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 September 28, 2002
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
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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 (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
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(Address of principal executive offices)
(Zip Code)
(315) 332-7100
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(Registrant's telephone number, including area code)
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(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 - 12,652,269 shares
outstanding as of October 31, 2002.
ULTRALIFE BATTERIES, INC.
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 2002 and June 30, 2002.......................... 3
Condensed Consolidated Statements of Operations -
Three months ended September 28, 2002 and
September 30, 2001............................................ 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 28, 2002 and
September 30, 2001............................................ 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................. 17
Item 4. Controls and Procedures......................................... 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 20
Signatures.................................................................. 21
CEO and CFO Certifications.................................................. 22
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
September 28, June 30,
ASSETS 2002 2002
------------- ---------
(unaudited)
Current assets:
Cash and cash equivalents $ 929 $ 2,016
Restricted cash 201 201
Available-for-sale securities 2 2
Trade accounts receivable (less
allowance for doubtful accounts of
$276 at September 28, 2002 and $272
at June 30, 2002) 5,147 6,049
Inventories 5,235 4,633
Prepaid expenses and other current assets 1,059 845
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Total current assets 12,573 13,746
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Property, plant and equipment 15,648 16,134
Other assets:
Technology license agreements (net
of accumulated amortization of
$1,293 at September 28, 2002 and
$1,268 at June 30, 2002) 158 183
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Total Assets $ 28,379 $ 30,063
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and
capital lease obligations $ 2,841 $ 3,148
Accounts payable 3,306 3,091
Accrued compensation 173 255
Accrued vacation 439 439
Other current liabilities 1,799 1,863
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Total current liabilities 8,558 8,796
Long-term liabilities:
Debt and capital lease obligations 103 103
Grant 395 --
--------- ---------
498 103
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 - 13,379,519 at
September 28, 2002 and 13,379,519
at June 30, 2002) 1,338 1,338
Capital in excess of par value 107,891 107,891
Accumulated other comprehensive loss (919) (856)
Accumulated deficit (88,684) (86,906)
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19,626 21,467
Less -- Treasury stock, at cost
-- 27,250 shares 303 303
--------- ---------
Total shareholders' equity 19,323 21,164
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Total Liabilities and Shareholders' Equity $ 28,379 $ 30,063
========= =========
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)
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Three Months Ended
September 28, September 30,
2002 2001
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Revenues $ 6,847 $ 7,616
Cost of products sold 6,718 8,064
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Gross margin 129 (448)
Operating and Other expenses:
Research and development 477 1,182
Selling, general, and administrative 1,569 2,121
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Total operating expenses 2,046 3,303
Operating loss (1,917) (3,751)
Other income (expense):
Interest income 33 69
Interest expense (115) (82)
Equity loss in affiliate -- --
Miscellaneous 221 122
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Loss before income taxes (1,778) (3,642)
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Income taxes -- --
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Net loss $ (1,778) $ (3,642)
======== ========
Net loss per share, basic and diluted $ (0.14) $ (0.30)
======== ========
Weighted average shares outstanding,
basic and diluted 13,137 12,005
======== ========
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)
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Three Months Ended
September 28, September 30,
2002 2001
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OPERATING ACTIVITIES
Net loss $(1,778) $(3,642)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 674 1,162
Loss on asset disposal 4
Equity loss in affiliate -- --
Changes in operating assets
and liabilities:
Accounts receivable 902 (1,832)
Inventories (602) 411
Prepaid expenses and other
current assets (214) (751)
Accounts payable and other
current liabilities 69 625
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Net cash used in operating
activities (945) (4,027)
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INVESTING ACTIVITIES
Purchase of property and
equipment (101) (613)
Proceeds from asset disposal 8 --
Purchase of securities -- (7,765)
Sales of securities -- 7,153
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Net cash provided by investing
activities (93) (1,225)
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FINANCING ACTIVITIES
Proceeds from issuance of
common stock -- 6,360
Proceeds from grant 395 --
Principal payments on
long-term debt and capital
lease obligations (307) (270)
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Net cash provided by (used in)
financing activities 88 6,090
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Effect of exchange rate
changes on cash (137) (136)
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Decrease in cash and cash
equivalents (1,087) 702
Cash and cash equivalents at
beginning of period 2,016 494
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Cash and cash equivalents at
end of period $ 929 $ 1,196
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ -- $ (1)
======= =======
Interest paid $ 112 $ 78
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
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1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2002.
As of July 1, 2002, the Company changed its monthly closing
schedule, moving to a weekly-based cycle as opposed to a calendar month -
based cycle. While the actual dates for the quarter-ends will change
slightly each year, the Company believes that there will not be any
material differences when making quarterly comparisons. In all cases, the
Company's fiscal year-end will continue to be June 30.
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
September 28, September 30,
2002 2001
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Net loss $(1,778) $(3,642)
Unrealized (loss) gain on securities -- (1)
Foreign currency translation adjustments (63) 130
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Total comprehensive loss $(1,841) $(3,513)
======== ========
6
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)
September 28, 2002 June 30, 2002
------------------ -------------
Raw materials $3,152 $2,680
Work in process 1,292 1,338
Finished goods 1,279 1,022
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5,723 5,040
Less: Reserve for obsolescence 488 407
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$5,235 $4,633
====== ======
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the
following:
(unaudited)
September 28, June 30,
2002 2002
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Land $ 123 $ 123
Buildings and leasehold improvements 1,619 1,619
Machinery and equipment 26,850 26,308
Furniture and fixtures 313 312
Computer hardware and software 1,347 915
Construction in progress 1,771 2,531
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32,023 31,808
Less: Accumulated depreciation 16,375 15,674
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$15,648 $16,134
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6. COMMITMENTS AND CONTINGENCIES
As of September 28, 2002, the Company had $201 in restricted cash
with a certain lending institution primarily for letters of credit
supporting leases for a building and some computer equipment.
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
7
their complaint and directing that the case be closed. Plaintiffs filed a
Notice of Appeal to the Third Circuit Court of Appeals and the parties
submitted their briefs. Subsequently, the parties notified the Court of
Appeals that they had reached an agreement in principle to resolve the
outstanding appeal and settle the case upon terms and conditions which
require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement,
the Court of Appeals issued an Order dated May 18, 2001 adjourning oral
argument on the appeal and remanding the case to the District Court for
further proceedings in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement,
the Company's insurance carrier commenced liquidation proceedings. The
insurance carrier informed the Company that in light of the liquidation
proceedings, it would no longer fund the settlement. In addition, the
value of the insurance policy is in serious doubt. In April 2002, the
Company and the insurance carrier for the underwriters offered to proceed
with the settlement. Plaintiff's counsel has accepted the terms of the
proposed settlement, amounting to $175 for the Company, and the matter
must now be approved by the Court and by the shareholders comprising the
class. Based on the terms of the proposed settlement, the Company has
established reserves for its share of the settlement costs and associated
expenses.
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. The Company has fully reserved for its portion of the
estimated liability. Test sampling was completed in the spring of 2001.
The next step is for the Company to submit a remediation plan to the New
York State Department of Environmental Conservation for approval. Upon
approval, the Company would have the authority to remediate the property.
Because this is a voluntary remediation, there is no requirement for the
Company to complete the project within any specific time frame. The
ultimate resolution of this matter may have a significant adverse impact
on the results of operations in the period in which it is resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein
it is asserted that the Customer's product, which is powered by an
Ultralife battery, does not operate according to the Customer's product
specification. No claim has been filed against Ultralife. However, in the
interest of fostering good customer relations, in September 2002,
Ultralife has agreed to lend technical support to the Customer in defense
of its claim. Additionally, Ultralife will honor its warranty by replacing
any batteries that may be determined to be defective. In the event a claim
is filed against Ultralife and it is ultimately determined that
Ultralife's product was defective, replacement of batteries to this
Customer or end-user may have a material adverse effect on the Company's
financial position and results of operations.
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,
8
cylindrical and various other non-rechargeable specialty batteries. The
Rechargeable Batteries segment includes the Company's lithium polymer and
lithium ion rechargeable batteries. The Technology Contracts segment
includes revenues and related costs associated with various government and
military development contracts. The 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 September 28, 2002
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
------------------------------------------------------------------------
Revenues $ 6,678 $169 $ -- $ -- $ 6,847
Segment contribution 32 (380) -- (1,569) (1,917)
Interest, net (82) (82)
Equity loss in affiliate -- --
Miscellaneous 221 221
Income taxes -- --
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Net loss $(1,778)
Total assets $20,428 $4,076 $ -- $ 3,875 $28,379
Three Months Ended September 30, 2001
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------
Revenues $ 7,274 $ 135 $207 $ -- $ 7,616
Segment contribution 727 (2,378) 21 (2,121) (3,751)
Interest income, net (13) (13)
Equity loss in affiliate -
Miscellaneous 122 122
Income taxes -
--------
Net loss $(3,642)
Total assets $21,049 $20,604 $312 $ 8,440 $50,405
8. OTHER MATTERS
In March 1998, the Company received a $500 grant from the Empire
State Development Corporation to fund certain equipment purchases. The
grant was contingent upon the Company achieving and maintaining minimum
employment levels for a period of five years. If annual levels of
employment are not maintained, a portion of the grant might become
repayable. Through the first four years of the grant period, the Company
has met the requirements. The Company has recognized revenue over the
grant period ratably, dependent upon meeting certain employment criteria.
The remaining unamortized balance of $50 relating to the grant is included
in other current liabilities in the accompanying Consolidated Balance
Sheet as of June 30, 2002. It is possible that the Company may not meet
the employment criteria at the end of the fifth year, and thus the Company
may be required to repay one-fifth of the overall grant.
In November 2001, the Company received approval for a $750
grant/loan from a federally sponsored small cities program. The grant/loan
will assist in funding current capital expansion plans that the Company
expects will lead to job creation. The Company will be reimbursed for
approved capital as it incurs the cost. In August 2002, the $750 small
cities grant/loan documentation was finalized and the Company was
reimbursed $395 for costs it had incurred to date for equipment purchases
applicable under this grant/loan. The remaining amount under this
grant/loan will be
9
reimbursed as the Company incurs additional expenses and submits requests
for reimbursement. Certain employment levels are required to be met during
the initial three year period. If the Company does not meet its employment
quota, it may adversely affect reimbursement requests, or the grant may be
converted to a loan that will be repaid over a seven-year period. The
Company is reflecting the proceeds from this grant/loan, as well as
accrued interest at the stated rate of 5% per year, as a long-term
liability, and will only amortize these proceeds into income as the
certainty of meeting the employment criteria becomes definitive.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Company adopted Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS)
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be
made. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The adoption of this pronouncement did not
have any adverse effect on the Company's financial statements.
In July 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principle
Board Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The adoption of this
pronouncement did not have any adverse effect on the Company's financial
statements.
In July 2002, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities", which nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. The adoption of
this pronouncement did not have any adverse effect on the Company's
financial statements.
10. 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. This venture
was named Ultralife Taiwan, Inc. ("UTI"). The Company does not guarantee
the obligations of UTI and is not required to provide any additional
funding. This investment is accounted for using the equity method of
accounting. In 2001, the Company's equity investment had been written down
to zero as the Company recorded its share of the ventures cumulative
losses. In 2002, since UTI continued to report losses, the Company did not
reflect these results in its financial results since the investment has
already been written down to zero. As of September 28, 2002, the Company's
equity interest in the venture was approximately 30%.
10
Summarized financial statement information for the unconsolidated
venture is as follows:
(unaudited)
Condensed Statements of Operations: Three Months Ended
September 30,
2002 2001
-------- --------
Net revenue $ 728 $ --
Cost of Sales (2,110) --
Operating loss (3,588) (1,694)
Net loss (4,130) (1,752)
11. SUBSEQUENT EVENT
On October 23, 2002, the Company exchanged an aggregate of
42,500,000 shares of Ultralife Taiwan, Inc. ("UTI") stock to UTI and PGT
Energy Corporation ("PGT") for total consideration of $2,400 and the
return of 700,000 shares of Ultralife common stock. Ultralife and PGT were
the two most significant investors when UTI was formed in 1999. Under the
terms of the transaction, Ultralife will receive $2,400 in a series of 5
cash payments beginning October 30, 2002 and ending no later than
mid-December 2002. In addition, over the next 3 years Ultralife will have
reserved access to 10% of UTI's high volume capacity for rechargeable
lithium battery products and the rights to utilize UTI's LSB (Large Scale
Battery) technology for the production of large capacity lithium ion
batteries for government and military markets in the U.S. and the U.K. As
a result of the transaction, Ultralife's ownership interest in UTI will
decline from approximately 30% to approximately 10.6%. In addition, the
Company expects to record a non-operating gain of at least $2,400 in its
second fiscal quarter and to record an increase in treasury stock to
reflect the return of its 700,000 common shares. This will result in
reducing the issued and outstanding common shares of Ultralife to
12,652,269 as of the date of this transaction.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This 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 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.
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, 2002.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable) and rechargeable
batteries for use in a wide array of applications. The Company believes that its
technologies allow the Company to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. The Company has focused on manufacturing a family
of lithium primary batteries for industrial, military and consumer applications,
which it believes is one of the most comprehensive lines of lithium manganese
dioxide primary batteries commercially available. The Company also supplies
rechargeable lithium polymer and lithium ion batteries for use in portable
electronic applications.
For several years, the Company has incurred net operating losses primarily
as a result of funding research and development activities and, to a lesser
extent, incurring manufacturing and selling, general and administrative costs.
During fiscal 2002, the Company realigned its resources to bring costs more in
line with revenues, moving the Company closer to its targets of operating cash
breakeven and profitability. In addition, the Company refined its rechargeable
strategy to allow it to be more effective in the marketplace.
The Company believes that its current growth strategy will be successful
in the long-term. However, at the present time, the status of the Company's cash
and credit situation is of serious concern, and much of the Company's ability to
succeed in the near-term is dependent upon continued revenue growth and a
favorable product mix that will generate positive cash flows. If the Company is
unsuccessful in growing the business sufficiently in the near-term to generate
adequate levels of cash, it will need to find alternative sources of funds to
allow it to continue to operate in its current capacity. The Company is
evaluating possible funding alternatives including obtaining additional debt or
equity financing and/or selling assets. While the Company has been successful at
raising funds in the past and is optimistic that it will be able to do so again
if necessary, there is no assurance that the Company will be able to do so under
the current circumstances. See "Liquidity and Capital Resources" for additional
information.
12
As of July 1, 2002, the Company changed its monthly closing schedule,
moving to a weekly-based cycle as opposed to a calendar month - based cycle.
While the actual dates for the quarter-ends will change slightly each year, the
Company believes that there will not be any material differences when making
quarterly comparisons. In all cases, the Company's fiscal year-end will continue
to be June 30.
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 other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The 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 September 28, 2002 and September 30, 2001
Consolidated revenues were $6,847,000 for the three-month period ended
September 28, 2002, a decrease of $769,000, or 10%, from the $7,616,000 reported
in the same quarter in the prior year. Primary battery sales decreased $596,000,
or 8%, from $7,274,000 last year to $6,678,000 this year, mainly as a result of
lower 9-volt battery shipments as customers adjusted their inventory levels, as
well as lower military battery sales related to a decline in orders for small
cylindrical batteries. Technology Contract revenues declined $207,000 due to the
completion of certain non-renewable government contracts.
Cost of products sold totaled $6,718,000 for the first quarter of fiscal
2003, a decrease of $1,346,000, or 17% over the same three-month period a year
ago. The gross margin on consolidated revenues for the quarter was $129,000, or
2% of revenues, an improvement of $577,000 from the gross margin loss of
$448,000, or 6%, in the prior year. The gross margin loss attributable to
rechargeable battery operations was $291,000, an improvement of $1,122,000 from
last year's reported loss of $1,413,000. This improvement resulted from the cost
savings actions that the Company took in the second and third quarters of fiscal
year 2002, as well as lower depreciation expense that resulted from the
write-down of rechargeable fixed assets in the fourth quarter of fiscal 2002.
Gross margins in the Company's primary battery operations were $420,000, a
decrease of $524,000 from the $944,000 reported in the same period last year. As
a percentage of sales, primary battery gross margins declined from 13% last year
to 6% this year. This decline was primarily attributable to lower production
volumes in conjunction with lower sales, as well as start-up costs associated
with the production of new military batteries.
Operating and other expenses totaled $2,046,000 for the three months ended
September 28, 2002, a decrease of $1,257,000, or 38%, compared to $3,303,000 in
the prior year. Research and development expenses declined $705,000, while
selling, general and administrative expenses declined $552,000. The decrease in
R&D expenses resulted from the Company's revised rechargeable strategy and the
cost savings initiatives that were implemented during fiscal 2002, in addition
to lower depreciation expense related to the rechargeable fixed asset impairment
charge that occurred in June 2002. SG&A expenses also declined due mainly to
lower compensation and related costs from the Company's cost savings initiatives
taken during last fiscal year.
Interest expense, net, increased $69,000 from $13,000 in the first quarter
of fiscal 2002 to $82,000 in the first quarter of fiscal 2003. This increase is
principally the result of lower average cash balances. Miscellaneous income
(expense) increased $99,000 in the quarter, from $122,000 in fiscal 2002 to
$221,000 in fiscal 2003. This change relates primarily to foreign currency
transaction gains, mainly the strengthening of the U.K. British pound versus the
U.S. dollar.
13
Net losses were $1,778,000, or $0.14 per share, for the first quarter of
fiscal 2003 compared to $3,642,000, or $0.30 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
At September 28, 2002, cash and cash equivalents and available for sale
securities totaled $1,132,000. Of this amount, $201,000 was restricted to
support certain outstanding letters of credit. During the first three months of
fiscal 2003, the Company used $945,000 of cash in operating activities. This use
of cash related primarily to an EBITDA loss of $1,243,000 (Operating Loss plus
depreciation and amortization). In addition, changes in working capital during
the quarter resulted in a increase of approximately $150,000, mainly due to
reductions in outstanding accounts receivable. The Company spent $101,000 for
capital expenditures and $307,000 on debt and capital lease principal payments
during the first quarter of fiscal 2003. In addition, the Company received an
initial $395,000 in proceeds from its government grant/loan program, as
reimbursement for previous expenditures on machinery and equipment.
At September 28, 2002, the Company had short and long-term debt and
capital lease obligations totaling $3,339,000. Of this total, $498,000 was
considered long-term. The following discussion provides additional information
on these obligations.
As of September 28, 2002, the Company had $2,200,000 outstanding under the
term loan component of its 3-year, $15,000,000 credit facility, and no
borrowings were outstanding under the revolver component of the credit facility.
The Company's additional borrowing capacity under the revolver component of the
credit facility as of September 28, 2002 was approximately $500,000, net of
outstanding letters of credit of $3,800,000. Since the facility expires in June
2003, the outstanding amount is classified as short-term on the Consolidated
Balance Sheet. As of September 2002, the Company had been concerned about
violating its debt covenant requiring a minimum net worth of approximately
$19,200,000. As a result of the exchange of a portion of the Company's
investment in Ultralife Taiwan, Inc. in October 2002, the Company expects a
$2,400,000 gain which will ultimately increase net worth (see further discussion
below). The Company is currently working with its primary lending institution to
arrange an extension of this credit facility well beyond the end of the current
fiscal year, although there is no assurance that the Company will be able to do
so.
In April 2002, the Company closed on a $3,000,000 private placement
consisting of common equity and a $600,000 convertible note. Initially, 801,333
shares were issued. The note, which was issued to one of the Company's
directors, will convert automatically into an additional 200,000 shares if the
Company's shareholders vote to approve the conversion of the note into common
shares at the Company's Annual Meeting in December 2002, and all accrued
interest will be forgiven. If shareholder approval is not obtained, the Company
is obligated to repay the note on December 31, 2002, with accrued interest at
10% per year. All shares will be issued at $3.00 per share.
In March 1998, the Company received a $500,000 grant from the Empire State
Development Corporation to fund certain equipment purchases. The grant was
contingent upon the Company achieving and maintaining minimum employment levels
for a period of five years. If annual levels of employment are not maintained, a
portion of the grant might become repayable. Through the first four years of the
grant period, the Company has met the requirements. The Company has recognized
revenue over the grant period ratably, dependent upon meeting certain employment
criteria. The remaining unamortized balance of $50,000 relating to the grant is
included in other current liabilities in the accompanying Consolidated Balance
Sheet as of June 30, 2002. It is possible that the Company may not meet the
14
employment criteria at the end of the fifth year, and thus the Company may be
required to repay one-fifth of the overall grant.
In November 2001, the Company received approval for a $750,000 grant/loan
from a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
the cost. In August 2002, the $750,000 small cities grant/loan documentation was
finalized and the Company was reimbursed $395,000 for costs it had incurred to
date for equipment purchases applicable under this grant/loan. The remaining
amount under this grant/loan will be reimbursed as the Company incurs additional
expenses and submits requests for reimbursement. Certain employment levels are
required to be met during the initial three year period. If the Company does not
meet its employment quota, it may adversely affect reimbursement requests, or
the grant may be converted to a loan that will be repaid over a seven-year
period. The Company is reflecting the proceeds from this grant/loan, as well as
accrued interest at the stated rate of 5% per year, as a long-term liability,
and will only amortize these proceeds into income upon the certainty of meeting
the employment criteria.
On October 23, 2002, the Company exchanged an aggregate of 42,500,000
shares of Ultralife Taiwan, Inc. ("UTI") stock to UTI and PGT Energy Corporation
("PGT") for total consideration of $2,400,000 and the return of 700,000 shares
of Ultralife common stock. Ultralife and PGT were the two most significant
investors when UTI was formed in 1999. Under the terms of the transaction,
Ultralife will receive $2,400,000 in a series of 5 cash payments beginning
October 30, 2002 and ending no later than mid-December 2002. In addition, over
the next 3 years Ultralife will have reserved access to 10% of UTI's high volume
capacity for rechargeable lithium battery products and the rights to utilize
UTI's LSB (Large Scale Battery) technology for the production of large capacity
lithium ion batteries for government and military markets in the U.S. and the
U.K. As a result of the transaction, Ultralife's ownership interest in UTI will
decline from approximately 30% to approximately 10.6%. In addition, the Company
expects to record a non-operating gain of at least $2,400,000 in its second
fiscal quarter and to record an increase in treasury stock to reflect the return
of its 700,000 common shares. This will result in reducing the issued and
outstanding common shares of Ultralife to 12,652,269 as of the date of this
transaction.
While the Company remains optimistic about its long-term future prospects
and growth potential, the timing aspect of near-term revenue and profitability
is unclear. The Company's future liquidity depends on its ability to
successfully generate positive cash flows from operations and to achieve
operational savings.
The Company also is continuing to explore other sources of capital,
including utilizing its unleveraged assets as collateral for additional
borrowing capacity, selling assets that are not core to the Company's long-term
strategic initiatives, and raising equity through a private or public offering.
Although the Company is confident that it will be successful in arranging
adequate financing, there can be no assurance that the Company will have
sufficient cash flows to meet its working capital and capital expenditure
requirements during the course of fiscal 2003. Therefore, this could have a
material adverse effect on the Company's business, financial position and
results of operations.
As of September 28, 2002, the Company had capital commitments, principally
for purchases of machinery and equipment, of approximately $169,000.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect
amounts reported therein.
15
The estimates that require management's most difficult, subjective or complex
judgments are described below.
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.
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.
Warranties:
The Company maintains provisions related to normal warranty
claims by customers. The Company evaluates these reserves monthly
based on actual experience with warranty claims to date.
Impairment of Long-Lived Assets:
The Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable on an undiscounted cash flow basis.
Environmental Issues:
Environmental expenditures that relate to current operations
are expensed or capitalized, as appropriate, in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities".
Remediation costs that relate to an existing condition caused by
past operations are accrued when it is probable that these costs
will be incurred and can be reasonably estimated.
Outlook
The Company expects revenues in its second quarter of fiscal 2003 to
increase from the first fiscal quarter, likely reaching in excess of $9,000,000.
At this time, indications are that 9-volt orders have strengthened from the
level in the first quarter, and the interest level in the Company's military
batteries is growing, particularly in the BA-5390 battery, which is an
alternative to the main communications battery
16
by military forces. Although the activity surrounding the rechargeable battery
products is increasing significantly, the Company is conservatively projecting
modest revenues in this area.
The Company believes that quarterly revenues of approximately $9,000,000
to $9,500,000 will allow it to achieve operating cash breakeven, depending on
the Company's overall product mix. The Company also believes that quarterly
revenues in the range of $10,500,000 should allow the Company to be able to
report a profit. While the Company was able to significantly reduce costs during
fiscal 2002, it still maintains a substantial fixed cost infrastructure to
support its overall operations. Increasing volumes of sales and production will
generate favorable returns due to economies of scale, but similarly, decreasing
volumes will result in the opposite effect.
While the Company believes that it will be able to achieve its operating
cash breakeven target in the near future, it expects that changes in working
capital for increasing sales volumes and inventory levels will be able to be
financed by its revolving credit facility.
For the full fiscal year, the Company is maintaining its target of
achieving a 35% revenue growth over fiscal 2002. While the first quarter's
revenues were lower than the Company's initial projections, it cannot determine
at this time whether the full year's results will be adversely impacted. The
revenue growth each quarter is subject to significant fluctuations as the timing
of customer orders is not easily predictable. In particular, 9-volt revenues are
dependent upon continued demand from the Company's customers, some of which are
dependent upon retail sell-through. Similarly, revenues from sales of
cylindrical products, primarily to military customers, are dependent upon a
variety of factors, including the timing of the battery solicitation process
within the military, the Company's ability to successfully win contract awards,
successful qualification of the Company's products in the applicable military
applications, and the timing of order releases against such contracts. Some of
these factors are outside of the Company's direct control.
The Company continues to believe that spending for capital projects during
fiscal 2003 will continue to be relatively modest. The Company carefully
evaluates such projects and will only make capital investments when necessary
and when there is typically a timely payback. Certain capital equipment
acquisitions during the upcoming fiscal year will be financed by the remaining
availability under the capital equipment grant/loan the Company recently
finalized.
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.
The Company monitors the relationship between the U.S. dollar and other
currencies on a continuous basis and adjusts sales prices for products and
services sold in these foreign currencies as appropriate to safeguard against
the fluctuations in the currency effects relative to the U.S. dollar.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the Company
carried out an evaluation, under the supervision and with the participation of
the company's management, including the Company's president and chief executive
officer, along with the Company's vice president - finance and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act 13a-14. Based upon
that evaluation, the Company's president and chief executive officer, along with
the Company's vice president - finance and chief financial officer, concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information related to the Company (including its
consolidated subsidiaries) required to be
17
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
18
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 commenced liquidation proceedings. The
insurance carrier informed the Company that in light of the liquidation
proceedings, it would no longer fund the settlement. In addition, the
value of the insurance policy is in serious doubt. In April 2002, the
Company and the insurance carrier for the underwriters offered to proceed
with the settlement. Plaintiff's counsel has accepted the terms of the
proposed settlement, amounting to $175,000 for the Company, and the matter
must now be approved by the Court and by the shareholders comprising the
class. Based on the terms of the proposed settlement, the Company has
established reserves for its share of the settlement costs and associated
expenses.
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
$230,000. 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. The Company has fully reserved for its portion of the
estimated liability. Test sampling was completed in
19
the spring of 2001. The next step is for the Company to submit a
remediation plan to the New York State Department of Environmental
Conservation for approval. Upon approval, the Company would have the
authority to remediate the property. Because this is a voluntary
remediation, there is no requirement for the Company to complete the
project within any specific time frame. The ultimate resolution of this
matter may have a significant adverse impact on the results of operations
in the period in which it is resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein
it is asserted that the Customer's product, which is powered by an
Ultralife battery, does not operate according to the Customer's product
specification. No claim has been filed against Ultralife. However, in the
interest of fostering good customer relations, in September 2002,
Ultralife has agreed to lend technical support to the Customer in defense
of its claim. Additionally, Ultralife will honor its warranty by replacing
any batteries that may be determined to be defective. In the event a claim
is filed against Ultralife and it is ultimately determined that
Ultralife's product was defective, replacement of batteries to this
Customer or end-user may have a material adverse effect on the Company's
financial position and results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Stock Purchase Agreement with Ultralife Taiwan, Inc.
99 CEO & CFO Certifications
(b) Reports on Form 8-K
Report on Form 8-K, dated October 23, 2002 reporting on Item
5. Other Events, relating to the exchange of shares of Ultralife
Taiwan, Inc. stock for cash and the return of shares of the
Company's common stock.
20
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: November 12, 2002 By: /s/ John D. Kavazanjian
----------------- ---------------------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Robert W. Fishback
----------------- ---------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
21
I, John D. Kavazanjian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John D. Kavazanjian
---------------------------
John D. Kavazanjian,
President and Chief Executive Officer
22
I, Robert W. Fishback, certify that:
1. I have reviewed this quarterly report on 10-Q of Ultralife Batteries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Robert W. Fishback
---------------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
23
Exhibit 10.1
STOCK PURCHASE AGREEMENT
This Agreement dated as of October 23, 2002 ("Effective Date") is entered
into by and among Ultralife Taiwan, Inc., a corporation existing under the laws
of the Republic of China ("ROC"), having a place of business located at No.2-3,
Industry E. Road II, Science-Based Industrial Park, Hsinchu, Taiwan, ROC
("UTI"),
Ultralife Batteries, Inc., a corporation organized under the laws of the State
of Delaware, United States of America, having a place of business located at
2000 Technology Parkway, Newark, NY 14513 USA ("UBI"), and
PGT Energy Corporation, a corporation existing under the laws of the ROC, having
a place of business located at 7F-1, No.67, Tze-You Road, Hsinchu, Taiwan, ROC
("Purchaser").
(UTI, UBI and Purchaser hereinafter referred to collectly as the "Parties" and
individually as a "Party.")
WHEREAS, UTI owns certain shares of common stock issued by UBI and intends to
transfer such shares to UBI through certain third parties;
WHEREAS, UBI owns Sixty Million Three Hundred Three Thousand and Ninety Three
(60,303,093) shares of common stock issued by UTI and intends to surrender to
UTI certain portion of such shares acquired by UBI for UBI's contribution in
kind to UTI in exchange for transfer of the shares of common stock in UBI held
by UTI and certain obligations committed by UTI hereunder;
WHEREAS, UBI intends to sell to Purchaser certain shares of common stock in UTI
which UBI acquires due to UBI's cash contribution; and
WHEREAS, the Parties will cooperate to complete the transactions contemplated
herein according to the terms and condition set forth hereunder.
NOW, THEREFORE, in consideration of the foregoing and of the covenants and
agreements herein contained and intending to be legally bound, the Parties agree
as follows:
Article 1. Agreement to Sell and Purchase UBI Shares and UTI Shares.
1.1 Upon the terms and subject to the conditions of this Agreement, on the
Closing Date (as defined in Article 2), UTI shall directly or indirectly assign,
transfer and deliver or cause to be assigned, transferred and delivered to UBI
seven hundred thousand (700,000) shares of common stock issued by UBI and
currently held by UTI, together with all rights attached or accrued thereto on
the date hereof including the right to all dividends and distributions declared,
paid or made in respect thereof on or after the date hereof ("UBI Shares") in
exchange of certain shares of common stock in UTI to be surrendered by UBI to
UTI as set forth in Article 1.2.
24
1.2 Upon the terms and subject to the conditions of this Agreement, on the
Closing Date, UBI shall surrender to UTI with immediate effect Thirty Two
Million Five Hundred Thousand (32,500,000) shares of common stock issued by UTI
to UBI due to UBI's contribution in kind to UTI, together with all rights
attached or accrued thereto on the date hereof including the right to all
dividends and distributions declared, paid or made in respect thereof on or
after the date hereof ("UTI Technology Shares") in exchange for the transfer of
UBI Shares from UTI to UBI as set forth in Article 1.1.
1.3 Upon the terms and subject to the conditions of this Agreement, on the
Closing Date, UBI shall sell, assign, transfer and deliver or cause to be sold,
assigned, transferred and delivered to Purchaser or the third parties designated
by Purchaser Ten Million (10,000,000) shares of common stock issued by UTI to
UBI for cash contribution, together with all rights attached or accrued thereto
on the date hereof including the right to all dividends and distributions
declared, paid or made in respect thereof on or after the date hereof ("UTI Cash
Shares") for an aggregate purchase price equivalent to Two Million and Four
Hundred Thousand U.S. Dollars (US$2,400,000) ("UTI Cash Shares Purchase Price")
in accordance with the payment schedule in Article 3.1.
Article 2. Closing; Delivery.
2.1. The Closing. The transfer of UBI Shares pursuant to Article 1.1 and
surrender of UTI Technology Shares pursuant to Article 1.2 shall be consummated
at a closing (the "Closing") held at the offices of UTI, on October 23, 2002.,
(the "Closing Date") or at such other time and place upon which the Parties
shall agree.
2.2. Deliveries. At the Closing, the following items shall be delivered:
(i) UTI shall deliver to UBI the original, chopped, and
authenticated stock certificates representing the UBI Shares.
(ii) UBI will deliver to UTI the original, chopped, and
authenticated stock certificates representing the UTI
Technology Shares.
(iii) UBI will deliver to UTI the executed Surrender per form as
Exhibit A.
(iv) UBI will deliver to Lee and Li, Attorneys-at-law the executed
Power of Attorney per form as Exhibit B.
(v) UBI will deliver to Purchaser the original, chopped, and
authenticated stock certificates representing the UTI Cash
Shares.
25
Article 3. Payments for UTI Cash Shares in Installments.
3.1 Purchaser shall pay to UBI for the UTI Cash Shares Purchase Price in
installments in accordance with the following schedule:
- -----------------------------------------------------------------
Payment Due Date Amount
- -----------------------------------------------------------------
First: October 30, 2002 US$400,000
- -----------------------------------------------------------------
Second: November 7, 2002 US$500,000
- -----------------------------------------------------------------
Third: November 14, 2002 US$500,000
- -----------------------------------------------------------------
Fourth: November 21, 2002 US$500,000
- -----------------------------------------------------------------
Fifth: November 28, 2002 US$500,000
- -----------------------------------------------------------------
Any payment(s) made for the second and third payments above within seven (7)
days after the respective due day(s) shall not constitute breach of the payment
schedule as set forth in this Article 3.1. Any payment(s) made for the fourth
and fifth payments above within fourteen (14) days after the respective due
day(s) shall not constitute breach of the payment schedule as set forth in this
Article 3.1.
3.2 Purchaser shall make each payment in accordance with Article 3.1 to
the following bank account of UBI or any bank account designated by UBI which
UBI informs Purchaser in writing ("Designated Bank Account"):
Bank: JP Morgan Chase Bank
Swift Code: CHASUS33
Account Name: Ultralife Batteries, Inc.
Account Number: 0001474121
3.3 The securities transaction tax for the UTI Cash Shares shall be borne
by UBI and withheld from the UTI Cash Shares Purchase Price for the account of
UBI. Any other taxes payable in connection with this Agreement shall be borne
respectively by the Parties on its own as required by the applicable laws and
regulations.
Article 4. Covenants After Closing.
4.1 Within ten (10) business days after the Closing, UBI shall procure the
foreign investment approval under the Taiwan Statute for Investment by Foreign
Nationals of transfer of UTI Cash Shares.
4.2 In the event that the executed Power of Attorney as provided in
Article 2.2(iv) is required of notarization and legalization, UBI shall cause
such document notarized and legalized within ten (10) business days after
receipt of UTI's request.
4.3 Each Party shall cooperate with the other, take such further action,
and execute and deliver such further documents, as may be reasonably requested
by the other Party in order to carry out the terms and purposes of this
Agreement.
26
Article 5. Supply of Lithium Products.
5.1 To induce UBI to surrender to UTI the UTI Technology Shares, UTI
agrees, within three (3) years after the date hereof, to supply UBI the Lithium
Products (as defined in Article 5.2) with the quantities up to ten percent (10%)
per annum of the capacity of UTI's current production line for such Lithium
Products, provided, however, that UBI shall place orders for the Lithium
Products no later than six (6) months prior to the delivery of such products and
the prices, trade terms, payment terms and all other terms and conditions
thereof shall be mutually agreed upon by UTI and UBI.
5.2 For the purpose of this Article 5, Lithium Products shall mean: (i)
rechargable lithium cobalt dioxide cell in cylindrical metal case, cell capacity
between six ampere-hour to ten ampere-hour ("Lithium Product I"); (ii)
rechargable lithium cobalt dioxide cell in thin prismatic metal case, thickness
between 3 mm to 6 mm ("Lithium Product II"); (iii) rechargable lithium cobalt
dioxide polymer cell packed in soft laminated foil ("Lithium Product III").
5.3 In the event that, within three (3) years after the date hereof, UBI
is required by the US or UK military or governmental end users to manufacture
the Lithium Products I within US, UTI agrees to enter into a license agreement
with UBI to grant to UBI a non-transferable, non-exclusive, non-licensable,
royalty-bearing, limited license under the technologies related to Lithium
Products I owned and licensable by UTI to manufacture (excluding have made) the
Lithium Products I at the facilities of UBI to be agreed upon by UBI and UTI for
sale to such US or UK military or governmental end users. The detailed terms and
conditions thereof are to be mutually agreed upon by UBI and UTI.
5.4 UBI's rights of supply in accordance with Artcile 5.1 and license to
be entered into in accordance with Article 5.3 may be terminated by UTI for
convenience with immediate effect, if (i) UBI voluntarily files a petition in
bankruptcy or (ii) UBI has a petition in bankruptcy involuntarily filed against
it, or is placed in an insolvency proceeding, or if an order is entered
appointing a receiver or trustee or a levy or attachment is made against a
substantial portion of its assets which petition, placement, order, levy or
attatchment shall not be vacated within thirty (30) days from date of entry, or
if any assignment for the benefit of its creditors is made; or (iii) UBI has
materially failed in the performance of any material contractual obligation in
Article 5.1 or Article 5.3 and such failure continues uncured for thirty (30)
days after UTI provides notice thereof to UBI; or (iv) any third party, which is
a competitor of UTI acquires directly or indirectly an equity interest greater
than ten percent (10%) in UBI.
Article 6. Representations and Warranties of UTI
UTI hereby represents and warrants to UBI that the statements in this
Article 6, are all true, complete, and not materially misleading in all material
respects as of the Effective Date and at the Closing:
6.1. UTI is a company limited by shares duly organized and validly
existing and UTI (and its representative who executes this Agreement) has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder, unless oterhwise provided or reserved herein.
All corporate action on the part of UTI has been taken or will have been taken
prior to the Closing.
27
6.2. Neither the entering into nor the delivery of this Agreement nor the
performance of the transactions contemplated therein by UTI will result in the
violation of any of the provisions of the Articles of Incorporation, or other
constitutional or formation documents of UTI or any contract to which UTI is a
party, by which UTI is bound, or any applicable law or permits applicable to
UTI.
6.3 The UBI Shares are free and clear of any security interest, mortgage,
pledge, lien, charge, claim, option, warrant, equity, easement, limitation,
restriction, royalty, preemptive or other right, restraint on alienation, voting
trust or arrangement, proxy, or encumbrance of any kind.
Article 7. Representations and Warranties of UBI
UBI hereby represents and warrants to UTI and Purchaser that the
statements in this Article 7, are all true, complete, and not materially
misleading in all material respects as of the Effective Date and at the Closing:
7.1. UBI is a company limited by shares duly organized and validly
existing and UBI (and its representative who executes this Agreement) has all
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder, unless oterhwise provided or reserved herein.
All corporate action on the part of UBI has been taken or will have been taken
prior to the Closing.
7.2. Neither the entering into nor the delivery of this Agreement nor the
performance of the transactions contemplated therein by UBI will result in the
violation of any of the provisions of the Articles of Incorporation, or other
constitutional or formation documents of UBI or any contract to which UBI is a
party, by which UBI is bound, or any applicable law or permits applicable to
UBI.
7.3 The UTI Technology Shares and the UTI Cash Shares are free and clear
of any security interest, mortgage, pledge, lien, charge, claim, option,
warrant, equity, easement, limitation, restriction, royalty, preemptive or other
right, restraint on alienation, voting trust or arrangement, proxy, or
encumbrance of any kind.
Article 8. Confidentiality.
8.1 The Parties shall keep all confidential information, which it acquires
pursuant to this Agreement and is not, at the time of such disclosure, publicly
available strictly confidential. The terms and conditions of this Agreement and
all exhibits and schedules attached hereto and thereto, including their
existence, shall be considered confidential information and shall not be
disclosed by any Party to any third party except in accordance with the
provisions set forth below.
8.2 In the event that either Party becomes legally compelled (including
without limitation, pursuant to securities laws and regulations) to disclose the
existence of this Agreement, such Party shall provide the other Parties with
prompt written notice of that fact and furnish only that portion of the
information which is legally required and exercise reasonable
28
efforts to obtain reliable assurance that confidential treatment will be
accorded such information to the extent reasonably requested by the other
Parties.
Article 9. Miscellaneous.
9.1. Governing Law and Venue. This Agreement shall be governed in all
respects by the laws of the ROC without regard to provisions regarding choice of
laws, and the Hsinchu District Court shall have non-exclusive jurisdiction over
any dispute arising under this Agreement.
9.2. Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Party and the Closing of
the transactions contemplated hereby.
9.3. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors, assigns, heirs, executors and administrators of
the Parties. No Party may assign, in whole or in part, its rights or obligations
under this Agreement to any third party without the other Parties' express
written consent.
9.4. Entire Agreement. This Agreement together with the exhibits and
schedules hereto constitute the entire understanding and agreement among the
Parties with regard to the subjects hereof and supersede all prior agreements
and understandings.
9.5. Notices. Except as may be otherwise provided herein, all notices,
requests, waivers and other communications made pursuant to this Agreement shall
be made in writing and delivered by hand, mail, facsimile, overnight delivery
service, or any other mode of communication routinely used by the Parties in
their course of dealing to the address and number set forth below the
recipient's signature below, or to such other address and/or number as the
recipient may indicate in writing. Any notice or communication delivered by hand
shall be deemed to have been received when delivered, and sent by mail shall be
deemed to have been received seven (7) days after the date on which such notice
or communication is deposited in the mail. Facsimile notices or communications
shall be deemed to be received on the date of receipt of the confirmation of
transmission.
9.6. Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or of any right or remedy arising hereunder shall be enforceable
unless in writing signed by the Party against whom enforcement is sought.
9.7. Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to either Parties upon any breach or default of the
other Party shall impair any such right, power or remedy of the aggrieved Party
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of any similar breach or default thereafter occurring.
9.8. Attorneys Fees. In the event of any dispute among the Parties
concerning this Agreement or the transactions or matters referred to or provided
for herein, the prevailing Party shall be entitled to reasonable attorneys' fees
and costs in addition to such other relief as may be
29
granted. The phrase "prevailing Party" shall mean the Party who is determined in
a proceeding to have prevailed or who prevails by dismissal, default or
otherwise.
9.9. Costs. Unless it is stipulated otherwise in this Agreement, the
Parties shall bear their own costs and expenses incurred in connection with this
Agreement, the preparation thereof and the preparation for the Closing,
including professional fees and costs of their attorneys and accountants.
9.10. Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
9.11. Counterparts. This Agreement may be executed in any number of
English-language counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
9.12 Severability. If, in light of a particular set of facts and
circumstances, any provision or provisions of this Agreement will be held to be
invalid or unenforceable by any court or arbitrator of competent jurisdiction,
then: (i) the validity and enforceability of such provision or provisions as
applied to any other particular facts or circumstances and the validity of other
provisions of this Agreement will not in any way be affected or impaired
thereby; and (ii) such provision or provisions will be reformed without further
action by the Parties, but only to the extent necessary to make such provision
or provisions valid and enforceable when applied to such particular facts and
circumstances.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
30
Ultralife Taiwan, Inc.
By /s/ J.F. Hsu
---------------
Name: J.F. Hsu
Title: Chairman
Address for notices:
No.2-3, Industry E. Road II, Science-Based
Industrial Park, Hsinchu, Taiwan, ROC
Attn.: Chairman
Fax Number: 886-3-5638585
PGT Energy Corporation
By /s/ J.F. Hsu
----------------
Name: J.F. Hsu
Title: Chairman
Address for notices:
7F-1, No.67, Tze-You Road, Hsinchu,
Taiwan, ROC
Attn.: Chairman
Fax Number: 886-3-5349539
Ultralife Batteries, Inc.
By /s/ John D. Kavazanjian
----------------------------------------
Name: John D. Kavazanjian
Title: CEO and authorized representative
Address for notices:
2000 Technology Parkway, Newark, NY 14513 USA
Attn: Peter Comerford, Secretary of Corporation
Fax Number:1-315-331-7800
31
Exhibit A
SURRENDER
To: Ultralife Taiwan, Inc.
The Undersigned, a corporation organized under the laws of the State of
Delaware, United States of America, having a place of business located at 2000
Technology Parkway, Newark, NY 14513 USA, is the corporate shareholder of
Ultralife Taiwan, Inc., a corporation existing under the laws of the Republic of
China, having a place of business located at No.2-3, Industry E. Road II,
Science-Based Industrial Park, Hsinchu, Taiwan, ROC ("UTI"), and hereby
irrevocably surrenders to UTI with immediate effect the right and title to
Thirty Two Million Five Hundred Thousand (32,500,000) shares of common stock
issued by UTI to the Undersigned for the Undersigned's contribution in kind to
UTI in accordance with the Joint Venture Agreement entered into by PGT Energy
Corporation and the Undersigned dated October 10, 1998 ("UTI Technology Shares")
for the sole purpose that UTI cancels the UTI Technology Shares and makes the
corresponding reduction of the paid-in capital of UTI.
For the above purpose, the Undersigned further agrees to authorize Lee and Li,
Attorneys-at-Law ("Attorney-in-fact") to affix the Chinese chop of the
Undersigned currently kept by Lee and Li, Attorneys-at-Law ("Chop") on all
documents necessary for consummation of cancellation of the UTI Technology
Shares and the corresponding reduction of the paid-in capital of UTI.
In the event that UTI is requried by the ROC government authority to convene the
shareholders meeting of UTI to resolve to cancel the UTI Technology Shares and
to make the corresponding reduction of the paid-in capital of UTI, the
Undersigned hereby authorize the Attorney-in-fact to take all necessary measures
including without limitation affixing the Chop on the proxy for such
shareholders meeting to authorize PGT Energy Corporation, a corporation existing
under the laws of the ROC, having a place of business located at 7F-1, No.67,
Tze-You Road, Hsinchu, Taiwan, ROC, as the Undersigned's proxy to vote for
cancellation of the UTI Technology Shares and the corresponding reduction of the
paid-in capital of UTI.
IN WITNESS HEREOF, the Undersigned has caused this instrument to be executed in
the city of Hsinchu, Taiwan, Republic of China on the 23rd day of October 2002.
Ultralife Batteries, Inc.
By /s/ John D. Kavazanjian
----------------------------------------
Name: John D. Kavazanjian
Title: CEO and authorized representative
32
Exhibit B
POWER OF ATTORNEY
To Lee and Li, Attorneys-at-Law
The Undersigned, a corporation organized under the laws of the State of
Delaware, United States of America, having a place of business located at 2000
Technology Parkway, Newark, NY 14513 USA, hereby irrevocably constitute and
appoint you to be the attorney-in-fact ("Attorney-in-fact ") of the Undersigned
with full power of substitution and revocation to (i) transfer the right and
title to UTI Cash Shares (as defined in Article 1.3) to Purchaser on behalf of
the Undersigned in accordance with Article 3.1 and (ii) surrender the right and
title to UTI Technology Shares (as defined in Article 1.2) to UTI on behalf of
the Undersigned in accordance with Article 1.2, including without limitation,
provision and execution of any and all documents and acts necessary for
consummation herein.
IN WITNESS HEREOF, the Undersigned has caused this instrument to be executed in
the city of Hsinchu, Taiwan, Republic of China on the 23rd day of October 2002.
Ultralife Batteries, Inc.
By /s/ John D. Kavazanjian
----------------------------------------
Name: John D. Kavazanjian
Title: CEO and authorized representative
33
Exhibit 99
Certification pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, John D. Kavazanjian, President and Chief Executive Officer of Ultralife
Batteries, Inc., hereby certify that (i) the Quarterly Report on Form 10-Q for
the period ended September 28, 2002 attached hereto fully complies with the
requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934,
and (ii) the information contained in the attached Form 10-Q fairly presents, in
all material respects, the financial conditions and results of operations of
Ultralife Batteries, Inc. for the period presented therein.
Dated: November 12, 2002 /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian
President and Chief Executive Officer
Certification pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Robert W. Fishback, Vice President of Finance and Chief Financial Officer of
Ultralife Batteries, Inc., hereby certify that (i) the Quarterly Report on Form
10-Q for the period ended September 28, 2002 attached hereto fully complies with
the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of
1934, and (ii) the information contained in the attached Form 10-Q fairly
presents, in all material respects, the financial conditions and results of
operations of Ultralife Batteries, Inc. for the period presented therein.
Dated: November 12, 2002 /s/ Robert W. Fishback
------------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
34
