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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2002
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $0.10 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On August 30, 2002, the aggregate market value of the Common Stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $36,000,000 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on August 30, 2002.
As of September 15, 2002, the Registrant had 13,142,829 shares of Common
Stock outstanding, net of 27,250 treasury shares and 209,440 shares out of
700,000 shares owned by Ultralife Taiwan, Inc., a Taiwanese venture of which the
Company owns approximately 30%.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Ultralife Batteries, Inc. Proxy Statement - With the exception of the
items of the Proxy Statement relating to the December 12, 2002 Annual Meeting of
Stockholders specifically incorporated by reference herein, the Proxy Statement
is not deemed to be filed as part of this Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
PART I 1 Business.........................................................3
2 Properties......................................................14
3 Legal Proceedings...............................................15
4 Submission of Matters to a Vote of Securities Holders...........16
PART II 5 Market for Registrant's Common Equity and Related
Shareholder Matters...........................................17
6 Selected Financial Data.........................................19
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................20
7a Quantitative and Qualitative Disclosures About Market Risks.....31
8 Financial Statements and Supplementary Data.....................32
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................55
PART III 10 Directors and Executive Officers of the Registrant..............55
11 Executive Compensation...........................................55
12 Security Ownership of Certain Beneficial Owners and
Management.....................................................55
13 Certain Relationships and Related Transactions...................55
14 Controls and Procedures .........................................55
PART IV 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................56
Signatures.......................................................60
CEO & CFO Certifications.........................................61
Exhibits.........................................................62
PART I
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fire, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected. See Risk Factors in Item 7.
As used in this Report, unless otherwise indicated the terms "Company" and
"Ultralife" include the Company's wholly-owned subsidiary, Ultralife (UK) Ltd.
ITEM 1. BUSINESS
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 and lithium ion batteries for use in portable electronic
applications.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various 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.
Primary Batteries
The Company manufactures and markets a family of lithium-manganese dioxide
(Li/MnO2) primary batteries including 9-volt, cylindrical, pouch, and thin cell,
in addition to magnesium silver-chloride seawater-activated batteries.
Applications of the Company's 9-volt batteries include smoke detectors, wireless
security systems and intensive care monitors. The Company's other lithium
primary batteries are sold to OEMs primarily for the military and industrial
markets for use in a variety of applications including radios, automotive
telematics, emergency radio beacons, search and rescue transponders, pipeline
inspection gauges, and other specialty instruments and applications. The Company
also manufactures seawater-activated batteries for specialty marine
applications. The Company believes that the materials used in, and the chemical
reactions inherent to, lithium batteries provide significant advantages over
other currently available primary battery technologies. These advantages include
lighter weight, longer operating time, longer shelf life, and a wider operating
temperature range. The Company's primary batteries also have relatively flat
voltage profiles, which provide stable power. Conventional primary batteries,
such as alkaline, have sloping voltage profiles, which result in decreasing
power output during discharge. While the price for the Company's lithium
batteries is generally higher than alkaline batteries, the increased energy per
unit of weight and volume of the Company's lithium batteries allow longer
operating time and less frequent battery replacements for the Company's targeted
applications.
The global market for primary batteries was approximately $10.0 billion in
2001, and is expected to reach approximately $11.5 billion in 2004. The lithium
primary battery market accounted for approximately $1.0 billion of the 2001
market.
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Revenues for this segment in fiscal year 2002 were $31.3 million and
segment contribution was $3.3 million. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and the 2002 Consolidated
Financial Statements and Notes thereto for additional information.
Rechargeable Batteries
The Company believes that its range of polymer and lithium ion
rechargeable batteries offer substantial benefits, including the ability to
design and produce lightweight cells in a variety of custom sizes, shapes, and
thickness (as thin as 1 millimeter for lithium polymer cells). In fiscal year
2002, the Company modified the strategy for its rechargeable batteries business.
While the Company continues to focus on the markets for lithium polymer
batteries utilizing its own technology and manufacturing infrastructure, in
order to expand its product offerings it also markets rechargeable batteries
comprised of cells manufactured by other qualified manufacturers, including
Ultralife Taiwan, Inc. ("UTI"), in which the Company has a 30% ownership
interest at August 31, 2002. Additionally, the Company is utilizing the
rechargeable battery products it has developed for military applications to
satisfy commercial customers seeking turnkey battery solutions, including
chargers. While the cost of both the Company's own and outsourced lithium
polymer rechargeable batteries tends to be higher than the cost of lithium ion
batteries due to higher material costs, the cells tend to be thinner and lighter
weight, offering application design advantages not available with non-polymer
rechargeable cells.
The global portable rechargeable batteries market was approximately $4.2
billion in 2001 and is expected to reach approximately $4.7 billion in 2004. The
widespread use of a variety of portable consumer electronic products such as
notebook computers and cellular telephones has placed increasing demands on
battery technologies, including lithium polymer and lithium ion, to deliver
greater amounts of energy through efficiently designed, smaller and lighter
batteries.
Revenues for this segment in fiscal year 2002 were $0.4 million and
segment contribution was a loss of $20.6 million. The segment contribution
includes a $14.3 million fixed asset impairment charge. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
2002 Consolidated Financial Statements and Notes thereto for additional
information.
Technology Contracts
On a continuing basis, the Company seeks to fund part of its efforts to
identify and develop new applications for its products and to advance its
technologies through contracts with both government agencies and third parties.
The Company has been successful in obtaining awards for such programs for both
rechargeable and primary battery technologies.
Revenues for this segment in fiscal year 2002 were $0.7 million and
segment contribution was $0.1 million. Revenues in this segment are expected to
continue to decline as certain non-renewable government contracts have been
completed. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and the 2002 Consolidated Financial Statements and Notes
thereto for additional information.
Corporate
The Company allocates revenues, cost of sales, research and development
expenses, loss on fires, and impairment charges on long-lived assets across the
above business segments. The balance of income and expense, including selling,
general and administrative expenses, interest income and expense, gains on sale
of securities and other net expenses, and its minority interest in Ultralife
Taiwan, Inc. are reported in the Corporate segment.
There were no revenues for this segment in fiscal year 2002 and segment
contribution was a loss of $7.9 million. See Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 2002
Consolidated Financial Statements and Notes thereto for additional information.
History
The Company was formed in December 1990. In March 1991, the Company
acquired certain technology and assets from Eastman Kodak Company ("Kodak")
relating to its 9-volt lithium-manganese dioxide primary battery. During the
initial 12 months of operation, the Company directed its efforts towards
reactivating the Kodak manufacturing facility and performing extensive tests on
the Kodak 9-volt battery. These tests demonstrated a need for design
modifications, which, once completed, resulted in a battery with improved
performance and shelf life. In December 1992, the Company completed its initial
public offering and became listed on NASDAQ. In June 1994, the Company's
subsidiary, Ultralife Batteries (UK) Ltd., acquired certain assets of the Dowty
Group PLC ("Dowty"). The Dowty acquisition provided the Company with a
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presence in Europe, manufacturing facilities for high rate lithium and
seawater-activated batteries and a team of highly skilled scientists with
significant lithium battery technology expertise. Ultralife (UK) further
expanded its operations through its acquisition of certain assets and
technologies of Accumulatorenwerke Hoppecke Carl Zoellner & Sohn GmbH & Co.
("Hoppecke") in July 1994. In December 1998, the Company announced a venture
with PGT Energy Corporation ("PGT"), together with a group of investors, to
produce lithium rechargeable batteries in Taiwan. During fiscal 2000, the
Company provided the venture, Ultralife Taiwan, Inc. ("UTI"), with proprietary
technology and other consideration in exchange for approximately a 46% interest
in the venture. Due to stock grants to certain UTI employees in fiscal 2001 and
subsequent capital raising initiatives, the Company's equity interest has been
reduced to 30% as of August 31, 2002.
Since its inception, the Company has concentrated significant resources on
research and development activities, including but not limited to activities
related to polymer rechargeable batteries. The Company has a segment that
produces advanced rechargeable batteries using automated custom-designed
equipment. Over the past few years, the Company has expanded its product
offering of lithium primary and rechargeable batteries.
Products and Technology
A battery is an electrochemical apparatus used to store and release energy
in the form of electricity. The main components of a conventional battery are
the anode, cathode, separator and an electrolyte, which can be either a liquid
or a solid. The separator acts as an electrical insulator, preventing electrical
contact between the anode and cathode inside the battery. During discharge of
the battery, the anode supplies a flow of electrons, known as current, to a load
or device outside of the battery. After powering the load, the electron flow
reenters the battery at the cathode. As electrons flow from the anode to the
device being powered by the battery, ions are released from the cathode, cross
through the electrolyte and react at the anode.
Primary Batteries
A primary battery is used until discharged and then discarded. The
principal competing primary battery technologies are carbon-zinc, alkaline and
lithium. The Company's primary battery products, exclusive of its
seawater-activated batteries, are based on lithium-manganese dioxide technology.
The following table sets forth the performance characteristics of battery
technologies that the Company believes represent its most significant current or
potential competition for its 9-volt and high-rate lithium batteries.
Comparison of Primary Battery Technologies
------------------------------------------
Operating
Technology Energy Density Discharge Shelf Life Temperature
---------- Wh/kg Wh/l Profile (years) Range ((Degree)F)
----- ------ --------- ---------- -----------------
9-Volt Configurations:
Carbon-zinc (1) 22 40 Sloping 1 to 2 23 to 113
Alkaline (1) 65 143 Sloping 4 to 5 -4 to 130
Ultralife lithium-manganese dioxide (2) 262 406 Flat up to 10 -40 to 160
High Rate Cylindrical: (3)
Alkaline (1) 59 160 Sloping 4 to 5 -4 to 130
Lithium-sulfur dioxide (1)(4) 260 430 Flat 10 -76 to 160
Lithium thionyl-chloride (2)(4) 250-300 650-700 Flat 10 -40 to 160
Ultralife lithium-manganese dioxide (2) 228 510 Flat 10 -40 to 160
(1) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.
(2) Results of tests conducted by the Company.
(3) Data for equivalent D-size cells.
(4) The Company believes that these batteries are limited in application due
to health, safety and environmental risks associated therewith.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume, as measured in watt-hours
per kilogram and watt-hours per liter, respectively. Higher energy density
translates into longer operating times for a battery of a given weight or volume
and, therefore, fewer replacement batteries. Discharge profile refers to the
profile of the voltage of the battery during discharge. A flat discharge profile
results in a more stable
5
voltage during discharge of the battery. High temperatures generally reduce the
storage life of batteries, and low temperatures reduce the battery's ability to
operate efficiently. The inherent electrochemical properties of lithium
batteries result in improved low temperature performance and an ability to
withstand relatively high temperature storage.
The Company's primary battery products are based predominantly on
lithium-manganese dioxide technology. The Company believes that materials used
in, and the chemical reactions inherent to, the lithium batteries provide
significant advantages over currently available primary battery technologies
which include lighter weight, longer operating time, longer shelf life, and a
wider operating temperature range. The Company's primary batteries also have
relatively flat voltage profiles, which provide stable power. Conventional
primary batteries, such as alkaline, have sloping voltage profiles, which result
in decreasing power outage during discharge. While the price for the Company's
lithium batteries is generally higher than commercially available alkaline
batteries produced by others, the Company believes that the increased energy per
unit of weight and volume of its batteries will allow longer operating time and
less frequent battery replacements for the Company's targeted applications.
Therefore, the Company believes that its primary batteries are price competitive
with other battery technologies on a price per watt hour basis.
9-Volt Lithium Battery. The Company's 9-volt lithium battery delivers a
unique combination of high energy and stable voltage, which results in a longer
operating life for the battery and, accordingly, fewer battery replacements.
While the Company's 9-volt battery price is generally higher than conventional
9-volt carbon-zinc and alkaline batteries, the Company believes the enhanced
operating performance and decreased costs associated with battery replacement
make the Ultralife 9-volt battery more cost effective than conventional
batteries on a cost per watt-hour basis when used in a variety of applications.
The Company currently markets its 9-volt lithium battery to consumer
retail and OEM markets, including manufacturers of safety and security systems
such as smoke alarms, medical devices and other electronic instrumentation.
Applications for which the Company's 9-volt lithium battery are currently sold
include:
Safety and Security
Equipment Medical Devices Specialty Instruments
Smoke alarms Bone growth stimulators Electronic meters
Wireless alarm systems Telemetry equipment Hand-held scanners
Tracking devices Portable blood analyzers Wireless electronics
Transmitters/receivers Ambulatory Infusion Pumps Garage door openers
The Company currently sells its 9-volt battery to Kidde Safety
(Fyrnetics), Maple Chase, and BRK Brands (First Alert(R)) for long-life smoke
alarms, to Philips Medical Systems, i-STAT Corp. and Orthofix for medical
devices, and to ADT, Ademco, Interactive Technologies, Inc., and Internix
(Japan) for security devices. Kidde Safety and Maple Chase offer long life smoke
alarms powered by the Company's 9-volt lithium battery with a limited 10-year
warranty. The Company also manufactures its 9-volt lithium battery under private
label for Energizer, Telenot in Germany and Uniline in Sweden. Additionally, the
Company sells its 9-volt battery to the broader consumer market by establishing
relationships with national and regional retail chains such as Sears, Radio
Shack, TruValue, Ace Hardware, Fred Meyer, Inc., Menards, Chase Pitkin, Lowes
and a number of catalogs.
The Company's 9-volt lithium battery market benefited as a result of a
state law enacted in Oregon. The Oregon statute required that, as of June 23,
1999, all battery-operated ionization-type smoke alarms sold in that state must
include a 10-year battery. Similar legislation has been passed by the New York
State Senate each year for the past three years that would also require all
ionization-type smoke alarms operated solely by a battery to include a battery
that lasts 10 years. However, passage of the legislation continues to be held up
in the New York State Assembly. The Company believes that if legislation were to
ultimately pass in New York State, and if other states were to follow suit,
demand for the Company's 9-volt batteries could increase significantly.
The Company believes that it manufactures the only standard size 9-volt
battery warranted to last 10 years when used in ionization-type smoke alarms.
Although designs exist using other battery configurations, such as using three
2/3 A-type battery cells, the Company believes its 9-volt solution is superior
to these alternatives. The Company believes that its current manufacturing
capacity is adequate to meet customer demand. However, with increased
legislative activity, demand could exceed current capacity, and therefore,
additional capital equipment would be required to meet these new needs.
Cylindrical Cell and Pouch Cell Lithium Batteries. The Company believes
that its high rate cylindrical and pouch lithium cells, based on its proprietary
lithium-manganese dioxide technology, are the most advanced high rate lithium
power
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sources currently available. The Company also markets high rate lithium
batteries using cells from other manufacturers in other sizes and voltage
configurations in order to offer a more comprehensive line of batteries to its
customers.
The Company markets its line of high rate lithium cells and batteries to
the OEM market for industrial, military, automotive telematics and search and
rescue applications. Significant industrial applications include pipeline
inspection equipment, autoreclosers and oceanographic devices. Among the
military uses are manpack radios, night vision goggles and thermal imaging
equipment. Search and rescue applications include ELT's (Emergency Location
Transmitters) for aircraft and EPIRB's (Emergency Position Indicating Radio
Beacons) for ships.
The market for high rate lithium batteries has been dominated by lithium
thionyl chloride and lithium sulphur dioxide which possess liquid cathode
systems. However, there is an increasing market share being taken by lithium
manganese dioxide, a solid cathode system, because of its superior performance
and safety. The Company believes that its high rate lithium manganese dioxide
batteries offer a combination of performance, safety and environmental benefits
which will enable it to gain an increasing share of this market.
Some of the Company's main cylindrical cell and pouch cell lithium
batteries include the following:
High Rate Cylindrical Batteries. The Company markets a wide range of
high rate cylindrical primary lithium batteries in various sizes and
voltage configurations. The Company currently manufactures a range of high
rate lithium cells which are sold and packaged into multi-cell battery
packs. These include D, C, 1 1/4 C, and 19 mm x 65 mm configurations,
among other sizes. Based on the Company's lithium-manganese dioxide
chemistry, the Company's cylindrical cells use solid cathode construction,
are non-pressurized and non-toxic, and are considered safer than liquid
cathode systems.
High Rate Pouch Batteries. The Company has developed a pouch cell
lithium battery. The pouch cell is a 3-volt, wound, rectangular-shaped,
high-rate cell configured for packaging in a compact, lightweight
laminated foil pouch. Based on the Company's lithium-manganese dioxide
chemistry, the pouch cell, like its cylindrical cell counterpart, uses
solid cathode construction, and is a non-pressurized, non-toxic system
that is considered safer than liquid cathode systems. The pouch technology
provides flexibility with a lightweight thin battery having high energy
density. The Company's lithium technology provides these batteries with a
long shelf life and eliminates voltage delay even after prolonged storage.
BA-5372 Batteries. The Company's BA-5372 battery is a cylindrical
6-volt lithium-manganese dioxide battery, which is used for memory back-up
in the Army's Single Channel Ground and Airborne Radio System (SINCGARS),
the most widely used U.S. military communication system. This battery
offers a combination of performance features suitable for military
applications including high energy density, lightweight, long shelf life
and ability to operate in a wide temperature range.
BA-5368 Batteries. The Company's BA-5368 battery is a cylindrical
12-volt lithium-manganese dioxide battery which is used in PRC90 pilot
survival radios. This battery is used by the U.S. military and other
military organizations around the world.
BA-5390 Batteries. The Company's BA-5390 battery is an alternative
for the lithium/sulfur dioxide (Li-SO2) BA-5590 battery, the most widely
used battery in the U.S. armed forces. The BA-5390 is a rectangular 15/30
volt lithium-manganese dioxide battery which provides approximately 50%
more capacity (mission time) than the BA-5590, and is primarily used as
the main power supply for the Army's SINCGARS radios. Approximately 60
other military applications, such as the Javelin Medium Anti-Tank Weapon
Control Unit, also use these batteries.
Thin Cell Batteries. The Company has developed a line of
lithium-manganese dioxide primary batteries, which are called Thin Cell
batteries. The Thin Cell batteries are flat, light weight, flexible
batteries that can be manufactured to conform to the shape of the
particular application. The Company is currently offering two
configurations of the Thin Cell battery, which range in capacity from 220
milliampere-hours to 1,000 milliampere-hours. The Company is currently
marketing these batteries to OEMs for applications such as identification
tags and theft detection systems.
Seawater-activated Batteries. The Company produces a variety of
seawater-activated batteries based on magnesium-silver chloride
technology. Seawater-activated batteries are custom designed and
manufactured to end user specifications. The batteries are activated when
placed in salt water, which acts as the electrolyte allowing current to
flow. The Company markets seawater-activated batteries to naval and other
specialty OEMs.
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Rechargeable Batteries
In contrast to primary batteries, after a rechargeable battery is
discharged, it can be recharged and reused many times. Generally, discharge and
recharge cycles can be repeated hundreds of times in rechargeable batteries, but
the achievable number of cycles (cycle life) varies among technologies and is an
important competitive factor. All rechargeable batteries experience a small, but
measurable, loss in energy with each cycle. The industry commonly reports cycle
life in number of cycles a battery can achieve until 80% of the battery's
initial energy capacity remains. In the rechargeable battery market, the
principal competing technologies are nickel-cadmium, nickel-metal hydride and
lithium-based batteries. Rechargeable batteries generally can be used in many
primary battery applications, as well as in applications such as portable
computers and other electronics, cellular telephones, medical devices, wearable
devices and many other consumer products.
Three important parameters for describing the performance characteristics
of a rechargeable battery suited for today's portable electronic devices are
design flexibility, energy density and cycle life. Design flexibility refers to
the ability of rechargeable batteries to be designed to fit a variety of shapes
and sizes of battery compartments. Thin profile batteries with prismatic
geometry provide the design flexibility to fit the battery compartments of
today's electronic devices. Energy density refers to the total electrical energy
per unit volume stored in a battery. High energy density batteries generally are
longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. Lithium batteries, by the nature of their
electrochemical properties, are capable of providing higher energy density than
comparably sized batteries that utilize other chemistries and, therefore, tend
to consume less volume and weight for a given energy content. Long cycle life is
a preferred feature of a rechargeable battery because it allows the user to
charge and recharge power many times before noticing a difference in
performance.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume as measured in watt-hours per
kilogram and watt-hours per liter, respectively. High energy density and long
achievable cycle life are important characteristics for comparing rechargeable
battery technologies. Greater energy density will permit the use of batteries of
a given weight or volume for a longer time period. Accordingly, greater energy
density will enable the use of smaller and lighter batteries with energy
comparable to those currently marketed. Long achievable cycle life, particularly
in combination with high energy density, is suitable for applications requiring
frequent battery rechargings, such as cellular telephones and portable
computers.
Advanced Polymer Rechargeable Batteries. The Company manufactures an
advanced rechargeable battery that is based on proprietary polymer technology.
The battery is composed of ultra-thin and flexible components including a
metallic oxide cathode, a carbon anode and a polymer electrolyte. The Company
believes that users of portable consumer electronic products such as notebook
computers and cellular telephones are seeking smaller and lighter products that
require less frequent recharges while providing the same or additional energy.
The Company believes that its technology is attractive to OEMs of such products
since the use of a flexible polymer electrolyte, rather than a liquid
electrolyte, reduces the battery's overall weight and volume, and allows for
increased design flexibility in conforming batteries to the variety of shapes
and sizes required for portable consumer products. The Company can provide a
variety of cell sizes meet market trends. Typical cell sizes offered by the
Company include cells ranging in size from 3.2x20x30 millimeters to 4.4x106x102
millimeters and ranging in capacity from 120 mAh to 3800 mAh.
In addition to the performance advantages described above, there is a
significant difference between rechargeable batteries, which are based on the
lithium ion liquid electrolyte technology, and the technology used in the
Company's advanced rechargeable batteries. Liquid lithium ion cells use a liquid
electrolyte that is contained within a cylindrical or prismatic metal housing.
Under abusive conditions, where internal battery temperatures may become
extremely high, significant pressure may build within these cells which can
cause these cells to vent and release liquid electrolyte into the environment.
The Company's advanced rechargeable batteries utilize a polymer electrolyte that
is bound within the pores of the cell materials and, thus, leakage is avoided.
Moreover, because the cell does not require pressure to maintain the contact
between the electrodes, the cells do not require a metal housing. Rather, they
are packaged within a thin foil laminate.
Liquid Lithium Ion Cells and Batteries. The Company offers a variety of
liquid lithium ion cells ranging in size from 4.6x30x48 millimeters to 10x30x50
millimeters and in capacity from 600 mAh to 1800 mAh. The Company also offers
the following batteries containing liquid lithium ion cells:
BB-2590 Batteries. The Company's BB-2590 battery is lithium ion
rechargeable version of the BA-5390 primary battery, and can be used in
many of the same applications as the BA-5390. The Company is also
marketing this battery, and a charger, for use in commercial applications.
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LWC-L Batteries. The Company's LWC-L battery is a lithium ion
rechargeable commercial version of the Land Warrior military battery being
developed for the US Army Land Warrior program. The Company is also
marketing this battery, and a charger, for use in commercial applications.
Sales and Marketing
The Company sells its current products directly to OEMs in the U.S. and
abroad and has contractual arrangements with sales representatives who market
the Company's products on a commission basis in particular areas. The Company
also distributes its products through domestic and international distributors
and retailers that purchase batteries from the Company for resale. The Company
employs a staff of sales and marketing personnel in the U.S., England and
Germany. The Company's sales are generated primarily from customer purchase
orders and the Company has traditionally had a number of long-term sales
contracts with customers.
Primary Batteries
The Company has targeted sales of its primary batteries to manufacturers
of security and safety equipment, automotive telematics, medical devices and
specialty instruments, as well as users of military equipment. The Company's
strategy is to develop marketing alliances with OEMs and governmental agencies
that utilize its batteries in their products, commit to cooperative research and
development or marketing programs, and recommend the Company's products for
design-in or replacement use in their products. The Company is addressing these
markets through direct contact by its sales and technical personnel, use of
sales representatives and stocking distributors, manufacturing under private
label and promotional activities.
The Company seeks to capture a significant market share for its products
within its targeted OEM markets, which the Company believes, if successful, will
result in increased product awareness and sales at the end-user or consumer
level. The Company is also selling the 9-volt battery to the consumer market
through retail distribution. Most military procurements are done directly by the
specific government organizations requiring batteries.
In fiscal 2002, three customers - Kidde Safety, the U.S. Army/CECOM, and
UNICOR - accounted for approximately $9.4 million of sales, which amounted to
approximately 29% of total revenues of the Company. Sales of 9-volt batteries to
Kidde Safety for use in long-life smoke detector applications amounted to $3.4
million in 2002, $3.3 million in 2001 and $2.9 million in 2000. The 2002 sales
to Kidde represented more than 10% of the Company's consolidated revenues. Sales
of BA-5368 batteries to UNICOR for use in pilot survival radio applications
amounted to $4.0 million in 2002, $1.2 million in 2001 and none in 2000. The
2002 sales to UNICOR also represented more than 10% of the Company's
consolidated revenues. Sales of BA-5372 batteries to the U.S. Army/CECOM, which
are used as backup batteries in the military's communications radios, amounted
to $2.0 million in 2002, $1.2 million in 2001 and $0.5 million in 2000. The
Company believes that the loss of any of these customers could have a material
adverse effect on the Company. The Company's relationship with these customers
is good. Currently, the Company does not experience significant seasonal trends
in primary battery revenues. However, a downturn in the U.S. economy, which
affects retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 19% of
total primary revenues in 2002. Additionally, a lower demand from the U.S.
Government could result in lower sales to government users.
In June 2002, the Company was awarded a five-year production contract by
the U.S. Army Communications and Electronics Command (CECOM) to provide three
types of primary (non-rechargeable) lithium-manganese dioxide batteries to the
U.S. Army. The contract provides for order releases approximately every six
months over a five-year period with a maximum potential value of up to $32
million. Combined, these batteries comprise what is called the Small Cell
Lithium Manganese Dioxide Battery Group under CECOM's NextGen II acquisition
strategy. A major objective of this acquisition is to maintain a domestic
production base of a sufficient capacity to timely meet peacetime demands and
have the ability to surge quickly to meet deployment demands. The Company
intends to participate in the two additional Next Gen II five-year battery
procurements. The Company has recently bid on the Large Cylindrical Battery
five-year procurement, and it plans to participate in the five-year procurement
for Rectangular Batteries during fiscal 2003. There is no assurance, however,
that the Company will be awarded any additional military contracts.
At June 30, 2002, the Company's backlog related to primary battery orders
was not significant, as most of the orders the Company receives are typically
shipped within a short time frame from when the order is placed.
9
Rechargeable Batteries
The Company has targeted sales of its advanced polymer rechargeable
batteries through OEM suppliers, as well as distributors and resellers focused
on its target markets. During fiscal 2002 the Company added Li ion products,
additional polymer products and charging systems to its portfolio. The Company
is currently seeking a number of design wins with OEMs, and believes that its
design capabilities, product characteristics and solution integration will drive
OEMs to incorporate the Company's batteries into their product offerings,
resulting in revenue growth opportunities for the Company. The Company has not
marketed its advanced rechargeable batteries for a sufficient period to
determine whether these OEMs or consumer sales are seasonal.
The Company continues to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries including
military, computers and communications applications, as well as wireless
headsets, computing devices, wearable devices and other electronic portable
devices. A key part of this expansion includes building its network of
distributors and value added distributors throughout the world.
At June 30, 2002, the Company's backlog related to rechargeable battery
orders was not significant.
Technology Contracts
The Company has participated in various programs in which it has done
contract research and development. These programs have incorporated a profit
margin in their structure. This segment has declined because the current
strategy for the Company is only to seek development projects that are in
harmony with its process and product strategy. Although the Company reports
technology contracts as a separate business segment, it does not actively market
this segment as a revenue source but rather accepts technology contract business
that supports and advances its overall battery business strategy.
Patents, Trade Secrets and Trademarks
The Company relies on licenses of technology as well as its unpatented
proprietary information, know-how and trade secrets to maintain and develop its
commercial position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to the Company's
proprietary information. In addition, there can be no assurance that the Company
would prevail if any challenges to intellectual property rights are asserted by
the Company against third parties, or that third parties will not successfully
assert infringement claims against the Company in the future. The Company
believes, however, that its success is less dependent on the legal protection
that its patents and other proprietary rights may or will afford than on the
knowledge, ability, experience and technological expertise of its employees.
The Company holds patents covering 19 inventions in the U.S. and foreign
countries, three of which relate to rechargeable polymer batteries, and has
certain patent applications pending also relating to polymer batteries. The
Company also pursues foreign patent protection in certain countries. The
Company's patents protect technology which makes automated production more
cost-effective and protect important competitive features of the Company's
products. However, the Company does not consider its business to be dependent on
patent protection.
The Company's research and development in support of its advanced
rechargeable battery technology and products is currently based, in part, on
non-exclusive technology transfer agreements. The Company made an initial
payment of $1.0 million for such technology and is required to make royalty and
other payments for products which incorporate the licensed technology of 8% of
the fair market value of the royalty bearing product. The license continues for
the respective unexpired terms of the patent licenses, and continues in
perpetuity with respect to other licensed technical information.
All of the Company's employees in the U.S. and all the Company's employees
involved with the Company's technology in England are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. These agreements also
contain certain noncompetition and nonsolicitation provisions effective during
the employment term and for a period of one year thereafter. There can be no
assurance that the Company will be able to enforce these agreements.
Following are trademarks of the Company: Ultralife, Ultralife Thin Cell,
Ultralife HiRate, Ultralife Polymer, Ultralife Polymer Cell, Ultralife Polymer
Battery, Ultralife Polymer System, The New Power Generation.
10
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component
parts that it purchases. The Company has ISO 9001 certification for its lithium
battery manufacturing operations in both of its manufacturing facilities in
Newark, New York and Abingdon, England.
Primary Batteries
The Company's Newark, New York facility has the capacity to produce in
excess of nine million 9-volt batteries per year, approximately 3.5 million
cylindrical cells per year, and approximately 500,000 pouch cells per year. The
manufacturing facility in Abingdon, England is capable of producing up to one
million cylindrical cells per year. This facility also manufactures
seawater-activated batteries and assembles customized multi-cell battery packs.
The Company believes that its current manufacturing capacity is adequate to meet
customer demand. However, with unanticipated growth in demand for the Company's
products, demand could exceed current capacity, which would require it to
install additional capital equipment to meet these incremental needs.
The Company utilizes lithium foil as well as other metals and chemicals to
manufacture its batteries. Although the Company knows of only three suppliers
that extrude lithium into foil and provide such foil in the form required by the
Company, it does not anticipate any shortage of lithium foil or any difficulty
in obtaining the quantities it requires. Certain materials used in the Company's
products are available only from a single source or a limited number of sources.
Additionally, the Company may elect to develop relationships with a single or
limited number of sources for materials that are otherwise generally available.
Although the Company believes that alternative sources are available to supply
materials that could replace materials it uses and that, if necessary, the
Company would be able to redesign its products to make use of an alternative
product, any interruption in its supply from any supplier that serves currently
as the Company's sole source could delay product shipments and adversely affect
the Company's financial performance and relationships with its customers.
Although the Company has experienced interruptions of product deliveries by sole
source suppliers, none of such interruptions has had a material effect on the
Company. All other raw materials utilized by the Company are readily available
from many sources.
The total carrying value of the Company's primary battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $3.5 million as of June 30, 2002.
Rechargeable Batteries
The Company's high-volume production line for advanced polymer
rechargeable batteries consists of automated coating, assembly and packaging
equipment, most of which was tooled for the manufacture of Nokia cell phone
replacement batteries. Pursuant to the Company's agreement with the manufacturer
of its assembly and packaging line, the manufacturer is prohibited from
manufacturing another production line that replicates 20% or more of the
components comprising the production line delivered to the Company. The Company
recorded a $14.3 million impairment charge on a significant portion of these
underutilized assets in June 2002 due to the culmination of various economic
conditions. The Company also has some lower volume, more flexible automated
manufacturing equipment at its Newark, New York facility mainly to be used for
higher value, lower quantity production orders. The raw materials utilized by
the Company are readily available from many sources.
In addition to its own manufacturing capabilities for rechargeable
batteries, the Company has a 30% ownership interest in a venture in Taiwan,
named Ultralife Taiwan, Inc. (UTI). This venture, established in December 1998,
was initially set up to develop manufacturing capabilities using the Company's
polymer rechargeable technology. In addition, UTI has recently developed the
capability to manufacture rechargeable lithium batteries using liquid lithium
technologies. The Company uses UTI and other lithium rechargeable cell
manufacturers as sources of raw materials for the assembly of battery packs.
The total carrying value of the Company's rechargeable battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $1.1 million as of June 30, 2002.
Research and Development
The Company conducts its research and development in both Newark, New
York, and Abingdon, England. During the years ended June 30, 2002, 2001, and
2000, the Company expended approximately $4.3 million, $3.4 million, and $5.3
million, respectively, on research and development. R&D expenses rose in fiscal
2002 as the Company increased its
11
development efforts in the area of new military batteries. R&D expenses were
significantly lower in fiscal 2001 due to the commercial launch and production
of its polymer rechargeable battery, and as a result, certain costs were shifted
to cost of products sold. The Company currently expects that research and
development expenditures will moderate as the resources devoted to the
development of rechargeable batteries have been diminished and the development
efforts associated with new high rate cylindrical batteries are winding down.
For future development projects, the Company will continue to seek to fund part
of its research and development efforts from both government and non-government
sources.
Cylindrical Cell Lithium Batteries
Since the summer of 2001, the Company's strategy has included the
development of new cells and batteries for various military applications,
utilizing technology developed through its work on pouch cell development, as
described below. The Company plans on continuing this activity, as this market
is a significant potential growth area for the business. In addition, the
Company is leveraging the new battery cases and components it is developing by
introducing rechargeable versions of these products. During fiscal 2002, the
Company spent approximately $1.2 million on the development of new military
batteries. The Company began to realize revenues from these development efforts
in small amounts in fiscal 2002 and expects increasing revenues during the next
few years.
Pouch Cell Lithium Batteries
The Company has been conducting research and development of pouch cell
lithium batteries, which have a broad range of potential applications in
military and industrial markets including radio communications, telematics and
medical devices. Included in the research and development activities are design
programs for specific cells and batteries to develop a volume manufacturing
methodology. The designs will incorporate a lean manufacturing approach to
optimize their construction. No assurance can be given that such efforts will be
successful or that the products that result will be marketable. In June 2000,
the Company announced that it entered into a two-year agreement with the U.S.
Army Communications-Electronics Command (CECOM) to complete the development of
its primary lithium-manganese dioxide pouch batteries for manufacture in high
volume. Products under this agreement will be produced on a flexible
manufacturing line. The Company is in the final phase of this project, which is
now expected to be completed during fiscal 2003. CECOM will fund approximately
$2.8 million for engineering efforts, based on the projected spending by the
Company. CECOM considers the Company's pouch technology critical to meeting
their future portable power needs in a safe, cost effective manner, and views it
as inherently safer than the other lithium technology currently in use.
Rechargeable Batteries
The Company is directing its rechargeable battery research and development
efforts toward design optimization and customization to customer specifications.
These batteries have a broad range of potential applications in consumer,
industrial and military markets including cellular telephones, computing devices
and other portable electronic devices.
During fiscal 2002, the Company significantly reduced its development
efforts focused on the polymer rechargeable technology due to changing economic
conditions. As a result, in fiscal 2003 the Company anticipates significantly
lower expenditures for rechargeable R&D. (See Item 7, Management's Discussion
and Analysis, for additional information concerning the Company's change in
strategy.)
Technology Contracts
The U.S. Government sponsors research and development programs designed to
improve the performance and safety of existing battery systems and to develop
new battery systems. The Company has successfully completed the initial and
second phase of a government-sponsored program to develop new configurations of
the Company's BA 7590 pouch cell primary battery, which lasts up to twice as
long and could replace the current BA 5590 battery. The BA 5590 is the most
widely used battery power source for the U.S. Army and NATO communications
equipment.
The Company was also awarded an additional cost sharing SBIR Phase III
contract for the development of the BA 7590 pouch cell primary battery that was
substantially completed in fiscal 2000. In 1999, the Company was awarded the
lead share of a three-year $15.3 million cost-sharing project sponsored by the
U.S. Department of Commerce's Advanced Technology Program (ATP). The objective
of this project was to develop and produce ultra-high energy polymer
rechargeable batteries that will significantly outperform existing batteries in
a broad range of portable electronic and aerospace applications. As lead
contractor, the Company received a total of $4.6 million over the 3-year life of
the contract. In fiscal 2002, the Company received $0.7 million. The Company's
participation in the ATP project was completed in June 2002.
12
Battery Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in the Company's batteries may pose
safety problems if improperly used. The Company has designed its batteries to
minimize safety hazards both in manufacturing and use.
The transportation of primary and rechargeable lithium batteries is
regulated by the International Civil Aviation Organization (ICAO) and
corresponding International Air Transport Association (IATA) Dangerous Goods
Regulations and, in the U.S., by the Department of Transportation (DOT). The
Company currently ships its products pursuant to ICAO, IATA and DOT hazardous
goods regulations. New regulations that pertain to all lithium battery
manufacturers are scheduled to become effective on January 1, 2003. The new
regulations require companies to meet certain new testing, packaging, labeling
and shipping specifications for safety reasons. The Company is working to ensure
that it will be able to comply with these new regulations.
National, state and local regulations impose various environmental
controls on the storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although the Company
believes that its operations are in substantial compliance with current
environmental regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Moreover, state and local
governments may enact additional restrictions relating to the disposal of
lithium batteries used by customers of the Company which could adversely affect
the demand for the Company's products. There can be no assurance that additional
or modified regulations relating to the storage, use and disposal of chemicals
used to manufacture batteries, or restricting disposal of batteries will not be
imposed.
Since primary and rechargeable lithium battery chemistry reacts adversely
with water and water vapor, certain of the Company's manufacturing processes
must be performed in a controlled environment with low relative humidity. Both
of the Company's facilities contain dry rooms as well as specialized air drying
equipment.
Primary Batteries
The Company's primary battery products incorporate lithium metal, which
reacts with water and may cause fires if not handled properly. Over the past ten
years, the Company has experienced fires that have temporarily interrupted
certain manufacturing operations in a specific area of one of its facilities.
However, in December 1996, a fire at the Abingdon, England facility caused an
interruption in the UK manufacturing operations for a period of 15 months.
During the period from December 1996 through January 1999, the Company received
insurance proceeds compensating the Company for loss of its plant and machinery,
leasehold improvements, inventory and business interruption. The Company
believes that it has adequate fire insurance, including business interruption
insurance, to protect against fire losses in its facilities.
The Company's 9-volt battery is designed to conform to the dimensional and
electrical standards of the American National Standards Institute, and the
9-volt and 3-volt batteries are recognized under the Underwriters Laboratories,
Inc. Component Recognition Program.
Rechargeable Batteries
The Company is not currently aware of any regulatory requirements
regarding the disposal of polymer or liquid lithium ion rechargeable cells and
batteries.
Corporate
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, the Company received an
environmental assessment, which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $0.2 million. However, there can be no assurance
that this will be the maximum cost. The Company entered into an agreement
whereby a third party has agreed to reimburse the Company for fifty percent of
the costs associated with this matter. 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
13
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.
Competition
Competition in the battery industry is, and is expected to remain,
intense. The competition ranges from development stage companies to major
domestic and international companies, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than those of the Company. The Company competes against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.
Historically, although other entities may attempt to take advantage of the
growth of the lithium battery market, the lithium battery industry has certain
technological and economic barriers to entry. The development of technology,
equipment and manufacturing techniques and the operation of a facility for the
automated production of lithium batteries require large capital expenditures,
which may deter new entrants from commencing production. During fiscal 2002,
several Asian companies gained manufacturing strength in the polymer market. The
Company's strategy is to form marketing partnerships with selected companies in
order to minimize competition from these companies. Through its experience in
battery manufacturing, the Company has also developed expertise which it
believes would be difficult to reproduce without substantial time and expense in
the primary battery market.
Employees
As of August 31, 2002, the Company employed 341 persons: 19 in research
and development, 282 in production and 40 in sales, administration and
management. Of the total, 272 are employed in the U.S. and 69 in England. None
of the Company's employees is represented by a labor union. The Company
considers its employee relations to be satisfactory.
In October and November 2001, the Company embarked on certain cost savings
initiatives to reduce costs and to move the Company closer to profitability,
resulting in the elimination of approximately 90 positions, mainly in the
Company's rechargeable business unit and in various support areas. Of these
positions, approximately 33 people lost their jobs, while the remaining 57
people were redeployed to other areas of the Company that were growing. In
February 2002, the Company reduced its workforce further by eliminating another
70 people in various manufacturing and support areas in an effort to run the
organization more efficiently. In total, approximately 160 positions at the
Company's U.S. operation were affected by the cost savings initiatives and over
100 people lost their jobs as a result of the workforce reductions during fiscal
2002.
ITEM 2. PROPERTIES
The Company occupies under a lease/purchase agreement approximately
250,000 square feet in two facilities located in Newark, New York. The Company
leases approximately 35,000 square feet in a facility based in Abingdon,
England. At both locations, the Company maintains administrative offices,
manufacturing and production facilities, a research and development laboratory,
an engineering department and a machine shop. At present, all of the Company's
rechargeable manufacturing and assembly operations are conducted at its Newark,
New York facility. The Company's corporate headquarters are located in the
Newark facility. The Company believes that its facilities are adequate and
suitable for its current manufacturing needs. The Company entered into a
lease/purchase agreement with the local county authority in February 1998 with
respect to its 110,000 square foot manufacturing facility in Newark, New York
which provides more favorable terms and reduces the expense for the lease of the
facility. The lease also includes an adjacent building to the Company's
manufacturing facility estimated to encompass approximately 140,000 square feet
and approximately 65 acres of property. Pursuant to the lease, the Company
delivered a down payment in the amount of $440,000 and paid the local
governmental authority annual installments in the amount of $50,000 through
December 2001 decreasing to approximately $30,000 for the period commencing
December 2001 and ending December 2007. Upon expiration of the lease in 2007,
the Company is required to purchase its facility for the purchase price of one
dollar.
14
The Company leases a facility in Abingdon, England. The term of the lease
was recently extended and continues until March 24, 2013. It currently has an
annual rent of approximately $240,000 and is subject to review every five years
based on current real estate market conditions. The next review is March 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In 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. Plaintiffs' 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. 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
15
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is included for quotation on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol "ULBI."
The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock during the Company's last two fiscal years:
Sales Prices
High Low
---- ---
Fiscal Year 2002:
Quarter ended September 30, 2001 $ 6.50 $4.15
Quarter ended December 31, 2001 5.24 3.55
Quarter ended March 31, 2002 4.55 3.00
Quarter ended June 30, 2002 4.24 2.80
Fiscal Year 2001:
Quarter ended September 30, 2000 $13.63 $9.81
Quarter ended December 31, 2000 10.19 5.13
Quarter ended March 31, 2001 9.25 5.56
Quarter ended June 30, 2001 5.63 4.88
During the period from July 1, 2002 through August 31, 2002, the high and
low closing sales prices of the Company's Common Stock were $3.65 and $2.50,
respectively.
Holders
As of August 31, 2002, there were 181 registered holders of record of the
Company's Common Stock. Based upon information from the Company's stock transfer
agent, management of the Company believes that there are more than 3,700
beneficial holders of the Company's Common Stock.
In July 1999, the Company issued 700,000 shares of its Common Stock to
Ultralife Taiwan, Inc. (UTI) in exchange for $8.75 million in cash.
Subsequently, in September 1999, the Company contributed $8.75 million in cash
to the UTI venture. This cash contribution coupled with the contribution of the
Company's technology resulted in approximately a 46% ownership interest in UTI.
The transaction was done in conjunction with the UTI agreement that was
announced by the Company in December 1998. Subsequently, the Company's interest
in UTI has been reduced to 30% due to stock issuances to certain UTI employees
and subsequent capital raising efforts. See also History in Item 1 of this
Annual Report.
On July 20, 2001, the Company completed a $6.8 million private placement
of 1,090,000 shares of its common stock at $6.25 per share. In conjunction with
the offering, warrants to acquire up to 109,000 shares of common stock were
granted. The exercise price of the warrants is $6.25 per share and the warrants
have a five-year term. The Company relied on the exemption provided by Rule 506
of Regulation D in connection with the unregistered private placement of its
common stock in connection with the shares issued pursuant to the Share Purchase
Agreement. The Company did not engage in any general solicitation, sold shares
only to "accredited investors" and sold shares primarily to purchasers who were
existing stockholders of the Company.
On April 23, 2002, the Company closed on a $3.0 million private placement
consisting of common equity and a convertible note. Initially, 801,333 shares
were issued. The $600,000 convertible note, which accrues interest at 10% per
annum, was issued to one of the Company's directors. Subject to shareholder
approval, an additional 200,000 shares will be issued, and all accrued interest
will be forgiven upon conversion of the note, which matures on December 31,
2002. Shareholders will vote to approve the conversion of the note into common
shares at the Company's Annual Meeting in December 2002. All shares will be
issued at $3.00 per share.
17
Dividends
The Company has never declared or paid any cash dividend on its capital
stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any future payment of dividends will depend
upon the financial condition, capital requirements and earnings of the Company,
as well as upon other factors that the Board of Directors may deem relevant.
Additionally, pursuant to the credit facility between the Company and Congress
Financial Corporation (New England), the Company shall not declare or pay any
dividends under the covenants specified in the loan agreement.
Securities Authorized for Issuance Under Equity Compensation Plans
See Note 8 in Notes to Consolidated Financial Statements in Item 8.
18
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Statement of Operations Data:
Year Ended June 30,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Revenues $ 32,515 $ 24,163 $ 24,514 $ 21,064 $ 16,391
Cost of products sold 31,168 27,696 25,512 19,016 14,522
-------- -------- -------- -------- --------
Gross margin 1,347 (3,533) (998) 2,048 1,869
-------- -------- -------- -------- --------
Research and development expenses 4,291 3,424 5,306 5,925 6,651
Selling, general and administrative expenses 7,949 8,009 7,385 6,195 5,790
Impairment of Long Lived Assets 14,318 -- -- -- --
Loss on fires -- -- -- (1,288) (2,697)
-------- -------- -------- -------- --------
Total operating and other expenses 26,558 11,433 12,691 10,832 9,744
Interest income, net (291) 166 909 1,456 888
Equity loss in affiliate -- (2,338) (818) (80) --
Gain on sale of securities -- -- 3,147 348 --
Other income (expense), net 320 (124) 209 (25) (33)
-------- -------- -------- -------- --------
Loss before income taxes (25,182) (17,262) (10,242) (7,085) (7,020)
Income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net loss $(25,182) $(17,262) $(10,242) $ (7,085) $ (7,020)
======== ======== ======== ======== ========
Net loss per share, basic and diluted $ (2.03) $ (1.55) $ (0.94) $ (0.68) $ (0.84)
======== ======== ======== ======== ========
Weighted average number
of shares outstanding 12,407 11,141 10,904 10,485 8,338
======== ======== ======== ======== ========
Balance Sheet Data:
June 30,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Cash and available-for-sale securities $ 2,219 $ 3,607 $ 18,639 $ 23,556 $ 35,688
Working capital $ 4,950 $ 6,821 $ 22,537 $ 28,435 $ 37,745
Total assets $ 30,063 $ 47,203 $ 64,460 $ 66,420 $ 75,827
Total long-term debt and capital lease obligations $ 103 $ 2,648 $ 3,567 $ 215 $ 197
Stockholders' equity $ 21,164 $ 37,453 $ 54,477 $ 60,400 $ 68,586
19
ITEM 7. 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 Annual Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forward-looking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, the successful commercialization of the
Company's advanced rechargeable batteries, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fires, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected. See Risk Factors in Item 7.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized 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 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 cash. 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. Some possible funding alternatives
include obtaining additional debt, issuing equity 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.
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.
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.
Results of Operations
Fiscal Year Ended June 30, 2002 Compared With the Fiscal Year Ended June 30,
2001
Revenues. Total revenues of the Company increased $8,352,000 from
$24,163,000 for the year ended June 30, 2001 to $32,515,000 for the year ended
June 30, 2002. Primary battery sales increased $9,229,000, from $22,105,000 for
the year
20
ended June 30, 2001 to $31,334,000 for the year ended June 30, 2002. The
increase in primary battery sales was primarily due to growth in cylindrical
battery sales, particularly to military customers, and higher 9-volt battery
sales. Rechargeable battery sales increased modestly from $370,000 for the year
ended June 30, 2001 to $445,000 for the year ended June 30, 2002, as the Company
broadened its strategy in the latter portion of fiscal 2002 from simply selling
polymer batteries it manufactures to selling a rechargeable "solution" that
encompasses sourcing cells from other lithium battery manufacturers and
assembling them to meet customer needs. Technology contract revenues decreased
$952,000, from $1,688,000 to $736,000 due to the scheduled reduction of certain
nonrenewable government contracts, which concluded in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $3,472,000, from
$27,696,000 for the year ended June 30, 2001 to $31,168,000 for the year ended
June 30, 2002. Consolidated cost of products sold as a percentage of total
revenue improved from approximately 115% to 96% for the year ended June 30,
2002. Consolidated gross margins improved from a negative 15% in fiscal 2001 of
sales to a positive 4% in fiscal 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. 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. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas. Overall,
the Company reduced its workforce by more than 20% during the year.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, the actions taken
during fiscal 2002 generated total cost savings of more than $2,000,000 per
quarter from the expense run rate that the Company experienced during its first
quarter of fiscal 2002.
In the Primary battery segment, the cost of batteries sold increased
$5,318,000, from $21,094,000 2001 to $26,412,000 in 2002, mainly related to
increased sales volume. As a percent of total primary battery sales, cost of
primary products sold improved from 95% for the year ended June 30, 2001 to 84%
for the year ended June 30, 2002, reflecting improved manufacturing efficiencies
related to higher volumes and the impact from certain of the cost savings
initiatives referred to above, as well as the ongoing positive effects from the
implementation of lean manufacturing disciplines.
In the Rechargeable battery segment, the cost of products sold decreased
$972,000 in fiscal 2002 from $5,065,000 in fiscal 2001 to $4,093,000 in 2002.
During fiscal 2001, in anticipation of significant increases in rechargeable
sales volume, the Company added resources to prepare for this expected growth.
As economic conditions changed during fiscal 2002, the Company reacted and
reduced its resources accordingly by realigning its resources and reducing
manpower as described above. In general, the decrease in costs from 2001 to 2002
primarily resulted from the cost savings initiatives that were implemented
during the year.
Technology contracts cost of sales decreased $874,000, or approximately
57%, from $1,537,000 for the year ended June 30, 2001 to $663,000 for the year
ended June 30, 2002, in line with the decrease in revenues. Technology contracts
cost of sales as a percentage of revenue was 10% in 2002, consistent with the
prior year.
Operating and Other Expenses. In June 2002, the Company recorded a fixed
asset impairment charge of $14,318,000. This impairment charge related to a
writedown of long-lived assets in the Company's rechargeable production
operations, reflecting a change in the Company's strategy. Changes in external
economic conditions culminated in June 2002, reflecting a slowdown in the mobile
electronics marketplace and a realization that near-term business opportunities
utilizing the high volume rechargeable production equipment had dissipated.
These changes caused the Company to shift away from high volume polymer
rechargeable battery production to higher value, lower volume opportunities. The
Company's redefined strategy eliminates the need for its high volume production
line that had been built mainly to manufacture Nokia cell phone replacement
batteries. The new strategy is a three-pronged approach. First, the Company will
manufacture in-house for the higher value, lower volume polymer rechargeable
opportunities. Second, the Company will utilize its affiliate in Taiwan,
Ultralife Taiwan, Inc., as a source for both polymer and liquid lithium cells.
Third, the Company will look to other rechargeable cell manufacturers as sources
for cells that the Company can then assemble into completed battery packs. In
the future, the impairment of the rechargeable fixed assets will result in lower
depreciation charges of approximately $1,800,000 per year.
Total operating and other expenses increased $15,125,000 from $11,433,000
for the year ended June 30, 2001 to $26,558,000 for the year ended June 30,
2002. Excluding the impairment charge, operating and other expenses increased
21
$807,000, from $11,433,000 in 2001 to $12,240,000 in 2002, mainly as a result of
higher research and development expenses. Operating and other expenses as a
percentage of revenue, excluding the impairment charge, improved from 47% for
the year ended June 30, 2001 to 38% for the year ended June 30, 2002. Research
and development costs increased $867,000, or 25% from $3,424,000 for the year
ended June 30, 2001 to $4,291,000 for the year ended June 30, 2002. This
increase was mainly due to higher costs related to the development of new
cylindrical batteries for the military applications, as the Company focused more
extensively on this significant market opportunity. R&D expenditures related to
rechargeable battery development diminished during the year as a result of the
cost savings actions discussed previously. The Company anticipates that R&D
costs overall will decline significantly in fiscal 2003 as compared with 2002
due to the sizeable reduction in rechargeable development efforts and the
expected near-term transition of the new cylindrical battery development to
manufacturing during fiscal 2003.
Selling, general and administration expenses decreased $60,000,
approximately 1%, from $8,009,000 for the year ended June 30, 2001 to $7,949,000
for the year ended June 30, 2002, even though revenues rose 35%. Selling and
marketing expenses declined $404,000 from fiscal 2001 to fiscal 2002 as a result
of a more targeted sales coverage strategy using fewer resources and lower
marketing and advertising costs. General and administrative expenses, on the
other hand, rose $344,000 as a result of higher insurance expenses and certain
severance costs pertaining to an executive employment agreement incurred in
conjunction with the Company's resource realignment during the second fiscal
quarter.
Other Income (Expense). Interest income decreased $611,000 from $702,000
for the year ended June 30, 2001 to $91,000 for the year ended June 30, 2002.
This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $154,000 form $536,000 in 2001 to $382,000 in 2002 as a result of
lower average balances of debt. Equity loss in affiliates, pertaining to the
Company's equity interest in Ultralife Taiwan, Inc. (UTI), was zero in fiscal
2002, compared with a loss of $2,338,000 in fiscal 2001. Since UTI continued to
report losses during fiscal 2002, the Company did not reflect its share of the
losses as the investment had been reduced to zero as of the end of 2001.
Miscellaneous income (expense) changed from an expense of $124,000 in 2001 to
income of $320,000 in 2002, primarily as a result of unrealized gains on foreign
currency transactions due mainly to the strengthening of the U.K. pounds
sterling relative to the U.S. dollar.
Net Losses. The consolidated net loss for the year ended June 30, 2002 was
$25,182,000, or $2.03 per share. Excluding the $14,318,000 impairment charge for
long-lived assets, the consolidated net loss improved $6,398,000 from a loss of
$17,262,000, or $1.55 per share, for the year ended June 30, 2001 to a loss of
$10,864,000, or $0.88 per share, for the year ended June 30, 2002, primarily as
a result of the reasons described above.
Fiscal Year Ended June 30, 2001 Compared With the Fiscal Year Ended June 30,
2000
Revenues. Total revenues of the Company decreased $351,000 from
$24,514,000 for the year ended June 30, 2000 to $24,163,000 for the year ended
June 30, 2001. Primary battery sales increased $265,000 from $21,840,000 for the
year ended June 30, 2000 to $22,105,000 for the year ended June 30, 2001. The
increase in primary battery sales was primarily due to the introduction of new
cylindrical products in fiscal 2001 and an increase in 9-volt battery shipments
related to higher demand. These increases were offset by a decline in sales from
the UK subsidiary due to the delay in renewing a government contract.
Rechargeable battery sales increased $345,000 from $25,000 for the year ended
June 30, 2000 to $370,000 for the year ended June 30, 2001, mainly as a result
of the commercial launch of the Company's polymer batteries in June 2000 and
shipments of retail and custom-sized batteries. Technology contract revenues
decreased $961,000, from $2,649,000 to $1,688,000 due to the scheduled reduction
of certain nonrenewable government contracts. The Company expects revenues from
technology contracts to continue to decline in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $2,184,000 from
$25,512,000 for the year ended June 30, 2000 to $27,696,000 for the year ended
June 30, 2001. Cost of products sold as a percentage of revenue increased from
approximately 104% to 115% for the year ended June 30, 2001. Cost of primary
batteries sold decreased $1,990,000 from $23,084,000, or 106% of revenues, for
the year ended June 30, 2000 to $21,094,000, or 95% of revenues, for the year
ended June 30, 2001. The decrease in cost of primary batteries sold as a
percentage of revenues was principally the result of improvements in the
manufacturing process due to the implementation of lean manufacturing practices.
To date, lean manufacturing practices in the primary battery segment have
resulted in the reduction of inventory, quicker manufacturing throughput times
and improvements in operating efficiencies throughout the Company. In fiscal
2001, the improvements in gross margins in the primary segment were offset by
losses in the rechargeable segment. Rechargeable battery cost of products sold
increased $5,040,000 in fiscal 2001 due to the launch of commercial production
of polymer rechargeable batteries in June 2000, which resulted in initial
expenditures necessary to start production of the polymer cells, including
approximately $2,000,000 in additional depreciation for the year, as equipment
was placed in service. Prior to commencing production of polymer cells, most of
these costs, including engineering, were charged to research and
22
development. Technology contracts cost of sales decreased $866,000, or
approximately 36%, from $2,403,000 for the year ended June 30, 2000 to
$1,537,000 for the year ended June 30, 2001. Technology contracts cost of sales
as a percentage of revenue was consistent year over year.
Operating and Other Expenses. Operating and other expenses decreased
$1,258,000 from $12,691,000 for the year ended June 30, 2000 to $11,433,000 for
the year ended June 30, 2001. Operating and other expenses as a percentage of
revenue decreased from approximately 52% to 47% for the year ended June 30,
2001. Of the Company's operating and other expenses, research and development
expenses decreased $1,882,000, or 36% from $5,306,000 for the year ended June
30, 2000 to $3,424,000 for the year ended June 30, 2001. Research and
development expenses decreased due to the commercial launch of polymer
rechargeable in June 2000, which shifted costs to cost of sales. Selling,
general and administration expenses increased $624,000, approximately 8%, from
$7,385,000 for the year ended June 30, 2000 to $8,009,000 for the year ended
June 30, 2001. Selling and marketing expenses increased as a result of new sales
people added to significantly enhance the Company's overall market coverage.
Other Income (Expense). Net interest income decreased $743,000 from
$909,000 for the year ended June 30, 2000 to $166,000 for the year ended June
30, 2001. The decrease in interest income is the result of lower average
balances on cash and investment securities which were used for operations. The
equity loss of $2,338,000 in fiscal 2001 and $818,000 in fiscal 2000 resulted
from the Company's ownership interest in its venture in Taiwan. The increase in
the equity loss includes compensation expense related to a stock distribution to
UTI employees totaling $2,500,000. The Company recognized approximately $900,000
equity loss for the transaction representing its share of the total UTI expense.
The gain on sale of securities of $3,147,000 in fiscal 2000 resulted from the
sale of the Company's investment in Intermagnetics General Corporation common
shares. No similar sale of securities occurred in 2001.
Net Losses. Net losses increased $7,020,000, or approximately 69%, from
$10,242,000, or $0.94 per share, for the year ended June 30, 2000 to
$17,262,000, or $1.55 per share, for the year ended June 30, 2001, primarily as
a result of the reasons described above.
Liquidity and Capital Resources
As of June 30, 2002, cash equivalents and available for sale securities
totaled $2,018,000, excluding restricted cash of $201,000. During the year ended
June 30, 2002, the Company used $8,199,000 of cash in operating activities as
compared to $10,406,000 for the year ended June 30, 2001. Cash used in
operations in 2002 was mainly a result of the Company's reported net loss, net
of non-cash items such as depreciation and impairment charges. Also during 2002,
accounts receivable rose $2,680,000 due to higher shipments made at the end of
fiscal 2002. Compared with 2001, the $2,207,000 improvement in cash used in
operations was primarily a result of decreasing net losses net of non-cash
expenses, offset in part by higher cash usage attributable to changes in working
capital related to higher volumes of business. In the year ended June 30, 2002,
the Company used $2,330,000 to purchase plant, property and equipment, which was
offset by proceeds from a sale leaseback of $995,000. Of the $2,330,000 of
equipment purchases, $1,884,000 related to the acquisition of machinery and
equipment for the Company's primary battery operations, $333,000 related to
rechargeable battery machinery and equipment and the balance was substantially
for facilities upgrades.
Months cost of sales in inventory at June 30, 2002 was 1.9 months as
compared to 2.6 months at June 30, 2001. This metric is indicative of the
Company's continuing focus to improve purchasing procedures and inventory
controls. The Company's Days Sales Outstanding (DSOs) was an average of 57 days
for 2002, compared with an average of 55 days for 2001. This modest slowdown in
collections is mainly attributable to increased business with non-U.S. customers
who typically take longer to pay than the U.S. customers.
At June 30, 2002, the Company had a capital lease obligation outstanding
of $118,000 for the Company's Newark, New York offices and manufacturing
facilities. In addition, the Company had a capital lease on computer equipment,
which had an outstanding balance of $65,000 at June 30, 2002.
As of June 30, 2002, the Company had made commitments to purchase
approximately $171,000 of production machinery and equipment.
In June 2000, the Company entered into a 3-year, $20,000,000 secured
credit facility with a lending institution. The financing agreement consisted of
an initial $12,000,000 term loan component 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). The amount available under
the term loan component amortizes over time. Principal and interest are paid
monthly on outstanding amounts borrowed. Initially, $4,000,000 was borrowed
under the term loan component in June 2000, and this
23
amount is being repaid over a five-year period. Debt issue costs amounting to
$198,000 were incurred in connection with the initiation of the agreement and
are being amortized over the term of the loan.
In December 2000 and June 2001, the Company and its commercial lender
agreed to revise downward the adjusted net worth covenant to better reflect the
Company's equity position at that particular time. In October 2001, this lending
institution informed the Company that its borrowing availability under its
$20,000,000 credit facility had been effectively reduced to zero as a result of
a recent appraisal of its fixed assets. In February 2002, the Company and its
primary lending institution amended the credit facility. The amended facility
was reduced to a total of $15,000,000, mainly due to the reduction in the
appraised valuation of fixed assets that limited the borrowing capacity under
the term loan component, as well as to minimize the cost of unused line fees.
Certain definitions were also revised which increased the Company's available
borrowing base. In addition, the minimum net worth covenant was effectively
reduced to approximately $19,200,000 after adjustments for fixed asset
impairment charges. At June 30, 2002, the Company was in compliance with this
covenant. The term loan component was revised to an initial $2,733,000 based on
the valuation of the Company's fixed assets (of which $2,468,000 was outstanding
on the term loan at June 30, 2002). The principal associated with the term loan
is continuing to be repaid over a 5-year amortization period from the initial
date of the credit facility in June 2000. The revolving credit component of the
overall credit facility comprises the remainder of the total potential borrowing
capacity. There was no balance outstanding on the revolving credit facility as
of June 30, 2002. If the credit facility, which expires in June 2003, is not
extended by agreement of both the Company and the lending institution, the
remaining principal under the term loan, and any amounts outstanding under the
revolving credit facility, would become due at that time. Therefore, the Company
has reflected its debt associated with this facility as a short-term liability
on the Consolidated Balance Sheet. If the Company is unsuccessful in
renegotiating this credit facility or is unable to refinance this debt with
another lending institution, this could have a material adverse effect on the
Company's business and financial position.
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company. At June 30, 2002, the rate was 5.75%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The total
amount available under the term loan component is reduced by outstanding letters
of credit. The Company had $3,800,000 outstanding on a letter of credit as of
June 30, 2002, supporting the Company's $4,000,000 equipment lease. The
Company's additional borrowing capacity under the revolver component of the
credit facility as of June 30, 2002 was approximately $1,000,000.
In March 2001, the Company initiated a $2,000,000 lease line of credit
with a third party leasing agency. Under this arrangement, the Company had
various options to acquire manufacturing equipment, including sales / leaseback
transactions and operating leases. In October 2001, the Company expanded its
leasing arrangement with a third party leasing agency. The revision increased
the amount of the lease line from $2,000,000 to $4,000,000. The increase in the
line was used to fund capital expansion plans for manufacturing equipment that
has allowed increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's quarterly
lease payment is approximately $226,000. In conjunction with this lease, the
Company is required to maintain a $3,800,000 letter of credit. The letter of
credit was issued by the Company's primary lending institution, which diminishes
the Company's overall borrowing availability under the revolver component of the
overall credit facility. The Company is working to see if it can find
alternatives to collateralize this letter of credit in order to alleviate this
restriction. There can be no assurance that the Company will be successful in
this pursuit.
While the Company is 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.
At this time based on the current financial outlook, it appears that the Company
may not generate the revenues necessary to allow it to continue to meet the
current net worth covenant of the credit facility. To date, the Company and its
lending institution have maintained a good relationship, and thus the Company is
optimistic that it will be able to negotiate a further revision of the net worth
covenant to better reflect the Company's current situation. There can be no
assurance, however, that the Company will be successful in its endeavor to do
so, and therefore, this situation could have a material adverse effect on the
Company's financial position.
During the fiscal year ended June 30, 2002, the Company raised capital
through two private equity transactions. First, in July 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. The second
transaction occurred in April 2002, when 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. If
shareholder approval is not obtained, the
24
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.
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 described in Part I, Item 3, "Legal Proceedings", the Company is
involved in certain environmental matters with respect to its facility in
Newark, New York. Although the Company has reserved for expenses related to
this, there can be no assurance that this will be the maximum amount. The
ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Outlook
Looking ahead for the full fiscal year of 2003, the Company is optimistic
about its sales prospects and the status of the manufacturing operations. At
this time, the Company expects to achieve revenue growth in a range comparable
to the 35% growth rate it achieved during fiscal 2002. The Company is projecting
growth in virtually all major product areas within its business - 9-volt,
cylindrical and rechargeable. The growth in each of the quarters, however, 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.
For instance, in June 2002, the Company was awarded the top award, 60%, of
the U.S. Army's Next Gen II 5-year procurement of Small Cylindrical Batteries.
Orders on this contract, though, have yet to begin, and it is difficult to
determine when such orders may start. In July 2002, the Company also submitted a
proposal on the Large Cylindrical Battery procurement under the Next Gen II
procurement. The Large Rectangular Battery solicitation for bids has yet to be
issued by the U.S. Army. It is difficult to determine at this time when the U.S.
Army will issue the solicitations or make any award decisions. While the Company
is optimistic about its chances of winning a substantial portion of the
contracts with this program, the ultimate outcome is uncertain. This
solicitation process is significantly behind the original schedule mainly as a
result of the U.S. government's diversion relating to the terrorist attacks on
September 11, 2001. A significant portion of the Company's growth projections is
dependent upon its success and participation in this Next Gen II program.
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 has been able to significantly reduce costs
during fiscal 2002, it still maintains a fairly substantial fixed cost
infrastructure to support its overall operations. Increasing volumes of sales
and production will generate very favorable returns to scale, but similarly,
decreasing volumes will result in the opposite effect.
In June 2002, the Company reported a $14,318,000 impairment charge. This
impairment charge related to a writedown of long-lived assets in the Company's
rechargeable production operations, reflecting a change in the Company's
strategy. Changes in external economic conditions culminated in June 2002,
reflecting a slowdown in the mobile electronics marketplace and a realization
that near-term business opportunities utilizing the high volume rechargeable
production equipment had dissipated. These changes caused the Company to shift
away from high volume polymer rechargeable battery production to higher value,
lower volume opportunities. The Company's redefined strategy eliminates
25
the need for its high volume production line that had been built mainly to
manufacture Nokia cell phone replacement batteries. The new strategy is a
three-pronged approach. First, the Company will manufacture in-house for the
higher value, lower volume polymer rechargeable opportunities. Second, the
Company will utilize its affiliate in Taiwan, Ultralife Taiwan, Inc., as a
source for both polymer and liquid lithium cells. Third, the Company will look
to other rechargeable cell manufacturers as sources for cells that the Company
can then assemble into completed battery packs. The Company is optimistic that
this broadened strategy can be a successful, although modest, aspect of its
growth for fiscal 2003.
As a result of the cost savings actions taken during fiscal 2002 that
significantly impacted the Rechargeable segment, and the decline of development
efforts related to new cylindrical batteries for military applications as those
products move into anticipated volume production, the Company expects that its
costs related to research and development will decline substantially in fiscal
2003 when compared with fiscal 2002.
The Company expects that spending for capital projects in fiscal 2003 will
be relatively modest. The Company carefully evaluates such projects and will
only make capital investments when necessary and when there is typically a very
quick payback. Some of the capital equipment acquisitions during the upcoming
fiscal year will be financed by the capital equipment grant/loan the Company
recently finalized.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company will adopt SFAS No. 143 in the fiscal year beginning July
1, 2002 and is currently evaluating the effect, if any, on the Company's
financial statements.
In October 2001, the FASB issued 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 Company will adopt SFAS No. 144 in the fiscal year beginning
July 1, 2002. The Company does not believe adoption of this pronouncement will
have a material adverse effect on its financial statements.
In June 2002, the FASB issued 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 Company will adopt SFAS No. 146 in the fiscal year
beginning July 1, 2002. The Company does not believe the adoption of this
pronouncement will have a material adverse effect on its financial statements.
Risk Factors
Dependence on Continued Demand for the Company's Existing Products
A substantial portion of the Company's business depends on the Continued
demand for products sold by OEMs using the Company's batteries. Therefore, the
Company's success is substantially dependent upon the success of the OEMs'
products in the marketplace. The Company is subject to many risks beyond its
control that influence the success or failure of a particular product
manufactured by an OEM, including: competition faced by the OEM in its
particular industry, market acceptance of the OEM's product, the engineering,
sales, marketing and management capabilities of the OEM, technical challenges
unrelated to the Company's technology or products faced by the OEM in developing
its products, and the financial and other resources of the OEM.
For instance, in fiscal 2002, 59% of the Company's revenues were comprised
of sales of its 9-volt batteries, and of this, approximately 30% pertained to
sales to smoke alarm OEMs in the U.S. If the retail demand for long-life smoke
26
detectors decreases significantly, this could have a material adverse effect on
the Company's business, financial condition and results of operations.
Similarly, in fiscal 2002, 19% of the Company's revenues was comprised of
sales of cylindrical batteries, and of this, approximately 62% pertained to
sales made directly or indirectly to the U.S. military. If the demand for
cylindrical batteries from the U.S. military were to decrease significantly,
this could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of the Company's Rechargeable Battery Business
Although the Company is in production of certain rechargeable cells and
batteries, it has not achieved wide market acceptance. The Company cannot assure
that volume acceptance of its rechargeable products will occur due to the highly
competitive nature of the business. There are many new company and technology
entrants into the marketplace and the Company must continually reassess the
market segments in which its products can be successful and seek to engage
customers in these segments who will adopt the Company's products for use in
their products. In addition, these companies must be successful with their
products in their markets for the Company to gain increased business. Increased
competition, failure to gain customer acceptance of products or failure of the
Company's customers in their markets could have a further adverse affect on the
Company's rechargeable battery business.
Risks Relating to Growth and Expansion
Rapid growth of the Company's battery business could significantly strain
management, operations and technical resources. If the Company is successful in
obtaining rapid market growth of its batteries, the Company will be required to
deliver large volumes of quality products to customers on a timely basis at a
reasonable cost to those customers. For example, significantly large orders from
the U.S. military for the Company's cylindrical products may strain the current
capacity capabilities of the Company and would require time to install
additional equipment and build a sufficient support infrastructure. The Company
cannot assure, however, that business will rapidly grow or that its efforts to
expand manufacturing and quality control activities will be successful or that
the Company will be able to satisfy commercial scale production requirements on
a timely and cost-effective basis. The Company will also be required to continue
to improve its operations, management and financial systems and controls. The
failure to manage growth effectively could have an adverse effect on business,
financial condition and results of operations.
Dependence on U.S. Military Procurement of Batteries
The Company will continue to develop both primary and rechargeable battery
products to meet the needs of the U.S. military forces. The Company believes it
has a high probability for success in solicitations for these batteries. Any
delay of solicitations by, or failure of, the U.S. government to purchase
batteries manufactured by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Related to Competition and Technological Obsolescence
The Company also competes with large and small manufacturers of alkaline,
carbon-zinc, seawater, high rate and primary batteries as well as other
manufacturers of lithium batteries. The Company cannot assure that it will
successfully compete with these manufacturers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and
other resources.
The market for the Company's products is characterized by changing
technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Although the Company believes that its
batteries, particularly the 9-volt and advanced rechargeable batteries, are
comprised of state-of-the-art technology, there can be no assurance that
competitors will not develop technologies or products that would render the
Company's technology and products obsolete or less marketable.
Primary Batteries - The primary (non-rechargeable) battery industry is
characterized by intense competition with a number of companies offering or
seeking to develop products similar to the Company's. The Company is subject to
competition from manufacturers of primary batteries, such as carbon-zinc,
alkaline and lithium batteries in various configurations, including 9-volt, AAA,
AA, C, D, 2/3 A and other cell sizes. Manufacturers of primary batteries include
The Gillette Company (Duracell), Energizer Holdings, Inc., Rayovac Corp., Sanyo
Electric Co. Ltd., Sony Corp., and Matsushita Electric Industrial Co., Ltd.
(Panasonic). Manufacturers of specialty lithium batteries include Saft, Eagle
Picher Industries and Friwo Silberkraft GmbH.
27
Many of these companies have substantially greater resources than the
Company, and some have the capacity and volume of business to be able to produce
their products more efficiently than the Company at the present time. In
addition, these companies are developing batteries using a variety of battery
technologies and chemistries that are expected to compete with the Company's
technology. If these companies successfully market their batteries before the
introduction of the Company's products, there could be a material adverse effect
on its business, financial condition and results of operations.
Rechargeable Batteries - The rechargeable battery industry is also characterized
by intense competition with a large number of companies offering or seeking to
develop technology and products similar to the Company's. The Company is subject
to competition from manufacturers of traditional rechargeable batteries, such as
nickel-cadmium batteries, from manufacturers of rechargeable batteries of more
recent technologies, such as nickel-metal hydride, lithium ion liquid
electrolyte and lithium polymer batteries, as well as from companies engaged in
the development of batteries incorporating new technologies. Manufacturers of
nickel-cadmium and/or nickel-metal hydride batteries include Sanyo Electric Co.
Ltd., Sony Corp., Toshiba Corp., Saft and Matsushita Electric Industrial Co.,
Ltd. (Panasonic), among others. Manufacturers of lithium ion liquid electrolyte
batteries currently include Saft-Soc des ACC, Sony Corp., Toshiba Corp.,
Matsushita Electric Industrial Co., Ltd., Sanyo Electric Co. Ltd., Sony Corp.,
E-One Moli Energy Ltd., BYD Co. Ltd., Samsung SDI Co., Ltd., Shenzhen B&K
Electronic Co. Ltd., and Ultralife Taiwan, Inc., among others. Manufacturers of
lithium polymer batteries currently include Valence Technology, Inc., Sony
Corp., Amperex Technology Ltd., Danionics A/S, Finecell Co. Ltd., LG Chemical,
Ltd., SKC, Samsung SDI Co., Ltd., Ultralife Taiwan, Inc., and Kokam Engineering
Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, including liquid electrolyte lithium and solid
electrolyte lithium batteries, which are expected to compete with the Company's
technology. Other companies undertaking research and development activities of
solid-polymer batteries have already developed prototypes and are constructing
commercial scale production facilities. If these companies successfully market
their batteries before the introduction of the Company's products, there could
be a material adverse effect on its business, financial condition and results of
operations.
Dependence on Key Personnel
Because of the specialized, technical nature of the business, the Company
is highly dependent on certain members of management, marketing, engineering and
technical staff. The loss of these services or these members, could have a
material adverse effect on the business, financial condition and results of
operations. In addition to developing manufacturing capacity to produce high
volumes of our advanced rechargeable batteries, the Company must attract,
recruit and retain a sizeable workforce of technically competent employees. The
Company's ability to pursue effectively its business strategy will depend upon,
among other factors, the successful recruitment and retention of additional
highly skilled and experienced managerial, marketing, engineering and technical
personnel. The Company cannot assure that it will be able to retain or recruit
this type of personnel.
Safety Risks; Demands of Environmental and Other Regulatory Compliance
Due to the high energy density inherent in lithium batteries, the
Company's batteries can pose safety certain risks, including the risk of fire.
Although the Company incorporates safety procedures in research, development and
manufacturing processes that are designed to minimize safety risks, the Company
cannot assure that accidents will not occur. Although the Company currently
carries insurance policies which cover loss of the plant and machinery,
leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may
result in significant production delays or claims for damages resulting from
injuries. These types of losses could have a material adverse effect on the
business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which it has sent waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers which could have a material adverse effect on business, financial
condition and results of operations. In addition, the U.S. Department of
Transportation and certain foreign regulatory agencies that consider lithium to
be a hazardous material regulate the transportation of batteries which contain
lithium metal. The Company currently ships lithium batteries in accordance with
regulations established by the U.S. Department of
28
Transportation. There can be no assurance that additional or modified
regulations relating to the manufacture, transportation, storage, use and
disposal of materials used to manufacture our batteries or restricting disposal
of batteries will not be imposed or how these regulations will affect the
Company or its customers.
In connection with our purchase/lease of the Newark, New York facility in
1998, a consulting firm performed a Phase I and II Environmental Site Assessment
which revealed the existence of contaminated soil and ground water around one of
the buildings. The Company retained an engineering firm which estimated that the
cost of remediation should be in the range of $230,000. This cost, however, is
merely an estimate and the cost may in fact be much higher. In February 1998,
the Company entered into an agreement with a third party which provides that the
Company and this third party will retain an environmental consulting firm to
conduct a supplemental Phase II investigation to verify the existence of the
contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse the Company for fifty percent of the cost of
correcting the environmental concern on the Newark property. The Company 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 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 Company cannot assure that it will not face claims
resulting in substantial liability which would have a material adverse effect on
the business, financial condition and results of operations in the period in
which such claims are resolved.
Limited Sources of Supply
Certain materials used in products are available only from a single or a
limited number of suppliers. Additionally, the Company may elect to develop
relationships with a single or limited number of suppliers for materials that
are otherwise generally available. Although the Company believes that
alternative suppliers are available to supply materials that could replace
materials currently used and that, if necessary, the Company would be able to
redesign its products to make use of such alternatives, any interruption in the
supply from any supplier that serves as a sole source could delay product
shipments and have a material adverse effect on the business, financial
condition and results of operations. Although the Company has experienced
interruptions of product deliveries by sole source suppliers, these
interruptions have not had a material adverse effect on the business, financial
condition and results of operations. The Company cannot guarantee that it will
not experience a material interruption of product deliveries from sole source
suppliers.
Dependence on Proprietary Technologies
The Company's success depends more on the knowledge, ability, experience
and technological expertise of its employees than on the legal protection of
patents and other proprietary rights. The Company claims proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating
to products and manufacturing processes. The Company cannot guarantee the degree
of protection these various claims may or will afford, or that competitors will
not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technology. The Company protects its
proprietary rights in its products and operations through contractual
obligations, including nondisclosure agreements with certain employees,
customers, consultants and strategic partners. There can be no assurance as to
the degree of protection these contractual measures may or will afford. The
Company, however, has had patents issued and patent applications pending in the
U.S. and elsewhere. The Company cannot assure (i) that patents will be issued
from any pending applications, or that the claims allowed under any patents will
be sufficiently broad to protect its technology, (ii) that any patents issued to
the Company will not be challenged, invalidated or circumvented, or (iii) as to
the degree or adequacy of protection any patents or patent applications may or
will afford. If the Company is found to be infringing third party patents, there
can be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. The failure to obtain necessary licenses
could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development,
manufacture or sale of products.
Dependence on Technology Transfer Agreements
The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. There can be no
assurance that competitors will not develop, independently or through the use of
similar technology transfer agreements, rechargeable battery technology or
products that are substantially equivalent or superior to the technologies and
products currently under research and development.
29
Risks Related to China Joint Venture Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China
Battery"), purchased certain technology, equipment, training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company has been attempting to collect the balance
due under this contract. China Battery has indicated that it will not make these
payments until certain contractual issues have been resolved. Due to China
Battery's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed as well as its investment aggregating $805,000. Since
China Battery has not purchased technology, equipment, training or consulting
services to produce batteries other than 2/3 A lithium batteries, the Company
does not believe that China Battery has the capacity to become a competitor. The
Company does not anticipate that the manufacturing or marketing of 2/3 A lithium
batteries will be a substantial portion of its product line in the future.
However, in December 1997, China Battery sent a letter demanding reimbursement
of an unspecified amount of losses they have incurred plus a refund for certain
equipment that was sold to China Battery. The Company has attempted to initiate
negotiations to resolve the dispute. However, an agreement has not yet been
reached. Although China Battery has not taken any additional steps, there can be
no assurance that China Battery will not further pursue such a claim which, if
successful, could have a material adverse effect on the business, financial
condition and results of operations. The Company believes that such a claim is
without merit.
Ability to Insure Against Losses
Because certain of the Company's primary batteries are used in a variety
of security and safety products and medical devices, it may be exposed to
liability claims if such a battery fails to function properly. The Company
maintains what it believes to be sufficient liability insurance coverage to
protect against potential claims; however, there can be no assurance that the
liability insurance will continue to be available, or that any such liability
insurance would be sufficient to cover any claim or claims.
Quarterly Fluctuations in Operating Results and Possible Volatility of Stock
Price
The Company's future operating results may vary significantly from quarter
to quarter depending on factors such as the timing and shipment of significant
orders, new product introductions, delays in customer releases of purchase
orders, the mix of distribution channels through which the Company sells its
products and general economic conditions. Frequently, a substantial portion of
the Company's revenues in each quarter is generated from orders booked and
shipped during that quarter. As a result, revenue levels are difficult to
predict for each quarter. If revenue results are below expectations, operating
results will be adversely affected as the Company has a sizeable base of fixed
overhead costs that do not vary much with the changes in revenue. In addition to
the uncertainties of quarterly operating results, future announcements
concerning the Company or its competitors, including technological innovations
or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of its products, may cause the market price of
its Common Stock to fluctuate substantially for reasons which may be unrelated
to operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price of
our Common Stock.
Risks Related to Product Warranty Claims
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Related to Company's Ability to Finance Ongoing Operations and Projected
Growth
While the Company believes that it revenue growth projections and its
ongoing cost controls will allow it to generate cash and achieve profitability
in the foreseeable future, there is no assurance as to when or if the Company
will be able to achieve its projections. The Company's future cash flows from
operations, combined with its accessibility to cash and credit, may not be
sufficient to allow the Company to finance ongoing operations or to make
required
30
investments for future growth. The Company may need to seek additional credit or
access capital markets for additional funds. There is no assurance that the
Company would be successful in this regard.
Risks Related to Maintaining Debt Obligations
The Company has certain debt covenants that must be maintained, most
notably a requirement with its primary lending institution to meet certain
levels of net worth. There is no assurance that the Company will be able to
continue to meet these debt covenants in the future. If the Company defaults on
any of its debt covenants and it is unable to renegotiate credit terms in order
to comply with such covenants, this could have a material adverse effect on the
business, financial condition and results of operations.
In June 2003, the Company's credit facility with its primary lending
institution is scheduled to expire. There is no assurance that the Company will
be successful in refinancing this credit facility.
Risks Related to Arthur Andersen LLP Being our Past Auditors
There may be no effective remedy against Arthur Andersen LLP in connection
with a material misstatement or omission in the financial statements audited by
them, due to the fact that Arthur Andersen LLP was convicted on June 15, 2002 of
federal obstruction of justice arising from the government's investigation of
Enron Corp.
Arthur Andersen LLP consented to the inclusion of their report in the
annual reports and registration statements we filed prior to June 30, 2002. Our
inability to include in future registration statements or reports financial
statements for one or more years audited by Arthur Andersen LLP or to obtain
Arthur Andersen LLP's consent to the inclusion of their report on our 2000 and
2001 financial statements may impede our access to the capital markets.
Should we seek to access the public capital markets, Securities and
Exchange Commission (SEC) rules will require us to include or incorporate by
reference in any prospectus three years of audited financial statements. Until
our audited financial statements for the fiscal year ending June 30, 2004 become
available, the SEC's current rules would require us to present audited financial
statements for one or more fiscal years audited by Arthur Andersen LLP. Prior to
that time, the SEC may cease accepting financial statements audited by Arthur
Andersen LLP, in which case we would be unable to access the public capital
markets unless PricewaterhouseCoopers LLP, our current independent accounting
firm, or another independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. In addition, as a result
of the departure of our former engagement team leaders, Arthur Andersen LLP is
no longer in a position to consent to the inclusion or incorporation by
reference in any prospectus of their report on our audited financial statements
for the years ended June 30, 2000 and June 30, 2001, and investors in any
subsequent offerings for which we use their audit report will not be entitled to
recovery against them under Section 11 of the Securities Act of 1933 for any
material misstatements or omissions in those financial statements. Consequently,
our financing costs may increase or we may miss attractive market opportunities
if either our annual financial statements for 2000 and 2001 audited by Arthur
Andersen LLP should cease to satisfy the SEC's requirements or those statements
are used in a prospectus but investors are not entitled to recovery against our
auditors for material misstatements or omissions in them.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently invest in derivative financial instruments.
In fiscal 2002, approximately 84% of the Company's sales were denominated
in U.S. dollars. The remainder of the Company's sales were denominated in U.K.
pounds sterling and euros. A 10% change in the value of the pound sterling or
the euro to the U.S. dollar would have impacted the Company's revenues in fiscal
2002 by less than 2%. The Company monitors the relationship between the U.S.
dollar and other currencies on a continuous basis and adjusts sales prices for
products and services sold in these foreign currencies as appropriate to
safeguard against the fluctuations in the currency effects relative to the U.S
dollar.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) and (2) are
included in this Report beginning on page 33.
Page
----
Report of Independent Accountants,
PricewaterhouseCoopers LLP 33
Report of Independent Public Accountants,
Arthur Andersen LLP 34
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and 2001 35
Consolidated Statements of Operations for the years ended
June 30, 2002, 2001 and 2000 36
Consolidated Statements of Changes in Shareholders'
Equity and Accumulated Other Comprehensive Loss
for the years ended June 30, 2002, 2001 and 2000 37
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000 38
Notes to Consolidated Financial Statements 39
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 59
32
REPORT OF INDEPENDENT ACCOUNTANTS
To Ultralife Batteries, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related statements of operations, of shareholders' equity and accumulated other
comprehensive income (loss), and of cash flows present fairly, in all material
respects, the financial position of Ultralife Batteries, Inc. and its subsidiary
at June 30, 2002, and the results of their operations and their cash flows for
the period ended June 30, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) on page 56 of this Annual Report on Form 10-K presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of June 30, 2001 and for each of the two years in the period
ended June 30, 2001 were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements, before the modification described in Note
1 to the consolidated financial statements as of June 30, 2002 and for the
period then ended, in their report dated August 16, 2001 (except with respect to
the matter discussed in Note 14, as to which the date is December 12, 2001).
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
August 2, 2002
33
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP AND ARTHUR
ANDERSEN LLP DID NOT CONSENT TO THE USE OF THIS REPORT IN THIS FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and accumulated other comprehensive income (loss) and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultralife Batteries, Inc.
and subsidiary as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
August 16, 2001 (except with respect to the matter discussed in Note 14, as to
which the date is December 12, 2001) [OBJECT OMITTED]
34
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
June 30,
ASSETS 2002 2001
--------- ---------
Current assets:
Cash and cash equivalents $ 2,016 $ 494
Restricted cash 201 540
Available-for-sale securities 2 2,573
Trade accounts receivable (less
allowance for doubtful accounts
of $272 and $262 at June 30, 2002
and 2001, respectively) 6,049 3,379
Other receivables -- 736
Inventories 4,633 5,289
Prepaid expenses and other
current assets 845 912
--------- ---------
Total current assets 13,746 13,923
Property, plant and equipment 16,134 32,997
Other assets:
Investment in affiliates -- --
Technology license agreements (net
of accumulated amortization of
$1,268 and $1,168 at June 30, 2002
and 2001, respectively) 183 283
--------- ---------
183 283
--------- ---------
Total Assets $ 30,063 $ 47,203
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and capital
lease obligations $ 3,148 $ 1,065
Accounts payable 3,091 3,755
Accrued compensation 255 427
Accrued vacation 439 259
Other current liabilities 1,863 1,596
--------- ---------
Total current liabilities 8,796 7,102
Long-term liabilities:
Debt and capital lease obligations 103 2,648
Commitments and contingencies (Note 7)
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 and 11,488,186
at June 30, 2002 and 2001, respectively 1,338 1,149
Capital in excess of par value 107,891 99,389
Accumulated other comprehensive loss (856) (1,058)
Accumulated deficit (86,906) (61,724)
--------- ---------
21,467 37,756
Less -- Treasury stock, at cost --
27,250 shares 303 303
--------- ---------
Total Shareholders' Equity 21,164 37,453
--------- ---------
Total Liabilities and Shareholders' Equity $ 30,063 $ 47,203
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Year ended June 30,
2002 2001 2000
-------- -------- --------
Revenues $ 32,515 $ 24,163 $ 24,514
Cost of products sold 31,168 27,696 25,512
-------- -------- --------
Gross margin 1,347 (3,533) (998)
Operating and other expenses:
Research and development 4,291 3,424 5,306
Selling, general, and administrative 7,949 8,009 7,385
Impairment of long-lived assets 14,318 -- --
-------- -------- --------
Total operating and other expenses 26,558 11,433 12,691
Operating loss (25,211) (14,966) (13,689)
Other income (expense):
Interest income 91 702 958
Interest expense (382) (536) (49)
Equity loss in affiliate -- (2,338) (818)
Gain on sale of securities -- -- 3,147
Miscellaneous income (expense) 320 (124) 209
-------- -------- --------
Loss before income taxes (25,182) (17,262) (10,242)
Income taxes -- -- --
-------- -------- --------
Net loss $(25,182) $(17,262) $(10,242)
======== ======== ========
Net loss per share, basic
and diluted $ (2.03) $ (1.55) $ (0.94)
======== ======== ========
Weighted average number of shares
outstanding, basic and diluted 12,407 11,141 10,904
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
36
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other
Comprehensive Income (Loss)
(Dollars in Thousands) ---------------------------
Common Stock Foreign
------------------------ Capital in Currency Unrealized
Number of excess of Translation Net Gain on Accumulated Treasury
Shares Amount Par Value Adjustment Securities Deficit Stock Total
--------- -------- ---------- ----------- ----------- ----------- -------- --------
Balance as of
June 30, 1999 10,512,386 $ 1,051 $ 93,605 $ (101) $ 368 $(34,220) $(303) $ 60,400
Comprehensive loss:
Net loss (10,242) (10,242)
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments (590) (590)
Unrealized net
loss on
securities (366) (366)
--------
Other
comprehensive
loss (956)
--------
Comprehensive loss (11,198)
--------
Shares issued to
affiliate 700,000 70 3,168 3,238
Shares issued under
stock option plans
and other stock
options 197,900 20 2,017 2,037
------------------------------------------------------------------------------------------------------
Balance as of
June 30, 2000 11,410,286 $ 1,141 $ 98,790 $ (691) $ 2 $(44,462) $ (303) $ 54,477
------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (17,262) (17,262)
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments (368) (368)
Unrealized net
loss on
securities (1) (1)
--------
Other
comprehensive
loss (369)
--------
Comprehensive loss (17,631)
--------
Shares issued under
stock option plans
and other stock
options 77,900 8 599 607
------------------------------------------------------------------------------------------------------
Balance as of
June 30, 2001 11,488,186 $ 1,149 $ 99,389 $(1,059) $ 1 $(61,724) $ (303) $ 37,453
------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (25,182) (25,182)
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments 202 202
Unrealized net
loss on
securities --
--------
Other
comprehensive
loss 202
--------
Comprehensive loss (24,980)
--------
Shares issued under
private stock
offerings 1,891,333 189 8,502 8,691
Shares issued under
stock option plans
and other stock
options
------------------------------------------------------------------------------------------------------
Balance as of
June 30, 2002 13,379,519 $ 1,338 $107,891 $ (857) $ 1 $(86,906) $ (303) $ 21,164
------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Year Ended June 30,
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES
Net loss $(25,182) $(17,262) $(10,242)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 4,265 3,811 2,038
Gain on sale of securities -- -- (3,147)
Equity loss in affiliate -- 2,338 818
Impairment of long-lived assets 14,318 -- --
Provision for loss on accounts
receivable 10 (6) 42
Provision for inventory
obsolescence (4) 12 410
Changes in operating assets
and liabilities:
Accounts receivable (2,680) 83 56
Inventories 660 381 (1,074)
Prepaid expenses and other
current assets 803 (471) 936
Accounts payable and other
current liabilities (389) 708 (369)
-------- -------- --------
Net cash used in operating
activities (8,199) (10,406) (10,532)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant
and equipment (2,330) (4,367) (2,946)
Proceeds from sale leaseback 995 -- (3,237)
Purchase of securities (8,424) (26,794) (70,934)
Sales of securities 11,334 22,905 46,064
Maturities of securities -- 13,702 37,504
-------- -------- --------
Net cash provided by investing
activities 1,575 5,446 6,451
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of
common stock 8,691 607 5,275
Proceeds from issuance of debt 600 -- 4,423
Principal payments under
long-term debt and capital
leases (1,062) (941) (91)
-------- -------- --------
Net cash provided by (used in)
financing activities 8,229 (334) 9,607
-------- -------- --------
Effect of exchange rate
changes on cash (83) 76 (590)
-------- -------- --------
Change in cash and cash
equivalents 1,522 (5,218) 4,936
-------- -------- --------
Cash and cash equivalents at
beginning of period 494 5,712 776
-------- -------- --------
Cash and cash equivalents at
end of period $ 2,016 $ 494 $ 5,712
======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest $ 374 $ 538 $ 42
Cash paid for taxes $ -- $ -- $ --
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
38
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a. Description of Business
Ultralife Batteries, Inc. (the "Company") 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 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 cash. If the Company is unsuccessful in
growing the business sufficiently in the near-term to maintain its viability, it
may need to find alternative sources of funds to allow it to continue to operate
in its current capacity, such as obtaining additional debt or equity or selling
assets. While the Company has been successful at raising funds in the past,
there is no assurance that it will be able to do so under the current
circumstances.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
accounts of the Company and its wholly owned subsidiary, Ultralife Batteries UK,
Ltd. ("Ultralife UK"). Intercompany accounts and transactions have been
eliminated in consolidation. Investments in entities in which the Company does
not have a controlling interest are accounted for using the equity method.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits with financial institutions and financial
instruments with original maturities of three months or less to be cash
equivalents.
e. Restricted Cash
The Company is required to maintain certain levels of escrowed cash in
order to comply with the terms of some of its debt and lease agreements. All
cash is retained for application against required escrows for debt obligations,
including certain letters of credit supporting lease obligations and any excess
borrowings from the Company's revolving credit facility. A portion of the
restricted cash pertaining to certain lease obligations is released periodically
as payments are made to reduce outstanding debt. With respect to the Company's
revolving credit
39
facility, the Company's primary lending institution will restrict cash if the
borrowing base (consisting of receivables and inventory) does not sufficiently
cover the outstanding borrowings on any particular day. As of June 30, 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. There was no cash restricted at June 30, 2002 pertaining to the
Company's revolving credit facility.
f. Available-for-Sale Securities
Management determines the appropriate classification of securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. Marketable equity securities and debt securities are classified as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses, net of tax, included as a component of accumulated
other comprehensive income.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
Realized gains and losses, and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are included in
the determination of net income (loss) as gains (losses) on sale of securities.
g. Inventories
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives
are as follows:
Buildings 20 years
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 3 - 7 years
Computer Hardware and Software 3 - 5 years
Leasehold Improvements Lease term
Depreciation and amortization are computed using the straight-line method.
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance costs are expensed when
incurred. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income (expense).
i. Long-Lived Assets and Intangibles
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", 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. The statement also requires that
when an impairment has occurred, long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value, less cost to sell. The Company recorded an asset impairment of
$14,318 in connection with the fixed assets in its rechargeable business (see
Note 3). The Company did not record any impairments of long-lived assets in 2001
or 2000.
j. Technology License Agreements
Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired a technology license
agreement for an initial payment of $1,000 in May 1994. Royalties are payable at
a rate of 8% of the fair market value of each battery using the technology if
the battery is sold or otherwise put into use by the Company. The royalties can
be reduced under certain circumstances based on the terms of this agreement. The
agreement is amortized using the straight-line method over 10 years.
Amortization expense was $100, $100, and $100 in 2002, 2001, and 2000,
respectively.
40
k. Translation of Foreign Currency
The financial statements of the Company's foreign affiliates are
translated into U.S. dollar equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation".
Exchange gains or losses included in net loss for the years ended June 30, 2002,
2001 and 2000 were $320, $(155), and $97, respectively.
l. 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.
m. Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are
included in Cost of products sold. Amounts charged to customers pertaining to
these costs are reflected as a contra-expense in Cost of products sold.
n. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations. Such expenses amounted to $213, $335 and $64 for the years ended
June 30, 2002, 2001 and 2000, respectively.
o. Research and Development
Research and development expenditures are charged to operations as
incurred.
p. Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that these costs will be incurred and can be reasonably estimated.
q. Income Taxes
The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that may be in effect when the differences are
expected to reverse. The Company recorded no income tax benefit relating to the
net operating loss generated during the years ended June 30, 2002, 2001 and
2000, and as such, the loss was offset by a valuation allowance. A valuation
allowance is required when it is more likely than not that the recorded value of
a deferred tax asset will not be realized.
41
r. Concentration of Credit Risk
In fiscal 2002, three customers - Kidde Safety, the U.S. Army/CECOM, and
UNICOR - accounted for approximately $9.4 million of sales, which amounted to
approximately 29% of total revenues of the Company. Sales of 9-volt batteries to
Kidde Safety for use in long-life smoke detector applications amounted to $3,400
in 2002, $3,300 in 2001 and $2,900 in 2000. The 2002 sales to Kidde represented
more than 10% of the Company's consolidated revenues. Sales of BA-5368 batteries
to UNICOR for use in pilot survival radio applications amounted to $4,000 in
2002, $1,200 in 2001 and none in 2000. The 2002 sales to UNICOR also represented
more than 10% of the Company's consolidated revenues. Sales of BA-5372 batteries
to the U.S. Army/CECOM, which are used as backup batteries in the military's
communications radios, amounted to $2,000 in 2002, $1,200 in 2001 and $500 in
2000. The Company believes that the loss of any of these customers could have a
material adverse effect on the Company. The Company's relationship with these
customers is good.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the U.S. economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 19% of
total primary revenues in 2002. Additionally, a lower demand from the U.S.
Government could result in lower sales to government users.
The Company generally does not distribute its products to a concentrated
geographical area nor is there a significant concentration of credit risks
arising from individuals or groups of customers engaged in similar activities,
or who have similar economic characteristics. The Company does not normally
obtain collateral on trade accounts receivable.
s. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at June 30, 2002, 2001 and 2000. Fair values
have been determined through information obtained from market sources.
t. Earnings Per Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires the
reporting of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing reported earnings available to common shareholders by weighted
average shares outstanding for the period. Diluted EPS includes the dilutive
effect of securities calculated using the treasury stock method, if any. No
dilution for common share equivalents is included in fiscal 2002, 2001 and 2000
as the effects would be antidilutive. For all years reported, diluted earnings
per share were the equivalent of basic earnings per share due to the net loss.
There were 2,562,640, 2,278,800, and 2,202,380 outstanding stock options and
warrants as of June 30, 2002, 2001 and 2000, respectively, that were not
included in EPS for those periods as the effect would be antidilutive. (See Note
8.)
u. Stock-Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires compensation costs to
be recognized based on the difference, if any, between the quoted market price
of the stock on the grant date and the exercise price.
In March 2000, the FASB issued Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN No. 44 had no significant impact on the Company's financial
statements.
v. Segment Reporting
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has four operating segments. The basis for determining the Company's
operating segments is the manner in which financial information is used by the
Company in its operations.
42
Management operates and organizes itself according to business units that
comprise unique products and services across geographic locations.
w. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company will adopt SFAS No. 143 in the fiscal year beginning July
1, 2002 and is currently evaluating the effect, if any, on the Company's
financial statements.
In October 2001, the FASB issued 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 Company will adopt SFAS No. 144 in the fiscal year beginning
July 1, 2002. The Company does not believe adoption of this pronouncement will
have a material adverse effect on its financial statements.
In June 2002, the FASB issued 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 Company will adopt SFAS No. 146 in the fiscal year
beginning July 1, 2002. The Company does not believe the adoption of this
pronouncement will have a material adverse effect on its financial statements.
x. Reclassifications
The Company has reclassified restricted cash and accrued vacation in the
2001 Consolidated Balance Sheet to conform to the current year presentation.
Note 2 - Investments
The following is a summary of available-for-sale securities:
Unrealized Estimated
June 30, 2002 Cost Gain Fair Value
- ------------- -------------------------------
Commercial Paper and other ................. $2 $-- $2
== === ==
Unrealized Estimated
June 30, 2001 Cost Gain Fair Value
- ------------- -------------------------------
Commercial Paper and other .............. $ 613 $-- $ 613
U.S. corporate bonds .................... 2,499 1 2,500
------ --- -----
$3,112 $ 1 $3,113
====== === ======
The Company has instructed its investment fund managers to invest in
conservative, investment grade securities with average maturities of less than
three years. In fiscal 2000, the Company realized a gain on sales of securities
of $3,147 relating to the sale of portions of the Company's investment in
Intermagnetics General Corporation.
43
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties or the Company may sell the securities to meet their
ongoing and potential future cash needs.
The following is a summary of the cost, which approximates fair value, of
the Company's available-for-sale securities by contractual maturity:
June 30,
--------
At Cost: 2002 2001
------ ------
Less than one year ................... $ 2 $1,112
More than one year ................... -- 2,000
------ ------
Total .............................. $ 2 $3,112
====== ======
Note 3 - Impairment of Long-Lived Assets
In June 2002, the Company reported a $14,318 impairment charge. This
impairment charge related to a writedown of long-lived assets in the Company's
rechargeable production operations, reflecting a change in the Company's
strategy. Changes in external economic conditions culminated in June 2002,
reflecting a slowdown in the mobile electronics marketplace and a realization
that near-term business opportunities utilizing the high volume rechargeable
production equipment had dissipated. These changes caused the Company to shift
away from high volume polymer battery production to higher value, lower volume
opportunities. The Company's redefined strategy eliminates the need for its high
volume production line that had been built mainly to manufacture Nokia cell
phone replacement batteries. The new strategy is a three-pronged approach.
First, the Company will manufacture in-house for the higher value, lower volume
polymer rechargeable opportunities. Second, the Company will utilize its
affiliate in Taiwan, Ultralife Taiwan, Inc., as a source for both polymer and
liquid lithium cells. And third, the Company will look to other rechargeable
cell manufacturers as sources for cells that the Company can then assemble into
completed battery packs.
The impairment charge was accounted for under Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires evaluating the assets'
carrying value based on future cash flows. As a result of the impairment of the
Company's fixed assets, depreciation charges will be reduced by approximately
$1,800 per year.
Note 4 - Supplemental Balance Sheet Information
The composition of inventories was:
June 30,
--------
2002 2001
------ ------
Raw materials ............................ $2,680 $2,595
Work in process .......................... 1,338 1,233
Finished products ........................ 1,022 1,872
------ ------
5,040 5,700
Less: Reserve for obsolescence ........... 407 411
------ ------
$4,633 $5,289
====== ======
The composition of property, plant and equipment was:
Land ..................................... $ 123 $ 123
Buildings and Leasehold Improvements ..... 1,619 1,608
Machinery and Equipment .................. 26,308 37,891
Furniture and Fixtures ................... 312 291
Computer Hardware and Software ........... 915 1,375
Construction in Progress ................. 2,531 2,984
------- -------
31,808 44,272
Less: Accumulated Depreciation ........... 15,674 11,275
------- -------
$16,134 $32,997
======= =======
44
Note 5 - Operating Leases
The Company leases various buildings, machinery, land, automobiles and
office equipment. Rental expenses for all operating leases were approximately
$801, $500 and $333 for the years ended June 30, 2002, 2001 and 2000,
respectively. Future minimum lease payments under non-cancelable operating
leases as of June 30, 2002 are as follows: 2003 - $1,172, 2004 - $1,168, 2005 -
$1,156, 2006 - $1,149, and thereafter - $1,984.
In March 2001, the Company entered into a $2,000 lease for certain new
manufacturing equipment with a third party leasing agency. Under this
arrangement, the Company had various options to acquire manufacturing equipment,
including sales / leaseback transactions and operating leases. In October 2001,
the Company expanded its leasing arrangement with this third party leasing
agency, increasing the amount of the lease line from $2,000 to $4,000. The
increase in the line was used to fund capital expansion plans for manufacturing
equipment that increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's lease
payment is $226 per quarter. In conjunction with this lease, the Company has a
letter of credit of $3,800 outstanding.
Note 6 - Debt and Capital Leases
New York Power Authority
In May 1999, the Company borrowed approximately $150 from New York Power
Authority (NYPA) that was used toward the construction of a solvent recovery
system. The annual interest rate on the loan is 6%. The loan was being repaid in
24 equal monthly payments and expired in July 2001.
Convertible Note to Director
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note will convert
automatically into 200,000 shares of the Company's common stock if the Company's
shareholders vote to approve the conversion of the note at the Company's Annual
Meeting in December 2002. 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.
Credit Facility
In June 2000, the Company entered into a 3-year, $20,000 secured credit
facility with a lending institution. The financing agreement consisted of an
initial $12,000 term loan component and a revolving credit facility component
for an initial $8,000, based on eligible net accounts receivable (as defined)
and eligible net inventory (as defined). The amount available under the term
loan component amortizes over time. Principal and interest are paid monthly on
outstanding amounts borrowed. Debt issue costs amounting to $198 were incurred
in connection with the initiation of the term of the agreement and are being
amortized over the life of the agreement.
In October 2001, this lending institution informed the Company that its
borrowing availability under its $20,000 credit facility had been effectively
reduced to zero as a result of a recent appraisal of its fixed assets. In
February 2002, the Company and its primary lending institution amended the
credit facility. The amended facility was reduced to $15,000 mainly due to the
reduction in the valuation of fixed assets that limited the borrowing capacity
under the term loan component, as well as to minimize the cost of unused line
fees. The term loan component was revised to an initial $2,733 based on the
valuation of the Company's fixed assets (of which $2,468 was outstanding on the
term loan at June 30, 2002). The principal associated with the term loan is
being repaid over a 5-year amortization period. However, since the initial term
of the three-year credit facility agreement expires in June 2003, and it is
subject to extension by the concurrence of both the Company and the lending
institution, the remaining principal under the term loan is reflected as a
short-term liability as of June 30, 2002. It is the Company's intention at this
time to extend this agreement.
The revolving credit facility component comprises the remainder of the
total potential borrowing capacity under the overall credit facility. There was
no balance outstanding on the revolving credit facility as of June 30, 2002.
Certain definitions were revised with the February 2002 amendment, resulting in
an increase in the Company's available borrowing base. In addition, the minimum
net worth covenant was effectively reduced to approximately $19,200, after
adjustments for fixed asset impairment charges. At June 30, 2002, the Company is
in compliance with this covenant.
45
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company. At June 30, 2002, the rate was 5.75%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The total
amount available under the term loan component is reduced by outstanding letters
of credit. The Company had $3,800 outstanding on a letter of credit as of June
30, 2002, supporting the Company's $4,000 equipment lease. The Company's
additional borrowing capacity as of June 30, 2002 was approximately $1,000.
Capital Leases
The Company has two capital leases. The first is a capital lease
commitment for the Newark, New York facility which provides for payments
(including principal and interest) of $50 per year through December 2001 and $28
per year from December 2002 through 2007. Remaining interest on the lease is
approximately $51. At the end of this lease term, the Company is required to
purchase the facility for one dollar. The second capital lease is for computer
equipment. The lease expires in 2003 and requires monthly payments of
approximately $13.
Payment Schedule
Principal payments under the current amount outstanding of the long-term
debt and capital leases is as follows:
Credit Note to
Facility Director Capital Leases Total
-------- -------- --------------------- -----
Building Equipment
-------- ---------
Fiscal 2003 $2,468 $600 $ 15 $65 $3,148
2004 -- -- 16 -- 16
2005 -- -- 18 -- 18
2006 -- -- 20 -- 20
2007 and thereafter -- -- 49 -- 49
------ ---- ---- --- ------
2,468 600 118 65 3,251
Less: Current portion 2,468 600 15 65 3,148
------ ---- ---- --- ------
Long-term $ -- $ -- $103 $-- $ 103
====== ==== ==== === ======
Letters of Credit
In conjunction with the purchase/lease agreement to acquire the Company's
Newark, New York facilities, the Company has a letter of credit in the amount of
$151, which expires in 2007. Additionally, the Company maintains a $50 letter of
credit for computer equipment, which expires in 2002. Lastly, in connection with
the $4,000 operating lease line that the Company initiated in March 2001, the
Company maintains a $3,800 letter of credit, which expires in July 2007. Each of
these letters of credit decline gradually at certain points over time as the
obligations they are associated with diminish.
Note 7 - Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first two years of the agreement, of which approximately
$5,600 has been paid. The Company has been attempting to collect the balance due
under this contract. China Battery has indicated that these payments will not be
made until certain contractual issues have been resolved. Due to the Chinese
partner's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed to the Company as well as the Company's investment. In
December 1997, China Battery sent to the Company a letter demanding
reimbursement of losses they have incurred plus a refund for certain equipment
that the Company sold to China Battery. Although China Battery has not taken any
additional steps, there can be no assurance that China Battery will not further
pursue such a claim, which, if successful,
46
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that such a claim is
without merit.
b. Indemnity Agreement
The Company has an Indemnity Agreement with each member of its Board of
Directors and corporate officers. The agreement provides that the Company will
reimburse directors or officers for all expenses, to the fullest extent
permitted by law and the Company by-laws, arising out of their performance as
agents or trustees of the Company.
c. Purchase Commitments
As of June 30, 2002, the Company has made commitments to purchase
approximately $171 of production machinery and equipment.
d. Royalty Agreement
Technology underlying certain products of the Company are based in part as
non-exclusive transfer agreements. The Company made an original payment for such
technology and is required to make royalty and other payments in the future
which incorporate the licensed technology.
e. Government Grants/Loans
The Company has been able to obtain certain grants/loans from governments
agencies to assist with various funding needs.
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 its status the 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 approximately $400 for costs it had
incurred to date for equipment purchases applicable under this grant/loan. The
remaining $350 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 and maintained for a period of three years. 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 five-year period. The Company will initially record the proceeds
from this grant/loan as a long-term liability, and will only amortize these
proceeds into income as the certainty of meeting the employment criteria become
definitive.
Also in November 2001, the Company received approval for a $300 grant/loan
from New York State. The grant/loan will fund capital expansion plans that the
Company expects will lead to job creation. In this case, the Company will be
reimbursed after the full completion of the particular project. This grant/loan
also required the Company to meet and maintain certain levels of employment.
However, since the Company does not meet the beginning employment threshold, it
is unlikely at this time that the Company will be able to gain access to these
funds.
f. Employment Contracts
The Company has employment contracts with certain of its key employees
with automatic one-year renewals unless terminated by either party. These
agreements provide for minimum salaries, as adjusted for annual increases, and
may include incentive bonuses based upon attainment of specified management
goals. In addition, these agreements provide for severance payments in the event
of specified termination of employment.
47
g. Legal Matters
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In 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 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.
48
Note 8 - Shareholders' Equity
a. Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, with a par
value of $0.10 per share. At June 30, 2002, no preferred shares were issued or
outstanding.
b. Common Stock
In July 2001, the Company completed a $6,800 private placement of
1,090,000 shares of its common stock at $6.25 per share.
In April 2002, the Company issued 801,333 shares of its common stock at
$3.00 per share in a private placement offering. In conjunction with this
offering, another 200,000 shares will be issued in December 2002 subject to
shareholder approval of a convertible note with one of the Company's directors
(see Note 6).
In December 2000, the shareholders approved an increase in the number of
authorized shares of common stock from 20,000,000 to 40,000,000.
c. Stock Options
The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense for its stock-based compensation plans has been recognized
in the Company's Consolidated Statements of Operations. The Company has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation". If the Company had elected to recognize compensation expense for
all of the Company's stock-based compensation based on the fair value of the
options at grant date as prescribed by SFAS No.123, the Company's net loss would
have been $26,473, $19,597 and $12,333 for the years ended June 30, 2002, 2001
and 2000, compared with the reported losses of $25,182, $17,262 and $10,242,
respectively. Loss per share would have been $2.13, $1.75 and $1.13 in the years
ended June 30, 2002, 2001 and 2000, respectively, as compared to reported loss
per share of $2.03, $1.55 and $0.94, respectively. The effect of SFAS No. 123 in
the pro forma disclosures may not be indicative of future amounts.
For purposes of this disclosure, the fair value of each fixed option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in fiscal 2002,
2001, and 2000:
2002 2001 2000
------------------------------------------------------------------------
Risk-free interest rate 3.6% 4.8% 6.4%
Volatility factor 75.8% 75.8% 74.1%
Weighted average expected life (years) 4 4 6
Weighted average fair value of
options granted $2.13 $3.56 $5.48
The shareholders of the Company have approved four stock option plans that
permit the grant of options. In addition, the shareholders of the Company have
approved the grant of options outside of these plans. Under the 1991 stock
option plan, 100,000 shares of Common Stock were reserved for grant to key
employees and consultants of the Company. These options expired on September 13,
2001, at which date the plan terminated. All options granted under the 1991 plan
were Non-Qualified Stock Options ("NQSOs").
The shareholders of the Company have also approved a 1992 stock option
plan that is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 1,150,000 shares of Common Stock for grant
under the plan. During 1997, the Board of Directors approved an amendment to the
plan increasing the number of shares of Common Stock reserved by 500,000 to
1,650,000. Options granted under the 1992 plan are either Incentive Stock
Options ("ISOs") or NQSOs. Key employees are eligible to receive ISOs and NQSOs;
however, directors and consultants are eligible to receive only NQSOs. As of
June 30, 2002, there are 28,410 shares available for grant.
Effective March 1, 1995, the Company established the 1995 stock option
plan and granted the former Chief Executive Officer ("CEO") options to purchase
100,000 shares at $14.25 per share under this plan. Of these shares,
49
60,000 vested prior to his termination and subsequently expired on March 1,
2001. There were no other grants under the 1995 stock option plan. In October
1992, the Company granted, to the former CEO, options to purchase 225,000 shares
of Common Stock at $9.75 per share outside of any of the stock option plans. The
options vested through June 1997 and expire in October 2002.
Effective July 12, 1999, the Company granted the current CEO options to
purchase 500,000 shares of Common Stock at $5.19 per share outside of any of the
stock option plans. Of these, 50,000 options were exercisable on the grant date,
and the remaining options are exercisable in annual increments of 90,000 over a
five-year period commencing July 12, 2000 through July 12, 2004, and expire on
July 12, 2005.
Effective December 2000, the Company established the 2000 stock option
plan which is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 500,000 shares of Common Stock for grant
under the plan. Options granted under the 2000 plan are either ISOs or NQSOs.
Key employees are eligible to receive ISOs and NQSOs; however, directors and
consultants are eligible to receive only NQSOs. As of June 30, 2002, there are
94,900 shares available for grant.
The following table summarizes data for the stock options issued by the
Company:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Per Share Of Shares Per Share of Shares Per Share
--------- --------- --------- --------- --------- ---------
Shares under option at beginning of
year ............................ 2,266,300 $7.95 2,189,880 $ 8.68 1,721,460 $10.16
Options granted ................... 461,000 3.78 341,600 7.06 1,033,500 6.59
Options exercised ................. -- -- (77,900) 7.77 (202,000) 10.22
Options canceled .................. (286,160) 9.92 (187,280) 14.28 (363,080) 8.94
--------- ----- --------- ------ --------- ------
Shares under option at end of year 2,441,140 $6.90 2,266,300 $ 7.95 2,189,880 $ 8.68
--------- ----- --------- ------ --------- ------
Options exercisable at end of year 1,289,200 $8.13 675,480 $10.09 633,320 $10.49
The following table represents additional information about stock options
outstanding at June 30, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 2002 Life Exercise Price at June 30, 2002 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
$3.15 - $5.13 500,400 5.17 $3.78 80,500 $4.33
$5.19 - $6.50 742,600 3.33 $5.45 340,320 $5.43
$6.55 - $9.00 639,050 3.19 $7.69 353,550 $7.89
$9.75 - $17.88 559,090 0.93 $10.71 514,830 $10.68
- --------------------------------------------------------------------------------------------------------------------------
$3.15 - $17.88 2,441,140 3.12 $6.90 1,289,200 $8.13
d. Warrants
In March 1998, the Company issued warrants to purchase 12,500 shares of
its common stock to the Empire State Development Corporation in connection with
a $500 grant. Proceeds of the grant were used to fund certain equipment
purchases and are contingent upon the Company achieving and maintaining minimum
employment levels. The warrants may be exercised through December 31, 2002 at an
exercise price equal to 60% of the average closing price for the 10 trading days
preceding the exercise date, but not less than the average closing price of the
Company's common stock during the 20 trading days prior to the grant.
50
In July 2001, the Company issued warrants to purchase 109,000 shares of
its common stock to H.C. Wainwright & Co., Inc. and other affiliated individuals
that participated as investment bankers in the $6,800 private placement of
1,090,000 shares of common stock that was completed at that time. The warrants
have an exercise price of $6.25 per share and the term of the warrants is five
years.
e. Reserved Shares
The Company has reserved 2,685,950 shares of common stock under the
various stock option plans and warrants as of June 30, 2002, and 2,588,200 and
2,266,225 as of June 30, 2001 and 2000, respectively.
Note 9 - Income Taxes
Foreign and domestic loss carryforwards totaling approximately $76,950 are
available to reduce future taxable income. Foreign loss carryforwards of $12,118
can be carried forward indefinitely. The domestic net operating loss
carryforward of $64,832 expires through 2022. If it is determined that a change
in ownership as defined under Internal Revenue Code Section 382 has occurred,
the net operating loss carryforward will be subject to an annual limitation.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The Company increased its
valuation allowance by approximately $10,203, $3,143 and $2,445 for the years
ended June 30, 2002, 2001 and 2000, respectively, to offset the deferred tax
assets based on the Company's estimates of its future earnings and the expected
timing of temporary difference reversals.
Significant components of the Company's deferred tax liabilities and
assets as of June 30 are as follows:
2002 2001
---- ----
Deferred tax liabilities:
Unrealized gain on securities ................. $ 1 $ 1
Property, plant and equipment ................. 2,766 913
-------- --------
Total deferred tax liabilities ................... 2,767 914
Deferred tax assets:
Impairment of long-lived assets ............... 4,868 --
Net operating loss carryforward ............... 25,678 18,560
Other ......................................... 526 456
-------- --------
Total deferred tax assets ........................ 31,072 19,016
Valuation allowance for deferred tax assets ...... (28,305) (18,102)
-------- --------
Net deferred tax assets .......................... 2,767 914
-------- --------
Net deferred tax assets / liabilities ............ $ -- $ --
There were no income taxes paid for the years ended June 30, 2002, 2001
and 2000. For financial reporting purposes, income (loss) from continuing
operations before income taxes included the following:
June 30,
2002 2001 2000
---- ---- ----
United States ............ $(22,894) $(13,999) $ (7,658)
Foreign .................. (2,288) (3,263) (2,584)
-------- -------- --------
Total .................... $(25,182) $(17,262) $(10,242)
There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at June 30, 2002.
The Company's effective tax benefit is lower than would be expected if the
statutory rate was applied to the pretax loss because the Company has recorded
an increase in the valuation allowance for deferred tax assets equal to the tax
benefit of the current year net operating loss carryforwards due to the
uncertainty of future operating results. Accordingly, the effective tax rate is
0.0% for each of the years ended June 30, 2002, 2001 and 2000.
51
Note 10 - 401(k) Plan
The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the
employees' contributions. Effective January 1, 2001, the Board of Directors
approved Company matching of employee contributions up to a maximum of 4% of the
employee's income. Prior to this, the maximum contribution for participants was
3%. For the years ended June 30, 2002, 2001 and 2000, the Company contributed
$162, $234 and $150, respectively. In January 2002, the employer match was
suspended in an effort to conserve cash.
Note 11 - Related Party Transactions
During 2000, the Company sold the majority of its investment in
Intermagnetics General Corporation (IGC) common stock and realized a gain on
sale of securities of $3,147. IGC was considered a related party since certain
directors of the Company served as officers or directors of IGC.
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note will convert
automatically into 200,000 shares of the Company's common stock if the Company's
shareholders vote to approve the conversion of the note at the Company's Annual
Meeting in December 2002. 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.
Note 12 - Business Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company reports its results in four
operating segments: Primary Batteries, Rechargeable Batteries, Technology
Contracts and Corporate. The Primary Batteries segment includes 9-volt
batteries, cylindrical batteries and various specialty batteries. The
Rechargeable Batteries segment consists of the Company's polymer rechargeable
batteries. The Technology Contracts segment includes revenues and related costs
associated with various government and military development contracts. The
Corporate segment consists of all other items that do not specifically relate to
the three other segments and are not considered in the performance of the other
segments.
2002
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
------------------------------------------------------------------
Revenues ............................ $ 31,334 $ 445 $736 $ -- $ 32,515
Segment contribution ................ 3,276 (20,612) 73 (7,948) (25,211)
Interest income, net ................ (291) (291)
Other income (expense), net ......... 320 320
Income taxes ........................ -- --
--------
Net loss ............................ (25,182)
Long-lived assets ................... 11,761 3,198 -- 1,358 16,317
Total assets ........................ 21,351 4,256 33 4,422 30,063
Capital expenditures ................ 1,884 333 -- 113 2,330
1,884
Depreciation and amortization expense 1,425 2,312 -- 628 4,265
52
2001
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
------------------------------------------------------------------
Revenues $22,105 $ 370 $1,688 $ -- $ 24,163
Segment contribution 443 (7,551) 151 (8,009) (14,966)
Interest income, net 166 166
Other income (expense), net (2,462) (2,462)
Income taxes -- --
--------
Net loss (17,262)
Long-lived assets 11,628 19,490 280 1,882 33,280
Total assets 18,609 21,166 303 7,125 47,203
Capital expenditures 2,241 1,382 -- 744 4,367
Depreciation and amortization expense 1,159 2,153 1 498 3,811
2000
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
------------------------------------------------------------------
Revenues $ 21,840 $ 25 $2,649 $ -- $ 24,514
Segment contribution (1,244) (5,306) 246 (7,385) (13,689)
Interest income, net 909 909
Other income (expense), net 2,538 2,538
Income taxes -- --
--------
Net loss (10,242)
Long-lived assets 10,892 19,985 281 4,349 35,507
Total assets 19,171 20,632 493 24,164 64,460
Capital expenditures 1,377 1,012 -- 557 2,946
Depreciation and amortization expense 1,128 591 1 318 2,038
Geographical Information
- ------------------------
Revenues Long-Lived Assets
2002 2001 2000 2002 2001 2000
------------------------------- -------------------------------
United States $21,208 $15,715 $13,587 $12,347 $29,139 $30,685
United Kingdom 3,853 1,797 2,874 3,970 4,141 4,822
Hong Kong 3,330 3,347 3,211 -- -- --
Europe, excluding United Kingdom 2,518 1,572 2,812 -- -- --
Other 1,606 1,732 2,030 -- -- --
------- ------- ------- ------- ------- -------
Total $32,515 $24,163 $24,514 $16,317 $33,280 $35,507
======= ======= ======= ======= ======= =======
Note 13 - Investment in Affiliate
In December 1998, the Company announced the formation of a venture with
PGT Energy Corporation (PGT), together with a group of investors, to produce
Ultralife's polymer rechargeable batteries in Taiwan. During fiscal 2000,
Ultralife provided the venture, named Ultralife Taiwan, Inc. (UTI), with its
proprietary technology and 700,000 shares of Ultralife Common Stock, in exchange
for approximately a 46% ownership interest. Ultralife holds half the seats on
UTI's board of directors. PGT and the group of investors funded UTI with $21,250
in cash and hold the remaining seats on the board. Due to stock granted to
certain UTI employees in fiscal 2001 and subsequent capital raising initiatives,
the Company's equity interest was reduced to 33% as of June 30, 2002. The
Company does not guarantee the obligation 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.
53
Summarized financial statement information for the unconsolidated venture
is as follows:
(unaudited)
Condensed Statements of Operations Year Ended June 30,
2002 2001 2000
------- ------- -------
Net revenue $ 101 $ -- $ --
Cost of Sales (1,573) -- --
Operating loss (8,360) (7,540) (1,897)
Net loss (8,784) (6,637) (1,778)
Condensed Balance Sheets June 30,
2002 2001
------- -------
Current assets $ 5,902 $11,577
Non-current assets 60,271 35,238
------- -------
$66,173 $46,815
======= =======
Current liabilities $12,372 $ 2,663
Non-current liabilities 16,260 6,362
Shareholders' equity 37,541 37,790
------- -------
$66,173 $46,815
======= =======
Note 14 - Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net
sales less cost of products sold), net loss and net loss per share, basic and
diluted, for each quarter during the past two years:
Quarter ended
--------------------------------------------------
Fiscal 2002 Sept. 30, Dec. 31, March 31, June 30, Full
2001 2001 2002 2002 Year
--------- --------- --------- -------- --------
Revenues $ 7,616 $ 7,459 $ 8,862 $ 8,578 $ 32,515
Gross margin (448) (212) 922 1,085 1,347
Net loss (3,642) (3,420) (2,292) (15,828) (25,182)
Net loss per share, basic and
diluted (0.30) (0.28) (0.19) (1.23) (2.03)
Quarter ended
--------------------------------------------------
Fiscal 2001 Sept. 30, Dec. 31, March 31, June 30, Full
2000 2000 2001 2001 Year
--------- --------- --------- -------- --------
Revenues $ 6,851 $ 5,290 $ 5,817 $ 6,205 $ 24,163
Gross margin (452) (1,699) (731) (651) (3,533)
Net loss (3,104) (5,737) (3,921) (4,500) (17,262)
Net loss per share, basic and
diluted (0.28) (0.51) (0.35) (0.40) (1.55)
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 24, 2002, the Company dismissed its independent public
accountants, Arthur Andersen LLP ("Andersen"), and engaged
PricewaterhouseCoopers LLP ("PwC") as its new independent public accountants,
effective immediately, for the fiscal year ending June 30, 2002. This decision
was approved by the Company's Board of Directors, based on the recommendation of
its Audit Committee. The decision was based on interviews with large public
accounting firms and reflected the Audit Committee's judgment as to which firm
was best suited to deliver external audits to the Company. PwC replaces the
Company's previous audit firm, Andersen, who had been the Company's auditors
since 1996.
Andersen's reports on the Company's consolidated financial statements for
each of the fiscal years ended June 30, 2001 and June 30, 2000 did not contain
an adverse opinion or a disclaimer of opinion, nor were qualified or modified as
to uncertainty, audit scope or accounting principles.
During the fiscal years ended June 30, 2001 and June 30, 2000, and the
subsequent interim period through March 31, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Andersen's satisfaction, would have caused Andersen to make
reference to the subject matter of any such disagreements in connection with
their reports on the Company's financial statements for such years.
None of the reportable events described under Item 304(a)(1)(v) of the
Securities and Exchange Commission's Regulation S-K occurred during the
Company's fiscal years ended June 30, 2001 and June 30, 2000, and the subsequent
interim period through March 31, 2002.
Due to the closure of Andersen's Rochester, New York office, the Company
was unable to obtain a copy of a letter from Andersen stating its agreement with
these statements.
PART III
The information required by Part III and each of the following items is
omitted from this Report and presented in the Company's definitive proxy
statement ("Proxy Statement") to be filed pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year covered by this Report, in
connection with the Company's 2002 Annual Meeting of Shareholders, which
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Directors and Executive Officers of the Registrant"
in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Proxy Statement is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Pursuant to Securities and Exchange Commission Release Numbers 33-8124 and
34-46427 (File No. S7-21-02), effective on August 29, 2002, the Company is not
required to report the information required in Item 14 because this Report
pertains to a period ending prior to the Effective Date, as such term is defined
in the aforementioned Release.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements and schedules required by this Item 15 are
set forth in Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts See Item 15 (d)
(b) Reports on Form 8-K
On June 7, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that Arthur Lieberman, member of the Board of
Directors, tendered his resignation from the Board effective June 4, 2002,
citing business and personal demands on available time resources.
On July 24, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that the Company had dismissed its independent
public accountants, Arthur Andersen LLP ("Andersen"), and engaged
PricewaterhouseCoopers LLP ("PwC") as its new independent public accountants,
effective immediately, for the fiscal year ending June 30, 2002. This decision
was approved by the Company's Board of Directors, based on the recommendation of
its Audit Committee. The decision was based on interviews with large public
accounting firms and reflected the Audit Committee's judgment as to which firm
was best suited to deliver external audits to the Company. PwC replaces the
Company's previous audit firm, Andersen, who had been the Company's auditors
since 1996.
(c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit
Index Description of Document Incorporated By Reference to:
3.1a Restated Certificate of Incorporation Exhibit 3.1 of Registration Statement, File
No. 33-54470 (the "1992 Registration
Statement")
3.1b Amendment to Certificate of Exhibit 3.1 of the Form 10-Q for the fiscal
Incorporation of Ultralife Batteries, quarter ended December 31, 2000, File No.
Inc. 0-20852 ("the 2000 10-Q")
3.2 By-laws Exhibit 3.2 of the 1992 Registration
Statement
4.1 Specimen Copy of Stock Certificate Exhibit 4.1 of the 1992 Registration
Statement
4.2 Share Purchase Agreement between the Exhibit 4.2 of the 1992 Registration
Registrant and Intermagnetics General Statement
Corporation
10.1 Asset Purchase Agreement between the Exhibit 10.1 of the 1992 Registration
Registrant, Eastman Technology, Inc. Statement
and Eastman Kodak Company
10.2 Lease Agreement, as amended, between Exhibit 10.2 of the 1992 Registration
Kodak and the Registrant Statement
10.3 Joint Venture Agreement between Exhibit 10.3 of the 1992 Registration
Changzhou Battery Factory, the Company Statement
and H&A Company and related agreements
10.4 Employment Agreement between the Exhibit 10.4 of the 1992 Registration
Registrant and Joseph N. Barrella Statement
56
10.5 Employment Agreement between the Exhibit 10.5 of the 1992 Registration
Registrant, Bruce Jagid and Martin G. Statement
Rosansky
10.6 1991 Stock Option Plan Exhibit 10.6 of the 1992 Registration
Statement
10.7 1992 Stock Option Plan, as amended Exhibit 10.7 of the 1992 Registration
Statement
10.8 Representative's Warrant exercisable Exhibit 10.8 of the 1992 Registration
for purchase of Common Stock Statement
10.9 Stock Option Agreement under the Exhibit 10.9 of the Form 10-Q for the
Company's Stock Option Plan fiscal quarter ended December 31, 1993,
File No. 0-20852 (the "1993 10-Q")
10.10 Stock Option Agreement under the Exhibit 10.10 of the 1993 10-Q
Company's 1992 Stock Option Plan for
incentive stock options
10.11 Stock Option Agreement under the Exhibit 10.11 of the 1993 10-Q
Company's 1992 Stock Option Plan for
non-qualified options
10.12 Stock Option Agreement between the Exhibit 10.12 of the 1993 10-Q
Company and Stanley Lewin
10.13 Stock Option Agreement between the Exhibit 10.13 of the 1993 10-Q
Company and Joseph Abeles
10.14 Stock Option Agreement between the Exhibit 10.14 of the 1993 10-Q
Company and Stuart Shikiar
10.15 Stock Option Agreement between the Exhibit 10.15 of the 1993 10-Q
Company and Stuart Shikiar
10.16 Stock Option Agreement between the Exhibit 10.16 of the 1993 10-Q
Company and Bruce Jagid
10.17 Various amendments, dated January 4, Exhibit 10.17 of the 1993 10-Q
1993 through January 18, 1993 to the
Agreement with the Changzhou Battery
Company
10.18 Sale of Business Agreement, by and Exhibit 10.18 of the Company's Current
between Dowty Group PLC and Ultralife Report on Form 8-K dated June 10, 1994,
(UK) File No. 0-20852
10.19 Technology Transfer Agreement relating Exhibit 10.19 of the Company's Registration
to Lithium Batteries (Confidential Statement on Form S-1 filed on October 7,
treatment has been granted as to 1994, File No. 33-84888 (the "1994
certain portions of this agreement) Registration Statement")
10.20 Technology Transfer Agreement relating Exhibit 10.20 of the 1994 Registration
to Lithium Batteries Confidential Statement
treatment has been granted as to
certain portions of this agreement)
10.21 Employment Agreement between the Exhibit 10.21 of the Company's Form 10-K
Registrant and Bruce Jagid for the fiscal year ended June 30, 1995
(the "1995 10-K")
10.22 Amendment to the Employment Agreement Exhibit 10.22 of the 1995 10-K
between the Registrant and Bruce Jagid
10.23 Amendment to the Employment Exhibit 10.23 of the Company's Form 10-K
Agreement between the Registrant for the fiscal year ended June 30,1996 (the
and Bruce Jagid "1996 10-K")
10.24 Amendment to the Agreement relating to Exhibit 10.24 of the 1996 10-K
rechargeable batteries. (Confidential
treatment has been granted as to
certain portions of this agreement)
10.25 Ultralife Batteries, Inc. Chief Exhibit 10.25 of the 1996 10-K
Executive Officer's Stock Option Plan
57
10.26 Agreement with Mitsubishi Electronics Exhibit 10.26 of the Company's Report on
America, Inc. relating to sample Form 10-K for the year ended June 30, 1998
batteries for lap-top computer use (the "1998 10-K")
10.27 Purchase orders from Mitsubishi Exhibit 10.27 of the 1998 10-K
Electronics America, Inc.
10.28 Lease agreement between Wayne County Exhibit 10.1 of Registration Statement,
Industrial Development Agency and the File No. 333-47087
Company, dated as of February 1, 1998
10.29 Joint Venture Agreement for Ultralife Exhibit 10.29 of the Company's Report on
Taiwan, Inc. dated October 10, 1998 Form 10-K for the year ended June 30, 1999
(the "1999 10-K")
10.30 Amendments to the Joint Venture Exhibit 10.30 of the 1999 10-K
Agreement dated October 10, 1998
between Ultralife Batteries, Inc.
(UBI) and PGT Energy Corporation (PGT)
10.31 Technology Transfer Agreement dated Exhibit 10.31 of the 1999 10-K
December 4, 1998 between UBI and PGT
10.32 Sales Agreement dated Exhibit 10.32 of the 1999 10-K
December 4, 1998 between UBI and PGT
10.33 Loan and Security Agreement dated June Exhibit 10.33 of the Company's Report on
15, 2000 between Congress Financial Form 10-K for the year ended June 30, 2000
Corporation (New England) and (the "2000 10-K")
Ultralife Batteries, Inc.
10.34 Term Promissory Note dated June 15, Exhibit 10.34 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries, Inc.
10.35 Term Promissory Note dated June 15, Exhibit 10.35 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries (UK), Ltd.
10.36 Employment Agreement between the Exhibit 10.36 of the 2000 10-K
Registrant and John D. Kavazanjian
10.37 Second Amendment to Financing Agreement Exhibit 10.1 of the 2000 10-Q
10.38 Third Amendment to Financing Agreement Exhibit 10.38 of the Company's Report on
Form 10-K for the year ended June 30, 2001
(the "2001 10-K")
10.39 Ultralife Batteries, Inc. 2000 Stock Exhibit 99.1 of the Company's Registration
Option Plan Statement on Form S-8 filed on May 15,
2001, File No. 333-60984
10.40 Employment Agreement between the Exhibit 10.40 of the 2001 10-K
Registrant and Eric R.Dix
10.41 Lease Agreement between Winthrop Exhibit 10.41 of the 2001 10-K
Resources and the Registrant
10.42 Amended Lease Agreement between Exhibit 10.1 of the Form 10-Q for the
Winthrop Resources and the Registrant fiscal quarter ended December 31, 2001
10.43 Senior Convertible Subordinated Exhibit 4.1 of the Form 10-Q for the fiscal
Debenture Agreement quarter ended March 31, 2002 (the "March
2002 10-Q")
10.44 Fourth Amendment to Financing Exhibit 10.1 of the March 2002 10-Q
Agreements
10.45 Employment Agreement between the Filed herewith
Registrant and John D. Kavazanjian
58
10.46 Employment Agreement between the Filed herewith
Registrant and Joseph N. Barrella
10.47 Employment Agreement between the Filed herewith
Registrant and William A. Schmitz
21 Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
99 CEO and CFO Certifications Filed herewith
Financial Statement Schedules.
The following financial statement schedules of the Registrant are filed
herewith:
Schedule II - Valuation and Qualifying Accounts
Additions
---------
Charged to
Charged to Other
June 30, 2001 Expense Accounts Deductions June 30, 2002
------------- ------- ---------- ---------- -------------
Allowance for doubtful accounts $ 262 $ 30 $17 $ 37 $ 272
Inventory reserves 411 1,038 -- 1,042 407
Warranty reserves 253 222 -- 254 221
Deferred tax valuation allowance 18,102 10,203 -- -- 28,305
Additions
---------
Charged to
Charged to Other
June 30, 2000 Expense Accounts Deductions June 30, 2001
------------- ------- ---------- ---------- -------------
Allowance for doubtful accounts $ 268 $ 11 $-- $ 17 $ 262
Inventory reserves 399 825 -- 813 411
Warranty reserves 384 292 -- 423 253
Deferred tax valuation allowance 14,959 3,143 -- -- 18,102
Additions
---------
Charged to
Charged to Other
June 30, 1999 Expense Accounts Deductions June 30, 2000
------------- ------- ---------- ---------- -------------
Allowance for doubtful accounts $ 429 $ 45 $-- $206 $ 268
Inventory reserves 295 1,035 -- 931 399
Warranty reserves 169 300 -- 85 384
Deferred tax valuation allowance 12,514 2,445 -- -- 14,959
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
Date: September 27, 2002 By: /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 27, 2002 /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian
President, Chief Executive Officer
and Director
Date: September 27, 2002 /s/ Robert W. Fishback
-------------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
Date: September 27, 2002 /s/ Joseph C. Abeles
-------------------------------------
Joseph C. Abeles (Director)
Date: September 27, 2002 /s/ Joseph N. Barrella
-------------------------------------
Joseph N. Barrella (Director)
Date: September 27, 2002 /s/ Patricia C. Barron
-------------------------------------
Patricia C. Barron (Director)
Date: September 27, 2002 /s/ Daniel W. Christman
-------------------------------------
Daniel W. Christman (Director)
Date: September 27, 2002 /s/ Carl H. Rosner
-------------------------------------
Carl H. Rosner (Director)
Date: September 27, 2002 /s/ Ranjit C. Singh
-------------------------------------
Ranjit C. Singh (Director)
60
I, John D. Kavazanjian, certify that:
1. I have reviewed this annual report on Form 10-K of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report.
Date: September 27, 2002 /s/ John D. Kavazanjian
-------------------------------------
John D. Kavazanjian
President and Chief Executive Officer
I, Robert W. Fishback, certify that:
1. I have reviewed this annual report on Form 10-K of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report.
Date: September 27, 2002 /s/ Robert W. Fishback
-------------------------------------
Robert W. Fishback
Vice President of Finance and Chief
Financial Officer
61