Ultralife Batteries, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission file number 0-20852
ULTRALIFE BATTERIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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16-1387013 |
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(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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2000 Technology Parkway, Newark, New York 14513
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer o Accelerated Filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock, $.10 par value 15,032,255 shares of common stock outstanding, net
of 727,250 treasury shares, as of September 30, 2006.
ULTRALIFE BATTERIES, INC.
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(unaudited)
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,345 |
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$ |
3,214 |
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Trade accounts receivable (less allowance for doubtful accounts
of $363 at September 30, 2006 and $458 at December 31, 2005) |
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18,453 |
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10,965 |
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Inventories |
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22,949 |
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19,446 |
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Due from insurance company |
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482 |
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Deferred tax asset current |
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3,152 |
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2,508 |
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Prepaid expenses and other current assets |
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2,667 |
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2,747 |
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Total current assets |
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48,566 |
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39,362 |
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Property, plant and equipment, net |
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19,663 |
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19,931 |
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Other assets: |
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Goodwill |
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12,513 |
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Intangible assets, net |
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10,585 |
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Security deposits and other |
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243 |
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Deferred tax asset non-current |
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20,905 |
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21,221 |
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44,003 |
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21,464 |
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Total Assets |
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$ |
112,232 |
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$ |
80,757 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Short-term debt and current portion of long-term debt |
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$ |
8,736 |
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$ |
7,715 |
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Accounts payable |
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10,295 |
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5,218 |
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Income taxes payable |
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19 |
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Other current liabilities |
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8,255 |
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5,450 |
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Total current liabilities |
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27,305 |
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18,383 |
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Long-term liabilities: |
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Debt and capital lease obligations |
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20,052 |
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25 |
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Other long-term liabilities |
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156 |
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242 |
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Total long-term liabilities |
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20,208 |
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267 |
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Commitments and contingencies (Note 11) |
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Shareholders equity: |
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Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none outstanding |
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Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued 15,759,505 at September 30, 2006 and 15,471,446 at December 31, 2005 |
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1,576 |
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1,547 |
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Capital in excess of par value |
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134,078 |
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130,530 |
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Accumulated other comprehensive loss |
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(570 |
) |
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(1,054 |
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Accumulated deficit |
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(67,987 |
) |
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(66,538 |
) |
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67,097 |
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64,485 |
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Less Treasury stock, at cost 727,250 shares |
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2,378 |
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2,378 |
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Total shareholders equity |
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64,719 |
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62,107 |
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Total Liabilities and Shareholders Equity |
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$ |
112,232 |
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$ |
80,757 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
3
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(unaudited)
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Three-Month Periods Ended |
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Nine-Month Periods Ended |
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September 30, |
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October 1, |
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September 30, |
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October 1, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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$ |
23,725 |
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$ |
15,692 |
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$ |
63,437 |
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$ |
52,658 |
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Cost of products sold |
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19,744 |
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13,332 |
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51,109 |
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44,070 |
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Gross margin |
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3,981 |
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2,360 |
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12,328 |
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8,588 |
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Operating expenses: |
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Research and development |
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1,239 |
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969 |
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3,083 |
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2,874 |
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Selling, general, and administrative |
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4,367 |
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2,902 |
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10,181 |
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8,745 |
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Amortization of intangible assets |
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512 |
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512 |
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Total operating expenses |
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6,118 |
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3,871 |
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13,776 |
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11,619 |
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Operating income/(loss) |
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(2,137 |
) |
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(1,511 |
) |
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(1,448 |
) |
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(3,031 |
) |
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Other income (expense): |
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Interest income |
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19 |
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44 |
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104 |
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162 |
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Interest expense |
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(451 |
) |
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(220 |
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(863 |
) |
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(593 |
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Gain on insurance settlement |
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191 |
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Miscellaneous |
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39 |
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(9 |
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186 |
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(203 |
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Income/(loss) before income taxes |
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(2,530 |
) |
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(1,696 |
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(1,830 |
) |
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(3,665 |
) |
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Income tax provision/(benefit)-current |
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(4 |
) |
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5 |
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20 |
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3 |
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Income tax provision/(benefit)-deferred |
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(828 |
) |
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(385 |
) |
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(401 |
) |
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637 |
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Total income taxes |
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(832 |
) |
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(380 |
) |
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(381 |
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640 |
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Net Income/(Loss) |
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$ |
(1,698 |
) |
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$ |
(1,316 |
) |
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$ |
(1,449 |
) |
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$ |
(4,305 |
) |
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Earnings/(Loss) per share basic |
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$ |
(0.11 |
) |
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$ |
(0.09 |
) |
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$ |
(0.10 |
) |
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$ |
(0.30 |
) |
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Earnings/(Loss) per share diluted |
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$ |
(0.11 |
) |
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$ |
(0.09 |
) |
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$ |
(0.10 |
) |
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$ |
(0.30 |
) |
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Weighted average shares outstanding basic |
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14,987 |
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14,642 |
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14,867 |
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14,497 |
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Weighted average shares outstanding diluted |
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14,987 |
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14,642 |
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14,867 |
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14,497 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
ULTRALIFE BATTERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
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Nine-Month Periods Ended |
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September 30, |
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October 1, |
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2006 |
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2005 |
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OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
(1,449 |
) |
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$ |
(4,305 |
) |
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |
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Depreciation |
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2,747 |
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2,375 |
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Amortization of intangible assets |
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512 |
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(Gain)/loss on asset disposal |
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124 |
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(6 |
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Gain on insurance settlement |
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(191 |
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Foreign exchange (gain)/loss |
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(186 |
) |
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214 |
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Non-cash stock-based compensation |
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975 |
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20 |
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Changes in deferred taxes |
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(401 |
) |
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|
680 |
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Changes in operating assets and liabilities, net of effects from
the purchase of ABLE and McDowell: |
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Accounts receivable |
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(3,147 |
) |
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(2,427 |
) |
Inventories |
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2,743 |
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(6,045 |
) |
Prepaid expenses and other current assets |
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304 |
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|
(395 |
) |
Insurance receivable relating to fires |
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602 |
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|
678 |
|
Income taxes payable |
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19 |
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Accounts payable and other liabilities |
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1,355 |
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|
3,076 |
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Net cash provided by (used in) operating activities |
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4,007 |
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(6,135 |
) |
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INVESTING ACTIVITIES |
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Purchase of property and equipment |
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(1,030 |
) |
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(3,211 |
) |
Proceeds from asset disposal |
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23 |
|
Sales of securities |
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|
1,000 |
|
Payment for purchase of ABLE, net of cash acquired |
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(1,949 |
) |
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Payment for purchase of McDowell |
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(5,059 |
) |
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Net cash used in investing activities |
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(8,038 |
) |
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|
(2,188 |
) |
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FINANCING ACTIVITIES |
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Net change in revolving credit facilities |
|
|
2,475 |
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|
68 |
|
Proceeds from issuance of common stock |
|
|
1,076 |
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|
|
2,310 |
|
Principal payments on long-term debt and capital lease obligations |
|
|
(1,510 |
) |
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|
(1,500 |
) |
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Net cash (used in) provided by in financing activities |
|
|
2,041 |
|
|
|
878 |
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Effect of exchange rate changes on cash |
|
|
121 |
|
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|
(78 |
) |
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Increase (decrease) in cash and cash equivalents |
|
|
(1,869 |
) |
|
|
(7,523 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
3,214 |
|
|
|
10,529 |
|
|
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|
Cash and cash equivalents at end of period |
|
$ |
1,345 |
|
|
$ |
3,006 |
|
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Taxes paid |
|
$ |
5 |
|
|
$ |
|
|
|
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Interest paid |
|
$ |
626 |
|
|
$ |
388 |
|
|
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Noncash investing and financing activities: |
|
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|
Issuance of common stock and stock warrants for purchase of ABLE |
|
$ |
1,526 |
|
|
$ |
|
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Issuance of convertible note payable for purchase of McDowell |
|
$ |
20,000 |
|
|
$ |
|
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|
Accrual of purchase price adjustment for purchase of McDowell |
|
$ |
3,000 |
|
|
$ |
|
|
|
|
|
|
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|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
5
ULTRALIFE BATTERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands Except Share and Per Share Amounts)
(unaudited)
The accompanying unaudited condensed consolidated financial statements of Ultralife
Batteries, Inc. and its subsidiaries (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a
fair presentation of the condensed consolidated financial statements have been included.
Results for interim periods should not be considered indicative of results to be expected for a
full year. Reference should be made to the consolidated financial statements contained in the
Companys Form 10-K for the twelve-month period ended December 31, 2005.
The year-end condensed balance sheet data was derived from audited financial statements,
but does not include all disclosures required by accounting principles generally accepted in the
United States of America.
The Companys monthly closing schedule is a weekly-based cycle as opposed to a calendar
month-based cycle. While the actual dates for the quarter-ends will change slightly each year,
the Company believes that there are not any material differences when making quarterly
comparisons.
The Company has accounted for the following acquisitions in accordance with the purchase
method of accounting provisions of Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, whereby the purchase price paid to effect an acquisition is allocated
to the acquired tangible and intangible assets and liabilities at fair value.
ABLE New Energy Co., Ltd.
On May 19, 2006, the Company acquired ABLE New Energy Co., Ltd. (ABLE), an established,
profitable manufacturer of lithium batteries located in Shenzhen, China. With more than 50
products, including a wide range of lithium-thionyl chloride and lithium-manganese dioxide
batteries and coin cells, this acquisition broadens the Companys expanding portfolio of
high-energy power sources, enabling it to further penetrate large and emerging markets such as
remote meter reading, RFID (Radio Frequency Identification) and other markets that will benefit
from these chemistries. The Company expects this acquisition will strengthen Ultralifes global
presence, facilitate its entry into the rapidly growing Chinese market, and improve the
Companys access to lower material and manufacturing costs.
The initial cash purchase price for ABLE was $1,896 (net of $104 in cash acquired), with an
additional $500 cash payment contingent on the achievement of certain performance milestones,
payable in separate $250 increments, when cumulative ABLE revenues from the date of acquisition
attain $5,000 and $10,000, respectively. The contingent payments will be recorded as an
addition to the purchase price when the performance milestones are attained. The equity portion
of the purchase price consisted of 96,247 shares of Ultralife common stock valued at $1,000,
based on the closing
6
price of the stock on the closing date of the acquisition, and 100,000 stock warrants
valued at $526, for a total equity consideration of $1,526. The fair value of the stock warrants
was estimated using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
Risk-free interest rate |
|
|
4.31 |
% |
Volatility factor |
|
|
61.25 |
% |
Dividends |
|
|
0.00 |
% |
Weighted average expected life (years) |
|
|
2.50 |
|
The Company has incurred $53 in acquisition related costs, which are included in the total
potential cost of the investment of $3,975. During the third quarter of 2006, $3 of additional
acquisition costs were incurred, which resulted in an increase of goodwill of $3.
The results of operations of ABLE and the estimated fair value of assets acquired and
liabilities assumed are included in the Companys consolidated financial statements beginning on
the acquisition date. Pro forma information has not been presented, as it would not be
materially different from amounts reported. The estimated excess of the purchase price over the
net tangible and intangible assets acquired of $2,345 (including $104 in cash) was recorded as
goodwill in the amount of $1,234. The Company is in the process of completing third party
valuations of certain tangible and intangible assets acquired with the new business. The final
allocation of the excess of the purchase price over the net assets acquired is subject to
revision based upon the Company's final review of the third partys valuation.
The following table represents the revised, preliminary allocation of the purchase price to
assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
104 |
|
Trade accounts receivables, net |
|
|
318 |
|
Inventories |
|
|
789 |
|
Prepaid expenses and other current expenses |
|
|
73 |
|
|
|
|
|
Total current assets |
|
|
1,284 |
|
Property, plant and equipment, net |
|
|
746 |
|
Goodwill |
|
|
1,234 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
90 |
|
Patents and technology |
|
|
390 |
|
Customer relationships |
|
|
830 |
|
Distributor relationships |
|
|
300 |
|
Non-compete agreements |
|
|
40 |
|
|
|
|
|
Total assets acquired |
|
|
4,914 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
|
|
1,085 |
|
Other current liabilities |
|
|
110 |
|
|
|
|
|
Total current liabilities |
|
|
1,195 |
|
Long-term liabilities: |
|
|
|
|
Other long-term liabilities |
|
|
65 |
|
Deferred tax liability |
|
|
75 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,335 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
3,579 |
|
|
|
|
|
7
As a result of revisions to the preliminary third party asset valuation during the third
quarter of 2006, values assigned to the intangible assets have been revised. The adjustments to
the values for intangible assets from those reported for the previous quarter were as follows:
trademarks decreased by $100, patents and technology decreased by $390, customer relationships
decreased by $90, distributor relationships decreased by $40, and non-compete agreements
decreased by $20. In addition, the Company completed its preliminary evaluation of the tax
basis in the net assets in connection with the acquisition during the third quarter of 2006,
which resulted in the Company recording a deferred tax liability of $75. These adjustments
resulted in an increase to goodwill of $715.
The trademark intangible asset has an indefinite life and will not be amortized. The
intangible assets related to patents and technology, customer relationships, and distributor
relationships will be amortized so that the economic benefits of the intangible assets are being
utilized over their weighted-average estimated useful life of eleven years. The non-compete
agreements intangible asset will be amortized on a straight-line basis over its estimated useful
life of three years. The acquired goodwill will be assigned to the non-rechargeable batteries
segment and is not expected to be deductible for income tax purposes.
McDowell Research, Ltd.
On July 3, 2006, the Company finalized the acquisition of substantially all of the assets
of McDowell Research, Ltd. (McDowell), a manufacturer of military communications accessories
located in Waco, Texas.
Under the terms of the acquisition agreement, the purchase price of approximately $25,000
consisted of $5,000 in cash and a $20,000 non-transferable convertible note to be held by the
sellers. The purchase price is subject to a post-closing adjustment based on a final valuation
of trade accounts receivable, inventory and trade accounts payable that were acquired or assumed
on the date of the closing, using a base value of $3,000. The Company currently estimates the
net value of these assets to be approximately $6,000, resulting in a revised purchase price of
approximately $28,000. The final purchase price is subject to the finalization of negotiations
pertaining to the valuation of trade accounts receivable, inventory and trade accounts payable.
Substantial negotiations involving this valuation remain ongoing. The initial $5,000 cash
portion was financed through a combination of cash on hand and borrowing through the revolver
component of the Companys credit facility with its primary lending banks, which was recently
amended to accommodate the acquisition of McDowell. The $20,000 convertible note carries a
five-year term and is convertible at $15 per share into 1.33 million shares of the Companys
common stock, with a forced conversion feature, at the Companys option, at any time after the
30-day average closing price of the Companys common stock exceeds $17.50 per share. The
Company has incurred $59 in acquisition related costs, which are included in the approximate
total cost of the investment of $28,059.
The estimated excess of the purchase price over the net tangible and intangible assets
acquired of $16,780 was recorded as goodwill in the amount of $11,279. Ultralife is in the
process of completing third party valuations of certain tangible and intangible assets acquired
with the new business. The final allocation of the excess of the purchase price over the net
assets acquired is subject to revision based upon the third partys valuation. The acquired
goodwill will be assigned to the Communications Accessories segment and is expected to be fully
deductible for income tax purposes.
8
The following table represents the preliminary allocation of the purchase price to assets
acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Trade accounts receivables, net |
|
$ |
3,849 |
|
Inventories |
|
|
5,155 |
|
Prepaid inventory and other current expenses |
|
|
10 |
|
|
|
|
|
Total current assets |
|
|
9,014 |
|
Property, plant and equipment, net |
|
|
397 |
|
Goodwill |
|
|
11,279 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
3,610 |
|
Patents and technology |
|
|
4,384 |
|
Customer relationships |
|
|
1,280 |
|
Non-compete agreements |
|
|
173 |
|
|
|
|
|
Total assets acquired |
|
|
30,137 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
|
|
46 |
|
Accounts payable |
|
|
1,783 |
|
Other current liabilities |
|
|
212 |
|
|
|
|
|
Total current liabilities |
|
|
2,041 |
|
Long-term liabilities: |
|
|
|
|
Debt |
|
|
37 |
|
|
|
|
|
Total liabilities assumed |
|
|
2,078 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
28,059 |
|
|
|
|
|
The patents and technology and customer relationships intangible assets will be amortized on
a schedule in which the economic benefits of the intangible assets are being utilized over their
weighted-average estimated useful life of thirteen years. The non-compete agreements intangible
asset will be amortized on a straight-line basis over its estimated useful life of two years.
The following table summarizes the unaudited pro forma financial information for the
periods indicated as if the McDowell acquisition had occurred at the beginning of the period
being presented. The pro forma information contains the actual combined results of the Company
and McDowell, with the results prior to the acquisition date including pro forma impact of: the
amortization of the acquired intangible assets, the interest expense incurred relating to the
convertible note payable issued in connection with the acquisition purchase price, to eliminate
the sales and purchases between the Company and McDowell, the impact on interest income and
interest expense in connection with funding the cash portion of the acquisition purchase price,
and the impact on income taxes. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisitions occurred as of the beginning
of each of the periods presented or that may be obtained in the future.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
Nine-Month Periods Ended |
(in thousands, except per |
|
September 30, |
|
October 1, |
|
September 30, |
|
October 1, |
share data) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
$ |
23,725 |
|
|
$ |
20,836 |
|
|
$ |
75,582 |
|
|
$ |
67,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss) |
|
$ |
(1,698 |
) |
|
$ |
(1,358 |
) |
|
$ |
(177 |
) |
|
$ |
(4,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(Loss) per
share Basic |
|
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.32 |
) |
Earnings/(Loss) per
share Diluted |
|
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.32 |
) |
In connection with the McDowell acquisition, the Company entered into an operating lease
agreement for real property in Waco, Texas with a partnership that is 50% owned by Tom Hauke,
who joined the Company as an executive officer following the completion of the McDowell
acquisition. The lease term is for one year, with annual rent of $208, payable in monthly
installments.
3. |
|
GOODWILL AND OTHER INTANGIBLE ASSETS |
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, the Company does not amortize goodwill and intangible assets with
indefinite lives, but instead measures these assets for impairment at least annually, or when
events indicate that impairment exists. The Company amortizes intangible assets that have
definite lives over their estimated useful lives.
Based on the current preliminary valuations for amortizable intangible assets, acquired in
the ABLE and McDowell acquisitions during 2006, the Company projects its amortization expense
will be approximately $954, $1,675, $1,272, $1,004, and $696 for the fiscal years ending
December 31, 2006 through 2010, respectively.
4. |
|
EARNINGS (LOSS) PER SHARE |
Basic earnings per share are calculated by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per share are
calculated by dividing net income by potentially dilutive common shares, which include stock
options and warrants.
Net loss per share is calculated by dividing net loss by the weighted average number of
common shares outstanding during the period. The impact of conversion of dilutive securities,
such as stock options and warrants, is not considered where a net loss is reported as the
inclusion of such securities would be anti-dilutive. As a result, basic loss per share is the
same as diluted loss per share.
10
The computation of basic and diluted (loss) earnings per share is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
October 1, |
|
|
September 30, |
|
|
October 1, |
|
(In thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
Net Income/(Loss) (a) |
|
$ |
(1,698 |
) |
|
$ |
(1,316 |
) |
|
$ |
(1,449 |
) |
|
$ |
(4,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding Basic (b) |
|
|
14,987 |
|
|
|
14,642 |
|
|
|
14,867 |
|
|
|
14,497 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options / Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding Diluted (c) |
|
|
14,987 |
|
|
|
14,642 |
|
|
|
14,867 |
|
|
|
14,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Basic (a/b) |
|
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.30 |
) |
EPS Diluted (a/c) |
|
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.30 |
) |
The Company has options and warrants outstanding to purchase 1,858,771 and 1,308,771 shares
of common stock at September 30, 2006 and October 1, 2005, respectively, which were not included
in the computation of diluted EPS because these securities were anti-dilutive. The Company also
had 1,333,333 and -0- shares of common stock at September 30, 2006 and October 1, 2005,
respectively, reserved under a convertible note payable, which were also not included in the
computation of diluted EPS because these securities were anti-dilutive. The securities in both
2006 and 2005 were anti-dilutive due to the Companys net loss positions.
5. |
|
STOCK-BASED COMPENSATION |
The Company has various stock-based employee compensation plans. Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R) requiring that compensation
cost relating to share-based payment transactions be recognized in the financial statements.
The cost is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employees requisite service period (generally the vesting
period of the equity award). The Company adopted FAS 123R using the modified prospective
method and, accordingly, did not restate prior periods presented in this Form 10-Q to reflect
the fair value method of recognizing compensation cost. Under the modified prospective
approach, FAS 123R applies to new awards and to awards that were outstanding on January 1, 2006
that are subsequently modified, repurchased or cancelled.
The shareholders of the Company have approved various equity-based plans that permit the
grant of options, restricted stock and other equity-based awards. In addition, the shareholders
of the Company have approved the grant of options outside of these plans.
The shareholders of the Company approved a 1992 stock option plan for grants to key
employees, directors and consultants of the Company. The shareholders approved reservation of
1,150,000 shares of Common Stock for grant under the plan. During 1997, the Board of Directors
and shareholders approved an amendment to the plan increasing the number of shares of Common
Stock reserved by 500,000 to 1,650,000. Options granted under the 1992 plan are either
Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs). Key employees are
eligible to receive ISOs and NQSOs; however, directors and consultants are eligible to receive
only NQSOs. All ISOs vest at twenty percent per year for five years and expire on the sixth
anniversary of the grant date. The
11
NQSOs vest immediately and expire on the sixth anniversary of the grant
date. On October 13, 2002, this plan expired and as a result, there are no more shares available for grant
under this plan. As of September 30, 2006, there were 76,500 stock options outstanding under this plan.
Effective July 12, 1999, the Company granted the current CEO options to purchase 500,000 shares of
Common Stock at $5.19 per share outside of any of the stock option plans. Of these, 50,000 options were
exercisable on the grant date, and the remaining options became exercisable in annual increments of 90,000
over a five-year period commencing July 12, 2000 and expired on July 12, 2005. As of September 30,
2006, there were no options outstanding under this grant and the options have been fully exercised.
Effective December 2000, the Company established the 2000 stock option plan which is substantially the
same as the 1992 stock option plan. The shareholders approved reservation of 500,000 shares of Common Stock
for grant under the plan. In December 2002, the shareholders approved an amendment to the plan increasing
the number of shares of Common Stock reserved by 500,000, to a total of 1,000,000.
In June 2004, shareholders adopted the Ultralife Batteries, Inc. 2004 Long-Term Incentive Plan (LTIP)
pursuant to which the Company was authorized to issue up to 750,000 shares of Common Stock and grant stock
options, restricted stock awards, stock appreciation rights and other stock-based awards. In June 2006,
shareholders approved an amendment to the LTIP, increasing the number of shares of Common Stock by an
additional 750,000, bringing the total shares authorized under the LTIP to 1,500,000.
Options granted under the amended 2000 stock option plan and the LTIP are either ISOs or NQSOs. Key
employees are eligible to receive ISOs and NQSOs; however, directors and consultants are eligible to receive
only NQSOs. Most ISOs vest over a three or five year period and expire on the sixth or seventh anniversary
of the grant date. All NQSOs issued to non-employee directors vest immediately and expire on either the
sixth or seventh anniversary of the grant date. Some NQSOs issued to non-employees vest immediately and
expire within three years; others have the same vesting characteristics as options given to employees. As of
September 30, 2006, there were 1,634,271 stock options outstanding under the amended 2000 stock option plan
and the LTIP.
On December 19, 2005, the Company granted the current CEO an option to purchase shares of Common Stock
at $12.96 per share outside of any of the Companys equity-based compensation plans, subject to shareholder
approval. Shareholder approval was obtained on June 8, 2006. The option to purchase 48,000 shares of
Common Stock becomes exercisable in annual increments of 16,000 shares over a three-year period commencing
December 9, 2006. The option expires on June 8, 2013.
As a result of adopting FAS 123R on January 1, 2006, the Company recorded compensation cost related to
stock options of $332 and $898 for the three- and nine-month periods ended September 30, 2006. As of
September 30, 2006, there was $2,175 of total unrecognized compensation costs related to outstanding stock
options, which is expected to be recognized over a weighted average period of 1.66 years.
Prior to January 1, 2006, the Company applied Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations which required compensation costs to
be recognized based on the difference, if any, between the quoted market price of the stock on the grant
date and the exercise price. As all options granted to employees under such plans had an exercise price at
least equal to the market value of the underlying common stock on the date of grant, and given the fixed
nature of the equity instruments, no stock-based employee compensation cost relating to stock options was
reflected in net income (loss).
12
The effect on net loss and loss per share, if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of SFAS No.
123, to stock-based employee compensation for the three- and nine-month periods ended October
1, 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
Period Ended |
|
(In thousands, except per share data) |
|
October 1, 2005 |
|
|
October 1, 2005 |
|
|
|
|
|
|
Net loss, as reported |
|
$ |
(1,316 |
) |
|
$ |
(4,305 |
) |
|
|
|
|
|
|
|
|
|
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |
|
|
(427 |
) |
|
|
(1,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(1,743 |
) |
|
$ |
(5,786 |
) |
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
Basic pro forma |
|
$ |
(0.12 |
) |
|
$ |
(0.40 |
) |
Diluted as reported |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
Diluted pro forma |
|
$ |
(0.12 |
) |
|
$ |
(0.40 |
) |
The Company uses the Black-Scholes option-pricing model to estimate fair value of
stock-based awards. The following weighted average assumptions were used to value options
granted during the nine-month period ended September 30, 2006:
|
|
|
|
|
Risk-free interest rate
|
|
|
4.91 |
% |
Volatility factor
|
|
|
60.20 |
% |
Dividends
|
|
|
0.00 |
% |
Weighted average expected life (years)
|
|
|
3.64 |
|
The Company calculates expected volatility for stock options by taking an average of
historical volatility over the past five years and a computation of implied volatility. Prior
to 2006, the computation of expected volatility was based solely on historical volatility. The
computation of expected term was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards and vesting schedules.
The interest rate for periods within the contractual life of the award is based on the U.S.
Treasury yield in effect at the time of grant.
13
Stock option activity for the first nine months of 2006 is summarized as follows (dollars
in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number |
|
Exercise Price |
|
Contractual |
|
Intrinsic |
|
|
of Shares |
|
Per Share |
|
Term |
|
Value |
Shares under option at January 1, 2006 |
|
|
1,430,271 |
|
|
$ |
10.94 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
455,300 |
|
|
$ |
10.53 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(84,600 |
) |
|
$ |
6.76 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(9,200 |
) |
|
$ |
4.51 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(33,000 |
) |
|
$ |
15.33 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option at September 30, 2006 |
|
|
1,758,771 |
|
|
$ |
10.99 |
|
|
4.72 years |
|
$ |
2,997 |
|
|
|
|
Vested and expected to vest as of
September 30, 2006 |
|
|
1,676,930 |
|
|
$ |
11.01 |
|
|
4.66 years |
|
$ |
2,924 |
|
|
|
|
Options exercisable at September 30, 2006 |
|
|
1,020,409 |
|
|
$ |
11.81 |
|
|
4.08 years |
|
$ |
1,910 |
|
The weighted average fair value of options granted during the nine months ended September
30, 2006 was $5.02. The total intrinsic value of options (which is the amount by which the
stock price exceeded the exercise price of the options on the date of exercise) exercised during
the nine-month period ended September 30, 2006 was $375.
Prior to adopting FAS 123R, all tax benefits resulting from the exercise of stock options
were presented as operating cash flows in the Condensed Statement of Cash Flows. FAS 123R
requires cash flows from excess tax benefits to be classified as a part of cash flows from
financing activities. Excess tax benefits are realized tax benefits from tax deductions for
exercised options in excess of the deferred tax asset attributable to stock compensation costs
for such options. The Company did not record any excess tax benefits in the first nine months
of 2006. Cash received from option exercises under the Companys stock-based compensation plans
for the nine-month periods ended September 30, 2006 and October 1, 2005 was $572 and $2,310,
respectively.
Restricted stock grants were awarded during the three-month period ended September 30, 2006
with the following values:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2006 |
|
Number of shares awarded |
|
|
26,668 |
|
Weighted average fair value per share |
|
$ |
10.30 |
|
|
|
|
|
Aggregate total value |
|
$ |
274,787 |
|
|
|
|
|
14
The activity of restricted stock grants of common stock for the first nine months of
2006 is summarized as follows (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number |
|
Grant Date |
|
|
Of Shares |
|
Fair Value |
Unvested at December 31, 2005 |
|
|
0 |
|
|
$ |
0 |
|
Granted |
|
|
26,668 |
|
|
|
10.30 |
|
Vested |
|
|
(6,667 |
) |
|
|
10.30 |
|
Forfeited |
|
|
0 |
|
|
|
0 |
|
|
|
|
Unvested at September 30, 2006 |
|
|
20,001 |
|
|
$ |
10.30 |
|
As of September 30, 2006, the Company recorded compensation cost related to restricted
stock grants of $77 for both the three- and nine-month periods ended September 30, 2006. As of
September 30, 2006, the Company had $197 of total unrecognized compensation expense related to
restricted stock grants, which is expected to be recognized over the remaining weighted average
period of approximately 0.38 years. The total fair value of these grants which vested during the
nine months ended September 30, 2006 was $65.
6. |
|
COMPREHENSIVE INCOME (LOSS) |
The components of the Companys total comprehensive income (loss) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods |
|
|
Nine-Month Periods |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
October 1, |
|
|
September 30, |
|
|
October 1, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
Net income (loss) |
|
$ |
(1,698 |
) |
|
$ |
(1,316 |
) |
|
$ |
(1,449 |
) |
|
$ |
(4,305 |
) |
Foreign currency translation adjustments |
|
|
117 |
|
|
|
(13 |
) |
|
|
487 |
|
|
|
(478 |
) |
Change in fair value of derivatives,
net of tax |
|
|
(35 |
) |
|
|
44 |
|
|
|
(3 |
) |
|
|
148 |
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(1,616 |
) |
|
$ |
(1,285 |
) |
|
$ |
(965 |
) |
|
$ |
(4,635 |
) |
|
|
|
Inventories are stated at the lower of cost or market with cost determined under the
first-in, first-
out (FIFO) method. The composition of inventories was:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
Raw materials |
|
$ |
12,384 |
|
|
$ |
8,817 |
|
Work in process |
|
|
7,711 |
|
|
|
8,648 |
|
Finished goods |
|
|
3,958 |
|
|
|
2,849 |
|
|
|
|
|
|
|
24,053 |
|
|
|
20,314 |
|
Less: Reserve for obsolescence |
|
|
1,104 |
|
|
|
868 |
|
|
|
|
|
|
$ |
22,949 |
|
|
$ |
19,446 |
|
|
|
|
15
8. |
|
PROPERTY, PLANT AND EQUIPMENT |
Major classes of property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
Land |
|
$ |
123 |
|
|
$ |
123 |
|
Buildings and leasehold improvements |
|
|
4,334 |
|
|
|
4,229 |
|
Machinery and equipment |
|
|
39,944 |
|
|
|
37,876 |
|
Furniture and fixtures |
|
|
969 |
|
|
|
788 |
|
Computer hardware and software |
|
|
2,101 |
|
|
|
2,197 |
|
Construction in progress |
|
|
992 |
|
|
|
1,059 |
|
|
|
|
|
|
|
48,463 |
|
|
|
46,272 |
|
Less: Accumulated depreciation |
|
|
28,800 |
|
|
|
26,341 |
|
|
|
|
|
|
$ |
19,663 |
|
|
$ |
19,931 |
|
|
|
|
On June 30, 2004, the Company closed on a $25,000 credit facility, comprised of a five-year
$10,000 term loan component and a three-year $15,000 revolving credit component. The facility
is collateralized by essentially all of the assets of the Company, including all of the
Companys subsidiaries. The term loan component is paid in equal
monthly installments over five
years. The rate of interest, in general, is based upon either a LIBOR rate or Prime, plus a
Eurodollar spread (dependent upon a debt to earnings ratio within a predetermined grid). This
facility replaced the Companys $15,000 credit facility that expired on the same date.
Availability under the revolving credit component is subject to meeting certain financial
covenants, whereas availability under the previous facility was limited by various asset values.
The lenders of the new credit facility are JP Morgan Chase Bank and Manufacturers and Traders
Trust Company, with JP Morgan Chase Bank acting as the administrative agent. The Company is
required to meet certain financial covenants, including a debt to earnings ratio, an EBIT (as
defined) to interest expense ratio, and a current assets to total liabilities ratio.
On June 30, 2004, the Company drew down the full $10,000 term loan. The proceeds of the
term loan, to be repaid in equal monthly installments of $167 over five years, were used for the
retirement of outstanding debt and capital expenditures. From June 30, 2004 through August 1,
2004, the interest rate associated with the term loan was based on LIBOR plus a 1.25% Eurodollar
spread. On July 1, 2004, the Company entered into an interest rate swap arrangement in the
notional amount of $10,000 to be effective on August 2, 2004, related to the $10,000 term loan,
in order to take advantage of historically low interest rates. The Company received a fixed
rate of interest in exchange for a variable rate. The swap rate received was 3.98% for five
years. The total rate of interest paid by the Company is equal to the swap rate of 3.98% plus
the Eurodollar spread stipulated in the predetermined grid associated with the term loan. From
August 2, 2004 to September 30, 2004, the total rate of interest associated with the outstanding
portion of the $10,000 term loan was 5.23%. On October 1, 2004, this adjusted rate increased to
5.33%, on January 1, 2005 the adjusted rate increased to 5.73%, on April 1, 2005, the adjusted
rate increased to 6.48%, and on October 3, 2005, the adjusted rate increased to 6.98%, the
maximum amount under the current grid structure, and remains at that rate as of September 30,
2006. Derivative instruments are accounted for in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which requires that all derivative instruments
be recognized in the financial statements at fair value. The fair value of this arrangement at
September 30, 2006 resulted in an asset of $86, all of which was reflected as short-term.
Effective July 3, 2006, the banks amended the credit facility to reflect the Companys
acquisitions of ABLE and McDowell. As a result, the banks increased the amount of the revolving
credit
16
component from $15,000 to $20,000. In addition, the financial covenants that the Company
is required to maintain under the facility were revised accordingly.
As of September 30, 2006, the Company had $5,667 outstanding under the term loan component
of its credit facility with its primary lending bank and $3,000 was outstanding under the
revolver component. Effective as of September 30, 2006, the Company received a waiver letter
from the banks concerning the Companys non-compliance with the EBIT (as defined) to interest
covenant of the credit facility, as amended. In addition, the Company
received a waiver for a non-financial covenant related to a Change in
Control provision, as defined in the credit agreement. As a result of the uncertainty of the Companys
ability to comply with the covenants within the next year, the Company continued to
classify all of the debt associated with this credit facility as a current liability on the
Condensed Consolidated Balance Sheet as of September 30, 2006. While the revolver arrangement
now provides for up to $20,000 of borrowing capacity, including outstanding letters of credit,
the actual borrowing availability may be limited at times by the financial covenants. At
September 30, 2006, the Company had $2,200 of outstanding letters of credit related to this
facility, as amended July 3, 2006, leaving $14,800 of potential borrowing capacity available.
As of September 30, 2006, the Companys wholly-owned U.K. subsidiary, Ultralife Batteries
(UK) Ltd., had nothing outstanding under its revolving credit facility with a commercial bank in
the U.K. This credit facility provides the Companys U.K. operation with additional financing
flexibility for its working capital needs. Any borrowings against this credit facility are
collateralized with that companys outstanding accounts receivable balances. There was
approximately $843 in additional borrowing capacity under this credit facility as of September
30, 2006.
The liability method, prescribed by SFAS No. 109, Accounting for Income Taxes, is used in
accounting for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that may be in effect when
the differences are expected to reverse.
For the three-month and nine-month periods ended September 30, 2006, the Company recorded
an income tax benefit of $832 and $381, respectively, related mainly
to the loss reported for
U.S. operations during the periods. The effective tax rates for the total Company were 33% and
21%, respectively. The overall effective rates are the result of the combination of income and
losses in each of the Companys tax jurisdictions, which is particularly influenced by the fact
that the Company has not recognized a deferred tax asset pertaining to cumulative historical
losses for its U.K. subsidiary, as management does not believe it is more likely than not that
they will realize the benefit of these losses. As a result, there is no provision for income
taxes for the U.K. subsidiary reflected in the Condensed Consolidated
Statements of Operations.
At September 30, 2006, the Company has a deferred tax asset of $24,057 reflecting
significant net operating losses related to past years cumulative losses. The Company believes
that it is more likely than not that it will be able to utilize the U.S. net operating loss
carryforwards that have accumulated over time. Managements belief is based on the expectation
that the U.S. Federal and state deferred tax assets will be realized primarily through future
taxable income from operations, and partly from reversing taxable temporary differences. The
Company will continually monitor the assumptions and performance results to assess the
realizability of the tax benefits of the U.S. net operating losses and other deferred tax
assets.
The Company has determined that a change in ownership as defined under Internal Revenue
Code Section 382 occurred during the fourth quarter of 2003 and again during the third quarter
of 2005. As such, the domestic net operating loss carryforward will be subject to an annual
limitation.
17
Management believes such limitation will not impact the Companys ability to realize
the deferred tax asset. In addition, certain of the Companys NOL carryforwards are subject to
U.S. alternative minimum tax such that carryforwards can offset only 90% of alternative minimum
taxable income. This limitation did not have an impact on income taxes determined for 2005 and
2006.
11. |
|
COMMITMENTS AND CONTINGENCIES |
As of September 30, 2006, the Company had open capital commitments to purchase
approximately $538 of production machinery and equipment.
The Company estimates future costs associated with expected product failure rates, material
usage and service costs in the development of its warranty obligations. Warranty reserves are
based on historical experience of warranty claims and generally will be estimated as a
percentage of sales over the warranty period. In the event the actual results of these items
differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes
in the Companys product warranty liability during the first nine months of 2006 were as
follows:
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
464 |
|
Accruals for warranties issued |
|
|
46 |
|
Settlements made |
|
|
(42 |
) |
|
|
|
|
Balance at September 30, 2006 |
|
$ |
468 |
|
|
|
|
|
A retail end-user of a product manufactured by one of the Companys customers (the
Customer), made a claim against the Customer wherein it asserted that the Customers product,
which is powered by an Ultralife battery, does not operate according to the Customers product
specification. No claim has been filed against Ultralife. However, in the interest of
fostering good customer relations, in September 2002, Ultralife agreed to lend technical support
to the Customer in defense of its claim. Additionally, Ultralife assured the Customer that it
would honor its warranty by replacing any batteries that might be determined to be defective.
Subsequently, the Company learned that the end-user and the Customer settled the matter. In
February 2005, Ultralife and the Customer entered into a settlement agreement. Under the terms
of the agreement, Ultralife has agreed to provide replacement batteries for product determined
to be defective, to warrant each replacement battery under the Companys standard warranty terms
and conditions, and to provide the Customer product at a discounted price for a period of time
in recognition of the Customers administrative costs in responding to the claim of the retail
end-user. In consideration of the above, the Customer released Ultralife from any and all
liability with respect to this matter. Consequently, the Company does not anticipate any
further expenses with regard to this matter other than its obligations under the settlement
agreement. The Companys warranty reserve as of September 30, 2006 includes an accrual related
to anticipated replacements under this agreement. Further, the Company does not expect the
ongoing terms of the settlement agreement to have a material impact on the Companys operations
or financial condition.
The Company is subject to legal proceedings and claims that arise in the normal course of
business. The Company believes that the final disposition of such matters will not have a
material adverse effect on the financial position, results of operations or cash flows of the
Company.
In conjunction with the Companys purchase/lease of its Newark, New York facility in 1998,
the Company entered into a payment-in-lieu of tax agreement, which provides the Company with
real
estate tax concessions upon meeting certain conditions. In connection with this agreement,
a consulting firm performed a Phase I and II Environmental Site Assessment, which revealed the
existence of contaminated soil and ground water around one of the buildings. The Company
retained
18
an engineering firm, which estimated that the cost of remediation should be in the
range of $230. Through September 30, 2006, total costs incurred have amounted to approximately
$140, none of which has been capitalized. In February 1998, the Company entered into an
agreement with a third party which provides that the Company and this third party will retain an
environmental consulting firm to conduct a supplemental Phase II investigation to verify the
existence of the contaminants and further delineate the nature of the environmental concern.
The third party agreed to reimburse the Company for fifty percent (50%) of the cost of
correcting the environmental concern on the Newark property. The Company has fully reserved for
its portion of the estimated liability. Test sampling was completed in the spring of 2001, and
the engineering report was submitted to the New York State Department of Environmental
Conservation (NYSDEC) for review. NYSDEC reviewed the report and, in January 2002, recommended
additional testing. The Company responded by submitting a work plan to NYSDEC, which was
approved in April 2002. The Company sought proposals from engineering firms to complete the
remedial work contained in the work plan. A firm was selected to undertake the remediation and
in December 2003 the remediation was completed, and was overseen by the NYSDEC. The report
detailing the remediation project, which included the test results, was forwarded to NYSDEC and
to the New York State Department of Health (NYSDOH). The NYSDEC, with input from the NYSDOH,
requested that the Company perform additional sampling. A work plan for this portion of the
project was written and delivered to the NYSDEC and approved. In November 2005, additional
soil, sediment and surface water samples were taken from the area outlined in the work plan, as
well as groundwater samples from the monitoring wells. The Company received the laboratory
analysis and met with the NYSDEC in March 2006 to discuss the results. On June 30, 2006, the
Final Investigation Report was delivered to the NYSDEC by the Companys outside environmental
consulting firm. The Company is now waiting for comments from the NYSDEC. The environmental
consulting firm previously estimated that the final cost to the Company to remediate the
requested area would be approximately $28, based on the submitted work plan. Additional testing
and analysis that has been completed will increase the estimated remediation costs modestly. At
September 30, 2006 and December 31, 2005, the Company had $45 and $38, respectively, reserved
for this matter.
The Company has had certain exigent, non-bid contracts with the government, which have
been subject to an audit and final price adjustment, which have resulted in decreased margins
compared with the original terms of the contracts. As of September 30, 2006, there were no
outstanding exigent contracts with the government. As part of its due diligence, the government
has conducted post-audits of the completed exigent contracts to ensure that information used in
supporting the pricing of exigent contracts did not differ materially from actual results. In
September 2005, the Defense Contracting Audit Agency (DCAA) presented its findings related to
the audits of three of the exigent contracts, suggesting a potential pricing adjustment of
approximately $1,400 related to reductions in the cost of materials that occurred prior to the
final negotiation of these contracts. The Company has reviewed these audit reports, has
submitted its response to these audits and believes the proposed audit adjustments, taken as a
whole, can be offset with the consideration of other compensating cost increases that occurred
prior to the final negotiation of the contracts. While the Company believes that potential
exposure exists relating to any final negotiation of these proposed adjustments, it cannot
reasonably estimate what, if any, adjustment may result when finalized. Such adjustments could
reduce margins and have an adverse effect on the Companys business, financial condition and
results of operations.
The Company has been able to obtain certain grants/loans from government agencies to assist
with various funding needs. In November 2001, the Company received approval for a $300
grant/loan from New York State. The grant/loan was to fund capital expansion plans that the
Company expected would lead to job creation. In this case, the Company was to be reimbursed
after the full completion of the particular project. This grant/loan also required the Company
to meet and
maintain certain levels of employment. During 2002, since the Company did not meet the
initial employment threshold, it appeared unlikely at that time that the Company would be able
to gain access to these funds. However, during 2006, the Companys employment levels have
increased to a
19
level that exceeds the minimum threshold, and the Company now expects to receive
these funds during the fourth quarter of 2006 and early 2007.
From August 2002 through August 2006, the Company participated in a self-insured trust to
manage its workers compensation activity for its employees in New York State. All members of
this trust have, by design, joint and several liability during the time they participate in the
trust. In the third quarter of 2006, the Company confirmed that the trust was in an underfunded
position (i.e. the assets of the trust were insufficient to cover the actuarially projected
liabilities associated with the members in the trust). In the third quarter of 2006, the
Company recorded a liability and an associated expense of $350 as an estimate of its potential
future cost related to the trusts underfunded status. It is likely, however, that the final
amount may be more or less, depending upon the ultimate settlement of claims that remain in the
trust for the period of time the Company was a member. It is likely to take several years
before resolution of outstanding workers compensation claims are finally settled. The Company
will continue to review this liability periodically and make adjustments accordingly as new
information is collected. In August 2006, the Company left the self-insured trust and has
obtained alternative coverage for its workers compensation program through a third-party
insurer.
12. |
|
BUSINESS SEGMENT INFORMATION |
The Company reports its results in four operating segments: Non-rechargeable Batteries,
Rechargeable Batteries, Communications Accessories, and Technology Contracts. The
Non-rechargeable Batteries segment includes 9-volt, cylindrical and various other
non-rechargeable specialty batteries. The Rechargeable Batteries segment includes the Companys
lithium polymer and lithium ion rechargeable batteries and battery chargers and accessories. The
Communications Accessories segment includes power supplies and cables, RF Amplifiers, and
various communication kits and equipment. The Technology Contracts segment includes revenues
and related costs associated with various development contracts. The Company looks at its
segment performance at the gross margin level, and does not allocate research and development or
selling, general and administrative costs against the segments. All other items that do not
specifically relate to these four segments and are not considered in the performance of the
segments are considered to be Corporate charges.
Three-Month Period Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Technology |
|
|
|
|
|
|
|
|
|
Batteries |
|
|
Batteries |
|
|
Accessories |
|
|
Contracts |
|
|
Corporate |
|
|
Total |
|
|
|
|
Revenues |
|
$ |
16,998 |
|
|
$ |
3,463 |
|
|
$ |
3,046 |
|
|
$ |
218 |
|
|
$ |
|
|
|
$ |
23,725 |
|
Segment contribution |
|
|
2,400 |
|
|
|
397 |
|
|
|
1,104 |
|
|
|
80 |
|
|
|
(6,118 |
) |
|
|
(2,137 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(432 |
) |
|
|
(432 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
39 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828 |
|
|
|
828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,698 |
) |
Total assets |
|
$ |
47,748 |
|
|
$ |
7,602 |
|
|
$ |
27,526 |
|
|
$ |
120 |
|
|
$ |
29,236 |
|
|
$ |
112,232 |
|
20
Three-Month
Period Ended October 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Technology |
|
|
|
|
|
|
|
|
|
Batteries |
|
|
Batteries |
|
|
Accessories |
|
|
Contracts |
|
|
Corporate |
|
|
Total |
|
|
|
|
Revenues |
|
$ |
12,805 |
|
|
$ |
2,286 |
|
|
$ |
|
|
|
$ |
601 |
|
|
$ |
|
|
|
$ |
15,692 |
|
Segment contribution |
|
|
1,811 |
|
|
|
456 |
|
|
|
|
|
|
|
93 |
|
|
|
(3,871 |
) |
|
|
(1,511 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
(176 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,316 |
) |
Total assets |
|
$ |
45,581 |
|
|
$ |
4,255 |
|
|
$ |
|
|
|
$ |
8 |
|
|
$ |
30,918 |
|
|
$ |
80,762 |
|
Nine-Month Period Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Technology |
|
|
|
|
|
|
|
|
|
Batteries |
|
|
Batteries |
|
|
Accessories |
|
|
Contracts |
|
|
Corporate |
|
|
Total |
|
|
|
|
Revenues |
|
$ |
51,101 |
|
|
$ |
8,676 |
|
|
$ |
3,046 |
|
|
$ |
614 |
|
|
$ |
|
|
|
$ |
63,437 |
|
Segment contribution |
|
|
9,280 |
|
|
|
1,882 |
|
|
|
1,104 |
|
|
|
62 |
|
|
|
(13,776 |
) |
|
|
(1,448 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(759 |
) |
|
|
(759 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377 |
|
|
|
377 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(20 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,449 |
) |
Total assets |
|
$ |
47,748 |
|
|
$ |
7,602 |
|
|
$ |
27,526 |
|
|
$ |
120 |
|
|
$ |
29,236 |
|
|
$ |
112,232 |
|
Nine-Month Period Ended October 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Technology |
|
|
|
|
|
|
|
|
|
Batteries |
|
|
Batteries |
|
|
Accessories |
|
|
Contracts |
|
|
Corporate |
|
|
Total |
|
|
|
|
Revenues |
|
$ |
43,305 |
|
|
$ |
7,676 |
|
|
$ |
|
|
|
$ |
1,677 |
|
|
$ |
|
|
|
$ |
52,658 |
|
Segment contribution |
|
|
7,460 |
|
|
|
946 |
|
|
|
|
|
|
|
182 |
|
|
|
(11,619 |
) |
|
|
(3,031 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431 |
) |
|
|
(431 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
|
(203 |
) |
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(637 |
) |
|
|
(637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,305 |
) |
Total assets |
|
$ |
45,581 |
|
|
$ |
4,255 |
|
|
$ |
|
|
|
$ |
8 |
|
|
$ |
30,918 |
|
|
$ |
80,762 |
|
13. |
|
FIRES AT MANUFACTURING FACILITIES |
In May 2004 and June 2004, the Company experienced two fires that damaged certain inventory
and property at its facilities. The May 2004 fire occurred at the Companys U.S. facility and
was caused by cells that shorted out when a forklift truck accidentally tipped the cells over in
an oven in an enclosed area. Certain inventory, equipment and a small portion of the building
where the fire was contained were damaged. The June 2004 fire happened at the Companys U.K.
location and mainly caused damage to various inventory and the U.K. companys leased facility.
The fire was contained mainly in a bunkered, non-manufacturing area designed to store various
material, and there was additional smoke and water damage to the facility and its contents. It
is unknown how the U.K. fire was started. The
fires caused relatively minor disruptions to the production operations, and had no impact
on the Companys ability to meet customer demand during that quarter.
21
The total amount of the two losses and related expenses associated with Company-owned
assets was approximately $2,000. Of this total, approximately $450 was related to machinery and
equipment, approximately $750 was related to inventory and approximately $800 was required to
repair and clean up the facilities. The insurance claim related to the fire at the Companys
U.S. facility was finalized in March 2005. In the first quarter of 2006, the Company had
received notice of a final claim settlement for the U.K. facility having received approximately
$1,900 in cash from the insurance companies to compensate it for its losses. As a result of the
final settlement for the fire at the U.K. facility, the Company reflected a gain of $148 in the
first quarter of 2006 related to equipment and inventory damage. In April 2006 the Company
received payment in final settlement. In June 2006 the Company recorded a gain of $43 for the
favorable settlement of fire damage that pertained to its leased facilities in the U.K.
14. |
|
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS |
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments (SFAS
No. 155). SFAS No. 155 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155
also resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 eliminates
the exemption from applying SFAS No. 133 to interests in securitized financial assets so that
similar instruments are accounted for in the same manner regardless of the form of the
instruments. SFAS No. 155 allows a preparer to elect fair value measurement at acquisition, at
issuance, or when a previously recognized financial instrument is subject to a re-measurement
(new basis) event, on an instrument-by-instrument basis. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of
SFAS No. 155 may also be applied upon adoption of SFAS No. 155 for hybrid financial instruments
that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of this
Statement. Earlier adoption is permitted as of the beginning of an entitys fiscal year,
provided the entity has not yet issued financial statements, including financial statements for
any interim period for that fiscal year. Provisions of SFAS No. 155 may be applied to
instruments that an entity holds at the date of adoption on an instrument-by-instrument basis.
The Company is currently assessing any potential impact of adopting this pronouncement.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 156). SFAS No. 156 requires all
separately recognized servicing assets and servicing liabilities be initially measured at fair
value, if practicable, and permits for subsequent measurement using either fair value
measurement with changes in fair value reflected in earnings or the amortization and impairment
requirements of Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for entities that manage
the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for
hedge accounting treatment and eliminates the characterization of declines in fair value as
impairments or direct write-downs. SFAS No. 156 is effective for an entitys first fiscal year
beginning after September 15, 2006. The Company is assessing any potential impact of adopting
this pronouncement.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS No. 109 (FIN 48). This statement clarifies the
accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance
with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken
22
or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The provisions of FIN 48 are effective for fiscal years ending
after December 15, 2006. The Company does not expect the adoption of this pronouncement to have
a significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No.
157), which establishes a framework for measuring fair value and requires expanded disclosure
about the information used to measure fair value. The statement applies whenever other
statements require, or permit, assets or liabilities to be measured at fair value. The statement
does not expand the use of fair value in any new circumstances and is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years, with early
adoption encouraged. The Company is currently assessing any potential impact of adopting this
pronouncement.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires companies to
recognize in their statement of financial position an asset for a plans over funded status or a
liability for a plans under funded status and to measure a plans assets and its obligations
that determine its funded status as of the end of the Companys fiscal year. Additionally, SFAS
No. 158 requires companies to recognize changes in the funded status of a defined benefit
postretirement plan in the year that the changes occur and those changes will be reported in
comprehensive income. The provisions of SFAS No. 158 are effective for fiscal years ending after
December 15, 2006. The Company does not expect the adoption of this pronouncement to have a
significant impact on its financial statements.
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial
Statements (SAB No. 108). SAB No. 108 requires the use of two alternative approaches in
quantitatively evaluating materiality of misstatements. If the misstatement as quantified under
either approach is material to the current year financial statements, the misstatement must be
corrected. If the effect of correcting the prior year misstatements, if any, in the current year
income statement is material, the prior year financial statements should be corrected. SAB No.
108 is effective for fiscal years ending after November 15, 2006. The Company is currently
assessing any potential impact of applying this interpretation.
23
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This report contains certain forward-looking statements and
information that are based on the beliefs of management as well as assumptions made by and
information currently available to management. The statements contained in this report relating to
matters that are not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, future demand for the Companys products and
services, addressing the process of U.S. military procurement, the successful commercialization of
the Companys advanced rechargeable batteries, general economic conditions, government and
environmental regulation, finalization of non-bid government contracts, competition and customer
strategies, technological innovations in the non-rechargeable and rechargeable battery industries,
changes in the Companys business strategy or development plans, capital deployment, business
disruptions, including those caused by fires, raw materials supplies, environmental regulations,
and other risks and uncertainties, certain of which are beyond the Companys control. Should one
or more of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may differ materially from those described herein as anticipated,
believed, estimated or expected.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the accompanying consolidated financial statements and notes
thereto contained herein and the Companys consolidated financial statements and notes thereto
contained in the Companys Form 10-K for the year ended December 31, 2005.
The financial information in this Managements Discussion and Analysis of Financial Condition
and Results of Operations is presented in thousands of dollars.
General
Ultralife Batteries, Inc. is a global provider of power solutions for diverse applications.
The Company develops, manufactures and markets a wide range of non-rechargeable and rechargeable
batteries, charging systems and accessories for use in military, industrial and consumer portable
electronic products. Through its range of standard products and engineered solutions, Ultralife is
at the forefront of providing the next generation of power systems. The Company believes that its
technologies allow the Company to offer batteries that are flexibly configured, lightweight and
generally achieve longer operating time than many competing batteries currently available.
The Company reports its results in four operating segments: Non-rechargeable Batteries,
Rechargeable Batteries, Communications Accessories, and Technology Contracts. The Non-rechargeable
Batteries segment includes 9-volt, cylindrical and various other non-rechargeable specialty
batteries. The Rechargeable Batteries segment includes the Companys lithium polymer and lithium
ion rechargeable batteries and battery chargers and accessories. The Communications Accessories
segment includes power supplies and cables, RF Amplifiers, and various communication kits and
equipment. The Technology Contracts segment includes revenues and related costs associated with
various development contracts. The Company looks at its segment performance at the gross margin
level, and does not allocate research and development or selling, general and administrative costs
against the segments. All other items that do not specifically relate to these four segments and
are not considered in the performance of the segments are considered to be Corporate charges.
On May 19, 2006, the Company acquired ABLE New Energy Co., Ltd. (ABLE), an established,
profitable manufacturer of lithium batteries located in Shenzhen, China. The initial cash purchase
price for ABLE was $1,896 (net of $104 in cash acquired), with an additional $500 cash payment
contingent on the achievement of certain performance milestones, payable in separate $250
increments, when cumulative ABLE revenues from the date of acquisition attain $5,000 and $10,000,
respectively. The equity portion of the purchase price consisted of 96,247 shares of Ultralife
common stock, valued at $1,000, and 100,000
24
stock warrants valued at $526, for a total equity consideration of $1,526. The Company has
incurred $53 in acquisition related costs, which are included in the total potential cost of the
investment of $3,975. The results of operations of ABLE and the estimated fair value of assets
acquired and liabilities assumed are included in the Companys consolidated financial statements
beginning on the acquisition date. The estimated excess of the purchase price over the net
tangible and intangible assets acquired of $2,345 (including $104 in cash) was recorded as goodwill
in the amount of $1,234. The Company is in the process of completing third party valuations of
certain tangible and intangible assets acquired with the new business. The final allocation of the
excess of the purchase price over the net assets acquired is subject to revision based upon the
Companys final review of the third partys valuation. (See Note 2 for additional information.)
On July 3, 2006, the Company finalized the acquisition of substantially all of the assets of
McDowell Research, Ltd. (McDowell), a manufacturer of military communications accessories located
in Waco, Texas. Under the terms of the acquisition agreement, the purchase price of approximately $25,000
consisted of $5,000 in cash and a $20,000 non-transferable convertible note to be held by the
sellers. The purchase price is subject to a post-closing adjustment based on a final valuation of
trade accounts receivable, inventory and trade accounts payable that were acquired or assumed on
the date of the closing, using a base value of $3,000. The Company presently estimates the net
value of these assets to be approximately $6,000, resulting in a revised purchase price of
approximately $28,000. The final purchase price is subject to the finalization of negotiations
pertaining to the valuation of trade accounts receivable, inventory and trade accounts payable.
Substantial negotiations involving this valuation remain ongoing. The initial $5,000 cash portion
was financed through a combination of cash on hand and borrowing through the revolver component of
the Companys credit facility with its primary lending banks, which was recently amended to
accommodate the acquisition of McDowell. The $20,000 convertible note carries a five-year term and
is convertible at $15 per share into 1.33 million shares of the Companys common stock, with a
forced conversion feature, at the Companys option, at any time after the 30-day average closing
price of the Companys common stock exceeds $17.50 per share. The Company has incurred $59 in
acquisition related costs, which are included in the approximate total cost of the investment of
$28,059. (See Note 2 for additional information.)
Results of Operations (dollars in thousands, except per share amounts)
Three-month periods ended September 30, 2006 and October 1, 2005
Impact of Adoption of FAS 123R, and Amortization Expense Associated with Acquisitions.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), requiring that compensation
cost relating to share-based payment transactions be recognized in the financial statements. The
Company adopted the modified prospective method of adoption, resulting in no restatement of the
Companys prior period results. The total amount of non-cash, stock-based compensation expense for
the third quarter of 2006 was $409. Since the Company had not adopted this pronouncement in 2005,
there was no expense for share-based compensation in the Companys 2005 reported results. (See
Note 5 for additional information.)
As a result of the acquisitions of ABLE and McDowell, the Company has begun to record a
non-cash expense related to the identifiable intangible assets of these companies, including
technology, customer and distributor lists, and non-compete agreements, among others. As of
September 30, 2006, the Company had, through preliminary independent appraisals, identified a total
of $7,397 in amortizable intangible assets, which will be amortized over their remaining economic
lives. In its internal evaluation of the Companys performance, management excludes this non-cash
expense. In the third quarter of 2006, the Company recorded amortization expense of $512.
25
In order for investors to be able to accurately assess the change in the Companys operating
performance from year to year, a reconciliation of the Companys reported results with a non-GAAP
measurement is being provided. The table below presents a reconciliation of the reported results
with a non-GAAP measurement by adjusting out the stock-based compensation expense and intangible
asset amortization expense included in the third quarter 2006 results with the comparable period
results in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Three-Month |
|
|
|
Period Ended |
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
September 30, |
|
|
|
|
|
|
Amortization |
|
|
September 30, |
|
|
October 1, |
|
|
|
2006 (as |
|
|
FAS 123R |
|
|
of Intangible |
|
|
2006 (as |
|
|
2005 |
|
|
|
reported) |
|
|
Impact |
|
|
Assets |
|
|
adjusted) |
|
|
(as reported) |
|
Revenues |
|
$ |
23,725 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23,725 |
|
|
$ |
15,692 |
|
Cost of Products Sold |
|
|
19,744 |
|
|
|
(54 |
) |
|
|
|
|
|
|
19,690 |
|
|
|
13,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
3,981 |
|
|
|
54 |
|
|
|
|
|
|
|
4,035 |
|
|
|
2,360 |
|
Operating Expenses |
|
|
6,118 |
|
|
|
(355 |
) |
|
|
(512 |
) |
|
|
5,251 |
|
|
|
3,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
(2,137 |
) |
|
$ |
409 |
|
|
$ |
512 |
|
|
$ |
(1,216 |
) |
|
$ |
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information provided in the table above provides the added information of showing the
effect of the adoption of FAS 123R on gross margin and operating expenses as they affect the
Companys business model. The Company uses this measure for internal purposes to assess its
performance and believes that this provides added information to investors who seek to utilize this
information, which although not a GAAP measurement, is utilized in several recognized models of the
value of a firm.
Revenues. Consolidated revenues for the three-month period ended September 30, 2006 amounted
to $23,725, an increase of $8,033, or 51%, from the $15,692 reported in the same quarter in the
prior year. Non-rechargeable battery sales increased $4,193, or 33%, from $12,805 last year to
$16,998 this year. An increase in 9-volt shipments, higher sales of batteries to commercial
customers mainly in the automotive telematics market, and the incremental impact of sales reported
by ABLE following the acquisition of that company in May 2006 were the key factors generating the
rise in revenues. Rechargeable revenues increased $1,177, or 51%, from $2,286 to $3,463, as a
result of higher sales of battery chargers related to the addition of McDowell. Communication
Accessories, a new segment added this quarter related to the acquisition of McDowell, amounted to
$3,046. Technology Contract revenues were $218 in the third quarter of 2006, a decrease of $383
from the $601 reported in the third quarter of 2005 mainly attributable to the completion of the
Companys development contract with General Dynamics.
Cost of Products Sold. Cost of products sold totaled $19,744 for the quarter ended September
30, 2006, an increase of $6,412, or 48%, from the $13,332 reported for the same three-month period
a year ago. The gross margin on consolidated revenues for the quarter was $3,981, an increase of
$1,621 over the $2,360 reported in the same quarter in the prior year due mainly to higher sales
volumes, including the impact from the ABLE and McDowell acquisitions. As a percentage of
revenues, gross margins amounted to 17% in the third quarter of 2006, an increase from 15% reported
in the third quarter of 2005. Non-rechargeable battery margins were $2,400, or 14% of revenues,
for the third quarter of 2006 compared with $1,811, or 14% of revenues, in the same period in 2005.
Improvements in gross margins were hampered by the recognition of a $350 reserve related to a
workers compensation trust in which the Company previously participated (of which $199 impacted
gross margins and $151 impacted operating expenses), an approximately $124 write-down of certain
fixed assets deemed to be no longer productive, a change in product mix, higher scrap costs in the
Companys Newark operations and higher energy costs. In the Companys Rechargeable operations,
gross margin amounted to $397 in the third quarter of 2006, or 11% of revenues, compared to $456,
or 20% of revenues, in 2005, a decrease of $59 related to sales of lower-margin products. Gross
margins in the Communication Accessories segment totaled $1,104 or 36% of revenues, related to the
acquisition of McDowell. Gross margins in the
26
Technology Contract segment amounted to $80, or 37% of revenues in the third quarter of 2006,
compared to $93, or 15%, in 2005, a decline of $13 mainly related to lower revenues.
Operating Expenses. Operating expenses for the three-month period ended September 30, 2006
totaled $6,118 a $2,247 increase from the prior years amount of $3,871. Excluding the impact of
expensing stock options of $355 ($323 in selling, general, and administrative expenses and $32 in
research and development charges) related to the adoption of FAS 123R in 2006, operating expenses
increased $1,892. Amortization expense associated with the recognition of intangible assets
related to the acquisitions of ABLE and McDowell caused $512 in added expenses, and ongoing
operating expenses from the acquired companies resulted in approximately $1,400 of the overall
increase in the quarter. Research and development charges increased $270 to $1,239 in 2006 due
mainly to the addition of McDowell new product development costs. Selling, general, and
administrative expenses increased $1,465 to $4,367. Excluding the impact of expensing stock
options, selling, general, and administrative expenses increased $1,142, primarily related to
additional costs associated with ABLE and McDowell, in addition to integration costs and a charge
related to workers compensation expense. Overall, operating expenses as a percentage of sales
increased to 26% in the third quarter 2006 from 25% reported in the prior year.
Other Income (Expense). Interest expense, net, for the third quarter of 2006 was $432, an
increase of $256 from the comparable period in 2005, mainly related to interest on the $20,000
convertible note issued to finance the McDowell acquisition. Miscellaneous income/expense amounted
to income of $39 for the third quarter of 2006 compared with an expense of $9 for the same period
in 2005. This change resulted mainly from changes in foreign currency exchange rates, related
primarily to the translation impact of the Companys U.S. dollar-denominated loan with its UK
subsidiary.
Income Taxes. The Company reflected a tax benefit of $832 for the third quarter of 2006
compared with a tax benefit of $380 in the third quarter of 2005. The effective tax rate for the
total Company in the third quarter of 2006 was 33%. Since the Company has significant net
operating loss carryforwards, the cash outlay for income taxes is expected to be nominal for quite
some time into the future.
Net (Loss)/Income. Net loss and loss per share were $1,698 and $0.11, respectively, for the
three months ended September 30, 2006, compared to net loss and loss per share of $1,316 and $0.09,
respectively, for the same quarter last year, primarily as a result of the reasons described above.
Average common shares outstanding used to compute basic earnings per share increased from
14,642,000 in the third quarter of 2005 to 14,987,000 in 2006 mainly due to stock option and
warrant exercises.
Nine-month periods ended September 30, 2006 and October 1, 2005
Impact of Adoption of FAS 123R, and Amortization Expense Associated with Acquisitions.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), requiring that compensation
cost relating to share-based payment transactions be recognized in the financial statements. The
Company adopted the modified prospective method of adoption, resulting in no restatement of the
Companys prior period results. The total amount of non-cash, stock-based compensation expense for
the nine-month period ended September 30, 2006 was $975. Since the Company had not adopted this
pronouncement in 2005, there was no expense for share-based compensation in the Companys 2005
reported results. (See Note 5 for additional information.)
As a result of the acquisitions of ABLE and McDowell, the Company has begun to record a
non-cash expense related to the identifiable intangible assets of these companies, including
technology, customer and distributor lists, and non-compete agreements, among others. As of
September 30, 2006, the Company had, through preliminary independent appraisals, identified a total
of $7,397 in amortizable intangible assets, which will be amortized over their remaining economic
lives. In its internal evaluation
27
of the Companys performance, management excludes this non-cash expense. In the first nine months
of 2006, the Company recorded amortization expense of $512.
In order for investors to be able to accurately assess the change in the Companys operating
performance from year to year, a reconciliation of the Companys reported results with a non-GAAP
measurement is being provided. The table below presents a reconciliation of the reported results
with a non-GAAP measurement by adjusting out the stock-based compensation expense and intangible
asset amortization expense included in the first nine months of 2006 results and comparing it to
the comparable period results in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
September 30, |
|
|
|
|
|
|
Amortization |
|
|
September 30, |
|
|
September |
|
|
|
2006 (as |
|
|
FAS 123R | |
|
of Intangible |
|
|
2006 (as |
|
|
30, 2005 |
|
|
|
reported) |
|
|
Impact |
|
|
Assets |
|
|
adjusted) |
|
|
(as reported) |
|
Revenues |
|
$ |
63,437 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
63,437 |
|
|
$ |
52,658 |
|
Cost of Products Sold |
|
|
51,109 |
|
|
|
(122 |
) |
|
|
|
|
|
|
50,987 |
|
|
|
44,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
12,328 |
|
|
|
122 |
|
|
|
|
|
|
|
12,450 |
|
|
|
8,588 |
|
Operating Expenses |
|
|
13,776 |
|
|
|
(853 |
) |
|
|
(512 |
) |
|
|
12,411 |
|
|
|
11,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income/(Loss) |
|
$ |
(1,448 |
) |
|
$ |
975 |
|
|
$ |
512 |
|
|
$ |
39 |
|
|
$ |
(3,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information provided in the table above provides the added information of showing the
effect of the adoption of FAS 123R on gross margin and operating expenses as they affect the
Companys business model. The Company uses this measure for internal purposes to assess its
performance and believes that this provides added information to investors who seek to utilize this
information, which although not a GAAP measurement, is utilized in several recognized models of the
value of a firm.
Revenues. Consolidated revenues for the nine-month period ended September 30, 2006 amounted
to $63,437, an increase of $10,779, or 20%, from the $52,658 reported in the same nine months in
2005. Non-rechargeable battery sales increased $7,796, or 18%, from $43,305 last year to $51,101
this year. Higher sales of batteries to commercial customers mainly in the automotive telematics
market, the incremental impact of sales reported by ABLE following the acquisition of that company
in May 2006, and an increase in 9-volt shipments were the key drivers in the rise in revenues.
Rechargeable revenues increased $1,000, or 13%, from $7,676 to $8,676, primarily due to higher
charger sales from the addition of McDowell. Communication Accessories, a new segment added this
quarter related to the acquisition of McDowell, amounted to $3,046. Technology Contract revenues
were $614 in the first nine months of 2006, a decrease of $1,063 from the $1,677 reported in the
first nine months of 2005 due mainly to the completion of the Companys development contract with
General Dynamics.
Cost of Products Sold. Cost of products sold totaled $51,109 for the nine-month period ended
September 30, 2006, an increase of $7,039, or 16%, over the $44,070 reported the same nine-month
period a year ago. The gross margin on consolidated revenues for the first nine-months of 2006 was
$12,328, an increase of $3,740 over the $8,588 reported in the same period in the prior year due
mainly to higher sales volumes, including the impact from the newly acquired companies. As a
percentage of revenues, gross margin amounted to 19% for the first nine months of 2006, an
improvement from 16% reported in the first nine months of 2005. Non-rechargeable battery margins
were $9,280, or 18% of revenues, for the nine-month period ended September 30, 2006 compared with
$7,460, or 17% of revenues, in the same period in 2005 primarily due to higher sales volumes.
Gross margins were partially hampered by the recognition of a $350 third quarter reserve related to
a workers compensation trust in which the Company previously participated (of which $199 impacted
gross margins and $151 impacted operating expenses), higher scrap costs in the Companys Newark
operations during the third quarter, an approximately $124 write-down of certain fixed assets
deemed to be no longer productive, and higher energy costs. In the Companys Rechargeable
operations, gross margin amounted to $1,882 in the first
28
nine months of 2006, or 22% of revenues, compared to $946, or 12% of revenues, in 2005, an
improvement of $936 mainly related to sales of higher margin batteries and chargers. Gross margins
in the Communication Accessories segment totaled $1,104 or 36% of revenues, related to the
acquisition of McDowell. Gross margins in the Technology Contract segment resulted in a gross
margin of $62 or 10% of revenue in the first nine-month period in 2006, compared to a profit of
$182, or 11% of revenues, in 2005, a decline of $120 due to the decline in revenues.
Operating Expenses. Operating expenses for the nine-month period ended September 30, 2006
totaled $13,776, a $2,157 increase from the prior years amount of $11,619. Excluding the impact
of expensing stock options of $853 ($804 in selling, general, and administrative expenses and $49
in research and development charges) related to the adoption of FAS 123R in 2006, operating
expenses increased $1,304. Amortization expense associated with the recognition of intangible
assets related to the acquisitions of ABLE and McDowell caused $512 in added expenses, and ongoing
operating expenses from the newly acquired companies added approximately $1,400 of operating
expenses in the third quarter. Research and development charges increased $209 to $3,083 in 2006
due to added development costs associated with the addition of McDowells operating costs.
Selling, general, and administrative expenses increased $1,436 to $10,181. Excluding the impact of
expensing stock options, selling, general, and administrative expenses increased $632 primarily
related to additional operating costs associated with the newly acquired entities, in addition to
integration costs, offset in part by lower consulting fees and professional services. Overall,
operating expenses as a percentage of sales were 22% in first nine months of 2006, consistent with
the 22% reported in 2005.
Other Income (Expense). Interest expense, net, for the nine-month period ended September 30,
2006 was $759, an increase of $328 from the comparable period in 2005, mainly related to interest
on the $20,000 convertible note issued to finance the McDowell acquisition in July 2006, lower
interest income on lower invested cash, and higher interest rates associated with the Companys
outstanding debt. During the first nine months of 2006, the Company recorded a $191 gain from an
insurance settlement related to the finalization of an insurance claim for the U.K. operation.
(See Note 13 for additional information.) Miscellaneous income/expense amounted to income of $186
for the first nine months of 2006 compared with an expense of $203 for the same period in 2005.
This change resulted mainly from changes in foreign currency exchange rates, related primarily to
the translation impact of the Companys U.S. dollar-denominated loan with its UK subsidiary.
Income Taxes. The Company reflected a tax benefit of $381 for the nine-month period ended
September 30, 2006 compared with a provision of $640 in the first nine months of 2005. Included in
the 2005 provision is a $1,279 impact from a change in the New York State income tax law in the
second quarter of 2005, which caused a revision to the associated deferred tax asset. The
effective tax rate for the total Company in the first nine months of 2006 was 21%. Since the
Company has significant net operating loss carryforwards, the cash outlay for income taxes is
expected to be nominal for quite some time into the future.
Net (Loss)/Income. Net loss and loss per share were $1,449 and $0.10, respectively, for the
nine-month period ended September 30, 2006, compared to net loss and loss per share of $4,305 and
$0.30, respectively, for the same period last year, primarily as a result of the reasons described
above. Average common shares outstanding used to compute basic earnings per share increased from
14,497,000 in the third quarter of 2005 to 14,867,000 in 2006 mainly due to stock option and
warrant exercises and the impact from issuing approximately 96,000 shares of common stock in the
acquisition of ABLE in May 2006.
Liquidity and Capital Resources (dollars in thousands)
As of September 30, 2006, cash and cash equivalents totaled $1,345, a decrease of $1,869 from
the beginning of the year. During the nine-month period ended September 30, 2006, operating
activities
29
provided $4,007 in cash as compared to a use of $6,135 for the nine-month period ended
September 30, 2005. The generation of cash from operating activities in 2006 resulted mainly from
an increase in earnings before depreciation and amortization and decreases in inventories, prepaids
and other current assets, offset partially by increases in accounts receivables and accounts
payable and other liabilities. Inventory levels have declined due to somewhat lower production
volumes of D-cells and BA-5390 batteries as sales of these batteries to military customers have
recently slowed.
The Company used $8,038 in cash for investing activities during the first nine-month period of
2006 compared with $2,188 in cash used for investing activities in the same period in 2005. In
2006, the Company used $1,949 in cash as part of the consideration to acquire ABLE in China, in
addition to using $5,059 in cash as part of the consideration to acquire McDowell. In addition,
the Company spent $1,030 to purchase plant, property and equipment, down from $3,211 for the same
period in 2005.
During the nine-month period ended September 30, 2006, the Company generated $2,041 in funds
from financing activities compared to the generation of $878 in funds in the same period of 2005.
The financing activities in 2006 included inflows from drawdowns on the revolver portion of the
Companys primary credit facility and the issuance of stock, mainly as stock options and warrants
were exercised during the period, offset by outflows for principal payments of term debt under the
Companys primary credit facility. During the first nine months of 2006, the Company issued 96,247
shares of common stock related to the acquisition of ABLE. The Company also awarded 26,668
restricted shares of common stock during the first nine months of 2006, of which 6,667 shares were
vested as of September 30, 2006. In addition, the Company issued approximately 165,000 shares of
common stock related to the exercises of stock options and warrants for which the Company received
approximately $1,076 in cash proceeds.
Inventory turnover for the first nine months of 2006 was an annualized rate of approximately
3.20 turns per year, down from the 3.40 turns for all of 2005. While improvements were made during
the third quarter, the Companys inventory levels are still relatively high due to a buildup of
BA-5390 batteries during 2005 in anticipation of orders from the military, a transition of certain
European customers to newer, more cost-effective products, and the initial stocking of
Warstoppers inventory for surge demand for the military. The Companys Days Sales Outstanding
(DSOs) was an average of 48 days for the first nine months of 2006, relatively consistent with the
45 days reflected for the full year of 2005.
At September 30, 2006, the Company had a capital lease obligation outstanding of $48 for the
Companys Newark, New York offices and manufacturing facilities.
As of September 30, 2006, the Company had open capital commitments to purchase approximately
$538 of production machinery and equipment.
On June 30, 2004, the Company closed on a $25,000 credit facility, comprised of a five-year
$10,000 term loan component and a three-year $15,000 revolving credit component. The facility is
collateralized by essentially all of the assets of the Company, including all of the Companys
subsidiaries. The term loan component is paid in equal monthly
installments over five years. The
rate of interest, in general, is based upon either a LIBOR rate or Prime, plus a Eurodollar spread
(dependent upon a debt to earnings ratio within a predetermined grid). This facility replaced the
Companys $15,000 credit facility that expired on the same date. Availability under the revolving
credit component is subject to meeting certain financial covenants, whereas availability under the
previous facility was limited by various asset values. The lenders of the new credit facility are
JP Morgan Chase Bank and Manufacturers and Traders Trust Company, with JP Morgan Chase Bank acting
as the administrative agent. The Company is required to meet certain financial covenants,
including a debt to earnings ratio, an EBIT (as defined) to interest expense ratio, and a current
assets to total liabilities ratio.
On June 30, 2004, the Company drew down the full $10,000 term loan. The proceeds of the term
loan, to be repaid in equal monthly installments of $167 over five years, were used for the
retirement of
30
outstanding debt and capital expenditures. From June 30, 2004 through August 1, 2004, the
interest rate associated with the term loan was based on LIBOR plus a 1.25% Eurodollar spread. On
July 1, 2004, the Company entered into an interest rate swap arrangement in the notional amount of
$10,000 to be effective on August 2, 2004, related to the $10,000 term loan, in order to take
advantage of historically low interest rates. The Company received a fixed rate of interest in
exchange for a variable rate. The swap rate received was 3.98% for five years. The total rate of
interest paid by the Company is equal to the swap rate of 3.98% plus the Eurodollar spread
stipulated in the predetermined grid associated with the term loan. From August 2, 2004 to
September 30, 2004, the total rate of interest associated with the outstanding portion of the
$10,000 term loan was 5.23%. On October 1, 2004, this adjusted rate increased to 5.33%, on January
1, 2005 the adjusted rate increased to 5.73%, on April 1, 2005, the adjusted rate increased to
6.48%, and on October 3, 2005, the adjusted rate increased to 6.98%, the maximum amount under the
current grid structure, and remains at that rate as of September 30, 2006. Derivative instruments
are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which requires that all derivative instruments be recognized in the financial
statements at fair value. The fair value of this arrangement at September 30, 2006 resulted in an
asset of $86, all of which was reflected as short-term.
Effective July 3, 2006, the banks amended the credit facility to reflect the Companys
acquisitions of ABLE and McDowell. As a result, the banks increased the amount of the revolving
credit component from $15,000 to $20,000. In addition, the financial covenants that the Company is
required to maintain under the facility were revised accordingly.
As of September 30, 2006, the Company had $5,667 outstanding under the term loan component of
its credit facility with its primary lending bank and $3,000 was outstanding under the revolver
component. Effective as of September 30, 2006, the Company received a waiver letter from the banks
concerning the Companys non-compliance with the EBIT (as defined) to interest covenant of the
credit facility, as amended. In addition, the Company received a
waiver for a non-financial covenant related to a Change in Control
provision, as defined in the credit agreement. As a result of the uncertainty of the Companys ability to comply
with the covenants within the next year, the Company continued to classify all of the
debt associated with this credit facility as a current liability on the Condensed Consolidated
Balance Sheet as of September 30, 2006. While the revolver arrangement now provides for up to
$20,000 of borrowing capacity, including outstanding letters of credit, the actual borrowing
availability may be limited at times by the financial covenants. At September 30, 2006, the
Company had $2,200 of outstanding letters of credit related to this facility, as amended July 3,
2006, leaving $14,800 of potential borrowing capacity available.
In October 2006, the Company announced two large contracts, one for $10,900 from a supplier to
a major defense contractor for certain rechargeable batteries and chargers to be used to help
combat improvised explosive devices, and the other for $9,000 from a major U.S. defense contractor
for Integration Kits supporting military communications systems. Each of the contracts has
deliveries beginning in the fourth quarter of 2006, which will require the use of a certain amount
of working capital to purchase materials and ramp up labor requirements. As such, the Company will
likely increase its borrowings under the revolving credit facility during the fourth quarter of
2006, and then diminish its borrowing levels during the first half of 2007 as these contracts are
completed.
While the Company believes relations with its lenders are good and has received waivers for
financial covenant violations as necessary in the past, there can be no assurance that such waivers
will always be obtained. In such case, the Company believes it has, in the aggregate, sufficient
cash, cash generation capabilities from operations, working capital, and financing alternatives at
its disposal, including but not limited to alternative borrowing arrangements and other available
lenders, to fund operations in the normal course.
As of September 30, 2006, the Companys wholly-owned U.K. subsidiary, Ultralife Batteries (UK)
Ltd., had nothing outstanding under its revolving credit facility with a commercial bank in the
U.K. This credit facility provides the Companys U.K. operation with additional financing
flexibility for its working capital needs. Any borrowings against this credit facility are
collateralized with that companys outstanding
31
accounts receivable balances. There was approximately $843 in additional borrowing capacity
under this credit facility as of September 30, 2006.
During the first nine-month periods of 2006 and 2005, the Company issued 165,000 and 418,000
shares of common stock, respectively, as a result of exercises of stock options and warrants. The
Company received approximately $1,076 in 2006 and $2,310 in 2005 in cash proceeds as a result of
these transactions.
The Company continues to be optimistic about its future prospects and growth potential. The
improvement in the Companys financial position in recent years has enhanced the Companys ability
to obtain additional financing. The Company continually explores various sources of capital,
including leasing alternatives, issuing new or refinancing existing debt, and raising equity
through private or public offerings. Although it stays abreast of such financing alternatives, the
Company believes it has the ability over the next 12 months to finance its operations primarily
through internally generated funds or through the use of additional financing that currently is
available to the Company. Additionally, the Company believes it has adequate third party financing
available to fund its operations or could obtain other financing, if needed.
If the Company is unable to achieve its plans or unforeseen events occur, the Company may need
to implement alternative plans. While the Company believes it could complete its original plans or
alternative plans, if necessary, there can be no assurance that such alternatives would be
available on acceptable terms and conditions or that the Company would be successful in its
implementation of such plans.
As described in Part II, Item 1, Legal Proceedings, the Company is involved in certain
environmental matters with respect to its facility in Newark, New York. Although the Company has
reserved for expenses related to this, there can be no assurance that this will be the maximum
amount. Management does not believe the ultimate resolution of this matter will have a significant
adverse impact on the Companys financial condition and results of operations in the period in
which it is resolved.
The Company typically offers warranties against any defects due to product malfunction or
workmanship for a period up to one year from the date of purchase. The Company also offers a
10-year warranty on its 9-volt batteries that are used in ionization-type smoke detector
applications. The Company provides for a reserve for this potential warranty expense, which is
based on an analysis of historical warranty issues. There can be no assurance that future warranty
claims will be consistent with past history, and in the event the Companys experiences a
significant increase in warranty claims, there can be no assurance that the Companys reserves
would be sufficient. This could have a material adverse effect on the Companys business,
financial condition and results of operations.
Outlook (in thousands of dollars)
For the fourth quarter of 2006, management expects revenues of approximately $35,000,
resulting in revenues for the full year in the range of $100,000. Operating income for the fourth
quarter is projected to range between approximately $2,500 and $3,000, including non-cash charges
for stock based compensation expense and intangible amortization, which are assumed to be $500 and
$400, respectively.
Recent Accounting Pronouncements and Developments
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS No. 155). SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of
32
Liabilities. SFAS No. 155 also resolves issues addressed in SFAS No. 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.
SFAS No. 155 eliminates the exemption from applying SFAS No. 133 to interests in securitized
financial assets so that similar instruments are accounted for in the same manner regardless of the
form of the instruments. SFAS No. 155 allows a preparer to elect fair value measurement at
acquisition, at issuance, or when a previously recognized financial instrument is subject to a
re-measurement (new basis) event, on an instrument-by-instrument basis. SFAS No. 155 is effective
for all financial instruments acquired or issued after the beginning of an entitys first fiscal
year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c)
of SFAS No. 155 may also be applied upon adoption of SFAS No. 155 for hybrid financial instruments
that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of this
Statement. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided
the entity has not yet issued financial statements, including financial statements for any interim
period for that fiscal year. Provisions of SFAS No. 155 may be applied to instruments that an
entity holds at the date of adoption on an instrument-by-instrument basis. The Company is currently
assessing any potential impact of adopting this pronouncement.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS No. 156). SFAS No. 156 requires all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if practicable, and permits
for subsequent measurement using either fair value measurement with changes in fair value reflected
in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent
measurement of separately recognized servicing assets and servicing liabilities at fair value
eliminates the necessity for entities that manage the risks inherent in servicing assets and
servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the
characterization of declines in fair value as impairments or direct write-downs. SFAS No. 156 is
effective for an entitys first fiscal year beginning after September 15, 2006. The Company is
assessing any potential impact of adopting this pronouncement.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS No. 109 (FIN 48). This statement clarifies the
accounting for uncertainty in income taxes recognized in a companys financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal
years ending after December 15, 2006. The Company does not expect the adoption of this
pronouncement to have a significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157),
which establishes a framework for measuring fair value and requires expanded disclosure about the
information used to measure fair value. The statement applies whenever other statements require, or
permit, assets or liabilities to be measured at fair value. The statement does not expand the use
of fair value in any new circumstances and is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years, with early adoption encouraged. The
Company is currently assessing any potential impact of adopting this pronouncement.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires companies to
recognize in their statement of financial position an asset for a plans over funded status or a
liability for a plans under funded status and to measure a plans assets and its obligations that
determine its funded status as of the end of the companys fiscal year. Additionally, SFAS No. 158
requires companies to recognize changes in the funded status of a defined benefit postretirement
plan in the year that the changes occur and those changes will be reported in comprehensive income.
The provisions of SFAS
33
No. 158 are effective for fiscal years ending after December 15, 2006. The Company does not
expect the adoption of this pronouncement to have a significant impact on its financial statements.
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial
Statements (SAB No. 108). SAB No. 108 requires the use of two alternative approaches in
quantitatively evaluating materiality of misstatements. If the misstatement as quantified under
either approach is material to the current year financial statements, the misstatement must be
corrected. If the effect of correcting the prior year misstatements, if any, in the current year
income statement is material, the prior year financial statements should be corrected. SAB No. 108
is effective for fiscal years ending after November 15, 2006. The Company is currently assessing
any potential impact of applying this interpretation.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and
applying accounting policies and methodologies in many areas. Not only are these decisions
necessary to comply with U.S. generally accepted accounting principles, but they also reflect
managements view of the most appropriate manner in which to record and report the Companys
overall financial performance. All accounting policies are important, and all policies described in
Note 1 (Summary of Operations and Significant Accounting Policies) in the Companys Annual Report
on Form 10-K should be reviewed for a greater understanding of how the Companys financial
performance is recorded and reported.
During the first nine months of 2006, there were no significant changes in the manner in which
the Companys significant accounting policies were applied or in which related assumptions and
estimates were developed. Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS
123R) requiring that compensation cost relating to share-based payment transactions be recognized
in the financial statements. The cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the employees requisite service period
(generally the vesting period of the equity award). The Company adopted FAS 123R using the
modified prospective method and, accordingly, did not restate prior periods presented in this Form
10-Q to reflect the fair value method of recognizing compensation cost. Under the modified
prospective approach, FAS 123R applies to new awards and to awards that were outstanding on January
1, 2006 that are subsequently modified, repurchased or cancelled. The Company calculates expected
volatility for stock options by taking an average of historical
volatility over the past five years
and a computation of implied volatility. Prior to 2006, the computation of expected volatility was
based solely on historical volatility. The computation of expected term was determined based on
historical experience of similar awards, giving consideration to the contractual terms of the
stock-based awards and vesting schedules. The interest rate for periods within the contractual
life of the award is based on the U.S. Treasury yield in effect at the time of grant.
During 2006, as a result of the ABLE and McDowell acquisitions, the Company added the
provisions of SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets, as critical accounting policies. In accordance with SFAS No. 141, Business
Combinations, the purchase price paid to effect an acquisition is allocated to the acquired
tangible and intangible assets and liabilities at fair value. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company does not amortize goodwill and intangible
assets with indefinite lives, but instead measures these assets for impairment at least annually,
or when events indicate that impairment exists. The Company amortizes intangible assets that have
definite lives over their useful lives.
34
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (in whole dollars)
The Company is exposed to various market risks in the normal course of business, primarily
interest rate risk and changes in market value of its investments and believes its exposure to
these risks is minimal. The Companys investments are made in accordance with the Companys
investment policy and primarily consist of commercial paper and U.S. corporate bonds. In July
2004, the Company entered into an interest rate swap arrangement in connection with the term loan
component of its new credit facility. Under the swap arrangement, effective August 2, 2004, the
Company received a fixed rate of interest in exchange for a variable rate. The swap rate received
was 3.98% for five years and will be adjusted accordingly for a Eurodollar spread incorporated in
the agreement. As of September 30, 2006, a one basis point move in the Eurodollar spread would
have a $750 value change. (See Note 9 in Notes to Condensed Consolidated Financial Statements for
additional information.)
The Company is subject to foreign currency risk, due to fluctuations in currencies relative to
the U.S. dollar. The Company monitors the relationship between the U.S. dollar and other
currencies on a continuous basis and adjusts sales prices for products and services sold in these
foreign currencies as appropriate to safeguard against the fluctuations in the currency effects
relative to the U.S. dollar.
The Company maintains manufacturing operations in the U.S., the U.K., and China, and exports
products to various countries. The Company purchases materials and sells its products in foreign
currencies, and therefore currency fluctuations may impact the Companys pricing of products sold
and materials purchased. In addition, the Companys foreign
subsidiaries maintain their books in
local currency, which is translated into U.S. dollars for its consolidated financial statements.
Item 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures The Companys president and chief executive
officer (principal executive officer) and its vice president- finance and chief financial officer
(principal financial officer) have evaluated the disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly
report. Based on this evaluation, the president and chief executive officer and vice president -
finance and chief financial officer concluded that the Companys disclosure controls and procedures
were effective as of such date.
Changes In Internal Control Over Financial Reporting In the beginning of the third quarter
of fiscal year 2006, the Company completed its acquisition of substantially all of the assets of
McDowell Research, Ltd., a manufacturer of military communications accessories located in Waco,
Texas. Shortly after the closing of this transaction, the Company performed an initial assessment
of McDowells internal control over financial reporting (ICFR). While the assessment is not as
complete or as detailed as would be necessary to support the report by management on the Companys
ICFR that will be required in its annual report, the Company has gained a basic understanding of
the internal control structure within McDowell, which previously was a closely-held, private
company. Managements opinion is that, if management were required to include McDowell in
assessing the Companys ICFR at this time, then management would not be able to conclude the
Companys ICFR is effective as it pertains to McDowell. Furthermore, since the McDowell
acquisition was completed in the third quarter of 2006, the Company does not expect that it will be
possible to complete its assessment and remediation of ICFR for McDowells operations as of
year-end.
35
Based on the initial assessment, the Company believes that the following areas would contain
enough significant deficiencies to constitute a material weakness in McDowells ICFR:
|
a) |
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Ineffective information systems and related control processes
surrounding such systems; |
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b) |
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Lack of routine and complete reconciliations of general ledger
accounts to detailed supporting documentation; and |
|
|
c) |
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Levels of staffing that would promote sufficient segregation of
duties and assure a sufficient level of expertise in manufacturing accounting
and proper application of generally accepted accounting principles. |
The Company is in the process of integrating McDowell into the Companys business and
assimilating McDowells operations, services, products and personnel with the Companys management
policies, procedures and strategies. The Company is in the process of remediating the noted
internal control deficiencies and expects to complete the implementation of the necessary changes
during the first quarter of 2007.
There has been no other change in the internal control over financial reporting that occurred
during the fiscal quarter covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, the internal control over financial reporting.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings (Dollars in thousands)
The Company is subject to legal proceedings and claims, which arise in the normal course of
business. The Company believes that the final disposition of such matters will not have a material
adverse effect on the financial position or results of operations of the Company.
In conjunction with the Companys purchase/lease of its Newark, New York facility in 1998, the
Company entered into a payment-in-lieu of tax agreement, which provides the Company with real
estate tax concessions upon meeting certain conditions. In connection with this agreement, a
consulting firm performed a Phase I and II Environmental Site Assessment, which revealed the
existence of contaminated soil and ground water around one of the buildings. The Company retained
an engineering firm, which estimated that the cost of remediation should be in the range of $230.
Through September 30, 2006, total costs incurred have amounted to approximately $140, none of which
have been capitalized. In February 1998, the Company entered into an agreement with a third party
which provides that the Company and this third party will retain an environmental consulting firm
to conduct a supplemental Phase II investigation to verify the existence of the contaminants and
further delineate the nature of the environmental concern. The third party agreed to reimburse the
Company for fifty percent (50%) of the cost of correcting the environmental concern on the Newark
property. The Company has fully reserved for its portion of the estimated liability. Test
sampling was completed in the spring of 2001, and the engineering report was submitted to the New
York State Department of Environmental Conservation (NYSDEC) for review. NYSDEC reviewed the
report and, in January 2002, recommended additional testing. The Company responded by submitting a
work plan to NYSDEC, which was approved in April 2002. The Company sought proposals from
engineering firms to complete the remedial work contained in the work plan. A firm was selected to
undertake the remediation and in December 2003 the remediation was completed, and was overseen by
the NYSDEC. The report detailing the remediation project, which included the test results, was
forwarded to NYSDEC and to the New York State Department of Health (NYSDOH). The NYSDEC, with
input from the NYSDOH, requested that the Company perform additional sampling. A work plan for
this portion of the project was written and delivered to the NYSDEC and approved. In November
2005, additional soil, sediment and surface water samples were taken from the area outlined in the
work plan, as well as groundwater samples from the monitoring wells. The Company received the
laboratory analysis and met with the NYSDEC in March 2006 to discuss the results. On June 30,
2006, the Final Investigation Report was delivered to the NYSDEC by the Companys outside
environmental consulting firm. The Company is now waiting for comments from the NYSDEC. The
environmental consulting firm previously estimated that the final cost to the Company to remediate
the requested area would be approximately $28, based on the submitted work plan. Additional
testing and analysis that has been completed will increase the estimated remediation costs
modestly. At September 30, 2006 and December 31, 2005, the Company had $45 and $38, respectively,
reserved for this matter.
Item 6. Exhibits
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31.1 |
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Section 302 Certification CEO |
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31.2 |
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Section 302 Certification CFO |
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32 |
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Section 906 Certifications |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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ULTRALIFE BATTERIES, INC. |
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(Registrant) |
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Date: November 9, 2006
|
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By:
|
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/s/ John D. Kavazanjian |
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John D. Kavazanjian
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President and Chief Executive Officer |
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Date: November 9, 2006
|
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By:
|
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/s/ Robert W. Fishback |
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Robert W. Fishback
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|
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Vice President Finance and Chief
Financial Officer |
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|
38
Index to Exhibits
31.1 |
|
Section 302 Certification CEO |
|
31.2 |
|
Section 302 Certification CFO |
|
32 |
|
Section 906 Certifications |
39