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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2005
OR
| o | 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)
Common Stock, par value $0.10 per share
(Title of class)
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
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. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act). Yes o No þ
On July 2, 2005, the aggregate market value of the Common Stock of Ultralife Batteries, Inc.
held by non-affiliates of the Registrant was approximately $175,000,000 based upon the
closing price for such Common Stock as reported on the NASDAQ National Market System on July 1,
2005.
As of February 4, 2006, the Registrant had 14,744,196 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 8, 2006 Annual Meeting of Stockholders are
specifically incorporated by reference in Part III, Items 10-14 herein.
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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, addressing the process of U.S. military procurement of batteries, 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 non-rechargeable 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 1A.
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. is a global provider of high-energy power systems for diverse
applications. The Company develops, manufactures and markets a wide range of non-rechargeable and
rechargeable batteries, charging systems and accessories for use in military, industrial and
consumer portable electronic products. Through its portfolio of standard products and engineered
solutions, Ultralife is at the forefront of providing the next generation of power systems. 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 reports its results in three operating segments: Non-Rechargeable Batteries,
Rechargeable Batteries, and Technology Contracts. The Non-Rechargeable 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 and
battery chargers and accessories. The Technology Contracts segment includes revenues and related
costs associated with various 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. (See Note 10 in the Notes to Consolidated Financial Statements.)
The Company evaluates various ways for it to grow, including opportunities to expand through
mergers and acquisitions. In January 2006, the Company announced that it had entered into a
definitive agreement to acquire all of the outstanding shares of Able New Energy Co., Ltd., an
established, profitable manufacturer of lithium batteries located in Shenzhen, China, for a
combination of cash, common stock and stock warrants for a total value of approximately $4.2
million. The acquisition, which is subject to customary closing conditions and approval of the
Chinese government, is expected to close in the second quarter of 2006, and will increase the
Company’s product offering and provide additional exposure to new markets. (See Note 14 in the
Notes to Consolidated Financial Statements.)
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 100 F Street, N.E., Washington, D.C. 20549 or by calling
1-800-SEC-0330.
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Non-Rechargeable Batteries
The Company manufactures and markets a family of lithium-manganese dioxide
(Li-MnO2) non-rechargeable batteries including 9-volt, HiRateÒ
cylindrical, and Thin CellÒ, 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
HiRate and Thin Cell lithium non-rechargeable batteries are sold primarily to the military and to
OEMs in industrial markets for use in a variety of applications including radios, automotive
telematics, emergency radio beacons, search and rescue transponders, pipeline inspection gauges,
portable medical devices and other specialty instruments and applications. The Company also
manufactures seawater-activated batteries for specialty marine applications. The Company believes
that the chemistry of lithium batteries provides significant advantages over other currently
available non-rechargeable battery technologies. These advantages include lighter weight, longer
operating time, longer shelf life, and a wider operating temperature range. The Company’s
non-rechargeable batteries also have relatively flat voltage profiles, which provide stable power.
Conventional non-rechargeable batteries, such as alkaline, have sloping voltage profiles that
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 a 2004 report, World Primary Lithium Battery Markets, by Frost & Sullivan,
lithium non-rechargeable batteries generated revenues of approximately $821 million in 2003 and are
forecasted to reach over $1.2 billion in 2009.
Revenues for this segment for the year ended December 31, 2005 were $58.5 million and segment
contribution was $10.9 million. See Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the 2005 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
offers substantial benefits, including the ability to design and produce lightweight batteries in a
variety of custom sizes, shapes, and thickness. The Company markets lithium polymer and lithium
ion rechargeable batteries comprised of cells manufactured by qualified cell manufacturers.
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 a 2005 report, Worldwide Market Update on NiMH, Li Ion and Polymer Batteries for
Portable Applications and HEVS, by the Institute of Information Technology, Ltd., the global
portable rechargeable batteries market was approximately $6.2 billion in 2004 and is expected to
reach approximately $6.5 billion in 2006. The widespread use of a variety of portable consumer and
commercial electronic products has increased demand. The Company believes its addressable market
is approximately $1 billion.
Revenues for this segment for the year ended December 31, 2005 were $10.1 million and segment
contribution was $1.3 million. See Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the 2005 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 non-rechargeable battery technologies.
Revenues for this segment in the year ended December 31, 2005 were $1.9 million and segment
contribution was $59,000. The Company continues to obtain contracts that are in parallel with its
efforts to ultimately commercialize products that it develops. Revenues in this segment may vary
widely each year, depending upon the quantity and size of contracts obtained. See Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the 2005 Consolidated
Financial Statements and Notes thereto for additional information.
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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, 2005 and corporate
contribution was a loss of $15.2 million. See Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the 2005 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 non-rechargeable 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 in UTI was diluted. In June 2004, the Company
wrote off its note receivable and the book value of its equity investment in UTI due to recent
events that had caused increasing uncertainty in UTI’s financial viability. At December 31, 2005,
the Company continued to hold a 9.2% ownership interest in UTI. Due to significant financial
difficulties, UTI’s manufacturing activity is at a very low level and UTI is no longer
manufacturing product for the Company.
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.
Non-Rechargeable Batteries
A non-rechargeable battery is used until discharged and then discarded. The principal
competing non-rechargeable battery technologies are carbon-zinc, alkaline and lithium. The
Company’s non-rechargeable 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.
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Comparison of Non-Rechargeable Battery Technologies
| Energy Density | ||||||||||||||||||||
| Watt- | Watt- | Operating | ||||||||||||||||||
| hours per | hours per | Discharge | Shelf Life | Temperature | ||||||||||||||||
| Technology | kilogram | liter | Profile | (years) | Range (°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 (Li-SO2) (1)(4) |
247 | 385 | Flat | 10 | -76 to 160 | |||||||||||||||
Ultralife lithium-manganese |
||||||||||||||||||||
dioxide (Li-MnO2) (2) |
270 | 600 | Flat | 10 | -40 to 162 | |||||||||||||||
| (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 non-rechargeable battery products are based predominantly on lithium-manganese
dioxide technology. The Company believes that the chemistry of lithium batteries provides
significant advantages over currently available non-rechargeable battery technologies, which
include lighter weight, longer operating time, longer shelf life, and a wider operating temperature
range. The Company’s non-rechargeable batteries also have relatively flat voltage profiles, which
provide stable power. Conventional non-rechargeable batteries, such as alkaline, have sloping
voltage profiles that 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. As a result, the Company believes that its non-rechargeable
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.
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. Examples of applications for which the Company’s 9-volt lithium battery
are currently sold include:
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| 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, Invensys (Firex®), BRK Brands
(First Alert®), Universal Security Instruments, Dicon Global, Sensotec, Uniline, Garvan, Homewatch,
Hekatron and Wizmart 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, Invensys (Firex®), BRK Brands (First Alert®),
Universal Security Instruments, Dicon Global, Sensotec, Uniline, Garvan, Homewatch, Hekatron and
Wizmart 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, TrueValue Hardware (TruServ), Ace Hardware, Fred Meyer, Inc.,
Menards, Chase Pitkin, Lowe’s 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 requires all battery-operated ionization-type smoke alarms sold in that
state to 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., European and Japanese 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 2/3A or 1/2AA-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 for its
9-volt battery products.
Cylindrical HiRate 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, commercial tracking (enabled through RFID
technology) and search and rescue applications, among others. 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 Cells and Batteries. The Company markets a wide range of
high-rate cylindrical non-rechargeable lithium batteries in various sizes and voltage
configurations. The Company currently manufactures a range of high-rate lithium cells under
the Ultralife HiRateÒ brand, which are sold and packaged into multi-cell
battery packs. These include D, C, 11/4 C, 1/2AA and 19 mm x 65 mm configurations, among other
sizes. Based 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.
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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/PRC-90 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 cylindrical 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% to 100% 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.
BA-5347 Batteries. The Company’s BA-5347 battery is a rectangular 6-volt
lithium-manganese dioxide battery, which is used in the AN/PAS-13 thermal weapon sight.
1/2AA Batteries. The Company’s 1/2AA battery is a cylindrical 3-volt lithium-manganese
dioxide battery, which is used in AN/AVS-9 fixed-wing aviator night vision goggles.
Thin Cell Batteries. The Company currently manufactures a range of thin
lithium-manganese dioxide non-rechargeable batteries under the Ultralife Thin
Cellâ 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 two 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 RFID devices.
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 non-rechargeable 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-ion and lithium-polymer-based batteries.
Rechargeable batteries generally can be used in many non-rechargeable 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
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batteries that utilize other chemistries and, therefore, tend to consume less 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 Ion Cells and Batteries. The Company offers a variety of lithium ion cells ranging in size
from 3.8x34x50 mm to 10x34x50 mm and ranging in capacity from 600 mAh to 1,800 mAh. Additionally,
the Company offers battery packs made from single and multiple lithium ion cells. The Company also
offers an assortment of battery packs containing lithium ion cells including:
UBI-2590 Batteries. The Company’s UBI-2590 battery is the lithium ion rechargeable
version of the BA-5390 non-rechargeable battery, and can be used in many of the same
military applications as the BA-5390. The Company is also marketing this battery, and a
number of chargers, for use in military and commercial applications.
LI-145 Batteries. The Company’s LI-145 battery, including a range of single and
multi-bay chargers, was developed for the U.S. Army Land Warrior-Stryker program. This
smart, SMBus compliant battery, which can be charged via a cable connection or through
contacts on the top of the battery, has an ergonomic form factor and built-in
state-of-charge indicator. The Company is also marketing this battery for use in commercial
applications.
LWC-L Batteries. The Company’s LWC-L battery is a commercial battery used in a variety
of rugged scientific and wearable diagnostic devices.
LI-7 Batteries. The Company’s LI-7 battery was originally developed for the U.S. Army
Land Warrior program. It has a built-in state-of-charge indicator and can be charged via a
cable connection or through contacts on the top of the battery. The battery is used in both
military training systems and commercial applications.
UBBL04 Batteries. The Company’s UBBL04 battery is a commercial battery used in
portable electronics applications.
UBBL07 Batteries. The Company’s UBBL07 battery is a commercial battery used in
portable electronics, hand-held devices, medical equipment, unmanned vehicles and back-up
power systems.
Battery Charging Systems and Accessories. To provide its customers with complete power
system solutions, the Company offers awide range of commercial and military battery charging
systems and accessories.
Lithium Polymer Cells and Batteries. The Company offers a variety of lithium polymer cells
ranging in size from 3.2x20x30 mm to 3.6x106x102 mm and ranging in capacity from 120 mAh to 3,300
mAh. Additionally, the Company offers battery packs made from single and multiple lithium polymer
cells.
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. While OEM agreements and contracts contain volume-based pricing based on
expected volumes, industry practices dictate that pricing is rarely adjusted retroactively when
contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but
the ability to adjust prices is generally based on market conditions.
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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. The Company has several long-term contracts with the U.S.
Government and companies within the automotive industry. These contracts do not commit the
customers to specific purchase volumes, and they include fixed price agreements over various
periods of time. The Company does not believe sales are seasonal, but it is possible the Company
may experience seasonality in products sold to electronic markets.
In 2005, sales to U.S. and non-U.S. customers were $50,178,000 and $20,323,000, respectively.
(See Note 10 in the Notes to Consolidated Financial Statements.)
Non-Rechargeable Batteries
The Company has targeted sales of its non-rechargeable batteries to manufacturers of security
and safety equipment, automotive telematics, medical devices, search and rescue equipment and
specialty instruments, as well as users of military equipment. The Company’s strategy is to
develop sales and 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 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. Additionally, the Company is
typically required to successfully meet contractual specifications and to pass various
qualification testing for the batteries under contract by the military. An inability by the
Company to pass these tests in a timely fashion could have a material adverse effect on the
Company’s business, financial condition and results of operations. When a government contract is
awarded, there is a government procedure that allows for companies to formally protest such award
if they believe they were unjustly treated in the governments’ bid evaluation process. A prolonged
delay in the resolution of a protest, or a reversal of an award resulting from such a protest could
have a material adverse effect on the Company’s business, financial condition and results of
operations.
During 2005, the Company had one major customer for its military products, the U.S. Defense
Department. In October 2004, purchasing responsibility for battery procurement was transferred
from the U.S. Department of the Army-Communications and Electronics Command (CECOM) to Defense
Logistics Agency (DLA). This customer comprised approximately 25% of the Company’s revenue in
2005, 56% in 2004, and 51% in 2003. The Company believes that the loss of this customer would
have a material adverse effect on the Company. The Company believes that it has a good
relationship with this customer.
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 non-rechargeable
lithium-manganese dioxide batteries to the U.S. Army. The contract provides for order releases
over a five-year period. The originally awarded contract had a maximum potential value of up to $32
million. In September 2005, the Company was awarded an increase, bringing the the total contract
value up to $45 million. Combined, these batteries comprise what is called the Small Cell Lithium
Manganese Dioxide Battery Group (Phase II) under CECOM’s Next Gen 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. In
December 2004, the Company was awarded 100% of the Next Gen II Phase IV battery production
contracts by the U.S. Defense Department to provide five types of non-rechargeable
lithium-manganese dioxide batteries to the U.S. Army. Combined, these batteries comprise what is
called the Rectangular Lithium Manganese Dioxide Battery Group. The Government awarded 60 percent
to the Company’s U.S. operation and 40 percent to its U.K operation. The contract provides for
order releases over a five-year period with a maximum potential value of up to $286 million. In
January 2005, a competitor of the Company filed a protest with the U.S. Government of the Company’s
award of the Next Gen II Phase IV contract with the U.S. military, and in April 2005 the protest
was denied by the Government, allowing the Company to proceed with the qualification process for
the batteries under this contract. In January 2006, the Company’s BA-5390A battery with State of
Charge Indicator, one of the five battery types under this contract, passed the qualification
process, allowing for future orders of this approved battery.
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At December 31, 2005, the Company’s backlog related to non-rechargeable battery orders was
approximately $10.1 million. The majority of this backlog was related to orders that are expected
to ship throughout 2006.
Rechargeable Batteries
The Company has targeted sales of its lithium ion and lithium polymer rechargeable batteries
and charging systems through OEM customers, as well as distributors and resellers focused on its
target markets. 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 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 hand-held devices, wearable devices and other electronic portable equipment. A key part of
this expansion includes increasing its battery design and assembly operations as well as building
its network of distributors and value added distributors throughout the world.
At December 31, 2005, the Company’s backlog related to rechargeable battery orders was
approximately $2.7 million .
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. The current
strategy for the Company is to seek development projects that are in harmony with its process and
product strategy. As an example, the Company was awarded a contract with General Dynamics in 2004
to develop portable non-rechargeable and rechargeable batteries and both vehicle and soldier
chargers for the Land Warrior program. 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 patented and 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 the same or similar information independently or
obtain access to the Company’s proprietary information, despite the Company’s efforts to protect
its proprietary information. In addition, there can be no assurance that the Company would prevail
if it asserted its intellectual property rights 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 8 patents in the U.S. and foreign 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 in 1994 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. However, the Company no longer utilizes this technology and has not paid any
royalties since 2002.
In 2003, the Company entered into an agreement with Saft Groupe S.A. to license certain
tooling for BA-5390 battery cases. The licensing fee associated with this agreement is essentially
one dollar per battery case. The total royalty expense reflected in 2005 was $103,000. 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
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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.
The following are registered trademarks or trademarks of the Company:
Ultralifeâ, Ultralife Thin Cellâ, Ultralife
HiRateâ, Ultralife Polymerâ, The New Power
GenerationÒ, LithiumPowerÒ, SmartCircuitä, The Ultimate
Power Sourceä, PowerBugä, and We Are Powerä.
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component parts that it
purchases. The Company has ISO 9001:2000 certification for its battery manufacturing operations in
both of its manufacturing facilities in Newark, New York and Abingdon, England.
Non-Rechargeable Batteries
The Company’s Newark, New York facility has the capacity to produce in excess of nine million
9-volt batteries per year, approximately 14 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. Capacity, however,
is also related to individual operations and product mix changes can produce bottlenecks in
individual operation, constraining overall capacity. The Company has acquired new machinery and
equipment in areas where production bottlenecks have resulted in the past and believes that it has
sufficient capacity in these areas. The Company continually evaluates its requirements for
additional capital equipment, and the Company believes that the planned increases in its current
manufacturing capacity will be adequate to meet foreseeable customer demand. However, with
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 Company uses various utilities to provide heat, light and power to its facilities. As
energy costs rise, the Company continues to seek ways to reduce these costs and will initiate
energy-saving projects at times to assist in this effort. It is possible, however, that rising
energy costs may have an adverse effect on the Company’s financial results.
The total carrying value of the Company’s non-rechargeable battery inventory, including raw
materials, work in process and finished goods, amounted to approximately $16.1 million as of
December 31, 2005.
Rechargeable Batteries
The Company believes that the raw materials and components utilized by the Company for its
rechargeable batteries are readily available from many sources. Although the Company believes that
alternative sources are available to supply materials that could replace materials it uses, 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.
The Company’s Newark, New York facility has the capacity to produce significant volumes of
rechargeable batteries, as this segment generally assembles battery packs and chargers and is
limited only by physical space and is not necessarily constrained by manufacturing equipment
capacity.
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In December 2004, the Company recorded an impairment charge of $1.8 million related to certain
polymer rechargeable manufacturing assets based on the determination that these assets would no
longer be utilized, resulting from a strategic decision to no longer manufacture polymer
rechargeable cells. Of the total impairment charge, $0.7 million related to the net book value of
the Company’s own assets and $1.1 million related to the present value of remaining payments for
leased assets.
The total carrying value of the Company’s rechargeable battery inventory, including raw
materials, work in process and finished goods, amounted to approximately $3.4 million as of
December 31, 2005.
Research and Development
The Company concentrates significant resources on research and development activities to
improve upon its technological capabilities and to design new products for customers’ applications.
The Company conducts its research and development in Newark, New York. During 2005, 2004 and 2003
the Company expended approximately $3.8 million, $2.6 million and $2.5 million, respectively, on
research and development. The Company expects that research and development expenditures will be
relatively consistent with the levels experienced in 2005, as new product development initiatives
will drive the Company’s growth. As in the past, the Company will continue to seek to fund part of
its research and development efforts based upon strategic demand for customer applications.
Cylindrical Cell Lithium Batteries
In 2001, the Company planned to develop new cells and batteries for various military
applications, utilizing technology developed through work on cell development, funded by the U.S.
Government in early 2000. The Company has successfully grown revenues in this market since the
product launch in late 2002, and continues to expand its military product portfolio. In 2004,
after the successful launch of military batteries, the Company increased its development activities
through the implementation of a Rapid Response Team, to enable it to quickly respond to customer
development requests. This has led to a significant increase in the development of products used
in commercial applications which led to additional revenues in 2005.
Rechargeable Batteries
In 2003, the Company redirected its research and development efforts toward design
optimization and customization of rechargeable products to customer specification, including
products with a broad range of potential applications. During 2003, and increasingly in 2004 and
2005, the Company realigned its development resources to more expeditiously respond to custom
development requests for battery solutions. In 2005, the rechargeable product portfolio continued
to grow as the Company has determined the viability of commercializing certain rechargeable
products.
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 Company successfully completed the contract 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 was completed in mid-2004.
In addition, the Company works to receive contracts with military contractors and commercial
customers. For example, 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
non-rechargeable and lithium ion rechargeable batteries, as well as vehicle and soldier-based
chargers for the Land Warrior-Stryker Interoperable (LW-SI) program. In 2005, the Company
received an added scope award of this project, increasing the total project to approximately $4.0
million. Additionally, purchase orders have been received for the products developed under this
contract as the batteries have become commercialized. In 2005, the Company was awarded various
development contracts, including the development of a rechargeable battery for a portable radio.
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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.
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the
International Civil Aviation Organization (ICAO) and corresponding International Air Transport
Association (IATA) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code
(IMDG), and in the U.S. by the Department of Transportation (DOT). These regulations are based on
the UN Recommendations on the Transport of Dangerous Goods Model Regulations and the UN Manual of
Tests and Criteria. 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 expected to go into effect in 2006. The
new regulations require companies to meet certain new testing, packaging, labeling and shipping
specifications for safety reasons. The Company complies with all current U.S. and international
regulations for the shipment of its products, and will comply with any new regulations that are
imposed. The Company has established its own testing facilities to ensure that it complies with
these regulations. If the Company were unable to comply with the new regulations, however, or if
regulations are introduced that limit the Company’s ability to transport its products to customers
in a cost-effective manner, this could have a material adverse effect on the Company’s business,
financial condition and results of operations.
The European Union’s RoHS (Restriction of Hazardous Substances) Directive places restrictions
on the use of certain hazardous substances in electrical and electronic equipment. All applicable
products sold in the EU market after July 1, 2006 must pass RoHS compliance. While this directive
does not apply to batteries and does not currently affect the Company’s products, should any
changes occur in the directive that would affect the Company’s products the Company will comply
with any new regulations that are imposed.
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. In 2005, the Company spent approximately
$317,000 on environmental controls, including costs to properly dispose of potentially hazardous
waste.
Since non-rechargeable and rechargeable lithium battery chemistries react 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.
Non-Rechargeable Batteries
The Company’s non-rechargeable battery products incorporate lithium metal, which reacts with
water and may cause fires if not handled properly. In the past, the Company has experienced fires
that have temporarily interrupted certain manufacturing operations. Most recently, in May 2004 and
June 2004, the Company experienced two fires that damaged certain inventory and property at its
facilities. The May 2004 fire occurred at the Company’s U.S. facility and was caused by cells that
shorted out when a forklift truck accidentally tipped the cells over in an oven in an enclosed
area. Certain inventory, equipment and a small portion of the building where the fire was
contained were damaged. The June 2004 fire occurred at the Company’s U.K. location and mainly
caused damage to various inventory and the U.K. company’s leased facility. The fire was contained
mainly in a bunkered, non-manufacturing area designed to store various material, and there was
additional smoke and water damage to the facility and its contents. It is unknown how the U.K.
fire was started. The fires caused relatively minor disruptions to the production operations, and
had no impact on the Company’s ability to meet customer demand. 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 a range of
3-volt cells are recognized under the Underwriters Laboratories, Inc. Component Recognition
Program.
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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 non-rechargeable 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.
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. 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 non-rechargeable battery market.
Employees
As of February 4, 2006, the Company employed a total of 592 permanent and temporary persons:
33 in research and development, 509 in production and 50 in sales, administration and management.
Of the total, 525 are employed in the U.S. and 67 in Europe. None of the Company’s employees is
represented by a labor union. The Company considers its employee relations to be satisfactory.
ITEM 1A. 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. The
Company sells much of its products through OEM supply agreements and contracts. While OEM
agreements and contracts contain volume-based pricing based on expected volumes, industry practices
dictate that pricing is rarely adjusted retroactively when contract volumes are not achieved.
Every effort is made to adjust future prices accordingly, but the ability to adjust prices is
generally based on market conditions. The Company is subject to many risks beyond its control that
influence the success or failure of a particular product manufactured by an OEM, including:
| • | competition faced by the OEM in its particular industry, | ||
| • | market acceptance of the OEM’s product, | ||
| • | the engineering, sales, marketing and management capabilities of the OEM, | ||
| • | technical challenges unrelated to our technology or products faced by the OEM in developing its products, and | ||
| • | the financial and other resources of the OEM |
For instance, in the year ended December 31, 2005, 32% of the Company’s revenues were
comprised of sales of its 9-volt batteries, and of this, approximately 21% pertained to sales to
smoke alarm OEMs. In 2004, 22% of the Company’s revenues were comprised of sales of its 9-volt
batteries, and of this, approximately 19% pertained to smoke alarm OEMs. If
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the retail demand for long-life smoke alarms decreases significantly, this could have a material
adverse effect on the Company’s business, financial condition and results of operations.
Risks Relating to Growth and Expansion
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
contracts recently received from the U.S. military for the Company’s batteries using cylindrical
cells could strain the current capacity capabilities of the Company’s U.K. facility and require
additional equipment and time to build a sufficient support infrastructure at that location. This
demand could also create working capital issues for the Company, as it may need 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.
In addition to organic growth, the Company has recently adopted a strategy to grow its
business through the acquisition of complementary businesses. The Company’s inability to acquire
such businesses, or increased competition which could increase the Company’s acquisition costs,
could impede the Company’s ability to close identified acquisitions, which could adversely affect
the Company’s growth strategy and results of operations. In addition, the Company’s inability to
improve the operating margins of businesses it acquires or operate such acquired businesses
profitably or to effectively integrate the operations of those acquired businesses could also
adversely affect the Company’s business and results of operations.
The Company will also be required to continue to improve its operations, management and
financial systems and controls. The failure to manage growth and expansion effectively could have
an adverse effect on the Company’s business, financial condition, results of operations, and
liquidity.
Risks Related to Government Contracts
A significant portion of the Company’s business comes from sales of product to the U.S.
military through various government contracts. These contracts are subject to procurement laws and
regulations that lay out uniform policies and procedures for acquiring goods and services by the
U.S. government. The regulations also contain guidelines for managing contracts after they are
awarded, including conditions under which contracts may be terminated, in whole or in part, at the
government’s convenience or for default. Failure to comply with the procurement laws or
regulations can result in civil, criminal or administrative proceedings involving fines, penalties,
suspension of payments, or suspension or disbarment from government contracting or subcontracting
for a period of time.
The Company has had certain “exigent”, non-bid contracts with the government which have been
subject to an audit and final price adjustment which have resulted in decreased margins compared
with the original terms of the contracts. As of December 31, 2005, there were no outstanding
exigent contracts with the government. As part of its due diligence, the government has conducted
post-audits of the completed exigent contracts to ensure that information used in supporting the
pricing of exigent contracts did not differ materially from actual results. In September 2005, the
Defense Contracting Audit Agency (DCAA) presented its findings related to the audits of three of
the exigent contracts, suggesting a potential pricing adjustment of approximately $1,400,000
related to reductions in the cost of materials that occurred prior to the final negotiation of
these contracts. The Company has reviewed these audit reports, has submitted its response to these
audits and believes, taken as a whole, the proposed audit adjustments can be offset with the
consideration of other compensating cost increases that occurred prior to the final negotiation of
the contracts. While the Company believes that potential exposure exists relating to any final
negotiation of these proposed adjustments, it cannot reasonably estimate what, if any, adjustment
may result when finalized. Such adjustments could reduce margins and 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 non-rechargeable and rechargeable battery products
to meet the needs of the U.S. military forces. The Company remains confident in its abilities to
compete successfully in solicitations for awards of contracts for these batteries, as well as
meeting delivery schedules for orders released under contract. The receipt of an award, however,
does not usually result in the immediate release of an order. Any delay of solicitations or
anticipated purchase orders 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. Additionally, the
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Company is typically required to successfully meet contractual specifications and to pass
various qualification testing for the batteries under contract by the military. An inability by
the Company to pass these tests in a timely fashion could have a material adverse effect on the
Company’s business, financial condition and results of operations. When a government contract is
awarded, there is a government procedure that allows for companies to formally protest such award
if they believe they were unjustly treated in the evaluation process. As a result of these
protests, the government is precluded from progressing under these contracts until the protests are
resolved. A prolonged delay in the resolution of a protest, or a reversal of an award resulting
from such a protest could have a material adverse effect on the Company’s business, financial
condition and results of operations.
In the years ended December 31, 2005, 2004 and 2003, approximately 45%, 65%, and 56%,
respectively, of the Company’s revenues were comprised of sales of batteries made directly or
indirectly to the U.S. military. If the demand for 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.
Concentration of Credit Risk
The Company has one major customer, the U.S. Department of Defense, that comprised 25%, 56%,
and 51% of the Company’s revenue in the years ended December 31, 2005, 2004, and 2003,
respectively. There were no other customers that comprised greater than 10% of the total company
revenues in those years.
Currently, the Company does not experience significant seasonal trends in non-rechargeable
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 non-rechargeable revenues in 2005. 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. military have been substantial during 2005, the Company does not consider this customer
to be a significant credit risk. The Company does not normally obtain collateral on trade accounts
receivable.
Risks Related to Development of Rechargeable Battery Business
Although the Company is involved with developing certain rechargeable cells and is in
production of rechargeable 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, the introduction
of disruptive technologies or failure of the Company’s customers in their markets could have a
further adverse effect on the Company’s rechargeable battery business.
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 alarms. 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.
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
certain safety risks, including the risk of fire. Although the Company incorporates safety
procedures in research, development, manufacturing processes and the transportation of batteries
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
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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 international
regulatory agencies that consider lithium to be a hazardous material regulate the transportation of
lithium-ion batteries and batteries that contain lithium metal. The Company currently ships
lithium batteries in accordance with regulations established by the U.S. Department of
Transportation and other international regulatory agencies. 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 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, in
conjunction with various environmental assessments of the property on which its Newark, New York
facility is located, has submitted various work plans to the New York State Department of
Environmental Conservation regarding further environmental testing and sampling in order to
determine the scope of any additional remediation. The Company is awaiting the results of
laboratory analysis. The ultimate resolution of this matter may result in the Company incurring
additional costs.
Risks Related to Changes in Transportation Regulations
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the
International Civil Aviation Organization (ICAO) and corresponding International Air Transport
Association (IATA) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code
(IMDG), and in the U.S. by the Department of Transportation (DOT). These regulations are based on
the UN Recommendations on the Transport of Dangerous Goods Model Regulations and the UN Manual of
Tests and Criteria. 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 expected to go into effect in 2006. The
new regulations require companies to meet certain new testing, packaging, labeling and shipping
specifications for safety reasons. The Company complies with all current U.S. and international
regulations for the shipment of its products, and will comply with any new regulations that are
imposed. The Company has established its own testing facilities to ensure that it complies with
these regulations. If the Company were unable to comply with the new regulations, however, or if
regulations are introduced that limit the Company’s ability to transport its products to customers
in a cost-effective manner, this could have a material adverse effect on the Company’s business,
financial condition and results of operations.
Limited Sources of Supply and Increases in Material Costs
Certain materials used in the Company’s 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
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interruption of product deliveries from sole source suppliers. Additionally, the Company could
face increasing pricing pressure from its suppliers dependent upon volume, due to rising costs by
these suppliers that could be passed on to the Company in higher prices for its raw materials,
which could have a material effect on the business, financial condition and results of operations.
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 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, and the
integration of such personnel obtained through business acquisitions. The Company cannot assure
that it will be able to retain or recruit this type of personnel. An inability to hire sufficient
numbers of people or to find people with the desired skills 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 competes with large and small manufacturers of alkaline, carbon-zinc, seawater,
and high-rate batteries as well as other manufacturers of lithium batteries, both rechargeable and
non-rechargeable. 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.
Many of the companies with which the Company competes 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, during or after 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.
Inability to Insure Against Losses
Because certain of the Company’s products are used in a variety of applications, including
high risk scenarios, it may be exposed to liability claims if such a product fails to function
properly. The Company maintains what it believes to
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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.
Risks Related to Currency Fluctuations
The Company maintains manufacturing operations in the U.S. and the U.K., and exports products
to various countries. The Company purchases materials and sells its products in foreign
currencies, and therefore currency fluctuations may impact the Company’s pricing of products sold
and materials purchased. In addition, the Company’s foreign subsidiary maintains its books in
local currency, and the translation of those subsidiary financial statements into U.S. dollars for
its consolidated financial statements could have an adverse effect on the Company’s consolidated
financial results, due to changes in local currency relative to the U.S. dollar. Accordingly,
currency fluctuations 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, 2005, the Company had approximately $82,418,000 of net operating loss
carryforwards available to offset current and future taxable income. In addition, the Company
reflected a net deferred tax asset of $23,729,000 on its Consolidated Balance Sheet associated with
the future tax benefit it expects to receive related to its U.S. operations. The amount of the net
deferred tax asset could be reduced if actual or expected future U.S. income or income tax rates
are lower than estimated, or if there are differences in the timing or amount of future reversals
of existing taxable or deductible temporary differences. Achieving its business plan targets,
particularly those relating to revenue and profitability, is integral to the Company’s assessment
regarding the recoverability of its net deferred tax asset.
The Company has determined that a change in ownership as defined under Internal Revenue Code
Section 382 occurred during 2003 and again during 2005. As such, the domestic net operating loss
carryforward will be subject to an annual limitation estimated to be in the range of approximately
$12,000,000. This limitation did not have an impact on income taxes determined for 2005. Such a
limitation could result in the possibility of a cash outlay for income taxes in a future year when
earnings exceed the amount of NOLs that can be used by the Company.
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 the
Company’s Common Stock.
Risks Related to Company’s Ability to Finance Ongoing Operations and Projected Growth
While the Company believes that its revenue growth projections and its ongoing cost controls
will allow it to 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.
The Company has certain debt covenants that must be maintained. 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. On November 1, 2005, the Company amended its
$25,000,000 credit facility to change the financial metrics that must be met to remain in
compliance with the debt covenants for the third and fourth quarters of 2005 and thereafter, to
accommodate the Company’s revised financial
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outlook. As a result of the uncertainty of the Company’s ability to comply with the financial
covenants within the next year, the Company is continuing to classify all of the debt associated
with this credit facility as a current liability on its balance sheet. While the Company believes
relations with its lenders are good and has received waivers as necessary in the past, there can be
no assurance that such waivers will always be obtained. In such case, the Company believes it has,
in the aggregate, sufficient cash, cash generation capabilities from operations, working capital
and financing alternatives at its disposal, including but not limited to alternative borrowing
arrangements and other available lenders, to fund operations in the normal course. If the Company
is unable to achieve its plans or unforeseen events occur, the Company may need to implement
alternative plans to provide it with sufficient levels of liquidity and working capital. While the
Company believes it could complete its original plans or alternative plans, if necessary, there can
be no assurance that such alternatives would be available on acceptable terms and conditions or
that the Company would be successful in its implementation of such plans.
Risks Related to Company’s Relationship with Ultralife Taiwan, Inc.
In June 2004, the Company recorded a $3,951,000 non-cash, non-operating charge related to the
Company’s ownership interest in Ultralife Taiwan, Inc. (“UTI”) that consisted of a write-off of its
$2,401,000 note receivable from UTI, including accrued interest, and the book value of its
$1,550,000 equity investment in UTI. The Company decided to record this charge due to events that
had caused increasing uncertainty over UTI’s near-term financial viability, including a failure by
UTI to meet commitments made to the Company and its other creditors to secure additional financial
support before July 1, 2004. Based on these factors, and UTI’s operating losses over several
years, the Company determined that its investment had an other than temporary decline in fair value
and the Company believes that the probability of being reimbursed for the note receivable is
remote. The Company continues to hold a 9.2% equity interest in UTI.
UTI is no longer supplying products to the Company and the Company has established alternate sources of supply.
Risks Related to Effectiveness of Internal Controls
The Company maintains and monitors various internal control processes over its financial
reporting. While the Company works to ensure a stringent control environment, it is possible that
the Company, through its ongoing internal control assessment, may determine that it has
deficiencies in certain internal controls that are considered to be material weaknesses. Such
material weaknesses in internal controls would be indicative of potential factors that could impact
the financial results being reported.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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, an engineering department and a machine shop. At
present, all of the Company’s research and development efforts and its 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 $280,000 and is
subject to review every five years based on current real estate market conditions. The next
five-year review is scheduled for March 2009.
On occasion, the Company rents additional warehouse space to store inventory and impaired
equipment.
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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. Through December 31, 2005, total costs incurred have amounted to approximately $100,000,
none of which have been capitalized. 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, and was overseen by the NYSDEC. The report detailing the remediation project, which
included the test results, was forwarded to NYSDEC and to the New York State Department of Health
(NYSDOH). The NYSDEC, with input from the NYSDOH, requested that the Company perform additional
sampling. A work plan for this portion of the project was written and delivered to the NYSDEC and
approved. In November 2005, additional soil, sediment and surface water samples were taken from
the area outlined in the work plan, as well as groundwater samples from the monitoring wells. The
Company has received the laboratory analysis and will be meeting with the NYSDEC in early March
2006 to discuss the results. Due to the additional sampling requested by the NYSDEC, the Company’s
outside environmental consulting firm has estimated that the final cost to the Company to remediate
the requested area will be approximately $28,000, based on the submitted work plan. The ultimate
resolution of this matter may result in further additional costs to be incurred. At December 31,
2005 and December 31, 2004, the Company had $38,000 and $66,000, respectively, reserved for this
matter.
A retail end-user of a product manufactured by one of Ultralife’s customers (the “Customer”),
made a claim against the Customer wherein it 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 assured the Customer that it will honor its warranty by
replacing any batteries that may be determined to be defective. Subsequently, the Company learned
that the end-user and the Customer settled the matter. In February 2005, Ultralife and the
Customer entered into a settlement agreement. Under the terms of the agreement, Ultralife has
agreed to provide replacement batteries for product determined to be defective, to warrant each
replacement battery under the Company’s standard warranty terms and conditions, and to provide the
Customer product at a discounted price for a period of time in recognition of the Customer’s
administrative costs in responding to the claim of the retail end-user. In consideration of the
above, the Customer released Ultralife from any and all liability with respect to this matter.
Consequently, the Company does not anticipate any further expenses with regard to this matter other
than its obligations under the settlement agreement. The Company’s warranty reserve as of December
31, 2005 includes an accrual related to anticipated replacements under this agreement. Further,
the Company does not expect the ongoing terms of the settlement agreement to have a material impact
on the Company’s operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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 2004 and 2005:
| Closing Sales Prices | ||||||||
| High | Low | |||||||
2004: |
||||||||
Quarter ended March 27, 2004 |
$ | 23.43 | $ | 13.25 | ||||
Quarter ended June 26, 2004 |
24.00 | 17.81 | ||||||
Quarter ended September 25, 2004 |
22.38 | 11.84 | ||||||
Quarter ended December 31, 2004 |
20.13 | 9.80 | ||||||
2005: |
||||||||
Quarter ended April 2, 2005 |
$ | 19.05 | $ | 16.46 | ||||
Quarter ended July 2, 2005 |
17.88 | 15.00 | ||||||
Quarter ended October 1, 2005 |
17.07 | 10.06 | ||||||
Quarter ended December 31, 2005 |
13.28 | 11.60 | ||||||
During the period from January 1, 2006 through February 28, 2006, the high and low closing
sales prices of the Company’s Common Stock were $13.67 and $10.41, respectively.
Holders
As of December 31, 2005, there were 443 registered holders of record of the Company’s Common
Stock. Based upon information from the Company’s stock transfer agent, management of the Company
estimates that there are more than 11,000 beneficial holders of the Company’s Common Stock.
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, 2005, there were 86,635 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.
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 note and shares were each 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 short-term financing to UTI while it worked to
complete an additional equity infusion to support its 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.
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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. Pursuant to
its current credit facility, the Company is precluded from paying any dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
| Number of | ||||||||||||
| securities | ||||||||||||
| remaining available | ||||||||||||
| Number of | for future issuance | |||||||||||
| securities to be | under equity | |||||||||||
| issued upon | Weighted-average | compensation plans | ||||||||||
| exercise of | exercise price of | (excluding | ||||||||||
| outstanding | outstanding | securities | ||||||||||
| options, warrants | options, warrants | reflected in column | ||||||||||
| and rights | and rights | (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation
plans approved by
security holders |
1,516,906 | $ | 10.67 | 72,351 | ||||||||
Equity compensation
plans not approved
by security holders |
0 | 0 | 0 | |||||||||
Total |
1,516,906 | $ | 10.67 | 72,351 | ||||||||
See Note 7 in Notes to Consolidated Financial Statements for additional information.
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Item 6. Selected Financial Data
Effective December 31, 2002, the Company changed its fiscal year-end from June 30 to December 31.
The financial results presented in this table include results from the last three calendar years
ended December 31, 2005, 2004 and 2003; the six-month transition period ended December 31, 2002;
and the fiscal years ended June 30, 2002 and 2001.
SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
(Dollars In Thousands, Except Per Share Amounts)
| Year Ended | Six Months Ended | |||||||||||||||||||||||
| December 31, | December 31, | Year Ended June 30, | ||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2002 | 2001 | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 70,501 | $ | 98,182 | $ | 79,450 | $ | 15,599 | $ | 32,515 | $ | 24,163 | ||||||||||||
Cost of products sold |
58,243 | 77,880 | 62,354 | 14,707 | 31,168 | 27,696 | ||||||||||||||||||
Gross margin |
12,258 | 20,302 | 17,096 | 892 | 1,347 | (3,533 | ) | |||||||||||||||||
Research and development expenses |
3,751 | 2,633 | 2,505 | 1,106 | 4,291 | 3,424 | ||||||||||||||||||
Selling, general and administrative expenses |
11,409 | 10,771 | 8,610 | 3,441 | 7,949 | 8,009 | ||||||||||||||||||
Impairment of long lived assets |
— | 1,803 | — | — | 14,318 | — | ||||||||||||||||||
Total operating and other expenses |
15,160 | 15,207 | 11,115 | 4,547 | 26,558 | 11,433 | ||||||||||||||||||
Operating income (loss) |
(2,902 | ) | 5,095 | 5,981 | (3,655 | ) | (25,211 | ) | (14,966 | ) | ||||||||||||||
Interest (expense)/income, net |
(636 | ) | (482 | ) | (520 | ) | (151 | ) | (291 | ) | 166 | |||||||||||||
Gain on fires |
— | 214 | — | — | — | — | ||||||||||||||||||
Equity (loss)/earnings in UTI |
— | — | — | (1,273 | ) | (954 | ) | (2,338 | ) | |||||||||||||||
Gain on sale of UTI stock |
— | — | — | 1,459 | — | — | ||||||||||||||||||
Write-off of UTI investment and note receivable |
— | (3,951 | ) | — | — | — | — | |||||||||||||||||
Gain from forgiveness of debt/grant |
— | — | 781 | — | — | — | ||||||||||||||||||
Other income (expense), net |
(318 | ) | 352 | 311 | 508 | 320 | (124 | ) | ||||||||||||||||
Income/(loss) before income taxes |
(3,856 | ) | 1,228 | 6,553 | (3,112 | ) | (26,136 | ) | (17,262 | ) | ||||||||||||||
Income tax provision-current |
3 | 32 | 106 | — | — | — | ||||||||||||||||||
Income tax provision/(benefit)-deferred |
486 | (21,136 | ) | — | — | — | — | |||||||||||||||||
Total income taxes |
489 | (21,104 | ) | 106 | — | — | — | |||||||||||||||||
Net (loss) income |
$ | (4,345 | ) | $ | 22,332 | $ | 6,447 | $ | (3,112 | ) | $ | (26,136 | ) | $ | (17,262 | ) | ||||||||
Net (loss) income per share-basic |
$ | (0.30 | ) | $ | 1.59 | $ | 0.49 | $ | (0.24 | ) | $ | (2.11 | ) | $ | (1.55 | ) | ||||||||
Net (loss) income per share-diluted |
$ | (0.30 | ) | $ | 1.48 | $ | 0.46 | $ | (0.24 | ) | $ | (2.11 | ) | $ | (1.55 | ) | ||||||||
Weighted average shares outstanding-basic |
14,551,000 | 14,087,000 | 13,132,000 | 12,958,000 | 12,407,000 | 11,141,000 | ||||||||||||||||||
Weighted average shares outstanding-diluted |
14,551,000 | 15,074,000 | 13,917,000 | 12,958,000 | 12,407,000 | 11,141,000 | ||||||||||||||||||
| December 31, | June 30, | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2002 | 2001 | |||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||||||
Cash and available-for-sale securities |
$ | 3,214 | $ | 11,529 | $ | 882 | $ | 1,374 | $ | 2,219 | $ | 3,607 | ||||||||||||
Working capital |
$ | 20,979 | $ | 30,645 | $ | 14,702 | $ | 7,211 | $ | 4,950 | $ | 6,821 | ||||||||||||
Total assets |
$ | 80,757 | $ | 81,134 | $ | 52,352 | $ | 31,374 | $ | 34,321 | $ | 47,203 | ||||||||||||
Total long-term debt and capital lease obligations |
$ | 25 | $ | 7,215 | $ | 68 | $ | 1,987 | $ | 103 | $ | 2,648 | ||||||||||||
Stockholders’ equity |
$ | 62,107 | $ | 63,625 | $ | 34,430 | $ | 22,243 | $ | 25,422 | $ | 37,453 | ||||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
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, addressing the process of U.S. military procurement of batteries, 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 non-rechargeable 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 1A.
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 thousands of dollars, except per share amounts.
General
Ultralife Batteries, Inc. is a global provider of high-energy power systems for diverse
applications. The Company develops, manufactures and markets a wide range of non-rechargeable and
rechargeable batteries, charging systems and accessories for use in military, industrial and
consumer portable electronic products. Through its portfolio of standard products and engineered
solutions, Ultralife is at the forefront of providing the next generation of power systems. 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 reports its results in three operating segments: Non-Rechargeable Batteries,
Rechargeable Batteries, and Technology Contracts. The Non-Rechargeable 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 and
battery chargers and accessories. The Technology Contracts segment includes revenues and related
costs associated with various 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. (See Note 10 in the Notes to Consolidated Financial Statements.)
The Company evaluates various ways for it to grow, including opportunities to expand through
mergers and acquisitions. In January 2006, the Company announced that it had entered into a
definitive agreement to acquire all of the outstanding shares of Able New Energy Co., Ltd., an
established, profitable manufacturer of lithium batteries located in Shenzhen, China, for a
combination of cash, common stock and stock warrants for a total value of approximately $4,200. The
acquisition, which is subject to customary closing conditions and approval of the Chinese
government, is expected to close in the second quarter of 2006, and will increase the Company’s
product offering and provide additional exposure to new markets.
Currently, the Company does not experience significant seasonal trends in non-rechargeable
battery revenues and does not have enough sales history on the rechargeable batteries to determine
if there is seasonality.
Subsequent to the Company’s fourth quarter earnings release dated February 9, 2006, the
Company reclassified certain assets and liabilities related to its deferred tax assets and
liabilities as of December 31, 2005. As a result, the Company’s Consolidated Balance Sheet as of
December 31, 2005 has been adjusted accordingly, resulting in a decrease of $930 in Total Assets
and a corresponding decrease in Total Liabilities. The Consolidated Statement of Operations was
not impacted by this adjustment.
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Results of Operations
Twelve Months Ended December 31, 2005 Compared With the Twelve Months Ended December 31, 2004
| 12 Months Ended | Increase / | |||||||||||
| 12/31/2005 | 12/31/2004 | (Decrease) | ||||||||||
Revenues |
$ | 70,501 | $ | 98,182 | $ | (27,681 | ) | |||||
Cost of products sold |
58,243 | 77,880 | (19,637 | ) | ||||||||
Gross margin |
12,258 | 20,302 | (8,044 | ) | ||||||||
Operating and other expenses |
15,160 | 15,207 | (47 | ) | ||||||||
Operating (loss) income |
(2,902 | ) | 5,095 | (7,997 | ) | |||||||
Other (expense) income, net |
(954 | ) | (3,867 | ) | 2,913 | |||||||
Income before taxes |
(3,856 | ) | 1,228 | (5,084 | ) | |||||||
Income tax provision/(benefit) |
489 | (21,104 | ) | 21,593 | ||||||||
Net (loss)/income |
$ | (4,345 | ) | $ | 22,332 | $ | (26,677 | ) | ||||
Net (loss)/income per share — basic |
$ | (0.30 | ) | $ | 1.59 | $ | (1.89 | ) | ||||
Net (loss)/income per share — diluted |
$ | (0.30 | ) | $ | 1.48 | $ | (1.78 | ) | ||||
Weighted average shares outstanding-basic |
14,551,000 | 14,087,000 | 464,000 | |||||||||
Weighted average shares outstanding-diluted |
14,551,000 | 15,074,000 | (523,000 | ) | ||||||||
Revenues. Total revenues of the Company for the twelve months ended December 31, 2005
amounted to $70,501, a decrease of $27,681, or 28% from the $98,182 reported for the twelve months
ended December 31, 2004.
Non-Rechargeable battery sales declined $29,390 year over year. Within the non-rechargeable
segment, large cylindrical battery sales declined $41,336 primarily as a result of lower shipments
of BA-5390 batteries, related to a transition of battery procurement responsibility within the
military from the U.S. Department of the Army-Communications and Electronics Command (CECOM) to the
Defense Logistics Agency (DLA) resulting in significantly fewer orders in 2005.
Offsetting the decline in BA-5390 shipments were higher sales of various other large
cylindrical products, small cylindrical products and 9-volt batteries.
Rechargeable revenues rose $1,996, or 25%, from $8,071 to $10,067, due to higher shipments of
rechargeable battery packs and charger systems, offset in part by a decrease in shipments of the
Company’s digital camera battery.
Technology contract revenues decreased $287, or 13% to $1,925 for the year ended December 31,
2005, mainly attributable to the timing of work of the Company’s development contract with General
Dynamics.
Cost of Products Sold. Cost of products sold decreased $19,637 from $77,880 for the year
ended December 31, 2004 to $58,243 for the year ended December 31, 2005 as a result of the decrease
in sales volume. Consolidated cost of products sold as a percentage of total revenue increased
from 79% for the twelve months ended December 31, 2004 to 83% for the year ended December 31, 2005.
Consolidated gross margins were 17% for the year ended December 31, 2005, compared with 21% for
the year ended December 31, 2004, mainly attributable to lower large cylindrical production volumes
and shipments that resulted in higher unabsorbed overhead costs.
In the Non-Rechargeable battery segment, the cost of batteries sold decreased $19,782, from
$67,408 in the year ended December 31, 2004 to $47,626 in 2005, mainly related to the decrease in
BA-5390 production volumes and shipments, offset in part by improvements in manufacturing
efficiencies at the Company’s UK facility. As a percent of total non-rechargeable battery sales,
the cost of non-rechargeable products sold for the year ended December 31, 2005 was 81%, an
increase over the 77% reported for the year ended December 31, 2004. The corresponding
non-rechargeable gross margins were 19% in 2005 and 23% in 2004.
In the Rechargeable battery segment, the cost of products sold increased $98, from $8,653 in
2004 to $8,751 in 2005. While rechargeable product sales rose 25%, the costs of products sold rose
by only 1%, attributable to a more favorable sales mix, including the introduction of higher margin
battery charging systems and accessories in 2005, a
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decline in shipments of the Company’s low margin digital camera battery, and lower depreciation expense and lease costs related to the asset
impairment charge taken in December 2004. Rechargeable gross margins for 2005 were $1,316, or 13%,
an increase of $1,898 over the 2004 loss of $582.
Technology contract cost of sales increased $47, from $1,819 for the year ended December 31,
2004, to $1,866 in 2005. While revenues decreased in this segment, cost of sales increased due to
varying margins realized under different technology contracts. Technology contracts cost of sales
as a percentage of revenue was 97% for the year ended December 31, 2005, compared with 82% for the
year ended December 31, 2004, primarily due to adjustments in estimated gross margins of the
Company’s contract with General Dynamics as the project transitions from development to production.
Operating and Other Expenses. Total operating expenses decreased $47, from $15,207 for the
year ended December 31, 2004 to $15,160 for the year ended December 31, 2005. In December 2004,
the Company recorded an impairment charge of $1,803 related to certain polymer rechargeable
manufacturing assets based on the determination that these assets would no longer be utilized,
resulting from a strategic decision to no longer manufacture polymer rechargeable cells. Excluding
the impairment charge in 2004, operating and other expenses increased 13%, or $1,756. Higher R&D
costs accounted for $1,118 of this increase, mainly due to additional resources committed to new
product development. In addition to the R&D line shown in Operating Expenses, the Company also
considers its efforts in the Technology Contracts segment to be related to key battery development
efforts. Operating and other expenses as a percentage of revenue rose to 22% in 2005 compared with
14% in 2004, excluding the impairment charge, mainly due to the lower revenue base and the
Company’s commitment to new product development. As quarterly revenues from the military market
have declined recently from high levels in the first half of 2004, the Company is committed to
continuing to develop other areas of the business, particularly in commercial markets such as
search and rescue, automotive telematics, and medical, where sales and development of new products
are growing. While the Company monitors its costs closely in conjunction with the recent decline
in revenues, it remains committed to ensuring that sufficient resources are in place to support the
additional growth it expects in the near future. In September 2005, the Company initiated certain
measures to reduce costs and improve efficiencies. The Company took actions to reduce costs in
order to lower the go-forward breakeven operating margin. The actions taken in the third quarter
of 2005 involved certain personnel reductions and tighter spending controls, and severance costs
were not material.
Selling, general and administrative expenses increased $638, or 6%, from $10,771 in 2004 to
$11,409 in 2005. This increase resulted primarily from an increase in general and administrative
expenses, due to higher audit, consulting and other professional fees, including compliance with
the Sarbanes-Oxley Act.
Other Income (Expense). Interest expense (net) increased $154, from $482 for the year ended
December 31, 2004 to $636 for the year ended December 31, 2005. This change was primarily a
result of higher financing fees associated with higher outstanding debt balances.
In 2004, the Company experienced two separate fires in its manufacturing plants – one in the
U.S. and one in the U.K. As a result of the insurance recovery related to these fires, the Company
recorded a $214 gain on fixed asset replacements for the year ended December 31, 2004 that did not
recur in 2005. (See Note 12 in the Notes to Consolidated Financial Statements.)
In June 2004, the Company recorded a $3,951 non-cash, non-operating charge related to the
Company’s ownership interest in Ultralife Taiwan, Inc. (“UTI”) that consisted of a write-off of its
$2,401 note receivable from UTI, including accrued interest, and the book value of its $1,550
equity investment in UTI. The Company decided to record this charge due to recent events that had
caused increasing uncertainty over UTI’s near-term financial viability, including a failure by UTI
to meet commitments made to the Company and its other creditors to secure additional financial
support before July 1, 2004. Based on these factors, and UTI’s operating losses over several
years, the Company determined that its investment had an other than temporary decline in fair value
and the Company believes that the probability of being reimbursed for the note receivable is
remote. The Company continues to hold a 9.2% equity interest in UTI, although the Company believes
that UTI has ceased its manufacturing operations. The Company does not believe the write-off poses
a risk to its current operations or future growth prospects because UTI is no longer manufacturing
product for the Company, and the Company has taken steps to establish alternate sources of supply.
Miscellaneous income, primarily consisting of foreign exchange transaction gains and losses,
decreased $670 to a loss of $318 for the year ended December 31, 2005, from a gain of $352 for the
year ended December 31, 2004, mainly related to losses on foreign currency translations, resulting
from the Company’s U.S. dollar-denominated intercompany loan arrangement with the Company’s U.K.
subsidiary, as the dollar strengthened against the British pound sterling.
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Income Taxes. The Company reflected a tax provision of $489 for the twelve month period ended
December 31, 2005 compared with a benefit of $21,104 in the same period of 2004. Included in the
2005 provision is a $1,465 impact from a change in the New York State income tax law in the second
quarter of 2005, which caused a reduction to the associated deferred tax asset. In April 2005,
legislation was enacted in New York State that changed the apportionment methodology for corporate
income from a “three factor formula” comprised of payroll, property and sales, to one which uses
only sales. This change is to be phased in beginning in 2006, and the change is fully effective
for the tax year 2008 and thereafter. It is expected that this legislative change will result in a
reduction in the Company’s New York State effective tax rate from approximately 2.46% to 0.03%.
Excluding the New York State tax provision, the 2005 benefit related mainly from the year-to-date
loss before income taxes for U.S operations.
In 2004, the Company recorded a $21,136 deferred income tax credit at the end of 2004 as a
result of the Company’s recognition of a deferred tax asset arising from the Company’s conclusion
that it is more likely than not that it will be able to utilize the U.S. net operating loss
carryforwards (NOLs) that have accumulated over time. The recognition of a deferred tax asset
resulted from the Company’s evaluation of all available evidence, both positive and negative,
including: a) recent historical net income, and income on a cumulative three-year basis, as well as
anticipated future profitability based in part on recent military contracts; b) a financial
evaluation that modeled the future utilization of anticipated deferred tax assets under three
alternative scenarios; and c) the award of a significant contract with the U.S. Defense Department
in December 2004 for various battery types that could reach a maximum value of $286,000 in revenues
over the next five years, though no sales have been recognized to date under this contract. The
amount of the net deferred tax assets is considered realizable; however, such amount could be
reduced or eliminated in the near term if actual or expected future U.S. income or income tax rates
are lower than estimated, or if there are differences in the timing or amount of future reversals
of existing taxable or deductible temporary differences. The Company had significant NOLs related
to past years’ cumulative losses, and as a result it is subject to a U.S. alternative minimum tax
where NOLs can offset only 90% of alternative minimum taxable income. The Company recorded $32 as
a current tax provision for the year ended December 31, 2004.
(See Note 8 for additional
information.)
Net Loss. Net loss was $4,345, or $0.30 per basic and diluted common share, for the year
ended December 31, 2005 compared with net income of $22,332, or $1.48 per diluted common share, for
the year ended December 31, 2004, primarily as a result of a decline in revenues and the
recognition of a deferred tax asset in 2004 that did not reoccur in 2005. Average common shares
outstanding used to compute basic earnings per share increased from 14,087,000 in 2004 to
14,551,000 in 2005, mainly due to stock option exercises in 2005. The impact from “in the money”
stock options and warrants resulted in an additional 987,000 shares for the average diluted shares
outstanding computation in 2004. There was no similar dilutive impact for 2005’s results due to
the Company’s reported loss, which would have resulted in an anti-dilutive impact.
Twelve Months Ended December 31, 2004 Compared With the Twelve Months Ended December 31, 2003
| 12 Months Ended | Increase / | |||||||||||
| 12/31/2004 | 12/31/2003 | (Decrease) | ||||||||||
Revenues |
$ | 98,182 | $ | 79,450 | $ | 18,732 | ||||||
Cost of products sold |
77,880 | 62,354 | 15,526 | |||||||||
Gross margin |
20,302 | 17,096 | 3,206 | |||||||||
Operating and other expenses |
15,207 | 11,115 | 4,092 | |||||||||
Operating income |
5,095 | 5,981 | (886 | ) | ||||||||
Other (expense) income, net |
(3,867 | ) | 572 | (4,439 | ) | |||||||
Income before taxes |
1,228 | 6,553 | (5,325 | ) | ||||||||
Income tax (benefit)/provision |
(21,104 | ) | 106 | (21,210 | ) | |||||||
Net income |
$ | 22,332 | $ | 6,447 | $ | 15,885 | ||||||
Net income per share — basic |
$ | 1.59 | $ | 0.49 | $ | 1.10 | ||||||
Net income per share — diluted |
$ | 1.48 | $ | 0.46 | $ | 1.02 | ||||||
Weighted average shares outstanding-basic |
14,087,000 | 13,132,000 | 955,000 | |||||||||
Weighted average shares outstanding-diluted |
15,074,000 | 13,917,000 | 1,157,000 | |||||||||
Revenues. Total revenues of the Company for the twelve months ended December 31, 2004,
increased $18,732, or 24% to $98,182 over the twelve months ended December 31, 2003.
Non-Rechargeable batteries accounted for $10,829 of this change, increasing from $77,070 for the
twelve months ended December 31, 2003 to $87,899 for the same twelve month
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period in 2004, 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. Rechargeable battery sales increased
$6,543, or 428%, from $1,528 in 2003 to $8,071 in 2004, primarily due to increased product
offerings, including sales of a new digital camera battery and the rechargeable version of the
BA-5390 as well as battery charging units and cables. Technology contract revenues increased
$1,360, or 160% to $2,212 for the year ended December 31, 2004, resulting from a development
contract with General Dynamics.
Cost of Products Sold. Cost of products sold increased $15,526 to $77,880 for the year ended
December 31, 2004 as a result of the increased volume of products sold. Consolidated cost of
products sold as a percentage of total revenue increased slightly from 78% for the twelve months
ended December 31, 2003 to 79% for the year ended December 31, 2004. Consolidated gross margins
were 21% for the year ended December 31, 2004, compared with 22% for year ended December 31, 2003.
In the Non-Rechargeable battery segment, the cost of batteries sold increased $8,237, from
$59,171 in the year ended December 31, 2003 to $67,408 in 2004, mainly related to increased sales
volume. As a percent of total non-rechargeable battery sales, the cost of non-rechargeable
products sold for the year ended December 31, 2004 was 77%, consistent with the year ended December
31, 2003. The corresponding non-rechargeable gross margins were 23% in both 2003 and 2004. While
revenues increased, the Company did not benefit from leveraging its overhead costs due to the
uncertainty with military order activity in the second half of the year. When it became clear that
orders were not forthcoming from the military in the near-term due to a shift in battery
procurement responsibility within the U.S. military, the Company took action to reduce its direct
labor force, but also maintained its indirect labor force since it expected that the order delay
was temporary.
In the Rechargeable battery segment, the cost of products sold increased $5,904, from $2,749
in 2003 to $8,653 in 2004. While rechargeable product sales rose 428%, the costs of products sold
rose by only half of that, or 215%. Rechargeable gross margins for 2004 were a loss of $582
compared with a loss of $1,221 in the prior year. The margins on incremental sales were modest,
mainly due to a higher volume of low-margin sales of product manufactured and distributed in Asia
to the end customer.
Technology contract cost of sales increased $1,385, or 319%, from $434 for the year ended
December 31, 2003 to $1,819 for the year ended December 31, 2004, as a result of the increase in
revenues. Technology contracts cost of sales as a percentage of revenue was 82% for the year ended
December 31, 2004, compared with 51% for the year ended December 31, 2003, primarily due to
differences in gross margins of current year contracts compared with prior year contracts.
Operating and Other Expenses. Total operating expenses increased 37%, or $4,092, to $15,207
for the year ended December 31, 2004 up from $11,115 for the year ended December 31, 2003. In
December 2004, the Company recorded an impairment charge of $1,803 related to certain polymer
rechargeable manufacturing assets based on the determination that these assets would no longer be
utilized, resulting from a strategic decision to no longer manufacture polymer rechargeable cells.
Of the total impairment charge, $664 related to the net book value of the Company’s own assets and
$1,139 related to the present value of remaining payments for leased assets. Excluding the
impairment charge, operating and other expenses as a percentage of revenue remained consistent at
14% in 2004 and 2003. Research and development costs increased to $2,633 for the year ended
December 31, 2004 as compared to $2,505 for the year ended December 31, 2003. The increase is
largely attributable to an increased investment in new product development as the level of interest
for the Company’s engineering capabilities has risen significantly.
Selling, general and administrative expenses increased $2,161, or 25%, from $8,610 in 2003 to
$10,771 in 2004. Selling and marketing expenses increased $679, 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 $1,482, or 27%, due to higher
personnel-related costs, and insurance and professional fees, including compliance with the
Sarbanes-Oxley Act.
Other Income (Expense). Interest expense (net) decreased $38, from $520 for the year ended
December 31, 2003 to $482 for the year ended December 31, 2004. This change was a result of lower
revolving loan balances in 2004 and higher interest income resulting from higher investment
balances.
In 2004, the Company experienced two separate fires in its manufacturing plants – one in the
U.S. and one in the U.K. As a result of the insurance recovery related to these fires, the Company
recorded a $214 gain on fixed asset replacements for the year ended December 31, 2004. (See Note 12
in the Notes to Consolidated Financial Statements.)
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In 2003, a $781 gain from the forgiveness of debt/grant was recorded during the third quarter
as the Company fulfilled its obligation to increase employment levels under a government-sponsored
loan.
In June 2004, the Company recorded a $3,951 non-cash, non-operating charge related to the
Company’s ownership interest in Ultralife Taiwan, Inc. (“UTI”) that consisted of a write-off of its
$2,401 note receivable from UTI, including accrued interest, and the book value of its $1,550
equity investment in UTI. The Company decided to record this charge due to recent events that had
caused increasing uncertainty over UTI’s near-term financial viability, including a failure by UTI
to meet commitments made to the Company and its other creditors to secure additional financial
support before July 1, 2004. Based on these factors, and UTI’s operating losses over several
years, the Company determined that its investment had an other than temporary decline in fair value
and the Company believed that the probability of being reimbursed for the note receivable was
remote. The Company continued to hold a 9.2% equity interest in UTI, and was working with UTI to
help it through its financial difficulties in an effort to ensure a satisfactory outcome for all
parties involved. The Company did not believe the write-off posed a risk to its current operations
or future growth prospects because UTI continued to manufacture product for it, and the Company
took steps to establish alternate sources of supply.
Miscellaneous income, primarily consisting of foreign exchange transaction gains and losses,
increased $41 to $352 for the year ended December 31, 2004 from $311 for the year ended December
31, 2003, mainly related to the exchange gain on a U.S. dollar-denominated intercompany loan
arrangement with the Company’s U.K. subsidiary, as the dollar weakened against the British pound
sterling.
Income Taxes. The Company recorded a $21,136 deferred income tax credit at the end of 2004 as
a result of the Company’s recognition of a deferred tax asset arising from the Company’s conclusion
that it is more likely than not that it will be able to utilize the U.S. net operating loss
carryforwards (NOLs) that have accumulated over time. The recognition of a deferred tax asset
resulted from the Company’s evaluation of all available evidence, both positive and negative,
including: a) recent historical net income, and income on a cumulative three-year basis, as well as
anticipated future profitability based in part on recent military contracts; b) a financial
evaluation that modeled the future utilization of anticipated deferred tax assets under three
alternative scenarios; and c) the award of a significant contract with the U.S. Defense Department
in December 2004 for various battery types that could reach a maximum value of $286,000 in revenues
over the next five years, though no sales have been recognized to date under this contract. The
amount of the net deferred tax assets is considered realizable; however, such amount could be
reduced or eliminated in the near term if actual or expected future U.S. income or income tax rates
are lower than estimated, or if there are differences in the timing or amount of future reversals
of existing taxable or deductible temporary differences. The Company had significant NOLs related
to past years’ cumulative losses, and as a result it is subject to a U.S. alternative minimum tax
where NOLs can offset only 90% of alternative minimum taxable income. The Company recorded $32 as
a current tax provision for the year ended December 31, 2004.
(See Note 8 for additional
information.)
Net Income. Net income was $22,332, or $1.48 per diluted common share, for the year ended
December 31, 2004 compared with $6,447, or $0.46 per diluted common share, for the year ended
December 31, 2003, primarily as a result of the reasons described above. Average common shares
outstanding used to compute basic earnings per share increased from 13,132,000 in 2003 to
14,087,000 in 2004 mainly due to stock option exercises in 2004. The impact from “in the money”
stock options and warrants resulted in an additional 987,000 shares for the average diluted shares
outstanding computation in 2004.
Liquidity and Capital Resources
Cash Flows and General Business Matters
As of December 31, 2005, cash and cash equivalents totaled $3,214. During the twelve months
ended December 31, 2005, the Company used $5,587 of cash from operating activities as compared to
generating $10,875 of cash for the twelve months ended December 31, 2004. The cash used during
2005 was mainly attributable to the reported net loss as well as increases in inventory levels
primarily related to a buildup of BA-5390 batteries in anticipation for orders expected to be
received during 2005 from the U.S. military. The cash generated during 2004 was attributable
primarily to positive results. Net changes in operating assets and liabilities in 2005 resulted in
a usage of cash, mainly as inventory balances rose $5,508 in anticipation of BA-5390 orders from
the U.S. military, as well as an increase in raw materials held on behalf of the military for a
surge demand. Higher balances in accounts receivable were generally offset by increases in
accounts payable, related to the timing of collections and payments. In 2005, the Company used
$2,284 of cash in investing activities, $3,309 of which was used to purchase fixed assets, offset
by a cash inflow from the sale of $1,000 in investment securities. During 2005, the Company
generated $663 in funds from financing activities. The financing activities included inflows of
$2,488 from stock option exercises, offset by principal payments on the Company’s term loan and
capital lease of $2,020.
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Inventory turnover for the year ended December 31, 2005 averaged 3.4 turns compared to 5.6
turns for 2004. The decline in this metric is mainly due to the timing of production and shipments,
including the impact from a decision to continue to manufacture and build inventory during 2005 in
anticipation of orders for BA-5390 batteries. The Company expects this metric to improve
during 2006 as orders from the U.S. military are fulfilled for BA-5390’s in the first half of the
year. The Company’s Days Sales Outstanding (DSOs) was an average of 45 days for 2005, improving
slightly from the 2004 average of 46 days.
The Company’s order backlog at December 31, 2005 was approximately $13,000, of which
approximately $6,000 related to orders from the U.S. military, which are expected to ship
throughout 2006.
As of December 31, 2005, the Company had made commitments to purchase approximately $295 of
production machinery and equipment, which it expects to fund through operating cash flows.
In October 2005, the Company received a contract valued at approximately $3,000 from the U.S.
Defense Department to purchase equipment and enhance processes to reduce lead time and increase
manufacturing efficiency to boost production surge capability of the Company’s BA-5390/U battery
during contingency operations. Under the contract, the Company also will purchase and pre-position
critical long lead-time materials and subassemblies. In January 2006, the Company received
approximately $1,000 for completing its first milestone under the contract, primarily related to
reimbursement for raw material inventory.
The Company has had certain “exigent”, non-bid contracts with the government which have been
subject to an audit and final price adjustment which have resulted in decreased margins compared
with the original terms of the contracts. As of December 31, 2005, there were no outstanding
exigent contracts with the government. As part of its due diligence, the government has conducted
post-audits of the completed exigent contracts to ensure that information used in supporting the
pricing of exigent contracts did not differ materially from actual results. In September 2005, the
Defense Contracting Audit Agency (DCAA) presented its findings related to the audits of three of
the exigent contracts, suggesting a potential pricing adjustment of approximately $1,400 related to
reductions in the cost of materials that occurred prior to the final negotiation of these
contracts. The Company has reviewed these audit reports, has submitted its response to these
audits and believes, taken as a whole, the proposed audit adjustments can be offset with the
consideration of other compensating cost increases that occurred prior to the final negotiation of
the contracts. While the Company believes that potential exposure exists relating to any final
negotiation of these proposed adjustments, it cannot reasonably estimate what, if any, adjustment
may result when finalized. Such adjustments could reduce margins and have an adverse effect on the
Company’s business, financial condition and results of operations.
In January 2006, the Company announced that it had entered into a definitive agreement to
acquire all of the outstanding shares of Able New Energy Co., Ltd., an established, profitable
manufacturer of lithium batteries located in Shenzhen, China, for a combination of cash, common
stock and stock warrants for a total value of approximately $4,200. The acquisition, which is
subject to customary closing conditions and approval of the Chinese government, is expected to
close in the second quarter of 2006, and will increase the Company’s product offering and provide
additional exposure to new markets. The cash portion of the purchase price is equal to $2,500 with
$500 of the cash purchase price contingent on the achievement of certain performance milestones of
the acquired business. The Company believes that it will be able to finance these payments from
the cash it has on hand, as well as from internally generated funds.
Debt and Lease Commitments
At December 31, 2005, the Company had a capital lease obligation outstanding of $48 for the
Company’s Newark, New York offices and manufacturing facilities.
On June 30, 2004, the Company closed on a new secured $25,000 credit facility, comprised of a
five-year $10,000 term loan component and a three-year $15,000 revolving credit component. The
facility is collateralized by essentially all of the assets of the Company, including its
subsidiary in the U.K. The term loan component is paid in equal monthly installments over 5 years.
The rate of interest, in general, is based upon either a LIBOR rate or Prime, plus a Eurodollar
spread (dependent upon a debt to earnings ratio within a predetermined grid). The lenders of the
credit facility are JP Morgan Chase Bank and Manufacturers and Traders Trust Company, with JP
Morgan Chase Bank acting as the administrative agent. The Company is required to meet certain
financial covenants, including a debt to earnings ratio, an EBIT, as defined, to interest expense
ratio, and a current assets to total liabilities ratio. Availability under the revolving credit
component of the facility is subject to the status of these financial covenants, as amended.
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On June 30, 2004, the Company drew down the full $10,000 term loan. The proceeds of the term
loan, to be repaid in equal monthly installments of $167 over five years, were used for the
retirement of outstanding debt and capital expenditures. From June 30, 2004 through August 1,
2004, the interest rate associated with the term loan was based on LIBOR plus a 1.25% Eurodollar
spread. On July 1, 2004, the Company entered into an interest rate swap arrangement in the
notional amount of $10,000 to be effective on August 2, 2004, related to the $10,000 term loan, in
order to take advantage of historically low interest rates. The Company received a fixed rate of
interest in exchange for a variable rate. The swap rate received was 3.98% for five years. The
total rate of interest paid by the Company is equal to the swap rate of 3.98% plus the Eurodollar
spread stipulated in the predetermined grid associated with the term loan. From August 2, 2004 to
September 30, 2004, the total rate of interest associated with the outstanding portion of the
$10,000 term loan was 5.23%. On October 1, 2004, this adjusted rate increased to 5.33%, on January
1, 2005 the adjusted rate increased to 5.73%, and on April 1, 2005, the adjusted rate increased to
6.48%, the maximum amount under the current grid structure, and remains at that rate as of December
31, 2005. Derivative instruments are accounted for in accordance with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” which requires that all derivative instruments
be recognized in the financial statements at fair value. The fair value of this arrangement at
December 31, 2005 resulted in an asset of $91, all of which was reflected as a short-term asset.
On May 4, 2005, the Company amended its $25,000 credit facility with JPMorgan Chase and M&T
Bank. The amendment provided for a waiver of the financial covenant violations as of the end of
the first quarter of 2005, and changed the financial metrics that must be met to remain in
compliance with the debt covenants for the second quarter of 2005 and after, in light of the lower
than expected revenue quarters caused mainly by delays in contract awards from the U.S. military.
In addition, the banks allowed for an adjustment to earnings in the definition of the financial
covenants related to the $1,803 non-cash charge taken in the fourth quarter of 2004 for the
impairment of certain of the Company’s rechargeable assets.
On August 5, 2005, the Company again amended its $25,000 credit facility. The amendment
provided for a waiver of the financial covenant violations as of the end of the second quarter of
2005, and changed the financial metrics that must be met to remain in compliance with the debt
covenants for the third quarter of 2005 and thereafter, to accommodate the Company’s revised
financial outlook. As a result of the uncertainty of the Company’s ability to comply with the
financial covenants within the next year, the Company reclassified the long-term portion of this
debt from long-term to current on the Consolidated Balance Sheet as of July 2, 2005.
On November 1, 2005, the Company amended its $25,000 credit facility with JPMorgan Chase and
M&T Bank. The amendment changed the financial metrics that must be met to remain in compliance
with the debt covenants for the third and fourth quarters of 2005 and thereafter, to accommodate
the Company’s revised financial outlook. In addition, the amendment provided the Company with
approximately $8,400 of additional borrowing availability under the revolver, based on the
financial results at October 1, 2005. As a result of the uncertainty of the Company’s ability to
comply with the financial covenants within the next year, the Company continued to classify all of
the debt associated with this credit facility as a current liability on the Consolidated Balance
Sheet as of October 1, 2005.
As of December 31, 2005, the Company had $7,167 outstanding under the term loan component of
its credit facility with its primary lending bank and nothing was outstanding under the revolver
component. At December 31, 2005, the Company was in compliance with all 3 covenants, as amended.
However, as a result of the uncertainty of the Company’s ability to comply with the financial
covenants, which become more restrictive within the next year, the Company continued to classify all of the debt associated with
this credit facility as a current liability on the Consolidated Balance Sheet as of December 31,
2005. While the revolver arrangement provides for up to $15,000 of borrowing capacity, including
outstanding letters of credit, the actual borrowing availability may be limited by the financial
covenants. At December 31, 2005, the Company had $2,920 of outstanding letters of credit related
to this facility. In addition, the Company’s additional borrowing capacity under the revolver
component of the credit facility as of December 31, 2005 was
approximately $9,500.
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 $774. This credit facility provides the Company’s U.K. operation with additional
financing flexibility for its working capital needs. The rate of interest, in general, is based
upon Prime plus 2.25%. At December 31, 2005 the rate of interest was 6.75%. At December 31, 2005,
the outstanding borrowings under this revolver were $525.
While the Company believes relations with its lenders are good and has received waivers as
necessary in the past, there can be no assurance that such waivers can always be obtained. In such
case, the Company believes it has, in the aggregate, sufficient cash, cash generation capabilities
from operations, working capital, and financing alternatives at its
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disposal, including but not limited to alternative borrowing arrangements and other available lenders, to fund operations in
the normal course.
Equity Transactions
In July 2004 the Company granted shares of its common stock pursuant to its Long-Term
Incentive Plan, to eligible hourly employees, based on years of service. The Company awarded 6
shares of stock for each year of service, in addition to awarding cash compensation to pay for
related taxes. This stock grant resulted in the issuance of 8,142 shares of common stock valued at
$135 on the date of grant, as well as total cash compensation of $95 amounting to an expense to the
Company of $230.
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 its terms, 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. 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. 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 approximately 9.2% ownership interest. This transaction was completed in
order to provide short term financing to UTI while it worked to complete an additional equity
infusion to support its growth plans. The transaction was recorded as a short-term note receivable
maturing on March 1, 2004 with interest accruing at 3% per annum.
During 2005, 2004 and 2003, the Company issued 452,000, 708,000 and 398,000 shares of common
stock, respectively, as a result of exercises of stock options and warrants. The Company received
approximately $2,488 in 2005, $4,172 in 2004 and $2,421 in 2003 in cash proceeds as a result of
these transactions.
Other Matters
The Company continues to be optimistic about its future prospects and growth potential. The
improvement in the Company’s financial position in recent years has enhanced the Company’s ability
to acquire additional financing. The Company continually explores various sources of capital,
including leasing alternatives, issuing new or refinancing existing debt, and raising equity
through private or public offerings. Although it stays abreast of such financing 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.
Management’s plan to achieve operational profitability and reduce its negative cash flows from
operations include reducing the build-up of inventory related to the production of BA-5390s and
executing certain cost cutting objectives that were begun in September 2005. Additionally, the
Company believes it has adequate third party financing available to fund its operations or could
obtain other financing, if needed.
If the Company is unable to achieve its plans or unforeseen events occur, the Company may need
to implement alternative plans. While the Company believes it could complete its original plans or
alternative plans, if necessary, there can be no assurance that such alternatives would be
available on acceptable terms and conditions or that the Company would be successful in its
implementation of such plans.
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.
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Contractual Obligations and Off-Balance Sheet Arrangements
| Payments due by period | ||||||||||||||||||||
| Less than 1 | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | year | years | years | 5 years | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Debt Obligations * |
$ | 7,167 | $ | 2,000 | $ | 4,000 | $ | 1,167 | $ | — | ||||||||||
Expected Interest Payments |
1,128 | 603 | 506 | 19 | — | |||||||||||||||
Capital Lease Obligations |
48 | 23 | 25 | — | — | |||||||||||||||
Operating Lease Obligations |
3,571 | 1,239 | 994 | 603 | 735 | |||||||||||||||
Purchase Obligations |
7,916 | 7,916 | — | — | — | |||||||||||||||
Total |
$ | 19,830 | $ | 11,781 | $ | 5,525 | $ | 1,789 | $ | 735 | ||||||||||
| * | Debt obligations are reflected herein at their contractual due dates. For financial reporting purposes the debt obligations are classified as current liabilities. (See Note 5 for additional information.) |
Expected interest payments are calculated assuming a 6.48% annual rate on outstanding debt
principal plus associated fees related to the credit facility. Purchase obligations consist of
commitments for property, plant and equipment, open purchase orders for materials and supplies, and
other general commitments for various service contracts.
The
Company has no off-balance sheet arrangements.
Outlook
Looking ahead into 2006, the Company is optimistic about its growth prospects and the status
of manufacturing operations. Management expects revenues in the first quarter of 2006 to be
approximately $21,000, including the restart of shipments of BA-5390 batteries to the U.S.
military. Management projects operating income will be in the range of $750 in the first quarter,
excluding any impact from the expensing of stock options pursuant to
the adoption of Statement of Financial Accounting Standards
No. 123R, “Share-Based Payments.” The
Company projects its first quarter non-cash expense related to stock options will be approximately
$250 based on current options outstanding and normal quarterly grants, primarily affecting the
Company’s operating expenses, although there will also be an impact on gross margins.
For the full year of 2006, the Company anticipates quarterly growth resulting in revenue of at
least $90,000. Growth above $90,000 will depend on a number of factors, including the pace at
which the military transitions to manganese dioxide technology, and further expansion in commercial
markets. This growth over 2005 revenues is expected to result from the restart of orders from the
U.S. military, particularly BA-5390 batteries, and from continued success in growing commercial
business, in key target markets such as automotive telematics and search and rescue. In September
2005, the Company took actions to reduce costs and improve efficiencies as order activity from the
military was delayed. As a result, the Company believes that it has lowered its go-forward
breakeven operating margin. Management generally expects that its overall effective income tax rate will be in the
range of 35% to 40% of pre-tax earnings for 2006, although actual cash payments for income taxes
are expected to be nominal as the Company utilizes its net operating loss carryforwards to offset
taxable income.
As revenues grow, manufacturing efficiencies are realized, and investments in operating
expenses (R&D and SG&A) are closely monitored, the Company believes it can generate favorable
returns to scale in the range of 30% to 40% on incremental revenues, depending on product mix.
Conversely, decreasing volumes will likely result in the opposite effect. The Company believes
that its gross margins can reach a range of 26%-27% as it nears approximately $35,000 in quarterly
revenues, resulting from ongoing improvements in operating efficiencies and an increase in the mix
of products with higher margins. Management has set an overall target of 30% gross margins for the
longer-term, as revenues reach a range of approximately $50,000 per quarter.
While the Company continues to monitor its operating costs very closely, SG&A costs are
expected to increase over time in order to support the needs of a growing business. The Company
believes that its operating expenses will trend toward a range of 11%-12% of revenues (excluding
the non-cash impact from expensing stock options) at the point
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where revenues are in the range of $35,000 per quarter, and it has set a target to reach 10% of revenues in the longer-term when total
sales amount to approximately $50,000 per quarter.
As gross margins improve with increases in revenues and as the Company continues to control
its operating expenses, operating income as a percentage of revenues (excluding the non-cash impact
of expensing stock options) is projected to be in the range of 15% at a revenue level of
approximately $35,000 per quarter, with a longer-term target of 20% at a revenue level of
approximately $50,000 per quarter.
During 2006, the Company projects that it will spend approximately $2,500 to $3,000 on capital
expenditures for machinery and equipment.
In January 2006, the Company entered into a definitive agreement to acquire all of the
outstanding shares of Able New Energy Co., Ltd., an established, profitable manufacturer of lithium
batteries located in Shenzhen, China, for a combination of cash, common stock and stock warrants
for a total value of approximately $4,200. In 2005, based on preliminary unaudited figures, which
have been reviewed by management, Able generated approximately $300 in operating profit on
approximately $2,300 in revenue. With more than 50 products, including a wide range of
lithium-thionyl chloride and lithium-manganese dioxide batteries and coin cells, this acquisition
broadens the Company’s expanding portfolio of high-energy power sources, enabling it to further
penetrate large and emerging markets such as remote meter reading, RFID and other markets that will
benefit from these chemistries. In addition, this acquisition will strengthen Ultralife’s global
presence, facilitate its entry into the rapidly growing Chinese market and improve the Company’s
access to lower cost raw materials. The cash portion of the purchase price is equal to $2,500,
with $500 of the cash purchase price contingent on the achievement of certain performance
milestones of the acquired business. The equity portion of the purchase price will consist of
80,000 shares of Ultralife common stock and 100,000 stock warrants, for a total equity
consideration of approximately $1,700. The Company anticipates that this acquisition will be
accretive in 2006. The acquisition, which is subject to customary closing conditions and approval
of the Chinese government, is expected to close in the second quarter.
On November 1, 2005, the Company amended its $25,000 credit facility with JPMorgan Chase and
M&T Bank. The amendment changed the financial metrics that must be met to remain in compliance
with the debt covenants for the third and fourth quarters of 2005 and
which become more restrictive thereafter, to accommodate
the Company’s revised financial outlook. The Company met the financial metrics for the fourth
quarter of 2005; however, as a result of the uncertainty of the Company’s ability to comply with
the financial covenants within the next year, the Company continues to classify all of the debt
associated with this credit facility as a current liability on the Consolidated Balance Sheet as of
December 31, 2005. In order to accommodate the acquisition of Able New Energy, the banks are
working on a waiver to the credit facility that is necessary to be completed prior to the closing
of this acquisition. While the Company believes relations with its lenders are good and has
received waivers for non-compliance with financial covenants, as necessary in the past, there can
be no assurance that such waivers can always be obtained. In such case, the Company believes it
has, in the aggregate, sufficient cash, cash generation capabilities from operations, working
capital, and financing alternatives at its disposal, including but not limited to alternative
borrowing arrangements and other available lenders, to fund operations in the normal course.
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.
Revenue recognition:
Battery Sales – In general, revenues from the sale of batteries are recognized when products
are shipped. When products are shipped with terms that require transfer of title upon
delivery at a customer’s location, revenues are recognized on date of delivery. Sales made
to distributors are recognized at time of shipment. A provision is made at the time the
revenue is recognized for warranty costs expected to be incurred. Customers, including
distributors, 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
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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 and the Company’s assessment of additional claims in the future. 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.
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
the assistance of an independent valuation or as the present value of expected discounted
future cash flows. The discount rate used by the Company in its evaluation approximates the
Company’s weighted average cost of capital. 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 regularly reviews the carrying value of its investments in affiliates to ensure
that these amounts are appropriate. If the carrying value of an investment is impaired and
is deemed to be other-than-temporary, the Company will adjust the value of such an
investment accordingly. 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 holds 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.
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
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market value of the underlying common stock on the date of grant, and given the fixed nature of the equity
instruments, no stock option-based employee compensation cost is reflected in net income.
In 2006, the Company will adopt SFAS No. 123R, “Share-Based Payment”. (See Note 1 for
additional information.)
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.
The Company recorded a deferred tax asset in December of 2004 arising from the Company’s
conclusion that it is more likely than not that it will be able to utilize its U.S. net
operating loss carryforwards (NOLs) that have accumulated over time. The recognition of a
deferred tax asset resulted from the Company’s evaluation of all available evidence, both
positive and negative, including: a) recent historical net income, and income on a
cumulative three-year basis, as well as anticipated future profitability based in part on
recent military contracts; b) a financial evaluation that modeled the future utilization of
anticipated deferred tax assets under three alternative scenarios; and c) the award of a
significant contract with the U.S. Defense Department in December 2004 for various battery
types that could reach a maximum value of $286,000 in revenues over the next five years,
though no sales have been recognized to date under this contract. The amount of the net
deferred tax assets is considered realizable; however, such amount could be reduced or
eliminated in the near term if actual or expected future U.S. income or income tax rates are
lower than estimated, or if there are differences in the timing or amount of future
reversals of existing taxable or deductible temporary differences. The Company has
significant NOLs related to past years’ cumulative losses, and as a result it is subject to
U.S. alternative minimum tax where NOLs can offset only 90% of alternative minimum taxable
income. Achieving business plan targets, particularly those relating to revenue and
profitability, is integral to the Company’s assessment regarding the recoverability of our
net deferred tax assets.
Recent Accounting Pronouncements
In January 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial
Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.” SFAS No. 155 also resolves issues addressed in
SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets.” SFAS No. 155 eliminates the exemption from
applying SFAS No. 133 to interests in securitized financial assets so that similar
instruments are accounted for in the same manner regardless of the form of the
instruments. SFAS No. 155 allows a preparer to elect fair value measurement at
acquisition, at issuance, or when a previously recognized financial instrument is subject
to a remeasurement (new basis) event, on an instrument-by-instrument basis. SFAS No. 155
is effective for all financial instruments acquired or issued after the beginning of an
entity’s first fiscal year that begins after September 15, 2006. The fair value election
provided for in paragraph 4(c) of SFAS No. 155 may also be applied upon adoption of SFAS
No. 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of
SFAS No. 133 prior to the adoption of this Statement. Earlier adoption is permitted as of
the beginning of an entity’s fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that fiscal year.
Provisions of SFAS No. 155 may be applied to instruments that an entity holds at the date
of adoption on an instrument-by-instrument basis. The Company is currently assessing any
potential impact of adopting this pronouncement.
In June 2005, the FASB issued FASB Staff Position No. FAS 143-1
(“FSP FAS 143-1”), Accounting
for Electronic Equipment Waste Obligations. FSP FAS 143-1 addresses the accounting for obligations
associated with the Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the
Directive) adopted by the European Union (EU). FSP FAS 143-1 is
effective the latter of the first
reporting period that ends after June 8, 2005 or the date that the EU-member country adopts the
law. As of December 31, 2005, the United Kingdom, the only EU-member country in which the Company
has significant operations, had not yet adopted the law.
In
June 2005, the FASB issued Statement of Financial
Accounting Standards No. 154 (“SFAS 154”), Accounting Changes and Error Corrections-a replacement of
APB No. 20 and FAS No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle and applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005. The
Company will apply the provisions of this statement effective January 1, 2006. The adoption of this
pronouncement will have no impact on the Company’s financial statements.
In
March 2005, the FASB issued FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No.
143” (“FIN 47”). This statement clarifies that an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred, if the liability’s fair
value can be reasonably estimated. The provisions of FIN 47 are effective for fiscal years ending
after December 15, 2005. The adoption of this pronouncement had no impact on the Company’s
financial statements.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. This statement is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB opinion No.
25, “Accounting for Stock Issued to Employees”. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values. The provisions of this statement were previously to become effective
for interim or annual periods beginning after June 15, 2005. However, in April 2005, the Securities
and Exchange Commission announced the adoption of a new rule which amends the effective date for
SFAS No. 123R. As a result, the Company will adopt the accounting provisions of SFAS No. 123R as
of January 1, 2006. The Company currently
38
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accounts for stock option-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, and has adopted the disclosure-only alternative of SFAS 123 and SFAS 148. The Company
expects the adoption of this pronouncement will result in the recognition of a non-cash expense of
approximately $1,000 for 2006 based on current options outstanding and normal quarterly grants.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43,
Chapter 4,” (“SFAS 151”) in an effort to conform U.S. accounting standards for inventories to
International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling
costs and wasted material (spoilage) costs to be recognized as current-period charges. It also
requires that the allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption of this
pronouncement will have no impact on the Company’s financial statements.
Risk Factors
See Item 1A.
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, changes in market value of its investments, and foreign currency risk, 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. In July 2004, the Company hedged this
risk by entering into an interest rate swap arrangement in connection with the term loan component
of its new credit facility. Under the swap arrangement, effective August 2, 2004, the Company
received a fixed rate of interest in exchange for a variable rate. The swap rate received was
3.98% for five years. The total rate of interest paid by the Company is equal to the swap rate of
3.98% plus the Eurodollar spread stipulated in the predetermined grid associated with the term
loan. As of December 31, 2005, a one basis point change in interest rates would have a $1,200
change in the fair value of the swap.
The Company is subject to foreign currency risk, due to fluctuations in currencies relative to
the U.S. dollar. In the year ended December 31, 2005, approximately 86% 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.
The Company maintains manufacturing operations in the U.S. and the U.K., and exports products
to various countries. The Company purchases materials and sells its products in foreign
currencies, and therefore currency fluctuations may impact the Company’s pricing of products sold
and materials purchased. In addition, the Company’s foreign subsidiary maintains its books in
local currency, which is translated into U.S. dollars for its consolidated financial statements. A
10% change in local currency relative to the U.S. dollar would have impacted the Company’s
consolidated income before taxes by approximately $250,000, or 6%.
39
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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- | ||||
| 41 | ||||
Consolidated Financial Statements: |
||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
Financial Statement Schedules: |
||||
| 74 | ||||
40
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ultralife Batteries, Inc.
Ultralife Batteries, Inc.
We have completed integrated audits of Ultralife Batteries, Inc.’s December 31, 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as
of December 31, 2005 and an audit of its December 31, 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
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
subsidiaries at December 31, 2005 and 2004 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 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 appearing under Item 15
(a) (2), 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 the
standards of the Public Company Accounting Oversight Board (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 of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal control
Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2005 based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal
Control — Integrated Framework issued by the COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
41
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Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
March 22, 2006
Rochester, New York
March 22, 2006
42
Table of Contents
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
| December 31, | ||||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,214 | $ | 10,529 | ||||
Available-for-sale securities |
— | 1,000 | ||||||
Trade accounts receivable, net of allowance for
doubtful accounts of $458 and $284, respectively |
10,965 | 8,585 | ||||||
Inventories |
19,446 | 13,938 | ||||||
Due from insurance companies |
482 | 1,198 | ||||||
Deferred tax asset-current |
2,508 | 3,082 | ||||||
Prepaid expenses and other current assets |
2,747 | 1,851 | ||||||
Total current assets |
39,362 | 40,183 | ||||||
Property, plant and equipment, net |
19,931 | 20,202 | ||||||
Other assets: |
||||||||
Financing fees |
— | 103 | ||||||
Security deposits |
243 | 226 | ||||||
Deferred tax asset-non current |
21,221 | 20,420 | ||||||
| 21,464 | 20,749 | |||||||
Total Assets |
$ | 80,757 | $ | 81,134 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of debt and capital lease obligations |
$ | 7,715 | $ | 2,390 | ||||
Accounts payable |
5,218 | 3,545 | ||||||
Accrued compensation |
329 | 309 | ||||||
Accrued vacation |
611 | 576 | ||||||
Other current liabilities |
4,510 | 2,718 | ||||||
Total current liabilities |
18,383 | 9,538 | ||||||
Long — term liabilities: |
||||||||
Debt and capital lease obligations |
25 | 7,215 | ||||||
Other long-term liabilities |
242 | 756 | ||||||
Total long — term liabilities |
267 | 7,971 | ||||||
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 — 15,471,446 and 15,019,262, respectively |
1,547 | 1,502 | ||||||
Capital in excess of par value |
130,530 | 127,299 | ||||||
Accumulated other comprehensive loss |
(1,054 | ) | (605 | ) | ||||
Accumulated deficit |
(66,538 | ) | (62,193 | ) | ||||
| 64,485 | 66,003 | |||||||
Less —
Treasury stock, at cost — 727,250 shares outstanding |
2,378 | 2,378 | ||||||
Total shareholders’ equity |
62,107 | 63,625 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 80,757 | $ | 81,134 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
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ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Amounts)
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Revenues |
$ | 70,501 | $ | 98,182 | $ | 79,450 | ||||||
Cost of products sold |
58,243 | 77,880 | 62,354 | |||||||||
Gross margin |
12,258 | 20,302 | 17,096 | |||||||||
Operating and other expenses: |
||||||||||||
Research and development |
3,751 | 2,633 | 2,505 | |||||||||
Selling, general, and administrative |
11,409 | 10,771 | 8,610 | |||||||||
Impairment of long lived assets |
— | 1,803 | — | |||||||||
Total operating and other expenses, net |
15,160 | 15,207 | 11,115 | |||||||||
Operating (loss) income |
(2,902 | ) | 5,095 | 5,981 | ||||||||
Other income (expense): |
||||||||||||
Interest income |
185 | 116 | 23 | |||||||||
Interest expense |
(821 | ) | (598 | ) | (543 | ) | ||||||
Gain on fires |
— | 214 | — | |||||||||
Write-off of UTI investment and note receivable |
— | (3,951 | ) | — | ||||||||
Gain from forgiveness of debt/grant |
— | — | 781 | |||||||||
Miscellaneous (expense) income |
(318 | ) | 352 | 311 | ||||||||
(Loss) income before income taxes |
(3,856 | ) | 1,228 | 6,553 | ||||||||
Income tax provision-current |
3 | 32 | 106 | |||||||||
Income tax provision (benefit)-deferred |
486 | (21,136 | ) | — | ||||||||
Total income tax provision (benefit) |
489 | (21,104 | ) | 106 | ||||||||
Net (loss) income |
$ | (4,345 | ) | $ | 22,332 | $ | 6,447 | |||||
(Loss) earnings per share — basic |
$ | (0.30 | ) | $ | 1.59 | $ | 0.49 | |||||
(Loss) earnings per share — diluted |
$ | (0.30 | ) | $ | 1.48 | $ | 0.46 | |||||
Weighted average shares outstanding — basic |
14,551,000 | 14,087,000 | 13,132,000 | |||||||||
Weighted average shares outstanding — diluted |
14,551,000 | 15,074,000 | 13,917,000 | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
44
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ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| Accumulated Other Comprehensive | ||||||||||||||||||||||||||||||||
| Income (Loss) | ||||||||||||||||||||||||||||||||
| Foreign | ||||||||||||||||||||||||||||||||
| Capital in | Currency | Other | ||||||||||||||||||||||||||||||
| Common Stock | excess of | Translation | Unrealized | Accumulated | Treasury | |||||||||||||||||||||||||||
| (Dollars in Thousands) | Number of Shares | Amount | Par Value | Adjustment | Net Gain (Loss) | Deficit | Stock | Total | ||||||||||||||||||||||||
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 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
22,332 | 22,332 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
218 | 218 | ||||||||||||||||||||||||||||||
Unrealized loss on interest rate swap arrangements |
(100 | ) | (100 | ) | ||||||||||||||||||||||||||||
Other comprehensive income |
118 | |||||||||||||||||||||||||||||||
Comprehensive income |
22,450 | |||||||||||||||||||||||||||||||
Tax benefits applicable to exercise of stock options |
2,428 | 2,428 | ||||||||||||||||||||||||||||||
Shares issued under employee stock grant |
8,142 | 1 | 134 | 135 | ||||||||||||||||||||||||||||
Shares issued under stock option and |
||||||||||||||||||||||||||||||||
warrant exercises |
708,338 | 71 | 4,101 | 4,172 | ||||||||||||||||||||||||||||
Stock-based compensation |
10 | 10 | ||||||||||||||||||||||||||||||
Balance as of December 31, 2004 |
15,019,262 | $ | 1,502 | $ | 127,299 | $ | (505 | ) | $ | (100 | ) | $ | (62,193 | ) | $ | (2,378 | ) | $ | 63,625 | |||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||
Net loss |
(4,345 | ) | (4,345 | ) | ||||||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
(609 | ) | (609 | ) | ||||||||||||||||||||||||||||
Unrealized gain on interest rate swap arrangements |
160 | 160 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
(449 | ) | ||||||||||||||||||||||||||||||
Comprehensive loss: |
(4,794 | ) | ||||||||||||||||||||||||||||||
Tax benefits applicable to exercise of stock options |
788 | 788 | ||||||||||||||||||||||||||||||
Shares issued under employee stock grant |
42 | — | 1 | 1 | ||||||||||||||||||||||||||||
Shares issued under stock option and
warrant exercises |
452,142 | 45 | 2,442 | 2,487 | ||||||||||||||||||||||||||||
Balance as of December 31, 2005 |
15,471,446 | $ | 1,547 | $ | 130,530 | $ | (1,114 | ) | $ | 60 | $ | (66,538 | ) | $ | (2,378 | ) | $ | 62,107 | ||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
45
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ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
| Year ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net (loss) income |
$ | (4,345 | ) | $ | 22,332 | $ | 6,447 | |||||
Adjustments to reconcile net (loss) income
to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
3,181 | 3,309 | 3,133 | |||||||||
Gain on assets disposed of in fire |
— | (214 | ) | — | ||||||||
Write-down of fixed assets destroyed in fire |
— | 137 | — | |||||||||
Write-down of inventory destroyed in fire |
— | 677 | — | |||||||||
Loss/(gain) on asset disposal |
22 | (1 | ) | 5 | ||||||||
Foreign exchange loss / (gain) |
330 | (345 | ) | (316 | ) | |||||||
Write off of UTI investment |
— | 3,916 | — | |||||||||
Non-cash stock-based compensation |
— | 146 | 26 | |||||||||
Non-cash gain on forgiveness of debt |
— | — | (781 | ) | ||||||||
Deferred income taxes |
489 | (21,073 | ) | — | ||||||||
Impairment of long lived assets |
— | 1,803 | — | |||||||||
Provision for loss on accounts receivable |
208 | 124 | 12 | |||||||||
Provision for inventory obsolescence |
221 | 405 | 388 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(2,734 | ) | 9,255 | (11,615 | ) | |||||||
Inventories |
(6,115 | ) | (4,640 | ) | (4,784 | ) | ||||||
Prepaid expenses and other assets |
(793 | ) | (548 | ) | (344 | ) | ||||||
Insurance proceeds receivable relating to fires |
659 | (1,198 | ) | — | ||||||||
Income taxes |
— | (106 | ) | 106 | ||||||||
Accounts payable and other liabilities |
3,290 | (3,104 | ) | 3,156 | ||||||||
Net cash (used in)/provided by operating activities |
(5,587 | ) | 10,875 | (4,567 | ) | |||||||
INVESTING ACTIVITIES |
||||||||||||
Purchase of property, plant and equipment |
(3,309 | ) | (5,437 | ) | (5,560 | ) | ||||||
Proceeds from asset disposal |
25 | 17 | 50 | |||||||||
Issuance of note to UTI |
— | — | (2,350 | ) | ||||||||
Purchase of securities |
— | (3,500 | ) | — | ||||||||
Sales of securities |
1,000 | 2,500 | — | |||||||||
Change in restricted cash |
— | 50 | — | |||||||||
Net cash used in investing activities |
(2,284 | ) | (6,370 | ) | (7,860 | ) | ||||||
FINANCING ACTIVITIES |
||||||||||||
Change in revolving credit facility |
195 | (6,669 | ) | 7,011 | ||||||||
Proceeds from issuance of common stock, net |
2,488 | 4,172 | 4,921 | |||||||||
Proceeds from issuance of debt |
— | 10,000 | 500 | |||||||||
Retirement of long-term debt |
— | (867 | ) | — | ||||||||
Debt issue costs |
— | (207 | ) | — | ||||||||
Proceeds from grant |
— | — | 117 | |||||||||
Principal payments under long-term debt and capital leases |
(2,020 | ) | (1,251 | ) | (818 | ) | ||||||
Net cash provided by financing activities |
663 | 5,178 | 11,731 | |||||||||
Effect of exchange rate changes on cash |
(107 | ) | 16 | 204 | ||||||||
Change in cash and cash equivalents |
(7,315 | ) | 9,699 | (492 | ) | |||||||
Cash and cash equivalents at beginning of period |
10,529 | 830 | 1,322 | |||||||||
Cash and cash equivalents at end of period |
$ | 3,214 | $ | 10,529 | $ | 830 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||||||
Cash paid for interest |
$ | 545 | $ | 333 | $ | 308 | ||||||
Cash paid for taxes |
$ | 22 | $ | 299 | $ | — | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
46
Table of Contents
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. is a global provider of high-energy power systems for diverse
applications. The Company develops, manufactures and markets a wide range of non-rechargeable and
rechargeable batteries, charging systems and accessories for use in military, industrial and
consumer portable electronic products. Through its portfolio of standard products and engineered
solutions, Ultralife is at the forefront of providing the next generation of power systems. 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.
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 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 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. Key areas affected by
estimates include: (a) reserves for excess and obsolete inventory, warranties, and bad debts, (b)
profitability on development contracts and (c) various expense accruals. Actual results could
differ from those estimates.
d. Cash and Cash Equivalents
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. For purposes of the Consolidated Balance Sheet, the
carrying value approximates fair value because of the short maturity of these instruments.
e. Available-for-Sale Securities
Management determines the appropriate classification of securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Marketable equity securities and debt
securities are classified as available-for-sale. These securities are carried at fair value, with
the unrealized gains and losses, net of tax, included as a component of accumulated other
comprehensive income. The Company had available-for-sale securities amounting to $0 at December 31,
2005 and $1,000 at December 31, 2004, consisting of auction rate securities. There were no
unrealized gains or losses related to securities included in other comprehensive income at December
31, 2005 or 2004.
The amortized cost of debt securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Such amortization is included in
interest income. The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale is included in interest income. Realized
gains and losses, and declines in value judged to be other-than-temporary on available-for-sale
securities, if any, are included in the determination of net income (loss) as gains (losses) on
sale of securities. There were no realized gains or losses included in net (loss) income for the
years ended December 31, 2005, 2004, or 2003.
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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
|
Lesser of useful life or 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 disposed, 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 the assistance of an
independent valuation or as the present value of expected discounted future cash flows. The
discount rate used by the Company in its evaluation approximates the Company’s weighted average
cost of capital. If the expected undiscounted future cash flows exceed the respective carrying
amount as of the date of assessment, no impairment is recognized. In 2004, the Company recorded an
impairment charge of $1,803 consisting of $664 of the net book value of the Company’s own assets,
and $1,139 of the present value of remaining payments for certain assets under operating leases.
The Company did not record any impairment of long-lived assets in the calendar years ended December
31, 2005 or 2003.
i. Technology License Agreements and Royalties
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. As
of December 31, 2004, the technology license agreements were fully amortized. Amortization expense
was $0, $33, and $100 in the years ended December 31, 2005, 2004 and 2003, 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 (losses) gains included in net (loss) income for the years ended
December 31, 2005, 2004 and 2003 were $(330), $345, and $316, respectively.
k. Revenue Recognition
Battery Sales – In general, revenues from the sale of batteries are recognized when products
are shipped. When products are shipped with terms that require transfer of title upon delivery at a
customer’s location, revenues are recognized on date of delivery. Sales made to distributors are
recognized at time of shipment. A provision is made at the time the revenue is recognized for
warranty costs expected to be incurred. Customers, including distributors, do not have a general
right of return on products shipped.
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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,
included in other current liabilities on the Company’s Consolidated Condensed Balance Sheet, are
based on historical experience of warranty claims. 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 $248, $208, and $142 for the years ended December 31, 2005, 2004 and 2003,
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. For the year ended December 31, 2005, the Company’s balance
sheet reflected a balance of $23,729 associated with its net deferred tax asset. In the year
ended December 31, 2004, the Company recorded a $23,501 net deferred tax asset associated with its
U.S. net operating loss carryforwards, due to the determination that it was more likely than not
that the Company would be able to utilize these benefits in the future. The Company recorded no
income tax benefit relating to the net operating loss generated during the year ended December 31,
2003 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. A valuation allowance was required for the years ended December 31,
2004 and 2005 related to the Company’s U.K. subsidiary and the history of losses at that facility.
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r. Concentration of Credit Risk
The Company has one major customer, the U.S. Department of Defense, that comprised 25%, 56%,
and 51% of the Company’s revenue in the years ended December 31, 2005, 2004, and 2003,
respectively. There were no other customers that comprised greater than 10% of the total company
revenues in those years.
Currently, the Company does not experience significant seasonal trends in non-rechargeable
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 non-rechargeable revenues in 2005. 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. military have been substantial during 2005, 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, 2005 and
2004. Fair values have been determined through information obtained from market sources.
t. Derivative Financial Instruments
Derivative instruments are accounted for in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” which requires that all derivative instruments be
recognized in the financial statements at fair value. The fair value of the Company’s interest
rate swap at December 31, 2005 resulted in an asset of $91, all of which was reflected as short
term. The fair value of the Company’s interest rate swap at December 31, 2004 resulted in a
liability of $100, of which $78 was reflected as long-term.
u. (Loss) Earnings Per Share
The Company accounts for net (loss) earnings 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. There were
1,516,906 outstanding stock options and warrants as of December 31, 2005 that were not included in
EPS as the effect would be anti-dilutive. For this period, diluted earnings per share was the
equivalent of basic earnings per share due to the net loss. The dilutive effect of 1,738,648 and
1,995,486 outstanding stock options and warrants were included in the dilution computation for the
years ended December 31, 2004 and 2003, respectively. (See Note 7.)
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The computation of basic and diluted earnings per share is summarized as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net (Loss) / Income (a) |
$ | (4,345 | ) | $ | 22,332 | $ | 6,447 | |||||
Effect of Dilutive Securities: |
||||||||||||
Stock Options / Warrants |
— | 10 | 44 | |||||||||
Convertible Note |
— | — | 9 | |||||||||
Net Income – Adjusted (b) |
$ | (4,345 | ) | $ | 22,342 | $ | 6,500 | |||||
Average Shares Outstanding – Basic (c) |
14,551,000 | 14,087,000 | 13,132,000 | |||||||||
Effect of Dilutive Securities: |
||||||||||||
Stock Options / Warrants |
— | 987,000 | 722,000 | |||||||||
Convertible Note |
— | — | 63,000 | |||||||||
Average Shares Outstanding –
Diluted (d) |
14,551,000 | 15,074,000 | 13,917,000 | |||||||||
EPS – Basic (a/c) |
$ | (0.30 | ) | $ | 1.59 | $ | 0.49 | |||||
EPS – Diluted (b/d) |
$ | (0.30 | ) | $ | 1.48 | $ | 0.46 | |||||
v. 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 option-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 option-based employee
compensation is as follows:
| 2005 | 2004 | 2003 | ||||||||||
Net (loss) income , as reported |
$ | (4,345 | ) | $ | 22,332 | $ | 6,447 | |||||
Add: Stock option-based
employee compensation expense
included in reported net
(loss) income, net of related
tax effects |
— | — | — | |||||||||
Deduct: Total stock
option-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects |
(3,236 | ) | (1,150 | ) | (1,348 | ) | ||||||
Pro forma net (loss) income |
$ | (7,581 | ) | $ | 21,182 | $ | 5,099 | |||||
(Loss) earnings per share: |
||||||||||||
Basic – as reported |
$ | (0.30 | ) | $ | 1.59 | $ | 0.49 | |||||
Diluted – as reported |
$ | (0.30 | ) | $ | 1.48 | $ | 0.46 | |||||
Basic – pro forma |
$ | (0.52 | ) | $ | 1.50 | $ | 0.39 | |||||
Diluted – pro forma |
$ | (0.52 | ) | $ | 1.41 | $ | 0.37 | |||||
In December 2005, the Board of Directors of the Company approved the acceleration of vesting
of certain “underwater” unvested stock options held by certain current employees of the Company,
including some of its executive officers. Options held by the Company’s President and Chief
Executive Officer were not included in the acceleration. Options held by non-employee directors
also were not included as those options vest immediately upon grant.
A stock option was considered “underwater” if the exercise price was $12.90 per share or greater. A
total of 346,186 options were impacted by this acceleration. The effect on net loss in 2005
resulting from this acceleration, if the
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Company had applied the fair value recognition provisions
of SFAS No. 148 to stock option-based employee compensation, was approximately $1,500 net of
related tax effects. (See Note 7).
w. 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.
x. Recent Accounting Pronouncements
In
January 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial
Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS No. 155 also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.” SFAS No. 155 eliminates the exemption from applying SFAS No. 133 to interests in
securitized financial assets so that similar instruments are accounted for in the same manner
regardless of the form of the instruments. SFAS No. 155 allows a preparer to elect fair value
measurement at acquisition, at issuance, or when a previously recognized financial instrument is
subject to a remeasurement (new basis) event, on an instrument-by-instrument basis. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning of an entity’s first
fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph
4(c) of SFAS No. 155 may also be applied upon adoption of SFAS No. 155 for hybrid financial
instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of
this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year,
provided the entity has not yet issued financial statements, including financial statements for any
interim period for that fiscal year. Provisions of SFAS No. 155 may be applied to instruments that
an entity holds at the date of adoption on an instrument-by-instrument basis. The Company is
currently assessing any potential impact of adopting this pronouncement.
In June 2005,
the FASB issued FASB Staff Position No. FAS 143-1 (“FSP FAS
143-1”), Accounting
for Electronic Equipment Waste Obligations. FSP FAS 143-1 addresses the accounting for obligations
associated with the Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the
Directive) adopted by the European Union (EU). FSP FAS 143-1 is
effective the latter of the first
reporting period that ends after June 8, 2005 or the date that the EU-member country adopts the
law. As of December 31, 2005, the United Kingdom, the only EU-member country in which the Company
has significant operations, had not yet adopted the law.
In
June 2005, the FASB issued Statement of Financial
Accounting Standards No. 154 (“SFAS 154”), Accounting Changes and Error Corrections-a replacement of
APB No. 20 and FAS No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle and applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005. The
Company will apply the provisions of this statement effective January 1, 2006. The adoption of this
pronouncement will have no impact on the Company’s financial statements.
In March 2005, the FASB issued FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No.
143” (“FIN 47”). This statement clarifies that an entity is required to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred, if the liability’s fair
value can be reasonably estimated. The provisions of FIN 47 are effective for fiscal years ending
after December 15, 2005. The adoption of this pronouncement had no impact on the Company’s
financial statements.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. This statement is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB opinion No.
25, “Accounting for Stock Issued to Employees”. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values. The provisions of this statement were previously to become effective
for interim or annual periods beginning after June 15, 2005. However, in April 2005, the Securities
and Exchange Commission announced the adoption of a new rule which amends the effective date for
SFAS No. 123R. As a result, the Company will adopt the accounting provisions of SFAS No. 123R as
of January 1, 2006. The Company currently accounts for stock option-based awards to employees in
accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, and has adopted the disclosure-only alternative of SFAS 123 and SFAS 148. The Company
expects the adoption of this pronouncement will result in the recognition of a non-cash expense of
approximately $1,000 for 2006 based on current options outstanding and normal quarterly grants.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43,
Chapter 4,” (“SFAS 151”) in an effort to conform U.S. accounting standards for inventories to
International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling
costs and wasted material (spoilage) costs to be recognized as current-period charges. It also
requires that the allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the relevant production facilities. SFAS 151 will be effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The adoption of this
pronouncement will have no impact on the Company’s financial statements.
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Note 2
— Impairment of Long-Lived Assets
In December 2004, the Company recorded a $1,803 impairment charge related to certain polymer
rechargeable manufacturing assets. This impairment consisted of $664 of the net book value of the
Company’s own assets, and $1,139 of the present value of remaining payments for certain assets
under operating leases. The Company determined that this manufacturing equipment would no longer
be utilized, resulting from a strategic decision to no longer manufacture polymer rechargeable
cells. The impairment charge was accounted for under Financial Accounting Standard No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets, and Financial
Accounting Standard No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”,
which requires that a liability for a cost associated with an exit or disposal activity should be
recognized at fair value when the liability is incurred. The $1,139 expense and liability related
to the Company’s estimated net ongoing costs associated with its lease obligation for its polymer
rechargeable manufacturing equipment requires the Company to make estimates and assumptions with
respect to costs to satisfy commitments under the lease. The Company used a credit-adjusted
risk-free rate of 6% to discount the remaining cash flows under the operating lease. The Company
will review its estimates and assumptions on at least a quarterly basis, and make whatever
modifications management believes necessary, based on the Company best judgment, to reflect any
changed circumstances. As a result of the impairment of these assets, depreciation charges and
lease expenses will be reduced by approximately $500 per year.
Note 3 — Supplemental Balance Sheet Information
The composition of inventories was:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Raw materials |
$ | 8,817 | $ | 7,441 | ||||
Work in process |
8,648 | 4,184 | ||||||
Finished products |
2,849 | 2,821 | ||||||
| 20,314 | 14,446 | |||||||
Less: Reserve for obsolescence |
868 | 508 | ||||||
| $ | 19,446 | $ | 13,938 | |||||
| The composition of property, plant and equipment was: | ||||||||
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Land |
$ | 123 | $ | 123 | ||||
Buildings and Leasehold Improvements |
4,229 | 3,223 | ||||||
Machinery and Equipment |
37,876 | 36,300 | ||||||
Furniture and Fixtures |
788 | 497 | ||||||
Computer Hardware and Software |
2,197 | 1,882 | ||||||
Construction in Progress |
1,059 | 2,185 | ||||||
| 46,272 | 44,210 | |||||||
Less: Accumulated Depreciation |
26,341 | 24,008 | ||||||
| $ | 19,931 | $ | 20,202 | |||||
Depreciation expense was $3,112, $3,193, and $3,033 for the years ended December 31, 2005,
2004, and 2003, 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, | ||||||||
| 2005 | 2004 | |||||||
Acquisition Value |
$ | 553 | $ | 553 | ||||
Accumulated Amortization |
433 | 378 | ||||||
Carrying Value |
$ | 120 | $ | 175 | ||||
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Note 4 — Operating Leases
The Company leases various buildings, machinery, land, automobiles and office equipment.
Rental expenses for all operating leases were approximately $768, $1,244 and $1,232 for the years
ended December 31, 2005, 2004 and 2003, respectively. Future minimum lease payments under
non-cancelable operating leases as of December 31, 2005 are as follows:
| 2010 | |||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | and beyond | |||||||||||||||
| $ | 1,239 | $ | 687 | $ | 307 | $ | 302 | $ | 1,036 | ||||||||||
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 Non-rechargeable business unit. At June 30, 2002, the lease line had been fully
utilized. In December 2004, the Company recorded an impairment charge of $1,139 related to the
present value of remaining payments for a portion of the assets under this lease. The Company
determined that the polymer rechargeable manufacturing assets under the lease would no longer be
utilized. The Company’s lease payment continues to be $226 per quarter. In conjunction with this
lease, the Company has a letter of credit of $2,920 outstanding at December 31, 2005.
Note 5 — Debt and Capital Leases
Credit Facilities
On June 30, 2004, the Company closed on a new secured $25,000 credit facility, comprised of a
five-year $10,000 term loan component and a three-year $15,000 revolving credit component. The
facility is collateralized by essentially all of the assets of the Company, including its
subsidiary in the U.K. The term loan component is paid in equal monthly installments over 5
years. The rate of interest, in general, is based upon either a LIBOR rate or Prime, plus a
Eurodollar spread (dependent upon a debt to earnings ratio within a predetermined grid). The
lenders of the credit facility are JP Morgan Chase Bank and Manufacturers and Traders Trust
Company, with JP Morgan Chase Bank acting as the administrative agent. The Company is required to
meet certain financial covenants, including a debt to earnings ratio, an EBIT, as defined, to
interest expense ratio, and a current assets to total liabilities ratio. Availability under the
revolving credit component of the facility is subject to the status of these financial covenants,
as amended.
On June 30, 2004, the Company drew down the full $10,000 term loan. The proceeds of the term
loan, to be repaid in equal monthly installments of $167 over five years, were used for the
retirement of outstanding debt and capital expenditures. From June 30, 2004 through August 1,
2004, the interest rate associated with the term loan was based on LIBOR plus a 1.25% Eurodollar
spread. On July 1, 2004, the Company entered into an interest rate swap arrangement in the
notional amount of $10,000 to be effective on August 2, 2004, related to the $10,000 term loan, in
order to take advantage of historically low interest rates. The Company received a fixed rate of
interest in exchange for a variable rate. The swap rate received was 3.98% for five years. The
total rate of interest paid by the Company is equal to the swap rate of 3.98% plus the Eurodollar
spread stipulated in the predetermined grid associated with the term loan. From August 2, 2004 to
September 30, 2004, the total rate of interest associated with the outstanding portion of the
$10,000 term loan was 5.23%. On October 1, 2004, this adjusted rate increased to 5.33%, on January
1, 2005 the adjusted rate increased to 5.73%, and on April 1, 2005, the adjusted rate increased to
6.48%, the maximum amount under the current grid structure, and remains at that rate as of December
31, 2005. Derivative instruments are accounted for in accordance with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” which requires that all derivative instruments
be recognized in the financial statements at fair value. The fair value of this arrangement at
December 31, 2005 resulted in an asset of $91, all of which was reflected as a short-term asset.
As of December 31, 2005, the Company had $7,167 outstanding under the term loan component of
its credit facility with its primary lending bank and nothing was outstanding under the revolver
component. At December 31, 2005, the Company was in compliance with all 3 covenants, as amended.
However, as a result of the uncertainty of the
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Company’s
ability to comply with the more restrictive financial covenants within the next year, the Company continued to classify all of the debt associated with
this credit facility as a current liability on the Consolidated Balance Sheet as of December 31,
2005. While the revolver arrangement provides for up to $15,000 of borrowing capacity, including
outstanding letters of credit, the actual borrowing availability may be limited by the financial
covenants. At December 31, 2005, the Company had $2,920 of outstanding letters of credit related
to this facility. In addition, the Company’s additional borrowing capacity under the revolver
component of the credit facility as of December 31, 2005 was
approximately $9,500.
In 2004, the Company paid $207 in financing fees in connection with the $25,000 credit
facility with JP Morgan Chase Bank, which will be amortized over the term of the credit facility.
For the year ended December 31, 2005, the Company recorded amortization expense related to
financing fees for its credit facilities of $69.
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 $774. This credit facility provides the Company’s U.K. operation with additional
financing flexibility for its working capital needs. The rate of interest is based upon Prime plus
2.25%. At December 31, 2005, the outstanding borrowings under this revolver were $525.
Management’s plan to achieve operational profitability and reduce its negative cash flows from
operations includes reducing the build-up of inventory related to the production of BA-5390s and
executing certain cost cutting objectives that were begun in September 2005. Additionally, the
Company believes it has adequate third party financing available to fund its operations or could
obtain other financing, if needed.
If the Company is unable to achieve its plans or unforeseen events occur, the Company may need
to implement alternative plans. While the Company believes it could complete its original plans or
alternative plans, if necessary, there can be no assurance that such alternatives would be
available on acceptable terms and conditions or that the Company would be successful in its
implementation of such plans.
While the Company believes relations with its lenders are good and has received waivers as
necessary in the past, there can be no assurance that such waivers can always be obtained. In such
case, the Company believes it has, in the aggregate, sufficient cash, cash generation capabilities
from operations, working capital, and financing alternatives at its disposal, including but not
limited to alternative borrowing arrangements (e.g. asset secured borrowings) and other available lenders, to fund operations in
the normal course.
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 $8. At the
end of this lease term, the Company is required to purchase the facility for one dollar.
Payment Schedule
As
a result of the uncertainty of the Company’s ability to comply
with the more restrictive financial covenants within the next year,
the Company classified all of the debt associated with its credit
facility as a current liability on the Consolidated Balance Sheet as
of December 31, 2005.
Scheduled principal payments under the current amount outstanding of debt and capital leases
are as follows:
| Capital | ||||||||||||
| Credit | Lease- | |||||||||||
| Facility* | Building | Total | ||||||||||
2006 |
$ | 2,000 | $ | 23 | $ | 2,023 | ||||||
2007 |
2,000 | 25 | 2,025 | |||||||||
2008 |
2,000 | — | 2,000 | |||||||||
2009 |
1,167 | — | 1,167 | |||||||||
2010 and thereafter |
— | — | — | |||||||||
| 7,167 | 48 | 7,215 | ||||||||||
Less: Current portion |
7,167 | 23 | 7,190 | |||||||||
Long-term |
$ | — | $ | 25 | $ | 25 | ||||||
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*
In accordance with EITF 86-30, the Company has classified debt
for financial reporting purposes as current liabilities for the
reasons cited above. |
||
Letters of Credit
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, 2005, the
amount of the letter of credit was $2,920. 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. Indemnity Agreement
The Company’s By-laws provide that the Company will reimburse directors or officers for all
expenses, to the fullest extent permitted by law arising out of their performance as agents or
trustees of the Company.
b. Purchase Commitments
As of December 31, 2005, the Company has made commitments to purchase approximately $295 of
production machinery and equipment.
c. Royalty Agreements
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 2005, 2004 and 2003 was $103, $605 and $247,
respectively. This agreement expires in the year 2017.
d. Government Grants/Loans
The Company has been able to obtain certain grants/loans from government agencies to assist
with various funding needs.
In November 2001, the Company received approval for a $750 grant/loan from a federally
sponsored small cities program. The grant/loan assisted in funding capital expansion plans that
the Company expected would lead to job creation. The Company was reimbursed for approved capital
as it incurred the costs. 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.
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. The Company received approximately
$2,100 related to this contract in 2003 and approximately $1,000 in 2004. The Company has met all
of its obligations under the grant.
In October 2005, the Company received a contract valued at approximately $3,000 from the U.S.
Defense Department to purchase equipment and enhance processes to reduce lead time and increase
manufacturing efficiency to
boost production surge capability of the Company’s BA-5390 battery during contingency operations.
As of December 31, 2005, the Company had not yet received any funds relating to this contract.
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e. 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.
f. 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 2005 were as follows:
Balance at December 31, 2004 |
$ | 326 | ||
Accruals for warranties issued |
205 | |||
Settlements made |
(67 | ) | ||
Balance at December 31, 2005 |
$ | 464 | ||
g. Post Audits of Government Contracts
The Company has had certain “exigent”, non-bid contracts with the government, which have been
subject to an audit and final price adjustment, which have resulted in decreased margins compared
with the original terms of the contracts. As of December 31, 2005, there were no outstanding
exigent contracts with the government. As part of its due diligence, the government has conducted
post-audits of the completed exigent contracts to ensure that information used in supporting the
pricing of exigent contracts did not differ materially from actual results. In September 2005, the
Defense Contracting Audit Agency (DCAA) presented its findings related to the audits of three of
the exigent contracts, suggesting a potential pricing adjustment of approximately $1,400 related to
reductions in the cost of materials that occurred prior to the final negotiation of these
contracts. The Company has reviewed these audit reports, has submitted its response to these
audits and believes, taken as a whole, the proposed audit adjustments can be offset with the
consideration of other compensating cost increases that occurred prior to the final negotiation of
the contracts. While the Company believes that potential exposure exists relating to any final
negotiation of these proposed adjustments, it cannot reasonably estimate what, if any, adjustment
may result when finalized. Such adjustments could reduce margins and have an adverse effect on the
Company’s business, financial condition and results of operations.
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.
Through December 31, 2005, total costs incurred have amounted to approximately $100, none of which
have been capitalized. 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
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was completed, and was overseen by the NYSDEC. The report detailing
the remediation project, which included the test results, was forwarded to NYSDEC and to the New
York State Department of Health (NYSDOH). The NYSDEC, with input from the NYSDOH, requested that
the Company perform additional sampling. A work plan for this portion of the project was written
and delivered to the NYSDEC and approved. In November 2005, additional soil, sediment and surface
water samples were taken from the area outlined in the work plan, as well as groundwater samples
from the monitoring wells. The Company has received the laboratory analysis and will be meeting
with the NYSDEC in early March 2006 to discuss the results. Due to the additional sampling
requested by the NYSDEC, the Company’s outside environmental consulting firm has estimated that the
final cost to the Company to remediate the requested area will be approximately $28, based on the
submitted work plan. The ultimate resolution of this matter may result in further additional costs
to be incurred. At December 31, 2005 and December 31, 2004, the Company had $38 and $66,
respectively, reserved for this matter.
A retail end-user of a product manufactured by one of Ultralife’s customers (the “Customer”),
made a claim against the Customer wherein it 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 assured the Customer that it will honor its warranty by
replacing any batteries that may be determined to be defective. Subsequently, the Company learned
that the end-user and the Customer settled the matter. In February 2005, Ultralife and the Customer
entered into a settlement agreement. Under the terms of the agreement, Ultralife has agreed to
provide replacement batteries for product determined to be defective, to warrant each replacement
battery under the Company’s standard warranty terms and conditions, and to provide the Customer
product at a discounted price for a period of time in recognition of the Customer’s administrative
costs in responding to the claim of the retail end-user. In consideration of the above, the
Customer released Ultralife from any and all liability with respect to this matter. Consequently,
the Company does not anticipate any further expenses with regard to this matter other than its
obligations under the settlement agreement. The Company’s warranty reserve as of December 31, 2005
includes an accrual related to anticipated replacements under this agreement. Further, the Company
does not expect the ongoing terms of the settlement agreement to have a material impact on the
Company’s operations or financial condition.
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, 2005, 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.
In July 2004 the Company granted shares of its common stock pursuant to its Long-Term
Incentive Plan, to eligible hourly employees, based on years of service. The Company awarded 6
shares of stock for each year of service, in addition to awarding cash compensation to pay for
related taxes. This stock grant resulted in the issuance of 8,142 shares of common stock valued at
$135 on the date of grant, as well as total cash compensation of $95 amounting to an expense to the
Company of $230.
c. Treasury Stock
At December 31, 2005 and 2004, the Company had 727,250 shares of treasury stock outstanding,
valued at $2,378.
d. Stock Options
The Company sponsors several stock option-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 option-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”.
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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 years ended December 31, 2005, 2004, and 2003:
| 2005 | 2004 | 2003 | ||||||||||
Risk-free interest rate |
4.2 | % | 3.2 | % | 2.3 | % | ||||||
Volatility factor |
69.4 | % | 84.5 | % | 75.9 | % | ||||||
Dividends |
0 | % | 0 | % | 0 | % | ||||||
Weighted average expected life (years) |
4 | 4 | 4 | |||||||||
Weighted average fair value of options granted |
$ | 7.53 | $ | 9.62 | $ | 3.38 | ||||||
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 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, 2005, there were 146,900 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 became 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. As of December 31, 2005, there were no options outstanding under this
plan. Since these options were granted without shareholder approval, any gains resulting from
exercises of these options that cause the CEO compensation to exceed $1,000 in any year may not be
deductible by the Company for income tax purposes.
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. In June 2004, shareholders approved an amendment to the 2000
Plan, increasing the number of shares of Common Stock by 750,000, as well as adding flexibility to
award restricted stock, among other things. Options granted under the revised 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 within the sixth or seventh year. Certain ISOs granted to officers vest over three
years and expire in the seventh year. All NQSOs issued to non-employee directors vest immediately
and expire in either the sixth or seventh year. Some NQSOs issued to non-employees vest immediately
and expire within three years; others have the same vesting characteristics as options given to
employees. As of December 31, 2005, there were 1,283,371 stock options outstanding under this plan.
The following table summarizes data for the stock options issued by the Company:
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| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Number | Price | Number | Price | Number | Price | |||||||||||||||||||
| of Shares | Per Share | of Shares | Per Share | Of Shares | Per Share | |||||||||||||||||||
Shares under option
at beginning of
year |
1,652,013 | $ | 8.95 | 1,908,579 | $ | 5.57 | 2,016,549 | $ | 6.05 | |||||||||||||||
Options granted |
291,000 | 13.82 | 579,500 | 15.70 | 451,700 | 6.13 | ||||||||||||||||||
Options exercised |
(452,142 | ) | 5.50 | (708,066 | ) | 5.89 | (376,170 | ) | 6.34 | |||||||||||||||
Options cancelled |
(60,600 | ) | 11.18 | (128,000 | ) | 5.35 | (183,500 | ) | 10.46 | |||||||||||||||
Shares under option
at end of year |
1,430,271 | $ | 10.94 | 1,652,013 | $ | 8.95 | 1,908,579 | $ | 5.57 | |||||||||||||||
Options
exercisable at end of year |
974,858 | $ | 12.36 | 715,590 | $ | 7.69 | 981,427 | $ | 6.13 | |||||||||||||||
The following table represents additional information about stock options outstanding at
December 31, 2005:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
| Weighted- | |||||||||||||||||||||
| Number | Average | ||||||||||||||||||||
| Outstanding | Remaining | Weighted- | Number | Weighted- | |||||||||||||||||
| Range of | at December 31, | Contractual | Average | Exercisable | Average | ||||||||||||||||
| Exercise Prices | 2005 | Life | Exercise Price | at December 31, 2005 | Exercise Price | ||||||||||||||||
$2.61 - $3.70
|
171,005 | 2.39 | $ | 3.29 | 88,305 | $ | 3.26 | ||||||||||||||
$3.70 - $5.36
|
270,493 | 2.92 | $ | 4.41 | 105,693 | $ | 4.42 | ||||||||||||||
$5.36 - $7.75
|
95,040 | 0.66 | $ | 7.01 | 77,720 | $ | 7.13 | ||||||||||||||
$7.75 - $11.43
|
52,733 | 4.16 | $ | 10.09 | 43,469 | $ | 10.03 | ||||||||||||||
$11.43 - $17.12
|
734,000 | 6.09 | $ | 14.42 | 553,169 | $ | 14.83 | ||||||||||||||
$17.12 - $21.28
|
107,000 | 5.19 | $ | 19.71 | 106,502 | $ | 19.72 | ||||||||||||||
$2.61 - $21.28
|
1,430,271 | 4.55 | $ | 10.94 | 974,858 | $ | 12.36 | ||||||||||||||
On December 28, 2005, the Board of Directors of the Company approved the acceleration of
vesting of certain “underwater” unvested stock options held by certain current employees of the
Company, including some of its executive officers. Options held by the Company’s President and
Chief Executive Officer were not included in the acceleration. Options held by non-employee
directors also were not included as those options vest immediately upon grant. A stock option was
considered “underwater” if the exercise price was $12.90 per share or greater. The Board of
Directors took action to accelerate the vesting of those options that were underwater and that had
been granted prior to October 2, 2005. The decision to accelerate vesting of these underwater stock
options was based on management’s desire to incentivize its employees who hold options that are
currently underwater, in addition to avoiding the recognition of
future compensation expense of approximately $1,500, net of related
tax effects, upon
the effectiveness of FASB Statement No. 123R “Share-Based Payment” (“SFAS 123R”). The aggregate
number of shares issuable upon options for which the vesting was accelerated and the weighted
average exercise price per share for executive officers, all other employees, and total,
respectively, are set forth below:
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| Aggregate Number of | ||||||||
| Shares Issuable Upon | ||||||||
| Accelerated Stock | Weighted Average | |||||||
| Options | Exercise Price Per Share | |||||||
Executive Officers* |
109,486 | $ | 15.46 | |||||
All Other Employees |
236,700 | $ | 15.41 | |||||
Total |
346,186 | $ | 15.43 | |||||
| * | Executive officers exclude the Company’s President and Chief Executive Officer. |
In taking these actions, and to avoid any unintended personal benefits to the Company’s
executive officers, the Company’s Board of Directors imposed, as a condition of the acceleration, a
holding period on the shares underlying the options for which the vesting was accelerated which
were held by certain executive officers of the Company. The holding period requires all such
executive officers to refrain from selling any shares of the Company’s common stock acquired upon
the exercise of the options until the earlier of the original vesting date applicable to such
shares (or any portion thereof) underlying the stock option grant or the termination of the
executive officer’s employment. The decision to accelerate vesting of these underwater stock
options was based on two considerations. First, the Company took the action as an alternative to
issuing additional options, in order to incentivize its employees who hold options that are
currently underwater. With the broad distribution of options that the Company has, the Board of
Directors felt that it was a non-dilutive way to incentivize these employees on a going forward
basis. Second, it would enable the Company to avoid recognizing future compensation expense
associated with the accelerated stock options upon the effectiveness of FASB Statement No. 123R
“Share-Based Payment” (“SFAS 123R”). The Company also believes that the underwater stock options
may not be offering the intended incentives to the holders of those options when compared to the
potential future compensation expense that the Company would have had to bear had it chosen not to
accelerate their vesting. The Company expects the acceleration to reduce the stock option expense
it would otherwise be required to record in fiscal 2006 pursuant to SFAS 123R by approximately
$1,045 on a pre-tax basis.
The 346,186 stock options affected by this accelerated vesting represent approximately 25% of
the outstanding stock options awarded to the Company’s employees under its long-term incentive plan
and predecessor plans.
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. The warrants are scheduled to expire in July 2006. There were 86,635 warrants
outstanding at December 31, 2005 with an exercise price of $6.25.
f. Reserved Shares
The Company has reserved 1,627,357, 2,050,399, and 2,051,637 shares of common stock under the
various stock option plans and warrants as of December 31, 2005, 2004, and 2003, respectively.
g. Accumulated Other Comprehensive Loss
Accumulated other comprehensive income (loss) is reported on the Consolidated Statement of
Changes in Stockholders Equity and accumulated other comprehensive income (loss) is reported on the
Consolidated Balance Sheet.
The components of accumulated other comprehensive loss were as follows:
| December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Foreign Exchange Translation Adjustments |
$ | (1,114 | ) | $ | (505 | ) | $ | (723 | ) | |||
Unrealized Gains (Losses) on Derivative Instruments |
60 | (100 | ) | — | ||||||||
Accumulated Other Comprehensive Loss |
$ | (1,054 | ) | $ | (605 | ) | $ | (723 | ) | |||
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Note 8 — Income Taxes
The provision for income taxes consists of:
| December 31, | December 31, | December 31, | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Current: |
||||||||||||
Federal |
$ | — | $ | 30 | $ | 106 | ||||||
State |
3 | 2 | — | |||||||||
| 3 | 32 | 106 | ||||||||||
Deferred: |
||||||||||||
Federal |
(970 | ) | (18,990 | ) | — | |||||||
State |
1,456 | (2,146 | ) | — | ||||||||
| 486 | (21,136 | ) | — | |||||||||
Total |
$ | 489 | $ | (21,104 | ) | $ | 106 | |||||
The Company reported a deferred income tax provision of $486 for 2005. Included in the 2005
provision is a $1,465 impact from a change in the New York State income tax law in the second
quarter of 2005, which caused a reduction in the associated deferred tax asset. In April 2005,
legislation was enacted in New York State that changed the apportionment methodology for corporate
income from a “three factor formula” comprised of payroll, property and sales, to one which uses
only sales. This change is to be phased in beginning in 2006, and the change is fully effective for
the tax year 2008 and thereafter. It is expected that this legislative change will result in a
reduction in the Company’s New York State effective tax rate from approximately 2.46% to 0.18%.
Excluding the New York State tax provision, the 2005 benefit related mainly from the loss before
income taxes for U.S operations.
The Company has concluded at the end of 2005 that it was more likely than not that it will be
able to utilize the U.S. net operating loss carryforwards (NOLs) that have accumulated over time.
Management’s conclusion is based on the expectation that the U.S. federal and state deferred tax
assets will be realized primarily through future taxable income from operations, and partly from
reversing taxable temporary differences. The Company will continually monitor the assumptions and
performance results to assess the realizability of the tax benefits of the U.S. net operating
losses and other deferred tax assets. The Company recorded a current tax provision for the year
ended December 31, 2005 for state income taxes.
Significant components of the Company’s deferred tax liabilities and assets are as follows:
| December 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
Deferred tax liabilities: |
||||||||
Property, plant and equipment |
$ | 1,214 | $ | 864 | ||||
Total deferred tax liabilities |
1,214 | 864 | ||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
27,557 | 26,403 | ||||||
Other |
1,960 | 2,187 | ||||||
Investments |
1,147 | 1,224 | ||||||
Total deferred tax assets |
30,664 | 29,814 | ||||||
Valuation allowance for deferred tax assets |
(5,721 | ) | (5,449 | ) | ||||
Net deferred tax assets |
24,943 | 24,365 | ||||||
Net deferred tax assets/liabilities |
$ | 23,729 | $ | 23,501 | ||||
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The Company recorded a $21,136 deferred tax credit in December of 2004 arising from the
Company’s conclusion that it is more likely than not that it will be able to utilize its U.S. net
operating loss carryforwards (NOLs) that have accumulated over time. The recognition of a deferred
tax asset resulted from the Company’s evaluation of all available evidence, both positive and
negative, including: a) recent historical net income, and income on a cumulative three-year basis,
as well as anticipated future profitability based in part on recent military contracts; b) a
financial evaluation that modeled the future utilization of anticipated deferred tax assets under
three alternative scenarios; and c) the award of a significant contract with the U.S. Defense
Department in December 2004 for various battery types that could reach a maximum value of $286,000
in revenues over the next five years, though no sales have been recognized to date under this
contract. The amount of the net deferred tax assets is considered realizable; however, such amount
could be reduced or eliminated in the near term if actual or expected future U.S. income or income
tax rates are lower than estimated, or if there are differences in the timing or amount of future
reversals of existing taxable or deductible temporary differences. The Company has significant
NOLs related to past years’ cumulative losses, and as a result it is subject to U.S. alternative
minimum tax where NOLs can offset only 90% of alternative minimum taxable income. Achieving
business plan targets, particularly those relating to revenue and profitability, is integral to the
Company’s assessment regarding the recoverability of its net deferred tax assets. The Company
recorded $32 as a current tax provision for the year ended December 31, 2004.
In 2005, the Company increased its valuation allowance related to the deferred tax assets due
primarily to the assessment of the realizability of the deferred tax assets related to its foreign
net operating loss carryforwards. Management believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the reliability of these
foreign net operating loss carryovers. These carryovers are dependent upon future income related to
these 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.
Foreign and domestic net operating loss carryforwards totaling approximately $82,418 are
available to reduce future taxable income. Foreign loss carryforwards of approximately $14,648 can
be carried forward indefinitely. The domestic net operating loss carryforward of $67,770 expires
through 2025.
The Company has determined that a change in ownership as defined under Internal Revenue Code
Section 382 occurred during the fourth quarter of 2003 and again during the third quarter of 2005.
As such, the domestic net operating loss carryforward will be subject to an annual limitation.
Management believes such limitation will not impact the Company’s ability to realize the deferred
tax asset. In addition, certain of the Company’s NOL carryforwards are subject to U.S. alternative
minimum tax such that carryforwards can offset only 90% of alternative minimum taxable income.
This limitation did not have an impact on income taxes determined for 2005.
For financial reporting purposes, income (loss) before income taxes is as follows:
| December 31, | December 31, | December 31, | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
United States |
$ | (2,871 | ) | $ | 3,946 | $ | 8,530 | |||||
Foreign |
(985 | ) | (2,718 | ) | (1,977 | ) | ||||||
Total |
$ | (3,856 | ) | $ | 1,228 | $ | 6,553 | |||||
There are no undistributed earnings of Ultralife UK, the Company’s foreign subsidiary, at
December 31, 2005.
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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, | December 31, | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
(Benefit)/provision computed using the
statutory rate |
(34.0 | )% | 34.0 | % | 34.0 | % | ||||||
Increase (reduction) in taxes resulting from: |
||||||||||||
State tax, net of federal benefit |
37.8 | (115.1 | ) | 2.6 | ||||||||
Foreign |
8.7 | 75.2 | — | |||||||||
Valuation allowance/deferred impact |
— | (1,706.1 | ) | (35.0 | ) | |||||||
Other |
.2 | (6.6 | ) | — | ||||||||
Provision for income taxes |
12.7 | % | 1,718.6 | )% | 1.6 | % | ||||||
The Company’s provision for income taxes is higher than would be expected if the statutory
rate was applied to pretax income. In 2005, the Company has recorded a provision for income taxes.
This provision results primarily from the reduction in state deferred tax asset due to a
legislative change in New York State. The state tax provision for
2005 reflected in the table above includes the amount related to this legislative change. In 2004, the Company recorded a benefit
for income taxes. This benefit resulted primarily from the reduction of the valuation allowance
related to the deferred tax assets recorded. In 2004, the state benefit resulted from a reduction
of the valuation allowance related to state deferred tax assets. In 2003, the expected tax
differed from the actual provision because the Company was able to utilize net operating losses on
which it had a valuation allowance in the prior period.
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. Beginning in February 2004, the Company matching was reinstated up
to a maximum of 2%. In November 2005, the employer match was suspended in an effort to conserve
cash. For 2005, 2004, and 2003 the Company contributed $133, $174, and $0, respectively.
Note 10 — 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: Non-rechargeable
Batteries, Rechargeable Batteries, and Technology Contracts. The Non-rechargeable 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 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.
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2005
| Non- | ||||||||||||||||||||
| rechargeable | Rechargeable | Technology | ||||||||||||||||||
| Batteries | Batteries | Contracts | Corporate | Total | ||||||||||||||||
Revenues |
$ | 58,509 | $ | 10,067 | $ | 1,925 | $ | — | $ | 70,501 | ||||||||||
Segment contribution |
10,883 | 1,316 | 59 | (15,160 | ) | (2,902 | ) | |||||||||||||
Interest expense, net |
(636 | ) | (636 | ) | ||||||||||||||||
Other income (expense), net |
(318 | ) | (318 | ) | ||||||||||||||||
Income taxes-current |
(3 | ) | (3 | ) | ||||||||||||||||
Income taxes-deferred |
(486 | ) | (486 | ) | ||||||||||||||||
Net income |
(4,345 | ) | ||||||||||||||||||
Long-lived assets |
17,825 | 683 | — | 1,423 | 19,931 | |||||||||||||||
Total assets |
43,231 | 4,473 | 478 | 32,575 | 80,757 | |||||||||||||||
Capital expenditures |
2,756 | 73 | — | 480 | 3,309 | |||||||||||||||
Depreciation and amortization expense |
2,140 | 329 | — | 712 | 3,181 | |||||||||||||||
2004
| Non- | ||||||||||||||||||||
| rechargeable | Rechargeable | Technology | ||||||||||||||||||
| Batteries | Batteries | Contracts | Corporate | Total | ||||||||||||||||
Revenues |
$ | 87,899 | $ | 8,071 | $ | 2,212 | $ | — | $ | 98,182 | ||||||||||
Segment contribution |
20,491 | (582 | ) | 393 | (15,207 | ) | 5,095 | |||||||||||||
Interest expense, net |
(482 | ) | (482 | ) | ||||||||||||||||
Other income (expense), net |
566 | 566 | ||||||||||||||||||
Write-down of UTI investment and
note receivable |
(3,951 | ) | (3,951 | ) | ||||||||||||||||
Income taxes-current |
(32 | ) | (32 | ) | ||||||||||||||||
Income taxes-deferred |
21,136 | 21,136 | ||||||||||||||||||
Net income |
22,332 | |||||||||||||||||||
Long-lived assets |
18,110 | 912 | — | 1,180 | 20,202 | |||||||||||||||
Total assets |
36,291 | 4,929 | 325 | 39,589 | 81,134 | |||||||||||||||
Capital expenditures |
4,946 | 28 | — | 463 | 5,437 | |||||||||||||||
Depreciation and amortization expense |
1,332 | 621 | — | 1,356 | 3,309 | |||||||||||||||
2003
| Non- | ||||||||||||||||||||
| rechargeable | 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 | 2,145 | — | 3,057 | 18,213 | |||||||||||||||
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 | |||||||||||||||
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Geographical Information
| Revenues | Long-Lived Assets | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
United States |
$ | 50,178 | $ | 82,035 | $ | 65,328 | $ | 16,776 | $ | 15,904 | $ | 13,844 | ||||||||||||
United Kingdom |
6,501 | 4,630 | 7,500 | 3,155 | 4,298 | 4,369 | ||||||||||||||||||
Hong Kong |
479 | 1,463 | 1,489 | — | — | — | ||||||||||||||||||
Europe, excluding
United Kingdom |
4,421 | 2,406 | 3,396 | — | — | — | ||||||||||||||||||
Singapore* |
2,610 | 4,114 | — | — | — | — | ||||||||||||||||||
Canada* |
2,494 | 1,168 | — | |||||||||||||||||||||
Other |
3,818 | 2,366 | 1,737 | — | — | — | ||||||||||||||||||
Total |
$ | 70,501 | $ | 98,182 | $ | 79,450 | $ | 19,931 | $ | 20,202 | $ | 18,213 | ||||||||||||
| * | Geographical data for 2003 included in “Other” category. |
Note 11 — Investment in Affiliate
In June 2004, the Company recorded a $3,951 non-cash, non-operating charge related to the
Company’s ownership interest in Ultralife Taiwan, Inc. (“UTI”) that consisted of a write-off of its
$2,401 note receivable from UTI, including accrued interest, and the book value of its $1,550
equity investment in UTI. The Company decided to record this charge due to recent events that had
caused increasing uncertainty over UTI’s near-term financial viability, including a failure by UTI
to meet commitments made to the Company and its other creditors to secure additional financial
support before July 1, 2004. Based on these factors, and UTI’s operating losses over several
years, the Company determined that its investment had an other than temporary decline in fair value
and the Company believes that the probability of being reimbursed for the note receivable is
remote. The Company continues to hold a 9.2% equity interest in UTI, although the Company believes
that UTI has ceased its manufacturing operations. The Company does not believe the write-off poses
a risk to its current operations or future growth prospects because UTI is no longer manufacturing
product for the Company, and the Company has taken steps to establish alternate sources of supply.
During 2004 and early 2005, the Company provided prepayments to UTI to assist that company
with the purchase of raw materials and the payment of payroll costs applicable to manufacturing the
products made for the Company. For the years ended December 31, 2005 and 2004, the Company
purchased approximately $1,905 and $4,106, respectively, of product from UTI. At December 31, 2005
and 2004, the net amount of prepayments made to UTI was $0 and $313, respectively.
Note 12 — Fires at Manufacturing Facilities
In May 2004 and June 2004, the Company experienced two fires that damaged certain inventory
and property at its facilities. The May 2004 fire occurred at the Company’s U.S. facility and was
caused by cells that shorted out when a forklift truck accidentally tipped the cells over in an
oven in an enclosed area. Certain inventory, equipment and a small portion of the building where
the fire was contained were damaged. The June 2004 fire happened at the Company’s U.K. location
and mainly caused damage to various inventory and the U.K. company’s leased facility. The fire was
contained mainly in a bunkered, non-manufacturing area designed to store various material, and
there was additional smoke and water damage to the facility and its contents. It is unknown how
the U.K. fire was started. The fires caused relatively minor disruptions to the production
operations, and had no impact on the Company’s ability to meet customer demand during that quarter.
The total amount of the two losses and related expenses associated with Company-owned assets
is expected to be in the range of $2,000. Of this total, $450 is related to machinery and
equipment, $750 is related to inventory and $800 is required to repair and clean up the facilities.
The insurance claim related to the fire at the Company’s U.S. facility was finalized in March 2005.
The claim related to the fire at the U.K. facility remains open. Through October 1, 2005, the
Company has received approximately $1,655 in cash from the insurance companies to compensate it for
these losses. In the fourth quarter of 2004, the Company recorded a gain of $214 on the
replacement of equipment destroyed in the
fires. The Company expects the remaining impact on the Consolidated Statement of Operations and
the net cash outflows from the Company to be negligible. For financial reporting purposes, the
impairment loss and probable reimbursement are netted within the Consolidated Statement of
Operations. The Company maintains replacement cost
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insurance on the property and equipment it owns
or rents, with relatively low deductibles. The Company is continuing to work closely with the
insurance companies on the remaining matters, and it expects to be fully reimbursed by the
insurance companies for these losses. At December 31, 2005, the Company’s current assets in its
Consolidated Balance Sheet included a receivable from insurance companies for approximately $482,
representing remaining proceeds to be received. Approximately $260 of this receivable was received
in January 2006.
Note 13 — 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 years:
| Quarter ended | ||||||||||||||||||||
| April 2, | July 2, | Oct 1, | Dec 31, | Full | ||||||||||||||||
| 2005 | 2005 | 2005 | 2005 | 2005 | Year | |||||||||||||||
Revenues |
$ | 15,363 | $ | 21,603 | $ | 15,692 | $ | 17,843 | $ | 70,501 | ||||||||||
Gross margin |
2,023 | 4,205 | 2,360 | 3,670 | 12,258 | |||||||||||||||
Net Loss |
(1,550 | ) | (1,439 | ) | (1,316 | ) | (40 | ) | (4,345 | ) | ||||||||||
Net Loss per share-basic |
(0.11 | ) | (0.10 | ) | (0.09 | ) | (0.00 | ) | (0.30 | ) | ||||||||||
Net Loss per share- diluted |
(0.11 | ) | (0.10 | ) | (0.09 | ) | (0.00 | ) | (0.30 | ) | ||||||||||
| Quarter ended | ||||||||||||||||||||
| March 27, | June 26, | Sept 25, | Dec 31, | Full | ||||||||||||||||
| 2004 | 2004 | 2004 | 2004 | 2004 | Year | |||||||||||||||
Revenues |
$ | 26,988 | $ | 28,439 | $ | 24,393 | $ | 18,362 | $ | 98,182 | ||||||||||
Gross margin |
6,332 | 7,048 | 4,876 | 2,046 | 20,302 | |||||||||||||||
Net Income
(loss) |
3,235 | (372 | ) | 1,417 | 18,052 | 22,332 | ||||||||||||||
Net Income
(loss) per share-basic |
0.23 | (0.03 | ) | 0.10 | 1.26 | 1.59 | ||||||||||||||
Net Income
(loss) per share- diluted |
0.22 | (0.03 | ) | 0.09 | 1.20 | 1.48 | ||||||||||||||
The Company’s monthly closing schedule is a weekly-based cycle as opposed to a calendar
month-based cycle. While the actual dates for the quarter-ends will change slightly each year, the
Company believes that there are not any material differences when making quarterly comparisons.
Quarterly and year-to-date computations of per share amounts are made independently;
therefore, the sum of per share amounts for the quarters may not equal per share amounts for the
year.
Earnings
reported in the fourth quarter of 2005 include an out of period
change of approximately $80 for certain inventory variances that
pertained to prior quarters in 2005. Excluding this charge in the
fourth quarter of 2005, the Company would have reported net income
of $13 in the fourth quarter of 2005 as compared with the reported
net loss of $40. Management concluded that these inventory variances
did not have a significant impact on the results reported for the prior
quarters in 2005; therefore, no revisions were made to the 2005
quarterly financial statements for this matter.
Earnings in the fourth quarter of 2004 were impacted, in part, by a net income tax benefit of
approximately $21,100 resulting from the recognition of a deferred tax asset.
Note
14 — Subsequent Events
In January 2006, the Company entered into a definitive agreement to acquire all of the
outstanding shares of Able New Energy Co., Ltd., an established, profitable manufacturer of lithium
batteries located in Shenzhen, China, for a combination of cash, common stock and stock warrants
for a total value of approximately $4,200. With more than 50 products, including a wide range of
lithium-thionyl chloride and lithium-manganese dioxide batteries and coin cells, this acquisition
broadens the Company’s expanding portfolio of high-energy power sources, enabling it to further
penetrate large and emerging markets such as remote meter reading, RFID and other markets that will
benefit from these chemistries. In addition,
this acquisition will strengthen Ultralife’s global presence, facilitate its entry into the
rapidly growing Chinese market and improve the Company’s access to lower cost raw materials. The
cash portion of the purchase price is equal to $2,500, with $500 of the cash purchase price
contingent on the achievement of certain performance
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Table of Contents
milestones of the acquired business. The
equity portion of the purchase price will consist of 80,000 shares of Ultralife common stock and
100,000 stock warrants, for a total equity consideration of approximately $1,700. The Company
anticipates that this acquisition will be accretive in 2006. The acquisition, which is subject to
customary closing conditions and approval of the Chinese government, is expected to close in the
second quarter of 2006.
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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 quarter ended December 31,
2005 that has materially affected, or is reasonably likely to materially affect, the internal
control over financial reporting.
Management’s Report on Internal Control over Financial Reporting – The management of
Ultralife Batteries, Inc. is responsible for establishing and maintaining adequate internal control
over financial reporting. Ultralife’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Ultralife’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2005. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment we concluded that, as of December 31, 2005,
the Company’s internal control over financial reporting was effective based on those criteria.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears herein.
ITEM 9B. OTHER INFORMATION
None.
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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 2006 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.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (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 (c) | |||
| (b) | 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”) | ||
3.1b
|
Amendment to Certificate of Incorporation of Ultralife Batteries, Inc. | Exhibit 3.1 of the Form 10-Q for the fiscal quarter ended December 31, 2000, File No. 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 Registrant, Eastman Technology, Inc. and Eastman Kodak Company | Exhibit 10.1 of the 1992 Registration Statement | ||
10.2
|
1992 Stock Option Plan, as amended | Exhibit 10.7 of the 1992 Registration Statement | ||
10.3
|
Stock Option Agreement under the Company’s 1992 Stock Option Plan for incentive stock options | Exhibit 10.10 of Form 10-Q for the fiscal quarter ended December 31, 1993, File No. 0-20852 (the “1993 10-Q”); (this Exhibit may be found in SEC File No. 0-20852) | ||
10.4
|
Stock Option Agreement under the Company’s 1992 Stock Option Plan for non-qualified options | Exhibit 10.10 of the 1993 10-Q (this Exhibit may be found in SEC File No. 0-20852) | ||
10.5
|
Technology Transfer Agreement relating to Lithium Batteries (Confidential treatment has been granted as to certain portions of this agreement) | Exhibit 10.19 of the Company’s Registration Statement on Form S-1 filed on October 7, 1994, File No. 33-84888 (the “1994 Registration Statement”) | ||
10.6
|
Technology Transfer Agreement relating to Lithium Batteries Confidential treatment has been granted as to certain portions of this agreement) | Exhibit 10.20 of the 1994 Registration Statement | ||
10.7
|
Amendment to the Agreement relating to rechargeable batteries (Confidential treatment has been granted as to certain portions of this agreement) | Exhibit 10.24 of the Company’s Form 10-K for the fiscal year ended June 30, 1996 (this Exhibit may be found in SEC File No. 0-20852) | ||
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| Exhibit | ||||
| Index | Description of Document | Incorporated By Reference to: | ||
10.8
|
Lease agreement between Wayne County Industrial Development Agency and the Company, dated as of February 1, 1998 | Exhibit 10.1 of the Company’s Registration Statement on Form S-3 filed on February 27, 1998, File No. 333-47087 | ||
10.9
|
Ultralife Batteries, Inc. 2000 Stock Option Plan | Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed on May 15, 2001, File No. 333-60984 | ||
10.10
|
Lease Agreement between Winthrop Resources and the Registrant | Exhibit 10.41 of the 2001 10-K | ||
10.11
|
Amended Lease Agreement between Winthrop Resources and the Registrant | Exhibit 10.1 of the Form 10-Q for the fiscal quarter ended December 31, 2001 | ||
10.12
|
Employment Agreement between the Registrant and John D. Kavazanjian | Exhibit 10.45 of the Company’s Report on Form 10-K for the year ended June 30, 2002 (the “2002 10-K”) | ||
10.13
|
Employment Agreement between the Registrant and William A. Schmitz | Exhibit 10.47 of the 2002 10-K | ||
10.14
|
Stock Purchase Agreement with Ultralife Taiwan, Inc. | Exhibit 10.1 of the Form 10-Q for the fiscal quarter ended September 28, 2002 | ||
10.15
|
Financing Agreement between Ultralife Batteries (UK) Ltd. and EuroFinance | Exhibit 10 of the Form 10-Q for the quarter ended June 28, 2003 | ||
10.16
|
Form of Stock Purchase Agreement dated October 7, 2003 (Three separate but identical (other than subscription amount) stock purchase agreements for Corsair Capital Partners, LP, Corsair Long Short International Ltd., and Neptune Partners, LP for an aggregate 200,000 shares for an aggregate purchase price of $2,500,000). | Exhibit 10.1 of the Form 10-Q for the quarter ended September 27, 2003 (the “September 2003 10-Q”) | ||
10.17
|
Form of Registration Rights Agreement dated October 7, 2003 (Three separate but identical (other than subscription amount) stock purchase agreements for Corsair Capital Partners, LP, Corsair Long Short International Ltd., and Neptune Partners, LP for an aggregate 200,000 shares for an aggregate purchase price of $2,500,000). | Exhibit 10.2 of the September 2003 10-Q | ||
10.18
|
Loan and Stock Subscription Agreement with Ultralife Taiwan, Inc. | Exhibit 10.3 of the September 2003 10-Q | ||
10.19
|
Credit Agreement dated as of June 30, 2004 with JPMorgan Chase Bank as Administrative Agent | Exhibit 10.1 of the Form 10-Q for the quarter ended June 26, 2004 (the “June 2004 10-Q”) | ||
10.20
|
General Security Agreement dated as of June 30, 2004 in favor of JPMorgan Chase Bank | Exhibit 10.2 of the June 2004 10-Q | ||
10.21
|
Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 99.2 of the Company’s Registration Statement on Form S-8 filed on July 26, 2004, File No. 333-117662 | ||
10.22
|
Amendment numbers One and Two to Credit Agreement dated as of September 24, 2004 with JPMorgan Chase Bank as Administrative Agent | Exhibit 10.1 of the Form 10-Q for the quarter ended April 2, 2005 | ||
10.23
|
Base compensation information for certain executive officers of the Company | Current report on Form 8-K dated June 10, 2005 | ||
72
Table of Contents
| Exhibit | ||||
| Index | Description of Document | Incorporated By Reference to: | ||
10.24
|
Amendment number Three to Credit Agreement dated as of August 5, 2005 with the Lenders Party Thereto and JPMorgan Chase Bank as Administrative Agent | Exhibit 10.1 of the Form 10-Q for the quarter ended July 2, 2005 | ||
10.25
|
Amendment number Four to Credit Agreement dated as of November 1, 2005 with the Lenders Party Thereto and JPMorgan Chase Bank as Administrative Agent | Exhibit 10.1 of the Form 10-Q for the quarter ended October 1, 2005 | ||
10.26
|
Officer bonus plan for 2006 and stock option grants for officers as of December 9, 2005 | Current report on Form 8-K dated December 13, 2005 | ||
10.27
|
Form of Resale Restriction Agreement between Ultralife Batteries, Inc. and option holders dated as of December 28, 2005 | Exhibit 10 of Form 8-K filed December 30, 2005 | ||
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 |
73
Table of Contents
| (c) | Financial Statement Schedules. |
The following financial statement schedules of the Registrant are filed herewith:
Schedule II – Valuation and Qualifying Accounts
| Additions | ||||||||||||||||||||
| Charged to | ||||||||||||||||||||
| December 31, | Charged to | Other | December 31, | |||||||||||||||||
| 2004 | Expense | Accounts | Deductions | 2005 | ||||||||||||||||
Allowance for
doubtful accounts |
$ | 284 | $ | 208 | $ | — | $ | 34 | $ | 458 | ||||||||||
Inventory reserves |
508 | 221 | 157 | 18 | 868 | |||||||||||||||
Warranty reserves |
326 | 205 | — | 67 | 464 | |||||||||||||||
Deferred tax
valuation allowance |
5,449 | 349 | — | 77 | 5,721 | |||||||||||||||
| Additions | ||||||||||||||||||||
| Charged to | ||||||||||||||||||||
| December 31, | Charged to | Other | December 31, | |||||||||||||||||
| 2003 | Expense | Accounts | Deductions | 2004 | ||||||||||||||||
Allowance for
doubtful accounts |
$ | 168 | $ | 124 | $ | — | $ | 8 | $ | 284 | ||||||||||
Inventory reserves |
742 | 405 | — | 639 | 508 | |||||||||||||||
Warranty reserves |
278 | 294 | — | 246 | 326 | |||||||||||||||
Deferred tax
valuation allowance |
29,802 | — | — | 24,353 | 5,449 | |||||||||||||||
| Additions | ||||||||||||||||||||
| Charged to | ||||||||||||||||||||
| December 31, | Charged 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 | |||||||||||||||
74
Table of Contents
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 22, 2006
|
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 22, 2006
|
/s/ John D. Kavazanjian | |||
| John D. Kavazanjian | ||||
| President, Chief Executive Officer and Director | ||||
Date: March 22, 2006
|
/s/ Robert W. Fishback | |||
| Robert W. Fishback | ||||
| Vice President — Finance and Chief Financial Officer (Principal Financial Officer) |
||||
Date: March 22, 2006
|
/s/ Patricia C. Barron | |||
| Patricia C. Barron (Director) | ||||
Date: March 22, 2006
|
/s/ Anthony J. Cavanna | |||
| Anthony J. Cavanna (Director) | ||||
Date: March 22, 2006
|
/s/ Paula H. J. Cholmondeley | |||
| Paula H. J. Cholmondeley (Director) | ||||
Date: March 22, 2006
|
/s/ Daniel W. Christman | |||
| Daniel W. Christman (Director) | ||||
Date: March 22, 2006
|
/s/ Carl H. Rosner | |||
| Carl H. Rosner (Director) | ||||
Date: March 22, 2006
|
/s/ Ranjit C. Singh | |||
| Ranjit C. Singh (Director) |
75
Exhibit 21
SUBSIDIARIES
The Company has a 100% ownership interest in Ultralife Batteries (UK) Ltd., incorporated in the
United Kingdom.
76
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3
(Nos. 333-110426, 333-67808 and 333-90984) and Forms S-8 (Nos. 333-31930, 333-60984, 333-114271
and 333-117662) of Ultralife Batteries, Inc. of our report dated
March 22, 2006 relating to the
financial statements, financial statement schedule, management’s assessment of the effectiveness
of internal control over financial reporting and the effectiveness of internal control over
financial reporting, which appears in this Form 10-K.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
March 23, 2006
Rochester, New York
March 23, 2006
77
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | 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 | ||
| d) | 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 22, 2006
|
/s/ John D. Kavazanjian
|
|||
| John D. Kavazanjian, | ||||
| President and Chief Executive Officer |
78
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | 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 | ||
| d) | 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 22, 2006
|
/s/ Robert W. Fishback
|
|||
| Robert W. Fishback, | ||||
| Vice President – Finance and Chief Financial Officer |
79
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,
2005 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 22, 2006
|
/s/ John D. Kavazanjian | |||
| John D. Kavazanjian President and Chief Executive Officer |
||||
Date: March 22, 2006
|
/s/ Robert W. Fishback | |||
| Robert W. Fishback Vice President-Finance and Chief Financial Officer |
80