SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
-------------------------
(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 - 13,120,289 shares outstanding
as of April 30, 2002.
ULTRALIFE BATTERIES, INC.
INDEX
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and June 30, 2001................................3
Condensed Consolidated Statements of Operations -
Three and nine months ended March 31, 2002 and 2001.............4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2002 and 2001.......................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...............................................17
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................19
SIGNATURES ...................................................................20
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
March 31, June 30,
ASSETS 2002 2001
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 344 $ 494
Available-for-sale securities 2 2,573
Restricted cash 201 540
Trade accounts receivable (less allowance for doubtful accounts
of $287 at March 31, 2002 and $262 at June 30, 2001) 6,155 3,379
Inventories 4,687 5,289
Prepaid expenses and other current assets 726 1,648
--------- ---------
Total current assets 12,115 13,923
--------- ---------
Property, plant and equipment 30,613 32,997
Other assets:
Investment in affiliates -- --
Technology license agreements (net of accumulated
amortization of $1,243 at March 31, 2002 and $1,168 at June 30, 2001) 208 283
--------- ---------
208 283
--------- ---------
Total Assets $ 42,936 $ 47,203
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 917 $ 1,065
Accounts payable 3,445 3,755
Other current liabilities 1,950 2,282
--------- ---------
Total current liabilities 6,312 7,102
Long-term liabilities:
Long-term debt and capital lease obligations 1,984 2,648
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 - 12,578,186 at March 31, 2002 and 11,488,186 at June 30, 2001) 1,258 1,149
Capital in excess of par value 105,621 99,389
Accumulated other comprehensive loss (858) (1,058)
Accumulated deficit (71,078) (61,724)
--------- ---------
34,943 37,756
Less --Treasury stock, at cost -- 27,250 shares 303 303
--------- ---------
Total shareholders' equity 34,640 37,453
--------- ---------
Total Liabilities and Shareholders' Equity $ 42,936 $ 47,203
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31, Nine Months Ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 8,862 $ 5,817 $ 23,937 $ 17,958
Cost of products sold 7,940 6,548 23,675 20,840
-------- -------- -------- --------
Gross margin 922 (731) 262 (2,882)
Operating expenses:
Research and development 1,038 799 3,192 2,307
Selling, general, and administrative 1,981 1,979 6,194 5,835
-------- -------- -------- --------
Total operating expenses 3,019 2,778 9,386 8,142
Operating loss (2,097) (3,509) (9,124) (11,024)
Other income (expense):
Interest income 3 126 88 628
Interest expense (101) (134) (276) (387)
Equity loss in affiliate -- (340) -- (1,930)
Miscellaneous (97) (64) (42) (49)
-------- -------- -------- --------
Loss before income taxes (2,292) (3,921) (9,354) (12,762)
-------- -------- -------- --------
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (2,292) $ (3,921) $ (9,354) $(12,762)
======== ======== ======== ========
Net loss per share, basic and diluted $ (0.19) $ (0.35) $ (0.77) $ (1.15)
======== ======== ======== ========
Weighted average shares outstanding,
basic and diluted 12,319 11,173 12,193 11,131
======== ======== ======== ========
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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Nine Months Ended March 31,
2002 2001
---- ----
OPERATING ACTIVITIES
Net loss $ (9,354) $(12,762)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,208 2,794
Equity loss in affiliate -- 1,930
Changes in operating assets and liabilities:
Accounts receivable (2,776) 1
Inventories 602 85
Prepaid expenses and other current assets 922 (503)
Accounts payable and other current liabilities (642) 193
-------- --------
Net cash used in operating activities (8,040) (8,262)
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment (1,715) (2,934)
Proceeds from sale leaseback 995 --
Purchase of securities (8,424) (24,671)
Sales of securities 11,334 19,652
Maturities of securities -- 12,695
-------- --------
Net cash provided by investing activities 2,190 4,742
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FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,341 606
Principal payments on long-term debt and capital lease obligations (812) (836)
-------- --------
Net cash provided by (used in) financing activities 5,529 (230)
-------- --------
Effect of exchange rate changes on cash 171 (129)
-------- --------
Decrease in cash and cash equivalents (150) (3,879)
Cash and cash equivalents at beginning of period 494 5,712
-------- --------
Cash and cash equivalents at end of period $ 344 $ 1,833
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ -- $ 1
======== ========
Interest paid $ 185 $ 357
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
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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, 2001.
2. 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 antidilutive. As a result, basic earnings per share is
the same as diluted earnings per share.
3. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive loss were:
(unaudited)
Three months ended Nine months ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- -------- --------
Net loss $ (2,292) $ (3,921) $ (9,354) $(12,762)
Unrealized (loss) gain on securities -- -- -- 1
Foreign currency translation adjustments (22) (271) 200 (447)
-------- -------- -------- --------
Total comprehensive loss $ (2,314) $ (4,192) $ (9,154) $(13,208)
======== ======== ======== ========
4. 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:
(unaudited)
March 31, 2002 June 30, 2001
-------------- -------------
Raw materials $2,652 $2,595
Work in process 1,610 1,233
Finished goods 771 1,872
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5,033 5,700
Less: Reserve for obsolescence 346 411
------ ------
$4,687 $5,289
====== ======
6
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the
following:
(unaudited)
March 31, June 30,
2002 2001
---------- --------
Land $ 123 $ 123
Buildings and Leasehold Improvements 1,608 1,608
Machinery and Equipment 38,287 37,891
Furniture and Fixtures 308 291
Computer Hardware and Software 1,390 1,375
Construction in Progress 3,305 2,984
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45,021 44,272
Less: Accumulated Depreciation 14,408 11,275
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$30,613 $32,997
======= =======
6. COMMITMENTS AND CONTINGENCIES
As of March 31, 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 funds that had
previously been restricted by the Company's primary lending institution at
December 31, 2001 were no longer restricted at March 31, 2002 because the
amount of eligible assets applicable to the borrowing base exceeded
borrowings against the revolver loan.
The Company is subject to legal proceedings and claims that 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
7
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 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 against a significant portion of 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. Test sampling occurred in the fourth quarter of fiscal 2001 and the
engineering report was submitted to the New York State Department of
Environmental Conservation (NYSDEC) for review. NYSDEC reviewed the report
and in January 2002 recommended additional testing. The Company responded
by submitting a proposed work plan to NYSDEC, which was approved by NYSDEC
in April 2002. The Company is now soliciting proposals from engineering
firms to complete remedial work contained in the work plan, and it is
unknown at this time whether the final cost to remediate will be in the
range of the original estimate, given the passage of time. 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.
7. BUSINESS SEGMENT INFORMATION (unaudited)
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries
and various specialty batteries. The Rechargeable Batteries segment
consists of the Company's rechargeable 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 March 31, 2002
---------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ----------- ---------- --------- -----
Revenues $ 8,741 $ 86 $ 35 $ -- $ 8,862
Segment contribution 954 (1,072) 2 (1,981) (2,097)
Interest, net (98) (98)
Equity loss in affiliate -- --
Miscellaneous expense (97) (97)
Income taxes -- --
-------
Net loss $(2,292)
Total assets $20,976 $19,031 $309 $ 2,620 $42,936
8
Three Months Ended March 31, 2001
---------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ----------- ---------- --------- -----
Revenues $ 5,401 $ 78 $338 $ -- $ 5,817
Segment contribution 272 (1,835) 33 (1,979) (3,509)
Interest income, net (8) (8)
Equity loss in affiliate (340) (340)
Miscellaneous (64) (64)
Income taxes -- --
-------
Net loss $(3,921)
Total assets $18,120 $21,674 $301 $ 11,120 $51,215
Nine Months Ended March 31, 2002
--------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ----------- ---------- --------- -----
Revenues $23,035 $ 374 $528 $ -- $23,937
Segment contribution 2,393 (5,376) 53 (6,194) (9,124)
Interest, net (188) (188)
Equity loss in affiliate -- --
Miscellaneous (42) (42)
Income taxes -- --
-------
Net loss $(9,354)
Total assets $20,976 $19,031 $309 $ 2,620 $42,936
Nine Months Ended March 31, 2001
--------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ----------- ---------- --------- -----
Revenues $16,310 $ 242 $1,406 $ -- $ 17,958
Segment contribution 72 (5,384) 123 (5,835) (11,024)
Interest income 241 241
Equity loss in affiliate (1,930) (1,930)
Miscellaneous (49) (49)
Income taxes -- --
--------
Net loss $(12,762)
Total assets $18,120 $21,674 $ 301 $11,120 $ 51,215
8. OTHER MATTERS
On July 20, 2001, the Company completed a $6,800 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.
In October 2001, the Company was informed by its primary lending
institution 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
9
$2,733 based on the valuation of the Company's fixed assets (of which
$2,681 was outstanding on the term loan at March 31, 2002). The revolving
credit facility component comprises the remainder of the total potential
borrowing capacity. Certain definitions were revised which increased the
Company's available borrowing base. In addition, the minimum net worth
covenant was reduced to $33,500. While these changes to the credit
facility improve the Company's overall financial flexibility, the
Company's future liquidity depends on the Company's ability to
successfully generate positive cash flow from operations and achieve
adequate operational savings. The Company is also exploring opportunities
for new or additional equity or debt financing. (See Note 10 for
additional information.) Notwithstanding the foregoing, there can be no
assurance that the Company will have sufficient cash flows to meet its
working capital and capital expenditure requirements.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand
in areas of the business that are growing. The realignment did not
significantly change any of the Company's existing operations nor were any
product lines discontinued. 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.
Less than 7% of the Company's total employees were terminated. The
realignment did not result in any significant severance costs. The Company
expects to realize cost savings from the measures being taken of
approximately $1,500 per quarter. These quarterly savings are comprised of
approximately $1,100 of reduced labor costs, approximately $200 of reduced
material usage, and approximately $200 of lower administrative expenses.
The Company realized the full value of the realignment in the third fiscal
quarter.
Also in February 2002, in its ongoing effort to improve liquidity to
bring costs more in line, the Company took further actions to reduce
costs. The cost reductions included employee terminations and salary
reductions, discontinuance of certain employee benefits and other cost
saving initiatives in general and administrative areas. Approximately 15%
of the Company's total employees were terminated during this time. As part
of these actions, the Company temporarily suspended the Company's match on
the 401k plan. The Company anticipates approximately $800 in reduced
expenses per quarter because of this action. Approximately two-thirds of
the savings will reduce cost of products sold and one-third will reduce
general and administrative costs. The Company realized approximately half
of the savings in the third fiscal quarter and will realize the remaining
cost savings in the fourth fiscal quarter. Severance costs associated with
this action were incurred in the third fiscal quarter and were not
material. The actions taken in February and the prior actions taken by the
Company as outlined above will aggregate to an anticipated cost savings of
approximately $2,300 per quarter.
The Company has maintained a lease line of credit with a third party
leasing agency. Under this arrangement, the Company has 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 to $4,000. The increase in the line
is being used to fund capital expansion plans for manufacturing equipment
that will allow increased capacity within the Company's Primary business
unit. In conjunction with this lease, the Company has a letter of credit
of $3,800 outstanding. At March 31, 2002, approximately $250 remained
outstanding under the lease line of credit. Once the lease line has been
fully utilized, which is expected to be by June 2002, the Company's
quarterly lease payment will approximate $226.
In November 2001, the Company received approval for two grants from
New York State and a federally sponsored small cities program in the
aggregate amount of $1,050. The grants will assist in funding current
capital expansion plans that the Company expects will lead to job
creation. In most cases, the Company will be reimbursed for approved
capital as it incurs the cost; in other cases, the
10
Company will be reimbursed after the full completion of the particular
project. At March 31, 2002, in connection with these grants, approximately
$57 had been submitted for reimbursement and is awaiting final review and
approval. Funding under these grants is subject to the Company's ability
to go forward with these projects. Additionally, the Company is obligated
under the terms of the grants to achieve a certain level of new jobs over
the next five years. If the Company does not meet its employment quota, it
may adversely affect reimbursement requests or the Company could be
required to pay back a portion of the amount of the grant, depending on
the lapsed time.
9. NEW ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company
is required to adopt SFAS No. 144 for fiscal years beginning after July 1,
2002. The Company is currently assessing the financial impact of SFAS No.
144 on its financial statements.
10. SUBSEQUENT EVENT
On April 23, 2002, the Company closed on a $3,000 private placement
consisting of common equity and a $600 convertible note. Initially,
801,333 shares were issued. The note, which was issued to one of the
Company's directors, will convert automatically into an additional 200,000
shares if the Company's shareholders vote to approve the conversion of the
note into common shares at the Company's Annual Meeting in December 2002.
If shareholder approval is not obtained, the 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.
11
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, world events,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fire, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
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, 2001.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of customized and standard lithium primary, lithium-ion and polymer rechargeable
batteries for use in a wide array of applications. The Company believes that its
proprietary technologies allow the Company to offer batteries that are
ultra-thin, lightweight and generally achieve longer operating time than many
competing batteries currently available. The Company manufactures a family of
lithium/manganese dioxide primary (non-rechargeable) batteries for military,
industrial and consumer applications which it believes is one of the most
comprehensive lines of primary batteries commercially available. In addition,
the Company manufactures and markets lithium polymer and lithium-ion
rechargeable batteries for use in portable electronic applications.
The Company has incurred net operating losses primarily as a result of
funding research and development activities and, to a lesser extent,
manufacturing and general and administrative costs. To date, the Company has
devoted a substantial portion of its resources to the research and development
of its products and technology, particularly its proprietary polymer
rechargeable technology. The Company's results of operations may vary
significantly from quarter to quarter depending upon the number of orders
received and the pace of the Company's research and development activities.
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.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's rechargeable 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.
12
Results of Operations
Three months ended March 31, 2002 and 2001
Consolidated revenues were $8,862,000 for the three month period ended
March 31, 2002, an all-time quarterly record. This sales amount reflected an
increase of $3,045,000, or 52%, from $5,817,000 in the same quarter in fiscal
2001. Primary battery sales increased $3,340,000, or 62%, from $5,401,000 last
year to $8,741,000 this year. Growth was seen in substantially all of Primary
battery products, including strong demand for 9-volt batteries, and continuing
growth of cylindrical battery products, including the BA-5368 and BA-5372
batteries, as well as new products, such as pouch cells and D-cells. These
increases were offset in part by a decline in Technology Contract revenues. As
expected, Technology Contract revenues declined $303,000, from $338,000 to
$35,000 due to the scheduled reduction of certain non-renewable government
contracts.
Cost of products sold amounted to $7,940,000 for the three-month period
ended March 31, 2002, an increase of $1,392,000, or 21% over the same three
month period a year ago. The gross margin on consolidated revenues for the
quarter was a positive 10%, compared to a loss of 13% in the prior year. The
gross margin for this fiscal year's third quarter represented the first positive
margin in nine quarters, resulting from the manufacturing improvements made by
the Company. Primary gross margins increased $1,051,000 over the prior year from
a 7% gross margin in fiscal 2001 to a 16% gross margin in fiscal 2002. This
improvement in margins is primarily the result of increased sales and
improvements in manufacturing efficiencies, resulting from the implementation of
lean manufacturing practices. Cost of products sold in the Rechargeable segment
decreased $625,000 over last year mainly due to cost savings initiatives that
were enacted during the past six months. The Rechargeable gross margin improved
from a loss of $1,154,000 last year to a loss of $521,000 this year. While the
Company has taken significant steps to narrow its focus for polymer production
in the Rechargeable area, the Company has enhanced its capability to source
rechargeable sales opportunities with product it can purchase from other
manufacturers, namely the Company's venture in Taiwan, Ultralife Taiwan, Inc.,
as well as others. The Company continues to believe that there are significant
opportunities for growth in the Rechargeable area.
Operating and other expenses were $3,019,000 for the three months ended
March 31, 2002 compared to $2,778,000 in the prior year, an increase of
$241,000, or 9%. The increase is mainly due to higher research and development
costs that resulted from the development of new Primary battery products.
Interest income decreased $123,000, or 98%, from $126,000 in the third
quarter of fiscal 2001 to $3,000 in the third quarter of fiscal 2002. The
reduction in interest income is principally the result of lower average cash
balances and lower interest rates. Interest expense declined $33,000 due to
lower average balances outstanding on the credit facility and lower borrowing
rates. Equity loss in affiliate was $340,000 for its equity interests in
Ultralife Taiwan, Inc. (UTI) for the quarter ended March 31, 2001. No losses
have been recorded in fiscal 2002 as the investment on the balance sheet has
been written down to zero under the equity method of accounting. Miscellaneous
income (expense) relates primarily to foreign currency transaction gains and
losses for the period reported.
Net losses were $2,292,000, or $0.19 per share, for the third quarter of
fiscal 2002 compared to $3,921,000, or $0.35 per share, for the same quarter
last year primarily as a result of the reasons described above.
Nine months ended March 31, 2002 and 2001
Consolidated revenues reached a new nine-month record of $23,937,000 for
the first three quarters of fiscal 2002, an increase of $5,979,000, or 33%, over
the comparable period in fiscal 2001. Primary battery sales increased
$6,725,000, or 41%, from $16,310,000 last year to $23,035,000 this year. In
fiscal 2001, the Company began production and shipments of the BA-5368 battery
used by the military in
13
survival radios for pilots, and this new small cylindrical battery resulted in
approximately $3,300,000 in incremental sales in the first nine months of fiscal
2002. Sales of 9-volt and BA-5372 batteries also rose. Shipments of HiRate and
assembled batteries continued the strong growth trend in the UK as a result of
an increase in demand from the UK military. Partially offsetting these increases
was a decline in Technology Contract revenues. As expected, Technology Contract
revenues declined $878,000, from $1,406,000 to $528,000 due to the scheduled
reduction of certain non-renewable government contracts.
Cost of products sold amounted to $23,675,000 for the nine-month period
ended March 31, 2002, an increase of $2,835,000, or 14% over the same nine month
period a year ago. The gross margin on total revenues for the nine-month period
of fiscal 2002 was a positive 1%, compared to a loss of 16% in the prior year.
The improvement in gross margins was affected mainly by two factors. First,
Primary gross margins increased $2,952,000 over the prior year from a 2% gross
margin in fiscal 2001 to a 15% gross margin in fiscal 2002. This improvement in
margins is principally the result of increased sales and enhancements in the
manufacturing process due to the implementation of lean manufacturing practices,
which in some instances have resulted in reductions in the workforce. To date,
lean manufacturing practices in the Primary battery segment have resulted in
quicker manufacturing throughput times, greater operating efficiencies and a
reduction of inventory. Second, Rechargeable gross margins improved $262,000
over the prior year due largely to cost savings actions taken over the last six
months, involving a realignment of resources and a more narrowed focus in the
Rechargeable business unit. In the second quarter of fiscal 2001, due to the
heavy competition, the Company shifted its focus to design and manufacture
lightweight custom sized batteries for OEMs rather than focus on the broad
retail cell phone market. The manufacture of cell phone batteries was an
important milestone for the Company as it demonstrated the Company's ability to
mass produce polymer rechargeable batteries. While the Company continues to
actively design and develop polymer rechargeable batteries, it has broadened its
supply source to include other lithium rechargeable cells made by other battery
manufacturers, including the Company's affiliate in Taiwan, Ultralife Taiwan,
Inc. Additionally, in the second and third quarters of fiscal 2002, the Company
reduced costs and reallocated resources to better align itself with the demand
in the marketplace. The Company has experienced significant demand from the
military for its primary battery products and as a result shifted significant
resources to be able to produce levels necessary to meet the demand. This has
resulted in lower costs charged to the Rechargeable business unit.
Operating and other expenses were $9,386,000 for the nine months ended
March 31, 2002, compared with $8,142,000 in the prior year, an increase of
$1,244,000, or 15%. Of the Company's operating and other expenses, research and
development expenses increased $885,000, or 38%, to $3,192,000 for the first
three quarters of fiscal 2002. The increase in research and development expenses
was due to increased development effort for samples and new product designs of
polymer rechargeable batteries in fiscal 2002. In addition, R&D costs rose due
to increases in Primary battery development activity for new military batteries
as prototypes were built for qualification with the US Army. Selling, general
and administrative costs increased $359,000 or 6% over the prior year period.
This increase was mainly due to higher selling and marketing expenses overseas
as the Company enhanced its market coverage, as well as severance costs
pertaining to an executive employment agreement incurred in conjunction with the
Company's resource realignment that was enacted in the second fiscal quarter.
Interest income decreased $540,000, or 86%, from $628,000 in the first
three quarters of fiscal 2001 to $88,000 in the first three quarters of fiscal
2002. The reduction in interest income is principally the result of lower
average cash balances and the lower interest rates. Interest expense declined
$111,000 due to lower average balances outstanding on the credit facility and
lower borrowing rates. Equity loss in affiliate was $1,930,000 for its equity
interest in Ultralife Taiwan, Inc. (UTI) for the first three quarters of fiscal
2001. No losses have been recorded in fiscal 2002 as the investment on the
balance sheet has been written down to zero under the equity method of
accounting. Additionally, in August 2001, the Company's ownership interest in
UTI was reduced to 33% as a result of additional capital raised by UTI for its
ongoing expansion. Miscellaneous income (expense) relates primarily to foreign
currency transaction gains and losses for the period reported.
14
Net losses were $9,354,000, or $0.77 per share, for the first nine months
of fiscal 2002 compared to $12,762,000, or $1.15 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
At March 31, 2002, cash and cash equivalents and available for sale
securities totaled $547,000. Of this amount, $201,000 was restricted at March
31, 2002 to support certain outstanding letters of credit. The Company used
$8,040,000 of cash in operating activities during the first nine months of
fiscal 2002. This use of cash related primarily to the net loss reported for the
period and an increase in accounts receivable, offset in part by depreciation
and decreases in other current assets. More specifically, receivables increased
$2,776,000 from June 30, 2001 to March 31, 2002. This increase resulted from a
significant increase in revenues in the third quarter of fiscal 2002 as compared
with the fourth quarter of fiscal 2001. The Company does not anticipate any
significant recoverability issues with these outstanding receivables. The
Company spent $1,715,000 for capital expenditures for production equipment and
facilities improvements during the first three quarters 2002. Of this amount
$995,000, was received as proceeds in sales-leaseback transactions and
incorporated under the Company's $4,000,000 lease line. As of April 30, 2002,
the remaining $250,000 available under the lease line of credit has been
committed for the acquisition of certain equipment.
At March 31, 2002, the Company had long-term debt outstanding including
capital lease obligations of $1,984,000 primarily relating to the financing
arrangement entered into by the Company at the end of fiscal 2000, described
below.
In June 2000, the Company entered into a $20,000,000 secured credit
facility with a lending institution. The financing agreement consisted of an
initial $12,000,000 term loan component based on the valuation of the Company's
fixed assets 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). While the amount available under the term loan
component amortizes over time, the amount of the revolving credit facility
component increases by an equal and offsetting amount. Principal and interest
are paid monthly on outstanding amounts borrowed. The loans bear interest at the
prime rate or other LIBOR-based rate options at the discretion of the Company.
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.
In October 2001, the Company was informed by its primary lending
institution that its borrowing availability under the $20,000,000 credit
facility had been effectively reduced to zero as the result of a recent
appraisal of its fixed assets. The appraisal resulted in a significant decrease
in the valuation of the Company's machinery and equipment which was based on an
"orderly liquidation valuation" methodology used by the appraiser.
In February 2002, the Company and its primary lending institution amended
the credit facility. The amended facility was reduced to $15,000,000 based on a
realistic assessment of the Company's potential borrowing capacity and to
minimize the cost of unused line fees. The term loan component was revised to an
initial $2,733,333 based on the valuation of the Company's fixed assets (of
which $2,681,000 was outstanding on the term loan at March 31, 2002). The
revolving credit facility component comprises the remainder of the total
potential borrowing capacity. Certain definitions were revised which increased
the Company's available borrowing base. In addition, the minimum net worth
covenant was reduced to $33,500,000. At March 31, 2002, the total amount
available under the revolver component was approximately $700,000, net of
$3,800,000 of outstanding letters of credit.
15
On July 20, 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 Company has maintained a lease line of credit with a third party
leasing agency. Under this arrangement, the Company has 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 is being used
to fund capital expansion plans for manufacturing equipment that will allow
increased capacity within the Company's Primary business unit. In conjunction
with this lease, the Company has a letter of credit of $3,800,000 outstanding.
At March 31, 2002, approximately $250,000 remained outstanding under the lease
line of credit. Once the lease line has been fully utilized, which is expected
to be by June 2002, the Company's quarterly lease payment will approximate
$226,000.
On April 23, 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. 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's capital resource commitments as of March 31, 2002 consisted
principally of capital equipment commitments of approximately $520,000.
The Company periodically reviews the carrying amount of its long-lived
assets for impairment. In particular, the recent activity surrounding the
Company's Rechargeable business unit has caused the Company to review the
carrying value of the long-lived assets associated with this business. At this
time, the Company believes that the future cash flows from this business will
exceed the carrying value of the assets. Therefore, no impairment has been
reflected. The Company will continue to closely monitor and reevaluate the
realizability of these assets each quarter. In the event that the Company is
required to record an impairment charge in the future, it could have a material
adverse effect on the Company's financial position and results of operations.
As previously noted, the Company's primary lending institution had
significantly reduced the total amount of the credit facility available.
Although the Company significantly improved its present liquidity position with
the private placement offering that raised $3,000,000 in April 2002, the
Company's future liquidity depends on the Company's ability to successfully
generate positive cash flow from operations and achieve adequate operational
savings. Notwithstanding the foregoing, there can be no assurance that the
Company will have sufficient cash flows to meet its working capital and capital
expenditure requirements. See additional comments on the Company's recent cost
reduction actions in "Outlook".
Outlook
The Company expects revenues in its fourth quarter of fiscal 2002 to be
relatively consistent with the results in the third quarter, i.e. in the range
of approximately $8,500,000 to $9,000,000. At this time, 9-volt orders are
continuing their strong trend. Sales of new military battery offerings are
expected to increase substantially, such as the BA-5390 battery used as the main
communications battery by military forces, providing for an improving mix of
higher margin products. Offsetting these improvements, however, is a delay in
certain military battery awards, which will have some impact on BA-5368 battery
sales. The Company is projecting modest revenues for its Rechargeable business
in the fourth fiscal
16
quarter, but it believes that there are still significant upside opportunities
in this area. For the year, the Company expects to conclude its year ended June
30, 2002 with approximately a 35% growth in revenues over the prior fiscal year.
While the Company made very significant strides toward meeting its goal of
operating cash breakeven in the March 2002 quarter, it fell short of its goal by
approximately $1,000,000. There were a few primary reasons for this shortfall.
First, the cost savings actions taken during the March quarter did not provide a
full quarter's worth of benefit. Second, the Company made a conscious decision
to continue to invest in its Primary R&D efforts to develop new products that
are key to its near-term growth prospects. And lastly, the Company continued to
improve the balance in its production schedule to keep inventory levels as low
as possible, reducing inventories during the quarter by approximately $800,000
which resulted in lower absorption of overheads than expected.
The Company believes that ongoing quarterly revenues of approximately
$9,000,000 to $9,500,000 will be the point where the Company reaches its key
financial target of operating cash breakeven. Depending on the mix of products
sold, and the sustaining benefits from the cost savings actions that were taken
over the past two quarters, the Company believes that it may be able to reach
this milestone in the June 2002 quarter.
In October and November 2001, and in February 2002, the Company took
various cost savings actions and realigned its resources to address changing
market conditions and to better meet customer demand in areas of the business
that are growing. While the actions have significantly reduced the production
workforce in the polymer Rechargeable business unit, no product lines have been
discontinued. In fact, the Company has broadened its product offerings by
increasing its sales focus and production capabilities to assemble rechargeable
battery packs from the purchase of cells from other sources, including its
affiliate, Ultralife Taiwan, Inc. The terms of the transactions with our
affiliate are arms-length. In total, approximately 20% of the Company's total
employees as of September 30, 2001 were terminated. The resource realignment did
not result in significant severance costs. The Company expects to realize cost
savings from the measures being taken of approximately $2,300,000 per quarter.
Approximately two-thirds of the savings will reduce cost of products sold and
one-third will reduce operating expenses. These quarterly savings are comprised
of approximately $1,800,000 of reduced labor costs, approximately $200,000 of
reduced material usage, and approximately $300,000 of lower administrative
expenses. The Company anticipates the full amount of these actions to be
realized in the June 2002 quarter.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently participate in the investment of derivative financial instruments.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims that 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 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 against a
significant portion of its share of the settlement costs and associated
expenses.
In the event settlement is not reached, the Company will continue to
defend the case vigorously. The amount of alleged damages, if any, cannot be
quantified, nor can the outcome of this litigation be predicted. Accordingly,
management cannot determine whether the ultimate resolution of this litigation
could have a material adverse effect on the Company's financial position and
results of operations.
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, the Company received an
environmental assessment, which revealed contaminated soil. The assessment
indicated potential actions that the Company may be required to undertake upon
notification by the environmental authorities. The assessment also proposed that
a second assessment be completed and provided an estimate of total potential
costs to remediate the soil of $230,000. However, there can be no assurance that
this will be the maximum cost. The Company entered into an agreement whereby a
third party has agreed to reimburse the Company for fifty percent of the costs
associated with this matter. Test sampling occurred in the fourth quarter of
fiscal 2001 and the engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed
the report and in January 2002 recommended additional testing. The Company
responded by submitting a proposed
18
work plan to NYSDEC, which was approved by NYSDEC in April 2002. The Company is
now soliciting proposals from engineering firms to complete remedial work
contained in the work plan, and it is unknown at this time whether the final
cost to remediate will be in the range of the original estimate, given the
passage of time. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Senior Convertible Subordinated Debenture Agreement
10.1 Fourth Amendment to Financing Agreements
(b) Reports on Form 8-K
On April 24, 2002, the Company filed a Form 8-K with the Securities
and Exchange Commission indicating that on April 23, 2002, the
Company closed on a $3 million private placement consisting of
common equity and a convertible note. Initially, approximately
800,000 shares were issued. Subject to shareholder approval, an
additional 200,000 shares will be issued upon conversion of the note
which matures on December 31, 2002. Shareholders will vote to
approve the conversion of the note into common shares at the
Company's Annual Meeting in December 2002. All shares will be issued
at $3.00 per share.
19
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: May 14, 2002 By: /s/John D. Kavazanjian
------------ ----------------------
John D. Kavazanjian
President and Chief Executive
Officer
Date: May 14, 2002 By: /s/Robert W. Fishback
------------ -------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
20