ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 1999
Business Overview: The Company develops, manufactures, and markets primary lithium batteries (9-volt, high-rate, sea water) and is commercializing advanced rechargeable polymer batteries. Operations are reported in four segments: Primary Batteries, Rechargeable Batteries, Technology Contracts, and Corporate.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 28.5% to $21.06 million, driven primarily by a 47% increase in Primary Battery sales ($19.56 million) due to higher 9-volt lithium battery shipments.
• Rechargeable Segment Decline: Rechargeable battery revenues plummeted 94% to $49,000 due to delays in bringing high-volume production equipment online.
• Insurance Gains: Gains from fire insurance proceeds decreased by 52% to $1.29 million compared to $2.70 million in the prior year, as claims related to the 1996 UK facility fire were settled.
• Cost Structure: Cost of products sold as a percentage of revenue increased from 89% to 90%, largely due to higher manufacturing costs in the UK subsidiary where production volumes have not yet fully recovered to pre-fire levels.
• Net Loss: Net loss increased slightly by 1% to $7.09 million, despite higher revenues, due to reduced insurance gains and continued high R&D and operating expenses.

Outlook, Risks, and Management Commentary

• Commercialization Strategy: Management is focusing on the commercialization of advanced rechargeable polymer batteries for portable computers and cellular telephones. A joint venture, Ultralife Taiwan, Inc. (UTI), was established to produce these batteries, with production planned for calendar year 2000.
• Government Contracts: The Company was awarded a $15.3 million cost-sharing project by the U.S. Department of Commerce's Advanced Technology Program (ATP) to develop ultra-high energy polymer batteries. Additionally, a $1.7 million sole-source contract was awarded by the U.S. Army for primary batteries.
• Liquidity: The Company holds $23.6 million in cash and securities. Management believes current cash positions are sufficient to satisfy estimated requirements for at least 12 months. The Company is exploring working capital lines of credit of approximately $15 million but has no commitments yet.
• Legal Risks: The Company is defending against a class-action lawsuit regarding a 1998 stock offering (damages unquantified) and a $25 million claim alleging tortious interference with a business opportunity. Management believes these claims are without merit.
• Environmental Contingency: An environmental assessment of the Newark, NY facility revealed contaminated soil. Estimated remediation costs are $230,000, with a third party agreeing to reimburse 50% of costs.
• Customer Concentration: One customer accounted for approximately 20% of total revenues in fiscal 1999. The loss of this customer would have a material adverse effect.

Investor Verification Checklist

• Rechargeable Battery Timeline: Verify the status of high-volume production equipment and the timeline for commercial shipments of polymer batteries.
• UK Facility Recovery: Confirm if production volumes and overhead absorption at the UK subsidiary have stabilized post-fire.
• Legal Proceedings: Monitor the status of the class-action securities lawsuit and the $25 million tortious interference claim.
• Customer Concentration: Assess the stability of the relationship with the single customer representing 20% of revenue.
• Environmental Costs: Track the final cost of soil remediation at the Newark facility and the reimbursement status from the third party.
• Government Funding: Verify the disbursement schedule and milestones for the $15.3 million ATP contract and the $1.7 million Army contract.