ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2001
Business Overview: The Company develops, manufactures, and markets primary lithium and polymer rechargeable batteries for consumer, industrial, and military applications. Operations are reported in four segments: Primary Batteries, Rechargeable Batteries, Technology Contracts, and Corporate.

Key Financial Metrics

Segment Performance (Fiscal 2001):

• Primary Batteries: Revenue $22.1 million; Contribution $0.4 million.
• Rechargeable Batteries: Revenue $0.4 million; Contribution loss $(7.6) million.
• Technology Contracts: Revenue $1.7 million; Contribution $0.2 million.
• Corporate: Revenue $0; Contribution loss $(8.0) million.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by $351,000 (1.4%) to $24.2 million. While Primary Battery sales increased by $265,000 due to new cylindrical products and higher 9-volt demand, this was offset by a $961,000 decline in Technology Contract revenues as non-renewable government contracts wound down.
• Widening Losses: Net loss increased by $7.0 million (69%) to $17.3 million. This was driven by a shift in costs from R&D to Cost of Goods Sold (COGS) following the commercial launch of polymer rechargeable batteries, resulting in a negative gross margin for the first time.
• COGS Increase: Cost of products sold rose $2.2 million to $27.7 million (115% of revenue), primarily due to $2.0 million in additional depreciation for new rechargeable battery equipment and initial production expenditures.
• Equity Loss: Equity loss in the Taiwan affiliate (Ultralife Taiwan, Inc.) increased to $2.3 million, partly due to the Company's share of stock-based compensation expenses incurred by the joint venture.
• Liquidity Reduction: Cash and securities dropped significantly from $18.6 million to $3.6 million due to operating losses and capital expenditures of $4.4 million.

Guidance, Outlook, and Risks

Management Outlook:

• Revenue Growth: Management projects a revenue increase of more than 40% for Fiscal 2002, driven by growth in 9-volt, cylindrical, high-rate, and rechargeable segments.
• Profitability Goals: The Company aims to reach operating cash breakeven by December 2001 and achieve positive net income by June 2002.
• Key Drivers: Success depends on securing "design wins" for rechargeable batteries with OEMs, increasing primary segment revenues, and continuing new product development for military and medical markets.

Risks and Contingencies:

• Market Acceptance: Advanced rechargeable batteries have not yet achieved wide market acceptance; delays could allow competitors to gain ground.
• Customer Concentration: One customer (Fyrnetics, Inc.) accounted for 13% of total revenues in 2001. Loss of this customer would have a material adverse effect.
• Environmental Liability: Contaminated soil was discovered at the Newark, NY facility. Estimated remediation costs are $0.23 million, with a third party agreeing to reimburse 50%. Final costs are uncertain.
• Legal Proceedings: A shareholder class action lawsuit regarding a 1998 stock offering is in settlement negotiations; the outcome and damages are currently unquantifiable.
• Supply Chain: Certain raw materials, including lithium foil, are sourced from a limited number of suppliers.

Investor Verification Checklist

• Cash Runway: Verify if the $3.6 million cash balance is sufficient to meet the December 2001 operating cash breakeven target given the $17.3 million net loss.
• Rechargeable Segment Viability: Assess the timeline for "design wins" with OEMs, as the segment currently contributes a significant loss ($7.6 million) with minimal revenue ($0.4 million).
• Customer Concentration: Monitor the relationship with Fyrnetics, Inc. (13% of revenue) and the impact of state legislation (e.g., Oregon, New York) requiring 10-year batteries in smoke alarms.
• Debt Covenants: Confirm continued compliance with the $35 million adjusted net worth covenant under the $20 million credit facility.
• Environmental Costs: Track the final engineering report regarding the Newark facility soil contamination to determine if costs exceed the $0.23 million estimate.