UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
/ / Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No___
On June 27, 2003, the aggregate market value of the Common Stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $128,400,000 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on June 27, 2003.
As of February 27, 2004, the Registrant had 13,878,857 shares of Common
Stock outstanding, net of 727,250 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Ultralife Batteries, Inc. Proxy Statement - Certain portions of the
Registrant's Definitive Proxy Statement relating to the June 10, 2004 Annual
Meeting of Stockholders are specifically incorporated by reference in Part III,
Items 10-14 herein.
TABLE OF CONTENTS
ITEM PAGE
PART I 1 Business.....................................................3
2 Properties...................................................15
3 Legal Proceedings............................................15
4 Submission of Matters to a Vote of Securities Holders........16
PART II 5 Market for Registrant's Common Equity and
Related Shareholder Matters...............................17
6 Selected Financial Data......................................19
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.............20
7a Quantitative and Qualitative Disclosures
About Market Risk.........................................40
8 Financial Statements and Supplementary Data..................40
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................68
9a Controls and Procedures......................................68
PART III 10 Directors and Executive Officers of the Registrant...........69
11 Executive Compensation.......................................69
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................69
13 Certain Relationships and Related Transactions...............69
14 Principal Accountant Fees and Services.......................69
PART IV 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................70
Signatures...................................................74
Exhibits.....................................................75
PART I
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
rechargeable batteries, general economic conditions, government and
environmental regulation, finalization of non-bid government contracts,
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 fire, 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. See
Risk Factors in Item 7.
As used in this Report, unless otherwise indicated the terms "Company" and
"Ultralife" include the Company's wholly-owned subsidiary, Ultralife Batteries
(UK) Ltd.
ITEM 1. BUSINESS
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. The financial results presented in this report
reflecting the calendar year ended December 31, 2003 are referred to as "2003".
The financial results presented in this report reflecting the six-month period
ended December 31, 2002 are referred to as "Transition 2002". The financial
results presented in this report reflecting the full twelve-month fiscal periods
that ended June 30 prior to Transition 2002 are referred to as "fiscal" years.
For instance, the year ended June 30, 2002 is referred to as "Fiscal 2002", and
the year ended June 30, 2001 is referred to as "Fiscal 2001".
The Company reports its results in three operating segments: Primary
Batteries, Rechargeable Batteries, and Technology Contracts. 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 Company looks at
its segment performance at the gross margin level, and does not allocate
research and development or selling, general and administrative costs against
the segments. All other items that do not specifically relate to these three
segments and are not considered in the performance of the segments are
considered to be Corporate charges.
The Company's website address is www.ultralifebatteries.com. The Company
makes available free of charge via a hyperlink on its website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
any amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission ("SEC"). The Company will provide this information upon
written request to the attention of Peter F. Comerford, Secretary, Ultralife
Batteries, Inc., 2000 Technology Parkway, Newark, New York, 14513. Information
is also available through the SEC website at www.sec.gov or at the SEC Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling
1-800-SEC-0330.
3
Primary Batteries
The Company manufactures and markets a family of lithium-manganese dioxide
(Li-MnO2) primary batteries including 9-volt, cylindrical, and Thin Cell(R), in
addition to magnesium silver-chloride seawater-activated batteries. Applications
of the Company's 9-volt batteries include smoke alarms, wireless security
systems and intensive care monitors, among many other devices. The Company's
other lithium primary batteries are sold primarily to the military and to OEMs
for industrial markets for use in a variety of applications including radios,
automotive telematics, emergency radio beacons, search and rescue transponders,
pipeline inspection gauges, and other specialty instruments and applications.
The Company also manufactures seawater-activated batteries for specialty marine
applications. The Company believes that the materials used in, and the chemical
reactions inherent to, lithium batteries provide significant advantages over
other currently available primary battery technologies. These advantages include
lighter weight, longer operating time, longer shelf life, and a wider operating
temperature range. The Company's primary batteries also have relatively flat
voltage profiles, which provide stable power. Conventional primary batteries,
such as alkaline, have sloping voltage profiles, which result in decreasing
power output during discharge. While the price for the Company's lithium
batteries is generally higher than alkaline batteries, the increased energy per
unit of weight and volume of the Company's lithium batteries allow longer
operating time and less frequent battery replacements for the Company's targeted
applications.
According to reports by the Freedonia Group, Incorporated, the global
market for primary batteries was approximately $16.9 billion in 2001, and is
expected to reach approximately $22.2 billion in 2006. The lithium primary
battery market accounted for approximately $1.75 billion of the 2001 market and
is expected to reach over $2.5 billion in 2006.
Revenues for this segment for the year ended December 31, 2003 were $77.1
million and segment contribution was $17.9 million. See Management's Discussion
and Analysis of Financial Condition and Results of Operations and the 2003
Consolidated Financial Statements and Notes thereto for additional information.
Rechargeable Batteries
The Company believes that its range of lithium polymer and lithium ion
rechargeable batteries offer substantial benefits, including the ability to
design and produce lightweight cells in a variety of custom sizes, shapes, and
thickness. While the Company continues to focus on the markets for lithium
polymer batteries utilizing its own technology and manufacturing infrastructure,
in order to expand its product offerings it also markets rechargeable batteries
comprised of cells manufactured by other qualified manufacturers, including
Ultralife Taiwan, Inc. ("UTI"), in which the Company has a 9.2% ownership
interest at December 31, 2003. Additionally, the Company is utilizing the
rechargeable battery products it has developed for military applications to
satisfy commercial customers seeking turnkey battery solutions and chargers.
According to reports by Institute of Information Technology, Ltd., the
global portable rechargeable batteries market was approximately $4.7 billion in
2003 and is expected to reach approximately $5.7 billion in 2005. The widespread
use of a variety of portable consumer electronic products such as notebook
computers and cellular telephones has placed increasing demands on battery
technologies, including lithium polymer and lithium ion, to deliver greater
amounts of energy through efficiently designed, smaller and lighter batteries.
Revenues for this segment for the year ended December 31, 2003 were $1.5
million and segment contribution was a loss of $1.2 million. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
2003 Consolidated Financial Statements and Notes thereto for additional
information.
Technology Contracts
On a continuing basis, the Company seeks to fund part of its efforts to
identify and develop new applications for its products and to advance its
technologies through contracts with both government agencies and third parties.
The Company has been successful in obtaining awards for such programs for both
rechargeable and primary battery technologies.
Revenues for this segment in the year ended December 31, 2003 were
$852,000 and segment contribution was $418,000. Revenues in this segment are
expected to increase modestly as the Company continues to obtain contracts that
are in parallel with its efforts to ultimately commercialize products that it
develops. See
4
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the 2003 Consolidated Financial Statements and Notes thereto for
additional information.
Corporate
The Company allocates revenues and cost of sales across the above business
segments. The balance of income and expense, including, but not limited to
research and development expenses, selling, general and administrative expenses,
and interest income and expense are reported as Corporate expenses.
There were no revenues for this category in the year ended December 31,
2003 and corporate contribution was a loss of $11.1 million. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
2003 Consolidated Financial Statements and Notes thereto for additional
information.
History
The Company was formed as a Delaware corporation in December 1990. In
March 1991, the Company acquired certain technology and assets from Eastman
Kodak Company ("Kodak") relating to its 9-volt lithium-manganese dioxide primary
battery. During the initial 12 months of operation, the Company directed its
efforts towards reactivating the Kodak manufacturing facility and performing
extensive tests on the Kodak 9-volt battery. These tests demonstrated a need for
design modifications, which, once completed, resulted in a battery with improved
performance and shelf life. In December 1992, the Company completed its initial
public offering and became listed on NASDAQ. In June 1994, the Company formed a
subsidiary, Ultralife Batteries (UK) Ltd., which acquired certain assets of the
Dowty Group PLC ("Dowty"). The Dowty acquisition provided the Company with a
presence in Europe, manufacturing facilities for high-rate lithium and
seawater-activated batteries and a team of highly skilled scientists with
significant lithium battery technology expertise. Ultralife (UK) further
expanded its operations through its acquisition of certain assets and
technologies of Accumulatorenwerke Hoppecke Carl Zoellner & Sohn GmbH & Co.
("Hoppecke") in July 1994. In December 1998, the Company announced a venture
with PGT Energy Corporation ("PGT"), together with a group of investors, to
produce lithium rechargeable batteries in Taiwan. During Fiscal 2000, the
Company provided the venture, Ultralife Taiwan, Inc. ("UTI"), with proprietary
technology and other consideration in exchange for approximately a 46% interest
in the venture. Due to stock grants to certain UTI employees in Fiscal 2001,
subsequent capital raising initiatives, and the Company's disposition of a
portion of its ownership interest in October 2002, the Company's ownership
interest has been reduced to 9.2% as of December 31, 2003. Over the past few
years, the Company has expanded its product offering of lithium primary and
rechargeable batteries.
Products and Technology
A battery is an electrochemical apparatus used to store and release energy
in the form of electricity. The main components of a conventional battery are
the anode, cathode, separator and an electrolyte, which can be either a liquid
or a solid. The separator acts as an electrical insulator, preventing electrical
contact between the anode and cathode inside the battery. During discharge of
the battery, the anode supplies a flow of electrons, known as current, to a load
or device outside of the battery. After powering the load, the electron flow
reenters the battery at the cathode. As electrons flow from the anode to the
device being powered by the battery, ions are released from the cathode, cross
through the electrolyte and react at the anode.
Primary Batteries
A primary battery is used until discharged and then discarded. The
principal competing primary battery technologies are carbon-zinc, alkaline and
lithium. The Company's primary battery products, exclusive of its
seawater-activated batteries, are based primarily on lithium-manganese dioxide
technology. The following table sets forth the performance characteristics of
battery technologies that the Company believes represent its most significant
current or potential competition for its 9-volt and high-rate lithium batteries.
5
Comparison of Primary Battery Technologies
Energy Density
--------------
Watt- Watt- Operating
hours per hours per Discharge Shelf Life Temperature
Technology kilogram liter Profile (years) Range ((Degree)F)
---------- --------- --------- --------- ---------- -----------------
9-Volt Configurations:
Carbon-zinc (1) 36 59 Sloping 1 20 to 130
Alkaline (1) 80 171 Sloping 5 0 to 130
Ultralife lithium-manganese dioxide (2) 262 406 Flat 10 -4 to 140
High-Rate Cylindrical: (3)
Alkaline (1) 88 223 Sloping 7 0 to 130
Lithium-sulfur dioxide (1)(4) 247 396 Flat 10 -60 to 160
Ultralife lithium-manganese dioxide (2) 263 592 Flat 10 -40 to 160
(1) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.
(2) Results of tests conducted by the Company.
(3) Data for equivalent D-size cells.
(4) The Company believes that these batteries are limited in application due
to health, safety and environmental risks associated therewith.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume, as measured in watt-hours
per kilogram and watt-hours per liter, respectively. Higher energy density
translates into longer operating times for a battery of a given weight or volume
and, therefore, fewer replacement batteries. Discharge profile refers to the
profile of the voltage of the battery during discharge. A flat discharge profile
results in a more stable voltage during discharge of the battery. High
temperatures generally reduce the storage life of batteries, and low
temperatures reduce the battery's ability to operate efficiently. The inherent
electrochemical properties of lithium batteries result in improved low
temperature performance and an ability to withstand relatively high temperature
storage.
The Company's primary battery products are based predominantly on
lithium-manganese dioxide technology. The Company believes that materials used
in, and the chemical reactions inherent to, the lithium batteries provide
significant advantages over currently available primary battery technologies
which include lighter weight, longer operating time, longer shelf life, and a
wider operating temperature range. The Company's primary batteries also have
relatively flat voltage profiles, which provide stable power. Conventional
primary batteries, such as alkaline, have sloping voltage profiles, which result
in decreasing power outage during discharge. While the price for the Company's
lithium batteries is generally higher than commercially available alkaline
batteries produced by others, the Company believes that the increased energy per
unit of weight and volume of its batteries will allow longer operating time and
less frequent battery replacements for the Company's targeted applications.
Therefore, the Company believes that its primary batteries are price competitive
with other battery technologies on a price per watt-hour basis.
9-Volt Lithium Battery. The Company's 9-volt lithium battery delivers a
unique combination of high energy and stable voltage, which results in a longer
operating life for the battery and, accordingly, fewer battery replacements.
While the Company's 9-volt battery price is generally higher than conventional
9-volt carbon-zinc and alkaline batteries, the Company believes the enhanced
operating performance and decreased costs associated with battery replacement
make the Ultralife 9-volt battery more cost effective than conventional
batteries on a cost per watt-hour basis when used in a variety of applications.
6
The Company currently markets its 9-volt lithium battery to OEM and
consumer retail markets, including manufacturers of safety and security systems
such as smoke alarms, medical devices and other electronic devices. Applications
for which the Company's 9-volt lithium battery are currently sold include:
Safety and Security Equipment Medical Devices Specialty Devices
- ----------------------------- --------------- -----------------
Smoke alarms Bone growth stimulators Electronic meters
Wireless alarm systems Telemetry equipment Parking meters
Tracking devices Portable blood analyzers Wireless audio devices
Transmitters/receivers Ambulatory Infusion Pumps Guitar pick-ups
The Company currently sells its 9-volt battery to Kidde Safety
(Fyrnetics), Invensys (Firex(R)), BRK Brands (First Alert(R)), Universal
Security Instruments, NADI, Sensotec, Uniline and Homewatch for long-life smoke
alarms; to Energizer, Philips Medical Systems, i-STAT Corp. and Orthofix for
medical devices; and to ADT, Ademco, Interactive Technologies, Inc., and
Internix (Japan) for security devices. Kidde Safety (Fyrnetics), Invensys
(Firex(R)), BRK Brands (First Alert(R)), Universal Security Instruments, NADI,
Sensotec, Uniline and Homewatch offer long life smoke alarms powered by the
Company's 9-volt lithium battery with a limited 10-year warranty. The Company
also manufactures its 9-volt lithium battery under private label for Energizer,
Telenot in Germany and Uniline in Sweden. Additionally, the Company sells its
9-volt battery to the broader consumer market by establishing relationships with
national and regional retail chains such as Radio Shack, TruValue Hardware, Ace
Hardware, Fred Meyer, Inc., Menards, Chase Pitkin, Lowes and a number of
catalogs and Internet retailers.
The Company's 9-volt lithium battery market benefited as a result of a
state law enacted in Oregon. The Oregon statute required that, as of June 23,
1999, all battery-operated ionization-type smoke alarms sold in that state must
include a 10-year battery. The Company believes that if similar legislation were
to ultimately pass in any major state, and if other states were to follow suit,
demand for the Company's 9-volt batteries could increase significantly. The
Company is also benefiting from local and national legislation passed in various
U.S. and European locations, which requires the installation of smoke alarms.
The passage of this type of legislation in other countries could also increase
the demand for the Company's 9-volt batteries.
The Company believes that it manufactures the only standard size 9-volt
battery warranted to last 10 years when used in ionization-type smoke alarms.
Although designs exist using other battery configurations, such as using three
2/3 A-type battery cells, the Company believes its 9-volt solution is superior
to these alternatives. The Company believes that its current manufacturing
capacity is adequate to meet forecasted customer demand.
Cylindrical Cell and Thin Cell Lithium Batteries. The Company believes
that its high-rate cylindrical and thin lithium cells, based on its proprietary
lithium-manganese dioxide technology, are the most advanced high-rate lithium
power sources currently available. The Company also markets high-rate lithium
batteries using cells from other manufacturers in other sizes and voltage
configurations in order to offer a more comprehensive line of batteries to its
customers.
The Company markets its line of high-rate lithium cells and batteries to
the OEM market for industrial, military, medical, automotive telematics and
search and rescue applications. Significant industrial applications include
pipeline inspection equipment, autoreclosers and oceanographic devices. Among
the military uses are manpack radios, night vision goggles, chemical agent
monitors, and thermal imaging equipment. Search and rescue applications include
ELT's (Emergency Location Transmitters) for aircraft and EPIRB's (Emergency
Position Indicating Radio Beacons) for ships.
The market for high-rate lithium batteries has been dominated by lithium-
sulfur dioxide and lithium- thionyl chloride, which possess liquid cathode
systems. However, there is an increasing market share being taken by lithium-
manganese dioxide, a solid cathode system, because of its superior performance
and safety. The Company believes that its high-rate lithium manganese dioxide
batteries offer a combination of performance, safety, cost, and environmental
benefits which will enable it to gain an increasing share of this market.
Some of the Company's main cylindrical cell and thin cell lithium
batteries include the following:
High-rate Cylindrical Batteries. The Company markets a wide range of
high-rate cylindrical primary lithium batteries in various sizes and
voltage configurations. The Company currently manufactures a range of
high-rate lithium cells under the Ultralife HiRate(R) brand, which are
sold and packaged into multi-cell battery packs. These include D, C, 1 1/4
C, and 19 mm x 65 mm configurations, among other sizes. Based
7
on the Company's lithium-manganese dioxide chemistry, the Company's
cylindrical cells use solid-cathode construction, are non-pressurized and
non-toxic, and are considered safer than liquid cathode systems.
BA-5372 Batteries. The Company's BA-5372 battery is a cylindrical
6-volt lithium-manganese dioxide battery, which is used for memory back-up
in communications devices, including the Army's Single Channel Ground and
Airborne Radio System (SINCGARS), the most widely used of these devices.
This battery offers a combination of performance features suitable for
military applications including high energy density, light weight, long
shelf life and ability to operate in a wide temperature range.
BA-5368 Batteries. The Company's BA-5368 battery is a cylindrical
12-volt lithium-manganese dioxide battery, which is used in AN/PRC90 pilot
survival radios. This battery is used by the U.S. military and other
military organizations around the world.
BA-5367 Batteries. The Company's BA-5367 battery is a 3-volt
lithium-manganese dioxide battery, which is a direct replacement for the
lithium-sulfur dioxide BA-5567 battery, and has over 50% more capacity. It
is used in a variety of military night vision, infrared aiming, digital
messaging and meteorological devices.
BA-5390 Batteries. The Company's BA-5390 battery is an alternative
for the Li-SO2 BA-5590 battery, the most widely used battery in the U.S.
armed forces. The BA-5390 is a rectangular 15/30 volt lithium-manganese
dioxide battery which provides 50% more capacity (mission time) than the
BA-5590, and is primarily used as the main power supply for the Army's
SINCGARS (Manpack) radios. Approximately 60 other military applications,
such as the Javelin Medium Anti-Tank Weapon Command Unit, also use these
batteries.
Thin Cell Batteries. The Company has developed a line of thin
lithium-manganese dioxide primary batteries under the Ultralife Thin
Cell(R) brand. The Thin Cell batteries are flat, lightweight, flexible
batteries that in certain configurations can be manufactured to conform to
the shape of the particular application. The Company is currently offering
four configurations of the Thin Cell battery, which range in capacity from
400 milliampere-hours to 1,500 milliampere-hours. The Company is currently
marketing these batteries to OEMs for applications such as wearable
medical devices, theft detection systems, and identification tags.
Seawater-activated Batteries. The Company produces a variety of
seawater-activated batteries based on magnesium-silver chloride
technology. Seawater-activated batteries are custom designed and
manufactured to end user specifications. The batteries are activated when
placed in salt water, which acts as the electrolyte allowing current to
flow. The Company markets seawater-activated batteries to naval and other
specialty OEMs.
Rechargeable Batteries
In contrast to primary batteries, after a rechargeable battery is
discharged, it can be recharged and reused many times. Generally, discharge and
recharge cycles can be repeated hundreds of times in rechargeable batteries, but
the achievable number of cycles (cycle life) varies among technologies and is an
important competitive factor. All rechargeable batteries experience a small, but
measurable, loss in energy with each cycle. The industry commonly reports cycle
life in number of cycles a battery can achieve until 80% of the battery's
initial energy capacity remains. In the rechargeable battery market, the
principal competing technologies are nickel-cadmium, nickel-metal hydride and
lithium-based batteries. Rechargeable batteries generally can be used in many
primary battery applications, as well as in applications such as portable
computers and other electronics, cellular telephones, medical devices, wearable
devices and many other consumer products.
Three important parameters for describing the performance characteristics
of a rechargeable battery suited for today's portable electronic devices are
design flexibility, energy density and cycle life. Design flexibility refers to
the ability of rechargeable batteries to be designed to fit a variety of shapes
and sizes of battery compartments. Thin profile batteries with prismatic
geometry provide the design flexibility to fit the battery compartments of
today's electronic devices. Energy density refers to the total electrical energy
per unit volume stored in a battery. High energy density batteries generally are
longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. Lithium batteries, by the nature of their
electrochemical properties, are capable of providing higher energy density than
comparably sized batteries that utilize other chemistries and, therefore, tend
to consume less
8
volume and weight for a given energy content. Long cycle life is a preferred
feature of a rechargeable battery because it allows the user to charge and
recharge many times before noticing a difference in performance.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume as measured in watt-hours per
kilogram and watt-hours per liter, respectively. High energy density and long
achievable cycle life are important characteristics for comparing rechargeable
battery technologies. Greater energy density will permit the use of batteries of
a given weight or volume for a longer time period. Accordingly, greater energy
density will enable the use of smaller and lighter batteries with energy
comparable to those currently marketed. Long achievable cycle life, particularly
in combination with high energy density, is suitable for applications requiring
frequent battery recharges, such as cellular telephones and portable computers.
Lithium Polymer Rechargeable Batteries. The Company manufactures, or has
others contract manufacture to the Company's specifications, lithium polymer
rechargeable batteries. These batteries are comprised of ultra-thin and flexible
components including a metallic oxide cathode, a carbon anode and a polymer
electrolyte. The Company believes that users of portable electronic products
such as wearable computers and wireless devices are seeking smaller and lighter
products that require less frequent recharges while providing the same or
additional energy. The Company believes that its technology is attractive to
OEMs of such products since the use of a polymer electrolyte, rather than a
liquid electrolyte, reduces the battery's overall weight and volume, and allows
for increased design flexibility in conforming batteries to the variety of
shapes and sizes required for portable electronic products. The Company can
provide a variety of cell sizes to satisfy market demands. Typical cell sizes
currently offered by the Company include cells ranging in size from 3.2x20x30 mm
to 3.6x106x102 mm and ranging in capacity from 120 mAh to 3300 mAh.
Lithium Ion Cells and Batteries. The Company offers a variety of lithium
ion cells ranging in size from 4.6x30x48 mm to 5.6x34x50 mm and in capacity from
600 mAh to 920 mAh. The Company also offers the following batteries containing
lithium ion cells:
UBI-2590 Batteries. The Company's UBI-2590 battery is the lithium
ion rechargeable version of the BA-5390 primary battery, and can be used
in the same applications as the BA-5390. The Company is also marketing
this battery, and a number of chargers, for use in military and commercial
applications.
LWC-L Batteries. The Company's LWC-L battery is a lithium ion
rechargeable commercial version of the Land Warrior military battery being
developed for the U.S. Army Land Warrior-Stryker program. The Company is
also marketing this battery, and a charger, for use in commercial
applications.
Sales and Marketing
The Company employs a staff of sales and marketing personnel in the U.S.,
England and Germany. The Company sells its current products directly to OEMs in
the U.S. and abroad and has contractual arrangements with sales agents who
market the Company's products on a commission basis in particular areas. The
Company also distributes its products through domestic and international
distributors and retailers that purchase batteries from the Company for resale.
The Company's sales are generated primarily from customer purchase orders and
the Company has traditionally had a number of long-term sales contracts with
customers.
In 2003, sales to U.S. and non-U.S. customers were $65,328,000 and
$14,122,000, respectively. (See Note 11 in the Notes to Consolidated Financial
Statements.)
Primary Batteries
The Company has targeted sales of its primary batteries to manufacturers
of security and safety equipment, automotive telematics, medical devices and
specialty instruments, as well as users of military equipment. The Company's
strategy is to develop marketing alliances with OEMs and governmental agencies
that utilize its batteries in their products, commit to cooperative research and
development or marketing programs, and recommend the Company's products for
design-in or replacement use in their products. The Company is addressing these
markets through direct contact by its sales and technical personnel, use of
sales agents and stocking distributors, manufacturing under private label and
promotional activities.
The Company seeks to capture a significant market share for its products
within its targeted OEM markets, which the Company believes, if successful, will
result in increased product awareness and sales at the end-user or
9
consumer level. The Company is also selling the 9-volt battery to the consumer
market through retail distribution. Most military procurements are done directly
by the specific government organizations requiring batteries, based on a
competitive bidding process. For those military procurements that are not bid,
the procurements are typically subject to an audit of the product's underlying
cost structure and associated profitability.
During 2003, the Company had one major customer, the U.S. Army /
Communications and Electronics Command (CECOM), which comprised approximately
51% of the Company's revenues. The Company believes that the loss of this
customer would have a material adverse effect on the Company. The Company is not
aware of any issues with this customer relationship.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 8% of
total primary battery revenues in 2003. Additionally, a lower demand from the
U.S. and U.K. Governments could result in lower sales to military and government
users. However, the Company currently is experiencing increasing demand from
military and government customers, and it expects continued demand in the near
term.
The Company has been successfully marketing its products to military
organizations in the U.S. and other countries around the world. These efforts
have recently resulted in some significant contracts for the Company. For
example, in June 2002, the Company was awarded a five-year production contract
by the U.S. Army/CECOM to provide three types of primary (non-rechargeable)
lithium-manganese dioxide batteries to the U.S. Army. The contract provides for
order releases approximately every six months over a five-year period with a
maximum potential value of up to $32 million. Combined, these batteries comprise
what is called the Small Cell Lithium Manganese Dioxide Battery Group under
CECOM's NextGen II acquisition strategy. A major objective of this acquisition
is to maintain a domestic production base of a sufficient capacity to timely
meet peacetime demands and have the ability to surge quickly to meet deployment
demands. The Company is in the process of bidding on two additional Next Gen II
five-year battery procurements, comprised of rectangular batteries. In addition,
between May 2003 and February 2004, the Company announced that it had received
orders from the U.S. military totaling $72 million for its BA-5390 batteries
that are used by the military for certain communications and other devices.
There is no assurance, however, that the Company will be awarded any additional
military contracts.
At December 31, 2003, the Company's backlog related to primary battery
orders was approximately $59 million. The majority of this backlog was related
to recent military orders which are expected to ship throughout 2004.
Rechargeable Batteries
The Company has targeted sales of its polymer rechargeable batteries
through OEM suppliers, as well as distributors and resellers focused on its
target markets. Since early 2002, the Company has added lithium ion products,
additional lithium polymer products and charging systems to its portfolio. The
Company is currently seeking a number of design wins with OEMs, and believes
that its design capabilities, product characteristics and solution integration
will drive OEMs to incorporate the Company's batteries into their product
offerings, resulting in revenue growth opportunities for the Company. The
Company has not marketed its rechargeable batteries for a sufficient period to
determine whether these OEMs or consumer sales are seasonal.
The Company continues to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries including
military and communications applications, as well as computing devices, wearable
devices and other electronic portable devices. A key part of this expansion
includes building its network of distributors and value added distributors
throughout the world.
At December 31, 2003, the Company's backlog related to rechargeable
battery orders was not significant.
Technology Contracts
The Company has participated in various programs in which it performed
contract research and development. These programs have incorporated a profit
margin in their structure. This segment has declined because the current
strategy for the Company is only to seek development projects that are in
harmony with its process and product strategy. An example is a Science and
Technology Contract awarded to the Company by the U.S. Army during 2002 for the
development of a Land Warrior specific hybrid power source system and smart
rapid-
10
on-the-move charger. Although the Company reports technology contracts as a
separate business segment, it does not actively market this segment as a revenue
source but rather accepts technology contract business that supports and
advances its overall battery business strategy.
Patents, Trade Secrets and Trademarks
The Company relies on licenses of technology as well as its unpatented
proprietary information, know-how and trade secrets to maintain and develop its
commercial position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to the Company's
proprietary information. In addition, there can be no assurance that the Company
would prevail if any challenges to intellectual property rights were asserted by
the Company against third parties, or that third parties will not successfully
assert infringement claims against the Company in the future. The Company
believes, however, that its success is less dependent on the legal protection
that its patents and other proprietary rights may or will afford than on the
knowledge, ability, experience and technological expertise of its employees.
The Company holds 19 patents in the U.S. and foreign countries, three of
which relate to rechargeable polymer batteries, and has certain patent
applications pending also relating to polymer batteries. The Company also
pursues foreign patent protection in certain countries. The Company's patents
protect technology that makes automated production more cost-effective and
protect important competitive features of the Company's products. However, the
Company does not consider its business to be dependent on patent protection.
The Company's research and development in support of its rechargeable
battery technology and products is currently based, in part, on non-exclusive
technology transfer agreements. The Company made an initial payment of $1.0
million for such technology and is required to make royalty and other payments
for products that incorporate the licensed technology of 8% of the fair market
value of the royalty bearing product. The license continues for the respective
unexpired terms of the patent licenses, and continues in perpetuity with respect
to other licensed technical information.
In 2003, the Company entered into an agreement with Saft to license
certain tooling for battery cases. The licensing fee associated with this
agreement is essentially one dollar per battery case. The total royalty expense
reflected in 2003 was $247,000. This agreement expires in the year 2017.
All of the Company's employees in the U.S. and all the Company's employees
involved with the Company's technology in England are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. These agreements also
contain certain noncompetition and nonsolicitation provisions effective during
the employment term and for a period of one year thereafter. There can be no
assurance that the Company will be able to enforce these agreements.
Following are registered trademarks of the Company: Ultralife(R),
Ultralife Thin Cell(R), Ultralife HiRate(R), Ultralife Polymer(R), The New Power
Generation(R), and LithiumPower(R).
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component
parts that it purchases. The Company has ISO 9001 certification for its lithium
battery manufacturing operations in both of its manufacturing facilities in
Newark, New York and Abingdon, England.
Primary Batteries
The Company's Newark, New York facility has the capacity to produce in
excess of nine million 9-volt batteries per year, approximately eleven million
cylindrical cells per year, and approximately 500,000 thin cells per year. The
manufacturing facility in Abingdon, England is capable of producing over one
million cylindrical cells per year. This facility also manufactures
seawater-activated batteries and assembles customized multi-cell battery packs.
The Company has experienced significantly increased demand recently,
particularly with respect to orders from various military organizations. The
Company has acquired new machinery and equipment in areas where production
bottlenecks have resulted, in order to meet customer demand. The Company
continually evaluates its requirements for additional capital equipment, and the
Company believes that the planned increases in its current manufacturing
11
capacity will be adequate to meet foreseeable customer demand. However, with
further unanticipated growth in demand for the Company's products, demand could
exceed capacity, which would require it to install additional capital equipment
to meet these incremental needs, which in turn may require the Company to lease
or contract additional space to accommodate needs.
The Company utilizes lithium foil as well as other metals and chemicals to
manufacture its batteries. Although the Company knows of only three major
suppliers that extrude lithium into foil and provide such foil in the form
required by the Company, it does not anticipate any shortage of lithium foil or
any difficulty in obtaining the quantities it requires. Certain materials used
in the Company's products are available only from a single source or a limited
number of sources. Additionally, the Company may elect to develop relationships
with a single or limited number of sources for materials that are otherwise
generally available. Although the Company believes that alternative sources are
available to supply materials that could replace materials it uses and that, if
necessary, the Company would be able to redesign its products to make use of an
alternative product, any interruption in its supply from any supplier that
serves currently as the Company's sole source could delay product shipments and
adversely affect the Company's financial performance and relationships with its
customers. Although the Company has experienced interruptions of product
deliveries by sole source suppliers, none of such interruptions has had a
material effect on the Company. All other raw materials utilized by the Company
are readily available from many sources.
The total carrying value of the Company's primary battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $9.1 million as of December 31, 2003.
Rechargeable Batteries
In June of 2002, the Company recorded a $14.3 million impairment charge on
a significant portion of its high volume production line for polymer
rechargeable batteries that was put in place to manufacture Nokia cell phone
replacement batteries. Due to the culmination of various economic conditions,
these assets were significantly underutilized. The Company also has some
lower-volume, but more flexible, automated manufacturing equipment at its
Newark, New York facility mainly to be used for higher value, lower quantity
production orders. The raw materials utilized by the Company are readily
available from many sources.
In addition to its own manufacturing capabilities for rechargeable
batteries, the Company has a 9.2% ownership interest in a venture in Taiwan,
named Ultralife Taiwan, Inc. (UTI). This venture, established in December 1998,
was initially set up to develop manufacturing capabilities using the Company's
polymer rechargeable technology. In addition, UTI has recently developed the
capability to manufacture rechargeable lithium batteries using lithium ion
technologies. The Company uses UTI and other lithium rechargeable cell
manufacturers as sources of raw materials for the assembly of battery packs. In
October 2002, when the Company sold a portion of its ownership interest in UTI,
the Company obtained an agreement from UTI that over the following three years,
the Company will have reserved access to 10% of UTI's high volume capacity for
rechargeable lithium battery products and the rights to utilize UTI's LSB (Large
Scale Battery) technology for the production of large capacity lithium ion
batteries for government and military markets in the U.S. and the U.K.
The total carrying value of the Company's rechargeable battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $1.1 million as of December 31, 2003.
Research and Development
Since its inception, the Company has concentrated significant resources on
research and development activities. The Company conducts its research and
development in Newark, New York. During 2003, Transition 2002, Fiscal 2002 and
Fiscal 2001, the Company expended approximately $2.5 million, $1.1 million, $4.3
million, and $3.4 million, respectively, on research and development. R&D
expenses for 2003 and Transition 2002 moderated somewhat compared to Fiscal 2002
as the development efforts for polymer rechargeable batteries declined
substantially. R&D expenses rose in Fiscal 2002 as the Company increased its
development efforts in the area of new military batteries. R&D expenses were
significantly lower in Fiscal 2001 due to the commercial launch and production
of its polymer rechargeable battery. The Company currently expects that research
and development expenditures will stay relatively consistent with the levels
experienced in 2003. As in the past, the Company will continue to seek to fund
part of its research and development efforts from both government and
non-government sources.
12
Cylindrical Cell Lithium Batteries
Since the summer of 2001, the Company's strategy has included the
development of new cells and batteries for various military applications,
utilizing technology developed through its work on pouch cell development, as
described below. The Company plans on continuing this activity, as this market
is a significant potential growth area for the business. In addition, the
Company is leveraging the new battery cases and components it is developing by
introducing rechargeable versions of these products. During 2003, the Company
spent $2.0 million mainly on development of military batteries. During
Transition 2002, the Company spent approximately $0.7 million on the development
of new military batteries, and during Fiscal 2002, it spent approximately $1.2
million on similar development efforts for the military. The Company began to
realize revenues from these development efforts in small amounts in Transition
2002 and Fiscal 2002, with significant increases in revenues realized in 2003.
Rechargeable Batteries
The Company is directing its rechargeable battery research and development
efforts toward design optimization and customization to customer specifications.
These batteries have a broad range of potential applications in industrial and
military markets including communications and computing devices and other
portable electronic devices.
During Fiscal 2002, the Company significantly reduced its development
efforts focused on the lithium polymer rechargeable technology due to changing
economic conditions. As a result, the Company realized significantly lower
expenditures for rechargeable R&D in Transition 2002. In 2003, the Company's
development efforts for the rechargeable line increased slightly from Transition
2002 levels as the Company aligned its development resources to more effectively
respond to increasing customer requests for rechargeable battery solutions. (See
Item 7, Management's Discussion and Analysis, for additional information
concerning the Company's change in strategy.)
Technology Contracts
The U.S. Government sponsors research and development programs designed to
improve the performance and safety of existing battery systems and to develop
new battery systems. In 2003, the Company was awarded the initial phase of a
government sponsored contract for battery charging systems. The contract was
successfully completed by the Company during 2003. In December 2003, the Company
was awarded a Small Business Innovative Research (SBIR) contract for the
development of a polymer battery. The development phase of this contract will be
completed in mid-2004. Additionally, the Company has completed the initial and
second phase of a government-sponsored program to develop new configurations of
the Company's BA-7590 pouch cell primary battery, which lasts up to twice as
long and could replace the current BA-5590 battery. The BA-5590 is the most
widely used battery power source for the U.S. Army and NATO communications
equipment.
In previous years, the Company had been awarded a cost sharing SBIR Phase
III contract for the development of the BA-7590 pouch cell primary battery that
was substantially completed in Fiscal 2000. In Fiscal 1999, the Company was
awarded the lead share of a three-year $15.3 million cost-sharing project
sponsored by the U.S. Department of Commerce's Advanced Technology Program
(ATP). The objective of this project was to develop and produce ultra-high
energy polymer rechargeable batteries that will significantly outperform
existing batteries in a broad range of portable electronic and aerospace
applications. As lead contractor, the Company received a total of $4.6 million
over the 3-year life of the contract. In Fiscal 2002, the Company received $0.7
million. The Company's participation in the ATP project was completed in June
2002.
In February 2004, the Company announced that it received a development
contract from General Dynamics valued at approximately $2.7 million. The
contract is for lithium primary (non-rechargeable) and lithium ion rechargeable
batteries, as well as vehicle and soldier-based chargers for the Land
Warrior-Stryker Interoperable (LW-SI) program. The development work has begun
and initial deliveries are expected to commence in January 2005.
Battery Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in the Company's batteries may pose
safety problems if improperly used. The Company has designed its batteries to
minimize safety hazards both in manufacturing and use.
13
The transportation of primary and rechargeable lithium batteries is
regulated by the International Civil Aviation Organization (ICAO) and
corresponding International Air Transport Association (IATA) Dangerous Goods
Regulations and, in the U.S., by the Department of Transportation (DOT). The
Company currently ships its products pursuant to ICAO, IATA and DOT hazardous
goods regulations. New regulations that pertain to all lithium battery
manufacturers went into effect in 2003 and additional regulations are planned to
go into effect in 2004. The new regulations require companies to meet certain
new testing, packaging, labeling and shipping specifications for safety reasons.
The Company has established its own testing facilities to ensure that it
complies with these regulations.
National, state and local regulations impose various environmental
controls on the storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although the Company
believes that its operations are in substantial compliance with current
environmental regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Moreover, state and local
governments may enact additional restrictions relating to the disposal of
lithium batteries used by customers of the Company that could adversely affect
the demand for the Company's products. There can be no assurance that additional
or modified regulations relating to the storage, use and disposal of chemicals
used to manufacture batteries, or restricting disposal of batteries will not be
imposed.
Since primary and rechargeable lithium battery chemistry reacts adversely
with water and water vapor, certain of the Company's manufacturing processes
must be performed in a controlled environment with low relative humidity. Both
of the Company's facilities contain dry rooms as well as specialized air drying
equipment.
Primary Batteries
The Company's primary battery products incorporate lithium metal, which
reacts with water and may cause fires if not handled properly. Over the past ten
years, the Company has experienced fires that have temporarily interrupted
certain manufacturing operations in a specific area of one of its facilities.
Specifically, in December 1996, a fire at the Abingdon, England facility caused
an interruption in the U.K. manufacturing operations for a period of 15 months.
During the period from December 1996 through January 1999, the Company received
insurance proceeds compensating the Company for loss of its plant and machinery,
leasehold improvements, inventory and business interruption. The Company
believes that it has adequate fire insurance, including business interruption
insurance, to protect against fire losses in its facilities.
The Company's 9-volt battery is designed to conform to the dimensional and
electrical standards of the American National Standards Institute, and the
9-volt battery and certain 3-volt cells are recognized under the Underwriters
Laboratories, Inc. Component Recognition Program.
Rechargeable Batteries
The Company is not currently aware of any regulatory requirements
regarding the disposal of lithium polymer or lithium ion rechargeable cells and
batteries.
Corporate
Refer to description of environmental remediation for the Company's
Newark, New York facility more specifically set forth in Item 3, Legal
Proceedings.
Competition
Competition in the battery industry is, and is expected to remain,
intense. The competition ranges from development stage companies to major
domestic and international companies, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than those of the Company. The Company competes against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.
14
Historically, although other entities may attempt to take advantage of the
growth of the lithium battery market, the lithium battery industry has certain
technological and economic barriers to entry. The development of technology,
equipment and manufacturing techniques and the operation of a facility for the
automated production of lithium batteries require large capital expenditures,
which may deter new entrants from commencing production. During the past few
years, several Asian companies have gained manufacturing strength in the polymer
market. The Company's strategy is to form marketing partnerships with selected
companies in order to minimize competition from these companies. Through its
experience in battery manufacturing, the Company has also developed expertise,
which it believes would be difficult to reproduce without substantial time and
expense in the primary battery market.
Employees
As of January 31, 2004, the Company employed a total of 935 permanent and
temporary persons: 16 in research and development, 869 in production and 50 in
sales, administration and management. Of the total, 819 are employed in the U.S.
and 116 in England. None of the Company's employees is represented by a labor
union. During 2003, the Company has been required to hire additional personnel
in order to meet the increasing demand for its products. In December 2002, the
Company employed 375 persons. The Company considers its employee relations to be
satisfactory.
ITEM 2. PROPERTIES
The Company occupies under a lease/purchase agreement approximately
250,000 square feet in two facilities located in Newark, New York. The Company
leases approximately 35,000 square feet in a facility based in Abingdon,
England. At both locations, the Company maintains administrative offices,
manufacturing and production facilities, a research and development laboratory,
an engineering department and a machine shop. At present, all of the Company's
rechargeable manufacturing and assembly operations are conducted at its Newark,
New York facility. The Company's corporate headquarters are located in the
Newark facility. The Company believes that its facilities are adequate and
suitable for its current manufacturing needs. However, the Company may require
additional manufacturing space in the event it continues to grow. The Company
entered into a lease/purchase agreement with the local county authority in
February 1998 with respect to its 110,000 square foot manufacturing facility in
Newark, New York which provides more favorable terms and reduces the expense for
the lease of the facility. The lease also includes an adjacent building to the
Company's manufacturing facility estimated to encompass approximately 140,000
square feet and approximately 65 acres of property. Pursuant to the lease, the
Company delivered a down payment in the amount of $440,000 and paid the local
governmental authority annual installments in the amount of $50,000 through
December 2001 decreasing to approximately $30,000 annually for the periods
commencing December 2001 and ending December 2007. Upon expiration of the lease
in 2007, the Company is required to purchase its facility for the purchase price
of one dollar.
The Company leases a facility in Abingdon, England. The term of the lease
was extended and continues until March 24, 2013. It currently has an annual rent
of approximately $240,000 and is subject to review every five years based on
current real estate market conditions. The next review is March 2004.
ITEM 3. 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
15
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 sought proposals from engineering firms to complete the
remedial work contained in the work plan. A firm was selected to undertake the
remediation and in December 2003 the remediation was completed. NYSDEC oversaw
the remedial work and requested additional sampling which was completed in
December of 2003, as well. The test results have been forwarded to NYSDEC and
the Company is awaiting further comment. 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, there is no
requirement for the Company to complete the project within any specific time
frame. 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. Additionally, Ultralife will
honor its warranty by replacing any batteries that may be determined to be
defective. The Company has learned that the end-user and the Customer have
settled the matter. 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.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal and remanding the case to the District Court for further proceedings
in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement, the
Company's insurance carrier commenced liquidation proceedings. The insurance
carrier informed the Company that in light of the liquidation proceedings, it
would no longer fund the settlement. In addition, the value of the insurance
policy was in serious doubt. In April 2002, the Company and the insurance
carrier for the underwriters offered to proceed with the settlement. Plaintiffs'
counsel accepted the terms of the proposed settlement, amounting to $175,000 for
the Company, which was previously accrued. The settlement was approved by the
Court and by the shareholders comprising the class, and the Company paid the
settlement in June of 2003. This matter is now completed and the Company will
not incur any further expenses with regard to this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is included for quotation on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol "ULBI."
The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock during 2003, Transition 2002 and Fiscal
2002:
Sales Prices
High Low
---- ---
2003:
Quarter ended March 29, 2003 $ 4.16 $ 3.21
Quarter ended June 28, 2003 10.32 3.95
Quarter ended September 27, 2003 14.46 9.60
Quarter ended December 31, 2003 17.92 12.38
Transition 2002:
Quarter ended September 28, 2002 $3.60 $2.52
Quarter ended December 31, 2002 3.70 1.74
Fiscal 2002:
Quarter ended September 30, 2001 $6.50 $4.15
Quarter ended December 31, 2001 5.24 3.55
Quarter ended March 31, 2002 4.55 3.00
Quarter ended June 30, 2002 4.24 2.80
During the period from January 1, 2004 through February 28, 2004, the high
and low closing sales prices of the Company's Common Stock were $23.00 and
$13.25, respectively.
Holders
As of February 28, 2003, there were 137 registered holders of record of
the Company's Common Stock. Based upon information from the Company's stock
transfer agent, management of the Company believes that there are more than
8,000 beneficial holders of the Company's Common Stock.
In July 1999, the Company issued 700,000 shares of its Common Stock to
Ultralife Taiwan, Inc. (UTI) in exchange for $8.75 million in cash.
Subsequently, in September 1999, the Company contributed $8.75 million in cash
to the UTI venture. This cash contribution coupled with the contribution of the
Company's technology resulted in approximately a 46% ownership interest in UTI.
The transaction was done in conjunction with the UTI agreement that was
announced by the Company in December 1998. Subsequently, the Company's interest
in UTI has been reduced to 9.2% due to stock issuances to certain UTI employees,
subsequent capital raising efforts, and the disposition of a portion of the
Company's interest in UTI in October 2002, which included the return of 700,000
shares of the Company's Common Stock from UTI. See also History in Item 1 of
this Report.
On July 20, 2001, the Company completed a $6.8 million private placement
of 1,090,000 shares of its common stock at $6.25 per share. In conjunction with
the offering, warrants to acquire up to 109,000 shares of common stock were
granted. The exercise price of the warrants is $6.25 per share and the warrants
have a five-year term. At December 31, 2003, there were 86,907 warrants
outstanding. The Company relied on the exemption provided by Rule 506 of
Regulation D in connection with the unregistered private placement of its common
stock in connection with the shares issued pursuant to the Share Purchase
Agreement. The Company did not engage in any general solicitation, sold shares
only to "accredited investors" and sold shares primarily to purchasers who were
existing shareholders of the Company.
17
On April 23, 2002, the Company closed on a $3.0 million private placement
consisting of common stock and a convertible note. Initially, 801,333 shares
were issued, all to "accredited investors". The $600,000 convertible note, which
accrued interest at 10% per annum, was issued to one of the Company's directors.
In December 2002, shareholders voted to approve the conversion of the note into
an additional 200,000 shares, and all accrued interest was forgiven. All shares
were issued at $3.00 per share. The shares and convertible note were issued in
reliance on the exemption from registration provided by Rule 506 of Regulation
D.
On June 4, 2003, the Company issued 125,000 shares of its common stock to
an accredited investor upon conversion of a three-month $500,000 note issued on
March 4, 2003 to raise funds to meet the Company's short-term working capital
needs. The shares were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
On October 7, 2003, the Company completed a private placement of 200,000
shares of unregistered common stock to "accredited investors" at a price of
$12.50 per share, for a total of $2,500,000. The net proceeds of the private
placement, $2,350,000, were used to advance funds to Ultralife Taiwan, Inc.
(UTI), in which the Company has an approximately 9.2% ownership interest. This
transaction was done in order to provide some short-term financing to UTI while
they work to complete an additional equity infusion into UTI to support their
growth plans. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Dividends
The Company has never declared or paid any cash dividend on its capital
stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any future payment of dividends will depend
upon the financial condition, capital requirements and earnings of the Company,
as well as upon other factors that the Board of Directors may deem relevant.
Additionally, pursuant to the credit facility between the Company and Congress
Financial Corporation (New England), the Company is precluded from declaring or
paying any dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average exercise equity compensation plans
be issued upon exercise price of outstanding (excluding securities
of outstanding options, options, warrants and reflected in column (a))
warrants and rights rights (c)
Plan Category (a) (b)
Equity compensation
plans approved by
security holders 1,495,486 $5.71 56,151
Equity compensation
plans not approved by
security holders 500,000 $5.19 0
------- ----- -
Total 1,995,486 $5.60 56,151
See Note 7 in Notes to Consolidated Financial Statements for additional
information.
18
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Six Months
Year Ended Ended
December 31, December 31, Year Ended June 30,
------------ ------------ --------------------------------------------------
2003 2002 2002 2001 2000 1999
-------- -------- -------- -------- -------- --------
Statement of Operations Data:
Revenues $ 79,450 $ 15,599 $ 32,515 $ 24,163 $ 24,514 $ 21,064
-------- -------- --------------------------------------------------
Cost of products sold 62,354 14,707 31,168 27,696 25,512 19,016
-------- -------- --------------------------------------------------
Gross margin 17,096 892 1,347 (3,533) (998) 2,048
-------- -------- --------------------------------------------------
Research and development expenses 2,505 1,106 4,291 3,424 5,306 5,925
Selling, general and administrative
expenses 8,610 3,441 7,949 8,009 7,385 6,195
Impairment of long lived assets -- -- 14,318 -- -- --
Gain on fires -- -- -- -- -- (1,288)
-------- -------- --------------------------------------------------
Total operating and other expenses 11,115 4,547 26,558 11,433 12,691 10,832
-------- -------- --------------------------------------------------
Operating income (loss) 5,981 (3,655) (25,211) (14,966) (13,689) (8,784)
Interest (expense)/income, net (520) (151) (291) 166 909 1,456
Gain on sale of securities -- -- -- -- 3,147 348
Equity (loss)/earnings in UTI -- (1,273) (954) (2,338) (818) (80)
Gain on sale of UTI stock -- 1,459 -- -- -- --
Gain from forgiveness of debt/grant 781 -- -- -- -- --
Other income (expense), net 311 508 320 (124) 209 (25)
-------- -------- --------------------------------------------------
Income/(loss) before income taxes 6,553 (3,112) (26,136) (17,262) (10,242) (7,085)
Income taxes 106 -- -- -- -- --
-------- -------- --------------------------------------------------
Net income (loss) $ 6,447 $ (3,112) $(26,136) $(17,262) $(10,242) $ (7,085)
======== ======== ==================================================
Net income (loss) per share-basic $ 0.49 $ (0.24) $ (2.11) $ (1.55) $ (0.94) $ (0.68)
======== ======== ==================================================
Net income (loss) per share-diluted $ 0.46 $ (0.24) $ (2.11) $ (1.55) $ (0.94) $ (0.68)
======== ======== ==================================================
Weighted average shares
outstanding-basic 13,132 12,958 12,407 11,141 10,904 10,485
======== ======== ==================================================
Weighted average shares
outstanding-diluted 13,917 12,958 12,407 11,141 10,904 10,485
======== ======== ==================================================
December 31, June 30,
---------------------- --------------------------------------------------
2003 2002 2002 2001 2000 1999
-------- -------- -------- -------- -------- --------
Balance Sheet Data:
Cash and available-for-sale securities $ 882 $ 1,374 $ 2,219 $ 3,607 $ 18,639 $ 23,556
Working capital $ 14,702 $ 7,211 $ 4,950 $ 6,821 $ 22,537 $ 28,435
Total assets $ 52,352 $ 31,374 $ 34,321 $ 47,203 $ 64,460 $ 66,420
Total long-term debt and capital lease
obligations $ 68 $ 1,987 $ 103 $ 2,648 $ 3,567 $ 215
Stockholders' equity $ 34,430 $ 22,243 $ 25,422 $ 37,453 $ 54,477 $ 60,400
19
ITEM 7. 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 Annual 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 Annual 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, finalization of non-bid government
contracts, 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. See Risk Factors in Item 7.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
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. The financial results presented in this report
reflecting the calendar year ended December 31, 2003 are referred to as "2003".
The financial results presented in this report reflecting the six-month period
ended December 31, 2002 are referred to as "Transition 2002". The financial
results presented in this report reflecting the full twelve-month fiscal periods
that ended June 30 prior to Transition 2002 are referred to as "fiscal" years.
For instance, the year ended June 30, 2002 is referred to as "Fiscal 2002", and
the year ended June 30, 2001 is referred to as "Fiscal 2001". The financial
results pertaining to the twelve month period ended December 31, 2002 and the
six month period ended December 31, 2001 were derived from unaudited financial
statements, due to the Company's change in its fiscal year end.
The Company reports its results in three operating segments: Primary
Batteries, Rechargeable Batteries, and Technology Contracts. 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 Company looks at
its segment performance at the gross margin level, and does not allocate
research and development or selling, general and administrative costs against
the segments. All other items that do not specifically relate to these three
segments and are not considered in the performance of these segments are
considered to be Corporate charges.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
20
Results of Operations
Twelve Months Ended December 31, 2003 Compared With the Twelve Months Ended
December 31, 2002
12 Months Ended Increase /
12/31/2003 12/31/2002 (Decrease)
-----------------------------------------------
Sales $79,450,000 $ 33,039,000 $ 46,411,000
Cost of Sales 62,354,000 30,140,000 32,214,000
-----------------------------------------------
Gross Margin 17,096,000 2,899,000 14,197,000
Operating Expenses 11,115,000 24,738,000 (13,623,000)
-----------------------------------------------
Operating Income (Loss) 5,981,000 (21,839,000) 27,820,000
Other Income (Expense) , net 572,000 (572,000) 1,144,000
Income Taxes 106,000 -- 106,000
-----------------------------------------------
Net Income (Loss) $ 6,447,000 $(22,411,000) $ 28,858,000
===============================================
Net income (loss) per share, basic $ 0.49 $ (1.75) $ 2.24
===============================================
Net income (loss) per share diluted $ 0.46 $ (1.75) $ 2.21
===============================================
Weighted average shares outstanding-basic 13,132,000 12,786,000 346,000
===============================================
Weighted average shares outstanding-diluted 13,917,000 12,786,000 1,131,000
===============================================
Revenues. Total revenues of the Company for the twelve months ended
December 31, 2003, increased $46,411,000, or 140% to $79,450,000 over the twelve
months ended December 31, 2002. Primary batteries accounted for $44,799,000 of
this change, increasing from $32,271,000 for the twelve months ended December
31, 2002 to $77,070,000 for the same twelve month period in 2003, mainly due to
strong sales of HiRate batteries related to increased demand for the Company's
large cylindrical BA-5390 battery sold to military customers, and higher 9-volt
sales. Rechargeable battery sales increased $1,097,000, or 255%, from $431,000
in 2002 to $1,528,000 in 2003, primarily due to increased product offerings,
including the rechargeable version of the BA-5390 and battery charging units.
Technology contract revenues increased $515,000, or 154% to $852,000 for the
year ended December 31, 2003, resulting from a military development contract
with the U.S. Army for rechargeable batteries and battery charging units.
Cost of Products Sold. Cost of products sold increased $32,214,000 to
$62,354,000 for the year ended December 31, 2003 as a result of the increase in
revenues. Consolidated cost of products sold as a percentage of total revenue
improved from approximately 91% for the twelve months ended December 31, 2002 to
78% for the twelve months ended December 31, 2003. Consolidated gross margins
improved from 9% for the year ended December 31, 2002 to 22% for the year ended
December 31, 2003.
In the Primary battery segment, the cost of batteries sold increased
$31,455,000, from $27,716,000 in the year ended December 31, 2002 to $59,171,000
in 2003, mainly related to increased sales volume. As a percent of total primary
battery sales, the cost of primary products sold decreased from 86% for the year
ended December 31, 2002 to 77% for the year ended December 31, 2003 mainly due
to increased production and improved manufacturing efficiencies. The
corresponding primary gross margins were 14% in 2002 and 23% in 2003.
In the Rechargeable battery segment, the cost of products sold increased
$570,000, from $2,179,000 in the year ended December 31, 2002 to $2,749,000 in
2003. While rechargeable product sales rose 255%, the costs of products sold
rose only a modest 26% in comparison. The most notable reason for this
improvement related to the cost reduction program that the Company initiated
during late 2001 and early 2002, as well as lower depreciation charges related
to the fixed asset impairment recorded in June 2002.
Technology contract cost of sales increased $189,000, or 77%, from
$245,000 for the year ended December 31, 2002 to $434,000 for the year ended
December 31, 2003, as a result of the increase in revenues. Technology contracts
cost of sales as a percentage of revenue was 51% for the year ended December 31,
2003, compared with 73% in 2002, primarily due to differences in gross margins
of current year contracts compared with prior year contracts.
21
Operating and Other Expenses. Total operating expenses increased 7%, or
$695,000, to $11,115,000 for the year ended December 31, 2003 up from
$10,420,000 for the year ended December 31, 2002, excluding a $14,318,000 asset
impairment charge recorded in June of 2002. In general, this increase related to
the higher costs required to support the significant growth of the Company.
Operating and other expenses as a percentage of revenue decreased from 32% in
2002, excluding the impairment charge, to 14% in 2003. Research and development
costs decreased to $2,505,000 for the twelve months ended December 31, 2003 as
compared to $3,243,000 for the same period in 2002. The decrease is largely
attributable to a decline in the development efforts for polymer rechargeable
batteries associated with the Company's shift in its strategy during 2002.
Selling, general and administrative expenses increased $1,433,000, or
20%, from $7,177,000 in 2002 to $8,610,000 in 2003. Selling and marketing
expenses increased $545,000, or 21%, as added investments were made relating to
additional customer service and sales support needed to keep pace with the rapid
sales growth. General and administrative expenses increased $888,000, or 20%,
due to higher professional and legal fees, and personnel costs.
Other Income (Expense). Interest expense (net) increased $168,000, from
$352,000 for the year ended December 31, 2002 to $520,000 for the year ended
December 31, 2003. This change was a result of higher revolving loan balances in
2003. Equity loss in Ultralife Taiwan, Inc., (UTI) was $2,452,000 in the year
ended December 31, 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%, resulting in the change in the method of accounting.
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 December 31, 2003. In connection with the sale, the
Company recorded a $1,459,000 gain in October 2002. During 2003, the Company
recognized a $781,000 gain from the forgiveness of a government-sponsored
debt/grant agreement dated in 2001 as the Company fulfilled its obligation to
increase employment levels under a government-sponsored loan, and the loan was
forgiven. Miscellaneous income, primarily consisting of foreign exchange
transaction gains and losses, decreased $462,000 to $311,000 for the year ended
December 31, 2003 from $773,000 for the year ended December 31, 2002.
Income Taxes. The Company recorded an income tax provision in 2003 of
$106,000, compared with zero in 2002. While the Company had significant net
operating loss carryforwards (NOLs) as of December 31, 2003 related to past
years' cumulative losses, it is subject to a U.S. alternative minimum tax where
NOLs can offset only 90% of alternative minimum taxable income.
Net Income. Net income was $6,447,000, or $0.46 per diluted common share,
for the year ended December 31, 2003 compared with a net loss of $22,411,000, or
$1.75 per share, for the year ended December 31, 2002, primarily as a result of
the reasons described above. Average common shares outstanding used to compute
basic earnings per share increased from 12,786,000 in 2002 to 13,132,000 in 2003
mainly due to various common equity transactions during 2002 and 2003, and stock
option exercises during 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 positive earnings in 2003, the increase in the Company's stock
price during 2003 and the related impact from "in the money" stock options and
warrants resulted in an additional 785,000 shares for the average diluted shares
outstanding computation in 2003.
22
Six Months Ended December 31, 2002 Compared With the Six Months Ended December
31, 2001
6 Months Ended Increase /
12/31/2002 12/31/2001 (Decrease)
----------------------------------------------
Sales $15,599,000 $15,075,000 $ 524,000
Cost of Sales 14,707,000 15,735,000 (1,028,000)
----------------------------------------------
Gross Margin 892,000 (660,000) 1,552,000
Operating Expenses 4,547,000 6,367,000 (1,820,000)
----------------------------------------------
Operating Loss (3,655,000) (7,027,000) 3,372,000
Other Income (Expense), net 543,000 190,000 353,000
----------------------------------------------
Net Loss $(3,112,000) $(6,837,000) $ 3,725,000
==============================================
Net loss per share, basic $ (0.24) $ (0.56) $ 0.32
==============================================
Net loss per share, diluted $ (0.24) $ (0.56) $ 0.32
==============================================
Weighted average shares outstanding-basic 12,958,000 12,140,000 818,000
==============================================
Weighted average shares outstanding-diluted 12,958,000 12,140,000 818,000
==============================================
Revenues. Total revenues of the Company increased $524,000 from
$15,075,000 for the six months ended December 31, 2001 to $15,599,000 for the
six months ended December 31, 2002. Primary battery sales increased $938,000,
from $14,294,000 for the six months ended December 31, 2001 to $15,232,000 for
the six months ended December 31, 2002. The increase in primary battery sales
was primarily due to new shipments of large cylindrical batteries, particularly
the Company's BA-5390 battery sold to military customers, and an increase in
HiRate battery sales due to stronger demand from the U.K. Ministry of Defence.
These increases were offset in part by a decline in sales of small cylindrical
batteries, mainly related to a fulfillment of orders from military for BA-5368
batteries used for pilot-down radio applications. Rechargeable battery sales
were consistent year over year. Technology contract revenues decreased $400,000,
from $493,000 to $93,000 due to the scheduled reduction of certain nonrenewable
government contracts, which concluded in June 2002.
Cost of Products Sold. Cost of products sold decreased $1,028,000, from
$15,735,000 for the six months ended December 31, 2001 to $14,707,000 for the
six months ended December 31, 2002. Consolidated cost of products sold as a
percentage of total revenue improved from approximately 104% to 94% for the six
months ended December 31, 2002. Consolidated gross margins improved from a
negative 4% of sales in the six months ended December 31, 2001 to a positive 6%
for the same six months in 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. A majority of employees affected by this
realignment were re-deployed from the Rechargeable segment and support functions
into open direct labor positions in the Primary segment, due to the
significantly growing demand for primary batteries from the military. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, these actions
generated total cost savings of more than $2,000,000 per quarter from the
expense run rate that the Company experienced during its September 2002 quarter.
In the Primary battery segment, the cost of batteries sold increased
$1,305,000, from $12,376,000 in the six months ended December 31, 2001 to
$13,681,000 in the same six month period in 2002, mainly related to increased
sales volume. As a percent of total primary battery sales, cost of primary
products sold rose from 87% for the six months ended December 31, 2001 to 90%
for the year ended June 30, 2002. The corresponding decline in primary gross
margins from 13% in 2001 to 10% in 2002 resulted from lower sales of small
cylindrical batteries, and start-up
23
costs for the large cylindrical battery business, offset in part by higher
margins in 9-volt batteries due mainly to improving manufacturing efficiencies.
In the Rechargeable battery segment, the cost of products sold decreased
$1,914,000 in the six months ended December 31, 2002 from $2,917,000 in the six
months ended December 31, 2001 to $1,003,000 in the same six-month period in
2002. In general, the decrease in costs from 2001 to 2002 primarily resulted
from the implementation of cost savings initiatives referred to previously, as
well as lower depreciation charges related to a $14.3 million write-down of
rechargeable fixed assets that the Company recorded in June 2002.
Technology contracts cost of sales decreased $418,000, or approximately
95%, from $442,000 for the six months ended December 31, 2001 to $24,000 for the
six months ended December 31, 2002, in line with the decrease in revenues.
Technology contracts cost of sales as a percentage of revenue was 90% for that
six-month period, consistent with the prior year.
Operating and Other Expenses. Total operating and other expenses decreased
$1,820,000 from $6,367,000 for the six months ended December 31, 2001 to
$4,547,000 for the six months ended December 31, 2002 mainly as a result of cost
savings initiatives implemented in late 2001 and early 2002. Operating and other
expenses as a percentage of revenue improved from 42% for the six months ended
December 31, 2001 to 29% for the same six-month period in 2002. Research and
development costs decreased $1,048,000, or 49% from $2,154,000 for the six
months ended December 31, 2001 to $1,106,000 for the same six months in 2002.
This decrease was mainly due to the cost savings initiatives and lower
depreciation charges resulting from the write-down of rechargeable equipment in
June 2002.
Selling, general and administration expenses decreased $772,000, or 18%,
from $4,213,000 for the six months ended December 31, 2001 to $3,441,000 for the
six months ended December 31, 2002. Selling and marketing expenses declined
$466,000 from the six-month period in 2001 over 2002 as a result of a more
targeted sales coverage strategy using fewer resources and lower marketing and
advertising costs. General and administrative expenses declined $305,000 mainly
due to lower executive severance costs and cost savings actions that reduced
personnel and other related expenses.
Other Income (Expense). Interest income decreased $67,000 from $107,000
for the six months ended December 31, 2001 to $40,000 for the same six months in
2002. This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $18,000 from $197,000 in 2001 to $179,000 in 2002 as a result of lower
average balances of debt. Equity loss in UTI was $1,273,000 in the six month
period ended December 31, 2002 compared with equity earnings of $225,000 in the
same period in 2001. This change resulted mainly from higher reported operating
losses at UTI. Miscellaneous income (expense) increased from income of $55,000
in the six months ended December 31, 2001 to income of $508,000 in the six
months ended December 31, 2002, primarily as a result of unrealized gains on
foreign currency transactions due mainly to the strengthening of the U.K. pounds
sterling relative to the U.S. dollar.
In October 2002, the Company sold a portion of its equity investment in
Ultralife Taiwan, Inc. (UTI), reducing its ownership interest from approximately
30% to approximately 10.6%. In exchange, the Company received total
consideration of $2.4 million in cash and the return of 700,000 shares of
Ultralife common stock. As a result of this transaction, the Company recorded a
gain on the disposition of its UTI investment of $1,459,000.
Net Losses. The consolidated net loss for the six months ended December
31, 2002 was $3,112,000, or $0.24 per share compared with a loss of $6,837,000,
or $0.56 per share, for the six months ended December 31, 2001, primarily as a
result of the reasons described above.
24
Fiscal Year Ended June 30, 2002 Compared With the Fiscal Year Ended June 30,
2001
12 Months Ended Increase /
6/30/2002 6/30/2001 (Decrease)
-------------------------------------------------
Sales $ 32,515,000 $ 24,163,000 $ 8,352,000
Cost of Sales 31,168,000 27,696,000 3,472,000
-------------------------------------------------
Gross Margin 1,347,000 (3,533,000) 4,880,000
Operating Expenses 26,558,000 11,433,000 15,125,000
-------------------------------------------------
Operating Loss (25,211,000) (14,966,000) (10,245,000)
Other (Expense)/Income, net (925,000) (2,296,000) 1,371,000
-------------------------------------------------
Net Loss $(26,136,000) $(17,262,000) $ (8,874,000)
=================================================
Net loss per share, basic $ (2.11) $ (1.55) $ (0.56)
=================================================
Net loss per share, diluted $ (2.11) $ (1.55) $ (0.56)
=================================================
Weighted average shares outstanding-basic 12,407,000 11,141,000 1,266,000
=================================================
Weighted average shares outstanding-diluted 12,407,000 11,141,000 1,266,000
=================================================
Revenues. Total revenues of the Company increased $8,352,000 from
$24,163,000 for the year ended June 30, 2001 to $32,515,000 for the year ended
June 30, 2002. Primary battery sales increased $9,229,000, from $22,105,000 for
the year ended June 30, 2001 to $31,334,000 for the year ended June 30, 2002.
The increase in primary battery sales was primarily due to growth in cylindrical
battery sales, particularly to military customers, and higher 9-volt battery
sales. Rechargeable battery sales increased modestly from $370,000 for the year
ended June 30, 2001 to $445,000 for the year ended June 30, 2002, as the Company
broadened its strategy in the latter portion of fiscal 2002 from simply selling
polymer batteries it manufactures to selling a rechargeable "solution" that
encompasses sourcing cells from other lithium battery manufacturers and
assembling them to meet customer needs. Technology contract revenues decreased
$952,000, from $1,688,000 to $736,000 due to the scheduled reduction of certain
nonrenewable government contracts, which concluded in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $3,472,000, from
$27,696,000 for the year ended June 30, 2001 to $31,168,000 for the year ended
June 30, 2002. Consolidated cost of products sold as a percentage of total
revenue improved from approximately 115% to 96% for the year ended June 30,
2002. Consolidated gross margins improved from a negative 15% in fiscal 2001 of
sales to a positive 4% in fiscal 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. A majority of employees affected by this
realignment were re-deployed from the Rechargeable segment and support functions
into open direct labor positions in the Primary segment, due to the
significantly growing demand for primary batteries from the military. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas. Overall,
the Company reduced its workforce by more than 20% during the year.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, the actions taken
during fiscal 2002 generated total cost savings of more than $2,000,000 per
quarter from the expense run rate that the Company experienced during its first
quarter of fiscal 2002.
In the Primary battery segment, the cost of batteries sold increased
$5,318,000, from $21,094,000 in 2001 to $26,412,000 in 2002, mainly related to
increased sales volume. As a percent of total primary battery sales, cost of
primary products sold improved from 95% for the year ended June 30, 2001 to 84%
for the year ended June 30, 2002, reflecting improved manufacturing efficiencies
related to higher volumes and the impact from certain of the cost
25
savings initiatives referred to above, as well as the ongoing positive effects
from the implementation of lean manufacturing disciplines.
In the Rechargeable battery segment, the cost of products sold decreased
$972,000 in fiscal 2002 from $5,065,000 in fiscal 2001 to $4,093,000 in 2002.
During fiscal 2001, in anticipation of significant increases in rechargeable
sales volume, the Company added resources to prepare for this expected growth.
As economic conditions changed during fiscal 2002, the Company reacted and
reduced its resources accordingly by realigning its resources and reducing
manpower as described above. In general, the decrease in costs from 2001 to 2002
primarily resulted from the cost savings initiatives that were implemented
during the year.
Technology contracts cost of sales decreased $874,000, or approximately
57%, from $1,537,000 for the year ended June 30, 2001 to $663,000 for the year
ended June 30, 2002, in line with the decrease in revenues. Technology contracts
cost of sales as a percentage of revenue was 10% in 2002, consistent with the
prior year.
Operating and Other Expenses. In June 2002, the Company recorded a fixed
asset impairment charge of $14,318,000. This impairment charge related to a
write-down 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
rechargeable 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 lithium ion cells.
Third, the Company will look to other rechargeable cell manufacturers as sources
for cells that the Company can then assemble into completed battery packs. In
the future, the impairment of the rechargeable fixed assets will result in lower
depreciation charges of approximately $1,800,000 per year.
Total operating and other expenses increased $15,125,000 from $11,433,000
for the year ended June 30, 2001 to $26,558,000 for the year ended June 30,
2002. Excluding the impairment charge, operating and other expenses increased
$807,000, from $11,433,000 in 2001 to $12,240,000 in 2002, mainly as a result of
higher research and development expenses. Operating and other expenses as a
percentage of revenue, excluding the impairment charge, improved from 47% for
the year ended June 30, 2001 to 38% for the year ended June 30, 2002. Research
and development costs increased $867,000, or 25% from $3,424,000 for the year
ended June 30, 2001 to $4,291,000 for the year ended June 30, 2002. This
increase was mainly due to higher costs related to the development of new
cylindrical batteries for the military applications, as the Company focused more
extensively on this significant market opportunity. R&D expenditures related to
rechargeable battery development diminished during the year as a result of the
cost savings actions discussed previously. The Company anticipates that R&D
costs overall will decline significantly in fiscal 2003 as compared with 2002
due to the sizeable reduction in rechargeable development efforts and the
expected near-term transition of the new cylindrical battery development to
manufacturing during fiscal 2003.
Selling, general and administration expenses decreased $60,000,
approximately 1%, from $8,009,000 for the year ended June 30, 2001 to $7,949,000
for the year ended June 30, 2002, even though revenues rose 35%. Selling and
marketing expenses declined $404,000 from fiscal 2001 to fiscal 2002 as a result
of a more targeted sales coverage strategy using fewer resources and lower
marketing and advertising costs. General and administrative expenses, on the
other hand, rose $344,000 as a result of higher insurance expenses and certain
severance costs pertaining to an executive employment agreement incurred in
conjunction with the Company's resource realignment during the second fiscal
quarter.
Other Income (Expense). Interest income decreased $611,000 from $702,000
for the year ended June 30, 2001 to $91,000 for the year ended June 30, 2002.
This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $154,000 from $536,000 in 2001 to $382,000 in 2002 as a result of
lower average balances of debt. Equity loss in UTI was $954,000 in Fiscal 2002
compared with a loss of $2,338,000 in Fiscal 2001. The Fiscal 2002 results
included a $1,096,000 favorable adjustment recorded in July 2001 to correct
cumulative net gains pertaining to the manner in which the Company accounted for
this equity investment in Fiscal 2001 and Fiscal 2000. The Company determined
that this cumulative adjustment was not significant enough to warrant a
restatement for those periods. Miscellaneous income (expense) changed from an
expense of $124,000 in 2001 to
26
income of $320,000 in 2002, primarily as a result of unrealized gains on foreign
currency transactions due mainly to the strengthening of the U.K. pounds
sterling relative to the U.S. dollar.
Net Losses. The consolidated net loss for the year ended June 30, 2002 was
$26,136,000, or $2.11 per share. Excluding the $14,318,000 impairment charge for
long-lived assets, the consolidated net loss improved $5,444,000 from a loss of
$17,262,000, or $1.55 per share, for the year ended June 30, 2001 to a loss of
$11,818,000, or $0.95 per share, for the year ended June 30, 2002, primarily as
a result of the reasons described above.
Liquidity and Capital Resources
Cash Flows and General Business Matters
As of December 31, 2003, cash equivalents totaled $830,000, excluding
restricted cash of $50,000. During the twelve months ended December 31, 2003,
the Company used $4,567,000 of cash in operating activities as compared to
$6,041,000 for the twelve months ended December 31, 2002. While net income plus
depreciation and amortization amounted to a positive $9,580,000 during 2003,
uses of working capital more than offset this. Accounts receivable rose
$11,615,000 related to the significant increase in sales, and inventories rose
$4,784,000 due to the increased production activity for the recent military
orders. In the year ended December 31, 2003, the Company used $5,560,000 to
purchase property, plant and equipment, mainly as a result of the need to
increase production capacity for cylindrical cells as demand from military
customers grew significantly. The Company also loaned $2,350,000 to UTI to help
that company with some short-term financing needs. During 2003, the Company
generated $11,731,000 in funds from financing activities. The financing
activities included inflows from a $2,500,000 private equity placement, stock
option exercises that generated approximately $2,421,000, 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. In addition, the
Company had accessed $7,011,000 of its revolving credit facilities during 2003
to finance working capital needs. Offsetting the inflows from financing
activities was the payment of $818,000 for reductions in debt principal and
capital leases.
Inventory turnover for the year ended December 31, 2003 averaged 6.7
turns, compared with 5.7 turns in 2002. This metric is indicative of 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 2003, compared with an average of 58 days for 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.
The Company's order backlog at December 31, 2003 was approximately
$60,000,000, of which approximately $42,000,000 related to orders from the U.S.
military which are expected to ship throughout 2004.
As of December 31, 2003, the Company had made commitments to purchase
approximately $1,146,000 of production machinery and equipment which it expects
to fund through operating cash flows.
Debt and Lease Commitments
At December 31, 2003, the Company had a capital lease obligation
outstanding of $86,000 for the Company's Newark, New York offices and
manufacturing facilities.
The Company has a $15,000,000 secured credit facility with it primary
lending institution, which was initially established in June 2000. The financing
agreement consists of a term loan component supported by fixed assets and a
revolving credit facility component based on eligible net accounts receivable
and eligible net inventory. At December 31, 2003, $1,267,000 was outstanding on
the term loan. The Company pays $200,000 per quarter on the principal of the
term loan plus interest, and there is no additional borrowing capacity on the
term loan component above the current amount outstanding. The revolving credit
component comprises the remainder of the total potential borrowing capacity. At
December 31, 2003, the outstanding borrowings on the revolving credit facility
were $6,557,000. The total amount available under the credit facility is reduced
by outstanding letters of credit. At December 31, 2003, the Company had
$3,800,000 outstanding on a letter of credit, supporting a $4,000,000 equipment
lease. The Company's additional borrowing capacity under the revolver component
of the credit facility as of December 31, 2003 was approximately $2,898,000.
27
At December 31, 2003, the main financial covenant of the $15,000,000
credit facility required the Company to maintain a net worth of at least
approximately $19,200,000. This covenant increases each January 1 by 50% of the
Company's net income in the prior year. At January 1, 2004, the minimum net
worth covenant was approximately $22,406,000. At December 31, 2003, the
Company's net worth was $34,430,000, in compliance with this covenant.
Loans under the $15,000,000 credit facility currently bear interest at
prime-based rates. At December 31, 2003, the rate was 5.25%. The Company also
pays a facility fee of 0.25% on the unused portion of the commitment. The loan
is collateralized by substantially all of the Company's assets and the Company
is precluded from paying dividends under the terms of the agreement. At December
31, 2003, the entire balance of outstanding borrowings under this credit
facility was classified as a short-term liability on the Consolidated Balance
Sheet. (See Note 5 for additional information.) This credit facility is
scheduled to expire on June 30, 2004. The Company is currently seeking and
reviewing proposals from various lending institutions that would provide it with
greater borrowing capacity, increased flexibility and lower borrowing costs. The
Company plans to refinance this debt, or extend its current credit flexibility,
before its current arrangement expires.
In March 2001, the Company established an operating lease line for the
purpose of financing the acquisition of certain manufacturing equipment, which
the Company completed drawing upon in June 2002. The total amount of the lease
line established was approximately $4,000,000. The Company's quarterly lease
payment is approximately $226,000, and the lease expires in July 2007. In
conjunction with this lease, the Company was initially required to maintain a
$3,800,000 letter of credit, and the amount required decreases periodically over
the term of the lease. On January 1, 2004, the amount required for this letter
of credit was reduced to $3,600,000. The letter of credit was issued by the
Company's primary lending institution, which diminishes the Company's overall
borrowing availability under the credit facility.
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 December 31, 2003, the outstanding borrowings under this revolver were
$454,000.
Equity Transactions
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.
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 $2,500,000. The net proceeds of the private placement, $2,350,000, were used
to advance funds to Ultralife Taiwan, Inc. (UTI), in which the Company has an
approximately 9.2% ownership interest. This transaction was completed in order
to provide some short term 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. At March 1, 2004, the note remains
unpaid and the Company is renegotiating the possible extension of the maturity
date of this note receivable while UTI continues its efforts to raise additional
equity capital. If UTI is successful in raising additional funds, the Company
currently expects to convert this note receivable into shares of UTI common
stock. Pursuant to the private placement agreement, the Company filed an S-3
Registration Statement with the SEC to register the shares issued in the private
placement 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
December 31, 2003 was $1,550,000. The Company does not guarantee the obligations
of UTI and is not required to provide any additional funding.
During Fiscal 2002, the Company raised capital through two private equity
transactions. First, in July 2001, the Company completed a $6,800,000 private
placement of 1,090,000 shares of its common stock at $6.25 per share. In
conjunction with the offering, warrants to acquire up to 109,000 shares of
common stock were granted. The exercise price of the warrants is $6.25 per share
and the warrants have a five-year term. The second transaction occurred in April
2002, when the Company closed on a $3,000,000 private placement consisting of
common equity and a $600,000 convertible note. Initially, 801,333 shares were
issued. The note, which was issued to one of the
28
Company's directors, converted into 200,000 shares of common stock upon
shareholder approval at the December 2002 Annual Meeting.
During 2003, the Company issued 398,000 shares of common stock as a result
of exercises of stock options and warrants. The Company received approximately
$2,421,000 in cash proceeds as a result of these transactions.
Other Matters
The Company continues to be 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
enhance capacity and build product to meet demand. The recent positive financial
results during 2003 have enhanced the Company's ability to acquire additional
financing. The Company continually explores various sources of capital,
including utilizing its unleveraged assets as collateral for additional
borrowing capacity, issuing new or refinancing existing debt, and raising equity
through private or public offerings. 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 I, Item 3, "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
potential exposure, there can be no assurance that such reserve 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.
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.
Contractual Obligations and Off Balance Sheet Arrangements
Payments due by period
Contractual Obligations:
More
Total Less than 1 1-3 3-5 than 5
year years years years
Debt Obligations $1,267,000 $1,267,000 $ -- $ -- $ --
Capital Lease Obligations 86,000 18,000 68,000 -- --
Operating Lease Obligations 5,214,000 1,203,000 2,576,000 782,000 653,000
Purchase Obligations 1,146,000 1,146,000 -- -- --
---------- ---------- ---------- -------- --------
Total $7,714,000 $3,635,000 $2,644,000 $782,000 $653,000
========== ========== ========== ======== ========
The Company has no off balance sheet arrangements.
Outlook
Looking ahead for the full calendar year of 2004, the Company is
optimistic about its growth prospects and the status of manufacturing
operations. At this time, the Company expects revenues to reach $104,000,000 in
2004, more than a 30% increase over the $79,450,000 in revenues reported for
2003. The Company is projecting growth in all major product areas within its
business - 9-volt, cylindrical and rechargeable. The Company expects continued
growth in demand for its military batteries, particularly for the BA-5390
battery. Of the total revenues projected for 2004, revenues of rechargeable
battery products are expected to be in the range of at least $5,000,000.
29
The Company projects revenues of approximately $26,000,000 in the first
quarter of 2004, with continued growth expected into the second quarter due to
current visibility of orders from the military. The outlook for the second half
of the year, at this time, is that the military demand may level off somewhat.
The results in each of the quarters can be subject to fluctuations as the timing
of some customer orders is not often easily predictable. In particular, 9-volt
revenues are dependent upon continued demand from the Company's customers, some
of which are dependent upon retail sell-through. Similarly, revenues from sales
of cylindrical products, primarily to military customers, are dependent upon a
variety of factors, including the timing of the battery solicitation process
within the military, the Company's ability to successfully win contract awards,
successful qualification of the Company's products in the applicable military
applications, the timing of shipments related to lot acceptance, and the timing
of order releases against such contracts. Additionally, there is always a risk
that Congressional appropriations might vary from what is needed or expected.
Some of these factors are outside of the Company's direct control.
One of the Company's key target markets continues to be the military
market. The U.S. Army / CECOM typically awards 5-year contracts for its battery
procurements, normally split 60% / 40% between two suppliers. The current
battery procurement process of the U.S. Army / CECOM is referred to as Next Gen
II. There are four phases to this overall solicitation. Phase I pertained to
lithium-sulfur dioxide batteries, which the Company does not manufacture, and
therefore, it did not participate in the bidding for this phase.
Phases II, III, and IV pertain to the manufacture of lithium-manganese
dioxide batteries which match with the Company's capabilities. For Phase II,
referred to as the "Small Cylindrical" phase, the Company successfully bid, and,
in May 2002, was awarded the 60% portion for this five-year contract, amounting
to up to $32 million over the five year term.
For Phase III, referred to as the "Large Cylindrical" phase, the Company
had provided its bid proposal to the U.S. Army / CECOM in August 2002 and has
since been awaiting notification of awards. In March 2004, the Company was
notified that it was not selected to participate in this phase, which would have
amounted to up to approximately $9 million over the five-year time horizon of
the contract. While the Company is disappointed in this outcome, this result
does not alter the Company's current financial outlook, as this contract had not
been incorporated in the guidance that has previously been provided by the
Company.
Phase IV of the Next Gen II solicitation is referred to as the
"Rectangular" phase. The formal solicitation for this phase was issued in
January 2004 and was split into two pieces, one of which includes the BA-5390
battery that the Company is already manufacturing under exigent, or non-bid,
contracts. The other piece consists of the BA-5347 battery, for which the
solicitation will result in a small business set-aside contract. Bids are due to
be submitted for these products in mid-March 2004. The Company cannot predict
when final awards will be made or what the final outcome may be. The total
amount for this phase of Next Gen II is expected to be in the range of up to
approximately $200-$300 million over five years. In the meantime, the Company
plans to continue to fulfill its current obligations related to exigent
contracts, and to pursue other such contracts as the opportunity arises. The
Company's current guidance incorporates ongoing BA-5390 contracts.
Over the next three to five years, with anticipated growth in various
target markets, such as military, medical, automotive telematics, and search and
rescue, the Company has targeted an annual growth rate in revenues of 20% - 30%,
heading toward $200,000,000. While the Company's revenues are expected to be
comprised of approximately 60% from military sales in 2004, this percentage is
expected to decline over time as the Company generates sales from customers in
commercial markets.
The Company has a fairly substantial fixed cost infrastructure to support
its overall operations. As sales continue to grow, manufacturing efficiencies
are realized, and operating expenses (R&D and SG&A) are closely controlled, the
Company believes it can generate favorable returns to scale in the range of 30%,
and possibly as high as 50%, on incremental revenues, depending on product mix.
Conversely, decreasing volumes will likely result in the opposite effect. Gross
margins in 2004 are expected to be in the range of 23% - 24%. Within the next
couple of years, the Company believes that its gross margins can reach a range
of 26%-27% as operating efficiencies improve and the mix of products with higher
margins increases. It has set a target of 30% gross margins for the longer-term,
i.e. within the next five years.
R&D costs in 2004 are expected to be at comparable levels as 2003. The
Company plans to continue its recent successful efforts related to new
cylindrical battery development for applications that initially have a military
focus, but often have sizeable commercial applications as well. In addition, it
is committing funds for the development of various Thin Cell and rechargeable
products. While the R&D expense line is expected to remain
30
relatively stable, the Company also enhances these efforts with technology
contracts, the revenues and related costs for which are reported as a part of
the Technology Contracts segment.
While the Company continues to monitor its operating costs very tightly,
it expects that SG&A costs will increase modestly over 2003 as it invests in
additional sales and marketing efforts, and general administrative costs rise to
support the growth of the business. Overall, the Company expects that total
operating expenses (R&D and SG&A) will amount to approximately 12% of total
revenues during 2004, compared with 14% in 2003. Within the next couple of
years,, the Company believes that its operating expenses will be in the range of
11%-12% of revenues, and it has set a target to reach 10% of revenues in the
longer-term.
As gross margins improve and as the Company continues to control its
operating expenses, operating income is expected to amount to approximately
$12,000,000 in 2004. Within the next couple of years, operating income as a
percentage of revenues, is projected to be in the range of 15%, with a
longer-term target of 20%, resulting from higher gross margins and lower
operating expenses as a percentage of sales.
At December 31, 2003, the Company had approximately $76,829,000 in net
operating loss (NOL) carryforwards available to offset current and future
taxable income. The Company determined there was not sufficient positive
evidence in accordance with FAS 109 to record a deferred tax asset at December
31, 2003. The Company will continue to assess the appropriateness based upon
profitability of recording a deferred tax asset for 2004 and beyond.
In addition, in early 2004, the Company determined that a change in
ownership, as defined under Internal Revenue Code Section 382, had occurred
during fourth quarter of 2003, resulting in an annual limitation on the
utilization of the net operating loss carryforwards. The Company is unable to
accurately quantify the amount of such limitation at this time. This limitation
did not have an impact on income taxes determined for 2003, but could result in
a higher than anticipated current tax expense for 2004 and beyond, than if the
Company had experienced no change.
During 2004, the Company projects that it will spend approximately
$5,000,000 to $6,000,000 on capital expenditures for machinery and equipment.
Nearly one-half of these expenditures are expected to be for projects that
enhance manufacturing productivity, with relatively quick returns. The remainder
of these expenditures will be used to alleviate bottlenecks and increase
capacity, as well as for tooling of new products.
In June 2004, the Company's credit facility with its primary lending bank
is scheduled to expire. The Company is currently seeking and reviewing proposals
from various lending institutions that would provide it with greater borrowing
capacity, increased flexibility and lower borrowing costs. The Company plans to
refinance this debt, or extend its current credit flexibility, before its
current arrangement expires.
In general, 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, leasing
assets, and raising equity through private or public offerings. During 2003, the
Company successfully managed its growth through the issuance of a $500,000
convertible note and proceeds from the exercise of stock options, as well as the
use of its revolving credit facility. In addition, in October 2003, the Company
was successful in raising $2,500,000 through a private placement of 200,000
shares of common stock, where the net proceeds of $2,350,000 were provided to
Ultralife Taiwan, Inc. in the form of a note receivable, convertible into shares
of UTI common stock subject to certain criteria. Although 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.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect
amounts reported therein. The estimates that require management's most
difficult, subjective or complex judgments are described below.
31
Revenue recognition:
Battery Sales - Revenues from the sale of batteries are recognized when
products are shipped. A provision is made at that time for warranty costs
expected to be incurred. Customers do not have a general right of return
on products shipped.
Technology Contracts - The Company recognizes revenue using the
proportional effort method based on the relationship of costs incurred to
date to the total estimated cost to complete the contract. Elements of
cost include direct material, labor and overhead. If a loss on a contract
is estimated, the full amount of the loss is recognized immediately. The
Company allocates costs to all technology contracts based upon actual
costs incurred including an allocation of certain research and development
costs incurred. Under certain research and development arrangements with
the U.S. Government, the Company may be required to transfer technology
developed to the U.S. Government. The Company has accounted for the
contracts in accordance with SFAS No. 68, "Research and Development
Arrangements". The Company, where appropriate, has recognized a liability
for amounts that may be repaid to third parties, or for revenue deferred
until expenditures have been incurred.
In May 2003, the Company adopted the provisions of EITF 00-21 "Revenue
Arrangements with Multiple Deliverables". This issue 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. Adoption of this Issue
had no significant impact on the Company's revenue recognition policy or
results of operations.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition in Financial
Statements". The Bulletin's primary purpose was to rescind accounting
guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables". This
should not be considered a change in accounting principle. The issuance
did not have a material impact on the Company.
Warranties:
The Company maintains provisions related to normal warranty claims by
customers. The Company evaluates these reserves monthly based on actual
experience with warranty claims to date.
Impairment of Long-Lived Assets:
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted
future cash flows of the assets with the respective carrying amount as of
the date of assessment. Should aggregate future cash flows be less than
the carrying value, a write-down would be required, measured as the
difference between the carrying value and the fair value of the asset.
Fair value is estimated either through independent valuation or as the
present value of expected discounted future cash flows. If the expected
undiscounted future cash flows exceed the respective carrying amount as of
the date of assessment, no impairment is recognized.
Environmental Issues:
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with the American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to
an existing condition caused by past operations are accrued when it is
probable that these costs will be incurred and can be reasonably
estimated.
Investments in Affiliates:
The Company reviews the appropriateness of the carrying value of its
investments in affiliates. Typically, investments in which the Company
holds a greater than 50% interest are recorded by the Company on a
consolidated basis of accounting, investments in which the Company hold
between 20% and 50% are accounted for using the equity method of
accounting, and investments in which the Company holds less than a 20%
interest are recorded using the cost method.
32
Stock-Based Compensation:
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. The Company has adopted the disclosure-only provision
of SFAS No. 148, "Accounting for Stock-Based Compensation". 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.
Income Tax Liabilities:
The Company applies SFAS No. 109, "Accounting for Income Taxes", in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax basis 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.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" ("FIN46"). The primary
objectives of FIN46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
("VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In December 2003, the FASB issued FIN 46R to defer the
effective date of FIN46 and exclude certain entities from its scope. Adoption of
FIN 46R has not had a material impact on the Company's consolidated financial
position, results of operations or cash flows.
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 of 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 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.
In 2003, the Company adopted the provisions of EITF 00-21 "Revenue
Arrangements with Multiple Deliverables". EITF Issue No. 01-21 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. Adoption of the standard has not had a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition in Financial
Statements". SAB 104's primary purpose was to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result or the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables". Adoption of the standard has not had a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
33
Risk Factors
Dependence on Continued Demand for the Company's Existing Products
A substantial portion of the Company's business depends on the continued
demand for products using our batteries sold by original equipment manufacturers
(OEM). Therefore, the Company's success depends significantly upon the success
of those OEMs' products in the marketplace. We are subject to many risks beyond
our control that influence the success or failure of a particular product
manufactured by an OEM, including:
o competition faced by the OEM in its particular industry,
o market acceptance of the OEM's product,
o the engineering, sales, marketing and management capabilities of the
OEM,
o technical challenges unrelated to our technology or products faced
by the OEM in developing its products, and
o the financial and other resources of the OEM
For instance, in the year ended December 31, 2003, 29% of the Company's
revenues were comprised of sales of its 9-volt batteries, and of this,
approximately 29% pertained to sales to smoke alarm OEMs in the U.S. In the
six-month period ended December 31, 2002, 56% of the Company's revenues were
comprised of sales of its 9-volt batteries, and of this, approximately 20%
pertained to sales to smoke alarm OEMs in the U.S. If the retail demand for
long-life smoke detectors decreases significantly, this could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Similarly, in the year ended December 31, 2003, 55% of the Company's
revenues were comprised of sales of U.S. cylindrical batteries, and of this,
approximately 92% pertained to sales made directly or indirectly to the U.S.
military. In the six-month period ended December 31, 2002, 20% of the Company's
revenues were comprised of sales of U.S. cylindrical batteries, and of this,
approximately 90% pertained to sales made directly or indirectly to the U.S.
military. If the demand for cylindrical batteries from the U.S. military were to
decrease significantly, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Related to Adjustment of Certain Government Contracts
The Company has certain "exigent", non-bid contracts with the government
which are subject to an audit and final price adjustment which could decrease
margins compared with the original terms of the contracts. As of December 31,
2003, the Company had one unfulfilled contract pertaining to BA-5390 battery
orders from the military that was subject to audit and final price adjustment.
These adjustments could have an effect on the Company's business, financial
condition and results of operations.
Risks Related to Development of Rechargeable Battery Business
Although the Company is in production of certain rechargeable cells and
batteries, it cannot assure that volume acceptance of its rechargeable products
will occur due to the highly competitive nature of the business. There are many
new company and technology entrants into the marketplace, and the Company must
continually reassess the market segments in which its products can be successful
and seek to engage customers in these segments that will adopt the Company's
products for use in their products. In addition, these companies must be
successful with their products in their markets for the Company to gain
increased business. Increased competition, failure to gain customer acceptance
of products or failure of the Company's customers in their markets could have a
further adverse effect on the Company's rechargeable battery business.
Risks Relating to Growth and Expansion
Continued rapid growth of the Company's battery business could
significantly strain management, operations and technical resources. If the
Company is successful in obtaining rapid market growth of its batteries, the
Company will be required to deliver large volumes of quality products to
customers on a timely basis at a reasonable cost to those customers. For
example, the large orders recently received from the U.S. and U.K. military
34
for the Company's cylindrical products are straining the current capacity
capabilities of the Company and require additional equipment and time to build a
sufficient support infrastructure. This demand also creates working capital
issues for the Company, as it needs increased liquidity to fund purchases of raw
materials and supplies. The Company cannot assure, however, that business will
rapidly grow or that its efforts to expand manufacturing and quality control
activities will be successful or that the Company will be able to satisfy
commercial scale production requirements on a timely and cost-effective basis.
The Company will also be required to continue to improve its operations,
management and financial systems and controls. The failure to manage growth
effectively could have an adverse effect on the Company's business, financial
condition and results of operations.
Dependence on U.S. Military Procurement of Batteries
The Company will continue to develop both primary and rechargeable battery
products to meet the needs of the U.S. military forces. The Company believes it
has a high probability for success in solicitations for these batteries. Any
delay of solicitations by, or future failure of, the U.S. government to purchase
batteries manufactured by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Related to Competition and Technological Obsolescence
The Company also competes with large and small manufacturers of alkaline,
carbon-zinc, seawater, high-rate and primary batteries as well as other
manufacturers of lithium batteries. The Company cannot assure that it will
successfully compete with these manufacturers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and
other resources.
The market for the Company's products is characterized by changing
technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Although the Company believes that its
batteries are comprised of state-of-the-art technology, there can be no
assurance that competitors will not develop technologies or products that would
render the Company's technology and products obsolete or less marketable.
Primary Batteries - The primary (non-rechargeable) battery industry is
characterized by intense competition with a number of companies offering or
seeking to develop products similar to the Company's. The Company is subject to
competition from manufacturers of primary batteries, such as carbon-zinc,
alkaline and lithium batteries in various configurations, including 9-volt, AAA,
AA, C, D, 2/3 A and other cell sizes. Manufacturers of primary batteries include
The Gillette Company (Duracell), Energizer Holdings, Inc., Rayovac Corp., Sanyo
Electric Co. Ltd., Sony Corp., and Matsushita Electric Industrial Co., Ltd.
(Panasonic). Manufacturers of specialty lithium batteries include Saft and Eagle
Picher Industries.
Many of these companies have substantially greater resources than the
Company, and some have the capacity and volume of business to be able to produce
their products more efficiently than the Company at the present time. In
addition, these companies are developing batteries using a variety of battery
technologies and chemistries that are expected to compete with the Company's
technology. If these companies successfully market their batteries before the
introduction of the Company's products, there could be a material adverse effect
on the Company's business, financial condition and results of operations.
Rechargeable Batteries - The rechargeable battery industry is also
characterized by intense competition with a large number of companies offering
or seeking to develop technology and products similar to the Company's. The
Company is subject to competition from manufacturers of traditional rechargeable
batteries, such as nickel-cadmium batteries, from manufacturers of rechargeable
batteries of more recent technologies, such as nickel-metal hydride, lithium ion
and lithium polymer batteries, as well as from companies engaged in the
development of batteries incorporating new technologies. Manufacturers of
nickel-cadmium and/or nickel-metal hydride batteries include Sanyo Electric Co.
Ltd., Sony Corp., Toshiba Corp., Saft and Matsushita Electric Industrial Co.,
Ltd. (Panasonic), among others. Manufacturers of lithium ion liquid electrolyte
batteries currently include Saft, Toshiba Corp., Matsushita Electric Industrial
Co., Ltd., Sanyo Electric Co. Ltd., Sony Corp., E-one Moli Energy Ltd., BYD Co.
Ltd., Samsung SDI Co., Ltd., Shenzhen B&K Electronic Co. Ltd., and Ultralife
Taiwan, Inc., among others. Manufacturers of lithium polymer batteries currently
include Valence Technology, Inc., Sony Corp., Amperex Technology Ltd., Danionics
A/S, Finecell Co. Ltd., LG Chemical, Ltd., SKC, Samsung SDI Co., Ltd., and Kokam
Engineering Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, including lithium ion and lithium polymer
batteries, which are expected to compete with the Company's technology.
35
If these companies successfully market their batteries before the introduction
of the Company's products, there could be a material adverse effect on its
business, financial condition and results of operations.
Dependence on Key Personnel
Because of the specialized, technical nature of the business, the Company
is highly dependent on certain members of management, marketing, engineering and
technical staff. The loss of these services or these members could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition to developing manufacturing capacity to
produce high volumes of batteries, the Company must attract, recruit and retain
a sizeable workforce of technically competent employees. The Company's ability
to pursue effectively its business strategy will depend upon, among other
factors, the successful recruitment and retention of additional highly skilled
and experienced managerial, marketing, engineering and technical personnel. The
Company cannot assure that it will be able to retain or recruit this type of
personnel.
Safety Risks; Demands of Environmental and Other Regulatory Compliance
Due to the high energy density inherent in lithium batteries, the
Company's batteries can pose safety certain risks, including the risk of fire.
Although the Company incorporates safety procedures in research, development and
manufacturing processes that are designed to minimize safety risks, the Company
cannot assure that accidents will not occur. Although the Company currently
carries insurance policies which cover loss of the plant and machinery,
leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may
result in significant production delays or claims for damages resulting from
injuries. These types of losses could have a material adverse effect on the
business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which it has sent waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers that could have a material adverse effect on business, financial
condition and results of operations. In addition, the U.S. Department of
Transportation and certain foreign regulatory agencies that consider lithium to
be a hazardous material regulate the transportation of batteries that contain
lithium metal. The Company currently ships lithium batteries in accordance with
regulations established by the U.S. Department of Transportation. There can be
no assurance that additional or modified regulations relating to the
manufacture, transportation, storage, use and disposal of materials used to
manufacture the Company's batteries or restricting disposal of batteries will
not be imposed or how these regulations will affect the Company or its
customers.
In connection 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 sought proposals from engineering firms to complete the remedial
work contained in the work plan. A firm was selected to undertake the
remediation and in December 2003 the remediation was completed. NYSDEC oversaw
the remedial work and requested additional sampling which was completed in
December of 2003, as well. The test results have been forwarded to NYSDEC and
the Company is awaiting further comment. It is unknown at this time whether the
final cost to remediate will be in the range of the
36
original estimate, given the passage of time. Because this is a voluntary
remediation, there is no requirement for the Company to complete the project
within any specific time frame. 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.
Limited Sources of Supply
Certain materials used in products are available only from a single or a
limited number of suppliers. As such, some materials could become in short
supply resulting in limited availability and/or increased costs. Additionally,
the Company may elect to develop relationships with a single or limited number
of suppliers for materials that are otherwise generally available. Due to the
Company's involvement with supplying military batteries to the government, the
Company could receive a government preference to continue to obtain critical
supplies to meet military production needs. However, if the government did not
provide the Company with a government preference in such circumstances, the
difficulty in obtaining supplies could have a material adverse effect on the
Company's financial results. Although the Company believes that alternative
suppliers are available to supply materials that could replace materials
currently used and that, if necessary, the Company would be able to redesign its
products to make use of such alternatives, any interruption in the supply from
any supplier that serves as a sole source could delay product shipments and have
a material adverse effect on the business, financial condition and results of
operations. Although the Company has experienced interruptions of product
deliveries by sole source suppliers, these interruptions have not had a material
adverse effect on the business, financial condition and results of operations.
The Company cannot guarantee that it will not experience a material interruption
of product deliveries from sole source suppliers.
Dependence on Proprietary Technologies
The Company's success depends more on the knowledge, ability, experience
and technological expertise of its employees than on the legal protection of
patents and other proprietary rights. The Company claims proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating
to products and manufacturing processes. The Company cannot guarantee the degree
of protection these various claims may or will afford, or that competitors will
not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technology. The Company protects its
proprietary rights in its products and operations through contractual
obligations, including nondisclosure agreements with certain employees,
customers, consultants and strategic partners. There can be no assurance as to
the degree of protection these contractual measures may or will afford. The
Company, however, has had patents issued and patent applications pending in the
U.S. and elsewhere. The Company cannot assure (i) that patents will be issued
from any pending applications, or that the claims allowed under any patents will
be sufficiently broad to protect its technology, (ii) that any patents issued to
the Company will not be challenged, invalidated or circumvented, or (iii) as to
the degree or adequacy of protection any patents or patent applications may or
will afford. If the Company is found to be infringing third party patents, there
can be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. The failure to obtain necessary licenses
could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development,
manufacture or sale of products.
Dependence on Technology Transfer Agreements
The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. There can be no
assurance that competitors will not develop, independently or through the use of
similar technology transfer agreements, rechargeable battery technology or
products that are substantially equivalent or superior to the technologies and
products currently under research and development.
Risks Related to China Joint Venture Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China
Battery"), purchased certain technology, equipment, training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company attempted to
37
collect the balance due under this contract. However, China Battery has
indicated that it will not make these payments until certain contractual issues
have been resolved. Due to China Battery's questionable willingness to pay, the
Company wrote off in Fiscal 1997 the entire balance owed as well as its
investment aggregating $805,000. Since China Battery has not purchased
technology, equipment, training or consulting services to produce batteries
other than 2/3A lithium batteries, the Company does not believe that China
Battery has the capacity to become a competitor. The Company does not anticipate
that the manufacturing or marketing of 2/3A lithium batteries will be a
substantial portion of its product line in the future. However, in December
1997, China Battery sent a letter demanding reimbursement of an unspecified
amount of losses they have incurred plus a refund for certain equipment that was
sold to China Battery. The Company has attempted to initiate negotiations to
resolve the dispute. However, an agreement has not yet been reached. Although
China Battery has not taken any additional steps, there can be no assurance that
China Battery will not further pursue such a claim which, if successful, could
have a material adverse effect on the business, financial condition and results
of operations. The Company believes that such a claim is without merit.
Ability to Insure Against Losses
Because certain of the Company's primary batteries are used in a variety
of security and safety products and medical devices, it may be exposed to
liability claims if such a battery fails to function properly. The Company
maintains what it believes to be sufficient liability insurance coverage to
protect against potential claims; however, there can be no assurance that the
liability insurance will continue to be available, or that any such liability
insurance would be sufficient to cover any claim or claims.
Quarterly Fluctuations in Operating Results and Possible Volatility of Stock
Price
The Company's future operating results may vary significantly from quarter
to quarter depending on factors such as the timing and shipment of significant
orders, new product introductions, delays in customer releases of purchase
orders, the mix of distribution channels through which the Company sells its
products and general economic conditions. Frequently, a substantial portion of
the Company's revenues in each quarter is generated from orders booked and
shipped during that quarter. As a result, revenue levels are difficult to
predict for each quarter. If revenue results are below expectations, operating
results will be adversely affected as the Company has a sizeable base of fixed
overhead costs that do not vary much with the changes in revenue. In addition to
the uncertainties of quarterly operating results, future announcements
concerning the Company or its competitors, including technological innovations
or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of its products, may cause the market price of
its Common Stock to fluctuate substantially for reasons which may be unrelated
to operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price of
our Common Stock.
Risks Related to Product Warranty Claims
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 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.
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 generate cash and achieve profitability
in the foreseeable future, there is no assurance as to when or if the Company
will be able to achieve its projections. 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 Company's Investment in Ultralife Taiwan, Inc.
The Company used the net proceeds of $2,350,000 that it received from the
recent private placement sale of its Common Stock to fund a short-term loan and
ultimate planned purchase of securities issued by Ultralife
38
Taiwan, Inc. The Company currently owns approximately 9.2% of Ultralife Taiwan.
The transaction has been recorded as a short-term note receivable maturing on
March 1, 2004, with interest accruing at 3% per annum. At March 1, 2004, the
note remains unpaid and the Company is negotiating the possible extension of the
maturity date of this note receivable while UTI continues its efforts to raise
additional equity capital. If UTI is successful in raising additional funds, the
Company currently expects to convert this note receivable into shares of UTI
common stock. Depending on the price at which Ultralife Taiwan completes its
anticipated capital raise, the Company's ownership interest in Ultralife Taiwan
could increase to approximately 15%. Because of the current uncertain financial
condition of Ultralife Taiwan, they may not be able to raise the necessary
additional funds from other investors and the Company may not be able to recover
or realize any gain on our investment. Such an occurrence could adversely affect
the financial condition and the market value of the Company's Common Stock.
Risks Related to Maintaining Debt Obligations
The Company has certain debt covenants that must be maintained, most
notably a requirement with its primary lending institution to meet certain
levels of net worth. There is no assurance that the Company will be able to
continue to meet these debt covenants in the future. If the Company defaults on
any of its debt covenants and it is unable to renegotiate credit terms in order
to comply with such covenants, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Related to Limiting the Use of Net Operating Loss Carryforwards
At December 31, 2003, the Company had approximately $76,829,000 of net
operating loss carryforwards available to offset current and future taxable
income. Due to cumulative losses reported for prior years and uncertainty as to
the utilization of these tax attributes in future periods, the Company has not
recorded a deferred tax asset on its Consolidated Balance Sheet. The Company
will reevaluate the appropriateness of recording a deferred tax asset during
2004.
In early 2004, the Company determined that a change in ownership, as
defined by Internal Revenue Code 382, had occurred during the fourth quarter of
2003, resulting in an annual limitation on the utilization of the net operating
loss carryforwards. This limitation did not have an impact on income taxes
determined for 2003, but could result in a higher than anticipated current tax
expense for 2004 and beyond than if the Company had experienced no change.
Risks Related to Arthur Andersen LLP Being the Company's Past Auditors
There may be no effective remedy against Arthur Andersen LLP in connection
with a material misstatement or omission in the financial statements audited by
them, due to the fact that Arthur Andersen LLP was convicted on June 15, 2002 of
federal obstruction of justice arising from the government's investigation of
Enron Corp.
Arthur Andersen LLP consented to the inclusion of their report in the
annual reports and registration statements the Company filed prior to June 30,
2002. The Company's inability to include in future registration statements or
reports financial statements for one or more years audited by Arthur Andersen
LLP or to obtain Arthur Andersen LLP's consent to the inclusion of their report
on the Company's 2000 and 2001 financial statements may impede the Company's
access to the capital markets.
Should the Company seek to access the public capital markets, Securities
and Exchange Commission (SEC) rules will require the Company to include or
incorporate by reference in any prospectus three years of audited financial
statements. Until the Company's audited financial statements for the fiscal year
ending December 31, 2004 become available, the SEC's current rules would require
the Company to present audited financial statements for one or more fiscal years
audited by Arthur Andersen LLP. Prior to that time, the SEC may cease accepting
financial statements audited by Arthur Andersen LLP, in which case the Company
would be unable to access the public capital markets unless and until such prior
financial statements originally audited by Arthur Andersen LLP are audited. In
addition, as a result of the departure of the Company's former engagement team
leaders, Arthur Andersen LLP is no longer in a position to consent to the
inclusion or incorporation by reference in any prospectus of their report on the
Company's audited financial statements for the years ended June 30, 2000 and
June 30, 2001, and investors in any subsequent offerings for which the Company
uses their audit report will not be entitled to recovery against them under
Section 11 of the Securities Act of 1933 for any material misstatements or
omissions in those financial statements. Consequently, the Company's financing
costs may increase or the Company may miss attractive market opportunities if
either the annual financial statements for 2000 and 2001 audited by Arthur
Andersen LLP
39
should cease to satisfy the SEC's requirements or those statements are used in a
prospectus but investors are not entitled to recovery against Arthur Andersen
auditors for material misstatements or omissions in them.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
primary interest rate risk is derived from its outstanding variable-rate debt
obligation. For the 12 month period ended December 31, 2003, the result of a
hypothetical 100 basis point increase in the average cost of the Company's
variable-rate debt would have reduced annual pretax income by approximately
$100,000. 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.
In the year ended December 31, 2003, approximately 88% of the Company's
sales were denominated in U.S. dollars. The remainder of the Company's sales was
denominated in U.K. pounds sterling and euros. A 10% change in the value of the
pound sterling or the euro to the U.S. dollar would have impacted the Company's
revenues in that period by less than 2%. The Company monitors the relationship
between the U.S. dollar and other currencies on a continuous basis and adjusts
sales prices for products and services sold in these foreign currencies as
appropriate to safeguard against the fluctuations in the currency effects
relative to the U.S. dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) and (2) are
included in this Report beginning on page 43.
Page
----
Report of Independent Auditors,
PricewaterhouseCoopers LLP 41
Report of Independent Public Accountants,
Arthur Andersen LLP 42
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2003
and 2002, and June 30, 2002 43
Consolidated Statements of Operations for the year ended
December 31, 2003, the six months ended December 31,
2002 and the years ended June 30, 2002 and 2001 44
Consolidated Statements of Changes in Shareholders' Equity
and Accumulated Other Comprehensive Income (Loss) for
the year ended December 31, 2003, the six months ended
December 31, 2002 and the years ended June 30, 2002 and
2001 45
Consolidated Statements of Cash Flows for the year ended
December 31, 2003, the six months ended December 31,
2002 and the years ended June 30, 2002 and 2001 46
Notes to Consolidated Financial Statements 47
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 73
40
Report of Independent Auditors
To the Board of Directors and Shareholders of
Ultralife Batteries, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Ultralife Batteries, Inc. and its subsidiary at December 31, 2003
and 2002, and June 30, 2002, and the results of their operations and their cash
flows for the year ended December 31, 2003, the six months ended December 31,
2002, and the year ended June 30, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. The
financial statements of the Company as of June 30, 2001 and for the year then
ended were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report dated August 16, 2001 (except with respect
to the matter discussed in Note 14, as to which the date is December 12, 2001).
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
February 3, 2004, except for the first paragraph of Note 13, as to which the
date is March 1, 2004
41
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP AND ARTHUR
ANDERSEN LLP DID NOT CONSENT TO THE USE OF THIS REPORT IN THIS FORM 10-K. (THE
REFERENCE TO NOTE 14 IN ARTHUR ANDERSEN'S DUAL DATING OF THEIR REPORT WAS A
REFERENCE TO A "RECENT DEVELOPMENTS" FOOTNOTE IN THE FINANCIAL STATEMENTS
INCLUDED IN THE FORM 10-K FOR WHICH THAT REPORT WAS ISSUED. SUCH FOOTNOTE IS NO
LONGER APPLICABLE AND HAS BEEN OMITTED FROM THIS FORM 10-K.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and accumulated other comprehensive income (loss) and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultralife Batteries, Inc.
and subsidiary as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
August 16, 2001 (except with respect to the matter discussed in Note 14, as to
which the date is December 12, 2001)
42
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
December 31, December 31, June 30,
ASSETS 2003 2002 2002
------------ ------------ --------
Current assets:
Cash and cash equivalents $ 830 $ 1,322 $ 2,016
Restricted cash 50 50 201
Trade accounts receivable (less allowance
for doubtful accounts of $168 and
$297 at December 31, 2003 and 2002,
respectively, and $272 at June 30, 2002) 17,803 6,200 6,049
UTI Note Receivable 2,350 -- --
Inventories 10,209 5,813 4,633
Prepaid expenses and other current assets 1,314 970 847
--------- --------- ---------
Total current assets 32,556 14,355 13,746
Property, plant and equipment, net 18,213 15,336 16,134
Other assets:
Investment in UTI 1,550 1,550 4,258
Technology license agreements (net of
accumulated amortization of $1,418
and $1,318 at December 31, 2003 and
2002, respectively, and $1,268 at
June 30, 2002) 33 133 183
--------- --------- ---------
1,583 1,683 4,441
--------- --------- ---------
Total Assets $ 52,352 $ 31,374 $ 34,321
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and capital
lease obligations $ 8,295 $ 816 $ 3,148
Accounts payable 6,385 4,283 3,091
Accrued compensation 257 134 255
Accrued vacation 564 439 439
Income taxes payable 106 -- --
Other current liabilities 2,247 1,472 1,863
--------- --------- ---------
Total current liabilities 17,854 7,144 8,796
Long - term liabilities:
Debt and capital lease obligations 68 1,354 103
Grant -- 633 --
--------- --------- ---------
68 1,987 103
Commitments and contingencies (Note 6)
Shareholders' Equity:
Preferred stock, par value $0.10 per
share, authorized 1,000,000 shares;
none issued and outstanding -- -- --
Common stock, par value $0.10 per share,
authorized 40,000,000 shares;
issued - 14,302,782 and 13,579,519
at December 31, 2003 and 2002,
respectively, and 13,379,519 at
June 30, 2002 1,430 1,358 1,338
Capital in excess of par value 120,626 115,251 113,103
Accumulated other comprehensive income (loss) (723) (1,016) (856)
Accumulated deficit (84,525) (90,972) (87,860)
--------- --------- ---------
36,808 24,621 25,725
Less - Treasury stock, at cost - 727,250
shares outstanding at December 31, 2003
and 2002, respectively and 27,250 shares
outstanding at June 30, 2002 2,378 2,378 303
--------- --------- ---------
Total shareholders' equity 34,430 22,243 25,422
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 52,352 $ 31,374 $ 34,321
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
43
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Year Ended 6 Months Ended Year Ended June 30,
December 31, December 31, --------------------------
2003 2002 2002 2001
------------ --------------- -------- --------
Revenues $ 79,450 $ 15,599 $ 32,515 $ 24,163
Cost of products sold 62,354 14,707 31,168 27,696
-------- -------- -------- --------
Gross margin 17,096 892 1,347 (3,533)
Operating and other expenses:
Research and development 2,505 1,106 4,291 3,424
Selling, general, and administrative 8,610 3,441 7,949 8,009
Impairment of long lived assets -- -- 14,318 --
-------- -------- -------- --------
Total operating and other expenses, net 11,115 4,547 26,558 11,433
Operating income (loss) 5,981 (3,655) (25,211) (14,966)
Other income (expense):
Interest income 23 41 91 702
Interest expense (543) (192) (382) (536)
Equity loss in UTI -- (1,273) (954) (2,338)
Gain on sale of UTI stock -- 1,459 -- --
Gain from forgiveness of debt/grant 781 -- -- --
Miscellaneous income (expense) 311 508 320 (124)
-------- -------- -------- --------
Income (loss) before income taxes 6,553 (3,112) (26,136) (17,262)
Income taxes 106 -- -- --
-------- -------- -------- --------
Net income (loss) $ 6,447 $ (3,112) $(26,136) $(17,262)
======== ======== ======== ========
Earnings (loss) per share - basic $ 0.49 $ (0.24) $ (2.11) $ (1.55)
======== ======== ======== ========
Earnings (loss) per share - diluted $ 0.46 $ (0.24) $ (2.11) $ (1.55)
======== ======== ======== ========
Weighted average shares outstanding - basic 13,132 12,958 12,407 11,141
======== ======== ======== ========
Weighted average shares outstanding - diluted 13,917 12,958 12,407 11,141
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
44
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive
Income (Loss)
----------------------
(Dollars in Thousands) Common Stock Capital Foreign Unrealized
------------------ in excess Currency Net Gain Accumu-
Number of Par Translation (Loss) on lated Treasury
of Shares Amount Value Adjustment Securities Deficit Stock Total
Balance as of June 30, 2000 11,410,286 $1,141 $ 98,790 $ (691) $ 2 $(44,462) $ (303) $ 54,477
Comprehensive loss:
Net loss (17,262) (17,262)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (368) (368)
Unrealized net loss on securities (1) (1)
---------
Other comprehensive loss (369)
---------
Comprehensive loss (17,631)
---------
Shares issued under stock option plans and
other stock options 77,900 8 599 607
------------------------------------------------------------------------------------
Balance as of June 30, 2001 11,488,186 $1,149 $ 99,389 $(1,059) $ 1 $(61,724) $ (303) $ 37,453
------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (26,136) (26,136)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 202 202
---------
Other comprehensive income 202
---------
Comprehensive loss (25,934)
---------
Shares issued under private stock offerings 1,891,333 189 8,502 8,691
UTI change in ownership transactions and other 5,212 5,212
------------------------------------------------------------------------------------
Balance as of June 30, 2002 13,379,519 $1,338 $113,103 $ (857) $ 1 $(87,860) $ (303) $ 25,422
------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (3,112) (3,112)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (159) (159)
Unrealized net loss on securities (1) (1)
---------
Other comprehensive loss (160)
---------
Comprehensive loss (3,272)
---------
Shares issued under private stock offerings 200,000 20 580 600
UTI change in ownership transactions and other 1,568 1,568
Treasury shares reacquired from UTI (2,075) (2,075)
------------------------------------------------------------------------------------
Balance as of December 31, 2002 13,579,519 $1,358 $115,251 $(1,016) $ -- $(90,972) $(2,378) $ 22,243
------------------------------------------------------------------------------------
Comprehensive income:
Net income 6,447 6,447
Other comprehensive income, net of tax:
Foreign currency translation adjustments 293 293
---------
Other comprehensive income 293
---------
Comprehensive income 6,740
---------
Shares issued under private stock offerings 200,000 20 2,342 2,362
Shares issued on conversion of short term note 125,000 13 487 500
Shares issued under stock option and
warrant exercises 398,263 40 2,520 2,560
Stock-based compensation 26 26
------------------------------------------------------------------------------------
Balance as of December 31, 2003 14,302,782 $1,430 $120,626 $ (723) $ -- $(84,525) $(2,378) $ 34,430
------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
45
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Six Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, June 30, June 30,
2003 2002 2002 2001
-------- ------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 6,447 $(3,112) $(26,136) $(17,262)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 3,133 1,407 4,393 3,656
Loss on asset disposal 5 4 -- --
Foreign exchange (gain) / loss (316) (445) (320) 155
Equity loss in UTI -- 1,273 954 2,338
Gain on sale of UTI stock -- (1,459) -- --
Non-cash stock-based compensation 26 -- -- --
Non-cash gain on forgiveness of debt (781) -- -- --
Impairment of long lived assets -- -- 14,318 --
Provision for loss on accounts receivable 12 25 10 (6)
Provision for inventory obsolescence 388 128 (4) 12
Changes in operating assets and liabilities:
Accounts receivable (11,615) (176) (2,640) 83
Inventories (4,784) (1,308) 750 381
Prepaid expenses and other current assets (344) (128) 799 (471)
Income taxes payable 106 -- -- --
Accounts payable and other current
liabilities 3,156 680 (323) 708
-------- ------- -------- --------
Net cash used in operating activities (4,567) (3,111) (8,199) (10,406)
-------- ------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (5,560) (341) (2,330) (4,367)
Proceeds from sale leaseback -- -- 995 --
Proceeds from asset disposal 50 8 -- --
Proceeds from sale of UTI stock -- 2,393 -- --
Issuance of note to UTI (2,350) -- -- --
Purchase of securities -- -- (8,424) (26,794)
Sales of securities -- 151 11,334 22,905
Maturities of securities -- -- -- 13,702
-------- ------- -------- --------
Net cash (used in)/provided by investing
activities (7,860) 2,211 1,575 5,446
-------- ------- -------- --------
FINANCING ACTIVITIES
Change in revolving credit facility 7,011 -- -- --
Proceeds from issuance of common stock, net 4,921 -- 8,691 607
Proceeds from issuance of debt 500 -- 600 --
Proceeds from grant 117 633 -- --
Principal payments under long-term debt
and capital leases (818) (481) (1,062) (941)
-------- ------- -------- --------
Net cash provided by (used in) financing
activities 11,731 152 8,229 (334)
-------- ------- -------- --------
Effect of exchange rate changes on cash 204 54 (83) 76
-------- ------- -------- --------
Change in cash and cash equivalents (492) (694) 1,522 (5,218)
-------- ------- -------- --------
Cash and cash equivalents at beginning of period 1,322 2,016 494 5,712
-------- ------- -------- --------
Cash and cash equivalents at end of period $ 830 $ 1,322 $ 2,016 $ 494
======== ======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 308 $ 76 $ 374 $ 538
Cash paid for taxes $ -- $ -- $ -- $ --
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
46
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a. Description of Business
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. The financial results presented in this report
reflecting the calendar year ended December 31, 2003 are referred to as "2003".
The financial results presented in this report reflecting the six-month period
ended December 31, 2002 are referred to as "Transition 2002". The financial
results presented in this report reflecting the full twelve-month fiscal periods
that ended June 30 prior to Transition 2002 are referred to as "fiscal" years.
For instance, the year ended June 30, 2002 is referred to as "Fiscal 2002", and
the year ended June 30, 2001 is referred to as "Fiscal 2001".
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
accounts of the Company and its wholly owned subsidiary, Ultralife Batteries UK,
Ltd. ("Ultralife UK"). Intercompany accounts and transactions have been
eliminated in consolidation. Investments in entities in which the Company does
not have a controlling interest are typically accounted for using the equity
method, if the Company's interest is greater than 20%. Investments in entities
in which the Company has less than a 20% ownership interest are typically
accounted for using the cost method.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits with financial institutions and financial
instruments with original maturities of three months or less to be cash
equivalents.
e. Restricted Cash
The Company is required to maintain certain levels of escrowed cash in
order to comply with the terms of some of its debt and lease agreements. All
cash is retained for application against required escrows for debt obligations,
including certain letters of credit supporting lease obligations and any excess
borrowings from the Company's revolving credit facility. A portion of the
restricted cash pertaining to certain lease obligations is released periodically
as payments are made to reduce outstanding debt. With respect to the Company's
revolving credit facility, the Company's primary lending institution will
restrict cash if the borrowing base (consisting of receivables and inventory)
does not sufficiently cover the outstanding borrowings on any particular day. As
of December 31, 2003 and 2002, the Company had $50 in restricted cash
47
with a certain lending institution primarily for letters of credit supporting a
corporate credit card program. There was no cash restricted at December 31, 2003
or 2002 pertaining to the Company's revolving credit facility. As of June 30,
2002, the Company had $201 in restricted cash primarily for letters of credit
supporting leases for a building and some computer equipment.
f. Inventories
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.
g. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives
are as follows:
Buildings 10 - 20 years
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 3 - 7 years
Computer Hardware and Software 3 - 5 years
Leasehold Improvements Lease term
Depreciation and amortization are computed using the straight-line method.
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance costs are expensed when
incurred. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in operating income (expense).
h. Long-Lived Assets and Intangibles
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted future
cash flows of the assets with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value,
a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through
independent valuation or as the present value of expected discounted future cash
flows. If the expected undiscounted future cash flows exceed the respective
carrying amount as of the date of assessment, no impairment is recognized. The
Company recorded an asset impairment of $14,318 in Fiscal 2002 in connection
with the fixed assets in its rechargeable business (see Note 2). The Company did
not record any impairments of long-lived assets in the calendar year ended
December 31, 2003, the six-month period ended December 31, 2002, or in the
fiscal year ended June 30, 2001.
i. Technology License Agreements
Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired a technology license
agreement for an initial payment of $1,000 in May 1994. Royalties are payable at
a rate of 8% of the fair market value of each battery using the technology if
the battery is sold or otherwise put into use by the Company. The royalties can
be reduced under certain circumstances based on the terms of this agreement. The
agreement is amortized using the straight-line method over 10 years, the term of
the agreement. Amortization expense was $100, $50, $100, and $100, in the year
ended December 31, 2003, the six months ended December 31, 2002 and the fiscal
years ended June 30, 2002, and 2001, respectively.
j. Translation of Foreign Currency
The financial statements of the Company's foreign affiliates are
translated into U.S. dollar equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation".
Exchange gains (losses) included in net income (loss) for the year ended
December 31, 2003, the six-month period ended December 31, 2002 and for the
years ended June 30, 2002, and 2001 were $316, $445, $320, and $(155),
respectively.
48
k. Revenue Recognition
Battery Sales - Revenues from the sale of batteries are recognized when
products are shipped. A provision is made at that time for warranty costs
expected to be incurred. Customers do not have a general right of return on
products shipped.
Technology Contracts - The Company recognizes revenue using the
proportional effort method based on the relationship of costs incurred to date
to the total estimated cost to complete the contract. Elements of cost include
direct material, labor and overhead. If a loss on a contract is estimated, the
full amount of the loss is recognized immediately. The Company allocates costs
to all technology contracts based upon actual costs incurred including an
allocation of certain research and development costs incurred. Under certain
research and development arrangements with the U.S. Government, the Company may
be required to transfer technology developed to the U.S. Government. The Company
has accounted for the contracts in accordance with SFAS No. 68, "Research and
Development Arrangements". The Company, where appropriate, has recognized a
liability for amounts that may be repaid to third parties, or for revenue
deferred until expenditures have been incurred.
l. Warranty Reserves
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 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.
m. Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are
included in Cost of products sold. Amounts charged to customers pertaining to
these costs are reflected as revenue.
n. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations. Such expenses amounted to $142, $72, $213, and $335 for calendar
year ended December 31, 2003, the six-month period ended December 31, 2002 and
for the years ended June 30, 2002 and 2001, respectively.
o. Research and Development
Research and development expenditures are charged to operations as
incurred. The majority of research and development costs have included the
development of new cylindrical cells and batteries for various military
applications, utilizing technology developed through its work on pouch cell
development. The Company is directing its rechargeable battery research and
development efforts toward design optimization and customization to customer
specifications. The majority of research and development expenses pertain to
salaries and benefits, developmental supplies, depreciation and other contracted
services.
p. Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that these costs will be incurred and can be reasonably estimated.
q. 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 basis of assets and liabilities and are measured using the
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. The Company recorded no income tax benefit
relating to the net operating loss generated during the six months ended
December 31, 2002 and the fiscal years ended June 30, 2002, and 2001, as such
income tax benefit was offset by an increase 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.
49
r. Concentration of Credit Risk
In 2003, the Company had one major customer, the U.S. Army / CECOM, which
comprised approximately 51% of the Company's revenues. The Company believes that
the loss of this customer would have a material adverse effect on the Company.
The Company is not aware of any issues with this customer relationship.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the U.S. economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 8% of
total primary revenues in 2003. Additionally, a lower demand from the U.S. and
U.K. Governments could result in lower sales to military and government users.
The Company generally does not distribute its products to a concentrated
geographical area nor is there a significant concentration of credit risks
arising from individuals or groups of customers engaged in similar activities,
or who have similar economic characteristics. While sales to the U.S. Army/CECOM
have been substantial during 2003, the Company does not consider this customer
to be a significant credit risk. The Company does not normally obtain collateral
on trade accounts receivable.
s. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at December 31, 2003, 2002 and June 30, 2002.
Fair values have been determined through information obtained from market
sources.
t. Earnings Per Share
The Company accounts for net earnings (loss) per common share in
accordance with the provisions of SFAS No. 128, "Earnings Per Share". SFAS No.
128 requires the reporting of basic and diluted earnings per share (EPS). Basic
EPS is computed by dividing reported earnings available to common shareholders
by weighted average shares outstanding for the period. Diluted EPS includes the
dilutive effect of securities, if any, calculated using the treasury stock
method. For the year ended December 31, 2003, the dilutive effect of 1,995,486
outstanding stock options and warrants were included in the dilution
computation. No dilution for common share equivalents was included in the
six-month period ended December 31, 2002 or in the fiscal years ended June 30,
2002 and 2001 as the effects would have been anti-dilutive. For those periods,
diluted earnings per share were the equivalent of basic earnings per share due
to the net loss. There were 2,125,549, 2,562,640, and 2,278,800, outstanding
stock options and warrants as of December 31, 2002 and June 30, 2002 and 2001
respectively, that were not included in EPS for those periods as the effect
would be anti-dilutive. (See Note 7.)
The computation of basic and diluted earnings per share is summarized as
follows:
Six Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, June 30, June 30,
2003 2003 2002 2001
------------------------------------------------------------------
Net Income / (Loss) (a) $ 6,447 ($ 3,112) ($26,136) ($17,262)
Effect of Dilutive Securities:
Stock Options / Warrants 44 -- -- --
Convertible Note 9 -- -- --
------------------------------------------------------------------
Net Income - Adjusted (b) $ 6,500 ($ 3,112) ($26,136) ($17,262)
==================================================================
Average Shares Outstanding - Basic (c) 13,132 12,958 12,407 11,141
Effect of Dilutive Securities:
Stock Options / Warrants 722 -- -- --
Convertible Note 63 -- -- --
------------------------------------------------------------------
Average Shares Outstanding - Diluted (d) 13,917 12,958 12,407 11,141
==================================================================
EPS - Basic (a/c) $ 0.49 ($ 0.24) ($ 2.11) ($ 1.55)
EPS - Diluted (b/d) $ 0.46 ($ 0.24) ($ 2.11) ($ 1.55)
50
u. Stock-Based Compensation
The Company has various stock-based employee compensation plans, which are
described more fully in Note 7. 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 effect on net income (loss) and earnings (loss) per share if
the Company had applied the fair value recognition provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of SFAS No. 123" (as discussed below in Recent Accounting
Pronouncements), to stock-based employee compensation is as follows:
2003 Transition 2002 Fiscal 2002 Fiscal 2001
---- --------------- ----------- -----------
Net income (loss), as reported $ 6,447 ($3,112) ($26,136) ($17,262)
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 (1,348) (415) (1,291) (2,335)
------- ------- -------- --------
Pro forma net income (loss) $ 5,099 ($3,527) ($27,427) ($19,597)
Earnings (loss) per share:
Basic - as reported $ 0.49 ($ 0.24) ($ 2.11) ($ 1.55)
Diluted - as reported $ 0.46 ($ 0.24) ($ 2.11) ($ 1.55)
Basic - pro forma $ 0.39 ($ 0.27) ($ 2.21) ($ 1.75)
Diluted - pro forma $ 0.37 ($ 0.27) ($ 2.21) ($ 1.75)
v. Segment Reporting
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has three operating segments. The basis for determining the Company's
operating segments is the manner in which financial information is used by the
Company in its operations. Management operates and organizes itself according to
business units that comprise unique products and services across geographic
locations.
w. Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51" ("FIN46"). The primary
objectives of FIN46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
("VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In December 2003, the FASB issued FIN 46R to
51
defer the effective date of FIN46 and exclude certain entities from its scope.
Adoption of FIN 46 has not had a material impact on the Company's consolidated
financial position, results of operations or cash flows.
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 of 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 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.
In 2003, the Company adopted the provisions of EITF 00-21 "Revenue
Arrangements with Multiple Deliverables". EITF Issue No. 01-21 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 amoung the
separate units of accounting. Adoption of the standard has not had a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104 "Revenue Recognition in Financial
Statements". SAB 104's primary purpose was to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result or the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables". Adoption of the standard has not had a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
y. Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation. In 2003, the
Company redefined its segment contribution in its segment reporting as gross
margin. As a result, the Company reclassified research and development expenses
for the periods prior to 2003 to corporate expense (see Note 11).
Note 2 - Impairment of Long-Lived Assets
In June 2002, the Company reported a $14,318 impairment charge. This
impairment charge related to a write-down 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
lithium ion 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.
52
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 will be reduced by approximately
$1,800 per year.
Note 3 - Supplemental Balance Sheet Information
The composition of inventories was:
December 31, December 31, June 30,
2003 2002 2002
------------ ------------ -------
Raw materials ........................... $ 5,946 $ 3,259 $ 2,680
Work in process ......................... 2,306 1,882 1,338
Finished products ....................... 2,699 1,207 1,022
--------------------------------------------
10,951 6,348 5,040
Less: Reserve for obsolescence .......... 742 535 407
--------------------------------------------
$10,209 $ 5,813 $ 4,633
============================================
The composition of property, plant and equipment was:
December 31, December 31, June 30,
2003 2002 2002
------------ ------------ --------
Land .................................... $ 123 $ 123 $ 123
Buildings and Leasehold Improvements .... 1,845 1,619 1,619
Machinery and Equipment ................. 33,207 28,772 26,308
Furniture and Fixtures .................. 358 319 312
Computer Hardware and Software .......... 1,554 1,405 915
Construction in Progress ................ 1,748 291 2,531
--------------------------------------------
38,835 32,529 31,808
Less: Accumulated Depreciation ......... 20,622 17,193 15,674
--------------------------------------------
$18,213 $15,336 $16,134
============================================
Depreciation expense was $3,033, $1,357, $4,293, and $3,556 for the year
ended December 31, 2003, the six months ended December 31, 2002, and the fiscal
years ended June 30, 2002 and 2001, respectively.
Included in Buildings and Leasehold Improvements is a capital lease for
the Company's Newark, New York facility. The carrying value for this facility is
as follows:
December 31, December 31, June 30,
2003 2002 2002
---- ---- ----
Acquisition Value $553 $553 $553
Amortization 323 267 240
---- ---- ----
Carrying Value $230 $286 $313
==== ==== ====
53
Note 4 - Operating Leases
The Company leases various buildings, machinery, land, automobiles and
office equipment. Rental expenses for all operating leases were approximately
$1,232, $611, $801, and $500 for the year ended December 31, 2003, the six
months ended December 31, 2002 and the years ended June 30, 2002, and 2001,
respectively. Future minimum lease payments under non-cancelable operating
leases as of December 31, 2003 are as follows:
2008
and
2004 2005 2006 2007 beyond
---- ---- ---- ---- ------
$1,203 $1,194 $925 $457 $1,435
In March 2001, the Company entered into a $2,000 lease for certain new
manufacturing equipment with a third party leasing agency. Under this
arrangement, the Company had various options to acquire manufacturing equipment,
including sales / leaseback transactions and operating leases. In October 2001,
the Company expanded its leasing arrangement with this third party leasing
agency, increasing the amount of the lease line from $2,000 to $4,000. The
increase in the line was used to fund capital expansion plans for manufacturing
equipment that increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's lease
payment is $226 per quarter. In conjunction with this lease, the Company has a
letter of credit of $3,800 outstanding at December 31, 2003.
Note 5 - Debt and Capital Leases
Convertible Note to Director
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note converted
into 200,000 shares of the Company's common stock upon the approval of
shareholders at the Company's Annual Meeting in December 2002. All shares were
issued at $3.00 per share.
Credit Facilities
The Company has a $15,000 secured credit facility with it primary lending
institution, which was initially established in June 2000. The financing
agreement consists of a term loan component supported by fixed assets and a
revolving credit facility component based on eligible net accounts receivable
and eligible net inventory. At December 31, 2003, $1,267 was outstanding on the
term loan. The Company pays $200 per quarter on the principal of the term loan
plus interest, and there is no additional borrowing capacity on the term loan
component above the current amount outstanding. The revolving credit component
comprises the remainder of the total potential borrowing capacity. At December
31, 2003, the outstanding borrowings on the revolving credit facility were
$6,557. The total amount available under the credit facility is reduced by
outstanding letters of credit. At December 31, 2003, the Company had $3,800
outstanding on a letter of credit, supporting a $4,000 equipment lease. The
Company's additional borrowing capacity under the revolver component of the
credit facility as of December 31, 2003 was approximately $2,898.
At December 31, 2003, the main financial covenant of the $15,000 credit
facility required the Company to maintain a net worth of at least approximately
$19,200. This covenant increases each January 1 by 50% of the Company's net
income in the prior year. At January 1, 2004, the minimum net worth covenant was
approximately $22,406. At December 31, 2003, the Company's net worth was
$34,430, in compliance with this covenant.
Loans under the $15,000 credit facility currently bear interest at
prime-based rates. At December 31, 2003, the rate was 5.25%. The Company also
pays a facility fee of 0.25% on the unused portion of the commitment. The loan
is collateralized by substantially all of the Company's assets and the Company
is precluded from paying dividends under the terms of the agreement. At December
31, 2003, the entire balance of outstanding borrowings under this credit
facility was classified as a short-term liability on the Consolidated Balance
Sheet. The Company plans to refinance this debt, or extend its current credit
flexibility, before its current arrangement expires on June 30, 2004.
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
54
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 December 31, 2003, the outstanding borrowings under this revolver were
$454.
Convertible Note
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 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.
Capital Leases
The Company has one capital lease. The capital lease commitment is for
the Newark, New York facility which provides for payments (including principal
and interest) of $28 per year from December 2003 through 2007. Remaining
interest payable on the lease is approximately $26. At the end of this lease
term, the Company is required to purchase the facility for one dollar.
Payment Schedule
Principal payments under the current amount outstanding of the long-term debt
and capital leases are as follows:
Capital
Credit Lease-
Facility Building Total
2004 $1,267 $18 $1,285
2005 -- 20 20
2006 -- 23 23
2007 -- 25 25
2008 and thereafter -- -- --
------ --- ------
1,267 86 1,353
Less: Current portion 1,267 18 1,285
------ --- ------
Long-term $ -- $68 $ 68
======= === ======
Letters of Credit
The Company maintains a $50 letter of credit that supports its corporate
credit card account. Also, in connection with the $4,000 operating lease line
that the Company initiated in March 2001, the Company maintains a letter of
credit, which expires in July 2007. At December 31, 2003, the amount of the
letter of credit was $3,800. This letter of credit declines gradually at certain
points over time as the obligation it is associated with diminishes.
Note 6 - Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first two years of the agreement, of which approximately
$5,600 has been paid. The Company has been attempting to collect the
55
balance due under this contract. China Battery has indicated that these payments
will not be made until certain contractual issues have been resolved. Due to the
Chinese partner's questionable willingness to pay, the Company wrote off in
Fiscal 1997 the entire balance owed to the Company as well as the Company's
investment. In December 1997, China Battery sent to the Company a letter
demanding reimbursement of losses they have incurred plus a refund for certain
equipment that the Company sold to China Battery. Although China Battery has not
taken any additional steps, there can be no assurance that China Battery will
not further pursue such a claim, which, if successful, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that such a claim is without merit.
b. Indemnity Agreement
The Company has an Indemnity Agreement with each member of its Board of
Directors and corporate officers. The agreement provides that the Company will
reimburse directors or officers for all expenses, to the fullest extent
permitted by law and the Company by-laws, arising out of their performance as
agents or trustees of the Company.
c. Purchase Commitments
As of December 31, 2003, the Company has made commitments to purchase
approximately $1,146 of production machinery and equipment.
d. Royalty Agreement
Technology underlying certain products of the Company is based in part on
non-exclusive transfer agreements. The Company made an original payment for such
technology and is required to make royalty and other payments in the future that
incorporate the licensed technology.
In 2003, the Company entered into an agreement with Saft, to license
certain tooling for battery cases. The licensing fee associated with this
agreement is essentially one dollar per battery case. The total royalty expense
reflected in 2003 was $247. This agreement expires in the year 2017.
e. Government Grants/Loans
The Company has been able to obtain certain grants/loans from government
agencies to assist with various funding needs.
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. 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 December
31, 2003, there is no balance pertaining to this grant on the balance sheet.
In November 2001, the Company received approval for a $750 grant/loan
from a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
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. As of
December 31, 2002, the total funds advanced to the Company were $633. The
remaining $117 under this grant/loan was reimbursed to the Company during 2003
as it incurred additional expenses and submitted requests for reimbursement. The
Company initially recorded the proceeds from this grant/loan as a long-term
liability, and was to amortize these proceeds into income as the certainty of
meeting the employment criteria became definitive. In the third quarter of 2003,
the Company satisfied its obligation to meet certain employment levels, and the
loan/grant was forgiven. As a result, the Company recorded a gain of $781
(including accrued interest) from the forgiveness of the loan/grant in the
Statement of Operations in 2003.
56
Also in November 2001, the Company received approval for a $300 grant/loan
from New York State. The grant/loan will fund capital expansion plans that the
Company expects will lead to job creation. In this case, the Company will be
reimbursed after the full completion of the particular project. This grant/loan
also required the Company to meet and maintain certain levels of employment.
During 2002, since the Company did not meet the beginning employment threshold,
it appeared unlikely at that time that the Company would be able to gain access
to these funds. However, since the Company's employment levels increased
significantly during 2003, the Company expects to be able to gain access to
these funds during 2004.
In September 2003, the Company signed a contract with the U.S. Department
of the Army-Communications and Electronics Command (CECOM) whereby the Company
will receive approximately $3,100 to purchase, on behalf of CECOM, manufacturing
equipment to expand its BA-5390 lithium-manganese dioxide battery manufacturing
capability. As of December 31, 2003, the Company received $2,132 related to this
contract.
f. Employment Contracts
The Company has employment contracts with certain of its key employees
with automatic one-year renewals unless terminated by either party. These
agreements provide for minimum salaries, as adjusted for annual increases, and
may include incentive bonuses based upon attainment of specified management
goals. In addition, these agreements provide for severance payments in the event
of specified termination of employment.
g. Product Warranties
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 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 2003 were as follows:
Balance at December 31, 2002 $236
Accruals for warranties issued 90
Changes in accruals related to pre-existing warranties --
Settlements made (48)
-----
Balance at December 31, 2003 $278
h. Legal Matters
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. 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 sought proposals from engineering firms to complete the remedial
work contained in the work plan. A firm was selected to undertake the
remediation and in
57
December 2003 the remediation was completed. NYSDEC oversaw the remedial work
and requested additional sampling which was completed in December of 2003, as
well. The test results have been forwarded to NYSDEC and the Company is awaiting
further comment. 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, there is no requirement for the Company
to complete the project within any specific time frame. 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. Additionally, Ultralife will
honor its warranty by replacing any batteries that may be determined to be
defective. The Company has learned that the end-user and the Customer have
settled the matter. 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.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal and remanding the case to the District Court for further proceedings
in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement, the
Company's insurance carrier commenced liquidation proceedings. The insurance
carrier informed the Company that in light of the liquidation proceedings, it
would no longer fund the settlement. In addition, the value of the insurance
policy is in serious doubt. In April 2002, the Company and the insurance carrier
for the underwriters offered to proceed with the settlement. Plaintiffs' counsel
accepted the terms of the proposed settlement, amounting to $175 for the
Company, which was previously accrued. The settlement has been approved by the
Court and by the shareholders comprising the class, and the Company paid the
settlement in June of 2003. This matter is now completed and the Company will
not incur any further expenses with regard to this lawsuit.
Note 7 - Shareholders' Equity
a. Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, with a par
value of $0.10 per share. At December 31, 2003, no preferred shares were issued
or outstanding.
b. Common Stock
The Company has authorized 40,000,000 shares of common stock, with a par
value of $0.10 per share.
58
In July 2001, the Company completed a $6,800 private placement of
1,090,000 shares of its common stock at $6.25 per share.
In April 2002, the Company issued 801,333 shares of its common stock at
$3.00 per share in a private placement. In conjunction with this offering,
another 200,000 shares were issued in December 2002 to one of the Company's
directors, upon conversion of a convertible debenture (see Note 5).
In March 2003, the Company issued 125,000 shares of its common stock at
$4.00 per share to complete a short term financing to help it meet certain
working capital needs as the Company was growing rapidly .
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 the Company has an
approximate 9.2% ownership interest. This transaction was done in order to
provide some short term 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. Pursuant to the private placement
agreement, the Company filed an S-3 Registration Statement with the SEC to
register the shares issued in the private placement 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 December 31, 2003 was $1,550. The
Company does not guarantee the obligations of UTI and is not required to provide
any additional funding (See Note 13).
c. Treasury Stock
At December 31, 2003 and 2002, the Company had 727,250 shares of treasury
stock outstanding, valued at $2,378. At June 30, 2002, the Company had 27,250
shares outstanding, valued at $303.
d. Stock Options
The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense for its stock-based compensation plans has been recognized
in the Company's Consolidated Statements of Operations. The Company has adopted
the disclosure-only provision of SFAS No. 148, "Accounting for Stock-Based
Compensation".
For purposes of this disclosure, the fair value of each fixed option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in the year
ended December 31, 2003, the six-month period ended December 31, 2002 and in the
fiscal years 2002, and 2001:
Transition Fiscal Fiscal
2003 2002 2002 2001
-------------------------------------------------------------------------------------------------------------
Risk-free interest rate 2.3% 2.2% 3.6% 4.8%
Volatility factor 75.9% 75.9% 75.8% 75.8%
Dividends 0% 0% 0% 0%
Weighted average expected life (years) 4 4 4 4
Weighted average fair value of options granted $3.38 $1.72 $2.13 $3.56
The shareholders of the Company have approved four stock option plans
that permit the grant of options. In addition, the shareholders of the Company
have approved the grant of options outside of these plans. Under the 1991 stock
option plan, 100,000 shares of Common Stock were reserved for grant to key
employees and consultants of the Company. These options expired on September 13,
2001, at which date the plan terminated. All options granted under the 1991 plan
were Non-Qualified Stock Options ("NQSOs").
The shareholders of the Company have also approved a 1992 stock option
plan that is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 1,150,000 shares of Common Stock
59
for grant under the plan. During 1997, the Board of Directors approved an
amendment to the plan increasing the number of shares of Common Stock reserved
by 500,000 to 1,650,000. Options granted under the 1992 plan are either
Incentive Stock Options ("ISOs") or NQSOs. Key employees are eligible to receive
ISOs and NQSOs; however, directors and consultants are eligible to receive only
NQSOs. All ISOs vest at twenty percent per year for five years and expire on the
sixth year. The NQSOs vest immediately and expire on the sixth year. On October
13, 2002, this plan expired and as a result, there are no more shares available
for grant under this plan. As of December 31, 2003, there were 589,700 stock
options outstanding under this plan.
Effective July 12, 1999, the Company granted the current CEO options to
purchase 500,000 shares of Common Stock at $5.19 per share outside of any of the
stock option plans. Of these, 50,000 options were exercisable on the grant date,
and the remaining options are exercisable in annual increments of 90,000 over a
five-year period commencing July 12, 2000 through July 12, 2004, and expire on
July 12, 2005.
Effective December 2000, the Company established the 2000 stock option
plan which is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 500,000 shares of Common Stock for grant
under the plan. In December 2002, the shareholders approved an amendment to the
plan increasing the number of shares of Common Stock reserved by 500,000, to a
total of 1,000,000. Options granted under the 2000 plan are either ISOs or
NQSOs. Key employees are eligible to receive ISOs and NQSOs; however, directors
and consultants are eligible to receive only NQSOs. Most ISOs vest at twenty
percent per year for five years and expire on the sixth year. Certain ISOs
granted to officers vest over three years and expire in the seventh year. All
NQSOs issued to employees and non employee directors vest immediately and expire
in either the sixth or seventh year. NQSOs issued to non-employees vest
immediately and expire within three years. As of December 31, 2003, there were
818,879 stock options outstanding under this plan.
The following table summarizes data for the stock options issued by the
Company:
2003 Transition 2002 Fiscal 2002 Fiscal 2001
---- --------------- ----------- -----------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
of Shares Per Share of Shares Per Share Of Shares Per Share of Shares Per Share
--------- --------- --------- --------- --------- --------- --------- ---------
Shares under option at
beginning of year...... 2,016,549 $ 6.05 2,441,140 $6.90 2,266,300 $7.95 2,189,880 $ 8.68
Options granted........... 451,700 6.13 110,549 3.01 461,000 3.78 341,600 7.06
Options exercised......... (376,170) 6.34 -- -- -- -- (77,900) 7.77
Options canceled.......... (183,500) 10.46 (535,140) 9.27 (286,160) 9.92 (187,280) 14.28
-----------------------------------------------------------------------------------------------
Shares under option at
end of year 1,908,579 $5.57 2,016,549 $6.05 2,441,140 $6.90 2,266,300 $7.95
-----------------------------------------------------------------------------------------------
Options exercisable at
end of year 981,427 $6.13 1,118,269 $6.74 1,289,200 $8.13 675,480 $10.09
The following table represents additional information about stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted-
Number Average Number
Outstanding Remaining Weighted- Exercisable Weighted-
Range of at December 31, Contractual Average at December 31, Average
Exercise Prices 2003 Life Exercise Price 2003 Exercise Price
- --------------------------------------------------------------------------------------------------------------
$2.61 - $3.39 321,025 4.41 $3.22 93,525 $3.01
$3.40 - $5.88 1,027,894 3.02 $4.78 546,596 $4.98
$5.90 - $8.25 403,160 2.28 $7.14 230.700 $7.29
$8.87-$11.75 90,500 3.41 $10.24 54,602 $10.63
$12.38 - $14.38 66,000 4.71 $13.37 56,004 $13,37
- --------------------------------------------------------------------------------------------------------------
$2.61 - $14.38 1,908,579 3.18 $5.57 981,427 $6.13
60
e. Warrants
In July 2001, the Company issued warrants to purchase 109,000 shares of
its common stock to H.C. Wainwright & Co., Inc. and other affiliated individuals
that participated as investment bankers in the $6,800 private placement of
1,090,000 shares of common stock that was completed at that time. There were
86,907 warrants outstanding at December 31, 2003 with an exercise price of $6.25
per share and a term of five years.
f. Reserved Shares
The Company has reserved 2,051,637 and 2,612,900 shares of common stock
under the various stock option plans and warrants as of December 31, 2003 and
2002, respectively, and 2,685,950 and 2,588,200 as of June 30, 2002 and 2001,
respectively.
Note 8 - Income Taxes
Foreign and domestic loss carryforwards totaling approximately $76,829 are
available to reduce future taxable income. Foreign loss carryforwards of
approximately $14,474 can be carried forward indefinitely. The domestic net
operating loss carryforward of $62,355 expires through 2022.
The Company has determined that a change in ownership as defined under
Internal Revenue Code Section 382 occurred during the fourth quarter of 2003. As
such, the net operating loss carryforward will be subject to an annual
limitation. This limitation did not have an impact on income taxes determined
for 2003.
Due to the consistent losses reported in prior years and uncertainty as to
the Company's ability to utilize the benefits of these tax losses in future
periods, the Company has not reported a deferred tax asset on its Consolidated
Balance Sheet. The Company will reevaluate the appropriateness of recording a
deferred tax asset during 2004. If during 2004, the Company determines that it
is appropriate to record a deferred tax asset, this would result in recognition
of an income tax benefit on the Consolidated Statement of Operations.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The Company
increased its valuation allowance by approximately $1,591, $253, $9,856, and
$3,143 for the twelve months ended December 31, 2003, the six months ended
December 31, 2002, and the years ended June 30, 2002 and 2001, respectively, to
offset the deferred tax assets based on the Company's estimates of its future
earnings and the expected timing of temporary difference reversals.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
December 31, December 31, June 30,
2003 2002 2002
---- ---- ----
Deferred tax liabilities:
Investments $ 200 $ 202 $ 348
Property, plant and equipment 2,999 3,124 2,766
------- ------- -------
Total deferred tax liabilities 3,199 3,326 3,114
Deferred tax assets:
Impairment of long-lived assets 5,248 4,868 4,868
Net operating loss carryforward 26,234 26,297 25,678
Other 1,519 372 526
------- ------- -------
Total deferred tax assets 33,001 31,537 31,072
Valuation allowance for deferred tax assets (29,802) (28,211) (27,958)
------- ------- -------
Net deferred tax assets 3,199 3,326 3,114
------- ------- -------
Net deferred tax assets/liabilities $ -- $ -- $ --
======= ======= =======
61
The provision for income taxes consists of:
December 31, December 31, June 30, June 30,
2003 2002 2002 2001
------------ ------------ -------- --------
Current:
Federal $106 $ -- $ -- $ --
State -- -- -- --
Foreign -- -- -- --
---- ---- ---- ----
$106 $ -- $ -- $ --
Deferred:
Federal $ -- $ -- $ -- $ --
State -- -- -- --
Foreign -- -- -- --
---- ---- ---- ----
$ -- $ -- $ -- $ --
---- ---- ---- ----
Total: $106 $ -- $ -- $ --
==== ==== ==== ====
For financial reporting purposes, income (loss) before income taxes is as
follows:
December 31, June 30,
------------ --------
2003 2002 2002 2001
---- ---- ---- ----
United States $8,530 ($2,168) ($23,848) ($13,999)
Foreign (1,977) (944) (2,288) (3,263)
------- ----- ------- -------
Total $6,553 ($3,112) ($26,136) ($17,262)
======= ======== ========= =========
62
There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at December 31, 2003.
The Company's provision for income taxes is lower than would be expected
if the statutory rate was applied to pretax income because the Company was able
to utilize net operating losses in 2003 on which the Company had recorded a full
valuation allowance. The provision for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory federal income
tax rate to income before income taxes as follows:
December 31, December 31, June 30, June 30,
2003 2002 2002 2001
------------ ------------ -------- --------
Amount Computed using the
Statuatory Rate 34.0% (34.0%) (34.0%) (34.0%)
Increase (reduction) in taxes
resulting from:
State tax, net of federal benefit 2.6 0.0 0.0 0.0
Valuation Allowance/
deferred impact (35.0) 34.0 34.0 34.0
----- ---- ---- ----
Provision for Income Taxes 1.6% 0.0% 0.0% 0.0%
===== ==== ==== ====
Note 9- 401(k) Plan
The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the
employees' contributions. Effective January 1, 2001, the Board of Directors
approved Company matching of employee contributions up to a maximum of 4% of the
employee's income. Prior to this, the maximum matching contribution for
participants was 3%. In January 2002, the employer match was suspended in an
effort to conserve cash. For 2003, the six-month period ended December 31, 2002
and for the years ended June 30, 2002, and 2001 the Company contributed $0, $0,
$162, and $234, respectively.
Note 10 - Related Party Transactions
In conjunction with the Company's private placement offering in April
2002, a convertible debenture was issued to one of the Company's directors. The
debenture converted into 200,000 shares of the Company's common stock as a
result of the Company's shareholders vote to approve the conversion which
occurred at the Company's Annual Meeting in December 2002. All shares were
issued at $3.00 per share.
In October 2002, the Company sold a portion of its equity investment in
UTI, reducing its ownership interest from approximately 30% to approximately
9.2%. See Note 12 for additional information.
63
Note 11 - Business Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company reports its results in three
operating segments: Primary Batteries, Rechargeable Batteries, and Technology
Contracts . The Primary Batteries segment includes 9-volt batteries, cylindrical
batteries and various 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. Corporate consists of all other items that do not specifically relate
to the three segments and are not considered in the performance of the segments.
In 2003, research and development costs were reclassified to Corporate expenses
as the Company redefined its segment contribution as gross margin.
2003
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------------
Revenues $77,070 $ 1,528 $852 $ -- $79,450
Segment contribution 17,899 (1,221) 418 (11,115) 5,981
Interest expense, net (520) (520)
Other income (expense), net 1,092 1,092
Income taxes (106) (106)
-------
Net income 6,447
Long-lived assets 13,011 2,178 -- 6,157 19,796
Total assets 40,494 3,485 23 8,350 52,352
Capital expenditures 4,860 15 -- 685 5,560
Depreciation and amortization expense 1,450 676 -- 1,007 3,133
Transition 2002
- ---------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------------
Revenues $15,232 $ 274 $93 $ -- $15,599
Segment contribution 1,552 (729) 69 (4,547) (3,655)
Interest expense, net (151) (151)
Other income (expense), net 694 694
Income taxes -- --
-------
Net loss (3,112)
Long-lived assets 10,609 2,840 -- 3,570 17,019
Total assets 21,914 3,455 93 5,912 31,374
Capital expenditures 253 -- -- 88 341
Depreciation and amortization expense 843 359 -- 205 1,407
64
Fiscal 2002
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------------
Revenues $31,334 $ 445 $736 $ -- $ 32,515
Segment contribution 4,921 (17,966) 73 (12,239) (25,211)
Interest expense, net (291) (291)
Other income (expense), net (634) (634)
Income taxes -- --
--------
Net loss (26,136)
Long-lived assets 11,761 3,198 -- 5,616 20,575
Total assets 21,351 4,256 33 8,681 34,321
Capital expenditures 333 -- 113 2,330 1,884
Depreciation and amortization expense 1,425 2,312 -- 656 4,393
Fiscal 2001
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------------
Revenues $22,105 $ 370 $1,688 $ -- $ 24,163
Segment contribution 1,011 (4,695) 151 (11,433) (14,966)
Interest income, net 166 166
Other income (expense), net (2,462) (2,462)
Income taxes -- --
--------
Net loss (17,262)
Long-lived assets 11,628 19,490 280 1,882 33,280
Total assets 18,609 21,166 303 7,125 47,203
Capital expenditures 2,241 1,382 -- 744 4,367
Depreciation and amortization expense 1,159 2,153 1 343 3,656
Geographical Information
Revenues Long-Lived Assets
Transition Fiscal Fiscal Transition Fiscal Fiscal
2003 2002 2002 2001 2003 2002 2002 2001
------------------------------------------ ------------------------------------------
United States $65,328 $10,602 $21,208 $15,715 $15,427 $13,030 $16,605 $29,139
United Kingdom 7,500 2,352 3,853 1,797 4,369 3,989 3,970 4,141
Hong Kong 1,489 437 3,330 3,347 -- -- -- --
Europe,
excluding United
Kingdom 3,396 1,309 2,518 1,572 -- -- -- --
Other 1,737 899 1,606 1,732 -- -- -- --
Total $79,450 $15,599 $32,515 $24,163 $19,796 $17,019 $20,575 $33,280
------------------------------------------ ------------------------------------------
Note 12 - Investment in Affiliate
In December 1998, the Company announced the formation of a venture with
PGT Energy Corporation (PGT), together with a group of investors, to produce
Ultralife's polymer rechargeable batteries in Taiwan. During Fiscal 2000,
Ultralife provided the venture, named Ultralife Taiwan, Inc. (UTI), with its
proprietary technology and 700,000 shares of Ultralife Common Stock, in exchange
for approximately a 46% ownership interest. Ultralife held half the seats on
UTI's board of directors. PGT and the group of investors funded UTI with $21,250
in cash and hold the remaining seats on the board.
65
Due to subsequent sales of UTI common stock to third parties to raise
additional capital, the Company's equity interest was reduced to approximately
30% as of September 30, 2002. As a result of these "change in interest"
transactions, the Company's share of UTI's underlying net assets actually
increased, creating gains on the transactions that were recorded as adjustments
in additional paid in capital on the balance sheet. These increases in
additional paid in capital amounted to $1,573 in Transition 2002 and $5,212 in
Fiscal 2002. (The Company was precluded from recognizing gains from these
"change in interest" transactions in its Consolidated Statement of Operations
because UTI was a development stage company.)
Until October 2002, the Company accounted for its investment in UTI using
the equity method of accounting. The Company recorded equity losses in UTI in
the Company's Consolidated Statement of Operations of $1,273 in Transition 2002
and $954, and $2,338, in Fiscal 2002, and 2001.
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%. In exchange, the Company received total consideration of $2,393 in cash
and the return of 700,000 shares of Ultralife common stock. As a result of this
transaction, the Company reported a gain of $1,459 from the sale of its UTI
stock. Since the Company's investment in UTI has fallen below 20% and the
Company does not have any significant influence over the ongoing operations of
UTI, the Company now accounts for this investment using the cost method. The
carrying value of the investment on the Company's balance sheet as of December
31, 2003 and 2002 was $1,550.
In October 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 the Company has an
approximate 9.2% ownership interest. This transaction was done in order to
provide short term 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. At March 1, 2004, the note remains unpaid and the
Company is negotiating the possible extension of the maturity date while UTI
continues its efforts to raise additional equity capital. Pursuant to the
agreement, the Company filed an S-3 Registration Statement with the SEC to
register 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 December 31, 2003 was $1,550. The Company does not guarantee the
obligations of UTI and is not required to provide any additional funding.
Summarized financial statement information for the unconsolidated venture
for the periods during which the Company accounted for its investment in UTI
under the equity method of accounting is as follows:
Condensed Statements of Operations Year Ended June 30,
2002 2001
------------------------
Net revenue $ 101 $ --
Cost of Sales (1,573) --
Operating loss (8,360) (7,540)
Net loss (8,784) (6,637)
Condensed Balance Sheets June 30,
2002
--------
Current assets $ 5,902
Non-current assets 60,271
-------
$66,173
Current liabilities $12,372
Non-current liabilities 16,260
Shareholders' equity 37,541
-------
$66,173
=======
66
Note 13 - Subsequent Events
On March 1, 2004, the short-term note with UTI was due to mature. On that
date, the note remains unpaid and the Company is negotiating the possible
extension of the maturity date, while UTI continues its efforts to raise
additional equity capital. If it is successful in raising additional funds, the
Company currently expects to convert this note receivable into shares of UTI
common stock.
On February 2, 2004, the Company announced that it was awarded a
production contract for its BA-5390/U battery valued at approximately $12,000 by
the U.S. Army Communications Electronics Command (CECOM). Battery shipments are
expected to begin in the second quarter and be completed during the third
quarter of 2004.
On February 24, 2004, the Company announced that it received a development
contract from General Dynamics valued at approximately $2,700. The contract is
for lithium primary (non-rechargeable) and lithium ion rechargeable batteries,
as well as vehicle and soldier-based chargers for the Land Warrior-Stryker
Interoperable (LW-SI) program. The development work has begun and initial
deliveries are expected to commence in January 2005.
Note 14 - Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net
sales less cost of products sold), net income (loss) and net income (loss) per
share, basic and diluted, for each quarter during the past two and a half years:
Quarter ended
---------------------------------------------------
2003 March 29, June 28, Sept 27, Dec 31, Full
2003 2003 2003 2003 Year
--------- -------- -------- ------- ----
Revenues $15,428 $20,110 $19,874 $24,038 $79,450
Gross margin 3,159 4,731 3,893 5,313 17,096
Net Income 311 2,149 1,777 2,210 6,447
Net Income per share-basic 0.02 0.17 0.13 0.16 0.49
Net Income per share- diluted 0.02 0.16 0.12 0.15 0.46
Quarter ended
-----------------------
Transition 2002 Sept. 28, Dec. 31, Transition
2002 2002 Year
--------- -------- ----------
Revenues $ 6,847 $8,752 $15,599
Gross margin 129 763 892
Net loss (2,737) (375) (3,112)
Net loss per share, basic and
diluted (0.21) (0.03) (0.24)
Quarter ended
---------------------------------------------------
Fiscal 2002 Sept. 30, Dec. 31, March 31, June 30, Full
2001 2001 2002 2002 Year
--------- -------- --------- -------- ----
Revenues $ 7,616 $ 7,459 $ 8,862 $ 8,578 $ 32,515
Gross margin (448) (212) 922 1,085 1,347
Net loss (3,006) (3,831) (2,793) (16,506) (26,136)
Net loss per share, basic and
diluted (0.25) (0.31) (0.23) (1.28) (2.11)
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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
annual 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 year covered by this annual report that has materially affected, or
is reasonably likely to materially affect, the internal controls over financial
reporting.
68
PART III
The information required by Part III and each of the following items is
omitted from this Report and presented in the Company's definitive proxy
statement ("Proxy Statement") to be filed pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year covered by this Report, in
connection with the Company's 2004 Annual Meeting of Shareholders, which
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Directors and Executive Officers of the Registrant"
in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference. For the
information regarding securities authorized for issuance under equity
compensation plans required by Regulation S-K Item 201(d), see Part I, Item 5 of
this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Proxy Statement is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section entitled "Principal Accountant Fees and Services" in the Proxy
Statement is incorporated herein by reference.
69
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements and schedules required by this Item
15 are set forth in Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts See Item 15(d)
(b) Reports on Form 8-K
On October 7, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it had completed a private placement of
200,000 shares of unregistered common stock at a price of $12.50 per share, for
a total of $2.5 million.
On October 15, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing it had received an order valued at approximately
$4.2 million from the U.S. Army Communications and Electronics Command (CECOM)
for its BA-5372/U military batteries.*
On November 6, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing its third quarter financial results.
On November 13, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it had received an order valued at
approximately $1.4 million from the U.S. Army Communications and Electronics
Command (CECOM) for its BA-5372/U military batteries.*
On November 13, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it would be presenting at the Western New
York Investors Conference in Buffalo on November 20.*
On November 20, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it would be presenting at the Friedman
Billings Ramsey 10th Annual Investor Conference on December 2, 2003.*
On December 10, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it had been awarded a production contract
for its BA-5390/U battery valued at approximately $13 million, by the U.S. Army
Communications Electronics Command (CECOM).*
On December 17, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing the election of Anthony J. Cavanna to its board
of directors.*
*This information was furnished but not filed in accordance with
Regulation FD.
(c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit
Index Description of Document Incorporated By Reference to:
3.1a Restated Certificate of Incorporation Exhibit 3.1 of Registration Statement, File
No. 33-54470 (the "1992 Registration
Statement")
70
3.1b Amendment to Certificate of Exhibit 3.1 of the Form 10-Q for the fiscal
Incorporation of Ultralife Batteries, quarter ended December 31, 2000, File No.
Inc. 0-20852 ("the 2000 10-Q")
3.2 By-laws Exhibit 3.2 of the 1992 Registration
Statement
4.1 Specimen Copy of Stock Certificate Exhibit 4.1 of the 1992 Registration
Statement
10.1 Asset Purchase Agreement between the Exhibit 10.1 of the 1992 Registration
Registrant, Eastman Technology, Inc. Statement
and Eastman Kodak Company
10.2 Joint Venture Agreement between Exhibit 10.3 of the 1992 Registration
Changzhou Battery Factory, the Company Statement
and H&A Company and related agreements
10.3 1992 Stock Option Plan, as amended Exhibit 10.7 of the 1992 Registration
Statement
10.4 Stock Option Agreement under the Exhibit 10.10 of Form 10-Q for the fiscal
Company's 1992 Stock Option Plan for quarter ended December 31, 1993, File No.
incentive stock options 0-20852 (the "1993 10-Q"); (this Exhibit
may be found in SEC File No. 0-20852)
10.5 Stock Option Agreement under the Exhibit 10.10 of the 1993 10-Q (this
Company's 1992 Stock Option Plan for Exhibit may be found in SEC File No.
non-qualified options 0-20852)
10.6 Various amendments, dated January 4, Exhibit 10.17 of the 1993 10-Q (this
1993 through January 18, 1993 to the Exhibit may be found in SEC File No.
Agreement with the Changzhou Battery 0-20852)
Company
10.7 Technology Transfer Agreement relating Exhibit 10.19 of the Company's Registration
to Lithium Batteries (Confidential Statement on Form S-1 filed on October 7,
treatment has been granted as to 1994, File No. 33-84888 (the "1994
certain portions of this agreement) Registration Statement")
10.8 Technology Transfer Agreement relating Exhibit 10.20 of the 1994 Registration
to Lithium Batteries Confidential Statement
treatment has been granted as to
certain portions of this agreement)
10.9 Amendment to the Agreement relating to Exhibit 10.24 of the Company's Form 10-K
rechargeable batteries. (Confidential for the fiscal year ended June 30, 1996
treatment has been granted as to (this Exhibit may be found in SEC File No.
certain portions of this agreement) 0-20852)
10.10 Lease agreement between Wayne County Exhibit 10.1 of the Company's Registration
Industrial Development Agency and the Statement on Form S-3 filed on February 27,
Company, dated as of February 1, 1998 1998, File No. 333-47087
10.11 Loan and Security Agreement dated June Exhibit 10.33 of the Company's Report on
15, 2000 between Congress Financial Form 10-K for the year ended June 30, 2000
Corporation (New England) and (the "2000 10-K")
Ultralife Batteries, Inc.
10.12 Term Promissory Note dated June 15, Exhibit 10.34 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries, Inc.
10.13 Term Promissory Note dated June 15, Exhibit 10.35 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries (UK), Ltd.
71
10.14 Employment Agreement between the Exhibit 10.36 of the 2000 10-K
Registrant and John D. Kavazanjian
10.15 Second Amendment to Financing Agreement Exhibit 10.1 of the Form 10-Q for the
fiscal quarter ended December 31, 2000
10.16 Third Amendment to Financing Agreement Exhibit 10.38 of the Company's Report on
Form 10-K for the year ended June 30, 2001
(the "2001 10-K")
10.17 Ultralife Batteries, Inc. 2000 Stock Exhibit 99.1 of the Company's Registration
Option Plan Statement on Form S-8 filed on May 15,
2001, File No. 333-60984
10.18 Lease Agreement between Winthrop Exhibit 10.41 of the 2001 10-K
Resources and the Registrant
10.19 Amended Lease Agreement between Exhibit 10.1 of the Form 10-Q for the
Winthrop Resources and the Registrant fiscal quarter ended December 31, 2001
10.20 Senior Convertible Subordinated Exhibit 4.1 of the Form 10-Q for the fiscal
Debenture Agreement quarter ended March 31, 2002 (the "March
2002 10-Q")
10.21 Fourth Amendment to Financing Exhibit 10.1 of the March 2002 10-Q
Agreements
10.22 Employment Agreement between the Exhibit 10.45 of the Company's Report on
Registrant and John D. Kavazanjian Form 10-K for the year ended June 30, 2002
(the "2002 10-K")
10.23 Employment Agreement between the Exhibit 10.46 of the 2002 10-K
Registrant and Joseph N. Barrella
10.24 Employment Agreement between the Exhibit 10.47 of the 2002 10-K
Registrant and William A. Schmitz
10.25 Stock Purchase Agreement with Exhibit 10.1 of the Form 10-Q for the
Ultralife Taiwan, Inc. fiscal quarter ended September 28, 2002
10.26 Subordinated Promissory Note with Exhibit 10.26 of the Company's Report on
Hitschler, Kimelman Holdings, LLC Form 10-K for six months ended December
31, 2002 (the "Transition 2002 10-K")
10.27 Loan Agreement with Hitschler, Exhibit 10.27 of the Transition 2002 10-K
Kimelman Holdings, LLC
10.28 Warrant Issued to Hitschler, Kimelman Exhibit 10.28 of the Transition 2002 10-K
Holdings, LLC to Purchase Shares of
Common Stock
10.29 Fifth Amendment to Financing Exhibit 10.29 of the Transition 2002 10-K
Agreements with Congress Financial
Corporation
10.30 Financing Agreement between Ultralife Exhibit 10 of the Form 10-Q for the quarter
Batteries (UK) Ltd. and EuroFinance ended June 28, 2003
10.31 Form of Stock Purchase Agreement dated Exhibit 10.1 of the Form 10-Q for the
October 7, 2003 (Three separate but quarter ended September 27, 2003 (the
identical (other than subscription "September 2003 10-Q")
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).
72
10.32 Form of Registration Rights Agreement Exhibit 10.2 of the September 2003 10-Q
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).
10.33 Loan and Stock Subscription Agreement Exhibit 10.3 of the September 2003 10-Q
with Ultralife Taiwan, Inc.
21 Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 CEO 302 Certifications Filed herewith
31.2 CFO 302 Certifications Filed herewith
32 906 Certifications Filed herewith
(d) Financial Statement Schedules.
The following financial statement schedules of the Registrant are filed
herewith:
Schedule II - Valuation and Qualifying Accounts
Additions
Charged
Charged to
December 31, to Other December 31,
2002 Expense Accounts Deductions 2003
------------ ------- -------- ---------- ------------
Allowance for doubtful accounts $ 297 $ 12 $ -- $141 $ 168
Inventory reserves 535 388 -- 181 742
Warranty reserves 236 90 -- 48 278
Deferred tax valuation allowance 28,211 1,591 -- -- 29,802
Additions
Charged
Charged to
June 30, to Other June 30,
2002 Expense Accounts Deductions 2003
-------- ------- -------- ---------- --------
Allowance for doubtful accounts $ 272 $ 25 $ -- $ -- $ 297
Inventory reserves 407 275 -- 147 535
Warranty reserves 221 25 -- 10 236
Deferred tax valuation allowance 27,958 253 -- -- 28,211
Additions
Charged
Charged to
June 30, to Other June 30,
2001 Expense Accounts Deductions 2002
-------- ------- -------- ---------- --------
Allowance for doubtful accounts $ 262 $ 30 $17 $ 37 $ 272
Inventory reserves 411 1,038 -- 1,042 407
Warranty reserves 253 222 -- 254 221
Deferred tax valuation allowance 18,102 9,856 -- -- 27,958
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 10, 2004 By: /s/ John D. Kavazanjian
------------------------------------------------
John D. Kavazanjian
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 10, 2004 /s/ John D. Kavazanjian
----------------------------------------------------
John D. Kavazanjian
President, Chief Executive Officer and Director
Date: March 10, 2004 /s/ Robert W. Fishback
----------------------------------------------------
Robert W. Fishback
Vice President - Finance and Chief Financial Officer
(Principal Financial Officer)
Date: March 10, 2004 /s/ Joseph C. Abeles
----------------------------------------------------
Joseph C. Abeles (Director)
Date: March 10, 2004 /s/ Joseph N. Barrella
----------------------------------------------------
Joseph N. Barrella (Director)
Date: March 10, 2004 /s/ Patricia C. Barron
----------------------------------------------------
Patricia C. Barron (Director)
Date: March 10, 2004 /s/ Anthony J. Cavanna
----------------------------------------------------
Anthony J. Cavanna (Director)
Date: March 10, 2004 /s/ Daniel W. Christman
----------------------------------------------------
Daniel W. Christman (Director)
Date: March 10, 2004 /s/ Carl H. Rosner
----------------------------------------------------
Carl H. Rosner (Director)
Date: March 10, 2004 /s/ Ranjit C. Singh
----------------------------------------------------
Ranjit C. Singh (Director)
74
Exhibit 21
SUBSIDIARIES
The Company has a 100% ownership interest in Ultralife Batteries (UK) Ltd.,
incorporated in the United Kingdom.
75
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-110426, 333-67808 and 333-90984) and Form
S-8 (Nos. 333-31930 and 333-60984) of Ultralife Batteries, Inc. of our
report dated February 4, 2004, except for the first paragraph of Note 13,
as to which the date is March 1, 2004, relating to the financial
statements as of December 31, 2003 and 2002, and June 30, 2002 and for the
year ended December 31, 2003, the six months ended December 31, 2002, and
the year ended June 30, 2002, which appears in this Report on Form 10-K.
We also consent to the incorporation by reference of our report dated
February 4, 2003, except for the first paragraph of Note 13, as to which
the date is March 1, 2004, relating to the financial statement schedule as
of December 31, 2003 and 2002, and June 30, 2002 and for the year ended
December 31, 2003, the six months ended December 31, 2002, and the year
ended June 30, 2002, which appears in this Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
March 11, 2004
76
Exhibit 31.1
I, John D. Kavazanjian, certify that:
1. I have reviewed this annual report on Form 10-K 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 officers 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 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: March 10, 2004 /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian,
President and Chief Executive Officer
77
Exhibit 31.2
I, Robert W. Fishback, certify that:
1. I have reviewed this annual report on Form 10-K 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 officers 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 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: March 10, 2004 /s/ Robert W. Fishback
----------------------------
Robert W. Fishback,
Vice President - Finance and
Chief Financial Officer
78
Exhibit 32.1
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 Annual Report on Form 10-K for the year ended December 31, 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: March 10, 2004 /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: March 10, 2004 /s/ Robert W. Fishback
-------------------------------------
Robert W. Fishback
Vice President-Finance and
Chief Financial Officer
79