UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended June 30, 2002
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, par value $0.10 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
On August 30, 2002, the aggregate market value of the Common Stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $36,000,000 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on August 30, 2002.
As of September 15, 2002, the Registrant had 13,142,829 shares of Common
Stock outstanding, net of 27,250 treasury shares and 209,440 shares out of
700,000 shares owned by Ultralife Taiwan, Inc., a Taiwanese venture of which the
Company owns approximately 30%.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Ultralife Batteries, Inc. Proxy Statement - With the exception of the
items of the Proxy Statement relating to the December 12, 2002 Annual Meeting of
Stockholders specifically incorporated by reference herein, the Proxy Statement
is not deemed to be filed as part of this Report on Form 10-K.
Introductory Note:
This Amendment No. 1 to Form 10-K for Ultralife Batteries, Inc. for the period
ended June 30, 2002, dated as of April 11, 2003 is being filed to restate the
financial statements and associated disclosures related to the manner in which
the Company had previously accounted for its equity investment in Ultralife
Taiwan, Inc. (UTI). The Items from the original Form 10-K filing that have been
impacted are being filed in their entirety with this Amendment and are
summarized in the following Table of Contents. (Refer to Note 2 to the
consolidated financial statements included in Item 8 herein.)
TABLE OF CONTENTS
ITEM PAGE
PART II 6 Selected Financial Data.........................................3
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................4
8 Financial Statements and Supplementary Data.....................16
PART IV 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................................40
Signatures......................................................42
CEO & CFO Certifications........................................43
Exhibits........................................................44
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Year Ended June 30,
--------------------------------------------------------------------
2002 (1) 2001 2000 1999 1998
-------- -------- -------- -------- --------
(As Restated)
Statement of Operations Data:
Revenues $ 32,515 $ 24,163 $ 24,514 $ 21,064 $ 16,391
Cost of products sold 31,168 27,696 25,512 19,016 14,522
-------- -------- -------- -------- --------
Gross margin 1,347 (3,533) (998) 2,048 1,869
-------- -------- -------- -------- --------
Research and development expenses 4,291 3,424 5,306 5,925 6,651
Selling, general and administrative expenses 7,949 8,009 7,385 6,195 5,790
Impairment of long lived assets 14,318 -- -- -- --
Loss on fires -- -- -- (1,288) (2,697)
-------- -------- -------- -------- --------
Total operating and other expenses 26,558 11,433 12,691 10,832 9,744
Interest income, net (291) 166 909 1,456 888
Equity loss in UTI (954) (2,338) (818) (80) --
Gain on sale of securities -- -- 3,147 348 --
Other income (expense), net 320 (124) 209 (25) (33)
-------- -------- -------- -------- --------
Loss before income taxes (26,136) (17,262) (10,242) (7,085) (7,020)
Income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net loss $(26,136) $(17,262) $(10,242) $ (7,085) $ (7,020)
======== ======== ======== ======== ========
Net loss per share, basic and diluted $ (2.11) $ (1.55) $ (0.94) $ (0.68) $ (0.84)
======== ======== ======== ======== ========
Weighted average number
of shares outstanding 12,407 11,141 10,904 10,485 8,338
======== ======== ======== ======== ========
June 30,
----------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and available-for-sale securities $ 2,219 $ 3,607 $ 18,639 $ 23,556 $ 35,688
Working capital $ 4,950 $ 6,821 $ 22,537 $ 28,435 $ 37,745
Total assets $ 34,321 $ 47,203 $ 64,460 $ 66,420 $ 75,827
Total long-term debt and capital lease obligations $ 103 $ 2,648 $ 3,567 $ 215 $ 197
Stockholders' equity $ 25,422 $ 37,453 $ 54,477 $ 60,400 $ 68,586
(1) Amounts have been restated. Refer to Note 2 to the consolidated
financial statements included in Item 8 herein.
3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Annual Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forward-looking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, the successful commercialization of the
Company's advanced rechargeable batteries, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fires, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected. See Risk Factors in Item 7.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable) and rechargeable
batteries for use in a wide array of applications. The Company believes that its
technologies allow the Company to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. The Company has focused on manufacturing a family
of lithium primary batteries for industrial, military and consumer applications,
which it believes is one of the most comprehensive lines of lithium manganese
dioxide primary batteries commercially available. The Company also supplies
rechargeable and lithium ion batteries for use in portable electronic
applications.
For several years, the Company has incurred net operating losses primarily
as a result of funding research and development activities and, to a lesser
extent, incurring manufacturing and selling, general and administrative costs.
During fiscal 2002, the Company realigned its resources to bring costs more in
line with revenues, moving the Company closer to its targets of operating cash
breakeven and profitability. In addition, the Company refined its rechargeable
strategy to allow it to be more effective in the marketplace.
The Company believes that its current growth strategy will be successful
in the long-term. However, at the present time, the status of the Company's cash
and credit situation is of serious concern, and much of the Company's ability to
succeed in the near-term is dependent upon continued revenue growth and a
favorable product mix that will generate cash. If the Company is unsuccessful in
growing the business sufficiently in the near-term to generate adequate levels
of cash, it will need to find alternative sources of funds to allow it to
continue to operate in its current capacity. Some possible funding alternatives
include obtaining additional debt, issuing equity or selling assets. While the
Company has been successful at raising funds in the past and is optimistic that
it will be able to do so again if necessary, there is no assurance that the
Company will be able to do so under the current circumstances.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The Corporate
segment consists of all other items that do not specifically relate to the three
other segments and are not considered in the performance of the other segments.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
Results of Operations
Fiscal Year Ended June 30, 2002 Compared With the Fiscal Year Ended June 30,
2001 (As Restated; See Note 2)
Revenues. Total revenues of the Company increased $8,352,000 from
$24,163,000 for the year ended June 30, 2001 to $32,515,000 for the year ended
June 30, 2002. Primary battery sales increased $9,229,000, from $22,105,000 for
the year
4
ended June 30, 2001 to $31,334,000 for the year ended June 30, 2002. The
increase in primary battery sales was primarily due to growth in cylindrical
battery sales, particularly to military customers, and higher 9-volt battery
sales. Rechargeable battery sales increased modestly from $370,000 for the year
ended June 30, 2001 to $445,000 for the year ended June 30, 2002, as the Company
broadened its strategy in the latter portion of fiscal 2002 from simply selling
polymer batteries it manufactures to selling a rechargeable "solution" that
encompasses sourcing cells from other lithium battery manufacturers and
assembling them to meet customer needs. Technology contract revenues decreased
$952,000, from $1,688,000 to $736,000 due to the scheduled reduction of certain
nonrenewable government contracts, which concluded in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $3,472,000, from
$27,696,000 for the year ended June 30, 2001 to $31,168,000 for the year ended
June 30, 2002. Consolidated cost of products sold as a percentage of total
revenue improved from approximately 115% to 96% for the year ended June 30,
2002. Consolidated gross margins improved from a negative 15% in fiscal 2001 of
sales to a positive 4% in fiscal 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. A majority of employees affected by this
realignment were re-deployed from the Rechargeable segment and support functions
into open direct labor positions in the Primary segment, due to the
significantly growing demand for primary batteries from the military. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas. Overall,
the Company reduced its workforce by more than 20% during the year.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, the actions taken
during fiscal 2002 generated total cost savings of more than $2,000,000 per
quarter from the expense run rate that the Company experienced during its first
quarter of fiscal 2002.
In the Primary battery segment, the cost of batteries sold increased
$5,318,000, from $21,094,000 2001 to $26,412,000 in 2002, mainly related to
increased sales volume. As a percent of total primary battery sales, cost of
primary products sold improved from 95% for the year ended June 30, 2001 to 84%
for the year ended June 30, 2002, reflecting improved manufacturing efficiencies
related to higher volumes and the impact from certain of the cost savings
initiatives referred to above, as well as the ongoing positive effects from the
implementation of lean manufacturing disciplines.
In the Rechargeable battery segment, the cost of products sold decreased
$972,000 in fiscal 2002 from $5,065,000 in fiscal 2001 to $4,093,000 in 2002.
During fiscal 2001, in anticipation of significant increases in rechargeable
sales volume, the Company added resources to prepare for this expected growth.
As economic conditions changed during fiscal 2002, the Company reacted and
reduced its resources accordingly by realigning its resources and reducing
manpower as described above. In general, the decrease in costs from 2001 to 2002
primarily resulted from the cost savings initiatives that were implemented
during the year.
Technology contracts cost of sales decreased $874,000, or approximately
57%, from $1,537,000 for the year ended June 30, 2001 to $663,000 for the year
ended June 30, 2002, in line with the decrease in revenues. Technology contracts
cost of sales as a percentage of revenue was 10% in 2002, consistent with the
prior year.
Operating and Other Expenses. In June 2002, the Company recorded a fixed
asset impairment charge of $14,318,000. This impairment charge related to a
writedown of long-lived assets in the Company's rechargeable production
operations, reflecting a change in the Company's strategy. Changes in external
economic conditions culminated in June 2002, reflecting a slowdown in the mobile
electronics marketplace and a realization that near-term business opportunities
utilizing the high volume rechargeable production equipment had dissipated.
These changes caused the Company to shift away from high volume polymer
rechargeable battery production to higher value, lower volume opportunities. The
Company's redefined strategy eliminates the need for its high volume production
line that had been built mainly to manufacture Nokia cell phone replacement
batteries. The new strategy is a three-pronged approach. First, the Company will
manufacture in-house for the higher value, lower volume polymer rechargeable
opportunities. Second, the Company will utilize its affiliate in Taiwan,
Ultralife Taiwan, Inc., as a source for both polymer and liquid lithium cells.
Third, the Company will look to other rechargeable cell manufacturers as sources
for cells that the Company can then assemble into completed battery packs. In
the future, the impairment of the rechargeable fixed assets will result in lower
depreciation charges of approximately $1,800,000 per year.
Total operating and other expenses increased $15,125,000 from $11,433,000
for the year ended June 30, 2001 to $26,558,000 for the year ended June 30,
2002. Excluding the impairment charge, operating and other expenses increased
5
$807,000, from $11,433,000 in 2001 to $12,240,000 in 2002, mainly as a result of
higher research and development expenses. Operating and other expenses as a
percentage of revenue, excluding the impairment charge, improved from 47% for
the year ended June 30, 2001 to 38% for the year ended June 30, 2002. Research
and development costs increased $867,000, or 25% from $3,424,000 for the year
ended June 30, 2001 to $4,291,000 for the year ended June 30, 2002. This
increase was mainly due to higher costs related to the development of new
cylindrical batteries for the military applications, as the Company focused more
extensively on this significant market opportunity. R&D expenditures related to
rechargeable battery development diminished during the year as a result of the
cost savings actions discussed previously. The Company anticipates that R&D
costs overall will decline significantly in fiscal 2003 as compared with 2002
due to the sizeable reduction in rechargeable development efforts and the
expected near-term transition of the new cylindrical battery development to
manufacturing during fiscal 2003.
Selling, general and administration expenses decreased $60,000,
approximately 1%, from $8,009,000 for the year ended June 30, 2001 to $7,949,000
for the year ended June 30, 2002, even though revenues rose 35%. Selling and
marketing expenses declined $404,000 from fiscal 2001 to fiscal 2002 as a result
of a more targeted sales coverage strategy using fewer resources and lower
marketing and advertising costs. General and administrative expenses, on the
other hand, rose $344,000 as a result of higher insurance expenses and certain
severance costs pertaining to an executive employment agreement incurred in
conjunction with the Company's resource realignment during the second fiscal
quarter.
Other Income (Expense). Interest income decreased $611,000 from $702,000
for the year ended June 30, 2001 to $91,000 for the year ended June 30, 2002.
This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $154,000 from $536,000 in 2001 to $382,000 in 2002 as a result of
lower average balances of debt. Equity loss in Ultralife Taiwan, Inc. (UTI) was
$954,000 (as restated - refer to Note 2 to the consolidated financial
statements) in Fiscal 2002 compared with a loss of $2,338,000 in Fiscal 2001.
The Fiscal 2002 results included a $1,096,000 favorable adjustment recorded in
July 2001 to correct cumulative net gains pertaining to the manner in which the
Company accounted for this equity investment in Fiscal 2001 and Fiscal 2000. The
Company determined that this cumulative adjustment was not significant enough to
warrant a restatement for those periods. Miscellaneous income (expense) changed
from an expense of $124,000 in 2001 to income of $320,000 in 2002, primarily as
a result of unrealized gains on foreign currency transactions due mainly to the
strengthening of the U.K. pounds sterling relative to the U.S. dollar.
Net Losses. The consolidated net loss for the year ended June 30, 2002 was
$26,136,000, or $2.11 per share. Excluding the $14,318,000 impairment charge for
long-lived assets, the consolidated net loss improved $5,444,000 from a loss of
$17,262,000, or $1.55 per share, for the year ended June 30, 2001 to a loss of
$11,818,000, or $0.95 per share, for the year ended June 30, 2002, primarily as
a result of the reasons described above.
Fiscal Year Ended June 30, 2001 Compared With the Fiscal Year Ended June 30,
2000
Revenues. Total revenues of the Company decreased $351,000 from
$24,514,000 for the year ended June 30, 2000 to $24,163,000 for the year ended
June 30, 2001. Primary battery sales increased $265,000 from $21,840,000 for the
year ended June 30, 2000 to $22,105,000 for the year ended June 30, 2001. The
increase in primary battery sales was primarily due to the introduction of new
cylindrical products in fiscal 2001 and an increase in 9-volt battery shipments
related to higher demand. These increases were offset by a decline in sales from
the UK subsidiary due to the delay in renewing a government contract.
Rechargeable battery sales increased $345,000 from $25,000 for the year ended
June 30, 2000 to $370,000 for the year ended June 30, 2001, mainly as a result
of the commercial launch of the Company's polymer batteries in June 2000 and
shipments of retail and custom-sized batteries. Technology contract revenues
decreased $961,000, from $2,649,000 to $1,688,000 due to the scheduled reduction
of certain nonrenewable government contracts. The Company expects revenues from
technology contracts to continue to decline in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $2,184,000 from
$25,512,000 for the year ended June 30, 2000 to $27,696,000 for the year ended
June 30, 2001. Cost of products sold as a percentage of revenue increased from
approximately 104% to 115% for the year ended June 30, 2001. Cost of primary
batteries sold decreased $1,990,000 from $23,084,000, or 106% of revenues, for
the year ended June 30, 2000 to $21,094,000, or 95% of revenues, for the year
ended June 30, 2001. The decrease in cost of primary batteries sold as a
percentage of revenues was principally the result of improvements in the
manufacturing process due to the implementation of lean manufacturing practices.
To date, lean manufacturing practices in the primary battery segment have
resulted in the reduction of inventory, quicker manufacturing throughput times
and improvements in operating efficiencies throughout the Company. In fiscal
2001, the improvements in gross margins in the primary segment were offset by
losses in the rechargeable segment. Rechargeable battery cost of products sold
increased $5,040,000 in fiscal 2001 due to the launch of commercial production
of polymer rechargeable batteries in June 2000, which resulted in initial
expenditures necessary to start production of the polymer cells,
6
including approximately $2,000,000 in additional depreciation for the year, as
equipment was placed in service. Prior to commencing production of polymer
cells, most of these costs, including engineering, were charged to research and
development. Technology contracts cost of sales decreased $866,000, or
approximately 36%, from $2,403,000 for the year ended June 30, 2000 to
$1,537,000 for the year ended June 30, 2001. Technology contracts cost of sales
as a percentage of revenue was consistent year over year.
Operating and Other Expenses. Operating and other expenses decreased
$1,258,000 from $12,691,000 for the year ended June 30, 2000 to $11,433,000 for
the year ended June 30, 2001. Operating and other expenses as a percentage of
revenue decreased from approximately 52% to 47% for the year ended June 30,
2001. Of the Company's operating and other expenses, research and development
expenses decreased $1,882,000, or 36% from $5,306,000 for the year ended June
30, 2000 to $3,424,000 for the year ended June 30, 2001. Research and
development expenses decreased due to the commercial launch of polymer
rechargeable in June 2000, which shifted costs to cost of sales. Selling,
general and administration expenses increased $624,000, approximately 8%, from
$7,385,000 for the year ended June 30, 2000 to $8,009,000 for the year ended
June 30, 2001. Selling and marketing expenses increased as a result of new sales
people added to significantly enhance the Company's overall market coverage.
Other Income (Expense). Net interest income decreased $743,000 from
$909,000 for the year ended June 30, 2000 to $166,000 for the year ended June
30, 2001. The decrease in interest income is the result of lower average
balances on cash and investment securities which were used for operations. The
equity loss of $2,338,000 in fiscal 2001 and $818,000 in fiscal 2000 resulted
from the Company's ownership interest in its venture in Taiwan. The increase in
the equity loss includes compensation expense related to a stock distribution to
UTI employees totaling $2,500,000. The Company recognized approximately $900,000
equity loss for the transaction representing its share of the total UTI expense.
The gain on sale of securities of $3,147,000 in fiscal 2000 resulted from the
sale of the Company's investment in Intermagnetics General Corporation common
shares. No similar sale of securities occurred in 2001.
Net Losses. Net losses increased $7,020,000, or approximately 69%, from
$10,242,000, or $0.94 per share, for the year ended June 30, 2000 to
$17,262,000, or $1.55 per share, for the year ended June 30, 2001, primarily as
a result of the reasons described above.
Liquidity and Capital Resources
As of June 30, 2002, cash equivalents and available for sale securities
totaled $2,018,000, excluding restricted cash of $201,000. During the year ended
June 30, 2002, the Company used $8,199,000 of cash in operating activities as
compared to $10,406,000 for the year ended June 30, 2001. Cash used in
operations in 2002 was mainly a result of the Company's reported net loss, net
of non-cash items such as depreciation and impairment charges. Also during 2002,
accounts receivable rose $2,680,000 due to higher shipments made at the end of
fiscal 2002. Compared with 2001, the $2,207,000 improvement in cash used in
operations was primarily a result of decreasing net losses net of non-cash
expenses, offset in part by higher cash usage attributable to changes in working
capital related to higher volumes of business. In the year ended June 30, 2002,
the Company used $2,330,000 to purchase plant, property and equipment, which was
offset by proceeds from a sale leaseback of $995,000. Of the $2,330,000 of
equipment purchases, $1,884,000 related to the acquisition of machinery and
equipment for the Company's primary battery operations, $333,000 related to
rechargeable battery machinery and equipment and the balance was substantially
for facilities upgrades.
Months cost of sales in inventory at June 30, 2002 was 1.9 months as
compared to 2.6 months at June 30, 2001. This metric is indicative of the
Company's continuing focus to improve purchasing procedures and inventory
controls. The Company's Days Sales Outstanding (DSOs) was an average of 57 days
for 2002, compared with an average of 55 days for 2001. This modest slowdown in
collections is mainly attributable to increased business with non-U.S. customers
who typically take longer to pay than the U.S. customers.
At June 30, 2002, the Company had a capital lease obligation outstanding
of $118,000 for the Company's Newark, New York offices and manufacturing
facilities. In addition, the Company had a capital lease on computer equipment,
which had an outstanding balance of $65,000 at June 30, 2002.
As of June 30, 2002, the Company had made commitments to purchase
approximately $171,000 of production machinery and equipment.
In June 2000, the Company entered into a 3-year, $20,000,000 secured
credit facility with a lending institution. The financing agreement consisted of
an initial $12,000,000 term loan component and a revolving credit facility
component for an initial $8,000,000 based on eligible net accounts receivable
(as defined) and eligible net inventory (as defined). The amount available under
the term loan component amortizes over time. Principal and interest are paid
monthly on
7
outstanding amounts borrowed. Initially, $4,000,000 was borrowed under the term
loan component in June 2000, and this amount is being repaid over a five-year
period. Debt issue costs amounting to $198,000 were incurred in connection with
the initiation of the agreement and are being amortized over the term of the
loan.
In December 2000 and June 2001, the Company and its commercial lender
agreed to revise downward the adjusted net worth covenant to better reflect the
Company's equity position at that particular time. In October 2001, this lending
institution informed the Company that its borrowing availability under its
$20,000,000 credit facility had been effectively reduced to zero as a result of
a recent appraisal of its fixed assets. In February 2002, the Company and its
primary lending institution amended the credit facility. The amended facility
was reduced to a total of $15,000,000, mainly due to the reduction in the
appraised valuation of fixed assets that limited the borrowing capacity under
the term loan component, as well as to minimize the cost of unused line fees.
Certain definitions were also revised which increased the Company's available
borrowing base. In addition, the minimum net worth covenant was effectively
reduced to approximately $19,200,000 after adjustments for fixed asset
impairment charges. At June 30, 2002, the Company was in compliance with this
covenant. The term loan component was revised to an initial $2,733,000 based on
the valuation of the Company's fixed assets (of which $2,468,000 was outstanding
on the term loan at June 30, 2002). The principal associated with the term loan
is continuing to be repaid over a 5-year amortization period from the initial
date of the credit facility in June 2000. The revolving credit component of the
overall credit facility comprises the remainder of the total potential borrowing
capacity. There was no balance outstanding on the revolving credit facility as
of June 30, 2002. If the credit facility, which expires in June 2003, is not
extended by agreement of both the Company and the lending institution, the
remaining principal under the term loan, and any amounts outstanding under the
revolving credit facility, would become due at that time. Therefore, the Company
has reflected its debt associated with this facility as a short-term liability
on the Consolidated Balance Sheet. If the Company is unsuccessful in
renegotiating this credit facility or is unable to refinance this debt with
another lending institution, this could have a material adverse effect on the
Company's business and financial position.
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company. At June 30, 2002, the rate was 5.75%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The total
amount available under the term loan component is reduced by outstanding letters
of credit. The Company had $3,800,000 outstanding on a letter of credit as of
June 30, 2002, supporting the Company's $4,000,000 equipment lease. The
Company's additional borrowing capacity under the revolver component of the
credit facility as of June 30, 2002 was approximately $1,000,000.
In March 2001, the Company initiated a $2,000,000 lease line of credit
with a third party leasing agency. Under this arrangement, the Company had
various options to acquire manufacturing equipment, including sales / leaseback
transactions and operating leases. In October 2001, the Company expanded its
leasing arrangement with a third party leasing agency. The revision increased
the amount of the lease line from $2,000,000 to $4,000,000. The increase in the
line was used to fund capital expansion plans for manufacturing equipment that
has allowed increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's quarterly
lease payment is approximately $226,000. In conjunction with this lease, the
Company is required to maintain a $3,800,000 letter of credit. The letter of
credit was issued by the Company's primary lending institution, which diminishes
the Company's overall borrowing availability under the revolver component of the
overall credit facility. The Company is working to see if it can find
alternatives to collateralize this letter of credit in order to alleviate this
restriction. There can be no assurance that the Company will be successful in
this pursuit.
While the Company is optimistic about its long-term future prospects and
growth potential, the timing aspect of near-term revenue and profitability is
unclear. The Company's future liquidity depends on its ability to successfully
generate positive cash flows from operations and to achieve operational savings.
At this time based on the current financial outlook, it appears that the Company
may not generate the revenues necessary to allow it to continue to meet the
current net worth covenant of the credit facility. To date, the Company and its
lending institution have maintained a good relationship, and thus the Company is
optimistic that it will be able to negotiate a further revision of the net worth
covenant to better reflect the Company's current situation. There can be no
assurance, however, that the Company will be successful in its endeavor to do
so, and therefore, this situation could have a material adverse effect on the
Company's financial position.
During the fiscal year ended June 30, 2002, the Company raised capital
through two private equity transactions. First, in July 2001, the Company
completed a $6,800,000 private placement of 1,090,000 shares of its common stock
at $6.25 per share. In conjunction with the offering, warrants to acquire up to
109,000 shares of common stock were granted. The exercise price of the warrants
is $6.25 per share and the warrants have a five-year term. The second
transaction occurred in April 2002, when the Company closed on a $3,000,000
private placement consisting of common equity and a $600,000 convertible note.
Initially, 801,333 shares were issued. The note, which was issued to one of the
Company's directors, will
8
convert automatically into an additional 200,000 shares if the Company's
shareholders vote to approve the conversion of the note into common shares at
the Company's Annual Meeting in December 2002. If shareholder approval is not
obtained, the Company is obligated to repay the note on December 31, 2002, with
accrued interest at 10% per year. All shares will be issued at $3.00 per share.
The Company also is continuing to explore other sources of capital,
including utilizing its unleveraged assets as collateral for additional
borrowing capacity, selling assets that are not core to the Company's long-term
strategic initiatives, and raising equity through a private or public offering.
Although the Company is confident that it will be successful in arranging
adequate financing, there can be no assurance that the Company will have
sufficient cash flows to meet its working capital and capital expenditure
requirements during the course of fiscal 2003. Therefore, this could have a
material adverse effect on the Company's business, financial position and
results of operations.
As described in Part I, Item 3, "Legal Proceedings", the Company is
involved in certain environmental matters with respect to its facility in
Newark, New York. Although the Company has reserved for expenses related to
this, there can be no assurance that this will be the maximum amount. The
ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Outlook
Looking ahead for the full fiscal year of 2003, the Company is optimistic
about its sales prospects and the status of the manufacturing operations. At
this time, the Company expects to achieve revenue growth in a range comparable
to the 35% growth rate it achieved during fiscal 2002. The Company is projecting
growth in virtually all major product areas within its business - 9-volt,
cylindrical and rechargeable. The growth in each of the quarters, however, is
subject to significant fluctuations as the timing of customer orders is not
easily predictable. In particular, 9-volt revenues are dependent upon continued
demand from the Company's customers, some of which are dependent upon retail
sell-through. Similarly, revenues from sales of cylindrical products, primarily
to military customers, are dependent upon a variety of factors, including the
timing of the battery solicitation process within the military, the Company's
ability to successfully win contract awards, successful qualification of the
Company's products in the applicable military applications, and the timing of
order releases against such contracts. Some of these factors are outside of the
Company's direct control.
For instance, in June 2002, the Company was awarded the top award, 60%, of
the U.S. Army's Next Gen II 5-year procurement of Small Cylindrical Batteries.
Orders on this contract, though, have yet to begin, and it is difficult to
determine when such orders may start. In July 2002, the Company also submitted a
proposal on the Large Cylindrical Battery procurement under the Next Gen II
procurement. The Large Rectangular Battery solicitation for bids has yet to be
issued by the U.S. Army. It is difficult to determine at this time when the U.S.
Army will issue the solicitations or make any award decisions. While the Company
is optimistic about its chances of winning a substantial portion of the
contracts with this program, the ultimate outcome is uncertain. This
solicitation process is significantly behind the original schedule mainly as a
result of the U.S. government's diversion relating to the terrorist attacks on
September 11, 2001. A significant portion of the Company's growth projections is
dependent upon its success and participation in this Next Gen II program.
The Company believes that quarterly revenues of approximately $9,000,000
to $9,500,000 will allow it to achieve operating cash breakeven, depending on
the Company's overall product mix. The Company also believes that quarterly
revenues in the range of $10,500,000 should allow the Company to be able to
report a profit. While the Company has been able to significantly reduce costs
during fiscal 2002, it still maintains a fairly substantial fixed cost
infrastructure to support its overall operations. Increasing volumes of sales
and production will generate very favorable returns to scale, but similarly,
decreasing volumes will result in the opposite effect.
In June 2002, the Company reported a $14,318,000 impairment charge. This
impairment charge related to a writedown of long-lived assets in the Company's
rechargeable production operations, reflecting a change in the Company's
strategy. Changes in external economic conditions culminated in June 2002,
reflecting a slowdown in the mobile electronics marketplace and a realization
that near-term business opportunities utilizing the high volume rechargeable
9
production equipment had dissipated. These changes caused the Company to shift
away from high volume polymer rechargeable battery production to higher value,
lower volume opportunities. The Company's redefined strategy eliminates the need
for its high volume production line that had been built mainly to manufacture
Nokia cell phone replacement batteries. The new strategy is a three-pronged
approach. First, the Company will manufacture in-house for the higher value,
lower volume polymer rechargeable opportunities. Second, the Company will
utilize its affiliate in Taiwan, Ultralife Taiwan, Inc., as a source for both
polymer and liquid lithium cells. Third, the Company will look to other
rechargeable cell manufacturers as sources for cells that the Company can then
assemble into completed battery packs. The Company is optimistic that this
broadened strategy can be a successful, although modest, aspect of its growth
for fiscal 2003.
As a result of the cost savings actions taken during fiscal 2002 that
significantly impacted the Rechargeable segment, and the decline of development
efforts related to new cylindrical batteries for military applications as those
products move into anticipated volume production, the Company expects that its
costs related to research and development will decline substantially in fiscal
2003 when compared with fiscal 2002.
The Company expects that spending for capital projects in fiscal 2003 will
be relatively modest. The Company carefully evaluates such projects and will
only make capital investments when necessary and when there is typically a very
quick payback. Some of the capital equipment acquisitions during the upcoming
fiscal year will be financed by the capital equipment grant/loan the Company
recently finalized.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company will adopt SFAS No. 143 in the fiscal year beginning July
1, 2002 and is currently evaluating the effect, if any, on the Company's
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principle Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will adopt SFAS No. 144 in the fiscal year beginning
July 1, 2002. The Company does not believe adoption of this pronouncement will
have a material adverse effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. The Company will adopt SFAS No. 146 in the fiscal year
beginning July 1, 2002. The Company does not believe the adoption of this
pronouncement will have a material adverse effect on its financial statements.
Risk Factors
Dependence on Continued Demand for the Company's Existing Products
A substantial portion of the Company's business depends on the Continued
demand for products sold by OEMs using the Company's batteries. Therefore, the
Company's success is substantially dependent upon the success of the OEMs'
products in the marketplace. The Company is subject to many risks beyond its
control that influence the success or failure of a particular product
manufactured by an OEM, including: competition faced by the OEM in its
particular industry, market acceptance of the OEM's product, the engineering,
sales, marketing and management capabilities of the OEM, technical challenges
unrelated to the Company's technology or products faced by the OEM in developing
its products, and the financial and other resources of the OEM.
10
For instance, in fiscal 2002, 59% of the Company's revenues were comprised
of sales of its 9-volt batteries, and of this, approximately 30% pertained to
sales to smoke alarm OEMs in the U.S. If the retail demand for long-life smoke
detectors decreases significantly, this could have a material adverse effect on
the Company's business, financial condition and results of operations.
Similarly, in fiscal 2002, 19% of the Company's revenues was comprised of
sales of cylindrical batteries, and of this, approximately 62% pertained to
sales made directly or indirectly to the U.S. military. If the demand for
cylindrical batteries from the U.S. military were to decrease significantly,
this could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of the Company's Rechargeable Battery Business
Although the Company is in production of certain rechargeable cells and
batteries, it has not achieved wide market acceptance. The Company cannot assure
that volume acceptance of its rechargeable products will occur due to the highly
competitive nature of the business. There are many new company and technology
entrants into the marketplace and the Company must continually reassess the
market segments in which its products can be successful and seek to engage
customers in these segments who will adopt the Company's products for use in
their products. In addition, these companies must be successful with their
products in their markets for the Company to gain increased business. Increased
competition, failure to gain customer acceptance of products or failure of the
Company's customers in their markets could have a further adverse affect on the
Company's rechargeable battery business.
Risks Relating to Growth and Expansion
Rapid growth of the Company's battery business could significantly strain
management, operations and technical resources. If the Company is successful in
obtaining rapid market growth of its batteries, the Company will be required to
deliver large volumes of quality products to customers on a timely basis at a
reasonable cost to those customers. For example, significantly large orders from
the U.S. military for the Company's cylindrical products may strain the current
capacity capabilities of the Company and would require time to install
additional equipment and build a sufficient support infrastructure. The Company
cannot assure, however, that business will rapidly grow or that its efforts to
expand manufacturing and quality control activities will be successful or that
the Company will be able to satisfy commercial scale production requirements on
a timely and cost-effective basis. The Company will also be required to continue
to improve its operations, management and financial systems and controls. The
failure to manage growth effectively could have an adverse effect on business,
financial condition and results of operations.
Dependence on U.S. Military Procurement of Batteries
The Company will continue to develop both primary and rechargeable battery
products to meet the needs of the U.S. military forces. The Company believes it
has a high probability for success in solicitations for these batteries. Any
delay of solicitations by, or failure of, the U.S. government to purchase
batteries manufactured by the Company could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Related to Competition and Technological Obsolescence
The Company also competes with large and small manufacturers of alkaline,
carbon-zinc, seawater, high rate and primary batteries as well as other
manufacturers of lithium batteries. The Company cannot assure that it will
successfully compete with these manufacturers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and
other resources.
The market for the Company's products is characterized by changing
technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Although the Company believes that its
batteries, particularly the 9-volt and advanced rechargeable batteries, are
comprised of state-of-the-art technology, there can be no assurance that
competitors will not develop technologies or products that would render the
Company's technology and products obsolete or less marketable.
Primary Batteries - The primary (non-rechargeable) battery industry is
characterized by intense competition with a number of companies offering or
seeking to develop products similar to the Company's. The Company is subject to
competition from manufacturers of primary batteries, such as carbon-zinc,
alkaline and lithium batteries in various configurations, including 9-volt, AAA,
AA, C, D, 2/3 A and other cell sizes. Manufacturers of primary batteries include
The Gillette Company (Duracell), Energizer Holdings, Inc., Rayovac Corp., Sanyo
Electric Co. Ltd., Sony Corp., and
11
Matsushita Electric Industrial Co., Ltd. (Panasonic). Manufacturers of specialty
lithium batteries include Saft, Eagle Picher Industries and Friwo Silberkraft
GmbH.
Many of these companies have substantially greater resources than the
Company, and some have the capacity and volume of business to be able to produce
their products more efficiently than the Company at the present time. In
addition, these companies are developing batteries using a variety of battery
technologies and chemistries that are expected to compete with the Company's
technology. If these companies successfully market their batteries before the
introduction of the Company's products, there could be a material adverse effect
on its business, financial condition and results of operations.
Rechargeable Batteries - The rechargeable battery industry is also
characterized by intense competition with a large number of companies offering
or seeking to develop technology and products similar to the Company's. The
Company is subject to competition from manufacturers of traditional rechargeable
batteries, such as nickel-cadmium batteries, from manufacturers of rechargeable
batteries of more recent technologies, such as nickel-metal hydride, lithium ion
liquid electrolyte and lithium polymer batteries, as well as from companies
engaged in the development of batteries incorporating new technologies.
Manufacturers of nickel-cadmium and/or nickel-metal hydride batteries include
Sanyo Electric Co. Ltd., Sony Corp., Toshiba Corp., Saft and Matsushita Electric
Industrial Co., Ltd. (Panasonic), among others. Manufacturers of lithium ion
liquid electrolyte batteries currently include Saft-Soc des ACC, Sony Corp.,
Toshiba Corp., Matsushita Electric Industrial Co., Ltd., Sanyo Electric Co.
Ltd., Sony Corp., E-One Moli Energy Ltd., BYD Co. Ltd., Samsung SDI Co., Ltd.,
Shenzhen B&K Electronic Co. Ltd., and Ultralife Taiwan, Inc., among others.
Manufacturers of lithium polymer batteries currently include Valence Technology,
Inc., Sony Corp., Amperex Technology Ltd., Danionics A/S, Finecell Co. Ltd., LG
Chemical, Ltd., SKC, Samsung SDI Co., Ltd., Ultralife Taiwan, Inc., and Kokam
Engineering Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, including liquid electrolyte lithium and solid
electrolyte lithium batteries, which are expected to compete with the Company's
technology. Other companies undertaking research and development activities of
solid-polymer batteries have already developed prototypes and are constructing
commercial scale production facilities. If these companies successfully market
their batteries before the introduction of the Company's products, there could
be a material adverse effect on its business, financial condition and results of
operations.
Dependence on Key Personnel
Because of the specialized, technical nature of the business, the Company
is highly dependent on certain members of management, marketing, engineering and
technical staff. The loss of these services or these members, could have a
material adverse effect on the business, financial condition and results of
operations. In addition to developing manufacturing capacity to produce high
volumes of our advanced rechargeable batteries, the Company must attract,
recruit and retain a sizeable workforce of technically competent employees. The
Company's ability to pursue effectively its business strategy will depend upon,
among other factors, the successful recruitment and retention of additional
highly skilled and experienced managerial, marketing, engineering and technical
personnel. The Company cannot assure that it will be able to retain or recruit
this type of personnel.
Safety Risks; Demands of Environmental and Other Regulatory Compliance
Due to the high energy density inherent in lithium batteries, the
Company's batteries can pose safety certain risks, including the risk of fire.
Although the Company incorporates safety procedures in research, development and
manufacturing processes that are designed to minimize safety risks, the Company
cannot assure that accidents will not occur. Although the Company currently
carries insurance policies which cover loss of the plant and machinery,
leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may
result in significant production delays or claims for damages resulting from
injuries. These types of losses could have a material adverse effect on the
business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which it has sent waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers which could have a material adverse effect on business, financial
condition and
12
results of operations. In addition, the U.S. Department of Transportation and
certain foreign regulatory agencies that consider lithium to be a hazardous
material regulate the transportation of batteries which contain lithium metal.
The Company currently ships lithium batteries in accordance with regulations
established by the U.S. Department of Transportation. There can be no assurance
that additional or modified regulations relating to the manufacture,
transportation, storage, use and disposal of materials used to manufacture our
batteries or restricting disposal of batteries will not be imposed or how these
regulations will affect the Company or its customers.
In connection with our purchase/lease of the Newark, New York facility in
1998, a consulting firm performed a Phase I and II Environmental Site Assessment
which revealed the existence of contaminated soil and ground water around one of
the buildings. The Company retained an engineering firm which estimated that the
cost of remediation should be in the range of $230,000. This cost, however, is
merely an estimate and the cost may in fact be much higher. In February 1998,
the Company entered into an agreement with a third party which provides that the
Company and this third party will retain an environmental consulting firm to
conduct a supplemental Phase II investigation to verify the existence of the
contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse the Company for fifty percent of the cost of
correcting the environmental concern on the Newark property. The Company has
fully reserved for its portion of the estimated liability. Test sampling was
completed in the spring of 2001. The next step is for the Company to submit a
remediation plan for approval. Upon approval, the Company would have the
authority to remediate the property. Because this is a voluntary remediation,
there is no requirement for the Company to complete the project within any
specific time frame. The Company cannot assure that it will not face claims
resulting in substantial liability which would have a material adverse effect on
the business, financial condition and results of operations in the period in
which such claims are resolved.
Limited Sources of Supply
Certain materials used in products are available only from a single or a
limited number of suppliers. Additionally, the Company may elect to develop
relationships with a single or limited number of suppliers for materials that
are otherwise generally available. Although the Company believes that
alternative suppliers are available to supply materials that could replace
materials currently used and that, if necessary, the Company would be able to
redesign its products to make use of such alternatives, any interruption in the
supply from any supplier that serves as a sole source could delay product
shipments and have a material adverse effect on the business, financial
condition and results of operations. Although the Company has experienced
interruptions of product deliveries by sole source suppliers, these
interruptions have not had a material adverse effect on the business, financial
condition and results of operations. The Company cannot guarantee that it will
not experience a material interruption of product deliveries from sole source
suppliers.
Dependence on Proprietary Technologies
The Company's success depends more on the knowledge, ability, experience
and technological expertise of its employees than on the legal protection of
patents and other proprietary rights. The Company claims proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating
to products and manufacturing processes. The Company cannot guarantee the degree
of protection these various claims may or will afford, or that competitors will
not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technology. The Company protects its
proprietary rights in its products and operations through contractual
obligations, including nondisclosure agreements with certain employees,
customers, consultants and strategic partners. There can be no assurance as to
the degree of protection these contractual measures may or will afford. The
Company, however, has had patents issued and patent applications pending in the
U.S. and elsewhere. The Company cannot assure (i) that patents will be issued
from any pending applications, or that the claims allowed under any patents will
be sufficiently broad to protect its technology, (ii) that any patents issued to
the Company will not be challenged, invalidated or circumvented, or (iii) as to
the degree or adequacy of protection any patents or patent applications may or
will afford. If the Company is found to be infringing third party patents, there
can be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. The failure to obtain necessary licenses
could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development,
manufacture or sale of products.
Dependence on Technology Transfer Agreements
The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. There can be no
assurance that competitors will not develop, independently or through the use of
similar technology transfer agreements, rechargeable battery
13
technology or products that are substantially equivalent or superior to the
technologies and products currently under research and development.
Risks Related to China Joint Venture Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China
Battery"), purchased certain technology, equipment, training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company has been attempting to collect the balance
due under this contract. China Battery has indicated that it will not make these
payments until certain contractual issues have been resolved. Due to China
Battery's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed as well as its investment aggregating $805,000. Since
China Battery has not purchased technology, equipment, training or consulting
services to produce batteries other than 2/3 A lithium batteries, the Company
does not believe that China Battery has the capacity to become a competitor. The
Company does not anticipate that the manufacturing or marketing of 2/3 A lithium
batteries will be a substantial portion of its product line in the future.
However, in December 1997, China Battery sent a letter demanding reimbursement
of an unspecified amount of losses they have incurred plus a refund for certain
equipment that was sold to China Battery. The Company has attempted to initiate
negotiations to resolve the dispute. However, an agreement has not yet been
reached. Although China Battery has not taken any additional steps, there can be
no assurance that China Battery will not further pursue such a claim which, if
successful, could have a material adverse effect on the business, financial
condition and results of operations. The Company believes that such a claim is
without merit.
Ability to Insure Against Losses
Because certain of the Company's primary batteries are used in a variety
of security and safety products and medical devices, it may be exposed to
liability claims if such a battery fails to function properly. The Company
maintains what it believes to be sufficient liability insurance coverage to
protect against potential claims; however, there can be no assurance that the
liability insurance will continue to be available, or that any such liability
insurance would be sufficient to cover any claim or claims.
Quarterly Fluctuations in Operating Results and Possible Volatility of Stock
Price
The Company's future operating results may vary significantly from quarter
to quarter depending on factors such as the timing and shipment of significant
orders, new product introductions, delays in customer releases of purchase
orders, the mix of distribution channels through which the Company sells its
products and general economic conditions. Frequently, a substantial portion of
the Company's revenues in each quarter is generated from orders booked and
shipped during that quarter. As a result, revenue levels are difficult to
predict for each quarter. If revenue results are below expectations, operating
results will be adversely affected as the Company has a sizeable base of fixed
overhead costs that do not vary much with the changes in revenue. In addition to
the uncertainties of quarterly operating results, future announcements
concerning the Company or its competitors, including technological innovations
or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of its products, may cause the market price of
its Common Stock to fluctuate substantially for reasons which may be unrelated
to operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price of
our Common Stock.
Risks Related to Product Warranty Claims
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
14
Risks Related to Company's Ability to Finance Ongoing Operations and Projected
Growth
While the Company believes that it revenue growth projections and its
ongoing cost controls will allow it to generate cash and achieve profitability
in the foreseeable future, there is no assurance as to when or if the Company
will be able to achieve its projections. The Company's future cash flows from
operations, combined with its accessibility to cash and credit, may not be
sufficient to allow the Company to finance ongoing operations or to make
required investments for future growth. The Company may need to seek additional
credit or access capital markets for additional funds. There is no assurance
that the Company would be successful in this regard.
Risks Related to Maintaining Debt Obligations
The Company has certain debt covenants that must be maintained, most
notably a requirement with its primary lending institution to meet certain
levels of net worth. There is no assurance that the Company will be able to
continue to meet these debt covenants in the future. If the Company defaults on
any of its debt covenants and it is unable to renegotiate credit terms in order
to comply with such covenants, this could have a material adverse effect on the
business, financial condition and results of operations.
In June 2003, the Company's credit facility with its primary lending
institution is scheduled to expire. There is no assurance that the Company will
be successful in refinancing this credit facility.
Risks Related to Arthur Andersen LLP Being our Past Auditors
There may be no effective remedy against Arthur Andersen LLP in connection
with a material misstatement or omission in the financial statements audited by
them, due to the fact that Arthur Andersen LLP was convicted on June 15, 2002 of
federal obstruction of justice arising from the government's investigation of
Enron Corp.
Arthur Andersen LLP consented to the inclusion of their report in the
annual reports and registration statements we filed prior to June 30, 2002. Our
inability to include in future registration statements or reports financial
statements for one or more years audited by Arthur Andersen LLP or to obtain
Arthur Andersen LLP's consent to the inclusion of their report on our 2000 and
2001 financial statements may impede our access to the capital markets.
Should we seek to access the public capital markets, Securities and
Exchange Commission (SEC) rules will require us to include or incorporate by
reference in any prospectus three years of audited financial statements. Until
our audited financial statements for the fiscal year ending June 30, 2004 become
available, the SEC's current rules would require us to present audited financial
statements for one or more fiscal years audited by Arthur Andersen LLP. Prior to
that time, the SEC may cease accepting financial statements audited by Arthur
Andersen LLP, in which case we would be unable to access the public capital
markets unless PricewaterhouseCoopers LLP, our current independent accounting
firm, or another independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. In addition, as a result
of the departure of our former engagement team leaders, Arthur Andersen LLP is
no longer in a position to consent to the inclusion or incorporation by
reference in any prospectus of their report on our audited financial statements
for the years ended June 30, 2000 and June 30, 2001, and investors in any
subsequent offerings for which we use their audit report will not be entitled to
recovery against them under Section 11 of the Securities Act of 1933 for any
material misstatements or omissions in those financial statements. Consequently,
our financing costs may increase or we may miss attractive market opportunities
if either our annual financial statements for 2000 and 2001 audited by Arthur
Andersen LLP should cease to satisfy the SEC's requirements or those statements
are used in a prospectus but investors are not entitled to recovery against our
auditors for material misstatements or omissions in them.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) and (2) are
included in this Report beginning on page 17.
Page
Report of Independent Accountants,
PricewaterhouseCoopers LLP 17
Report of Independent Public Accountants,
Arthur Andersen LLP 18
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002
and 2001 19
Consolidated Statements of Operations for the years
ended June 30, 2002, 2001 and 2000 20
Consolidated Statements of Changes in Shareholders'
Equity and Accumulated Other Comprehensive Loss
for the years ended June 30, 2002, 2001 and 2000 21
Consolidated Statements of Cash Flows for the years
ended June 30, 2002, 2001 and 2000 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 41
16
Report of Independent Accountants
To the Board of Directors and Shareholders of
Ultralife Batteries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Ultralife Batteries, Inc. and its subsidiary at June 30, 2002, and the results
of their operations and their cash flows for the period ended June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of June 30, 2001 and for each of the two years in the period
ended June 30, 2001 were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated August 16, 2001
(except with respect to the matter discussed in Note 14, as to which the date is
December 12, 2001).
As discussed in Note 2 in the accompanying consolidated financial statements,
the Company has restated its financial statements for the year ended June 30,
2002 related to its equity investment in UTI.
Our original report dated August 2, 2002, contained a paragraph explaining that
the Company's recurring losses from operations raised substantial doubt about
the Company's ability to continue as a going concern. Subsequent to the date of
our original report, the Company's financial outlook has improved significantly.
Accordingly, our reissued report on the June 30, 2002 financial statements, as
presented herein, does not contain such a paragraph.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
August 2, 2002, except for Note 2 for which the
date is March 28, 2003
17
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP AND ARTHUR
ANDERSEN LLP DID NOT CONSENT TO THE USE OF THIS REPORT IN THIS FORM 10-K. (THE
REFERENCE TO NOTE 14 IN ARTHUR ANDERSEN'S DUAL DATING OF THEIR REPORT WAS A
REFERENCE TO A "RECENT DEVELOPMENTS" FOOTNOTE IN THE FINANCIAL STATEMENTS
INCLUDED IN THE FORM 10-K FOR WHICH THAT REPORT WAS ISSUED. SUCH FOOTNOTE IS NO
LONGER APPLICABLE AND HAS BEEN OMITTED FROM THIS FORM 10-K.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and accumulated other comprehensive income (loss) and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultralife Batteries, Inc.
and subsidiary as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
August 16, 2001 (except with respect to the matter discussed in Note 14, as to
which the date is December 12, 2001)
18
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
June 30,
ASSETS 2002 2001
--------- ---------
(As Restated;
See Note 2)
Current assets:
Cash and cash equivalents $ 2,016 $ 494
Restricted cash 201 540
Available-for-sale securities 2 2,573
Trade accounts receivable (less allowance for doubtful accounts
of $272 and $262 at June 30, 2002 and 2001, respectively) 6,049 3,379
Other receivables 0 736
Inventories 4,633 5,289
Prepaid expenses and other current assets 845 912
--------- ---------
Total current assets 13,746 13,923
Property, plant and equipment 16,134 32,997
Other assets:
Investment in affiliates 4,258 --
Technology license agreements (net of accumulated
amortization of $1,268 and $1,168 at June 30, 2002 and 2001,
respectively) 183 283
--------- ---------
4,441 283
--------- ---------
Total Assets $ 34,321 $ 47,203
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and capital lease obligations $ 3,148 $ 1,065
Accounts payable 3,091 3,755
Accrued compensation 255 427
Accrued vacation 439 259
Other current liabilities 1,863 1,596
--------- ---------
Total current liabilities 8,796 7,102
Long - term liabilities:
Debt and capital lease obligations 103 2,648
Commitments and contingencies (Note 6)
Shareholders' Equity :
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding -- --
Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 13,379,519 and 11,488,186 at June 30, 2002 and 2001, respectively 1,338 1,149
Capital in excess of par value 113,103 99,389
Accumulated other comprehensive income (loss) (856) (1,058)
Accumulated deficit (87,860) (61,724)
--------- ---------
25,725 37,756
Less -- Treasury stock, at cost -- 27,250 shares 303 303
--------- ---------
Total shareholders' equity 25,422 37,453
--------- ---------
Total Liabilities and Shareholders' Equity $ 34,321 $ 47,203
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
19
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
Year ended June 30,
2002 2001 2000
-------- -------- --------
(As Restated;
See Note 2)
Revenues $ 32,515 $ 24,163 $ 24,514
Cost of products sold 31,168 27,696 25,512
-------- -------- --------
Gross margin 1,347 (3,533) (998)
Operating and other expenses (income):
Research and development 4,291 3,424 5,306
Selling, general, and administrative 7,949 8,009 7,385
Impairment of Long Lived Assets 14,318 -- --
-------- -------- --------
Total operating and other expenses, net 26,558 11,433 12,691
Operating loss (25,211) (14,966) (13,689)
Other income (expense):
Interest income 91 702 958
Interest expense (382) (536) (49)
Equity loss in UTI (954) (2,338) (818)
Gain on sale of securities -- -- 3,147
Miscellaneous (expense) income 320 (124) 209
-------- -------- --------
Loss before income taxes (26,136) (17,262) (10,242)
Income taxes -- -- --
-------- -------- --------
Net loss $(26,136) $(17,262) $(10,242)
======== ======== ========
Net loss per share, basic and diluted $ (2.11) $ (1.55) $ (0.94)
======== ======== ========
Weighted average number of shares outstanding,
basic and diluted 12,407 11,141 10,904
======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
20
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------
(Dollars in Thousands)
Accumulated Other
Comprehensive Income (Loss)
---------------------------
Foreign
Common Stock Capital in Currency Unrealized
------------------------- excess of Translation Net Gain on Accumulated Treasury
Number of Shares Amount Par Value Adjustment Securities Deficit Stock Total
---------------- ------ --------- ---------- ---------- ------- ----- -----
Balance as of June 30, 1999 10,512,386 $ 1,051 $ 93,605 $ (101) $ 368 $ (34,220) $ (303) $ 60,400
Comprehensive loss:
Net loss (10,242) (10,242)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (590) (590)
Unrealized net loss on
securities (366) (366)
--------
Other comprehensive loss (956)
--------
Comprehensive loss (11,198)
--------
Shares issued to affiliate 700,000 70 3,168 3,238
Shares issued under stock
option plans and other
stock options 197,900 20 2,017 2,037
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2000 11,410,286 $ 1,141 $ 98,790 $ (691) $ 2 $(44,462) $ (303) $ 54,477
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (17,262) (17,262)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (368) (368)
Unrealized net loss on
securities (1) (1)
--------
Other comprehensive loss (369)
--------
Comprehensive loss (17,631)
--------
Shares issued under stock
option plans and other
stock options 77,900 8 599 607
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2001 11,488,186 $ 1,149 $ 99,389 $(1,059) $ 1 $(61,724) $ (303) $ 37,453
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (26,136) (26,136)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments 202 202
Unrealized net loss on
securities --
--------
Other comprehensive loss 202
--------
Comprehensive loss (25,934)
--------
Shares issued under private
stock offerings 1,891,333 189 8,502 8,691
UTI change in ownership
transactions and other 5,212 5,212
------------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2002 13,379,519 $ 1,338 $113,103 $ (857) $ 1 $(87,860) $ (303) $ 25,422
------------------------------------------------------------------------------------------------------------------------------------
* As Restated; See Note 2.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
21
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
--------------------------------------------------------------------------------
Year Ended June 30,
2002 2001 2000
-------- -------- --------
(As Restated;
See Note 2)
OPERATING ACTIVITIES
Net loss $(26,136) $(17,262) $(10,242)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 4,265 3,811 2,038
Gain on sale of securities -- -- (3,147)
Equity loss in UTI 954 2,338 818
Impairment to Long Lived Assets 14,318 -- --
Provision for loss on accounts receivable 10 (6) 42
Provision for inventory obsolescence (4) 12 410
Changes in operating assets and liabilities:
Accounts receivable (2,680) 83 56
Inventories 660 381 (1,074)
Prepaid expenses and other current assets 803 (471) 936
Accounts payable and other current liabilities (389) 708 (369)
-------- -------- --------
Net cash used in operating activities (8,199) (10,406) (10,532)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,330) (4,367) (2,946)
Proceeds from Sale Leaseback 995 -- (3,237)
Purchase of securities (8,424) (26,794) (70,934)
Sales of securities 11,334 22,905 46,064
Maturities of securities -- 13,702 37,504
-------- -------- --------
Net cash provided by investing activities 1,575 5,446 6,451
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 8,691 607 5,275
Proceeds from issuance of debt 600 -- 4,423
Principal payments under long-term debt and capital leases (1,062) (941) (91)
-------- -------- --------
Net cash (used in) provided by financing activities 8,229 (334) 9,607
-------- -------- --------
Effect of exchange rate changes on cash (83) 76 (590)
-------- -------- --------
Change in cash and cash equivalents 1,522 (5,218) 4,936
-------- -------- --------
Cash and cash equivalents at beginning of period 494 5,712 776
-------- -------- --------
Cash and cash equivalents at end of period $ 2,016 $ 494 $ 5,712
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 374 $ 538 $ 42
Cash paid for taxes $ -- $ -- $ --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
22
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a. Description of Business
Ultralife Batteries, Inc. (the "Company") develops, manufactures and
markets a wide range of standard and customized lithium primary
(non-rechargeable) and rechargeable batteries for use in a wide array of
applications. The Company believes that its technologies allow the Company to
offer batteries that are flexibly configured, lightweight and generally achieve
longer operating time than many competing batteries currently available. The
Company has focused on manufacturing a family of lithium primary batteries for
industrial, military and consumer applications, which it believes is one of the
most comprehensive lines of lithium manganese dioxide primary batteries
commercially available. The Company also supplies rechargeable and lithium ion
batteries for use in portable electronic applications.
For several years, the Company has incurred net operating losses primarily
as a result of funding research and development activities and, to a lesser
extent, incurring manufacturing and selling, general and administrative costs.
During fiscal 2002, the Company realigned its resources to bring costs more in
line with revenues, moving the Company closer to its targets of operating cash
breakeven and profitability. In addition, the Company refined its rechargeable
strategy to allow it to be more effective in the marketplace.
The Company believes that its current growth strategy will be successful
in the long-term. However, at the present time, the status of the Company's cash
and credit situation is of serious concern, and much of the Company's ability to
succeed in the near-term is dependent upon continued revenue growth and a
favorable product mix that will generate cash. If the Company is unsuccessful in
growing the business sufficiently in the near-term to maintain its viability, it
may need to find alternative sources of funds to allow it to continue to operate
in its current capacity, such as obtaining additional debt or equity or selling
assets. While the Company has been successful at raising funds in the past,
there is no assurance that it will be able to do so under the current
circumstances.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
accounts of the Company and its wholly owned subsidiary, Ultralife Batteries UK,
Ltd. ("Ultralife UK"). Intercompany accounts and transactions have been
eliminated in consolidation. Investments in entities in which the Company does
not have a controlling interest are accounted for using the equity method.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits with financial institutions and financial
instruments with original maturities of three months or less to be cash
equivalents.
e. Restricted Cash
The Company is required to maintain certain levels of escrowed cash in
order to comply with the terms of some of its debt and lease agreements. All
cash is retained for application against required escrows for debt obligations,
including certain letters of credit supporting lease obligations and any excess
borrowings from the Company's revolving credit facility. A portion of the
restricted cash pertaining to certain lease obligations is released periodically
as payments are made to reduce outstanding debt. With respect to the Company's
revolving credit
23
facility, the Company's primary lending institution will restrict cash if the
borrowing base (consisting of receivables and inventory) does not sufficiently
cover the outstanding borrowings on any particular day. As of June 30, 2002, the
Company had $201 in restricted cash with a certain lending institution primarily
for letters of credit supporting leases for a building and some computer
equipment. There was no cash restricted at June 30, 2002 pertaining to the
Company's revolving credit facility.
f. Available-for-Sale Securities
Management determines the appropriate classification of securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. Marketable equity securities and debt securities are classified as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses, net of tax, included as a component of accumulated
other comprehensive income.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
Realized gains and losses, and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are included in
the determination of net income (loss) as gains (losses) on sale of securities.
g. Inventories
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives
are as follows:
Buildings 20 years
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 3 - 7 years
Computer Hardware and Software 3 - 5 years
Leasehold Improvements Lease term
Depreciation and amortization are computed using the straight-line method.
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance costs are expensed when
incurred. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income (expense).
i. Long-Lived Assets and Intangibles
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable on an undiscounted cash flow basis. The statement also requires that
when an impairment has occurred, long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value, less cost to sell. The Company recorded an asset impairment of
$14,318 in connection with the fixed assets in its rechargeable business (see
Note 3). The Company did not record any impairments of long-lived assets in 2001
or 2000.
j. Technology License Agreements
Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired a technology license
agreement for an initial payment of $1,000 in May 1994. Royalties are payable at
a rate of 8% of the fair market value of each battery using the technology if
the battery is sold or otherwise put into use by the Company. The royalties can
be reduced under certain circumstances based on the terms of this agreement. The
agreement is amortized using the straight-line method over 10 years.
Amortization expense was $100, $100, and $100 in 2002, 2001, and 2000,
respectively.
24
k. Translation of Foreign Currency
The financial statements of the Company's foreign affiliates are
translated into U.S. dollar equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation".
Exchange gains or losses included in net loss for the years ended June 30, 2002,
2001 and 2000 were $320, $(155), and $97, respectively.
l. Revenue Recognition
Battery Sales - Revenues from the sale of batteries are recognized when
products are shipped. A provision is made at that time for warranty costs
expected to be incurred.
Technology Contracts - The Company recognizes revenue using the percentage
of completion method based on the relationship of costs incurred to date to the
total estimated cost to complete the contract. Elements of cost include direct
material, labor and overhead. If a loss on a contract is estimated, the full
amount of the loss is recognized immediately. The Company allocates costs to all
technology contracts based upon actual costs incurred including an allocation of
certain research and development costs incurred. Under certain research and
development arrangements with the U.S. Government, the Company may be required
to transfer technology developed to the U.S. Government. The Company has
accounted for the contracts in accordance with SFAS No. 68, "Research and
Development Arrangements". The Company, where appropriate, has recognized a
liability for amounts that may be repaid to third parties, or for revenue
deferred until expenditures have been incurred.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements". This guidance summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This staff bulletin had no significant impact on the Company's
revenue recognition policy or results of operations.
m. Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are
included in Cost of products sold. Amounts charged to customers pertaining to
these costs are reflected as a contra-expense in Cost of products sold.
n. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations. Such expenses amounted to $213, $335 and $64 for the years ended
June 30, 2002, 2001 and 2000, respectively.
o. Research and Development
Research and development expenditures are charged to operations as
incurred.
p. Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that these costs will be incurred and can be reasonably estimated.
q. Income Taxes
The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that may be in effect when the differences are
expected to reverse. The Company recorded no income tax benefit relating to the
net operating loss generated during the years ended June 30, 2002, 2001 and
2000, and as such, the loss was offset by a valuation allowance. A valuation
allowance is required when it is more likely than not that the recorded value of
a deferred tax asset will not be realized.
25
r. Concentration of Credit Risk
In fiscal 2002, three customers - Kidde Safety, the U.S. Army/CECOM, and
UNICOR - accounted for approximately $9.4 million of sales, which amounted to
approximately 29% of total revenues of the Company. Sales of 9-volt batteries to
Kidde Safety for use in long-life smoke detector applications amounted to $3,400
in 2002, $3,300 in 2001 and $2,900 in 2000. The 2002 sales to Kidde represented
more than 10% of the Company's consolidated revenues. Sales of BA-5368 batteries
to UNICOR for use in pilot survival radio applications amounted to $4,000 in
2002, $1,200 in 2001 and none in 2000. The 2002 sales to UNICOR also represented
more than 10% of the Company's consolidated revenues. Sales of BA-5372 batteries
to the U.S. Army/CECOM, which are used as backup batteries in the military's
communications radios, amounted to $2,000 in 2002, $1,200 in 2001 and $500 in
2000. The Company believes that the loss of any of these customers could have a
material adverse effect on the Company. The Company's relationship with these
customers is good.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the U.S. economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 19% of
total primary revenues in 2002. Additionally, a lower demand from the U.S.
Government could result in lower sales to government users.
The Company generally does not distribute its products to a concentrated
geographical area nor is there a significant concentration of credit risks
arising from individuals or groups of customers engaged in similar activities,
or who have similar economic characteristics. The Company does not normally
obtain collateral on trade accounts receivable.
s. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at June 30, 2002, 2001 and 2000. Fair values
have been determined through information obtained from market sources.
t. Earnings Per Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires the
reporting of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing reported earnings available to common shareholders by weighted
average shares outstanding for the period. Diluted EPS includes the dilutive
effect of securities calculated using the treasury stock method, if any. No
dilution for common share equivalents is included in fiscal 2002, 2001 and 2000
as the effects would be anti-dilutive. For all years reported, diluted earnings
per share were the equivalent of basic earnings per share due to the net loss.
There were 2,562,640, 2,278,800, and 2,202,380 outstanding stock options and
warrants as of June 30, 2002, 2001 and 2000, respectively, that were not
included in EPS for those periods as the effect would be anti-dilutive. (See
Note 8.)
u. Stock-Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," which requires compensation costs to
be recognized based on the difference, if any, between the quoted market price
of the stock on the grant date and the exercise price.
In March 2000, the FASB issued Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN No. 44 had no significant impact on the Company's financial
statements.
v. Segment Reporting
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has four operating segments. The basis for determining the Company's
operating segments is the manner in which financial information is used by the
Company in its operations.
26
Management operates and organizes itself according to business units that
comprise unique products and services across geographic locations.
w. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company will adopt SFAS No. 143 in the fiscal year beginning July
1, 2002 and is currently evaluating the effect, if any, on the Company's
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principle Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will adopt SFAS No. 144 in the fiscal year beginning
July 1, 2002. The Company does not believe adoption of this pronouncement will
have a material adverse effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. The Company will adopt SFAS No. 146 in the fiscal year
beginning July 1, 2002. The Company does not believe the adoption of this
pronouncement will have a material adverse effect on its financial statements.
x. Reclassifications
The Company has reclassified restricted cash and accrued vacation in the
2001 Consolidated Balance Sheet to conform to the current year presentation.
Note 2 - Restatement of Prior Period Financial Results
In assessing the partial unwind of the Company's investment in UTI on
October 23, 2002, the Company determined that it had incorrectly accounted for
certain activities with regard to its equity investment in UTI. Specifically,
the Company should have adjusted its proportionate share of the UTI net losses
to reflect the Company's carrying value of its UTI investment, and the Company
should have recorded certain increases to its investment in UTI arising from
change in interest transactions at the UTI level occurring in November 2000,
August 2001, and July 2002. The impact of not accounting for the negative basis
difference was that the Company's reported equity losses were overstated for the
Company's fiscal years ended June 30, 2002, 2001 and 2000. The primary impact of
the Company not recognizing the UTI change in interest transactions was that the
Company's UTI investment and additional paid-in capital captions were
understated, primarily in fiscal year 2002. Further, the Company's equity losses
for fiscal year 2002, even with the beneficial amortization effect noted above,
were understated, as the additional basis created by the change in interest
accounting that should have taken place would have created additional basis
sufficient to absorb additional equity losses which had not been recognized
previously (as the Company's equity investment had been reduced to zero).
27
The Company has determined that the impacts relating to fiscal years 2001
and 2000 were not material and therefore these previously issued financial
statements have not been restated. The financial statements for the fiscal year
ended June 30, 2002, have been restated as follows:
June 30, 2002
Financial Statement Caption As Previously Reported As Restated
--------------------------- ---------------------- -----------
Equity Loss in UTI $ -- $ (954)
Net Loss $(25,182) $(26,136)
Investment in Affiliates $ -- $ 4,258
Total Assets $ 30,063 $ 34,321
Stockholders' Equity $ 21,164 $ 25,422
Net Loss per Share $ (2.03) $ (2.11)
Note 3 - Investments
The following is a summary of available-for-sale securities:
Unrealized Estimated
June 30, 2002 Cost Gain Fair Value
------------- ---- ---------- ----------
Commercial Paper and other ................. $ 2 $ -- $ 2
====== ====== ======
Unrealized Estimated
June 30, 2001 Cost Gain Fair Value
------------- ---- ---------- ----------
Commercial Paper and other ................. $ 613 $ -- $ 613
U.S. corporate bonds ....................... 2,499 1 2,500
------ ------ ------
$3,112 $ 1 $3,113
====== ====== ======
The Company has instructed its investment fund managers to invest in
conservative, investment grade securities with average maturities of less than
three years. In fiscal 2000, the Company realized a gain on sales of securities
of $3,147 relating to the sale of portions of the Company's investment in
Intermagnetics General Corporation.
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties or the Company may sell the securities to meet their
ongoing and potential future cash needs.
The following is a summary of the cost, which approximates fair value, of
the Company's available-for-sale securities by contractual maturity:
June 30,
--------
At Cost: 2002 2001
------ ------
Less than one year $ 2 $1,112
More than one year -- 2,000
------ ------
Total $ 2 $3,112
====== ======
Note 4 - Impairment of Long-Lived Assets
In June 2002, the Company reported a $14,318 impairment charge. This
impairment charge related to a writedown of long-lived assets in the Company's
rechargeable production operations, reflecting a change in the Company's
strategy. Changes in external economic conditions culminated in June 2002,
reflecting a slowdown in the mobile electronics marketplace and a realization
that near-term business opportunities utilizing the high volume rechargeable
production equipment had dissipated. These changes caused the Company to shift
away from high volume polymer battery production to higher value, lower volume
opportunities. The Company's redefined strategy eliminates the need for its high
volume production line that had been built mainly to manufacture Nokia cell
phone replacement
28
batteries. The new strategy is a three-pronged approach. First, the Company will
manufacture in-house for the higher value, lower volume polymer rechargeable
opportunities. Second, the Company will utilize its affiliate in Taiwan,
Ultralife Taiwan, Inc., as a source for both polymer and liquid lithium cells.
And third, the Company will look to other rechargeable cell manufacturers as
sources for cells that the Company can then assemble into completed battery
packs.
The impairment charge was accounted for under Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires evaluating the assets'
carrying value based on future cash flows. As a result of the impairment of the
Company's fixed assets, depreciation charges will be reduced by approximately
$1,800 per year.
Note 5 - Supplemental Balance Sheet Information
The composition of inventories was:
June 30,
--------
2002 2001
---- ----
Raw materials ....................................... $ 2,680 $ 2,595
Work in process ..................................... 1,338 1,233
Finished products ................................... 1,022 1,872
------- -------
5,040 5,700
Less: Reserve for obsolescence ...................... 407 411
------- -------
$ 4,633 $ 5,289
======= =======
The composition of property, plant and equipment was:
Land ................................................ $ 123 $ 123
Buildings and Leasehold Improvements ................ 1,619 1,608
Machinery and Equipment ............................. 26,308 37,891
Furniture and Fixtures .............................. 312 291
Computer Hardware and Software ...................... 915 1,375
Construction in Progress ............................ 2,531 2,984
------- -------
31,808 44,272
Less: Accumulated Depreciation ..................... 15,674 11,275
------- -------
$16,134 $32,997
======= =======
Note 6 - Operating Leases
The Company leases various buildings, machinery, land, automobiles and
office equipment. Rental expenses for all operating leases were approximately
$801, $500 and $333 for the years ended June 30, 2002, 2001 and 2000,
respectively. Future minimum lease payments under non-cancelable operating
leases as of June 30, 2002 are as follows: 2003 - $1,172, 2004 - $1,168, 2005 -
$1,156, 2006 - $1,149, and thereafter - $1,984.
In March 2001, the Company entered into a $2,000 lease for certain new
manufacturing equipment with a third party leasing agency. Under this
arrangement, the Company had various options to acquire manufacturing equipment,
including sales / leaseback transactions and operating leases. In October 2001,
the Company expanded its leasing arrangement with this third party leasing
agency, increasing the amount of the lease line from $2,000 to $4,000. The
increase in the line was used to fund capital expansion plans for manufacturing
equipment that increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's lease
payment is $226 per quarter. In conjunction with this lease, the Company has a
letter of credit of $3,800 outstanding.
29
Note 7 - Debt and Capital Leases
New York Power Authority
In May 1999, the Company borrowed approximately $150 from New York Power
Authority (NYPA) that was used toward the construction of a solvent recovery
system. The annual interest rate on the loan is 6%. The loan was being repaid in
24 equal monthly payments and expired in July 2001.
Convertible Note to Director
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note will convert
automatically into 200,000 shares of the Company's common stock if the Company's
shareholders vote to approve the conversion of the note at the Company's Annual
Meeting in December 2002. If shareholder approval is not obtained, the Company
is obligated to repay the note on December 31, 2002, with accrued interest at
10% per year. All shares will be issued at $3.00 per share.
Credit Facility
In June 2000, the Company entered into a 3-year, $20,000 secured credit
facility with a lending institution. The financing agreement consisted of an
initial $12,000 term loan component and a revolving credit facility component
for an initial $8,000, based on eligible net accounts receivable (as defined)
and eligible net inventory (as defined). The amount available under the term
loan component amortizes over time. Principal and interest are paid monthly on
outstanding amounts borrowed. Debt issue costs amounting to $198 were incurred
in connection with the initiation of the term of the agreement and are being
amortized over the life of the agreement.
In October 2001, this lending institution informed the Company that its
borrowing availability under its $20,000 credit facility had been effectively
reduced to zero as a result of a recent appraisal of its fixed assets. In
February 2002, the Company and its primary lending institution amended the
credit facility. The amended facility was reduced to $15,000 mainly due to the
reduction in the valuation of fixed assets that limited the borrowing capacity
under the term loan component, as well as to minimize the cost of unused line
fees. The term loan component was revised to an initial $2,733 based on the
valuation of the Company's fixed assets (of which $2,468 was outstanding on the
term loan at June 30, 2002). The principal associated with the term loan is
being repaid over a 5-year amortization period. However, since the initial term
of the three-year credit facility agreement expires in June 2003, and it is
subject to extension by the concurrence of both the Company and the lending
institution, the remaining principal under the term loan is reflected as a
short-term liability as of June 30, 2002. It is the Company's intention at this
time to extend this agreement.
The revolving credit facility component comprises the remainder of the
total potential borrowing capacity under the overall credit facility. There was
no balance outstanding on the revolving credit facility as of June 30, 2002.
Certain definitions were revised with the February 2002 amendment, resulting in
an increase in the Company's available borrowing base. In addition, the minimum
net worth covenant was effectively reduced to approximately $19,200, after
adjustments for fixed asset impairment charges. At June 30, 2002, the Company is
in compliance with this covenant.
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company. At June 30, 2002, the rate was 5.75%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The total
amount available under the revolver component is reduced by outstanding letters
of credit. The Company had $3,800 outstanding on a letter of credit as of June
30, 2002, supporting the Company's $4,000 equipment lease. The Company's
additional borrowing capacity as of June 30, 2002 was approximately $1,000.
Capital Leases
The Company has two capital leases. The first is a capital lease
commitment for the Newark, New York facility which provides for payments
(including principal and interest) of $50 per year through December 2001 and $28
per year from December 2002 through 2007. Remaining interest on the lease is
approximately $51. At the end of this lease term, the Company is required to
purchase the facility for one dollar. The second capital lease is for computer
equipment. The lease expires in 2003 and requires monthly payments of
approximately $13.
30
Payment Schedule
Principal payments under the current amount outstanding of the long-term
debt and capital leases is as follows:
Credit Note to
Facility Director Capital Leases Total
-------- -------- ------------------- -----
Building Equipment
-------- ---------
Fiscal 2003 $2,468 $ 600 $ 15 $ 65 $3,148
2004 -- -- 16 -- 16
2005 -- -- 18 -- 18
2006 -- -- 20 -- 20
2007 and thereafter -- -- 49 -- 49
------ ------ ------ ------ ------
2,468 600 118 65 3,251
Less: Current portion 2,468 600 15 65 3,148
------ ------ ------ ------ ------
Long-term $ -- $ -- $ 103 $ -- $ 103
====== ====== ====== ====== ======
Letters of Credit
In conjunction with the purchase/lease agreement to acquire the Company's
Newark, New York facilities, the Company has a letter of credit in the amount of
$151, which expires in 2007. Additionally, the Company maintains a $50 letter of
credit for computer equipment, which expires in 2002. Lastly, in connection with
the $4,000 operating lease line that the Company initiated in March 2001, the
Company maintains a $3,800 letter of credit, which expires in July 2007. Each of
these letters of credit decline gradually at certain points over time as the
obligations they are associated with diminish.
Note 8 - Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first two years of the agreement, of which approximately
$5,600 has been paid. The Company has been attempting to collect the balance due
under this contract. China Battery has indicated that these payments will not be
made until certain contractual issues have been resolved. Due to the Chinese
partner's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed to the Company as well as the Company's investment. In
December 1997, China Battery sent to the Company a letter demanding
reimbursement of losses they have incurred plus a refund for certain equipment
that the Company sold to China Battery. Although China Battery has not taken any
additional steps, there can be no assurance that China Battery will not further
pursue such a claim, which, if successful, would have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes that such a claim is without merit.
b. Indemnity Agreement
The Company has an Indemnity Agreement with each member of its Board of
Directors and corporate officers. The agreement provides that the Company will
reimburse directors or officers for all expenses, to the fullest extent
permitted by law and the Company by-laws, arising out of their performance as
agents or trustees of the Company.
c. Purchase Commitments
As of June 30, 2002, the Company has made commitments to purchase
approximately $171 of production machinery and equipment.
31
d. Royalty Agreement
Technology underlying certain products of the Company are based in part as
non-exclusive transfer agreements. The Company made an original payment for such
technology and is required to make royalty and other payments in the future
which incorporate the licensed technology.
e. Government Grants/Loans
The Company has been able to obtain certain grants/loans from governments
agencies to assist with various funding needs.
In March 1998, the Company received a $500 grant from the Empire State
Development Corporation to fund certain equipment purchases. The grant was
contingent upon the Company achieving and maintaining minimum employment levels
for a period of five years. If annual levels of employment are not maintained, a
portion of the grant might become repayable. Through the first four years of the
grant period, the Company has met the requirements. The Company has recognized
revenue over the grant period ratably, dependent upon its status the employment
criteria. The remaining unamortized balance of $50 relating to the grant is
included in other current liabilities in the accompanying Consolidated Balance
Sheet as of June 30, 2002. It is possible that the Company may not meet the
employment criteria at the end of the fifth year, and thus the Company may be
required to repay one-fifth of the overall grant.
In November 2001, the Company received approval for a $750 grant/loan from
a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
the cost. In August 2002, the $750 small cities grant/loan documentation was
finalized and the Company was reimbursed approximately $400 for costs it had
incurred to date for equipment purchases applicable under this grant/loan. The
remaining $350 under this grant/loan will be reimbursed as the Company incurs
additional expenses and submits requests for reimbursement. Certain employment
levels are required to be met and maintained for a period of three years. If the
Company does not meet its employment quota, it may adversely affect
reimbursement requests, or the grant may be converted to a loan that will be
repaid over a five-year period. The Company will initially record the proceeds
from this grant/loan as a long-term liability, and will only amortize these
proceeds into income as the certainty of meeting the employment criteria become
definitive.
Also in November 2001, the Company received approval for a $300 grant/loan
from New York State. The grant/loan will fund capital expansion plans that the
Company expects will lead to job creation. In this case, the Company will be
reimbursed after the full completion of the particular project. This grant/loan
also required the Company to meet and maintain certain levels of employment.
However, since the Company does not meet the beginning employment threshold, it
is unlikely at this time that the Company will be able to gain access to these
funds.
f. Employment Contracts
The Company has employment contracts with certain of its key employees
with automatic one-year renewals unless terminated by either party. These
agreements provide for minimum salaries, as adjusted for annual increases, and
may include incentive bonuses based upon attainment of specified management
goals. In addition, these agreements provide for severance payments in the event
of specified termination of employment.
g. Legal Matters
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
32
asserting substantially the same claims as in the prior pleading. The Company
again moved to dismiss the complaint. By Opinion and Order dated September 28,
2000, the Court dismissed the action, this time with prejudice, thereby barring
plaintiffs from any further amendments to their complaint and directing that the
case be closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court
of Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in principle to
resolve the outstanding appeal and settle the case upon terms and conditions
which require submission to the District Court for approval. Upon application of
the parties and in order to facilitate the parties' pursuit of settlement, the
Court of Appeals issued an Order dated May 18, 2001 adjourning oral argument on
the appeal and remanding the case to the District Court for further proceedings
in connection with the proposed settlement.
Subsequent to the parties entering into the settlement agreement, the
Company's insurance carrier commenced liquidation proceedings. The insurance
carrier informed the Company that in light of the liquidation proceedings, it
would no longer fund the settlement. In addition, the value of the insurance
policy is in serious doubt. In April 2002, the Company and the insurance carrier
for the underwriters offered to proceed with the settlement. Plaintiff's counsel
has accepted the terms of the proposed settlement, amounting to $175 for the
Company, and the matter must now be approved by the Court and by the
shareholders comprising the class. Based on the terms of the proposed
settlement, the Company has established reserves for its share of the settlement
costs and associated expenses.
In the event settlement is not reached, the Company will continue to
defend the case vigorously. The amount of alleged damages, if any, cannot be
quantified, nor can the outcome of this litigation be predicted. Accordingly,
management cannot determine whether the ultimate resolution of this litigation
could have a material adverse effect on the Company's financial position and
results of operations.
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, the Company received an
environmental assessment, which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $230. However, there can be no assurance that
this will be the maximum cost. The Company entered into an agreement whereby a
third party has agreed to reimburse the Company for fifty percent of the costs
associated with this matter. The Company has fully reserved for its portion of
the estimated liability. Test sampling was completed in the spring of 2001. The
next step is for the Company to submit a remediation plan to the New York State
Department of Environmental Conservation for approval. Upon approval, the
Company would have the authority to remediate the property. Because this is a
voluntary remediation, there is no requirement for the Company to complete the
project within any specific time frame. The ultimate resolution of this matter
may have a significant adverse impact on the results of operations in the period
in which it is resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein it is
asserted that the Customer's product, which is powered by an Ultralife battery,
does not operate according to the Customer's product specification. No claim has
been filed against Ultralife. However, in the interest of fostering good
customer relations, in September 2002, Ultralife has agreed to lend technical
support to the Customer in defense of its claim. Additionally, Ultralife will
honor its warranty by replacing any batteries that may be determined to be
defective. In the event a claim is filed against Ultralife and it is ultimately
determined that Ultralife's product was defective, replacement of batteries to
this Customer or end-user may have a material adverse effect on the Company's
financial position and results of operations.
Note 9 - Shareholders' Equity
a. Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, with a par
value of $0.10 per share. At June 30, 2002, no preferred shares were issued or
outstanding.
b. Common Stock
In July 2001, the Company completed a $6,800 private placement of
1,090,000 shares of its common stock at $6.25 per share.
33
In April 2002, the Company issued 801,333 shares of its common stock at
$3.00 per share in a private placement offering. In conjunction with this
offering, another 200,000 shares will be issued in December 2002 subject to
shareholder approval of a convertible note with one of the Company's directors
(see Note 7).
In December 2000, the shareholders approved an increase in the number of
authorized shares of common stock from 20,000,000 to 40,000,000.
c. Stock Options
The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense for its stock-based compensation plans has been recognized
in the Company's Consolidated Statements of Operations. The Company has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation". If the Company had elected to recognize compensation expense for
all of the Company's stock-based compensation based on the fair value of the
options at grant date as prescribed by SFAS No.123, the Company's net loss would
have been $27,427, $19,597 and $12,333 for the years ended June 30, 2002, 2001
and 2000, compared with the reported losses of $26,136, $17,262 and $10,242,
respectively. Loss per share would have been $2.21, $1.75 and $1.13 in the years
ended June 30, 2002, 2001 and 2000, respectively, as compared to reported loss
per share of $2.11, $1.55 and $0.94, respectively. The effect of SFAS No. 123 in
the pro forma disclosures may not be indicative of future amounts.
For purposes of this disclosure, the fair value of each fixed option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in fiscal 2002,
2001, and 2000:
2002 2001 2000
-------------------------------------------------------------------------
Risk-free interest rate 3.6% 4.8% 6.4%
Volatility factor 75.8% 75.8% 74.1%
Weighted average expected life (years) 4 4 6
Weighted average fair value of options granted $2.13 $3.56 $5.48
The shareholders of the Company have approved four stock option plans that
permit the grant of options. In addition, the shareholders of the Company have
approved the grant of options outside of these plans. Under the 1991 stock
option plan, 100,000 shares of Common Stock were reserved for grant to key
employees and consultants of the Company. These options expired on September 13,
2001, at which date the plan terminated. All options granted under the 1991 plan
were Non-Qualified Stock Options ("NQSOs").
The shareholders of the Company have also approved a 1992 stock option
plan that is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 1,150,000 shares of Common Stock for grant
under the plan. During 1997, the Board of Directors approved an amendment to the
plan increasing the number of shares of Common Stock reserved by 500,000 to
1,650,000. Options granted under the 1992 plan are either Incentive Stock
Options ("ISOs") or NQSOs. Key employees are eligible to receive ISOs and NQSOs;
however, directors and consultants are eligible to receive only NQSOs. As of
June 30, 2002, there are 28,410 shares available for grant.
Effective March 1, 1995, the Company established the 1995 stock option
plan and granted the former Chief Executive Officer ("CEO") options to purchase
100,000 shares at $14.25 per share under this plan. Of these shares, 60,000
vested prior to his termination and subsequently expired on March 1, 2001. There
were no other grants under the 1995 stock option plan. In October 1992, the
Company granted, to the former CEO, options to purchase 225,000 shares of Common
Stock at $9.75 per share outside of any of the stock option plans. The options
vested through June 1997 and expire in October 2002.
Effective July 12, 1999, the Company granted the current CEO options to
purchase 500,000 shares of Common Stock at $5.19 per share outside of any of the
stock option plans. Of these, 50,000 options were exercisable on the grant date,
and the remaining options are exercisable in annual increments of 90,000 over a
five-year period commencing July 12, 2000 through July 12, 2004, and expire on
July 12, 2005.
Effective December 2000, the Company established the 2000 stock option
plan which is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 500,000 shares of Common Stock for grant
under the plan. Options granted under the 2000 plan are either ISOs or NQSOs.
Key employees are eligible to receive
34
ISOs and NQSOs; however, directors and consultants are eligible to receive only
NQSOs. As of June 30, 2002, there are 94,900 shares available for grant.
The following table summarizes data for the stock options issued by the
Company:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
of Shares Per Share Of Shares Per Share of Shares Per Share
--------- --------- --------- --------- --------- ---------
Shares under option at beginning of year ... 2,266,300 $7.95 2,189,880 $ 8.68 1,721,460 $10.16
Options granted ............................ 461,000 3.78 341,600 7.06 1,033,500 6.59
Options exercised .......................... -- -- (77,900) 7.77 (202,000) 10.22
Options canceled ........................... (286,160) 9.92 (187,280) 14.28 (363,080) 8.94
--------- ----- --------- ------ --------- ------
Shares under option at end of year ......... 2,441,140 $6.90 2,266,300 $ 7.95 2,189,880 $ 8.68
--------- ----- --------- ------ --------- ------
Options exercisable at end of year ......... 1,289,200 $8.13 675,480 $10.09 633,320 $10.49
The following table represents additional information about stock options
outstanding at June 30, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------- ----------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 2002 Life Exercise Price at June 30, 2002 Exercise Price
-------------------------------------------------------------------------------- ----------------------------------------
$3.15 - $5.13 500,400 5.17 $ 3.78 80,500 $ 4.33
$5.19 - $6.50 742,600 3.33 $ 5.45 340,320 $ 5.43
$6.55 - $9.00 639,050 3.19 $ 7.69 353,550 $ 7.89
$9.75 - $17.88 559,090 0.93 $10.71 514,830 $10.68
-------------------------------------------------------------------------------- ----------------------------------
$3.15 - $17.88 2,441,140 3.12 $6.90 1,289,200 $8.13
d. Warrants
In March 1998, the Company issued warrants to purchase 12,500 shares of
its common stock to the Empire State Development Corporation in connection with
a $500 grant. Proceeds of the grant were used to fund certain equipment
purchases and are contingent upon the Company achieving and maintaining minimum
employment levels. The warrants may be exercised through December 31, 2002 at an
exercise price equal to 60% of the average closing price for the 10 trading days
preceding the exercise date, but not less than the average closing price of the
Company's common stock during the 20 trading days prior to the grant.
In July 2001, the Company issued warrants to purchase 109,000 shares of
its common stock to H.C. Wainwright & Co., Inc. and other affiliated individuals
that participated as investment bankers in the $6,800 private placement of
1,090,000 shares of common stock that was completed at that time. The warrants
have an exercise price of $6.25 per share and the term of the warrants is five
years.
e. Reserved Shares
The Company has reserved 2,685,950 shares of common stock under the
various stock option plans and warrants as of June 30, 2002, and 2,588,200 and
2,266,225 as of June 30, 2001 and 2000, respectively.
35
Note 10 - Income Taxes (As Restated; See Note 2)
Foreign and domestic loss carryforwards totaling approximately $76,950 are
available to reduce future taxable income. Foreign loss carryforwards of $12,118
can be carried forward indefinitely. The domestic net operating loss
carryforward of $64,832 expires through 2022. If it is determined that a change
in ownership as defined under Internal Revenue Code Section 382 has occurred,
the net operating loss carryforward will be subject to an annual limitation.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The Company increased its
valuation allowance by approximately $9,856, $3,143 and $2,445 for the years
ended June 30, 2002, 2001 and 2000, respectively, to offset the deferred tax
assets based on the Company's estimates of its future earnings and the expected
timing of temporary difference reversals.
Significant components of the Company's deferred tax liabilities and
assets as of June 30 are as follows:
2002 2001
---- ----
Deferred tax liabilities:
Investments ..................................... $ 348 $ 1
Property, plant and equipment ................... 2,766 913
-------- --------
Total deferred tax liabilities ..................... 3,114 914
Deferred tax assets:
Impairment of long-lived assets ................. 4,868 --
Net operating loss carryforward ................. 25,678 18,560
Other ........................................... 526 456
-------- --------
Total deferred tax assets .......................... 31,072 19,016
Valuation allowance for deferred tax assets ........ (27,958) (18,102)
-------- --------
Net deferred tax assets ............................ 3,114 914
-------- --------
Net deferred tax assets / liabilities .............. $ -- $ --
There were no income taxes paid for the years ended June 30, 2002, 2001
and 2000. For financial reporting purposes, income (loss) from continuing
operations before income taxes included the following:
June 30,
2002 2001 2000
---- ---- ----
United States ................... $(23,848) $(13,999) $ (7,658)
Foreign ......................... (2,288) (3,263) (2,584)
-------- -------- --------
Total ........................... $(26,136) $(17,262) $(10,242)
There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at June 30, 2002.
The Company's effective tax benefit is lower than would be expected if the
statutory rate was applied to the pretax loss because the Company has recorded
an increase in the valuation allowance for deferred tax assets equal to the tax
benefit of the current year net operating loss carryforwards due to the
uncertainty of future operating results. Accordingly, the effective tax rate is
0.0% for each of the years ended June 30, 2002, 2001 and 2000.
Note 11 - 401(k) Plan
The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the
employees' contributions. Effective January 1, 2001, the Board of Directors
approved Company matching of employee contributions up to a maximum of 4% of the
employee's income. Prior to this, the maximum contribution for participants was
3%. For the years ended June 30, 2002, 2001 and 2000, the Company contributed
$162, $234 and $150, respectively. In January 2002, the employer match was
suspended in an effort to conserve cash.
36
Note 12 - Related Party Transactions
During 2000, the Company sold the majority of its investment in
Intermagnetics General Corporation (IGC) common stock and realized a gain on
sale of securities of $3,147. IGC was considered a related party since certain
directors of the Company served as officers or directors of IGC.
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note will convert
automatically into 200,000 shares of the Company's common stock if the Company's
shareholders vote to approve the conversion of the note at the Company's Annual
Meeting in December 2002. If shareholder approval is not obtained, the Company
is obligated to repay the note on December 31, 2002, with accrued interest at
10% per year. All shares will be issued at $3.00 per share.
Note 13 - Business Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company reports its results in four
operating segments: Primary Batteries, Rechargeable Batteries, Technology
Contracts and Corporate. The Primary Batteries segment includes 9-volt
batteries, cylindrical batteries and various specialty batteries. The
Rechargeable Batteries segment consists of the Company's polymer rechargeable
batteries. The Technology Contracts segment includes revenues and related costs
associated with various government and military development contracts. The
Corporate segment consists of all other items that do not specifically relate to
the three other segments and are not considered in the performance of the other
segments.
2002 (As Previously Reported)
-----------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
----------------------------------------------------------------------------
Revenues $ 31,334 $ 445 $ 736 $ -- $ 32,515
Segment contribution 3,276 (20,612) 73 (7,948) (25,211)
Interest income, net (291) (291)
Other income (expense), net 320 320
Income taxes -- --
--------
Net loss (25,182)
Long-lived assets 11,761 3,198 -- 1,358 16,317
Total assets 21,351 4,256 33 4,423 30,063
Capital expenditures 1,884 333 -- 113 2,330
Depreciation and amortization expense 1,425 2,312 -- 628 4,265
2002 (As Restated; See Note 2)
------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
----------------------------------------------------------------------------
Revenues $ 31,334 $ 445 $ 736 $ -- $ 32,515
Segment contribution 3,276 (20,612) 73 (7,948) (25,211)
Interest income, net (291) (291)
Other income (expense), net (634) (634)
Income taxes -- --
--------
Net loss (26,136)
Long-lived assets 11,761 3,198 -- 5,616 20,575
Total assets 21,351 4,256 33 8,681 34,321
Capital expenditures 1,884 333 -- 113 2,330
Depreciation and amortization expense 1,425 2,312 -- 628 4,265
37
2001
----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
----------------------------------------------------------------------------
Revenues $ 22,105 $ 370 $ 1,688 $ -- $ 24,163
Segment contribution 443 (7,551) 151 (8,009) (14,966)
Interest income, net 166 166
Other income (expense), net (2,462) (2,462)
Income taxes -- --
--------
Net loss (17,262)
Long-lived assets 11,628 19,490 280 1,882 33,280
Total assets 18,609 21,166 303 7,125 47,203
Capital expenditures 2,241 1,382 -- 744 4,367
Depreciation and amortization expense 1,159 2,153 1 498 3,811
2000
----
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
----------------------------------------------------------------------------
Revenues $ 21,840 $ 25 $ 2,649 $ -- $ 24,514
Segment contribution (1,244) (5,306) 246 (7,385) (13,689)
Interest income, net 909 909
Other income (expense), net 2,538 2,538
Income taxes -- --
--------
Net loss (10,242)
Long-lived assets 10,892 19,985 281 4,349 35,507
Total assets 19,171 20,632 493 24,164 64,460
Capital expenditures 1,377 1,012 -- 557 2,946
Depreciation and amortization expense 1,128 591 1 318 2,038
Geographical Information
------------------------
Revenues Long-Lived Assets
2002 2001 2000 2002 2000 2001
(As
Restated;
See Note 2)
-------------------------------------- ------------------------------------
United States $ 21,208 $ 15,715 $ 13,587 $ 16,605 $ 29,139 $ 30,685
United Kingdom 3,853 1,797 2,874 3,970 4,141 4,822
Hong Kong 3,330 3,347 3,211 -- -- --
Europe, excluding United Kingdom 2,518 1,572 2,812 -- -- --
Other 1,606 1,732 2,030 -- -- --
-------- -------- -------- -------- -------- --------
Total $ 32,515 $ 24,163 $ 24,514 $ 20,575 $ 33,280 $ 35,507
======== ======== ======== ======== ======== ========
Note 14 - Investment in Affiliate
In December 1998, the Company announced the formation of a venture with
PGT Energy Corporation (PGT), together with a group of investors, to produce
Ultralife's polymer rechargeable batteries in Taiwan. During fiscal 2000,
Ultralife provided the venture, named Ultralife Taiwan, Inc. (UTI), with its
proprietary technology and 700,000 shares of Ultralife Common Stock, in exchange
for approximately a 46% ownership interest. Ultralife holds half the seats on
UTI's board of directors. PGT and the group of investors funded UTI with $21,250
in cash and hold the remaining seats on the board.
Due to subsequent sales of UTI common stock to third parties to raise
additional capital, the Company's equity interest was reduced to approximately
33% as of June 30, 2002. As a result of these "change in interest" transactions,
the Company's share of UTI's underlying net assets actually increased, creating
gains on the transactions that were recorded as adjustments in additional paid
in capital on the balance sheet. These increases in additional paid in capital
amounted
38
to $5,212 in Fiscal 2002. (The Company was precluded from recognizing gains from
these "change in interest" transactions in its consolidated statement of income
because UTI was a development stage company.)
The Company accounts for its investment in UTI using the equity method of
accounting. The Company recorded equity losses in UTI in the Company's
consolidated statement of income of $954, $2,338, and $818 in Fiscal 2002, 2001
and 2000, respectively.
Summarized financial statement information for the unconsolidated venture
is as follows:
(unaudited)
Condensed Statements of Operations Year Ended June 30,
2002 2001 2000
------- ------- -------
Net revenue $ 101 $ -- $ --
Cost of Sales (1,573) -- --
Operating loss (8,360) (7,540) (1,897)
Net loss (8,784) (6,637) (1,778)
Condensed Balance Sheets June 30,
2002 2001
------- -------
Current assets $ 5,902 $11,577
Non-current assets 60,271 35,238
------- -------
$66,173 $46,815
======= =======
Current liabilities $12,372 $ 2,663
Non-current liabilities 16,260 6,362
Shareholders' equity 37,541 37,790
------- -------
$66,173 $46,815
======= =======
Note 15 - Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net
sales less cost of products sold), net loss and net loss per share, basic and
diluted, for each quarter during the past two years:
Quarter ended
-----------------------------------------------------------
Fiscal 2002 Sept. 30, Dec. 31, March 31, June 30, Full
2001 2001 2002 2002 Year
-------- -------- -------- -------- --------
Revenues $ 7,616 $ 7,459 $ 8,862 $ 8,578 $ 32,515
Gross margin (448) (212) 922 1,085 1,347
Net loss (As Previously Reported) (3,642) (3,420) (2,292) (15,828) (25,182)
Net loss (As Restated; See Note 2) (3,006) (3,831) (2,793) (16,506) (26,136)
Net loss per share, basic and
diluted (As Previously Reported) (0.30) (0.28) (0.19) (1.23) (2.03)
Net loss per share, basic and
diluted (As Restated; See Note 2) (0.25) (0.31) (0.23) (1.28) (2.11)
Quarter ended
------------------------------------------------------------
Fiscal 2001 Sept. 30, Dec. 31, March 31, June 30, Full
2000 2000 2001 2001 Year
-------- -------- -------- -------- --------
Revenues $ 6,851 $ 5,290 $ 5,817 $ 6,205 $ 24,163
Gross margin (452) (1,699) (731) (651) (3,533)
Net loss (3,104) (5,737) (3,921) (4,500) (17,262)
Net loss per share, basic and diluted (0.28) (0.51) (0.35) (0.40) (1.55)
39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements and schedules required by this Item 15 are
set forth in Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts See Item 15 (d)
(b) Reports on Form 8-K
On June 7, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that Arthur Lieberman, member of the Board of
Directors, tendered his resignation from the Board effective June 4, 2002,
citing business and personal demands on available time resources.
On July 24, 2002, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that the Company had dismissed its independent
public accountants, Arthur Andersen LLP ("Andersen"), and engaged
PricewaterhouseCoopers LLP ("PwC") as its new independent public accountants,
effective immediately, for the fiscal year ending June 30, 2002. This decision
was approved by the Company's Board of Directors, based on the recommendation of
its Audit Committee. The decision was based on interviews with large public
accounting firms and reflected the Audit Committee's judgment as to which firm
was best suited to deliver external audits to the Company. PwC replaces the
Company's previous audit firm, Andersen, who had been the Company's auditors
since 1996.
(c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit
Index Description of Document Incorporated By Reference to:
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
99 CEO and CFO Certifications Filed herewith
40
(d) Financial Statement Schedules.
The following financial statement schedules of the Registrant are filed
herewith:
Schedule II - Valuation and Qualifying Accounts
Additions
---------
Charged to
Charged to Other
June 30, 2001 Expense Accounts Deductions June 30, 2002
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 262 $ 30 $ 17 $ 37 $ 272
Inventory reserves 411 1,038 -- 1,042 407
Warranty reserves 253 222 -- 254 221
Deferred tax valuation allowance 18,102 9,856 -- -- 27,958
Additions
---------
Charged to
Charged to Other
June 30, 2000 Expense Accounts Deductions June 30, 2002
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 268 $ 11 $ -- $ 17 $ 262
Inventory reserves 399 825 -- 813 411
Warranty reserves 384 292 -- 423 253
Deferred tax valuation allowance 14,959 3,143 -- -- 18,102
Additions
---------
Charged to
Charged to Other
June 30, 1999 Expense Accounts Deductions June 30, 2002
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 429 $ 45 $ -- $ 206 $ 268
Inventory reserves 295 1,035 -- 931 399
Warranty reserves 169 300 -- 85 384
Deferred tax valuation allowance 12,514 2,445 -- -- 14,959
41
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: April 11, 2003 By: /s/ John D. Kavazanjian
-----------------------------------------
John D. Kavazanjian
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 11, 2003 /s/ John D. Kavazanjian
-----------------------------------------
John D. Kavazanjian
President, Chief Executive Officer
and Director
Date: April 11, 2003 /s/ Robert W. Fishback
-----------------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
Date: April 11, 2003 /s/ Joseph C. Abeles
-----------------------------------------
Joseph C. Abeles (Director)
Date: April 11, 2003 /s/ Joseph N. Barrella
-----------------------------------------
Joseph N. Barrella (Director)
Date:
-----------------------------------------
Patricia C. Barron (Director)
Date: April 11, 2003 /s/ Daniel W. Christman
-----------------------------------------
Daniel W. Christman (Director)
Date: April 11, 2003 /s/ Carl H. Rosner
-----------------------------------------
Carl H. Rosner (Director)
Date: April 11, 2003 /s/ Ranjit C. Singh
-----------------------------------------
Ranjit C. Singh (Director)
42
I, John D. Kavazanjian, certify that:
1. I have reviewed this annual report on Form 10-K of Ultralife Batteries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: April 11, 2003 /s/ John D. Kavazanjian
-----------------------------------
John D. Kavazanjian
President and Chief Executive Officer
I, Robert W. Fishback, certify that:
1. I have reviewed this annual report on Form 10-K of Ultralife Batteries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: April 11, 2003 /s/ Robert W. Fishback
-----------------------------------
Robert W. Fishback
Vice President of Finance and
Chief Financial Officer
43