SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
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or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
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ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
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(Address of principal executive offices)
(Zip Code)
(315) 332-7100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X... No.....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 12,652,269 shares outstanding as of
October 31, 2002.
1
Introductory Note:
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This Amendment No. 1 to Form 10-Q/A for Ultralife Batteries, Inc. for the period
ended September 28, 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-Q 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 1 herein.)
ULTRALIFE BATTERIES, INC.
INDEX
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 2002 and June 30, 2002 .............................. 3
Condensed Consolidated Statements of Operations -
Three months ended September 28, 2002 and September 30, 2001 ...... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 28, 2002 and September 30, 2001 ...... 5
Notes to Consolidated Financial Statements .... .................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 18
Signatures ......................................................... 19
CEO and CFO Certifications ......................................... 20
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
(unaudited)
September 28, June 30,
ASSETS 2002 2002
---- ----
(As Restated; See Note 2)
Current assets:
Cash and cash equivalents $ 929 $ 2,016
Restricted cash 201 201
Available-for-sale securities 2 2
Trade accounts receivable (less allowance for doubtful accounts
of $276 at September 28, 2002 and $272 at June 30, 2002) 5,147 6,049
Inventories 5,235 4,633
Prepaid expenses and other current assets 1,059 845
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Total current assets 12,573 13,746
----------- -----------
Property, plant and equipment 15,648 16,134
Other assets:
Investment in UTI 4,872 4,258
Technology license agreements (net of accumulated
amortization of $1,293 at September 28, 2002 and $1,268 at June 30, 2002) 158 183
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5,030 4,441
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Total Assets $ 33,251 $ 34,321
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and capital lease obligations $ 2,841 $ 3,148
Accounts payable 3,306 3,091
Accrued compensation 173 255
Accrued vacation 439 439
Other current liabilities 1,799 1,863
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Total current liabilities 8,558 8,796
Long-term liabilities:
Debt and capital lease obligations 103 103
Grant 395 0
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498 103
Commitments and Contingencies (Note 6)
Shareholders' equity :
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding - -
Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 13,379,519 at September 28, 2002 and 13,379,519 at June 30, 2002) 1,338 1,338
Capital in excess of par value 114,676 113,103
Accumulated other comprehensive loss (919) (856)
Accumulated deficit (90,597) (87,860)
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24,498 25,725
Less --Treasury stock, at cost -- 27,250 shares 303 303
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Total shareholders' equity 24,195 25,422
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Total Liabilities and Shareholders' Equity $ 33,251 $ 34,321
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
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Three Months Ended
September 28, September 30,
2002 2001
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(As Restated; See Note 2)
Revenues $ 6,847 $ 7,616
Cost of products sold 6,718 8,064
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Gross margin 129 (448)
Operating and Other expenses:
Research and development 477 1,182
Selling, general, and administrative 1,569 2,121
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Total operating expenses 2,046 3,303
Operating loss (1,917) (3,751)
Other income (expense):
Interest income 33 69
Interest expense (115) (82)
Equity (loss)/gain in UTI (959) 636
Miscellaneous 221 122
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Loss before income taxes (2,737) (3,006)
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Income taxes -- --
-------- -------
Net loss $(2,737) $(3,006)
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Net loss per share, basic and diluted $ (0.21) $ (0.25)
======= =======
Weighted average shares outstanding,
basic and diluted 13,137 12,005
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
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Three Months Ended
September 28, September 30,
2002 2001
---- ----
(As Restated; See Note 2)
OPERATING ACTIVITIES
Net loss $(2,737) $(3,006)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 674 1,162
Loss on asset disposal 4
Equity (gain) / loss in UTI 959 (636)
Changes in operating assets and liabilities:
Accounts receivable 902 (1,832)
Inventories (602) 411
Prepaid expenses and other current assets (214) (751)
Accounts payable and other current liabilities 69 625
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Net cash used in operating activities (945) (4,027)
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INVESTING ACTIVITIES
Purchase of property and equipment (101) (613)
Proceeds from asset disposal 8 --
Purchase of securities -- (7,765)
Sales of securities -- 7,153
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Net cash provided by investing activities (93) (1,225)
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FINANCING ACTIVITIES
Proceeds from issuance of common stock 0 6,360
Proceeds from grant 395 --
Principal payments on long-term debt
and capital lease obligations (307) (270)
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Net cash provided by (used in) financing activities 88 6,090
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Effect of exchange rate changes on cash (137) (136)
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Decrease in cash and cash equivalents (1,087) 702
Cash and cash equivalents at beginning of period 2,016 494
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Cash and cash equivalents at end of period $ 929 $ 1,196
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ -- $ (1)
======= =======
Interest paid $ 112 $ 78
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The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
ULTRALIFE BATTERIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dollar Amounts in Thousands - Except Share and Per Share Amounts)
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1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2002.
As of July 1, 2002, the Company changed its monthly closing
schedule, moving to a weekly-based cycle as opposed to a calendar month -
based cycle. While the actual dates for the quarter-ends will change
slightly each year, the Company believes that there will not be any
material differences when making quarterly comparisons. In all cases, the
Company's fiscal year-end will continue to be June 30.
2. RESTATEMENT OF PRIOR PERIOD FINANCIAL RESULTS
In assessing the partial unwind of the Company's investment in
Ultralife Taiwan, Inc. (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).
6
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 three month periods ended September 28, 2002 and September 30, 2001,
have been restated as follows:
September 28, 2002 September 30, 2001
-------------------------------- --------------------------------
As Previously As Previously
Financial Statement Caption Reported As Restated Reported As Restated
--------------------------- ------------- ----------- ------------- -----------
Equity loss (gain) in UTI $ -- $ (959) $ -- $ 636
Net loss $(1,778) $(2,737) $(3,642) $(3,006)
Investment in UTI $ -- $ 4,872 $ -- $ 5,848
Total assets $ 28,379 $ 33,251 $ 50,405 $ 56,253
Total shareholders' equity $ 19,323 $ 24,195 $ 40,300 $ 46,148
Net loss per share $ (0.14) $ (0.21) $ (0.30) $ (0.25)
3. NET LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
Common stock options and warrants have not been included as their
inclusion would be anti-dilutive. As a result, basic earnings per share is
the same as diluted earnings per share.
4. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive loss were:
Three months ended
(As Restated; See Note 2) September 28, September 30,
2002 2001
--------------------------------
Net loss $(2,737) $(3,006)
Unrealized (loss) gain
on securities - (1)
Foreign currency
translation adjustments (63) 130
---- ----
Total comprehensive loss $(2,800) $(2,877)
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5. INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined under the first-in, first- out (FIFO) method. The composition
of inventories was:
September 28, June 30,
2002 2002
---------------------------
Raw materials $ 3,152 $ 2,680
Work in process 1,292 1,338
Finished goods 1,279 1,022
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5,723 5,040
Less: Reserve for obsolescence 488 407
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$ 5,235 $ 4,633
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7
6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
September 28, June 30,
2002 2002
------------------------------
Land $ 123 $ 123
Buildings and leasehold improvements 1,619 1,619
Machinery and equipment 26,850 26,308
Furniture and fixtures 313 312
Computer hardware and software 1,347 915
Construction in progress 1,771 2,531
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32,023 31,808
Less: Accumulated depreciation 16,375 15,674
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$15,648 $16,134
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7. COMMITMENTS AND CONTINGENCIES
As of September 28, 2002, the Company had $201 in restricted cash
with a certain lending institution primarily for letters of credit
supporting leases for a building and some computer equipment.
The Company is subject to legal proceedings and claims which arise
in the normal course of business. The Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
In August 1998, the Company, its Directors, and certain underwriters
were named as defendants in a complaint filed in the United States
District Court for the District of New Jersey by certain shareholders,
purportedly on behalf of a class of shareholders, alleging that the
defendants, during the period April 30, 1998 through June 12, 1998,
violated various provisions of the federal securities laws in connection
with an offering of 2,500,000 shares of the Company's Common Stock. The
complaint alleged that the Company's offering documents were materially
incomplete, and as a result misleading, and that the purported class
members purchased the Company's Common Stock at artificially inflated
prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice,
allowing the complaint to be refiled. The shareholder action was
subsequently refiled, asserting substantially the same claims as in the
prior pleading. The Company again moved to dismiss the complaint. By
Opinion and Order dated September 28, 2000, the Court dismissed the
action, this time with prejudice, thereby barring plaintiffs from any
further amendments to 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
8
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.
9
8. BUSINESS SEGMENT 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, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable
batteries. The Technology Contracts segment includes revenues and related
costs associated with various government and military development
contracts. The Corporate segment consists of all other items that do not
specifically relate to the three other segments and are not considered in
the performance of the other segments.
Three Months Ended September 28, 2002
-------------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------------
Revenues $6,678 $169 $ - $ - $6,847
Segment contribution 32 (380) - (1,569) (1,917)
Interest, net (82) (82)
Equity loss in UTI (959) (959)
Miscellaneous 221 221
Income taxes - -
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Net loss $(2,737)
Total assets $20,428 $4,076 $ - $8,747 $33,251
Three Months Ended September 30, 2001
-------------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
------------------------------------------------------------------------
Revenues $7,274 $135 $207 $ - $7,616
Segment contribution 727 (2,378) 21 (2,121) (3,751)
Interest income, net (13) (13)
Equity gain in UTI 636 636
Miscellaneous 122 122
Income taxes -
--------
Net loss $(3,006)
Total assets $21,049 $20,604 $312 $14,288 $56,253
9. OTHER MATTERS
In March 1998, the Company received a $500 grant from the Empire
State Development Corporation to fund certain equipment purchases. The
grant was contingent upon the Company achieving and maintaining minimum
employment levels for a period of five years. If annual levels of
employment are not maintained, a portion of the grant might become
repayable. Through the first four years of the grant period, the Company
has met the requirements. The Company has recognized revenue over the
grant period ratably, dependent upon meeting certain employment criteria.
The remaining unamortized balance of $50 relating to the grant is included
in other current liabilities in the accompanying Consolidated Balance
Sheet as of June 30, 2002. It is possible that the Company may not meet
the employment criteria at the end of the fifth year, and thus the Company
may be required to repay one-fifth of the overall grant.
In November 2001, the Company received approval for a $750
grant/loan from a federally sponsored small cities program. The grant/loan
will assist in funding current capital expansion plans that the Company
expects will lead to job creation. The Company will be reimbursed for
approved
10
capital as it incurs the cost. In August 2002, the $750 small cities
grant/ loan documentation was finalized and the Company was reimbursed
$395 for costs it had incurred to date for equipment purchases applicable
under this grant/loan. The remaining amount under this grant/loan will be
reimbursed as the Company incurs additional expenses and submits requests
for reimbursement. Certain employment levels are required to be met during
the initial three year period. If the Company does not meet its employment
quota, it may adversely affect reimbursement requests, or the grant may be
converted to a loan that will be repaid over a seven-year period. The
Company is reflecting the proceeds from this grant/loan, as well as
accrued interest at the stated rate of 5% per year, as a long-term
liability, and will only amortize these proceeds into income as the
certainty of meeting the employment criteria becomes definitive.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Company adopted Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS)
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be
made. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. The adoption of this pronouncement did not
have any adverse effect on the Company's financial statements.
In July 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principle
Board Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The adoption of this
pronouncement did not have any adverse effect on the Company's financial
statements.
In July 2002, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities", which nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. The adoption of
this pronouncement did not have any adverse effect on the Company's
financial statements.
11. 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 held 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.
11
Due to subsequent sales of UTI common stock to third parties to
raise additional capital, the Company's equity interest was reduced to
approximately 30% as of September 28, 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 to $1,573
for the three months ended September 28, 2002 and $5,212 for the twelve
months ended June 30, 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 has accounted for its investment in UTI using the equity
method of accounting. The Company recorded an equity loss in UTI in the
Company's consolidated statement of income of $959 in the three months
ended September 28, 2002 and an equity gain of $636 for the comparable
three month period ended September 30, 2001.
The Company does not guarantee the obligations of UTI and is not
required to provide any additional funding.
Summarized financial statement information for the unconsolidated
venture for the periods during which the Company accounted for its
investment in UTI under the equity method of accounting is as follows:
Condensed Statements of Operations: Three Months Ended
September 30,
2002 2001
-------------------------
Net revenue $ 728 $ -
Cost of Sales (2,110) -
Operating loss (3,588) (1,694)
Net loss (4,130) (1,752)
12. SUBSEQUENT EVENT
On October 23, 2002, the Company exchanged an aggregate of
42,500,000 shares of Ultralife Taiwan, Inc. ("UTI") stock to UTI and PGT
Energy Corporation ("PGT") for total consideration of $2,393 and the
return of 700,000 shares of Ultralife common stock. Ultralife and PGT were
the two most significant investors when UTI was formed in 1999. Under the
terms of the transaction, Ultralife will receive $2,393 in a series of 5
cash payments beginning October 30, 2002 and ending no later than
mid-December 2002. In addition, over the next 3 years Ultralife will have
reserved access to 10% of UTI's high volume capacity for rechargeable
lithium battery products and the rights to utilize UTI's LSB (Large Scale
Battery) technology for the production of large capacity lithium ion
batteries for government and military markets in the U.S. and the U.K. As
a result of the transaction, Ultralife's ownership interest in UTI will
decline from approximately 30% to approximately 10.6%. In addition, the
Company expects to record a non-operating gain of approximately $1,459 in
its second fiscal quarter and to record an increase in treasury stock to
reflect the return of its 700,000 common shares. This will result in
reducing the issued and outstanding common shares of Ultralife to
12,652,269 as of the date of this transaction.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended June 30, 2002.
General
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Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable) and rechargeable
batteries for use in a wide array of applications. The Company believes that its
technologies allow the Company to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. The Company has focused on manufacturing a family
of lithium primary batteries for industrial, military and consumer applications,
which it believes is one of the most comprehensive lines of lithium manganese
dioxide primary batteries commercially available. The Company also supplies
rechargeable lithium polymer and lithium ion batteries for use in portable
electronic applications.
For several years, the Company has incurred net operating losses primarily
as a result of funding research and development activities and, to a lesser
extent, incurring manufacturing and selling, general and administrative costs.
During fiscal 2002, the Company realigned its resources to bring costs more in
line with revenues, moving the Company closer to its targets of operating cash
breakeven and profitability. In addition, the Company refined its rechargeable
strategy to allow it to be more effective in the marketplace.
The Company believes that its current growth strategy will be successful
in the long-term. However, at the present time, the status of the Company's cash
and credit situation is of serious concern, and much of the Company's ability to
succeed in the near-term is dependent upon continued revenue growth and a
favorable product mix that will generate postive cash flows. If the Company is
unsuccessful in growing the business sufficiently in the near-term to generate
adequate levels of cash, it will need to find alternative sources of funds to
allow it to continue to operate in its current capacity. The Company is
evaluating possible funding alternatives including obtaining additional debt or
equity financing and/or selling assets. While the Company has been successful at
raising funds in the past and is optimistic that it will be able to do so again
if necessary, there is no assurance that the Company will be able to do so under
the current circumstances. See "Liquidity and Capital Resources" for additional
information.
13
As of July 1, 2002, the Company changed its monthly closing schedule,
moving to a weekly-based cycle as opposed to a calendar month - based cycle.
While the actual dates for the quarter-ends will change slightly each year, the
Company believes that there will not be any material differences when making
quarterly comparisons. In all cases, the Company's fiscal year-end will continue
to be June 30.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The Corporate
segment consists of all other items that do not specifically relate to the three
other segments and are not considered in the performance of the other segments.
Results of Operations
---------------------
Three months ended September 28, 2002 and September 30, 2001
Consolidated revenues were $6,847,000 for the three-month period ended
September 28, 2002, a decrease of $769,000, or 10%, from the $7,616,000 reported
in the same quarter in the prior year. Primary battery sales decreased $596,000,
or 8%, from $7,274,000 last year to $6,678,000 this year, mainly as a result of
lower 9-volt battery shipments as customers adjusted their inventory levels, as
well as lower military battery sales related to a decline in orders for small
cylindrical batteries. Technology Contract revenues declined $207,000 due to the
completion of certain non-renewable government contracts.
Cost of products sold totaled $6,718,000 for the first quarter of fiscal
2003, a decrease of $1,346,000, or 17% over the same three-month period a year
ago. The gross margin on consolidated revenues for the quarter was $129,000, or
2% of revenues, an improvement of $577,000 from the gross margin loss of
$448,000, or 6%, in the prior year. The gross margin loss attributable to
rechargeable battery operations was $291,000, an improvement of $1,122,000 from
last year's reported loss of $1,413,000. This improvement resulted from the cost
savings actions that the Company took in the second and third quarters of fiscal
year 2002, as well as lower depreciation expense that resulted from the
write-down of rechargeable fixed assets in the fourth quarter of fiscal 2002.
Gross margins in the Company's primary battery operations were $420,000, a
decrease of $524,000 from the $944,000 reported in the same period last year. As
a percentage of sales, primary battery gross margins declined from 13% last year
to 6% this year. This decline was primarily attributable to lower production
volumes in conjunction with lower sales, as well as start-up costs associated
with the production of new military batteries.
Operating and other expenses totaled $2,046,000 for the three months ended
September 28, 2002, a decrease of $1,257,000, or 38%, compared to $3,303,000 in
the prior year. Research and development expenses declined $705,000, while
selling, general and administrative expenses declined $552,000. The decrease in
R&D expenses resulted from the Company's revised rechargeable strategy and the
cost savings initiatives that were implemented during fiscal 2002, in addition
to lower depreciation expense related to the rechargeable fixed asset impairment
charge that occurred in June 2002. SG&A expenses also declined due mainly to
lower compensation and related costs from the Company's cost savings initiatives
taken during last fiscal year.
Interest expense, net, increased $69,000 from $13,000 in the first quarter
of fiscal 2002 to $82,000 in the first quarter of fiscal 2003. This increase is
principally the result of lower average cash balances. Equity loss in UTI (as
restated, refer to Note 2 to the consolidated financial statements in Item 1
herein) increased $1,595,000 for the three months ended September 28, 2002 from
a gain of $636,000 for the three months ended September 30, 2001 to a loss of
$959,000 for the three months ended
14
September 28, 2002. This change resulted mainly from higher reported operating
losses at UTI. Miscellaneous income (expense) increased $99,000 in the quarter,
from $122,000 in fiscal 2002 to $221,000 in fiscal 2003. This change relates
primarily to foreign currency transaction gains, mainly the strengthening of the
U.K. British pound versus the U.S. dollar.
Net losses were $2,737,000, or $0.21 per share, for the first quarter of
fiscal 2003 compared to $3,006,000, or $0.25 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
-------------------------------
At September 28, 2002, cash and cash equivalents and available for sale
securities totaled $1,132,000. Of this amount, $201,000 was restricted to
support certain outstanding letters of credit. During the first three months of
fiscal 2003, the Company used $945,000 of cash in operating activities. This use
of cash related primarily to an EBITDA loss of $1,243,000 (Operating Loss plus
depreciation and amortization). In addition, changes in working capital during
the quarter resulted in a increase of approximately $150,000, mainly due to
reductions in outstanding accounts receivable. The Company spent $101,000 for
capital expenditures and $307,000 on debt and capital lease principal payments
during the first quarter of fiscal 2003. In addition, the Company received an
initial $395,000 in proceeds from its government grant/loan program, as
reimbursement for previous expenditures on machinery and equipment.
At September 28, 2002, the Company had short and long-term debt and
capital lease obligations totaling $3,339,000. Of this total, $498,000 was
considered long-term. The following discussion provides additional information
on these obligations.
As of September 28, 2002, the Company had $2,200,000 outstanding under the
term loan component of its 3-year, $15,000,000 credit facility, and no
borrowings were outstanding under the revolver component of the credit facility.
The Company's additional borrowing capacity under the revolver component of the
credit facility as of September 28, 2002 was approximately $500,000, net of
outstanding letters of credit of $3,800,000. Since the facility expires in June
2003, the outstanding amount is classified as short-term on the Consolidated
Balance Sheet. As of September 2002, the Company had been concerned about
violating its debt covenant requiring a minimum net worth of approximately
$19,200,000. As a result of the exchange of a portion of the Company's
investment in Ultralife Taiwan, Inc. in October 2002, the Company expects a
$2,400,000 gain which will ultimately increase net worth (see further discussion
below). The Company is currently working with its primary lending institution to
arrange an extension of this credit facility well beyond the end of the current
fiscal year, although there is no assurance that the Company will be able to do
so.
In April 2002, the Company closed on a $3,000,000 private placement
consisting of common equity and a $600,000 convertible note. Initially, 801,333
shares were issued. The note, which was issued to one of the Company's
directors, will convert automatically into an additional 200,000 shares if the
Company's shareholders vote to approve the conversion of the note into common
shares at the Company's Annual Meeting in December 2002, and all accrued
interest will be forgiven. If shareholder approval is not obtained, the Company
is obligated to repay the note on December 31, 2002, with accrued interest at
10% per year. All shares will be issued at $3.00 per share.
In March 1998, the Company received a $500,000 grant from the Empire State
Development Corporation to fund certain equipment purchases. The grant was
contingent upon the Company achieving and maintaining minimum employment levels
for a period of five years. If annual levels of employment are not maintained, a
portion of the grant might become repayable. Through the first four years of the
grant period, the Company has met the requirements. The Company has recognized
revenue over the
15
grant period ratably, dependent upon meeting certain employment criteria. The
remaining unamortized balance of $50,000 relating to the grant is included in
other current liabilities in the accompanying Consolidated Balance Sheet as of
June 30, 2002. It is possible that the Company may not meet the employment
criteria at the end of the fifth year, and thus the Company may be required to
repay one-fifth of the overall grant.
In November 2001, the Company received approval for a $750,000 grant/loan
from a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
the cost. In August 2002, the $750,000 small cities grant/loan documentation was
finalized and the Company was reimbursed $395,000 for costs it had incurred to
date for equipment purchases applicable under this grant/loan. The remaining
amount under this grant/loan will be reimbursed as the Company incurs additional
expenses and submits requests for reimbursement. Certain employment levels are
required to be met during the initial three year period. If the Company does not
meet its employment quota, it may adversely affect reimbursement requests, or
the grant may be converted to a loan that will be repaid over a seven-year
period. The Company is reflecting the proceeds from this grant/loan, as well as
accrued interest at the stated rate of 5% per year, as a long-term liability,
and will only amortize these proceeds into income upon the certainty of meeting
the employment criteria.
On October 23, 2002, the Company exchanged an aggregate of 42,500,000
shares of Ultralife Taiwan, Inc. ("UTI") stock to UTI and PGT Energy Corporation
("PGT") for total consideration of $2,393 and the return of 700,000 shares of
Ultralife common stock. Ultralife and PGT were the two most significant
investors when UTI was formed in 1999. Under the terms of the transaction,
Ultralife will receive $2,393 in a series of 5 cash payments beginning October
30, 2002 and ending no later than mid-December 2002. In addition, over the next
3 years Ultralife will have reserved access to 10% of UTI's high volume capacity
for rechargeable lithium battery products and the rights to utilize UTI's LSB
(Large Scale Battery) technology for the production of large capacity lithium
ion batteries for government and military markets in the U.S. and the U.K. As a
result of the transaction, Ultralife's ownership interest in UTI will decline
from approximately 30% to approximately 10.6%. In addition, the Company expects
to record a non-operating gain of approximately $1,459 in its second fiscal
quarter and to record an increase in treasury stock to reflect the return of its
700,000 common shares. This will result in reducing the issued and outstanding
common shares of Ultralife to 12,652,269 as of the date of this transaction.
While the Company remains optimistic about its long-term future prospects
and growth potential, the timing aspect of near-term revenue and profitability
is unclear. The Company's future liquidity depends on its ability to
successfully generate positive cash flows from operations and to achieve
operational savings.
The Company also is continuing to explore other sources of capital,
including utilizing its unleveraged assets as collateral for additional
borrowing capacity, selling assets that are not core to the Company's long-term
strategic initiatives, and raising equity through a private or public offering.
Although the Company is confident that it will be successful in arranging
adequate financing, there can be no assurance that the Company will have
sufficient cash flows to meet its working capital and capital expenditure
requirements during the course of fiscal 2003. Therefore, this could have a
material adverse effect on the Company's business, financial position and
results of operations.
As of September 28, 2002, the Company had capital commitments, principally
for purchases of machinery and equipment, of approximately $169,000.
16
Critical Accounting Policies and Estimates
------------------------------------------
The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect
amounts reported therein. The estimates that require management's most
difficult, subjective or complex judgments are described below.
Revenue recognition:
Battery Sales - Revenues from the sale of batteries are
recognized when products are shipped. A provision is made at that
time for warranty costs expected to be incurred.
Technology Contracts - The Company recognizes revenue using
the percentage of completion method based on the relationship of
costs incurred to date to the total estimated cost to complete the
contract. Elements of cost include direct material, labor and
overhead. If a loss on a contract is estimated, the full amount of
the loss is recognized immediately. The Company allocates costs to
all technology contracts based upon actual costs incurred including
an allocation of certain research and development costs incurred.
Under certain research and development arrangements with the U.S.
Government, the Company may be required to transfer technology
developed to the U.S. Government. The Company has accounted for the
contracts in accordance with SFAS No. 68, "Research and Development
Arrangements". The Company, where appropriate, has recognized a
liability for amounts that may be repaid to third parties, or for
revenue deferred until expenditures have been incurred.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition
in Financial Statements". This guidance summarizes the SEC staff's
views in applying generally accepted accounting principles to
revenue recognition in financial statements. This staff bulletin had
no significant impact on the Company's revenue recognition policy or
results of operations.
Warranties:
The Company maintains provisions related to normal warranty
claims by customers. The Company evaluates these reserves monthly
based on actual experience with warranty claims to date.
Impairment of Long-Lived Assets:
The Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable on an undiscounted cash flow basis.
Environmental Issues:
Environmental expenditures that relate to current operations
are expensed or capitalized, as appropriate, in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities".
Remediation costs that relate to an existing condition caused by
past operations are accrued when it is probable that these costs
will be incurred and can be reasonably estimated.
17
Outlook
-------
The Company expects revenues in its second quarter of fiscal 2003 to
increase from the first fiscal quarter, likely reaching in excess of $9,000,000.
At this time, indications are that 9-volt orders have strengthened from the
level in the first quarter, and the interest level in the Company's military
batteries is growing, particularly in the BA-5390 battery, which is an
alternative to the main communications battery by military forces. Although the
activity surrounding the rechargeable battery products is increasing
significantly, the Company is conservatively projecting modest revenues in this
area.
The Company believes that quarterly revenues of approximately $9,000,000
to $9,500,000 will allow it to achieve operating cash breakeven, depending on
the Company's overall product mix. The Company also believes that quarterly
revenues in the range of $10,500,000 should allow the Company to be able to
report a profit. While the Company was able to significantly reduce costs during
fiscal 2002, it still maintains a substantial fixed cost infrastructure to
support its overall operations. Increasing volumes of sales and production will
generate favorable returns due to economies of scale, but similarly, decreasing
volumes will result in the opposite effect.
While the Company believes that it will be able to achieve its operating
cash breakeven target in the near future, it expects that changes in working
capital for increasing sales volumes and inventory levels will be able to be
financed by its revolving credit facility.
For the full fiscal year, the Company is maintaining its target of
achieving a 35% revenue growth over fiscal 2002. While the first quarter's
revenues were lower than the Company's initial projections, it cannot determine
at this time whether the full year's results will be adversely impacted. The
revenue growth each quarter is subject to significant fluctuations as the timing
of customer orders is not easily predictable. In particular, 9-volt revenues are
dependent upon continued demand from the Company's customers, some of which are
dependent upon retail sell-through. Similarly, revenues from sales of
cylindrical products, primarily to military customers, are dependent upon a
variety of factors, including the timing of the battery solicitation process
within the military, the Company's ability to successfully win contract awards,
successful qualification of the Company's products in the applicable military
applications, and the timing of order releases against such contracts. Some of
these factors are outside of the Company's direct control.
The Company continues to believe that spending for capital projects during
fiscal 2003 will continue to be relatively modest. The Company carefully
evaluates such projects and will only make capital investments when necessary
and when there is typically a timely payback. Certain capital equipment
acquisitions during the upcoming fiscal year will be financed by the remaining
availability under the capital equipment grant/loan the Company recently
finalized.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 CEO & CFO Certifications
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
(Registrant)
Date: April 11, 2003 By: /s/ John D. Kavazanjian
-------------- -----------------------
John D. Kavazanjian
President and Chief Executive
Officer
Date: April 11, 2003 By: /s/ Robert W. Fishback
-------------- ----------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
19
I, John D. Kavazanjian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 11, 2003 /s/ John D. Kavazanjian
-----------------------
John D. Kavazanjian,
President and Chief Executive Officer
20
I, Robert W. Fishback, certify that:
1. I have reviewed this quarterly report on 10-Q/A of Ultralife Batteries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 11, 2003 /s/ Robert W. Fishback
----------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
21