THIS 10-K/A REPLACES THE 10-K FILED ON SEPTEMBER 25, 2001 IN ITS ENTIRETY.
CHANGES WERE MADE TO THE PREVIOUSLY FILED FORM 10-K BASED ON THE COMMISSION'S
REVIEW OF THE FORM S-3 FILED ON AUGUST 16, 2001 AND THE FORM 10-K WHICH WAS
INCORPORATED BY REFERENCE.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2001
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
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(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:
Title of Class
Common Stock, par value $0.10 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On August 31, 2001, the aggregate market value of the Common Stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $50,721,983 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on August 31, 2001.
As of September 14, 2001, the Registrant had 12,263,866 shares of Common
Stock outstanding.
Documents Incorporated by Reference.
Part III Ultralife Batteries, Inc. Proxy Statement. With the exception of the
items of the Proxy Statement specifically incorporated by reference
herein, the Proxy Statement is not deemed to be filed as part of
this Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
PART I 1 Business.................................................... 3
2 Properties.................................................. 13
3 Legal Proceedings........................................... 14
4 Submission of Matters to a Vote of Securities
Holders................................................... 14
PART II 5 Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 15
6 Selected Financial Data..................................... 16
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
7a Quantitative and Qualitative Disclosures About
Market Risks........................................ 24
8 Financial Statements and Supplementary Data................. 25
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 47
PART III 10 Directors and Executive Officers of the Registrant.......... 47
11 Executive Compensation...................................... 47
12 Security Ownership of Certain Beneficial Owners and
Management..................................................47
13 Certain Relationships and Related Transactions.............. 47
PART IV 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 47
Signatures.................................................. 48
PART I
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
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. See Risk Factors in Item 7.
ITEM 1. BUSINESS
General
Ultralife Batteries, Inc. (the "Company") develops, manufactures and
markets a wide range of standard and customized primary lithium and polymer
rechargeable batteries for use in a wide array of applications. The Company
believes that its proprietary technologies allow the Company to offer batteries
that are ultra-thin, lightweight and generally achieve longer operating time
than many competing batteries currently available. To date, the Company has
focused on manufacturing a family of lithium primary batteries for consumer,
industrial, and military applications which it believes is one of the most
comprehensive lines of lithium manganese dioxide primary batteries commercially
available. The Company has introduced its advanced polymer rechargeable
batteries which are based on its proprietary technology for use in portable
electronic applications.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various 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.
Primary Batteries
The Company manufactures and markets a family of lithium-manganese dioxide
(Li/MnO2) primary batteries including 9-volt, 3-volt, C, 1 1/4 C and D
configurations, thin cell, custom pouch batteries, and magnesium silver-chloride
seawater-activated batteries. Some applications of the Company's primary
batteries include smoke detectors, home security systems, intensive care
monitors and military portable communications devices. The Company's high rate
lithium batteries are sold to OEMs primarily for the military and industrial
markets for use in a variety of applications including automotive telematics,
emergency radio beacons, search and rescue transponders, and other specialty
instruments and applications. The Company also manufactures seawater-activated
batteries for specialty marine applications. The Company believes that the
materials used in, and the chemical reactions inherent to, lithium batteries
provide significant advantages over other currently available primary battery
technologies which advantages include lighter weight, longer operating time,
longer shelf life, and a wider operating temperature range. The Company's
primary batteries also have relatively flat voltage profiles, which provide
stable power. Conventional primary batteries, such as alkaline, have sloping
voltage profiles, which result in decreasing power outage 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 will allow longer operating time and less frequent
battery replacements for the Company's targeted applications.
Revenues for this segment in fiscal year 2001 were $22.1 million and
segment contribution was $0.4 million. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and the 2001 Consolidated
Financial Statements and Notes thereto for additional information.
3
Rechargeable Batteries
The Company believes that its polymer rechargeable battery technology
provides substantial benefits, including the ability to design and produce
lightweight cells in a variety of custom sizes, shapes, and thickness (as thin
as 0.9 millimeter). As a result of significantly increased efforts to work
closely with OEMs to get the Company's rechargeable batteries designed into new
products, the Company expects that sales of rechargeable batteries will account
for a substantially greater percentage of total revenue in the next few years.
While the cost of the Company's polymer rechargeable batteries tends to be
higher than the competition due to higher material costs, the cells tend to be
thinner and lighter weight than non-polymer rechargeable cells (principally
lithium ion cells). Additionally, the cycle life of the Company's polymer
rechargeable technology tends to be lower than the competition but through the
Company's development efforts the Company continues to expect to see this gap
narrowed.
The global small cell rechargeable batteries market was approximately
$5.5 billion in 2000 and is expected to grow to over $6 billion by 2003. The
widespread use of a variety of portable consumer electronic products such as
notebook computers and cellular telephones has resulted in large and growing
markets for rechargeable batteries. These electronic products are placing
increasing demands on existing battery technologies to deliver greater amounts
of energy through efficiently designed, smaller and lighter batteries. In some
cases, current battery capabilities are a major limitation in the development of
next generation electronic products. The Company believes that its proprietary
technology can provide substantial benefits over other available rechargeable
battery systems.
Revenues for this segment in fiscal year 2001 were $0.4 million and
segment contribution was a loss of $7.6 million. See Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 2001
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 government sponsors research and development programs designed to improve
the performance and safety of existing battery systems and to develop new
battery systems. The Company has been successful in obtaining awards for such
programs for both rechargeable and primary battery technologies.
Revenues for this segment in fiscal year 2001 were $1.7 million and
segment contribution was $0.2 million. Revenues in this segment are expected to
continue to decline as certain non-renewable government contracts wind down. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the 2001 Consolidated Financial Statements and Notes thereto for
additional information.
Corporate
The Company allocates revenues, cost of sales, research and development
expenses and gains on fires from insurance proceeds across the above business
segments. The balance of income and expense, including selling, general and
administration expenses, interest income and expense, gains on sale of
securities and other net expenses, and its minority interest in Ultralife
Taiwan, Inc. are reported in the Corporate segment.
There were no revenues for this segment in fiscal year 2001 and segment
contribution was a loss of $8.0 million. See Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 2001
Consolidated Financial Statements and Notes thereto for additional information.
History
The Company was formed in December 1990. In March 1991, the Company
acquired certain technology and assets from Eastman Kodak Company ("Kodak")
relating to its 9-volt lithium-manganese dioxide primary battery. During the
initial 12 months of operation, the Company directed its efforts towards
reactivating the Kodak manufacturing facility and performing extensive tests on
the Kodak 9-volt battery. These tests demonstrated a need for design
modifications, which, once completed, resulted in a battery with improved
performance and shelf life. In June 1994, the Company's subsidiary, Ultralife
Batteries (UK) Ltd., acquired certain
4
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 the Company's polymer 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 joint venture. Due to stock grants to certain UTI employees
in fiscal 2001, the equity interest was reduced to 41%.
Since its inception, the Company has concentrated significant resources on
research and development activities related to polymer rechargeable batteries.
The Company has a segment that produces advanced rechargeable batteries using
automated custom-designed equipment. Over the past few years, the Company
expanded its product offering of lithium primary and polymer rechargeable
batteries.
As used in this Report, unless otherwise indicated the terms "Company" and
"Ultralife" include the Company's wholly-owned subsidiary, Ultralife (UK) Ltd.
Products and Technology
A battery is an electrochemical apparatus used to store and release energy
in the form of electricity. The main components of a conventional battery are
the anode, cathode, separator and an electrolyte, which can be either a liquid
or a solid. The separator acts as an electrical insulator, preventing electrical
contact between the anode and cathode inside the battery. During discharge of
the battery, the anode supplies a flow of electrons, known as current, to a load
or device outside of the battery. After powering the load, the electron flow
reenters the battery at the cathode. As electrons flow from the anode to the
device being powered by the battery, ions are released from the cathode, cross
through the electrolyte and react at the anode.
Primary Batteries
A primary battery is used until discharged and then discarded. The
principal competing primary battery technologies are carbon-zinc, alkaline and
lithium. The Company's primary battery products, exclusive of its
seawater-activated batteries, are based on lithium-manganese dioxide technology.
The following table sets forth the performance characteristics of battery
technologies that the Company believes represent its most significant current or
potential competition for its 9-volt and high-rate lithium batteries.
5
Comparison of Primary Battery Technologies
Technology Energy Density Operating
- ---------- -------------- Discharge Shelf Life Temperature
Wh/kg Wh/l Profile (years) Range ((Degree)F)
----- ---- ------- ------- -----------------
9-Volt Configurations:
Carbon-zinc (1) 22 40 Sloping 1 to 2 23 to 113
Alkaline (1) 65 143 Sloping 4 to 5 -4 to 130
Ultralife lithium-manganese dioxide (2) 262 406 Flat up to 10 -40 to 160
High Rate Cylindrical: (3)
Alkaline (1) 59 160 Sloping 4 to 5 -4 to 130
Lithium-sulfur dioxide (1)(4) 260 430 Flat 10 -76 to 160
Lithium thionyl-chloride (2)(4) 250-300 650-700 Flat 10 -40 to 160
Ultralife lithium-manganese dioxide (2) 228 510 Flat 10 -40 to 160
(1) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.
(2) Results of tests conducted by the Company.
(3) Data for equivalent D-size cells.
(4) The Company believes that these batteries are limited in application due to
health, safety and environmental risks associated therewith.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume, as measured in watt-hours
per kilogram and watt-hours per liter, respectively. Higher energy density
translates into longer operating times for a battery of a given weight or volume
and, therefore, fewer replacement batteries. Discharge profile refers to the
profile of the voltage of the battery during discharge. A flat discharge profile
results in a more stable voltage during discharge of the battery. High
temperatures generally reduce the storage life of batteries, and low
temperatures reduce the battery's ability to operate efficiently. The inherent
electrochemical properties of lithium batteries result in improved low
temperature performance and an ability to withstand relatively high temperature
storage.
The Company's primary battery products are based primarily on
lithium-manganese dioxide technology. The Company believes that materials used
in, and the chemical reactions inherent to, the lithium batteries provide
significant advantages over currently available primary battery technologies
which include lighter weight, longer operating time, longer shelf life, and a
wider operating temperature range. The Company's primary batteries also have
relatively flat voltage profiles, which provide stable power. Conventional
primary batteries, such as alkaline, have sloping voltage profiles, which result
in decreasing power outage during discharge. While the price for the Company's
lithium batteries is generally higher than commercially available alkaline
batteries produced by others, the Company believes that the increased energy per
unit of weight and volume of its batteries will allow longer operating time and
less frequent battery replacements for the Company's targeted applications.
Therefore, the Company believes that its primary batteries are price competitive
with other battery technologies on a price per watt hour basis.
9-Volt Lithium Battery. The Company's 9-volt lithium battery delivers a
unique combination of high energy and stable voltage, which results in a longer
operating life for the battery and, accordingly, fewer battery replacements.
While the Company's 9-volt battery's 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.
6
The Company currently markets its 9-volt lithium battery to consumer
retail and OEM markets, including manufacturers of safety and security systems
such as smoke alarms, medical devices and other electronic instrumentation.
Applications for which the Company's 9-volt lithium battery are currently sold
include:
Safety and Medical Devices Specialty Instruments
Security Equipment
Smoke alarms Bone growth stimulators Garage door openers
Wireless alarm systems Telemetry equipment Electronic meters
Tracking devices Portable blood analyzers Hand-held scanners
Transmitters/receivers Ambulatory Infusion Pumps Wireless electronics
The Company currently sells its 9-volt battery to Fyrnetics, Inc., Maple
Chase, and First Alert(R) for long-life smoke alarms, to Philips Medical
Systems, Siemens Medical Systems, Inc., i-STAT Corp. and Orthofix for medical
devices, and to ADT and Interactive Technologies, Inc. for security devices.
Fyrnetics, Inc. and Maple Chase have introduced long life smoke alarms powered
by the Company's 9-volt lithium battery, offered with a limited 10 year
warranty. The Company also manufactures its 9-volt lithium battery under private
label for Energizer, Sonnenschein Lithium GmbH and Telenot in Germany, as well
as 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 Sears, Radio Shack, Fred Meyer, Inc., TruValue, Chase
Pitkin, Ace Hardware, and a number of catalogs.
The Company believes that its 9-volt lithium battery market has expanded
as a result of a state law enacted in Oregon. The Oregon statute required that,
as of June 23, 1999, all battery-operated ionization-type smoke alarms sold in
that state must include a 10-year battery. Similar legislation was passed by the
New York State Senate that would also require all ionization-type smoke alarms
operated solely by a battery to include a battery that lasts 10 years. The
Company believes that it manufactures the only standard size 9-volt battery
warranted to last 10 years when used in smoke alarms. The Company believes that
its current manufacturing capacity is adequate to meet customer demand. However,
with increased legislative activity, demand could exceed current capacity, and
therefore, additional capital equipment would be required to meet these new
needs.
High Rate Lithium Batteries. The Company markets a wide range of high rate
primary lithium batteries in various sizes and voltage configurations. The
Company currently manufactures a range of high rate lithium cells which are sold
and packaged into multi-cell battery packs. The Company believes that its high
rate 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, automotive telematics and search and
rescue applications. Significant industrial applications include pipeline
inspection equipment, autoreclosers and oceanographic devices. Among the
military uses are manpack radios, night vision goggles 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
thionyl chloride and lithium sulphur dioxide 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 and environmental benefits
which will enable it to gain an increasing share of this market.
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 manufactures
seawater-activated batteries at the Abingdon, England facility and markets them
to naval and other specialty OEMs.
BA-5372/BA-5368 Batteries. The Company's BA-5372 battery is a cylindrical
6-volt lithium-manganese dioxide battery which is used for memory back-up in
specialized mobile communication equipment. This battery offers a combination of
performance
7
features suitable for military applications including high energy density,
lightweight, long shelf life and ability to operate in a wide temperature range.
The Company's BA-5368 battery is a 3-volt cylindrical battery and is used
in survival radios to pilots after they have been ejected from or crash-landed
their planes. This battery is used by the U.S. military and other military
organizations around the world.
Pouch Cell Lithium Batteries. The Company has developed a pouch cell
lithium battery. The pouch cell is a 3-volt, wound, rectangular-shaped,
high-rate cell configured for packaging in a compact, lightweight laminated foil
pouch. Based on the Company's lithium-manganese dioxide chemistry, the pouch
cell, with solid cathode construction, is a non-pressurized, non-toxic system
that is considered safer than liquid cathode systems. The pouch technology
provides flexibility with a lightweight thin battery having high energy density.
The Company's lithium technology provides these batteries with a long shelf life
and eliminates voltage delay even after prolonged storage.
Thin Cell Batteries. The Company has developed a line of lithium-manganese
dioxide primary batteries, which are called Thin Cell batteries. The Thin Cell
batteries are flat, light weight, flexible and 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 160
milliampere-hours to 1,000 milliampere-hours. The Company is currently marketing
these batteries to OEMs for applications such as identification tags and theft
detection systems.
Rechargeable Batteries
In contrast to primary batteries, after a rechargeable battery is
discharged, it can be recharged and reused many times. Generally, discharge and
recharge cycles can be repeated hundreds of times in rechargeable batteries, but
the achievable number of cycles (cycle life) varies among technologies and is an
important competitive factor. All rechargeable batteries experience a small, but
measurable, loss in energy with each cycle. The industry commonly reports cycle
life in number of cycles a battery can achieve until 80% of the battery's
initial energy capacity remains. In the rechargeable battery market, the
principal competing technologies are nickel-cadmium, nickel-metal hydride and
lithium-based batteries. Rechargeable batteries generally can be used in many
primary battery applications, as well as in applications such as portable
computers, cellular telephones and other consumer products.
Three important parameters for describing the performance characteristics
of a rechargeable battery suited for today's portable electronic devices are
design flexibility, energy density and cycle life. Design flexibility refers to
the ability of rechargeable batteries to be designed to fit a variety of shapes
and sizes of battery compartments. Thin profile batteries with prismatic
geometry provide the design flexibility to fit the battery compartments of
today's electronic devices. Energy density refers to the total electrical energy
per unit volume stored in a battery. High energy density batteries generally are
longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. Lithium batteries, by the nature of their
electrochemical properties, are capable of providing higher energy density than
comparably sized batteries that utilize other chemistries and, therefore, tend
to consume less 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 power many times before noticing a difference in
performance.
The Company's advanced rechargeable battery is based on proprietary
polymer technology. The battery is composed of ultra-thin and flexible
components including a metallic oxide cathode, a carbon anode and a polymer
electrolyte. The Company believes that users of portable consumer electronic
products such as notebook computers and cellular telephones are seeking smaller
and lighter products that require less frequent recharges while providing the
same or additional energy. The Company believes that its technology is
attractive to OEMs of such products since the use of a flexible polymer
electrolyte, rather than a liquid electrolyte, reduces the battery's overall
weight and volume, and allows for increased design flexibility in conforming
batteries to the variety of shapes and sizes required for portable consumer
products.
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
8
high energy density, is suitable for applications requiring frequent battery
rechargings, such as cellular telephones and portable computers.
In addition to the performance advantages described above, there is a
significant difference between rechargeable batteries, which are based on the
lithium-ion liquid electrolyte technology, and the technology used in the
Company's advanced rechargeable batteries. Liquid lithium-ion cells use a
flammable liquid electrolyte that is contained within a cylindrical or prismatic
metal housing. Under abusive conditions, where internal battery temperatures may
become extremely high, significant pressure may build within these cells which
can cause these cells to vent and release liquid electrolyte into the
environment. For various reasons, flames may result. The Company's advanced
rechargeable batteries utilize a polymer electrolyte that is bound within the
pores of the cell materials and, thus, leakage is avoided. Moreover, because the
cell does not require pressure to maintain the contact between the electrodes,
the cells do not require a metal housing. Rather, they are packaged within a
thin foil laminate.
Sales and Marketing
The Company sells its current products directly to OEMs in the U.S. and
abroad and has contractual arrangements with sales representatives who market
the Company's products on a commission basis in particular areas. The Company
also distributes its products through domestic and international distributors
and retailers that purchase batteries from the Company for resale. The Company
employs a staff of sales and marketing personnel in the U.S., England and
Germany. See Note 11 of the Consolidated Financial Statements. The Company's
sales are generated primarily from customer purchase orders and the Company has
traditionally had a number of long-term sales contracts with customers.
Primary Batteries
The Company has targeted sales of its primary batteries to manufacturers
of security and safety equipment, automotive telematics, medical devices,
military and specialty instruments. The Company's primary strategy is to develop
marketing alliances with OEMs and governmental agencies that utilize its
batteries in their products, commit to cooperative research and development or
marketing programs, and recommend the Company's products for replacement use in
their products. The Company is addressing these markets through direct contact
by its sales and technical personnel, use of sales representatives and stocking
distributors, manufacturing under private label and promotional activities. The
Company's warranty on its products is limited to replacement of the product.
The Company seeks to capture a significant market share for its products
within its initially 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 limited retail distribution.
In fiscal 2001, one customer (Fyrnetics, Inc.) accounted for approximately
$3.1 million of sales, which amounted to approximately 13% of total revenues of
the Company. The Company believes that the loss of this customer's business
would have a material adverse effect on the Company. The Company's relationship
with this customer is good. Currently, the Company does not experience
significant seasonal trends in primary battery revenues.
The Company's sales are executed primarily through purchase orders with
scheduled deliveries on a weekly or monthly basis. At the end of fiscal 2001,
the Company's backlog was not significant.
Rechargeable Batteries
The Company has initially targeted sales of its advanced polymer
rechargeable batteries through OEM suppliers, 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 unique design
capabilities and product characteristics will drive OEMs to incorporate the
Company's batteries into their product offerings, resulting in substantial
revenue growth opportunities for the Company. UTI, the Company's Taiwan venture,
will be responsible for manufacturing polymer rechargeable batteries for sale in
Asia. The Company has not marketed its advanced rechargeable batteries for a
sufficient period to determine whether these OEM or consumer sales are seasonal.
9
The Company plans to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries including
military, computers and communications applications, as well as increase sales
of its rechargeable batteries to manufacturers of cellular telephones, wireless
headsets, computing devices and electronic portable devices.
Technology Contracts
Through the Company's engineering and sales and marketing departments, the
Company monitors and seeks relevant programs from various government or prime
contracting companies to pursue these opportunities and coordinate proposal
submissions. The Company anticipates a continued decline in this segment due to
the planned reduction of certain non-renewable government contracts.
Patents, Trade Secrets and Trademarks
The Company relies on licenses of technology as well as its unpatented
proprietary information, know-how and trade secrets to maintain and develop its
commercial position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to the Company's
proprietary information. In addition, there can be no assurance that the Company
would prevail if any challenges to intellectual property rights are asserted by
the Company against third parties, or that third parties will not successfully
assert infringement claims against the Company in the future. The Company
believes, however, that its success is less dependent on the legal protection
that its patents and other proprietary rights may or will afford than on the
knowledge, ability, experience and technological expertise of its employees.
The Company holds patents covering 19 inventions in the U.S. and foreign
countries, three of which relate to rechargeable polymer batteries, and has
certain patent applications pending also relating to polymer batteries. The
Company also pursues foreign patent protection in certain countries. The
Company's patents protect technology which 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 advanced
rechargeable battery technology and products is currently based, in part, on
non-exclusive technology transfer agreements. The Company made an initial
payment of one million dollars for such technology and is required to make
royalty and other payments for products which 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.
All of the Company's employees in the U.S. and all the Company's employees
involved with the Company's technology in England are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. These agreements also
contain certain noncompetition and nonsolicitation provisions effective during
the employment term and for a period of one year thereafter. There can be no
assurance that the Company will be able to enforce these agreements.
Following are trademarks of the Company; Ultralife, Ultralife Thin Cell,
Ultralife Hi Rate, Ultralife Polymer, Ultralife Polymer Cell, Ultralife Polymer
Battery, Ultralife Polymer System, New Power Generation.
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component
parts that it purchases. The Company has obtained ISO 9001 certification for its
lithium battery manufacturing operations in both Newark, New York and Abingdon,
England.
Primary Batteries
The Company's Newark facility has the capacity to produce approximately
9,000,000 9-volt batteries per year. The Company believes that its current
manufacturing capacity is adequate to meet customer demand. However, with the
successful passage of certain legislation, demand could exceed current capacity,
which would require the Company to install additional capital equipment to meet
these new needs. The Company utilizes lithium foil as well as other metals and
chemicals to manufacture its
10
batteries. Although the Company knows of only three 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 manufacturing facility in Abingdon, England was rebuilt following a
fire in December 1996. At present, the facility is capable of producing up to
500,000 high-rate lithium cells per year in a single shift. The facility also
has research and development laboratories as well as areas for the manufacture
of seawater-activated batteries and the fabrication of customized multi-cell
battery packs.
Rechargeable Batteries
The Company's production line for advanced polymer rechargeable batteries
consists of automated coating, assembly and packaging equipment capable of
high-volume manufacturing. Pursuant to the Company's agreement with the
manufacturer of its assembly and packaging line, the manufacturer is prohibited
from manufacturing another production line that replicates 20% or more of the
components comprising the production line delivered to the Company. The Company
further expanded its production capacity in fiscal 2001 by installing additional
automated equipment at its Newark, New York facility and has the ability to
further expand as necessary. An additional manufacturing capability for
rechargeable batteries based on the Company's technology has been established in
Taiwan as Ultralife Taiwan, Inc. under a venture established in December 1998.
The new facility has been completed and production commenced in the second half
of fiscal 2001.
Research and Development
The Company conducts its research and development in both Newark, New
York, and Abingdon, England. During the years ended June 30, 2001, 2000, and
1999, the Company expended approximately $3.4 million, $5.3 million, and $5.9
million, respectively, on research and development. R&D expenses were
significantly lower in fiscal 2001 due to the commercial launch and production
of its polymer rechargeable battery, as such, certain costs were shifted to cost
of sales. The Company currently expects that research and development
expenditures will moderate as it seeks to fund part of its research and
development effort on a continuing basis from both government and non-government
sources.
Rechargeable Batteries
The Company is primarily directing its research and development efforts
toward design optimization of rechargeable batteries and customization to
customer specifications. These batteries have a broad range of potential
applications in consumer, industrial and military markets including cellular
telephones, computing devices and other portable electronic devices.
Pouch Cell Lithium Batteries
The Company has been conducting research and development of pouch cell
lithium batteries, which have a broad range of potential applications in
military and industrial markets including radio communications, telematics and
medical devices. Included in the research and development activities are design
programs for specific cells and batteries to develop a volume manufacturing
methodology. The designs will incorporate a lean manufacturing approach to
optimize their construction. No assurance can be given that such efforts will be
successful or that the products that result will be marketable. In June 2000,
the Company announced that it entered into an agreement with the U.S. Army
Communications-Electronics Command (CECOM) to complete the development of its
primary lithium-manganese dioxide Pouch batteries for manufacture in high
volume. Products under this agreement will be produced on a flexible
manufacturing line. The development activities required under this agreement are
expected to last 24 months. CECOM will fund approximately $2.8 million for
engineering efforts. The funding is based on the projected spending by the
11
Company. CECOM considers the Company's pouch technology critical to meeting
their future portable power needs in a safe, cost effective manner, and views it
as inherently safer than the other lithium technology currently in use.
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. The Company has successfully completed the initial and
second phase of a government-sponsored program to develop new configurations of
the Company's BA 7590 pouch cell primary battery, which lasts up to twice as
long and could replace the current BA 5590 battery. The BA 5590 is the most
widely used battery power source for the U.S. Army and NATO communications
equipment. The Company was also awarded an additional cost sharing SBIR Phase
III contract for the development of the BA 7590 pouch cell primary battery that
was substantially completed in fiscal 2000. In 1999, the Company was also
awarded the lead share of a three-year $15.3 million cost-sharing project
sponsored by the U.S. Department of Commerce's Advanced Technology Program
(ATP). The objective of this project is to develop and produce ultra-high energy
polymer rechargeable batteries that will significantly outperform existing
batteries in a broad range of portable electronic and aerospace applications. As
lead contractor, the Company will receive approximately $4.6 million. In fiscal
2001, the Company received $1.6 million, and $.5 million will be received the
next fiscal year, the final year of this contract.
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.
Primary Batteries
The Company's primary battery products incorporate lithium metal, which
reacts with water and may cause fires if not handled properly. Over the past ten
years, the Company has experienced fires that have temporarily interrupted
certain manufacturing operations in a specific area of one of its facilities.
However, in December 1996, a fire at the Abingdon, England facility caused an
interruption in the UK manufacturing operations for a period of 15 months.
During the period from December 1996 through January 1999, the Company received
insurance proceeds compensating the Company for loss of its plant and machinery,
leasehold improvements, inventory and business interruption. The Company
believes that it has adequate fire insurance, including business interruption
insurance, to protect against fire losses in its facilities.
Since lithium metal reacts with water and water vapor, certain of the
Company's manufacturing processes must be performed in a controlled environment
with low relative humidity. Each of the Company's facilities contain dry rooms
as well as specialized air drying equipment.
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 and 3-volt batteries are recognized under the Underwriters Laboratories,
Inc. Component Recognition Program.
The transportation of batteries containing lithium metal is regulated by
the International Air Transportation Association ("IATA") and, in the U.S., by
the Department of Transportation, as well as by certain foreign regulatory
agencies that consider lithium metal a hazardous material. The Company currently
ships its products pursuant to IATA and Department of Transportation
regulations.
National, state and local regulations impose various environmental
controls on the storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although the Company
believes that its operations are in substantial compliance with current
environmental regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Moreover, state and local
governments may enact additional restrictions relating to the disposal of
lithium batteries used by customers of the Company which 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.
12
Corporate
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, the Company received an
environmental assessment, which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $0.2 million. However, there can be no assurance
that this will be the maximum cost. The Company entered into an agreement
whereby a third party has agreed to reimburse the Company for fifty percent of
the costs associated with this matter. Test sampling was completed in Spring
2001 and the Company is awaiting the final engineering report. 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.
Competition
Competition in the battery industry is, and is expected to remain,
intense. The competition ranges from development stage companies to major
domestic and international companies, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than those of the Company. The Company competes against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.
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.
Employees
As of August 31, 2001, the Company employed 481 persons: 32 in research
and development, 387 in production and 62 in sales, administration and
management. Of the total, 411 are employed in the U.S. and 70 in England. In
addition, U.S. operations uses a temporary agency primarily for entry level
production workers, on a regular basis. As of August 31, 2001, the Company was
under contract for 16 production workers. None of the Company's employees is
represented by a labor union. The Company considers its employee relations to be
satisfactory.
ITEM 2. PROPERTIES
The Company occupies under a lease/purchase agreement approximately
250,000 square feet in two facilities located in Newark, New York. The Company
leases approximately 30,000 square feet in a facility based in Abingdon,
England. At both locations, the Company maintains administrative offices,
manufacturing and production facilities, a research and development laboratory,
an engineering department and a machine shop. The Company's corporate
headquarters are located in the Newark facility. The Company also maintains a
sales office in Nutley, New Jersey. The Company believes that its facilities are
adequate and suitable for its current manufacturing needs. 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 $0.44 million and paid the local
governmental authority annual installments in the amount of $0.05 million
through December 2001 decreasing to approximately $0.03 million for the period
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.
13
The Company leases a facility in Abingdon, England. The term of the lease
was recently extended and continues until March 24, 2013. It currently has an
annual rent of $0.24 million and is subject to review every five years based on
current real estate market conditions. The next review is March 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In 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 tortuously 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. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal for a period of at least 120 days, and remanded the case to the
District Court for further proceedings in connection with the proposed
settlement. In the event settlement is not reached, the Company will continue to
defend the case 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is included for quotation on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol "ULBI."
The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock during the Company's last two fiscal years:
Sales Prices
High Low
---- ---
Fiscal Year 2001:
Quarter ended September 30, 2000 $ 13.63 $ 9.81
Quarter ended December 31, 2000 10.19 5.13
Quarter ended March 31, 2001 9.25 5.56
Quarter ended June 30, 2001 5.63 4.88
Fiscal Year 2000:
Quarter ended September 30, 1999 $ 6.13 $ 4.00
Quarter ended December 31, 1999 8.00 3.63
Quarter ended March 31, 2000 15.50 7.00
Quarter ended June 30, 2000 12.88 7.38
During the period from July 1, 2001 through September 21, 2001, the high
and low closing sales prices of the Company's Common Stock were $6.30 and $4.50,
respectively.
Holders
As of August 31, 2001, there were 170 registered holders of record of the
Company's Common Stock. Based upon information from the Company's stock transfer
agent, management of the Company believes that there are more than 3,700
beneficial holders of the Company's Common Stock.
In July 1999, the Company issued 700,000 shares of its Common Stock to
Ultralife Taiwan, Inc. (UTI) in exchange for $8.75 million in cash.
Subsequently, in September 1999, the Company contributed $8.75 million in cash
to the UTI venture. This cash contribution coupled with the contribution of the
Company's technology resulted in approximately a 46% ownership interest in UTI.
The transaction was done in conjunction with the UTI agreement that was
announced by the Company in December 1998. Subsequently, the Company's interest
in UTI has been reduced to 41% due to stock issuances to certain UTI employees.
See also History in Item 1 of this Annual Report.
On July 20, 2001, the Company completed a $6.8 million private placement
of 1,090,000 shares of its common stock at $6.25 per share. In conjunction with
the offering, warrants to acquire up to 109,000 shares of common stock were
granted. The exercise price of the warrants is $6.25 per share and the warrants
have a five-year term. 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 stockholders of the Company.
Dividends
The Company has never declared or paid any cash dividend on its capital
stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any future payment of dividends will depend
upon the financial condition, capital requirements and earnings of the Company,
as well as upon other factors that the Board of Directors may deem relevant.
Additionally, pursuant to the credit facility between the Company and Congress
Financial Corporation (New England), the Company shall not declare or pay any
dividends under the covenants specified in the loan agreement.
15
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Statement of Operations Data:
Year Ended June 30,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 24,163 $ 24,514 $ 21,064 $ 16,391 $ 15,941
Cost of products sold 27,696 25,512 19,016 14,522 15,118
---------------------------------------------------------------------
Gross margin (3,533) (998) 2,048 1,869 823
---------------------------------------------------------------------
Research and development expenses 3,424 5,306 5,925 6,651 3,413
Selling, general and administrative expenses 8,009 7,385 6,195 5,790 5,218
Loss on China development program -- -- -- -- 805
Loss on fires -- -- (1,288) (2,697) (56)
---------------------------------------------------------------------
Total operating and other expenses 11,433 12,691 10,832 9,744 9,380
Interest income, net 166 909 1,456 888 1,352
Equity loss in affiliate (2,338) (818) (80) -- --
Gain on sale of securities -- 3,147 348 -- --
Other (expense) income, net (124) 209 (25) (33) (41)
---------------------------------------------------------------------
Loss before income taxes (17,262) (10,242) (7,085) (7,020) (7,246)
Income taxes -- -- -- -- --
---------------------------------------------------------------------
Net loss $(17,262) $(10,242) $ (7,085) $ (7,020) $ (7,246)
=====================================================================
Net loss per share, basic and diluted $ (1.55) $ (0.94) $ (0.68) $ (0.84) $ (0.91)
=====================================================================
Weighted average number
of shares outstanding 11,141 10,904 10,485 8,338 7,923
=====================================================================
Balance Sheet Data:
June 30,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Cash and available-for-sale securities $ 3,607 $ 18,639 $ 23,556 $ 35,688 $ 22,158
Working Capital $ 6,821 $ 22,537 $ 28,435 $ 37,745 $ 27,205
Total Assets $ 47,203 $ 64,460 $ 66,420 $ 75,827 $ 51,395
Total long-term debt and capital lease obligations $ 2,648 $ 3,567 $ 215 $ 197 $ --
Stockholders' Equity $ 37,453 $ 54,477 $ 60,400 $ 68,586 $ 46,763
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
RESULTS OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Annual Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forward-looking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, the successful commercialization of the
Company's advanced rechargeable batteries, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fires, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected. See Risk Factors in Item 7.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized primary lithium and polymer rechargeable batteries
for use in a wide array of applications. The Company believes that its
proprietary technologies allow the Company to offer batteries that are
ultra-thin, lightweight and generally achieve longer operating time than many
competing batteries currently available. To date, the Company has focused on
manufacturing a family of lithium primary batteries for consumer, industrial,
and military applications which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company has introduced its advanced polymer rechargeable batteries which are
based on its proprietary technology for use in portable electronic applications.
The Company has incurred net operating losses primarily as a result of
funding research and development activities and, to a lesser extent,
manufacturing and general and administrative costs. To date, the Company has
devoted a substantial portion of its resources to the research and development
of its products and technology, particularly its proprietary polymer
rechargeable technology. The Company expects its operating expenses to increase
as it continues to expand production activities. The Company's results of
operations may vary significantly from quarter to quarter depending upon the
number of orders received and the pace of the Company's research and development
activities. Currently, the Company does not experience significant seasonal
trends in primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
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.
Results of Operations
Fiscal Year Ended June 30, 2001 Compared With the Fiscal Year Ended June 30,
2000
Revenues. Total revenues of the Company decreased $351,000 from
$24,514,000 for the year ended June 30, 2000 to $24,163,000 for the year ended
June 30, 2001. Primary battery sales increased $265,000 from $21,840,000 for the
year ended June 30, 2000 to $22,105,000 for the year ended June 30, 2001. The
increase in primary battery sales was primarily due to the introduction of new
cylindrical products in fiscal 2001 and an increase in 9-volt battery shipments
related to higher demand. These increases were offset by a decline in sales from
the UK subsidiary due to the delay in renewing a government contract.
Rechargeable battery sales increased $345,000 from $25,000 for the year ended
June 30, 2000 to $370,000 for the year ended June 30, 2001, mainly as a result
of the commercial launch of the Company's polymer batteries in June 2000 and
17
shipments of retail and custom-sized batteries. Technology contract revenues
decreased $961,000, from $2,649,000 to $1,688,000 due to the scheduled reduction
of certain nonrenewable government contracts. The Company expects revenues from
technology contracts to continue to decline in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $2,184,000 from
$25,512,000 for the year ended June 30, 2000 to $27,696,000 for the year ended
June 30, 2001. Cost of products sold as a percentage of revenue increased from
approximately 104% to 115% for the year ended June 30, 2001. Cost of primary
batteries sold decreased $1,990,000 from $23,084,000, or 106% of revenues, for
the year ended June 30, 2000 to $21,094,000, or 95% of revenues, for the year
ended June 30, 2001. The decrease in cost of primary batteries sold as a
percentage of revenues was principally the result of improvements in the
manufacturing process due to the implementation of lean manufacturing practices.
To date, lean manufacturing practices in the primary battery segment have
resulted in the reduction of inventory, quicker manufacturing throughput times
and improvements in operating efficiencies throughout the Company. In fiscal
2001, the improvements in gross margins in the primary segment were offset by
losses in the rechargeable segment. Rechargeable battery cost of products sold
increased $5,040,000 in fiscal 2001 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 $2,000,000 in additional depreciation for the year, as equipment
was placed in service. Prior to commencing production of polymer cells, most of
these costs, including engineering, were charged to research and development.
Technology contracts cost of sales decreased $866,000, or approximately 36%,
from $2,403,000 for the year ended June 30, 2000 to $1,537,000 for the year
ended June 30, 2001. Technology contracts cost of sales as a percentage of
revenue was consistent year over year.
Operating and Other Expenses. Operating and other expenses decreased
$1,258,000 from $12,691,000 for the year ended June 30, 2000 to $11,433,000 for
the year ended June 30, 2001. Operating and other expenses as a percentage of
revenue decreased from approximately 52% to 47% for the year ended June 30,
2001. Of the Company's operating and other expenses, research and development
expenses decreased $1,882,000, or 36% from $5,306,000 for the year ended June
30, 2000 to $3,424,000 for the year ended June 30, 2001. Research and
development expenses decreased due to the commercial launch of polymer
rechargeable in June 2000, which shifted costs to cost of sales. Selling,
general and administration expenses increased $624,000, approximately 8%, from
$7,385,000 for the year ended June 30, 2000 to $8,009,000 for the year ended
June 30, 2001. Selling and marketing expenses increased as a result of new sales
people added to significantly enhance the Company's overall market coverage.
Other Income (Expense). Net interest income decreased $743,000 from
$909,000 for the year ended June 30, 2000 to $166,000 for the year ended June
30, 2001. The decrease in interest income is the result of lower average
balances on cash and investment securities which were used for operations. The
equity loss of $2,338,000 in fiscal 2001 and $818,000 in fiscal 2000 resulted
from the Company's ownership interest in its venture in Taiwan. The increase in
the equity loss includes compensation expense related to a stock distribution to
UTI employees totaling $2,500,000. The Company recognized approximately $900,000
equity loss for the transaction representing its share of the total UTI expense.
The gain on sale of securities of $3,147,000 in fiscal 2000 resulted from the
sale of the Company's investment in Intermagnetics General Corporation common
shares. No similar sale of securities occurred in 2001.
Net Losses. Net losses increased $7,020,000, or approximately 69%, from
$10,242,000, or $0.94 per share, for the year ended June 30, 2000 to
$17,262,000, or $1.55 per share, for the year ended June 30, 2001, primarily as
a result of the reasons described above.
Fiscal Year Ended June 30, 2000 Compared With the Fiscal Year Ended June 30,
1999
Revenues. Total revenues of the Company increased $3,450,000 from
$21,064,000 for the year ended June 30, 1999 to $24,514,000 for the year ended
June 30, 2000. Primary battery sales increased $2,281,000 or approximately 12%
from $19,559,000 for the year ended June 30, 1999 to $21,840,000 for the year
ended June 30, 2000. The increase in primary battery sales was primarily due to
an increase in BA-5372 battery shipments. Greater sales of high rate and 9-volt
batteries also contributed to the increased revenue. Rechargeable battery sales
amounted to $25,000 for the year ended June 30, 2000 Rechargeable battery
revenues were $24,000 less than in the prior year due to fewer shipments in
fiscal 2000 as compared to fiscal 1999. Technology contract revenues increased
$1,193,000, or 82%, from $1,456,000 to $2,649,000 reflecting a full year of the
Company's involvement with one key development program. In April 1999, the
Company commenced work on a $15,300,000 cost-sharing project sponsored by the
U.S. Department of Commerce's Advanced Technology Program (ATP). As
18
lead contractor, the Company will receive approximately $4,600,000 during the
three-year program. In fiscal 2000, the Company recorded revenues of $2,235,000
for the ATP program, compared with $267,000 in fiscal 1999.
Cost of Products Sold. Cost of products sold increased $6,496,000 from
$19,016,000 for the year ended June 30, 1999 to $25,512,000 for the year ended
June 30, 2000. Cost of products sold as a percentage of revenue increased from
approximately 90% to 104% for the year ended June 30, 2000. Cost of primary
batteries sold increased $5,273,000 from $17,811,000, or 91% of revenues, for
the year ended June 30, 1999 to $23,084,000, or 106% of revenues, for the year
ended June 30, 2000. The increase in cost of primary batteries sold as a
percentage of revenues was principally the result of costs related to the
implementation of lean manufacturing practices and higher material costs in
fiscal 2000. Also, receipt of insurance proceeds of $1,547,000 reduced the cost
of products sold in fiscal 1999. To date, lean manufacturing practices have
resulted in the reduction of inventory, quicker manufacturing throughput times
and improvements in operating efficiencies throughout the Company. Technology
contracts cost of sales increased $1,245,000, or approximately 108%, from
$1,158,000 for the year ended June 30, 1999 to $2,403,000 for the year ended
June 30, 2000. Technology contracts cost of sales as a percentage of revenue
increased from 80% to 91% for the year ended June 30, 2000, reflecting a change
in the mix of contracts.
Operating and Other Expenses. Operating and other expenses increased
$1,859,000 from $10,832,000 for the year ended June 30, 1999 to $12,691,000 for
the year ended June 30, 2000. Operating and other expenses as a percentage of
revenue increased slightly from approximately 51% to 52% for the year ended June
30, 2000. Of the Company's operating and other expenses, research and
development expenses decreased $619,000, or 10% from $5,925,000 for the year
ended June 30, 1999 to $5,306,000 for the year ended June 30, 2000. Research and
development expenses decreased as a result of a shift in resources to the U.S.
Department of Commerce's ATP Program and a narrower focus on key rechargeable
development programs. Selling, general and administration expenses increased
$1,190,000, approximately 19%, from $6,195,000 for the year ended June 30, 1999
to $7,385,000 for the year ended June 30, 2000. Selling and administrative
expenses increased as a result of certain one-time costs relating mostly to
legal fees and settlement costs associated with the conclusion of several legal
matters, as well as additional expenditures required to build an infrastructure
necessary to support the volume production of polymer rechargeable batteries.
Lastly, the gain on fires of $1,288,000 for the year ended June 30, 1999
resulted from the receipt of insurance proceeds to replace assets previously
written off due to fires at Ultralife UK.
Other Income (Expense). Net interest income decreased $547,000 from
$1,456,000 for the year ended June 30, 1999 to $909,000 for the year ended June
30, 2000. The decrease in interest income is the result of lower average
balances on cash and investment securities which were used for operations. The
equity loss of $818,000 in fiscal 2000 and $80,000 in fiscal 1999 resulted from
the Company's ownership interest in its venture in Taiwan. The gain on sale of
securities of $3,147,000 and $348,000 in fiscal 2000 and 1999, respectively,
resulted from the sale of the Company's investment in Intermagnetics General
Corporation common shares.
Net Losses. Net losses increased $3,157,000, or approximately 45%, from
$7,085,000, or $0.68 per share, for the year ended June 30, 1999 to $10,242,000,
or $0.94 per share, for the year ended June 30, 2000, primarily as a result of
the reasons described above.
Liquidity and Capital Resources
As of June 30, 2001, cash equivalents and available for sale securities
totaled $3,607,000. During the year ended June 30, 2001, the Company used
$10,406,000 of cash in operating activities as compared to $10,532,000 for the
year ended June 30, 2000. The change in cash used in operations is the result of
the net loss for the year, and an increase in other current assets offset by
higher depreciation and amortization expenses, equity losses, increased
provisions for inventory obsolescence and higher accounts payable. Months cost
of sales in inventory at June 30, 2001 was 2.6 months as compared to 2.8 months
at June 30, 2000. In the year ended June 30, 2001, the Company used $4,367,000
to purchase plant, property and equipment. Of this amount, $2,241,000 relates to
the acquisition of machinery and equipment for the Company's primary battery
operations, $1,382,000 relates to rechargeable battery machinery and equipment
and the balance is substantially for facilities upgrades.
In June 2000, the Company entered into a $20,000,000 secured credit
facility with a lending institution. The financing agreement consists of an
initial $12,000,000 term loan component (of which approximately $3,333,000
million was outstanding at June 30, 2001) and a revolving credit facility
component for an initial $8,000,000, 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
19
June 30, 2001. The amount available under the term loan component amortizes over
time. 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 substantially all of
the Company's assets and the Company is precluded from paying dividends under
the terms of the agreement. The total amount available under the term loan
component is reduced by outstanding letters of credit. The Company had
$1,900,000 outstanding on a letter of credit as of June 30, 2001 and the
Company's additional borrowing capacity as of June 30, 2001 was approximately
$6,900,000.
On June 1, 2001, the Company and its commercial lender agreed to revise
downward the adjusted net worth covenant to better reflect the Company's equity
position. The revised covenant requires the Company to maintain adjusted net
worth (as defined) of at least $35,000,000. As of June 30, 2001, the Company was
in compliance with all covenants.
At June 30, 2001, the Company had a capital lease obligation outstanding
of $150,000 for the Company's Newark, New York offices and manufacturing
facilities. In addition, the Company had a capital lease on computer equipment,
which had an outstanding balance of $212,000 at June 30, 2001.
As of June 30, 2001, the Company has made commitments to purchase
approximately $1,640,000 of production machinery and equipment.
The Company believes that its present cash position and cash flows from
operations will be sufficient to satisfy the Company's estimated cash
requirements for at least 12 months. However, this is dependent upon meeting
anticipated sales and expense targets.
On July 20, 2001, the Company completed a $6,800,000 private placement of
1,090,000 shares of its common stock at $6.25 per share. In conjunction with the
offering, warrants to acquire up to 109,000 shares of common stock were granted.
The exercise price of the warrants is $6.25 per share and the warrants have a
five-year term.
Outlook
Looking ahead for fiscal year 2002, the Company expects to achieve more
than a 40% increase in revenues over fiscal year 2001. The Company is projecting
growth in virtually all major areas of its business - 9 volt, standard
cylindricals, high rate, and rechargeable. The Company expects to take advantage
of its ability to customize and develop new products that will continue to
enhance growth throughout the year. Management of the Company has set two key
financial goals; to reach operating cash breakeven by December 2001, and to
attain positive net income by June 2002. There are three factors that will be
critical to the Company's success in meeting these goals. First, the
rechargeable segment must begin to successfully obtain design wins which will
produce significant sales and match those sales with solid manufacturing yields.
The Company is very optimistic about the opportunities in rechargeable and
believes that it is only a matter of time before the Company starts to see these
production orders. Second, the Company must continue to increase revenues from
existing products in the primary segment. Again, the Company is confident in its
ability to meet this objective. Lastly, the Company must continue to develop new
primary battery products, for markets such as military, medical, and automotive
telematics. The Company feels very strongly about its new product development
efforts and believes it is well positioned for success in these areas. At this
time, the Company does not foresee any adverse impacts on demand due to the
tragic events occurring in the United States on September 11, 2001.
Risk Factors
Uncertainty of Market Acceptance of Advanced Rechargeable Batteries
Although the Company has begun volume production of our rechargeable
batteries, advanced rechargeable batteries have not yet achieved wide acceptance
in the market. The Company cannot assure that a market will ever accept its
advanced rechargeable batteries. The introduction of new products is subject to
the inherent risks of unforeseen delays and the time necessary to achieve market
success for any individual product is uncertain. If volume production and/or
market penetration of the Company's advanced rechargeable batteries is delayed
for any reason, competitors may introduce emerging technologies or improve
existing technologies which could have a material adverse effect on the
Company's business, financial condition and results of operations.
20
Dependence on OEM Relationships and their products for Sale of Advanced
Rechargeable Batteries
The Company will continue to promote market demand for, and awareness of,
its advanced rechargeable batteries. The Company will accomplish this partly
through the development of relationships with OEMs that manufacture products
which require the performance characteristics of advanced rechargeable
batteries. The success of any such relationship depends upon the general
business condition of the OEM and the Company's ability to produce advanced
rechargeable batteries at the quality and cost and within the period required by
such OEMs. The failure to develop a sufficient number of relationships with OEMs
could have a material adverse effect on its business, financial condition and
results of operations.
A substantial portion of the Company's business will depend upon the
success of products sold by OEMs that use its batteries. Therefore, the
Company's success is substantially dependent upon the acceptance of the OEMs'
products in the marketplace. 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 the Company's technology or products faced by the OEM in developing
its products; and, the financial and other resources of the OEM.
Risks Relating to Growth and Expansion
Rapid growth of the Company's advanced rechargeable battery business or
other segments of its business may significantly strain management, operations
and technical resources. If the Company is successful in obtaining rapid market
growth of its advanced rechargeable 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. The Company cannot assure, however, that
business will rapidly grow or that its efforts to expand manufacturing and
quality control activities will be successful or that the Company will be able
to satisfy commercial scale production requirements on a timely and
cost-effective basis. The Company will also be required to continue to improve
its operations, management and financial systems and controls. The failure to
manage growth effectively could have an adverse effect on business, financial
condition and results of operations.
Competition; Technological Obsolescence
The primary and rechargeable battery industry is characterized by intense
competition with a large number of companies offering or seeking to develop
technology and products similar to the Company's. The Company is subject to
competition from manufacturers of traditional rechargeable batteries, such as
nickel-cadmium batteries, from manufacturers of rechargeable batteries of more
recent technologies, such as nickel-metal hydride, lithium-ion liquid
electrolyte and lithium-ion solid-polymer batteries, as well as from companies
engaged in the development of batteries incorporating new technologies.
Manufacturers of nickel-cadmium and nickel-metal hydride batteries include
Eveready, Sanyo Electric Co. Ltd., Sony Corp., Toshiba Corp., Matsushita
Electric Industrial Co., Ltd. and Duracell International, Inc. Manufacturers of
lithium-ion liquid electrolyte batteries currently include Saft-Soc des ACC,
Sony Corp., Toshiba Corp., Matsushita Electric Industrial Co., Ltd., Sanyo
Electric Co. Ltd. and Duracell International, Inc. Valence Technology, Inc.,
Lithium Technology Corporation, and Yuasa-Exide, Inc. have developed prototype
solid-polymer batteries and are constructing commercial-scale manufacturing
facilities. The Company also competes with large and small manufacturers of
alkaline, carbon-zinc, seawater, high rate and primary batteries as well as
other manufacturers of lithium batteries. The Company cannot assure that it will
successfully compete with these manufacturers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and
other resources. Many companies with substantially greater resources are
developing a variety of battery technologies, including liquid electrolyte
lithium and solid electrolyte lithium batteries, which are expected to compete
with the Company's technology. Other companies undertaking research and
development activities of solid-polymer batteries have already developed
prototypes and are constructing commercial scale production facilities. If these
companies successfully market their batteries before the introduction of the
Company's products, there could be a material adverse effect on its business,
financial condition and results of operations. 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, particularly the 9-volt and
advanced rechargeable 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.
21
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 business, financial condition and results of
operations. In addition to developing manufacturing capacity to produce high
volumes of our advanced rechargeable batteries, the Company must attract,
recruit and retain a sizeable workforce of technically competent employees. The
Company's ability to pursue effectively its business strategy will depend upon,
among other factors, the successful recruitment and retention of additional
highly skilled and experienced managerial, marketing, engineering and technical
personnel. The Company cannot assure that it will be able to retain or recruit
this type of personnel.
Safety Risks; Demands of Environmental and Other Regulatory Compliance
Components of the Company's batteries contain certain elements that are
known to pose safety risks. Primary battery products incorporate lithium metal,
which when it reacts with water may cause fires if not handled properly. In
addition to a December 1996 fire at the Abingdon, England facility, a fire
occurred August 1997 at the Newark, New York facility and fires occurred in July
1994 and September 1995 at the Abingdon, England facility, each of which
temporarily interrupted certain manufacturing operations in a specific area of
these facilities. Although the Company incorporates safety procedures in
research, development and manufacturing processes that are designed to minimize
safety risks, the Company cannot assure that more accidents will not occur.
Although the Company currently carries insurance policies which cover loss of
the plant and machinery, leasehold improvements, inventory and business
interruption, any accident, whether at the manufacturing facilities or from the
use of the products, may result in significant production delays or claims for
damages resulting from injuries. These types of losses could have a material
adverse effect on the business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which it has sent waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers which could have a material adverse effect on business, financial
condition and results of operations. In addition, the U.S. Department of
Transportation and certain foreign regulatory agencies that consider lithium to
be a hazardous material regulate the transportation of batteries which contain
lithium metal. The Company currently ships lithium batteries in accordance with
regulations established by the U.S. Department of Transportation. There can be
no assurance that additional or modified regulations relating to the
manufacture, transportation, storage, use and disposal of materials used to
manufacture our batteries or restricting disposal of batteries will not be
imposed or how these regulations will affect the Company or its customers.
In connection with our purchase/lease of the Newark, New York facility in
1998, a consulting firm performed a Phase I and II Environmental Site Assessment
which revealed the existence of contaminated soil and ground water around one of
the buildings. The Company retained an engineering firm which estimated that the
cost of remediation should be in the range of $230,000. This cost, however, is
merely an estimate and the cost may in fact be much higher. In February 1998,
the Company entered into an agreement with a third party which provides that the
Company and this third party will retain an environmental consulting firm to
conduct a supplemental Phase II investigation to verify the existence of the
contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse the Company for fifty percent of the cost of
correcting the environmental concern on the Newark property. The Company cannot
assure that it will not face claims resulting in substantial liability which
would have a material adverse effect on business, financial condition and
results of operations in the period in which such claims are resolved.
Limited Sources of Supply
Certain materials used in products are available only from a single or a
limited number of suppliers. Additionally, the Company may elect to develop
relationships with a single or limited number of suppliers for materials that
are otherwise generally available. 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
22
alternatives, any interruption in the supply from any supplier that serves as a
sole source could delay product shipments and have a material adverse effect on
the business, financial condition and results of operations. Although the
Company has experienced interruptions of product deliveries by sole source
suppliers, these interruptions have not had a material adverse effect on the
business, financial condition and results of operations. The Company cannot
guarantee that it will not experience a material interruption of product
deliveries from sole source suppliers.
Dependence on Proprietary Technologies
The Company's success depends more on the knowledge, ability, experience
and technological expertise of its employees than on the legal protection of
patents and other proprietary rights. The Company claims proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating
to products and manufacturing processes. The Company cannot guarantee the degree
of protection these various claims may or will afford, or that competitors will
not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technology. The Company protects its
proprietary rights in its products and operations through contractual
obligations, including nondisclosure agreements with certain employees,
customers, consultants and strategic partners. There can be no assurance as to
the degree of protection these contractual measures may or will afford. The
Company, however, have had patents issued and patent applications pending in the
U.S. and elsewhere. The Company cannot assure (i) that patents will be issued
from any pending applications, or that the claims allowed under any patents will
be sufficiently broad to protect its technology, (ii) that any patents issued to
the Company will not be challenged, invalidated or circumvented, or (iii) as to
the degree or adequacy of protection any patents or patent applications may or
will afford. If the Company is found to be infringing third party patents, there
can be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. The failure to obtain necessary licenses
could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development,
manufacture or sale of products.
Dependence on Technology Transfer Agreements
The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. There can be no
assurance that competitors will not develop, independently or through the use of
similar technology transfer agreements, rechargeable battery technology or
products that are substantially equivalent or superior to the technologies and
products currently under research and development.
Risks Related to China Joint Venture Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China
Battery"), purchased certain technology, equipment, training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company has been attempting to collect the balance
due under this contract. China Battery has indicated that it will not make these
payments until certain contractual issues have been resolved. Due to China
Battery's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed as well as its investment aggregating $805,000. Since
China Battery has not purchased technology, equipment, training or consulting
services to produce batteries other than 2/3 A lithium batteries, the Company
does not believe that China Battery has the capacity to become a competitor. The
Company does not anticipate that the manufacturing or marketing of 2/3 A lithium
batteries will be a substantial portion of its product line in the future.
However, in December 1997, China Battery sent a letter demanding reimbursement
of an unspecified amount of losses they have incurred plus a refund for certain
equipment that was sold to China Battery. The Company has attempted to initiate
negotiations to resolve the dispute. However, an agreement has not yet reached.
Although China Battery has not taken any additional steps, there can be no
assurance that China Battery will not further pursue such a claim which, if
successful, would have a material adverse effect on business, financial
condition and results of operations. The Company believes that such a claim is
without merit.
23
Ability to Insure Against Losses
Because certain of the Company's primary batteries are used in a variety
of security and safety products and medical devices, it may be exposed to
liability claims if such a battery fails to function properly. The Company
maintains what it believes to be sufficient liability insurance coverage to
protect against potential claims; however, there can be no assurance that the
liability insurance will continue to be available, or that any such liability
insurance would be sufficient to cover any claim or claims.
Possible Volatility of Stock Price
Future announcements concerning the Company or its competitors, including
technological innovations or commercial products, litigation or public concerns
as to the safety or commercial value of one or more of its products, may cause
the market price of its Common Stock to fluctuate substantially for reasons
which may be unrelated to operating results. These fluctuations, as well as
general economic, political and market conditions, may have a material adverse
effect on the market price of our Common Stock.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently invest in derivative financial instruments.
More than 88% of the Company's sales are denominated in U.S. dollars. The
remainder of the Company's sales are denominated in U.K. pound sterling. A 10%
change in the value of the pound sterling to the U.S. dollar would impact the
Company's revenues by less than 1%. The Company monitors the relationship
between the U.S. and U.K. currencies on a continuous basis and adjusts sales
prices for products and services sold in pound sterling as appropriate to
safeguard the currency effects between the U.S dollar and U.K. pound sterling.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on page 26.
Page
----
Report of Independent Public Accountants,
Arthur Andersen LLP 26
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 and 2000 27
Consolidated Statements of Operations for the years ended
June 30, 2001, 2000 and 1999 28
Consolidated Statements of Changes in Shareholders' Equity and
Accumulated Other Comprehensive Loss for the years ended
June 30, 2001, 2000 and 1999 29
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000 and 1999 30
Notes to Consolidated Financial Statements 31
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and accumulated other comprehensive income (loss) and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ultralife Batteries, Inc. and
subsidiary as of June 30, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2001,
in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
August 16, 2001 (except with respect to the matter discussed in Note 14, as to
which the date is December 12, 2001)
26
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
June 30,
ASSETS 2001 2000
---- ----
Current assets:
Cash and cash equivalents $ 494 $ 5,712
Available-for-sale securities 3,113 12,927
Trade accounts receivable (less allowance for doubtful accounts
of $262 and $268 at June 30, 2001 and 2000, respectively) 3,379 3,456
Other receivables 736 --
Inventories 5,289 5,682
Prepaid expenses and other current assets 912 1,176
-------- --------
Total current assets 13,923 28,953
Property, plant and equipment 32,997 32,785
Other assets:
Investment in affiliates -- 2,339
Technology license agreements (net of accumulated
amortization of $1,168 and $1,068 at June 30, 2001 and 2000,
respectively) 283 383
-------- --------
283 2,722
-------- --------
Total Assets $ 47,203 $ 64,460
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,065 $ 1,087
Accounts payable 3,755 2,886
Accrued compensation 427 338
Other current liabilities 1,855 2,105
-------- --------
Total current liabilities 7,102 6,416
Long - term liabilities:
Long-term debt and capital lease obligations 2,648 3,567
Commitments and contingencies (Note 6)
Shareholders' Equity :
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding -- --
Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 11,488,186 and 11,410,286 at June 30, 2001 and 2000, respectively 1,149 1,141
Capital in excess of par value 99,389 98,790
Accumulated other comprehensive income (loss) (1,058) (689)
Accumulated deficit (61,724) (44,462)
-------- --------
37,756 54,780
Less --Treasury stock, at cost -- 27,250 shares 303 303
-------- --------
Total Shareholders' Equity 37,453 54,477
-------- --------
Total Liabilities and Shareholders' Equity $ 47,203 $ 64,460
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
27
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Year ended June 30,
2001 2000 1999
---- ---- ----
Revenues $ 24,163 $ 24,514 $ 21,064
Cost of products sold 27,696 25,512 19,016
-------- -------- --------
Gross margin (3,533) (998) 2,048
Operating and other expenses (income):
Research and development 3,424 5,306 5,925
Selling, general, and administrative 8,009 7,385 6,195
Gain on fires -- -- (1,288)
-------- -------- --------
Total operating and other expenses, net 11,433 12,691 10,832
Operating loss (14,966) (13,689) (8,784)
Other income (expense):
Interest income 702 958 1,456
Interest expense (536) (49) --
Equity loss in affiliate (2,338) (818) (80)
Gain on sale of securities -- 3,147 348
Miscellaneous (expense) income (124) 209 (25)
-------- -------- --------
Loss before income taxes (17,262) (10,242) (7,085)
Income taxes -- -- --
-------- -------- --------
Net loss $(17,262) $(10,242) $ (7,085)
======== ======== ========
Net loss per share, basic and diluted $ (1.55) $ (0.94) $ (0.68)
======== ======== ========
Weighted average number of shares outstanding,
basic and diluted 11,141 10,904 10,485
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive Income (Loss)
-------------------------------------
(Dollars in Thousands) Foreign
Common Stock Capital in Currency Unrealized
------------------------- excess of Translation Net Gain on Accumulated
Number of Shares Amount Par Value Adjustment Securities Deficit
Balance as of June 30, 1998 10,512,386 $1,051 $93,605 $ 358 $1,010 $(27,135)
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (459)
Unrealized net loss on securities (642)
Other comprehensive loss
Comprehensive loss
-------------------------------------------------------------------------------
Balance as of June 30, 1999 10,512,386 $1,051 $93,605 $(101) $368 $(34,220)
-------------------------------------------------------------------------------
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (590)
Unrealized net loss on securities (366)
Other comprehensive loss
Comprehensive loss
Shares issued to affiliate 700,000 70 3,168
Shares issued under stock option plans and
other stock options 197,900 20 2,017
-------------------------------------------------------------------------------
Balance as of June 30, 2000 11,410,286 $1,141 $98,790 $(691) $ 2 $(44,462)
-------------------------------------------------------------------------------
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (368)
Unrealized net loss on securities (1)
Other comprehensive loss
Comprehensive loss
Shares issued under stock option plans and
other stock options 77,900 8 599
-------------------------------------------------------------------------------
Balance as of June 30, 2001 11,488,186 $1,149 $99,389 $(1,059) $ 1 $(61,724)
-------------------------------------------------------------------------------
Treasury
Stock Total
Balance as of June 30, 1998 $ (303) $ 68,586
Comprehensive loss:
Net loss (7,085) (7,085)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (459)
Unrealized net loss on securities (642)
--------
Other comprehensive loss (1,101)
--------
Comprehensive loss (8,186)
--------
-----------------------------
Balance as of June 30, 1999 $ (303) $ 60,400
-----------------------------
Comprehensive loss:
Net loss (10,242) (10,242)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (590)
Unrealized net loss on securities (366)
--------
Other comprehensive loss (956)
--------
Comprehensive loss (11,198)
--------
Shares issued to affiliate 3,238
Shares issued under stock option plans and
other stock options 2,037
----------------------------
Balance as of June 30, 2000 $ (303) $ 54,477
----------------------------
Comprehensive loss:
Net loss (17,262) (17,262)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (368)
Unrealized net loss on securities (1)
--------
Other comprehensive loss (369)
--------
Comprehensive loss (17,631)
--------
Shares issued under stock option plans and
other stock options 607
----------------------------
Balance as of June 30, 2001 $ (303) $ 37,453
----------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended June 30,
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES
Net loss $(17,262) $(10,242) $ (7,085)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,811 2,038 2,205
Gain on sale of securities -- (3,147) (348)
Equity loss in affiliate 2,338 818 80
Provision for loss on accounts receivable (6) 42 271
Provision for inventory obsolescence 12 410 68
Changes in operating assets and liabilities:
Accounts receivable 83 56 (779)
Inventories 381 (1,074) (1,175)
Prepaid expenses and other current assets (471) 936 32
Accounts payable and other current liabilities 708 (369) (1,296)
-------- -------- --------
Net cash used in operating activities (10,406) (10,532) (8,027)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (4,367) (2,946) (3,427)
Investment in affiliates -- (3,237) --
Purchase of securities (26,794) (70,934) (94,417)
Sales of securities 22,905 46,064 75,130
Maturities of securities 13,702 37,504 31,029
-------- -------- --------
Net cash provided by investing activities 5,446 6,451 8,315
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 607 5,275 --
Proceeds from issuance of debt -- 4,423 115
Principal payments under long-term debt and capital leases (941) (91) (40)
-------- -------- --------
Net cash (used in) provided by financing activities (334) 9,607 75
-------- -------- --------
Effect of exchange rate changes on cash 76 (590) (459)
-------- -------- --------
Change in cash and cash equivalents (5,218) 4,936 (96)
-------- -------- --------
Cash and cash equivalents at beginning of period 5,712 776 872
-------- -------- --------
Cash and cash equivalents at end of period $ 494 $ 5,712 $ 776
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 538 $ 42 $ 40
Cash paid for taxes $ -- $ -- $ --
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
30
Note 1-Summary of Operations and Significant Accounting Policies
a. Description of Business
Ultralife Batteries, Inc. (the "Company") develops, manufactures, and
markets a wide range of standard and customized primary lithium and polymer
rechargeable batteries. The Company's primary manufacturing and research and
development (R&D) facility is in Newark, New York. The Company also maintains a
production and R&D facility in Abingdon, England.
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.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits with financial institutions and financial
instruments with original maturities of three months or less to be cash
equivalents.
e. 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 amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity or
in the case of mortgage-backed securities, over the estimated life of the
security. 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.
f. Inventories
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.
31
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
g. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives
are as follows:
Buildings 20 years
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 3 - 7 years
Computer Hardware and Software 3 - 5 years
Leasehold Improvements Lease term
Depreciation and amortization are computed using the straight-line method.
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance costs are expensed when
incurred. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income (expense).
h. Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying
amount of a long-lived asset may be impaired, an evaluation of recoverability
would be performed. If an impairment is determined to exist, a loss is
recognized to the extent the carrying value of the asset is in excess of its
fair value. The Company did not record any impairments of long-lived assets in
2001, 2000 or 1999.
i. Technology License Agreements
Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired two technology license
agreements for an initial payment of $1,000 in May 1994 and $100 in September
1997. Royalties are payable at a rate of 8% and an initial rate of 4%,
respectively, 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 these agreements.
The agreements are amortized using the straight-line method over 3 to 10 years.
During 1998, in connection with the settlement of a lawsuit, the Company
acquired an additional technology license agreement for $350, which expired in
May 1999.
Amortization expense was $100, $100, and $407 in 2001, 2000, and 1999,
respectively.
j. Translation of Foreign Currency
The financial statements of the Company's foreign affiliates are
translated into U.S. dollar equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation".
Exchange gains or losses included in net loss for the years ended June 30, 2001,
2000 and 1999 were not significant.
k. Revenue Recognition
Battery Sales
Revenues from the sale of batteries are recognized when products are
shipped. A provision is made at that time for warranty costs expected to be
incurred.
32
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
Technology Contracts
The Company recognizes revenue using the percentage of completion method
based on the relationship of costs incurred to date to the total estimated cost
to complete the contract. Elements of cost include direct material, labor and
overhead. If a loss on a contract is estimated, the full amount of the loss is
recognized immediately. The Company allocates costs to all technology contracts
based upon actual costs incurred including an allocation of certain research and
development costs incurred. Under certain research and development arrangements
with the U.S. Government, the Company may be required to transfer technology
developed to the U.S. Government. The Company has accounted for the contracts in
accordance with SFAS No. 68, "Research and Development Arrangements". The
Company, where appropriate, has recognized a liability for amounts that may be
repaid to third parties, or for revenue deferred until expenditures have been
incurred.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements". This guidance summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This staff bulletin had no significant impact on the Company's
revenue recognition policy or results of operations.
l. Research and Development
Research and development expenditures are charged to operations as
incurred.
m. 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.
n. Income Taxes
The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that may be in effect when the differences are
expected to reverse. The Company recorded no income tax benefit relating to the
net operating loss generated during the year ended June 30, 2001, 2000 and 1999,
as such the loss was offset by a 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.
o. Concentration of Credit Risk
The Company had battery sales to a single customer amounting to $3,055, or
13% of total revenues in 2001; $2,937, or 12% of total revenues in 2000; and
$4,192, or 20% of total revenues in 1999. 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. The Company does not normally obtain collateral on trade
accounts receivable.
33
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
p. 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 June 30, 2001, 2000 and 1999. Fair values
have been determined through information obtained from market sources.
q. Earnings per Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires the
reporting of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing reported earnings available to common shareholders by weighted
average shares outstanding for the period. Diluted EPS includes the dilutive
effect of securities calculated using the treasury stock method, if any. No
dilution for common share equivalents is included in fiscal 2001, 2000 and 1999
as the effects would be antidilutive. For all years reported, diluted earnings
per share were the equivalent of basic earnings per share due to the net loss.
There were 2,278,800, 2,202,380 and 1,733,960 outstanding stock options and
warrants as of June 30, 2001, 2000 and 1999, respectively, that were not
included in EPS for those periods as the effect would be antidilutive. See Note
7.
r. Stock-Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires 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.
In March 2000, the FASB issued Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN No. 44 had no significant impact on the Company's financial
statements.
s. 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 four 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 which comprise unique products and services across geographic
locations.
t. Other Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
was subsequently amended in June 1999 by SFAS No. 137, which required the
Company to adopt SFAS No. 133 no later than the first quarter of fiscal 2001.
SFAS No. 133 requires the Company to record all derivatives on the balance sheet
at fair value. Changes in derivative fair values are either to be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or for forecasted transactions, deferred and
recorded as a component of accumulated other comprehensive income until the
hedged transactions occur and are
34
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
recognized in earnings. The ineffective portion of a hedging derivative's change
in fair value are immediately recognized in earnings.
As of July 1, 1999, the Company adopted SFAS No. 133. 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 June 30, 2001, the Company did not have any outstanding
derivative financial instruments.
Note 2-Investments
The following is a summary of available-for-sale securities:
June 30, 2001 Unrealized Estimated
Cost Gain Fair Value
-------------------------------
Commercial Paper and other ........... $ 613 $ -- $ 613
U.S. corporate bonds ................. 2,499 1 2,500
------ ------ ------
$3,112 $ 1 $3,113
====== ====== ======
June 30, 2000 Unrealized Estimated
Cost Gain Fair Value
-------------------------------
Commercial Paper and other ........... $ 9,427 $ -- $ 9,427
U.S. corporate bonds ................. 3,496 -- 3,496
------- ------- -------
Total debt securities ................ 12,923 -- 12,923
Intermagnetics General Corporation
Equity Securities .................. 2 2 4
------- ------- -------
$12,925 $ 2 $12,927
======= ======= =======
The Company has instructed its investment fund managers to invest in
conservative, investment grade securities with average maturities of less than
three years. In fiscal 2000 and 1999, the Company realized gains on sales of
securities of $3,147 and $348, respectively, relating to the sale of portions of
the Company's investment in Intermagnetics General Corporation.
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties or the Company may sell the securities to meet their
ongoing and potential future cash needs.
The following is a summary of the Company's investment periods:
June 30,
--------
At Cost: 2001 2000
------- -------
Less than one year $ 1,112 $10,429
More than one year 2,000 2,496
------- -------
Total $ 3,112 $12,925
======= =======
35
Note 3-Supplemental Balance Sheet Information
The composition of inventories was:
June 30,
--------
2001 2000
---- ----
Raw materials .............................. $2,595 $3,032
Work in process ............................ 1,233 1,427
Finished products .......................... 1,872 1,622
----- -----
5,700 6,081
Less: Reserve for obsolescence 411 399
----- -----
$5,289 $5,682
====== ======
The composition of property, plant and equipment was:
Land ....................................... $ 123 $ 123
Buildings and Leasehold Improvements ....... 1,608 1,202
Machinery and Equipment .................... 37,891 18,638
Furniture and Fixtures ..................... 291 196
Computer Hardware and Software ............. 1,375 1,041
Construction in Progress ................... 2,984 19,149
------- -------
44,272 40,349
Less: Accumulated Depreciation ............ 11,275 7,564
------- -------
$32,997 $32,785
In July 2000, $16,500 of amounts in Construction in Progress were
completed and placed in service. As a result, those assets were transferred to
their respective property and equipment component.
Note 4-Operating Leases
The Company leases various buildings, machinery, land, automobiles and
office equipment. Rental expenses for all operating leases were approximately
$500, $333 and $379 for the years ended June 30, 2001, 2000 and 1999,
respectively. Future minimum lease payments under noncancelable operating leases
as of June 30, 2001 are as follows: 2002 - $740, 2003 - $689, 2004 - $681, 2005
- - $664, and thereafter - $1,802. The above amounts do not include contingent or
additional rent.
In March 2001, the Company entered into a $2,000 lease for certain new
manufacturing equipment with a third party. A portion of the lease covered
assets purchased by the Company within six months of commencing the lease and,
therefore, was accounted for as a sale and leaseback transaction. Proceeds of
the sale and leaseback transaction totaled $1,800 which equaled the book value
of the equipment. The lease is accounted for as an operating lease with
quarterly lease payments of approximately $115 over the next 5 years.
Note 5-Long-term Debt and Capital Leases
Credit Facility
In June 2000, the Company entered into a $20,000 secured credit facility
with a lending institution. The financing agreement consists of an initial
$12,000 term loan component (of which $3,333 was outstanding at June 30, 2001)
and a revolving credit facility component for an initial $8,000, 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 June 30, 2001. The amount available under the term loan
component amortizes over time. Principal and interest are paid monthly on
outstanding amounts borrowed.
36
Note 5-Long-term Debt and Capital Leases (cont'd)
The loans bear interest at the prime rate or other LIBOR-based rate options at
the discretion of the Company. At June 30, 2001, the rate was 6.56%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The total
amount available under the term loan component is reduced by outstanding letters
of credit. The Company had $1,900,000 outstanding on a letter of credit as of
June 30, 2001 and the Company's additional borrowing capacity as of June 30,
2001 was approximately $6,900,000. The Company is required to maintain specified
tangible net worth levels throughout the agreement. At June 30, 2001, the
Company is in compliance with this restriction.
Debt issue costs amounting to $198 were incurred in connection with the
initiation of the term of the agreement and are being amortized over the life of
the agreement.
New York Power Authority
In May 1999, the Company borrowed approximately $150 from New York Power
Authority (NYPA) that was used toward the construction of a solvent recovery
system. The annual interest rate on the loan is 6%. The loan is being repaid in
24 equal monthly payments and expired in July 2001.
Capital Leases
The Company has two capital leases. The first is a capital lease
commitment for the Newark, New York facility which provides for payments of $50
per year through December 2001 and $28 per year from December 2002 through 2007.
Remaining interest on the lease approximates $68. At the end of this lease term,
the Company is required to purchase the facility for one dollar. The second
capital lease is for computer equipment. The lease expires in 2003 and requires
monthly payments of approximately $13.
Payment Schedule
Principal payments under the current amount outstanding of the long term
debt and capital leases is as follows:
CREDIT
FACILITY NYPA CAPITAL LEASES TOTAL
-----------------------
Building Equipment
Fiscal 2002 $867 $ 18 $33 $147 $1,065
2003 800 -- 15 65 880
2004 800 -- 16 -- 816
2005 800 -- 18 -- 818
2006 66 -- 68 -- 134
----- ---- --- ---- -----
$3,333 $ 18 $150 $212 $3,713
Less: Current portion $ 867 $ 18 $33 $147 1,065
------ ---- --- ---- -----
Long Term $2,466 $ -- $117 $ 65 $2,648
====== ==== ==== ==== ======
37
Note 5-Long-term Debt and Capital Leases (cont'd)
Letters of Credit
In conjunction with the purchase/lease agreement to acquire the Company's
Newark, New York facilities, the Company has a letter of credit in the amount of
$180, which expires in 2007. Additionally, the Company maintains a $360 letter
of credit for computer equipment, which expires in 2002. Lastly, in connection
with the operating lease entered into in fiscal 2001, the Company maintains a
$1,900 letter of credit, which expires in March 2006.
Note 6-Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first two years of the agreement, of which approximately
$5,600 has been paid. The Company has been attempting to collect the balance due
under this contract. China Battery has indicated that these payments will not be
made until certain contractual issues have been resolved. Due to the Chinese
partner's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed to the Company as well as the Company's investment. In
December 1997, China Battery sent to the Company a letter demanding
reimbursement of losses they have incurred plus a refund for certain equipment
that the Company sold to China Battery. Although China Battery has not taken any
additional steps, there can be no assurance that China Battery will not further
pursue such a claim, which, if successful, would have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes that such a claim is without merit.
b. Indemnity Agreement
The Company has an Indemnity Agreement with each member of its Board of
Directors and corporate officers. The agreement provides that the Company will
reimburse directors or officers for all expenses, to the fullest extent
permitted by law and the Company by-laws, arising out of their performance as
agents or trustees of the Company.
c. Purchase Commitments
As of June 30, 2001, the Company has made commitments to purchase
approximately $1,640 of production machinery and equipment.
d. Royalty Agreement
Technology underlying certain products of the Company are based in part as
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
which incorporate the licensed technology.
38
Note 6-Commitments and Contingencies (cont'd)
e. 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 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 tortuously 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. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal for a period of at least 120 days, and remanded the case to the
District Court for further proceedings in connection with the proposed
settlement. In the event settlement is not reached, the Company will continue to
defend the case 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.
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, the Company received an
environmental assessment, which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $230. However, there can be no assurance that
this will be the maximum cost. The Company entered into an agreement whereby a
third party has agreed to reimburse the Company for fifty percent of the costs
associated with this matter. Test sampling occurred in the fourth quarter of
fiscal 2001 and the Company is awaiting the final engineering report. 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.
39
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 June 30, 2001, no preferred shares were issued or
outstanding.
b. Common Stock
In May of 1998, the Company sold 2,500,000 shares of Common Stock at
$12.50 per share, resulting in gross proceeds of $31,250 and net proceeds of
$28,551 to the Company.
In June of 1998, the shareholders approved an increase in the number of
authorized shares of Common Stock from 12,000,000 to 20,000,000.
In December of 2000, the shareholders approved an increase in the number
of authorized shares of Common Stock from 20,000,000 to 40,000,000.
c. Stock Options
The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense for its stock-based compensation plans has been recognized
in the Company's Consolidated Statements of Operations. The Company has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation". If the Company had elected to recognize compensation expense for
all of the Company's stock-based compensation based on the fair value of the
options at grant date as prescribed by SFAS No.123, the Company's net loss would
have been $19,597, $12,333 and $8,043 for the years ended June 30, 2001, 2000
and 1999, compared with the reported losses of $17,262, $10,242 and $7,085. Loss
per share would have been $1.75, $1.13 and $0.77 in the years ended June 30,
2001, 2000 and 1999, respectively, as compared to reported loss per share of
$1.55, $0.94 and $0.68, respectively. The effect of SFAS No. 123 in the pro
forma disclosures may not be indicative of future amounts.
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 fiscal 2001,
2000, and 1999:
2001 2000 1999
--------------------------------------------------------------------------
Risk-free interest rate 4.8% 6.4% 5.3%
Volatility factor 75.8% 74.1% 68.2%
Weighted average expected life (years) 4 6 5
Weighted average fair value of options granted $3.56 $5.48 $5.48
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 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 ISO's or NQSO's. Key
employees are eligible
40
Note 7-Shareholders' Equity (cont'd)
to receive ISO's and NQSO's; however, directors and consultants are eligible to
receive only NQSO's. As of June 30, 2001, there are 41,290 shares available for
grant.
Effective March 1, 1995, the Company established the 1995 stock option
plan and granted the former Chief Executive Officer ("CEO") options to purchase
100,000 shares at $14.25 per share under this plan. Of these shares, 60,000
vested prior to his termination and subsequently expired on March 1, 2001. There
were no other grants under the 1995 stock option plan. In October 1992, the
Company granted, to the former CEO, options to purchase 225,000 shares of Common
Stock at $9.75 per share outside of any of the stock option plans. The options
vested through June 1997 and expire in October 2002.
Effective July 12, 1999, the Company granted the current CEO options to
purchase 500,000 shares of Common Stock at $5.19 per share outside of any of the
stock option plans. Of these, 50,000 options were exercisable on the grant date,
and the remaining options are exercisable in annual increments of 90,000 over a
five-year period commencing July 12, 2000 through July 12, 2004, and expire on
July 12, 2005.
Effective December 2000, the Company established the 2000 stock option
plan which is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 500,000 shares of Common Stock for grant
under the plan. Options granted under the 2000 plan are either ISO's or NQSO's.
Key employees are eligible to receive ISO's and NQSO's; however, directors and
consultants are eligible to receive only NQSO's. As of June 30, 2001, there are
269,400 shares available for grant.
The following table summarizes data for the stock options issued by the
Company:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number of Price Number Price Number Price
Shares Per Share Of Shares Per Share of Shares Per Share
Shares under option at beginning of year ......... 2,189,880 $ 8.68 1,721,460 $10.16 1,661,900 $10.96
Options granted ................................... 341,600 $ 7.06 1,033,500 $ 6.59 338,000 $ 6.44
Options exercised ................................. (77,900) $ 7.77 (202,000) $10.22 -- $ --
Options canceled .................................. (187,280) $14.28 (363,080) $ 8.94 (278,440) $10.31
---------- ------ --------- --- ---------- ------
Shares under option at end of year ................ 2,266,300 $ 7.95 2,189,880 $ 8.68 1,721,460 $10.16
---------- ---- --------- ------ -------- ------
Options exercisable at end of year ................ 675,480 $10.09 633,320 $10.49 1,073,240 $10.98
41
Note 7-Shareholders' Equity (cont'd)
The following table represents additional information about stock options
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 2001 Life Exercise Price at June 30, 2001 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
$3.56 - $5.19 588,300 3.98 $ 5.12 24,500 $ 4.71
$5.38 - $7.38 757,100 4.99 $ 6.82 97,300 $ 6.73
$7.75 - $9.75 570,350 1.77 $ 9.20 366,400 $ 9.30
$9.88 - $20.25 350,550 2.53 $12.87 187,280 $14.08
- --------------------------------------------------------------------------------------------------------------------------
$3.56 - $20.25 2,266,300 3.53 $ 7.95 675,480 $10.09
d. Warrants
In March 1998, the Company issued warrants to purchase 12,500 shares of
its Common Stock to the Empire State Development Corporation in connection with
a $500 grant. Proceeds of the grant were used to fund certain equipment
purchases and are contingent upon the Company achieving and maintaining minimum
employment levels. The remaining unamortized balance of $150 relating to the
grant is included in other current liabilities in the accompanying Consolidated
Balance Sheet as of June 30, 2001. The warrants may be exercised through
December 31, 2002 at an exercise price equal to 60% of the average closing price
for the 10 trading days preceding the exercise date, but not less than the
average closing price of the Company's Common Stock during the 20 trading days
prior to the grant.
e. Reserved Shares
The Company has reserved 2,588,200 shares of Common Stock under the
various stock option plans and warrants as of June 30, 2001, and 2,266,225 and
1,953,000 as of June 30, 2000 and 1999, respectively.
Note 8-Income Taxes
Foreign and domestic loss carryforwards totaling approximately $62,000 are
available to reduce future taxable income. Foreign loss carryforwards of $7,400
can be carried forward indefinitely. The domestic net operating loss
carryforward of $54,600 expires through 2021. If it is determined that a change
in ownership as defined under Internal Revenue Code Section 382 has occurred,
the net operating loss carryforward will be subject to an annual limitation.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The Company increased its
valuation allowance by approximately $3,143, $2,445 and $2,901 for the years
ended June 30, 2001, 2000 and 1999, respectively, to offset the deferred tax
assets based on the Company's estimates of its future earnings and the expected
timing of temporary difference reversals.
42
Note 8-Income Taxes (cont'd)
Significant components of the Company's deferred tax liabilities and
assets as of June 30 are as follows:
2001 2000
---- ----
Deferred tax liabilities:
Unrealized gain on securities ........... $ 1 $ 1
Tax over book depreciation .............. 913 1,031
-------- --------
Total deferred tax liabilities ............. 914 1,032
Deferred tax assets:
Net operating loss carryforward ......... 18,560 15,509
Other ................................... 456 482
-------- --------
Total deferred tax assets .................. 19,016 15,991
Valuation allowance for deferred assets .... (18,102) (14,959)
Net deferred tax assets .................... 914 1,032
-------- --------
Net deferred income taxes .................. $ -- $ --
There were no income taxes paid for the years ended June 30, 2001, 2000
and 1999. For financial reporting purposes, income (loss) from continuing
operations before income taxes included the following:
June 30,
2001 2000 1999
---- ---- ----
United States ......... $(13,999) $ (7,658) $ (7,830)
Foreign ............... (3,263) (2,584) 745
-------- -------- --------
Total ................. $(17,262) $(10,242) $ (7,085)
There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at June 30, 2001.
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 contribution for participants was
3%. For the years ended June 30, 2001, 2000 and 1999, the Company contributed
$234, $150 and $177, respectively.
Note 10-Related Party Transactions
During 2000 and 1999, the Company sold the majority of its investment in
Intermagnetics General Corporation (IGC) common stock and realized gains on
sales of securities of $3,147 and $348, respectively. IGC is considered a
related party since certain directors of the Company serve as officers or
directors of IGC.
43
Note 11-Business Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company reports its results in 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.
2001
----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------------------
Revenues $ 22,105 $ 370 $ 1,688 $ -- $ 24,163
Segment contribution $ 443 $ (7,551) $ 151 $ (8,009) $(14,966)
Interest income, net $ 166 $ 166
Other income (expense), net $ (2,462) $ (2,462)
Income taxes $ -- $ --
--------
Net loss $(17,262)
Long-lived assets $ 11,628 $ 19,490 $ 280 $ 1,882 $ 33,280
Total assets $ 18,609 $ 21,166 $ 303 $ 7,125 $ 47,203
Capital expenditures $ 2,241 $ 1,382 $ -- $ 744 $ 4,367
Depreciation and amortization expense $ 1,159 $ 2,153 $ 1 $ 498 $ 3,811
2000
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------------------
Revenues $ 21,840 $ 25 $ 2,649 $ -- $ 24,514
Segment contribution $ (1,244) $ (5,306) $ 246 $ (7,385) $(13,689)
Interest income, net $ 909 $ 909
Other income (expense), net $ 2,538 $ 2,538
Income taxes $ -- $ --
--------
Net loss $(10,242)
Long-lived assets $ 10,892 $ 19,985 $ 281 $ 4,349 $ 35,507
Total assets $ 19,171 $ 20,632 $ 493 $ 24,164 $ 64,460
Capital expenditures $ 1,377 $ 1,012 $ -- $ 557 $ 2,946
Depreciation and amortization expense $ 1,128 $ 591 $ 1 $ 318 $ 2,038
44
Note 11-Business Segment Information (cont'd)
1999
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------------------
Revenues $ 19,559 $ 49 $ 1,456 $ -- $ 21,064
Segment contribution $ 2,651 $ (5,537) $ 297 $ (6,195) $ (8,784)
Interest income, net $ 1,456 $ 1,456
Other income (expense), net $ 243 $ 243
Income taxes $ -- $ --
--------
Net loss $ (7,085)
Long-lived assets $ 7,776 $ 19,525 $ 264 $ 4,615 $ 32,180
Total assets $ 16,494 $ 19,554 $ 735 $ 29,637 $ 66,420
Capital expenditures $ 1,798 $ 1,036 $ 20 $ 573 $ 3,427
Depreciation and amortization expense $ 952 $ 898 $ 66 $ 289 $ 2,205
Geographical Information
- ------------------------
Revenues Long-lived Assets
2001 2000 1999 2001 2000 1999
--------------------------------- ---------------------------------
United States $15,715 $13,587 $10,504 $29,139 $30,685 $26,532
United Kingdom 1,797 2,874 3,423 4,141 4,822 5,648
Hong Kong 3,347 3,211 4,423 -- -- --
Europe, excluding United Kingdom 1,572 2,812 1,671 -- -- --
Other 1,732 2,030 1,043 -- -- --
--------------------------------- ---------------------------------
Total $24,163 $24,514 $21,064 $33,280 $35,507 $32,180
======= ======= ======= ======= ======= =======
Note 12-Investment in Affiliate
In December 1998, the Company announced the formation of a venture with
PGT Energy Corporation (PGT), together with a group of investors, to produce
Ultralife's polymer rechargeable batteries in Taiwan. During fiscal 2000,
Ultralife provided the venture, named Ultralife Taiwan, Inc. (UTI), with its
proprietary technology and 700,000 shares of Ultralife Common Stock, in exchange
for approximately a 46% ownership interest. Ultralife holds half the seats on
UTI's board of directors. PGT and the group of investors funded UTI with $21,250
in cash and hold the remaining seats on the board. Due to stock granted to
certain UTI employees in fiscal 2001, the Company's equity interest was reduced
to 41%. This investment is accounted for using the equity method of accounting.
Summarized financial statement information for the unconsolidated venture
is as follows:
(unaudited)
Condensed Statements of Operations Year Ended June 30,
2001 2000 1999
----------------------------------
Net revenue $ -- $ -- $ --
Cost of Sales -- -- --
Operating loss (7,540) (1,897) (205)
Net loss (6,637) (1,778) (174)
45
Note 12-Investment in Affiliate (cont'd)
Condensed Balance Sheets June 30,
2001 2000
------- -------
Current assets $11,577 $17,125
Non-current assets 35,238 23,005
------- -------
$46,815 $40,130
Current liabilities $ 2,663 $ 4,446
Non-current liabilities 6,362 --
Shareholders' equity 37,790 35,684
------- -------
$46,815 $40,130
======= =======
Note 13 - Subsequent Event
On July 20, 2001, the Company completed a $6,800 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.
Note 14 - Recent Developments
In October 2001, the Company was informed by its primary lending
institution that the borrowing availability under the $20,000 secured credit
facility had been effectively reduced to zero as a result of a recent appraisal
of the Company's fixed assets. Accordingly, the Company's liquidity depends upon
its ability to successfully generate positive cash flow from operations and
achieve adequate operational savings. The Company is also exploring
opportunities with its primary lending institution and other lending
institutions for additional or new debt financing and with other investors for
additional equity. Notwithstanding the foregoing, there can be no assurance that
the Company will have sufficient cash flows to meet its working capital and
capital expenditure requirements.
Note 15 - Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net
sales less cost of products sold), net loss and net loss per share, basic and
diluted, for each quarter during the past two years:
Quarter ended
--------------------------------------------------------
Fiscal 2001 Sept. 30, Dec. 31, March 31, June 30, Full
2000 2000 2001 2001 Year
---- ---- ---- ----- ----
Revenues $ 6,851 $ 5,290 $ 5,817 $ 6,205 $ 24,163
Gross margin (452) (1,699) (731) (651) (3,533)
Net loss (3,104) (5,737) (3,921) (4,500) (17,262)
Net loss per share,
basic and diluted (0.28) (0.51) (0.35) (0.40) (1.55)
Quarter ended
--------------------------------------------------------
Fiscal 2000 Sept. 30, Dec. 31, March 31, June 30, Full
1999 1999 2000 2000 Year
---- ---- ---- ----- ----
Revenues $ 6,225 $ 6,677 $ 6,199 $ 5,413 $ 24,514
Gross margin 419 302 (1,005) (714) (998)
Net loss (1,926) (2,989) (1,205) (4,122) (10,242)
Net loss per share,
basic and diluted (0.18) (0.28) (0.11) (0.37) (0.94)
46
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 2001 Annual Meeting of Shareholders, which
information included therein is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
Reference is made to Item 8 of Part II hereof.
Financial Statement Schedules
Schedules other than those listed above have been omitted as they are
either not required, are not applicable, or the information called for is shown
in the financial statements or notes thereto.
Reports on Form 8-K
None.
Exhibits
Reference is made to the Index to Exhibits accompanying this Form 10-K as
filed with the Securities and Exchange Commission. The Company will furnish to
any shareholder, upon written request, any exhibit listed in such Index to
Exhibits.
47
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: December 12, 2001 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: December 12, 2001 /s/John D. Kavazanjian
-----------------------------------
John D. Kavazanjian
President, Chief Executive Officer
and Director
Date: December 12,, 2001* /s/Robert W. Fishback
-----------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
Date: December 12, 2001* /s/Joseph C. Abeles
-----------------------------------
Joseph C. Abeles (Director)
Date: December 12, 2001* /s/Joseph N. Barrella
-----------------------------------
Joseph N. Barrella (Director)
Date: December 12, 2001* /s/Patricia C. Barron
-----------------------------------
Patricia C. Barron (Director)
Date: December 12, 2001
_______________________________
Daniel W. Christman (Director)
Date: December 12, 2001* /s/Arthur M. Lieberman
-----------------------------------
Arthur M. Lieberman (Director)
Date:December 12, 2001* /s/Carl H. Rosner
-----------------------------------
Carl H. Rosner (Director)
Date: December 12, 2001* /s/Ranjit Singh
-----------------------------------
Ranjit Singh (Director)
*By: /s/ JOHN D. KAVAZANJIAN
--------------------------------
John D. Kavazanjian, as Attorney-in-Fact
48