ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2002
Business Overview: Ultralife develops, manufactures, and markets lithium primary (non-rechargeable) and rechargeable batteries for industrial, military, and consumer applications. The company operates four segments: Primary Batteries, Rechargeable Batteries, Technology Contracts, and Corporate.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 35% to $32.5 million, driven primarily by a 42% increase in Primary Battery sales ($31.3 million) due to higher military and 9-volt smoke detector demand.
• Impairment Charge: The company recorded a non-cash impairment charge of $14.3 million related to long-lived assets in the Rechargeable Batteries segment. This reflected a strategic shift away from high-volume polymer production due to market slowdowns.
• Segment Performance:
  • Primary Batteries: Generated a segment contribution of $3.3 million.
  • Rechargeable Batteries: Reported a segment loss of $20.6 million, largely due to the impairment charge.
  • Technology Contracts: Revenues declined to $0.7 million as non-renewable government contracts concluded.
• Cost Reductions: The company reduced its workforce by over 20% and implemented cost-saving initiatives, resulting in quarterly savings of over $2 million from the previous expense run rate.

Guidance, Outlook, and Risks

• Outlook: Management expects revenue growth in fiscal 2003 comparable to the 35% growth achieved in 2002. The company projects that quarterly revenues of approximately $9.0 million to $9.5 million will achieve operating cash breakeven, while $10.5 million should allow for profitability.
• Liquidity Concerns: Management expressed serious concern regarding the company's cash and credit situation. Future viability depends on revenue growth and favorable product mix. The company may need to seek additional debt, equity, or asset sales if cash flows are insufficient.
• Debt Covenants: The company's credit facility expires in June 2003. There is uncertainty regarding the ability to meet net worth covenants or refinance the debt. The facility was amended in February 2002 to reduce the minimum net worth covenant to approximately $19.2 million.
• Key Risks:
  • Customer Concentration: Three customers (Kidde Safety, U.S. Army/CECOM, and UNICOR) accounted for 29% of total revenues in 2002.
  • Military Dependence: Significant growth projections depend on winning U.S. Army "Next Gen II" procurement contracts, which face scheduling delays.
  • Going Concern: The auditor's report includes an emphasis of matter regarding the company's recurring losses and ability to continue as a going concern.
  • Legal/Environmental: Pending settlement of a shareholder class action ($175,000 reserve) and potential environmental remediation costs at the Newark facility (estimated $230,000 total, 50% reimbursable).

Investor Verification Checklist

• Cash Runway: Verify current cash balances and burn rate to assess the timeline before additional financing is required.
• Debt Refinancing: Confirm the status of negotiations to extend or refinance the credit facility expiring in June 2003.
• Military Contract Awards: Monitor the status of the U.S. Army "Next Gen II" solicitations, as these are critical to the 2003 revenue outlook.
• Rechargeable Strategy: Assess the progress of the new three-pronged strategy (in-house high-value, Taiwan affiliate sourcing, and third-party assembly) to replace the impaired high-volume line.
• Customer Concentration: Evaluate the stability of relationships with Kidde Safety, UNICOR, and the U.S. Army, which represent nearly 30% of revenue.