SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________________ to ________________
Commission file number 0-20852
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ULTRALIFE BATTERIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387013
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2000 Technology Parkway, Newark, New York 14513
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(Address of principal executive offices)
(Zip Code)
(315) 332-7100
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X... No.....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.10 par value - 13,120,289 shares outstanding
as of April 30, 2002.
1
Introductory Note:
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This Amendment No. 1 to Form 10-Q/A for Ultralife Batteries, Inc. for the period
ended March 31, 2002, dated as of April 11, 2003, is being filed to restate the
financial statements and associated disclosures related to the manner in which
the Company had previously accounted for its equity investment in Ultralife
Taiwan, Inc. (UTI). The Items from the original Form 10-Q filing that have been
impacted are being filed in their entirety with this Amendment and are
summarized in the following Table of Contents. (Refer to Note 2 to the
consolidated financial statements included in Item 1 herein.)
ULTRALIFE BATTERIES, INC.
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and June 30, 2001 .................................. 3
Condensed Consolidated Statements of Operations -
Three and nine months ended March 31, 2002 and 2001 ............... 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2002 and 2001 ......................... 5
Notes to Consolidated Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................... 18
Signatures ......................................................... 19
CEO and CFO Certifications ......................................... 20
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
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(unaudited)
March 31, June 30,
ASSETS 2002 2001
---- ----
(As Restated;
See Note 2)
Current assets:
Cash and cash equivalents $ 344 $ 494
Available-for-sale securities 2 2,573
Restricted cash 201 540
Trade accounts receivable (less allowance for doubtful accounts
of $287 at March 31, 2002 and $262 at June 30, 2001) 6,155 3,379
Inventories 4,687 5,289
Prepaid expenses and other current assets 726 1,648
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Total current assets 12,115 13,923
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Property, plant and equipment 30,613 32,997
Other assets:
Investment in UTI 4,936 --
Technology license agreements (net of accumulated
amortization of $1,243 at March 31, 2002 and $1,168 at June 30, 2001) 208 283
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5,144 283
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Total Assets $47,872 $47,203
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 917 $ 1,065
Accounts payable 3,445 3,755
Other current liabilities 1,950 2,282
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Total current liabilities 6,312 7,102
Long-term liabilities:
Long-term debt and capital lease obligations 1,984 2,648
Shareholders' equity :
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding -- --
Common stock, par value $0.10 per share, authorized 40,000,000 shares
issued - 12,578,186 at March 31, 2002 and 11,488,186 at June 30, 2001) 1,258 1,149
Capital in excess of par value 110,833 99,389
Accumulated other comprehensive loss (858) (1,058)
Accumulated deficit (71,354) (61,724)
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39,879 37,756
Less -- Treasury stock, at cost -- 27,250 shares 303 303
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Total shareholders' equity 39,576 37,453
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Total Liabilities and Shareholders' Equity $47,872 $47,203
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
--------------------------------------------------------------------------------
Three Months Ended March 31, Nine Months Ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
(As Restated; (As Restated;
See Note 2) See Note 2)
Revenues $ 8,862 $ 5,817 $ 23,937 $ 17,958
Cost of products sold 7,940 6,548 23,675 20,840
-------- -------- -------- --------
Gross margin 922 (731) 262 (2,882)
Operating expenses:
Research and development 1,038 799 3,192 2,307
Selling, general, and administrative 1,981 1,979 6,194 5,835
-------- -------- -------- --------
Total operating expenses 3,019 2,778 9,386 8,142
Operating loss (2,097) (3,509) (9,124) (11,024)
Other income (expense):
Interest income 3 126 88 628
Interest expense (101) (134) (276) (387)
Equity loss in UTI (501) (340) (276) (1,930)
Miscellaneous (97) (64) (42) (49)
-------- -------- -------- --------
Loss before income taxes (2,793) (3,921) (9,630) (12,762)
-------- -------- -------- --------
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (2,793) $ (3,921) $ (9,630) $(12,762)
======== ======== ======== ========
Net loss per share, basic and diluted $ (0.23) $ (0.35) $ (0.79) $ (1.15)
======== ======== ======== ========
Weighted average shares outstanding,
basic and diluted 12,319 11,173 12,193 11,131
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
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Nine Months Ended March 31,
2002 2001
---- ----
(As Restated;
See Note 2)
OPERATING ACTIVITIES
Net loss $(9,630) $(12,762)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,208 2,794
Equity loss in UTI 276 1,930
Changes in operating assets and liabilities:
Accounts receivable (2,776) 1
Inventories 602 85
Prepaid expenses and other current assets 922 (503)
Accounts payable and other current liabilities (642) 193
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Net cash used in operating activities (8,040) (8,262)
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INVESTING ACTIVITIES
Purchase of property and equipment (1,715) (2,934)
Proceeds from sale leaseback 995 --
Purchase of securities (8,424) (24,671)
Sales of securities 11,334 19,652
Maturities of securities -- 12,695
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Net cash provided by investing activities 2,190 4,742
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FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,341 606
Principal payments on long-term debt and capital lease obligations (812) (836)
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Net cash provided by (used in) financing activities 5,529 (230)
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Effect of exchange rate changes on cash 171 (129)
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Decrease in cash and cash equivalents (150) (3,879)
Cash and cash equivalents at beginning of period 494 5,712
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Cash and cash equivalents at end of period $ 344 $ 1,833
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ - $ 1
======= =======
Interest paid $ 185 $ 357
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands - Except Share and Per Share Amounts)
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1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Results for interim periods should not be considered indicative
of results to be expected for a full year. Reference should be made to the
consolidated financial statements contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2001.
2. RESTATEMENT OF PRIOR PERIOD FINANCIAL RESULTS
In assessing the partial unwind of the Company's investment in
Ultralife Taiwan, Inc. (UTI) on October 23, 2002, the Company determined
that it had incorrectly accounted for certain activities with regard to
its equity investment in UTI. Specifically, the Company should have
adjusted its proportionate share of the UTI net losses to reflect the
Company's carrying value of its UTI investment, and the Company should
have recorded certain increases to its investment in UTI arising from
change in interest transactions at the UTI level occurring in November
2000, August 2001, and July 2002. The impact of not accounting for the
negative basis difference was that the Company's reported equity losses
were overstated for the Company's fiscal years ended June 30, 2002, 2001
and 2000. The primary impact of the Company not recognizing the UTI change
in interest transactions was that the Company's UTI investment and
additional paid-in capital captions were understated, primarily in fiscal
year 2002. Further, the Company's equity losses for fiscal year 2002, even
with the beneficial amortization effect noted above, were understated, as
the additional basis created by the change in interest accounting that
should have taken place would have created additional basis sufficient to
absorb additional equity losses which had not been recognized previously
(as the Company's equity investment had been reduced to zero).
The Company has determined that the impacts relating to fiscal years
2001 and 2000 were not material and therefore these previously issued
financial statements have not been restated. The financial statements for
the three and nine months ended March 31, 2002, have been restated as
follows:
Three months ended Nine months ended
March 31, 2002 March 31, 2002
-----------------------------------------------------------------
As Previously As Previously
Financial Statement Caption Reported As Restated Reported As Restated
--------------------------- -------- ----------- -------- -----------
Equity loss in UTI $ -- $ (501) $ -- $ (276)
Net loss $ (2,292) $(2,793) $(9,354) $(9,630)
Investment in UTI $ -- $ 4,936 $ -- $ 4,936
Total assets $ 42,936 $47,872 $42,936 $47,872
Total shareholders' equity $ 34,640 $39,576 $34,640 $39,576
Net loss per share $ (0.19) $ (0.23) $ (0.77) $ (0.79)
6
3. NET LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
Common stock options and warrants have not been included as their
inclusion would be anti-dilutive. As a result, basic earnings per share is
the same as diluted earnings per share.
4. COMPREHENSIVE INCOME (LOSS)
The components of the Company's total comprehensive loss were:
Three months ended Nine months ended
(As Restated; See Note 2) March 31, March 31,
2002 2001 2002 2001
----------------------------------------------------
Net loss $(2,793) $(3,921) $(9,630) $(12,762)
Unrealized (loss) gain on securities -- -- -- 1
Foreign currency translation adjustments (22) (271) 200 (447)
------- ------- ------- --------
Total comprehensive loss $(2,815) $(4,192) $(9,430) $(13,208)
======= ======= ======= ========
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 31, 2002 June 30, 2001
----------------------------------
Raw materials $2,652 $2,595
Work in process 1,610 1,233
Finished goods 771 1,872
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5,033 5,700
Less: Reserve for obsolescence 346 411
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$4,687 $5,289
====== ======
6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
March 31, 2002 June 30, 2001
----------------------------------
Land $ 123 $ 123
Buildings and Leasehold Improvements 1,608 1,608
Machinery and Equipment 38,287 37,891
Furniture and Fixtures 308 291
Computer Hardware and Software 1,390 1,375
Construction in Progress 3,305 2,984
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45,021 44,272
Less: Accumulated Depreciation 14,408 11,275
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$30,613 $32,997
======= =======
7
7. COMMITMENTS AND CONTINGENCIES
As of March 31, 2002, the Company had $201 in restricted cash with a
certain lending institution primarily for letters of credit supporting
leases for a building and some computer equipment. The funds that had
previously been restricted by the Company's primary lending institution at
December 31, 2001 were no longer restricted at March 31, 2002 because the
amount of eligible assets applicable to the borrowing base exceeded
borrowings against the revolver loan.
The Company is subject to legal proceedings and claims that arise in
the normal course of business. The Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
In August 1998, the Company, its Directors, and certain underwriters
were named as defendants in a complaint filed in the United States
District Court for the District of New Jersey by certain shareholders,
purportedly on behalf of a class of shareholders, alleging that the
defendants, during the period April 30, 1998 through June 12, 1998,
violated various provisions of the federal securities laws in connection
with an offering of 2,500,000 shares of the Company's Common Stock. The
complaint alleged that the Company's offering documents were materially
incomplete, and as a result misleading, and that the purported class
members purchased the Company's Common Stock at artificially inflated
prices and were damaged thereby. Upon a motion made on behalf of the
Company, the Court dismissed the shareholder action, without prejudice,
allowing the complaint to be refiled. The shareholder action was
subsequently refiled, asserting substantially the same claims as in the
prior pleading. The Company again moved to dismiss the complaint. By
Opinion and Order dated September 28, 2000, the Court dismissed the
action, this time with prejudice, thereby barring plaintiffs from any
further amendments to their complaint and directing that the case be
closed. Plaintiffs filed a Notice of Appeal to the Third Circuit Court of
Appeals and the parties submitted their briefs. Subsequently, the parties
notified the Court of Appeals that they had reached an agreement in
principle to resolve the outstanding appeal and settle the case upon terms
and conditions which require submission to the District Court for
approval. Upon application of the parties and in order to facilitate the
parties' pursuit of settlement, the Court of Appeals issued an Order dated
May 18, 2001 adjourning oral argument on the appeal and remanding the case
to the District Court for further proceedings in connection with the
proposed settlement.
Subsequent to the parties entering into the settlement agreement,
the Company's insurance carrier commenced liquidation proceedings. The
insurance carrier informed the Company that in light of the liquidation
proceedings, it would no longer fund the settlement. In addition, the
value of the insurance policy is in serious doubt. In April 2002, the
Company and the insurance carrier for the underwriters offered to proceed
with the settlement. Plaintiff's counsel has accepted the terms of the
proposed settlement and the matter must now be approved by the Court and
by the shareholders comprising the class. Based on the terms of the
proposed settlement, the Company has established reserves against a
significant portion of its share of the settlement costs and associated
expenses.
In the event settlement is not reached, the Company will continue to
defend the case vigorously. The amount of alleged damages, if any, cannot
be quantified, nor can the outcome of this litigation be predicted.
Accordingly, management cannot determine whether the ultimate resolution
of this litigation could have a material adverse effect on the Company's
financial position and results of operations.
In conjunction with the Company's purchase/lease of its Newark, New
York facility in 1998, the Company entered into a payment-in-lieu of tax
agreement which provides the Company with real estate tax concessions upon
meeting certain conditions. In connection with this agreement, the Company
received an environmental assessment, which revealed contaminated soil.
The assessment indicated potential actions that the Company may be
required to undertake upon notification by the
8
environmental authorities. The assessment also proposed that a second
assessment be completed and provided an estimate of total potential costs
to remediate the soil of $230. However, there can be no assurance that
this will be the maximum cost. The Company entered into an agreement
whereby a third party has agreed to reimburse the Company for fifty
percent of the costs associated with this matter. Test sampling occurred
in the fourth quarter of fiscal 2001 and the engineering report was
submitted to the New York State Department of Environmental Conservation
(NYSDEC) for review. NYSDEC reviewed the report and in January 2002
recommended additional testing. The Company responded by submitting a
proposed work plan to NYSDEC, which was approved by NYSDEC in April 2002.
The Company is now soliciting proposals from engineering firms to complete
remedial work contained in the work plan, and it is unknown at this time
whether the final cost to remediate will be in the range of the original
estimate, given the passage of time. The ultimate resolution of this
matter may have a significant adverse impact on the results of operations
in the period in which it is resolved.
8. BUSINESS SEGMENT INFORMATION
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries
and various specialty batteries. The Rechargeable Batteries segment
consists of the Company's rechargeable batteries. The Technology Contracts
segment includes revenues and related costs associated with various
government and military development contracts. The Corporate segment
consists of all other items that do not specifically relate to the three
other segments and are not considered in the performance of the other
segments.
Three Months Ended March 31, 2002
---------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------------
Revenues $ 8,741 $ 86 $ 35 $ -- $ 8,862
Segment contribution 954 (1,072) 2 (1,981) (2,097)
Interest, net (98) (98)
Equity loss in UTI (501) (501)
Miscellaneous expense (97) (97)
Income taxes -- --
-------
Net loss $(2,793)
Total assets $20,976 $19,031 $309 $7,556 $47,872
Three Months Ended March 31, 2001
---------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------------
Revenues $ 5,401 $ 78 $338 $ -- $ 5,817
Segment contribution 272 (1,835) 33 (1,979) (3,509)
Interest income, net (8) (8)
Equity loss in UTI (340) (340)
Miscellaneous (64) (64)
Income taxes -- --
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Net loss $(3,921)
Total assets $18,120 $21,674 $301 $11,120 $51,215
9
Nine Months Ended March 31, 2002
--------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------------
Revenues $23,035 $ 374 $528 $ -- $23,937
Segment contribution 2,393 (5,376) 53 (6,194) (9,124)
Interest, net (188) (188)
Equity loss in UTI (276) (276)
Miscellaneous (42) (42)
Income taxes -- --
-------
Net loss $(9,630)
Total assets $20,976 $19,031 $309 $7,556 $47,872
Nine Months Ended March 31, 2001
--------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------------
Revenues $16,310 $ 242 $1,406 $ -- $ 17,958
Segment contribution 72 (5,384) 123 (5,835) (11,024)
Interest income 241 241
Equity loss in UTI (1,930) (1,930)
Miscellaneous (49) (49)
Income taxes -- --
---------
Net loss $(12,762)
Total assets $18,120 $21,674 $ 301 $11,120 $51,215
9. OTHER MATTERS
On July 20, 2001, the Company completed a $6,800 private placement
of 1,090,000 shares of its common stock at $6.25 per share. In conjunction
with the offering, warrants to acquire up to 109,000 shares of common
stock were granted. The exercise price of the warrants is $6.25 per share
and the warrants have a five-year term.
In October 2001, the Company was informed by its primary lending
institution that its borrowing availability under its $20,000 credit
facility had been effectively reduced to zero as a result of a recent
appraisal of its fixed assets. In February 2002, the Company and its
primary lending institution amended the credit facility. The amended
facility was reduced to $15,000 mainly due to the reduction in the
valuation of fixed assets that limited the borrowing capacity under the
term loan component, as well as to minimize the cost of unused line fees.
The term loan component was revised to an initial $2,733 based on the
valuation of the Company's fixed assets (of which $2,681 was outstanding
on the term loan at March 31, 2002). The revolving credit facility
component comprises the remainder of the total potential borrowing
capacity. Certain definitions were revised which increased the Company's
available borrowing base. In addition, the minimum net worth covenant was
reduced to $33,500. While these changes to the credit facility improve the
Company's overall financial flexibility, the Company's future liquidity
depends on the Company's ability to successfully generate positive cash
flow from operations and achieve adequate operational savings. The Company
is also exploring opportunities for new or additional equity or debt
financing. (See Note 10 for additional information.) Notwithstanding the
foregoing, there can be no assurance that the Company will have sufficient
cash flows to meet its working capital and capital expenditure
requirements.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand
in areas of the business that are growing. The
10
realignment did not significantly change any of the Company's existing
operations nor were any product lines discontinued. A majority of
employees affected by this realignment were re-deployed from the
Rechargeable segment and support functions into open direct labor
positions in the Primary segment, due to the significantly growing demand
for primary batteries from the military. Less than 7% of the Company's
total employees were terminated. The realignment did not result in any
significant severance costs. The Company expects to realize cost savings
from the measures being taken of approximately $1,500 per quarter. These
quarterly savings are comprised of approximately $1,100 of reduced labor
costs, approximately $200 of reduced material usage, and approximately
$200 of lower administrative expenses. The Company realized the full value
of the realignment in the third fiscal quarter.
Also in February 2002, in its ongoing effort to improve liquidity to
bring costs more in line, the Company took further actions to reduce
costs. The cost reductions included employee terminations and salary
reductions, discontinuance of certain employee benefits and other cost
saving initiatives in general and administrative areas. Approximately 15%
of the Company's total employees were terminated during this time. As part
of these actions, the Company temporarily suspended the Company's match on
the 401k plan. The Company anticipates approximately $800 in reduced
expenses per quarter because of this action. Approximately two-thirds of
the savings will reduce cost of products sold and one-third will reduce
general and administrative costs. The Company realized approximately half
of the savings in the third fiscal quarter and will realize the remaining
cost savings in the fourth fiscal quarter. Severance costs associated with
this action were incurred in the third fiscal quarter and were not
material. The actions taken in February and the prior actions taken by the
Company as outlined above will aggregate to an anticipated cost savings of
approximately $2,300 per quarter.
The Company has maintained a lease line of credit with a third party
leasing agency. Under this arrangement, the Company has various options to
acquire manufacturing equipment, including sales / leaseback transactions
and operating leases. In October 2001, the Company expanded its leasing
arrangement with a third party leasing agency. The revision increased the
amount of the lease line from $2,000 to $4,000. The increase in the line
is being used to fund capital expansion plans for manufacturing equipment
that will allow increased capacity within the Company's Primary business
unit. In conjunction with this lease, the Company has a letter of credit
of $3,800 outstanding. At March 31, 2002, approximately $250 remained
outstanding under the lease line of credit. Once the lease line has been
fully utilized, which is expected to be by June 2002, the Company's
quarterly lease payment will approximate $226.
In November 2001, the Company received approval for two grants from
New York State and a federally sponsored small cities program in the
aggregate amount of $1,050. The grants will assist in funding current
capital expansion plans that the Company expects will lead to job
creation. In most cases, the Company will be reimbursed for approved
capital as it incurs the cost; in other cases, the Company will be
reimbursed after the full completion of the particular project. At March
31, 2002, in connection with these grants, approximately $57 had been
submitted for reimbursement and is awaiting final review and approval.
Funding under these grants is subject to the Company's ability to go
forward with these projects. Additionally, the Company is obligated under
the terms of the grants to achieve a certain level of new jobs over the
next five years. If the Company does not meet its employment quota, it may
adversely affect reimbursement requests or the Company could be required
to pay back a portion of the amount of the grant, depending on the lapsed
time.
10. NEW ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of
11
Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No.
144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). The Company is required to adopt SFAS No. 144
for fiscal years beginning after July 1, 2002. The Company is currently
assessing the financial impact of SFAS No. 144 on its financial
statements.
11. SUBSEQUENT EVENT
On April 23, 2002, the Company closed on a $3,000 private placement
consisting of common equity and a $600 convertible note. Initially,
801,333 shares were issued. The note, which was issued to one of the
Company's directors, will convert automatically into an additional 200,000
shares if the Company's shareholders vote to approve the conversion of the
note into common shares at the Company's Annual Meeting in December 2002.
If shareholder approval is not obtained, the Company is obligated to repay
the note on December 31, 2002, with accrued interest at 10% per year. All
shares will be issued at $3.00 per share.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in whole dollars)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, world events,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fire, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended June 30, 2001.
General
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Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of customized and standard lithium primary, lithium-ion and polymer rechargeable
batteries for use in a wide array of applications. The Company believes that its
proprietary technologies allow the Company to offer batteries that are
ultra-thin, lightweight and generally achieve longer operating time than many
competing batteries currently available. The Company manufactures a family of
lithium/manganese dioxide primary (non-rechargeable) batteries for military,
industrial and consumer applications which it believes is one of the most
comprehensive lines of primary batteries commercially available. In addition,
the Company manufactures and markets lithium polymer and lithium-ion
rechargeable batteries for use in portable electronic applications.
The Company has incurred net operating losses primarily as a result of
funding research and development activities and, to a lesser extent,
manufacturing and general and administrative costs. To date, the Company has
devoted a substantial portion of its resources to the research and development
of its products and technology, particularly its proprietary polymer
rechargeable technology. The Company's results of operations may vary
significantly from quarter to quarter depending upon the number of orders
received and the pace of the Company's research and development activities.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's rechargeable batteries. The Technology Contracts segment includes
revenues and related costs associated with various government and military
development contracts. The Corporate segment consists of all other items that do
not specifically relate to the three other segments and are not considered in
the performance of the other segments.
13
Results of Operations
---------------------
Three months ended March 31, 2002 and 2001
Consolidated revenues were $8,862,000 for the three month period ended
March 31, 2002, an all-time quarterly record. This sales amount reflected an
increase of $3,045,000, or 52%, from $5,817,000 in the same quarter in fiscal
2001. Primary battery sales increased $3,340,000, or 62%, from $5,401,000 last
year to $8,741,000 this year. Growth was seen in substantially all of Primary
battery products, including strong demand for 9-volt batteries, and continuing
growth of cylindrical battery products, including the BA-5368 and BA-5372
batteries, as well as new products, such as pouch cells and D-cells. These
increases were offset in part by a decline in Technology Contract revenues. As
expected, Technology Contract revenues declined $303,000, from $338,000 to
$35,000 due to the scheduled reduction of certain non-renewable government
contracts.
Cost of products sold amounted to $7,940,000 for the three-month period
ended March 31, 2002, an increase of $1,392,000, or 21% over the same three
month period a year ago. The gross margin on consolidated revenues for the
quarter was a positive 10%, compared to a loss of 13% in the prior year. The
gross margin for this fiscal year's third quarter represented the first positive
margin in nine quarters, resulting from the manufacturing improvements made by
the Company. Primary gross margins increased $1,051,000 over the prior year from
a 7% gross margin in fiscal 2001 to a 16% gross margin in fiscal 2002. This
improvement in margins is primarily the result of increased sales and
improvements in manufacturing efficiencies, resulting from the implementation of
lean manufacturing practices. Cost of products sold in the Rechargeable segment
decreased $625,000 over last year mainly due to cost savings initiatives that
were enacted during the past six months. The Rechargeable gross margin improved
from a loss of $1,154,000 last year to a loss of $521,000 this year. While the
Company has taken significant steps to narrow its focus for polymer production
in the Rechargeable area, the Company has enhanced its capability to source
rechargeable sales opportunities with product it can purchase from other
manufacturers, namely the Company's venture in Taiwan, Ultralife Taiwan, Inc.,
as well as others. The Company continues to believe that there are significant
opportunities for growth in the Rechargeable area.
Operating and other expenses were $3,019,000 for the three months ended
March 31, 2002 compared to $2,778,000 in the prior year, an increase of
$241,000, or 9%. The increase is mainly due to higher research and development
costs that resulted from the development of new Primary battery products.
Interest income decreased $123,000, or 98%, from $126,000 in the third
quarter of fiscal 2001 to $3,000 in the third quarter of fiscal 2002. The
reduction in interest income is principally the result of lower average cash
balances and lower interest rates. Interest expense declined $33,000 due to
lower average balances outstanding on the credit facility and lower borrowing
rates. Equity loss in affiliate (as restated, refer to Note 2 to the
consolidated financial statements in Item 1 herein) increased $161,000 from a
loss of $340,000 for the quarter ended March 31, 2001 to a loss of $501,000 for
the quarter ended March 31, 2002. Additionally, the Company's ownership in UTI
was reduced to 33% as a result of additional capital raised by UTI in November
2000 and August 2001 for its ongoing expansion. Miscellaneous income (expense)
relates primarily to foreign currency transaction gains and losses for the
period reported.
Net losses were $2,793,000, or $0.23 per share, for the third quarter of
fiscal 2002 compared to $3,921,000, or $0.35 per share, for the same quarter
last year primarily as a result of the reasons described above.
Nine months ended March 31, 2002 and 2001
Consolidated revenues reached a new nine-month record of $23,937,000 for
the first three quarters of fiscal 2002, an increase of $5,979,000, or 33%, over
the comparable period in fiscal 2001. Primary
14
battery sales increased $6,725,000, or 41%, from $16,310,000 last year to
$23,035,000 this year. In fiscal 2001, the Company began production and
shipments of the BA-5368 battery used by the military in survival radios for
pilots, and this new small cylindrical battery resulted in approximately
$3,300,000 in incremental sales in the first nine months of fiscal 2002. Sales
of 9-volt and BA-5372 batteries also rose. Shipments of HiRate and assembled
batteries continued the strong growth trend in the UK as a result of an increase
in demand from the UK military. Partially offsetting these increases was a
decline in Technology Contract revenues. As expected, Technology Contract
revenues declined $878,000, from $1,406,000 to $528,000 due to the scheduled
reduction of certain non-renewable government contracts.
Cost of products sold amounted to $23,675,000 for the nine-month period
ended March 31, 2002, an increase of $2,835,000, or 14% over the same nine month
period a year ago. The gross margin on total revenues for the nine-month period
of fiscal 2002 was a positive 1%, compared to a loss of 16% in the prior year.
The improvement in gross margins was affected mainly by two factors. First,
Primary gross margins increased $2,952,000 over the prior year from a 2% gross
margin in fiscal 2001 to a 15% gross margin in fiscal 2002. This improvement in
margins is principally the result of increased sales and enhancements in the
manufacturing process due to the implementation of lean manufacturing practices,
which in some instances have resulted in reductions in the workforce. To date,
lean manufacturing practices in the Primary battery segment have resulted in
quicker manufacturing throughput times, greater operating efficiencies and a
reduction of inventory. Second, Rechargeable gross margins improved $262,000
over the prior year due largely to cost savings actions taken over the last six
months, involving a realignment of resources and a more narrowed focus in the
Rechargeable business unit. In the second quarter of fiscal 2001, due to the
heavy competition, the Company shifted its focus to design and manufacture
lightweight custom sized batteries for OEMs rather than focus on the broad
retail cell phone market. The manufacture of cell phone batteries was an
important milestone for the Company as it demonstrated the Company's ability to
mass produce polymer rechargeable batteries. While the Company continues to
actively design and develop polymer rechargeable batteries, it has broadened its
supply source to include other lithium rechargeable cells made by other battery
manufacturers, including the Company's affiliate in Taiwan, Ultralife Taiwan,
Inc. Additionally, in the second and third quarters of fiscal 2002, the Company
reduced costs and reallocated resources to better align itself with the demand
in the marketplace. The Company has experienced significant demand from the
military for its primary battery products and as a result shifted significant
resources to be able to produce levels necessary to meet the demand. This has
resulted in lower costs charged to the Rechargeable business unit.
Operating and other expenses were $9,386,000 for the nine months ended
March 31, 2002, compared with $8,142,000 in the prior year, an increase of
$1,244,000, or 15%. Of the Company's operating and other expenses, research and
development expenses increased $885,000, or 38%, to $3,192,000 for the first
three quarters of fiscal 2002. The increase in research and development expenses
was due to increased development effort for samples and new product designs of
polymer rechargeable batteries in fiscal 2002. In addition, R&D costs rose due
to increases in Primary battery development activity for new military batteries
as prototypes were built for qualification with the US Army. Selling, general
and administrative costs increased $359,000 or 6% over the prior year period.
This increase was mainly due to higher selling and marketing expenses overseas
as the Company enhanced its market coverage, as well as severance costs
pertaining to an executive employment agreement incurred in conjunction with the
Company's resource realignment that was enacted in the second fiscal quarter.
Interest income decreased $540,000, or 86%, from $628,000 in the first
three quarters of fiscal 2001 to $88,000 in the first three quarters of fiscal
2002. The reduction in interest income is principally the result of lower
average cash balances and the lower interest rates. Interest expense declined
$111,000 due to lower average balances outstanding on the credit facility and
lower borrowing rates. Equity loss in affiliate (as restated, refer to Note 2 to
the consolidated financial statements in Item 1 herein) decreased $1,654,000 for
its equity interest in Ultralife Taiwan, Inc. (UTI) from a loss of $1,930,000
for the first three quarters of fiscal 2001 to a loss of $276,000 for the first
three quarters of fiscal 2002. The fiscal 2002 results included a $1,096,000
favorable adjustment recorded in July 2001 to correct cumulative net
15
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. Additionally, the Company's ownership in UTI was reduced to 33%
as a result of additional capital raised by UTI in November 2000 and August 2001
for its ongoing expansion. 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 $5,212,000 in the nine months ended March
31, 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.) Miscellaneous income (expense)
relates primarily to foreign currency transaction gains and losses for the
period reported.
Net losses were $9,630,000, or $0.79 per share, for the first nine months
of fiscal 2002 compared to $12,762,000, or $1.15 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
-------------------------------
At March 31, 2002, cash and cash equivalents and available for sale
securities totaled $547,000. Of this amount, $201,000 was restricted at March
31, 2002 to support certain outstanding letters of credit. The Company used
$8,040,000 of cash in operating activities during the first nine months of
fiscal 2002. This use of cash related primarily to the net loss reported for the
period and an increase in accounts receivable, offset in part by depreciation
and decreases in other current assets. More specifically, receivables increased
$2,776,000 from June 30, 2001 to March 31, 2002. This increase resulted from a
significant increase in revenues in the third quarter of fiscal 2002 as compared
with the fourth quarter of fiscal 2001. The Company does not anticipate any
significant recoverability issues with these outstanding receivables. The
Company spent $1,715,000 for capital expenditures for production equipment and
facilities improvements during the first three quarters 2002. Of this amount
$995,000, was received as proceeds in sales-leaseback transactions and
incorporated under the Company's $4,000,000 lease line. As of April 30, 2002,
the remaining $250,000 available under the lease line of credit has been
committed for the acquisition of certain equipment.
At March 31, 2002, the Company had long-term debt outstanding including
capital lease obligations of $1,984,000 primarily relating to the financing
arrangement entered into by the Company at the end of fiscal 2000, described
below.
In June 2000, the Company entered into a $20,000,000 secured credit
facility with a lending institution. The financing agreement consisted of an
initial $12,000,000 term loan component based on the valuation of the Company's
fixed assets and a revolving credit facility component for an initial
$8,000,000, based on eligible net accounts receivable (as defined) and eligible
net inventory (as defined). While the amount available under the term loan
component amortizes over time, the amount of the revolving credit facility
component increases by an equal and offsetting amount. Principal and interest
are paid monthly on outstanding amounts borrowed. The loans bear interest at the
prime rate or other LIBOR-based rate options at the discretion of the Company.
The Company also pays a facility fee on the unused portion of the commitment.
The loan is secured by substantially all of the Company's assets and the Company
is precluded from paying dividends under the terms of the agreement.
In October 2001, the Company was informed by its primary lending
institution that its borrowing availability under the $20,000,000 credit
facility had been effectively reduced to zero as the result of a recent
appraisal of its fixed assets. The appraisal resulted in a significant decrease
in the valuation of the Company's machinery and equipment which was based on an
"orderly liquidation valuation" methodology used by the appraiser.
16
In February 2002, the Company and its primary lending institution amended
the credit facility. The amended facility was reduced to $15,000,000 based on a
realistic assessment of the Company's potential borrowing capacity and to
minimize the cost of unused line fees. The term loan component was revised to an
initial $2,733,333 based on the valuation of the Company's fixed assets (of
which $2,681,000 was outstanding on the term loan at March 31, 2002). The
revolving credit facility component comprises the remainder of the total
potential borrowing capacity. Certain definitions were revised which increased
the Company's available borrowing base. In addition, the minimum net worth
covenant was reduced to $33,500,000. At March 31, 2002, the total amount
available under the revolver component was approximately $700,000, net of
$3,800,000 of outstanding letters of credit.
On July 20, 2001, the Company completed a $6,800,000 private placement of
1,090,000 shares of its common stock at $6.25 per share. In conjunction with the
offering, warrants to acquire up to 109,000 shares of common stock were granted.
The exercise price of the warrants is $6.25 per share and the warrants have a
five-year term.
The Company has maintained a lease line of credit with a third party
leasing agency. Under this arrangement, the Company has various options to
acquire manufacturing equipment, including sales / leaseback transactions and
operating leases. In October 2001, the Company expanded its leasing arrangement
with a third party leasing agency. The revision increased the amount of the
lease line from $2,000,000 to $4,000,000. The increase in the line is being used
to fund capital expansion plans for manufacturing equipment that will allow
increased capacity within the Company's Primary business unit. In conjunction
with this lease, the Company has a letter of credit of $3,800,000 outstanding.
At March 31, 2002, approximately $250,000 remained outstanding under the lease
line of credit. Once the lease line has been fully utilized, which is expected
to be by June 2002, the Company's quarterly lease payment will approximate
$226,000.
On April 23, 2002, the Company closed on a $3,000,000 private placement
consisting of common equity and a $600,000 convertible note. Initially, 801,333
shares were issued. The note, which was issued to one of the Company's
directors, will convert automatically into an additional 200,000 shares if the
Company's shareholders vote to approve the conversion of the note into common
shares at the Company's Annual Meeting in December 2002. If shareholder approval
is not obtained, the Company is obligated to repay the note on December 31,
2002, with accrued interest at 10% per year. All shares will be issued at $3.00
per share.
The Company's capital resource commitments as of March 31, 2002 consisted
principally of capital equipment commitments of approximately $520,000.
The Company periodically reviews the carrying amount of its long-lived
assets for impairment. In particular, the recent activity surrounding the
Company's Rechargeable business unit has caused the Company to review the
carrying value of the long-lived assets associated with this business. At this
time, the Company believes that the future cash flows from this business will
exceed the carrying value of the assets. Therefore, no impairment has been
reflected. The Company will continue to closely monitor and reevaluate the
realizability of these assets each quarter. In the event that the Company is
required to record an impairment charge in the future, it could have a material
adverse effect on the Company's financial position and results of operations.
As previously noted, the Company's primary lending institution had
significantly reduced the total amount of the credit facility available.
Although the Company significantly improved its present liquidity position with
the private placement offering that raised $3,000,000 in April 2002, the
Company's future liquidity depends on the Company's ability to successfully
generate positive cash flow from operations and achieve adequate operational
savings. Notwithstanding the foregoing, there can be no assurance that the
Company will have sufficient cash flows to meet its working capital and capital
expenditure requirements. See additional comments on the Company's recent cost
reduction actions in "Outlook".
-------
17
Outlook
-------
The Company expects revenues in its fourth quarter of fiscal 2002 to be
relatively consistent with the results in the third quarter, i.e. in the range
of approximately $8,500,000 to $9,000,000. At this time, 9-volt orders are
continuing their strong trend. Sales of new military battery offerings are
expected to increase substantially, such as the BA-5390 battery used as the main
communications battery by military forces, providing for an improving mix of
higher margin products. Offsetting these improvements, however, is a delay in
certain military battery awards, which will have some impact on BA-5368 battery
sales. The Company is projecting modest revenues for its Rechargeable business
in the fourth fiscal quarter, but it believes that there are still significant
upside opportunities in this area. For the year, the Company expects to conclude
its year ended June 30, 2002 with approximately a 35% growth in revenues over
the prior fiscal year.
While the Company made very significant strides toward meeting its goal of
operating cash breakeven in the March 2002 quarter, it fell short of its goal by
approximately $1,000,000. There were a few primary reasons for this shortfall.
First, the cost savings actions taken during the March quarter did not provide a
full quarter's worth of benefit. Second, the Company made a conscious decision
to continue to invest in its Primary R&D efforts to develop new products that
are key to its near-term growth prospects. And lastly, the Company continued to
improve the balance in its production schedule to keep inventory levels as low
as possible, reducing inventories during the quarter by approximately $800,000
which resulted in lower absorption of overheads than expected.
The Company believes that ongoing quarterly revenues of approximately
$9,000,000 to $9,500,000 will be the point where the Company reaches its key
financial target of operating cash breakeven. Depending on the mix of products
sold, and the sustaining benefits from the cost savings actions that were taken
over the past two quarters, the Company believes that it may be able to reach
this milestone in the June 2002 quarter.
In October and November 2001, and in February 2002, the Company took
various cost savings actions and realigned its resources to address changing
market conditions and to better meet customer demand in areas of the business
that are growing. While the actions have significantly reduced the production
workforce in the polymer Rechargeable business unit, no product lines have been
discontinued. In fact, the Company has broadened its product offerings by
increasing its sales focus and production capabilities to assemble rechargeable
battery packs from the purchase of cells from other sources, including its
affiliate, Ultralife Taiwan, Inc. The terms of the transactions with our
affiliate are arms-length. In total, approximately 20% of the Company's total
employees as of September 30, 2001 were terminated. The resource realignment did
not result in significant severance costs. The Company expects to realize cost
savings from the measures being taken of approximately $2,300,000 per quarter.
Approximately two-thirds of the savings will reduce cost of products sold and
one-third will reduce operating expenses. These quarterly savings are comprised
of approximately $1,800,000 of reduced labor costs, approximately $200,000 of
reduced material usage, and approximately $300,000 of lower administrative
expenses. The Company anticipates the full amount of these actions to be
realized in the June 2002 quarter.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 CEO & CFO Certifications
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTRALIFE BATTERIES, INC.
-------------------------
(Registrant)
Date: April 11, 2003 By: /s/ John D. Kavazanjian
-------------- -----------------------
John D. Kavazanjian
President and Chief
Executive Officer
Date: April 11, 2003 By: /s/ Robert W. Fishback
-------------- ----------------------
Robert W. Fishback
Vice President - Finance and
Chief Financial Officer
19
I, John D. Kavazanjian, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: April 11, 2003 /s/ John D. Kavazanjian
-----------------------
John D. Kavazanjian
President and Chief Executive Officer
I, Robert W. Fishback, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Ultralife Batteries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: April 11, 2003 /s/ Robert W. Fishback
----------------------
Robert W. Fishback
Vice President of Finance and Chief
Financial Officer
20