ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended December 31, 1997 (Fiscal Year 1998).
Business Overview: The company manufactures and sells primary and rechargeable batteries and technology contracts. Key products include 9-volt batteries for smoke detectors and BA-5372 batteries for the US Army. The company is currently expanding facilities for high-volume production of rechargeable batteries.

Key Financial Metrics

Liquidity: As of December 31, 1997, total liquid assets (cash, cash equivalents, and available-for-sale securities) totaled approximately $15.9 million. The company maintains a limited line of credit of $370,000 for its UK subsidiary but has no long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by approximately 12% ($961,000) year-over-year. This was driven by a 21% increase in sales of 9-volt and BA-5372 primary batteries and a 140% increase in technology contract revenues (attributed to an agreement with Mitsubishi).
• Margin Improvement: Gross margin improved significantly from 5.2% to 14.0% due to higher production volumes of 9-volt batteries and manufacturing efficiencies. Cost of products sold as a percentage of revenue decreased from 95% to 86%.
• Operating Expenses: Operating expenses decreased slightly ($85,400) despite a significant increase in Research & Development (R&D) spending ($1.28 million increase). R&D increased to accelerate the commercialization of advanced rechargeable batteries. Selling, General, and Administrative (SG&A) expenses decreased due to cost control efforts.
• Insurance Proceeds: Operating expenses were reduced by $1,195,427 due to insurance proceeds received for leasehold improvements written off following a fire at the UK subsidiary in December 1996.
• Interest Income: Interest income decreased by $373,700 as the company utilized cash and investments to fund operations and capital equipment additions.

Guidance, Outlook, Risks, and Contingencies

• Capital Expenditures: The company spent $5.7 million on property and equipment year-to-date. An additional $2.9 million is expected to be required in the third quarter of fiscal 1998 to complete a fully automated production line for rechargeable batteries.
• Outlook: Management believes the current financial position is adequate to support near-term requirements. However, continued sales growth and expansion may necessitate exploring normal working capital lines of credit.
• Contingency (China Battery): A significant contingency exists regarding a manufacturing facility in China. The Chinese partner, Changzhou Ultra Power Battery Co., Ltd., owes approximately $400,000 (balance of a $6.0 million contract) and has demanded reimbursement of losses. The company wrote down the balance and investment in fiscal 1997 but notes that a successful claim by the partner could adversely affect financial condition.
• UK Subsidiary: Operations at the Abingdon, England facility were suspended due to a fire in December 1996, impacting sales of high-rate batteries. Production has resumed, but the fire continues to influence comparative results.

Investor Verification Checklist

• Capital Burn Rate: Verify the sufficiency of the $15.9 million in liquid assets to cover the projected $2.9 million capital expenditure and ongoing operating losses.
• China Contingency: Assess the legal status of the dispute with Changzhou Ultra Power Battery Co., Ltd. and the potential financial impact of their claim for reimbursement.
• R&D Commercialization: Monitor the timeline and success of the advanced rechargeable battery commercialization efforts, which are driving increased R&D costs.
• UK Recovery: Confirm the full operational recovery and sales normalization of the UK subsidiary following the 1996 fire.
• Debt Financing: Watch for announcements regarding new working capital lines of credit as the company scales production.