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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, 1999
Commission file number 0-20852
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ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction 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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, par value $0.10 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On August 31, 1999, the aggregate market value of the voting stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $40,825,000 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on August 31, 1999.
As of September 25, 1999, the Registrant had 10,862,436 shares of Common Stock
outstanding.
Documents Incorporated by Reference.
Part III Ultralife Batteries, Inc. Proxy Statement. With the exception of the
items of the Proxy Statement specifically incorporated by reference
herein, the Proxy Statement is not deemed to be filed as part of this
Report on Form 10-K.
TABLE OF CONTENTS
ITEM PAGE
PART I 1 Business..........................................................2
2 Properties........................................................13
3 Legal Proceedings.................................................13
4 Submission of Matters to a Vote of Securities Holders.............14
PART II 5 Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................14
6 Selected Financial Data...........................................16
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................17
8 Financial Statements and Supplementary Data.......................22
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................22
PART III 10 Directors and Executive Officers of the Registrant................22
11 Executive Compensation............................................22
12 Security Ownership of Certain Beneficial Owners and Management....22
13 Certain Relationships and Related Transactions....................22
PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...23
Exhibit Index.....................................................23
Signatures........................................................27
PART I
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, raw materials supplies, 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.
ITEM 1. BUSINESS
General
Ultralife Batteries, Inc. develops, manufactures and markets primary
lithium batteries for use in a wide array of applications and has developed and
is in the process of commercializing rechargeable polymer batteries. The Company
believes that its proprietary technologies allow the Company to offer batteries
that are ultra-thin, lightweight and generally achieve longer operating time
than many competing batteries currently available. To date, the Company has
focused on manufacturing a family of lithium primary batteries for consumer,
industrial, and military applications which it believes is one of the most
comprehensive lines of lithium manganese dioxide primary batteries commercially
available. The Company is currently focusing on the commercialization of its
advanced rechargeable batteries which are based on its proprietary polymer
technology and are integrated into consumer electronic applications such as
portable computers and cellular telephones manufactured and sold for commercial
use.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's rechargeable polymer 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 primary batteries in 9-volt, 3-volt, 2/3A, C, 1 1/4C and D
configurations, custom Thin Cell(TM) batteries, and silver-chloride sea water
batteries. The Company's 9-volt battery is marketed to the security and safety
equipment, medical device and specialty instrument markets. The Company's 9-volt
battery is currently used in devices such as smoke detectors, home security
devices and medical infusion pumps. The Company's high rate lithium batteries
are sold to OEMs primarily for the industrial and military markets, for use in
sea and air safety products such as emergency positioning indicating radio
beacons and search and rescue transponders. The Company manufactures sea water
batteries used for specialty marine applications.
Revenues for this segment in fiscal year 1999 were $19,559,000 and
segment contribution was $2,651,000. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
Rechargeable Batteries
The Company believes that its polymer technology provides substantial
benefits, including the ability to provide thin, light-weight cells in custom
sizes. In addition, the Company believes that its technology, which does not
utilize lithium metal or a free liquid electrolyte, provides safety
characteristics superior to other lithium-based rechargeable batteries currently
available. The Company has manufactured advanced rechargeable batteries on a
pilot production line for testing by certain OEMs. Automated manufacturing
equipment has been installed and is undergoing preparation for high-volume
manufacturing.
The global small cell rechargeable batteries market was approximately
$4.7 billion in 1998 and is expected to grow to $6.1 billion by 2001. The
widespread use of a variety of portable consumer electronics such as notebook
computers and cellular telephones has resulted in large and growing markets for
rechargeable batteries. These electronic products are placing increasing demands
on existing battery technologies to deliver greater amounts of energy through
efficiently designed, smaller and lighter batteries. In some cases, current
battery capabilities are a major limitation in the development of next
generation electronic products. The Company believes that its proprietary
technology can provide substantial benefits over other available rechargeable
battery systems.
Revenues for this segment in fiscal year 1999 were $49,000 and segment
contribution was a loss of $5,617,000. See Management's Discussion and Analysis
of Financial Condition and Results of Operations for additional information.
2
Technology Contracts
On a continuing basis, the Company seeks to fund part of its efforts to
identify and develop new applications for its products and to advance its
technologies through contracts with both government agencies and third parties.
The government sponsors research and development programs designed to improve
the performance and safety of existing battery systems and to develop new
battery systems. The Company has been successful in obtaining awards for such
programs for both primary and rechargeable battery technologies.
Revenues for this segment in fiscal year 1999 were $1,456,000 and
segment contribution was $297,000. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional information.
Corporate
The Company reports revenues, cost of sales, research and development
expenses, gains on fires from insurance proceeds and its minority interest in
Ultralife Taiwan, Inc. by the above business segments. The balance of income and
expense, including selling, general and administration expenses, interest
income, gains on sale of securities and other expense, net are reported in the
Corporate segment.
There were no revenues for this segment in fiscal year 1999 and segment
contribution was a loss of $6,195,000. See Management's Discussion and Analysis
of Financial Condition and Results of Operations 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 the 9-volt lithium-manganese dioxide primary battery that was
developed and manufactured by Kodak. 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 were incorporated into the
Company's 9-volt battery, resulting in a battery with improved performance and
shelf life. The Company then expanded its operations by the acquisition in June
1994 by its subsidiary, Ultralife Batteries (UK) Ltd., of certain assets of
Dowty Group PLC ("Dowty"). The Dowty acquisition provided the Company with a
presence in Europe, manufacturing facilities for high rate lithium and sea water
batteries and highly skilled scientists with significant expertise in lithium
battery technology. The customer base of Ultralife UK was further expanded by
the acquisition of certain assets of Accumulatorenwerke Hoppecke Carl Zoellner &
Sohn GmbH & Co. ("Hoppecke") in July 1994. The Company has developed a wide
array of products based on combining technology developed by the Company's
research and development personnel and assets acquired from Kodak, Dowty and
Hoppecke as well as various technology licenses.
In December 1998, the Company announced a venture with PGT Energy
Corporation (PGT), together with a group of investors, to produce Ultralife's
polymer rechargeable batteries in Taiwan. Ultralife will provide the venture,
named Ultralife Taiwan, Inc. (UTI), with its proprietary technology and 700,000
shares of Ultralife common stock. Ultralife will be UTI's largest shareholder
with approximately 46% ownership, and hold half of the seats on UTI's board of
directors. PGT and the group of investors will fund UTI with $21.25 million in
cash and hold the remaining seats on the board. See also "Item 5. Market for
Registrant's Common Equity and Related Matters."
Since its inception, the Company has concentrated significant resources
on research and development activities related to polymer rechargeable
batteries. The Company is producing advanced rechargeable batteries in limited
quantities using a low volume production line which includes manual operations.
Automated custom-designed equipment has been installed and is producing samples
and undergoing preparation for high-volume manufacturing.
As used in this Report, unless otherwise indicated the terms "Company"
and "Ultralife" include the Company's wholly-owned subsidiary, Ultralife UK Ltd.
3
Products and Technology
A battery is an electrochemical apparatus used to store energy and
release it in the form of electricity. The main components of a conventional
battery are the anode, the cathode, the 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.
Upon 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 sea water
batteries, are based on lithium-manganese dioxide technology. The following
table sets forth the performance characteristics of the battery technologies
that the Company believes represent its most significant current or potential
competition for its 9-volt battery and its high-rate lithium battery.
Comparison of Primary Battery Technologies
Technology Energy Density Operating
- ---------- -------------- Discharge Shelf Life Temperature
Wh/kg Wh/l Profile (years) Range ((Degree)(F)
----- ---- ------- ------- -----------------
9-Volt Configurations:
Carbon-zinc (1) 22 40 Sloping 1 to 2 23 to 113
Alkaline (1) 65 143 Sloping 4 to 5 -4 to 130
Ultralife lithium-manganese dioxide (2) 262 406 Flat up to 10 -40 to 160
4
Technology Energy Density Operating
- ---------- -------------- Discharge Shelf Life Temperature
Wh/kg Wh/l Profile (years) Range ((Degree)(F)
----- ---- ------- ------- -----------------
High Rate Cylindrical: (3)
Alkaline (1) 59 160 Sloping 4 to 5 -4 to 130
Lithium-sulfur dioxide (1)(4) 260 430 Flat 10 -40 to 160
Lithium thionyl-chloride (2)(4) 250-300 650-700 Flat 10 -40 to 160
Ultralife lithium-manganese dioxide (2) 228 510 Flat 10 -40 to 160
(1) Data compiled from industry sources and sales literature of other
battery manufacturers or derived therefrom by the Company.
(2) Results of tests conducted by the Company.
(3) Data for equivalent D-size cells.
(4) The Company believes that these batteries are limited in application
due to health, safety and environmental risks associated therewith.
Energy density refers to the total amount of electrical energy stored
in a battery divided by the battery's weight and volume, as measured in
watt-hours per kilogram and watt-hours per liter, respectively. Higher energy
density translates into longer operating times for a battery of a given weight
or volume and, therefore, fewer replacement batteries. Discharge profile refers
to the profile of the voltage of the battery during discharge. A flat discharge
profile results in a more stable voltage during discharge of the battery. High
temperatures generally reduce the storage life of batteries, and low
temperatures reduce the battery's ability to operate efficiently. The inherent
electrochemical properties of lithium batteries result in improved low
temperature performance and an ability to withstand relatively high temperature
storage.
The Company's primary battery products are based on lithium-manganese
dioxide technology. The Company believes that materials used in, and the
chemical reactions inherent to, the Company's 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 batteries, have sloping voltage profiles,
which result in decreasing power outage during discharge. While the price for
the Company's lithium batteries is generally higher than commercially available
alkaline batteries produced by others, the Company believes that the increased
energy per unit of weight and volume of its batteries will allow longer
operating time and less frequent battery replacements for the Company's targeted
applications. Therefore, the Company believes that its primary batteries are
price competitive with other battery technologies on a price per watt hour
basis.
9-Volt Lithium Battery. The Company's 9-volt lithium battery delivers a
unique combination of high energy and stable voltage which results in a longer
operating life for the battery and, accordingly, fewer battery replacements.
While the Company's 9-volt battery's price is generally higher than conventional
9-volt carbon-zinc and alkaline batteries, the Company believes the enhanced
operating performance and decreased costs associated with battery replacement
make the Ultralife 9-volt battery more cost effective than conventional
batteries on a cost per watt-hour basis.
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. The
Company believes that approximately 10% of the 220 million 9-volt batteries sold
in the U.S. in 1998 were sold to OEMs. Applications for which the Company's
9-volt lithium battery are currently sold include:
5
Safety and Security Equipment Medical Devices Specialty Instruments
Smoke alarms Bone growth stimulators Garage door openers
Wireless alarm systems Telemetry equipment Electronic meters
Tracking devices Portable blood analyzers Hand-held scanners
Transmitters/receivers Ambulatory Infusion Pumps Wireless electronics
The Company currently sells its 9-volt battery to Fyrnetics, Inc.,
Maple Chase, and First Alert(R) for long life smoke alarms, to Hewlett Packard,
Siemens Medical Systems, Inc. and i-STAT Corp. for medical devices and to ADEMCO
and Interactive Technologies, Inc. for security devices. Fyrnetics, Inc. and
Maple Chase have recently introduced long life smoke alarms powered by the
Company's 9-volt lithium battery, offered with a limited 10 year warranty. The
Company also manufactures its 9-volt lithium battery under private label for
Eveready, Sonnenschein Lithium GmbH and Telenot in Germany and Uniline in
Sweden. Additionally, the Company has introduced its 9-volt battery to the
broader consumer market by establishing relationships with national and regional
retail chains such as Sears, Radio Shack, Fred Meyer, Inc., TruServ, Chase
Pitkin, Ace Hardware and a number of catalogues.
The Company believes that its 9-volt lithium battery market has
expanded as a result of a state law recently enacted in Oregon. The Oregon
statute requires 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 that would also require
all ionization-type smoke alarms operated solely by a battery to include a
battery that lasts 10 years. The New York bill is currently under review by an
Assembly committee. The Company believes that it manufactures the only standard
size 9-volt battery warranted to last 10 years when used in smoke alarms. The
Company believes that its current manufacturing capacity is adequate to meet
customer demand. However, with increased legislative activity, demand could
exceed current capacity; and therefore, additional capital equipment would be
required to meet these new needs.
High Rate Lithium Batteries. Ultralife UK, the Company's wholly owned
subsidiary based in Abingdon, England, markets a wide range of high rate primary
lithium batteries in various sizes and voltage configurations. The Company
currently manufactures C, 1 1/4 C, and D size high rate lithium cells which are
sold and packaged into multi-cell battery packs. The Company believes that its
high rate lithium C,1 1/4 C and D primary cells, based on it proprietary
lithium-manganese dioxide technology, are the most advanced high rate lithium
power sources currently available. The Company also markets high rate lithium
batteries under private label 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 and search & rescue applications.
Significant industrial applications include pipeline inspection equipment,
autoreclosers and oceanographic. Among the military uses are manpack radio,
night vision goggles and thermal imaging equipment. Search & 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 it superior
performance and safety. Following a fire in December 1996 which resulted in the
suspension of manufacturing operations for 15 months, new production equipment
has now been installed and is fully operational. Manufacturing volumes have been
ramping up throughout 1999 resulting in sales of $1.7 million. The Company
believes that its high rate lithium manganese dioxide batteries offer a
6
combination of performance, safety and environmental benefits which will enable
it to gain an increasing share of this market.
Sea Water Batteries. The Company produces a variety of sea water
batteries based on magnesium-silver chloride technology. Sea water batteries are
custom designed and manufactured to end user specifications. The batteries are
activated when placed in salt water, which acts as the electrolyte allowing
current to flow. The Company manufactures sea water batteries at the Abingdon,
England facility and markets them to naval and other specialty OEM's. This
facility was also damaged in the fire that occurred in December 1996 resulting
in temporary cessation of its sea water operation. Manufacture has now been
fully restored.
BA-5372 Battery. The Company's BA-5372 battery is a cylindrical 6-volt
lithium-manganese dioxide battery which is used for memory back-up in
specialized mobile communication equipment. The Company's BA-5372 battery offers
a combination of performance features suitable for military applications
including high energy density, light weight, long shelf life and ability to
operate in a wide temperature range.
Thin Cell Battery. The Company has developed a line of
lithium-manganese dioxide primary batteries which the Company calls its Thin
Cell batteries. The Thin Cell batteries are flat, light weight, flexible and can
be manufactured to conform to the shape of the particular application. The
Company is currently offering three configurations of the Thin Cell battery
which range in capacity from 120 milliampere-hours to 1,000 milliampere-hours.
The Company is currently marketing these batteries to OEMs for applications such
as identification tags, computer access cards and personal communication
devices.
3-Volt Lithium Battery. The Company has developed and is producing a
3-volt lithium-manganese dioxide battery based on the technology and physical
configuration of the 9-volt lithium battery. By configuring the three 3-volt
cells in parallel, rather than in a series as in the 9-volt battery, the Company
is able to produce a 3-volt battery which it believes offers the highest energy
density for a commercially available 3-volt battery. The high energy density
makes it suitable for applications requiring high current pulses, such as radio
transmitters and receivers, and remote utility meter reading systems.
Rechargeable Batteries
In contrast to primary batteries, after a rechargeable battery is
discharged, it can be recharged close to full capacity and used again (subject
to the memory effect, if any). Generally, discharge and recharge cycles can be
repeated a number 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 all primary battery
applications, as well as in applications such as portable computers, cellular
telephones and other consumer products.
Three important parameters for describing the performance
characteristics of a rechargeable battery suited for today's portable electronic
devices are design flexibility, energy density and cycle life. Design
flexibility refers to the ability of rechargeable batteries to be designed to
fit a variety of shapes and sizes of battery compartments. Thin profile
batteries with prismatic geometry provide the design flexibility to fit the
battery compartments of today's electronic devices. Energy density refers to the
total electrical energy per unit volume stored in a battery. High energy density
batteries generally are longer-lasting power sources providing longer operating
time and necessitating fewer battery recharges. Lithium batteries, by the nature
of their electrochemical properties, are capable of providing higher energy
density than comparably-sized batteries that utilize other chemistries and,
therefore, tend to consume less volume and weight. Long cycle life is a
preferred feature of a rechargeable battery because it allows the user to charge
and recharge power many times before noticing a difference in performance.
The Company's advanced rechargeable battery is based on its proprietary
polymer technology. The battery is composed of ultra-thin and flexible
components including a metallic oxide cathode, a carbon anode and a polymer
electrolyte. The Company believes that users of portable consumer electronic
products such as notebook computers and cellular telephones are seeking smaller
and lighter products that require less frequent recharges while providing the
same or additional energy. The Company believes that its technology is
attractive to OEMs of such products since the use of a flexible polymer
electrolyte, rather than a liquid electrolyte, reduces the battery's overall
weight and volume, and allows for increased design flexibility in conforming
batteries to the variety of shapes and sizes required for portable consumer
products.
Energy density refers to 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.
7
In addition to the performance advantages described above, there is a
significant difference between the rechargeable batteries which are based on the
lithium-ion liquid electrolyte technology and the technology used in the
Company's advanced rechargeable batteries. Liquid lithium-ion cells use a
flammable liquid electrolyte that is contained within a cylindrical or prismatic
metal housing. Under abusive conditions, where internal battery temperatures may
become extremely high, significant pressure may build within these cells which
can cause these cells to vent and release liquid electrolyte into the
environment. For various reasons, flames may result. The Company's advanced
rechargeable batteries utilize a polymer electrolyte that is bound within the
pores of the cell materials and, thus, leakage is avoided. Moreover, because the
cell does not require pressure to maintain contact between the electrodes, the
cells do not require a metal housing. Rather, they are packaged within a thin
foil laminate. The Company further believes that its cells will perform safely
under the same abusive conditions that could cause a flame from liquid
lithium-ion cells. The Company's rechargeable cells have passed each of the
following safety tests: UL 1950, IEC 950, CSA 950 and the Japan Storage
Batteries Association Guideline for Safety Evaluation of Lithium Cells.
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
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 including a
vice president of sales, a director of marketing, a marketing manager, a
European sales director, a U.K. sales and marketing manager, an applications
engineer, an industrial sales manager for OEM customers, and managers who are
responsible for particular markets such as retail sales and
audio/visual/security/medical sales. These managers are responsible for direct
sales, supervising the sales representatives and distributors, and other sales
and marketing and distribution activities. The Company operates on a purchase
order basis and has 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, medical devices and specialty
instruments. The Company's primary strategy is to develop marketing alliances
with OEMs that utilize its batteries in their products, commit to cooperative
research and development or marketing programs and recommend the Company's
products for replacement use in their products. The Company is addressing these
markets through direct contact by its sales and technical personnel, use of
sales representatives and stocking distributors, manufacturing under private
label and promotional activities. The Company's warranty on its products is
limited to replacement of the product.
The Company seeks to capture a significant market share for its
products within its initially targeted OEM markets, which the Company believes,
if successful, will result in increased product awareness and sales at the
end-user or consumer level. The Company is also selling the 9-volt battery to
the consumer market through limited retail distribution. Ultralife UK targets
the industrial markets through direct sales and the efforts of its distributors.
In fiscal 1999, one customer accounted for approximately $4.2 million
of sales, which amounted to approximately 20% of total revenues of the Company.
The Company believes that the loss of this customer's business would have a
material adverse effect on the Company. The Company believes that sales of its
9-volt batteries for smoke alarms typically increase in October because October
is "Fire Prevention Month," and at the end of its third quarter as consumers
tend to replace their batteries at the end of winter. The Company has not
marketed its advanced rechargeable batteries for a sufficient period to
determine whether these OEM or consumer sales are seasonal.
The Company's sales are executed primarily through purchase orders with
scheduled deliveries on a weekly or monthly basis. Prior to calendar 1998, the
Company's backlog was not material. However, at the beginning of the fourth
fiscal 1998 quarter, orders for the company's 9-volt battery started increasing
more rapidly than anticipated. Although the Company started to increase
production of these batteries, it was unable to increase production as rapidly
as the orders were received. As a result, the Company built up a backlog of
approximately 1,000,000 9-volt batteries by the end of fiscal 1998. At the end
of fiscal 1999, the backlog of 9-volt batteries has been reduced to
approximately 350,000 9-volt batteries, which is less that one month's
shipments.
Rechargeable Batteries
The Company has initially targeted sales of its advanced rechargeable
batteries to manufacturers of portable consumer electronics products. The
Company also intends to enter into contractual arrangements
8
with distributors in the U.S. and abroad to purchase rechargeable batteries from
the Company for resale to the after-market. UTI, the Company's Taiwan venture,
will be responsible for sales of polymer rechargeable batteries in Asia.
The Company plans to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries to manufacturers
of cellular telephones, notebook computers and new electronic portable devices.
Technology Contracts
Through the Company's engineering and sales and marketing departments,
the Company monitors and seeks relevant programs from various government or
prime contracting companies. One individual is specifically assigned to pursue
these opportunities and coordinate proposal submissions.
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 have been recently awarded relating to
rechargeable polymer batteries, and has two 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 for such technology and is required to make royalty and other payments
for products which incorporate the licensed technology. 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 these agreements will be enforceable by the Company.
Ultralife(R) is a registered trademark of the Company. In 1998, the
Company settled an opposition in the Trademark Trial and Appeal Board brought by
a third party in which the third party claims to produce, distribute and sell
vehicle batteries, power supplies and related accessories, products and services
using the mark Ultralife. Under the settlement in principle, the Company paid
$17,500 to the third party. The papers dismissing the opposition were filed with
the U.S. Trademark Office and all rights under the mark were assigned to the
Company.
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component
parts that it purchases. The Company has obtained ISO 9001 certification for its
lithium battery manufacturing operations in both
9
Newark, New York and Abingdon, England.
Primary Batteries
The Company's Newark facility has the capacity to produce approximately
nine million 9-volt batteries per year. 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. 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,
any interruption in its supply from any supplier that serves currently as the
Company's sole source could delay product shipments and adversely affect the
Company's financial performance and relationships with its customers. Although
the Company has experienced interruptions of product deliveries by sole source
suppliers, none of such interruptions has had a material effect on the Company.
All other raw materials utilized by the Company are readily available from many
sources.
The manufacturing facility in Abingdon, England has been rebuilt
following a fire in December 1996. The facility is capable of producing up to
500,000 high-rate lithium cells per annum in a single shift. The facility also
has research and development laboratories as well as areas for the manufacture
of seawater batteries and the fabrication of customized multi-cell battery
packs.
Rechargeable Batteries
The Company's production line for advanced rechargeable batteries
consists of automated coating, assembly and packaging equipment. This equipment
is currently being used to produce samples for potential customers and is
undergoing preparation for high-volume manufacturing. Pursuant to the Company's
agreement with the manufacturer of its assembly and packaging line, the
manufacturer is prohibited from manufacturing another production line that
replicates 20% or more of the components comprising the production line
delivered to the Company. The Company has plans to further expand its production
capacity by installing additional automated equipment at its Newark, New York
facility. An additional manufacturing capability for rechargeable batteries
based on the Company's technology is being established in Taiwan as Ultralife
Taiwan, Inc. under a venture established earlier this year. Ground breaking
ceremonies for the new facility, to be built in Taiwan's Hsinchu Science Park,
occurred in June 1999; and production of rechargeable batteries is planned to
begin in calendar year 2000.
Research and Development
The Company conducts its research and development in both Newark, New
York, and Abingdon, England.
Rechargeable Batteries
The Company is primarily directing its research and development efforts
toward design optimization of rechargeable batteries. These batteries have a
broad range of potential applications in consumer, industrial and military
markets including cellular telephones, portable computers and other portable
electronic devices. No assurance can be given that such efforts will be
successful or that the products which result will be marketable.
10
During the years ended June 30, 1999, 1998, and 1997, the Company
expended approximately $5,925,000, $6,651,000 and $3,413,000, respectively, on
research and development substantially for rechargeable batteries. The Company
currently expects that research and development expenditures will moderate as it
seeks to fund part of its research and development effort on a continuing basis
from both government and non-government sources.
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 5590 thin cell primary battery. The Company was also awarded an
additional cost sharing SBIR Phase III contract for the development of the BA
5590 thin cell primary battery that will be completed early in fiscal 2000. The
contract provides that these batteries will be developed and produced in small
quantities. 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 the
lead share of a three-year $15.3 million cost-sharing project sponsored by the
U.S. Department of Commerce's Advanced Technology Program (ATP). The objective
of this project is to develop and produce ultra-high energy polymer rechargeable
batteries that will significantly outperform existing batteries in a broad range
of portable electronic applications. As lead contractor, the Company will
receive approximately $2.14 million during the first year, $1.65 million during
the second year and $0.8 million during the third year of the program.
Battery Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in the Company's batteries may pose
safety problems if improperly used. The Company has designed its batteries to
minimize safety hazards both in manufacturing and use.
Primary Batteries
The Company's primary battery products incorporate lithium metal, which
reacts with water and may cause fires if not handled properly. Over the past
eight 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 all 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 hazards in its facilities.
Since lithium metal reacts with water and water vapor, certain of the
Company's manufacturing processes must be performed in a controlled environment
with low relative humidity. Each of the Company's facilities contains dry rooms
as well as specialized air drying equipment.
The Company's 9-volt battery is designed to conform to the dimensional
and electrical standards of the American National Standards Institute and the
9-volt battery, 3-volt battery are recognized under the Underwriters
Laboratories, Inc. Component Recognition Program.
The transportation of batteries containing lithium metal is regulated
by the International Air Transportation Association ("IATA") and, in the U.S.,
by the Department of Transportation, as well as by
11
certain foreign regulatory agencies that consider lithium metal a hazardous
material. The Company currently ships its products pursuant to IATA regulations
and ships the 9-volt battery in accordance with Department of Transportation
regulations.
National, state and local regulations impose various environmental
controls on the storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although the Company
believes that its operations are in substantial compliance with current
environmental regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Moreover, state and local
governments may enact additional restrictions relating to the disposal of
lithium batteries used by customers of the Company which could adversely affect
the demand for the Company's products. There can be no assurance that additional
or modified regulations relating to the storage, use and disposal of chemicals
used to manufacture batteries or restricting disposal of batteries will not be
imposed.
Rechargeable Batteries
The Company's rechargeable cells have passed each of the following
safety tests: UL 1950, IEC 950, CSA 950 and the Japan Storage Batteries
Association Guideline for Safety Evaluation of Lithium Cells.
Corporate
In connection with the Company's purchase/lease of its Newark, New York
facility, a consulting firm performed a Phase I and II Environmental Site
Assessment which revealed the existence of contaminated soil around one of the
Company's buildings. The Company has retained an engineering firm which
estimated that the cost of remediation should be in the range of $230,000,
however, there can be no assurance that this will be the case. In February 1998,
the Company entered into an agreement with a third party which provides that the
Company and the third party will retain an environmental consulting firm to
verify the existence of the contaminants and further delineate the nature of the
environmental concern. A voluntary investigation workplan of the site is
scheduled for the end of calendar year 1999 to fully characterize the nature and
extent of the contamination that was found during a Phase II investigation. The
third party agreed to reimburse the Company for fifty percent of the cost
associated with remediating the environmental concern. There can be no assurance
that the Company will not face claims resulting in substantial liability which
would have a material adverse effect on the Company's business, financial
condition and results of operations in the period in which such claims are
resolved.
Competition
Competition in the battery industry is, and is expected to remain,
intense. The competition ranges from development stage companies to major
domestic and international companies, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than those of the Company. The Company competes against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.
Although other entities may attempt to take advantage of the growth of
the lithium battery market, the lithium battery industry has certain
technological and economic barriers to entry. The development of technology,
equipment and manufacturing techniques and the operation of a facility for the
automated production of lithium batteries require large capital expenditures,
which may deter new entrants from
12
commencing production. Through its experience in battery manufacturing, the
Company has also developed expertise which it believes would be difficult to
reproduce without substantial time and expense.
Employees
As of August 31, 1999, the Company employed 458 persons: 78 in research
and development, 332 in production and 48 in sales, administration and
management. Of the total, 392 are employed in the U.S. and 66 in England. In
addition, U.S. operations uses a temporary agency primarily for entry level
production workers, on a regular basis. As of August 31, 1999, the Company was
under contract for 9 production workers. None of the Company's employees are
represented by a labor union. The Company considers its employee relations to be
satisfactory.
ITEM 2. PROPERTIES
The Company occupies under a lease/purchase agreement approximately
250,000 square feet in two facilities located in Newark, New York. The Company
leases approximately 30,000 square feet in a facility based in Abingdon,
England. At both locations, the Company maintains administrative offices,
manufacturing and production facilities, a research and development laboratory,
an engineering department and a machine shop. The Company's corporate
headquarters are located in the Newark facility. The Company also maintains a
sales office in Nutley, New Jersey. The Company believes that its facilities are
adequate and suitable for its current manufacturing needs. The Company entered
into a lease/purchase agreement with the local county authority in February 1998
with respect to its 110,000 square foot factory 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 current
facility estimated to encompass approximately 140,000 square feet and
approximately 65 acres of property. Pursuant to the lease, the Company has
delivered a down payment in the amount of $400,000 and is obligated to pay the
local governmental authority annual installments in the amount of $50,000 until
December 2001 decreasing to approximately $28,000 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 $1.
In connection with the acquisition by the Company's subsidiary,
Ultralife UK, of certain assets and liabilities from Dowty in June 1994, it was
provided that Dowty would cause the lease for Dowty's UK facility, located in
Abingdon, England, to be assigned to the Company's subsidiary, Ultralife UK.
After some delay, this assignment was recently accomplished. The term of the
lease was extended and continues until March 24, 2013. It currently has an
annual rent of $200,000 and is subject to review every five years based on
current real estate market conditions until March, 2009. From March, 2009 the
rent shall be reviewed annually.
ITEM 3. LEGAL PROCEEDINGS
In December 1996, Aerospace Energy System, Inc. ("Aerospace") commenced
an action in the United States District Court for the District Court of Utah
against the Company alleging that it is owed commissions in excess of $50,000
for sales made on behalf of the Company and $100,000 for the Company's alleged
breach of its duty of good faith and fair dealings. The Company believes that
Aerospace is not the party that made such sales for which it claims it is owed
commissions. Although Aerospace has been deposed it has not articulated any
grounds for its claim of $100,000 for the Company's alleged breach of its duty
of good faith and fair dealing.
In May 1997, William Boyd, the principal of Aerospace, and Leland J.
Coleman commenced an action against the Company and Loeb Partners Corporation
("Loeb"), an investment firm, in the U.S. District Court for the Southern
District Court of New York alleging that they had entered into a contract
13
with Loeb to arrange for the acquisition of Dowty and that the Company
tortiously interfered with their contract and business opportunity. The Company
believes the claim against it, for $25 million, is without merit.
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 stockholders, purportedly on
behalf of a class of stockholders, 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 alleges 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. The Company believes that the
litigation is without merit and intends to defend it vigorously. All defendants
have filed Motions to Dismiss the Complaint. As of May 6, 1999, the motions have
been fully briefed and submitted to the Court. The amount of alleged damages, if
any, cannot be quantified, nor can the outcome of this litigation be predicted.
Accordingly, management cannot determine whether the ultimate resolution of this
litigation could have a material adverse effect on the Company's financial
position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 1998:
Quarter ended September 30, 1997 $ 20.38 $ 10.38
Quarter ended December 31, 1997 20.38 13.13
Quarter ended March 31, 1998 16.88 14.00
Quarter ended June 30, 1998 15.25 7.50
Fiscal Year 1999:
Quarter ended September 30, 1998 $ 8.63 $ 5.06
Quarter ended December 31, 1998 7.56 5.13
Quarter ended March 31, 1999 6.94 4.44
Quarter ended June 30, 1999 5.63 4.00
During the period from July 1, 1999 through September 23, 1999, the
high and low closing sales prices of the Company's common stock were $6.13 and
$4.47, respectively.
14
Holders
As of August 31, 1999, there were 172 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
4,500 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 $8,750,000 in cash. Subsequently,
in September 1999, the Company contributed $8,750,000 in cash to the UTI
venture. This cash contribution coupled with the contribution of the Company's
technology will result 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. See also History in Item 1. of this report.
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.
15
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Statement of Operations Data:
Year Ended June 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues $ 21,064 $ 16,391 $ 15,941 $ 15,101 $ 14,643
Cost of products sold 19,016 14,522 15,118 14,271 13,917
--------------------------------------------------------
Gross profit 2,048 1,869 823 830 726
Research and development expenses 5,925 6,651 3,413 2,671 1,542
Selling, general and administrative expenses 6,195 5,790 5,218 4,993 4,263
Loss on China development program -- -- 805 -- --
Loss (gain) on fires (1,288) (2,697) (56) 352 --
--------------------------------------------------------
Total operating and other expenses 10,832 9,744 9,380 8,016 5,805
Interest income, net 1,456 888 1,352 2,017 1,722
Equity earnings (loss) in affiliates (80) -- -- -- --
Gain on sale of securities 348 -- -- 1,930 --
Other expense, net (25) (33) (41) -- (35)
--------------------------------------------------------
Loss before income taxes (7,085) (7,020) (7,246) (3,239) (3,392)
Income taxes -- -- -- -- --
--------------------------------------------------------
Net loss $ (7,085) $ (7,020) $ (7,246) $ (3,239) $ (3,392)
========================================================
Net loss per common share $ (0.68) $ (0.84) $ (0.91) $ (0.41) $ (0.50)
========================================================
Weighted average number
of shares outstanding 10,485 8,338 7,923 7,814 6,747
========================================================
Balance Sheet Data:
June 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Cash and available-for-sale securities $ 23,556 $ 35,688 $ 22,158 $ 35,069 $ 27,398
Working capital $ 28,435 $ 37,745 $ 27,205 $ 44,666 $ 32,705
Total assets $ 66,420 $ 75,827 $ 51,395 $ 60,633 $ 62,593
Total long-term debt and capital lease
obligations $ 215 $ 197 $ -- $ -- $ --
Stockholders' equity $ 60,400 $ 68,586 $ 46,763 $ 56,435 $ 57,957
16
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, raw materials supplies, 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.
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
report.
General
The Company develops, manufactures and markets primary and rechargeable
lithium batteries for use in a wide array of applications. The Company has been
focusing on the commercialization of its advanced rechargeable batteries which
are based on its proprietary lithium-ion solid-polymer technology and are
integrated into consumer electronic applications such as portable computers and
cellular telephones.
The Company has incurred net operating losses primarily as a result of
funding research and development activities, and to a lesser extent
manufacturing and general and administrative costs. To date, the Company has
devoted a substantial portion of its resources to the research and development
of its products and technology, particularly its proprietary rechargeable
polymer technology. The Company expects its operating expenses to increase
as it expands production activities. The Company's results of operations may
vary significantly from quarter to quarter depending upon the number of orders
received, technology contracts entered into and the pace of the Company's
research and development activities.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's rechargeable polymer 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.
17
Results of Operations
Fiscal Year Ended June 30, 1999 Compared With the Fiscal Year Ended June 30,
1998
Revenues. Total revenues of the Company increased $4,673,000 from
$16,391,000 for the year ended June 30, 1998 to $21,064,000 for the year ended
June 30, 1999. Primary battery sales increased $6,262,000 or approximately 47%
from $13,297,000 for the year ended June 30, 1998 to $19,559,000 for the year
ended June 30, 1999. The increase in primary battery sales was primarily due to
an increase in 9-volt lithium battery shipments. Greater sales of high rate
batteries also contributed to the increased revenue. Rechargeable battery sales
declined $717,000, or approximately 94%, from $766,000 for the year ended June
30, 1998 to $49,000 for the year ended June 30, 1999. The decrease was primarily
due to the decline in purchase orders for the Company's rechargeable batteries
due to delays in bringing the high-volume production equipment on line.
Technology contract revenues decreased $872,000, or 37%, from $2,328,000 to
$1,456,000 reflecting the completion of certain development programs. In April
1999 the Company commenced work on the $15,300,000 cost-sharing project
sponsored by the U.S. Department of Commerce's Advanced Technology Program
(ATP). As lead contractor, the Company will receive approximately $2,140,000
during the first year, $1,650,000 during the second year and $800,000 during the
third year of the program.
Cost of Products Sold. Cost of products sold increased $4,494,000 from
$14,522,000 for the year ended June 30, 1998 to $19,016,000 for the year ended
June 30, 1999. Cost of products sold as a percentage of revenue increased from
approximately 89% to 90% for the year ended June 30, 1999. Cost of primary
batteries sold increased $6,019,000 from $11,792,000, or 89% of revenues, for
the year ended June 30, 1998 to $17,811,000, or 91% of revenues, for the year
ended June 30, 1999. The increase in cost of primary batteries sold as a
percentage of revenues was principally the result of higher manufacturing cost
in the Company's United Kingdom subsidiary where sales and production volumes of
high-rate batteries have not yet fully recovered to the levels achieved prior to
the December 1996 fire. This fire suspended production of high-rate batteries
for a period of 15 months. Cost of products sold for the year ended June 30,
1998 included $2,011,000 of insurance proceeds received by Ultralife UK that
fully offset unabsorbed overhead expenses resulting from lower production
volumes associated with suspended manufacturing operations following the
December 1996 fire. During the year ended June 30, 1999, insurance proceeds
amounting to $1,547,000 were received to partially offset unabsorbed overhead
expenses. While sales and production volumes of high-rate batteries are
increasing, they are not yet at a level to fully absorb all current overhead
expenses. Cost of rechargeable battery sales decreased $719,000, or
approximately 94%, from $766,000, or 100%, of revenues for the year ended June
30, 1998 to $47,000, or 96% of revenues for the year ended June 30, 1999.
Technology contracts cost of sales decreased $806,000, or approximately 41%,
from $1,964,000 for the year ended June 30, 1998 to $1,158,000 for the year
ended June 30, 1999. Technology contracts cost of sales as a percentage of
revenue decreased from 84% to 80% for the year ended June 30, 1999. The decrease
in technology contract cost of sales as a percentage of revenue reflects a
favorable mix of contracts performed during fiscal 1999.
Operating and Other Expenses. Operating and other expenses increased
$1,088,000 from $9,744,000 for the year ended June 30, 1998 to $10,832,000 for
the year ended June 30, 1999. Of the Company's operating and other expenses,
research and development expenses decreased $726,000, or 11% from $6,651,000 for
the year ended June 30, 1998 to $5,925,000 for the year ended June 30, 1999.
Research and development expenses decreased as a result of the Company focusing
its resources on a limited number of key rechargeable battery programs. Selling,
general and administration expenses increased $405,000, approximately 7%, from
$5,790,000 for the year ended June 30, 1998 to $6,195,000 for the year ended
June 30, 1999. Selling and administrative expenses in the year ended June 30,
1998 included insurance proceeds of $663,000 offsetting incremental costs of
operations corresponding to replacement facility rental, transportation costs
and other such costs relating to the December 1996 fire
18
at Ultralife UK. Gains as a result of the receipt of insurance proceeds to
replace assets previously written off due to fires at Ultralife UK decreased by
$1,409,000, or approximately 52%, from $2,697,000 in the year ended June 30,
1998 to $1,288,000 in the year ended June 30, 1999. The insurance claims have
been settled and there will be no further gains from these claims recorded in
future periods.
Other Income and Expense. Interest income, net increased $568,000 from
$888,000 for the year ended June 30, 1998 to $1,456,000 for the year ended June
30, 1999. The increase in interest income is the result of higher average
balances invested following the public securities offering completed April 30,
1998. Other income includes a gain of $348,000 on the sale of Intermagnetics
General Corporation common shares in the fourth quarter of the year ended June
30, 1999.
Net Losses. Net losses increased $65,000, or approximately 1%, from
$7,020,000, or $0.84 per share, for the year ended June 30, 1998 to $7,085,000,
or $0.68 per share, for the year ended June 30, 1999, primarily as a result of
the reasons described above.
Fiscal Year Ended June 30, 1998 Compared with the Fiscal Year Ended June 30,
1997
Revenues. Total revenues of the Company increased $450,000 from
$15,941,000 for the year ended June 30, 1997 to $16,391,000 for the year ended
June 30, 1998. Primary battery sales decreased $1,468,000 or approximately 10%
from $14,765,000 for the year ended June 30,1997 to $13,297,000 for the year
ended June 30,1998. The decline in battery sales was primarily due to lower
sales of high rate batteries by Ultralife UK as a result of suspended operations
at the Company's Abingdon, England facility due to a fire which occurred in
December 1996. The completion of the U.S. Army Contract in December 1997 for
BA-5372 primary batteries also contributed to the lower sales in fiscal 1998.
Substantially offsetting these declines were greater sales of 9-Volt lithium
batteries, which increased 32% over the prior year. Rechargeable battery sales
increased $766,000 as the Company achieved the first commercial deliveries of
its advanced technology polymer batteries. Technology contract revenues
increased $1,152,000 or approximately 98%, from $1,176,000 for the year ended
June 30, 1997 to $2,328,000 for the year ended June 30,1998. The increase in
technology contract revenues resulted principally from development funds for the
development of rechargeable batteries for a new generation notebook computer. In
addition, work on the Company's Phase III Small Business Innovation Research
(SBIR) Department of Defense contract for enhanced BA-5590 batteries further
contributed to higher technology contract revenues.
Cost of Products Sold. Cost of products sold decreased $596,000, from
$15,118,000 for the year ended June 30, 1997 to $14,522,000 for the year ended
June 30, 1998. Cost of products sold as a percentage of revenues decreased from
approximately 95% to 89% for the year ended June 30, 1998. Cost of primary
batteries sold decreased $2,088,000 from $13,880,000, or 94% of revenues, for
the year ended June 30, 1997 to $11,792,000, or 89% of revenues, for the year
ended June 30, 1998. The decrease in cost of primary batteries sold as a
percentage of revenues was principally the result of increased production
volumes of 9-volt batteries. During the fourth quarter the Company attempted to
further increase its production rates for 9-volt batteries to respond to an
increase in customer orders. While the Company was successful in achieving a
moderate increase over the previous quarter, the Company experienced higher
production costs along with lower yields. Corrective actions were implemented to
improve efficiencies at higher production rates. Cost of products sold includes
$2,011,000 of insurance proceeds received by Ultralife UK that offset unabsorbed
overhead expenses resulting from lower production volumes associated with
suspended manufacturing operations following the December 1996 fire. Cost of
rechargeable battery sales increased $766,000, or 100% of revenues, as the
Company began initial commercial shipments of its polymer batteries. Technology
contracts cost of sales increased $726,000 from $1,238,000 for the year ended
June 30, 1997 to $1,964,000 for the year ended June 30, 1998. Technology
contracts cost of sales as a percentage of revenue decreased from 105% to 84%
for the year ended June 30, 1998. The decrease in technology contract cost of
sales as a percentage of revenue reflected a greater number of contracts to
19
absorb overhead expenses.
Operating and Other Expenses. Operating and other expenses increased
$364,000, from $9,380,000 for the year ended June 30, 1997 to $9,744,000 for the
year ended June 30, 1998. Of the Company's operating and other expenses,
research and development expenses increased $3,238,000, or 95%, from $3,413,000
for the year ended June 30, 1997 to $6,651,000 for the year ended June 30, 1998.
Research and development expenses increased as a result of the Company's efforts
to improve its production processes and performance of its advanced rechargeable
batteries. Selling, general and administrative expenses increased $572,000, from
$5,218,000 for the year ended June 30, 1997 to $5,790,000 for the year ended
June 30, 1998. The increase in selling, general and administrative expenses is
primarily attributable to increased personnel to support the Company's expansion
plans, legal costs to resolve various claims, higher compensation, and
associated personnel expenses. Selling and administrative expenses also included
insurance proceeds of $663,000 offsetting incremental costs of operations
corresponding to replacement facility rental, transportation costs and other
such costs relating to the December 1996 fire at Ultralife UK. Total operating
and other expenses also decreased by $2,697,000 as a result of the receipt of
insurance proceeds to replace assets previously written off due to fires at
Ultralife UK.
Other Income and Expense. Interest income decreased $464,000, from
$1,352,000 for the year ended June 30, 1997 to $888,000 the year ended June 30,
1998. The decrease of interest income was the result of lower average balances
invested since the Company used cash and investments to fund operations and
capital additions primarily for high volume production equipment for
rechargeable batteries.
Net Loss. Net loss decreased $226,000 from $7,246,000, or $0.91 per
share, for the year ended June 30, 1997 to $7,020,000, or $0.84 per share, for
the year ended June 30, 1998, primarily as a result of the reasons described
above.
Liquidity and Capital Resources
As of June 30, 1999, cash equivalents and available for sale securities
totaled $23,556,000. During the year ended June 30, 1999, the Company used
$8,027,000 of cash in operating activities as compared to $2,715,000 for the
year ended June 30, 1998. The increase in cash used in operations is the net
result of the net loss for the year, increased trade receivables and inventories
and lower accounts payable and customer advances offset by depreciation and
amortization expenses and increased provisions for doubtful accounts and
inventory obsolescense. The increase in trade receivables primarily reflects
higher fourth quarter sales partially offset by improved collections. Days sales
in trade receivables were 53 days at June 30, 1999 as compared to 70 days at
June 30, 1998. The increase in inventories at June 30, 1999 is the result of
increased production volumes partially offset by continued improvement in the
turnover of battery inventories. Months cost of sales in inventory at June 30,
1999 was 2.9 months as compared to 3.4 months at June 30, 1998. In the year
ended June 30, 1999, the Company used $3,427,000 to purchase plant, property and
equipment. Of this amount, $482,000 related to the acquisition of assets for the
reinstatement of Ultralife UK's manufacturing facility following the fire in
December 1996, $1,316,000 relates to the acquisition of machinery and equipment
for the Company's other primary battery operations, $1,036,000 relates to
rechargeable battery machinery and equipment and the balance is substantially
for a new enterprise-wide computer system and facilities upgrades for Year 2000
compliance.
The Company has long term debt of $215,000 primarily relating to the
capital lease obligation for the Company's Newark, New York offices and
manufacturing facilities. A line of credit in the amount of $330,000 is
maintained by Ultralife UK for short term working capital requirements. With
planned sales growth, the Company is continuing to explore obtaining working
capital lines of credit of approximately $15,000,000. At present, no commitments
for this financing have been obtained.
20
The Company believes that its present cash position and cash flows from
operations will be sufficient to satisfy the Company's estimated cash
requirements for at least 12 months.
Other
Taiwan Venture. In December 1998, the Company announced a venture with
PGT Energy Corporation (PGT), together with a group of investors, to produce
Ultralife's polymer rechargeable batteries in Taiwan. Ultralife will provide the
venture, named Ultralife Taiwan, Inc. (UTI), with its proprietary technology and
700,000 shares of Ultralife common stock. Ultralife will be UTI's largest
shareholder with approximately 46% ownership, and hold half of the seats on
UTI's board of directors. PGT and the group of investors will fund UTI with
$21.25 million in cash and hold the remaining seats on the board.
Newly Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet either as an asset or liability measured at its fair value,
and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. This statement is to
be effective for fiscal years beginning after June 15, 1999. The Company has not
yet determined the impact of adopting SFAS No. 133 on its financial statements.
However, given the current level of the Company's derivative and hedging
activities, the impact is not expected to be material.
Year 2000 Compliance. The "Year 2000" issue is the result of computer
programs being written using only two digits as opposed to four to represent the
applicable year. Computer programs that have time sensitive software may
recognize "00" as the year 1900 rather than the year 2000. This could
potentially result in a system failure or an error in calculation. This Year
2000 issue is believed to affect all companies and organizations, including the
Company.
The Company is taking a number of steps in an effort to assess its
readiness for Year 2000 issues, including reviewing all business systems,
testing equipment, surveying key material suppliers, and completing the
remediation plan.
During fiscal 1999, the Company's review and assessment determined that
its U.S. accounting system was not Year 2000 compliant. As part of its ongoing
project to improve the flow of management information and control of operations,
the Company implemented and began using an enterprise-wide software system as of
July 1, 1999. The Company now believes that its systems are fully Year 2000
compliant. The total costs of this project, including hardware, software,
consulting and implementation costs, amounted to approximately $450,000. Most of
these costs were capitalized.
In addition to internal Year 2000 activities, the Company is in contact
with its key suppliers and vendors to assess their state of readiness and
compliance. The Company has issued documentation to key vendors and suppliers
and is receiving assurances from these companies that all new equipment
purchased is Year 2000 compliant, and that the supply of materials necessary to
the continued smooth operation of the Company will not be materially affected by
any Year 2000 issues. However, it is difficult to predict with certainty what
the impact on the Company may be as a result of any Year 2000 problems at its
vendors and suppliers.
The Company believes that the cost of completing the assessment and
remediation plan will not be material and that the risks to the Company with
respect to Year 2000 issues are manageable. Management is continuing to examine
the Year 2000 issues as they potentially impact the Company and is finalizing
contingency plans as necessary.
U.S. Army Contract. On April 23, 1999, the Company announced that it
had been awarded a $1.7 million sole-source contract to provide primary
(disposable) batteries to the U.S. Army. The contract was awarded by the U.S.
Army Communications and Electronics Command (CECOM) in Ft. Monmouth, New Jersey.
The battery ordered by CECOM is designated BA-X372/U, a 6-volt cylindrical
battery consisting of two lithium-manganese dioxide cells connected in series.
The batteries are primarily used to provide the necessary memory back-up power
for the most widely used military "Singars" radio. Ultralife had
21
previously produced this battery from 1994 through 1997 under a separate
contract with CECOM. The new contract calls for production to begin within four
months, and it is expected that shipments of the batteries will run through
mid-2000.
Advanced Technology Program (ATP). In April 1999 the Company began work
on a three-year, $15.3 million cost-sharing project sponsored by the U.S.
Department of Commerce. The objective of the project is to develop and produce
ultra-high-energy solid polymer rechargeable batteries that will significantly
outperform existing batteries in a broad range of portable electronic
applications. The Company is leading a team comprised of Eagle-Picher
Technologies, the world's largest supplier of satellite batteries, and
Lockheed-Martin Missiles and Space, a leading supplier of satellites and space
vehicles. Major subcontractors, such as Sandia National Laboratories will also
play key roles in the project. As the lead contractor, Ultralife will receive
approximately $2.14 million during the first year, $1.65 million during the
second year, and $0.8 million during the third year of the program.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 14(a)(1) and (2)
are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
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
Incorporated by reference from the information captioned "Certain
Transactions" included in the Proxy Statement.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
Attached hereto and filed as part of this report are the financial
statements and schedules listed below:
Ultralife Batteries, Inc. and Subsidiary Page
- ---------------------------------------- ----
Report of Independent Public Accountants, F-1
Arthur Andersen LLP
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30,
1999 and 1998 F-2
Consolidated Statements of Operations for the
years ended June 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Changes in Comprehensive
Income and Stockholders' Equity for the years ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
years ended June 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
2 Financial Statement Schedules
Schedules other than those listed above have been omitted as they are
either not required, are not applicable, or the information called for is shown
in the financial statements or notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit
Index Description of Document Incorporated By Reference to:
3.1 Restated Certificate of Incorporation Exhibit 3.1 of Registration Statement,
File No. 33-54470 ("the 1992
Registration Statement")
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
23
Exhibit
Index Description of Document Incorporated By Reference to:
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
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 on the Form 10-Q for the
Company's Report on Company's fiscal quarter ended
1991 Stock Option Plan 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
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
joint venture agreement with the
Changzhou Battery Company
10.18 Sale of Business Agreement, by and Exhibit 10.18 on the Company's Current
between Dowty Group PLC and Ultralife Report on Form 8-K dated June 10, 1994,
(UK) File No. 0-20852
24
10.19 Technology Transfer Agreement relating Exhibit 10.19 of the Company's
to Lithium Batteries (Confidential Registration Statement of Form S-1 filed
treatment has been granted as to on October 7, 1994, File No. 33-84888 (
certain portions of this agreement) "the 1994 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
Amendment to the Employment
10.23 Agreement between the Registrant Exhibit 10.23 of the Company's form 10-K
And Bruce Jagid for the fiscal year ended June 30,1996
("the 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.
10.26 Agreement with Mitsubishi Electronics Exhibit 10.26 to the Company's Report on
America, Inc. relating to sample Form 10-K for the year ended June 30,
batteries for lap-top computer use. 1998
10.27 Purchase orders from Mitsubishi Exhibit 10.27 to the Company's Report on
Electronics America, Inc. Form 10-K for the year ended June 30,
1998
10.28 Lease agreement between Wayne County Exhibit 10.1 to 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 Filed herewith
Taiwan, Inc. dated October 10, 1998
10.30 Amendments to the Joint Venture Filed herewith
Agreement dated October 10, 1998
between Ultralife Batteries, Inc.
(UBI) and PGT Energy Corporation (PGT)
10.31 Technology Transfer Agreement dated Filed herewith
December 4, 1998 between UBI and PGT
10.32 Sales Agreement dated Filed herewith
December 4, 1998 between UBI and PGT
25
23.1 Consent of Arthur Andersen LLP Filed herewith
27. Financial Data Schedule Filed herewith
(d) Financial Statement Schedules.
The following financial statement schedules of the Registrant are filed
herewith:
None
26
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, 1999 By:/s/JOHN KAVAZANJIAN
-------------------
John 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, 1999 /s/JOHN KAVAZANJIAN
----------------------------------
John Kavazanjian
President, Chief Executive Officer
and Director
Date: September 27, 1999 /s/FREDERICK F. DRULARD
----------------------------------
Frederick F. Drulard
Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: September 27, 1999 /s/JOSEPH C. ABELES
----------------------------------
Joseph C. Abeles (Director)
Date: September 27, 1999 /s/JOSEPH N. BARRELLA
----------------------------------
Joseph N. Barrella (Director)
Date: September 27, 1999 /s/RICHARD HANSEN
----------------------------------
Richard Hansen (Director)
Date: September 27, 1999 /s/BRUCE JAGID
----------------------------------
Bruce Jagid (Director)
Date: September 27, 1999 /s/ARTHUR LIEBERMAN
----------------------------------
Arthur Lieberman (Director)
Date: September 27, 1999 /s/CARL H. ROSNER
----------------------------------
Carl H. Rosner (Director)
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 1999 and
1998, and the related consolidated statements of operations, changes in
comprehensive income and stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. 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 generally accepted auditing
standards. 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 statments. 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, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Rochester, New York
September 8, 1999
F-1
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Amounts)
June 30,
--------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 776 $ 872
Available-for-sale securities 22,780 34,816
Trade accounts receivable (less allowance for doubtful accounts
of $429, and $158 at June 30, 1999 and 1998, respectively) 3,554 3,046
Inventories 5,018 3,911
Prepaid expenses and other current assets 2,112 2,144
-------- --------
Total current assets 34,240 44,789
Property and equipment:
Machinery and equipment 36,288 33,113
Leasehold improvements 1,115 863
-------- --------
37,403 33,976
Less -- accumulated depreciation and amortization 5,626 3,828
-------- --------
31,777 30,148
-------- --------
Other assets and deferred charges:
Technology license agreements and other (net of accumulated amortization of
$968 and $561, at June 30, 1999 and 1998,
respectively) 403 890
-------- --------
Total assets $ 66,420 $ 75,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 107 $ 50
Accounts payable 3,847 4,785
Accrued compensation 653 335
Customer advances -- 334
Other current liabilities 1,198 1,540
-------- --------
Total current liabilities 5,805 7,044
-------- --------
Long term liabilities:
Long-term debt and capital lease obligations 215 197
-------- --------
Commitments and contingencies (Note 6)
Stockholders' 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 20,000,000 shares;
10,512,386 shares issued in 1999 and 1998 1,051 1,051
Capital in excess of par value 93,605 93,605
Accumulated other comprehensive income 267 1,368
Accumulated deficit (34,220) (27,135)
-------- --------
60,703 68,889
Less -- Treasury stock, at cost (27,250 shares in 1999 and 1998) (303) (303)
-------- --------
Total stockholders' equity 60,400 68,586
-------- --------
Total liabilities and stockholders' equity $ 66,420 $ 75,827
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-2
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Year ended June 30,
-------------------
1999 1998 1997
-------- -------- --------
Revenues $ 21,064 $ 16,391 $ 15,941
Cost of products sold 19,016 14,522 15,118
-------- -------- --------
Gross profit 2,048 1,869 823
Operating and other expenses:
Research and development 5,925 6,651 3,413
Selling, general, and administrative 6,195 5,790 5,218
Loss on China battery development program -- -- 805
Gain on fires (1,288) (2,697) (56)
-------- -------- --------
Total operating and other expenses 10,832 9,744 9,380
Other income (expense):
Interest income, net 1,456 888 1,352
Equity loss in affiliates (80) -- --
Gain on sale of securities 348 -- --
Other expense, net (25) (33) (41)
-------- -------- --------
Loss before income taxes (7,085) (7,020) (7,246)
-------- -------- --------
Income taxes -- -- --
-------- -------- --------
Net loss $ (7,085) $ (7,020) $ (7,246)
======== ======== ========
Net loss per common share $ (0.68) $ (0.84) $ (0.91)
======== ======== ========
Weighted average number of shares outstanding 10,485 8,338 7,923
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN COMPREHENSIVE INCOME AND STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Accumulated Other
Common Stock Comprehensive Income
------------------ --------------------------
Foreign
Capital in Currency Unrealized
Number of Excess of Translation Net Gain on Accumulated
Shares Amount Par Value Adjustment Securities Deficit
--------- ------ --------- ----------- ----------- -----------
Balance as of June 30, 1996 7,923,211 $ 793 $64,631 $ 37 $3,843 ($ 12,869)
Comprehensive loss:
Net loss (7,246)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 254
Unrealized net gain (loss) on securities (2,532)
Other comprehensive income (loss)
Comprehensive loss
Shares issued under stock option
plan and other stock options 30,125 3 152
Purchase of treasury stock (27,500)
Other 250 3
---------- ------ ------- ------ ------ --------
Balance as of June 30, 1997 7,926,086 796 64,786 291 1,311 (20,115)
Comprehensive loss:
Net loss (7,020)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 67
Unrealized net gain (loss) on securities (301)
Other comprehensive income (loss)
Comprehensive loss
Shares issued under public
offering, less offering costs of
approximately $2,699 2,500,000 250 28,301
Shares issued under stock option
plan and other stock options 58,800 5 518
Issuance of common stock from
treasury 250
---------- ------ ------- ------ ------ --------
Balance as of June 30, 1998 10,485,136 1,051 93,605 358 1,010 (27,135)
Comprehensive loss:
Net loss (7,085)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (459)
Unrealized net gain (loss) on securities (642)
Other comprehensive income (loss)
Comprehensive loss
---------- ------ ------- ------ ------ --------
Balance as of June 30, 1999 10,485,136 $1,051 $93,605 ($101) $ 368 ($ 34,220)
========== ====== ======= ====== ====== ========
Treasury
Stock Total
-------- -----
Balance as of June 30, 1996 $ - $56,435
Comprehensive loss:
Net loss (7,246)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 254
Unrealized net gain (loss) on securities (2,532)
-------
Other comprehensive income (loss) (2,278)
-------
Comprehensive loss (9,524)
Shares issued under stock option
plan and other stock options 155
Purchase of treasury stock (306) (306)
Other 3
--------- -------
Balance as of June 30, 1997 (306) 46,763
Comprehensive loss:
Net loss (7,020)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 67
Unrealized net gain (loss) on securities (301)
-------
Other comprehensive income (loss) (234)
-------
Comprehensive loss (7,254)
Shares issued under public
offering, less offering costs of
approximately $2,699 28,551
Shares issued under stock option
plan and other stock options 523
Issuance of common stock from
treasury 3 3
--------- -------
Balance as of June 30, 1998 (303) 68,586
Comprehensive loss:
Net loss (7,085)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (459)
Unrealized net gain (loss) on securities (642)
-------
Other comprehensive income (loss) (1,101)
-------
Comprehensive loss (8,186)
--------- -------
Balance as of June 30, 1999 ($303) $60,400
========= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Year ended June 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net loss $ (7,085) $ (7,020) $ (7,246)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,205 1,364 841
Equity loss in affiliates 80 -- --
Loss on China battery development program -- -- 284
Provision for loss on accounts receivable 271 (120) 88
Provision for inventory obsolescence 68 (659) 93
Realized gain on sale of securities (348) -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (779) (210) 1,203
(Increase) decrease in inventories (1,175) 2,051 3,042
Decrease (increase) in prepaid expenses
and other current assets 32 (483) (311)
(Decrease) increase in accounts payable
and other current liabilities (962) 3,664 (868)
(Decrease) increase in customer advances (334) (1,302) 1,302
--------- --------- ---------
Net cash used in operating activities (8,027) (2,715) (1,572)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (3,427) (12,245) (8,913)
Purchase of technology license -- (350) --
Purchases of securities (94,417) (164,438) (139,485)
Sales of securities 75,130 137,104 64,969
Maturities of securities 31,029 12,064 85,993
--------- --------- ---------
Net cash provided by (used in) investing activities 8,315 (27,865) 2,564
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of debt 115 -- --
Principal payments under capital
lease obligations (40) -- --
Proceeds from issuance of common stock -- 29,074 159
Purchase of treasury stock -- -- (306)
--------- --------- ---------
Net cash provided by (used in) financing activities 75 29,074 (147)
--------- --------- ---------
Effect of exchange rate changes on cash (459) 67 253
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (96) (1,439) 1,098
Cash and cash equivalents at beginning of period 872 2,311 1,213
--------- --------- ---------
Cash and cash equivalents at end of period $ 776 $ 872 $ 2,311
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Capital lease obligation related to building $ -- $ 247 $ --
Unrealized net gain (loss) in securities $ 294 $ 301 $ (2,532)
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
ULTRALIFE BATTERIES, INC.
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 primary and rechargeable lithium batteries for use in a wide array of
applications. The Company generally does not distribute its product to a
concentrated geographical area nor is there a significant concentration of
credit risks arising from individual or groups of customers engaged in similar
activities, or who have similar economic characteristics. The Company had
battery sales to a single customer amounting to $4,192, or 20% of total revenues
in 1999; $1,993, or 12% of total revenues in 1998; and $2,391, or 15% of total
revenues in 1997. The Company does not normally obtain collateral on trade
accounts receivable.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its wholly-owned subsidiary, Ultralife Batteries UK, Ltd. ("Ultralife UK").
All material 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 the date of the financial
statements 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 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. Interest
paid was $40 in 1999, $3 in 1998 and $0 in 1997.
e. Available-for-Sale Securities
Management determines the appropriate classification of securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. Marketable equity securities and debt securities are classified as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses, net of tax, included as a component of accumulated
other comprehensive income.
The amortized cost of debt securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity
or in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
Realized gains and losses, and declines in value judged to be
other-than-temporary on available-for-sale securities are included in the
determination of net income (loss) as gains (losses) on sale of securities.
F-6
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
f. Inventories
Inventories are stated at the lower of cost or market with cost
determined under the first-in, first-out (FIFO) method.
g. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
three to twelve years. Betterments, renewals and extraordinary repairs that
extend the life of the assets are capitalized. Other repairs and maintenance
costs are expensed. 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 income.
In the event that facts and circumstances indicate that the carrying
amount of a long-lived asset may be impaired, an evaluation of recoverability
would be performed. If an impairment is determined to exist, a loss is
recognized to the extent the carrying value of the asset is in excess of the sum
of the undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. The Company did not record any impairments of long
lived assets in 1999, 1998 or 1997.
h. Technology License Agreements
Technology license agreements consist of the rights to patented
technology and related technical information. The Company acquired two
technology license agreements for an initial payment of $1,000 and $100
respectively. Royalties are payable at a rate of 8% and an initial rate of 4%,
respectively, of the fair market value of each battery using the technology if
the battery is sold or otherwise put into use by the Company for a 10-year
period. The royalties can be reduced under certain circumstances based on the
terms of these agreements. The agreements are amortized using the straight-line
method over three to ten years. Additionally, the Company will be required to
make royalty payments at stated rates based on the terms of each agreement.
During 1998, in connection with the settlement of a lawsuit (see Note 6(f)), the
Company acquired an additional technology license agreement for $350, which
expired in May 1999.
i. 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".
There were no exchange gains or losses included in net loss for the years ended
June 30, 1999, 1998 and 1997.
j. 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.
k. Research and Development
Research and development expenditures are charged to operations as
incurred.
F-7
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
l. Revenue Recognition
Revenues from sales of batteries are recognized when products are
shipped. A provision is made at that time for warranty costs expected to be
incurred.
m. Revenue on Technology Contracts
For a majority of its 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. When 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.
n. Derivative Financial Instruments and Fair Value of Financial
Instruments
SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments", requires disclosure of any significant
derivative or other financial instruments. The Company did not have any
derivative financial instruments at June 30, 1999 and 1998.
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, 1999 and 1998. Fair values have
been determined through information obtained from market sources.
o. 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 stockholders by weighted
average shares outstanding for the period. No dilution for common share
equivalents is included. Diluted EPS includes the dilutive effect of securities
calculated using the treasury stock method. For 1999, 1998 and 1997, diluted
earnings per share was the equivalent of basic earnings per share due to the net
loss.
p. New Accounting Pronouncements
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (loss) and its components. Comprehensive income (loss) includes net
income (loss) and other comprehensive income consisting of unrealized gains and
losses that bypass the traditional income statement and are recorded in a
separate section of stockholders' equity on the consolidated balance sheet. The
components of other comprehensive income for the Company consist of unrealized
net gains on securities and foreign currency translation adjustments.
In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for
reporting information about operating segments in the
F-8
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 1-Summary of Operations and Significant Accounting Policies (cont'd)
financial statements. The standard requires businesses to present information on
business segments in a manner consistent with the way in which a company's chief
operating decision maker views the business to make resource-related decisions.
(See Note 11--Business Segment Information.)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting requirements for derivative
instruments and hedging activities. The statement is effective for all fiscal
years beginning after June 15, 1999. The Company has not yet determined the
impact of this standard on its financial statements. However, given the current
level of the Company's derivative and hedging activities, the impact is not
expected to be material.
q. Legal Matters
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management, such liability
will not have a material adverse effect on the Company's financial condition or
results of operations.
r. Reclassifications
In order to conform to the 1999 presentation, certain amounts in the
1998 and 1997 financial statements have been reclassified.
Note 2-Investments
The following is a summary of available-for-sale securities:
June 30, 1999 Unrealized Estimated
------------- Cost Gains/(Losses) Fair Value
---- -------------- ----------
Commercial Paper and other ............. $ 6,986 $ -- $ 6,986
U.S. corporate bonds ................... 13,708 (93) 13,615
-------- -------- --------
Total debt securities .................. 20,694 (93) 20,601
Intermagnetics General
Corporation (equity securities) ...... 1,718 461 2,179
-------- -------- --------
$ 22,412 $ 368 $ 22,780
======== ======== ========
June 30, 1998 Unrealized Estimated
------------- Cost Gains/(Losses) Fair Value
---- -------------- ----------
Commercial Paper and other ............. $ 28,087 $ -- $ 28,087
U.S. Government agencies ............... 250 -- 250
U.S. corporate bonds ................... 3,315 9 3,324
-------- -------- --------
Total debt securities .................. 31,652 9 31,661
Intermagnetics General
Corporation (equity securities) ...... 2,154 1,001 3,155
-------- -------- --------
$ 33,806 $ 1,010 $ 34,816
======== ======== ========
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 1999, the Company realized a gain on sale of securities
of $348, relating to the sale of a portion of the Company's investment in
Intermagnetics General Corporation.
F-9
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 2-Investments (cont'd)
At June 30, 1999, all of the Company's available-for-sale securities
had contractual maturities of one year or less. 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.
Note 3-Inventories
The composition of inventories was:
June 30,
--------
1999 1998
---- ----
Raw materials...................................... $ 2,984 $ 2,613
Work in process.................................... 2,080 1,333
Finished products.................................. 249 192
---------------------
5,313 4,138
Less: Reserve for obsolescence..................... 295 227
---------------------
$ 5,018 $ 3,911
======= ==========
Note 4-Leases
The Company leases various buildings, land, automobiles and office
equipment. Rental expenses for all operating leases were approximately $379,
$713 and $745 for the years ended June 30, 1999, 1998 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of June
30, 1999 are as follows: 2000 - $351, 2001 - $309, 2002 - $261, 2003 - $224,
2004 - $222 and thereafter - $1,993. The above amounts do not include contingent
or additional rent.
In addition to operating leases, the Company also has a capital lease
for its Newark, New York facility which provides for payments of $50 per year
through December 2001 and $28 per year from December 2001 through 2007. At the
end of this lease term, the Company is required to purchase the facility for one
dollar.
Note 5-Long-term Debt
In May 1999, the Company borrowed funds from New York Power Authority
that were used toward the construction of a solvent recovery system. The annual
interest rate on the loan is 6%. The loan is to be repaid in 24 equal monthly
payments. The principal balance of the loan at June 30, 1999 was $115, of which
$57 is classified as a current liability.
Note 6-Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to
the establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first
F-10
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 6-Commitments and Contingencies (cont'd)
two years of the agreement, of which approximately $5,600 has been paid. The
Company has been attempting to collect the balance due under this contract.
China Battery has indicated that these payments will not be made until certain
contractual issues have been resolved. Due to the Chinese partner's questionable
willingness to pay, the Company wrote off in fiscal 1997 the entire balance owed
to the Company as well as the Company's investment. In December 1997, China
Battery sent to the Company a letter demanding reimbursement of losses they have
incurred plus a refund for certain equipment that the Company sold to China
Battery. Although China Battery has not taken any additional steps, there can be
no assurance that China Battery will not further pursue such a claim, which, if
successful, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that such a
claim is without merit.
b. Letters of Credit
In conjunction with the purchase/lease agreement to acquire the
Company's Newark, NY facilities, the Company established a letter of credit in
the amount of $200 which expires in 2001. As of June 30, 1999, $150 remains
outstanding. All letters of credit are collateralized by the Company's
investments.
In addition, a line of credit in the amount of $330 is maintained by
Ultralife UK for short term working capital requirements.
c. 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.
d. Purchase Commitments
As of June 30, 1999, the Company has made commitments to purchase
approximately $1,074 of production machinery and equipment.
e. 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. The license expires in 2007.
f. Legal Matters
A company has filed a claim against the Company seeking amounts related
to commissions and breach of good faith and fair dealings. The Company's counsel
believes that an unfavorable outcome is unlikely in this matter.
An individual has filed suit claiming the Company interfered with his
opportunity to purchase Dowty Group, PLC (now the Company's U.K. subsidiary).
The claim amounts to $25,000. The Company believes that the claim is without
merit and the Company intends to vigorously defend its position. At this time,
the outcome of this suit is uncertain. An unfavorable outcome of this suit may
have a material adverse impact on the Company's financial position and results
of operations.
F-11
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 6-Commitments and Contingencies (cont'd)
A company had alleged infringement of two patents concerning technology
incorporated into the Company's rechargeable batteries. In May of 1998, the
Company settled this suit. In the settlement the Company acquired a technology
license agreement in exchange for $350, which expired in fiscal 1999.
In August 1998, the Company, its Directors, certain of its officers,
and certain underwriters were named as defendants in a complaint filed by
certain shareholders who claim to represent a class of shareholders alleging
that the defendants, during the period of 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
alleges that the Company's offering documents were materially incomplete, and as
a result misleading, and that the class members purchased the Company's common
stock at artificially inflated prices in reliance thereon and were thereby
damaged. The Company believes that the litigation is without merit and intends
to defend it vigorously. All defendants have filed Motions to Dismiss the
Complaint. As of May 6, 1999, the motions have been fully briefed and submitted
to the Court. The amount of alleged damages, if any, cannot be quantified, nor
can the outcome or 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 agreement of its
Newark, New York facility in 1998, the Company entered into a payment-in-lieu of
tax agreement which provides the Company with certain real estate tax
concessions upon 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 next phase of the project
is expected to begin in late calendar 1999. 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.
Note 7-Stockholders' 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, 1999, no preferred shares were issued
or outstanding.
b. Common Stock
In June of 1998, the stockholders approved an increase in the number of
authorized shares of common stock from 12,000,000 to 20,000,000.
In May of 1998, the Company sold 2,500,000 shares of common stock at
$12.50 per share, resulting in gross proceeds of $31,250 and net proceeds of
$28,551 to the Company.
c. Stock Options
The Company sponsors several stock-based compensation plans, all of
which are accounted for under the provisions of Accounting Principles Board
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. In accordance with the
disclosure
F-12
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 7-Stockholders' Equity (cont'd)
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company elected not to recognize compensation cost related to stock options. 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
$8,252, $8,232 and $8,295 for the years ended June 30, 1999, 1998 and 1997,
compared with the reported losses of $7,085, $7,020, and $7,246. Loss per share
would have been $0.79, $0.99, and $1.05 in the years ended June 30, 1999, 1998
and 1997, respectively, as compared to reported loss per share of $0.68, $0.84,
and $0.91, 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
1999, 1998 and 1997, respectively; expected option terms of three years for all
periods; expected stock volatility of approximately 53.4% for 1999, 53.1% for
1998, and 46.6% for 1997; expected dividend yields of 0% for all periods; and
average risk free interest rates of 5.3%, 5.8%, and 5.8% for 1999, 1998, and
1997, respectively. The weighted average fair value of options granted was $3.63
in fiscal 1999, $5.48 for 1998 and $4.18 in fiscal 1997.
The stockholders of the Company have approved three stock option plans
that permit the grant of options. In addition, the stockholders 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 are reserved for grant to key
employees and consultants of the Company through September 13, 2001. There are
currently 11,250 shares remaining to be granted under the 1991 plan. The
exercise price per share shall be determined by the Board of Directors as
follows: (i) Incentive Stock Options (ISOs) shall not be less than 100% of the
fair market value at the date of grant; (ii) ISOs granted to holders of more
than 10% of the Company's common stock shall not be less than 110% of the fair
market value at the date of grant; and (iii) non-qualified stock options
("NQSOs") shall not be less than 85% of the fair market value of a share at the
date of grant. The exercise period is to be determined at the time of grant but
cannot exceed ten years (five years from the time of grant if issued to a holder
of more than 10% of the Company's common stock). All options granted under the
1991 plan are NQSOs.
The stockholders of the Company have also approved a 1992 stock option
plan that is substantially the same as the 1991 stock option plan. The
shareholders have 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 common shares reserved by 500,000 to
1,650,000. Options granted under the 1992 plan are either ISO's or NQSO's. Key
employees are eligible to receive ISO's and NQSO's; however, directors and
consultants are eligible to receive only NQSO's.
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. The options are exercisable
in annual increments of 20,000 shares over a five-year period commencing March
1, 1996 until 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 on October
2002. In addition, on March 1, 1994, the Company granted options to the former
CEO to purchase 150,000 shares at $11.00 per share under the terms of an
employment agreement and outside of any of the stock option plans. These options
are exercisable in annual increments of 30,000 shares over a five-year period
commencing March 1, 1995 until March 1, 2000.
F-13
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 7-Stockholders' Equity (cont'd)
This table summarizes data for the stock options issued by the Company:
1999 1998 1997
---- ---- ----
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............................. 1,734,600 $ 11.03 1,337,300 $11.51 1,194,425 $12.67
Options granted..................... 346,000 $ 7.10 736,200 $10.42 503,150 $10.12
Options exercised................... -- $ -- (58,800) $ 9.33 (30,125) $ 5.15
Options canceled.................... (262,600) $ 11.20 (280,100) $12.17 (330,150) $14.30
--------- ------- --------- ------ --------- ------
Shares under option at end of year 1,818,000 $ 10.27 1,734,600 $11.03 1,337,300 $11.51
--------- ------- --------- ------ --------- ------
Options exercisable at end of year 1,074,940 $11.17 946,900 $11.29 826,300 $11.43
The following table represents additional information about stock options
outstanding at June 30, 1999 :
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------------------------------
Weighted-
Average
Range of Number Remaining Weighted- Number Weighted-
Exercise Outstanding Contractual Average Exercisable Average
Prices At June 30, 1999 Life Exercise Price At June 30, 1999 Exercise Price
-------- ---------------- ----------- -------------- ---------------- --------------
$ 4.25- 8.90 678,500 4.9 Years $ 7.47 188,300 $ 7.81
$ 9.00-11.75 774,850 2.8 Years $10.20 615,490 $10.13
$12.00-17.50 300,650 2.4 Years $14.46 220,150 $14.57
$18.25-24.50 64,000 1.7 Years $21.16 51,000 $21.43
--------------------------------------------------- ------------------------------------------------------
$ 4.25-24.50 1,818,000 3.5 Years $10.27 1,074,940 $11.17
--------------------------------------------------- ------------------------------------------------------
Subsequent to the end of the fiscal year, the Company issued 500,000
stock options as part of a compensation plan for the new CEO.
d. Warrants
In April 1997, the Company issued warrants to purchase 100,000 shares
of its common stock at an exercise price of $12.00 per share. Those warrants
expired in April 1998. In March 1998, the Company issued warrants to purchase
12,500 shares of its common stock to the Empire State Development Corporation in
connection with a $500 grant. Proceeds of the grant were used to fund certain
equipment purchases and are contingent upon the Company achieving and
maintaining minimum employment levels. The remaining unamortized balance of $350
relating to the grant is included in other current liabilities in the
accompanying Consolidated Balance Sheet as of June 30, 1999. 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 during the 20 trading days prior to the
grant.
F-14
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 7-Stockholders' Equity (cont'd)
e. Reserved Shares
The Company has reserved 1,953,000, 1,953,000 and 2,159,125 shares of
common stock under the various stock option plans and warrants as of June 30,
1999, 1998 and 1997, respectively.
Note 8-Income Taxes
Foreign and domestic loss carryforwards totaling approximately $36,000
are available to reduce future taxable income. Foreign loss carryforwards of
$900 can be carried forward indefinitely. The domestic net operating loss
carryforward of $35,100 expires through 2014. Due to a change in ownership
defined under Internal Revenue Code Section 382, 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 $2,901, $2,843, and $3,273
for the years ended June 30, 1999, 1998 and 1997, respectively, to offset the
deferred tax assets due to uncertainty.
Significant components of the Company's deferred tax liabilities and assets as
of June 30 are as follows:
1999 1998
---- ----
Deferred tax liabilities:
Unrealized gain on securities ................. $ 125 $ 341
Tax over book depreciation ................. 892 888
-------- --------
Total deferred tax liabilities ................... 1,017 1,229
Deferred tax assets:
Net operating loss carryforward ............... 13,159 10,604
Other ......................................... 372 238
-------- --------
Total deferred tax assets ........................ 13,531 10,842
Valuation allowance for deferred assets .......... (12,514) (9,613)
Net deferred tax assets .......................... 1,017 1,229
-------- --------
Net deferred income taxes ........................ $ -- $ --
======== ========
There were no income taxes paid for the years ended June 30, 1999, 1998
and 1997. For financial reporting purposes, loss from continuing operations
before income taxes included the following:
June 30,
1999 1998 1997
---- ---- ----
United States ............... $(7,830) $(9,053) $(6,916)
Foreign ..................... 745 2,033 (330)
------- ------- -------
Total ....................... $(7,085) $(7,020) $(7,246)
======= ======= =======
There are no undistributed earnings of Ultralife UK, the Company's
foreign subsidiary, at June 30, 1999.
F-15
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 9-401(K) Plan
The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the
employees' contributions. Effective January 1, 1997, the Board of Directors
approved Company matching of employee contributions up to a maximum of 3% of the
employee's income. For the years ended June 30, 1999, 1998 and 1997, the Company
contributed $177, $124 and $75, respectively.
Note 10-Related Party Transactions
The Company held 281,210 common shares (market value of $2,179) and
345,795 common shares (market value of $3,155) of Intermagnetics General
Corporation ("IGC") at June 30, 1999 and 1998, respectively. During 1999, the
company sold a portion of its investment in IGC and realized a gain on sale of
securities of $348. IGC is considered to be a related party since certain
directors of the Company also serve as officers or directors of IGC.
During 1999, the Company paid $214 for professional services to a firm
affiliated with one of the members of the Board of Directors.
Note 11-Business Segment Information
Effective June 30, 1999, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information". This
statement establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this statement had no impact
on the Company's consolidated financial position, results of operations or cash
flows. Comparative information for prior years has been restated.
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.
1999
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------
Revenues $ 19,559 $ 49 $ 1,456 $ -- $ 21,064
Segment contribution $ 2,651 $ (5,617) $ 297 $ (6,195) $ (8,864)
Interest income, net 1,456
Other income (expense), net 323
Income taxes --
--------
Net loss $ (7,085)
Long-lived assets $ 7,776 $ 19,525 $ 264 $ 4,615 $ 32,180
Total assets $ 16,494 $ 19,554 $ 735 $ 29,637 $ 66,420
Capital expenditures $ 1,798 $ 1,036 $ 20 $ 573 $ 3,427
Depreciation and amortization expense $ 952 $ 898 $ 66 $ 289 $ 2,205
F-16
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 11-Business Segment Information (cont'd)
1998
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------
Revenues $ 13,297 $ 766 $ 2,328 $ -- $ 16,391
Segment contribution $ 3,661 $ (6,108) $ 361 $ (5,789) $ (7,875)
Interest income, net 888
Other income (expense), net (33)
Income taxes --
--------
Net loss $ (7,020)
Long-lived assets $ 7,085 $ 19,337 $ 295 $ 4,321 $ 31,038
Total assets $ 12,444 $ 20,119 $ 1,317 $ 41,947 $ 75,827
Capital expenditures $ 505 $ 10,978 $ 14 $ 748 $ 12,245
Depreciation and amortization expense $ 708 $ 496 $ 38 $ 122 $ 1,364
1997
- ----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-----------------------------------------------------------
Revenues $ 14,765 $ -- $ 1,176 $ -- $ 15,941
Segment contribution $ 799 $ (3,271) $ (867) $ (5,217) (8,556)
Interest income, net 1,352
Other income (expense), net (42)
Income taxes --
--------
Net loss $ (7,246)
Long-lived assets $ 5,712 $ 12,863 $ 85 $ 897 $ 19,557
Total assets $ 13,233 $ 12,485 $ 702 $ 24,975 $ 51,395
Capital expenditures $ 1,018 $ 7,283 $ 53 $ 559 $ 8,913
Depreciation and amortization expense $ 654 $ 105 $ 12 $ 70 $ 841
Geographical Information
- ------------------------
Revenues Long-lived Assets
1999 1998 1997 1999 1998 1997
----------------------------- -------------------------------
United States $ 10,504 $ 8,081 $ 8,892 $ 26,612 $ 25,554 $ 18,134
United Kingdom 3,423 1,716 4,234 5,648 5,484 1,423
Hong Kong 4,423 1,986 288 -- -- --
Europe, excluding UK 1,671 3,384 1,602 -- -- --
Other 1,043 1,224 925 (80) -- --
-------- -------- -------- -------- -------- --------
Total $ 21,064 $ 16,391 $ 15,941 $ 32,180 $ 31,038 $ 19,557
======== ======== ======== ======== ======== ========
Note 12-Taiwan Venture
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. The agreement stipulated
that Ultralife will provide 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 will also hold
half the seats on UTI's board of directors. PGT and the group of investors will
ultimately fund UTI with $21,250 in cash and hold the remaining seats on the
board.
F-17
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Note 12-Taiwan Venture (cont'd)
In July 1999, the Company issued 700,000 shares of its common stock to
UTI in exchange for $8,750 in cash. Subsequently, in September 1999, the Company
contributed $8,750 in cash to the UTI venture, fulfilling its investment
pursuant to the agreement.
F-18