ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc. (ULTRALIFE CORP)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 1998
Business Overview: The Company develops, manufactures, and markets primary and rechargeable lithium batteries. Key products include 9-volt and 3-volt lithium-manganese dioxide primary batteries for consumer and industrial markets, high-rate lithium batteries for military/industrial use, and advanced lithium-ion solid-polymer rechargeable batteries for portable electronics. Operations are conducted in Newark, New York, and Abingdon, England.

Key Financial Metrics (Fiscal Year Ended June 30, 1998)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.8% to $16.39 million from $15.94 million in 1997. This was driven by a 98% increase in technology contract revenues ($2.33 million vs. $1.18 million), partially offset by a 4.8% decline in battery sales ($14.06 million vs. $14.77 million).
• Profitability: Net loss improved slightly to $7.02 million from $7.25 million in 1997. Gross profit increased significantly to $1.87 million from $0.82 million, aided by insurance proceeds offsetting costs.
• Operating Expenses: R&D expenses surged 95% to $6.65 million due to efforts to improve advanced rechargeable battery production. SG&A expenses rose 11% to $5.79 million.
• Insurance Impact: The Company recorded a $2.70 million gain on fires (insurance proceeds) in 1998, compared to a $0.06 million gain in 1997. This relates to the December 1996 fire at the UK facility.
• Liquidity: Cash and securities increased to $35.7 million, bolstered by a secondary public offering in May 1998 that raised net proceeds of $28.9 million.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects operating expenses to increase as production of advanced rechargeable batteries expands. The Company anticipates filling approximately 70% of its 1 million unit backlog of 9-volt batteries by the end of the first quarter of fiscal 1999.
• Unusual Items:
  • Fire Recovery: Significant insurance proceeds were received for the December 1996 arson fire at the UK facility, offsetting operating losses and costs of sales.
  • Legal Settlement: Settled a patent infringement suit with Eveready in May 1998 for $350,000, acquiring a technology license.
  • China Program Write-off: In 1997, the Company wrote off $805,000 related to a China development program; no such charge occurred in 1998.
• Risks and Contingencies:
  • Customer Concentration: One customer (Fyrnetics, Inc.) accounted for 12% of total revenues in 1998. Loss of this customer would have a material adverse effect.
  • Legal Proceedings: A class-action lawsuit was filed in August 1998 regarding the May 1998 stock offering. The Company believes the claim is without merit but cannot predict the outcome.
  • Environmental: Contaminated soil was discovered at the Newark facility. Estimated remediation costs are $230,000, with a third party agreeing to reimburse 50%.
  • Supply Chain: Reliance on limited sources for lithium foil and other materials poses a risk of production interruption.

Investor Verification Checklist

• Backlog Fulfillment: Verify the Company's ability to ramp up production to clear the 1 million unit 9-volt battery backlog without further yield issues.
• Rechargeable Battery Commercialization: Assess progress in commercializing the lithium-ion solid-polymer technology and securing OEM contracts beyond the current Mitsubishi agreement.
• Legal Exposure: Monitor the status of the August 1998 class-action lawsuit and the potential for claims from the China Battery partner.
• Customer Dependency: Evaluate the stability of the relationship with Fyrnetics, Inc., given its 12% revenue contribution.
• Environmental Costs: Confirm the final cost of soil remediation at the Newark facility and the enforceability of the third-party reimbursement agreement.