SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
-------
ULTRALIFE BATTERIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 12,318,956 shares outstanding as of January
31, 2002.
1
ULTRALIFE BATTERIES, INC.
INDEX
- --------------------------------------------------------------------------------
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2001 and June 30, 2001.........................3
Condensed Consolidated Statements of Operations -
Three and six months ended December 31, 2001 and 2000.......4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2001 and 2000.................5
Notes to Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..........................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................17
Item 4. Submission of Matters to a Vote of Security Holders..........18
Item 6. Exhibits and Reports on Form 8-K.............................18
SIGNATURES .................................................................19
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
December 31, June 30,
ASSETS 2001 2001
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 706 $ 494
Available-for-sale securities 968 2,573
Restricted cash 1,300 540
Trade accounts receivable (less allowance
for doubtful accounts of $285 at
December 31, 2001 and $262 at June 30, 2001) 4,426 3,379
Inventories 5,459 5,289
Prepaid expenses and other current assets 1,131 1,648
-------- --------
Total current assets 13,990 13,923
-------- --------
Property, plant and equipment 32,020 32,997
Other assets:
Investment in affiliates -- --
Technology license agreements (net of
accumulated amortization of $1,218 at
December 31, 2001 and $1,168 at
June 30, 2001) 233 283
-------- --------
233 283
-------- --------
Total Assets $ 46,243 $ 47,203
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 955 $ 1,065
Accounts payable 4,368 3,755
Other current liabilities 1,763 2,282
-------- --------
Total current liabilities 7,086 7,102
Long-term liabilities:
Long-term debt and capital lease obligations 2,202 2,648
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 - 12,578,186 at December 31, 2001 and
11,488,186 at June 30, 2001) 1,258 1,149
Capital in excess of par value 105,621 99,389
Accumulated other comprehensive loss (835) (1,058)
Accumulated deficit (68,786) (61,724)
-------- --------
37,258 37,756
Less--Treasury stock, at cost--27,250 shares 303 303
-------- --------
Total shareholders' equity 36,955 37,453
-------- --------
Total Liabilities and Shareholders' Equity $ 46,243 $ 47,203
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 7,459 $ 5,290 $15,075 $12,141
Cost of products sold 7,671 6,989 15,735 14,292
------- ------- ------- -------
Gross margin (212) (1,699) (660) (2,151)
Operating expenses:
Research and development 972 948 2,154 1,508
Selling, general, and
administrative 2,092 2,060 4,213 3,856
------- ------- ------- -------
Total operating expenses 3,064 3,008 6,367 5,364
Operating loss (3,276) (4,707) (7,027) (7,515)
Other income (expense):
Interest income 16 276 85 502
Interest expense (93) (121) (175) (253)
Equity loss in affiliate -- (1,258) -- (1,590)
Miscellaneous (67) 73 55 15
------- ------- ------- -------
Loss before income taxes (3,420) (5,737) (7,062) (8,841)
------- ------- ------- -------
Income taxes -- -- -- --
------- ------- ------- -------
Net loss $(3,420) $(5,737) $(7,062) $(8,841)
======= ======= ======= =======
Net loss per share, basic
and diluted $ (0.28) $ (0.51) $ (0.58) $ (0.80)
======= ======= ======= =======
Weighted average shares
outstanding, basic and
diluted 12,319 11,151 12,140 11,113
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
- --------------------------------------------------------------------------------
Six Months Ended December 31,
2001 2000
---- ----
OPERATING ACTIVITIES
Net loss $(7,062) $ (8,841)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,134 1,912
Equity loss in affiliate -- 1,590
Changes in operating assets and
liabilities:
Accounts receivable (1,047) 78
Inventories (170) 244
Prepaid expenses and other
current assets 517 (333)
Accounts payable and other
current liabilities 94 562
------- --------
Net cash used in operating activities (5,534) (4,788)
------- --------
INVESTING ACTIVITIES
Purchase of property and equipment (1,538) (2,916)
Proceeds from sale leaseback 544 --
Purchase of securities (9,090) (21,048)
Sales of securities 9,935 14,128
Maturities of securities -- 10,230
------- --------
Net cash (used in) provided by
investing activities (149) 394
------- --------
FINANCING ACTIVITIES
Proceeds from issuance of
common stock 6,341 606
Principal payments on long-term
debt and capital lease obligations (556) (380)
------- --------
Net cash provided by financing activities 5,785 226
------- --------
Effect of exchange rate changes on cash 110 (174)
------- --------
Increase (Decrease) in cash and
cash equivalents 212 (4,342)
Cash and cash equivalents at
beginning of period 494 5,712
------- --------
Cash and cash equivalents at
end of period $ 706 $ 1,370
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ -- $ 1
======= ========
Interest paid $ 108 $ 69
======= ========
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and adjustments) considered
necessary for a fair presentation of the condensed consolidated financial
statements have been included. Results for interim periods should not be
considered indicative of results to be expected for a full year. Reference
should be made to the consolidated financial statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
2. NET LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Common stock
options and warrants have not been included as their inclusion would be
antidilutive; as a result, basic earnings per share is the same as diluted
earnings per share.
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive loss were:
(unaudited)
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
-------- ------- ------- -------
Net loss $(3,420) $(5,737) $(7,062) $(8,841)
Unrealized (loss) gain on securities -- (1) -- 1
Foreign currency translation adjustments 94 (221) 223 (176)
------- ------- ------- -------
Total comprehensive loss $(3,326) $(5,959) $(6,839) $(9,016)
======= ======= ======= =======
4. INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first- out (FIFO) method. The composition of inventories
was:
(unaudited)
December 31, 2001 June 30, 2001
----------------- -------------
Raw materials $2,811 $2,595
Work in process 1,930 1,233
Finished goods 1,075 1,872
------ ------
5,816 5,700
Less: Reserve for obsolescence 357 411
------ ------
$5,459 $5,289
====== ======
6
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
(unaudited)
December 31, June 30,
2001 2001
------------ --------
Land $ 123 $ 123
Buildings and Leasehold Improvements 1,608 1,608
Machinery and Equipment 38,449 37,891
Furniture and Fixtures 311 291
Computer Hardware and Software 1,406 1,375
Construction in Progress 3,538 2,984
------- -------
44,985 44,272
Less: Accumulated Depreciation 13,415 11,275
------- -------
$32,020 $32,997
======= =======
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 2001, the Company had $1,300 in restricted cash with
two lending institutions. $250 of this amount was for a letter of credit against
a building and equipment operating lease. The remaining $1,050 represents funds
restricted by the Company's primary lending institution to cover outstanding
letters of credit in excess of eligible assets. The Company is in the process of
restructuring the terms of the credit facility with the lending institution to
increase the amount of eligible assets.
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 August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal and remanding the case to the District Court for further proceedings
in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement, the
Company's insurance carrier commenced liquidation proceedings. The insurance
carrier informed the Company that in light of the
7
liquidation proceedings, it would no longer fund the settlement. In addition,
the value of the insurance policy is in serious doubt. Because of these
developments with the insurance carrier, the Company may cancel the settlement
agreement and allow the stockholders to proceed with their appeal.
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 engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC has
reviewed the report and in January 2002 recommended additional testing. The
Company has responded by submitting a proposed work plan to NYSDEC and is
waiting further review. 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.
7. BUSINESS SEGMENT INFORMATION (unaudited)
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 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.
Three Months Ended December 31, 2001
- ------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------
Revenues $ 7,020 $ 153 $286 $ -- $ 7,459
Segment contribution 712 (1,926) 30 (2,092) (3,276)
Interest, net (77) (77)
Equity loss in
affiliate -- --
Miscellaneous expense (67) (67)
Income taxes -- --
-------
Net loss $(3,420)
Total assets $20,535 $19,827 $309 $ 5,572 $46,243
8
Three Months Ended December 31, 2000
- ------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------
Revenues $ 4,667 $ 44 $579 $ -- $ 5,290
Segment contribution 6 (2,680) 56 (2,089) (4,707)
Interest income, net 155 155
Equity loss in
affiliate (1,258) (1,258)
Miscellaneous 73 73
Income taxes -- --
-------
Net loss $(5,737)
Total assets $17,884 $22,504 $288 $15,556 $56,232
Six Months Ended December 31, 2001
- ----------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------
Revenues $14,294 $ 288 $493 $ -- $15,075
Segment contribution 1,439 (4,304) 51 (4,213) (7,027)
Interest, net (90) (90)
Equity loss in
affiliate -- --
Miscellaneous income 55 55
Income taxes -- --
-------
Net loss $(7,062)
Total assets $20,535 $19,827 $309 $ 5,572 $46,243
Six Months Ended December 31, 2000
- ----------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
---------------------------------------------------------
Revenues $10,909 $ 164 $1,068 $ -- $12,141
Segment contribution 17 (3,766) 90 (3,856) (7,515)
Interest income 249 249
Equity loss in
affiliate (1,590) (1,590)
Miscellaneous 15 15
Income taxes -- --
- -------
Net loss $(8,841)
Total assets $17,884 $22,504 $ 288 $15,556 $56,232
8. OTHER MATTERS
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.
In October 2001, the Company was informed by its primary lending
institution that its borrowing availability under the $20,000 credit facility
had been effectively reduced to zero as a result of a recent appraisal of its
fixed assets. Accordingly, the Company's liquidity depends on the Company's
ability to successfully generate positive cash flow from operations and achieve
adequate operational savings. The Company is also exploring opportunities for
new or additional equity or debt financing. Notwithstanding
9
the foregoing, there can be no assurance that the Company will have sufficient
cash flows to meet its working capital and capital expenditure requirements.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand in
areas of the business that are growing. The realignment did not significantly
change any of the Company's existing operations nor were any product lines
discontinued. A majority of employees affected by this realignment were
re-deployed from the Rechargeable segment and support functions into open direct
labor positions in the Primary segment, due to the significantly growing demand
for primary batteries from the military. Less than 7% of the Company's total
employees were terminated. The realignment did not result in any significant
severance costs. The Company expects to realize cost savings from the measures
being taken of approximately $1,500 per quarter. These quarterly savings are
comprised of approximately $1,100 of reduced labor costs, approximately $200 of
reduced material usage, and approximately $200 of lower administrative expenses.
The Company anticipates the full amount of the realignment to be realized in the
third fiscal quarter.
Additionally, in October 2001, the Company expanded its leasing
arrangement with a third party leasing agency. The revision increased the amount
of the lease line to $4,000, from a previous amount of $2,000. The additional
line will be used to fund capital expansion plans for manufacturing equipment
which will allow increased capacity within the Company's Primary business unit.
Once the lease line has been fully utilized the Company's quarterly lease
payment will approximate $226.
In November 2001, the Company received approval for two grants from New
York State and a federally sponsored small cities program in the aggregate
amount of $1,050. The grants will assist in funding current capital expansion
plan which the Company expects will lead to job creation. The Company will be
reimbursed for approved capital as it incurs the cost. Additionally, the Company
is obligated under the terms of the grants to achieve a certain level of new
jobs over the next five years. If the Company does not meet its employment
quota, it will be required to pay back a portion or all of the amount of the
grant depending on the lapsed time.
9. NEW ACCOUNTING PRONOUNCMENT
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning after July 1, 2002.
The Company is currently assessing the financial impact of SFAS No. 144 on its
financial statements.
10. SUBSEQUENT EVENT
On February 11, 2002, in its ongoing effort to improve liquidity to bring
costs more in line with revenues, the Company took further action to reduce
costs. The cost reductions included employee terminations and salary reductions,
discontinuance of certain employee benefits and other cost saving initiatives in
general and administrative areas. As part of these actions, the Company
temporarily suspended the Company's match on the 401k plan. The Company
anticipates an approximately $800 reduction in expenses per quarter because of
this action. Nearly two-thirds of the savings will reduce cost of products sold
and one-third will reduce general and administrative costs. The Company expects
to
10
realize approximately half of the savings in the third fiscal quarter and 100%
in the fourth fiscal quarter. Severance costs associated with this action will
be incurred in the third fiscal quarter and are not material. This action plus
the prior actions taken by the Company as outlined above will aggregate to an
anticipated cost savings of approximately $2,300 per quarter.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, world events,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fire, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended June 30, 2001.
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 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'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
11
Company's 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
Three months ended December 31, 2001 and 2000
Consolidated revenues increased 41% or $2,169,000 to $7,459,000 for the
second three months of fiscal 2002, compared to the same quarter in fiscal 2001.
Primary battery sales increased $2,353,000, or 50%, from $4,667,000 last year to
$7,020,000 this year. In December 2000, the Company began production and
shipments of the BA-5368 battery used by the military in survival radios for
pilots, and this new small cylindrical battery resulted in approximately
$1,400,000 in sales in the second quarter of fiscal 2002. Also adding to the
notable increase in revenues was an increase of $733,000 or 100% in sales of the
High Rate and assembled batteries due to increased demand from the UK military
as compared to prior year. These increases were offset in part by a decline in
Technology Contract revenues. As expected, Technology Contract revenues declined
$293,000, from $579,000 to $286,000 due to the scheduled reduction of certain
non-renewable government contracts.
Cost of products sold amounted to $7,671,000 for the three-month period
ended December 31, 2001, an increase of $682,000, or 10% over the same three
month period a year ago. The gross margin on total revenues for the quarter was
a loss of 3%, compared to a loss of 32% in the prior year. The improvement in
gross margins was attributed to greater sales, significant efficiencies attained
in the manufacturing process and an inventory valuation adjustment made in the
prior year on rechargeable batteries. Primary gross margins increased $968,000
over the prior year from a 0% gross margin in fiscal 2001 to a 14% gross margin
in fiscal 2002. This improvement in margins is principally the result of
increased sales and enhancements 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 quicker manufacturing
throughput times, greater operating efficiencies and a reduction of inventory.
Cost of products sold in the Rechargeable segment decreased $433,000 over the
prior year period due to the inventory adjustment of $400,000 made in the
comparable quarter in the prior year to reduce the market value of the
inventory. The Rechargeable business remains a large opportunity but one that
the Company expects to realize over the long term. By focusing on this
opportunity and broadening its offerings, the Company believes that it has a
good prospect of realizing this growth potential.
Operating and other expenses were $3,064,000 the three months ended
December 31, 2001 compared to $3,008,000 in the prior year, an increase of
$56,000, or 2%. The increase is largely driven by an increase in administrative
costs related to severance costs incurred during the quarter as a result of the
resource realignment.
Interest income decreased $260,000, or 94%, from $276,000 in the second
quarter of fiscal 2001 to $16,000 in the second quarter of fiscal 2002. The
reduction in interest income is principally the result of lower average cash
balances and the reduction of rates of return on investments. Interest expense
declined $28,000 due to lower average balances outstanding on the credit
facility and lower borrowing rates. Equity loss in affiliate was $1,258,000 for
its equity interests in Ultralife Taiwan, Inc. (UTI) for the quarter ended
December 31, 2001. No losses have been recorded in fiscal 2002 as the investment
on the balance sheet has been written down to zero under the equity method of
accounting. Additionally, in August 2001, the Company's ownership in UTI was
reduced to 33% as a result of additional capital raised by UTI for its ongoing
expansion. Miscellaneous income (expense) relates primarily to foreign currency
transaction gains and losses for the period reported.
12
Net losses were $3,420,000, or $0.28 per share, for the second three
months of fiscal 2002 compared to $5,737,000, or $0.51 per share, for the same
quarter last year primarily as a result of the reasons described above.
Six months ended December 31, 2001 and 2000
Consolidated revenues reached a new six month record of $15,075,000 for
the first half of fiscal 2002, an increase of $2,934,000, or 24%, over the
comparable quarter in fiscal 2001. Primary battery sales increased $3,385,000,
or 31%, from $10,909,000 last year to $14,294,000 this year. In fiscal 2001, the
Company began production and shipments of the BA-5368 battery used by the
military in survival radios for pilots, and this new small cylindrical battery
resulted in approximately $2,500,000 in sales in the first half of fiscal 2002.
Shipments of High Rate and assembled batteries also increased over $800,000, or
59%, as a result of an increase in demand from the UK military. Partially
offsetting these increases was a decline in Technology Contract revenues. As
expected, Technology Contract revenues declined $575,000, from $1,068,000 to
$493,000 due to the scheduled reduction of certain non-renewable government
contracts.
Cost of products sold amounted to $15,735,000 for the six-month period
ended December 31, 2001, an increase of $1,443,000, or 10% over the same six
month period a year ago. The gross margin on total revenues for the first half
of the year was a loss of 4%, compared to a loss of 18% in the prior year. The
improvement in gross margins was affected by two offsetting factors. Primary
gross margins increased $1,901,000 over the prior year from a 0% gross margin in
fiscal 2001 to a 13% gross margin in fiscal 2002. This improvement in margins is
principally the result of increased sales and enhancements 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 quicker
manufacturing throughput times, greater operating efficiencies and a reduction
of inventory. The improvements in gross margins in the Primary segment were
partially offset by declines in the Rechargeable segment. In the Rechargeable
segment cost of products sold increased $495,000 over the prior year period due
to less overhead absorption due to lower production volumes. In the second
quarter of fiscal 2001, due to the heavy competition, the Company shifted its
focus to design and manufacture lightweight custom sized batteries for OEMs
rather than focus on the broad retail cell phone market. The manufacture of cell
phone batteries was an important milestone for the Company as it demonstrated
the Company's ability to mass produce polymer rechargeable batteries. The
Company continues to actively design and develop rechargeable batteries and is
vigorously supplying samples to OEMs in order to achieve the desired sales
growth in this segment. Additionally, in the second quarter of fiscal 2002, the
Company reallocated resources to better align itself with the demand in the
marketplace. The Company has experienced significant demand from the military
and as a result shifted significant resources to be able to produce levels
necessary to meet the demand. This resulted in less costs charged to the
Rechargeable business unit.
Operating and other expenses were $6,367,000 for the six months ended
December 31, 2001 from $5,364,000 in the prior year, an increase of $1,003,000,
or 19%. Of the Company's operating and other expenses, research and development
expenses increased $646,000, or 43%, to $2,154,000 for the first half of fiscal
2002. The increase in research and development expenses was due to greater
development of samples and new product designs of polymer rechargeable batteries
in fiscal 2002, as well as increases in research and development costs in the
Primary battery business unit as prototypes were built for qualification with
the US Army. Selling, general and administrative costs increased $357,000 or 9%
over the prior year period. This increase was mainly due to higher selling,
marketing, and advertising costs, both in the U.S. and abroad as the Company
enhanced its market coverage at the end of fiscal 2001, as well as severance
costs incurred in conjunction with the realignment previously mentioned.
Interest income decreased $417,000, or 83%, from $502,000 in the first
half of fiscal 2001 to $85,000 in the first half of fiscal 2002. The reduction
in interest income is principally the result of lower average
13
cash balances and the reduction of rates of return on investments. Interest
expense declined $78,000 due to lower average balances outstanding on the credit
facility and lower borrowing rates. Equity loss in affiliate was $1,590,000 for
its equity interest in Ultralife Taiwan, Inc. (UTI) for the first half of fiscal
2001. No losses have been recorded in fiscal 2002 as the investment on the
balance sheet has been written down to zero under the equity method of
accounting. Additionally, in August 2001, the Company's ownership in UTI was
reduced to 33% as a result of additional capital raised by UTI for its ongoing
expansion. Miscellaneous income (expense) relates primarily to foreign currency
transaction gains and losses for the period reported.
Net losses were $7,062,000, or $0.58 per share, for the first six months
of fiscal 2002 compared to $8,841,000, or $0.80 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
At December 31, 2001, cash and cash equivalents and available for sale
securities totaled $2,974,000. Of this amount, $1,300,000 is restricted at
December 31, 2001 to cover a portion of the outstanding letters of credit. The
Company used $5,534,000 of cash in operating activities during the first six
months of fiscal 2002. This usage of cash related primarily to the net loss
reported for the period and an increase in accounts receivable, offset in part
by depreciation and decreases in other current assets. More specifically,
receivables increased $1,047,000 from June 30, 2001 to December 31, 2001. This
increase resulted from a significant increase in revenues in the second quarter
of fiscal 2002 as compared with the fourth quarter of fiscal 2001. The Company
does not anticipate any significant recoverability issues with these outstanding
receivables. The Company spent $1,538,000 for capital expenditures for
production equipment and facilities improvements during the first half 2002, and
of this amount approximately $544,000 was received as proceeds in a sale
leaseback transaction. Additionally, in February 2002, the Company received
approximately $450,000 in proceeds from a sale leaseback of assets previously
purchased by the Company. As of February 11, 2002 nearly $600,000 remains
available under the lease line of credit.
At December 31, 2001, the Company had long-term debt outstanding including
capital lease obligations of $2,202,000 primarily relating to the financing
arrangement entered into by the Company at the end of fiscal 2000, described
below.
In June 2000, the Company entered into a $20,000,000 secured credit
facility with a lending institution. The financing agreement consists of an
initial $12,000,000 term loan component based on the valuation of the Company's
fixed assets (of which $2,867,000 was outstanding on the term loan at December
31, 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). While the amount available under the term loan component
amortizes over time, the amount of the revolving credit facility component
increases by an equal and offsetting amount. Principal and interest are paid
monthly on outstanding amounts borrowed. The loans bear interest at the prime
rate or other LIBOR-based rate options at the discretion of the Company. The
Company also pays a facility fee on the unused portion of the commitment. The
loan is secured by 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 revolver component is reduced by outstanding letters
of credit. The Company had $3,800,000 outstanding on a letter of credit as of
December 31, 2001. In October 2001, the Company was informed by its primary
lending institution that its borrowing availability under the $20,000,000 credit
facility had been effectively reduced to zero as the result of a recent
appraisal of its fixed assets. The appraisal resulted in a significant decrease
in the valuation of the Company's machinery and equipment which was based on an
"orderly liquidation valuation" methodology used by the appraiser. The Company
is in the process of restructuring the terms of the credit facility with the
lending institution to enhance the Company's borrowing flexibility.
14
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.
In October 2001, the Company increased the lease line of credit with a
financing institution to $4,000,000 to acquire equipment in the Primary
business. In conjunction with this lease, the Company has obtained and is
required to maintain an additional letter of credit for $1,900,000. The total
outstanding letters of credit for this lease arrangement equal $3,800,000.
The Company's capital resource commitments as of December 31, 2001
consisted principally of capital equipment commitments of approximately
$732,000.
As previously noted, the Company's primary lending institution
significantly reduced the total amount of the credit facility available.
Accordingly, the Company's liquidity depends on the Company's ability to
successfully generate positive cash flow from operations and achieve adequate
operational savings. In addition, the Company is working with its primary
lending bank to obtain increased credit flexibility. The Company is also
exploring opportunities for new or additional equity or debt financing.
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. See additional comments on the Company's recent cost reduction
actions in "Outlook".
Outlook
The Company expects to achieve an increase of approximately 15% in
consolidated revenues in the third quarter of fiscal 2002 as compared to the
second quarter of fiscal 2002. During the third fiscal quarter, the Company is
projecting the growth to come largely from standard cylindrical and high rate
batteries for growth in military markets. Sales of 9-volt batteries are expected
to increase slightly from the second quarter as smoke detector and medical
customers replenish their inventories. The Company expects to take advantage of
its flexibility to tailor and develop its existing and new products that will
continue to enhance revenue growth throughout the year. The Company believes
that it is well positioned with its current portfolio of products, and its new
products in development, to meet the current demands communicated to the Company
by the commercial and military customers, both in the US and UK. Management
believes that revenues will increase fiscal year 2002 over fiscal year 2001 in
the range of 40%.
Management has maintained focus on two key financial goals - to reach
operating cash breakeven by March 2002 and to attain positive net income by June
2002. While these goals are dependent on continuing increases in sales volumes
and improving operating efficiencies, management is striving to meet these
objectives, and they believe that the strategies being put into action will
drive the Company toward these goals.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand in
areas of the business that are growing. The realignment did not significantly
change any of the Company's existing operations nor were any product lines
discontinued. A majority of employees affected by this realignment were
re-deployed from the Rechargeable segment and support functions into open direct
labor positions in the Primary segment, due to the significantly growing demand
for primary batteries from the military. Less than 7% of the Company's total
employees were terminated. The realignment did not result in any significant
severance costs. The Company expects to realize cost savings from the measures
being taken of approximately $1.5 million per quarter. These quarterly savings
are comprised of approximately $1.1 million of reduced labor costs,
approximately $0.2 million of reduced material usage, and approximately $0.2
million of
15
lower administrative expenses. The Company anticipates the full amount of this
realignment to be realized in the third fiscal quarter.
On February 11, 2002, in its ongoing effort to improve liquidity to bring
costs more in line with revenues, the Company took further action to reduce
costs. The cost reductions included employee terminations and salary reductions,
discontinuance of certain employee benefits and other cost saving initiatives in
general and administrative areas. As part of these actions, the Company
temporarily suspended the Company's match on the 401k plan. The Company
anticipates an approximately $800,000 reduction in expenses per quarter because
of this action. Nearly two-thirds of the savings will reduce cost of products
sold and one-third will reduce general and administrative costs. The Company
expects to realize approximately half of the savings in the third fiscal quarter
and 100% in the fourth fiscal quarter. Severance costs associated with this
action will be incurred in the third fiscal quarter and are not material. This
action plus the prior actions taken by the Company as outlined above will
aggregate to an anticipated cost savings of approximately $2.3 million per
quarter.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently participate in the investment of derivative financial instruments.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
asserting substantially the same claims as in the prior pleading. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal and remanding the case to the District Court for further proceedings
in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement, the
Company's insurance carrier has commenced liquidation proceedings. The insurance
carrier informed the Company that in light of the liquidation proceedings, it
would no longer fund the settlement. In addition, the value of the insurance
policy is in serious doubt. Because of these developments with the insurance
carrier, the Company may cancel the settlement agreement and allow the
stockholders to proceed with their appeal.
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
17
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 engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC has
reviewed the report and in January 2002 recommended additional testing. The
Company has responded by submitting a proposed work plan to NYSDEC and is
waiting further review. 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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On December 5, 2001, an Annual Meeting of Shareholders of the
Company was held.
(b) At the Annual Meeting, the Shareholders of the Company elected to
the Board of Directors all eight nominees for Director with the
following votes:
DIRECTOR FOR WITHHELD
-------- --- --------
Joseph C. Abeles 11,085,384 33,117
Joseph N. Barrella 11,085,384 33,117
Patricia C. Barron 11,069,384 49,117
Daniel W. Christman 11,085,384 33,117
John D. Kavazanjian 11,085,384 33,117
Arthur M. Lieberman 10,246,684 871,817
Carl H. Rosner 11,085,384 33,117
Ranjit Singh 11,085,384 33,117
(c) At the Annual Meeting, the Shareholders of the Company voted for the
ratification of Arthur Andersen LLP as independent auditors with the
following votes:
FOR AGAINST ABSTAIN
--- ------- -------
11,057,101 48,450 12,950
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended Lease Agreement between Winthrop Resources and the
Registrant
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
-------------------------
(Registrant)
Date: February 12, 2002 By: /s/John D. Kavazanjian
---------------------------
John D. Kavazanjian
President and Chief
Executive Officer
Date: February 12, 2002 By: /s/Robert W. Fishback
---------------------------
Robert W. Fishback
Vice President - Finance
and Chief Financial Officer
19
Exhibit 10.1
AMENDED LEASE SCHEDULE
LEASE SCHEDULE NO. 001R
(This Lease Schedule No. 001R replaces Lease Schedule No. 001)
This Lease Schedule is issued pursuant to the Lease Agreement Number UL022101
dated February 21, 2001. The terms of the Lease Agreement and serial numbers
contained on Certificates of Acceptance are a part hereof and are incorporated
by reference herein.
LESSOR LESSEE
Winthrop Resources Corporation Ultralife Batteries, Inc.
11100 Wayzata Boulevard 2000 Technology Parkway
Suite 800 Newark, NY 14513
Minnetonka, MN 55305
SUPPLIER OF EQUIPMENT LOCATION OF INSTALLATION
Various Same As Above
Term of Lease from Commencement Date: 60 Months (20 quarters) Quarterly Lease
Charge: $75,213.00, due quarterly as $225,639.00 Anticipated Delivery and
Installation: February 2001 - March 2002 Security Deposit: Upon Lessee's
execution of this Lease Schedule, Lessee shall deliver a security deposit in the
amount of $225,639.00. If there is no event of default, this security deposit
will be applied toward the total Lease Charges associated with the last quarter
of this Lease Schedule.
EQUIPMENT
---------
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT DESCRIPTION (including features
- ------------ --- ------------- -----------------------------------------
SEE ATTACHMENT A
Upon execution of this Lease Schedule, Lessee shall deliver a non-refundable sum
of money equal to the Security Deposit, which shall become the Security Deposit
after Lessor's receipt of a letter of credit satisfactory in all respects to
Winthrop Resources Corporation. If a letter of credit is not delivered by
Lessee, Lessor shall be entitled to retain any and all monies paid it by Lessee.
Lease Agreement Number UL022101 and this Lease Schedule 001R are subject to
Winthrop Resources Corporation receiving a letter of credit that is satisfactory
in all respects to Wintrhop Resources Corporation, including, but not limited
to, the terms and conditions contained therein and the bank drawn thereon.
Obtaining this letter of credit is a condition precedent to Winthrop Resources
Corporations's obligations under Lease Agreement UL022101 and Lease Schedule
Number 001R.
The Monthly Lease Charge will be prorated and charged as interim rent between
the date an item of equipment is accepted and the Commencement Date.
Agreed to and Accepted: Agreed to and Accepted:
WINTHROP RESOURCES CORPORATION ULTRALIFE BATTERIES, INC.
"LESSOR" "LESSEE"
By: s/o Richard J. Pieper By: s/o Molly Henderson
Print Print
Name: Richard J. Pieper Name: Molly Henderson
Title: Sr. Vice President Title: Corporate Controller
Date: September 26, 2001 Date: August 15, 2001
Lease Agreement Number: UL022101
Lease Schedule Number: 001R
ATTACHMENT A
------------
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT DESCRIPTION (including features)
- ------------ --- ------------- ------------------------------------------
Innovative Machine Corp. Coating Line Equipment
Various Cathode Manufacturing Cell
Various Anode Manufacturing Cell
Various Other Related Equipment
LET 1 Laminator Bi-cell Asselmby Lamination Machine and Packaging
Machine
LET 1 Tab Welder LET Tab Welder
LET 1 Benchtop Benchtop Form Station Which Includes ATP, 303480, 103
X103 Products
LET 1 PCB Welding System
DDS 1 Accumulator System for Custom Automation Equipment
Intelligent 1 Automation Trim and Fold Machine
Automation
Intelligent 1 Automation Trim and Fold Machine Final Payment
Automation
Intelligent 1 Automation Trim and Fold Machine ECN
Automation
Intelligent 1 Automation Trim and Fold Machine 10% due with Ultralife
Automation Acceptance
Agreed to and Accepted: Agreed to and Accepted:
WINTHROP RESOURCES CORPORATION ULTRALIFE BATTERIES, INC.
"LESSOR" "LESSEE"
By: s/o Richard J. Pieper By: s/o Molly Henderson
Print Print
Name: Richard J. Pieper Name: Molly Henderson
Title: Sr. Vice President Title: Corporate Controller
Date: September 26, 2001 Date: August 15, 2001