UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended___________________________
OR
/X/ Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from July 1, 2002 to December 31, 2002.
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X__ No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No_X__
On June 30, 2002, the aggregate market value of the Common Stock of
Ultralife Batteries, Inc. held by non-affiliates of the Registrant was
approximately $39,600,000 based upon the closing price for such Common Stock as
reported on the NASDAQ National Market System on June 30, 2002.
As of February 28, 2003, the Registrant had 12,852,869 shares of Common
Stock outstanding, net of 727,250 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Ultralife Batteries, Inc. Proxy Statement -- Certain portions of the
Proxy Statement relating to the June 10, 2003 Annual Meeting of Stockholders are
specifically incorporated by reference in Part III, Items 10-13 herein.
TABLE OF CONTENTS
ITEM PAGE
PART I 1 Business .................................................... 3
2 Properties .................................................. 15
3 Legal Proceedings ........................................... 15
4 Submission of Matters to a Vote of Securities Holders ....... 17
PART II 5 Market for Registrant's Common Equity and Related
Shareholder Matters ......................................... 18
6 Selected Financial Data ..................................... 20
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 21
7a Quantitative and Qualitative Disclosures About Market
Risks ....................................................... 36
8 Financial Statements and Supplementary Data ................. 36
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 62
PART III 10 Directors and Executive Officers of the Registrant .......... 63
11 Executive Compensation ...................................... 63
12 Security Ownership of Certain Beneficial Owners
and Management .............................................. 63
13 Certain Relationships and Related Transactions .............. 63
14 Controls and Procedures ..................................... 63
PART IV 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................. 64
Signatures .................................................. 68
CEO & CFO Certifications .................................... 69
Exhibits .................................................... 71
PART I
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 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. See Risk Factors in Item 7.
As used in this Report, unless otherwise indicated the terms "Company" and
"Ultralife" include the Company's wholly-owned subsidiary, Ultralife (UK) Ltd.
ITEM 1. BUSINESS
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide
range of standard and customized lithium primary (non-rechargeable), lithium ion
and lithium polymer rechargeable batteries for use in a wide array of
applications. The Company believes that its technologies allow the Company to
offer batteries that are flexibly configured, lightweight and generally achieve
longer operating time than many competing batteries currently available. The
Company has focused on manufacturing a family of lithium primary batteries for
military, industrial and consumer applications, which it believes is one of the
most comprehensive lines of lithium manganese dioxide primary batteries
commercially available. The Company also supplies rechargeable lithium ion and
lithium polymer batteries for use in portable electronic applications.
Effective December 31, 2002, the Company changed its fiscal year-end from
June 30 to December 31. The financial results presented in this report
reflecting the six-month period ended December 31, 2002 are referred to as
"Transition 2002". The financial results presented in this report reflecting the
full twelve-month fiscal periods that ended June 30 prior to Transition 2002 are
referred to as "fiscal" years. For instance, the year ended June 30, 2002 is
referred to as "Fiscal 2002", and the year ended June 30, 2001 is referred to as
"Fiscal 2001".
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.
Primary Batteries
The Company manufactures and markets a family of lithium-manganese dioxide
(Li-MnO2) primary batteries including 9-volt, cylindrical, pouch, and thin cell,
in addition to magnesium silver-chloride seawater-activated batteries.
Applications of the Company's 9-volt batteries include smoke alarms, wireless
security systems and intensive care monitors, among many other devices. The
Company's other lithium primary batteries are sold primarily to the military and
to OEMs for industrial markets for use in a variety of applications including
radios, automotive telematics, emergency radio beacons, search and rescue
transponders, pipeline inspection gauges, and other specialty instruments and
applications. The Company also manufactures seawater-activated batteries for
specialty marine applications. The Company believes that the materials used in,
and the chemical reactions inherent to, lithium batteries provide significant
advantages over other currently available primary battery technologies. These
advantages include lighter weight, longer operating time, longer shelf life, and
a wider operating temperature range. The Company's primary batteries also have
relatively flat voltage profiles, which provide stable power. Conventional
primary batteries, such as alkaline, have sloping voltage profiles, which result
in decreasing power output during discharge. While the price for the Company's
lithium batteries is generally higher
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than alkaline batteries, the increased energy per unit of weight and volume of
the Company's lithium batteries allow longer operating time and less frequent
battery replacements for the Company's targeted applications.
The global market for primary batteries was approximately $10.0 billion in
2001, and is expected to reach approximately $11.5 billion in 2004. The lithium
primary battery market accounted for approximately $1.0 billion of the 2001
market.
Revenues for this segment for the six months ended December 31, 2002 were
$15.2 million and segment contribution was $0.6 million. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Transition 2002 Consolidated Financial Statements and Notes thereto for
additional information.
Rechargeable Batteries
The Company believes that its range of polymer and lithium ion
rechargeable batteries offer substantial benefits, including the ability to
design and produce lightweight cells in a variety of custom sizes, shapes, and
thickness (as thin as 1 millimeter for lithium polymer cells). In Fiscal 2002,
the Company modified the strategy for its rechargeable batteries business. While
the Company continues to focus on the markets for lithium polymer batteries
utilizing its own technology and manufacturing infrastructure, in order to
expand its product offerings it also markets rechargeable batteries comprised of
cells manufactured by other qualified manufacturers, including Ultralife Taiwan,
Inc. ("UTI"), in which the Company has a 10.6% ownership interest at December
31, 2002. Additionally, the Company is utilizing the rechargeable battery
products it has developed for military applications to satisfy commercial
customers seeking turnkey battery solutions, including chargers. While the cost
of both the Company's own and outsourced lithium polymer rechargeable batteries
tends to be higher than the cost of lithium ion batteries due to higher material
costs, the cells tend to be thinner and lighter weight, offering application
design advantages not available with non-polymer rechargeable cells.
The global portable rechargeable batteries market was approximately $4.2
billion in 2001 and is expected to reach approximately $4.7 billion in 2004. The
widespread use of a variety of portable consumer electronic products such as
notebook computers and cellular telephones has placed increasing demands on
battery technologies, including lithium polymer and lithium ion, to deliver
greater amounts of energy through efficiently designed, smaller and lighter
batteries.
Revenues for this segment for the six months ended December 31, 2002 were
$0.3 million and segment contribution was a loss of $0.9 million. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Transition 2002 Consolidated Financial Statements and Notes
thereto for additional information.
Technology Contracts
On a continuing basis, the Company seeks to fund part of its efforts to
identify and develop new applications for its products and to advance its
technologies through contracts with both government agencies and third parties.
The Company has been successful in obtaining awards for such programs for both
rechargeable and primary battery technologies.
Revenues for this segment in the six months ended December 31, 2002 were
$100,000 and segment contribution was $70,000. Revenues in this segment are
expected to increase modestly as the Company continues to obtain contracts that
are in parallel with its efforts to ultimately commercialize products that it
develops. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Transition 2002 Consolidated Financial Statements
and Notes thereto for additional information.
Corporate
The Company allocates revenues, cost of sales, research and development
expenses, loss on fires, and impairment charges on long-lived assets across the
above business segments. The balance of income and expense, including selling,
general and administrative expenses, interest income and expense, gains on sale
of securities and other net expenses, and its gains and losses associated with
its equity interest in Ultralife Taiwan, Inc. are reported in the Corporate
segment.
There were no revenues for this segment in the six months ended December
31, 2002 and segment contribution was a loss of $3.4 million. See Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Transition 2002 Consolidated Financial Statements and Notes thereto for
additional information.
4
History
The Company was formed as a Delaware corporation in December 1990. In
March 1991, the Company acquired certain technology and assets from Eastman
Kodak Company ("Kodak") relating to its 9-volt lithium-manganese dioxide primary
battery. During the initial 12 months of operation, the Company directed its
efforts towards reactivating the Kodak manufacturing facility and performing
extensive tests on the Kodak 9-volt battery. These tests demonstrated a need for
design modifications, which, once completed, resulted in a battery with improved
performance and shelf life. In December 1992, the Company completed its initial
public offering and became listed on NASDAQ. In June 1994, the Company's
subsidiary, Ultralife Batteries (UK) Ltd., acquired certain assets of the Dowty
Group PLC ("Dowty"). The Dowty acquisition provided the Company with a presence
in Europe, manufacturing facilities for high rate lithium and seawater-activated
batteries and a team of highly skilled scientists with significant lithium
battery technology expertise. Ultralife (UK) further expanded its operations
through its acquisition of certain assets and technologies of Accumulatorenwerke
Hoppecke Carl Zoellner & Sohn GmbH & Co. ("Hoppecke") in July 1994. In December
1998, the Company announced a venture with PGT Energy Corporation ("PGT"),
together with a group of investors, to produce lithium rechargeable batteries in
Taiwan. During Fiscal 2000, the Company provided the venture, Ultralife Taiwan,
Inc. ("UTI"), with proprietary technology and other consideration in exchange
for approximately a 46% interest in the venture. Due to stock grants to certain
UTI employees in Fiscal 2001, subsequent capital raising initiatives, and the
Company's disposition of a portion of its ownership interest in October 2002,
the Company's ownership interest has been reduced to 10.6% as of December 31,
2002.
Since its inception, the Company has concentrated significant resources on
research and development activities, including but not limited to activities
related to polymer rechargeable batteries. The Company has a segment that
produces advanced rechargeable batteries using automated custom-designed
equipment. Over the past few years, the Company has expanded its product
offering of lithium primary and rechargeable batteries.
Products and Technology
A battery is an electrochemical apparatus used to store and release energy
in the form of electricity. The main components of a conventional battery are
the anode, cathode, separator and an electrolyte, which can be either a liquid
or a solid. The separator acts as an electrical insulator, preventing electrical
contact between the anode and cathode inside the battery. During discharge of
the battery, the anode supplies a flow of electrons, known as current, to a load
or device outside of the battery. After powering the load, the electron flow
reenters the battery at the cathode. As electrons flow from the anode to the
device being powered by the battery, ions are released from the cathode, cross
through the electrolyte and react at the anode.
Primary Batteries
A primary battery is used until discharged and then discarded. The
principal competing primary battery technologies are carbon-zinc, alkaline and
lithium. The Company's primary battery products, exclusive of its
seawater-activated batteries, are based primarily on lithium-manganese dioxide
technology. The following table sets forth the performance characteristics of
battery technologies that the Company believes represent its most significant
current or potential competition for its 9-volt and high-rate lithium batteries.
Comparison of Primary Battery Technologies
Energy Density
--------------
Watt- Watt- Operating
per hours hours per Discharge Shelf Life Temperature
Technology kilogram liter Profile (years) Range (Degree F)
---------- --------- --------- --------- ---------- ----------------
9-Volt Configurations:
Carbon-zinc (1) 36 59 Sloping 1 20 to 130
Alkaline (1) 80 171 Sloping 5 0 to 130
Ultralife lithium-manganese dioxide (2) 262 406 Flat 10 -4 to 140
High Rate Cylindrical: (3)
Alkaline (1) 88 223 Sloping 7 0 to 130
Lithium-sulfur dioxide (1)(4) 247 396 Flat 10 -60 to 160
Ultralife lithium-manganese dioxide (2) 263 592 Flat 10 -40 to 160
5
(1) Data compiled from industry sources and sales literature of other battery
manufacturers or derived therefrom by the Company.
(2) Results of tests conducted by the Company.
(3) Data for equivalent D-size cells.
(4) The Company believes that these batteries are limited in application due
to health, safety and environmental risks associated therewith.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume, as measured in watt-hours
per kilogram and watt-hours per liter, respectively. Higher energy density
translates into longer operating times for a battery of a given weight or volume
and, therefore, fewer replacement batteries. Discharge profile refers to the
profile of the voltage of the battery during discharge. A flat discharge profile
results in a more stable voltage during discharge of the battery. High
temperatures generally reduce the storage life of batteries, and low
temperatures reduce the battery's ability to operate efficiently. The inherent
electrochemical properties of lithium batteries result in improved low
temperature performance and an ability to withstand relatively high temperature
storage.
The Company's primary battery products are based predominantly on
lithium-manganese dioxide technology. The Company believes that materials used
in, and the chemical reactions inherent to, the lithium batteries provide
significant advantages over currently available primary battery technologies
which include lighter weight, longer operating time, longer shelf life, and a
wider operating temperature range. The Company's primary batteries also have
relatively flat voltage profiles, which provide stable power. Conventional
primary batteries, such as alkaline, have sloping voltage profiles, which result
in decreasing power outage during discharge. While the price for the Company's
lithium batteries is generally higher than commercially available alkaline
batteries produced by others, the Company believes that the increased energy per
unit of weight and volume of its batteries will allow longer operating time and
less frequent battery replacements for the Company's targeted applications.
Therefore, the Company believes that its primary batteries are price competitive
with other battery technologies on a price per watt-hour basis.
9-Volt Lithium Battery. The Company's 9-volt lithium battery delivers a
unique combination of high energy and stable voltage, which results in a longer
operating life for the battery and, accordingly, fewer battery replacements.
While the Company's 9-volt battery price is generally higher than conventional
9-volt carbon-zinc and alkaline batteries, the Company believes the enhanced
operating performance and decreased costs associated with battery replacement
make the Ultralife 9-volt battery more cost effective than conventional
batteries on a cost per watt-hour basis when used in a variety of applications.
The Company currently markets its 9-volt lithium battery to consumer
retail and OEM markets, including manufacturers of safety and security systems
such as smoke alarms, medical devices and other electronic instrumentation.
Applications for which the Company's 9-volt lithium battery are currently sold
include:
Safety and Security Equipment Medical Devices Specialty Instruments
Smoke alarms Bone growth stimulators Electronic meters
Wireless alarm systems Telemetry equipment Hand-held scanners
Tracking devices Portable blood analyzers Wireless electronics
Transmitters/receivers Ambulatory Infusion Pumps Garage door openers
The Company currently sells its 9-volt battery to Kidde Safety
(Fyrnetics), Invensys (Firex(R)), BRK Brands (First Alert(R)), Universal
Security Instruments, NADI (Dicon), and Homewatch for long-life smoke alarms, to
Energizer, Philips Medical Systems, i-STAT Corp. and Orthofix for medical
devices, and to ADT, Ademco, Interactive Technologies, Inc., and Internix
(Japan) for security devices. Kidde Safety (Fyrnetics), Invensys (Firex(R)), BRK
Brands (First Alert(R)), Universal Security Instruments, NADI (Dicon), and
Homewatch offer long life smoke alarms powered by the Company's 9-volt lithium
battery with a limited 10-year warranty. The Company also manufactures its
9-volt lithium battery under private label for Energizer, Telenot in Germany and
Uniline in Sweden. Additionally, the Company sells its 9-volt battery to the
broader consumer market by establishing relationships with national and regional
retail chains such as Radio Shack, TruValue, Ace Hardware, Fred Meyer, Inc.,
Menards, Chase Pitkin, Lowes and a number of catalogs.
The Company's 9-volt lithium battery market benefited as a result of a
state law enacted in Oregon. The Oregon statute required that, as of June 23,
1999, all battery-operated ionization-type smoke alarms sold in that state must
include a 10-year battery. The Company believes that if legislation were to
ultimately pass in any major state, and if other states were to follow suit,
demand for the Company's 9-volt batteries could increase significantly. The
Company is also benefiting from local and national legislation passed in various
U.S. and European locations, which requires the installation of smoke alarms.
The passage of this type of legislation in other countries could also increase
the demand for the Company's 9-volt batteries.
6
The Company believes that it manufactures the only standard size 9-volt
battery warranted to last 10 years when used in ionization-type smoke alarms.
Although designs exist using other battery configurations, such as using three
2/3 A-type battery cells, the Company believes its 9-volt solution is superior
to these alternatives. The Company believes that its current manufacturing
capacity is adequate to meet customer demand. However, with increased
legislative activity, demand could exceed current capacity, and therefore,
additional capital equipment would be required to meet these new needs.
Cylindrical Cell and Pouch Cell Lithium Batteries. The Company believes
that its high rate cylindrical and pouch lithium cells, based on its proprietary
lithium-manganese dioxide technology, are the most advanced high rate lithium
power sources currently available. The Company also markets high rate lithium
batteries using cells from other manufacturers in other sizes and voltage
configurations in order to offer a more comprehensive line of batteries to its
customers.
The Company markets its line of high rate lithium cells and batteries to
the OEM market for industrial, military, medical, automotive telematics and
search and rescue applications. Significant industrial applications include
pipeline inspection equipment, autoreclosers and oceanographic devices. Among
the military uses are manpack radios, night vision goggles, chemical agent
monitors, and thermal imaging equipment. Search and rescue applications include
ELT's (Emergency Location Transmitters) for aircraft and EPIRB's (Emergency
Position Indicating Radio Beacons) for ships.
The market for high rate lithium batteries has been dominated by lithium-
sulfur dioxide and lithium- thionyl chloride, which possess liquid cathode
systems. However, there is an increasing market share being taken by lithium
manganese dioxide, a solid cathode system, because of its superior performance
and safety. The Company believes that its high rate lithium manganese dioxide
batteries offer a combination of performance, safety and environmental benefits
which will enable it to gain an increasing share of this market.
Some of the Company's main cylindrical cell and pouch cell lithium
batteries include the following:
High Rate Cylindrical Batteries. The Company markets a wide range of
high rate cylindrical primary lithium batteries in various sizes and
voltage configurations. The Company currently manufactures a range of high
rate lithium cells under the Ultralife HiRate(R) brand, which are sold and
packaged into multi-cell battery packs. These include D, C, 1 1/4 C, and
19 mm x 65 mm configurations, among other sizes. Based on the Company's
lithium-manganese dioxide chemistry, the Company's cylindrical cells use
solid cathode construction, are non-pressurized and non-toxic, and are
considered safer than liquid cathode systems.
High Rate Pouch Batteries. The Company has developed a pouch cell
lithium battery. The pouch cell is a 3-volt, wound, rectangular-shaped,
high-rate cell configured for packaging in a compact, lightweight
laminated foil pouch. Based on the Company's lithium-manganese dioxide
chemistry, the pouch cell, like its cylindrical cell counterpart, uses
solid cathode construction, and is a non-pressurized, non-toxic system
that is considered safer than liquid cathode systems. The pouch technology
provides flexibility with a lightweight thin battery having high energy
density. The Company's lithium technology provides these batteries with a
long shelf life and eliminates voltage delay even after prolonged storage.
BA-5372 Batteries. The Company's BA-5372 battery is a cylindrical
6-volt lithium-manganese dioxide battery, which is used for memory back-up
in communications devices, including the Army's Single Channel Ground and
Airborne Radio System (SINCGARS), the most widely used of these devices.
This battery offers a combination of performance features suitable for
military applications including high energy density, lightweight, long
shelf life and ability to operate in a wide temperature range.
BA-5368 Batteries. The Company's BA-5368 battery is a cylindrical
12-volt lithium-manganese dioxide battery, which is used in AN/PRC90 pilot
survival radios. This battery is used by the U.S. military and other
military organizations around the world.
BA-5367 Batteries. The Company's BA-5367 battery is a 3-volt
lithium-manganese dioxide battery, which is a direct replacement for the
lithium-sulfur dioxide (Li-SO2) BA-5567 battery, and has over 50% more
capacity. It is used in a variety of military night vision, infrared
aiming, digital messaging and meteorological devices.
UBI5390 Batteries. The Company's UBI5390 battery is an alternative
for the Li-SO2 BA-5590 battery, the most widely used battery in the U.S.
armed forces. The UBI5390 is a rectangular 15/30 volt lithium-manganese
dioxide battery which provides 50% more capacity (mission time) than the
BA-5590, and is primarily used as the
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main power supply for the Army's SINCGARS (Manpack) radios. Approximately
60 other military applications, such as the Javelin Medium Anti-Tank
Weapon Control Unit, also use these batteries.
Thin Cell Batteries. The Company has developed a line of
lithium-manganese dioxide primary batteries, which are called Thin Cell
batteries. The Thin Cell batteries are flat, light weight, flexible
batteries that can be manufactured to conform to the shape of the
particular application. The Company is currently offering two
configurations of the Thin Cell battery, which range in capacity from 220
milliampere-hours to 1,000 milliampere-hours. The Company is currently
marketing these batteries to OEMs for applications such as identification
tags and theft detection systems.
Seawater-activated Batteries. The Company produces a variety of
seawater-activated batteries based on magnesium-silver chloride
technology. Seawater-activated batteries are custom designed and
manufactured to end user specifications. The batteries are activated when
placed in salt water, which acts as the electrolyte allowing current to
flow. The Company markets seawater-activated batteries to naval and other
specialty OEMs.
Rechargeable Batteries
In contrast to primary batteries, after a rechargeable battery is
discharged, it can be recharged and reused many times. Generally, discharge and
recharge cycles can be repeated hundreds of times in rechargeable batteries, but
the achievable number of cycles (cycle life) varies among technologies and is an
important competitive factor. All rechargeable batteries experience a small, but
measurable, loss in energy with each cycle. The industry commonly reports cycle
life in number of cycles a battery can achieve until 80% of the battery's
initial energy capacity remains. In the rechargeable battery market, the
principal competing technologies are nickel-cadmium, nickel-metal hydride and
lithium-based batteries. Rechargeable batteries generally can be used in many
primary battery applications, as well as in applications such as portable
computers and other electronics, cellular telephones, medical devices, wearable
devices and many other consumer products.
Three important parameters for describing the performance characteristics
of a rechargeable battery suited for today's portable electronic devices are
design flexibility, energy density and cycle life. Design flexibility refers to
the ability of rechargeable batteries to be designed to fit a variety of shapes
and sizes of battery compartments. Thin profile batteries with prismatic
geometry provide the design flexibility to fit the battery compartments of
today's electronic devices. Energy density refers to the total electrical energy
per unit volume stored in a battery. High energy density batteries generally are
longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. Lithium batteries, by the nature of their
electrochemical properties, are capable of providing higher energy density than
comparably sized batteries that utilize other chemistries and, therefore, tend
to consume less volume and weight for a given energy content. Long cycle life is
a preferred feature of a rechargeable battery because it allows the user to
charge and recharge power many times before noticing a difference in
performance.
Energy density refers to the total amount of electrical energy stored in a
battery divided by the battery's weight and volume as measured in watt-hours per
kilogram and watt-hours per liter, respectively. High energy density and long
achievable cycle life are important characteristics for comparing rechargeable
battery technologies. Greater energy density will permit the use of batteries of
a given weight or volume for a longer time period. Accordingly, greater energy
density will enable the use of smaller and lighter batteries with energy
comparable to those currently marketed. Long achievable cycle life, particularly
in combination with high energy density, is suitable for applications requiring
frequent battery rechargings, such as cellular telephones and portable
computers.
Advanced Polymer Rechargeable Batteries. The Company manufactures, or has
manufactured, to the Company's specifications, an advanced rechargeable battery
that is based on proprietary polymer technology. The battery is composed of
ultra-thin and flexible components including a metallic oxide cathode, a carbon
anode and a polymer electrolyte. The Company believes that users of portable
electronic products such as wearable computers and wireless devices are seeking
smaller and lighter products that require less frequent recharges while
providing the same or additional energy. The Company believes that its
technology is attractive to OEMs of such products since the use of a flexible
polymer electrolyte, rather than a liquid electrolyte, reduces the battery's
overall weight and volume, and allows for increased design flexibility in
conforming batteries to the variety of shapes and sizes required for portable
electronic products. The Company can provide a variety of cell sizes to satisfy
market demands. Typical cell sizes offered by the Company include cells ranging
in size from 3.2x20x30 mm to 3.4x106x102 mm and ranging in capacity from 120 mAh
to 2800 mAh.
In addition to the performance advantages described above, there is a
significant difference between rechargeable batteries, which are based on the
lithium ion liquid electrolyte technology, and the technology used in the
Company's
8
advanced rechargeable batteries. Liquid lithium ion cells use a liquid
electrolyte that is contained within a cylindrical or prismatic metal housing.
Under abusive conditions, where internal battery temperatures may become
extremely high, significant pressure may build within these cells which can
cause these cells to vent and release liquid electrolyte into the environment.
The Company's advanced rechargeable batteries utilize a polymer electrolyte that
is bound within the pores of the cell materials and, thus, leakage is avoided.
Moreover, because the cell does not require pressure to maintain the contact
between the electrodes, the cells do not require a metal housing. Rather, they
are packaged within a thin foil laminate.
Liquid Lithium Ion Cells and Batteries. The Company offers a variety of
liquid lithium ion cells ranging in size from 4.6x30x48 mm to 5.6x35x50 mm and
in capacity from 600 mAh to 920 mAh. The Company also offers the following
batteries containing liquid lithium ion cells:
BB-2590 Batteries. The Company's BB-2590 battery is lithium ion
rechargeable version of the UBI5390 primary battery, and can be used in
the same applications as the UBI5390. The Company is also marketing this
battery, and a charger, for use in commercial applications.
LWC-L Batteries. The Company's LWC-L battery is a lithium ion
rechargeable commercial version of the Land Warrior military battery being
developed for the U.S. Army Land Warrior program. The Company is also
marketing this battery, and a charger, for use in commercial applications.
Sales and Marketing
The Company sells its current products directly to OEMs in the U.S. and
abroad and has contractual arrangements with sales representatives who market
the Company's products on a commission basis in particular areas. The Company
also distributes its products through domestic and international distributors
and retailers that purchase batteries from the Company for resale. The Company
employs a staff of sales and marketing personnel in the U.S., England and
Germany. The Company's sales are generated primarily from customer purchase
orders and the Company has traditionally had a number of long-term sales
contracts with customers.
Primary Batteries
The Company has targeted sales of its primary batteries to manufacturers
of security and safety equipment, automotive telematics, medical devices and
specialty instruments, as well as users of military equipment. The Company's
strategy is to develop marketing alliances with OEMs and governmental agencies
that utilize its batteries in their products, commit to cooperative research and
development or marketing programs, and recommend the Company's products for
design-in or replacement use in their products. The Company is addressing these
markets through direct contact by its sales and technical personnel, use of
sales representatives and stocking distributors, manufacturing under private
label and promotional activities.
The Company seeks to capture a significant market share for its products
within its targeted OEM markets, which the Company believes, if successful, will
result in increased product awareness and sales at the end-user or consumer
level. The Company is also selling the 9-volt battery to the consumer market
through retail distribution. Most military procurements are done directly by the
specific government organizations requiring batteries.
During Transition 2002, the Company had one customer, the U.S. Army /
CECOM, which comprised more than 10% of the Company's revenues. The Company
believes that the loss of this customer could have a material adverse effect on
the Company. The Company's relationship with this customer is good.
During Fiscal 2002, the Company had two customers, UNICOR and Kidde plc,
each of which comprised more than 10% of the Company's revenues. While the
demand from each of these customers has diminished as a percent of total
revenues since June 2002 mainly as a result of growing demand from other
customers, the Company's relationship with these customers is good.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the U.S. economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The U.S. smoke detector OEM market segment comprised approximately 19%
of total primary revenues in Transition 2002. Additionally, a lower demand from
the U.S. and U.K. Governments could result in lower sales to military and
government users. However, the Company
9
currently is experiencing increasing demand from military and government
customers, and it expects this demand to continue in the near term.
The Company has been successfully marketing its products to military
organizations in the U.S. and other countries around the world. These efforts
have recently resulted in some significant contracts for the Company. For
example, in June 2002, the Company was awarded a five-year production contract
by the U.S. Army Communications and Electronics Command (CECOM) to provide three
types of primary (non-rechargeable) lithium-manganese dioxide batteries to the
U.S. Army. The contract provides for order releases approximately every six
months over a five-year period with a maximum potential value of up to $32
million. Combined, these batteries comprise what is called the Small Cell
Lithium Manganese Dioxide Battery Group under CECOM's NextGen II acquisition
strategy. A major objective of this acquisition is to maintain a domestic
production base of a sufficient capacity to timely meet peacetime demands and
have the ability to surge quickly to meet deployment demands. The Company
intends to participate in the two additional Next Gen II five-year battery
procurements. The Company has recently bid on the Large Cylindrical Battery
five-year procurement, and it plans to participate in the five-year procurement
for Rectangular Batteries during calendar year 2003. In addition, in December
2002, the Company announced that it had received orders from the U.S. military
for $14.4 million of its UBI5390 batteries that are used by the military for
certain communications devices. There is no assurance, however, that the Company
will be awarded any additional military contracts.
At December 31, 2002, the Company's backlog related to primary battery
orders was approximately $23 million. The majority of this backlog was related
to recent military orders. Backlog for the Company's 9-volt batteries was not
significant, as most of the orders the Company receives for 9-volt batteries are
typically shipped within a short time frame from when the order is placed.
Rechargeable Batteries
The Company has targeted sales of its advanced polymer rechargeable
batteries through OEM suppliers, as well as distributors and resellers focused
on its target markets. During the Transition 2002 and Fiscal 2002 periods, the
Company added lithium ion products, additional polymer products and charging
systems to its portfolio. The Company is currently seeking a number of design
wins with OEMs, and believes that its design capabilities, product
characteristics and solution integration will drive OEMs to incorporate the
Company's batteries into their product offerings, resulting in revenue growth
opportunities for the Company. The Company has not marketed its advanced
rechargeable batteries for a sufficient period to determine whether these OEMs
or consumer sales are seasonal.
The Company continues to expand its marketing activities as part of its
strategic plan to increase sales of its rechargeable batteries including
military, computers and communications applications, as well as wireless
headsets, computing devices, wearable devices and other electronic portable
devices. A key part of this expansion includes building its network of
distributors and value added distributors throughout the world.
At December 31, 2002, the Company's backlog related to rechargeable
battery orders was not significant.
Technology Contracts
The Company has participated in various programs in which it has done
contract research and development. These programs have incorporated a profit
margin in their structure. This segment has declined because the current
strategy for the Company is only to seek development projects that are in
harmony with its process and product strategy. An example is a Science and
Technology Contract awarded to the Company by the U.S. Army during 2002 for the
development of a Land Warrior specific hybrid power source system and smart
rapid-on-the-move charger. Although the Company reports technology contracts as
a separate business segment, it does not actively market this segment as a
revenue source but rather accepts technology contract business that supports and
advances its overall battery business strategy.
Patents, Trade Secrets and Trademarks
The Company relies on licenses of technology as well as its unpatented
proprietary information, know-how and trade secrets to maintain and develop its
commercial position. Although the Company seeks to protect its proprietary
information, there can be no assurance that others will not either develop
independently the same or similar information or obtain access to the Company's
proprietary information. In addition, there can be no assurance that the Company
would prevail if any challenges to intellectual property rights were asserted by
the Company against third parties, or that third parties will not successfully
assert infringement claims against the Company in the future. The Company
believes, however,
10
that its success is less dependent on the legal protection that its patents and
other proprietary rights may or will afford than on the knowledge, ability,
experience and technological expertise of its employees.
The Company holds 19 patents in the U.S. and foreign countries, three of
which relate to rechargeable polymer batteries, and has certain patent
applications pending also relating to polymer batteries. The Company also
pursues foreign patent protection in certain countries. The Company's patents
protect technology that makes automated production more cost-effective and
protect important competitive features of the Company's products. However, the
Company does not consider its business to be dependent on patent protection.
The Company's research and development in support of its advanced
rechargeable battery technology and products is currently based, in part, on
non-exclusive technology transfer agreements. The Company made an initial
payment of $1.0 million for such technology and is required to make royalty and
other payments for products that incorporate the licensed technology of 8% of
the fair market value of the royalty bearing product. The license continues for
the respective unexpired terms of the patent licenses, and continues in
perpetuity with respect to other licensed technical information.
All of the Company's employees in the U.S. and all the Company's employees
involved with the Company's technology in England are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. These agreements also
contain certain noncompetition and nonsolicitation provisions effective during
the employment term and for a period of one year thereafter. There can be no
assurance that the Company will be able to enforce these agreements.
Following are trademarks of the Company: Ultralife(R), Ultralife Thin
Cell(R), Ultralife HiRate(R), Ultralife Polymer(R), Ultralife Polymer Cell,
Ultralife Polymer Battery, Ultralife Polymer System, The New Power Generation.
Manufacturing and Raw Materials
The Company manufactures its products from raw materials and component
parts that it purchases. The Company has ISO 9001 certification for its lithium
battery manufacturing operations in both of its manufacturing facilities in
Newark, New York and Abingdon, England.
Primary Batteries
The Company's Newark, New York facility has the capacity to produce in
excess of nine million 9-volt batteries per year, approximately seven million
cylindrical cells per year, and approximately 500,000 pouch cells per year. The
manufacturing facility in Abingdon, England is capable of producing up to one
million cylindrical cells per year. This facility also manufactures
seawater-activated batteries and assembles customized multi-cell battery packs.
The Company has experienced significantly increased demand recently,
particularly with respect to orders from various military organizations. As a
result, the manufacturing capability for certain of the Company's battery
platforms has been approaching the current production capacity with the existing
equipment. The Company has taken steps to order and acquire new machinery and
equipment in areas where production bottlenecks have resulted, in order to be
able to fulfill the demand. The Company continually evaluates its requirements
for additional capital equipment, and the Company believes that the planned
increases in its current manufacturing capacity will be adequate to meet
foreseeable customer demand. However, with further unanticipated growth in
demand for the Company's products, demand could exceed capacity, which would
require it to install additional capital equipment to meet these incremental
needs.
The Company utilizes lithium foil as well as other metals and chemicals to
manufacture its batteries. Although the Company knows of only three major
suppliers that extrude lithium into foil and provide such foil in the form
required by the Company, it does not anticipate any shortage of lithium foil or
any difficulty in obtaining the quantities it requires. Certain materials used
in the Company's products are available only from a single source or a limited
number of sources. Additionally, the Company may elect to develop relationships
with a single or limited number of sources for materials that are otherwise
generally available. Although the Company believes that alternative sources are
available to supply materials that could replace materials it uses and that, if
necessary, the Company would be able to redesign its products to make use of an
alternative product, any interruption in its supply from any supplier that
serves currently as the Company's sole source could delay product shipments and
adversely affect the Company's financial performance and relationships with its
customers. Although the Company has experienced interruptions of product
deliveries by sole source suppliers, none of such interruptions has had a
material effect on the Company. All other raw materials utilized by the Company
are readily available from many sources.
11
The total carrying value of the Company's primary battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $5.2 million as of December 31, 2002.
Rechargeable Batteries
In June of 2002, the Company recorded a $14.3 million impairment charge on
a significant portion of its high volume production line for advanced polymer
rechargeable batteries that was put in place to manufacture Nokia cell phone
replacement batteries. Due to the culmination of various economic conditions,
these assets were significantly underutilized. The Company also has some
lower-volume, but more flexible, automated manufacturing equipment at its
Newark, New York facility mainly to be used for higher value, lower quantity
production orders. The raw materials utilized by the Company are readily
available from many sources.
In addition to its own manufacturing capabilities for rechargeable
batteries, the Company has a 10.6% ownership interest in a venture in Taiwan,
named Ultralife Taiwan, Inc. (UTI). This venture, established in December 1998,
was initially set up to develop manufacturing capabilities using the Company's
polymer rechargeable technology. In addition, UTI has recently developed the
capability to manufacture rechargeable lithium batteries using liquid lithium
technologies. The Company uses UTI and other lithium rechargeable cell
manufacturers as sources of raw materials for the assembly of battery packs. In
October 2002, when the Company sold a portion of its ownership interest in UTI,
the Company obtained an agreement from UTI that over the following three years,
the Company 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.
The total carrying value of the Company's rechargeable battery inventory,
including raw materials, work in process and finished goods, amounted to
approximately $ 0.6 million as of December 31, 2002.
Research and Development
The Company conducts its research and development in Newark, New York, and
Abingdon, England. During Transition 2002 and Fiscal 2002, 2001, and 2000, the
Company expended approximately $1.1 million, $4.3 million, $3.4 million, and
$5.3 million, respectively, on research and development. R&D expenses for
Transition 2002 moderated somewhat compared with the prior year run rate as the
development efforts for polymer rechargeable batteries declined substantially.
R&D expenses rose in Fiscal 2002 as the Company increased its development
efforts in the area of new military batteries. R&D expenses were significantly
lower in Fiscal 2001 due to the commercial launch and production of its polymer
rechargeable battery, and as a result, certain costs were shifted to cost of
products sold. The Company currently expects that research and development
expenditures will moderate as the resources devoted to the development of
rechargeable batteries have been diminished and the development efforts
associated with new cylindrical batteries, particularly for military
applications at the present time, are relatively constant. For future
development projects, the Company will continue to seek to fund part of its
research and development efforts from both government and non-government
sources.
Cylindrical Cell Lithium Batteries
Since the summer of 2001, the Company's strategy has included the
development of new cells and batteries for various military applications,
utilizing technology developed through its work on pouch cell development, as
described below. The Company plans on continuing this activity, as this market
is a significant potential growth area for the business. In addition, the
Company is leveraging the new battery cases and components it is developing by
introducing rechargeable versions of these products. During Transition 2002, the
Company spent approximately $0.7 million on the development of new military
batteries, and during Fiscal 2002, it spent approximately $1.2 million on
similar development efforts for the military. The Company began to realize
revenues from these development efforts in small amounts in Transition 2002 and
Fiscal 2002, but the Company expects revenues to increase significantly during
the next few years.
Pouch Cell Lithium Batteries
The Company has been conducting research and development of pouch cell
lithium batteries, which have a broad range of potential applications in
military and industrial markets including radio communications, telematics and
medical devices. Included in the research and development activities are design
programs for specific cells and batteries to develop a volume manufacturing
methodology. The designs will incorporate a lean manufacturing approach to
optimize their construction. No assurance can be given that such efforts will be
successful or that the products that result will be marketable. In June 2000,
the Company announced that it entered into a two-year agreement with the U.S.
Army
12
Communications-Electronics Command (CECOM) to complete the development of its
primary lithium-manganese dioxide pouch batteries for manufacture in high
volume. Products under this agreement will be produced on a flexible
manufacturing line. The Company is in the final phase of this project, which is
now expected to be completed during 2003. CECOM provided funding of
approximately $2.8 million for engineering efforts, and CECOM considers the
Company's pouch technology critical to meeting their future portable power needs
in a safe, cost effective manner, and views it as inherently safer than the
other lithium technology currently in use.
Rechargeable Batteries
The Company is directing its rechargeable battery research and development
efforts toward design optimization and customization to customer specifications.
These batteries have a broad range of potential applications in consumer,
industrial and military markets including cellular telephones, computing devices
and other portable electronic devices.
During Fiscal 2002, the Company significantly reduced its development
efforts focused on the polymer rechargeable technology due to changing economic
conditions. As a result, the Company realized significantly lower expenditures
for rechargeable R&D in Transition 2002 and it is expected that this lower level
of expenses will continue throughout 2003. (See Item 7, Management's Discussion
and Analysis, for additional information concerning the Company's change in
strategy.)
Technology Contracts
The U.S. Government sponsors research and development programs designed to
improve the performance and safety of existing battery systems and to develop
new battery systems. The Company has successfully completed the initial and
second phase of a government-sponsored program to develop new configurations of
the Company's BA-7590 pouch cell primary battery, which lasts up to twice as
long and could replace the current BA-5590 battery. The BA-5590 is the most
widely used battery power source for the U.S. Army and NATO communications
equipment.
The Company was also awarded an additional cost sharing SBIR Phase III
contract for the development of the BA-7590 pouch cell primary battery that was
substantially completed in fiscal 2000. In Fiscal 1999, the Company was awarded
the lead share of a three-year $15.3 million cost-sharing project sponsored by
the U.S. Department of Commerce's Advanced Technology Program (ATP). The
objective of this project was to develop and produce ultra-high energy polymer
rechargeable batteries that will significantly outperform existing batteries in
a broad range of portable electronic and aerospace applications. As lead
contractor, the Company received a total of $4.6 million over the 3-year life of
the contract. In Fiscal 2002, the Company received $0.7 million. The Company's
participation in the ATP project was completed in June 2002.
Battery Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in the Company's batteries may pose
safety problems if improperly used. The Company has designed its batteries to
minimize safety hazards both in manufacturing and use.
The transportation of primary and rechargeable lithium batteries is
regulated by the International Civil Aviation Organization (ICAO) and
corresponding International Air Transport Association (IATA) Dangerous Goods
Regulations and, in the U.S., by the Department of Transportation (DOT). The
Company currently ships its products pursuant to ICAO, IATA and DOT hazardous
goods regulations. New regulations that pertain to all lithium battery
manufacturers are scheduled to become effective in 2003 and 2004. The new
regulations require companies to meet certain new testing, packaging, labeling
and shipping specifications for safety reasons. The Company is working to ensure
that it will be able to comply with these new regulations.
National, state and local regulations impose various environmental
controls on the storage, use and disposal of lithium batteries and of certain
chemicals used in the manufacture of lithium batteries. Although the Company
believes that its operations are in substantial compliance with current
environmental regulations, there can be no assurance that changes in such laws
and regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Moreover, state and local
governments may enact additional restrictions relating to the disposal of
lithium batteries used by customers of the Company that could adversely affect
the demand for the Company's products. There can be no assurance that additional
or modified regulations relating to the storage, use and disposal of chemicals
used to manufacture batteries, or restricting disposal of batteries will not be
imposed.
13
Since primary and rechargeable lithium battery chemistry reacts adversely
with water and water vapor, certain of the Company's manufacturing processes
must be performed in a controlled environment with low relative humidity. Both
of the Company's facilities contain dry rooms as well as specialized air drying
equipment.
Primary Batteries
The Company's primary battery products incorporate lithium metal, which
reacts with water and may cause fires if not handled properly. Over the past ten
years, the Company has experienced fires that have temporarily interrupted
certain manufacturing operations in a specific area of one of its facilities.
Specifically, in December 1996, a fire at the Abingdon, England facility caused
an interruption in the U.K. manufacturing operations for a period of 15 months.
During the period from December 1996 through January 1999, the Company received
insurance proceeds compensating the Company for loss of its plant and machinery,
leasehold improvements, inventory and business interruption. The Company
believes that it has adequate fire insurance, including business interruption
insurance, to protect against fire losses in its facilities.
The Company's 9-volt battery is designed to conform to the dimensional and
electrical standards of the American National Standards Institute, and the
9-volt battery and 3-volt cells are recognized under the Underwriters
Laboratories, Inc. Component Recognition Program.
Rechargeable Batteries
The Company is not currently aware of any regulatory requirements
regarding the disposal of polymer or liquid lithium ion rechargeable cells and
batteries.
Corporate
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, a consulting firm performed a
Phase I and II Environmental Site Assessment which revealed the existence of
contaminated soil and ground water around one of the buildings. The Company
retained an engineering firm which estimated that the cost of remediation should
be in the range of $230,000. This cost, however, is merely an estimate and the
cost may in fact be much higher. In February, 1998, the Company entered into an
agreement with a third party which provides that the Company and this third
party will retain an environmental consulting firm to conduct a supplemental
Phase II investigation to verify the existence of the contaminants and further
delineate the nature of the environmental concern. The third party agreed to
reimburse the Company for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. The Company has fully reserved for
its portion of the estimated liability. Test sampling was completed in the
spring of 2001, and the engineering report was submitted to the New York State
Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed
the report and, in January 2002, recommended additional testing. The Company
responded by submitting a work plan to NYSDEC, which was approved in April 2002.
The Company has sought proposals from engineering firms to complete the remedial
work contained in the work plan, but 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. Because this is a voluntary remediation, there is no
requirement for the Company to complete the project within any specific time
frame. The ultimate resolution of this matter may have a significant adverse
impact on the results of operations in the period in which it is resolved.
Furthermore, the Company may face claims resulting in substantial liability
which could have a material adverse effect on the Company's business, financial
condition and the results of operations in the period in which such claims are
resolved.
Competition
Competition in the battery industry is, and is expected to remain,
intense. The competition ranges from development stage companies to major
domestic and international companies, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than those of the Company. The Company competes against companies
producing lithium batteries as well as other primary and rechargeable battery
technologies. The Company competes on the basis of design flexibility,
performance and reliability. There can be no assurance that the Company's
technology and products will not be rendered obsolete by developments in
competing technologies which are currently under development or which may be
developed in the future or that the Company's competitors will not market
competing products which obtain market acceptance more rapidly than those of the
Company.
14
Historically, although other entities may attempt to take advantage of the
growth of the lithium battery market, the lithium battery industry has certain
technological and economic barriers to entry. The development of technology,
equipment and manufacturing techniques and the operation of a facility for the
automated production of lithium batteries require large capital expenditures,
which may deter new entrants from commencing production. During the past couple
years, several Asian companies have gained manufacturing strength in the polymer
market. The Company's strategy is to form marketing partnerships with selected
companies in order to minimize competition from these companies. Through its
experience in battery manufacturing, the Company has also developed expertise,
which it believes would be difficult to reproduce without substantial time and
expense in the primary battery market.
Employees
As of February 28, 2003, the Company employed a total of 461 permanent and
temporary persons: 14 in research and development, 402 in production and 45 in
sales, administration and management. Of the total, 367 are employed in the U.S.
and 94 in England. None of the Company's employees is represented by a labor
union. During the latter part of Transition 2002 and into 2003, the Company has
been required to hire additional personnel in order to meet the increasing
demand for its products. In June 2002, the Company employed 349 persons. The
Company considers its employee relations to be satisfactory.
In October and November 2001, the Company embarked on certain cost savings
initiatives to reduce costs and to move the Company closer to profitability,
resulting in the elimination of approximately 90 positions, mainly in the
Company's rechargeable business unit and in various support areas. Of these
positions, approximately 33 people lost their jobs, while the remaining 57
people were redeployed to other areas of the Company that were growing. In
February 2002, the Company reduced its workforce further by eliminating another
70 people in various manufacturing and support areas in an effort to run the
organization more efficiently. In total, approximately 160 positions at the
Company's U.S. operation were affected by the cost savings initiatives and over
100 people lost their jobs as a result of the workforce reductions during Fiscal
2002.
ITEM 2. PROPERTIES
The Company occupies under a lease/purchase agreement approximately
250,000 square feet in two facilities located in Newark, New York. The Company
leases approximately 35,000 square feet in a facility based in Abingdon,
England. At both locations, the Company maintains administrative offices,
manufacturing and production facilities, a research and development laboratory,
an engineering department and a machine shop. At present, all of the Company's
rechargeable manufacturing and assembly operations are conducted at its Newark,
New York facility. The Company's corporate headquarters are located in the
Newark facility. The Company believes that its facilities are adequate and
suitable for its current manufacturing needs. The Company entered into a
lease/purchase agreement with the local county authority in February 1998 with
respect to its 110,000 square foot manufacturing facility in Newark, New York
which provides more favorable terms and reduces the expense for the lease of the
facility. The lease also includes an adjacent building to the Company's
manufacturing facility estimated to encompass approximately 140,000 square feet
and approximately 65 acres of property. Pursuant to the lease, the Company
delivered a down payment in the amount of $440,000 and paid the local
governmental authority annual installments in the amount of $50,000 through
December 2001 decreasing to approximately $30,000 annually for the periods
commencing December 2001 and ending December 2007. Upon expiration of the lease
in 2007, the Company is required to purchase its facility for the purchase price
of one dollar.
The Company leases a facility in Abingdon, England. The term of the lease
was extended and continues until March 24, 2013. It currently has an annual rent
of approximately $240,000 and is subject to review every five years based on
current real estate market conditions. The next review is March 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In 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
15
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. Plaintiffs' counsel
has accepted the terms of the proposed settlement, amounting to $175,000 for the
Company, and the matter must now be approved by the Court and by the
shareholders comprising the class. Based on the terms of the proposed
settlement, the Company has established reserves for its share of the settlement
costs and associated expenses.
In the event settlement is not approved by the Court and by the class, 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, a consulting firm
performed a Phase I and II Environmental Site Assessment which revealed the
existence of contaminated soil and ground water around one of the buildings. The
Company retained an engineering firm which estimated that the cost of
remediation should be in the range of $230,000. This cost, however, is merely an
estimate and the cost may in fact be much higher. In February, 1998, the Company
entered into an agreement with a third party which provides that the Company and
this third party will retain an environmental consulting firm to conduct a
supplemental Phase II investigation to verify the existence of the contaminants
and further delineate the nature of the environmental concern. The third party
agreed to reimburse the Company for fifty percent (50%) of the cost of
correcting the environmental concern on the Newark property. The Company has
fully reserved for its portion of the estimated liability. Test sampling was
completed in the spring of 2001, and the engineering report was submitted to the
New York State Department of Environmental Conservation (NYSDEC) for review.
NYSDEC reviewed the report and, in January 2002, recommended additional testing.
The Company responded by submitting a work plan to NYSDEC, which was approved in
April 2002. The Company has sought proposals from engineering firms to complete
the remedial work contained in the work plan, but 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. Because this is a voluntary remediation,
there is no requirement for the Company to complete the project within any
specific time frame. The ultimate resolution of this matter may have a
significant adverse impact on the results of operations in the period in which
it is resolved. Furthermore, the Company may face claims resulting in
substantial liability which could have a material adverse effect on the
Company's business, financial condition and the results of operations in the
period in which such claims are resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein it is
asserted that the Customer's product, which is powered by an Ultralife battery,
does not operate according to the Customer's product specification. No claim has
been filed against Ultralife. However, in the interest of fostering good
customer relations, in September 2002, Ultralife 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.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) On December 12, 2002, an Annual Meeting of Shareholders of the
Company was held.
(b) At the Annual Meeting, the Shareholders of the Company elected to
the Board of Directors all seven nominees for Director with the
following votes:
DIRECTOR FOR AGAINST
-------- --- -------
Joseph C. Abeles 11,693,562 22,976
Joseph N. Barrella 11,693,562 22,976
Patricia C. Barron 11,627,262 89,276
Daniel W. Christman 11,627,762 88,776
John D. Kavazanjian 11,693,062 23,476
Carl H. Rosner 11,693,562 22,976
Ranjit C. Singh 11,693,062 23,476
(c) At the Annual Meeting, the Shareholders of the Company voted for the
ratification of PricewaterhouseCoopers LLP as independent auditors
with the following votes:
FOR AGAINST ABSTAIN
--- ------- -------
11,631,153 48,510 36,875
(d) At the Annual Meeting, the Shareholders of the Company voted to
amend the Company's 2000 Stock Option Plan to:
1. Increase the number of shares of the Company's Common Stock
available for issuance under that Plan from 500,000 to
1,000,000 shares; and
2. Eliminate any reference to post-termination time periods
within which outstanding options can be exercised and provide
the Compensation and Management Committee with the discretion
to determine the terms of post-termination exercises:
FOR AGAINST ABSTAIN
--- ------- -------
8,067,980 2,274,675 1,373,883
(e) At the Annual Meeting, the Shareholders of the Company voted to
authorize the conversion of a $600,000 Convertible Subordinated
Debenture issued to Joseph C. Abeles, a director of the Company, on
April 23, 2002 to 200,000 shares of the Company's Common Stock with
the following votes:
FOR AGAINST ABSTAIN
--- ------- -------
7,775,942 107,821 74,949
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Common Stock is included for quotation on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol "ULBI."
The following table sets forth the quarterly high and low closing sales
prices of the Company's Common Stock during the Company's last two fiscal years
and the transition period:
Sales Prices
------------
High Low
---- ---
Transition 2002:
Quarter ended September 28, 2002 $3.60 $2.52
Quarter ended December 31, 2002 3.70 1.74
Fiscal 2002:
Quarter ended September 30, 2001 $6.50 $4.15
Quarter ended December 31, 2001 5.24 3.55
Quarter ended March 31, 2002 4.55 3.00
Quarter ended June 30, 2002 4.24 2.80
Fiscal 2001:
Quarter ended September 30, 2000 $13.63 $9.81
Quarter ended December 31, 2000 10.19 5.13
Quarter ended March 31, 2001 9.25 5.56
Quarter ended June 30, 2001 5.63 4.88
During the period from January 1, 2003 through February 28, 2003, the high
and low closing sales prices of the Company's Common Stock were $4.16 and $3.21,
respectively.
Holders
As of February 28, 2003, there were 184 registered holders of record of
the Company's Common Stock. Based upon information from the Company's stock
transfer agent, management of the Company believes that there are more than
3,100 beneficial holders of the Company's Common Stock.
In July 1999, the Company issued 700,000 shares of its Common Stock to
Ultralife Taiwan, Inc. (UTI) in exchange for $8.75 million in cash.
Subsequently, in September 1999, the Company contributed $8.75 million in cash
to the UTI venture. This cash contribution coupled with the contribution of the
Company's technology resulted in approximately a 46% ownership interest in UTI.
The transaction was done in conjunction with the UTI agreement that was
announced by the Company in December 1998. Subsequently, the Company's interest
in UTI has been reduced to 10.6% due to stock issuances to certain UTI
employees, subsequent capital raising efforts, and the disposition of a portion
of the Company's interest in UTI in October 2002. See also History in Item 1 of
this Transition Report.
On July 20, 2001, the Company completed a $6.8 million 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 relied on the exemption provided by Rule 506
of Regulation D in connection with the unregistered private placement of its
common stock in connection with the shares issued pursuant to the Share Purchase
Agreement. The Company did not engage in any general solicitation, sold shares
only to "accredited investors" and sold shares primarily to purchasers who were
existing shareholders of the Company.
On April 23, 2002, the Company closed on a $3.0 million private placement
consisting of common equity and a convertible note. Initially, 801,333 shares
were issued. The $600,000 convertible note, which accrued interest at 10% per
annum, was issued to one of the Company's directors. In December 2002,
shareholders voted to approve the conversion
18
of the note into an additional 200,000 shares, and all accrued interest was
forgiven. All shares were issued at $3.00 per share.
Dividends
The Company has never declared or paid any cash dividend on its capital
stock. The Company intends to retain earnings, if any, to finance future
operations and expansion and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any future payment of dividends will depend
upon the financial condition, capital requirements and earnings of the Company,
as well as upon other factors that the Board of Directors may deem relevant.
Additionally, pursuant to the credit facility between the Company and Congress
Financial Corporation (New England), the Company shall not declare or pay any
dividends under the covenants specified in the loan agreement.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average exercise equity compensation plans
be issued upon exercise price of outstanding (excluding securities
of outstanding options, options, warrants and reflected in column (a))
warrants and rights rights (c)
Plan Category (a) (b)
Equity compensation plans
approved by security holders 1,516,549 $6.34 487,351
Equity compensation plans
not approved by security
holders 500,000 $5.19 0
--------- ----- -------
Total 2,016,549 $6.05 487,351
See Note 8 in Notes to Consolidated Financial Statements for additional
information.
19
ITEM 6.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Six Months
Ended December 31, Year Ended June 30,
------------------ ------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $15,599 $15,075 $ 32,515 $ 24,163 $ 24,514 $21,064 $16,391
Cost of products sold 14,707 15,735 31,168 27,696 25,512 19,016 14,522
------- ------- -------- -------- -------- ------- -------
Gross margin 892 (660) 1,347 (3,533) (998) 2,048 1,869
------- ------- -------- -------- -------- ------- -------
Research and development expenses 1,106 2,154 4,291 3,424 5,306 5,925 6,651
Selling, general and administrative expenses 3,441 4,213 7,949 8,009 7,385 6,195 5,790
Impairment of long lived assets -- -- 14,318 -- -- -- --
Loss on fires -- -- -- -- -- (1,288) (2,697)
------- ------- -------- -------- -------- ------- -------
Total operating and other expenses 4,547 6,367 26,558 11,433 12,691 10,832 9,744
Interest income, net (151) (90) (291) 166 909 1,456 888
Gain on sale of securities -- -- -- -- 3,147 348 0
Equity (loss)/earnings in UTI (1,273) 225 (954) (2,338) (818) (80) 0
Gain on sale of UTI stock 1,459 -- -- -- -- --
Other income (expense), net 508 55 320 (124) 209 (25) (33)
------- ------- -------- -------- -------- ------- -------
Loss before income taxes (3,112) (6,837) (26,136) (17,262) (10,242) (7,085) (7,020)
Income taxes -- -- -- -- -- -- --
------- ------- -------- -------- -------- ------- -------
Net loss $(3,112) $(6,837) $(26,136) $(17,262) $(10,242) $(7,085) $(7,020)
======= ======= ======== ======== ======== ======= =======
Net loss per share, basic and diluted $ (0.24) $ (0.56) $ (2.11) $ (1.55) $ (0.94) $ (0.68) $ (0.84)
======= ======= ======== ======== ======== ======= =======
Weighted average number
of shares outstanding 12,958 12,140 12,407 11,141 10,904 10,485 8,338
======= ======= ======== ======== ======== ======= =======
December 31, June 30,
------------------ ------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data:
Cash and available-for-sale securities $ 1,374 $ 2,974 $ 2,219 $ 3,607 $ 18,639 $23,556 $35,688
Working capital $ 7,211 $ 6,904 $ 4,950 $ 6,821 $ 22,537 $28,435 $37,745
Total assets $31,374 $51,680 $ 34,321 $ 47,203 $ 64,460 $66,420 $75,827
Total long-term debt and capital lease
obligations $ 1,987 $ 2,202 $ 103 $ 2,648 $ 3,567 $ 215 $ 197
Stockholders' equity $22,243 $42,392 $ 25,422 $ 37,453 $ 54,477 $60,400 $68,586
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Annual Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forward-looking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, the successful commercialization of the
Company's advanced rechargeable batteries, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fires, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected. See Risk Factors in Item 7.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable), lithium ion and
lithium polymer rechargeable batteries for use in a wide array of applications.
The Company believes that its technologies allow the Company to offer batteries
that are flexibly configured, lightweight and generally achieve longer operating
time than many competing batteries currently available. The Company has focused
on manufacturing a family of lithium primary batteries for military, industrial
and consumer applications, which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company also supplies rechargeable lithium ion and lithium polymer batteries for
use in portable electronic applications.
Effective December 31, 2002, the Company changed its fiscal year-end from
June 30 to December 31. The financial results presented in this report
reflecting the six-month period ended December 31, 2002 are referred to as
"Transition 2002". The financial results presented in this report reflecting the
full twelve-month fiscal periods that ended June 30 prior to Transition 2002 are
referred to as "fiscal" years. For instance, the year ended June 30, 2002 is
referred to as "Fiscal 2002", and the year ended June 30, 2001 is referred to as
"Fiscal 2001".
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 achieving 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 reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable batteries.
The Technology Contracts segment includes revenues and related costs associated
with various government and military development contracts. The Corporate
segment consists of all other items that do not specifically relate to the three
other segments and are not considered in the performance of the other segments.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
Results of Operations
Six Months Ended December 31, 2002 Compared With the Six Months Ended December
31, 2001
Revenues. Total revenues of the Company increased $524,000 from
$15,075,000 for the six months ended December 31, 2001 to $15,599,000 for the
six months ended December 31, 2002. Primary battery sales increased $938,000,
21
from $14,294,000 for the six months ended December 31, 2001 to $15,232,000 for
the six months ended December 31, 2002. The increase in primary battery sales
was primarily due to new shipments of large cylindrical batteries, particularly
the Company's UBI5390 battery sold to military customers, and an increase in
HiRate battery sales due to stronger demand from the U.K. Ministry of Defence.
These increases were offset in part by a decline in sales of small cylindrical
batteries, mainly related to a fulfillment of orders from military for BA-5368
batteries used for pilot-down radio applications. Rechargeable battery sales
were consistent year over year. Technology contract revenues decreased $400,000,
from $493,000 to $93,000 due to the scheduled reduction of certain nonrenewable
government contracts, which concluded in June 2002.
Cost of Products Sold. Cost of products sold decreased $1,028,000, from
$15,735,000 for the six months ended December 31, 2001 to $14,707,000 for the
six months ended December 31, 2002. Consolidated cost of products sold as a
percentage of total revenue improved from approximately 104% to 94% for the six
months ended December 31, 2002. Consolidated gross margins improved from a
negative 4% of sales in the six months ended December 31, 2001 to a positive 6%
for the same six months in 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. A majority of employees affected by this
realignment were re-deployed from the Rechargeable segment and support functions
into open direct labor positions in the Primary segment, due to the
significantly growing demand for primary batteries from the military. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, these actions
generated total cost savings of more than $2,000,000 per quarter from the
expense run rate that the Company experienced during its September 2002 quarter.
In the Primary battery segment, the cost of batteries sold increased
$1,305,000, from $12,376,000 in the six months ended December 31, 2001 to
$13,681,000 in the same six month period in 2002, mainly related to increased
sales volume. As a percent of total primary battery sales, cost of primary
products sold rose from 87% for the six months ended December 31, 2001 to 90%
for the year ended June 30, 2002. The corresponding decline in primary gross
margins from 13% in 2001 to 10% in 2002 resulted from lower sales of small
cylindrical batteries, and start-up costs for the large cylindrical battery
business, offset in part by higher margins in 9-volt batteries due mainly to
improving manufacturing efficiencies.
In the Rechargeable battery segment, the cost of products sold decreased
$1,914,000 in the six months ended December 31, 2002 from $2,917,000 in the six
months ended December 31, 2001 to $1,003,000 in the same six-month period in
2002. In general, the decrease in costs from 2001 to 2002 primarily resulted
from the implementation of cost savings initiatives referred to previously, as
well as lower depreciation charges related to a $14.3 million writedown of
rechargeable fixed assets that the Company recorded in June 2002.
Technology contracts cost of sales decreased $418,000, or approximately
95%, from $442,000 for the six months ended December 31, 2001 to $24,000 for the
six months ended December 31, 2002, in line with the decrease in revenues.
Technology contracts cost of sales as a percentage of revenue was 90% for that
six-month period, consistent with the prior year.
Operating and Other Expenses. Total operating and other expenses decreased
$1,820,000 from $6,367,000 for the six months ended December 31, 2001 to
$4,547,000 for the six months ended December 31, 2002 mainly as a result of cost
savings initiatives implemented in late 2001 and early 2002. Operating and other
expenses as a percentage of revenue improved from 42% for the six months ended
December 31, 2001 to 29% for the same six-month period in 2002. Research and
development costs decreased $1,048,000, or 49% from $2,154,000 for the six
months ended December 31, 2001 to $1,106,000 for the same six months in 2002.
This decrease was mainly due to the cost savings initiatives and lower
depreciation charges resulting from the write-down of rechargeable equipment in
June 2002. During the upcoming year ending December 31, 2003, the Company
anticipates that R&D costs overall will remain relatively consistent with the
quarterly levels realized during the latter half of calendar 2002, as the
reduction in rechargeable development efforts has been partially replaced with
new primary battery development for military and commercial applications.
Selling, general and administration expenses decreased $772,000, or 18%,
from $4,213,000 for the six months ended December 31, 2001 to $3,441,000 for the
six months ended December 31, 2002. Selling and marketing expenses declined
$466,000 from the six-month period in 2001 over 2002 as a result of a more
targeted sales coverage strategy using fewer
22
resources and lower marketing and advertising costs. General and administrative
expenses declined $305,000 mainly due to lower executive severance costs and
cost savings actions that reduced personnel and other related expenses.
Other Income (Expense). Interest income decreased $67,000 from $107,000
for the six months ended December 31, 2001 to $40,000 for the same six months in
2002. This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $18,000 from $197,000 in 2001 to $179,000 in 2002 as a result of lower
average balances of debt. Equity loss in UTI was $1,273,000 in the six month
period ended December 31, 2002 compared with equity earnings of $225,000 in the
same period in 2001. This change resulted mainly from higher reported operating
losses at UTI. Miscellaneous income (expense) increased from income of $55,000
in the six months ended December 31, 2001 to income of $508,000 in the six
months ended December 31, 2002, primarily as a result of unrealized gains on
foreign currency transactions due mainly to the strengthening of the U.K. pounds
sterling relative to the U.S. dollar.
In October 2002, the Company sold a portion of its equity investment in
Ultralife Taiwan, Inc. (UTI), reducing its ownership interest from approximately
30% to approximately 10.6%. In exchange, the Company received total
consideration of $2.4 million in cash and the return of 700,000 shares of
Ultralife common stock. As a result of this transaction, the Company recorded a
gain on the disposition of its UTI investment of $1,459,000.
Net Losses. The consolidated net loss for the six months ended December
31, 2002 was $3,112,000, or $0.24 per share compared with a loss of $6,837,000,
or $0.56 per share, for the six months ended December 31, 2001, primarily as a
result of the reasons described above.
Fiscal Year Ended June 30, 2002 Compared With the Fiscal Year Ended June 30,
2001
Revenues. Total revenues of the Company increased $8,352,000 from
$24,163,000 for the year ended June 30, 2001 to $32,515,000 for the year ended
June 30, 2002. Primary battery sales increased $9,229,000, from $22,105,000 for
the year ended June 30, 2001 to $31,334,000 for the year ended June 30, 2002.
The increase in primary battery sales was primarily due to growth in cylindrical
battery sales, particularly to military customers, and higher 9-volt battery
sales. Rechargeable battery sales increased modestly from $370,000 for the year
ended June 30, 2001 to $445,000 for the year ended June 30, 2002, as the Company
broadened its strategy in the latter portion of fiscal 2002 from simply selling
polymer batteries it manufactures to selling a rechargeable "solution" that
encompasses sourcing cells from other lithium battery manufacturers and
assembling them to meet customer needs. Technology contract revenues decreased
$952,000, from $1,688,000 to $736,000 due to the scheduled reduction of certain
nonrenewable government contracts, which concluded in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $3,472,000, from
$27,696,000 for the year ended June 30, 2001 to $31,168,000 for the year ended
June 30, 2002. Consolidated cost of products sold as a percentage of total
revenue improved from approximately 115% to 96% for the year ended June 30,
2002. Consolidated gross margins improved from a negative 15% in fiscal 2001 of
sales to a positive 4% in fiscal 2002.
In October and November 2001, the Company realigned its resources to
address changing market conditions and to better meet customer demand in areas
of the business that were growing. A majority of employees affected by this
realignment were re-deployed from the Rechargeable segment and support functions
into open direct labor positions in the Primary segment, due to the
significantly growing demand for primary batteries from the military. Again in
February 2002, the Company took further actions to reduce costs in its ongoing
effort to improve liquidity and to bring costs more in line with current and
near-term anticipated revenues. These cost reductions included employee
terminations and salary reductions, discontinuance of certain employee benefits
and other cost savings initiatives in general and administrative areas. Overall,
the Company reduced its workforce by more than 20% during the year.
Approximately one-half of these cost savings reduced cost of products sold, with
the other half reducing R&D and selling, general and administrative costs.
Severance costs associated with these actions were incurred in the period of the
force reductions, although they were not material. In total, the actions taken
during fiscal 2002 generated total cost savings of more than $2,000,000 per
quarter from the expense run rate that the Company experienced during its first
quarter of fiscal 2002.
In the Primary battery segment, the cost of batteries sold increased
$5,318,000, from $21,094,000 in 2001 to $26,412,000 in 2002, mainly related to
increased sales volume. As a percent of total primary battery sales, cost of
primary products sold improved from 95% for the year ended June 30, 2001 to 84%
for the year ended June 30, 2002, reflecting improved manufacturing efficiencies
related to higher volumes and the impact from certain of the cost savings
initiatives referred to above, as well as the ongoing positive effects from the
implementation of lean manufacturing disciplines.
23
In the Rechargeable battery segment, the cost of products sold decreased
$972,000 in fiscal 2002 from $5,065,000 in fiscal 2001 to $4,093,000 in 2002.
During fiscal 2001, in anticipation of significant increases in rechargeable
sales volume, the Company added resources to prepare for this expected growth.
As economic conditions changed during fiscal 2002, the Company reacted and
reduced its resources accordingly by realigning its resources and reducing
manpower as described above. In general, the decrease in costs from 2001 to 2002
primarily resulted from the cost savings initiatives that were implemented
during the year.
Technology contracts cost of sales decreased $874,000, or approximately
57%, from $1,537,000 for the year ended June 30, 2001 to $663,000 for the year
ended June 30, 2002, in line with the decrease in revenues. Technology contracts
cost of sales as a percentage of revenue was 10% in 2002, consistent with the
prior year.
Operating and Other Expenses. In June 2002, the Company recorded a fixed
asset impairment charge of $14,318,000. This impairment charge related to a
writedown of long-lived assets in the Company's rechargeable production
operations, reflecting a change in the Company's strategy. Changes in external
economic conditions culminated in June 2002, reflecting a slowdown in the mobile
electronics marketplace and a realization that near-term business opportunities
utilizing the high volume rechargeable production equipment had dissipated.
These changes caused the Company to shift away from high volume polymer
rechargeable battery production to higher value, lower volume opportunities. The
Company's redefined strategy eliminates the need for its high volume production
line that had been built mainly to manufacture Nokia cell phone replacement
batteries. The new strategy is a three-pronged approach. First, the Company will
manufacture in-house for the higher value, lower volume polymer rechargeable
opportunities. Second, the Company will utilize its affiliate in Taiwan,
Ultralife Taiwan, Inc., as a source for both polymer and liquid lithium cells.
Third, the Company will look to other rechargeable cell manufacturers as sources
for cells that the Company can then assemble into completed battery packs. In
the future, the impairment of the rechargeable fixed assets will result in lower
depreciation charges of approximately $1,800,000 per year.
Total operating and other expenses increased $15,125,000 from $11,433,000
for the year ended June 30, 2001 to $26,558,000 for the year ended June 30,
2002. Excluding the impairment charge, operating and other expenses increased
$807,000, from $11,433,000 in 2001 to $12,240,000 in 2002, mainly as a result of
higher research and development expenses. Operating and other expenses as a
percentage of revenue, excluding the impairment charge, improved from 47% for
the year ended June 30, 2001 to 38% for the year ended June 30, 2002. Research
and development costs increased $867,000, or 25% from $3,424,000 for the year
ended June 30, 2001 to $4,291,000 for the year ended June 30, 2002. This
increase was mainly due to higher costs related to the development of new
cylindrical batteries for the military applications, as the Company focused more
extensively on this significant market opportunity. R&D expenditures related to
rechargeable battery development diminished during the year as a result of the
cost savings actions discussed previously. The Company anticipates that R&D
costs overall will decline significantly in fiscal 2003 as compared with 2002
due to the sizeable reduction in rechargeable development efforts and the
expected near-term transition of the new cylindrical battery development to
manufacturing during fiscal 2003.
Selling, general and administration expenses decreased $60,000,
approximately 1%, from $8,009,000 for the year ended June 30, 2001 to $7,949,000
for the year ended June 30, 2002, even though revenues rose 35%. Selling and
marketing expenses declined $404,000 from fiscal 2001 to fiscal 2002 as a result
of a more targeted sales coverage strategy using fewer resources and lower
marketing and advertising costs. General and administrative expenses, on the
other hand, rose $344,000 as a result of higher insurance expenses and certain
severance costs pertaining to an executive employment agreement incurred in
conjunction with the Company's resource realignment during the second fiscal
quarter.
Other Income (Expense). Interest income decreased $611,000 from $702,000
for the year ended June 30, 2001 to $91,000 for the year ended June 30, 2002.
This decrease is mainly the result of lower average balances of cash and
investment securities, as well as lower interest rates. Interest expense
decreased $154,000 from $536,000 in 2001 to $382,000 in 2002 as a result of
lower average balances of debt. Equity loss in UTI was $954,000 (as restated -
refer to Note 2 to the consolidated financial statements) in Fiscal 2002
compared with a loss of $2,338,000 in Fiscal 2001. The Fiscal 2002 results
included a $1,096,000 favorable adjustment recorded in July 2001 to correct
cumulative net gains pertaining to the manner in which the Company accounted for
this equity investment in Fiscal 2001 and Fiscal 2000. The Company determined
that this cumulative adjustment was not significant enough to warrant a
restatement for those periods. Miscellaneous income (expense) changed from an
expense of $124,000 in 2001 to income of $320,000 in 2002, primarily as a result
of unrealized gains on foreign currency transactions due mainly to the
strengthening of the U.K. pounds sterling relative to the U.S. dollar.
Net Losses. The consolidated net loss for the year ended June 30, 2002 was
$26,136,000, or $2.11 per share. Excluding the $14,318,000 impairment charge for
long-lived assets, the consolidated net loss improved $5,444,000 from a
24
loss of $17,262,000, or $1.55 per share, for the year ended June 30, 2001 to a
loss of $11,818,000, or $0.95 per share, for the year ended June 30, 2002,
primarily as a result of the reasons described above.
Fiscal Year Ended June 30, 2001 Compared With the Fiscal Year Ended June 30,
2000
Revenues. Total revenues of the Company decreased $351,000 from
$24,514,000 for the year ended June 30, 2000 to $24,163,000 for the year ended
June 30, 2001. Primary battery sales increased $265,000 from $21,840,000 for the
year ended June 30, 2000 to $22,105,000 for the year ended June 30, 2001. The
increase in primary battery sales was primarily due to the introduction of new
cylindrical products in fiscal 2001 and an increase in 9-volt battery shipments
related to higher demand. These increases were offset by a decline in sales from
the UK subsidiary due to the delay in renewing a government contract.
Rechargeable battery sales increased $345,000 from $25,000 for the year ended
June 30, 2000 to $370,000 for the year ended June 30, 2001, mainly as a result
of the commercial launch of the Company's polymer batteries in June 2000 and
shipments of retail and custom-sized batteries. Technology contract revenues
decreased $961,000, from $2,649,000 to $1,688,000 due to the scheduled reduction
of certain nonrenewable government contracts. The Company expects revenues from
technology contracts to continue to decline in fiscal 2002.
Cost of Products Sold. Cost of products sold increased $2,184,000 from
$25,512,000 for the year ended June 30, 2000 to $27,696,000 for the year ended
June 30, 2001. Cost of products sold as a percentage of revenue increased from
approximately 104% to 115% for the year ended June 30, 2001. Cost of primary
batteries sold decreased $1,990,000 from $23,084,000, or 106% of revenues, for
the year ended June 30, 2000 to $21,094,000, or 95% of revenues, for the year
ended June 30, 2001. The decrease in cost of primary batteries sold as a
percentage of revenues was principally the result of improvements in the
manufacturing process due to the implementation of lean manufacturing practices.
To date, lean manufacturing practices in the primary battery segment have
resulted in the reduction of inventory, quicker manufacturing throughput times
and improvements in operating efficiencies throughout the Company. In fiscal
2001, the improvements in gross margins in the primary segment were offset by
losses in the rechargeable segment. Rechargeable battery cost of products sold
increased $5,040,000 in fiscal 2001 due to the launch of commercial production
of polymer rechargeable batteries in June 2000, which resulted in initial
expenditures necessary to start production of the polymer cells, including
approximately $2,000,000 in additional depreciation for the year, as equipment
was placed in service. Prior to commencing production of polymer cells, most of
these costs, including engineering, were charged to research and development.
Technology contracts cost of sales decreased $866,000, or approximately 36%,
from $2,403,000 for the year ended June 30, 2000 to $1,537,000 for the year
ended June 30, 2001. Technology contracts cost of sales as a percentage of
revenue was consistent year over year.
Operating and Other Expenses. Operating and other expenses decreased
$1,258,000 from $12,691,000 for the year ended June 30, 2000 to $11,433,000 for
the year ended June 30, 2001. Operating and other expenses as a percentage of
revenue decreased from approximately 52% to 47% for the year ended June 30,
2001. Of the Company's operating and other expenses, research and development
expenses decreased $1,882,000, or 36% from $5,306,000 for the year ended June
30, 2000 to $3,424,000 for the year ended June 30, 2001. Research and
development expenses decreased due to the commercial launch of polymer
rechargeable in June 2000, which shifted costs to cost of sales. Selling,
general and administration expenses increased $624,000, approximately 8%, from
$7,385,000 for the year ended June 30, 2000 to $8,009,000 for the year ended
June 30, 2001. Selling and marketing expenses increased as a result of new sales
people added to significantly enhance the Company's overall market coverage.
Other Income (Expense). Net interest income decreased $743,000 from
$909,000 for the year ended June 30, 2000 to $166,000 for the year ended June
30, 2001. The decrease in interest income is the result of lower average
balances on cash and investment securities that were used for operations. The
equity loss of $2,338,000 in Fiscal 2001 and $818,000 in Fiscal 2000 resulted
from the Company's ownership interest in its venture in Taiwan. The increase in
the equity loss includes compensation expense related to a stock distribution to
UTI employees totaling $2,500,000. The Company recognized approximately $900,000
equity loss for the transaction representing its share of the total UTI expense.
The gain on sale of securities of $3,147,000 in fiscal 2000 resulted from the
sale of the Company's investment in Intermagnetics General Corporation common
shares. No similar sale of securities occurred in 2001.
Net Losses. Net losses increased $7,020,000, or approximately 69%, from
$10,242,000, or $0.94 per share, for the year ended June 30, 2000 to
$17,262,000, or $1.55 per share, for the year ended June 30, 2001, primarily as
a result of the reasons described above.
25
Liquidity and Capital Resources
As of December 31, 2002, cash equivalents and available for sale
securities totaled $1,324,000, excluding restricted cash of $50,000. During the
six months ended December 31, 2002, the Company used $3,111,000 of cash in
operating activities as compared to $5,534,000 for the six months ended December
31, 2001. Cash used in operations in the six months ended December 31, 2002 was
mainly the result of the Company's operating loss, net of non-cash items such as
depreciation. Also during the six months ended December 31, 2002, inventories
rose $1,180,000 due to the increased production activity for the recent military
orders. Compared with the six months ended December 31, 2001, cash used in
operations declined $2,423,000 primarily as a result of decreasing operating
losses net of depreciation. In the six months ended December 31, 2002, the
Company used $341,000 to purchase plant, property and equipment, a significant
decrease from the $1,538,000 expended in the same period a year ago.
Months cost of sales in inventory at December 31, 2002 was 1.9 months as
compared to 2.3 months at December 31, 2001. This metric is indicative of the
Company's continuing focus to improve purchasing procedures and inventory
controls. The Company's Days Sales Outstanding (DSOs) was an average of 58 days
for the last six months of 2002, compared with an average of 54 days for the
same six-month period in 2001. This modest slowdown in collections is mainly
attributable to general economic conditions, as well as increased business with
non-U.S. customers who typically have more favorable payment terms and take
longer to pay than the U.S. customers.
At December 31, 2002, the Company had a capital lease obligation
outstanding of $103,000 for the Company's Newark, New York offices and
manufacturing facilities.
As of December 31, 2002, the Company had made commitments to purchase
approximately $881,000 of production machinery and equipment.
In June 2000, the Company entered into a 3-year, $20,000,000 secured
credit facility with a lending institution. The financing agreement consisted of
an initial $12,000,000 term loan component and a revolving credit facility
component for an initial $8,000,000 based on eligible net accounts receivable
(as defined) and eligible net inventory (as defined). The amount available under
the term loan component amortizes over time. Principal and interest are paid
monthly on outstanding amounts borrowed. Initially, $4,000,000 was borrowed
under the term loan component in June 2000, and this amount is being repaid over
a five-year period. Debt issue costs amounting to $198,000 were incurred in
connection with the initiation of the agreement and are being amortized over the
term of the loan.
In December 2000 and June 2001, the Company and its commercial lender
agreed to revise downward the adjusted net worth covenant to better reflect the
Company's equity position at that particular time. In October 2001, this lending
institution informed the Company that its borrowing availability under its
$20,000,000 credit facility had been effectively reduced to zero as a result of
a recent appraisal of its fixed assets. In February 2002, the Company and its
primary lending institution amended the credit facility. The amended facility
was reduced to a total of $15,000,000, mainly due to the reduction in the
appraised valuation of fixed assets that limited the borrowing capacity under
the term loan component, as well as to minimize the cost of unused line fees.
Certain definitions were also revised which increased the Company's available
borrowing base. In addition, the minimum net worth covenant was effectively
reduced to approximately $19,200,000 after adjustments for fixed asset
impairment charges. At December 31, 2002, the Company was in compliance with
this covenant. The term loan component was revised to an initial $2,733,000
based on the valuation of the Company's fixed assets (of which $2,066,000 was
outstanding on the term loan at December 31, 2002). The Company has no
additional borrowing capacity on the term loan component above the current
amount outstanding. The principal associated with the term loan is continuing to
be repaid over a 5-year amortization period from the initial date of the credit
facility in June 2000. The revolving credit component of the overall credit
facility comprises the remainder of the total potential borrowing capacity.
There was no balance outstanding on the revolving credit facility as of December
31, 2002. As of December 31, 2002, the credit facility was scheduled to expire
in June 2003. On March 25, 2003, the Company amended its credit facility with
its primary lending bank, extending the agreement to June 30, 2004, and
obtaining additional borrowing flexibility. As a result, the Company has
classified the portion of this debt that is due and payable beyond one year as a
long-term liability on the December 31, 2002 Consolidated Balance Sheet. (See
Notes 6 and 14 for additional information.)
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company, depending on outstanding cash balances. At December
31, 2002, the rate was 5.75%. The Company also pays a facility fee on the unused
portion of the commitment. The loan is secured by substantially all of the
Company's assets and the Company is precluded from paying dividends under the
terms of the agreement. The total amount available under the term loan component
is reduced by outstanding letters of credit. The Company had $3,800,000
outstanding on a letter of credit as of December 31, 2002, supporting the
Company's $4,000,000 equipment lease. The Company's additional borrowing
capacity under the revolver component of the credit facility as of December 31,
2002 was approximately $1,300,000.
26
In March 2001, the Company initiated a $2,000,000 operating lease line of
credit with a third party leasing agency. Under this arrangement, the Company
had various options to acquire manufacturing equipment, including sales /
leaseback transactions and operating leases. In October 2001, the Company
expanded its leasing arrangement with a third party leasing agency. The revision
increased the amount of the lease line from $2,000,000 to $4,000,000. The
increase in the line was used to fund capital expansion plans for manufacturing
equipment that has allowed increased capacity within the Company's Primary
business unit. The lease line had been fully utilized as of June 30, 2002. The
Company's quarterly lease payment is approximately $226,000, and the lease
expires in July 2007. In conjunction with this lease, the Company was initially
required to maintain a $3,800,000 letter of credit, and the amount required
decreases periodically over the term of the lease. The letter of credit was
issued by the Company's primary lending institution, which diminishes the
Company's overall borrowing availability under the revolver component of the
overall credit facility. The Company has explored alternatives to collateralize
this letter of credit in order to alleviate this restriction. There can be no
assurance that the Company will be successful in this pursuit.
The Company is optimistic about its future prospects and growth potential.
However, the recent rapid growth of the business has created a near-term need
for certain machinery, equipment and working capital in order to enhance
capacity and build product to meet demand. The Company continues to explore
other sources of capital, including utilizing its unleveraged assets as
collateral for additional borrowing capacity, issuing debt and raising equity
through a private or public offering. Although it is evaluating these
alternatives, the Company believes it has the ability over the next 12 months to
finance its operations primarily through internally generated funds, or through
the use of additional financing that currently is available to the Company.
During the Fiscal 2002, the Company raised capital through two private
equity transactions. First, in July 2001, the Company completed a $6,800,000
private placement of 1,090,000 shares of its common stock at $6.25 per share. In
conjunction with the offering, warrants to acquire up to 109,000 shares of
common stock were granted. The exercise price of the warrants is $6.25 per share
and the warrants have a five-year term. The second transaction occurred in April
2002, when the Company closed on a $3,000,000 private placement consisting of
common equity and a $600,000 convertible note. Initially, 801,333 shares were
issued. The note, which was issued to one of the Company's directors, converted
into 200,000 shares of common stock upon shareholder approval at the December
2002 Annual Meeting.
As described in Part I, Item 3, "Legal Proceedings", the Company is
involved in certain environmental matters with respect to its facility in
Newark, New York. Although the Company has reserved for expenses related to
this, there can be no assurance that this will be the maximum amount. The
ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is no assurance that future
warranty claims will be consistent with past history, and in the event the
Company's experiences a significant increase in warranty claims, there is no
assurance that the Company's reserves are sufficient. This could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Outlook
Looking ahead for the full calendar year of 2003, the Company is
optimistic about its sales prospects and the status of the manufacturing
operations. At this time, the Company expects revenues to reach at least $50
million, more than a 50% increase over the comparable 12 months in the period
ended December 31, 2002. The Company is projecting growth in all major product
areas within its business -- 9-volt, cylindrical and rechargeable. The most
significant growth is expected to be driven by growing demand from the U.S. and
U.K. military organizations, where orders for new business began in late 2002
and early 2003. The results in each of the quarters, however, can be 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,
27
including the timing of the battery solicitation process within the military,
the Company's ability to successfully win contract awards, successful
qualification of the Company's products in the applicable military applications,
and the timing of order releases against such contracts. Some of these factors
are outside of the Company's direct control.
For instance, in June 2002, the Company was awarded the top award, 60%, of
the U.S. Army's Next Gen II 5-year procurement of Small Cylindrical Batteries.
Orders on this contract, though, have yet to begin, and it is difficult to
determine when such orders may start. In July 2002, the Company also submitted a
proposal on the Large Cylindrical Battery procurement under the Next Gen II
procurement, and an award by the Army is still pending. The Large Rectangular
Battery solicitation for bids has yet to be issued by the U.S. Army. It is
difficult to determine at this time when the U.S. Army will issue the
solicitations or make any award decisions. While the Company is optimistic about
its chances of winning a substantial portion of the contracts with this program,
the ultimate outcome is uncertain. This solicitation process is significantly
behind the original schedule mainly as a result of the U.S. government's
diversion relating to the terrorist attacks on September 11, 2001. A significant
portion of the Company's growth projections is dependent upon its success and
participation in this Next Gen II program.
In light of the delays in the Next Gen II procurement process, however,
the Company has recently been awarded other significant contracts with the U.S.
Army. In particular, in December 2002, the Company announced that it was awarded
$14,400,000 of orders for UBI5390 batteries that the U.S. Army uses for various
communications devices, to be delivered from February 2003 through July 2003. In
March 2003, the Company announced that it had received orders for more than
$3,300,000 from the U.K. Ministry of Defence for batteries shipments to be
completed over the next three to four months.
The Company has a fairly substantial fixed cost infrastructure to support
its overall operations. Increasing volumes of sales and production will generate
favorable returns to scale in the range of 30% to 50%. Conversely, decreasing
volumes will result in the opposite effect. During Fiscal 2002, the Company was
able to significantly reduce costs through various cost savings actions, moving
it closer to its cash generation and profitability targets. As the Company
continues to grow and leverage this infrastructure, it believes that sustainable
profitability can be achieved. The Company believes that quarterly revenues in
the range of $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 $11,000,000 to $12,000,000, depending on mix,
should allow the Company to be able to report a profit.
Due to the strong order volume that it has experienced recently across all
product lines, the Company expects to set a new quarterly revenue record in the
March 2003 quarter, in the range of $12,000,000. While the demand from military
customers has increased significantly and is a primary factor for the Company's
rapid growth, its 9-volt and high rate businesses are also showing strong
growth. Although its rechargeable revenues remain modest, the Company continues
to be optimistic about the contribution that this business segment can make to
the Company. For the full calendar year of 2003, the Company believes that its
goal of breaking $50,000,000 in revenue, a 50% increase over the $33,000,000
reported for the twelve-month period ended December 31, 2002, is clearly
achievable. The Company also believes that it will be generating operating cash
and will be profitable in each of the four quarters in calendar 2003.
As a result of the cost savings actions taken during Fiscal 2002 that
significantly impacted the Rechargeable segment and the associated development
efforts in this area, research and development costs will continue to be less
than in previous years. Going forward throughout 2003, the Company plans to
continue its recent successful efforts related to new cylindrical battery
development for applications that initially have a military focus, but often
have sizeable commercial applications as well. As such, the Company expects that
its costs related to research and development will remain in approximately the
same quarterly range as what the Company experienced during Transition 2002.
While the Company continues to monitor its operating costs very tightly,
it expects that its selling, general and administrative costs may increase
modestly over the level achieved in Transition 2002 on an annualized basis,
mainly due to general cost increases.
As a result of the recent order activity in all areas of the business,
most notably from the rapid demand from the U.S. military, the Company has made
certain commitments to purchase certain machinery and equipment to ensure that
production bottlenecks are minimized and to increase overall capacity. Compared
to the expenditures made in Transition 2002, the Company expects that spending
for capital projects will increase somewhat in calendar 2003. The Company
carefully evaluates its projects and will only make capital investments when
necessary and when there is typically a very quick payback.
The Company continually explores its financing alternatives, including
utilizing its unleveraged assets as collateral for additional borrowing
capacity, refinancing current debt or issuing new debt, and raising equity
through a private or
28
public offering. In March 2003, the Company completed a short-term financing to
help it meet certain working capital needs as the Company was growing rapidly.
The 90-day, $500,000 note, which accrues interest at 7.5% per annum, can be
converted into 125,000 shares of common stock at $4.00 per share, at the option
of the note holder. If the Company were to default on this obligation, the note
would instead convert into 250,000 shares of common stock at $2.00 per share. In
addition, the Company amended its credit facility with its primary lending bank,
extending the agreement to June 30, 2004, and obtaining additional borrowing
flexibility. Although the Company is confident that it will be successful in
continuing to arrange adequate financing to support its growth, there can be no
assurance that the Company will be able to do so. Therefore, this could have a
material adverse effect on the Company's business, financial position and
results of operations.
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 regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted
future cash flows of the assets with the respective carrying amount as of
the date of assessment. Should aggregate future cash flows be less than
the carrying value, a write-down would be required, measured as the
difference between the carrying value and the fair value of the asset.
Fair value is estimated either through independent valuation or as the
present value of expected discounted future cash flows. If the expected
undiscounted future cash flows exceed the respective carrying amount as of
the date of assessment, no impairment is recognized.
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.
Investments in Affiliates:
The Company reviews the appropriateness of the carrying value of its
investments in affiliates. Typically, investments in which the Company
holds a greater than 50% interest are recorded by the Company on a
29
consolidated basis of accounting, investments in which the Company hold
between 20% and 50% are accounted for using the equity method of
accounting, and investments in which the Company holds less than a 20%
interest are recorded using the cost method.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Others Indebtedness." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The only material guarantees that the
Company has in accordance with FASB Interpretation No. 45 are product
warranties. All such guarantees have been appropriately recorded in the
financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FASB Statement No. 123." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 does not permit the use of the original
SFAS No. 123 prospective method of transition for changes to the fair value
based method made in fiscal years after December 15, 2003. The Company currently
applies the intrinsic value method and has no plans to convert to the fair value
method.
In December 2002, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities." This Interpretation requires companies to
reevaluate their accounting for certain investments in "variable interest
entities." A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. Variable interest entities are to be
consolidated if the Company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. The disclosure requirements of this
Interpretation are effective for all financial statements issued after January
31, 2003. The consolidation requirements of this Interpretation are effective
for all periods beginning after June 15, 2003. The Company has no investments in
variable interest entities.
Risk Factors
Dependence on Continued Demand for the Company's Existing Products
A substantial portion of the Company's business depends on the continued
demand for products sold by OEMs using the Company's batteries. Therefore, the
Company's success depends significantly upon the success of the OEMs' products
in the marketplace. The Company is subject to many risks beyond its control that
influence the success or failure of a particular product manufactured by an OEM,
including: competition faced by the OEM in its particular industry, market
acceptance of the OEM's product, the engineering, sales, marketing and
management capabilities of the OEM, technical challenges unrelated to the
Company's technology or products faced by the OEM in developing its products,
and the financial and other resources of the OEM.
For instance, in the fiscal year ended June 30, 2002, 59% of the Company's
revenues were comprised of sales of its 9-volt batteries, and of this,
approximately 30% pertained to sales to smoke alarm OEMs in the U.S. In the
six-month period ended December 31, 2002, 56% of the Company's revenues were
comprised of sales of its 9-volt batteries, and of this, approximately 14%
pertained to sales to smoke alarm OEMs in the U.S. If the retail demand for
long-life smoke detectors
30
decreases significantly, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Similarly, in the fiscal year ended June 30, 2002, 19% of the Company's
revenues were comprised of sales of U.S. cylindrical batteries, and of this,
approximately 62% pertained to sales made directly or indirectly to the U.S.
military. In the six-month period ended December 31, 2002, 20% of the Company's
revenues were comprised of sales of U.S. cylindrical batteries, and of this,
approximately 90% pertained to sales made directly or indirectly to the U.S.
military. If the demand for cylindrical batteries from the U.S. military were to
decrease significantly, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Uncertainty of the Company's Rechargeable Battery Business
Although the Company is in production of certain rechargeable cells and
batteries, it has not achieved wide market acceptance. The Company cannot assure
that volume acceptance of its rechargeable products will occur due to the highly
competitive nature of the business. There are many new company and technology
entrants into the marketplace, and the Company must continually reassess the
market segments in which its products can be successful and seek to engage
customers in these segments that will adopt the Company's products for use in
their products. In addition, these companies must be successful with their
products in their markets for the Company to gain increased business. Increased
competition, failure to gain customer acceptance of products or failure of the
Company's customers in their markets could have a further adverse effect on the
Company's rechargeable battery business.
Risks Relating to Growth and Expansion
Rapid growth of the Company's battery business could significantly strain
management, operations and technical resources. If the Company is successful in
obtaining rapid market growth of its batteries, the Company will be required to
deliver large volumes of quality products to customers on a timely basis at a
reasonable cost to those customers. For example, the large orders recently
received from the U.S. and U.K. military for the Company's cylindrical products
are straining the current capacity capabilities of the Company and require
additional equipment and time to build a sufficient support infrastructure. This
demand also creates working capital issues for the Company, as it needs
increased liquidity to fund purchases of raw materials and supplies. The Company
cannot assure, however, that business will rapidly grow or that its efforts to
expand manufacturing and quality control activities will be successful or that
the Company will be able to satisfy commercial scale production requirements on
a timely and cost-effective basis. The Company will also be required to continue
to improve its operations, management and financial systems and controls. The
failure to manage growth effectively could have an adverse effect on the
Company's business, financial condition and results of operations.
Dependence on U.S. and U.K. Military Procurement of Batteries
The Company will continue to develop both primary and rechargeable battery
products to meet the needs of the U.S. and U.K. military forces. The Company
believes it has a high probability for success in solicitations for these
batteries. Any delay of solicitations by, or future failure of, the U.S. or the
U.K. governments to purchase batteries manufactured by the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Related to Competition and Technological Obsolescence
The Company also competes with large and small manufacturers of alkaline,
carbon-zinc, seawater, high rate and primary batteries as well as other
manufacturers of lithium batteries. The Company cannot assure that it will
successfully compete with these manufacturers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and
other resources.
The market for the Company's products is characterized by changing
technology and evolving industry standards, often resulting in product
obsolescence or short product lifecycles. Although the Company believes that its
batteries, particularly the 9-volt and advanced rechargeable batteries, are
comprised of state-of-the-art technology, there can be no assurance that
competitors will not develop technologies or products that would render the
Company's technology and products obsolete or less marketable.
Primary Batteries -- The primary (non-rechargeable) battery industry is
characterized by intense competition with a number of companies offering or
seeking to develop products similar to the Company's. The Company is subject to
competition from manufacturers of primary batteries, such as carbon-zinc,
alkaline and lithium batteries in various configurations, including 9-volt, AAA,
AA, C, D, 2/3 A and other cell sizes. Manufacturers of primary batteries include
The Gillette Company (Duracell), Energizer Holdings, Inc., Rayovac Corp., Sanyo
Electric Co. Ltd., Sony Corp., and Matsushita
31
Electric Industrial Co., Ltd. (Panasonic). Manufacturers of specialty lithium
batteries include Saft, Eagle Picher Industries and Friwo Silberkraft GmbH.
Many of these companies have substantially greater resources than the
Company, and some have the capacity and volume of business to be able to produce
their products more efficiently than the Company at the present time. In
addition, these companies are developing batteries using a variety of battery
technologies and chemistries that are expected to compete with the Company's
technology. If these companies successfully market their batteries before the
introduction of the Company's products, there could be a material adverse effect
on the Company's business, financial condition and results of operations.
Rechargeable Batteries -- The rechargeable battery industry is also
characterized by intense competition with a large number of companies offering
or seeking to develop technology and products similar to the Company's. The
Company is subject to competition from manufacturers of traditional rechargeable
batteries, such as nickel-cadmium batteries, from manufacturers of rechargeable
batteries of more recent technologies, such as nickel-metal hydride, lithium ion
liquid electrolyte and lithium polymer batteries, as well as from companies
engaged in the development of batteries incorporating new technologies.
Manufacturers of nickel-cadmium and/or nickel-metal hydride batteries include
Sanyo Electric Co. Ltd., Sony Corp., Toshiba Corp., Saft and Matsushita Electric
Industrial Co., Ltd. (Panasonic), among others. Manufacturers of lithium ion
liquid electrolyte batteries currently include Saft-Soc des ACC, Sony Corp.,
Toshiba Corp., Matsushita Electric Industrial Co., Ltd., Sanyo Electric Co.
Ltd., Sony Corp., E-one Moli Energy Ltd., BYD Co. Ltd., Samsung SDI Co., Ltd.,
Shenzhen B&K Electronic Co. Ltd., and Ultralife Taiwan, Inc., among others.
Manufacturers of lithium polymer batteries currently include Valence Technology,
Inc., Sony Corp., Amperex Technology Ltd., Danionics A/S, Finecell Co. Ltd., LG
Chemical, Ltd., SKC, Samsung SDI Co., Ltd., Ultralife Taiwan, Inc., and Kokam
Engineering Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, including liquid electrolyte lithium and solid
electrolyte lithium batteries, which are expected to compete with the Company's
technology. Other companies undertaking research and development activities of
solid-polymer batteries have already developed prototypes and are constructing
commercial scale production facilities. If these companies successfully market
their batteries before the introduction of the Company's products, there could
be a material adverse effect on its business, financial condition and results of
operations.
Dependence on Key Personnel
Because of the specialized, technical nature of the business, the Company
is highly dependent on certain members of management, marketing, engineering and
technical staff. The loss of these services or these members could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition to developing manufacturing capacity to
produce high volumes of advanced rechargeable batteries, the Company must
attract, recruit and retain a sizeable workforce of technically competent
employees. The Company's ability to pursue effectively its business strategy
will depend upon, among other factors, the successful recruitment and retention
of additional highly skilled and experienced managerial, marketing, engineering
and technical personnel. The Company cannot assure that it will be able to
retain or recruit this type of personnel.
Safety Risks; Demands of Environmental and Other Regulatory Compliance
Due to the high energy density inherent in lithium batteries, the
Company's batteries can pose safety certain risks, including the risk of fire.
Although the Company incorporates safety procedures in research, development and
manufacturing processes that are designed to minimize safety risks, the Company
cannot assure that accidents will not occur. Although the Company currently
carries insurance policies which cover loss of the plant and machinery,
leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may
result in significant production delays or claims for damages resulting from
injuries. These types of losses could have a material adverse effect on the
business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although the
Company believes that its operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which it has sent waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on the Company or otherwise
subject it to future liabilities. Moreover, state and local governments may
enact additional restrictions relating to the disposal of lithium batteries used
by customers that could have a material adverse effect on business, financial
condition and results of operations. In addition, the U.S. Department of
Transportation and certain foreign regulatory agencies that consider lithium to
be a hazardous
32
material regulate the transportation of batteries that contain lithium metal.
The Company currently ships lithium batteries in accordance with regulations
established by the U.S. Department of Transportation. There can be no assurance
that additional or modified regulations relating to the manufacture,
transportation, storage, use and disposal of materials used to manufacture the
Company's batteries or restricting disposal of batteries will not be imposed or
how these regulations will affect the Company or its customers.
In connection with the Company's purchase/lease of the Newark, New York
facility in 1998, a consulting firm performed a Phase I and II Environmental
Site Assessment which revealed the existence of contaminated soil and ground
water around one of the buildings. The Company retained an engineering firm
which estimated that the cost of remediation should be in the range of $230,000.
This cost, however, is merely an estimate and the cost may in fact be much
higher. In February, 1998, the Company entered into an agreement with a third
party which provides that the Company and this third party will retain an
environmental consulting firm to conduct a supplemental Phase II investigation
to verify the existence of the contaminants and further delineate the nature of
the environmental concern. The third party agreed to reimburse the Company for
fifty percent (50%) of the cost of correcting the environmental concern on the
Newark property. The Company has fully reserved for its portion of the estimated
liability. Test sampling was completed in the spring of 2001, and the
engineering report was submitted to the New York State Department of
Environmental Conservation (NYSDEC) for review. NYSDEC reviewed the report and,
in January 2002, recommended additional testing. The Company responded by
submitting a work plan to NYSDEC, which was approved in April 2002. The Company
has sought proposals from engineering firms to complete the remedial work
contained in the work plan, but 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. Because this is a voluntary remediation, there is no
requirement for the Company to complete the project within any specific time
frame. The ultimate resolution of this matter may have a significant adverse
impact on the results of operations in the period in which it is resolved.
Furthermore, the Company may face claims resulting in substantial liability
which could have a material adverse effect on the Company's business, financial
condition and the results of operations in the period in which such claims are
resolved.
Limited Sources of Supply
Certain materials used in products are available only from a single or a
limited number of suppliers. Additionally, the Company may elect to develop
relationships with a single or limited number of suppliers for materials that
are otherwise generally available. Although the Company believes that
alternative suppliers are available to supply materials that could replace
materials currently used and that, if necessary, the Company would be able to
redesign its products to make use of such alternatives, any interruption in the
supply from any supplier that serves as a sole source could delay product
shipments and have a material adverse effect on the business, financial
condition and results of operations. Although the Company has experienced
interruptions of product deliveries by sole source suppliers, these
interruptions have not had a material adverse effect on the business, financial
condition and results of operations. The Company cannot guarantee that it will
not experience a material interruption of product deliveries from sole source
suppliers.
Dependence on Proprietary Technologies
The Company's success depends more on the knowledge, ability, experience
and technological expertise of its employees than on the legal protection of
patents and other proprietary rights. The Company claims proprietary rights in
various unpatented technologies, know-how, trade secrets and trademarks relating
to products and manufacturing processes. The Company cannot guarantee the degree
of protection these various claims may or will afford, or that competitors will
not independently develop or patent technologies that are substantially
equivalent or superior to the Company's technology. The Company protects its
proprietary rights in its products and operations through contractual
obligations, including nondisclosure agreements with certain employees,
customers, consultants and strategic partners. There can be no assurance as to
the degree of protection these contractual measures may or will afford. The
Company, however, has had patents issued and patent applications pending in the
U.S. and elsewhere. The Company cannot assure (i) that patents will be issued
from any pending applications, or that the claims allowed under any patents will
be sufficiently broad to protect its technology, (ii) that any patents issued to
the Company will not be challenged, invalidated or circumvented, or (iii) as to
the degree or adequacy of protection any patents or patent applications may or
will afford. If the Company is found to be infringing third party patents, there
can be no assurance that it will be able to obtain licenses with respect to such
patents on acceptable terms, if at all. The failure to obtain necessary licenses
could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development,
manufacture or sale of products.
33
Dependence on Technology Transfer Agreements
The Company's research and development of advanced rechargeable battery
technology and products utilizes internally-developed technology, acquired
technology and certain patents and related technology licensed by the Company
pursuant to non-exclusive, technology transfer agreements. There can be no
assurance that competitors will not develop, independently or through the use of
similar technology transfer agreements, rechargeable battery technology or
products that are substantially equivalent or superior to the technologies and
products currently under research and development.
Risks Related to China Joint Venture Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in Changzhou, China, for the
production and distribution in and from China of 2/3A lithium primary batteries.
Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China
Battery"), purchased certain technology, equipment, training and consulting
services relating to the design and operation of a lithium battery manufacturing
plant. China Battery was required to pay approximately $6.0 million to the
Company over the first two years of the agreement, of which approximately $5.6
million has been paid. The Company attempted to collect the balance due under
this contract. However, China Battery has indicated that it will not make these
payments until certain contractual issues have been resolved. Due to China
Battery's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed as well as its investment aggregating $805,000. Since
China Battery has not purchased technology, equipment, training or consulting
services to produce batteries other than 2/3A lithium batteries, the Company
does not believe that China Battery has the capacity to become a competitor. The
Company does not anticipate that the manufacturing or marketing of 2/3A lithium
batteries will be a substantial portion of its product line in the future.
However, in December 1997, China Battery sent a letter demanding reimbursement
of an unspecified amount of losses they have incurred plus a refund for certain
equipment that was sold to China Battery. The Company has attempted to initiate
negotiations to resolve the dispute. However, an agreement has not yet been
reached. Although China Battery has not taken any additional steps, there can be
no assurance that China Battery will not further pursue such a claim which, if
successful, could have a material adverse effect on the business, financial
condition and results of operations. The Company believes that such a claim is
without merit.
Ability to Insure Against Losses
Because certain of the Company's primary batteries are used in a variety
of security and safety products and medical devices, it may be exposed to
liability claims if such a battery fails to function properly. The Company
maintains what it believes to be sufficient liability insurance coverage to
protect against potential claims; however, there can be no assurance that the
liability insurance will continue to be available, or that any such liability
insurance would be sufficient to cover any claim or claims.
Quarterly Fluctuations in Operating Results and Possible Volatility of Stock
Price
The Company's future operating results may vary significantly from quarter
to quarter depending on factors such as the timing and shipment of significant
orders, new product introductions, delays in customer releases of purchase
orders, the mix of distribution channels through which the Company sells its
products and general economic conditions. Frequently, a substantial portion of
the Company's revenues in each quarter is generated from orders booked and
shipped during that quarter. As a result, revenue levels are difficult to
predict for each quarter. If revenue results are below expectations, operating
results will be adversely affected as the Company has a sizeable base of fixed
overhead costs that do not vary much with the changes in revenue. In addition to
the uncertainties of quarterly operating results, future announcements
concerning the Company or its competitors, including technological innovations
or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of its products, may cause the market price of
its Common Stock to fluctuate substantially for reasons which may be unrelated
to operating results. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price of
our Common Stock.
Risks Related to Product Warranty Claims
The Company typically offers warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of
purchase. The Company also offers a 10-year warranty on its 9-volt batteries
that are used in ionization-type smoke detector applications. The Company
provides for a reserve for this potential warranty expense, which is based on an
analysis of historical warranty issues. There is
34
no assurance that future warranty claims will be consistent with past history,
and in the event the Company experiences a significant increase in warranty
claims, there is no assurance that the Company's reserves are sufficient. This
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Related to Company's Ability to Finance Ongoing Operations and Projected
Growth
While the Company believes that its revenue growth projections and its
ongoing cost controls will allow it to generate cash and achieve profitability
in the foreseeable future, there is no assurance as to when or if the Company
will be able to achieve its projections. The Company's future cash flows from
operations, combined with its accessibility to cash and credit, may not be
sufficient to allow the Company to finance ongoing operations or to make
required investments for future growth. The Company may need to seek additional
credit or access capital markets for additional funds. There is no assurance
that the Company would be successful in this regard.
Risks Related to Maintaining Debt Obligations
The Company has certain debt covenants that must be maintained, most
notably a requirement with its primary lending institution to meet certain
levels of net worth. There is no assurance that the Company will be able to
continue to meet these debt covenants in the future. If the Company defaults on
any of its debt covenants and it is unable to renegotiate credit terms in order
to comply with such covenants, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Related to Arthur Andersen LLP Being the Company's Past Auditors
There may be no effective remedy against Arthur Andersen LLP in connection
with a material misstatement or omission in the financial statements audited by
them, due to the fact that Arthur Andersen LLP was convicted on June 15, 2002 of
federal obstruction of justice arising form the government's investigation of
Enron Corp.
Arthur Andersen LLP consented to the inclusion of their report in the
annual reports and registration statements the Company filed prior to June 30,
2002. The Company's inability to include in future registration statements or
reports financial statements for one or more years audited by Arthur Andersen
LLP or to obtain Arthur Andersen LLP's consent to the inclusion of their report
on the Company's 2000 and 2001 financial statements may impede the Company's
access to the capital markets.
Should the Company seek to access the public capital markets, Securities
and Exchange Commission (SEC) rules will require the Company to include or
incorporate by reference in any prospectus three years of audited financial
statements. Until the Company's audited financial statements for the fiscal year
ending December 31, 2004 become available, the SEC's current rules would require
the Company to present audited financial statements for one or more fiscal years
audited by Arthur Andersen LLP. Prior to that time, the SEC may cease accepting
financial statements audited by Arthur Andersen LLP, in which case the Company
would be unable to access the public capital markets unless
PricewaterhouseCoopers LLP, the Company's current independent accounting firm,
or another independent accounting firm, is able to audit the financial
statements originally audited by Arthur Andersen LLP. In addition, as a result
of the departure of the Company's former engagement team leaders, Arthur
Andersen LLP is no longer in a position to consent to the inclusion or
incorporation by reference in any prospectus of their report on the Company's
audited financial statements for the years ended June 30, 2000 and June 30,
2001, and investors in any subsequent offerings for which the Company uses their
audit report will not be entitled to recovery against them under Section 11 of
the Securities Act of 1933 for any material misstatements or omissions in those
financial statements. Consequently, the Company's financing costs may increase
or the Company may miss attractive market opportunities if either the annual
financial statements for 2000 and 2001 audited by Arthur Andersen LLP should
cease to satisfy the SEC's requirements or those statements are used in a
prospectus but investors are not entitled to recovery against Arthur Andersen
auditors for material misstatements or omissions in them.
35
ITEM 7a. 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 invest in derivative financial instruments.
In the six months ended December 31, 2002, approximately 82% of the
Company's sales were denominated in U.S. dollars. The remainder of the Company's
sales was denominated in U.K. pounds sterling and euros. A 10% change in the
value of the pound sterling or the euro to the U.S. dollar would have impacted
the Company's revenues in that six month period by less than 2%. The Company
monitors the relationship between the U.S. dollar and other currencies on a
continuous basis and adjusts sales prices for products and services sold in
these foreign currencies as appropriate to safeguard against the fluctuations in
the currency effects relative to the U.S dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) and (2) are
included in this Report beginning on page 37.
Page
----
Report of Independent Accountants,
PricewaterhouseCoopers LLP 37
Report of Independent Public Accountants,
Arthur Andersen LLP 38
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002, and
June 30, 2002 and 2001 39
Consolidated Statements of Operations for the six months
ended December 31, 2002 and the years ended
June 30, 2002, 2001 and 2000 40
Consolidated Statements of Changes in Shareholders' Equity and
Accumulated Other Comprehensive Loss for the six
months ended December 31, 2002 and the years ended
June 30, 2002, 2001 and 2000 41
Consolidated Statements of Cash Flows for the six months
ended December 31, 2002
and the years ended June 30, 2002, 2001 and 2000 42
Notes to Consolidated Financial Statements 43
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts 67
36
Report of Independent Accountants
To the Board of Directors and Shareholders of
Ultralife Batteries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Ultralife Batteries, Inc. and its subsidiary at December 31, 2002 and June 30,
2002, and the results of their operations and their cash flows for the six
months ended December 31, 2002 and the year ended June 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
the Company as of June 30, 2001 and for each of the two years in the period
ended June 30, 2001 were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated August 16, 2001
(except with respect to the matter discussed in Note 14, as to which the date is
December 12, 2001).
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
March 28, 2003
37
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP AND ARTHUR
ANDERSEN LLP DID NOT CONSENT TO THE USE OF THIS REPORT IN THIS FORM 10-K. (THE
REFERENCE TO NOTE 14 IN ARTHUR ANDERSEN'S DUAL DATING OF THEIR REPORT WAS A
REFERENCE TO A "RECENT DEVELOPMENTS" FOOTNOTE IN THE FINANCIAL STATEMENTS
INCLUDED IN THE FORM 10-K FOR WHICH THAT REPORT WAS ISSUED. SUCH FOOTNOTE IS NO
LONGER APPLICABLE AND HAS BEEN OMITTED FROM THIS FORM 10-K.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ultralife Batteries, Inc.:
We have audited the accompanying consolidated balance sheets of Ultralife
Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and accumulated other comprehensive income (loss) and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ultralife Batteries, Inc.
and subsidiary as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
August 16, 2001 (except with respect to the matter discussed in Note 14, as to
which the date is December 12, 2001)
38
ULTRALIFE BATTERIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
December 31, June 30,
------------ --------------------
ASSETS 2002 2002 2001
---- ---- ----
Current assets:
Cash and cash equivalents $ 1,322 $ 2,016 $ 494
Restricted cash 50 201 540
Available-for-sale securities 2 2 2,573
Trade accounts receivable (less allowance for doubtful
accounts of $297 at December 31, 2002 and $272 and
$262 at June 30, 2002 and 2001, respectively) 6,200 6,049 3,379
Other receivables 0 0 736
Inventories 5,813 4,633 5,289
Prepaid expenses and other current assets 968 845 912
-------- -------- --------
Total current assets 14,355 13,746 13,923
Property, plant and equipment 15,336 16,134 32,997
Other assets:
Investment in UTI 1,550 4,258 --
Technology license agreements (net of accumulated amortization
of $1,318 at December 31, 2002 and $1,268 and $1,168 at
June 30, 2002 and 2001, respectively) 133 183 283
-------- -------- --------
1,683 4,441 283
-------- -------- --------
Total Assets $ 31,374 $ 34,321 $ 47,203
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and capital lease obligations $ 816 $ 3,148 $ 1,065
Accounts payable 4,283 3,091 3,755
Accrued compensation 134 255 427
Accrued vacation 439 439 259
Other current liabilities 1,472 1,863 1,596
-------- -------- --------
Total current liabilities 7,144 8,796 7,102
Long -- term liabilities:
Debt and capital lease obligations 1,354 103 2,648
Grant 633 -- --
-------- -------- --------
1,987 103 2,648
Commitments and contingencies (Note 7)
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 -- 13,579,519 at December 31, 2002 and
13,379,519 and 11,488,186 at June 30, 2002 and 2001, respectively 1,358 1,338 1,149
Capital in excess of par value 115,251 113,103 99,389
Accumulated other comprehensive income (loss) (1,016) (856) (1,058)
Accumulated deficit (90,972) (87,860) (61,724)
-------- -------- --------
24,621 25,725 37,756
Less --Treasury stock, at cost -- 727,250 shares 2,378 303 303
-------- -------- --------
Total shareholders' equity 22,243 25,422 37,453
-------- -------- --------
Total Liabilities and Shareholders' Equity $ 31,374 $ 34,321 $ 47,203
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
39
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
6 Months Ended
December 31, Year ended June 30,
-------------- ------------------------------
2002 2002 2001 2000
---- ---- ---- ----
Revenues $ 15,599 $ 32,515 $ 24,163 $ 24,514
Cost of products sold 14,707 31,168 27,696 25,512
-------- -------- -------- --------
Gross margin 892 1,347 (3,533) (998)
Operating and other expenses (income):
Research and development 1,106 4,291 3,424 5,306
Selling, general, and administrative 3,441 7,949 8,009 7,385
Impairment of long lived assets -- 14,318 -- --
-------- -------- -------- --------
Total operating and other expenses, net 4,547 26,558 11,433 12,691
-------- -------- -------- --------
Operating loss (3,655) (25,211) (14,966) (13,689)
Other income (expense):
Interest income 41 91 702 958
Interest expense (192) (382) (536) (49)
Gain on sale of securities -- -- -- 3,147
Equity loss in UTI (1,273) (954) (2,338) (818)
Gain on sale of UTI stock 1,459 -- -- --
Miscellaneous income (expense) 508 320 (124) 209
-------- -------- -------- --------
Loss before income taxes (3,112) (26,136) (17,262) (10,242)
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (3,112) $(26,136) $(17,262) (10,242)
======== ======== ======== ========
Net loss per share, basic and diluted $ (0.24) $ (2.11) $ (1.55) $ (0.94)
======== ======== ======== ========
Weighted average number of shares outstanding,
basic and diluted 12,958 12,407 11,141 10,904
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
40
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated
Other
Comprehensive
Income (Loss)
-------------
(Dollars in Thousands) Common Foreign
Stock Common Capital in Currency
Number of Stock excess of Translation
Shares Amount Par Value Adjustment
------------ ------ ---------- -----------
Balance as of June 30, 1999 10,512,386 $ 1,051 $ 93,605 $ (101)
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (590)
Unrealized net loss on securities
Other comprehensive loss
Comprehensive loss
Shares issued to UTI 700,000 70 3,168
Shares issued under stock option plans and
other stock options 197,900 20 2,017
---------- ------- --------- -------
Balance as of June 30, 2000 11,410,286 $ 1,141 $ 98,790 $ (691)
---------- ------- --------- -------
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (368)
Unrealized net loss on securities
Other comprehensive loss
Comprehensive loss
Shares issued under stock option plans and
other stock options 77,900 8 599
---------- ------- --------- -------
Balance as of June 30, 2001 11,488,186 $ 1,149 $ 99,389 $(1,059)
---------- ------- --------- -------
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments 202
Unrealized net loss on securities
Other comprehensive loss
Comprehensive loss
Shares issued under private stock offerings 1,891,333 189 8,502
UTI change in ownership transactions and other 5,212
Balance as of June 30, 2002 13,379,519 $ 1,338 $ 113,103 $ (857)
Comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (159)
Unrealized net loss on securities
Other comprehensive loss
Comprehensive loss
Shares issued under private stock offerings 200,000 20 580
UTI change in ownership transactions and other 1,568
Treasury shares reaquired from UTI
---------- ------- --------- -------
Balance as of December 31, 2002 13,579,519 $ 1,358 $ 115,251 $(1,016)
---------- ------- --------- -------
Accumulated
Other
Comprehensive
Income (Loss)
-------------
Unrealized
Net Gain on Accumulated Treasury
Securities Deficit Stock Total
----------- ----------- -------- -----
Balance as of June 30, 1999 $ 368 $(34,220) $ (303) $ 60,400
Comprehensive loss:
Net loss (10,242) (10,242)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (590)
Unrealized net loss on securities (366) (366)
--------
Other comprehensive loss (956)
--------
Comprehensive loss (11,198)
--------
Shares issued to UTI 3,238
Shares issued under stock option plans and
other stock options 2,037
----- -------- ------- --------
Balance as of June 30, 2000 $ 2 $(44,462) $ (303) $ 54,477
----- -------- ------- --------
Comprehensive loss:
Net loss (17,262) (17,262)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (368)
Unrealized net loss on securities (1) (1)
--------
Other comprehensive loss (369)
--------
Comprehensive loss (17,631)
--------
Shares issued under stock option plans and
other stock options 607
----- -------- ------- --------
Balance as of June 30, 2001 $ 1 $(61,724) $ (303) $ 37,453
----- -------- ------- --------
Comprehensive loss:
Net loss (26,136) (26,136)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments 202
Unrealized net loss on securities --
Other comprehensive loss 202
--------
Comprehensive loss (25,934)
--------
Shares issued under private stock offerings 8,691
UTI change in ownership transactions and other 5,212
Balance as of June 30, 2002 $ 1 $(87,860) $ (303) $ 25,422
Comprehensive loss:
Net loss (3,112) (3,112)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (159)
Unrealized net loss on securities (1) (1)
--------
Other comprehensive loss (160)
--------
Comprehensive loss (3,272)
--------
Shares issued under private stock offerings 600
UTI change in ownership transactions and other 1,568
Treasury shares reaquired from UTI (2,075) (2,075)
----- -------- ------- --------
Balance as of December 31, 2002 $ -- $(90,972) $(2,378) $ 22,243
----- -------- ------- --------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
41
ULTRALIFE BATTERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended
December 31, Year Ended June 30,
---------------- --------------------------------------
2002 2002 2001 2000
---- ---- ---- ----
OPERATING ACTIVITIES
Net loss $ (3,112) $(26,136) $(17,262) $(10,242)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,407 4,393 3,656 1,941
Loss on asset disposal 4 -- -- --
Foreign exchange (gain) / loss (445) (320) 155 97
Gain on sale of securities -- -- -- (3,147)
Equity loss in UTI 1,273 954 2,338 818
Gain on sale of UTI stock (1,459) -- -- --
Impariment of long lived assets -- 14,318 -- --
Provision for loss on accounts receivable 25 10 (6) 42
Provision for inventory obsolescence 128 (4) 12 410
Changes in operating assets and liabilities:
Accounts receivable (176) (2,640) 83 56
Inventories (1,308) 750 381 (1,074)
Prepaid expenses and other current assets (128) 799 (471) 936
Accounts payable and other current liabilities 680 (323) 708 (369)
------- -------- ----- --------
Net cash used in operating activities (3,111) (8,199) (10,406) (10,532)
------- -------- ----- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (341) (2,330) (4,367) (2,946)
Proceeds from sale leaseback -- 995 -- (3,237)
Proceeds from asset disposal 8 -- -- --
Proceeds from sale of UTI stock 2,393 -- -- --
Purchase of securities -- (8,424) (26,794) (70,934)
Sales of securities 151 11,334 22,905 46,064
Maturities of securities -- -- 13,702 37,504
------- -------- ----- --------
Net cash provided by investing activities 2,211 1,575 5,446 6,451
------- -------- ----- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 8,691 607 5,275
Proceeds from issuance of debt -- 600 -- 4,423
Proceeds from grant 633 -- -- --
Principal payments under long-term debt and capital leases (481) (1,062) (941) (91)
------- -------- ----- --------
Net cash (used in) provided by financing activities 152 8,229 (334) 9,607
------- -------- ----- --------
Effect of exchange rate changes on cash 54 (83) 76 (590)
------- -------- ----- --------
Change in cash and cash equivalents (694) 1,522 (5,218) 4,936
------- -------- ----- --------
Cash and cash equivalents at beginning of period 2,016 494 5,712 776
------- -------- ----- --------
Cash and cash equivalents at end of period $ 1,322 $ 2,016 $ 494 $ 5,712
======= ======== ===== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 76 $ 374 $ 538 $ 42
Cash paid for taxes $ -- $ -- $ -- $ --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
42
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 -- Summary of Operations and Significant Accounting Policies
a. Description of Business
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized lithium primary (non-rechargeable), lithium ion and
lithium polymer rechargeable batteries for use in a wide array of applications.
The Company believes that its technologies allow the Company to offer batteries
that are flexibly configured, lightweight and generally achieve longer operating
time than many competing batteries currently available. The Company has focused
on manufacturing a family of lithium primary batteries for military, industrial
and consumer applications, which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company also supplies rechargeable lithium ion and lithium polymer batteries for
use in portable electronic applications.
Effective December 31, 2002, the Company changed its fiscal year-end from
June 30 to December 31. The financial results presented in this report
reflecting the six-month period ended December 31, 2002 are referred to as
"Transition 2002". The financial results presented in this report reflecting the
full twelve-month fiscal periods that ended June 30 prior to Transition 2002 are
referred to as "fiscal" years. For instance, the year ended June 30, 2002 is
referred to as "Fiscal 2002", and the year ended June 30, 2001 is referred to as
"Fiscal 2001". Certain unaudited financial information for the six-month period
ended December 31, 2001 is presented in Note 16 for comparative purposes.
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 achieving 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 it has the ability over the next 12 months to finance its operations
primarily from internally generated funds, or through the use of additional
financing that currently is available to the Company.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
accounts of the Company and its wholly owned subsidiary, Ultralife Batteries UK,
Ltd. ("Ultralife UK"). Intercompany accounts and transactions have been
eliminated in consolidation. Investments in entities in which the Company does
not have a controlling interest are typically accounted for using the equity
method, if the Company's interest is greater than 20%. Investments in entities
in which the Company has less than a 20% ownership interest are typically
accounted for using the cost method.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all demand deposits with financial institutions and financial
instruments with original maturities of three months or less to be cash
equivalents.
e. Restricted Cash
The Company is required to maintain certain levels of escrowed cash in
order to comply with the terms of some of its debt and lease agreements. All
cash is retained for application against required escrows for debt obligations,
including certain letters of credit supporting lease obligations and any excess
borrowings from the Company's revolving credit facility. A portion of the
restricted cash pertaining to certain lease obligations is released
43
periodically as payments are made to reduce outstanding debt. With respect to
the Company's revolving credit facility, the Company's primary lending
institution will restrict cash if the borrowing base (consisting of receivables
and inventory) does not sufficiently cover the outstanding borrowings on any
particular day. As of December 31, 2002, the Company had $50 in restricted cash
with a certain lending institution primarily for letters of credit supporting a
corporate credit card program. There was no cash restricted at December 31, 2002
pertaining to the Company's revolving credit facility. As of June 30, 2002, the
Company had $251 in restricted cash primarily for letters of credit supporting
leases for a building and some computer equipment.
f. Available-for-Sale Securities
Management determines the appropriate classification of securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. Marketable equity securities and debt securities are classified as
available-for-sale. These securities are carried at fair value, with the
unrealized gains and losses, net of tax, included as a component of accumulated
other comprehensive income.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
Realized gains and losses, and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are included in
the determination of net income (loss) as gains (losses) on sale of securities.
g. Inventories
Inventories are stated at the lower of cost or market with cost determined
under the first-in, first-out (FIFO) method.
h. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives
are as follows:
Buildings 20 years
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 3 - 7 years
Computer Hardware and Software 3 - 5 years
Leasehold Improvements Lease term
Depreciation and amortization are computed using the straight-line method.
Betterments, renewals and extraordinary repairs that extend the life of the
assets are capitalized. Other repairs and maintenance costs are expensed when
incurred. When sold, the cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in other income (expense).
i. Long-Lived Assets and Intangibles
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted future
cash flows of the assets with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value,
a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through
independent valuation or as the present value of expected discounted future cash
flows. If the expected undiscounted future cash flows exceed the respective
carrying amount as of the date of assessment, no impairment is recognized. The
Company recorded an asset impairment of $14,318 in Fiscal 2002 in connection
with the fixed assets in its rechargeable business (see Note 3). The Company did
not record any impairments of long-lived assets in the six-month period ended
December 31, 2002, or in the fiscal years ended June 30, 2001 or 2000.
j. Technology License Agreements
Technology license agreements consist of the rights to patented technology
and related technical information. The Company acquired a technology license
agreement for an initial payment of $1,000 in May 1994. Royalties are payable at
a rate of 8% of the fair market value of each battery using the technology if
the battery is sold or otherwise put
44
into use by the Company. The royalties can be reduced under certain
circumstances based on the terms of this agreement. The agreement is amortized
using the straight-line method over 10 years. Amortization expense was $50,
$100, $100, and $100 in the six months ended December 31, 2002 and the fiscal
years ended June 30, 2002, 2001, and 2000, respectively.
k. Translation of Foreign Currency
The financial statements of the Company's foreign affiliates are
translated into U.S. dollar equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation".
Exchange gains (losses) included in net loss for the six-month period ended
December 31, 2002 and for the years ended June 30, 2002, 2001 and 2000 were
$445, $320, $(155), and $97, respectively.
l. Revenue Recognition
Battery Sales -- Revenues from the sale of batteries are recognized when
products are shipped. A provision is made at that time for warranty costs
expected to be incurred.
Technology Contracts -- The Company recognizes revenue using the
percentage of completion method based on the relationship of costs incurred to
date to the total estimated cost to complete the contract. Elements of cost
include direct material, labor and overhead. If a loss on a contract is
estimated, the full amount of the loss is recognized immediately. The Company
allocates costs to all technology contracts based upon actual costs incurred
including an allocation of certain research and development costs incurred.
Under certain research and development arrangements with the U.S. Government,
the Company may be required to transfer technology developed to the U.S.
Government. The Company has accounted for the contracts in accordance with SFAS
No. 68, "Research and Development Arrangements". The Company, where appropriate,
has recognized a liability for amounts that may be repaid to third parties, or
for revenue deferred until expenditures have been incurred.
m. Warranty Reserves
The Company estimates future costs associated with expected product
failure rates, material usage and service costs in the development of its
warranty obligations. Warranty reserves are based on historical experience of
warranty claims and generally will be estimated as a percentage of sales over
the warranty period. In the event the actual results of these items differ from
the estimates, an adjustment to the warranty obligation would be recorded.
n. Shipping and Handling Costs
Costs incurred by the Company related to shipping and handling are
included in Cost of products sold. Amounts charged to customers pertaining to
these costs are reflected as a contra-expense in Cost of products sold.
o. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations. Such expenses amounted to $72, $213, $335 and $64 for the
six-month period ended December 31, 2002 and for the years ended June 30, 2002,
2001 and 2000, respectively.
p. Research and Development
Research and development expenditures are charged to operations as
incurred.
q. Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that these costs will be incurred and can be reasonably estimated.
45
r. Income Taxes
The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that may be in effect when the differences are
expected to reverse. The Company recorded no income tax benefit relating to the
net operating loss generated during the six months ended December 31, 2002 and
the fiscal years ended June 30, 2002, 2001 and 2000, as such income tax benefit
was offset by an increase in the valuation allowance. A valuation allowance is
required when it is more likely than not that the recorded value of a deferred
tax asset will not be realized.
s. Concentration of Credit Risk
In Transition 2002, the Company had one customer, the U.S. Army / CECOM,
which comprised more than 10% of the Company's revenues. The Company believes
that the loss of this customer could have a material adverse effect on the
Company. The Company's relationship with this customer is good.
In Fiscal 2002, the Company had two customers, UNICOR and Kidde plc, each
of which comprised more than 10% of the Company's revenues. While the demand
from each of these customers has diminished as a percent of total revenues since
June 2002 mainly as a result of growing demand from other customers, the
Company's relationship with these customers is good.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues. However, a downturn in the U.S. economy, which affects
retail sales and which could result in fewer sales of smoke detectors to
consumers, could potentially result in lower Company sales to this market
segment. The smoke detector OEM market segment comprised approximately 19% of
total primary revenues in Transition 2002. Additionally, a lower demand from the
U.S. and U.K. Governments could result in lower sales to military and government
users.
The Company generally does not distribute its products to a concentrated
geographical area nor is there a significant concentration of credit risks
arising from individuals or groups of customers engaged in similar activities,
or who have similar economic characteristics. The Company does not normally
obtain collateral on trade accounts receivable.
t. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at December 31, 2002 and June 30, 2002, 2001
and 2000. Fair values have been determined through information obtained from
market sources.
u. Earnings Per Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires the
reporting of basic and diluted earnings per share (EPS). Basic EPS is computed
by dividing reported earnings available to common shareholders by weighted
average shares outstanding for the period. Diluted EPS includes the dilutive
effect of securities calculated using the treasury stock method, if any. No
dilution for common share equivalents is included in the six-month period ended
December 31, 2002 or in the fiscal years ended June 30, 2002, 2001 and 2000 as
the effects would be anti-dilutive. For all periods reported, diluted earnings
per share were the equivalent of basic earnings per share due to the net loss.
There were 2,125,549, 2,562,640, 2,278,800, and 2,202,380 outstanding stock
options and warrants as of December 31, 2002 and June 30, 2002, 2001 and 2000,
respectively, that were not included in EPS for those periods as the effect
would be anti-dilutive. (See Note 8.)
v. Stock-Based Compensation
The Company has various stock-based employee compensation plans, which are
described more fully in Note 8. The Company applies Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations which require compensation costs to be recognized based on the
difference, if any, between the quoted market price of the stock on the grant
date and the exercise price. As all options granted to employees under such
plans had an exercise price at least equal to the market value of the underlying
common stock on the date of grant, and given the fixed nature of the equity
instruments, no stock-based employee compensation cost is reflected in net loss.
The effect on net loss and earnings per share if the Company had applied the
fair value recognition provisions of SFAS
46
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure,
an Amendment of SFAS No. 123" (as discussed below in Recent Accounting
Pronouncements), to stock-based employee compensation is as follows:
Transition 2002 Fiscal 2002 Fiscal 2001 Fiscal 2000
--------------- ----------- ----------- -----------
Net income (loss), as reported ($3,112) ($26,136) ($17,262) ($10,242)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects
-- -- -- --
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (415) (1,291) (2,335) (2,091)
Pro forma net income (loss) ($3,527) ($27,427) ($19,597) ($12,333)
Earnings (loss) per share:
Basic and diluted -- as reported ($0.24) ($2.11) ($1.55) ($0.94)
Basic and diluted -- pro forma ($0.27) ($2.21) ($1.75) ($1.13)
w. Segment Reporting
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has four operating segments. The basis for determining the Company's
operating segments is the manner in which financial information is used by the
Company in its operations. Management operates and organizes itself according to
business units that comprise unique products and services across geographic
locations.
x. Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Others Indebtedness." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others." The initial
recognition and measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The only material guarantees that the
Company has in accordance with FASB Interpretation No. 45 are product
warranties. All such guarantees have been appropriately recorded in the
financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of FASB Statement No. 123." This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 does not permit the use of the original
SFAS No. 123 prospective method of transition for changes to the fair value
based method made in fiscal years after December 15, 2003. The Company currently
applies the intrinsic value method and has no plans to convert to the fair value
method.
In December 2002, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities." This Interpretation requires companies to
reevaluate their accounting for certain investments in "variable interest
entities." A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. Variable interest entities are to be
47
consolidated if the Company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. The disclosure requirements of this
Interpretation are effective for all financial statements issued after January
31, 2003. The consolidation requirements of this Interpretation are effective
for all periods beginning after June 15, 2003. The Company has no investments in
variable interest entities.
y. Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year presentation.
Note 2 -- Investments
The following is a summary of available-for-sale securities:
Unrealized Estimated
December 31, 2002 Cost Gain Fair Value
----------------- ---- ---- ----------
Commercial Paper and other ... $ 2 $ -- $ 2
======= ====== =======
Unrealized Estimated
June 30, 2002 Cost Gain Fair Value
------------- ---- ---- ----------
Commercial Paper and other ... $ 2 $ -- $ 2
======= ====== =======
Unrealized Estimated
June 30, 2001 Cost Gain Fair Value
------------- ---- ---- ----------
Commercial Paper and other ... $ 613 $ -- $ 613
U.S. corporate bonds ......... 2,499 1 2,500
------- ------ -------
$ 3,112 $ 1 $ 3,113
======= ====== =======
The Company has instructed its investment fund managers to invest in
conservative, investment grade securities with average maturities of less than
three years. In fiscal 2000, the Company realized a gain on sales of securities
of $3,147 relating to the sale of portions of the Company's investment in
Intermagnetics General Corporation.
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties or the Company may sell the securities to meet their
ongoing and potential future cash needs.
The following is a summary of the cost, which approximates fair value, of
the Company's available-for-sale securities by contractual maturity:
December 31, June 30,
2002 2002 2001
------------ ---- ----
At Cost:
Less than one year $ 2 $ 2 $ 1,112
More than one year -- -- 2,000
--- ---- -------
Total $ 2 $ 2 $ 3,112
=== ==== =======
Note 3 -- Impairment of Long-Lived Assets
In June 2002, the Company reported a $14,318 impairment charge. This
impairment charge related to a writedown of long-lived assets in the Company's
rechargeable production operations, reflecting a change in the Company's
strategy. Changes in external economic conditions culminated in June 2002,
reflecting a slowdown in the
48
mobile electronics marketplace and a realization that near-term business
opportunities utilizing the high volume rechargeable production equipment had
dissipated. These changes caused the Company to shift away from high volume
polymer battery production to higher value, lower volume opportunities. The
Company's redefined strategy eliminates the need for its high volume production
line that had been built mainly to manufacture Nokia cell phone replacement
batteries. The new strategy is a three-pronged approach. First, the Company will
manufacture in-house for the higher value, lower volume polymer rechargeable
opportunities. Second, the Company will utilize its affiliate in Taiwan,
Ultralife Taiwan, Inc., as a source for both polymer and liquid lithium cells.
And third, the Company will look to other rechargeable cell manufacturers as
sources for cells that the Company can then assemble into completed battery
packs.
The impairment charge was accounted for under Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires evaluating the assets'
carrying value based on future cash flows. As a result of the impairment of the
Company's fixed assets, depreciation charges will be reduced by approximately
$1,800 per year.
Note 4 -- Supplemental Balance Sheet Information
The composition of inventories was:
December 31, June 30, June 30,
2002 2002 2001
------------ ---- ----
Raw materials ......................... $ 3,259 $ 2,680 $ 2,595
Work in process ....................... 1,882 1,338 1,233
Finished products ..................... 1,207 1,022 1,872
------- ------- -------
6,348 5,040 5,700
Less: Reserve for obsolescence ........ 535 407 411
------- ------- -------
$ 5,813 $ 4,633 $ 5,289
======= ======= =======
The composition of property,
plant and equipment was:
Land .................................. $ 123 $ 123 $ 123
Buildings and Leasehold Improvements .. 1,619 1,619 1,608
Machinery and Equipment ............... 28,772 26,308 37,891
Furniture and Fixtures ................ 319 312 291
Computer Hardware and Software ........ 1,405 915 1,375
Construction in Progress .............. 291 2,531 2,984
------- ------- -------
32,529 31,808 44,272
Less: Accumulated Depreciation ....... 17,193 15,674 11,275
------- ------- -------
$15,336 $16,134 $32,997
======= ======= =======
Note 5 -- Operating Leases
The Company leases various buildings, machinery, land, automobiles and
office equipment. Rental expenses for all operating leases were approximately
$611, $801, $500 and $333 for the six months ended December 31, 2002 and the
years ended June 30, 2002, 2001 and 2000, respectively. Future minimum lease
payments under non-cancelable operating leases as of December 31, 2002 are as
follows: 2003 - $1,206, 2004 - $1,188, 2005 - $1,179, 2006 - $1,173, and
thereafter - $1,854.
In March 2001, the Company entered into a $2,000 lease for certain new
manufacturing equipment with a third party leasing agency. Under this
arrangement, the Company had various options to acquire manufacturing equipment,
including sales / leaseback transactions and operating leases. In October 2001,
the Company expanded its leasing arrangement with this third party leasing
agency, increasing the amount of the lease line from $2,000 to $4,000. The
increase in the line was used to fund capital expansion plans for manufacturing
equipment that increased capacity within the Company's Primary business unit. At
June 30, 2002, the lease line had been fully utilized. The Company's lease
payment is $226 per quarter. In conjunction with this lease, the Company has a
letter of credit of $3,800 outstanding.
49
Note 6 -- Debt and Capital Leases
New York Power Authority
In May 1999, the Company borrowed approximately $150 from New York Power
Authority (NYPA) that was used toward the construction of a solvent recovery
system. The annual interest rate on the loan was 6%. The loan was being repaid
in 24 equal monthly payments and expired in July 2001.
Convertible Note to Director
In conjunction with the Company's private placement offering in April
2002, a note was issued to one of the Company's directors. The note converted
into 200,000 shares of the Company's common stock upon the approval of
shareholders at the Company's Annual Meeting in December 2002. All shares were
issued at $3.00 per share.
Credit Facility
In June 2000, the Company entered into a 3-year, $20,000 secured credit
facility with a lending institution. The financing agreement consisted of an
initial $12,000 term loan component and a revolving credit facility component
for an initial $8,000, based on eligible net accounts receivable (as defined)
and eligible net inventory (as defined). The amount available under the term
loan component amortizes over time. Principal and interest are paid monthly on
outstanding amounts borrowed. Debt issue costs amounting to $198 were incurred
in connection with the initiation of the term of the agreement and are being
amortized over the life of the agreement.
In October 2001, this lending institution informed the Company that its
borrowing availability under its $20,000 credit facility had been effectively
reduced to zero as a result of a recent appraisal of its fixed assets. In
February 2002, the Company and its primary lending institution amended the
credit facility. The amended facility was reduced to $15,000 mainly due to the
reduction in the valuation of fixed assets that limited the borrowing capacity
under the term loan component, as well as to minimize the cost of unused line
fees. The term loan component was revised to an initial $2,733 based on the
valuation of the Company's fixed assets (of which $2,067 was outstanding on the
term loan at December 31, 2002). The Company has no additional borrowing
capacity on the term loan component above the current amount outstanding. The
principal associated with the term loan is being repaid over a 5-year
amortization period. In March 2003, the Company amended its credit facility,
extending the agreement to June 30, 2004, among other things. As a result, the
Company has classified the portion of this debt that is due and payable beyond
one year as a long-term liability on the December 31, 2002 Consolidated Balance
Sheet. (See Note 14 for additional information on the Company's subsequent
amendment to this credit facility.)
The revolving credit facility component comprises the remainder of the
total potential borrowing capacity under the overall credit facility. There was
no balance outstanding on the revolving credit facility as of December 31, 2002.
Certain definitions were revised with the February 2002 amendment, resulting in
an increase in the Company's available borrowing base. In addition, the minimum
net worth covenant was effectively reduced to approximately $19,200, after
adjustments for fixed asset impairment charges. At December 31, 2002, the
Company is in compliance with this covenant.
The loans bear interest at prime-based or LIBOR-based rates, at the
discretion of the Company. At December 31, 2002, the rate was 5.75%. The Company
also pays a facility fee on the unused portion of the commitment. The loan is
secured by substantially all of the Company's assets and the Company is
precluded from paying dividends under the terms of the agreement. The lending
institution has the right to periodically reappraise the Company's underlying
assets throughout the term of the credit facility, which could potentially
reduce the Company's borrowing availability. In addition, in the event of a
default (which could include a material adverse change in the business, assets
or prospects of the Company), the lending institution could terminate the credit
facility. The total amount available under the revolver component is reduced by
outstanding letters of credit. The Company had $3,800 outstanding on a letter of
credit as of December 31, 2002, supporting the Company's $4,000 equipment lease.
The Company's additional borrowing capacity as of December 31, 2002 was
approximately $1,300.
Capital Leases
The Company has one capital lease. The capital lease commitment is for the
Newark, New York facility which provides for payments (including principal and
interest) of $28 per year from December 2002 through 2007. Remaining interest on
the lease is approximately $38. At the end of this lease term, the Company is
required to purchase the facility for one dollar.
50
Payment Schedule
Principal payments under the current amount outstanding of the long-term
debt and capital leases is as follows:
Capital
Credit Lease-
Facility Building Total
-------- -------- -----
Calendar 2003 $ 800 $ 16 $ 816
2004 1,267 18 1,285
2005 -- 20 20
2006 -- 23 23
2007 and thereafter -- 26 26
------- ---- ------
2,067 103 2,170
Less: Current portion 800 16 816
------- ---- ------
Long-term $ 1,267 $ 87 $1,354
======= ==== ======
Letters of Credit
The Company maintains a $50 letter of credit that supports its corporate
credit card account. Also, in connection with the $4,000 operating lease line
that the Company initiated in March 2001, the Company maintains a $3,800 letter
of credit, which expires in July 2007. The $3,800 letter of credit declines
gradually at certain points over time as the obligation it is associated with
diminishes.
Note 7 -- Commitments and Contingencies
a. China Program
In July 1992, the Company entered into several agreements related to the
establishment of a manufacturing facility in China for the production and
distribution of batteries. The Company made an investment of $284 of a total
anticipated investment of $405 which would represent a 15% interest in the China
Program and accounted for this investment using the cost method. Changzhou Ultra
Power Battery Co., Ltd., a company organized in China ("China Battery"),
purchased from the Company certain technology, equipment, training and
consulting services relating to the design and operation of a lithium battery
manufacturing plant. China Battery was required to pay approximately $6,000 to
the Company over the first two years of the agreement, of which approximately
$5,600 has been paid. The Company has been attempting to collect the balance due
under this contract. China Battery has indicated that these payments will not be
made until certain contractual issues have been resolved. Due to the Chinese
partner's questionable willingness to pay, the Company wrote off in fiscal 1997
the entire balance owed to the Company as well as the Company's investment. In
December 1997, China Battery sent to the Company a letter demanding
reimbursement of losses they have incurred plus a refund for certain equipment
that the Company sold to China Battery. Although China Battery has not taken any
additional steps, there can be no assurance that China Battery will not further
pursue such a claim, which, if successful, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes that such a claim is without merit.
b. Indemnity Agreement
The Company has an Indemnity Agreement with each member of its Board of
Directors and corporate officers. The agreement provides that the Company will
reimburse directors or officers for all expenses, to the fullest extent
permitted by law and the Company by-laws, arising out of their performance as
agents or trustees of the Company.
c. Purchase Commitments
As of December 31, 2002, the Company has made commitments to purchase
approximately $881 of production machinery and equipment.
51
d. Royalty Agreement
Technology underlying certain products of the Company is based in part as
non-exclusive transfer agreements. The Company made an original payment for such
technology and is required to make royalty and other payments in the future that
incorporate the licensed technology.
e. Government Grants/Loans
The Company has been able to obtain certain grants/loans from governments
agencies to assist with various funding needs.
In March 1998, the Company received a $500 grant from the Empire State
Development Corporation to fund certain equipment purchases. The grant was
contingent upon the Company achieving and maintaining minimum employment levels
for a period of five years. If annual levels of employment were not maintained,
a portion of the grant might have become repayable. Through the first four years
of the grant period, the Company met the requirements. The Company believes that
it has also met the requirements in the fifth and final year, and it has
recognized this portion of the grant into income. However, there is some
uncertainty with the interpretation of the grant agreement, and it is possible
that the Company may be required to repay $100 of the grant. The Company
believes that the likelihood of a repayment is remote, and it is discussing its
position with the Empire State Development Corporation accordingly. At December
31, 2002, there is no balance pertaining to this grant on the balance sheet.
In November 2001, the Company received approval for a $750 grant/loan from
a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
the cost. In August 2002, the $750 small cities grant/loan documentation was
finalized and the Company was reimbursed approximately $400 for costs it had
incurred to date for equipment purchases applicable under this grant/loan. As of
December 31, 2002, the total funds advanced to the Company were $633. The
remaining $117 under this grant/loan will be reimbursed as the Company incurs
additional expenses and submits requests for reimbursement. Certain employment
levels are required to be met and maintained for a period of three years. If the
Company does not meet its employment quota, it may adversely affect
reimbursement requests, or the grant will be converted to a loan that will be
repaid over a five-year period. The Company has initially recorded the proceeds
from this grant/loan as a long-term liability, and will only amortize these
proceeds into income as the certainty of meeting the employment criteria become
definitive.
Also in November 2001, the Company received approval for a $300 grant/loan
from New York State. The grant/loan will fund capital expansion plans that the
Company expects will lead to job creation. In this case, the Company will be
reimbursed after the full completion of the particular project. This grant/loan
also required the Company to meet and maintain certain levels of employment.
However, since the Company does not meet the beginning employment threshold, it
is unlikely at this time that the Company will be able to gain access to these
funds.
f. Employment Contracts
The Company has employment contracts with certain of its key employees
with automatic one-year renewals unless terminated by either party. These
agreements provide for minimum salaries, as adjusted for annual increases, and
may include incentive bonuses based upon attainment of specified management
goals. In addition, these agreements provide for severance payments in the event
of specified termination of employment.
52
g. Product Warranties
The Company estimates future costs associated with expected product
failure rates, material usage and service costs in the development of its
warranty obligations. Warranty reserves are based on historical experience of
warranty claims and generally will be estimated as a percentage of sales over
the warranty period. In the event the actual results of these items differ from
the estimates, an adjustment to the warranty obligation would be recorded.
Changes in the Company's product warranty liability during Transition 2002 were
as follows:
Balance at June 30, 2002 $221
Accruals for warranties issued 25
Changes in accruals related to pre-existing warranties --
Settlements made (10)
----
Balance at December 31, 2002 $236
h. Legal Matters
The Company is subject to legal proceedings and claims which arise in the
normal course of business. The Company believes that the final disposition of
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In August 1998, the Company, its Directors, and certain underwriters were
named as defendants in a complaint filed in the United States District Court for
the District of New Jersey by certain shareholders, purportedly on behalf of a
class of shareholders, alleging that the defendants, during the period April 30,
1998 through June 12, 1998, violated various provisions of the federal
securities laws in connection with an offering of 2,500,000 shares of the
Company's Common Stock. The complaint alleged that the Company's offering
documents were materially incomplete, and as a result misleading, and that the
purported class members purchased the Company's Common Stock at artificially
inflated prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice, allowing
the complaint to be refiled. The shareholder action was subsequently refiled,
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. Plaintiffs' counsel
has accepted the terms of the proposed settlement, amounting to $175 for the
Company, and the matter must now be approved by the Court and by the
shareholders comprising the class. Based on the terms of the proposed
settlement, the Company has established reserves for its share of the settlement
costs and associated expenses.
In the event settlement is not reached, the Company will continue to
defend the case vigorously. The amount of alleged damages, if any, cannot be
quantified, nor can the outcome of this litigation be predicted. Accordingly,
management cannot determine whether the ultimate resolution of this litigation
could have a material adverse effect on the Company's financial position and
results of operations.
In conjunction with the Company's purchase/lease of its Newark, New York
facility in 1998, the Company entered into a payment-in-lieu of tax agreement
which provides the Company with real estate tax concessions upon meeting certain
conditions. In connection with this agreement, a consulting firm performed a
Phase I and II Environmental Site Assessment which revealed the existence of
contaminated soil and ground water around one of the buildings. The Company
retained an engineering firm which estimated that the cost of remediation should
be in the range of $230. This cost, however, is merely an estimate and the cost
may in fact be much higher. In February, 1998, the Company entered into an
agreement with a third party which provides that the Company and this third
party will retain an environmental consulting firm to conduct a supplemental
Phase II investigation to verify the existence of the
53
contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse the Company for fifty percent (50%) of the cost
of correcting the environmental concern on the Newark property. The Company has
fully reserved for its portion of the estimated liability. Test sampling was
completed in the spring of 2001, and the engineering report was submitted to the
New York State Department of Environmental Conservation (NYSDEC) for review.
NYSDEC reviewed the report and, in January 2002, recommended additional testing.
The Company responded by submitting a work plan to NYSDEC, which was approved in
April 2002. The Company has sought proposals from engineering firms to complete
the remedial work contained in the work plan, but 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. Because this is a voluntary remediation,
there is no requirement for the Company to complete the project within any
specific time frame. The ultimate resolution of this matter may have a
significant adverse impact on the results of operations in the period in which
it is resolved. Furthermore, the Company may face claims resulting in
substantial liability which could have a material adverse effect on the
Company's business, financial condition and the results of operations in the
period in which such claims are resolved.
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein it is
asserted that the Customer's product, which is powered by an Ultralife battery,
does not operate according to the Customer's product specification. No claim has
been filed against Ultralife. However, in the interest of fostering good
customer relations, in September 2002, Ultralife has agreed to lend technical
support to the Customer in defense of its claim. Additionally, Ultralife will
honor its warranty by replacing any batteries that may be determined to be
defective. In the event a claim is filed against Ultralife and it is ultimately
determined that Ultralife's product was defective, replacement of batteries to
this Customer or end-user may have a material adverse effect on the Company's
financial position and results of operations.
Note 8 -- Shareholders' Equity
a. Preferred Stock
The Company has authorized 1,000,000 shares of preferred stock, with a par
value of $0.10 per share. At December 31, 2002, no preferred shares were issued
or outstanding.
b. Common Stock
The Company has authorized 40,000,000 shares of common stock, with a par
value of $0.10 per share.
In July 2001, the Company completed a $6,800 private placement of
1,090,000 shares of its common stock at $6.25 per share.
In April 2002, the Company issued 801,333 shares of its common stock at
$3.00 per share in a private placement. In conjunction with this offering,
another 200,000 shares were issued in December 2002 to one of the Company's
directors, upon conversion of a convertible debenture (see Note 6).
c. Stock Options
The Company sponsors several stock-based compensation plans, all of which
are accounted for under the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense for its stock-based compensation plans has been recognized
in the Company's Consolidated Statements of Operations. The Company has adopted
the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation". If the Company had elected to recognize compensation expense for
all of the Company's stock-based compensation based on the fair value of the
options at grant date as prescribed by SFAS No.123, the Company's net loss would
have been $3,527, $27,427, $19,597 and $12,333 for the six-month period ended
December 31, 2002 and for the years ended June 30, 2002, 2001 and 2000, compared
with the reported losses of $3,112, $26,136, $17,262 and $10,242, respectively.
Loss per share would have been $0.27, $2.21, $1.75 and $1.13 in the six months
ended December 31, 2002 and in the years ended June 30, 2002, 2001 and 2000,
respectively, as compared to reported loss per share of $0.24, $2.11, $1.55 and
$0.94, respectively. The effect of SFAS No. 123 in the pro forma disclosures may
not be indicative of future amounts.
54
For purposes of this disclosure, the fair value of each fixed option grant
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in the six-month
period ended December 31, 2002 and in the fiscal years 2002, 2001, and 2000:
Transition Fiscal Fiscal Fiscal
2002 2002 2001 2000
-------------------------------------------------------------------------
Risk-free interest rate 2.2% 3.6% 4.8% 6.4%
Volatility factor 75.9% 75.8% 75.8% 74.1%
Weighted average expected life
(years) 4 4 4 6
Weighted average fair value of
options granted $1.72 $2.13 $3.56 $5.48
The shareholders of the Company have approved four stock option plans that
permit the grant of options. In addition, the shareholders of the Company have
approved the grant of options outside of these plans. Under the 1991 stock
option plan, 100,000 shares of Common Stock were reserved for grant to key
employees and consultants of the Company. These options expired on September 13,
2001, at which date the plan terminated. All options granted under the 1991 plan
were Non-Qualified Stock Options ("NQSOs").
The shareholders of the Company have also approved a 1992 stock option
plan that is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 1,150,000 shares of Common Stock for grant
under the plan. During 1997, the Board of Directors approved an amendment to the
plan increasing the number of shares of Common Stock reserved by 500,000 to
1,650,000. Options granted under the 1992 plan are either Incentive Stock
Options ("ISOs") or NQSOs. Key employees are eligible to receive ISOs and NQSOs;
however, directors and consultants are eligible to receive only NQSOs. On
October 13, 2002, this plan expired and as a result, there are no more shares
available for grant under this plan. As of December 31, 2002, there were
1,003,900 stock options outstanding under this plan.
Effective March 1, 1995, the Company established the 1995 stock option
plan and granted the former Chief Executive Officer ("CEO") options to purchase
100,000 shares at $14.25 per share under this plan. Of these shares, 60,000
vested prior to his termination and subsequently expired on March 1, 2001. There
were no other grants under the 1995 stock option plan. In October 1992, the
Company granted, to the former CEO, options to purchase 225,000 shares of Common
Stock at $9.75 per share outside of any of the stock option plans. The options
vested through June 1997 and expired in October 2002. As of December 31, 2002,
there were no stock options outstanding under this plan.
Effective July 12, 1999, the Company granted the current CEO options to
purchase 500,000 shares of Common Stock at $5.19 per share outside of any of the
stock option plans. Of these, 50,000 options were exercisable on the grant date,
and the remaining options are exercisable in annual increments of 90,000 over a
five-year period commencing July 12, 2000 through July 12, 2004, and expire on
July 12, 2005.
Effective December 2000, the Company established the 2000 stock option
plan which is substantially the same as the 1991 stock option plan. The
shareholders approved reservation of 500,000 shares of Common Stock for grant
under the plan. In December 2002, the shareholders approved an amendment to the
plan increasing the number of shares of Common Stock reserved by 500,000, to a
total of 1,000,000. Options granted under the 2000 plan are either ISOs or
NQSOs. Key employees are eligible to receive ISOs and NQSOs; however, directors
and consultants are eligible to receive only NQSOs. As of December 31, 2002,
there were 512,649 stock options outstanding under this plan.
55
The following table summarizes data for the stock options issued by the
Company:
Transition 2002 Fiscal 2002 Fiscal 2001 Fiscal 2000
--------------- ----------- ----------- -----------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
of Shares Per Share of Shares Per Share Of Shares Per Share of Shares Per Share
--------- --------- --------- --------- --------- --------- --------- ---------
Shares under option at
beginning of year...... 2,441,140 $6.90 2,266,300 $7.95 2,189,880 $8.68 1,721,460 $10.16
Options granted........... 110,549 3.01 461,000 3.78 341,600 7.06 1,033,500 6.59
Options exercised......... -- -- -- -- (77,900) 7.77 (202,000) 10.22
Options canceled.......... (535,140) 9.27 (286,160) 9.92 (187,280) 14.28 (363,080) 8.94
--------- --------- --------- ---------
Shares under option at
end of year ........... 2,016,549 $6.05 2,441,140 $6.90 2,266,300 $7.95 2,189,880 $8.68
--------- --------- --------- ---------
Options exercisable at
end of year ........... 1,118,269 $6.74 1,289,200 $8.13 675,480 $10.09 633,320 $10.49
The following table represents additional information about stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at December 31, 2002 Life Exercise Price at December 31, 2002 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
$2.74 - $4.15 542,149 5.19 $3.49 164,249 $3.31
$4.31 - $5.19 547,500 2.53 $5.15 357,500 $5.15
$5.36 - $7.75 548,600 3.45 $6.77 253,520 $6.70
$7.87 - $14.88 378,300 1.05 $9.99 343,000 $10.07
- ------------------------------------------------------------------------------------------------------------------------------
$2.74 - $14.88 2,016,549 3.22 $6.05 1,118,269 $6.74
d. Warrants
In March 1998, the Company issued warrants to purchase 12,500 shares of
its common stock to the Empire State Development Corporation in connection with
a $500 grant. Proceeds of the grant were used to fund certain equipment
purchases and are contingent upon the Company achieving and maintaining minimum
employment levels. The warrants could have been exercised through December 31,
2002 at an exercise price equal to 60% of the average closing price for the 10
trading days preceding the exercise date, but not less than the average closing
price of the Company's common stock during the 20 trading days prior to the
grant. The warrants expired on December 31, 2002.
In July 2001, the Company issued warrants to purchase 109,000 shares of
its common stock to H.C. Wainwright & Co., Inc. and other affiliated individuals
that participated as investment bankers in the $6,800 private placement of
1,090,000 shares of common stock that was completed at that time. The warrants,
all of which remain outstanding as of December 31, 2002, have an exercise price
of $6.25 per share and the term of the warrants is five years.
e. Reserved Shares
The Company has reserved 2,612,900 shares of common stock under the
various stock option plans and warrants as of December 31, 2002, and 2,685,950,
2,588,200 and 2,266,225 as of June 30, 2002, 2001 and 2000, respectively.
56
Note 9 -- Income Taxes
Foreign and domestic loss carryforwards totaling approximately $78,816 are
available to reduce future taxable income. Foreign loss carryforwards of $12,519
can be carried forward indefinitely. The domestic net operating loss
carryforward of $66,297 expires through 2022. If it is determined that a change
in ownership as defined under Internal Revenue Code Section 382 has occurred,
the net operating loss carryforward will be subject to an annual limitation.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The Company increased its
valuation allowance by approximately $253, $9,856, $3,143 and $2,445 for the six
months ended December 31, 2002 and for the years ended June 30, 2002, 2001 and
2000, respectively, to offset the deferred tax assets based on the Company's
estimates of its future earnings and the expected timing of temporary difference
reversals.
Significant components of the Company's deferred tax liabilities and
assets are as follows:
December 31, June 30,
2002 2002 2001
------------ ---- ----
Deferred tax liabilities:
Investments $ 202 $ 348 $ 1
Property, plant and equipment 3,124 2,766 913
-------- -------- --------
Total deferred tax liabilities 3,326 3,114 914
Deferred tax assets:
Impairment of long-lived assets 4,868 4,868 -
Net operating loss carryforward 26,297 25,678 18,560
Other 372 526 456
-------- -------- --------
Total deferred tax assets 31,537 31,072 19,016
Valuation allowance for deferred tax assets (28,211) (27,958) (18,102)
-------- -------- --------
Net deferred tax assets 3,326 3,114 914
-------- -------- --------
Net deferred tax assets/liabilities $ -- $ -- $ --
There were no income taxes paid for the six months ended December 31, 2002
or the years ended June 30, 2002, 2001 and 2000. For financial reporting
purposes, income (loss) from continuing operations before income taxes included
the following:
December 31, June 30,
2002 2002 2001 2000
------------ ---- ---- ----
United States $(2,168) $(23,848) $(13,999) $ (7,658)
Foreign (944) (2,288) (3,263) (2,584)
------- -------- -------- --------
Total $(3,112) $(26,136) $(17,262) $(10,242)
There are no undistributed earnings of Ultralife UK, the Company's foreign
subsidiary, at December 31, 2002.
The Company's effective tax benefit is lower than would be expected if the
statutory rate was applied to the pretax loss because the Company has recorded
an increase in the valuation allowance for deferred tax assets equal to the tax
benefit of the current year net operating loss carryforwards due to the
uncertainty of future operating results. Accordingly, the effective tax rate is
0.0% for the six months ended December 31, 2002 and each of the years ended June
30, 2002, 2001 and 2000.
Note 10 -- 401(k) Plan
The Company maintains a defined contribution 401(k) plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under Section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company may, at the Board of Directors
discretion, authorize an employer
57
contribution based on a portion of the employees' contributions. Effective
January 1, 2001, the Board of Directors approved Company matching of employee
contributions up to a maximum of 4% of the employee's income. Prior to this, the
maximum contribution for participants was 3%. In January 2002, the employer
match was suspended in an effort to conserve cash. For the six-month period
ended December 31, 2002 and for the years ended June 30, 2002, 2001 and 2000,
the Company contributed $0, $162, $234 and $150, respectively.
Note 11 -- Related Party Transactions
During 2000, the Company sold the majority of its investment in
Intermagnetics General Corporation (IGC) common stock and realized a gain on
sale of securities of $3,147. IGC was considered a related party since certain
directors of the Company served as officers or directors of IGC.
In conjunction with the Company's private placement offering in April
2002, a convertible debenture was issued to one of the Company's directors. The
debenture converted into 200,000 shares of the Company's common stock as a
result of the Company's shareholders vote to approve the conversion which
occurred at the Company's Annual Meeting in December 2002. All shares were
issued at $3.00 per share.
In October 2002, the Company sold a portion of its equity investment in
UTI, reducing its ownership interest from approximately 30% to approximately
10.6%. See Note 13 for additional information.
Note 12 -- Business Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company reports its results in four
operating segments: Primary Batteries, Rechargeable Batteries, Technology
Contracts and Corporate. The Primary Batteries segment includes 9-volt
batteries, cylindrical batteries and various 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.
Transition 2002
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 15,232 $ 274 $ 93 $ -- $ 15,599
Segment contribution 623 (906) 69 (3,441) (3,655)
Interest income, net (151) (151)
Other income (expense), net 694 694
Income taxes -- --
--------
Net loss (3,112)
Long-lived assets 10,609 2,840 -- 3,570 17,019
Total assets 21,914 3,455 93 5,912 31,374
Capital expenditures 253 -- -- 88 341
Depreciation and amortization expense 843 359 -- 205 1,407
58
Fiscal 2002
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 31,334 $ 445 $ 736 $ -- $ 32,515
Segment contribution 3,276 (20,612) 73 (7,948) (25,211)
Interest income, net (291) (291)
Other income (expense), net (634) (634)
Income taxes -- --
--------
Net loss (26,136)
Long-lived assets 11,761 3,198 -- 5,616 20,575
Total assets 21,351 4,256 33 8,681 34,321
Capital expenditures 1,884 333 -- 113 2,330
Depreciation and amortization expense 1,425 2,312 -- 656 4,393
Fiscal 2001
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 22,105 $ 370 $1,688 $ -- $ 24,163
Segment contribution 443 (7,551) 151 (8,009) (14,966)
Interest income, net 166 166
Other income (expense), net (2,462) (2,462)
Income taxes -- --
--------
Net loss (17,262)
Long-lived assets 11,628 19,490 280 1,882 33,280
Total assets 18,609 21,166 303 7,125 47,203
Capital expenditures 2,241 1,382 -- 744 4,367
Depreciation and amortization expense 1,159 2,153 1 343 3,656
Fiscal 2000
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------- ------------ ---------- --------- -----
Revenues $ 21,840 $ 25 $ 2,649 $ -- $ 24,514
Segment contribution (1,244) (5,306) 246 (7,385) (13,689)
Interest income, net 909 909
Other income (expense), net 2,538 2,538
Income taxes -- --
--------
Net loss (10,242)
Long-lived assets 10,892 19,985 281 4,349 35,507
Total assets 19,171 20,632 493 24,164 64,460
Capital expenditures 1,377 1,012 -- 557 2,946
Depreciation and amortization expense 1,128 591 1 221 1,941
Geographical Information
Revenues Long-Lived Assets
Transition Fiscal Fiscal Fiscal Transition Fiscal Fiscal Fiscal
2002 2002 2001 2000 2002 2002 2001 2000
---------- ------ ------ ------ ---------- ------ ------ ------
United States $10,602 $21,208 $15,715 $13,587 $13,030 $16,605 $29,139 $30,685
United Kingdom 2,352 3,853 1,797 2,874 3,989 3,970 4,141 4,822
Hong Kong 437 3,330 3,347 3,211 -- -- -- --
Europe, excluding
United Kingdom 1,309 2,518 1,572 2,812 -- -- -- --
Other 899 1,606 1,732 2,030 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total $15,599 $32,515 $24,163 $24,514 $17,019 $20,575 $33,280 $35,507
59
Note 13 -- 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.
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 30, 2002. As a result of these "change in interest"
transactions, the Company's share of UTI's underlying net assets actually
increased, creating gains on the transactions that were recorded as adjustments
in additional paid in capital on the balance sheet. These increases in
additional paid in capital amounted to $1,573 in Transition 2002 and $5,212 in
Fiscal 2002. (The Company was precluded from recognizing gains from these
"change in interest" transactions in its consolidated statement of income
because UTI was a development stage company.)
Until October 2002, the Company accounted for its investment in UTI using
the equity method of accounting. The Company recorded equity losses in UTI in
the Company's consolidated statement of income of $1,273 in Transition 2002 and
$954, $2,338, and $818 in Fiscal 2002, 2001 and 2000, respectively.
In October 2002, the Company sold a portion of its equity investment in
UTI, reducing its ownership interest from approximately 30% to approximately
10.6%. In exchange, the Company received total consideration of $2,393 in cash
and the return of 700,000 shares of Ultralife common stock. As a result of this
transaction, the Company reported gain of $1,459 from the sale of its UTI stock.
Since the Company's investment in UTI has fallen below 20% and the Company does
not have any significant influence over the ongoing operations of UTI, the
Company now accounts for this investment using the cost method. The carrying
value of the investment on the Company's balance sheet as of December 31, 2002
was $1,550. 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:
(unaudited)
Condensed Statements of Operations Year Ended June 30,
2002 2001 2000
---- ---- ----
Net revenue $ 101 $ -- $ --
Cost of Sales (1,573) -- --
Operating loss (8,360) (7,540) (1,897)
Net loss (8,784) (6,637) (1,778)
Condensed Balance Sheets June 30,
2002 2001
------- -------
Current assets $ 5,902 $11,577
Non-current assets 60,271 35,238
------- -------
$66,173 $46,815
======= =======
Current liabilities $12,372 $2,663
Non-current liabilities 16,260 6,362
Shareholders' equity 37,541 37,790
------- -------
$66,173 $46,815
======= =======
Note 14 -- Subsequent Events
On March 4, 2003, the Company completed a short-term financing to help it
meet certain working capital needs as the Company was growing rapidly. The
90-day, $500,000 note, which accrues interest at 7.5% per annum, can be
converted into 125,000 shares of common stock at $4.00 per share, at the option
of the note holder. If the Company were to default on this obligation, the note
would instead convert into 250,000 shares of common stock at $2.00 per share.
60
On March 25, 2003, the Company's primary lending bank agreed to amend the
Company's credit facility. Among other things, this amendment included an
extension of the credit agreement through June 30, 2004, a release of accounts
receivable at the Company's U.K. subsidiary in order to allow that subsidiary to
obtain its own revolving credit facility with a U.K. bank, and a formula
adjustment in the borrowing base that enhanced the eligible receivables related
to the U.S. military in recognition of the increasing business with the U.S.
Army.
Note 15 -- Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net
sales less cost of products sold), net loss and net loss per share, basic and
diluted, for each quarter during the past two years:
Quarter ended
-----------------------
Transition 2002 Sept. 28, Dec. 31, Transition
2002 2002 Year
---- ---- ----------
Revenues $ 6,847 $8,752 $ 15,599
Gross margin 129 763 892
Net loss (2,737) (375) (3,112)
Net loss per share, basic and
diluted (0.21) (0.03) (0.24)
Quarter ended
----------------------------------------------------
Fiscal 2002 Sept. 30, Dec. 31, March 31, June 30, Full
2001 2001 2002 2002 Year
---- ---- ---- ---- ----
Revenues $7,616 $7,459 $ 8,862 $ 8,578 $ 32,515
Gross margin (448) (212) 922 1,085 1,347
Net loss (3,006) (3,831) (2,793) (16,506) (26,136)
Net loss per share, basic and
diluted (0.25) (0.31) (0.23) (1.28) (2.11)
Quarter ended
-----------------------------------------------------
Fiscal 2001 Sept. 30, Dec. 31, March 31, June 30, Full
2000 2000 2001 2001 Year
---- ---- ---- ---- ----
Revenues $6,851 $5,290 $ 5,817 $ 6,205 $ 24,163
Gross margin (452) (1,699) (731) (651) (3,533)
Net loss (3,104) (5,737) (3,921) (4,500) (17,262)
Net loss per share, basic and
diluted (0.28) (0.51) (0.35) (0.40) (1.55)
61
Note 16 -- Transition Period Comparative Data
The following table presents certain financial information for the six
months ended December 31, 2002 and 2001, respectively.
Six Months
Ended December 31,
2002 2001
---- ----
(Unaudited)
Revenues $15,599 $15,075
Gross margin $ 892 $ (660)
Loss before income taxes $(3,112) $(6,837)
Income taxes -- --
Net loss $(3,112) $(6,837)
Earnings per common share $ (0.24) $ (0.56)
Weighted average common shares
outstanding 12,958 12,140
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by Item 9 was previously reported in the
Company's Form 10-K for the period ended June 30, 2002, filed with the SEC on
September 27, 2002.
62
PART III
The information required by Part III and each of the following items is
omitted from this Report and presented in the Company's definitive proxy
statement ("Proxy Statement") to be filed pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year covered by this Report, in
connection with the Company's 2003 Annual Meeting of Shareholders, which
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Directors and Executive Officers of the Registrant"
in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference. For the
information regarding securities authorized for issuance under equity
compensation plans required by Regulation S-K Item 201(d), see PART I, Item 5 of
this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Proxy Statement is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's president and chief executive
officer, along with the Company's vice president -- finance and chief financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act 13a-14. Based upon
that evaluation, the Company's president and chief executive officer, along with
the Company's vice president -- finance and chief financial officer, concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information related to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings with the Securities and Exchange Commission. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
63
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements and schedules required by this Item 15 are set
forth in Part II, Item 8 of this Report.
2. Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts See Item 15 (d)
(b) Reports on Form 8-K
On December 12, 2002, Company filed a Form 8-K with the Securities and
Exchange Commission indicating that the Company's Board of Directors approved
changing the Company's fiscal year-end from June 30 to December 31. This change
will be made for the period ending December 31, 2002. The Company will file a
transition report on Form 10-K for the six-month period ending December 31,
2002.
On February 26, 2003, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that Company announced its preliminary, unaudited
financial results for the period ended December 31, 2002, referring to a press
release that had been issued that same day. In the release, the Company
indicated that it would likely need to restate prior period financial results
relating to its equity investment in its affiliate, Ultralife Taiwan, Inc.
On March 27, 2003, the Company filed a Form 8-K with the Securities and
Exchange Commission indicating that Company had amended its credit facility. On
March 25, 2003, the Company's primary lending bank agreed to amend the Company's
credit facility. Among other things, this amendment included an extension of the
credit agreement through June 30, 2004, a release of accounts receivable at the
Company's U.K. subsidiary in order to allow it to obtain its own revolving
credit facility with a U.K. bank, and a formula adjustment in the borrowing base
that enhanced the eligible receivables related to the U.S. military in
recognition of the increasing business with the U.S. Army.
(c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit
Index Description of Document Incorporated By Reference to:
3.1a Restated Certificate of Incorporation Exhibit 3.1 of Registration Statement, File
No. 33-54470 (the "1992 Registration
Statement")
3.1b Amendment to Certificate of Exhibit 3.1 of the Form 10-Q for the fiscal
Incorporation of Ultralife Batteries, quarter ended December 31, 2000, File No.
Inc. 0-20852 ("the 2000 10-Q")
3.2 By-laws Exhibit 3.2 of the 1992 Registration
Statement
4.1 Specimen Copy of Stock Certificate Exhibit 4.1 of the 1992 Registration
Statement
10.1 Asset Purchase Agreement between the Exhibit 10.1 of the 1992 Registration
Registrant, Eastman Technology, Inc. Statement
and Eastman Kodak Company
10.2 Joint Venture Agreement between Exhibit 10.3 of the 1992 Registration
Changzhou Battery Factory, the Company Statement
and H&A Company and related agreements
10.3 1992 Stock Option Plan, as amended Exhibit 10.7 of the 1992 Registration
Statement
64
Exhibit
Index Description of Document Incorporated By Reference to:
10.4 Stock Option Agreement under the Exhibit 10.10 of Form 10-Q for the fiscal
Company's 1992 Stock Option Plan for quarter ended December 31, 1993, File No.
incentive stock options 0-20852 (the "1993 10-Q"); (this Exhibit
10.5 Stock Option Agreement under the Exhibit 10.10 of the 1993 10-Q (this
Company's 1992 Stock Option Plan for Exhibit may be found in SEC File No.
non-qualified options 0-20852)
10.6 Various amendments, dated January 4, Exhibit 10.17 of the 1993 10-Q (this
1993 through January 18, 1993 to the Exhibit may be found in SEC File No.
Agreement with the Changzhou Battery 0-20852)
Company
10.7 Technology Transfer Agreement relating Exhibit 10.19 of the Company's Registration
to Lithium Batteries (Confidential Statement on Form S-1 filed on October 7,
treatment has been granted as to 1994, File No. 33-84888 (the "1994
certain portions of this agreement) Registration Statement")
10.8 Technology Transfer Agreement relating Exhibit 10.20 of the 1994 Registration
to Lithium Batteries Confidential Statement
treatment has been granted as to
certain portions of this agreement)
10.9 Amendment to the Agreement relating to Exhibit 10.24 of the Company's Form 10-K
rechargeable batteries. (Confidential for the fiscal year ended June 30, 1996
treatment has been granted as to (this Exhibit may be found in SEC File No.
certain portions of this agreement) 0-20852)
10.10 Lease agreement between Wayne County Exhibit 10.1 of the Company's Registration
Industrial Development Agency and the Statement on Form S-3 filed on February 27,
Company, dated as of February 1, 1998 1998, File No. 333-47087
10.11 Loan and Security Agreement dated June Exhibit 10.33 of the Company's Report on
15, 2000 between Congress Financial Form 10-K for the year ended June 30, 2000
Corporation (New England) and (the "2000 10-K")
Ultralife Batteries, Inc.
10.12 Term Promissory Note dated June 15, Exhibit 10.34 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries, Inc.
10.13 Term Promissory Note dated June 15, Exhibit 10.35 of the 2000 10-K
2000 between Congress Financial
Corporation (New England) and
Ultralife Batteries (UK), Ltd.
10.14 Employment Agreement between the Exhibit 10.36 of the 2000 10-K
Registrant and John D. Kavazanjian
10.15 Second Amendment to Financing Agreement Exhibit 10.1 of the Form 10-Q for the
fiscal quarter ended December 31, 2000
10.16 Third Amendment to Financing Agreement Exhibit 10.38 of the Company's Report on
Form 10-K for the year ended June 30, 2001
(the "2001 10-K")
10.17 Ultralife Batteries, Inc. 2000 Stock Exhibit 99.1 of the Company's Registration
Option Plan Statement on Form S-8 filed on May 15,
2001, File No. 333-60984
10.18 Lease Agreement between Winthrop Exhibit 10.41 of the 2001 10-K
Resources and the Registrant
10.19 Amended Lease Agreement between Exhibit 10.1 of the Form 10-Q for the
Winthrop Resources and the Registrant fiscal quarter ended December 31, 2001
10.20 Senior Convertible Subordinated Exhibit 4.1 of the Form 10-Q for the fiscal
Debenture Agreement quarter ended March 31, 2002 (the "March
2002 10-Q")
10.21 Fourth Amendment to Financing Exhibit 10.1 of the March 2002 10-Q
Agreements
65
Exhibit
Index Description of Document Incorporated By Reference to:
10.22 Employment Agreement between the Exhibit 10.45 of the Company's Report on
Registrant and John D. Kavazanjian Form 10-K for the year ended June 30, 2002
(the "2002 10-K")
10.23 Employment Agreement between the Exhibit 10.46 of the 2002 10-K
Registrant and Joseph N. Barrella
10.24 Employment Agreement between the Exhibit 10.47 of the 2002 10-K
Registrant and William A. Schmitz
10.25 Stock Purchase Agreement with Exhibit 10.1 of the Form 10-Q for the
Ultralife Taiwan, Inc. fiscal quarter ended September 28, 2002
10.26 Subordinated Promissory Note with Filed herewith
Hitschler, Kimelman Holdings, LLC
10.27 Loan Agreement with Hitschler, Filed herewith
Kimelman Holdings, LLC
10.28 Warrant Issued to Hitschler, Kimelman Filed herewith
Holdings, LLC to Purchase Shares of
Common Stock
10.29 Fifth Amendment to Financing Filed herewith
Agreements with Congress Financial
Corporation
21 Subsidiaries Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
99 CEO and CFO Certifications Filed herewith
66
(d) Financial Statement Schedules.
The following financial statement schedules of the Registrant are filed
herewith:
Schedule II -- Valuation and Qualifying Accounts
Additions
Charged to
Charged to Other December 31,
June 30, 2002 Expense Accounts Deductions 2002,
------------- ---------- -------- ---------- ------------
Allowance for doubtful accounts $ 272 $ 25 $-- $ -- $ 297
Inventory reserves 407 275 -- 147 535
Warranty reserves 221 25 -- 10 236
Deferred tax valuation allowance 27,958 253 -- -- 28,211
Additions
Charged to
Charged to Other
June 30, 2001 Expense Accounts Deductions June 30, 2002
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 262 $ 30 $17 $ 37 $ 272
Inventory reserves 411 1,038 -- 1,042 407
Warranty reserves 253 222 -- 254 221
Deferred tax valuation allowance 18,102 9,856 -- -- 27,958
Additions
Charged to
Charged to Other
June 30, 2000 Expense Accounts Deductions June 30, 2001
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 268 $ 11 $-- $ 17 $ 262
Inventory reserves 399 825 -- 813 411
Warranty reserves 384 292 -- 423 253
Deferred tax valuation allowance 14,959 3,143 -- -- 18,102
Additions
Charged to
Charged to Other
June 30, 1999 Expense Accounts Deductions June 30, 2000
------------- ------- -------- ---------- -------------
Allowance for doubtful accounts $ 429 $ 45 $-- $206 $ 268
Inventory reserves 295 1,035 -- 931 399
Warranty reserves 169 300 -- 85 384
Deferred tax valuation allowance 12,514 2,445 -- -- 14,959
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
Date: April 11, 2003 By: /s/ John D. Kavazanjian
-------------------------
John D. Kavazanjian
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 11, 2003 /s/ John D. Kavazanjian
-----------------------------------------------
John D. Kavazanjian
President, Chief Executive Officer and Director
Date: April 11, 2003 /s/ Robert W. Fishback
-----------------------------------------------
Robert W. Fishback
Vice President -- Finance and Chief
Financial Officer
(Principal Financial Officer)
Date: April 11, 2003 /s/ Joseph C. Abeles
-----------------------------------------------
Joseph C. Abeles (Director)
Date: April 11, 2003 /s/ Joseph N. Barrella
-----------------------------------------------
Joseph N. Barrella (Director)
Date:
-----------------------------------------------
Patricia C. Barron (Director)
Date: April 11, 2003 /s/ Daniel W. Christman
-----------------------------------------------
Daniel W. Christman (Director)
Date: April 11, 2003 /s/ Carl H. Rosner
-----------------------------------------------
Carl H. Rosner (Director)
Date: April 11, 2003 /s/ Ranjit C. Singh
-----------------------------------------------
Ranjit C. Singh (Director)
68
I, John D. Kavazanjian, certify that:
1. I have reviewed this transition report on Form 10-K of Ultralife
Batteries, Inc.;
2. Based on my knowledge, this transition 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
transition report;
3. Based on my knowledge, the financial statements, and other financial
information included in this transition 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 transition 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 transition 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 transition report (the "Evaluation Date"); and
c) presented in this transition 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
transition 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
69
I, Robert W. Fishback, certify that:
1. I have reviewed this transition report on Form 10-K of Ultralife
Batteries, Inc.;
2. Based on my knowledge, this transition 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
transition report;
3. Based on my knowledge, the financial statements, and other financial
information included in this transition 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 transition 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 transition 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 transition report (the "Evaluation Date"); and
c) presented in this transition 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
transition 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
70