SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X... No.....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 11,173,466 shares outstanding
as of April 30, 2001.
ULTRALIFE BATTERIES, INC.
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2001 and June 30, 2000 ................................ 3
Condensed Consolidated Statements of Operations -
Three and nine months ended March 31, 2001 and 2000 ............. 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2001 and 2000 ....................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................................. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 14
Item 6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES .............................................................. 16
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
- --------------------------------------------------------------------------------
March 31, June 30,
ASSETS 2001 2000
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 1,833 $ 5,712
Available-for-sale securities 5,250 12,927
Trade accounts receivable (less allowance
for doubtful accounts of $256 at
March 31, 2001 and $268 at June 30, 2000) 3,455 3,456
Inventories, net 5,597 5,682
Prepaid expenses and other current assets 1,679 1,176
-------- --------
Total current assets 17,814 28,953
-------- --------
Property, plant and equipment, net 32,685 32,785
Other assets:
Investment in affiliates 409 2,339
Technology license agreements (net of
accumulated amortization of $1,144 at
March 31, 2001 and $1,068 at June 30, 2000) 307 383
-------- --------
716 2,722
-------- --------
Total Assets $ 51,215 $ 64,460
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 989 $ 1,087
Accounts payable 3,301 2,886
Other current liabilities 2,221 2,443
-------- --------
Total current liabilities 6,511 6,416
Long-term liabilities:
Long-term debt and capital lease obligations 2,829 3,567
Shareholders' equity :
Preferred stock, par value $0.10 per share,
authorized 1,000,000 shares;
none outstanding -- --
Common stock, par value $0.10 per share,
authorized 40,000,000 shares as of
March 31, 2001 and 20,000,000 shares
as of June 30, 2000; issued - 11,487,786
at March 31, 2001 and 11,410,286
at June 30, 2000) 1,149 1,141
Capital in excess of par value 99,388 98,790
Accumulated other comprehensive loss (1,135) (689)
Accumulated deficit (57,224) (44,462)
-------- --------
42,178 54,780
Less -- Treasury stock, at cost -- 27,250 shares 303 303
-------- --------
Total shareholders' equity 41,875 54,477
-------- --------
Total Liabilities and Shareholders' Equity $ 51,215 $ 64,460
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended March 31, Ended March 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 5,817 $ 6,199 $ 17,958 $ 19,101
Cost of products sold 6,548 7,204 20,840 19,385
-------- -------- -------- --------
Gross margin (731) (1,005) (2,882) (284)
Operating expenses:
Research and development 799 1,384 2,307 3,542
Selling, general,
and administrative 1,979 1,871 5,835 5,631
-------- -------- -------- --------
Total operating expenses 2,778 3,255 8,142 9,173
Operating loss (3,509) (4,260) (11,024) (9,457)
Other income (expense):
Interest income 126 205 628 692
Interest expense (134) (11) (387) (33)
Equity loss in affiliate (340) (335) (1,930) (517)
Miscellaneous (64) 3,196 (49) 3,195
-------- -------- -------- --------
Loss before income taxes (3,921) (1,205) (12,762) (6,120)
-------- -------- -------- --------
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (3,921) $ (1,205) $(12,762) $ (6,120)
======== ======== ======== ========
Net loss per common share $ (0.35) $ (0.11) $ (1.15) $ (0.56)
======== ======== ======== ========
Weighted average shares
outstanding 11,173 10,953 11,131 10,861
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended March 31,
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss $(12,762) $ (6,120)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,794 1,558
Gain on sale of securities (3,147)
Equity loss in affiliate 1,930 518
Changes in operating assets and liabilities:
Accounts receivable 1 709
Inventories 85 (704)
Prepaid expenses and other current assets (503) 969
Accounts payable and other current liabilities 193 (1,362)
-------- --------
Net cash used in operating activities (8,262) (7,579)
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net (2,934) (2,109)
Investment in affiliates -- (3,238)
Purchase of securities (24,671) (53,051)
Sales of securities 19,652 32,714
Maturities of securities 12,695 28,095
-------- --------
Net cash provided by investing activities 4,742 2,411
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 606 5,175
Proceeds from issuance of debt -- 423
Principal payments on long-term debt and
capital lease obligations (836) (69)
-------- --------
Net cash (used in) provided by
financing activities (230) 5,529
-------- --------
Effect of exchange rate changes on cash (129) (152)
-------- --------
(Decrease) Increase in cash and cash equivalents (3,879) 209
Cash and cash equivalents at beginning of period 5,712 776
-------- --------
Cash and cash equivalents at end of period $ 1,833 $ 985
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ 1 $ 378
======== ========
Interest paid $ 357 $ 50
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and adjustments) considered
necessary for a fair presentation of the condensed consolidated financial
statements have been included. Results for interim periods should not be
considered indicative of results to be expected for a full year. Reference
should be made to the consolidated financial statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
2. NET LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Common stock
options have not been included as their inclusion would be antidilutive; as a
result, basic earnings per share is the same as diluted earnings per share.
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive loss were (in thousands):
Three Months ended Nine Months ended
March 31, March 31,
2001 2000 2001 2000
-------- -------- -------- --------
Net loss $ (3,921) $ (1,205) $(12,762) $ (6,120)
Unrealized (loss) gain
on securities -- (732) 1 (378)
Foreign currency
translation adjustments (271) (131) (447) (152)
-------- -------- -------- --------
Total comprehensive loss $ (4,192) $ (2,068) $(13,208) $ (6,650)
======== ======== ======== ========
4. INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method. The composition of inventories was
(in thousands):
March 31, 2001 June 30, 2000
-------------- -------------
Raw materials $ 2,595 $ 3,032
Work in process 1,727 1,427
Finished goods 1,721 1,622
-------- --------
6,043 6,081
Less: Reserve for obsolescence 446 399
-------- --------
$ 5,597 $ 5,682
======== ========
6
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following (in
thousands):
March 31, June 30,
2001 2000
--------- --------
Land ........................................ $ 123 $ 123
Buildings and Leasehold Improvements ........ 1,294 1,202
Machinery and Equipment ..................... 35,800 18,638
Furniture and Fixtures ...................... 196 196
Computer Hardware and Software .............. 1,077 1,041
Construction in Progress .................... 4,477 19,149
-------- --------
42,967 40,349
Less: Accumulated Depreciation ............. 10,282 7,564
-------- --------
$ 32,685 $ 32,785
======== ========
6. OPERATING LEASE
In March 2001, the Company entered into a sale-leaseback transaction for
certain recently purchased manufacturing equipment with a third party. Proceeds
of the transaction totaled $1.8 million which equaled the book value of the
equipment. The lease is accounted for as an operating lease with quarterly lease
payments of $101,000 over the next 20 quarters.
7. COMMITMENTS AND CONTINGENCIES
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 May 1997, William Boyd, the principal of Aerospace Energy Systems,
Inc., and Leland J. Coleman commenced an action against the Company and Loeb
Partners Corporation ("Loeb"), an investment firm, in the U.S. District Court
for the Southern District Court of New York alleging that they had entered into
a contract with Loeb to arrange for the acquisition of Dowty Group, PLC and that
the Company tortiously interfered with their contract and business opportunity.
The Company maintained that the claim against it, for $25 million, was without
merit. After a jury trial in December of 1999, the case was dismissed.
Plaintiffs appealed, and on October 19, 2000 the United States Court of Appeals
for the Second Circuit affirmed the dismissal. The time to appeal expired
January 17, 2001. Accordingly, the judgment of dismissal is final and the
Company will incur no liability in this action.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. Earlier this
year, the Company again moved to dismiss the complaint. By Opinion and Order
dated September 28, 2000, the Court dismissed the action, this time with
7
prejudice, thereby barring plaintiffs from any further amendments to their
complaint and directing that the case be closed. Plaintiffs filed a Notice of
Appeal to the Third Circuit Court of Appeals, the parties have submitted their
briefs, and the matter is scheduled for oral argument the week of May 21, 2001.
The Company believes that the litigation is without merit and will continue to
defend it vigorously. The amount of alleged damages, if any, cannot be
quantified, nor can the outcome of this litigation be predicted. Accordingly,
management cannot determine whether the ultimate resolution of this litigation
could have a material adverse effect on the Company's financial position and
results of operations.
The Company is dependent upon its ability to successfully generate
positive cash flow from operations or obtain additional debt or equity
financing. The Company believes that there are adequate operational savings
and/or funding available to meet their future cash flows requirements; however,
there can be no assurances that the Company will be successful in these
endeavors.
8. BUSINESS SEGMENT INFORMATION
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's polymer rechargeable batteries. The Technology Contracts segment
includes revenues and related costs associated with various government and
military development contracts. The Corporate segment consists of all other
items that do not specifically relate to the three other segments and are not
considered in the performance of the other segments.
(In Thousands)
Three Months Ended March 31, 2001
- ---------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 5,401 $ 78 $338 $ -- $ 5,817
Segment
contribution 272 (1,835) 33 (1,979) (3,509)
Interest, net (8) (8)
Equity loss
in affiliate (340) (340)
Miscellaneous (64) (64)
Income taxes -- --
-------
Net loss $(3,921)
Total assets $18,120 $21,674 $301 $11,120 $51,215
Three Months Ended March 31, 2001
- ---------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 5,400 $ 23 $776 $ -- $ 6,199
Segment
contribution (993) (1,321) 70 (2,016) (4,260)
Interest income, net 194 194
Equity loss
in affiliate (335) (335)
Miscellaneous 3,196 3,196
Income taxes -- --
-------
Net loss $(1,205)
Total assets $14,626 $21,236 $774 $27,301 $63,937
8
Nine Months Ended March 31, 2001
- --------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $16,310 $ 242 $1,406 $ -- $ 17,958
Segment
contribution 72 (5,384) 123 (5,835) (11,024)
Interest, net 241 241
Equity loss
in affiliate (1,930) (1,930)
Miscellaneous (49) (49)
Income taxes -- --
--------
Net loss $(12,762)
Total assets $18,120 $21,674 $ 301 $11,120 $ 51,215
Nine Months Ended March 31, 2001
- --------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $16,945 $ 25 $2,131 $ -- $19,101
Segment
contribution (514) (3,399) 231 (5,775) (9,457)
Interest income 659 659
Equity loss
in affiliate (517) (517)
Miscellaneous 3,195 3,195
Income taxes -- --
-------
Net loss $(6,120)
Total assets $14,626 $21,236 $ 774 $27,301 $63,937
9. NEW ACCOUNTING PRONOUNCEMENTS
As of July 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities", which established accounting and reporting requirements for
derivative instruments and hedging activities. The Company, on occasion, has
used derivative financial instruments for purposes other than trading and does
so to reduce its exposure to fluctuations in foreign currency exchange rates. As
of March 31, 2001, the Company did not have any outstanding derivative financial
instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101") which summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B which delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company has implemented SAB 101, and the effect of
the implementation has not had any impact on the financial position and results
of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", which provides guidance for issues that have arisen in applying
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees". This Interpretation, which became effective July 1, 2000, applies
prospectively to new awards, exchanges or awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 31, 1998.
As of March 31, 2001, Interpretation No. 44 has not had any impact on the
Company's financial position and results of operations.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fire, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended June 30, 2000.
Results of Operations
Three months ended March 31, 2001 and 2000
Consolidated revenues were $5,817,000 for the third quarter of fiscal
2001, a decrease of $382,000, or 6%, over the comparable quarter in fiscal 2000.
Primary battery sales were constant year over year, consisting of increases in
9-volt and BA-5368 shipments offset by declines in BA-5372 and High Rate sales.
Nine-volt revenues increased $330,000, or 9%, over the prior year due to higher
shipments to smoke detector customers. BA-5368 sales amounted to $382,000 for
the third quarter of fiscal 2001, as the Company made its first shipments under
its recently obtained contract with the U.S. Department of Justice. These
increases were offset by lower BA-5372 sales of $222,000 due to lower production
quantities as stated under a contract with the U.S. Army and reduced shipments
of High Rate batteries mainly due to the timing of certain military contracts.
These reductions were offset by an increase in rechargeable battery sales of
$55,000 as a result of the launch of polymer batteries in June 2000. Technology
contract revenues decreased $438,000, or 56%, from $776,000 to $338,000 due to
the scheduled reduction of the Advanced Technology Program (ATP) with the U.S.
Department of Commerce. Total revenues for the third quarter of 2001 were
$527,000, or 10% higher than projected three months ago due to higher 9-volt and
BA-5368 shipments.
Cost of products sold amounted to $6,548,000 for the three-month period
ended March 31, 2001, a decrease of $656,000, or 9% over the same three month
period a year ago. The gross margin on total revenues for the quarter improved
$274,000 from a loss of $1,005,000, or 16% negative gross margin in the prior
year, to a $731,000 loss, or 13% negative gross margin. The improvement in gross
margin is largely related to improvements in gross margins for 9-volt batteries.
In addition, a $1.0 million write-off related to inventory adjustments in fiscal
2000 was offset by the addition of Rechargeable costs as that operation began
commercial production in June 2000. Gross margins on 9-volt batteries improved
from a gross profit of 4% in the second quarter of fiscal 2001 to a 12% gross
profit in the third quarter of fiscal 2001, a $300,000 increase in gross
margins. This improvement is directly related to the implementation of lean
manufacturing principles, improvements made in process manufacturing, and an
increased focus
10
on quality. Additionally, the $1,154,000 negative gross margin on rechargeable
batteries includes approximately $500,000 in depreciation. Gross margin on
technology contracts remained consistent year over year.
Operating expenses were $2,778,000 for the three months ended March 31,
2001, a decrease of $477,000, or 15%, from $3,255,000 in the prior year. Of the
Company's operating expenses, research and development expenses decreased
$585,000, or 42%, to $799,000 for the third quarter of fiscal 2001. The decline
in research and development expenses was primarily due to the launch of polymer
rechargeable batteries at the end of fiscal 2000. Certain resources previously
charged to research and development are now included in cost of products sold as
polymer rechargeable batteries are in production. Additionally, selling,
general, and administrative expenses increased $108,000 or 6%. This increase was
mainly due to sales and advertising expenses for the polymer rechargeable
batteries.
Net interest income declined $202,000 in the third quarter 2001 as
compared to 2000 due to the lower average cash balances and higher interest
expense related to outstanding debt. Miscellaneous income/expense decreased
$3,260,000 from the prior year due to the one-time gain of $3,147,000 on the
sale of Intermagnetics General Corporation stock reflected in last year's third
quarter. No similar sale of stock occurred in fiscal 2001.
Net loss was $3,921,000, or $0.35 per share, for the third quarter of
fiscal 2001 compared to a loss of $1,205,000, or $0.11 per share, for the same
quarter last year primarily as a result of the reasons described above.
Excluding the one-time $3,147,000 gain on the sale of securities, last year's
comparable net loss was $4,352,000, or $.40 per share.
Nine months ended March 31, 2001 and 2000
Consolidated revenues were $17,958,000 for the first nine months of fiscal
2001, a decrease of $1,143,000, or 6%, over the comparable nine months in fiscal
2000. Primary battery sales decreased $635,000, or 4%, from $16,945,000 last
year to $16,310,000 this year. The decrease in primary battery sales was
primarily due to lower shipments of 9-volt and BA-5372 batteries. The decline in
9-volt shipments resulted from lower demand in the second quarter 2001 from
10-year smoke detector customers who had overstocked their distribution
channels. The decrease in BA-5372 battery shipments was the result of lower
production requirements due to accelerated initial shipments last year under a
contract from the U.S. Army. Polymer rechargeable revenues for the nine month
period were $242,000, a $217,000 increase over the prior year's comparable
period due to the commercial launch of the product in June 2000. Technology
contract revenues declined $725,000, or 34%, from $2,131,000 to $1,406,000
reflecting the scheduled reduction of the ATP program with the U.S. Department
of Commerce.
Cost of products sold amounted to $20,840,000 for the nine month period
ended March 31, 2001, an increase of $1,455,000, or 8%, over the same nine month
period a year ago. The gross margin on total revenues for the nine months ended
March 31, 2001, was a loss of $2,882,000, or 16%, compared to a loss of
$284,000, or 1% reported for the first nine months in the prior year. The
decline in gross margins is due to the launch of commercial production of
polymer rechargeable batteries in June 2000, which resulted in initial
expenditures necessary to start production of the polymer cells, including
approximately $1,600,000 in depreciation for the nine month period. Prior to
commencing production of polymer cells, most of these costs, including
engineering, were charged to research and development. Gross margin on primary
batteries for the nine month period ended March 31 improved from a negative
gross margin of 3% in the prior year to a 2% positive gross margin in the
current fiscal year. This improvement was largely due to the implementation of
lean manufacturing principles, improvements made in process manufacturing, and
increased focus on quality. Gross margin on technology contracts for this period
decreased from 11% to 9% in fiscal 2001 when compared to fiscal 2000 due to the
timing of expenditures.
11
Operating expenses were $8,142,000 for the nine months ended March 31,
2001, a decrease of $1,031,000, or 11%, from $9,173,000 in the same nine months
in the prior year. Of the Company's operating expenses, research and development
expenses decreased $1,235,000, or 35%, to $2,307,000 for the first nine months
of fiscal 2001. The decline in research and development expenses was primarily
due to the commercial launch of polymer rechargeable batteries at the end of
fiscal 2000. Certain costs previously charged to research and development are
included in cost of products sold as polymer rechargeable batteries are in
production. That decrease was partially offset by an increase of $204,000, or
4%, in selling, general, and administrative expenses, to $5,835,000 in the first
nine months of fiscal 2001. This increase in SG&A expenses was mainly attributed
to increased sales and advertising expenses for the polymer rechargeable
batteries.
Net interest income decreased $418,000, or 63%, from $659,000 in the first
nine months of fiscal 2000 to $241,000 in the first nine months of fiscal 2001.
The reduction in interest income is principally the result of lower average cash
balances and higher interest expense related to outstanding debt.
The loss associated with the Company's equity ownership interest in its
Taiwan venture (UTI) amounted to $1,930,000 for the first nine months of fiscal
2001 compared with a loss of $517,000 in the previous year. The $1,413,000
increase in the loss was due to higher expenses related to start up operations
and a stock distribution to UTI employees in November 2000. UTI recorded
compensation expense related to the stock distribution of $2.5 million, and the
Company recognized approximately $900,000 equity loss for the transaction
representing its share of the total UTI loss. In addition, employees, directors
and supervisors were given the opportunity to purchase UTI shares at a specified
price. As a result of the stock issuances, the Company's interest in UTI
declined to 41%.
Net losses were $12,762,000, or $1.15 per share, for the first nine months
of fiscal 2001 compared to $6,120,000, or $0.56 per share, for the same period
last year. Excluding the one-time $3,147,000 gain on the sale of securities,
last year's comparable net loss was $9,267,000, or $.85 per share.
Liquidity and Capital Resources
At March 31, 2001, cash and cash equivalents and available for sale
securities totaled $7,083,000. The Company used $8,262,000 of cash in operating
activities during the first nine months of fiscal 2001. This use of cash related
primarily to the net loss reported for the period net of depreciation and equity
losses in affiliates. Decreases in prepaid and other assets were partially
offset by an increase in accounts payable and slightly lower inventories.
Additionally, the Company spent $2,934,000 for capital additions for production
equipment and facilities improvements during the first nine months of fiscal
2001.
At March 31, 2001, the Company had long-term debt outstanding including
capital lease obligations of $2,829,000 primarily relating to the financing
arrangement entered into by the Company at the end of fiscal 2000 described
below.
In June 2000, the Company entered into a $20 million secured credit
facility with a lending institution. The financing agreement consists of an
initial $12 million term loan component (of which $3,467,000 was outstanding at
March 31, 2001) and a revolving credit facility component for an initial $8
million, based on eligible net accounts receivable (as defined) and eligible net
inventory (as defined). There was no balance outstanding on the revolving credit
facility component as of March 31, 2001. While the amount available under the
term loan component amortizes over time (and is reduced by outstanding letters
of credit), the amount of the revolving credit facility component increases by
an equal and offsetting amount. Principal and interest are paid monthly on
outstanding amounts borrowed. The loans bear interest at the prime rate or other
LIBOR-based rate options at the discretion of the Company. The Company also pays
a facility fee on the unused portion of the commitment. The loan is secured by
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substantially all of the Company's assets. The total amount available under the
term loan component is reduced by outstanding letters of credit. The Company had
$1.9 million outstanding on a letter of credit as of March 31, 2001.
Additionally, the Company is precluded from paying dividends under the
terms of the agreement. On December 22, 2000, the Company and its commercial
lender agreed to revise downward the adjusted net worth covenant under the
Company's credit facility to better reflect the Company's equity position. The
revised covenant requires the Company to maintain adjusted net worth (as
defined) of at least $40,000,000. As of March 31, 2001, the Company was in
compliance with all covenants.
The Company's capital resource commitments as of March 31, 2001 consisted
principally of capital equipment commitments of approximately $2,147,000. The
Company is dependent upon its ability to successfully generate positive cash
flow from operations or obtain additional debt or equity financing. The Company
believes that there are adequate operational savings and/or funding available to
meet their future cash flows requirements; however, there can be no assurances
that the Company will be successful in these endeavors.
Outlook
At the present time, the Company expects that consolidated revenues for
the fourth fiscal quarter will be moderately higher than the third quarter.
Sales of 9-volt batteries in the fourth quarter are expected to be consistent
with this quarter. Revenues from our various cylindrical platforms, including
High Rate, BA-5372 and BA-5368 batteries, are expected to increase in the fourth
quarter and beyond as production capability and incremental sales opportunities
continue to develop. Gross margins in the fourth quarter for the Primary Battery
operations are expected to continue to improve by at least an additional
$200,000 to $300,000 over the third quarter due to ongoing improvements in the
manufacturing process and continuing development of new business. Lastly, the
near-term outlook for rechargeable sales is consistent with the third quarter
and is fairly conservative. The Company is continuing to market the cellular
phone aftermarket product by adjusting prices and expanding into new channels.
The majority of the selling efforts at this time, however, are centered on
design-in applications with OEMs and helping these companies get their products
to market. The Company is not projecting significant revenues in this area until
the December 2001 quarter because of the inherent product introduction cycles
for this business.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently participate in the investment of derivative financial instruments.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In May 1997, William Boyd, the principal of Aerospace Energy Systems,
Inc., and Leland J. Coleman commenced an action against the Company and Loeb
Partners Corporation ("Loeb"), an investment firm, in the U.S. District Court
for the Southern District Court of New York alleging that they had entered into
a contract with Loeb to arrange for the acquisition of Dowty Group, PLC and that
the Company tortiously interfered with their contract and business opportunity.
The Company maintained that the claim against it, for $25 million, was without
merit. After a jury trial in December of 1999, the case was dismissed.
Plaintiffs appealed, and on October 19, 2000 the United States Court of Appeals
for the Second Circuit affirmed the dismissal. The time to appeal expired
January 17, 2001. Accordingly, the judgment of dismissal is final and the
Company will incur no liability in this action.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. Earlier this
year, the Company again moved to dismiss the complaint. By Opinion and Order
dated September 28, 2000, the Court dismissed the action, this time with
prejudice, thereby barring plaintiffs from any further amendments to their
complaint and directing that the case be closed. Plaintiffs filed a Notice of
Appeal to the Third Circuit Court of Appeals, the parties have submitted their
briefs, and the matter is scheduled for oral argument the week of May 21, 2001.
The Company believes that the litigation is without merit and will continue to
defend it vigorously. The amount of alleged damages, if any, cannot be
quantified, nor can the outcome of this litigation be predicted. Accordingly,
management cannot determine whether the ultimate resolution of this litigation
could have a material adverse effect on the Company's financial position and
results of operations.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
(Registrant)
Date: May 14, 2001 By: /s/John D. Kavazanjian
------------------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: May 14, 2001 By: /s/Robert W. Fishback
---------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
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