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 December 31, 2001
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 Identification No.)
of incorporation or organization)
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 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 - 12,318,956 shares outstanding
as of January 31, 2002.
Introductory Note:
This Amendment No. 1 to Form 10-Q/A for Ultralife Batteries, Inc. for the period
ended December 31, 2001, dated as of April 11, 2003, is being filed to restate
the financial statements and 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 -
December 31, 2001 and June 30, 2001..............................3
Condensed Consolidated Statements of Operations -
Three and six months ended December 31, 2001 and 2000............4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2001 and 2000......................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................17
Signatures....................................................................18
CEO and CFO Certifications....................................................19
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------
(unaudited)
December 31, June 30,
ASSETS 2001 2001
---- ----
(As Restated;
See Note 2)
Current assets:
Cash and cash equivalents $ 706 $ 494
Available-for-sale securities 968 2,573
Restricted cash 1,300 540
Trade accounts receivable (less allowance for doubtful accounts
of $285 at December 31, 2001 and $262 at June 30, 2001) 4,426 3,379
Inventories 5,459 5,289
Prepaid expenses and other current assets 1,581 1,648
-------- --------
Total current assets 14,440 13,923
-------- --------
Property, plant and equipment 31,570 32,997
Other assets:
Investment in UTI 5,437 --
Technology license agreements (net of accumulated
amortization of $1,218 at December 31, 2001 and $1,168 at June 30, 2001) 233 283
-------- --------
5,670 283
-------- --------
Total Assets $ 51,680 $ 47,203
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 955 $ 1,065
Accounts payable 4,368 3,755
Other current liabilities 1,763 2,282
-------- --------
Total current liabilities 7,086 7,102
Long-term liabilities:
Long-term debt and capital lease obligations 2,202 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 December 31, 2001 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 (835) (1,058)
Accumulated deficit (68,561) (61,724)
-------- --------
42,695 37,756
Less --Treasury stock, at cost -- 27,250 shares 303 303
-------- --------
Total shareholders' equity 42,392 37,453
-------- --------
Total Liabilities and Shareholders' Equity $ 51,680 $ 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)
--------------------------------------------------------------------------------
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
-------- --------
Net cash used in operating activities (8,040) (8,262)
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment (1,715) (2,934)
Proceeds from sale leaseback 995 --
Purchase of securities (8,424) (24,671)
Sales of securities 11,334 19,652
Maturities of securities -- 12,695
-------- --------
Net cash provided by investing activities 2,190 4,742
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,341 606
Principal payments on long-term debt and
capital lease obligations (812) (836)
-------- --------
Net cash provided by (used in) financing activities 5,529 (230)
-------- --------
Effect of exchange rate changes on cash 171 (129)
-------- --------
Decrease in cash and cash equivalents (150) (3,879)
Cash and cash equivalents at beginning of period 494 5,712
-------- --------
Cash and cash equivalents at end of period $ 344 $ 1,833
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gain on securities $ -- $ 1
======== ========
Interest paid $ 185 $ 357
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO 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 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 six months ended December 31, 2001, have been restated as
follows:
Three months ended December 31, Six months ended
2001 December 31, 2001
------------------------------- ------------------------------
As Previously As Previously
Financial Statement Caption Reported As Restated Reported As Restated
--------------------------- ------------- ----------- ------------- -----------
Equity (loss) / gain in UTI $ -- $ (411) $ -- $ 225
Net loss $(3,420) $(3,831) $(7,062) $(6,837)
Investment in UTI $ -- $ 5,437 $ -- $ 5,437
Total assets $ 46,243 $51,680 $46,243 $51,680
Total shareholders' equity $ 36,955 $42,392 $36,955 $42,392
Net loss per share $ (0.28) $ (0.31) $ (0.58) $ (0.56)
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 Six months ended
(As Restated; See Note 2) December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- --------
Net loss $(3,831) $(5,737) $(6,837) $(8,841)
Unrealized (loss) gain on securities -- (1) -- 1
Foreign currency translation adjustments 94 (221) 223 (176)
------- ------- ------- -------
Total comprehensive loss $(3,737) $(5,959) $(6,614) $(9,016)
======= ======= ======= =======
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:
December 31, 2001 June 30, 2001
----------------- -------------
Raw materials $2,811 $2,595
Work in process 1,930 1,233
Finished goods 1,075 1,872
------ ------
5,816 5,700
Less: Reserve for obsolescence 357 411
------ ------
$5,459 $5,289
====== ======
6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
December 31, 2001 June 30, 2001
----------------- -------------
Land $ 123 $ 123
Buildings and Leasehold Improvements 1,608 1,608
Machinery and Equipment 38,449 37,891
Furniture and Fixtures 311 291
Computer Hardware and Software 1,406 1,375
Construction in Progress 3,538 2,984
------- -------
44,985 44,272
Less: Accumulated Depreciation 13,415 11,275
------- -------
$32,020 $32,997
======= =======
7
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 2001, the Company had $1,300 in restricted cash
with two lending institutions. $250 of this amount was for a letter of
credit against a building and equipment operating lease. The remaining
$1,050 represents funds restricted by the Company's primary lending
institution to cover outstanding letters of credit in excess of eligible
assets. The Company is in the process of restructuring the terms of the
credit facility with the lending institution to increase the amount of
eligible assets.
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. Because of these
developments with the insurance carrier, the Company may cancel the
settlement agreement and allow the stockholders to proceed with their
appeal.
In the event settlement is not reached, the Company will continue to
defend the case vigorously. The amount of alleged damages, if any, cannot
be quantified, nor can the outcome of this litigation be predicted.
Accordingly, management cannot determine whether the ultimate resolution
of this litigation could have a material adverse effect on the Company's
financial position and results of operations.
In conjunction with the Company's purchase/lease of its Newark, New
York facility in 1998, the Company entered into a payment-in-lieu of tax
agreement which provides the Company with real estate tax concessions upon
meeting certain conditions. In connection with this agreement, the Company
received an environmental assessment, which revealed contaminated soil.
The assessment indicated potential actions that the Company may be
required to undertake upon notification by the environmental authorities.
The assessment also proposed that a second assessment be completed and
provided an estimate of total potential costs to remediate the soil of
$230. However, there can be no assurance that this will be the maximum
cost. The Company entered into an agreement whereby a third party has
agreed to reimburse the Company for fifty percent of the costs associated
with this matter. Test sampling occurred in the fourth quarter of fiscal
2001 and the engineering report was
8
submitted to the New York State Department of Environmental Conservation
(NYSDEC) for review. NYSDEC has reviewed the report and in January 2002
recommended additional testing. The Company has responded by submitting a
proposed work plan to NYSDEC and is waiting further review. 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 December 31, 2001
------------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------
Revenues $ 7,020 $ 153 $286 $ -- $ 7,459
Segment contribution 712 (1,926) 30 (2,092) (3,276)
Interest, net (77) (77)
Equity loss in UTI (411) (411)
Miscellaneous expense (67) (67)
Income taxes -- --
Net loss $(3,831)
-------
Total assets $20,535 $19,827 $309 $11,009 $51,680
Three Months Ended December 31, 2000
------------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------
Revenues $ 4,667 $ 44 $579 $ -- $ 5,290
Segment contribution 6 (2,680) 56 (2,089) (4,707)
Interest income, net 155 155
Equity loss in UTI (1,258) (1,258)
Miscellaneous 73 73
Income taxes -- --
Net loss $(5,737)
-------
Total assets $17,884 $22,504 $288 $15,556 $56,232
Six Months Ended December 31, 2001
----------------------------------
Primary Rechargeable Technology
(As Restated; See Note 2) Batteries Batteries Contracts Corporate Total
--------------------------------------------------------------------
Revenues $14,294 $ 288 $493 $ -- $15,075
Segment contribution 1,439 (4,304) 51 (4,213) (7,027)
Interest, net (90) (90)
Equity gain in UTI 225 225
Miscellaneous income 55 55
Income taxes -- --
Net loss $(6,837)
-------
Total assets $20,535 $19,827 $309 $11,009 $51,680
9
Six Months Ended December 31, 2000
----------------------------------
Primary Rechargeable Technology
Batteries Batteries Contracts Corporate Total
-------------------------------------------------------------------
Revenues $10,909 $ 164 $1,068 $ -- $12,141
Segment contribution 17 (3,766) 90 (3,856) (7,515)
Interest income 249 249
Equity loss in UTI (1,590) (1,590)
Miscellaneous 15 15
Income taxes -- --
Net loss $(8,841)
-------
Total assets $17,884 $22,504 $288 $15,556 $56,232
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 the $20,000 credit facility
had been effectively reduced to zero as a result of a recent appraisal of its
fixed assets. Accordingly, the Company's 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. Notwithstanding the foregoing, there
can be no assurance that the Company will have sufficient cash flows to meet its
working capital and capital expenditure requirements.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand in
areas of the business that are growing. The realignment did not significantly
change any of the Company's existing operations nor were any product lines
discontinued. A majority of employees affected by this realignment were
re-deployed from the Rechargeable segment and support functions into open direct
labor positions in the Primary segment, due to the significantly growing demand
for primary batteries from the military. Less than 7% of the Company's total
employees were terminated. The realignment did not result in any significant
severance costs. The Company expects to realize cost savings from the measures
being taken of approximately $1,500 per quarter. These quarterly savings are
comprised of approximately $1,100 of reduced labor costs, approximately $200 of
reduced material usage, and approximately $200 of lower administrative expenses.
The Company anticipates the full amount of the realignment to be realized in the
third fiscal quarter.
Additionally, in October 2001, the Company expanded its leasing
arrangement with a third party leasing agency. The revision increased the amount
of the lease line to $4,000, from a previous amount of $2,000. The additional
line will be used to fund capital expansion plans for manufacturing equipment
which will allow increased capacity within the Company's Primary business unit.
Once the lease line has been fully utilized 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
plan which the Company expects will lead to job creation. The Company will be
reimbursed for approved capital as it incurs the cost. 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
10
the Company does not meet its employment quota, it will be required to pay back
a portion or all 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 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 February 11, 2002, in its ongoing effort to improve liquidity to bring
costs more in line with revenues, the Company took further action 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. As part of these actions, the Company
temporarily suspended the Company's match on the 401k plan. The Company
anticipates an approximately $800 reduction in expenses per quarter because of
this action. Nearly two-thirds of the savings will reduce cost of products sold
and one-third will reduce general and administrative costs. The Company expects
to realize approximately half of the savings in the third fiscal quarter and
100% in the fourth fiscal quarter. Severance costs associated with this action
will be incurred in the third fiscal quarter and are not material. This action
plus the prior actions taken by the Company as outlined above will aggregate to
an anticipated cost savings of approximately $2,300 per quarter.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this report relating to matters that are
not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Company's
products and services, the successful commercialization of the Company's
advanced rechargeable batteries, general economic conditions, world events,
government and environmental regulation, competition and customer strategies,
technological innovations in the primary and rechargeable battery industries,
changes in the Company's business strategy or development plans, capital
deployment, business disruptions, including those caused by fire, raw materials
supplies, environmental regulations, and other risks and uncertainties, certain
of which are beyond the Company's control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended June 30, 2001.
General
Ultralife Batteries, Inc. develops, manufactures and markets a wide range
of standard and customized primary lithium 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. To date, the Company has focused on
manufacturing a family of lithium primary batteries for consumer, industrial,
and military applications which it believes is one of the most comprehensive
lines of lithium manganese dioxide primary batteries commercially available. The
Company has introduced its advanced rechargeable batteries which are based on
its proprietary technology for use in portable electronic applications.
The Company has incurred net operating losses primarily as a result of
funding research and development activities and, to a lesser extent,
manufacturing and general and administrative costs. To date, the Company has
devoted a substantial portion of its resources to the research and development
of its products and technology, particularly its proprietary polymer
rechargeable technology. The Company's results of operations may vary
significantly from quarter to quarter depending upon the number of orders
received and the pace of the Company's research and development activities.
Currently, the Company does not experience significant seasonal trends in
primary battery revenues and does not have enough sales history on the
rechargeable batteries to determine if there is seasonality.
The Company reports its results in four operating segments: Primary
Batteries, Rechargeable Batteries, Technology Contracts and Corporate. The
Primary Batteries segment includes 9-volt batteries, cylindrical batteries and
various specialty batteries. The Rechargeable Batteries segment consists of the
Company's rechargeable batteries. The Technology Contracts segment includes
revenues and related costs associated with various government and military
development contracts. The Corporate segment consists of all other items that do
not specifically relate to the three other segments and are not considered in
the performance of the other segments.
12
Results of Operations
Three months ended December 31, 2001 and 2000
Consolidated revenues increased 41% or $2,169,000 to $7,459,000 for the
second three months of fiscal 2002, compared to the same quarter in fiscal 2001.
Primary battery sales increased $2,353,000, or 50%, from $4,667,000 last year to
$7,020,000 this year. In December 2000, 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
$1,400,000 in sales in the second quarter of fiscal 2002. Also adding to the
notable increase in revenues was an increase of $733,000 or 100% in sales of the
High Rate and assembled batteries due to increased demand from the UK military
as compared to prior year. These increases were offset in part by a decline in
Technology Contract revenues. As expected, Technology Contract revenues declined
$293,000, from $579,000 to $286,000 due to the scheduled reduction of certain
non-renewable government contracts.
Cost of products sold amounted to $7,671,000 for the three-month period
ended December 31, 2001, an increase of $682,000, or 10% over the same three
month period a year ago. The gross margin on total revenues for the quarter was
a loss of 3%, compared to a loss of 32% in the prior year. The improvement in
gross margins was attributed to greater sales, significant efficiencies attained
in the manufacturing process and an inventory valuation adjustment made in the
prior year on rechargeable batteries. Primary gross margins increased $968,000
over the prior year from a 0% gross margin in fiscal 2001 to a 14% 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. 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.
Cost of products sold in the Rechargeable segment decreased $433,000 over the
prior year period due to the inventory adjustment of $400,000 made in the
comparable quarter in the prior year to reduce the market value of the
inventory. The Rechargeable business remains a large opportunity but one that
the Company expects to realize over the long term. By focusing on this
opportunity and broadening its offerings, the Company believes that it has a
good prospect of realizing this growth potential.
Operating and other expenses were $3,064,000 the three months ended
December 31, 2001 compared to $3,008,000 in the prior year, an increase of
$56,000, or 2%. The increase is largely driven by an increase in administrative
costs related to severance costs incurred during the quarter as a result of the
resource realignment.
Interest income decreased $260,000, or 94%, from $276,000 in the second
quarter of fiscal 2001 to $16,000 in the second quarter of fiscal 2002. The
reduction in interest income is principally the result of lower average cash
balances and the reduction of rates of return on investments. Interest expense
declined $28,000 due to lower average balances outstanding on the credit
facility and lower borrowing rates. Equity loss in UTI (as restated, refer to
Note 2 to the consolidated financial statements in Item 1 herein) decreased
$847,000 from $1,258,000 for its equity interests in Ultralife Taiwan, Inc.
(UTI) for the quarter ended December 31, 2000 to $411,000 for the quarter ended
December 31, 2001. 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 $3,831,000, or $0.28 per share, for the second three
months of fiscal 2002 compared to $5,737,000, or $0.51 per share, for the same
quarter last year primarily as a result of the reasons described above.
13
Six months ended December 31, 2001 and 2000
Consolidated revenues reached a new six month record of $15,075,000 for
the first half of fiscal 2002, an increase of $2,934,000, or 24%, over the
comparable quarter in fiscal 2001. Primary battery sales increased $3,385,000,
or 31%, from $10,909,000 last year to $14,294,000 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 $2,500,000 in sales in the first half of fiscal 2002.
Shipments of High Rate and assembled batteries also increased over $800,000, or
59%, 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 $575,000, from $1,068,000 to
$493,000 due to the scheduled reduction of certain non-renewable government
contracts.
Cost of products sold amounted to $15,735,000 for the six-month period
ended December 31, 2001, an increase of $1,443,000, or 10% over the same six
month period a year ago. The gross margin on total revenues for the first half
of the year was a loss of 4%, compared to a loss of 18% in the prior year. The
improvement in gross margins was affected by two offsetting factors. Primary
gross margins increased $1,901,000 over the prior year from a 0% gross margin in
fiscal 2001 to a 13% 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. 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. The improvements in gross margins in the Primary segment were
partially offset by declines in the Rechargeable segment. In the Rechargeable
segment cost of products sold increased $495,000 over the prior year period due
to less overhead absorption due to lower production volumes. 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. The
Company continues to actively design and develop rechargeable batteries and is
vigorously supplying samples to OEMs in order to achieve the desired sales
growth in this segment. Additionally, in the second quarter of fiscal 2002, the
Company reallocated resources to better align itself with the demand in the
marketplace. The Company has experienced significant demand from the military
and as a result shifted significant resources to be able to produce levels
necessary to meet the demand. This resulted in less costs charged to the
Rechargeable business unit.
Operating and other expenses were $6,367,000 for the six months ended
December 31, 2001 from $5,364,000 in the prior year, an increase of $1,003,000,
or 19%. Of the Company's operating and other expenses, research and development
expenses increased $646,000, or 43%, to $2,154,000 for the first half of fiscal
2002. The increase in research and development expenses was due to greater
development of samples and new product designs of polymer rechargeable batteries
in fiscal 2002, as well as increases in research and development costs in the
Primary battery business unit as prototypes were built for qualification with
the US Army. Selling, general and administrative costs increased $357,000 or 9%
over the prior year period. This increase was mainly due to higher selling,
marketing, and advertising costs, both in the U.S. and abroad as the Company
enhanced its market coverage at the end of fiscal 2001, as well as severance
costs incurred in conjunction with the realignment previously mentioned.
Interest income decreased $417,000, or 83%, from $502,000 in the first
half of fiscal 2001 to $85,000 in the first half of fiscal 2002. The reduction
in interest income is principally the result of lower average cash balances and
the reduction of rates of return on investments. Interest expense declined
$78,000 due to lower average balances outstanding on the credit facility and
lower borrowing rates. Equity gain / loss in UTI (as restated, refer to Note 2
to the consolidated financial statements in Item 1 herein) increased $1,815,000
from a loss of $1,590,000 for the first half of fiscal 2001 to a gain of
$225,000 for the first
14
half of fiscal 2002. The Fiscal 2002 results included a $1,096,000 favorable
adjustment recorded in July 2001 to correct cumulative net gains pertaining to
the manner in which the Company accounted for this equity investment in Fiscal
2001 and Fiscal 2000. The Company determined that this cumulative adjustment was
not significant enough to warrant a restatement for those periods. 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 six months ended December 31, 2001. (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 $6,837,000, or $0.56 per share, for the first six months
of fiscal 2002 compared to $8,841,000, or $0.80 per share, for the same quarter
last year primarily as a result of the reasons described above.
Liquidity and Capital Resources
At December 31, 2001, cash and cash equivalents and available for sale
securities totaled $2,974,000. Of this amount, $1,300,000 is restricted at
December 31, 2001 to cover a portion of the outstanding letters of credit. The
Company used $5,534,000 of cash in operating activities during the first six
months of fiscal 2002. This usage 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 $1,047,000 from June 30, 2001 to December 31, 2001. This
increase resulted from a significant increase in revenues in the second 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 $1,538,000 for capital expenditures for
production equipment and facilities improvements during the first half 2002, and
of this amount approximately $544,000 was received as proceeds in a sale
leaseback transaction. Additionally, in February 2002, the Company received
approximately $450,000 in proceeds from a sale leaseback of assets previously
purchased by the Company. As of February 11, 2002 nearly $600,000 remains
available under the lease line of credit.
At December 31, 2001, the Company had long-term debt outstanding including
capital lease obligations of $2,202,000 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 consists of an
initial $12,000,000 term loan component based on the valuation of the Company's
fixed assets (of which $2,867,000 was outstanding on the term loan at December
31, 2001) 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. The total
amount available under the revolver component is reduced by outstanding letters
of credit. The Company had $3,800,000 outstanding on a letter of credit as of
December 31, 2001. In October 2001, the Company was informed by its primary
lending institution that its borrowing availability under the $20,000,000 credit
facility had
15
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. The Company is in the
process of restructuring the terms of the credit facility with the lending
institution to enhance the Company's borrowing flexibility.
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.
In October 2001, the Company increased the lease line of credit with a
financing institution to $4,000,000 to acquire equipment in the Primary
business. In conjunction with this lease, the Company has obtained and is
required to maintain an additional letter of credit for $1,900,000. The total
outstanding letters of credit for this lease arrangement equal $3,800,000.
The Company's capital resource commitments as of December 31, 2001
consisted principally of capital equipment commitments of approximately
$732,000.
As previously noted, the Company's primary lending institution
significantly reduced the total amount of the credit facility available.
Accordingly, the Company's liquidity depends on the Company's ability to
successfully generate positive cash flow from operations and achieve adequate
operational savings. In addition, the Company is working with its primary
lending bank to obtain increased credit flexibility. The Company is also
exploring opportunities for new or additional equity or debt financing.
Notwithstanding the foregoing, there can be no assurance that the Company will
have sufficient cash flows to meet its working capital and capital expenditure
requirements. See additional comments on the Company's recent cost reduction
actions in "Outlook".
Outlook
The Company expects to achieve an increase of approximately 15% in
consolidated revenues in the third quarter of fiscal 2002 as compared to the
second quarter of fiscal 2002. During the third fiscal quarter, the Company is
projecting the growth to come largely from standard cylindrical and high rate
batteries for growth in military markets. Sales of 9-volt batteries are expected
to increase slightly from the second quarter as smoke detector and medical
customers replenish their inventories. The Company expects to take advantage of
its flexibility to tailor and develop its existing and new products that will
continue to enhance revenue growth throughout the year. The Company believes
that it is well positioned with its current portfolio of products, and its new
products in development, to meet the current demands communicated to the Company
by the commercial and military customers, both in the US and UK. Management
believes that revenues will increase fiscal year 2002 over fiscal year 2001 in
the range of 40%.
Management has maintained focus on two key financial goals - to reach
operating cash breakeven by March 2002 and to attain positive net income by June
2002. While these goals are dependent on continuing increases in sales volumes
and improving operating efficiencies, management is striving to meet these
objectives, and they believe that the strategies being put into action will
drive the Company toward these goals.
In October and November 2001, the Company realigned its resources to
address the changing market conditions and to better meet customer demand in
areas of the business that are growing. The realignment did not significantly
change any of the Company's existing operations nor were any product lines
discontinued. A majority of employees affected by this realignment were
re-deployed from the Rechargeable segment and support functions into open direct
labor positions in the Primary segment, due
16
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 $1.5 million
per quarter. These quarterly savings are comprised of approximately $1.1 million
of reduced labor costs, approximately $0.2 million of reduced material usage,
and approximately $0.2 million of lower administrative expenses. The Company
anticipates the full amount of this realignment to be realized in the third
fiscal quarter.
On February 11, 2002, in its ongoing effort to improve liquidity to bring
costs more in line with revenues, the Company took further action 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. As part of these actions, the Company
temporarily suspended the Company's match on the 401k plan. The Company
anticipates an approximately $800,000 reduction in expenses per quarter because
of this action. Nearly two-thirds of the savings will reduce cost of products
sold and one-third will reduce general and administrative costs. The Company
expects to realize approximately half of the savings in the third fiscal quarter
and 100% in the fourth fiscal quarter. Severance costs associated with this
action will be incurred in the third fiscal quarter and are not material. This
action plus the prior actions taken by the Company as outlined above will
aggregate to an anticipated cost savings of approximately $2.3 million per
quarter.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 CEO & CFO Certifications
17
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
18
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
19