UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1387013
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2000 Technology Parkway, Newark, New York 14513
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 12,852,869 shares of common stock
outstanding, net of 727,250 treasury shares, as of April 30, 2003.
ULTRALIFE BATTERIES, INC.
INDEX
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 29, 2003 and December 31, 2002...............................3
Condensed Consolidated Statements of Operations -
Three months ended March 29, 2003 and March 31, 2002...............4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 29, 2003 and March 31, 2002...............5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................20
Item 4. Controls and Procedures.............................................20
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................21
Item 6. Exhibits and Reports on Form 8-K....................................22
Signatures..........................................................23
CEO and CFO Certifications..........................................24
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
March 29, December 31,
ASSETS 2003 2002
--------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 394 $ 1,322
Available-for-sale securities 2 2
Restricted cash 50 50
Trade accounts receivable
(less allowance for doubtful
accounts of $292 at March 29, 2003
and $297 at December 31, 2002) 9,696 6,200
Inventories 5,744 5,813
Prepaid expenses and other
current assets 851 968
-------- --------
Total current assets 16,737 14,355
-------- --------
Property, plant and equipment 15,897 15,336
Other assets:
Investment in UTI 1,550 1,550
Technology license agreements
(net of accumulated amortization
of $1,343 at March 29, 2003 and
$1,318 at December 31, 2002 108 133
-------- --------
1,658 1,683
-------- --------
Total Assets $ 34,292 $ 31,374
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
portion of long-term debt $ 1,439 $ 816
Accounts payable 5,922 4,283
Other current liabilities 2,386 2,045
-------- --------
Total current liabilities 9,747 7,144
Long-term liabilities:
Debt and capital lease obligations 1,154 1,354
Grant 750 633
-------- --------
1,904 1,987
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 -
13,580,119 at March 29, 2003 and
13,579,519 at December 31, 2002 1,358 1,358
Capital in excess of par value 115,279 115,251
Accumulated other comprehensive loss (957) (1,016)
Accumulated deficit (90,661) (90,972)
-------- --------
25,019 24,621
Less -- Treasury stock, at cost -- 727,250 shares 2,378 2,378
-------- --------
Total shareholders' equity 22,641 22,243
-------- --------
Total Liabilities and Shareholders' Equity $ 34,292 $ 31,374
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
Three Months Ended
March 29, March 31,
2003 2002
--------- ---------
Revenues $15,428 $ 8,862
Cost of products sold 12,269 7,940
------- -------
Gross margin 3,159 922
------- -------
Operating expenses:
Research and development 585 1,038
Selling, general, and administrative 1,962 1,981
------- -------
Total operating expenses 2,547 3,019
------- -------
Operating income (loss) 612 (2,097)
Other income (expense):
Interest income 1 3
Interest expense (92) (101)
Equity loss in UTI -- (501)
Miscellaneous (210) (97)
------- -------
Income (loss) before income taxes 311 (2,793)
------- -------
Income taxes -- --
------- -------
Net income (loss) $ 311 $(2,793)
======= =======
Earnings (loss) per share - basic $ 0.02 $ (0.23)
======= =======
Earnings (loss) per share - diluted $ 0.02 $ (0.23)
======= =======
Weighted average shares outstanding - basic 12,852 12,319
======= =======
Weighted average shares outstanding - diluted 12,938 12,319
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 29, March 31,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 311 $(2,793)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 737 1,032
Foreign exchange loss 194 42
Equity loss in UTI -- 501
Non-cash stock-based compensation 26 --
Changes in operating assets
and liabilities:
Accounts receivable (3,496) (1,729)
Inventories 69 772
Prepaid expenses and other
current assets 117 405
Accounts payable and other
current liabilities 1,980 (736)
------- -------
Net cash used in operating activities (62) (2,506)
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment (1,359) (177)
Proceeds from sale leaseback -- 451
Purchase of securities -- 666
Sales of securities -- 1,399
------- -------
Net cash provided by investing activities (1,359) 2,339
------- -------
FINANCING ACTIVITIES
Change in revolving credit facility 123 --
Proceeds from issuance of common stock 2 --
Proceeds from issuance of debt 500 --
Principal payments on long-term debt
and capital lease obligations (200) (256)
Proceeds from grant 117 --
------- -------
Net cash provided by (used in)
financing activities 542 (256)
------- -------
Effect of exchange rate changes on cash (49) 61
------- -------
Decrease in cash and cash equivalents (928) (362)
Cash and cash equivalents at
beginning of period 1,322 706
------- -------
Cash and cash equivalents at end of period $ 394 $ 344
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 68 $ 77
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Transition
Report on Form 10-K for the six-month period ended December 31, 2002.
As of July 1, 2002, the Company changed its monthly closing
schedule, moving to a weekly-based cycle as opposed to a calendar month -
based cycle. While the actual dates for the quarter-ends will change
slightly each year, the Company believes that there will not be any
material differences when making quarterly comparisons.
Effective December 31, 2002, the Company changed its fiscal year-end
from June 30 to December 31.
Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year
presentation.
6
2. EARNINGS (LOSS) PER SHARE
Basic earnings per share are calculated by dividing net income by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share are calculated by dividing net income,
adjusted for interest on convertible securities, by potentially dilutive
common shares, which include stock options, warrants and convertible
securities.
Net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
The impact of conversion of dilutive securities, such as stock options and
warrants, are not considered where a net loss is reported as the inclusion
of such securities would be anti-dilutive. As a result, basic loss per
share is the same as diluted loss per share.
The computation of basis and diluted earnings per share is
summarized as follows:
Three Months Ended
March 29, March 31,
2003 2002
--------- ----------
Net Income (a) $ 311 ($ 2,793)
Effect of Dilutive Securities:
Stock Options / Warrants -- --
Convertible Note 3 --
-------- --------
Net Income - Adjusted (b) $ 314 ($ 2,793)
======== ========
Average Shares Outstanding - Basic (c) 12,852 12,319
Effect of Dilutive Securities:
Stock Options / Warrants 23 --
Convertible Note 63 --
-------- --------
Average Shares Outstanding -
Diluted (d) 12,938 12,319
======== ========
EPS - Basic (a/c) $0.02 ($0.23)
EPS - Diluted (b/d) $0.02 ($0.23)
The Company also had the equivalent of 1,841 and 2,235 options and
warrants outstanding for the three-month periods ended as of March 29,
2003 and March 31, 2002, respectively, which were not included in the
computation of diluted EPS because these securities would have been
anti-dilutive for the periods presented.
7
3. STOCK-BASED COMPENSATION
The Company has various stock-based employee compensation plans. 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 income (loss). The effect on net income (loss) and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an Amendment of
SFAS No. 123" (as discussed below in Note 9 - Recent Accounting
Pronouncements), to stock-based employee compensation is as follows:
Three Months Ended
March 29, 2003 March 31, 2002
-------------- --------------
Net income (loss), as reported $311 ($2,793)
Add: Stock-based employee
compensation expense included in
reported net income (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 (226) (297)
----- ------
Pro forma net income (loss) $85 ($3,090)
Earnings (loss) per share:
Basic - as reported $0.02 ($0.23)
Basic - pro forma $0.01 ($0.25)
Diluted - as reported $0.02 ($0.23)
Diluted - pro forma $0.01 ($0.25)
4. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive income (loss)
were:
Three Months Ended
March 29, March 31,
2003 2002
--------- ---------
Net income (loss) $311 $(2,793)
Foreign currency translation adjustments 59 (22)
---- -------
Total comprehensive income (loss) $370 $(2,815)
==== =======
8
5. INVENTORIES
Inventories are stated at the lower of cost or market with cost
determined under the first-in, first- out (FIFO) method. The composition
of inventories was:
March 29, 2003 December 31, 2002
-------------- -----------------
Raw materials $3,218 $3,259
Work in process 1,598 1,882
Finished goods 1,686 1,207
------ ------
6,502 6,348
Less: Reserve for obsolescence 758 535
------ ------
$5,744 $5,813
====== ======
6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the
following:
March 29, 2003 December 31, 2002
-------------- -----------------
Land $ 123 $ 123
Buildings and leasehold improvements 1,619 1,619
Machinery and equipment 28,702 28,772
Furniture and fixtures 318 319
Computer hardware and software 1,400 1,405
Construction in progress 1,567 291
------- -------
33,729 32,529
Less: Accumulated depreciation 17,832 17,193
------- -------
$15,897 $15,336
======= =======
7. DEBT
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 March 29,
2003, all $750 had been advanced to the Company. During the March 2003
quarter, $117 under this grant/loan was reimbursed as the Company incurred
additional expenses and submitted 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, 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 becomes definitive.
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 three-month, $500 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. If the note holder elects not to convert
the note into shares of common stock, the Company is obligated to issue
9
warrants to purchase 25,000 shares of common stock at $4.00 per share in
addition to making the cash payment of principal plus accrued interest.
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. As a result of the extension
of this credit facility, the Company has classified the portion of this
debt that is due and payable beyond one year as a long-term liability on
the March 29, 2003 and the December 31, 2002 Consolidated Balance Sheets.
8. COMMITMENTS AND CONTINGENCIES
As of March 29, 2003, the Company had $50 in restricted cash in
support of a corporate credit card account.
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
March 29, 2003, there is no balance pertaining to this grant on the
balance sheet.
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 the first three months of 2003 were as follows:
Balance at December 31, 2002 $236
Accruals for warranties issued 25
Changes in accruals related to pre-existing warranties --
Settlements made (29)
----
Balance at March 29, 2003 $232
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
10
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 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.
11
A retail end-user of a product manufactured by one of Ultralife's
customers (the "Customer"), has made a claim against the Customer wherein
it is asserted that the Customer's product, which is powered by an
Ultralife battery, does not operate according to the Customer's product
specification. No claim has been filed against Ultralife. However, in the
interest of fostering good customer relations, in September 2002,
Ultralife has agreed to lend technical support to the Customer in defense
of its claim. Additionally, Ultralife will honor its warranty by replacing
any batteries that may be determined to be defective. In the event a claim
is filed against Ultralife and it is ultimately determined that
Ultralife's product was defective, replacement of batteries to this
Customer or end-user may have a material adverse effect on the Company's
financial position and results of operations.
9. BUSINESS SEGMENT INFORMATION
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment
includes the Company's lithium polymer and lithium ion rechargeable
batteries. The Technology Contracts segment includes revenues and related
costs associated with various government and military development
contracts. The Corporate segment consists of all other items that do not
specifically relate to the three other segments and are not considered in
the performance of the other segments.
Effective January 1, 2003, the Company revised its definition of
segment contribution for each of its segments to be defined as gross
margin (excluding the Corporate segment). Previously, segment contribution
included applicable research and development costs. The Corporate segment
now includes all of the Company's operating expenses, including research
and development costs. This change in presentation was made to be
consistent with the manner in which the Company's management views its
results from operations. Certain amounts in the prior year's segment
information have been reclassified to conform to the current year
presentation.
Three Months Ended March 29, 2003
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------
Revenues $14,632 $ 380 $416 $ -- $15,428
Segment contribution 3,165 (208) 202 (2,547) 612
Interest expense, net (91) (91)
Equity loss in UTI -- --
Miscellaneous (210) (210)
Income taxes -- --
-------
Net income (loss) $ 311
Total assets $26,102 $3,220 $207 $ 4,763 $34,292
Three Months Ended March 31, 2002
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------
Revenues $ 8,741 $ 86 $ 35 $ -- $ 8,862
Segment contribution 1,441 (521) 2 (3,019) (2,097)
Interest expense, net (98) (98)
Equity loss in UTI (501) (501)
Miscellaneous (97) (97)
Income taxes -- --
-------
Net income (loss) $(2,793)
Total assets $20,976 $19,031 $309 $ 7,556 $47,872
12
10. 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.
11. SUBSEQUENT EVENTS
On April 29, 2003, Ultralife Batteries (UK) Ltd., the Company's
wholly-owned U.K. subsidiary, completed an agreement for a revolving
credit facility with a commercial bank in the U.K. Any borrowings against
this credit facility are collateralized with that company's outstanding
accounts receivable balances. The maximum credit available to that company
under the facility is approximately $700. This credit facility provides
the Company's U.K. operation with additional financing flexibility for its
working capital needs.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, government and
environmental regulation, competition and customer strategies, technological
innovations in the primary and rechargeable battery industries, changes in the
Company's business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies,
environmental regulations, and other risks and uncertainties, certain of which
are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Transition Report on Form 10-K as of and for the six-month period
ended December 31, 2002.
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.
For several years, the Company had 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 the twelve month period ended June 30, 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. As a result of the Company's focus on its key financial goals,
the Company successfully achieved operating profitability for the first time in
its history in the quarter ended March 29, 2003.
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
14
development contracts. The Corporate segment consists of all other items that do
not specifically relate to the three other segments and are not considered in
the performance of the other segments.
Results of Operations
Three months ended March 29, 2003 and March 31, 2002
Revenues. Consolidated revenues reached a quarterly record of $15,428,000
for the three-month period ended March 29, 2003, an increase of $6,566,000, or
74%, from the $8,862,000 reported in the same quarter in the prior year. Primary
battery sales increased $5,890,000, or 67%, from $8,742,000 last year to
$14,632,000 this year, mainly as a result of strong shipments of HiRate(R)
battery products, including sales of UBI5390's used mainly in various
communications and weapons applications in the military. Additionally, sales of
9-volt batteries set a quarterly revenue record, partially attributable to a
significant order from the U.K. Ministry of Defence. Rechargeable revenues rose
$294,000 to $380,000 as deliveries were made on a special order consisting of
lithium ion products. Technology Contract revenues increased $381,000 to
$416,000 in the first quarter of 2003 as certain milestones were met on a
development contract with the U.S. Army.
Cost of Products Sold. Cost of products sold totaled $12,269,000 for the
quarter ended March 29, 2003, an increase of $4,329,000, or 55% over the same
three-month period a year ago. The gross margin on consolidated revenues for the
quarter was $3,159,000, or 20% of revenues, an improvement of $2,237,000 over
the $922,000 in the same quarter in the prior year. Gross margins in the
Company's primary battery operations improved $1,724,000, from $1,441,000 in
2002 to $3,165,000 in 2003. As a percentage of revenues, primary battery margins
amounted to 22% in the first quarter of 2003 compared with 16% in 2002. This
improvement resulted mainly from higher sales and production volumes that spread
manufacturing overhead costs over a broader base, as well as improvements in
manufacturing efficiencies. In the Company's rechargeable operations, the gross
margin loss amounted to $208,000 in the first three months of 2003 compared with
$521,000 in the same period in 2002. This improvement in the rechargeable area
was the result of higher sales volumes and the favorable impact from cost
savings initiatives that were implemented during the first quarter in 2002, as
well as lower depreciation charges. Gross margins in the Technology Contract
segment increased from $2,000 in 2002 to $202,000 in 2003 as a result of higher
sales.
During the first quarter of 2003, the Company's production volumes
increased significantly in order to keep pace with product demand. As a result,
the Company increased its direct labor force by more than 140 people, or
approximately 65%. Certain inefficiencies in the production operation that
resulted from the rapid manufacturing ramp-up, including the need to work
significant amounts of overtime to meet customer delivery requirements, are
expected to improve as the direct labor force stabilizes. In addition, the
Company expects to realize further direct material cost reductions over the
levels achieved in the first quarter as production volumes increase.
Operating Expenses. Operating expenses for the three months ended March
29, 2003 totaled $2,547,000, a decrease of $472,000, or 16%, compared to
$3,019,000 in the prior year. This decrease was primarily attributable to lower
research and development costs, which declined $453,000, as the development
efforts for rechargeable products were diminished and depreciation expenses
declined. While selling, general and administrative expenses were relatively
consistent between the two periods, these costs as a percentage of sales
improved significantly, from 22% in the March 2002 quarter to 13% in the March
2003 quarter.
Other Income (Expense). Interest expense, net, for the first three months
of 2003 was consistent with the comparable period in 2002. Equity loss in
Ultralife Taiwan, Inc., (UTI) was $501,000 in the first quarter of 2002 compared
with zero in the first quarter of 2003. This change resulted mainly from an
October 2002 change in the method of accounting for the Company's investment in
UTI, from the equity
15
method of accounting to the cost method of accounting. 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%. Miscellaneous expense
rose from $97,000 in 2002 to $210,000 in 2003. This change related primarily to
higher losses on foreign currency transactions, mainly due to changes between
the British pounds sterling and the U.S. dollar. More specifically, the Company
has had intercompany transactions over the years with its wholly-owned U.K.
subsidiary, Ultralife Batteries (UK) Ltd., that have resulted in a net payable
balance to the U.S. parent company, and which are denominated in U.S. dollars.
While there was no cash impact to the Company as a result of the translation of
these intercompany balances during the periods presented, foreign currency
transaction losses were recognized as the British pounds sterling weakened
against the U.S. dollar during each of the three-month periods ended March 29,
2003 and March 31, 2002.
Net Income. Net income and basic earnings per share were $311,000 and
$0.02, respectively, for the three months ended March 29, 2003, compared to a
net loss and basic loss per share of $2,793,000 and $0.23, respectively, for the
same quarter last year, primarily as a result of the reasons described above.
Average common shares outstanding increased mainly due to the Company's private
equity offering in April 2002, offset in part by the reacquisition of shares
from UTI that resulted from the Company's sale of a portion of its interest in
UTI in October 2002.
Liquidity and Capital Resources
As of March 29, 2003, cash equivalents and available for sale securities
totaled $396,000, excluding restricted cash of $50,000. During the three months
ended March 29, 2003, the Company used $62,000 of cash in operating activities
as compared to $2,506,000 for the three months ended March 31, 2002. During the
first quarter of 2003, the Company's net income plus depreciation and
amortization were offset by an increase in working capital usage, particularly
an increase in accounts receivable related to the significant rise in sales
during the quarter. In the three months ended March 29, 2003, the Company used
$1,359,000 to purchase plant, property and equipment, a marked increase from the
prior year's capital expenditures, mainly as a result of the need to increase
production capacity for cylindrical cells in the U.S. facility as demand from
military customers grew significantly. During the quarter ended March 29, 2003,
the Company generated funds from financing activities as it issued a $500,000
90-day convertible note which matures on June 4, 2003, and received the final
payment of $117,000 on a $750,000 government grant/loan. In addition, the
Company had accessed $123,000 of its revolving credit facility as of March 29,
2003 to finance working capital needs.
Months cost of sales in inventory at March 29, 2003 was 0.8 months as
compared to 1.9 months at December 31, 2002. This metric is indicative of the
rapid turnaround of product to the military and the high volume of sales during
the quarter, as well as the Company's continuing focus to improve purchasing
procedures and inventory controls. The Company's Days Sales Outstanding (DSOs)
was an average of 51 days for the first quarter of 2003, compared with an
average of 63 days for the same three-month period in 2002. This improvement in
DSOs mainly reflects the timing of shipments toward the latter part of the
quarter and the favorable impact from the timely payments made by the U.S.
military.
At March 29, 2003, the Company had a capital lease obligation outstanding
of $103,000 for the Company's Newark, New York offices and manufacturing
facilities.
As of March 29, 2003, the Company had open capital commitments to purchase
approximately $710,000 of production machinery and equipment.
On March 25, 2003, the Company's primary lending bank and the Company
agreed to amend the Company's $15,000,000 credit facility. Among other things,
the amendment extended the maturity date to June 30, 2004, allowed for the
collateral release of accounts receivable related to the Company's subsidiary in
the U.K. affording it the ability to enter into a separate revolving credit
facility, and also
16
revised certain limitations on customer concentration to account for the
increased sales activity with the U.S. military. The Company has classified the
portion of this debt that is due and payable beyond one year as a long-term
liability on the March 29, 2003 and December 31, 2002 Consolidated Balance
Sheets. As of March 29, 2003, the Company had $1,867,000 outstanding under the
term loan component of its $15,000,000 credit facility, and had $123,000 of
borrowings outstanding under the revolver component of the credit facility. The
Company's additional borrowing capacity under the revolver component of the
credit facility as of March 29, 2003 was approximately $3,500,000, net of
outstanding letters of credit of $3,800,000. At March 29, 2003, the Company's
net worth was $22,641,000, compared to the debt covenant requiring a minimum net
worth of approximately $19,200,000.
In November 2001, the Company received approval for a $750,000 grant/loan
from a federally sponsored small cities program. The grant/loan will assist in
funding current capital expansion plans that the Company expects will lead to
job creation. The Company will be reimbursed for approved capital as it incurs
the cost. In August 2002, the $750,000 small cities grant/loan documentation was
finalized and the Company was reimbursed approximately $400,000 for costs it had
incurred to date for equipment purchases applicable under this grant/loan. As of
March 29, 2003, all $750,000 had been advanced to the Company. During the March
2003 quarter, $117,000 under this grant/loan was reimbursed as the Company
incurred additional expenses and submitted 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, 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.
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
three-month, $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. If
the note holder elects not to convert the note into shares of common stock, the
Company is obligated to issue warrants to purchase 25,000 shares of common stock
at $4.00 per share in addition to making the cash payment of principal plus
accrued interest.
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 increase
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.
As described in Part II, Item 1, "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
17
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
The Company expects revenues in its second quarter of calendar 2003 to
reach approximately $18,000,000, an increase of 17% from the first quarter. At
this time, the third and fourth quarters of the year are expected to be in the
same range as the second quarter, or approximately $18,000,000 per quarter.
Demand for the UBI5390 battery remains very strong, and the Company is
responding as quickly as possible to the orders on hand. The Company believes
that the order activity from the military will continue to be strong throughout
at least the remainder of 2003. In addition to the strong demand from the
military, orders from commercial customers for 9-volts and other batteries
remain strong. Sampling activity for various rechargeable products continues to
be very high, although the Company is conservatively projecting comparable
revenues in this part of the business for the second quarter.
Looking ahead for the full calendar year of 2003, the Company remains
optimistic about its sales prospects and the status of the manufacturing
operations. At this time, the Company is now projecting revenues to reach at
least $65,000,000 (up from the previous guidance of at least $50,000,000),
nearly double the $33,039,000 reported for the comparable 12 months in the
period ended December 31, 2002. The Company is raising its outlook due to the
strong order activity it has experienced recently, and its current view for
near-term orders.
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 the past 18 months, the
Company was able to significantly reduce costs through various cost savings
actions, moving it to cash generation and profitability. As the Company
continues to grow and leverage this infrastructure, it believes that sustainable
profitability can be achieved. The Company believes that consistent, quarterly
revenues in the range of $11,000,000 to $12,000,000, depending on mix, is the
operating income breakeven point for profitability.
The Company continues to monitor its operating costs very tightly. Over
the remainder of the calendar year, the Company is projecting operating expenses
to be in line with or modestly higher than the first quarter of 2003.
The Company expects that basic earnings per common share in the June 2003
quarter will be in the range of $0.11 to $0.15, based on the Company's projected
increase in revenues. This compares to a net loss per share of $1.28 in the June
2002 quarter. For the full year of 2003, the Company is projecting that basic
earnings per common share will be in the range of $0.35 to $0.45, based on a
continuing strong demand for the Company's products, compared with a loss of
$1.75 for the full calendar year of 2002. The losses per share for the June
quarter and full year of 2002 include a charge of $1.11 and $1.12 per share,
respectively, related to the impairment of certain fixed assets reflected in the
June quarter.
In order to meet the significant demand from the military, the Company
expects to continue to make prudent investments in capital equipment that have a
very short payback. At this time, the Company believes that expenditures for
capital projects during 2003 will be in the range of $3,000,000 to $4,000,000,
depending on the level of orders received in the near future and any expedited
delivery requirements of such orders. The Company carefully evaluates such
projects and will only make capital investments when necessary and when there is
typically a favorable payback period.
While the Company's volume grows, it expects that working capital needs
related to increasing sales volumes and inventory levels will be able to be
financed by its revolving credit facility. The
18
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 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. While 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.
New 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 Financial Accounting Standards Board ("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.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to various market risks in the normal course of
business, primarily interest rate risk and changes in market value of its
investments and believes its exposure to these risks is minimal. The Company's
investments are made in accordance with the Company's investment policy and
primarily consist of commercial paper and U.S. corporate bonds. The Company does
not currently invest in derivative financial instruments.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, 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.
20
PART II OTHER INFORMATION
Item 1. 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 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
21
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 CEO & CFO Certifications
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
(Registrant)
Date: May 13, 2003 By: /s/ John D. Kavazanjian
------------ -----------------------------------
John D. Kavazanjian
President and Chief Executive Officer
Date: May 13, 2003 By: /s/ Robert W. Fishback
------------ -----------------------------------
Robert W. Fishback
Vice President - Finance and Chief
Financial Officer
23
I, John D. Kavazanjian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ John D. Kavazanjian
---------------------------------
John D. Kavazanjian,
President and Chief Executive Officer
24
I, Robert W. Fishback, certify that:
1. I have reviewed this quarterly report on 10-Q of Ultralife Batteries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Robert W. Fishback
---------------------------------
Robert W. Fishback
Vice President - Finance and Chief Financial
Officer
25