UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2004
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 14,198,825 shares of common stock
outstanding, net of 727,250 treasury shares, as of June 26, 2004.
1
ULTRALIFE BATTERIES, INC.
INDEX
- --------------------------------------------------------------------------------
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 26, 2004 and December 31, 2003 ........................... 3
Condensed Consolidated Statements of Operations -
Three and Six months ended June 26, 2004
and June 28, 2003 ............................................. 4
Condensed Consolidated Statements of Cash Flows -
Three and Six months ended June 26, 2004
and June 28, 2003 ............................................. 5
Notes to Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. ........................................... 22
Item 4. Controls and Procedures ......................................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders ............. 24
Item 6. Exhibits and Reports on Form 8-K ................................ 24
Signatures ...................................................... 26
Index to Exhibits ............................................... 27
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
June 26, December 31,
ASSETS 2004 2003
--------- ------------
Current assets:
Cash and cash equivalents $ 941 $ 830
Restricted cash 51 50
Trade accounts receivable (less
allowance for doubtful accounts
of $223 at June 26, 2004 and
$168 at December 31, 2003) 20,205 17,803
UTI note receivable -- 2,350
Inventories 16,131 10,209
Prepaid expenses and other current
assets 1,662 1,314
--------- ---------
Total current assets 38,990 32,556
--------- ---------
Property, plant and equipment, net 19,169 18,213
Other assets:
Investment in UTI -- 1,550
Technology license agreements
(net of accumulated amortization
of $1,451 at June 26, 2004 and
$1,418 at December 31, 2003) -- 33
--------- ---------
-- 1,583
--------- ---------
Total Assets $ 58,159 $ 52,352
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
portion of long-term debt $ 5,439 $ 8,295
Accounts payable 7,720 6,385
Income taxes payable 13 106
Other current liabilities 3,828 3,068
--------- ---------
Total current liabilities 17,000 17,854
Long-term liabilities:
Debt and capital lease obligations 68 68
Commitments and contingencies
(Note 10)
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 - 14,926,075 at
June 26, 2004 and 14,302,782 at
December 31, 2003 1,493 1,430
Capital in excess of par value 124,276 120,626
Accumulated other comprehensive loss (638) (723)
Accumulated deficit (81,662) (84,525)
--------- ---------
43,469 36,808
Less -- Treasury stock, at cost
-- 727,250 shares 2,378 2,378
--------- ---------
Total shareholders' equity 41,091 34,430
--------- ---------
Total Liabilities and Shareholders'
Equity $ 58,159 $ 52,352
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
Three Months Ended Six Months Ended
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 28,439 $ 20,110 $ 55,427 $ 35,538
Cost of products sold 21,391 15,379 42,047 27,648
-------- -------- -------- --------
Gross margin 7,048 4,731 13,380 7,890
-------- -------- -------- --------
Operating expenses:
Research and development 560 646 1,063 1,231
Selling, general, and
administrative 2,858 2,187 5,329 4,149
-------- -------- -------- --------
Total operating expenses 3,418 2,833 6,392 5,380
-------- -------- -------- --------
Operating income 3,630 1,898 6,988 2,510
Other income (expense):
Interest income 27 4 47 5
Interest expense (150) (110) (235) (242)
Write-off of UTI investment and
note receivable (3,951) -- (3,951) --
Miscellaneous 32 397 93 187
-------- -------- -------- --------
(Loss) income before income taxes (372) 2,149 2,942 2,460
-------- -------- -------- --------
Income taxes -- -- 79 --
-------- -------- -------- --------
Net (loss) income $ (372) $ 2,149 $ 2,863 $ 2,460
======== ======== ======== ========
(Loss) earnings per share - basic $ (0.03) $ 0.17 $ 0.21 $ 0.19
======== ======== ======== ========
(Loss) earnings per share - diluted $ (0.03) $ 0.16 $ 0.19 $ 0.19
======== ======== ======== ========
Weighted average shares
outstanding - basic 14,115 12,927 13,930 12,895
======== ======== ======== ========
Weighted average shares
outstanding - diluted 14,115 13,651 15,109 13,266
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
June 26, June 28,
2004 2003
OPERATING ACTIVITIES
Net income $ 2,863 $ 2,460
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 1,705 1,504
Gain on asset disposal (14) --
Foreign exchange gain (87) (192)
Write-off of UTI investment
and note receivable 3,951 --
Write-down of inventory damaged
in fire 543 --
Write-down of fixed assets
damaged in fire 112
Non-cash stock-based compensation 10 26
Changes in operating assets
and liabilities:
Accounts receivable (2,402) (6,940)
Inventories (6,465) (916)
Prepaid expenses and other
current assets 399 (142)
Insurance receivable relating
to fires (798) --
Income taxes payable (93) --
Accounts payable and other
current liabilities 2,095 3,957
--------- ---------
Net cash provided by (used in)
operating activities 1,819 (243)
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (2,628) (3,278)
Proceeds from asset disposal 16 --
Purchase of securities (1) --
--------- ---------
Net cash used in investing activities (2,613) (3,278)
--------- ---------
FINANCING ACTIVITIES
Change in revolving credit facilities (2,456) 2,440
Proceeds from issuance of common stock 3,703 1,128
Proceeds from issuance of debt 500 --
Principal payments on long-term
debt and capital lease obligations (400) (401)
Proceeds from grant 117 --
--------- ---------
Net cash provided by financing
activities 847 3,784
--------- ---------
Effect of exchange rate changes
on cash 58 27
--------- ---------
Increase in cash and cash equivalents 111 290
Cash and cash equivalents at
beginning of period 830 1,322
--------- ---------
Cash and cash equivalents at end
of period $ 941 $ 1,612
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Taxes paid $ 255 $ --
========= =========
Interest paid $ 173 $ 116
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
(unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Form 10-K for
the twelve-month period ended December 31, 2003.
The Company's monthly closing schedule is a weekly-based cycle as
opposed to a calendar month-based cycle. While the actual dates for the
quarter-ends will change slightly each year, the Company believes that
there are not any material differences when making quarterly comparisons.
2. WRITE-OFF OF UTI INVESTMENT AND NOTE RECEIVABLE
In June 2004, the Company recorded a $3,951 non-cash, non-operating
charge related to the Company's ownership interest in Ultralife Taiwan,
Inc. ("UTI") that consisted of a write-off of its $2,401 note receivable
from UTI, including accrued interest, and the book value of its $1,550
equity investment in UTI. The Company decided to record this charge due to
recent events that have caused increasing uncertainty over UTI's near-term
financial viability, including a failure by UTI to meet commitments made
to the Company and its other creditors to secure additional financial
support before July 1, 2004. Based on these factors, and UTI's operating
losses over several years, the Company's investment has had an other than
temporary decline in fair value and the Company believes that the
probability of being reimbursed for the note receivable is nominal. The
Company continues to hold a 9.2% equity interest in UTI, and it is working
with UTI to help it through its financial difficulties in an effort to
ensure a satisfactory outcome for all parties involved. The Company does
not believe the write-off poses a risk to its current operations or future
growth prospects because UTI continues to manufacture product for it and
the Company has taken steps to establish alternate sources of supply.
3. EARNINGS (LOSS) PER SHARE
Basic earnings per share are calculated by dividing net income by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share are calculated by dividing net income,
adjusted for interest on convertible securities, by potentially dilutive
common shares, which include stock options, warrants and convertible
securities.
Net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
The impact of conversion of dilutive securities, such as stock options and
warrants, are not considered where a net loss is reported as the inclusion
of such securities would be anti-dilutive. As a result, basic loss per
share is the same as diluted loss per share.
6
The computation of basic and diluted earnings per share is
summarized as follows:
(In thousands, except per share data) Three Months Ended Six Months Ended
--------------------------------------------------------------------
June 26, 2004 June 28, 2003 June 26, 2004 June 28, 2003
--------------------------------------------------------------------
Net (Loss) / Income (a) $ (372) $ 2,149 $ 2,863 $ 2,460
Effect of Dilutive Securities:
Stock Options / Warrants -- 44 -- 44
Convertible Note -- 6 -- 9
-----------------------------------------------------------------
Net (Loss) / Income - Adjusted (b) $ (372) $ 2,199 $ 2,863 $ 2,513
=================================================================
Average Shares Outstanding - Basic (c) 14,115 12,927 13,930 12,895
Effect of Dilutive Securities:
Stock Options / Warrants -- 557 1,179 246
Convertible Note -- 167 -- 125
-----------------------------------------------------------------
Average Shares Outstanding - Diluted (d) 14,115 13,651 15,109 13,266
=================================================================
EPS - Basic (a/c) $ (0.03) $ 0.17 $ 0.21 $ 0.19
EPS - Diluted (b/d) $ (0.03) $ 0.16 $ 0.19 $ 0.19
The Company also had the equivalent of 1,056,880 options and
warrants outstanding for the three-month period ended June 26, 2004 which
were not included in the computation of diluted EPS because these
securities would have been anti-dilutive for that period.
4. STOCK-BASED COMPENSATION
The Company has various stock-based employee compensation plans. The
Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
which require 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. As all options granted to employees under such plans
had an exercise price at least equal to the market value of the underlying
common stock on the date of grant, and given the fixed nature of the
equity instruments, no stock-based employee compensation cost is reflected
in net (loss) income. The effect on net (loss) income and (loss) earnings
per share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
Amendment of SFAS No. 123", to stock-based employee compensation is as
follows:
7
(In thousands, except per share data) Three Months Ended Six Months Ended
----------------------------------------------------------------------
June 26, 2004 June 28, 2003 June 26, 2004 June 28, 2003
----------------------------------------------------------------------
Net (loss) income, as reported $ (372) $ 2,149 $ 2,863 $ 2,460
Add: Stock-based employee compensation
expense included in reported net (loss)
income, net of related tax effects -- -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (467) (317) (681) (540)
-----------------------------------------------------------------
Pro forma net (loss) income $ (839) $ 1,832 $ 2,182 $ 1,920
(Loss) earnings per share:
Basic - as reported $ (0.03) $ 0.17 $ 0.21 $ 0.19
Basic - pro forma $ (0.06) $ 0.14 $ 0.16 $ 0.15
Diluted - as reported $ (0.03) $ 0.16 $ 0.19 $ 0.19
Diluted - pro forma $ (0.06) $ 0.13 $ 0.14 $ 0.14
During the first six months of 2004, the Company issued 623,293
shares of common stock as a result of exercises of stock options and
warrants. The Company received approximately $3,703 in cash proceeds as a
result of these transactions.
5. COMPREHENSIVE (LOSS) INCOME
The components of the Company's total comprehensive (loss) income
were:
Three Months Ended Six Months Ended
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
-----------------------------------------------------------------
Net (loss) income $ (372) $ 2,149 $ 2,863 $ 2,460
Foreign currency translation adjustments 15 (124) 85 (65)
-----------------------------------------------------------------
Total comprehensive (loss) income $ (357) $ 2,025 $ 2,948 $ 2,395
=================================================================
8
6. INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined under the first-in, first- out (FIFO) method. The composition
of inventories was:
June 26, 2004 December 31, 2003
--------------------------------
Raw materials $ 6,368 $ 5,946
Work in process 4,004 2,306
Finished goods 6,266 2,699
-------------------------
16,638 10,951
Less: Reserve for obsolescence 507 742
-------------------------
$ 16,131 $ 10,209
=========================
7. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the
following:
June 26, 2004 December 31, 2003
--------------------------------
Land $ 123 $ 123
Buildings and leasehold improvements 2,540 1,845
Machinery and equipment 34,053 33,207
Furniture and fixtures 371 358
Computer hardware and software 1,664 1,554
Construction in progress 2,762 1,748
-------------------------
41,513 38,835
Less: Accumulated depreciation 22,344 20,622
-------------------------
$ 19,169 $ 18,213
=========================
8. DEBT
As of June 26, 2004, the Company had $867 outstanding under the term
loan component of its credit facility with its primary lending bank, and
had $4,209 of borrowings outstanding under the revolver component of the
credit facility. The Company's additional borrowing capacity under the
revolver component of the credit facility as of June 26, 2004 was
approximately $5,900, net of outstanding letters of credit of $3,600. At
June 26, 2004, the Company's net worth was $41,091, compared to the debt
covenant requiring a minimum net worth of approximately $22,406. (See Note
13 for information on the Company's new credit facility.)
As of June 26, 2004, the Company's wholly-owned U.K. subsidiary,
Ultralife Batteries (UK) Ltd., had approximately $345 outstanding under
its revolving credit facility with a commercial bank in the U.K. This
credit facility provides the Company's U.K. operation with additional
financing flexibility for its working capital needs. Any borrowings
against this credit facility are collateralized with that company's
outstanding accounts receivable balances. There was approximately $476 in
additional borrowing capacity under this credit facility as of June 26,
2004.
9
9. 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 an
income tax expense of $79 for the six months ended June 26, 2004 relating
to alternative minimum tax calculations.
As of December 31, 2003, the Company had foreign and domestic net
operating loss carryforwards totaling approximately $76,829 that are
available to reduce future taxable income. The Company has not reported a
deferred tax asset on its Consolidated Balance Sheet due to prior
operating losses. It is reasonably possible the Company's profitability in
2003 and 2004 would result in the recognition of a deferred tax asset
during 2004. The Company has determined that a change in ownership as
defined under Internal Revenue Code Section 382 occurred during the fourth
quarter of 2003. As a result, the net operating loss carryforwards will be
subject to an annual limitation, currently estimated to be in the range of
approximately $14,000 to $18,000. Such a limitation could result in the
possibility of a cash outlay for income taxes in a future year when
earnings exceed the amount of NOLs that can be used by the Company.
10. COMMITMENTS AND CONTINGENCIES
As of June 26, 2004, the Company had $51 in restricted cash in
support of a corporate credit card account.
As of June 26, 2004, the Company had open capital commitments to
purchase approximately $2,071 of production machinery and equipment.
The Company estimates future costs associated with expected product
failure rates, material usage and service costs in the development of its
warranty obligations. Warranty reserves, included in other current
liabilities on the Company's Consolidated Condensed Balance Sheet, are
based on historical experience of warranty claims and generally will be
estimated as a percentage of sales over the warranty period. In the event
the actual results of these items differ from the estimates, an adjustment
to the warranty obligation would be recorded. Changes in the Company's
product warranty liability during the first six months of 2004 were as
follows:
Balance at December 31, 2003 $ 278
Accruals for warranties issued 237
Settlements made (147)
-----
Balance at June 26, 2004 $ 368
=====
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 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, 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.
This cost, however, is merely an estimate and the cost may in fact be much
higher. In February, 1998, the
10
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 (50%) 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,
and the engineering report was submitted to the New York State Department
of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed the
report and, in January 2002, recommended additional testing. The Company
submitted a work plan to NYSDEC in October 2003, which was approved
shortly thereafter. The Company sought proposals from engineering firms to
complete the remedial work outlined in the work plan. A firm was selected
to perform the tasks associated with the remediation activities, which
were completed in December 2003. The test results were then forwarded to
NYSDEC for comment. NYSDEC responded to the Company in March 2004
requesting a report summarizing the data, findings, discussions and
conclusions. The report has been submitted to NYSDEC who will review and
make recommendations as to whether additional remediation is required.
Because the Company believes that the source of the contamination has been
removed, NYSDEC recommended that the Company conduct quarterly monitoring
of the groundwater for one year. The Company believes that the final cost
to remediate will not exceed the original estimate. The Company awaits
final comments from the NYSDEC and will begin the additional sampling upon
approval of the conclusions stated in the report. 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. Furthermore, the Company
may face claims resulting in substantial liability which could have a
material adverse effect on the Company's business, financial condition and
the results of operations in the period in which such claims are 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 agreed to lend technical support to the Customer in defense of
its claim. The claim between the end-user and the Customer has now been
settled. Ultralife has renewed its commitment to the Customer to 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.
11. BUSINESS SEGMENT INFORMATION
The Company reports its results in three operating segments: Primary
Batteries, Rechargeable Batteries, and Technology Contracts. 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 Company looks at its segment performance at the gross
margin level, and does not allocate research and development or selling,
general and administrative costs against the segments. All other items
that do not specifically relate to these three segments and are not
considered in the performance of the segments are considered to be
Corporate charges.
11
Three Months Ended June 26, 2004
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------------
Revenues $ 26,321 $ 1,691 $ 427 $ -- $ 28,439
Segment contribution 7,048 (82) 82 (3,418) 3,630
Interest expense, net (83) (83)
Write-down of UTI investment
and note receivable (3,951) (3,951)
Miscellaneous 32 32
Income taxes -- --
--------
Net loss $ (372)
Total assets $ 48,928 $ 4,179 $ 243 $ 4,809 $ 58,159
Three Months Ended June 28, 2003
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------------
Revenues $ 19,570 $ 258 $ 282 $ -- $ 20,110
Segment contribution 5,008 (389) 112 (2,833) 1,898
Interest expense, net (146) (146)
Miscellaneous 397 397
Income taxes -- --
--------
Net income $ 2,149
Total assets $ 31,956 $ 3,249 $ 140 $ 6,191 $ 41,536
Six Months Ended June 26, 2004
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------------
Revenues $ 51,643 $ 3,065 $ 719 $ -- $ 55,427
Segment contribution 13,822 (567) 125 (6,392) 6,988
Interest expense, net (188) (188)
Write-down of UTI investment
and note receivable (3,951) (3,951)
Miscellaneous 93 93
Income taxes (79) (79)
--------
Net income $ 2,863
Total assets $ 48,928 $ 4,179 $ 243 $ 4,809 $ 58,159
Six Months Ended June 28, 2003
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------------------------
Revenues $ 34,202 $ 638 $ 698 $ -- $ 35,538
Segment contribution 8,172 (596) 314 (5,380) 2,510
Interest expense, net (237) (237)
Miscellaneous 187 187
Income taxes -- --
--------
Net income $ 2,460
Total assets $ 31,956 $ 3,249 $ 140 $ 6,191 $ 41,536
12
12. FIRES AT MANUFACTURING FACILITIES
In May 2004 and June 2004, the Company experienced two fires that
damaged certain inventory and property at its facilities. The May 2004
fire occurred at the Company's U.S. facility and was caused by cells that
shorted out when a forklift truck accidentally tipped the cells over in an
oven in an enclosed area. Certain inventory, equipment and a small portion
of the building where the fire was contained were damaged. The June 2004
fire happened at the Company's U.K. location and mainly caused damage to
various inventory and the U.K. company's leased facility. The fire was
contained mainly in a bunkered, non-manufacturing area designed to store
various material, and there was additional smoke and water damage to the
facility and its contents. It is unknown how the U.K. fire was started.
The fires caused relatively minor disruptions to the production
operations, and had no impact on the Company's ability to meet customer
demand during the quarter.
The Company maintains replacement cost insurance on the property and
equipment it owns or rents, with relatively low deductibles. The total of
the two losses related to company-owned assets, including expenditures
required to repair and clean up the facilities, is expected to be in the
range of $2,000. The Company is working closely with the insurance
companies on these matters, and it expects to be fully reimbursed by the
insurance companies for these losses. The impacts on the Consolidated
Statement of Operations and the net cash outflows from the Company are
expected to be negligible. At June 26, 2004, the Company's prepaid and
other current assets on its Consolidated Balance Sheet included a
receivable from insurance companies for approximately $800 for equipment
losses, inventory losses and clean-up costs incurred to date.
13. SUBSEQUENT EVENT - NEW CREDIT FACILITY
On June 30, 2004, the Company closed on a new secured $25,000 credit
facility, comprised of a five-year $10,000 term loan component and a
three-year $15,000 revolving credit component. This agreement replaces the
Company's $15,000 credit facility that expired on the same date.
On June 30, 2004, the Company drew down the full $10,000 term loan.
The proceeds of the term loan, which is to be repaid in equal monthly
installments over five years, are to be used for the retirement of
outstanding debt and capital expenditures. Availability under the
revolving credit component is subject to a debt to earnings ratio, whereas
availability under the previous facility was limited by various asset
values. The lenders of the new credit facility are JP Morgan Chase Bank
and Manufacturers and Traders Trust Company, with JP Morgan Chase Bank
acting as the administrative agent.
On July 1, 2004, the Company entered into an interest rate swap
arrangement to be effective on August 2, 2004, related to the $10,000 term
loan, in order to take advantage of historically low interest rates. The
Company received a fixed rate of interest in exchange for a variable rate.
The swap rate received was 3.98% for five years and will be adjusted
accordingly for a Eurodollar spread incorporated in the agreement, which
is dependent upon a debt to earnings ratio within a predetermined grid. At
July 1, 2004, the total adjusted rate of interest that the Company will
pay on the outstanding portion of the $10,000 term loan was 5.23%.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services (particularly from the U.S. Government for BA-5390
batteries), the successful commercialization of the Company's advanced
rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the year ended December 31, 2003.
The financial information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is presented in whole dollars.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable), lithium ion and
lithium polymer 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 military, industrial
and consumer applications, which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company also supplies rechargeable lithium ion and lithium polymer batteries for
use in portable electronic applications.
The Company reports its results in three operating segments: Primary
Batteries, Rechargeable Batteries, and Technology Contracts. 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 Company looks at
its segment performance at the gross margin level, and does not allocate
research and development or selling, general and administrative costs against
the segments. All other items that do not specifically relate to these three
segments and are not considered in the performance of the segments are
considered to be Corporate charges.
14
Results of Operations (in whole dollars)
Three months ended June 26, 2004 and June 28, 2003
Revenues. Consolidated revenues for the three-month period ended June 26,
2004 amounted to $28,439,000, an increase of $8,329,000, or 41%, from the
$20,110,000 reported in the same quarter in the prior year. Primary battery
sales increased $6,751,000, or 34%, from $19,570,000 last year to $26,321,000
this year, as a result of strong shipments of HiRate(R) battery products,
including sales of BA-5390 batteries used mainly in various military
communications and weapons applications. Modestly lower sales of 9-volt
batteries partially offset this increase. Rechargeable revenues rose $1,433,000
to $1,691,000, primarily due to higher shipments to military and commercial
customers of various rechargeable battery packs to an increasing customer base.
Technology Contract revenues were $427,000 in the second quarter of 2004,
attributable to work on the Company's $2,700,000 development contract with
General Dynamics. Compared with the same period a year ago, technology contract
revenues increased $145,000 related to contracts with different customers in
each period.
Cost of Products Sold. Cost of products sold totaled $21,391,000 for the
quarter ended June 26, 2004, an increase of $6,012,000, or 39% over the same
three-month period a year ago. The gross margin on consolidated revenues for the
quarter was $7,048,000, or 25% of revenues, an improvement of $2,317,000 over
the $4,731,000, or 24% of revenues, reported in the same quarter in the prior
year. Gross margins in the Company's primary battery operations improved
$2,040,000, from $5,008,000 in 2003 to $7,048,000 in 2004 due to volume
increases and improved manufacturing efficiencies. In the Company's rechargeable
operations, the gross margin loss amounted to $82,000 in the second quarter of
2004, compared to a loss of $389,000 in 2003, an improvement of $307,000 due to
the increased volumes. Gross margins in the Technology Contract segment were
$82,000 in the second quarter of 2004 compared to $112,000 in 2003, a decrease
of $30,000 mainly due to the timing and realized margins of different technology
contracts.
Operating Expenses. Operating expenses for the three months ended June 26,
2004 totaled $3,418,000, a $585,000 increase over the prior year's amount of
$2,833,000. Research and development charges decreased $86,000 to $560,000 in
2004 due to the consolidation of all R&D efforts to the U.S. facility in order
to reduce costs and combine efforts. Although the R&D line reflects a decline,
the Company also considers its efforts in the Technology Contracts segment to be
related to key battery development efforts. Selling, general, and administrative
expenses increased $671,000 to $2,858,000 due mainly to planned resource
additions in sales and marketing and information systems to support the
Company's commitment to support a higher volume of development opportunities. In
addition, various administrative costs associated with running a larger business
also increased, including insurance and professional fees. Overall, operating
expenses as a percentage of sales improved, declining from 14% in the June 2003
quarter to 12% in the June 2004 quarter.
Other Income (Expense). Interest expense, net, for the second quarter of
2004 was $83,000, a decrease of $63,000 from the comparable period in 2003,
mainly as a result of lower balances of debt outstanding. Miscellaneous income /
expense decreased from income of $397,000 in 2003 to income of $32,000 in 2004
mostly due to changes in foreign currency in connection with the Company's
intercompany loan with its U.K. subsidiary. The strength of the U.K. pound
against the U.S. dollar rose more rapidly in 2003 as compared with 2004. In June
2004, the Company recorded a $3,951,000 non-cash, non-operating charge related
to the Company's ownership interest in Ultralife Taiwan, Inc. ("UTI") that
consisted of a write-off of its $2,401,000 note receivable from UTI, including
accrued interest, and the book value of its $1,550,000 equity investment in UTI.
The Company decided to record this charge due to recent events that have caused
increasing uncertainty over UTI's near-term financial viability, including a
failure by UTI to meet commitments made to the Company and its other creditors
to secure additional financial support before July 1, 2004. Based on these
factors, and UTI's operating losses over several years, the Company's investment
has had an other than temporary decline in fair value and the
15
Company believes that the probability of being reimbursed for the note
receivable is nominal. The Company continues to hold a 9.2% equity interest in
UTI, and it is working with UTI to help it through its financial difficulties in
an effort to ensure a satisfactory outcome for all parties involved. The Company
does not believe the write-off poses a risk to its current operations or future
growth prospects because UTI continues to manufacture product for it and the
Company has taken steps to establish alternate sources of supply.
Income Taxes. The Company did not record income tax expense for the three
months ended June 26, 2004 due to the loss that was reported for the quarter.
Net (Loss) Income. Net loss and loss per share were $372,000 and $0.03,
respectively, for the three months ended June 26, 2004, compared to net earnings
and earnings per share of $2,149,000 and $0.16, respectively, for the same
quarter last year, primarily as a result of the reasons described above. Average
common shares outstanding used to compute basic and diluted loss per share
increased to 14,115,000 in 2004 mainly due to the impact of stock options and a
private equity placement of 200,000 common shares during the fourth quarter of
2003. The impact from "in the money" stock options and warrants resulted in an
additional 724,000 shares for the average diluted shares outstanding computation
in 2003.
Six months ended June 26, 2004 and June 28, 2003
Revenues. Consolidated revenues for the six-month period ended June 26,
2004 amounted to $55,427,000, an increase of $19,889,000, or 56%, from the
$35,538,000 reported in the same period in 2003. Primary battery sales increased
$17,441,000, or 51%, from $34,202,000 last year to $51,643,000 this year, as a
result of strong shipments of HiRate(R) battery products, led by sales of
BA-5390 batteries to military customers. Somewhat lower sales of 9-volt
batteries partially offset this increase. Rechargeable revenues rose $2,427,000
to $3,065,000, primarily due to higher shipments of various rechargeable battery
packs to a growing number of customers. Technology Contract revenues were
$719,000 in the first half of 2004, attributable mainly to work on the Company's
$2,700,000 development contract with General Dynamics. Compared with the same
period a year ago, technology contract revenues increased $21,000 related to
contracts with different customers in each period.
Cost of Products Sold. Cost of products sold totaled $42,047,000 for the
six months ended June 26, 2004, an increase of $14,399,000, or 52% over the same
six-month period a year ago. The gross margin on consolidated revenues for the
first half of 2004 was $13,380,000, or 24% of revenues, an improvement of
$5,490,000 over the $7,890,000, or 22% of revenues, reported in the same period
in 2003. Consolidated gross margins rose 70% for the first half of 2004 compared
with 2003 on the 56% increase in revenue. Gross margins in the Company's primary
battery operations improved $5,650,000, from $8,172,000 in 2003 to $13,822,000
in 2004. In the Company's rechargeable operations, the gross margin loss
amounted to $567,000 in the first two quarters of 2004, improving slightly from
a loss of $596,000 in 2003. The 2004 results included a $250,000 charge for
increasing reserves for obsolete rechargeable inventory. Gross margins in the
Technology Contract segment were $125,000 in the first half of 2004, decreasing
$189,000 from $314,000 in 2003, mainly due to the timing and realized margins of
different technology contracts.
Operating Expenses. Operating expenses for the six months ended June 26,
2004 totaled $6,392,000, a $1,012,000, or a 19% increase over the prior year's
amount of $5,380,000. Research and development costs decreased $168,000 to
$1,063,000 in 2004 due to the consolidation of all R&D efforts to the U.S.
facility in order to reduce costs and combine efforts. Although the R&D line
reflects a decline, the Company also considers its efforts in the Technology
Contracts segment to be related to key battery development efforts. Selling,
general, and administrative expenses increased $1,180,000 to $5,329,000 due
mainly to planned resource additions in sales, marketing and administrative
functions that are necessary for the company to execute on its target growth
opportunities, in addition to higher costs
16
associated with a growing business. Overall, operating expenses as a percentage
of sales improved, declining from 15% in the first half of 2003 to 12% in the
same period in 2004.
Other Income (Expense). Interest expense, net, for the first six months of
2004 was $188,000, a decrease of $49,000 from the comparable period in 2003,
mainly as a result of lower outstanding debt balances. Miscellaneous income /
expense decreased from income of $187,000 in 2003 to income of $93,000 in 2004
mostly due to changes in foreign currency in connection with the Company's
intercompany loan with its U.K. subsidiary. The strength of the U.K. pound
against the U.S. dollar rose more rapidly in 2003 as compared with 2004. In June
2004, the Company recorded a $3,951,000 non-cash, non-operating charge related
to the Company's ownership interest in Ultralife Taiwan, Inc. ("UTI") that
consisted of a write-off of its $2,401,000 note receivable from UTI, including
accrued interest, and the book value of its $1,550,000 equity investment in UTI.
The Company decided to record this charge due to recent events that have caused
increasing uncertainty over UTI's near-term financial viability, including a
failure by UTI to meet commitments made to the Company and its other creditors
to secure additional financial support before July 1, 2004. Based on these
factors, and UTI's operating losses over several years, the Company's investment
has had an other than temporary decline in fair value and the Company believes
that the probability of being reimbursed for the note receivable is nominal. The
Company continues to hold a 9.2% equity interest in UTI, and it is working with
UTI to help it through its financial difficulties in an effort to ensure a
satisfactory outcome for all parties involved. The Company does not believe the
write-off poses a risk to its current operations or future growth prospects
because UTI continues to manufacture product for it and the Company has taken
steps to establish alternate sources of supply.
Income Taxes. The Company recorded income tax expense of $79,000 for the
first half of 2004. While the Company has significant net operating loss
carryforwards (NOLs) related to past years' cumulative losses, it is subject to
a U.S. alternative minimum tax where NOLs can offset only 90% of taxable income.
Net Income. Net income and diluted earnings per share for the first six
months of 2004 were $2,863,000 and $0.19, respectively, compared to $2,460,000
and $0.19, respectively, for the same six months in 2003, primarily as a result
of the reasons described above. Average common shares outstanding used to
compute basic earnings per share increased from 12,895,000 in the first half of
2003 to 13,930,000 in 2004 mainly due to stock option exercises, as well as the
conversion of a short-term note into 125,000 common shares in the second quarter
of 2003 and a private equity placement of 200,000 common shares during the
fourth quarter of 2003. The impact from "in the money" stock options and
warrants resulted in an additional 1,179,000 and 371,000 shares for the average
diluted shares outstanding computation in 2004 and 2003, respectively.
Liquidity and Capital Resources (in whole dollars)
As of June 26, 2004, cash and cash equivalents totaled $941,000, excluding
restricted cash of $51,000. During the six months ended June 26, 2004, the
Company provided $1,819,000 of cash in operating activities as compared to using
$243,000 for the six months ended June 28, 2003, mainly due to the increase in
net income offset by an increase in inventory due to higher production volumes.
In the six months ended June 26, 2004, the Company used $2,628,000 to purchase
plant, property and equipment, a decrease of $650,000 from the prior year's
capital expenditures. This decrease was mainly attributable to the timing of
various projects. During the six month period ended June 26, 2004, the Company
generated $847,000 in funds from financing activities. The financing activities
included inflows from the issuance of stock, mainly as stock options were
exercised during the period, and outflows resulting from a reduction in the
Company's revolving loan balance. During the first six months of 2004, the
Company issued 623,293 shares of common stock as a result of exercises of stock
options and warrants, and the Company received approximately $3,703,000 in cash
proceeds as a result of these transactions. The
17
Company reduced its debt by $2,856,000 during the first six months of 2004 as
loan principal was paid and revolving debt was reduced.
Inventory turnover for the first half of 2004 was at an annualized rate of
6.0 turns per year, a decline from the 6.7 turns reflected during the full year
of 2003, mainly due to the timing of production and shipments and a modest
buildup of inventory related to higher production volumes, a semi-annual
shutdown week at the beginning of the third quarter, and a production conversion
project at the U.K. operation. The Company's Days Sales Outstanding (DSOs) was
an average of 50 days for the first half of 2004, remaining constant with the 50
days reflected for the full 12-month period in 2003.
At June 26, 2004, the Company had a capital lease obligation outstanding
of $86,000 for the Company's Newark, New York offices and manufacturing
facilities.
As of June 26, 2004, the Company had open capital commitments to purchase
approximately $2,071,000 of production machinery and equipment.
In May 2004 and June 2004, the Company experienced two fires that damaged
certain inventory and property at its facilities. The May 2004 fire occurred at
the Company's U.S. facility and was caused by cells that shorted out when a
forklift truck accidentally tipped the cells over in an oven in an enclosed
area. Certain inventory, equipment and a small portion of the building where the
fire was contained were damaged. The June 2004 fire happened at the Company's
U.K. facility and mainly caused damage to various inventory, and to contained,
non-manufacturing area in the building that is leased by the Company. It is
unknown how the U.K. fire was started. The fires caused relatively minor
disruptions to the production operations, and had no impact on the Company's
ability to meet customer demand during the quarter. The Company maintains
replacement cost insurance on the property and equipment it owns or rents, with
relatively low deductibles. The total of the two losses related to company-owned
assets, including expenditures required to repair and clean up the facilities,
is expected to be in the range of $2,000,000. The Company is working closely
with the insurance companies on these matters, and it expects to be fully
reimbursed by the insurance companies for these losses. The impacts on the
Consolidated Statement of Operations and the net cash outflows from the Company
are expected to be negligible. At June 26, 2004, the Company's prepaid and other
current assets on its Consolidated Balance Sheet included a receivable from
insurance companies for approximately $800,000 for equipment losses, inventory
losses and clean-up costs incurred to date.
As of June 26, 2004, the Company had $867,000 outstanding under the term
loan component of its credit facility with its primary lending bank, and had
$4,209,000 of borrowings outstanding under the revolver component of the credit
facility. The Company's additional borrowing capacity under the revolver
component of the credit facility as of June 26, 2004 was approximately
$5,900,000, net of outstanding letters of credit of $3,600,000. At June 26,
2004, the Company's net worth was $41,091,000, compared to the debt covenant
requiring a minimum net worth of approximately $22,406,000.
On June 30, 2004, the Company closed on a new secured $25,000,000 credit
facility, comprised of a five-year $10,000,000 term loan component and a
three-year $15,000,000 revolving credit component. This agreement replaces the
Company's $15,000,000 credit facility that expired on the same date. On June 30,
2004, the Company drew down the full $10,000,000 term loan. The proceeds of the
term loan, which is to be repaid in equal monthly installments over five years,
are to be used for the retirement of outstanding debt and capital expenditures.
Availability under the revolving credit component is subject to a debt to
earnings ratio, whereas availability under the previous facility was limited by
various asset values. The lenders of the new credit facility are JP Morgan Chase
Bank and Manufacturers and Traders Trust Company, with JP Morgan Chase Bank
acting as the administrative agent. On July 1, 2004, the Company entered into an
interest rate swap arrangement to be effective on August 2, 2004, related to the
$10,000,000 term loan, in order to take advantage of historically low interest
rates. The Company received a fixed rate of interest in exchange for a variable
rate. The swap
18
rate received was 3.98% for five years and will be adjusted accordingly for a
eurodollar spread incorporated in the agreement which is dependent upon a debt
to earnings ratio within a predetermined grid. At July 1, 2004, the total
adjusted rate of interest that the Company will pay on the outstanding portion
of the $10,000,000 term loan was 5.23%.
As of June 26, 2004, the Company's wholly-owned U.K. subsidiary, Ultralife
Batteries (UK) Ltd., had approximately $345,000 outstanding under its revolving
credit facility with a commercial bank in the U.K. This credit facility provides
the Company's U.K. operation with additional financing flexibility for its
working capital needs. Any borrowings against this credit facility are
collateralized with that company's outstanding accounts receivable balances.
There was $476,000 of additional borrowing capacity under this credit facility
as of June 26, 2004.
The Company continues to be optimistic about its future prospects and
growth potential. However, the recent rapid growth of the business has created a
near-term need for certain machinery, equipment and working capital in order to
enhance capacity and build product to meet demand. The recent positive financial
results during 2003 have enhanced the Company's ability to acquire additional
financing, as evidenced by the new credit facility entered into as of June 30,
2004. The Company continually explores various sources of capital, including
issuing new or refinancing existing debt, and raising equity through private or
public offerings. While it continually evaluates these alternatives, the Company
believes it has the ability over the next 12 months to finance its operations
primarily through internally generated funds, or through the use of financing
that currently is available to the Company.
As described in Part II, Item 1, "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. While the Company believes that its
current warranty reserves are adequate, there is no assurance that future
warranty claims will be consistent with past history. 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 (in whole dollars)
For the full year of 2004, the Company is reaffirming its guidance
provided last quarter of $106,000,000 in revenues, compared with $79,450,000 in
2003, an increase of approximately 33%. Overall, military sales are continued to
comprise at least 60% of the total revenues for the year, and rechargeable
revenues are expected to reach approximately $7,000,000 for the full 12-month
period ending December 31, 2004. Compared to the $55,427,000 in revenues for the
first half of 2004, management anticipates a modest flattening of order flow
from the military in the second half of the year compared to the first half,
consistent with the Company's outlook at the beginning of fiscal 2004.
Management cautions that uncertainties exist arising from the pending October
transfer of procurement authority from the U.S. Army Communications and
Electronics Command (CECOM) to the Defense Logistics Agency (DLA) and the
outcome of the Next Gen II Phase IV award.
19
The results in each quarter can be subject to fluctuations as the timing
of some customer orders is not often easy to predict. In particular, 9-volt
revenues depend upon continued demand from the Company's customers, some of
which depend upon retail sell-through. Similarly, revenues from sales of
cylindrical products, primarily to military customers, depend 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,
the timing of shipments related to lot acceptance, and the timing of order
releases against such contracts. Additionally, there is always a risk that
Congressional appropriations might vary from what is needed or expected. Some of
these factors are outside of the Company's direct control.
At the present time, there is some uncertainty with military order
activity as it relates particularly to the BA-5390 batteries. In October 2004,
the battery procurement responsibility for the U.S. military is scheduled to be
shifting from CECOM to DLA. Due to this change, and the impending award for Next
Gen Phase IV contract (discussed below), it is unclear at this time what the
level of orders for the BA-5390 batteries will be from the military during the
remainder of 2004. Current orders for the BA-5390 by the U.S. military provide
for production to take place into the early part of the fourth quarter. The
above guidance assumes that the military will place an order for additional
BA-5390's within the next couple of months for production and delivery during
the fourth quarter, at a slightly lower level than what the Company produced and
shipped during the first half of 2004. The guidance assumes no more than a
minimal disruption from the transfer to DLA and that the Company will be
successful in receiving an award under the Next Gen II Phase IV contract. As a
result of the uncertainty with the military orders at this time, we believe that
the second half results will likely be evenly split between the third and fourth
quarters.
Over the next three to five years, with anticipated growth in various
target markets, such as military, medical, automotive telematics, and search and
rescue, the Company has targeted an annual growth rate in revenues of 20% - 30%,
heading toward annual revenues of $200 million. While the Company's revenues are
expected to be comprised of approximately 60% from military sales in 2004, this
percentage is expected to decline over time as the Company generates sales from
customers in commercial markets. For 2005, the Company currently expects
consolidated revenues to range from $125 million to $135 million, including
business comprised of approximately 50% military and a doubling of rechargeable
revenues from 2004 in the range of $14 million. Significant growth in commercial
markets such as medical and automotive telematics is also expected to contribute
significantly to the 2005 outlook.
As discussed in the Company's Form 10-K for the year ended December 31,
2003, the solicitation for the Next Gen II Phase IV lithium battery procurement,
referred to as the "Rectangular" phase, was issued in January 2004. This phase
was split into two pieces, one of which included the BA-5390 battery that the
Company is already manufacturing under exigent, or non-bid, contracts. The other
piece consisted of the BA-5347 battery, for which the solicitation will result
in a small business set-aside contract. Bids were submitted for these products
in mid-March 2004. At this time, the Company is expecting that awards will be
made on this contract in August or September of 2004; however, the Company
cannot predict precisely when final awards will be made or what the final
outcome may be. The total amount for this phase of Next Gen II is expected to be
in the range of up to approximately $200-$300 million over five years. In the
meantime, the Company plans to continue to fulfill its current obligations
related to exigent contracts, and to pursue other such contracts as the
opportunity arises. The Company's current guidance incorporates ongoing BA-5390
contracts.
The Company has a fairly substantial fixed cost infrastructure to support
its overall operations. As sales continue to grow, manufacturing efficiencies
are realized, and operating expenses (R&D and SG&A) are closely controlled, the
Company believes it can generate favorable returns in the range of 30%, and
possibly as high as 50%, on incremental revenues, depending on product mix.
Conversely, decreasing volumes will likely result in the opposite effect. Gross
margins in 2004 are expected to be in the range of 23% - 24%. Within the next
couple of years, the Company believes that its gross margins
20
can reach a range of 26%-27% as operating efficiencies improve and the mix of
products with higher margins increases. It has set a target of 30% gross margins
for the longer-term, i.e. within the next five years.
The interest from potential customers for various types of new batteries
continues to increase significantly. As a result, management made a commitment
to increase resources in the R&D area, mainly related to new product
development, all of which will be done at the Company's U.S. facility. The
Company plans to continue its recent successful efforts related to new
cylindrical battery development for applications that initially have a military
focus, but often have sizeable commercial applications as well. In addition, it
is committing funds for the development of various Thin Cell and rechargeable
products. In order to keep up with this increase in opportunities, R&D costs are
now expected to be in the range of $600,000 to $700,000 per quarter for the
remainder of 2004. While the R&D expense line is now expected to increase
somewhat, it is also important to note that the Company also enhances its R&D
efforts with technology contracts, the revenues and related costs for which are
reported as a part of the Technology Contracts segment.
While the Company continues to monitor its operating costs very tightly,
it expects that SG&A costs will increase modestly in 2004 over 2003 as it
invests in additional sales and marketing efforts, and general administrative
costs rise to support increasing efforts for new product development
opportunities as well as to support the growth of the business. Overall, the
Company expects that total quarterly operating expenses (R&D and SG&A) for the
last two quarters of 2004 will remain roughly around the amount reported for the
second quarter. For the full year, operating expenses are expected to amount to
approximately 12% of total revenues during 2004, compared with 14% in 2003.
Within the next couple of years, the Company believes that its operating
expenses will be in the range of 11%-12% of revenues, and it has set a target to
reach 10% of revenues in the longer-term.
At this time, the Company expects to achieve operating income in the
second half of 2004 of approximately $5,500,000. For the full year 2004, the
Company expects operating income to amount to approximately $12,500,000,
reaffirming its previous guidance. With second half revenues expected to be
fairly evenly split between the third and fourth quarters, second half operating
income is similarly expected to be split proportionately. Within the next couple
of years, operating income as a percentage of revenues, is projected to be in
the range of 15%, with a longer-term target of 20%, resulting from higher gross
margins and lower operating expenses as a percentage of sales.
At December 31, 2003, the Company had approximately $76,829,000 in net
operating loss (NOL) carryforwards available to offset current and future
taxable income. The Company determined there was not sufficient positive
evidence in accordance with FAS 109 to record a deferred tax asset at December
31, 2003. The Company has not reported a deferred tax asset on its Consolidated
Balance Sheet due to prior operating losses. It is reasonably possible the
Company's profitability in 2003 and 2004 would result in the recognition of a
deferred tax asset during 2004.
In addition, in early 2004, the Company determined that a change in
ownership, as defined under Internal Revenue Code Section 382, had occurred
during fourth quarter of 2003, resulting in an annual limitation on the
utilization of the net operating loss carryforwards. The Company currently
estimates that the amount of such limitation will be in the range of
approximately $14,000,000 to $18,000,000 annually. If the Company's U.S. taxable
income were to exceed this annual limitation, it could result in a higher than
anticipated current tax expense for any year in which this occurs.
During 2004, the Company projects that it will spend approximately
$5,000,000 to $6,000,000 on capital expenditures for machinery and equipment.
Nearly one-half of these expenditures are expected to be for projects that
enhance manufacturing productivity, with relatively quick returns. The remainder
of these expenditures will be used to alleviate bottlenecks and increase
capacity, as well as for tooling of new products.
21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. At June 26,
2004, the Company did not invest in derivative financial instruments. In July
2004, the Company entered into an interest rate swap arrangement in connection
with its new credit facility. (See Note 13 in Notes to Consolidated Financial
Statements for additional information.)
Item 4. Controls and Procedures
Evaluation Of Disclosure Controls And Procedures - The Company's president
and chief executive officer (principal executive officer) and its vice
president- finance and chief financial officer (principal financial officer)
have evaluated the disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based on this evaluation, the president and chief executive
officer and vice president - finance and chief financial officer concluded that
the Company's disclosure controls and procedures were effective as of such date.
Changes In Internal Controls Over Financial Reporting - There has been no
change in the internal controls over financial reporting that occurred during
the fiscal quarter covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, the internal controls
over financial reporting.
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In 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, 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 (50%) 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, and the engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed
the report and, in January 2002, recommended additional testing. The Company
submitted a work plan to NYSDEC in October 2003, which was approved shortly
thereafter. The Company sought proposals from engineering firms to complete the
remedial work outlined in the work plan. A firm was selected to perform the
tasks associated with the remediation activities, which were completed in
December 2003. The test results were then forwarded to NYSDEC for comment.
NYSDEC responded to the Company in March 2004 requesting a report summarizing
the data, findings, discussions and conclusions. The report has been submitted
to NYSDEC who will review and make recommendations as to whether additional
remediation is required. Because the Company believes that the source of the
contamination has been removed, NYSDEC recommended that the Company conduct
quarterly monitoring of the groundwater for one year. The Company believes that
the final cost to remediate will not exceed the original estimate. The Company
awaits final comments from the NYSDEC and will begin the additional sampling
upon approval of the conclusions stated in the report. 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. Furthermore, the Company may face claims resulting in
substantial liability which could have a material adverse effect on the
Company's business, financial condition and the results of operations in the
period in which such claims are 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 agreed to lend technical
support to the Customer in defense of its claim. The claim between the end-user
and the Customer has now been settled. Ultralife has renewed its commitment to
the Customer to 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.
23
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 10, 2004 an Annual Meeting of Shareholders of the Company
was held.
(b) At the Annual Meeting, the Shareholders of the Company elected to
the Board of Directors all seven nominees for Director with the
following votes:
DIRECTOR FOR AGAINST
Patricia C. Barron 12,941,993 99,580
Anthony J. Cavanna 12,997,490 44,083
Paula H. J. Cholmondeley 12,997,290 44,283
Daniel W. Christman 12,941,993 99,580
John D. Kavazanjian 12,997,490 44,083
Carl H. Rosner 12,692,550 349,023
Ranjit C. Singh 12,926,390 115,183
(c) At the Annual Meeting, the Shareholders of the Company voted for the
ratification of PricewaterhouseCoopers LLP as its independent
registered public accounting firm for 2004 with the following votes:
FOR AGAINST
12,826,320 35,673
(d) At the Annual Meeting, the Shareholders of the Company voted for the
approval of the Company's 2004 Long -Term Incentive Plan:
FOR AGAINST ABSTAIN UNVOTED
7,498,899 1,187,239 54,492 4,300,943
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit Agreement dated as of June 30, 2004 with JPMorgan Chase
Bank as Administrative Agent
10.2 General Security Agreement dated as of June 30, 2004 in favor
of JPMorgan Chase Bank
31.1 Section 302 Certification - CEO
31.2 Section 302 Certification - CFO
32 Section 906 Certifications
24
(b) Reports on Form 8-K
On April 14, 2004, the Company filed Form 8-K with the Securities
and Exchange Commission announcing that it will report its first quarter
2004 results for the period ended March 27, 2004 before the market opens
on Thursday, April 29, 2004.*
On April 22, 2004, the Company filed Form 8-K with the Securities
and Exchange Commission announcing it had received an order valued at
approximately $1.5 million to supply custom lithium ion batteries and
chargers to Cubic Defense Applications.*
On April 27, 2004, the Company filed Form 8-K with the Securities
and Exchange Commission announcing that it had received an order valued at
$6 million from the U.S. Army Communications Electronics Command (CECOM)
for its BA-5372/U military batteries.*
On April 29, 2004, the Company filed a Form 8-K with the Securities
and Exchange Commission announcing its financial results for the quarter
ended March 27, 2004.*
On April 29, 2004, the Company filed a Form 8-K with the Securities
and Exchange Commission disclosing that two sitting directors would not
stand for re-election to the Board of Directors at the Annual Meeting.
On May 4, 2004, the Company filed a Form 8-K with the Securities and
Exchange Commission announcing the election of Philip M. Meek, Vice
President of Manufacturing, as an officer of the company.
On May 27, 2004, the Company filed Form 8-K with the Securities and
Exchange Commission indicating that it would hold its annual meeting of
shareholders for the period ending December 31, 2003, at the JPMorgan
Chase Conference Center in New York City on Thursday, June 10, 2004.*
On June 15, 2004, the Company filed a Form 8-K with the Securities
and Exchange Commission announcing the election of Paula H. J.
Cholmondeley to its board of directors.*
*This information was furnished but not filed in accordance with
Regulation FD.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
(Registrant)
Date: August 2, 2004 By: /s/ John D. Kavazanjian
-----------------------------
John D. Kavazanjian
President and Chief Executive
Officer
Date: August 2, 2004 By: /s/ Robert W. Fishback
-----------------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
26
Index to Exhibits
10.1 Credit Agreement dated as of June 30, 2004 with JPMorgan Chase Bank as
Administrative Agent
10.2 General Security Agreement dated as of June 30, 2004 in favor of JPMorgan
Chase Bank
31.1 Section 302 Certification - CEO
31.2 Section 302 Certification - CFO
32 Section 906 Certifications
27