2003, the Company completed a private placement of
200,000 shares of unregistered common stock at a price of $12.50 per
share, for a total of $2,500. The net proceeds of the private placement,
$2,350, were used to advance funds to Ultralife Taiwan, Inc. (UTI), in
which Ultralife has an approximate 9.2% ownership interest. This
transaction was done in order to provide some bridge financing to UTI
while they work to complete an additional equity infusion into UTI to
support their growth plans. The transaction was recorded as a short-term
note receivable maturing on March 1, 2004 with interest accruing at 3% per
annum. The Company expects to convert this note receivable into shares of
UTI common stock on or before March 1, 2004, assuming UTI is successful in
raising additional equity capital. Pursuant to the agreement, the Company
expects to file an S-3 Registration Statement with the SEC within 30 days
of the initial transaction to initiate the process of registering these
shares for unrestricted trading. The Company accounts for its investment
in UTI using the cost method. The carrying value of the Company's 9.2%
ownership interest in UTI reflected on the Company's Consolidated Balance
Sheet as of September 27, 2003 was $1,550. The Company does not guarantee
the obligations of UTI and is not required to provide any additional
funding.
In May 2003, the Company announced a contract with the U.S. Army /
CECOM to provide BA-5390 batteries worth a total of approximately $18,600.
Unlike contract awards that result from a competitive bidding process,
this contract was an "exigent" contract, which is subject to an audit and
a final price adjustment. The contract authorized the U.S. Army / CECOM to
pay up to 50% of the total value specified, precluding any further
payments until the contract was definitized. As of September 27, 2003, the
Company had reached the 50% threshold under this contract. In the first
week of November 2003, the audit process was completed, resulting in a
reduction of the margin over the term of the contract. This lower margin
is reflected in the third quarter results, resulting in a $547 lower
margin than was anticipated under the original terms of the contract.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (In whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Transition Report on Form 10-K as of and for the six-month period
ended December 31, 2002.
The financial information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in whole dollars.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable), lithium ion and
lithium polymer rechargeable batteries for use in a wide array of applications.
The Company believes that its technologies allow the Company to offer batteries
that are flexibly configured, lightweight and generally achieve longer operating
time than many competing batteries currently available. The Company has focused
on manufacturing a family of lithium primary batteries for military, industrial
and consumer applications, which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company also supplies rechargeable lithium ion and lithium polymer batteries for
use in portable electronic applications.
Effective December 31, 2002, the Company changed its fiscal year-end from
June 30 to December 31.
For several years, the Company had incurred net operating losses primarily
as a result of funding research and development activities and, to a lesser
extent, incurring manufacturing and selling, general and administrative costs.
During the twelve month period ended June 30, 2002, the Company realigned its
resources to bring costs more in line with revenues, moving the Company closer
to achieving operating cash breakeven and profitability. In addition, the
Company refined its rechargeable strategy to allow it to be more effective in
the marketplace. As a result of the Company's focus on its key financial goals,
the Company successfully achieved operating profitability for the first time in
its history in the quarter ended March 29, 2003.
16
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The Corporate
segment consists of all other items that do not specifically relate to the three
other segments and are not considered in the performance of the other segments.
Results of Operations (in whole dollars)
Three months ended September 27, 2003 and September 28, 2002
Revenues. Consolidated revenues for the three-month period ended September
27, 2003 amounted to $19,874,000, an increase of $13,027,000, or 190%, from the
$6,847,000 reported in the same quarter in the prior year. Primary battery sales
increased $12,772,000, or 191%, from $6,678,000 last year to $19,450,000 this
year, mainly as a result of strong shipments of HiRate(R) battery products,
including sales of BA-5390 batteries used mainly in various communications and
weapons applications in the military, as well as higher 9-volt battery sales.
Rechargeable revenues rose $124,000 to $293,000 as the Company's broadened
strategy to include battery assemblies resulted in new customers. Technology
Contract revenues were $131,000 in the third quarter of 2003 as certain
milestones were met on a development contract with the U.S. Army. There were no
Technology Contract revenues reflected during the comparable three-month period
in 2002.
Cost of Products Sold. Cost of products sold totaled $15,981,000 for the
quarter ended September 27, 2003, an increase of $9,263,000, or 138% over the
same three-month period a year ago. The gross margin on consolidated revenues
for the quarter was $3,893,000, or 20% of revenues, an improvement of $3,764,000
over the $129,000, or 2% of revenues, reported in the same quarter in the prior
year. Gross margins in the Company's primary battery operations improved
$3,704,000, from $421,000 in 2002 to $4,125,000 in 2003. As a percentage of
revenues, primary battery margins amounted to 21% in the third quarter of 2003
compared with 6% in 2002. This improvement resulted mainly from higher sales and
production volumes that spread manufacturing overhead costs over a broader base,
as well as improvements in manufacturing efficiencies. In the Company's
rechargeable operations, the gross margin loss amounted to $318,000 in the third
quarter of 2003, relatively consistent with the same period in 2002. Gross
margins in the Technology Contract segment were $86,000 in the September quarter
of 2003.
During the third quarter of 2003, the Company's production volumes
continued to be limited by equipment capacity, with the workforce generally
working 13 out of 14 days in order to keep pace with product demand. As of
September 2003, the Company had more than doubled its direct labor force since
December 2002, adding more than 350 people to manufacturing operations. As a
result of this rapid growth, certain inefficiencies were inherent in the
production operations, including the need to work significant amounts of
overtime to meet customer delivery requirements and significant training and
learning curve issues. As the Company installs additional equipment to alleviate
the capacity constraints during the next several months, manufacturing
efficiencies are expected to improve as the direct labor force stabilizes and
benefits of automation are realized. In addition to labor efficiencies, the
Company expects to realize further direct material cost reductions as production
volumes increase.
Operating Expenses. Operating expenses for the three months ended
September 27, 2003 totaled $2,750,000, a $704,000 increase over the prior year's
amount of $2,046,000. Research and development charges increased $175,000 to
$652,000 in 2003 due to an increased focus in the development of military
batteries, as well as the development of opportunities for new rechargeable
batteries. Selling, general, and administrative expenses increased $529,000 to
$2,098,000 due to higher
17
compensation costs and professional fees. Overall, operating expenses as a
percentage of sales improved significantly, from 30% in the September 2002
quarter to 14% in the September 2003 quarter, as the revenue base increased.
Other Income (Expense). Interest expense, net, for the third quarter of
2003 was $143,000, an increase of $61,000 from the comparable period in 2002,
mainly as a result of higher revolving loan balances. Equity loss in Ultralife
Taiwan, Inc., (UTI) was $959,000 in the third quarter of 2002 compared with zero
in the third quarter of 2003. This change resulted from an October 2002 change
in the method of accounting for the Company's investment in UTI, from the equity
method of accounting to the cost method of accounting. In October 2002, the
Company sold a portion of its equity investment in UTI, reducing its ownership
interest from approximately 30% to approximately 10.6%. Subsequent to the
completion of this transaction, UTI has raised additional equity capital and the
Company's ownership interest in UTI has declined to approximately 9.2% as of
September 27, 2003. A $781,000 gain from the forgiveness of debt/grant was
recorded during the third quarter of 2003 as the Company fulfilled its
obligation to increase employment levels under a government-sponsored loan.
Miscellaneous income / expense changed from income of $221,000 in 2002 to an
expense of $4,000 in 2003 due to smaller gains on foreign currency translations,
primarily related to dealings with the Company's affiliate in the U.K. In July
2003, the Company reevaluated the amount of the intercompany loan and determined
that a significant portion of the loan owed by the U.K. subsidiary to the U.S.
parent company is unlikely to be repaid within the foreseeable future. As a
result, the impact of the foreign currency translations on the Consolidated
Statement of Income related to this intercompany loan balance has been
significantly diminished.
Net Income. Net income and diluted earnings per share were $1,777,000 and
$0.12, respectively, for the three months ended September 27, 2003, compared to
a net loss and loss per share of $2,737,000 and $0.21, respectively, for the
same quarter last year, primarily as a result of the reasons described above.
Average common shares outstanding used to compute basic earnings per share
increased mainly due to the Company's private equity offering in April 2002,
stock option exercises in 2003, and the conversion of a short-term note in June
2003, offset in part by the reacquisition of shares from UTI that resulted from
the Company's sale of a portion of its interest in UTI in October 2002. The
increase in the Company's stock price during 2003 and the related impact on
stock options and warrants "in the money" resulted in an additional 1,132,000
shares for the average diluted shares outstanding computation.
Nine months ended September 27, 2003 and September 28, 2002
Revenues. Consolidated revenues totaled $55,412,000 for the nine-month
period ended September 27, 2003, an increase of $31,125,000, or 128%, from the
$24,287,000 reported for the same nine months in 2002. Primary battery sales
increased $29,935,000, or 126%, from $23,717,000 last year to $53,652,000 this
year, mainly as a result of strong shipments of HiRate(R) battery products,
including sales of BA-5390 batteries used mainly in various communications and
weapons applications in the military, as well as higher 9-volt sales.
Rechargeable revenues rose $604,000 to $931,000 as the Company's broadened
strategy including battery assemblies began to develop new customers. Technology
Contract revenues increased $586,000 to $829,000 in the first nine months of
2003 as certain milestones were met on a development contract with the U.S.
Army.
Cost of Products Sold. Cost of products sold totaled $43,629,000 for the
nine months ended September 27, 2003, an increase of $21,478,000, or 97% over
the same nine-month period a year ago. The gross margin on consolidated revenues
for the nine-month period of 2003 was $11,783,000, or 21% of revenues, an
improvement of $9,647,000 over the $2,136,000, or 9% of revenues, in the same
period in the prior year. Gross margins in the Company's primary battery
operations improved $8,873,000, from $3,424,000 in 2002 to $12,297,000 in 2003.
As a percentage of revenues, primary battery margins amounted to 23% in the
first three quarters of 2003 compared with 14% in 2002. This improvement
resulted mainly from higher sales and production volumes, in addition to
manufacturing efficiencies. In
18
the Company's rechargeable operations, the gross margin loss amounted to
$914,000 in the first nine months of 2003 compared with a loss of $1,310,000 in
the same period in 2002. This improvement in the rechargeable area was the
result of higher sales volumes and the favorable impact from cost savings
initiatives that were implemented during the first quarter in 2002, as well as
lower depreciation charges. Gross margins in the Technology Contract segment
increased from $22,000 in 2002 to $400,000 in 2003 as a result of higher sales
and contracts with higher margins.
During the first nine months of 2003, the Company's production volumes
increased in order to keep pace with product demand. As a result, the Company
has more than doubled its direct labor force since December 2002, adding more
than 350 people to manufacturing operations. Certain inefficiencies in the
production operation resulting from the rapid manufacturing ramp-up, including
the need to work significant amounts of overtime to meet customer delivery
requirements, are expected to improve as the direct labor force stabilizes and
additional production equipment is installed to alleviate various manual
processes. In addition, the Company expects to realize further direct material
cost reductions over the levels achieved in the first half of 2003 as production
volumes increase.
Operating Expenses. Operating expenses for the nine months ended September
27, 2003 totaled $8,130,000, an increase of $211,000 from the prior year,
excluding the $14,318,000 impairment charge related to rechargeable assets. This
increase was primarily attributable to higher selling, general and
administrative costs, which increased $942,000, mainly as a result of higher
compensation expenses and higher professional fees. As a percentage of sales,
total operating expenses (excluding impairment charges) declined noticeably from
33% in the first nine months of 2002 to 15% in the same period in 2003, mostly
due to the higher revenue base.
Other Income (Expense). Interest expense, net, for the first nine months
of 2003 rose $97,000 to $380,000 due to interest expense associated with the
$500,000 short-term convertible note that was issued in March 2003 and higher
revolving loan balances. Equity loss in Ultralife Taiwan, Inc., (UTI) was
$2,138,000 in the first nine months of 2002 compared with zero in the same
period of 2003. This change resulted mainly from an October 2002 change in the
method of accounting for the Company's investment in UTI, from the equity method
of accounting to the cost method of accounting. In October 2002, the Company
sold a portion of its equity investment in UTI, reducing its ownership interest
from approximately 30% to approximately 10.6%. Subsequent to the completion of
this transaction, UTI has raised additional equity capital and the Company's
ownership interest in UTI has declined to approximately 9.2% as of September 27,
2003. A $781,000 gain from the forgiveness of debt/grant was recorded during the
third quarter of 2003 as the Company fulfilled its obligation to increase
employment levels under a government-sponsored loan. Miscellaneous income
decreased from $486,000 in 2002 to $183,000 in 2003 due to smaller gains on
foreign currency translations, primarily related to dealings with the Company's
affiliate in the U.K. In July 2003, the Company reevaluated the amount of the
intercompany loan and determined that a significant portion of the loan owed by
the U.K. subsidiary to the U.S. parent company is unlikely to be repaid within
the foreseeable future. As a result, the impact of the foreign currency
translations on the Consolidated Statement of Income related to this
intercompany loan balance has been significantly diminished.
Net Income. Net income and diluted earnings per share were $4,237,000 and
$0.31, respectively, for the nine month period ended September 27, 2003,
compared to a net loss and loss per share of $22,036,000 and $1.72,
respectively, for the same nine-month period last year, primarily as a result of
the reasons described above. Average common shares outstanding changed due to
the Company's private equity offering in April 2002, stock option exercises
during 2003, and the conversion of a short-term note in June 2003, offset in
part by the reacquisition of shares from UTI that resulted from the Company's
sale of a portion of its interest in UTI in October 2002. The increase in the
Company's stock price during 2003 and the related impact on stock options and
warrants "in the money" resulted in an additional 697,000 shares for the average
diluted shares outstanding computation.
19
Liquidity and Capital Resources (in whole dollars)
As of September 27, 2003, cash equivalents and available for sale
securities totaled $879,000, excluding restricted cash of $50,000. During the
nine months ended September 27, 2003, the Company used $3,104,000 of cash in
operating activities as compared to $4,033,000 for the nine months ended
September 28, 2002. During the first three quarters of 2003, the Company's net
income plus depreciation and amortization were more than offset by an increase
in working capital usage, particularly a $9,642,000 increase in accounts
receivable related to the significant rise in sales during the period. In the
nine months ended September 27, 2003, the Company used $4,542,000 to purchase
plant, property and equipment, an increase of $3,649,000 from the prior year's
capital expenditures, mainly as a result of the need to increase production
capacity for cylindrical cells as demand from military customers grew
significantly. During the nine month period ended September 27, 2003, the
Company generated $7,185,000 in funds from financing activities. The financing
activities included inflows from issuance of stock, mainly as stock options were
exercised during the period, a $500,000 90-day note converted into shares of
common stock in June 2003, and the final payment of $117,000 that was received
on a $750,000 government grant/loan, offset in part by payments on debt
obligations. In addition, the Company had accessed $4,908,000 of its revolving
credit facilities as of September 27, 2003 to finance working capital needs.
Months cost of sales in inventory at September 27, 2003 was 1.7 months
based on a rolling three-month average, compared with 2.0 months at December 31,
2002. This metric is indicative of the rapid turnaround of product to the
military and the high volume of sales during the first nine months of 2003, as
well as the Company's continuing focus to improve purchasing procedures and
inventory controls. The Company's Days Sales Outstanding (DSOs) was an average
of 50 days for the first nine months of 2003, compared with an average of 60
days for the same nine-month period in 2002. This improvement in DSOs mainly
reflects the significant increase in sales to the U.S. military and the
associated favorable impact from the timely payments made by them.
At September 27, 2003, the Company had a capital lease obligation
outstanding of $103,000 for the Company's Newark, New York offices and
manufacturing facilities.
As of September 27, 2003, the Company had open capital commitments to
purchase approximately $2,584,000 of production machinery and equipment, of
which $1,416,000 is expected to be reimbursed to the Company and owned by the
U.S. Army / CECOM in conjunction with the agreement announced in September 2003.
Pursuant to that agreement, the U.S. Army will pay approximately $3,100,000 for
the installation of machinery and equipment through the end of the first quarter
of 2004, increasing the production capacity for military batteries.
On March 25, 2003, the Company's primary lending bank and the Company
agreed to amend the Company's $15,000,000 credit facility. Among other things,
the amendment extended the maturity date to June 30, 2004, allowed for the
collateral release of accounts receivable related to the Company's subsidiary in
the U.K. affording it the ability to enter into a separate revolving credit
facility, and also revised certain limitations on customer concentration to
account for the increased sales activity with the U.S. military. The Company has
classified the portion of this debt that is due and payable as of September 27,
2003 as a short-term liability on the Consolidated Balance Sheet because the
credit facility expires in less than one year. As of September 27, 2003, the
Company had $1,467,000 outstanding under the term loan component of the credit
facility, and had $4,568,000 of borrowings outstanding under the revolver
component of the credit facility. The Company's additional borrowing capacity
under the revolver component of the credit facility as of September 27, 2003 was
approximately $4,400,000, net of outstanding letters of credit of $3,800,000. At
September 27, 2003, the Company's net worth was $29,763,000, compared to the
debt covenant requiring a minimum net worth of approximately $19,200,000.
20
On April 29, 2003, Ultralife Batteries (UK) Ltd., the Company's
wholly-owned U.K. subsidiary, completed an agreement for a revolving credit
facility with a commercial bank in the U.K. Any borrowings against this credit
facility are collateralized with that company's outstanding accounts receivable
balances. The maximum credit available to that company under the facility is
approximately $700,000. This credit facility provides the Company's U.K.
operation with additional financing flexibility for its working capital needs.
At September 27, 2003, the outstanding borrowings under this revolver were
$340,000.
In November 2001, the Company received approval for a $750,000 grant/loan
from a federally sponsored small cities program. The grant/loan has assisted in
funding capital expansion plans that the Company expected would lead to job
creation. The Company has been reimbursed for approved capital as it incurred
the cost. In August 2002, the $750,000 small cities grant/loan documentation was
finalized and the Company was reimbursed approximately $400,000 for costs it had
incurred to date for equipment purchases applicable under this grant/loan.
During the first quarter of 2003, $117,000 under this grant/loan was reimbursed
as the Company incurred additional expenses and submitted requests for
reimbursement. By the end of March 2003, all $750,000 had been advanced to the
Company. If the Company were to meet its employment quota requirements by April
1, 2005, the loan and all associated accrued interest would be forgiven. If the
Company did not meet its employment quota requirements, then the funds advanced
and the associated interest would be converted into a loan that will be repaid
over a seven-year period. The Company had initially recorded the proceeds from
this grant/loan as a long-term liability. In September 2003, the Company
fulfilled its obligations and had met its employment quota requirements, and the
loan has been forgiven. As a result, the Company reclassified this liability and
associated accrued interest from the Consolidated Balance Sheet and has recorded
miscellaneous income of $781,000 in the September 2003 quarter. Interest had
been accrued at a rate of 5% per year.
On March 4, 2003, the Company completed a short-term financing to help it
meet certain working capital needs as the Company was growing rapidly. Pursuant
to the terms of the note, the three-month, $500,000 note, which accrued interest
at 7.5% per annum, was converted into 125,000 shares of common stock at $4.00
per share on June 4, 2003. Accrued interest was paid to the note holder on the
maturity date.
During the first nine months of 2003, the Company issued 345,483 shares of
common stock as a result of exercises of stock options and warrants. The Company
received approximately $2,260,000 in cash proceeds as a result of these
transactions.
The Company is optimistic about its future prospects and growth potential.
However, the recent rapid growth of the business has created a near-term need
for certain machinery, equipment and working capital in order to increase
capacity and build product to meet demand. In certain areas of manufacturing,
the Company has been producing at or near capacity. In order to increase its
capacity in these areas, the Company has added a significant number of people
and is adding machinery and equipment to enhance its ability to continue to
fulfill this demand. The Company continues to explore other sources of capital,
including utilizing its unleveraged assets as collateral for additional
borrowing capacity, issuing debt and raising equity through a private or public
offering. Although it is evaluating these alternatives, the Company believes it
has the ability over the next 12 months to finance its operations primarily
through internally generated funds, or through the use of additional financing
that currently is available to the Company.
As described in Part II, Item 1, "Legal Proceedings", the Company is
involved in certain environmental matters with respect to its facility in
Newark, New York. Although the Company has reserved for expenses related to
this, there can be no assurance that this will be the maximum amount. The
ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.
21
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Outlook (in whole dollars)
Compared to the guidance last provided by management of $2,100,000 in
Operating Income for the third quarter of 2003, the Company actually reported
Operating Income of $1,143,000. This $957,000 shortfall resulted from (a) lower
margins per unit than originally expected under the $18,600,000 contract with
the U.S. Army / CECOM to produce BA-5390 batteries (a $547,000 impact), (b)
production disruptions due to unusually high temperatures during the summer in
the Company's U.K. facility, making it difficult to operate the humidity
controlled dry rooms effectively, and (c) equipment operating failures in the
U.S. operations due to running at levels above normal capacity. The Company does
not expect these production inefficiencies to recur in the fourth quarter of
2004, as it has added additional equipment to enhance overall production
capacity.
The Company expects revenues in its fourth quarter of calendar 2003 to
reach approximately $23,000,000, as new equipment is commissioned and overall
capacity increases. This would result in total revenues for 2003 of
approximately $78,000,000 (up from the previous guidance of approximately
$75,000,000), compared with $33,039,000 in 2002, an increase of more than 135%.
Demand for the BA-5390 battery remains very strong, and the Company continues to
respond as quickly as possible to the orders on hand. The Company's current
outlook incorporates the margin adjustments that were recently made to the
$18,600,000 BA-5390 "exigent" contract with the U.S. Army / CECOM, as well as
other possible margin adjustments on other "exigent" contracts that the Company
has, or expects to have, with them.
The Company has a fairly substantial fixed cost infrastructure to support
its overall operations. The Company believes that incremental sales volumes can
generate added gross margins in the range of 30%, based on recent results and
subject to product mix and the ability to maintain consistent levels of pricing.
Conversely, decreasing sales volumes will result in the opposite effect. During
the December 2001 and March 2002 quarters, the Company was able to significantly
reduce costs through various cost savings actions, moving it toward cash
generation and profitability. As the Company continues to grow and leverage this
infrastructure, it believes that sustainable profitability can be achieved.
The Company continues to monitor its operating costs very tightly. In the
fourth quarter of 2003, the Company is projecting operating expenses to be
relatively consistent with the first three quarters of 2003, in the range of
approximately $2,800,000.
The Company expects that operating income in the December 2003 quarter
will be approximately $2,000,000 and net income will be approximately
$1,850,000, based on the Company's projected revenues and the assumptions that
other income and expense consists only of net interest expense of approximately
$150,000 and there are no applicable income taxes. While management expects to
realize general improvements in manufacturing efficiencies during the quarter,
the holiday season is expected to result in fewer productive workdays, and
margins on the BA-5390 batteries produced for the U.S. Army / CECOM are expected
to decline due to the significantly higher contract volumes and pressure on unit
margins. This compares to an operating loss of $1,738,000 and a net loss of
$375,000 in the December 2002 quarter. For the full year of 2003, this will
result in a total operating income of approximately $5,700,000 and net income
(before applicable income taxes) of approximately $6,100,000, compared with an
operating loss of $21,839,000 and a net loss of $22,411,000, including a
$14,318,000 asset impairment charge, for the full calendar year of 2002. The
guidance previously provided called operating income in the range of $7,000,000
for the
22
year. The Company's current guidance for operating income for the full year is
less than the previous guidance due to lower margins than expected on BA-5390
contracts with the U.S. Army / CECOM, as well as capacity constraints that have
resulted in the Company being less efficient than expected during this phase of
its production ramp up.
At December 31, 2002, the Company had approximately $78,800,000 of net
operating loss carryforwards applicable to income taxes. Due to the consistent
losses reported in prior years, the Company has not reported a deferred tax
asset on its Consolidated Balance Sheet due to the uncertainty of its ability to
utilize the benefits of these tax losses in the future. As a result of the
positive earnings trend during 2003, the Company needs to reevaluate these
income tax benefits. During the fourth quarter of 2003, the Company will assess
the likelihood of being able to utilize these benefits against taxable earnings,
which may result in the recognition of a deferred tax asset on the Consolidated
Balance Sheet when this assessment is made, along with an ongoing income tax
expense on the Consolidated Statement of Income into the future. The Company is
unable to adequately quantify the amount of these impacts on the financial
statements at this time. In addition, if it is determined that a change in
ownership as defined under Internal Revenue Code Section 382 has occurred, the
net operating loss carry forwards will be subject to an annual limitation. Such
a limitation could result in the possibility of a cash outlay for income taxes
for the year ended December 31, 2003.
Looking ahead to 2004, the Company believes that total revenues will
exceed $100,000,000 for the year, a nearly 30% increase over 2003. This growth
is expected to be generated from all areas of the business. The Company has
solid order coverage from the military booked into the first half of 2004, and
the commitment by the U.S. Army to purchase approximately $3,100,000 of
machinery and equipment on the Company's behalf is an indicator that demand from
the military will continue to be strong into next year. Quarterly, revenues are
expected to be fairly consistent throughout the year at this time.
The Company's basic financial model is to drive gross margins to exceed
25% of revenues, and to drive operating expenses as a percentage of sales down
below 12%, resulting in a pre-tax operating profit margin in the range of 15%.
The Company believes that these targets can be realized by continuing to grow
the revenue base while improving manufacturing efficiencies, in addition to
monitoring operating expenses closely.
At this time, operating income for 2004 is expected to be in the range of
$11,000,000. Gross margins are expected to improve as manufacturing efficiencies
are realized with a more experienced workforce, and operating expenses as a
percentage of revenues are expected to decline.
In order to meet the significant demand from the military, the Company is
continuing to make prudent investments in capital equipment that have a very
short payback. At this time, the Company believes that expenditures for capital
projects in 2003 will be approximately $5,500,000 to $6,000,000, based on the
recent volume of orders and the expectation that demand will continue to
increase across all product lines. In addition, the Company received a contract
from the U.S. Army / CECOM whereby they will provide funding for approximately
$3,100,000 of machinery and equipment related to the production of BA-5390
batteries, to ensure that there is adequate capacity to produce at increased
volumes, if necessary. The Company will act as the intermediary to ensure proper
installation and setup, receiving reimbursement for expenditures made throughout
the process. This specific equipment will be installed on the Company's
premises, but the title to the equipment will reside with the U.S. Army. As of
September 27, 2003, the Company had incurred expenditures of approximately
$1,400,000 on behalf of the U.S. Army / CECOM, which was included in other
current assets on the Consolidated Balance Sheet because the Company will
invoice the U.S. Army / CECOM for reimbursement of these funds. Since the lead
time, in general, for ordering certain production equipment can range from six
to twelve months, the Company has had to make some up front investments in
capital in order to increase its capacity to meet anticipated demand. The recent
success and the continued outlook for growth has required the Company to make
some such investments in new equipment during 2003. The Company carefully
evaluates such projects and will only make capital investments when necessary
and when there is typically a favorable payback period.
23
As the Company's volume grows, it expects that working capital needs
related to increasing sales volumes and inventory levels will be able to be
financed by its revolving credit facility. The Company continually explores its
financing alternatives, including utilizing its unleveraged assets as collateral
for additional borrowing capacity, refinancing current debt or issuing new debt,
and raising equity through a private or public offering. Although it is
evaluating these alternatives, the Company believes it has the ability over the
next 12 months to finance its operations primarily through internally generated
funds, or through the use of additional financing that currently is available to
the Company. While the Company is confident that it will be successful in
continuing to arrange adequate financing to support its growth, there can be no
assurance that the Company will be able to do so. Therefore, this could have a
material adverse effect on the Company's business, financial position and
results of operations.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Others Indebtedness." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The only material guarantees that the
Company has in accordance with FASB Interpretation No. 45 are product
warranties. All such guarantees have been appropriately recorded in the
financial statements.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123." This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 does not permit the use of the original SFAS No. 123 prospective
method of transition for changes to the fair value based method made in fiscal
years after December 15, 2003. The Company currently applies the intrinsic value
method and has no plans to convert to the fair value method.
In December 2002, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities." This Interpretation requires companies to
reevaluate their accounting for certain investments in "variable interest
entities." A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. Variable interest entities are to be
consolidated if the Company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. The disclosure requirements of this
Interpretation are effective for all financial statements issued after January
31, 2003. The consolidation requirements of this Interpretation have been
deferred and are effective for all periods ending after December 15, 2003. The
Company has no investments in variable interest entities.
24
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." The standard amends and
clarifies financial reporting for derivative instruments and for hedging
activities accounted for under SFAS No. 133 and is effective for contracts
entered into or modified, and for hedges designated, after June 30, 2003. The
Company has no derivative instruments and adoption of the standard is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." The standard
establishes how an issuer classifies and measures certain freestanding financial
instruments with characteristics of liabilities and equity and requires that
such instruments be classified as liabilities. The standard is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. Adoption of the standard has not had a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In May 2003, the Emerging Issues Task Force (EITF) issued Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables". EITF Issue No.
00-21 provides guidance on how to determine when an arrangement that involves
multiple revenue-generating activities or deliverables should be divided into
separate units of accounting for revenue recognition purposes, and if this
division is required, how the arrangement consideration should be allocated
among the separate units of accounting. The guidance in this Issue is effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Adoption of this Issue has not had a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In May 2003, the EITF issued Issue No. 01-08, "Determining Whether an
Arrangement Contains a Lease". EITF Issue No. 01-08 provides guidance on how to
determine whether an arrangement contains a lease that is within the scope of
SFAS No.13, "Accounting for leases". The guidance in this Issue is effective for
arrangements agreed or committed to, or modified after July 1, 2003. Adoption of
the standard has not had a material impact on the Company's consolidated
financial position, results of operations or cash flows.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently invest in derivative financial instruments.
Item 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures - The Company's president
and chief executive officer (principal executive officer) and its vice
president- finance and chief financial officer (principal financial officer)
have evaluated the disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based on this evaluation, the president and chief executive
officer and vice president - finance and chief financial officer concluded that
the Company's disclosure controls and procedures were effective as of such date.
Changes In Internal Controls Over Financial Reporting - There has been
no change in the internal controls over financial reporting that occurred during
the fiscal quarter covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, the internal controls
over financial reporting.
26
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, a consulting firm performed a
Phase I and II Environmental Site Assessment which revealed the existence of
contaminated soil and ground water around one of the buildings. The Company
retained an engineering firm which estimated that the cost of remediation should
be in the range of $230,000. This cost, however, is merely an estimate and the
cost may in fact be much higher. In February, 1998, the Company entered into an
agreement with a third party which provides that the Company and this third
party will retain an environmental consulting firm to conduct a supplemental
Phase II investigation to verify the existence of the contaminants and further
delineate the nature of the environmental concern. The third party agreed to
reimburse the Company for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. The Company has fully reserved for
its portion of the estimated liability. Test sampling was completed in the
spring of 2001, and the engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed
the report and, in January 2002, recommended additional testing. The Company
responded by submitting a work plan to NYSDEC, which was approved in April 2002.
The Company has sought proposals from environmental remediation firms to
complete the remedial work contained in the work plan, but it is unknown at this
time whether the final cost to remediate will be in the range of the original
estimate, given the passage of time. Because this is a voluntary remediation,
the Company does not have a specified time frame in which to complete the
project. The ultimate resolution of this matter may have a significant adverse
impact on the results of operations in the period in which it is resolved.
Furthermore, the Company may face claims resulting in substantial liability
which could have a material adverse effect on the Company's business, financial
condition and the results of operations in the period in which such claims are
resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein it is
asserted that the Customer's product, which is powered by an Ultralife battery,
does not operate according to the Customer's product specification. No claim has
been filed against Ultralife. However, in the interest of fostering good
customer relations, in September 2002, Ultralife agreed to lend technical
support to the Customer in defense of its claim. The claim between the end-user
and the Customer has now been settled. Ultralife has renewed its commitment to
the Customer to honor its warranty by replacing any batteries that may be
determined to be defective. In the event a claim is filed against Ultralife and
it is ultimately determined that Ultralife's product was defective, replacement
of batteries to this Customer or end-user may have a material adverse effect on
the Company's financial position and results of operations.
27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Stock Purchase Agreement Dated October 7, 2003 (Three
separate but identical (other than subscription amount) stock
purchase agreements for Corsair Capital Partners, LP, Corsair
Long Short International Ltd., and Neptune Partners, LP for an
aggregate 200,000 shares for an aggregate purchase price of
$2,500,000)
10.2 Form of Registration Rights Agreement Dated October 7, 2003
(Three separate but identical registration rights agreements
for Corsair Capital Partners, LP, Corsair Long Short
International Ltd., and Neptune Partners, LP)
10.3 Loan and Subscription Agreement with Ultralife Taiwan, Inc.
Dated October 7, 2003
31.1 Section 302 Certification - CEO
31.2 Section 302 Certification - CFO
32 Section 906 Certifications
(b) Reports on Form 8-K
On July 28, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing the receipt of a
multi-million dollar order and annual contract renewal to continue
supplying its advanced 9-volt lithium battery under private label
for an existing major consumer battery-brand customer.
On July 29, 2003, the Company announced that it would report
its second quarter 2003 results for the period ended June 28, 2003
on August 7, 2003.
On July 30, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing receipt of an order
valued at $545,000 for its HiRate D-size lithium cells from one of
its U.S. battery assembly customers.
On August 5, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing a contract, valued at
$28 Million, awarded by the U.S. Army Communications Electronic
Command for its BA-5390/U battery. Shipments will begin in November
2003 and continue into the first quarter of 2004.
On August 7, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing its second quarter
2003 earnings.
On August 13, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing the receipt of a $2.9
million order for its lithium Thin Cell (R) batteries from an
undisclosed U.S. medical device maker. Cell deliveries began in
September and extend into 2004.
On August 19, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing the receipt of a $1.4
million order for its HiRate(TM) D-size lithium cells from one of
its U.S. battery assembly customers. Deliveries have begun and are
expected to continue through the first quarter of 2004.
On August 27, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing that it received
orders valued at approximately $2.6 million from the U.S. Army
Communications and Electronics Command for its BA-
28
5372/U military batteries. Deliveries against the new releases under
the NextGen II contract are expected to begin in 2004 with
deliveries into the 2nd half of the year.
On September 24, 2003, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing that it signed a
contract with the U.S. Department of the Army - Communications and
Electronics Command (CECOM) whereby the Company will receive $3.1
million to purchase, on behalf of CECOM, manufacturing equipment to
expand its BA-5390 lithium-manganese dioxide battery manufacturing
capability.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
-------------------------
(Registrant)
Date: November 6, 2003 By: /s/ John D. Kavazanjian
---------------- ------------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: November 6, 2003 By: /s/ Robert W. Fishback
---------------- ----------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
30
Exhibit 10.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made as of the 7th day
of October, 2003 between ULTRALIFE BATTERIES, INC., a Delaware corporation (the
"Company") and ______________, a _____________________ (the "Purchaser").
Recitals
The Company desires to issue and sell, and the Purchaser desires to buy,
shares of the Common Stock, $0.10 par value (the "Common Stock") of the Company
on the terms and conditions set forth in this Agreement. The Company has
authorized the sale of 200,000 shares of its Common Stock in a private placement
at a price of $12.50 per share to raise $2,500,000 of working capital, the net
proceeds of which the Company intends to use to fund a purchase of securities
issued by Ultralife Taiwan, Inc., and anticipates closing the sale of the Common
Stock upon the execution and delivery of this Agreement.
The Company and the Purchaser acknowledge that, in addition to the
Purchaser, there will be others who will be subscribing for shares of the
Company's Common Stock and that there will be a simultaneous closing of all
subscriptions.
In consideration of the covenants and conditions set forth in this
Agreement, the parties agree as follows:
1. Sale of Shares. The Company agrees to sell, transfer and assign to the
Purchaser and, subject to and in reliance upon the representations, warranties,
terms and conditions of this Agreement, the Purchaser agrees to purchase _______
newly issued shares of Common Stock or shares issued from the Company's treasury
(the "Shares") at a purchase price of $12.50 per share for an aggregate purchase
price of $_______ (the "Purchase Price").
2. Closing. The closing of the purchase and sale of the Shares (the
"Closing") shall be held concurrently with the execution and delivery of this
Agreement at the offices of the Company, or at such other time and place or in
such other manner as the Company and the Purchaser may agree. At the Closing,
upon receipt of the Purchase Price for the Shares by wire transfer to the
Company's account, the Company shall authorize its transfer agent to issue to
the Purchaser a certificate representing the Shares bearing the legend required
by Section 7 of this Agreement. Within ten (10) business days of the Closing,
the Company will cause to be delivered to the Purchaser a certificate
representing the Shares.
3. Representations of the Company. The Company represents, warrants and
agrees as follows:
(a) Neither the execution nor delivery by the Company of this
Agreement will conflict with or violate any provision of the Articles of
Incorporation, Bylaws or any agreement to which the Company is a party.
(b) The Shares, when issued, sold, delivered and paid for in
accordance with the terms hereof, will be duly and validly issued, fully paid
and nonassessable.
(c) The sale and issuance of the Shares in accordance with the terms
of and on the basis of the representations and warranties set forth in this
Agreement, will be exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act").
1
(d) This Agreement has been duly executed and delivered by the
Company and is enforceable against the Company in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, fraudulent transfer, marshalling or similar
laws affecting creditors' rights and remedies generally, and general principles
of equity, including without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Except for
any notice of issuance to or listing of additional shares with NASDAQ, if
required, all consents, approvals, orders or authorizations of, or
registrations, qualifications, designations or filings with any federal or state
governmental authority on the part of the Company required in connection with
the consummation of the transactions contemplated herein have been obtained and
are effective.
4. Representations of the Purchaser. The Purchaser represents, warrants
and agrees as follows:
(a) It is the Purchaser's present intention to acquire the Shares
hereunder for the Purchaser's own account as principal and the Shares are being
and will be acquired for the purpose of investment and not with a view to
distribution or resale except in accordance with the provisions of a
registration statement declared effective by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "Act").
(b) The Purchaser has such knowledge and experience in business and
financial matters that the Purchaser is capable of evaluating the merits and
risks of the investment contemplated hereby.
(c) The Purchaser has full power and authority to execute, deliver
and perform this Agreement and to make this Agreement the valid and enforceable
obligation of the Purchaser.
(d) The Purchaser understands that the Shares will be "restricted
securities" as that term is defined in Rule 144 under the Act and that the
Shares may only be resold in compliance with applicable federal and state
securities laws.
(e) The Purchaser's domicile is located at the Purchaser's address
set forth on the signature page hereto.
(f) The Purchaser is an "Accredited Investor" as defined in Rule
501(a) of the Act, a copy of which is set forth on Exhibit A to this Agreement,
and the Purchaser has certified to the Company the basis for that Purchaser's
Accredited Investor status by checking the appropriate category on Exhibit A and
signing and dating that Exhibit.
(g) The Purchaser has no contract, understanding, agreement or
arrangement with any person to sell, transfer or pledge to such person or anyone
else any of the Shares the Purchaser hereby purchases (in whole or in part) and
that the Purchaser has no present plans to enter into any such contract,
undertaking, agreement or arrangement.
(h) The Purchaser will provide, if requested, any additional
information that may be requested or required to determine the Purchaser's
eligibility to purchase the Shares.
(i) The Purchaser acknowledges that the Purchaser's representations,
warranties, acknowledgements and agreements in this Agreement will be relied
upon by the Company in determining the Purchaser's suitability as a purchaser of
the Shares.
(j) The Purchaser has not retained a broker or finder in connection
with the Purchaser's purchase of the Shares and to the Purchaser's knowledge
there are no other brokers or finders entitled to compensation in connection
with the sale of the Shares to the Purchaser other than Richard Hansen and
William Gomez, who shall share in the fee to be paid by the Company to Richard
Hansen.
5. Company Information. The Purchaser and the Company agree that each is
capable of evaluating the merits and risks of the purchase and sale,
respectively, of the Shares hereunder. The Purchaser acknowledges that it has
reviewed the Company's (i) Annual Report on Form 10-K for the transition period
ended December 31, 2002 (the "Transition Report"), as filed with the SEC
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); (ii) Proxy Statement for its 2003 Annual Meeting of Shareholders; (iii)
Quarterly Reports on Form 10-Q, as amended, for the fiscal quarters ended March
29, 2003 and June 28, 2003 as filed with the SEC pursuant to the Exchange Act;
and (iv) all other reports filed with the SEC since June 28, 2003. Since June
28,
2
2003, the Company has filed with the SEC all reports, documents, definitive
proxy statements and all other filings required to be filed with the SEC. The
Purchaser further acknowledges that it has reviewed the Risk Factors of the
Company set forth in the Transition Report and the additional Risk Factors set
forth on Exhibit B to this Agreement. The Purchaser further acknowledges that it
has been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Shares that have been requested by the Purchaser. The Purchaser further
acknowledges that it has been afforded the opportunity to meet with and ask
questions of senior officers of the Company concerning the Company's business,
finance and operations, including in particular the Company's business, finances
and operations since June 28, 2003.
6. Registration Rights. Within thirty (30) days of the date of Closing,
the Company shall use its best efforts to prepare and file with the SEC a resale
registration statement (the "Registration Statement") on Form S-3 covering the
Shares (including any shares of the Company's Common Stock issued as, or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as, a dividend or other distribution with respect to, or in
exchange for or in replacement of, the Shares), provided that Form S-3 is
available to the Company for such purpose. The Company shall take all actions
necessary or desirable to qualify to use Form S-3 for the registration of the
resale of the Shares. The Company shall be required to file only one
Registration Statement. The Purchaser and the Company agree that promptly after
the Closing, they shall enter into a separate Registration Rights Agreement
consistent with the provisions of this Section 6, which Registration Rights
Agreement shall contain customary representations and warranties and provisions
regarding indemnification and contribution.
7. Legend. The Purchaser understands and acknowledges that the
certificates evidencing the Shares will bear the following legend: "THE
SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES"
AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD
OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT; (II) IN COMPLIANCE WITH
RULE 144; OR (III) AFTER RECEIPT OF AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ULTRALIFE BATTERIES, INC. THAT SUCH REGISTRATION OR COMPLIANCE
IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION."
8. Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed an original but all of which will be deemed one instrument.
9. Expenses and Taxes. The Company shall pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution,
delivery and performance of this Agreement and any other instruments and
documents to be delivered hereunder and agrees to save the Purchaser harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes and filing fees.
10. Survival of Representations and Warranties. All representations and
warranties made in this Agreement or any other instrument or document delivered
in connection herewith shall survive the execution and delivery hereof.
11. Prior Agreements. This Agreement constitutes the entire agreement
between the parties and supersedes any prior or contemporaneous understandings
or agreements concerning the subject matter hereof.
12. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York. The rights of the parties
under this Agreement are unique and, accordingly, the parties shall, in addition
to such other remedies as may be available to any of them at law or in equity,
have the right to enforce their rights hereunder by actions of specific
performance to the extent permitted by law.
14. Headings. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of the Agreement for any other purpose.
3
15. Amendments and Waivers. This Agreement may not be amended,
supplemented or otherwise modified except by an instrument in writing signed by
both parties that specifically refers to this Agreement. Either party hereto
may, only by an instrument in writing, waive compliance by the other party
hereto with any term or provision of this Agreement on the part of such other
party to be performed or complied with. The waiver by a party hereto of a breach
of any term or provision of this Agreement shall not be construed as a waiver of
any subsequent breach. Any amended or waiver effected in accordance with this
Section 15 shall be binding upon each party and its permitted assigns.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ULTRALIFE BATTERIES, INC.
By:___________________________________________
Name:
Title:
THE PURCHASER: _______________________________
Print Name
______________________________________________
Signature
Address: _____________________________________
______________________________________________
______________________________________________
Social Security Number or
Employment Identification Number: ____________
5
EXHIBIT A
Section 501(a) of the Securities Act of 1933, as amended:
"As used in Regulation D (17 CFR ss.ss. 230.501-230.508), the following terms
shall have the meaning indicated:
(a) Accredited investor. "Accredited investor" shall mean any person who
comes within any of the following categories, or who the issuer
reasonably believes comes within any of the following categories, at
the time of the sale of the securities to that person:
(1) Any bank as defined in section 3(a)(2) of the [Securities Act
of 1933, as amended (the "Act")], or any savings and loan
association or other institution as defined in section
3(a)(5)(A) of the Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered pursuant
to section 15 of the Securities Exchange Act of 1934; any
insurance company as defined in section 2(13) of the Act; any
investment company registered under the Investment Company Act
of 1940 or a business development company as defined in
section 2(a)(48) of that Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration
under section 301(c) or (d) of the Small Business Investment
Act of 1958; any plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality
of a state or its political subdivisions, for the benefit of
its employees, if such plan has total assets in excess of
$5,000,000; any employee benefit plan within the meaning of
the Employee Retirement Income Security Act of 1974 if the
investment decision is made by a plan fiduciary, as defined in
section 3(21) of such Act, which is either a bank, savings and
loan association, insurance company, or registered adviser, or
if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment
decisions made solely by persons that are accredited
investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific
purpose of acquiring the securities offered, with total assets
in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the
issuer of the securities being offered or sold, or any
director, executive officer, or general partner of a general
partner of that issuer;
(5) Any natural person whose individual net worth, or joint net
worth with that person's spouse, at the time of his purchase
exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income
with that person's spouse in excess of $300,000 in each of
those years and has a reasonable expectation of reaching the
same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person
as described in ss. 230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited
investors."
The undersigned Purchaser hereby certifies to the Company that the Purchaser is
an "Accredited Investor" on the basis of the box checked above.
PURCHASER
Date: __________________________ _________________________________
Print Name
_________________________________
Signature
6
EXHIBIT B
RISK FACTORS
Please carefully consider all information provided by the Company. In
particular, the Risk Factors set forth in the Company's Transition Report and
the following factors could cause actual results to differ materially from the
matters described in the forward-looking statements, with material and adverse
effects on the Company's business, operating results, financial condition and
the value of Ultralife Batteries, Inc. stock.
Risks Related to Company's Ability to Finance Ongoing Operations and Projected
Growth
While the Company believes that its revenue growth projections and its
ongoing cost controls will allow it to continue to generate cash and achieve
profitability, there is no assurance that the Company will be able to be
successful. The Company's future cash flows from operations, combined with its
accessibility to cash and credit, may not be sufficient to allow the Company to
finance ongoing operations or to make required investments for future growth.
The Company may need to seek additional credit or access capital markets for
additional funds. There is no assurance that the Company would be successful in
this regard.
Risks Related to Ability to Staff Adequately
As the Company has added equipment to increase production capacity, so has
it increased its number of employees. The ability of the Company to continue
increased production levels depends on its ability to attract, hire and retain a
sufficient number of employees at its Newark, New York production facility.
While the Company has retained the services of an employment agency to assist in
this endeavor, there is no assurance that the Company will be able to adequately
staff its Newark production facility. The inability to staff adequately would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Timely Delivery of Quality Products from Suppliers
The Company relies upon its suppliers and vendors to provide quality
materials, components and equipment for its use in production. The Company's
ability to meet demand for its product and to maintain adequate production
schedules for the manufacture of cells and batteries is vital for its continued
success. In the event one or more of these suppliers or vendors is significantly
late in meeting its delivery schedule to the Company, or if one or more
demonstrates a serious inability to consistently supply quality goods, the
Company may fall behind in its production schedule which could, in turn, result
in late deliveries to its customers. Continued or habitual late deliveries to
customers could lead to the cancellation of orders and/or loss of customers,
either of which could have a material adverse effect on the Company's business.
Risks Related to Investment in Ultralife Taiwan, Inc.
The Company intends to use the net proceeds of the private placement
contemplated by the Stock Purchase Agreement to which this Exhibit B is attached
to fund a short-term loan and ultimate purchase of securities issued by
Ultralife Taiwan, Inc. The terms and conditions of that transaction have not yet
been finalized. Because of the precarious financial condition of Ultralife
Taiwan, the Company may not be able to recover or realize any gain on its
investment which could adversely affect the financial condition of the Company
and the market value of its Common Stock.
7
Exhibit 10.2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of the 7th
day of October, 2003 between ULTRALIFE BATTERIES, INC., a Delaware corporation
(the "Company") and _________________________, a ______________________________
(the "Purchaser").
The Company and the Purchaser have entered into that certain Stock
Purchase Agreement (the "Stock Purchase Agreement") pursuant to which the
Purchaser purchased _______ newly-issued shares of the Company's Common Stock or
shares issued from the Company's treasury (the "Shares") at a purchase price of
$12.50 per share and also pursuant to which the Company agreed to register the
Shares for the benefit of the Purchaser.
Capitalized terms not defined in this Agreement shall have the meanings
given them in the Stock Purchase Agreement.
In consideration of the covenants and conditions set forth in this
Agreement, the parties agree as follows:
A. REGISTRATION; COMPLIANCE WITH THE SECURITIES ACT; COVENANTS
a.1 Registration of Shares
a.1.1 Registration Statement; Expenses
The Company shall:
(a) use its best efforts to prepare and file with the Securities and
Exchange Commission (the "Commission") within thirty (30) days of the date of
Closing a Registration Statement on Form S-3 (or, if the Company is ineligible
to use Form S-3, then on Form S-1) relating to the sale of the Shares by the
Purchaser from time to time on the Nasdaq National Market (or the facilities of
any national securities exchange on which the Company's Common Stock is then
traded) or in privately negotiated transactions (the "Registration Statement");
(b) provide to the Purchaser any information required to permit the sale
of the Shares under Rule 144A of the Securities Act;
(c) subject to receipt of necessary information from the Purchaser, use
its reasonable best efforts to cause the Commission to declare the Registration
Statement effective as soon as practicable after the Registration Statement is
filed with the Commission;
1
(d) notify Purchaser promptly upon the Registration Statement, and any
post-effective amendment thereto, being declared effective by the Commission;
(e) prepare and file with the Commission such amendments and supplements
to the Registration Statement and the Prospectus (as defined in Section 1.3.1
below) and take such other action, if any, as may be necessary to keep the
Registration Statement effective until the earlier of (i) the date on which the
Shares may be resold by the Purchaser without registration and without regard to
any volume limitations by reason of Rule 144(k) under the Securities Act or any
other rule of similar effect or (ii) all of the Shares have been sold pursuant
to the Registration Statement or Rule 144 under the Securities Act or any other
rule of similar effect;
(f) promptly furnish to the Purchaser with respect to the Shares
registered under the Registration Statement such reasonable number of copies of
the Prospectus, including any supplements to or amendments of the Prospectus, in
order to facilitate the public sale or other disposition of all or any of the
Shares by the Purchaser;
(g) during the period when copies of the Prospectus are required to be
delivered under the Securities Act or the Exchange Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of the
Exchange Act within the time periods required by the Exchange Act and the rules
and regulations promulgated thereunder;
(h) file documents required of the Company for customary Blue Sky
clearance in all states requiring Blue Sky clearance; provided, however, that
the Company shall not be required to qualify to do business or consent to
service of process in any jurisdiction in which it is not now so qualified or
has not so consented;
(i) advise the Purchaser, promptly after it shall receive notice or obtain
knowledge of the issuance of any stop order by the Commission delaying or
suspending the effectiveness of the Registration Statement or of the initiation
of any proceeding for that purpose; and it will promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal at the
earliest practicable moment if such stop order should be issued; and
(j) bear all expenses in connection with the procedures in paragraphs (a)
through (i) of this Section 1.1.1 and the registration of the Shares pursuant to
the Registration Statement.
a.2 Transfer of Shares After Registration
Purchaser agrees that the Purchaser will not effect any disposition of the
Shares or right to purchase the Shares that would constitute a sale within the
meaning of the Securities Act, except as contemplated in the Registration
Statement referred to in Section 1.1 or as otherwise permitted by law, and that
the Purchaser will promptly notify the Company of any changes in the information
set forth in the Registration Statement regarding the Purchaser or the
Purchaser's plan of distribution.
a.3 Indemnification
For the purpose of this Section 1.3, the term "Registration Statement" shall
include any preliminary or final prospectus, exhibit, supplement or amendment
included in or relating to the Registration Statement referred to in Section
1.1.
a.3.1 Indemnification by the Company
The Company agrees to indemnify and hold harmless the Purchaser and each person,
if any, who controls the Purchaser within the meaning of the Securities Act,
against any losses, claims, damages, liabilities or expenses, joint or several,
to which the Purchaser or such controlling person may become subject, under the
Securities Act, the Exchange Act, or any other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, including the Prospectus, financial statements and schedules, and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the
2
Registration Statement, including any information deemed to be a part thereof as
of the time of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant
to Rule 434, of the Rules and Regulations, or the Prospectus, in the form first
filed with the Commission pursuant to Rule 424(b) of the Regulations, or filed
as part of the Registration Statement at the time of effectiveness if no Rule
424(b) filing is required (the "Prospectus"), or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state in any of them a material fact required to be stated therein or necessary
to make the statements in any of them, in light of the circumstances under which
they were made, not misleading, or arise out of or are based in whole or in part
on any inaccuracy in the representations and warranties of the Company contained
in this Agreement, or any failure of the Company to perform its obligations
under this Agreement or under applicable law, and will reimburse the Purchaser
and each such controlling person for any legal and other expenses as such
expenses are reasonably incurred by the Purchaser or such controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon (i) an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, the Prospectus or any amendment or
supplement of the Registration Statement or Prospectus in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
the Purchaser expressly for use in the Registration Statement or the Prospectus,
or (ii) the failure of the Purchaser to comply with the covenants and agreements
contained in the Stock Purchase Agreement or in Section 1.2 of this Agreement
respecting resale of the Shares, or (iii) the inaccuracy of any representations
made by the Purchaser in this Agreement or (iv) any untrue statement or omission
of a material fact required to make such statement not misleading in any
Prospectus that is corrected in any subsequent Prospectus that was delivered to
the Purchaser before the pertinent sale or sales by the Purchaser.
a.3.2 Indemnification by the Purchaser
The Purchaser will indemnify and hold harmless the Company, each of its
directors, each of its officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of the Securities
Act, against any losses, claims, damages, liabilities or expenses to which the
Company, each of its directors, each of its officers who signed the Registration
Statement or controlling person may become subject, under the Securities Act,
the Exchange Act, or any other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Purchaser, which consent
shall not be unreasonably withheld) insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon (i) any failure on the part of the Purchaser to
comply with the covenants and agreements contained in the Stock Purchase
Agreement or Section 1.2 of this Agreement respecting the sale of the Shares or
(ii) the inaccuracy of any representation made by the Purchaser in this
Agreement or (iii) any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, the Prospectus, or any amendment or
supplement to the Registration Statement or Prospectus, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, the Prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
to the Company by or on behalf of the Purchaser expressly for use therein;
provided, however, that the Purchaser shall not be liable for any such untrue or
alleged untrue statement or omission or alleged omission of which the Purchaser
has delivered to the Company in writing a correction before the occurrence of
the transaction from which such loss was incurred, and the Purchaser will
reimburse the Company, each of its directors, each of its officers who signed
the Registration Statement or controlling person for any legal and other expense
reasonably incurred by the Company, each of its directors, each of its officers
who signed the Registration Statement or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action.
a.3.3 Indemnification Procedure
(a) Promptly after receipt by an indemnified party under this Section 1.3
of notice of the threat or commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 1.3, promptly notify the indemnifying party in writing of the
claim; but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any
3
indemnified party for contribution or otherwise under the indemnity agreement
contained in this Section 1.3 or to the extent it is not prejudiced as a result
of such failure.
(b) In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it or other indemnified parties that are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7.3 for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless:
(i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the preceding sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one separate counsel,
approved by such indemnifying party representing all of the indemnified parties
who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of action, in each
of which cases the reasonable fees and expenses of counsel shall be at the
expense of the indemnifying party. Notwithstanding the provisions of this
Section 1.3, the Purchaser shall not be liable for any indemnification
obligation under this Agreement in excess of the amount of net proceeds received
by the Purchaser from the sale of the Shares.
a.3.4 Contribution
If the indemnification provided for in this Section 1.3 is required by its terms
but is for any reason held to be unavailable to or otherwise insufficient to
hold harmless an indemnified party under this Section 1.3 in respect to any
losses, claims, damages, liabilities or expenses referred to in this Agreement,
then each applicable indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of any losses, claims, damages,
liabilities or expenses referred to in this Agreement
(a) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Purchaser from the placement of Common Stock or
(b) if the allocation provided by clause (a) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (a) above but the relative fault of the
Company and the Purchaser in connection with the statements or omissions or
inaccuracies in the representations and warranties in this Agreement that
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations.
The respective relative benefits received by the Company on the one hand and the
Purchaser on the other shall be deemed to be in the same proportion as the
amount paid by the Purchaser to the Company pursuant to this Agreement for the
Shares purchased by the Purchaser that were sold pursuant to the Registration
Statement bears to the difference (the "Difference") between the amount the
Purchaser paid for the Shares that were sold pursuant to the Registration
Statement and the amount received by the Purchaser from such sale. The relative
fault of the Company and the Purchaser shall be determined by reference to,
among other things, whether the untrue or alleged statement of a material fact
or the omission or alleged omission to state a material fact or the inaccurate
or the alleged inaccurate representation or warranty relates to information
supplied by the Company or by the Purchaser
4
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject to the
limitations set forth in Section 1.3.3, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in Section 1.3.3 with respect to
the notice of the threat or commencement of any threat or action shall apply if
a claim for contribution is to be made under this Section 1.3.4; provided,
however, that no additional notice shall be required with respect to any threat
or action for which notice has been given under Section 1.3 for purposes of
indemnification. The Company and each Purchaser agree that it would not be just
and equitable if contribution pursuant to this Section 1.3 were determined
solely by pro rata allocation (even if the Purchaser were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this Section 1.3, the Purchaser shall not be
required to contribute any amount in excess of the amount by which the
Difference exceeds the amount of any damages that the Purchaser has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
a.4 Termination of Conditions and Obligations
The restrictions imposed by the Stock Purchase Agreement or this Agreement upon
the transferability of the Shares shall cease and terminate as to any particular
number of the Shares upon the passage of two years from the Closing Date or at
such time as an opinion of counsel satisfactory in form and substance to the
Company shall have been rendered to the effect that such conditions are not
necessary in order to comply with the Securities Act.
a.5 Information Available
From the date of this Agreement through the date the Registration Statement
covering the resale of Shares owned by the Purchaser is no longer effective, the
Company will furnish to the Purchaser:
(a) as soon as practicable after available (but in the case of the
Company's Annual Report to Shareholders, within 90 days after the end of each
fiscal year of the Company), one copy of
(i) its Annual Report to Stockholders (which Annual Report shall
contain financial statements audited in accordance with generally accepted
accounting principles by a national firm of certified public accountants);
(ii) if not included in substance in the Annual Report to
Stockholders, its Annual Report on Form 10-K;
(iii) if not included in substance in its Quarterly Reports to
Stockholders, its quarterly reports on Form 10-Q; and
(iv) a full copy of the particular Registration Statement covering
the Shares (the foregoing, in each case, excluding exhibits);
(b) upon the request of the Purchaser, a reasonable number of copies of
the Prospectus to supply to any other party requiring the Prospectus.
a.6 Rule 144 Information
Until the earlier of (i) the date on which the Shares may be resold by the
Purchaser without registration and without regard to any volume limitations by
reason of Rule 144(k) under the Securities Act or any other rule of similar
effect or (ii) all of the Shares have been sold pursuant to the Registration
Statement or Rule 144 under the Securities Act or any other rule of similar
effect, the Company shall file all reports required to be filed by it under the
Securities Act, the Rules and Regulations and the Exchange Act and shall take
such further action to the extent required to enable the Purchasers to sell the
Shares pursuant to Rule 144 under the Securities Act (as such rule may be
amended from time to time).
5
B. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER
b.1 Securities Law Representations and Warranties
The Purchaser represents, warrants and covenants to the Company as
follows:
(a) The Purchaser has acquired the Shares for the Purchaser's own account
for investment only, and has no present intention of distributing any of the
Shares, nor any arrangement or understanding with any other persons regarding
the distribution of the Shares within the meaning of Section 2(11) of the
Securities Act, other than as contemplated in Section 1 of this Agreement.
(b) The Purchaser will not, directly or indirectly, offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) any of the Shares except in compliance
with the Securities Act and rules and regulations promulgated thereunder the
"Rules and Regulations").
(c) The Purchaser has completed or caused to be completed the Registration
Statement Questionnaire, attached to this Agreement as Appendix I, for use in
preparation of the Registration Statement, and the answers to the Questionnaire
are true and correct as of the date of this Agreement and will be true and
correct as of the effective date of the Registration Statement; provided,
however, that the Purchaser shall be entitled to update such information by
providing notice thereof to the Company before the effective date of the
Registration Statement.
b.2 Resales of Shares
(a) The Purchaser hereby covenants with the Company not to make any sale
of the Shares without satisfying the requirements of the Securities Act and the
Rules and Regulations, including, in the event of any resale under the
Registration Statement, the prospectus delivery requirements under the
Securities Act, and the Purchaser acknowledges and agrees that such Shares are
not transferable on the books of the Company pursuant to a resale under the
Registration statement unless the certificate submitted to the transfer agent
evidencing the Shares is accompanied by a separate certificate
(i) in the form of Appendix II to this Agreement;
(ii) executed by the Purchaser individually, or if the Purchaser is
an entity, by an officer of, or other authorized person designated by, the
Purchaser; and
(iii) to the effect that (a) the Shares have been sold in accordance
with the Registration Statement and (b) the requirement of delivering a current
prospectus has been satisfied.
(b) The Purchaser acknowledges that there may occasionally be times when
the Company determines, in good faith following consultation with its Board of
Directors or a committee thereof, the use of the Prospectus forming a part of
the Registration Statement should be suspended until such time as an amendment
or supplement to the Registration Statement or the Prospectus has been filed by
the Company with the Commission and any such amendment to the Registration
Statement is declared effective by the Commission, or until such time as the
Company has filed an appropriate report with the Commission pursuant to the
Exchange Act. The Purchaser hereby covenants that the Purchaser will not sell
any Shares pursuant to the Prospectus during the period commencing at the time
at which the Company gives the Purchaser written notice of the suspension of the
use of the Prospectus and ending at the time the Company gives the Purchaser
written notice that the Purchaser may thereafter effect sales pursuant to the
Prospectus. The Company may, upon written notice to the Purchaser, suspend the
use of the Prospectus for up to thirty (30) days in any 365-day period based on
the reasonable determination of the Company's Board of Directors that there is a
significant business purpose for such determination, such as pending corporate
developments, public filings with the Commission or similar events. The Company
shall in no event be required to disclose the business purpose for which it has
suspended the use of the Prospectus if the Company determines in its good faith
judgment that the business purpose should remain confidential. In addition, the
Company shall notify each Purchaser (i) of any request by the Commission for an
amendment or any supplement to such Registration Statement or the Prospectus, or
any other information request by any other governmental agency directly relating
to
6
the sale of Shares, and (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of the Prospectus or the initiation or threat
of any proceeding for that purpose.
(c) The Purchaser further covenants to notify the Company promptly of the
sale of any of the Shares, other than sales pursuant to the Registration
Statement or sales upon termination of the transfer restrictions pursuant to
Section 1.4 of this Agreement.
3. MISCELLANEOUS
3.1 Counterparts
This Agreement may be executed in counterparts, each of which will be
deemed an original but all of which will be deemed one instrument.
3.2 Survival of Representations and Warranties
All representations and warranties made in this Agreement or any other
instrument or document delivered in connection herewith shall survive the
execution and delivery hereof.
3.3 Prior Agreements
This Agreement constitutes the entire agreement between the parties and
supersedes any prior or contemporaneous understandings or agreements concerning
the subject matter hereof.
3.4 Severability
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
3.5 Governing Law
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York. The rights of the parties under this Agreement
are unique and, accordingly, the parties shall, in addition to such other
remedies as may be available to any of them at law or in equity, have the right
to enforce their rights hereunder by actions of specific performance to the
extend permitted by law.
3.6 Headings
Section and subsection headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of the Agreement
for any other purpose.
3.7 Amendments and Waivers
This Agreement may not be amended, supplemented or otherwise modified
except by an instrument in writing signed by both parties that specifically
refers to this Agreement. Either party hereto may, only by an instrument in
writing, waive compliance by the other party hereto with any term or provision
of this Agreement on the part of such other party to be performed or complied
with. The waiver by a party hereto of a breach of any term or provision of this
Agreement shall not be construed as a waiver of any subsequent breach. Any
amendment or waiver effected in accordance with this Section 2.7 shall be
binding upon each party and its permitted assigns.
7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ULTRALIFE BATTERIES, INC.
By: ___________________________________
Name: _________________________________
Title: ________________________________
_______________________________________
_______________________________________
Print Name:
_______________________________________
Signature
8
APPENDIX I
ULTRALIFE BATTERIES, INC.
REGISTRATION STATEMENT QUESTIONNAIRE
In connection with the preparation of the Registration Statement, please provide
us with the following information:
A. Pursuant to the "Selling Stockholder" section of the Registration
Statement, please state your or your organization's name exactly as it
should appear in the Registration Statement:
_________________________________________
B. Please provide the number of shares that you or your organization will own
immediately after Closing, including those Shares purchased by you or your
organization pursuant to this Purchase Agreement and those shares
purchased by you or your organization through other transactions:
_________________________________________
C. Have you or your organization had any position, office or other material
relationship within the past three years with the Company or its
affiliates?
_____ Yes _____ No
If yes, please indicate the nature of any such relationships below:
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
9
APPENDIX II
PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE
The undersigned, an officer of, or other person duly authorized by
________________________________________________________________________________
[fill in official name of individual or institution]
hereby certifies that he/she/it is the Purchaser of the shares evidenced by the
attached certificate, and as such, sold such shares on ________________, 200__
in accordance with Registration Statement number 333-________________, and
complied with the requirement of delivering a current prospectus in connection
with such sale.
Print or Type:
Name of Purchaser (Individual or Institution):
________________________________________________________________________________
Name of Individual representing Purchaser (if an Institution)
________________________________________________________________________________
Title of Individual representing Purchaser (if an Institution):
________________________________________________________________________________
Signature:
Individual Purchaser or Individual representing Purchaser:
________________________________________________________________________________
10
Exhibit 10.3
LOAN AND STOCK SUBSCRIPTION AGREEMENT
This Loan Agreement (the "Agreement") is made as of the 7th day of
October, 2003 among ULTRALIFE BATTERIES, INC., a Delaware corporation, having
its principle office at 2000 Technology Parkway, Newark, NY 14513, U.S.A.
("UBI") and ULTRALIFE TAIWAN, INC., a company organized and existing under the
laws of the Republic of China ("R.O.C."), having its principle office at No. 2-3
Industry E. Rd. II, Science-Based Industrial Park, Hsinchu, Taiwan, R.O.C. (the
"Company").
The Company currently has an authorized capital of NT$2,500,000,000
divided into 250,000,000 shares of common stock at a par value of NT$10 each, of
which 194,062,000 shares are fully issued and outstanding. The Company intends
to first reduce its paid-in capital and then increase its paid-in capital by
issuing certain new shares of common stock. UBI desires to invest in the Company
by initially making a loan to the Company and then, upon repayment of that loan
under certain conditions, subscribing for certain shares of common stock to be
issued by the Company under such capital increase, all upon the terms and
conditions set forth in this Agreement.
In consideration of the covenants and conditions set forth in this
Agreement, the parties agree as follows:
1. Amount of Loan. UBI agrees to lend to the Company and the Company
agrees to borrow from UBI, a loan in the amount of US$2,350,000) (the "Loan").
UBI agrees to remit the Loan into the bank account designated by the Company on
October 7th, 2003. The Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit A.
2. Reduction of Paid-in Capital. The Company shall take all
necessary corporate actions to reduce its paid-in capital from NT$1,940,620,000
to NT$776,248,000 by reducing NT$1,164,372,000 representing 116,437,200 shares
in proportion to the number of shares held by each of the shareholders of the
Company, namely, six hundred (600) shares shall be reduced for every one
thousand (1,000) old shares ("Contemplated Capital Reduction").
3. Increase of Paid-in Capital. Immediately following the
comsummation of the Contemplated Capital Reduction, the Company shall take all
necessary corporate actions to increase its paid-in capital by at least
NT$300,000,000. ("Contemplated Capital Increase").
4. Repayment of the Loan. The Company shall repay the Loan plus an
interest accrued at the interest rate of three percent (3%) per annum (i) at
least three (3) days prior to the record date of the Contemplated Capital
Increase; or (ii) immediately upon the request of UBI in the event that the
Contemplated Capital Increase or the Contemplated Capital Reduction has not been
consummated prior to March 1st, 2004. The repayment to be made by the Company
pursuant to this Agreement shall be made in US Dollars to a bank account
designated by UBI.
5. Subscription to Shares. Subject to the repayment of the Loan in
accordance with Section 4(i) (rather than in accordance with Sections 4(ii) or 8
in which case UBI shall have no obligation to subscribe) and the terms and
conditions set forth herein, UBI agrees to subscribe to as many shares (the
"Shares") of common stock of the Company to be newly issued under the
Contemplated Capital Increase as the loan plus the accrued interest would buy at
the US dollar-New Taiwan dollar exchange rate at the day of the subscription.
The Company shall take any and all corporate actions to issue the Shares for
subscription by UBI, including, if necessary, obtaining waivers of any
preemptive rights with respect to the Shares.
6. Closing. The closing of the share subscription (the "Closing")
shall be held at the time and place and in the manner to which the Company and
UBI may agree. At the Closing, UBI shall effect payment of the Subscription
Price through wire transfer to the bank account designated by the Company and
shall provide documentary evidence showing such payment. Upon receipt of such
documentary evidence, the Company shall deliver to UBI a certificate
acknowlegding receipt of payment of the Subscription Price and a certificate
confirming delivery of the share certificates representing the Shares within
seven (7) days after the Company amendment registration reflecting the
Contemplated Capital Increase has been approved by the Science-based Industrial
Park Administration ("SIPA").
1
7. Representations of the Company. The Company represents, warrants
and agrees as follows:
(a) The Company is a corporation duly organized and validly
existing under the laws of the R.O.C. and has obtained all the government
approvals, certificates and permits necessary for the rights, benefits and
incentives that it is entitled to under the laws and regulations of the R.O.C.
(b) The Company has the authority to execute and deliver this
Agreement and to otherwise carry out and perform its obligations hereunder. The
execution and delivery of this Agreement and the other agreements contemplated
by this Agreement by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company. This Agreement and the other agreements contemplated by
this Agreement have been duly executed by the Company and constitute the valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms.
(c) The total paid-in capital of the Company consists solely
of 194,062,000 shares of common stock at par value of NT$10 per share, all of
which have been issued and outstanding as of the date of this Agreement. Except
for the obligations set forth herein, there is no outstanding security or other
instrument convertible into or exchange for share capital of the Company nor is
there any subscription, option, warrant, right, agreement, call or commitment
relating to the issuance, sale, delivery or transfer by the Company or any of
its shareholders of any share capital of the Company of any class.
(d) The Company is in compliance with its organizational and
corporate documents and with all laws, ordinances, regulations and orders
applicable to its business. The Company is not aware of any non-compliance of
such laws, ordinances, regulations and orders of a material nature that have not
been corrected.
(e) The Company owns or possesses sufficient legal rights to
all patents, trademarks, service marks, tradenames, copyrights, trade secrets,
licenses, information and proprietary rights and processes necessary for its
business as presently conducted, to the Company's knowledge with respect to any
such rights in recipes, without any conflict with, or infringement of, the
rights of others.
(f) There are neither any claims, actions, suits, proceedings
or investigations pending against the Company before any court or government
agency, nor is there any reasonable basis therefor or threat thereof.
(g) The per share subscription price payable by UBI to the
Company pursuant to Section 3 shall not be higher than those payable by other
investors who also participate in subscription to the shares issued under the
Contemplated Capital Increase.
(h) As of the record date of the Contemplated Capital
Reduction, the net value of the shares of the Company shall be no less than NT$2
(two) per share.
(i) The Company shall obtain for the benefit of UBI loan
subordinations from any Company officer or director (a "Company affiliate") who
is a creditor of the Company to the effect that any obligation owed UBI by the
Company shall be paid in full prior to making any payment on any obligation owed
to a Company affiliate.
(j) The Company has delivered to UBI its audited financial
statements for the year Ended December 31, 2002 and interim financial statements
for the eight months ended August 31, 2003 (the "Financial Statements"). Such
Financial Statements and any notes thereto fairly present the financial
condition and the results of operations of the Company as of the respective
dates of and for the periods referred to in such Financial Statements in
accordance with generally accepted accounting principles and reflect the
consistent application of such accounting principles throughout the period
involved.
(k) The Company owns all the real, personal and tangible
property and assets that it purports to own or located in facilities leased by
the Company or reflected as owned in the books and records of the Company,
including all of the properties and assets reflected in the Financial
Statements. All material properties and assets reflected in the Financial
Statements are free and clear of all encumbrances except as noted in the
Financial Statements.
2
(l) The Company has no liabilities or obligations of any
nature except for liabilities or obligations reflected or reserved against in
the most recent Financial Statements and current liabilities incurred in the
ordinary course of business since the date thereof.
(m) The Company has filed or caused to be filed (on a timely
basis) all applicable tax returns that are or were required to be filed and has
paid, or made provision for the payment of, all taxes that have or may have
become due pursuant to those tax returns or otherwise, or pursuant to any
assessment received by the Company.
(n) No representation or warranty of the Company in this
Agreement omits to state a material fact necessary to make the statements herein
or therein, in light of the circumstances in which they were made, not
misleading.
8. Acceleration of Maturity Date. Under any of the following
circumstances, the Loan and the interest accrued thereon shall be deemed matured
in full amount, effective immediately without requiring a further notice, and
the Company shall repay the Loan upon its maturity without any delay:
(a) The Company fails to pay as and when due and payable
(whether at maturity, by acceleration or otherwise) all or any part of the
principal of or interest on any indebtedness of or assumed by it, or of the
rentals due under any lease or sublease, or of any other obligation for the
payment of money, and such default shall not be cured within the period or
periods of grace, if any, specified in the instruments governing such
obligations; or default shall occur under any evidence of, or any indenture,
lease, sublease, agreement or other instrument governing such obligations, and
such default shall continue for a period of time sufficient to permit the
acceleration of the maturity of any such indebtedness or other obligation or the
termination of such lease or sublease;
(b) The Company: (i) becomes insolvent; or (ii) is unable, or
admits in writing its inability to pay its debts as they mature; or (iii) makes
a general assignment for the benefit of creditors or to an agent authorized to
liquidate any substantial amount of its property; or (iv) becomes the subject of
a creditor's petition for liquidation, reorganization or to effect a plan or
other arrangement with creditors; or (v) applies to a court for the appointment
of a custodian or receiver for any of its assets; or (vi) has a custodian or
receiver appointed for any of its assets (with or without its consent); or (vii)
otherwise becomes the subject of any insolvency proceedings or propose or enter
into any formal or informal composition or arrangement with its creditors; or
(c) The Company has materially breached any of its
representations or obligations under this Agreement.
9. Termination after Closing. After the Closing, this Agreement may
be terminated by UBI by written notice to the Company with immediate effect, if:
(a) The Contemplated Capital Reduction or the Contemplated
Capital Increase has not been consummated before March 1st, 2004, regardless of
the reasons therefor; or
(b) The Company has materially breached any of its
representations or obligations under this Agreement.
10. Effect of Termination. If this Agreement is terminated pursuant
to Section 9, the Company shall be liable for returning the Subscription Price
back to UBI as well as any and all costs and expenses of UBI incurred in
performing this Agreement within three (3) days after such termination.
Termination hereunder shall be without prejudice to the respective right and
liabilities of the parties accrued prior to termination, or to any provision
expressed to remain in full force and effect notwithstanding termination.
11. Compensation for Issuance of Additional Shares. If the Company
shall issue any shares ("Additional Shares"), within three (3) months after the
record date of the Contemplated Capital Increase, for a consideration (the "New
Consideration") per share less than the per share subscription price paid by UBI
to the Company pursuant to Section 5 (the "Subscription Price"), the Company
shall pay UBI an amount equal to the difference between the Subscription Price
and the New Consideration multiplied by the number of Shares for which UBI
subscribed:
3
12. Counterparts. This Agreement may be executed in counterparts,
each of which will be deemed an original but all of which will be deemed one
instrument.
13. Expenses and Taxes. Except otherwise provided herein, each party
shall be responsible for its owned costs, expenses incurred in performing this
Agreement and any tax levied by the authorities in accordance with applicable
laws.
14. Notice. All notices and other communications hereunder shall be
given if given in writing and delivered personally, by registered or certified
mail, return receipt requested, postage prepaid, or by overnight courier for
which a receipt confirming delivery is provided, to the party to receive the
same at its respective address set forth below (or at such other address as may
from time to time be designated by such party to the others in accordance with
this Section 15):
If to the Company, to:
ULTRALIFE TAIWAN, INC.
No. 2-3 Industry E. Rd. II, Science-Based Industrial
Park, Hsinchu, Taiwan, R.O.C.
Attention: J.F. Hsu, Chairman
If to UBI, to:
ULTRALIFE BATTERIES, INC.
2000 Technology Parkway, Newark, NY 14513, U.S.A.
Attention: Peter F. Comerford, Vice President of
Administration and General Counsel
15. Survival of Representations and Warranties. All representations
and warranties made in this Agreement or any other instrument or document
delivered in connection herewith shall survive the execution and delivery
hereof.
16. Prior Agreements. This Agreement constitutes the entire
agreement between the parties and supersedes any prior or contemporaneous
understandings or agreements concerning the subject matter hereof.
17. Severability. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
18. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the R.O.C, without giving effect to
the principles of conflicts of laws. Any disputes arising out of or relating to
this Agreement shall be submitted for arbitration in Taipei in accordance with
the R.O.C. Arbitration Act.
19. Headings. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of the Agreement for any other purpose.
20. Amendments and Waivers. This Agreement may not be amended,
supplemented or otherwise modified except by an instrument in writing signed by
both parties that specifically refers to this Agreement. Any party hereto may,
only by an instrument in writing, waive compliance by the other parties hereto
with any term or provision of this Agreement on the part of such other parties
to be performed or complied with. The waiver by a party hereto of a breach of
any term or provision of this Agreement shall not be construed as a waiver of
any subsequent breach. Any amended or waiver effected in accordance with this
Section 21 shall be binding upon each party and its permitted assigns.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
ULTRALIFE BATTERIES, INC.
By: /s/ Robert W. Fishback
-------------------------------
Name: Robert W. Fishback
Title: VP - Finance & CFO
ULTRALIFE TAIWAN, INC.
By: /s/ J. F. Hsu
-------------------------------
Name: J.F. Hsu
Title: Chairman / President
5
Exhibit A
PROMISSORY NOTE
US $2,350, 000 Newark , New York
October 7, 2003
FOR VALUE RECEIVED, Ultralife Taiwan, Inc. (the "Company") a company
organized and existing under the laws of the Republic of China ("R.O.C.") with
its principal office at No. 2-3 Industry E. Rd. II, Science Based Industrial
Park, Hsinchu, Taiwan, R.O.C. hereby promises to pay to the order of Ultralife
Batteries, Inc. ("UBI") a Delaware corporation at its principal office of 2000
Technology Parkway, Newark, NY 14513, or, at the holder's option, at such other
place as may be designated from time to time by the holder, the principal sum of
US Two Million Three Hundred Fifty Thousand Dollars (US$ 2,350,000) in lawful
money of the United States of America, plus interest at a per annum rate equal
to three percent (3%). In no event shall the rate of interest on this Note
exceed the maximum rate authorized by applicable law. Interest will be
calculated for each day at 1/360th of the applicable per annum rate, which will
result in a higher effective annual rate.
This Promissory Note is the promissory note referenced in that certain
Loan and Stock Subscription Agreement by and between the Company and UBI dated
October 7, 2003 (the " Loan Agreement").
The Company shall repay this Promissory Note in an amount equal to the
then unpaid principal balance hereof, together with any unpaid interest (i) at
least three (3) days prior to the record date of the Contemplated Capital
Increase (as such term is defined herein); or (ii) immediately upon the request
of UBI in the event that the Contemplated Capital Increase or the Contemplated
Capital Reduction (as such term is defined herein) has not been consummated
prior to March 1st, 2004.
"Contemplated Capital Reduction" shall mean the Company reducing its
paid-in capital from NT$1,940,620,000 to NT$776,248,000 by reducing
NT$1,164,372,000 representing 116,437,200 shares in proportion to the number of
shares held by each of the shareholders of the Company, namely, six hundred
(600) shares shall be reduced for every one thousand (1,000) old shares.
"Contemplated Capital Increase" shall mean immediately following the
consummation of the Contemplated Capital Reduction, the Company shall take all
necessary corporate actions to increase its paid-in capital by at least
NT$300,000,000.
The Company may make a partial or complete pre-payment of this Promissory
Note at any time without penalty. If any installment of this Note is not paid
when due, whether because such installment becomes due on a Saturday, Sunday or
a federally recognized holiday, or for any other reason, the Company will pay
interest thereon at the applicable rate until the date of actual receipt of such
installment by the holder of this Note.
Any holder of this Promissory Note may declare all indebtedness evidenced
by this Note to be immediately due and payable upon the happening of any of the
following:
(a) The Company fails to pay as and when due and payable (whether at
maturity, by acceleration or otherwise) all or any part of the principal of or
interest on any indebtedness of or assumed by it, or of the rentals due under
any lease or sublease, or of any other obligation for the payment of money, and
such default shall not be cured within the period or periods of grace, if any,
specified in the instruments governing such obligations; or default shall occur
under any evidence of, or any indenture, lease, sublease, agreement or other
instrument governing such obligations, and such default shall continue for a
period of time sufficient to permit the acceleration of the maturity of any such
indebtedness or other obligation or the termination of such lease or sublease;
(b) The Company: (i) becomes insolvent; or (ii) is unable, or admits
in writing its inability to pay its debts as they mature; or (iii) makes a
general assignment for the benefit of creditors or to an agent authorized to
liquidate any substantial amount of its property; or (iv) becomes the subject of
a creditor's petition for liquidation, reorganization or to effect a plan or
other arrangement with creditors; or (v) applies to a court for the
6
appointment of a custodian or receiver for any of its assets; or (vi) has a
custodian or receiver appointed for any of its assets (with or without its
consent); or (vii) otherwise becomes the subject of any insolvency proceedings
or propose or enter into any formal or informal composition or arrangement with
its creditors; or
(c) The Company has materially breached any of its representations
or obligations under the Loan Agreement.
No failure by UBI to exercise, and no delay in exercising, any right or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise by such holder of any right or remedy hereunder preclude any
other or further exercise thereof or the exercise of any other right or remedy.
The rights and remedies of UBI as herein specified are cumulative and not
exclusive of any other rights or remedies that such holder may otherwise have.
No recission, waiver, forbearance, release or amendment of any provision
of this Promissory Note shall be made, except by a written agreement duly
executed by the Company and UBI. This Promissory Note may not be assigned by the
Company. The provisions of this Promissory Note shall inure to the benefit of
UBI and its successors and assigns. If any provision of this Promissory Note
shall, to any extent, be held invalid or unenforceable, then only such provision
shall be deemed ineffective and the remainder of this Promissory Note shall not
be affected.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of New York (but not its conflicts of law provisions). The
Company agrees to submit any dispute hereunder to the jurisdiction and venue of
the state and federal courts located in Monroe County, New York and waives any
objection it may have to the convenience of the forum. The Company agrees to pay
all costs and expenses incurred by the holder hereof in enforcing this
Promissory Note, including, without limitation, actual attorney's fees and
disbursements. All notices hereunder shall be in writing and shall be deemed
given three business day following deposit with an overnight courier service or
ten days following deposit in the United States mail, certified and return
receipt requested.
ULTRALIFE TAIWAN, INC.
By: /s/ J. F. Hsu
-----------------------
Name: J. F. Hsu
Title: Chairman / President
7
Exhibit 31.1
I, John D. Kavazanjian,, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ultralife
Batteries, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 6, 2003 /s/ John D. Kavazanjian
-----------------------
John D. Kavazanjian
President and Chief Executive Officer
1
Exhibit 31.2
I, Robert W. Fishback, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ultralife
Batteries, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 6, 2003 /s/ Robert W. Fishback
----------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
1
Exhibit 32
Section 1350 Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 ("Section 906"), John D. Kavazanjian and Robert W.
Fishback, the President and Chief Executive Officer and Vice President - Finance
and Chief Financial Officer, respectively, of Ultralife Batteries, Inc., certify
that (i) the Quarterly Report on Form 10-Q for the quarter ended September 27,
2003 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in such
report fairly presents, in all material respects, the financial condition and
results of operations of Ultralife Batteries, Inc.
A signed original of this written statement required by Section 906 has been
provided to Ultralife Batteries, Inc. and will be retained by Ultralife
Batteries, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
Date: November 6, 2003 /s/ John D. Kavazanjian
-----------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: November 6, 2003 /s/ Robert W. Fishback
----------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
1