FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2008
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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
Commission file number 0-20852
ULTRALIFE CORPORATION
(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 of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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| 2000 Technology Parkway, Newark, New York
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14513 |
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| (Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange on which registered |
| Common Stock, par value $0.10 per share
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The Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company 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
On June 28, 2008, the aggregate market value of the Common Stock of Ultralife Corporation held
by non-affiliates of the Registrant was approximately $142,000,000 (in whole dollars) based upon
the closing price for such Common Stock as reported on the NASDAQ Global Market on June 27, 2008.
As
of March 1, 2009, the Registrant had 17,207,595 shares of Common Stock outstanding, net of
1,043,660 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Ultralife Corporation Proxy Statement — Certain portions of the Registrant’s Definitive
Proxy Statement relating to the June 9, 2009 Annual Meeting of Shareholders are specifically
incorporated by reference in Part III, Items 10-14 herein, except for the equity plan information
required by Item 12 as set forth therein.
PART I
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 our products and services,
addressing the process of U.S. defense procurement, the successful commercialization of our
products, the successful integration of our acquired businesses, general domestic and global
economic conditions, including the recent distress in the financial markets that has had an adverse
impact on the availability of credit and liquidity resources generally, 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 our business strategy or development plans, capital deployment, business disruptions,
including those caused by fires, raw material supplies, environmental regulations, and other risks
and uncertainties, certain of which are beyond our control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
differ materially from those forward-looking statements described herein as anticipated, believed,
estimated or expected or words of similar import. For further discussion of certain of the matters
described above, see “Risk Factors” in Item 1A of this annual report.
As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us”
refer to Ultralife Corporation (formerly Ultralife Batteries, Inc.) and include our wholly-owned
subsidiaries, Ultralife Batteries (UK) Ltd., McDowell Research Co., Inc., ABLE New Energy Co.,
Limited and its wholly-owned subsidiary ABLE New Energy Co., Ltd, RedBlack Communications, Inc.
(formerly Innovative Solutions Consulting, Inc.), Stationary Power Services, Inc. and RPS Power
Systems, Inc. (formerly Reserve Power Systems, Inc.), and our majority owned subsidiary Ultralife
Batteries India Private Limited.
Dollar amounts throughout this Form 10-K Annual Report are presented in thousands of dollars,
except for per share amounts.
ITEM 1. BUSINESS
General
We offer products and services ranging from portable and standby power solutions to
communications and electronics systems. Through our engineering and collaborative approach to
problem solving, we serve government, defense and commercial customers across the globe. We
design, manufacture, install and maintain power and communications systems including: rechargeable
and non-rechargeable batteries, standby power systems, communications and electronics systems and
accessories, and custom engineered systems, solutions and services.
We sell our products worldwide through a variety of trade channels, including original
equipment manufacturers (“OEMs”), industrial and retail distributors, national retailers and
directly to U.S. and international defense departments. We enjoy strong name recognition in our
markets under our Ultralife® Batteries, McDowell Research®,
RedBlackTM Communications, Stationary Power ServicesTM, U.S. Energy
SystemsTM, RPS Power SystemsTM and ABLETM brands. We have sales,
operations and product development facilities in North America, Europe and Asia.
We report our results in four operating segments: Non-Rechargeable Products, Rechargeable
Products, Communications Systems and Design and Installation Services. The Non-Rechargeable
Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable
batteries. The Rechargeable Products segment includes: rechargeable batteries, charging systems,
uninterruptable power supplies and accessories, such as cables. The Communications Systems segment
includes: power supplies, cable and connector assemblies, RF amplifiers, amplified speakers,
equipment mounts, case equipment and integrated communication system kits. The Design and
Installation Services segment includes: standby power and communications and electronics systems
design, installation and maintenance activities and revenues and related costs associated with
various development contracts. We look at our segment performance at the gross margin level, and
we do 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. (See Note 10 in the Notes to Consolidated
Financial Statements.)
We continually evaluate various ways to grow, including opportunities to expand through
mergers, acquisitions and business partnerships. On May 19, 2006, we acquired 100% of the equity
securities of ABLE New Energy Co., Ltd.
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(“ABLE”), an established manufacturer of lithium batteries.
ABLE is located in Shenzhen, China. On July 3, 2006, we finalized the acquisition of
substantially all the assets of McDowell Research, Ltd. (“McDowell”), a manufacturer of military
communications accessories. McDowell was located originally in Waco,
Texas, with the operations having been relocated to the Newark, New
York facility during the second half of 2007. On September 28, 2007, we
finalized the acquisition of all of the issued and outstanding shares of common stock of RedBlack
Communications, Inc. (“RedBlack”), a provider of a wide range of engineering and technical services
for communication electronic systems to government agencies and prime contractors. RedBlack is
located in Hollywood, Maryland. On November 16, 2007, we completed the acquisition of all of the
issued and outstanding shares of common stock of Stationary Power Services, Inc. (“Stationary
Power”), an infrastructure power management services firm specializing in engineering, installation
and preventative maintenance of standby power systems, uninterruptible power supply systems, DC
power systems and switchgear/control systems for the telecommunications, aerospace, banking and
information services industries. Stationary Power is located in Clearwater, Florida. On November
16, 2007, we completed the acquisition of all of the issued and outstanding shares of common stock
of RPS Power Systems, Inc. (“RPS”), an affiliate of Stationary Power, and a supplier of lead acid
batteries primarily for use by Stationary Power in the design and installation of standby power
systems. In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited
(“India JV”), with our distributor partner in India. The India JV assembles Ultralife power
solution products and manages local sales and marketing activities, serving commercial, government
and defense customers throughout India. We have invested cash into the India JV, as consideration
for our 51% ownership stake in the India JV. On November 10, 2008, we acquired certain assets of
U.S. Energy Systems, Inc. and its services affiliate, U.S. Power Services, Inc. (“USE”
collectively), a nationally recognized standby power installation and power management services
business. USE is located in Riverside, California. (See Note 2 in the Notes to Consolidated
Financial Statements for additional information.)
Our website address is www.ultralifecorp.com. We make available free of charge via a
hyperlink on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and Exchange Commission
(“SEC”). We will provide copies of these reports upon written request to the attention of Peter F.
Comerford, Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our
filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
Non-Rechargeable Products
We manufacture and/or market a family of lithium-manganese dioxide (Li-MnO2)
non-rechargeable batteries including 9-volt, HiRateÒ cylindrical, Thin
CellÒ, and other chemistries and form factors. We also manufacture and market a
family of lithium-thionyl chloride (Li-SOCl2) non-rechargeable batteries produced by our
ABLE operating unit. Applications for our 9-volt batteries include: smoke alarms, wireless
security systems and intensive care monitors, among many other devices. Our HiRate and Thin Cell
lithium non-rechargeable batteries are sold primarily to the military and to OEMs in industrial
markets for use in a variety of applications including radios, automotive telematics, emergency
radio beacons, search and rescue transponders, pipeline inspection gauges, portable medical devices
and other specialty instruments and applications. Military applications for our non-rechargeable
HiRate batteries include: man-pack and survival radios, night vision goggles, targeting devices,
chemical agent monitors and thermal imaging equipment. Our lithium-thionyl chloride batteries,
sold under our ABLE brand as well as various private label brands, are used in a variety of
applications including utility meters, wireless security devices, electronic meters, automotive
electronics and geothermal devices. We believe that the chemistry of lithium batteries provides
significant advantages over other currently available non-rechargeable battery technologies. These
advantages include: lighter weight, longer operating time, longer shelf life, and a wider operating
temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles,
which provide stable power. Conventional non-rechargeable batteries, such as alkaline batteries,
have sloping voltage profiles that result in decreasing power output during discharge. While the
price for our lithium batteries is generally higher than alkaline batteries, the increased energy
per unit of weight and volume of our lithium batteries allow for longer operating times and less
frequent battery replacements for our targeted applications.
Revenues for this segment for the year ended December 31, 2008 were $68,076 and segment
contribution was $10,791.
Rechargeable Products
We believe that our range of lithium ion rechargeable batteries and chargers offer substantial
benefits, including the ability to design and produce lightweight batteries in a variety of custom
sizes, shapes, and thickness. We market lithium ion rechargeable batteries comprised of cells
manufactured by qualified cell manufacturers. Our rechargeable products can be used in a wide
variety of applications including communications, medical and other portable electronic devices.
We believe that the chemistry of our lithium ion batteries provides significant advantages over
other currently
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available rechargeable batteries. These advantages include lighter weight, longer
operating time, longer time between charges and a wider operating temperature range. Conventional
rechargeable batteries, nickel metal hydride and nickel cadmium, are heavier, have lower energy and
require more frequent charging. Additionally, we offer lead-acid batteries and uninterruptable
power supplies, sold under our RPS Power Systems brand, and other brands, for the standby power
market. Products include standby batteries and uninterruptable power supplies for use in
telecommunications, banking, aerospace and information services industries.
Revenues for this segment for the year ended December 31, 2008 were $34,691 and segment
contribution was $6,818.
Communications Systems
Under our McDowell Research brand, we design and manufacture a line of communications systems
and accessories to support military communications systems including power supplies, power cables,
connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment and
integrated communication systems such as tactical repeaters and SATCOM-On-The-Move systems.
Products include field deployable systems, which operate from wide-ranging AC and DC sources using
a basic building block approach, allowing for a quick response to specialized applications. All
systems are packaged to meet specific customer needs in rugged enclosures to allow for their use in
severe environments. We market these products to all branches of the U.S. military, approved
foreign defense organizations, and U.S. and international prime defense contractors.
Revenues for this segment in the year ended December 31, 2008 were $136,072 and segment
contribution was $36,805.
Design and Installation Services
These services include the design, installation, integration and maintenance of both
communications electronics and standby power systems. Within this segment, we also seek to fund
the development of new products to advance our technologies through contracts with both government
agencies and third parties. We have been successful in obtaining awards for such programs for
power-system technologies.
We continue to obtain contracts that are in parallel with our efforts to ultimately
commercialize products that we develop. Revenues in this segment that pertain to technology
contracts may vary widely each year, depending upon the quantity and size of contracts obtained.
Revenues for this segment in the year ended December 31, 2008 were $15,861 and segment
contribution was $2,529.
Corporate
We allocate revenues and cost of sales across the above operating segments. The balance of
income and expense, including but not limited to research and development expenses, and selling,
general and administrative expenses, are reported as Corporate expenses.
There were no revenues for this category in the year ended December 31, 2008 and corporate
contribution was a loss of $39,638.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and
the 2008 Consolidated Financial Statements and Notes thereto for additional information. For
information relating to total assets by segment, revenues for the last three years by segment, and
contribution by segment for the last three years, see Note 10 in the Notes to Consolidated
Financial Statements.
History
We were formed as a Delaware corporation in December 1990. In March 1991, we acquired certain
technology and assets from Eastman Kodak Company (“Kodak”) relating to its 9-volt lithium-manganese
dioxide non-rechargeable battery. In December 1992, we completed our initial public offering and
became listed on NASDAQ. In June 1994, we formed a subsidiary, Ultralife Batteries (UK) Ltd.
(“Ultralife UK”), which acquired certain assets of the Dowty Group PLC (“Dowty”) and provided us
with a presence in Europe. In May 2006, we acquired ABLE, an established manufacturer of lithium
batteries located in Shenzhen, China, which broadened our product offering and provided additional
exposure to new markets. In July 2006, we finalized the acquisition of substantially all the
assets of McDowell, a manufacturer of military
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communications accessories located originally in Waco,
Texas, with the operations having been relocated to the Newark, New
York facility during the second half of 2007, which enhanced our channels into the military communications area and strengthened our
presence in global defense markets. In September 2007, we acquired RedBlack, located in Hollywood,
Maryland, an engineering and technical services firm specializing in the design, integration, and
fielding of mobile, modular, and fixed-site communication and electronic systems. The acquisition
provided a natural extension to our communications systems business and opened another channel of
distribution for our broad portfolio of communications systems, accessories and portable power
products. In November 2007, we acquired Stationary Power and RPS, affiliated companies both
located in Clearwater, Florida. Stationary Power is an infrastructure power management services
firm specializing in the engineering, installation and preventive maintenance of standby power
systems, uninterruptible power supply systems, DC power systems and switchgear/control systems for
the telecommunications, aerospace, banking and information services industries. RPS supplies lead
acid batteries for use in the design and installation of standby power systems. The Stationary
Power acquisition furthered our transformation to a value-added power solutions, accessories and
engineering services company serving a broad spectrum of government, defense and commercial
markets. In November 2008, we acquired certain assets of USE, a nationally recognized standby
power installation and power management services business located in Riverside, California. The
acquisition was made to advance our goal of becoming the leading provider of engineering,
installation, integration and maintenance services to the growing standby power industry.
Products, Services and Technology
Non-Rechargeable Products
A non-rechargeable battery is used until discharged and then discarded. The principal
competing non-rechargeable battery technologies are carbon-zinc, alkaline and lithium. We
manufacture a range of non-rechargeable battery products based on lithium-manganese dioxide,
lithium-thionyl chloride and magnesium-silver chloride technologies.
Our non-rechargeable battery products are based predominantly on lithium-manganese dioxide and
lithium-thionyl chloride technologies. We believe that the chemistry of lithium batteries provides
significant advantages over currently available non-rechargeable battery technologies, which
include: lighter weight, longer operating time, longer shelf life, and a wider operating
temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which
provide stable power. Conventional non-rechargeable batteries, such as alkaline batteries, have
sloping voltage profiles that result in decreasing power outage during discharge. While the prices
for our lithium batteries are generally higher than commercially available alkaline batteries
produced by others, we believe that the increased energy per unit of weight and volume of our
batteries will allow longer operating time and less frequent battery replacements for our targeted
applications. As a result, we believe that our non-rechargeable batteries are price competitive
with other battery technologies on a price per watt-hour basis.
Our non-rechargeable products include the following product configurations:
9-Volt Lithium Battery. Our 9-volt lithium battery delivers a unique combination of high
energy and stable voltage, which results in a longer operating life for the battery and,
accordingly, fewer battery replacements. While our 9-volt battery price is generally higher than
conventional 9-volt carbon-zinc and alkaline batteries, we believe the enhanced operating
performance and decreased costs associated with battery replacement make our 9-volt battery more
cost effective than conventional batteries on a cost per watt-hour basis when used in a variety of
applications.
We market our 9-volt lithium batteries to OEM, distributor and retail markets including
industrial electronics, safety and security, medical and music/audio. Significant applications
include: smoke alarms, wireless alarm systems, bone growth stimulators, telemetry devices, blood
analyzers, ambulatory infusion pumps, parking meters, wireless audio devices and guitar pickups. A
significant portion of the sales of our 9-volt battery is to major U.S. and international smoke
alarm OEMs for use in their long-life smoke alarms. We also manufacture our 9-volt lithium battery
under private label for a variety of international companies. Additionally, we sell our 9-volt
battery to the broader consumer market through national and regional retail chains and Internet
retailers.
We believe that we manufacture the only standard size 9-volt battery warranted to last 10
years when used in ionization-type smoke alarms. Although designs exist using other battery
configurations, such as three 2/3 A or 1/2 AA-type battery cells, we believe that our 9-volt
solution is superior to these alternatives. Our current 9-volt battery manufacturing capacity is
adequate to meet forecasted customer demand.
Cylindrical Batteries. Featuring high energy, wide temperature range, long shelf life and
operating life, our cylindrical cells and batteries, based on both lithium-manganese dioxide and
lithium-thionyl chloride technologies, represent some of
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the most advanced lithium power sources
currently available. We market a wide range of cylindrical non-rechargeable lithium cells and
batteries in various sizes under both the Ultralife HiRate and ABLE brands. These
include: D, C, 5/4 C, 1/2 AA, 2/3 A and other sizes, which are sold individually as well as
packaged into multi-cell battery packs, including our leading BA-5390 military battery, an
alternative to the competing Li-SO2 BA-5590 battery, and one of the most widely used
batteries in the U.S. armed forces for portable applications. Our BA-5390 battery provides 50% to
100% more energy (mission time) than the BA-5590, and it is used in approximately 60 military
applications.
We market our line of lithium cells and batteries to the OEM market for commercial, defense,
medical, automotive, asset tracking and search and rescue applications, among others. Significant
commercial applications include pipeline inspection equipment, autoreclosers and oceanographic
devices. Asset tracking applications include RFID (Radio Frequency Identification) systems. Among
the defense uses are manpack radios, night vision goggles, chemical agent monitors, and thermal
imaging equipment. Medical applications include: AED’s (Automated External Defibrillators),
infusion pumps and telemetry systems. Automotive applications include: telematics, tire-pressure
monitoring and engine electronics systems. Search and rescue applications include: ELT’s
(Emergency Locator Transmitters) for aircraft and EPIRB’s (Emergency Position Indicating Radio
Beacons) for ships.
Thin Cell Batteries. We manufacture a range of thin lithium-manganese dioxide batteries under
the Thin Cell brand. Thin Cell batteries are flat, light weight batteries providing a unique
combination of high energy, long shelf life, wide operating temperature range and light weight.
With their thin prismatic form and a high ratio of active materials to packaging, Thin Cell
batteries can efficiently fill most battery cavities. We are currently marketing these batteries to
OEMs for applications such as displays, wearable medical devices, theft detection systems, and RFID
devices.
Rechargeable Products
In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can
be recharged and reused many times. Generally, discharge and recharge cycles can be repeated
hundreds of times in rechargeable batteries, but the achievable number of cycles (cycle life)
varies among technologies and is an important competitive factor. All rechargeable batteries
experience a small, but measurable, loss in energy with each cycle. The industry commonly reports
cycle life in the number of cycles a battery can achieve until 80% of the battery’s initial energy
capacity remains. In the rechargeable battery market, the principal competing technologies are
nickel-cadmium, nickel-metal hydride, lithium-ion and lithium-polymer-based batteries.
Rechargeable batteries can be used in many applications, such as military radios, laptop computers,
mobile telephones, portable medical devices, wearable devices and many other commercial, defense
and consumer products.
Three important performance characteristics of a rechargeable battery are design flexibility,
energy density and cycle life. Design flexibility refers to the ability of rechargeable batteries
to be designed to fit a variety of shapes and sizes of battery compartments. Thin profile batteries
with prismatic geometry provide the design flexibility to fit the battery compartments of today’s
electronic devices. Energy density refers to the total electrical energy per unit volume stored in
a battery. High energy density batteries generally are longer lasting power sources providing
longer operating time and necessitating fewer battery recharges. Lithium batteries, by the nature
of their electrochemical
properties, are capable of providing higher energy density than comparably sized batteries that
utilize other chemistries and, therefore, tend to consume less volume and weight for a given energy
content. Long cycle life is a preferred feature of a rechargeable battery because it allows the
user to charge and recharge many times before noticing a difference in performance.
Energy density refers to the total amount of electrical energy stored in a battery divided by
the battery’s weight and volume as measured in watt-hours per kilogram and watt-hours per liter,
respectively. High energy density and long achievable cycle life are important characteristics for
comparing rechargeable battery technologies. Greater energy density will permit the use of
batteries of a given weight or volume for a longer time period. Accordingly, greater energy
density will enable the use of smaller and lighter batteries with energy comparable to those
currently marketed. Long achievable cycle life, particularly in combination with high energy
density, is suitable for applications requiring frequent battery recharges, such as cellular
telephones and portable computers. We believe that our lithium ion batteries generally have the
highest energy density and longest cycle life.
Lithium Ion Cells and Batteries. We offer a variety of lithium ion cells and batteries. These
products are used in a wide variety of applications including communications, medical and other
portable electronic devices.
Lead-Acid Batteries. We offer a variety of lead-acid batteries primarily for use in the
design and installation of standby power systems. These products include standby batteries and
uninterruptable power supplies for use in telecommunications, banking, aerospace and information
services industries.
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Battery Charging Systems and Accessories. To provide our customers with complete power system
solutions, we offer a wide range of rugged military and commercial battery charging systems and
accessories including smart chargers, multi-bay charging systems and a variety of cables.
Communications Systems
We design and manufacture communications systems and accessories, through our McDowell
Research brand, to support military communications systems including power supplies, RF amplifiers,
battery chargers, amplified speakers, equipment mounts, case equipment and integrated communication
systems. We specialize in field deployable power systems, which operate from wide-ranging AC and
DC sources using a basic building block approach, allowing for a quick response to specialized
applications. We package all systems to meet specific customer needs in rugged enclosures to allow
their use in severe environments.
We offer a wide range of military communications systems and accessories designed to enhance
and extend the operation of communications equipment such as vehicle-mounted, manpack and handheld
transceivers. Our communications products include the following product configurations:
Integrated Systems. Our integrated systems include: SATCOM-On-The-Move (“SOTM”); ruggedized
deployable case systems; multiband transceiver kits and HF transceiver kits; briefcase power
systems; dual transceiver cases; enroute communications cases; four radio cases; and tactical
repeater systems. These systems give communications operators everything that is needed to provide
reliable links to support C4I (Command, Control, Communications, Computers and Information
systems).
Power Systems. Our power systems include: universal AC/DC power supplies with battery backup
for tactical manpack and handheld transceivers; Rover III power supplies; interoperable power
adapters and chargers; portable power systems; tactical combat and AC to DC power supplies for
encryption units, among many others. We can provide power supplies for virtually all tactical
communications devices.
RF Amplifiers. Our RF amplifiers include: 20 and 100-watt multiband (30 — 512 MHz) and 50
watt VHF RF (30 — 90 MHz) amplifiers. These amplifiers are used to extend the range of manpack and
handheld tactical transceivers and can be used on mobile or fixed site applications.
Design and Installation Services
Our design and installation services focus on standby power system design, installation and
maintenance, integrating communications equipment and power systems for maximum mobility and
optimum customer utility. These include equipment installations in commercial, defense and law
enforcement applications, including vehicles
for satellite communications, engineering services, upgrading current fleet vehicles and integrated
logistics and project management support.
Communications and Electronics. Our communications and electronics services include the
design, integration, fielding and life cycle management of portable, mobile and fixed-site
communications systems. Capabilities include engineering, rapid prototyping, systems integration
and logistics support.
Standby Power. Our standby power services provide mission critical solutions to a broad range
of applications in the telecommunications, aerospace, banking and information services industries
involving the installation and preventive maintenance of standby power systems, uninterrupted power
supply systems, DC power systems and switchgear/control systems.
Technology Contracts. Our technology contract activities involve the development of new
products or the advancement of existing products through contracts with both government agencies
and third parties.
Sales and Marketing
We employ a staff of sales and marketing personnel in North America, Europe and Asia. We sell
our current products and services directly to commercial customers, including OEMs, as well as
government and defense agencies in the U.S. and abroad and have contractual arrangements with sales
agents who market our products on a commission basis in particular areas. While OEM agreements and
contracts contain volume-based pricing based on expected volumes, industry practices dictate that
pricing is rarely adjusted retroactively when contract volumes are not achieved. Every effort is
made to adjust future prices accordingly, but the ability to adjust prices is generally based on
market conditions.
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We also distribute our products through domestic and international distributors and retailers.
Our sales are generated primarily from customer purchase orders. We have several long-term
contracts with the U.S. government and companies within the automotive industry. These contracts do
not commit the customers to specific purchase volumes, nor to specific timing of purchase order
releases, and they include fixed price agreements over various periods of time. We do not believe
our sales are seasonal.
During the year ended December 31, 2008, we had two major customers, Raytheon Company and Port
Electronics Corp., which comprised 29% and 16% of our revenue, respectively. During the year ended
December 31, 2007, we had three major customers, the U.S. Department of Defense, the U.K. Ministry
of Defence and Raytheon Company, which comprised 14%, 12%, and 13% of our revenue, respectively.
During the year ended December 31, 2006, we had one major customer, the U.S. Department of Defense,
which comprised 20% of our revenue. We believe that the loss of these customers could have a
material adverse effect on us. We believe that we currently have good relationships with these
customers.
In 2008, sales to U.S. and non-U.S. customers were approximately $205,400 and $49,300,
respectively. For information relating to revenues by country for the last three years and
long-lived assets for the last three years by country of origin, see Note 10 in the Notes to
Consolidated Financial Statements.
Non-Rechargeable Products
We target sales of our non-rechargeable products to manufacturers of security and safety
equipment, automotive telematics, medical devices, search and rescue equipment, specialty
instruments, point of sale equipment and metering applications, as well as users of military
equipment. Our strategy is to develop sales and marketing alliances with OEMs and governmental
agencies that utilize our batteries in their products, commit to cooperative research and
development or marketing programs, and recommend our products for design-in or replacement use in
their products. We are addressing these markets through direct contact by our sales and technical
personnel, use of sales agents and stocking distributors, manufacturing under private label and
promotional activities.
We seek to capture a significant market share for our products within our targeted OEM
markets, which we believe, if successful, will result in increased product awareness and sales at
the end-user or consumer level. We are also selling our 9-volt battery to the consumer market
through retail distribution. Most military procurements are done directly by the specific
government organizations requiring products, based on a competitive bidding process. For those
military procurements that are not bid, the procurements are typically subject to an audit of the
product’s underlying cost structure and associated profitability. Additionally, we are typically
required to successfully meet contractual specifications and to pass various qualification testing
for the products under contract by the military. An
inability by us to pass these tests in a timely fashion could have a material adverse effect
on our business, financial condition and results of operations. When a government contract is
awarded, there is a government procedure that allows for unsuccessful companies to formally protest
the award if they believe they were unjustly treated in the government’s bid evaluation process. A
prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a
protest could have a material adverse effect on our business, financial condition and results of
operations.
We have been successfully marketing our products to defense organizations in the U.S. and
other countries. These efforts have resulted in us winning significant contracts. For example, in
December 2004, we were awarded 100% of the Next Gen II Phase IV battery production contracts by the
U.S. Defense Department to provide five types of non-rechargeable lithium-manganese dioxide
batteries to the U.S. Army. Combined, these batteries comprise what is called the Rectangular
Lithium Manganese Dioxide Battery Group. The government awarded 60 percent to our U.S. operation
and 40 percent to our U.K operation. The contract provides for order releases over a five-year
period with a maximum potential value of up to $286,000. Orders under this contract are dependent
upon the demand for these batteries by end users and inventory stocking strategies, among other
things. Through December 31, 2008, we have received orders for deliveries under this contract
totaling $28,800. This contract is set to expire by the end of 2009. In February 2005, we were
awarded a five-year production contract by the U.S. Defense Department, with a maximum total
potential of $15,000, to provide our BA-5347/U non-rechargeable lithium-manganese dioxide batteries
to the U.S. military. The contract value represented 60 percent of a small business set-aside
award. Production deliveries began in the first quarter of 2006. Through December 31, 2008, we
have received orders for deliveries under this contract totaling $9,847.
At December 31, 2008 and 2007, our backlog of non-rechargeable products was approximately
$23,300 and $15,300, respectively. The majority of the 2008 backlog was related to orders that are
expected to ship throughout 2009.
9
Rechargeable Products
We target sales of our lithium ion rechargeable batteries and charging systems to OEM
customers, as well as distributors and resellers focused on our target markets. We seek design wins
with OEMs, and believe that our design capabilities, product characteristics and solution
integration will drive OEMs to incorporate our batteries into their product offerings, resulting in
revenue growth opportunities for us. We target sales of our lead-acid rechargeable batteries
through direct sales to customers in the telecommunications, banking, aerospace and information
services industries.
We continue to expand our marketing activities as part of our strategic plan to increase sales
of our rechargeable products for commercial, stand-by, defense and communications applications, as
well as hand-held devices, wearable devices and other electronic portable equipment. A key part of
this expansion includes increasing our design and assembly capabilities as well as building our
network of distributors and value added distributors throughout the world.
At December 31, 2008 and 2007, our backlog related to rechargeable products was approximately
$9,700 and $7,500, respectively. The majority of the 2008 backlog was related to orders that are
expected to ship throughout 2009.
Communications Systems
We target sales of our communications systems, which include power solutions and accessories
to support communications systems such as battery chargers, power supplies, power cables, connector
assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment and integrated
communication systems, to military OEMs and U.S. and international government organizations. We
sell our products directly and through authorized distributors to OEMs and to defense organizations
in the U.S. and internationally.
We market our products to defense organizations and OEMs in the U.S. and internationally.
These efforts resulted in a number of significant contracts for us. For example, in September
2007, we were awarded a $24,000 contract from Raytheon Company to produce and supply SOTM satellite
communications systems for installation on Mine Resistant Ambush Protected (“MRAP”) armored
vehicles. In December 2007, we received two separate orders
valued at $62,000 and $40,000, from
U.S. defense contractors to supply advanced communications systems.
At December 31, 2008 and 2007, our backlog related to communications systems orders was
approximately $4,400 and $115,500, respectively. The majority of the 2008 backlog was related to
orders that are expected to ship throughout 2009.
Design and Installation Services
We continue to expand our sales and marketing activities to increase sales of our design and
installation services for communications electronics systems and standby power applications. We
provide our services directly to defense organizations, government agencies and commercial
customers in the telecommunications, aerospace, banking and information services industries.
At December 31, 2008 and 2007, our backlog related to design and installation services was
approximately $6,000 and $3,600, respectively. The majority of the 2008 backlog was related to
services that are expected to be performed throughout 2009.
Patents, Trade Secrets and Trademarks
We rely on licenses of technology as well as our patented and unpatented proprietary
information, know-how and trade secrets to maintain and develop our commercial position. Although
we seek to protect our proprietary information, there can be no assurance that others will not
either develop the same or similar information independently or obtain access to our proprietary
information, despite our efforts to protect such proprietary information. In addition, there can
be no assurance that we would prevail if we asserted our intellectual property rights against third
parties, or that third parties will not successfully assert infringement claims against us in the
future. We believe, however, that our success is more dependent on the knowledge, ability,
experience and technological expertise of our employees, as opposed to the legal protection that
our patents and other proprietary rights may or will afford.
We hold twelve patents in the U.S. and foreign countries. Our patents protect technology that
makes automated production more cost-effective and protect important competitive features of our
products. However, we do not consider our business to be dependent on patent protection.
10
In 2003, we entered into an agreement with Saft Groupe S.A. to license certain tooling for
certain BA-5390 battery cases. The licensing fee associated with this agreement is essentially one
dollar per battery case sold. The total royalty expense reflected in 2008 was $22. This agreement
expires in the year 2017.
All of our employees in the U.S. and all our key employees involved with our technology in
England and China are required to enter into agreements providing for confidentiality and the
assignment of rights to inventions made by them while employed by us. These agreements also contain
certain noncompetition and nonsolicitation provisions effective during the employment term and for
varying periods thereafter depending on position and location. There can be no assurance that we
will be able to enforce these agreements.
The following are registered trademarks or trademarks of ours: Ultralifeâ,
Ultralife Thin Cellâ, Ultralife HiRateâ, Ultralife
Polymerâ, The New Power GenerationÒ,
LithiumPowerÒ, SmartCircuitÒ, PowerBugÒ, We Are
PowerÒ, ABLEÔ, RedBlack™, RPS Power Systems™, Stationary Power Systems™,
U.S. Energy Systems™, McDowell Research®, and Max Juice For More Gigs®.
Manufacturing and Raw Materials
We manufacture our products from raw materials and component parts that we purchase. We have
ISO 9001:2000 certification for our manufacturing facilities in Newark, New York, Abingdon,
England, and Shenzhen, China. In addition, our manufacturing facilities in Newark, New York and
Shenzhen, China are ISO 14001 certified.
We expect that in the future, raw material purchases will fluctuate based on the timing of
customer orders, the related need to build inventory in anticipation of orders and actual shipment
dates.
Non-Rechargeable Products
Our Newark, New York facility has the capacity to produce approximately nine million 9-volt
batteries per year and approximately fourteen million cylindrical cells per year. Our
manufacturing facility in Abingdon, England is capable of producing approximately two million
cylindrical cells per year. Capacity, however, is also related to individual operations and
product mix changes can produce bottlenecks in an individual operation, constraining overall
capacity. Our ABLE operating unit in Shenzhen, China is capable of producing approximately five
million cylindrical cells per year and approximately 500,000 thin cells per year. We have acquired
new machinery and equipment in areas where production bottlenecks have resulted in the past and
believe that we have sufficient capacity in these areas. We continually evaluate our requirements
for additional capital equipment, and we believe that the planned increases in our current
manufacturing capacity will be adequate to meet foreseeable customer demand. However, with
unanticipated growth in demand for our products, demand could exceed capacity, which would require
us to install additional capital equipment to meet these incremental needs, which in turn may
require us to lease or contract additional space to accommodate such needs.
We utilize lithium foil as well as other metals and chemicals to manufacture our batteries.
Although we know of only three major suppliers that extrude lithium into foil and provide such foil
in the form required by us, we do not anticipate any shortage of lithium foil or any difficulty in
obtaining the quantities we require. Certain materials used in our products are available only from
a single source or a limited number of sources. Additionally, we may elect to develop relationships
with a single or limited number of sources for materials that are otherwise generally available.
Although we believe that alternative sources are available to supply materials that could replace
materials we use and that, if necessary, we would be able to redesign our products to make use of
an alternative product, any interruption in our supply from any supplier that serves currently as
our sole source could delay product shipments and adversely affect our financial performance and
relationships with our customers. Although we have experienced interruptions of product deliveries
by sole source suppliers, none of such interruptions has had a material adverse effect on us. All
other raw materials utilized by us are readily available from many sources.
We use various utilities to provide heat, light and power to our facilities. As energy costs
rise, we continue to seek ways to reduce these costs and will initiate energy-saving projects at
times to assist in this effort. It is possible, however, that rising energy costs may have an
adverse effect on our financial results.
The total carrying value of our non-rechargeable products inventory, including raw materials,
work in process and finished goods, amounted to approximately $13,475 as of December 31, 2008.
11
Rechargeable Products
We believe that the raw materials and components utilized for our rechargeable batteries are
readily available from many sources. Although we believe that alternative sources are available to
supply materials that could replace materials we use, any interruption in our supply from any
supplier that serves currently as our sole source could delay product shipments and adversely
affect our financial performance and relationships with our customers.
Our Newark, New York facility has the capacity to produce significant volumes of rechargeable
batteries, as this segment generally assembles battery packs and chargers and is limited only by
physical space and is not constrained by manufacturing equipment capacity. In addition, our
facility in Abingdon, England has the capacity to produce significant volumes of rechargeable
batteries and chargers.
The total carrying value of our rechargeable products inventory, including raw materials, work
in process and finished goods, amounted to approximately $10,820 as of December 31, 2008.
Communications Systems
In general, we believe that the raw materials and components utilized by us for our
communications accessories and systems, including RF amplifiers, power supplies and integration
kits, are available from many sources. Although we believe that alternative sources are available
to supply materials that could replace materials we use, any interruption in our supply from any
supplier that serves currently as our sole source could delay product shipments and adversely
affect our financial performance and relationships with our customers.
Our Newark, New York facility has the capacity to produce significant volumes of
communications accessories and systems, as this operation generally assembles products and is
limited only by physical space and is not constrained by manufacturing equipment capacity.
Our Hollywood, Maryland facility has the capacity to produce communications accessories and
systems. This operation generally assembles products and is limited only by physical space and is
not constrained by manufacturing equipment capacity.
Our Woodinville, Washington facility has the capacity to produce communications accessories
and systems. This operation generally assembles products and is limited only by physical space and
is not constrained by manufacturing equipment capacity.
The total carrying value of our communications systems inventory, including raw materials,
work in process and finished goods, amounted to approximately $12,428 as of December 31, 2008.
Design and Installation Services
We believe that the raw materials and components utilized for our standby power installations
are readily available from many sources. Although we believe that alternative sources are
available to supply materials that could replace materials we use, any interruption in our supply
from any supplier that serves currently as our sole source could delay product shipments and
adversely affect our financial performance and relationships with our customers.
The total carrying value of our design and installation services inventory, including raw
materials, work in process and finished goods, amounted to approximately $3,742 as of December 31,
2008.
Research and Development
We concentrate significant resources on research and development activities to improve upon
our technological capabilities and to design new products for customers’ applications. We conduct
our research and development in Newark, New York, Shenzhen, China and Woodinville, Washington.
During 2008, 2007 and 2006 we expended approximately $8,100, $7,000 and $5,100, respectively, on
research and development. We expect that research and development expenditures in the future will
be modestly higher than those in 2008, as new product development initiatives will drive our
growth. As in the past, we will continue to make funding decisions for our research and
development efforts based upon strategic demand for customer applications.
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Non-Rechargeable Products
We continue to develop non-rechargeable cells and batteries that broaden our product offering
to our customers.
Rechargeable Products
We continue to develop our rechargeable product portfolio, including batteries, cables and
charging systems, as our customers’ needs continue to grow for portable power.
Communications Systems
We continue to develop a variety of communications accessories and systems for the defense
market to meet the ever-changing demands of our customers.
Design and Installation Services
The U.S. government sponsors research and development programs designed to improve the
performance and safety of existing battery systems and to develop new battery systems.
We work to receive contracts with defense contractors and commercial customers. For example,
in February 2004, we announced that we received a development contract from General Dynamics valued
at approximately $2,700. The contract was for lithium non-rechargeable and lithium ion rechargeable
batteries, as well as vehicle and soldier-based chargers for the Land Warrior-Stryker Interoperable
(LW-SI) program. In 2005, we received an added scope award of this project, increasing the total
project to approximately $4,000. Additionally, purchase orders have been received for the products
developed under this contract as the batteries have become commercialized. In 2005, we were
awarded various development contracts, including the development of a rechargeable battery for a
portable radio. In 2006, we completed the General Dynamics contract work and were awarded several
small development contracts for rechargeable product development and new generation high-powered
cells.
In January 2008, we entered into a technology partnership with Mississippi State University
(“MSU”) to develop fuel cell-battery portable power systems enabling lightweight, long endurance
military missions. The development of this power system is to be performed under a $1,600 program
that was awarded by a U.S. Defense Department agency to MSU as the prime contractor. MSU has
awarded us a $475 contract to participate in this program as a subcontractor. Under the contract,
we will oversee the development, testing, approval and manufacturing of prototypes of a new compact
military battery to be used with handheld tactical radios, building on its ongoing development work
under the Land Warrior System Stryker Interoperable Program. In addition, we established a
development and assembly operation in a 14,000 square-foot facility located in West Point,
Mississippi to manufacture products coming out of the technology partnership and other of our
products.
Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in our batteries may pose safety problems if improperly
used. We have designed our batteries to minimize safety hazards both in manufacturing and use.
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the
International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport
Association (“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods
Code (“IMDG”), and in the U.S. by the Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (“PHMSA”). These regulations are based on the United Nations
Recommendations on the Transport of Dangerous Goods Model Regulations and the United Nations Manual
of Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous
goods regulations. New regulations that pertain to all lithium battery shippers went into effect
in October 2008 and January 2009, and additional regulations will go into effect in 2010. The
regulations require companies to meet certain testing, packaging, labeling and shipping
specifications for safety reasons. We have not incurred, and do not expect to incur, any
significant costs in order to comply with these regulations. We believe we comply with all current
U.S. and international regulations for the shipment of our products, and we intend and expect to
comply with any new regulations that are imposed. We have established our own testing facilities
to ensure that we comply with these regulations. If we are unable to comply with the new
regulations, however, or if
regulations are introduced that limit our ability to transport our products to customers in a
cost-effective manner, this could have a material adverse effect on our business, financial
condition and results of operations.
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Our RPS lead acid products have been tested and have been deemed to meet all requirements as
specified in 49 CFR 173.159 (d) for exception as hazardous material classification. Our RPS lead
acid batteries have been tested and have been deemed to meet all requirements as specified in the
special provision 238 for determination of “Non-Spillable” and are not subject to the provision of
49 CFR 173.159 (d).
The European Union’s Restriction of Hazardous Substances (“RoHS”) Directive places
restrictions on the use of certain hazardous substances in electrical and electronic equipment. All
applicable products sold in the European Union market after July 1, 2006 must pass RoHS compliance.
While this directive does not apply to batteries and does not currently affect our defense
products, should any changes occur in the directive that would affect our products, we intend and
expect to comply with any new regulations that are imposed. Our commercial chargers are in
compliance with this directive. Additional European Union Directives, entitled the Waste
Electrical and Electronic Equipment (“WEEE”) Directive and the Directive on Batteries and
Accumulators and Waste Batteries and Accumulators, impose regulations affecting our non-defense
products. These directives require that producers or importers of particular classes of electrical
goods are financially responsible for specified collection, recycling, treatment and disposal of
past and future covered products. These directives assign levels of responsibility to companies
doing business in European Union markets based on their relative market share. These directives
call on each European Union member state to enact enabling legislation to implement the directive.
As additional European Union member states pass enabling legislation our compliance system should
be sufficient to meet such requirements. Our current estimated costs associated with our compliance
with these directives based on our current market share are not significant. However, we continue
to evaluate the impact of these directives as European Union member states implement guidance, and
actual costs could differ from our current estimates.
China’s “Management Methods for Controlling Pollution Caused by Electronic Information
Products Regulation” (“China RoHS”) provides a two-step, broad regulatory framework including
similar hazardous substance restrictions as are imposed by the European Union’s RoHS Directive, and
apply to methods for the control and reduction of pollution and other public hazards to the
environment caused during the production, sale, and import of electronic information products
(“EIP”) in China affecting a broad range of electronic products and parts, with an implementation
date of March 1, 2007. Currently, only the first step of the regulatory framework of China RoHS,
which details marking and labeling requirements under Standard SJT11364-2006 (“Marking Standard”),
is in effect. However, the methods under China RoHS only apply to EIP placed in the marketplace in
China. Additionally, the Marking Standard does not apply to components sold to OEM’s for use in
other EIP. Our sales in China are limited to sales to OEM’s and to distributors who supply to
OEM’s. Should our sales strategy change to include direct sales to end-users, our compliance
system is sufficient to meet our requirements under China RoHS. Our current estimated costs
associated with our compliance with this regulation based on our current market share are not
significant. However, we continue to evaluate the impact of this regulation, and actual costs could
differ from our current estimates.
National, state and local laws impose various environmental controls on the manufacture,
transportation, storage, use and disposal of batteries and of certain chemicals used in the
manufacture of batteries. Although we believe that our operations are in substantial compliance
with current environmental regulations, there can be no assurance that changes in such laws and
regulations will not impose costly compliance requirements on us or otherwise subject us to future
liabilities. There can be no assurance that additional or modified regulations relating to the
manufacture, transportation, storage, use and disposal of materials used to manufacture our
batteries or restricting disposal of batteries will not be imposed or how these regulations will
affect us or our customers, that could have a material adverse effect on our business, financial
condition and results of operations. In 2008, we spent approximately $447 on environmental
controls, including costs to properly dispose of potentially hazardous waste.
Since non-rechargeable and rechargeable lithium battery chemistries react adversely with water
and water vapor, certain of our manufacturing processes must be performed in a controlled
environment with low relative humidity. Our Newark, New York, Abingdon, England and Shenzhen,
China facilities contain dry rooms or glove box equipment, as well as specialized air-drying
equipment.
Non-Rechargeable Products
Our non-rechargeable battery products incorporate lithium metal, which reacts with water and
may cause fires if not handled properly. In the past, we have experienced fires that have
temporarily interrupted certain manufacturing operations. We believe that we have adequate fire
insurance, including business interruption insurance, to protect against fire losses in our
facilities.
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Our 9-volt battery, among other sizes, is designed to conform to the dimensional and
electrical standards of the American National Standards Institute, and the 9-volt battery and a
range of 3-volt cells are recognized under the Underwriters Laboratories, Inc. Component
Recognition Program.
Rechargeable Products
We are not currently aware of any regulatory requirements regarding the disposal of lithium
ion rechargeable cells and batteries.
Our lead acid batteries are recovered from our customers and delivered to a permitted lead
smelter for reclamation following applicable federal, state and local regulations.
Communications Systems
We are not currently aware of any other regulatory requirements regarding the disposal of
communications accessories.
Design and Installation Services
Our RPS lead acid products have been tested and have been deemed to meet all requirements as
specified in 49 CFR 173.159 (d) for exception as hazardous material classification. Our RPS lead
acid batteries have been tested and have been deemed to meet all requirements as specified in the
special provision 238 for determination of “Non-Spillable” and are not subject to the provision of
49 CFR 173.159 (d).
Corporate
Please refer to the description of the environmental remediation for our Newark, New York
facility set forth in Item 3, Legal Proceedings of this report.
Competition
Competition in both the battery and communications systems markets is, and is expected to
remain, intense. The competition ranges from development stage companies to major domestic and
international companies, many of which have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than ours. We compete against companies
producing batteries as well as those offering standby power installation services, and companies
producing communications systems, design and installation services. We compete on the basis of
design flexibility, performance and reliability. There can be no assurance that our technologies
and products will not be rendered obsolete by developments in competing technologies that are
currently under development or that may be developed in the future or that our competitors will not
market competing products that obtain market acceptance more rapidly than ours.
Historically, although other entities may attempt to take advantage of the growth of the
battery market, the lithium battery industry has certain technological and economic barriers to
entry. The development of technology, equipment and manufacturing techniques and the operation of
a facility for the automated production of lithium batteries require large capital expenditures,
which may deter new entrants from commencing production. Through our experience in battery
manufacturing, we have also developed expertise, which we believe would be difficult to reproduce
without substantial time and expense in the non-rechargeable battery market.
Competition in the standby power market is concentrated among a number of suppliers and
installers ranging from small distributors who purchase, resell and install products manufactured
by others to major battery and power supply manufacturers, which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly greater than those
of ours. We compete on the basis of product and installation design, functionality, flexibility,
performance, reliability and service. There can be no assurance that our technology and products
will not be rendered obsolete by developments in competing technologies that are currently under
development or that may be developed in the future or that our competitors will not market
competing products that obtain market acceptance more rapidly than ours.
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Employees
As of February 1, 2009, we employed a total of 1,191 permanent and temporary employees: 67 in
research and development, 988 in production and 136 in sales and administration. Of the total, 893
are employed in the U.S., 15 in Europe and 283 in Asia. None of our employees is represented by a
labor union. We consider our employee relations to be satisfactory.
ITEM 1A. RISK FACTORS
We face risks related to general domestic and global economic conditions.
In general, our operating results can be significantly affected by negative economic
conditions, high labor, material and commodity costs and unforeseen changes in demand for our
products and services. These risks are heightened as economic conditions globally have
deteriorated significantly and may remain at recessionary levels for the foreseeable future. The
current recessionary conditions could have a potentially significant negative impact on demand for
our products and services, which may have a direct negative impact on our sales and profitability,
as well as our ability to generate sufficient internal cash flows or access credit at reasonable
rates to meet future operating expenses, service debt and fund capital expenditures.
We face risks related to the current credit crisis.
We currently generate sufficient operating cash flows, which combined with access to the
credit markets, provides us with significant discretionary funding capacity. However, the recent
disruption in credit markets, may impact demand for our products and services, as well as our
ability to manage normal relationships with our customers, suppliers and creditors. Tighter credit
markets could result in supplier or customer disruptions.
The potential bankruptcy of certain customers could leave us exposed to certain risks of
collection of outstanding receivables. For example, approximately 5% of our business is associated
with the automotive industry, which has recently experienced significant financial difficulties.
If any of our customers declare bankruptcy, this could have a material adverse effect on our
business, financial condition and results of operations.
We may be unable to obtain financing to fund ongoing operations and future growth.
While we believe that our revenue growth projections and our ongoing cost controls will allow
us to generate cash and achieve profitability in the foreseeable future, there is no assurance as
to when or if we will be able to achieve our projections. Our future cash flows from operations,
combined with our accessibility to cash and credit, may not be sufficient to allow us to finance
ongoing operations or to make required investments for future growth. In addition, recent
significant orders have required us to ramp up our supply chain quickly, and this will result in a
need for additional working capital. We may need to seek additional credit or access capital
markets for additional funds. There is no assurance, given the current state of credit markets,
that we would be successful in this regard.
We have certain debt covenants that must be maintained in accordance with the provisions of
our credit facility. There is no assurance that we will be able to continue to meet these debt
covenants in the future. If we default on any of our debt covenants and we are unable to
renegotiate credit terms in order to comply with such covenants, this could have a material adverse
effect on our business, financial condition and results of operations.
While we believe relations with our lenders are good and have received waivers as necessary in
the past, there can be no assurance that such waivers will always be obtained when needed. In such
case, we believe we have, in the aggregate, sufficient cash, cash generation capabilities from
operations, working capital and financing alternatives at our disposal, including but not limited
to alternative borrowing arrangements and other available lenders, to fund operations in the normal
course for the foreseeable future. If we are unable to achieve our plans or unforeseen events
occur, we may need to implement alternative plans to provide us with sufficient levels of liquidity
and working capital. While we believe we could complete our 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 we would be successful in our implementation of such plans.
A decline in demand for products or services using our batteries or communications systems could
reduce demand for our products or services.
A substantial portion of our business depends on the continued demand for products or services
using our batteries and communications systems sold by our customers, including OEM’s. Our
success depends significantly upon
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the success of those customers’ products or services in the
marketplace. We are subject to many risks beyond our control that influence the success or failure
of a particular product or service offered by a customer, including:
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competition faced by the customer in its particular industry, |
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market acceptance of the customer’s product or service, |
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the engineering, sales, marketing and management capabilities of the customer, |
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technical challenges unrelated to our technology or products faced by the customer
in developing its products or services, and |
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the financial and other resources of the customer. |
For instance, in the years ended December 31, 2006, 2007, 2008, 27%, 17% and 8% of our
revenues, respectively, were comprised of sales of our 9-volt batteries, and of this, approximately
47%, 41% and 39%, respectively, pertained to sales to smoke alarm OEMs. If the retail demand for
long-life smoke alarms decreases significantly, this could have a material adverse effect on our
business, financial condition and results of operations.
Our customers may not meet the volume requirements in our supply agreements.
We sell most of our products and services through supply agreements and contracts. While
supply agreements and contracts contain volume-based pricing based on expected volumes, industry
practices dictate that pricing is rarely adjusted retroactively when contract volumes are not
achieved. Every effort is made to adjust future prices accordingly, but the ability to adjust
prices is generally based on market conditions.
Our growth and expansion strategy could strain or overwhelm our resources.
Rapid growth of our business could significantly strain management, operations and technical
resources. If we are successful in obtaining rapid market growth of our products and services, we
will be required to deliver large volumes of quality products and increased levels of services to
customers on a timely basis at a reasonable cost to those customers. For example, the large
contracts received from the U.S. military for our batteries using cylindrical cells could strain
the current capacity capabilities of our manufacturing facilities and require additional equipment
and time to build a sufficient support infrastructure. This demand could also create working
capital issues for us, as we may need increased liquidity to fund purchases of raw materials and
supplies. We cannot assure, however, that our business will grow rapidly or that our efforts to
expand manufacturing and quality control activities will be successful or that we will be able to
satisfy commercial scale production requirements on a timely and cost-effective basis.
We have a strategy to grow our business through the acquisition of complementary businesses or
through business partnerships, for example joint ventures, in addition to organic growth. Our
inability to acquire such businesses, or increased competition for such businesses which could
increase our acquisition costs, could adversely affect our growth strategy and results of
operations. In addition, our inability to improve the operating margins of businesses we acquire
or operate such acquired businesses profitably or to effectively integrate the operations of those
acquired businesses could also adversely affect our business, financial condition and results of
operations.
In 2006 we acquired McDowell and ABLE, in 2007 we acquired RedBlack, Stationary Power and RPS,
and in 2008 we formed a joint venture in India and acquired USE, which added new facilities and
operations to our overall business. We experienced some initial operational challenges at McDowell
that required a greater amount of management’s time to resolve than we expected. The integration
of recent, and future, acquisitions could place an increased burden on our management team which
could adversely impact our ability to effectively manage these businesses.
We also will be required to continue to improve our operations, management and financial
systems and controls in order to remain competitive. The failure to manage growth and expansion
effectively could have an adverse effect on our business, financial condition, and results of
operations.
Our acquisitions and business partnerships may not result in the revenue growth and profitability
that we expect. In addition, we may not be able to successfully integrate our acquisitions.
We are integrating our acquisitions into our business and assimilating their operations,
services, products and personnel with our management policies, procedures and strategies. We
cannot be sure that we will achieve the benefits of revenue growth and profitability that we expect
from these acquisitions or that we will not incur unforeseen additional costs or expenses in
connection with the integration of these acquisitions. To effectively manage our expected growth,
we must continue to successfully manage our integration of these companies and continue to improve
our operational and
17
information technology systems, internal procedures, accounts receivable and
management, financial and operational controls to accommodate these acquisitions. If we fail in
any of these areas, our business could be adversely affected.
The U.S. and foreign governments can audit our contracts with their respective defense and
government agencies and, under certain circumstances, can adjust the economic terms of those
contracts.
A significant portion of our business comes from sales of products and services to the U.S.
and foreign governments through various contracts. These contracts are subject to procurement laws
and regulations that lay out policies and procedures for acquiring goods and services. The
regulations also contain guidelines for managing contracts after they are awarded, including
conditions under which contracts may be terminated, in whole or in part, at the government’s
convenience or for default. Failure to comply with the procurement laws or regulations can result
in civil, criminal or administrative proceedings involving fines, penalties, suspension of
payments, or suspension or disbarment from government contracting or subcontracting for a period of
time.
We have had certain “exigent”, non-bid contracts with the U.S. government that 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 December 31, 2008, 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. We have reviewed these audit reports, have submitted our response to these audits and
believe, taken as a whole, the proposed audit adjustments can be offset with the consideration of
other compensating cost increases that occurred prior to the final negotiation of the contracts.
While we believe that potential exposure exists relating to any final negotiation of these proposed
adjustments, we cannot reasonably estimate what, if any, adjustment may result when finalized. In
addition, in June 2007, we received a request from the Office of Inspector General of the
Department of Defense (“DoD IG”) seeking certain information and documents relating to our business
with the Department of Defense. We are cooperating with the DoD IG inquiry and are furnishing the
requested information and documents. At this time we have no basis for assessing whether we might
face any penalties or liabilities on account of the DoD IG inquiry. The aforementioned
DCAA-related adjustments could reduce margins and, along with the aforementioned DoD IG inquiry,
could have an adverse effect on our business, financial condition and results of operation.
We are subject to the contract rules and procedures of the U.S. and foreign governments.
These rules and procedures create significant risks and uncertainties for us that are not usually
present in contracts with private parties.
We will continue to develop battery products, communications systems and services to meet the
needs of the U.S. and foreign governments. We compete in solicitations for awards of contracts.
The receipt of an award, however, does not always result in the immediate release of an order and
does not guarantee in any way any given volume of orders. Any delay of solicitations or
anticipated purchase orders by, or future failure of, the U.S. or foreign governments to purchase
products manufactured by us could have a material adverse effect on our business, financial
condition and results of operations. Additionally, in these scenarios we are typically required to
successfully meet contractual specifications and to pass various qualification-testing for the
products under contract. Our inability to pass these tests in a timely fashion, as well as meet
delivery schedules for orders released under contract, could have a material adverse effect on our
business, financial condition and results of operations.
When a government contract is awarded, there is a government procedure that permits
unsuccessful companies to formally protest such award if they believe they were unjustly treated in
the evaluation process. As a result of these protests, the government is precluded from proceeding
under these contracts until the protests are resolved. A prolonged delay in the resolution of a
protest, or a reversal of an award resulting from such a protest could have a material adverse
effect on our business, financial condition and results of operations.
A significant portion of our revenues is derived from certain key customers.
A significant portion of our revenues is derived from contracts with the U.S. and foreign
militaries or OEMs that supply the U.S. and foreign militaries. In the years ended December 31,
2008, 2007 and 2006, approximately 75%, 67%, and 47% respectively, of our revenues were comprised
of sales made directly or indirectly to the U.S. and foreign militaries. During the year ended
December 31, 2008, we had two major customers, Raytheon Company and Port Electronics Corp., which
comprised 29% and 16% of our revenue, respectively. During the year ended December 31, 2007, we
had three major customers, the U.S. Department of Defense, the U.K. Ministry of Defence and
Raytheon Company, which comprised 14%, 12%, and 13% of our revenue, respectively. During the year
ended December 31, 2006, we had one major customer, the U.S.
18
Department of Defense, which comprised
20% of our revenue. There were no other customers that comprised greater than 10% of our total
revenues during the years ended December 31, 2008, 2007 and 2006. While sales to these customers
were substantial during the years ended December 31, 2008, 2007 and 2006, we do not consider these
customers to be significant credit risks. Government decisions regarding military deployment and
budget allocations to fund military operations may have an impact on the demand for our products
and services. If the demand for products and services from the U.S. or foreign militaries were to
decrease significantly, this could have a material adverse effect on our business, financial
condition and results of operations.
We generally do not distribute our products to a concentrated geographical area nor is there a
significant concentration of credit risks arising from individuals or groups of customers engaged
in similar activities, or who have similar economic characteristics, except for our automotive
industry customers. Approximately 5% of our business in 2008 was associated with the automotive
industry, which has recently experienced significant financial difficulties. We have two customers
that comprised 36% of our trade accounts receivables as of December 31, 2008. We have two
customers that comprised 42% of our trade accounts receivable as of December 31, 2007. There were
no other customers that comprised greater than 10% of our total trade accounts receivable as of
December 31, 2008 and 2007. We do not normally obtain collateral on trade accounts receivable.
Our efforts to develop new commercial applications for our products could fail.
Although we are involved with developing certain products for new commercial applications, we
cannot provide assurance that volume acceptance of our products will occur due to the highly competitive
nature of the business. There are many new product and technology entrants into the marketplace,
and we must continually reassess the market segments in which our products can be successful and
seek to engage customers in these segments that will adopt our products for use in their products.
In addition, these companies must be successful with their products in their markets for us to gain
increased business. Increased competition, failure to gain customer acceptance of products, the
introduction of competitive technologies or failure of our customers in their markets could have a
further adverse effect on our business.
We may incur significant costs because of the warranties we supply with our products and services.
With respect to our battery products, we typically offer warranties against any defects due to
product malfunction or workmanship for a period up to one year from the date of purchase. With
respect to our communications systems products, we typically offer up to a four-year warranty. We
also offer a 10-year warranty on our 9-volt batteries that are used in ionization-type smoke
alarms. With respect to the installation of our standby power systems, we offer a warranty over
the installation, generally restrictive to meeting the customers’ performance specifications. We
provide for a reserve for these potential warranty expenses, which is based on an analysis of
historical warranty issues. There is no assurance that future warranty claims will be consistent
with past history, and in the event we experience a significant increase in warranty claims, there
is no assurance that our reserves will be sufficient. This could have a material adverse effect on
our business, financial condition and results of operations.
We are subject to certain safety risks, including the risk of fire, inherent in the manufacture and
use of lithium batteries.
Due to the high energy inherent in lithium batteries, our lithium batteries can pose certain
safety risks, including the risk of fire. We incorporate procedures in research, development,
product design, manufacturing processes and the transportation of lithium batteries that are
intended to minimize safety risks, but we cannot assure that accidents will not occur or that our
products will not be subject to recall for safety concerns. Although we currently carry insurance
policies which cover loss of the plant and machinery, leasehold improvements, inventory and
business interruption, any accident, whether at the manufacturing facilities or from the use of the
products, may result in significant production delays or claims for damages resulting from
injuries. While we maintain what we
believe to be sufficient casualty liability coverage to protect against such occurrences, these
types of losses could have a material adverse effect on our business, financial condition and
results of operation.
We may incur significant costs because of known and unknown environmental matters.
National, state and local laws impose various environmental controls on the manufacture,
transportation, storage, use and disposal of batteries and of certain chemicals used in the
manufacture of batteries. Although we believe that our operations are in substantial compliance
with current environmental regulations and that, except as noted below, there are no environmental
conditions that will require material expenditures for clean-up at our present or former facilities
or at facilities to which we have sent waste for disposal, there can be no assurance that changes
in such laws and regulations will not impose costly compliance requirements on us or otherwise
subject us to future liabilities. There can be no assurance that additional or modified
regulations relating to the manufacture, transportation, storage, use and disposal of materials
19
used to manufacture our batteries or restricting disposal of batteries will not be imposed or how
these regulations will affect us or our customers, that could have a material adverse effect on our
business, financial condition and results of operations.
In conjunction with our purchase/lease of our Newark, New York facility in 1998, 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. We have submitted various work
plans to the New York State Department of Environmental Conservation (“NYSDEC”) regarding further
environmental testing and sampling in order to determine the scope of any additional remediation.
We subsequently 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 our outside environmental firm. In
November 2006, the NYSDEC completed its review of the Final Investigation Report and requested
additional groundwater, soil and sediment sampling. A work plan to address the additional
investigation was submitted to the NYSDEC in January 2007 and was approved in April 2007.
Additional investigation work was performed in May 2007. A preliminary report of results was
prepared by our outside environmental consulting firm in August 2007 and a meeting with the NYSDEC
and the New York State Department of Health (“NYSDOH”) took place in September 2007. As a result
of this meeting, NYSDEC and NYSDOH have requested additional investigation work. A work plan to
address this additional investigation was submitted to and approved by the NYSDEC in November 2007.
Additional investigation work was performed in December 2007. Our environmental consulting firm
has prepared and submitted a Final Investigation Report to the NYSDEC for review. The results of
the additional investigation requested by the NYSDEC may increase the estimated remediation costs
modestly. At December 31, 2008, we have reserved $52 for this matter. The ultimate resolution of
this matter may result in us incurring costs in excess of what we have reserved.
The future regulatory direction of the European Union’s Restriction of Hazardous Substances
(“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) Directives, as they pertain to our
products, is uncertain. Their potential impact to our business would become material if battery
packs were to be included in new guidelines and we were unable to procure materials in a timely
manner. Other associated risks related to these directives include excess inventory risk due to a
write off of non-compliant inventory. We continue to monitor the regulatory activity of the
European Union to ascertain such risks.
China’s “Management Methods for Controlling Pollution Caused by Electronic Information
Products Regulation” (“China RoHS”) provides a two-step, broad regulatory framework, including
similar hazardous substance restrictions as are imposed by the European Union’s RoHS Directive, and
apply to methods for the control and reduction of pollution and other public hazards to the
environment caused during the production, sale, and import of electronic information products
(“EIP”) in China affecting a broad range of electronic products and parts, with an implementation
date of March 1, 2007. Currently, only the first step of the regulatory framework of China RoHS,
which details marking and labeling requirements under Standard SJT11364-2006 (“Marking Standard”),
is in effect. However, the methods under China RoHS only apply to EIP placed in the marketplace in
China. Additionally, the Marking Standard does not apply to components sold to OEMs for use in
other EIP. Our sales in China are limited to sales to OEMs and to distributors who supply to OEMs.
Should our sales strategy change to include direct sales to end-users, our compliance system is
sufficient to meet our requirements under China RoHS. Our current estimated costs associated with
our compliance with this regulation based on our current market share are not significant.
However, we continue to evaluate the impact of this regulation, and actual costs could differ from
our current estimates.
Any inability to comply with changes to the regulations for the shipment of our products could
limit our ability to transport our products to customers in a cost-effective manner.
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the
International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport
Association (“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods
Code (“IMDG”) and in the U.S. by the Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (“PHMSA”). These regulations are based on the United Nations
Recommendations on the Transport of Dangerous Goods Model Regulations and the United Nations Manual
of Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous
goods regulations. New regulations that pertain to all lithium battery shippers went into effect
in October 2008 and January 2009, and additional regulations will go into effect in 2010. The
regulations require companies to meet certain testing, packaging, labeling and shipping
specifications for safety reasons. We have not incurred, and do not expect to incur, any
significant costs in order to comply with these regulations. We believe we comply with all current
U.S. and international regulations for the shipment of our products, and we intend and expect to
comply with any new regulations that are imposed. We have established our own testing facilities
to ensure that we comply with these regulations. If we are unable to comply with the new
regulations, however, or if regulations are introduced that limit our ability to transport our
products to customers in a cost-effective manner, this could have a material adverse effect on our
business, financial condition and results of operations.
20
Our RPS lead acid products have been tested and have been deemed to meet all requirements as
specified in 49CFR 173.159 (d) for exception as hazardous material classification. Our RPS lead
acid batteries have been tested and have been deemed to meet all requirements as specified in the
special provision 238 for determination of “Non-Spillable” and are not subject to the provision of
49CFR 173.159 (d).
Our supply of raw materials and components could be disrupted.
Certain materials and components used in our products are available only from a single or a
limited number of suppliers. As such, some materials and components could become in short supply
resulting in limited availability and/or increased costs. Additionally, we may elect to develop
relationships with a single or limited number of suppliers for materials and components that are
otherwise generally available. Due to our involvement with supplying defense products to the
government, we could receive a government preference to continue to obtain critical supplies to
meet military production needs. However, if the government did not provide us with a government
preference in such circumstances, the difficulty in obtaining supplies could have a material
adverse effect on our business, financial condition and results of operations. Although we believe
that alternative suppliers are available to supply materials and components that could replace
materials and components currently used and that, if necessary, we would be able to redesign our
products to make use of such alternatives, any interruption in the supply from any supplier that
serves as a sole source could delay product shipments and have a material adverse effect on our
business, financial condition and results of operations. We have experienced interruptions of
product deliveries by sole source suppliers in the past, and we cannot guarantee that we will not
experience a material interruption of product deliveries from sole source suppliers in the future.
Additionally, we could face increasing pricing pressure from our suppliers dependent upon volume,
due to rising costs by these suppliers that could be passed on to us in higher prices for our raw
materials, which could have a material effect on our business, financial condition and results of
operations.
Any inability to protect our proprietary and intellectual property could allow our competitors and
others to produce competing products based on our proprietary and intellectual property.
Our success depends more on the knowledge, ability, experience and technological expertise of
our employees than on the legal protection of patents and other proprietary rights. We claim
proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks
relating to products and manufacturing processes. We cannot guarantee the degree of protection
these various claims may or will afford, or that competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our technology. We protect
our proprietary rights in our products and operations through contractual obligations, including
nondisclosure agreements with certain employees, customers, consultants and strategic partners.
There can be no assurance as to the degree of protection these contractual measures may or will
afford. We have had patents issued and have patent applications pending in the U.S. and elsewhere.
We cannot assure (1) that patents will be issued from any pending applications, or that the claims
allowed under any patents will be sufficiently broad to protect our technology, (2) that any
patents issued to us will not be challenged, invalidated or circumvented, or (3) as to the degree
or adequacy of protection any patents or patent applications may or will afford. If we are found
to be infringing third party patents, there can be no assurance that we will be able to obtain
licenses with respect to such patents on acceptable terms, if at all. The failure to obtain
necessary licenses could delay product shipment or the introduction of new products, and costly
attempts to design around such patents could foreclose the development, manufacture or sale of
products.
The loss of key personnel could significantly harm our business, and the ability and technical
competence of persons we hire will be critical to the success of our business.
Because of the specialized, technical nature of our business, we are highly dependent on
certain members of our management, marketing, engineering and technical staffs. The loss of these
employees could have a material adverse effect on our business, financial condition and results of
operations. In addition to developing manufacturing capacity to produce high volumes of batteries,
we must attract, recruit and retain a sizeable workforce of technically competent employees. Our
ability to pursue effectively our business strategy will depend upon, among other factors, the
successful recruitment and retention of additional highly skilled and experienced managerial,
marketing, engineering and technical personnel, and the integration of such personnel obtained
through business acquisitions. We cannot assure that we will be able to retain or recruit this
type of personnel. An inability to hire sufficient numbers of people or to find people with the
desired skills could result in greater demands being placed on limited management resources which
could have a material adverse effect on our business, financial condition and results of
operations.
21
We are subject to competition from other manufacturers and suppliers of portable and standby
batteries, communications systems and services.
We compete with other manufacturers and suppliers of non-rechargeable and rechargeable
portable and standby batteries, communications systems and services. We cannot assure that we will
successfully compete with these manufacturers and suppliers, many of which have substantially
greater financial, technical, manufacturing, distribution, marketing, sales and other resources.
Our products could become obsolete.
The market for our products is characterized by changing technology and evolving industry
standards, often resulting in product obsolescence or short product lifecycles. Although we
believe that our products are comprised of state-of-the-art technology, there can be no assurance
that competitors will not develop technologies or products that would render our technologies and
products obsolete or less marketable.
Many of the companies with which we compete have substantially greater resources than we do,
and some have the capacity and volume of business to be able to produce their products more
efficiently than we can at the present time. In addition, these companies are developing or have
developed products using a variety of technologies that are expected to compete with our
technologies. If these companies successfully market their products in a manner that renders our
technologies obsolete, there will be a material adverse effect on our business, financial condition
and results of operations.
We are subject to foreign currency fluctuations.
We maintain manufacturing operations in North America, Europe and Asia, and we export products
to various countries. We purchase materials and sell our products in foreign currencies, and
therefore currency fluctuations may impact our pricing of products sold and materials purchased.
In addition, our foreign subsidiaries maintain their books in local currency, and the translation
of those subsidiary financial statements into U.S. dollars for our consolidated financial
statements could have an adverse effect on our consolidated financial results, due to changes in
local currency relative to the U.S. dollar. Accordingly, currency fluctuations could have a
material adverse effect on our business, financial condition and results of operations.
Our ability to use our Net Operating Loss Carryforwards in the future may be limited, which could
have an adverse impact on our tax liabilities.
At
December 31, 2008, we had approximately $58,400 of net operating loss carryforwards
(“NOL’s”) available to offset future taxable income. We continually assess the carrying value of
this asset based on the relevant accounting standards. As of December 31, 2008, we reflected a
full valuation allowance against our deferred tax asset to the extent the asset is not able to be
offset by future reversing temporary differences. As a result, we have reflected a net deferred
tax liability of $3,453 in the U. S. We have reflected a net deferred tax asset of $-0- in the U.
K. and China due to our current assessment that it is more likely than not to not be realized. As
we continue to assess the realizability of our deferred tax assets, the amount of the valuation
allowance could be reduced. In addition, certain of our NOL carryforwards are subject to U.S.
alternative minimum tax such that carryforwards can offset only 90% of alternative minimum taxable
income. Achieving our business plan targets, particularly those relating to revenue and
profitability, is integral to our assessment regarding the recoverability of our net deferred tax
asset.
We have determined that a change in ownership, as defined under Internal Revenue Code Section
382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to an
annual limitation estimated to be in the range of approximately $12,000 to $14,500. This limitation
did not have an impact on income taxes determined for 2008. Such a limitation could result in the
possibility of a cash outlay for income taxes in a future year when earnings exceed the amount of
NOL carryforwards that can be used by us. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during
2008 from a manufacturing and assembly center to primarily a distribution and service center.
Our quarterly and annual results and the price of our common stock could fluctuate significantly.
Our future operating results may vary significantly from quarter to quarter and from year to
year depending on factors such as the timing and shipment of significant orders, new product
introductions, delays in customer releases of purchase orders, delays in receiving raw materials
from vendors, the mix of distribution channels through which we sell our products and services and
general economic conditions. Frequently, a substantial portion of our revenue in each quarter is
generated from orders booked and fulfilled during that quarter. As a result, revenue levels
are difficult to predict for each quarter. If revenue results are below expectations, operating
results will be adversely affected as we have a sizeable base of fixed overhead costs that do not
fluctuate much with the changes in revenue. Due to such variances in operating results, we have
sometimes failed to meet, and in the future may not meet, market expectations or even our own
guidance regarding our future operating results.
22
In addition to the uncertainties of quarterly and annual operating results, future
announcements concerning us or our competitors, including technological innovations or commercial
products, litigation or public concerns as to the safety or commercial value of one or more of our
products may cause the market price of our common stock to fluctuate substantially for reasons
which may be unrelated to our operating results. These fluctuations, as well as general economic,
political and market conditions, may have a material adverse effect on the market price of our
common stock.
The re-payment of the debt outstanding under our credit facility and the vesting of options under
certain of our equity compensation plans may both be accelerated if any single shareholder owns
more than 30% of our stock. Currently, our largest shareholder owns in excess of 25% of our stock.
Our largest single shareholder is Grace Brothers, Ltd., which, as of its most recent Schedule
13D/A filing, beneficially owned 26.4% of our issued and outstanding shares of common stock. On
June 6, 2007, Mr. Bradford T. Whitmore, general partner of Grace Brothers, Ltd., became a member of
our Board of Directors. If Grace Brothers, Ltd. were to increase its ownership to more than 30%,
it would be deemed a “change in control” for purposes of our credit facility administered by JP
Morgan Chase and for purposes of options granted under our 2004 Amended and Restated Long Term
Incentive Plan, or LTIP. If a “change in control” were to occur, our commercial lenders would be
able to demand payment of all amounts outstanding under our existing credit facility and the
vesting of all outstanding options granted under our LTIP would be accelerated resulting in a
significant expense being charged against our income for the period during which the “change in
control” occurred, all of which could have a material, adverse effect on our business, financial
condition and results of operations.
Our operations in China are subject to unique risks and uncertainties.
Our operating facility in China presents risks including, but not limited to, political
changes, civil unrest, labor disputes, currency restrictions and changes in currency exchange
rates, taxes, duties, import and export laws and boycotts and other civil disturbances that are
outside of our control. Any such disruptions could have a material adverse effect on our business,
financial condition and results of operations.
We may be unable to adequately maintain and monitor our internal controls over financial reporting.
We maintain and monitor various internal control processes over our financial reporting.
Whenever we acquire a new business or operations, we need to integrate those operations with our
existing control processes, which can prove to be a challenge if the acquired business had not been
required to have such controls in effect. We are in the process of integrating our recently
acquired companies into our business and assimilating their operations, services, products and
personnel with our management policies, procedures and strategies. While we work to ensure a
stringent control environment, it is possible that we may fail to adequately maintain and monitor
our various internal control processes over our financial reporting. Any such failure could result
in internal control deficiencies that might be considered to be material weaknesses. Such material
weaknesses in internal controls would be indicative of potential factors that affect the
reliability of our financial statements and other reported financial information and impact the
financial results we report.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2008, we own two buildings in Newark, New York comprising approximately
250,000 square feet. Our corporate headquarters are located in our Newark, New York facility. In
addition, we lease approximately 35,000 square feet in a facility based in Abingdon, England and
approximately 130,000 square feet in four buildings on one campus in Shenzhen, China. The
Shenzhen, China campus location includes dormitory facilities. We also lease sales and
administrative offices, as well as manufacturing and production facilities, in nine separate
facilities across the U.S. and one in India. In addition, we lease a separate sales office in
Shenzhen, China. Our research and development efforts for our battery products are conducted at
our Newark, New York and Shenzhen, China facilities, while our research and development efforts for
our communications accessories are conducted at our Newark, New York facility and our research and
development efforts for our amplifier products are conducted at our facility in Woodinville,
Washington. On occasion, we rent additional warehouse space to store inventory and
non-operational equipment. We believe that our facilities are adequate and suitable for our
current needs. However, we may require additional manufacturing and administrative space if demand
for our products and services continues to grow.
23
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the normal course of business.
We believe that the final disposition of such matters will not have a material adverse effect on
the financial position or results of our operations.
In conjunction with our purchase/lease of our Newark, New York facility in 1998, we entered
into a payment-in-lieu of tax agreement, which provided us 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. We retained an engineering firm, which estimated that
the cost of remediation should be in the range of $230. In February 1998, we entered into an
agreement with a third party which provides that we 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 us for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. We have fully reserved for our 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. We responded by
submitting a work plan to NYSDEC, which was approved in April 2002. We 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 we 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. We 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 our outside environmental consulting firm. In November 2006,
the NYSDEC completed its review of the Final Investigation Report and requested additional
groundwater, soil and sediment sampling. A work plan to address the additional investigation was
submitted to the NYSDEC in January 2007 and was approved in April 2007. Additional investigation
work was performed in May 2007. A preliminary report of results was prepared by our outside
environmental consulting firm in August 2007 and a meeting with the NYSDEC and NYSDOH took place in
September 2007. As a result of this meeting, NYSDEC and NYSDOH have requested additional
investigation work. A work plan to address this additional investigation was submitted to and
approved by the NYSDEC in November 2007. Additional investigation work was performed in December
2007. Our environmental consulting firm has prepared and submitted a Final Investigation Report to
the NYSDEC for review. The results of the additional investigation requested by the NYSDEC may
increase the estimated remediation costs modestly. Through December 31, 2008, total costs incurred
have amounted to approximately $227, none of which has been capitalized. At December 31, 2008 and
December 31, 2007, we have $52 and $85, respectively, reserved for this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock is included for quotation on the NASDAQ Global Market System under the symbol
“ULBI.”
The following table sets forth the quarterly high and low closing sales prices of our Common
Stock during 2007 and 2008:
| |
|
|
|
|
|
|
|
|
| |
|
Closing Sales Prices |
| |
|
High |
|
Low |
2007: |
|
|
|
|
|
|
|
|
Quarter ended March 31, 2007
|
|
$ |
11.74 |
|
|
$ |
8.04 |
|
Quarter ended June 30, 2007
|
|
|
10.57 |
|
|
|
9.00 |
|
Quarter ended September 29, 2007
|
|
|
12.86 |
|
|
|
10.57 |
|
Quarter ended December 31, 2007
|
|
|
20.75 |
|
|
|
12.19 |
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
Quarter ended March 29, 2008
|
|
$ |
22.69 |
|
|
$ |
11.56 |
|
Quarter ended June 28, 2008
|
|
|
13.35 |
|
|
|
9.67 |
|
Quarter ended September 27, 2008
|
|
|
12.18 |
|
|
|
8.65 |
|
Quarter ended December 31, 2008
|
|
|
13.90 |
|
|
|
5.19 |
|
Holders
As of February 27, 2009, there were 395 registered holders of record of our Common Stock.
Based upon information from our stock transfer agent, management estimates that there are
approximately 5,000 beneficial holders of our Common Stock.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
In October 2008, the Board of Directors authorized a share repurchase program of up to $10,000
of our common stock to be implemented over the course of a six-month period. Repurchases may be
made from time to time at management’s discretion, either in the open market or through privately
negotiated transactions. The repurchases will be made in compliance with Securities and Exchange
Commission guidelines and will be subject to market conditions, applicable legal requirements, and
other factors. We have no obligation under the program to repurchase shares and the program may be
suspended or discontinued at any time without prior notice. We intend to fund the purchase price
for shares of our common stock acquired primarily with current cash on hand and cash generated from
operations, in addition to borrowing from our credit facility, if necessary. Common stock
repurchases in the fourth quarter of 2008 were as follows:
25
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(c) Total Number |
|
|
| |
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
(d) Approximate |
| |
|
|
|
|
|
|
|
|
|
as Part of |
|
Dollar Value of |
| |
|
(a) Total Number |
|
(b) Average |
|
Publically |
|
Shares that May yet |
| |
|
of Shares |
|
Price Paid |
|
Announced Plans or |
|
Be Purchased Under |
| Period |
|
Purchased |
|
Per Share |
|
Programs |
|
The Plans or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2008 -
November 1, 2008
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
10,000 |
|
November 2, 2008 -
November 29, 2008
|
|
|
212,108 |
|
|
|
8.56 |
|
|
|
212,108 |
|
|
|
8,185 |
|
November 30, 2008 -
December 31, 2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fourth Quarter of 2008
|
|
|
212,108 |
|
|
|
|
|
|
|
212,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
We have never declared or paid any cash dividend on our capital stock. We intend to retain
earnings, if any, to finance future operations and expansion and, therefore, do not anticipate
paying any cash dividends in the foreseeable future. Any future payment of dividends will depend
upon our financial condition, capital requirements and earnings, as well as upon other factors that
the Board of Directors may deem relevant. Pursuant to our current credit facility, we are
precluded from paying any dividends.
26
ITEM 6. SELECTED FINANCIAL DATA
The financial results presented in this table include results from the last five calendar years
ended December 31, 2008, 2007, 2006, 2005 and 2004.
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
254,700 |
|
|
$ |
137,596 |
|
|
$ |
93,546 |
|
|
$ |
70,501 |
|
|
$ |
98,182 |
|
Cost of products sold |
|
|
197,757 |
|
|
|
108,822 |
|
|
|
76,103 |
|
|
|
58,243 |
|
|
|
77,880 |
|
| |
|
|
| |
Gross margin |
|
|
56,943 |
|
|
|
28,774 |
|
|
|
17,443 |
|
|
|
12,258 |
|
|
|
20,302 |
|
| |
|
|
Research and development expenses |
|
|
8,138 |
|
|
|
7,000 |
|
|
|
5,097 |
|
|
|
3,751 |
|
|
|
2,633 |
|
Selling, general and administrative expenses |
|
|
31,500 |
|
|
|
21,973 |
|
|
|
15,303 |
|
|
|
11,409 |
|
|
|
10,771 |
|
Impairment of long lived assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,803 |
|
| |
|
|
| |
Total operating and other expenses |
|
|
39,638 |
|
|
|
28,973 |
|
|
|
20,400 |
|
|
|
15,160 |
|
|
|
15,207 |
|
| |
|
|
Operating income (loss) |
|
|
17,305 |
|
|
|
(199 |
) |
|
|
(2,957 |
) |
|
|
(2,902 |
) |
|
|
5,095 |
|
Interest (expense) income, net |
|
|
(930 |
) |
|
|
(2,184 |
) |
|
|
(1,298 |
) |
|
|
(636 |
) |
|
|
(482 |
) |
Gain on insurance settlement |
|
|
39 |
|
|
|
— |
|
|
|
191 |
|
|
|
— |
|
|
|
214 |
|
Gain on McDowell settlement |
|
|
— |
|
|
|
7,550 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gain on debt conversion |
|
|
313 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Write-off of UTI investment and note receivable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,951 |
) |
Other income (expense), net |
|
|
815 |
|
|
|
493 |
|
|
|
311 |
|
|
|
(318 |
) |
|
|
352 |
|
| |
|
|
| |
Income (loss) before income taxes |
|
|
17,542 |
|
|
|
5,660 |
|
|
|
(3,753 |
) |
|
|
(3,856 |
) |
|
|
1,228 |
|
| |
|
|
Income tax provision-current |
|
|
582 |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
32 |
|
Income tax provision/(benefit)-deferred |
|
|
3,297 |
|
|
|
77 |
|
|
|
23,735 |
|
|
|
486 |
|
|
|
(21,136 |
) |
| |
|
|
Total income taxes |
|
|
3,879 |
|
|
|
77 |
|
|
|
23,735 |
|
|
|
489 |
|
|
|
(21,104 |
) |
| |
|
|
| |
Net income (loss) |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
|
$ |
(4,345 |
) |
|
$ |
22,332 |
|
| |
|
|
Net income (loss) per share-basic |
|
$ |
0.79 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.30 |
) |
|
$ |
1.59 |
|
| |
|
|
Net income (loss) per share-diluted |
|
$ |
0.78 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
$ |
(0.30 |
) |
|
$ |
1.48 |
|
| |
|
|
| |
Weighted average shares outstanding-basic |
|
|
17,230 |
|
|
|
15,316 |
|
|
|
14,906 |
|
|
|
14,551 |
|
|
|
14,087 |
|
| |
|
|
Weighted average shares outstanding-diluted |
|
|
17,705 |
|
|
|
15,557 |
|
|
|
14,906 |
|
|
|
14,551 |
|
|
|
15,074 |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and available-for-sale securities |
|
$ |
1,878 |
|
|
$ |
2,245 |
|
|
$ |
720 |
|
|
$ |
3,214 |
|
|
$ |
11,529 |
|
Working capital |
|
$ |
42,937 |
|
|
$ |
26,461 |
|
|
$ |
18,070 |
|
|
$ |
20,979 |
|
|
$ |
30,645 |
|
Total assets |
|
$ |
129,587 |
|
|
$ |
122,048 |
|
|
$ |
97,758 |
|
|
$ |
80,757 |
|
|
$ |
81,134 |
|
Total long-term debt and capital lease obligations |
|
$ |
4,670 |
|
|
$ |
16,224 |
|
|
$ |
20,043 |
|
|
$ |
25 |
|
|
$ |
7,215 |
|
Stockholders’ equity |
|
$ |
88,132 |
|
|
$ |
63,007 |
|
|
$ |
39,589 |
|
|
$ |
62,107 |
|
|
$ |
63,625 |
|
27
ITEM 7. MANAGEMENT’S 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 our products and services,
addressing the process of U.S. defense procurement, the successful commercialization of our
products, the successful integration of our acquired businesses, general domestic and global
economic conditions, including the recent distress in the financial markets that has had an adverse
impact on the availability of credit and liquidity resources generally, 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 our business strategy or development plans, capital deployment, business disruptions,
including those caused by fires, raw material supplies, environmental regulations, and other risks
and uncertainties, certain of which are beyond our control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
differ materially from those forward-looking statements described herein as anticipated, believed,
estimated or expected or words of similar import. For further discussion of certain of the matters
described above, see “Risk Factors” in Item 1A of this annual report.
The following discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report.
The financial information in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations is presented in thousands of dollars, except for share and per share
amounts.
General
We offer products and services ranging from portable and standby power solutions to
communications and electronics systems. Through our engineering and collaborative approach to
problem solving, we serve government, defense and commercial customers across the globe. We
design, manufacture, install and maintain power and communications systems including: rechargeable
and non-rechargeable batteries, standby power systems, communications and electronics systems and
accessories, and custom engineered systems, solutions and services. We sell our products worldwide
through a variety of trade channels, including original equipment manufacturers (“OEMs”),
industrial and retail distributors, national retailers and directly to U.S. and international
defense departments.
We report our results in four operating segments: Non-Rechargeable Products, Rechargeable
Products, Communications Systems and Design and Installation Services. The Non-Rechargeable
Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable
batteries. The Rechargeable Products segment includes: rechargeable batteries, charging systems,
uninterruptable power supplies and accessories, such as cables. The Communications Systems segment
includes: power supplies, cable and connector assemblies, RF amplifiers, amplified speakers,
equipment mounts, case equipment and integrated communication system kits. The Design and
Installation Services segment includes: standby power and communications and electronics systems
design, installation and maintenance activities and revenues and related costs associated with
various development contracts. We look at our segment performance at the gross margin level, and
we do 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. (See Note 10
in the Notes to Consolidated Financial Statements.)
We continually evaluate ways to grow, including opportunities to expand through mergers,
acquisitions and joint ventures, which can broaden the scope of our products and services, expand
operating and market opportunities and provide the ability to enter new lines of business
synergistic with our portfolio of offerings.
On May 19, 2006, we acquired 100% of the equity securities of ABLE, an established
manufacturer of lithium batteries. ABLE is located in Shenzhen, China. The total consideration
given for ABLE was a combination of cash and equity. The initial cash portion of the purchase
price 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 our
common stock, valued at $1,000, and 100,000 stock warrants valued at $526, for a total equity
consideration of $1,526. (See Note 2 in Notes to Consolidated Financial Statements for additional
information.)
28
On July 3, 2006, we finalized the acquisition of substantially all of the assets of McDowell,
a manufacturer of military communications accessories. McDowell was
located originally in Waco,
Texas, with the operations having been relocated to the Newark, New York facility during the second half
of 2007. 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, subordinated convertible promissory
note to be held by the sellers of McDowell. In addition, the purchase price was 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 final net value of these assets, under our contractual obligation under the
acquisition agreement, was $6,389, resulting in a revised purchase price of approximately $28,448.
On November 16, 2007, we finalized a settlement agreement with the sellers of McDowell, which
resolved various operational issues that arose during the first several months following the
acquisition that significantly reduced our profit margins. The settlement agreement reduced the
overall purchase price by approximately $7,900, by reducing the principal amount on the convertible
note from $20,000 to $14,000, and eliminating a $1,889 liability related to the Purchase Price
Adjustment formula. In addition, the interest rate on the convertible notes was increased from 4%
to 5% and we made prepayments totaling $3,500 on the convertible notes. In January 2008, the
convertible notes were converted in full into 700,000 shares of our common stock. (See Note 2 in
Notes to Consolidated Financial Statements for additional information.)
On September 28, 2007, we finalized the acquisition of all the issued and outstanding shares
of common stock of RedBlack, a provider of a wide range of engineering and technical services for
communication electronic systems to government agencies and prime contractors. RedBlack is located
in Hollywood, Maryland. The initial cash purchase price was $943 (net of $57 in cash acquired),
with up to $2,000 in additional cash consideration contingent on the achievement of certain sales
milestones. The additional cash consideration was payable in up to three annual payments and
subject to possible adjustments as set forth in the stock purchase agreement. On February 9, 2009,
we entered into Amendment No. 1 to the RedBlack stock purchase agreement, which eliminated the up
to $2,000 in additional cash consideration contingent on the achievement of certain sales
milestones provision, in exchange for a one time final payment of $1,020. (See Note 2 to
Consolidated Financial Statements for additional information.)
On November 16, 2007, we completed the acquisition of all of the issued and outstanding shares
of common stock of Stationary Power, an infrastructure power management services firm specializing
in engineering, installation and preventative maintenance of standby power systems, uninterruptible
power supply systems, DC power systems and switchgear/control systems for the telecommunications,
aerospace, banking and information services industries. Stationary Power is located in Clearwater,
Florida. Under the terms of the stock purchase agreement, the initial purchase price of $10,000
consisted of $5,889 (net of $111 in cash acquired) in cash and a $4,000 subordinated convertible
promissory note to be held by the previous owner of Stationary Power. In addition, on the
achievement of certain post-acquisition sales milestones, we will issue up to an aggregate amount
of 100,000 shares of our common stock. (See Note 2 in the Notes to Consolidated Financial
Statements for additional information.)
On November 16, 2007, we completed the acquisition of all of the issued and outstanding shares
of common stock of RPS, an affiliate of Stationary Power, and a supplier of lead acid batteries
primarily for use by Stationary Power in the design and installation of standby power systems.
Under the terms of the stock purchase agreement, the initial purchase price consisted of 100,000
shares of our common stock, valued at $1,383. In addition, on the achievement of certain
post-acquisition sales milestones, we will pay the sellers, in cash, 5% of sales up to the sales in
the operating plan, and 10% of sales that exceed the sales in the operating plan, for the remainder
of the calendar year 2007 and for calendar years 2008, 2009 and 2010. The additional contingent
cash consideration is payable in annual installments, and excludes sales made to Stationary Power,
which historically have comprised substantially all of RPS’s sales. (See Note 2 in the Notes to
Consolidated Financial Statements for additional information.)
In March 2008, we formed a joint venture, the India JV, with our distributor partner in India.
The India JV assembles Ultralife power solution products and manages local sales and marketing
activities, serving commercial, government and defense customers throughout India. We have
invested $61 in cash into the India JV, as consideration for our 51% ownership stake in the India
JV.
In June 2008, we changed our corporate name from Ultralife Batteries, Inc. to Ultralife
Corporation. The purpose of the name change was to align our corporate name more closely with the
business now being conducted by us, as we are no longer exclusively a battery manufacturing
company.
On November 10, 2008, we acquired certain assets of USE, a nationally recognized standby power
installation and power management services business. USE is located in Riverside, California.
Under the terms of the agreement, the initial purchase price consisted of $2,865 in cash. In
addition, on the achievement of certain post-acquisition financial
29
milestones, we will issue up to
an aggregate amount of 200,000 unregistered shares of our common stock, over a period of four
years. (See Note 2 in the Notes to Consolidated Financial Statements for additional information.)
Currently, we do not experience significant seasonal sales trends in any of our operating
segments, although sales to the U.S. Defense Department and other international defense
organizations can be sporadic based on the needs of those particular customers.
Results of Operations
Twelve Months Ended December 31, 2008 Compared With the Twelve Months Ended December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
12 Months Ended |
|
|
Increase / |
|
| |
|
12/31/2008 |
|
|
12/31/2007 |
|
|
(Decrease) |
|
| |
Revenues |
|
$ |
254,700 |
|
|
$ |
137,596 |
|
|
$ |
117,104 |
|
Cost of products sold |
|
|
197,757 |
|
|
|
108,822 |
|
|
|
88,935 |
|
| |
|
|
Gross margin |
|
|
56,943 |
|
|
|
28,774 |
|
|
|
28,169 |
|
Operating and other expenses |
|
|
39,638 |
|
|
|
28,973 |
|
|
|
10,665 |
|
| |
|
|
Operating income (loss) |
|
|
17,305 |
|
|
|
(199 |
) |
|
|
17,504 |
|
Other income (expense), net |
|
|
237 |
|
|
|
5,859 |
|
|
|
(5,622 |
) |
| |
|
|
Income before taxes |
|
|
17,542 |
|
|
|
5,660 |
|
|
|
11,882 |
|
Income tax provision |
|
|
3,879 |
|
|
|
77 |
|
|
|
3,802 |
|
| |
|
|
Net income |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
8,080 |
|
| |
|
|
Net income per share — basic |
|
$ |
0.79 |
|
|
$ |
0.36 |
|
|
$ |
0.43 |
|
| |
|
|
Net income per share — diluted |
|
$ |
0.78 |
|
|
$ |
0.36 |
|
|
$ |
0.42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic |
|
|
17,230,000 |
|
|
|
15,316,000 |
|
|
|
1,914,000 |
|
| |
|
|
Weighted average shares outstanding-diluted |
|
|
17,705,000 |
|
|
|
15,557,000 |
|
|
|
2,148,000 |
|
| |
|
|
Revenues. Total revenues for the twelve months ended December 31, 2008 amounted to $254,700,
an increase of $117,104, or 85% from the $137,596 reported for the twelve months ended December 31,
2007.
Non-Rechargeable product sales decreased $12,186, or 15%, from $80,262 last year to $68,076
this year. The decrease in Non-Rechargeable revenues was mainly attributable to the non-recurrence
in 2008 of the fulfillment of battery orders to international defense customers that occurred in
2007. Offsetting this decrease, in part, were increases in BA-5390 and other military battery
sales, as well as higher sales of backup battery systems for automotive telematics customers.
Rechargeable product revenues increased $17,935, or 107%, from $16,756 last year to $34,691
this year. The increase in Rechargeable revenues was mainly attributable to higher sales of
lithium-ion battery packs and charging systems primarily to government/defense customers.
Communications Systems revenues increased $98,932, or 266%, from $37,140 last year to $136,072
this year. The increase in Communications Systems revenues was mainly attributable to deliveries
of SATCOM-On-The-Move and other advanced communications systems related to the sizeable orders we
received during the latter part of 2007.
Design and Installation Services revenues increased $12,423, or 361%, from $3,438 last year to
$15,861 this year. The increase in Design and Installation Services revenues was mainly
attributable to the full year impact of the acquisitions of RedBlack and Stationary Power that were
completed in the second half of 2007, as well as the acquisition of USE in November 2008.
Cost of Products Sold. Cost of products sold increased $88,935, or 82%, from $108,822 for
the year ended December 31, 2007 to $197,757 for the year ended December 31, 2008, primarily as a
result of the increase in revenues. Consolidated cost of products sold as a percentage of total
revenue decreased from 79% for the twelve months ended December 31, 2007 to 78% for the year ended
December 31, 2008. Correspondingly, consolidated gross margins was 22% for the year ended December
31, 2008, compared with 21% for the year ended December 31, 2007, generally attributable to higher
sales and production volumes and a more favorable sales mix of higher margin products.
30
In our Non-Rechargeable Products segment, the cost of products sold decreased $5,230, from
$62,515 in the year ended December 31, 2007 to $57,285 in 2008. Non-Rechargeable gross margin for
2008 was $10,791, or 16%, a decrease of $6,956 from 2007’s gross margin of $17,747, or 22%.
Non-Rechargeable gross margin declined primarily as a result of lower overhead absorption from
lower sales volumes, an unfavorable product shift which was partially impacted by lower margin
telematics products, and higher costs of raw materials related to increasing energy and
transportation costs. The decrease was also attributable to the costs incurred to transition our
U.K. manufacturing and assembly operation to a distribution and service center, including a second
quarter restructuring charge of approximately $750 for employee termination costs and certain asset
valuation adjustments.
In our Rechargeable Products segment, the cost of products sold increased $14,695, from
$13,178 in 2007 to $27,873 in 2008. Rechargeable gross margin for 2008 was $6,818, or 20%, an
increase of $3,240 from 2007’s gross margin of $3,578, or 21%. The decrease in Rechargeable gross
margin percentage was primarily attributable to an increase in component costs, acceptance of lower
margin projects to develop new customers and product mix.
In our Communications Systems segment, the cost of products sold increased $68,820, from
$30,447 in 2007 to $99,267 in 2008. Communications Systems gross margin for 2008 was $36,805, or
27%, an increase of $30,112 from 2007’s gross margin of $6,693, or 18%. The increase in the
Communications Systems gross margin primarily resulted from higher overall sales, production
volumes and a favorable product mix, as well as improvements in our supply chain management and
lower material costs.
In our Design and Installation Services segment, the cost of sales increased $10,650, from
$2,682 for the year ended December 31, 2007, to $13,332 in 2008. Design and Installation Services
gross margin for 2008 was $2,529, or 16%, compared to 2007’s gross margin of $756, or 22%. The
gross margin percentage in this particular segment declined in 2008 due primarily to investments we
are making and associated start-up costs to grow this segment, including the addition of new
sales/service centers and certain integration costs associated with the acquisition of USE.
Previous to the acquisitions of RedBlack and Stationary Power, this segment was comprised mainly of
technology contracts which had varying margins dependent on the progress of individual contracts.
Operating Expenses. Total operating expenses increased $10,665, from $28,973 for the year
ended December 31, 2007 to $39,638 for the year ended December 31, 2008. Overall, operating
expenses as a percentage of sales decreased to 16% in 2008 from 21% reported the prior year, as we
were able to leverage our operating expense base against the increase in revenues. Amortization
expense associated with intangible assets related to our acquisitions was $2,119 for 2008 ($1,486
in selling, general and administrative expenses and $633 in research and development costs),
compared with $2,317 for 2007 ($1,290 in selling, general, and administrative expenses and $1,027
in research and development costs). Research and development costs were $8,138 in 2008, an
increase of $1,138, or 16%, over the $7,000 reported in 2007. This increase was mainly due to an
increase in overall product development and design activity. Selling, general, and administrative
expenses increased $9,527, or 43%, to $31,500. This increase was comprised of approximately $4,700
associated with costs related to acquired companies, in addition to higher sales-based commissions,
enhanced sales and marketing efforts and higher administrative costs required to operate a more
diverse organization.
Other Income (Expense). Other income (expense) totaled $237 for the year ended December 31,
2008, compared to $5,859 for the year ended December 31, 2007. Interest expense, net of interest
income, decreased $1,254, from $2,184 for 2007 to $930 for 2008, mainly as a result of the
conversion, in the first quarter of 2008, of convertible notes into shares of common stock related
to the McDowell acquisition, as well as lower borrowings under our revolving credit facility. In
2008, we recognized a gain of $313 on the early conversion of the $10,500 convertible notes held by
the sellers of McDowell, which related to an increase in the interest rate on the notes from 4% to
5% in October 2007. In 2007, we recorded a gain on the McDowell settlement of $7,550 as a result
of a negotiated reduction in the purchase price that was finalized in November 2007 (see Note 2 for
additional information). Miscellaneous income/expense amounted to income of $854 for 2008
compared with income of $493 for 2007. This income was primarily due to the recognition of $300 in
grant revenue from the satisfaction of all the requirements from a government grant in 2008 and the
transactions impacted by changes in foreign currencies relative to the U.S. dollar.
Income Taxes. We reflected a tax provision of $3,879 for the twelve-month period ended
December 31, 2008 compared with $77 in the same period of 2007. The 2008 tax provision included an
approximate $3,100 non-cash charge to record a deferred tax liability for liabilities generated
from book/tax differences pertaining to goodwill and certain intangible assets that cannot be
predicted to reverse during our loss carryforward periods.
Substantially all of this adjustment related to book/tax differences that occurred during 2007
and were identified during the second quarter of 2008. In connection with this adjustment, we
reviewed the illustrative list of qualitative considerations provided in SEC Staff Accounting
Bulletin No. 99 and other qualitative factors in our determination that this adjustment was not
material to the 2007 consolidated financial statements or this annual report on Form 10-K. The
effective consolidated tax rate for
31
the twelve-month period ended December 31, 2008 was 22.1%
compared with 1.4% for the same period in 2007. Since we have significant net operating loss
carryforwards from our U.S. and U.K. operations, the cash outlay for income taxes is limited to the
alternative minimum tax in 2008 in the U.S. and nominal for quite some time into the future in the
U.K. The cash outlay for the alternative minimum tax in the U.S. is due to the fact that certain
of our NOL carryforwards are subject to U.S. alternative minimum tax limitation, such that
carryforwards can offset only 90% of alternative minimum taxable income.
During the fiscal quarter ended December 31, 2006, we recorded a full valuation allowance on
our net deferred tax asset, due to the determination, at that time, that it was more likely than
not that we would not be able to utilize our U.S. and U.K. net operating loss carryforwards
(“NOL’s”) that had accumulated over time. At December 31, 2008, we continue to recognize a
valuation allowance on our U.S. deferred tax asset, to the extent that we believe, that it is more
likely than not that we will not be able to utilize that portion of our U.S. NOL’s that had
accumulated over time. A U.S. valuation allowance is not required for the portion of the deferred
tax asset that will be realized by the reversal of temporary differences related to deferred tax
liabilities to the extent those temporary differences are expected to reverse in our carryforward
period. At December 31, 2008, we continue to recognize a full valuation allowance on our U.K. net
deferred tax asset, as we believe, at this time, that it is more likely than not that we will not
be able to utilize our U.K. NOL’s that had accumulated over time. (See Notes 1 and 8 in the Notes
to Consolidated Financial Statements for additional information.) We continually monitor the
assumptions and performance results to assess the realizability of the tax benefits of the U.S. and
U.K. NOL’s and other deferred tax assets, in accordance with the accounting standards.
We have determined that a change in ownership, as defined under Internal Revenue Code Section
382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to an
annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused
portion of the annual limitation can be carried forward to subsequent periods. Our ability to
utilize NOL carryforwards due to the successive ownership changes is currently limited to a minimum
of approximately $12,000 annually, plus the carryover from unused portions of the annual
limitations. We believe such limitation will not impact our ability to realize the deferred tax
asset.
In addition, certain of our 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 2007. However, this limitation does have an
impact of $559 on income taxes determined for 2008. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during
2008 from a manufacturing and assembly center to primarily a
distribution and service center. For further discussion, see “Risk Factors” in
Item 1A of this annual report.
Net Income. Net income and earnings per diluted share were $13,663 and $0.78, respectively,
for the year ended December 31, 2008, compared to net income and earnings per diluted share of
$5,583 and $0.36, respectively, for the year ended December 31, 2007, primarily as a result of the
reasons described above. Average common shares outstanding used to compute diluted earnings per
share increased from 15,557,000 in 2007 to 17,705,000 in 2008, mainly due to the 1,000,000 share
issuance in the fourth quarter of 2007 from our limited public offering, conversion of the McDowell
convertible notes into 700,000 shares of our common stock during the first quarter of 2008, stock
option and warrant exercises, restricted stock grants, and potentially dilutive shares from
unexercised options and convertible notes.
32
Twelve Months Ended December 31, 2007 Compared With the Twelve Months Ended December 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
12 Months Ended |
|
Increase / |
| |
|
12/31/2007 |
|
12/31/2006 |
|
(Decrease) |
| |
|
|
Revenues |
|
$ |
137,596 |
|
|
$ |
93,546 |
|
|
$ |
44,050 |
|
Cost of products sold |
|
|
108,822 |
|
|
|
76,103 |
|
|
|
32,719 |
|
| |
|
|
Gross margin |
|
|
28,774 |
|
|
|
17,443 |
|
|
|
11,331 |
|
Operating and other expenses |
|
|
28,973 |
|
|
|
20,400 |
|
|
|
8,573 |
|
| |
|
|
Operating income (loss) |
|
|
(199 |
) |
|
|
(2,957 |
) |
|
|
2,758 |
|
Other income (expense), net |
|
|
5,859 |
|
|
|
(796 |
) |
|
|
6,655 |
|
| |
|
|
Income (loss) before taxes |
|
|
5,660 |
|
|
|
(3,753 |
) |
|
|
9,413 |
|
Income tax provision |
|
|
77 |
|
|
|
23,735 |
|
|
|
(23,658 |
) |
| |
|
|
Net income (loss) |
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
|
$ |
33,071 |
|
| |
|
|
Net income (loss) per share — basic |
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
$ |
2.20 |
|
| |
|
|
Net income (loss) per share — diluted |
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
$ |
2.20 |
|
| |
|
|
Weighted average shares outstanding-basic |
|
|
15,316,000 |
|
|
|
14,906,000 |
|
|
|
410,000 |
|
| |
|
|
Weighted average shares outstanding-diluted |
|
|
15,557,000 |
|
|
|
14,906,000 |
|
|
|
651,000 |
|
| |
|
|
Revenues. Total revenues for the twelve months ended December 31, 2007 amounted to $137,596,
an increase of $44,050, or 47% from the $93,546 reported for the twelve months ended December 31,
2006.
Non-Rechargeable product sales increased $12,483, or 18%, from $67,779 in 2006 to $80,262 in
2007. The increase in revenues was mainly attributable to an increase in sales of batteries to
international defense organizations, an increase in demand from automotive telematics customers,
and a full year contribution from ABLE which was acquired in mid-2006, offset in part by lower
9-volt battery revenues.
Rechargeable product revenues decreased $989, or 6%, from $17,745 in 2006 to $16,756 in 2007.
The decrease in revenues was attributable to a strong prior year in which we shipped a large order
of batteries and chargers for an IED jammer application.
Sales of communications systems increased $29,707, or 400%, from $7,433 in 2006 to $37,140 in
2007. This increase in revenues was mainly attributable to a growing demand for advanced
communications systems and kits sold to government/defense customers, including systems such as
SATCOM-On-The-Move and other systems that provide a person with the ability to significantly extend
the range of a communications radio. In addition, since McDowell was acquired in July 2006, only a
partial year’s results were included in 2006.
Design and Installation Services revenues increased $2,849, or 484%, from $589 in 2006 to
$3,438 in 2007. This increase in revenues was mainly attributable to the added contributions from
the acquisitions of RedBlack in September 2007 and Stationary Power in November 2007.
Cost of Products Sold. Cost of products sold increased $32,719, or 43%, from $76,103 for the
year ended December 31, 2006 to $108,822 for the year ended December 31, 2007, primarily as a
result of the increase in revenues. Consolidated cost of products sold as a percentage of total
revenue decreased from 81% for the twelve months ended December 31, 2006 to 79% for the year ended
December 31, 2007. Correspondingly, consolidated gross margins were 21% for the year ended
December 31, 2007, compared with 19% for the year ended December 31, 2006, generally attributable
to higher sales and production volumes and a more favorable sales mix of higher margin products.
In the Non-Rechargeable Products segment, the cost of products sold increased $6,594, from
$55,921 in the year ended December 31, 2006 to $62,515 in 2007, mainly related to higher sales and
production volumes. Non-Rechargeable gross margins for 2007 were $17,747, or 22%, an increase of
$5,889 from 2006’s gross margin of
$11,858, or 17%. This increase in gross margin was mainly attributable to shipments of higher
margin products to international customers.
In the Rechargeable Products segment, the cost of products sold decreased $745, from $13,923
in 2006 to $13,178 in 2007. Rechargeable gross margins for 2007 were $3,578, or 21%, a decrease of
$244 from 2006’s gross margin of $3,822, or 22%. This decrease in gross margin was the result of
the decline in sales volumes and a modest change in sales mix.
33
In the Communications Systems segment, the cost of products sold increased $24,785, from
$5,662 in 2006 to $30,447 in 2007, reflective of the increase in revenues. Communications Systems
gross margins for 2007 were $6,693, or 18%, a decrease from 2006’s gross margin of $1,771, or 24%.
The decrease in gross margin percentages was mainly related to operational issues incurred at our
Waco, Texas operation shortly after the acquisition of McDowell in July 2006 that resulted in the
procurement of premium cost inventory, increasing our cost of goods sold during 2007 as this
inventory was sold to customers. As a result of manufacturing inefficiencies at that facility, we
relocated the Waco operations to our Newark, New York facility during
the second half of 2007, to instill better processes and manufacturing disciplines. The actual costs associated
with this relocation were relatively modest, amounting to approximately $156. In addition, we
encountered certain inefficiencies in our manufacturing process during the fourth quarter of 2007
as we ramped up our production operation to begin to fulfill certain large orders we received
during the latter portion of 2007 for advanced communications systems, as we increased our
workforce and trained new people on processes, procedures and systems.
Design and Installation Services cost of sales increased $2,085, from $597 for the year ended
December 31, 2006, to $2,682 in 2007. Design and Installation Services gross margins for 2007 were
$756, or 22%, an increase from 2006’s gross margin of ($8), or (1)%. This increase was mainly due
to varying margins realized under different technology contracts, in addition to the contribution
from RedBlack and Stationary Power.
Operating and Other Expenses. Total operating expenses increased $8,573, from $20,400 for the
year ended December 31, 2006 to $28,973 for the year ended December 31, 2007. Overall, operating
expenses as a percentage of sales decreased to 21% in 2007 from 22% reported the prior year.
Research and development costs were $7,000 in 2007, an increase of $1,903, or 37%, over the $5,097
reported in 2006. This increase was mainly due to greater investments in the development of
various new products, including products resulting from our acquisitions and support for a broader
base of products. In addition to the research and development line shown in Operating Expenses, we
also consider our efforts associated with technology contracts for which we are paid (revenues and
related costs are included in the Design and Installation Services segment), to be related to key
product development efforts. Selling, general, and administrative expenses increased $6,670, or
44%, to $21,973, mainly related to costs associated with acquired companies and costs associated
with providing a significantly higher level of support to enhance the growth prospects of these
acquisitions, including increased personnel-related costs, and higher professional fees incurred
and corporate costs required to support a broader, more diverse business. Included in research and
development and selling, general and administrative expenses is $2,317 for 2007 in amortization
expense associated with intangible assets related to our acquisitions ($1,290 in selling, general
and administrative expenses and $1,027 in research and development costs), an increase of $1,118
from the prior year amount of $1,199, driven by the timing of the acquisitions.
Other Income (Expense). Interest expense (net) increased $886, from $1,298 for the year ended
December 31, 2006 to $2,184 for the year ended December 31, 2007. This change was mainly related
to higher interest on convertible debt and higher borrowings under our revolving credit facility.
We recorded a gain on the McDowell settlement of $7,550 as a result of a negotiated reduction in
the purchase price that was finalized in November 2007 (see Note 2 for additional information).
Miscellaneous income/expense amounted to income of $493 for 2007 compared with income of $311 for
2006. This income was primarily due to foreign currency exchange gains, and the increase related
mainly to the strengthening of the U.K. pound sterling compared with the U. S. dollar.
Income Taxes. We reflected a tax provision of $77 for the twelve-month period ended December
31, 2007 compared with $23,735 in the same period of 2006. At the end of 2006, we recorded a full
valuation allowance on our net deferred tax asset, due to the determination that it was more likely
than not that we would not be able to utilize these benefits in the future. At December 31, 2007,
we continue to recognize a full valuation allowance on our net deferred tax asset, as we believe
that it is more likely than not that we will not be able to utilize these benefits in the future.
(See Notes 1 and 8 for additional information.)
Net Income. Net income was $5,583, or $0.36 per basic and diluted common share, for the year
ended December 31, 2007 compared with a net loss of $27,488, or $1.84 per basic and diluted common
share, for the year ended December 31, 2006, primarily as a result of an improvement in the
operating loss due to improved profit margins on revenues and overall increase in sales volumes,
the recognition of a non-operating gain on the McDowell settlement, and the recognition of a full
valuation allowance against our deferred tax asset in 2006 that did not reoccur in 2007. Average
common shares outstanding used to compute diluted earnings per share increased from 14,906,000 in
2006 to 15,557,000 in 2007, mainly due to stock option exercises, the dilutive impact from
unexercised options and warrants, and the partial-year impact of the limited public offering
completed in November 2007 where an additional 1,000,000 shares were issued.
34
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure,
as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income
(loss) before net interest expense, provision (benefit) for income taxes, depreciation and
amortization, plus/minus expenses/income that we do not consider reflective of our ongoing
operations. We use Adjusted EBITDA as a supplemental measure to review and assess our operating
performance and to enhance comparability between periods. We also believe the use of Adjusted
EBITDA facilitates investors’ use of operating performance comparisons from period to period and
company to company by backing out potential differences caused by variations in such items as
capital structures (affecting relative interest expense and stock-based compensation expense), the
book amortization of intangible assets (affecting relative amortization expense), the age and book
value of facilities and equipment (affecting relative depreciation expense) and other significant
non-cash, non-operating expenses or income. We also present Adjusted EBITDA because we believe it
is frequently used by securities analysts, investors and other interested parties as a measure of
financial performance. We reconcile Adjusted EBITDA to net income (loss), the most comparable
financial measure under U.S. generally accepted accounting principles (“U.S. GAAP”).
We use Adjusted EBITDA in our decision-making processes relating to the operation of our
business together with U.S. GAAP financial measures such as income (loss) from operations. We
believe that Adjusted EBITDA permits a comparative assessment of our operating performance,
relative to our performance based on our U.S. GAAP results, while isolating the effects of
depreciation and amortization, which may vary from period to period without any correlation to
underlying operating performance, and of non-cash stock-based compensation, which is a non-cash
expense that varies widely among companies. We provide information relating to our Adjusted EBITDA
so that securities analysts, investors and other interested parties have the same data that we
employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a
valuable indicator of our operating performance on a consolidated basis and of our ability to
produce operating cash flows to fund working capital needs, to service debt obligations and to fund
capital expenditures.
The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating
income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted
EBITDA has limitations as an analytical tool, and when assessing our operating performance,
Adjusted EBITDA should not be considered in isolation, or as a substitute for net income (loss) or
other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of
these limitations include, but are not limited to, the following:
| |
• |
|
Adjusted EBITDA (1) does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments; (2) does not reflect changes in,
or cash requirements for, our working capital needs; (3) does not reflect the interest
expense, or the cash requirements necessary to service interest or principal payments,
on our debt; (4) does not reflect income taxes or the cash requirements for any tax
payments; and (5) does not reflect all of the costs associated with operating our
business; |
| |
| |
• |
|
although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and Adjusted
EBITDA does not reflect any cash requirements for such replacements; |
| |
| |
• |
|
while stock-based compensation is a component of cost of products sold and
operating expenses, the impact on our consolidated financial statements compared to
other companies can vary significantly due to such factors as assumed life of the
stock-based awards and assumed volatility of our common stock; and |
| |
| |
• |
|
other companies may calculate Adjusted EBITDA differently than we do, limiting its
usefulness as a comparative measure. |
We compensate for these limitations by relying primarily on our U.S. GAAP results and using
Adjusted EBITDA only supplementally. Adjusted EBITDA is calculated as follows for the periods
presented:
35
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
Add: interest expense, net |
|
|
930 |
|
|
|
2,184 |
|
|
|
1,298 |
|
Add: income tax provision |
|
|
3,879 |
|
|
|
77 |
|
|
|
23,735 |
|
Add: depreciation expense |
|
|
3,851 |
|
|
|
3,861 |
|
|
|
3,667 |
|
Add: amortization expense |
|
|
2,119 |
|
|
|
2,317 |
|
|
|
1,199 |
|
Add: stock-based compensation expense |
|
|
2,266 |
|
|
|
2,149 |
|
|
|
1,480 |
|
Less: gain on McDowell settlement |
|
|
— |
|
|
|
(7,550 |
) |
|
|
— |
|
Less: gain on debt conversion |
|
|
(313 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
26,395 |
|
|
$ |
8,621 |
|
|
$ |
3,891 |
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Cash Flows and General Business Matters
As of December 31, 2008, cash and cash equivalents totaled $1,878. During the twelve months
ended December 31, 2008, we generated $19,058 of cash from operating activities as compared to
generating $1,569 of cash for the twelve months ended December 31, 2007. The cash from operating
activities generated during 2008 was mainly attributable to our pre-tax income of $13,663, plus an
addback of $8,236 for non-cash expenses including depreciation, amortization and stock-based
compensation. Approximately $10,499 of cash was used for working capital due mainly to increases in
accounts receivable and inventories, offset by an increase in accounts payable and a decrease in
prepaid expenses. For 2007, the cash generated from operating activities of $1,569 was mainly
attributable to a pre-tax income of $5,583, plus an addback for non-cash expenses of depreciation,
amortization and stock-based compensation of $8,327 offset by a deduction of $7,550 for the
non-cash gain from the McDowell settlement agreement. Approximately $6,114 of cash was used for
working capital due mainly to an increase in inventories that resulted from sizeable orders for
communications systems in the latter part of 2007.
In 2008, we used $6,958 of cash in investing activities, $3,787 of which was used to purchase
fixed assets, and $3,171 of which was used in connection with the acquisition of USE, as well as a
contingent purchase price payout related to the ABLE acquisition. During 2008, we used $12,723 of
cash in financing activities. The financing activities included outflows of $11,204 for revolver
loan repayments, $2,230 for principal payments on our term loan, capital leases, and debt we
assumed from acquisitions, and purchase of treasury shares of $1,815. The financing activities
included inflows of $2,526 from stock option and warrant exercises.
Although we booked a full reserve for our deferred tax asset during the fourth quarter of 2006
and continued to carry this reserve as of December 31, 2007 and 2008, we continue to have
significant U.S. NOL’s available to us to utilize as an offset to taxable income. As of December
31, 2008, none of our U.S. NOL’s have expired. During 2008, we
utilized $27,682 of our U.S. NOL
carryforwards such that over the next five years, there are no scheduled expirations of our U.S.
NOL’s. (See Note 8 in the Notes to the Consolidated Financial Statements for additional
information.)
Inventory turnover for the year ended December 31, 2008 averaged 4.6 turns compared to 3.0
turns for 2007. The improvement in this metric is mainly due to the increased volume of sales and
production activity during 2008, primarily driven by our communications systems business. Going
forward, we anticipate achieving an annual rate of between 4.0 and 5.0 turns. Our Days Sales
Outstanding (DSOs) was an average of 53 days for 2008, an improvement from the 2007 average of 55
days, mainly due to more favorable timing on payments received from customers in our Communications
Systems segment.
Our order backlog at December 31, 2008 was approximately $43,400. The majority of the backlog
was related to orders that are expected to ship throughout 2009.
As of December 31, 2008, we had made commitments to purchase approximately $629 of production
machinery and equipment, which we expect to fund through operating cash flows.
36
Potential Commitments
In October 2005, we received a contract valued at approximately $3,000 from the U.S. Defense
Department to purchase equipment and enhance processes to reduce lead time and increase
manufacturing efficiency to boost production surge capability of our BA-5390 battery during
contingency operations. Under the contract, we had also purchased and pre-positioned critical long
lead-time materials and subassemblies. During 2006, 2007 and 2008, we received approximately
$3,077, primarily related to reimbursement for raw material inventory and the procurement of
certain equipment. The funding under this contract was completed during 2008.
We have had certain “exigent” non-bid contracts with the U.S. government that 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 December 31, 2008, 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. We have reviewed these audit reports, have submitted our response to these audits and
believe, taken as a whole, the proposed audit adjustments can be offset with the consideration of
other compensating cost increases that occurred prior to the final negotiation of the contracts.
While we believe that potential exposure exists relating to any final negotiation of these proposed
adjustments, we cannot reasonably estimate what, if any, adjustment may result when finalized. In
addition, in June 2007, we received a request from the Office of Inspector General of the
Department of Defense (“DoD IG”) seeking certain information and documents relating to our business
with the Department of Defense. We are cooperating with the DoD IG inquiry and are furnishing the
requested information and documents. At this time we have no basis for assessing whether we might
face any penalties or liabilities on account of the DoD IG inquiry. The aforementioned
DCAA-related adjustments could reduce margins and, along with the aforementioned DoD IG inquiry,
could have an adverse effect on our business, financial condition and results of operation.
From August 2002 through August 2006, we participated in a self-insured trust to manage our
workers’ compensation activity for our 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
August 2006, we left the self-insured trust and have obtained alternative coverage for our workers’
compensation program through a third-party insurer. In the third quarter of 2006, we 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, we recorded a liability and an associated expense of $350 as an estimate of our
potential future cost related to the trust’s underfunded status
based on our estimated level of participation. On April 28, 2008, we, along with
all other members of the trust, were served by the State of New York Workers’ Compensation Board
(“Compensation Board”) with a Summons with Notice that was filed in Albany County Supreme Court,
wherein the Compensation Board put all members of the trust on notice that it would be seeking
approximately $1,000 in previously billed and unpaid assessments and further assessments estimated
to be not less than $25,000 arising from the accumulated estimated under-funding of the trust. The
Summons with Notice did not contain a complaint or a specified demand. We timely filed a Notice of
Appearance in response to the Summons with Notice. On June 16, 2008, we were served with a
Verified Complaint. The Verified Complaint estimates that the trust was underfunded by $9,700
during the period of December 1, 1997 — November 30, 2003 and an additional $19,400 for the period
December 1, 2003 — August 31, 2006. The Verified Complaint estimates our pro-rata share of the
liability for the period of December 1, 1997 — November 30, 2003 is $195. The Verified Complaint
did not contain a pro-rata share liability estimate for the period of December 1, 2003-August 31,
2006. Further, the Verified Complaint states that all estimates of the underfunded status of the
trust and the pro-rata share liability for the period of December 1, 1997-November 30, 2003 are
subject to adjustment based on a forensic audit of the trust that is currently being conducted on
behalf of the Compensation Board by a third-party audit firm. We timely filed our Verified Answer
with Affirmative Defenses on July 24, 2008. While the potential of joint and several liability
exists, we have paid all assessments that have been levied against us to date during our
participation in the trust. In addition, our liability is limited to the extent that the trust was
underfunded for the years of our participation. As of December 31, 2008, we have determined that
our $350 reserve for this potential liability continues to be reasonable. 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 we were a member. It may take several years before resolution of outstanding
workers’ compensation claims are finally settled. We will continue to review this liability
periodically and make adjustments accordingly as new information is collected.
In connection with our acquisition of ABLE on May 19, 2006, there was an additional $500 cash
payment to be made to the sellers of ABLE upon the achievement of certain performance milestones,
payable in separate $250 payments, when cumulative ABLE revenues from the date of acquisition
attain $5,000 and $10,000, respectively. The contingent payments were recorded as an addition to
the purchase price when the performance milestones were attained. The first
37
milestone payment was
made during the fourth quarter of 2007 and the second milestone payment was made during the third
quarter of 2008.
In connection with our acquisition of McDowell, the purchase price of approximately $25,000
(consisting of $5,000 in cash and a $20,000 non-transferable convertible note to be held by the
sellers of McDowell) was 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 final net value of these assets, under our
contractual obligation under the acquisition agreement, was $6,389, resulting in a revised purchase
price of approximately $28,448. In January 2007, we made a $1,500 payment to the sellers of
McDowell as partial payment for the remaining obligation and we had accrued $1,889 for the
remaining final post-closing adjustment of $3,389. On November 16, 2007, we finalized a settlement
agreement with the sellers of McDowell, which resolved various operational issues that arose during
the first several months following the acquisition that significantly reduced our profit margins.
The settlement agreement reduced the overall purchase price by approximately $7,900, by reducing
the principal amount on the convertible note from $20,000 to $14,000, and eliminating a $1,889
liability related to the Purchase Price Adjustment formula. In addition, the interest rate on the
convertible notes was increased from 4% to 5% and we made prepayments totaling $3,500 on the
convertible notes. In January 2008, the remaining $10,500 principal balance on the convertible
notes was converted in full into 700,000 shares of our common stock.
In connection with our acquisition of RedBlack on September 28, 2007, there was an additional
cash payment of up to $2,000 to be made contingent upon the achievement of certain annual sales
milestones through September 30, 2010. The additional cash consideration was payable in up to
three annual payments and subject to possible adjustments as set forth in the stock purchase
agreement. On February 9, 2009, we entered into Amendment No. 1 to the RedBlack stock purchase
agreement, which eliminated the up to $2,000 in additional cash consideration contingent on the
achievement of certain sales milestones provision, in exchange for a one time final payment of
$1,020.
In connection with our acquisition of Stationary Power on November 16, 2007, the purchase
agreement specified an adjustment mechanism based upon Stationary Power’s closing date net worth
balance relative to a previously-agreed amount of $500. The final net value of the “Net Worth”,
under the stock purchase agreement, was $339, resulting in a revised initial purchase price of
$9,839. In addition, there is a contingent payout of up to 100,000 shares of our common stock to
be earned upon the achievement of certain post-acquisition sales milestones. Through the year
ended December 31, 2008, we have issued no shares of our common stock relating to this contingent
consideration.
In connection with our acquisition of RPS on November 16, 2007, on the achievement of certain
post-acquisition sales milestones, we will pay the previous owners of RPS, in cash, 5% of sales up
to the sales in the operating plan, and 10% of sales that exceed the sales in the operating plan,
for the remainder of the calendar year 2007 and for calendar years 2008, 2009 and 2010. The
additional contingent cash consideration is payable in annual installments, and excludes sales made
to Stationary Power, which historically have comprised substantially all of RPS’s sales. Through
the year ended December 31, 2008, we have recorded $49 in contingent cash consideration.
In connection with our acquisition of USE on November 10, 2008, there is a contingent payout
of up to 200,000 unregistered shares of our common stock to be earned upon the achievement of
certain post-acquisition financial milestones. Through the year ended December 31, 2008, we have
issued no shares of our common stock relating to this contingent consideration.
Debt and Lease Commitments
At December 31, 2008, we had outstanding capital lease obligations of $437.
As of December 31, 2008, our primary credit facility consisted of both a term loan component
and a revolver component, and the facility is collateralized by essentially all of our assets,
including all of our subsidiaries. The lenders of the credit facility are JP Morgan Chase Bank and
Manufacturers and Traders Trust Company, with JP
Morgan Chase Bank acting as the administrative agent. As of December 31, 2008, the revolver
loan commitment was $22,500. Availability under the revolving credit component is subject to
meeting certain financial covenants, including a debt to earnings ratio, a fixed charge coverage
ratio, and a current assets to total liabilities ratio. In addition, we are required to meet
certain non-financial covenants. The rate of interest, in general, was based upon either the
current prime rate, or a LIBOR rate plus 250 basis points.
On June 30, 2004, we drew down the full $10,000 term loan. The term loan is being repaid in
equal monthly installments of $167 over five years. On July 1, 2004, we 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
38
historically low interest rates. We
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 us is equal to the swap rate of 3.98%
plus the applicable Eurodollar spread associated with the term loan. During the full year of 2006,
the adjusted rate was 6.98%. During the full year of 2007, the adjusted rate ranged from 5.98% to
7.23%. During the full year of 2008, the adjusted rate ranged from 5.73% to 6.48% 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 December 31, 2008
resulted in a liability of $12, all of which was reflected as a short-term liability.
There have been several amendments to the credit facility during the past few years, including
amendments to authorize acquisitions and modify financial covenants. Effective February 14, 2007,
we entered into Forbearance and Amendment Number Six to the Credit Agreement (“Forbearance and
Amendment”) with the banks. The Forbearance and Amendment provided that the banks would forbear
from exercising their rights under the credit facility arising from our failure to comply with
certain financial covenants in the credit facility with respect to the fiscal quarter ended
December 31, 2006. Specifically, we were not in compliance with the terms of the credit facility
because we failed to maintain the required debt-to-earnings and EBIT-to-interest ratios provided
for in the credit facility at that time. The banks agreed to forbear from exercising their
respective rights and remedies under the credit facility until March 23, 2007 (“Forbearance
Period”), unless we breached the Forbearance and Amendment or unless another event or condition
occurred that constituted a default under the credit facility. Each bank agreed to continue to make
revolving loans available to us during the Forbearance Period. Pursuant to the Forbearance and
Amendment, the aggregate amount of the banks’ revolving loan commitment was reduced from $20,000 to
$15,000. During the Forbearance Period, the applicable revolving interest rate and the applicable
term interest rate, in each case as set forth in the credit agreement, both were increased by 25
basis points. In addition to a number of technical and conforming amendments, the Forbearance and
Amendment revised the definition of “Change in Control” in the credit facility to provide that the
acquisition of equity interests representing more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding equity interests of us shall constitute a “Change in
Control” for purposes of the credit facility. Previously, the equity interest threshold had been
set at 20%.
Effective March 23, 2007, we entered into Extension of Forbearance and Amendment Number Seven
to Credit Agreement (“Extension and Amendment”) with the banks. The Extension and Amendment
provided that the banks agreed to extend the Forbearance Period until May 18, 2007. The Extension
and Amendment also acknowledged that we continued not to be in compliance with the financial
covenants identified above for the fiscal quarter ended December 31, 2006 and did not contemplate
being in compliance for the fiscal quarter ending March 31, 2007.
Effective May 18, 2007, we entered into Extension of Forbearance and Amendment Number Eight to
Credit Agreement (“Second Extension and Amendment”) with the banks. The Second Extension and
Amendment provided that the banks agreed to extend the Forbearance Period until August 15, 2007.
The Second Extension and Amendment also acknowledged that we continued not to be in compliance with
the financial covenants identified above for the fiscal quarter ended March 31, 2007 and did not
contemplate being in compliance for the fiscal quarter ending June 30, 2007.
Effective August 15, 2007, we entered into Amendment Number Nine to Credit Agreement
(“Amendment Nine”) with the banks. Amendment Nine effectively ended the Forbearance Period and
extended the term of the revolving credit component of the facility to January 31, 2009 and the
term of the term loan component of the facility to July 1, 2009. Amendment Nine also added several
definitions and modified or replaced certain covenants.
Effective April 23, 2008, we entered into Amendment Number Ten to Credit Agreement (“Amendment
Ten”) with the banks. Amendment Ten increased the amount of the revolving credit facility from
$15,000 to $22,500, an increase of $7,500. Additionally, Amendment Ten amended the applicable
revolver and term rates under the Credit
Agreement from a variable pricing grid based on quarterly financial ratios to a set interest
rate structure based on either the current prime rate, or a LIBOR rate plus 250 basis points. As
of December 31, 2008, we were in compliance with all of the credit facility covenants, as amended.
As of December 31, 2008, we had $1,167 outstanding under the term loan component of our credit
facility with our primary lending bank and $-0- was outstanding under the revolver component. At
December 31, 2008, the interest rate on the revolver component was 3.25%. As of December 31, 2008,
the revolver arrangement provided for up to $22,500 of borrowing capacity, including outstanding
letters of credit. At December 31, 2008, we had no outstanding letters of credit related to this
facility, as amended April 23, 2008, leaving $22,500 of additional borrowing capacity.
On January 27, 2009, we entered into an Amended and Restated Credit Agreement (the “Restated
Credit Agreement”) with JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company
(together, the
39
“Lenders”). The Restated Credit Agreement reflects the previous ten amendments to
the original Credit Agreement dated June 30, 2004 between us and the Lenders and modifies certain
of those provisions. The Restated Credit Agreement among other things (i) increases the current
revolver loan commitment from $22,500 to $35,000, (ii) extends the maturity date of the revolving
credit component from January 31, 2009 to June 30, 2010, (iii) modifies the interest rate, and (iv)
modifies certain covenants. The rate of interest is based, in general, upon either a LIBOR rate
plus a Eurodollar spread or an Alternate Base Rate plus an ABR spread, as that term is defined in
the Restated Credit Agreement, within a predetermined grid, which is dependent upon whether
Earnings Before Interest and Taxes for the most recently completed fiscal quarter is greater than
or less than zero. Generally, borrowings under the Restated Credit Agreement will bear interest
based primarily on the Prime Rate plus 50 to 200 basis points or LIBOR plus 300 to 500 basis
points. Additionally, among other covenant modifications, the Restated Credit Agreement modifies
the financial covenants by (i) revising the debt to earnings ratio and fixed charge coverage ratio
and (ii) deleting the current assets to liabilities ratio.
Previously our wholly-owned U.K. subsidiary, Ultralife Batteries (UK) Ltd. (“Ultralife UK”),
had a revolving credit facility with a commercial bank in the U.K. This credit facility provided
our U.K. operation with additional financing flexibility for its working capital needs. Any
borrowings against this credit facility were collateralized with that company’s outstanding
accounts receivable balances. During the second quarter of 2008, this credit facility was
terminated. The Ultralife UK operations will be funded by operating cash flows and cash advances
from Ultralife Corporation, if necessary.
While we believe relations with our lenders are good and we have received waivers as necessary
in the past, there can be no assurance that such waivers can always be obtained. In such case, we
believe we have, in the aggregate, sufficient cash, cash generation capabilities from operations,
working capital, and financing alternatives at our disposal, including but not limited to
alternative borrowing arrangements (e.g. asset secured borrowings) and other available lenders, to
fund operations in the normal course and repay the debt outstanding under our credit facility.
Continuing volatility in the debt capital markets may affect our ability to access those
markets. Notwithstanding these adverse market conditions, we believe that current cash and cash
equivalent balances and cash generated from operations, together with access to external sources of
funds from the revolving credit facility, will be sufficient to meet our operating and capital
needs in the foreseeable future.
Equity Transactions
During 2008, 2007 and 2006, we issued approximately 305,000, 204,000, and 200,000 shares of
common stock, respectively, as a result of exercises of stock options and warrants. We received
approximately $2,526 in 2008, $1,314 in 2007 and $1,231 in 2006 in cash proceeds as a result of
these transactions.
During 2008, 2007 and 2006, we issued restricted stock awards of -0-, 51,548 and 85,668 shares
of our common stock, respectively, to certain officers and directors, with various vesting
schedules related to time and performance. At December 31, 2008, 67,352 shares had vested.
During 2008, 2007 and 2006, we issued 12,737, -0- and -0- unrestricted shares of common stock,
respectively, to directors.
In November 2007, we completed a limited public offering, whereby 1,000,000 shares of our
common stock were issued. Total net proceeds from the offering were approximately $12,600, of
which $6,000 was used for the Stationary Power acquisition cash payment, $3,500 was used as a
prepayment on the subordinated convertible notes that were issued as partial consideration for the
McDowell acquisition, and $1,000 was used as a repayment of borrowings outstanding under our credit
facility used to fund the RedBlack acquisition. The remainder of the proceeds was used for general
working capital purposes.
In connection with our May 2006 stock purchase of ABLE, we issued a combination of shares and
warrants exercisable for shares of our common stock to the previous owners of ABLE as part of the
purchase price. The equity portion of the purchase price consisted of 96,247 shares of our common
stock valued at $1,000, based on the closing price of the stock on the closing date of the
acquisition, and 100,000 stock warrants with a five-year term valued at $526, for a total equity
consideration of $1,526. In January 2008, 82,000 warrants were exercised.
In connection with our July 2006 acquisition of substantially all of the assets of McDowell,
we issued to McDowell a non-transferable, subordinated convertible promissory note in the principal
amount of $20,000 as part of the purchase price. The $20,000 convertible note carried a five-year
term, an annual interest rate of 4% and was convertible at $15 per share into 1.33 million shares
of our common stock, with a forced conversion feature, at our option, at any time after the
40
30-day
average closing price of our common stock exceeded $17.50 per share. The conversion price was
subject to adjustment as defined in the subordinated convertible promissory note. Interest was
payable quarterly in arrears, with all unpaid accrued interest and outstanding principal due in
full on July 3, 2011. In April 2007, in connection with its dissolution, McDowell distributed the
convertible note to its previous owners in proportion to their ownership interests, resulting in
six separate convertible notes aggregating to $20,000. On November 16, 2007, we finalized a
settlement agreement with the sellers of McDowell, which resolved various operational issues that
arose during the first several months following the acquisition that significantly reduced our
profit margins. The settlement agreement reduced the overall purchase price by approximately
$7,900, by reducing the principal amount on the convertible notes from $20,000 to $14,000, and
eliminating the $1,889 liability related to the purchase price adjustment. In addition, the
interest rate on the convertible notes was increased from 4% to 5% and we made prepayments totaling
$3,500 on the convertible notes. In January 2008, the convertible notes were converted in full
into 700,000 shares of our common stock.
In connection with our November 2007 acquisition of all of the issued and outstanding shares
of common stock of Stationary Power, we issued, to the previous owner of Stationary Power, a
subordinated convertible promissory note in the principal amount of $4,000 as part of the purchase
price. The $4,000 convertible note carries a three-year term, an annual interest rate of 5% and is
convertible at $15 per share into 266,667 shares of our common stock, with a forced conversion
feature at $17.00 per share. The conversion price is subject to adjustment as defined in the
subordinated convertible promissory note. Interest is payable quarterly in arrears, with all
unpaid accrued interest and outstanding principal due in full on November 16, 2010. In addition,
on the achievement of certain post-acquisition sales milestones, we will issue up to an aggregate
amount of 100,000 shares of our common stock.
In connection with our November 2007 acquisition of all of the issued and outstanding shares
of common stock of RPS, we issued 100,000 shares of our common stock valued at $1,383.
In connection with our November 2008 acquisition of certain assets of USE, on the achievement
of certain post-acquisition financial milestones, we will issue up to an aggregate amount of
200,000 unregistered shares of our common stock.
We utilized securities as consideration in these transactions in part to reduce the need to
draw on the liquidity provided by our cash and cash equivalents and revolving credit facility.
In October 2008, the Board of Directors authorized a share repurchase program of up to $10,000
to be implemented over the course of a six-month period. Repurchases may be made from time to time
at management’s discretion, either in the open market or through privately negotiated transactions.
The repurchases will be made in compliance with Securities and Exchange Commission guidelines and
will be subject to market conditions, applicable legal requirements, and other factors. We have no
obligation under the program to repurchase shares and the program may be suspended or discontinued
at any time without prior notice. We intend to fund the purchase price for shares acquired
primarily with current cash on hand and cash generated from operations, in addition to borrowing
from our credit facility, if necessary. As of December 31, 2008, approximately $8,185 remained of
the $10,000 approved repurchase amount.
Other Matters
We continue to be optimistic about our future prospects and growth potential. We continually
explore various sources of liquidity to ensure financing flexibility, including leasing
alternatives, issuing new or refinancing existing debt, and raising equity through private or
public offerings. Although we stay abreast of such financing alternatives, we believe we have the
ability during the next 12 months to finance our operations primarily through internally generated
funds or through the use of additional financing that currently is available to us. In the event
that we are unable to finance our operations with the internally generated funds or through the use
of additional financing that currently is available to us, we may need to seek additional credit or
access capital markets for additional funds. We can provide no assurance, given the current state
of credit markets, that we would be successful in this regard.
If we are unable to achieve our plans or unforeseen events occur, we may need to implement
alternative plans. While we believe we can complete our 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 we would be successful in our implementation of such plans.
As described in Part I, Item 3, “Legal Proceedings” of this report, we are involved in certain
environmental matters with respect to our facility in Newark, New York. Although we have reserved
for expenses related to this potential
41
exposure, there can be no assurance that such reserve will
be adequate. The ultimate resolution of this matter may have a significant adverse impact on the
results of operations in the period in which it is resolved.
With respect to our battery products, we typically offer warranties against any defects due to
product malfunction or workmanship for a period up to one year from the date of purchase. With
respect to our communications accessory products, we typically offer a four-year warranty. We also
offer a 10-year warranty on our 9-volt batteries that are used in ionization-type smoke detector
applications. We provide for a reserve for these potential warranty expenses, which is based on an
analysis of historical warranty issues. There is no assurance that future warranty claims will be
consistent with past history, and in the event we experience a significant increase in warranty
claims, there is no assurance that our reserves would be sufficient. This could have a material
adverse effect on our business, financial condition and results of operations.
Contractual Obligations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period |
|
| |
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
| |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Obligations |
|
$ |
5,658 |
|
|
$ |
1,305 |
|
|
$ |
4,262 |
|
|
$ |
91 |
|
|
$ |
— |
|
Expected Interest Payments |
|
|
539 |
|
|
|
291 |
|
|
|
236 |
|
|
|
12 |
|
|
|
— |
|
Capital Lease Obligations |
|
|
437 |
|
|
|
120 |
|
|
|
243 |
|
|
|
74 |
|
|
|
— |
|
Operating Lease Obligations |
|
|
2,227 |
|
|
|
869 |
|
|
|
955 |
|
|
|
403 |
|
|
|
— |
|
Purchase Obligations |
|
|
26,455 |
|
|
|
26,455 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,316 |
|
|
$ |
29,040 |
|
|
$ |
5,696 |
|
|
$ |
580 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected interest payments are calculated assuming a 6.48% annual rate on outstanding debt
principal, 3.25% annual rate on the outstanding revolver balance, plus associated fees related to
the our credit facility; the applicable annual interest rates ranging
from 0.00% to 12.02% for
various notes payable for equipment and vehicles; and a 5.00% annual rate on the outstanding
principal related to the subordinated convertible notes payable. Purchase obligations consist of
commitments for property, plant and equipment, open purchase orders for materials and supplies, and
other general commitments for various service contracts.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Outlook
Based on current visibility, management expects revenue for the full year of 2009 to be at
least $250,000 with operating income of approximately $20,000, based on our outlook for order
opportunities and strong demand for the our products and services. Management expects strong 2009
revenue growth in its Rechargeable Products segment, in addition to year-over-year increases in the
Non-Rechargeable Products and Design and Installation Services segments. Management expects
another strong year in 2009 for Communications Systems, though it expects less revenue as the large
orders for advanced communications systems that were shipped in 2008 are not expected to reoccur at
the same level.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles in the U.S. The preparation of these financial statements
requires management to make estimates and assumptions that affect amounts reported therein. The
estimates and assumptions that require management’s most difficult, subjective or complex judgments
are described below.
Revenue recognition:
Product Sales — In general, revenues from the sale of products are recognized when products
are shipped. When products are shipped with terms that require transfer of title upon
delivery at a customer’s location, revenues are recognized on date of delivery. A provision
is made at the time the revenue is recognized for warranty costs expected to be incurred.
Customers, including distributors, do not have a general right of return on products
shipped.
42
Service Contracts — Revenue from the sale of installation services is recognized upon
customer acceptance, generally the date of installation. Revenue from fixed price engineering contracts is recognized on a
proportional method, measured by the percentage of actual costs incurred to total estimated
costs to complete the contract. Revenue from time and material engineering contracts is
recognized as work progresses through monthly billings of time and materials as they are
applied to the work pursuant to the terms in the respective contract. Revenue from customer
maintenance agreements is recognized using the straight-line method over the term of the
related agreements, which range from six months to three years.
Technology Contracts — We recognize revenue using the proportional method, measured by the
percentage of actual costs incurred to date to the total estimated costs to complete the
contract. Elements of cost include direct material, labor and overhead. If a loss on a
contract is estimated, the full amount of the loss is recognized immediately. We allocate
costs to all technology contracts based upon actual costs incurred including an allocation
of certain research and development costs incurred.
Deferred Revenue — For each source of revenues, we defer recognition if: i) evidence of an
agreement does not exist, ii) delivery or service has not occurred, iii) the selling price is not
fixed or determinable, or iv) collectability is not reasonably assured.
Valuation of Inventory:
Inventories are stated at the lower of cost or market, with cost determined using the
first-in, first-out (FIFO) method. Our inventory includes raw materials, work in process and
finished goods. We record provisions for excess, obsolete or slow moving inventory based on
changes in customer demand, technology developments or other economic factors. The factors
that contribute to inventory valuation risks are our purchasing practices, material and
product obsolescence, accuracy of sales and production forecasts, introduction of new
products, product lifecycles, product support and foreign regulations governing hazardous
materials (see Item 1A — Risk Factors for further information on foreign regulations). We
manage our exposure to inventory valuation risks by maintaining safety stocks, minimum
purchase lots, managing product end-of-life issues brought on by aging components or new
product introductions, and by utilizing certain inventory minimization strategies such as
vendor-managed inventories. We believe that the accounting estimate related to valuation of
inventories is a “critical accounting estimate” because it is susceptible to changes from
period-to-period due to the requirement for management to make estimates relative to each of
the underlying factors ranging from purchasing, to sales, to production, to after-sale
support. If actual demand, market conditions or product lifecycles are adversely different
from those estimated by management, inventory adjustments to lower market values would
result in a reduction to the carrying value of inventory, an increase in inventory
write-offs and a decrease to gross margins.
Warranties:
We maintain provisions related to normal warranty claims by customers. We evaluate
these reserves quarterly based on actual experience with warranty claims to date and our
assessment of additional claims in the future. There is no assurance that future warranty
claims will be consistent with past history, and in
the event we experience a significant increase in warranty claims, there is no assurance
that our reserves would be sufficient.
Impairment of Long-Lived Assets:
We regularly assess all of our long-lived assets for impairment when events or
circumstances indicate their carrying amounts may not be recoverable. This is accomplished
by comparing the expected undiscounted future cash flows of the assets with the respective
carrying amount as of the date of assessment. Should aggregate future cash flows be less
than the carrying value, a write-down would be required, measured as the difference between
the carrying value and the fair value of the asset. Fair value is estimated either through
the assistance of an independent valuation or as the present value of expected discounted
future cash flows. The discount rate used by us in our evaluation approximates our weighted
average cost of capital. If the expected undiscounted future cash flows exceed the
respective carrying amount as of the date of assessment, no impairment is recognized.
Environmental Issues:
Environmental expenditures that relate to current operations are expensed or capitalized, as
appropriate, in accordance with the American Institute of Certified Public Accountants
(“AICPA”) Statement of Position (“SOP”) 96-1, “Environmental Remediation Liabilities”.
Remediation costs that relate to an existing condition caused by past operations are accrued
when it is probable that these costs will be incurred and can be reasonably estimated.
Goodwill and Other Intangible Assets:
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,” we
do not amortize goodwill and intangible assets with indefinite lives, but instead measure
these assets for impairment at least annually, or when events indicate that impairment
exists. We amortize intangible assets that have definite lives so that the economic benefits
of the intangible assets are being utilized over their weighted-average estimated useful
life.
43
Stock-Based Compensation:
We follow the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”), which requires 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 fair value of the award, and is recognized as an expense over the employee’s requisite
service period (generally the vesting period of the equity award). We calculate expected
volatility for stock options by taking an average of historical volatility over the past
five years and a computation of implied volatility. A blended volatility factor was deemed
to be more appropriate as we believe that implied volatility, a forward-looking measure,
provides a more market-driven valuation related to investors’ expectations of the volatility
of our business, and provides a balance against focusing only on a historical measure. 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.
Income Taxes:
We apply SFAS No. 109, “Accounting for Income Taxes”, in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis 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.
In December 2006, we placed a full valuation allowance on our deferred tax assets arising
from our conclusion that it was more likely than not that we would not be able to utilize
our U.S. NOL’s that had accumulated over time. The recognition of the full valuation
allowance on our deferred tax asset resulted from our evaluation of all available evidence,
both positive and negative, including recent historical net income/losses, income/losses on
a cumulative three-year basis; and as well as other objective evidence. As of December 31,
2007, we continued to recognize a full valuation allowance on our deferred tax assets, based
on a consistent evaluation methodology that was used for 2006 and arising from our
conclusion that it is more likely than not that we would not be able to utilize our U.S.
NOL’s that have accumulated over time. As of December 31, 2008, we continue to recognize a
valuation allowance on our deferred tax assets to the extent they are not able to be offset
by future reversing temporary differences. The assessment of the realizability of the of
the U.S. NOL was based on a number of factors including, our history of net operating
losses, the volatility of the company’s earnings, our historical operating volatility and
our historical ability to accurately forecast earnings for future periods as well the
increased uncertainty of the general business climate as of the end of 2008. We concluded
that these factors represent sufficient negative evidence and have concluded that we should
record a full valuation allowance under SFAS No. 109. Achieving business plan targets,
particularly those relating to revenue and profitability, is integral to our assessment
regarding the recoverability of our net deferred tax asset. (See Note 8 in the Notes to the
Consolidated Financial Statements for additional information.)
Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (“FASB”) ratified the consensus
reached on Emerging Issues Task Force Issue No. 07-05, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF Issue No. 07-5”). EITF Issue No.
07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to
an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”. EITF Issue No. 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early adoption for an
existing instrument is not permitted. We do not expect the adoption of this pronouncement to have a
significant impact on our financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting principles to be used in the
preparation of financial statements of nongovernmental entities that are presented in conformity
with generally accepted accounting principles in the United States. The FASB does not expect that
SFAS No. 162 will result in a change in current practice. However, transition provisions have been
provided in the unusual circumstance that the application of the provisions of SFAS No. 162 results
in a change in practice. SFAS No. 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” The SEC approved the
amendments on September 15, 2008; therefore, SFAS No. 162 was effective November 15, 2008. The
adoption of this pronouncement did not have a significant impact on our financial statements.
44
In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“FSP No. APB 14-1”). FSP No. APB 14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph
12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants.” Additionally, FSP No. APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
FSP No. APB 14-1 is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. We do not expect the adoption of this pronouncement to have a
significant impact on our financial statements.
In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the
Useful Life of Intangible Assets.” (“FSP No. SFAS 142-3”). FSP No. SFAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP FAS 142-3 intends to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (Revised 2007), “Business Combinations”, and other U.S.
generally accepted accounting principles. FSP No. SFAS 142-3 is effective for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008. We do not expect
the adoption of this pronouncement to have a significant impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133”. The statement amends and expands the
disclosure requirements of SFAS No. 133 to provide users of financial statements with an enhanced
understanding of (i) how and why an entity uses derivative instruments; (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations, and cash flows. The statement also requires (i)
qualitative disclosures about objectives for using derivatives by primary underlying risk exposure;
(ii) information about the volume of derivative activity; (iii) tabular disclosures about balance
sheet location and gross
fair value amounts of derivative instruments, income statement, and other comprehensive income
location and amounts of gains and losses on derivative instruments by type of contract; and (iv)
disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for financial statements issued for fiscal years or interim periods beginning after
November 15, 2008. We do not expect the adoption of this pronouncement to have a significant
impact on our financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141
(revised 2007), “Business Combinations” (“SFAS No. 141R”), which replaces SFAS 141. The statement
retains the purchase method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and development at fair value, and requires the
expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for fiscal years
beginning on or after December 15, 2008 and will apply prospectively to business combinations
completed on or after that date. The impact of adopting SFAS No. 141R will be dependent on the
future business combinations that we may pursue after its effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB 51”, which changes the accounting and reporting for
minority interests. Minority interests will be recharacterized as noncontrolling interests and
will be reported as a component of equity separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained, will be recorded at fair value with
any gain or loss recognized in earnings. SFAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008 and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The impact of adopting SFAS No. 160 will be
dependent on the structure of future business combinations or partnerships that we may pursue after
its effective date.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for an entity’s
first fiscal year beginning after November 15, 2007. The adoption of this pronouncement had no
significant impact on our financial statements.
45
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157
provides enhanced guidance for using fair value to measure assets and liabilities. It does not
require any new fair value measurements, but does require expanded disclosures to provide
information about the extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, with early adoption encouraged. In February 2008, the
FASB issued FASB Staff Position SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP”).
The FSP delayed, for one year, the effective date of SFAS No. 157 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed in the financial statements on at least
an annual basis. As such, we partially adopted the provisions of SFAS No. 157 effective January 1,
2008. The partial adoption of this statement did not have a material impact on our financial
statements. We adopted the remaining provisions of SFAS No. 157 effective January 1, 2009. We
expect the adoption of the deferred provisions of SFAS No. 157 to impact the way in which we
calculate fair value for assets and liabilities initially measured at fair value in a business
combination, our annual impairment review of goodwill and non-amortizable intangible assets, and
when conditions exist that require us to calculate the fair value of long-lived assets; however, we
do not expect this adoption to have a material impact on our financial statements, except for the
additional disclosures that will be required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
We are exposed to various market risks in the normal course of business, primarily interest
rate risk and foreign currency risk. Our primary interest rate risk is derived from our
outstanding variable-rate debt obligation. In July 2004, we hedged this risk by entering into an
interest rate swap arrangement in connection with the term loan component of our credit facility.
Under the swap arrangement, effective August 2, 2004, we received a fixed rate of
interest in exchange for a variable rate. The swap rate received was 3.98% for five years and is
adjusted accordingly for a Eurodollar spread incorporated in the agreement. As of December 31,
2008, a one basis point change in the Eurodollar spread would have a less than $1 value change.
We are subject to foreign currency risk, due to fluctuations in currencies relative to the
U.S. dollar. In the year ended December 31, 2008, approximately 97% of our sales were denominated
in U.S. dollars. The remainder of our sales was denominated in U.K. pounds sterling, euros,
Australian dollars, Canadian dollars, Indian rupee and Chinese yuan renminbi. A 10% change in the
value of the pound sterling, the euro, Australian dollar, Canadian dollar, the rupee or the yuan
renminbi to the U.S. dollar would have impacted our revenues in that period by less than 1%. We
monitor the relationship between the U.S. dollar and other currencies on a continuous basis and
adjust 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.
We maintain manufacturing operations in North America, Europe and Asia, and export products
internationally. We purchase materials and sell our products in foreign currencies, and therefore
currency fluctuations may impact our pricing of products sold and materials purchased. In
addition, our foreign subsidiaries maintain their books in local currency, which is translated into
U.S. dollars for our consolidated financial statements. A 10% change in local currency relative to
the U.S. dollar would have impacted our consolidated income before taxes by approximately $265, or
approximately 2%.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) and (2) are included in this
Report beginning on page 49.
| |
|
|
|
|
| |
|
Page |
|
|
|
|
48 |
|
Consolidated Financial Statements: |
|
|
|
|
|
|
|
49 |
|
|
|
|
50 |
|
|
|
|
51 |
|
|
|
|
52 |
|
|
|
|
53 |
|
Financial Statement Schedules: |
|
|
|
|
Schedule II — Valuation and Qualifying Accounts |
|
|
95 |
|
47
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Ultralife Corporation
Newark, New York
We have audited the accompanying consolidated balance sheets of Ultralife Corporation as of
December 31, 2008 and 2007 and the related consolidated statements of operations, changes in
shareholders’ equity and accumulated other comprehensive income (loss), and cash flows for each of
the three years in the period ended December 31, 2008. In connection with our audits of the
financial statements, we have also audited the financial statement schedule listed in the
accompanying index. These financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statements and schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Ultralife Corporation at December 31, 2008 and 2007,
and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with accounting principles generally accepted in the United
States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Ultralife Corporation’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 12, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Troy, Michigan
March 12, 2009
48
ULTRALIFE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,878 |
|
|
$ |
2,245 |
|
Trade accounts receivable, net of allowance for
doubtful accounts of $1,086 and $485, respectively |
|
|
30,588 |
|
|
|
26,540 |
|
Inventories |
|
|
40,465 |
|
|
|
35,098 |
|
Deferred tax asset — current |
|
|
441 |
|
|
|
309 |
|
Prepaid expenses and other current assets |
|
|
1,801 |
|
|
|
4,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
75,173 |
|
|
|
68,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
18,465 |
|
|
|
19,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
22,943 |
|
|
|
21,180 |
|
Intangible assets, net |
|
|
12,925 |
|
|
|
13,113 |
|
Security deposits |
|
|
81 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
35,949 |
|
|
|
34,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
129,587 |
|
|
$ |
122,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of debt and capital lease obligations |
|
$ |
1,425 |
|
|
$ |
13,423 |
|
Accounts payable |
|
|
20,255 |
|
|
|
18,326 |
|
Income taxes payable |
|
|
582 |
|
|
|
— |
|
Accrued compensation |
|
|
917 |
|
|
|
974 |
|
Accrued vacation |
|
|
627 |
|
|
|
928 |
|
Deferred revenue |
|
|
4,534 |
|
|
|
2,809 |
|
Other current liabilities |
|
|
3,896 |
|
|
|
5,372 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
32,236 |
|
|
|
41,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Debt and capital lease obligations |
|
|
4,670 |
|
|
|
16,224 |
|
Deferred tax liability |
|
|
3,894 |
|
|
|
455 |
|
Other long-term liabilities |
|
|
634 |
|
|
|
530 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
9,198 |
|
|
|
17,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in equity of subsidiaries |
|
|
21 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none issued and outstanding |
|
|
— |
|
|
|
— |
|
Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued — 18,227,009 and 17,208,862, respectively |
|
|
1,815 |
|
|
|
1,712 |
|
Capital in excess of par value |
|
|
167,259 |
|
|
|
152,070 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,930 |
) |
|
|
69 |
|
Accumulated deficit |
|
|
(74,780 |
) |
|
|
(88,443 |
) |
|
|
|
|
|
|
|
|
|
|
92,364 |
|
|
|
65,408 |
|
|
|
|
|
|
|
|
|
|
Less —Treasury stock, at cost - 942,202 and 728,690 shares outstanding, respectively |
|
|
4,232 |
|
|
|
2,401 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
88,132 |
|
|
|
63,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
129,587 |
|
|
$ |
122,048 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
49
ULTRALIFE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
254,700 |
|
|
$ |
137,596 |
|
|
$ |
93,546 |
|
Cost of products sold |
|
|
197,757 |
|
|
|
108,822 |
|
|
|
76,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
56,943 |
|
|
|
28,774 |
|
|
|
17,443 |
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (including $633, $1,027 and $619 of
amortization of intangible assets, respectively) |
|
|
8,138 |
|
|
|
7,000 |
|
|
|
5,097 |
|
Selling, general, and administrative (including $1,486, $1,290 and $580 of
amortization of intangible assets, respectively) |
|
|
31,500 |
|
|
|
21,973 |
|
|
|
15,303 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
39,638 |
|
|
|
28,973 |
|
|
|
20,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
17,305 |
|
|
|
(199 |
) |
|
|
(2,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
37 |
|
|
|
50 |
|
|
|
126 |
|
Interest expense |
|
|
(967 |
) |
|
|
(2,234 |
) |
|
|
(1,424 |
) |
Gain on insurance settlement |
|
|
39 |
|
|
|
— |
|
|
|
191 |
|
Gain on McDowell settlement |
|
|
— |
|
|
|
7,550 |
|
|
|
— |
|
Gain on debt conversion |
|
|
313 |
|
|
|
— |
|
|
|
— |
|
Minority interest in loss of subsidiaries |
|
|
38 |
|
|
|
— |
|
|
|
— |
|
Miscellaneous income |
|
|
777 |
|
|
|
493 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
17,542 |
|
|
|
5,660 |
|
|
|
(3,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision — current |
|
|
582 |
|
|
|
— |
|
|
|
— |
|
Income tax provision — deferred |
|
|
3,297 |
|
|
|
77 |
|
|
|
23,735 |
|
|
|
|
|
|
|
|
|
|
|
Total income taxes provision |
|
|
3,879 |
|
|
|
77 |
|
|
|
23,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic |
|
$ |
0.79 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted |
|
$ |
0.78 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
|
17,230 |
|
|
|
15,316 |
|
|
|
14,906 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
17,705 |
|
|
|
15,557 |
|
|
|
14,906 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
50
ULTRALIFE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock |
|
|
Capital in |
|
|
Currency |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
| |
|
Number |
|
|
|
|
|
|
excess of |
|
|
Translation |
|
|
Unrealized |
|
|
Accumulated |
|
|
Treasury |
|
|
|
|
| |
|
of Shares |
|
|
Amount |
|
|
Par Value |
|
|
Adjustment |
|
|
Net Gain (Loss) |
|
|
Deficit |
|
|
Stock |
|
|
Total |
|
Balance as of December 31, 2005 |
|
|
15,471,446 |
|
|
$ |
1,547 |
|
|
$ |
130,530 |
|
|
$ |
(1,114 |
) |
|
$ |
60 |
|
|
$ |
(66,538 |
) |
|
$ |
(2,378 |
) |
|
$ |
62,107 |
|
| |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,488 |
) |
|
|
|
|
|
|
(27,488 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743 |
|
Unrealized loss on interest rate swap arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options |
|
|
|
|
|
|
|
|
|
|
1,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320 |
|
Shares issued and compensation under restricted stock grants |
|
|
85,668 |
|
|
|
1 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
|
Shares and stock warrants issued in connection with ABLE acquisition |
|
|
96,247 |
|
|
|
10 |
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,526 |
|
Shares issued under stock option and warrant exercises |
|
|
199,945 |
|
|
|
20 |
|
|
|
1,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Balance as of December 31, 2006 |
|
|
15,853,306 |
|
|
$ |
1,578 |
|
|
$ |
134,736 |
|
|
$ |
(371 |
) |
|
$ |
50 |
|
|
$ |
(94,026 |
) |
|
$ |
(2,378 |
) |
|
$ |
39,589 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,583 |
|
|
|
|
|
|
|
5,583 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437 |
|
Unrealized loss on interest rate swap arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options |
|
|
|
|
|
|
|
|
|
|
1,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,648 |
|
Shares issued and compensation under restricted stock grants |
|
|
51,548 |
|
|
|
4 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
478 |
|
Shares issued in connection with RPS acquisition |
|
|
100,000 |
|
|
|
10 |
|
|
|
1,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,383 |
|
Shares issued in connection with limited public offering, net of expenses |
|
|
1,000,000 |
|
|
|
100 |
|
|
|
12,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,622 |
|
Shares issued under stock option exercises |
|
|
204,008 |
|
|
|
20 |
|
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Balance as of December 31, 2007 |
|
|
17,208,862 |
|
|
$ |
1,712 |
|
|
$ |
152,070 |
|
|
$ |
66 |
|
|
$ |
3 |
|
|
$ |
(88,443 |
) |
|
$ |
(2,401 |
) |
|
$ |
63,007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,663 |
|
|
|
|
|
|
|
13,663 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,984 |
) |
Unrealized loss on interest rate swap arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation related to stock options |
|
|
|
|
|
|
|
|
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
1,684 |
|
Stock-based compensation related to restricted stock grants |
|
|
— |
|
|
|
— |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442 |
|
Shares purchased in connection with stock repurchase program |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,815 |
) |
|
|
(1,815 |
) |
Shares issued in connection with conversion of convertible notes payable |
|
|
700,000 |
|
|
|
70 |
|
|
|
10,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500 |
|
Shares issued to directors |
|
|
12,737 |
|
|
|
1 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
Shares issued under stock option and warrant exercises |
|
|
305,410 |
|
|
|
32 |
|
|
|
2,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Balance as of December 31, 2008 |
|
|
18,227,009 |
|
|
$ |
1,815 |
|
|
$ |
167,259 |
|
|
$ |
(1,918 |
) |
|
$ |
(12 |
) |
|
$ |
(74,780 |
) |
|
$ |
(4,232 |
) |
|
$ |
88,132 |
|
| |
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
51
ULTRALIFE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
Adjustments to reconcile net income (loss)
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of financing fees |
|
|
3,851 |
|
|
|
3,861 |
|
|
|
3,667 |
|
Amortization of intangible assets |
|
|
2,119 |
|
|
|
2,317 |
|
|
|
1,199 |
|
Loss on asset disposal |
|
|
39 |
|
|
|
37 |
|
|
|
152 |
|
Gain on insurance settlement |
|
|
(39 |
) |
|
|
— |
|
|
|
(191 |
) |
Foreign exchange gain |
|
|
(399 |
) |
|
|
(425 |
) |
|
|
(285 |
) |
Gain on McDowell settlement |
|
|
— |
|
|
|
(7,550 |
) |
|
|
— |
|
Gain on debt conversion |
|
|
(313 |
) |
|
|
— |
|
|
|
— |
|
Non-cash stock-based compensation |
|
|
2,266 |
|
|
|
2,149 |
|
|
|
1,480 |
|
Minority interest in loss of subsidiaries |
|
|
(38 |
) |
|
|
— |
|
|
|
— |
|
Changes in deferred income taxes |
|
|
3,297 |
|
|
|
77 |
|
|
|
23,735 |
|
Provision for loss on accounts receivable |
|
|
1,086 |
|
|
|
101 |
|
|
|
74 |
|
Provision for inventory obsolescence |
|
|
2,850 |
|
|
|
1,323 |
|
|
|
90 |
|
Provision for warranty charges |
|
|
1,010 |
|
|
|
210 |
|
|
|
131 |
|
Provision for workers’ compenstion obligation |
|
|
— |
|
|
|
— |
|
|
|
350 |
|
Changes in operating assets and liabilities, net of effects from
acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,507 |
) |
|
|
83 |
|
|
|
(8,866 |
) |
Inventories |
|
|
(9,170 |
) |
|
|
(7,348 |
) |
|
|
(2,366 |
) |
Prepaid expenses and other current assets |
|
|
2,530 |
|
|
|
(1,157 |
) |
|
|
143 |
|
Insurance receivable relating to fires |
|
|
202 |
|
|
|
682 |
|
|
|
602 |
|
Income taxes payable |
|
|
582 |
|
|
|
— |
|
|
|
19 |
|
Accounts payable and other liabilities |
|
|
864 |
|
|
|
1,626 |
|
|
|
7,705 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,058 |
|
|
|
1,569 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(3,787 |
) |
|
|
(2,073 |
) |
|
|
(1,455 |
) |
Payment for acquired companies, net of cash acquired |
|
|
(3,171 |
) |
|
|
(8,678 |
) |
|
|
(7,013 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,958 |
) |
|
|
(10,751 |
) |
|
|
(8,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in revolving credit facilities |
|
|
(11,204 |
) |
|
|
3,308 |
|
|
|
6,475 |
|
Proceeds from issuance of common stock |
|
|
2,526 |
|
|
|
13,936 |
|
|
|
1,231 |
|
Principal payments on debt and capital lease obligations |
|
|
(2,230 |
) |
|
|
(6,817 |
) |
|
|
(2,046 |
) |
Purchase of treasury stock |
|
|
(1,815 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(12,723 |
) |
|
|
10,427 |
|
|
|
5,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
256 |
|
|
|
280 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(367 |
) |
|
|
1,525 |
|
|
|
(2,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
2,245 |
|
|
|
720 |
|
|
|
3,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,878 |
|
|
$ |
2,245 |
|
|
$ |
720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
934 |
|
|
$ |
2,175 |
|
|
$ |
992 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
| |
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock warrants for acquired companies |
|
$ |
— |
|
|
$ |
1,383 |
|
|
$ |
1,526 |
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible notes payable for acquired companies |
|
$ |
— |
|
|
$ |
4,000 |
|
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment via capital lease payable |
|
$ |
98 |
|
|
$ |
545 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes into shares of common stock |
|
$ |
10,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
52
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 — Summary of Operations and Significant Accounting Policies
a. Description of Business
We offer products and services ranging from portable and standby power solutions to
communications and electronics systems. Through our engineering and collaborative approach to
problem solving, we serve government, defense and commercial customers across the globe. We
design, manufacture, install and maintain power and communications systems including: rechargeable
and non-rechargeable batteries, standby power systems, communications and electronics systems and
accessories, and custom engineered systems, solutions and services. We sell our products worldwide
through a variety of trade channels, including original equipment manufacturers (“OEMs”),
industrial and retail distributors, national retailers and directly to U.S. and international
defense departments.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States and include the accounts of Ultralife Corporation
(formerly Ultralife Batteries, Inc.), our wholly owned subsidiaries, Ultralife Batteries (UK) Ltd.,
ABLE New Energy Co., Limited, and its wholly-owned subsidiary ABLE New Energy Co., Ltd., McDowell
Research Co., Inc., RedBlack Communications, Inc. (formerly Innovative Solutions Consulting, Inc.),
Stationary Power Services, Inc. and RPS Power Systems, Inc. (formerly Reserve Power Systems, Inc.),
and our majority owned subsidiary Ultralife Batteries India Private Limited. Intercompany accounts
and transactions have been eliminated in consolidation. Investments in entities in which we do not
have a controlling interest are accounted for using the equity method, if our interest is greater
than 20%. Investments in entities in which we have less than a 20% ownership interest are
accounted for using the cost method.
c. Management’s Use of Judgment and Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at year end and the
reported amounts of revenues and expenses during the reporting period. Key areas affected by
estimates include: (a) reserves for deferred tax assets, excess and obsolete inventory, warranties,
and bad debts; (b) profitability on development contracts; (c) various expense accruals; (d)
stock-based compensation; and, (e) carrying value of goodwill and intangible assets. Actual
results could differ from those estimates.
d. Reclassifications
Certain items previously reported in specific financial statement captions have been
reclassified to conform to the current presentation.
e. Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, we consider all demand deposits
with financial institutions and financial instruments with original maturities of three months or
less to be cash equivalents. For purposes of the Consolidated Balance Sheet, the carrying value
approximates fair value because of the short maturity of these instruments.
f. Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers in the normal course of business. We perform ongoing credit
evaluations and generally do not require collateral. Trade accounts receivable are recorded at
their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our
allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment
terms are considered past due and are reviewed individually for collectability. We maintain
reserves for potential credit losses based upon our loss history and
specific receivables aging analysis. Receivable balances are written off when collection is
deemed unlikely. Such losses have been within management’s expectations.
53
Changes in our allowance for doubtful accounts during the years ended December 31, 2008, 2007
and 2006 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
2006 |
| |
Balance at beginning of year |
|
$ |
485 |
|
|
$ |
447 |
|
|
$ |
458 |
|
Amounts charged (credited) to expense |
|
|
675 |
|
|
|
101 |
|
|
|
74 |
|
Amounts charged (credited) to other accounts |
|
|
(11 |
) |
|
|
6 |
|
|
|
— |
|
Uncollectible accounts written-off, net of recovery |
|
|
(63 |
) |
|
|
(69 |
) |
|
|
(85 |
) |
| |
|
|
Balance at end of year |
|
$ |
1,086 |
|
|
$ |
485 |
|
|
$ |
447 |
|
| |
|
|
g. Inventories
Inventories are stated at the lower of cost or market with cost determined under the first-in,
first-out (FIFO) method. We record provisions for excess, obsolete or slow-moving inventory based
on changes in customer demand, technology developments or other economic factors.
h. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives are as follows:
| |
|
|
Buildings
|
|
10 - 20 years |
Machinery and Equipment
|
|
5 - 10 years |
Furniture and Fixtures
|
|
3 - 10 years |
Computer Hardware and Software
|
|
3 - 5 years |
Leasehold Improvements
|
|
Lesser of useful life or lease term |
Depreciation and amortization are computed using the straight-line method. Betterments,
renewals and extraordinary repairs that extend the life of the assets are capitalized. Other
repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated
depreciation applicable to assets retired are removed from the accounts and the gain or loss on
disposition is recognized in operating income (expense).
i. Long-Lived Assets, Goodwill and Intangibles
We regularly assess all of our long-lived assets for impairment when events or circumstances
indicate that their carrying amounts may not be recoverable. This is accomplished by comparing the
expected undiscounted future cash flows of the assets with the respective carrying amount as of the
date of assessment. Should aggregate future cash flows be less than the carrying value, a
write-down would be required, measured as the difference between the carrying value and the fair
value of the asset. Fair value is estimated either through the assistance of an independent
valuation or as the present value of expected discounted future cash flows. The discount rate used
by us in our evaluation approximates our weighted average cost of capital. If the expected
undiscounted future cash flows exceed the respective carrying amount as of the date of assessment,
no impairment is recognized. During the year ended December 31, 2008, we recorded an impairment on
long-lived assets of $138, in connection with our restructuring of the U.K. facility operations.
We did not record any impairment of long-lived assets in the years ended December 31, 2007 or 2006.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and
Other Intangible Assets,” we do not amortize goodwill and intangible assets with indefinite lives,
but instead measure these assets for impairment at least annually, or when events indicate that
impairment exists. We amortize intangible assets that have definite lives so that the economic
benefits of the intangible assets are being utilized over their weighted-average estimated useful
life.
Based on the current preliminary valuations for amortizable intangible assets acquired in the
USE acquisition during 2008, and the final valuations for amortizable intangible assets acquired in
the RedBlack and Stationary Power acquisitions during 2007 and the ABLE and McDowell acquisitions during 2006,
we project our amortization expense will be approximately $1,632,
$1,207, $980, $794 and $651 for
the fiscal years ending December 31, 2009 through 2013, respectively.
54
j. Translation of Foreign Currency
The financial statements of our foreign affiliates are translated into U.S. dollar equivalents
in accordance with SFAS No. 52, “Foreign Currency Translation”, with translation adjustments
recorded as a component of accumulated other comprehensive income. Exchange gains (losses) relate
to foreign currency transactions included in net income (loss) for the years ended December 31,
2008, 2007 and 2006 were $399, $425, and $285, respectively.
k. Revenue Recognition
Product Sales — In general, revenues from the sale of products are recognized when products
are shipped. When products are shipped with terms that require transfer of title upon delivery at a
customer’s location, revenues are recognized on date of delivery. A provision is made at the time
the revenue is recognized for warranty costs expected to be incurred. Customers, including
distributors, do not have a general right of return on products shipped.
Services — Revenue from the sale of installation services is recognized upon customer
acceptance, generally the date of installation. Revenue from fixed price engineering contracts is recognized on a proportional method,
measured by the percentage of actual costs incurred to total estimated costs to complete the
contract. Revenue from time and material engineering contracts is recognized as work progresses
through monthly billings of time and materials as they are applied to the work pursuant to the
terms in the respective contract. Revenue from customer maintenance agreements is recognized using
the straight-line method over the term of the related agreements, which range from six months to
three years.
Technology Contracts — We recognize revenue using the proportional effort method based on the
relationship of costs incurred to date to the total estimated cost to complete the contract.
Elements of cost include direct material, labor and overhead. If a loss on a contract is
estimated, the full amount of the loss is recognized immediately. We allocate costs to all
technology contracts based upon actual costs incurred including an allocation of certain research
and development costs incurred.
Deferred Revenue — For each source of revenues, we defer recognition if: i) evidence of an
agreement does not exist, ii) delivery or service has not occurred, iii) the selling price is not
fixed or determinable, or iv) collectability is not reasonably assured.
l. Warranty Reserves
We estimate future costs associated with expected product failure rates, material usage and
service costs in the development of our warranty obligations. Warranty reserves, included in other
current liabilities and other long-term liabilities as applicable on our Consolidated Balance
Sheets, are based on historical experience of warranty claims. In the event the actual results of
these items differ from the estimates, an adjustment to the warranty obligation would be recorded.
m. Shipping and Handling Costs
Costs incurred by us related to shipping and handling are included in cost of products sold.
Amounts charged to customers pertaining to these costs are reflected as revenue.
n. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling, general and
administrative expenses in the accompanying Consolidated Statements of Operations. Such expenses
amounted to $940, $443, and $320 for the years ended December 31, 2008, 2007 and 2006,
respectively.
o. Research and Development
Research and development expenditures are charged to operations as incurred. The majority of
research and development expenses pertain to salaries and benefits, developmental supplies,
depreciation and other contracted services.
p. Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized, as
appropriate, in accordance with the American Institute of Certified Public Accountants (“AICPA”)
Statement of Position (“SOP”) 96-1, “Environmental Remediation Liabilities”. Remediation costs
that relate to an existing condition caused by past operations are accrued when it is probable that
these costs will be incurred and can be reasonably estimated.
55
q. Income Taxes
The asset and 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 basis of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
A valuation allowance is required when it is more likely than not that the recorded value of a
deferred tax asset will not be realized. For the year ended December 31, 2008, we continued to
recognize a full valuation allowance on our deferred tax asset to the extent they are not able to
be offset by future reversing temporary differences, based on a consistent evaluation methodology
that was used for 2006 and 2007. As of December 31, 2008 we continue to recognize a valuation
allowance for our deferred tax assets to the extent they are not able to be offset by future
reversing temporary differences. The assessment of the realizability of the U.S. NOL was based on
a number of factors including, our history of net operating losses, the volatility of our earnings,
our historical operating volatility, our historical ability to accurately forecast earnings for
future periods and the increased uncertainty of the general business climate as of the end of 2008.
We concluded that these factors represent sufficient negative evidence and have concluded that we
should record a full valuation allowance under SFAS No. 109. For the years ended December 31, 2006
and 2007, we recorded a full valuation allowance on our net deferred tax asset, due to the
determination that it was more likely than not that we would not be able to utilize these benefits
in the future. Because of the negative evidence at December 31, 2006 and 2007, such as our
operating results during the most recent historical periods, our cumulative loss during our most
recent three-year period, and uncertainty of future earnings, we determined the need for a full
valuation allowance under SFAS No. 109. A valuation allowance was required for the years ended
December 31, 2008, 2007 and 2006 related to our U.K. subsidiary due to the history of losses at
that facility.
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 company’s 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 were effective for fiscal
years beginning after December 15, 2006. The adoption of this pronouncement on January 1, 2007 had
no significant impact on our financial statements.
r. Concentration Related to Customers and Suppliers
During the year ended December 31, 2008, we had two major customers, Raytheon Company and Port
Electronics Corp., which comprised 29% and 16% of our revenue, respectively. During the year ended
December 31, 2007, we had three major customers, the U.S. Department of Defense, the U.K. Ministry
of Defence and Raytheon Company, which comprised 14%, 12%, and 13% of our revenue, respectively.
During the year ended December 31, 2006, we had one major customer, the U.S. Department of Defense,
which comprised 20% of our revenue. There were no other customers that comprised greater than 10%
of our total revenues during the years ended December 31, 2008, 2007 and 2006.
We have two customers that comprised 36% of our trade accounts receivables as of December 31,
2008. We have two customers that comprised 42% of our trade accounts receivable as of December 31,
2007. There were no other customers that comprised greater than 10% of our total trade accounts
receivable as of December 31, 2008 and 2007.
Currently, we do not experience significant seasonal trends in non-rechargeable product
revenues. However, a downturn in the U.S. economy, such as the one that we are currently
experiencing, which affects retail sales and which could result in fewer sales of smoke detectors
to consumers, could potentially result in lower sales for us to this market segment. The smoke
detector OEM market segment comprised approximately 8% of total non-rechargeable revenues in 2008.
Additionally, lower demand from the U.S., U.K. and other foreign governments could result in lower
sales to defense and government users.
We generally do not distribute our products to a concentrated geographical area nor is there a
significant concentration of credit risks arising from individuals or groups of customers engaged
in similar activities, or who have similar economic characteristics. While sales to the U.S.
Department of Defense have been substantial during
2008, 2007 and 2006, we do not consider this customer to be a significant credit risk. We do not
normally obtain collateral on trade accounts receivable.
56
Certain materials and components used in our products are available only from a single or a
limited number of suppliers. As such, some materials and components could become in short supply
resulting in limited availability and/or increased costs. Additionally, we may elect to develop
relationships with a single or limited number of suppliers for materials and components that are
otherwise generally available. Although we believe that alternative suppliers are available to
supply materials and components that could replace materials and components currently used and
that, if necessary, we would be able to redesign our products to make use of such alternatives, any
interruption in the supply from any supplier that serves as a sole source could delay product
shipments and have a material adverse effect on our business, financial condition and results of
operations. We have experienced interruptions of product deliveries by sole source suppliers in
the past. For example, in the fourth quarter of 2007, we ramped up production levels in our
Communications Systems business to meet increased order volumes. A sole-source supplier of a key
component was unable to meet an agreed-upon delivery schedule which caused a delay in shipments of
our products to our customers.
s. Fair Value of Financial Instruments
On January 1, 2008, we partially adopted SFAS No. 157, “Fair Value Measurements”. SFAS No.
157 provides enhanced guidance for using fair value to measure assets and liabilities. It does not
require any new fair value measurements, but does require expanded disclosures to provide
information about the extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value measures on
earnings. In February 2008, the FASB issued FASB Staff Position SFAS No. 157-2, “Effective Date of
FASB Statement No. 157” (“FSP”). The FSP delayed, for one year, the effective date of SFAS No. 157
for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the
financial statements on at least an annual basis. As such, we partially adopted the provisions of
SFAS No. 157. We adopted the remaining provisions of SFAS No. 157 effective January 1, 2009. We
expect the adoption of the deferred provisions of SFAS No. 157 to impact the way in which we
calculate fair value for assets and liabilities initially measured at fair value in a business
combination, our annual impairment review of goodwill and non-amortizable intangible assets, and
when conditions exist that require us to calculate the fair value of long-lived assets; however, we
do not expect this adoption to have a material impact on our financial statements, except for the
additional disclosures that will be required.
SFAS No. 107, “Disclosure About Fair Value of Financial Instruments”, requires disclosure of
an estimate of the fair value of certain financial instruments. The fair value of financial
instruments pursuant to SFAS No. 107 approximated their carrying values at December 31, 2008 and
2007. Fair values have been determined through information obtained from market sources.
t. Derivative Financial Instruments
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 our interest rate swap at
December 31, 2008 and 2007 resulted in a liability of $12 and an asset of $4, respectively, all of
which was reflected as short term.
u. Earnings (Loss) Per Share
We account for earnings (loss) per common share in accordance with the provisions of SFAS No.
128, “Earnings Per Share”. SFAS No. 128 requires the reporting of basic and diluted earnings per
share (“EPS”). Basic EPS is computed by dividing reported earnings available to common
shareholders by weighted average shares outstanding for the period. Diluted EPS includes the
dilutive effect of securities, if any, calculated using the treasury stock method. There were
1,301,383 outstanding stock options, warrants and restricted stock awards as of December 31, 2008
that were not included in EPS as the effect would be anti-dilutive. The dilutive effect of 421,988
outstanding stock options, warrants and restricted stock awards and 320,513 shares of common stock
reserved under convertible notes payable were included in the dilution computation for the year
ended December 31, 2008. There were 1,573,325 and 1,915,471 outstanding stock options, warrants
and restricted stock awards as of December 31, 2007 and 2006, respectively, that were not included
in EPS as the effect would be anti-dilutive. We also had 966,667 and 1,333,333 shares of common
stock at December 31, 2007 and 2006, respectively reserved under convertible notes payable, which
were not included in EPS as the effect would be anti-dilutive. The dilutive effect of 392,041
outstanding stock options, warrants and restricted stock awards was included in the dilution
computation for the year ended December 31, 2007. For year ended December 31, 2006, diluted
earnings (loss) per share was the equivalent of basic earnings (loss) per share due to the net
loss. (See Note 7)
57
The computation of basic and diluted earnings per share is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
Net Income (Loss) (a) |
|
$ |
13,663 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable |
|
|
215 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Net Income (Loss) — Adjusted (b) |
|
$ |
13,878 |
|
|
$ |
5,583 |
|
|
$ |
(27,488 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Shares Outstanding — Basic (c) |
|
|
17,230 |
|
|
|
15,316 |
|
|
|
14,906 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options / Warrants |
|
|
130 |
|
|
|
222 |
|
|
|
— |
|
Restricted Stock Awards |
|
|
24 |
|
|
|
19 |
|
|
|
— |
|
Convertible Notes Payable |
|
|
321 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Average Shares Outstanding —
Diluted (d) |
|
|
17,705 |
|
|
|
15,557 |
|
|
|
14,906 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS — Basic (a/c) |
|
$ |
0.79 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
EPS — Diluted (b/d) |
|
$ |
0.78 |
|
|
$ |
0.36 |
|
|
$ |
(1.84 |
) |
v. Stock-Based Compensation
We have various stock-based employee compensation plans, which are described more fully in
Note 7. We follow the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”), which requires 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 fair
value of the award, and is recognized as an expense over the employee’s requisite service period
(generally the vesting period of the equity award).
w. Segment Reporting
We report segment information in accordance with SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information”. We have four operating segments. The basis for
determining our operating segments is the manner in which financial information is used by us in
our operations. Management operates and organizes itself according to business units that comprise
unique products and services across geographic locations.
x. Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (“FASB”) ratified the consensus
reached on Emerging Issues Task Force Issue No. 07-05, “Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF Issue No. 07-5”). EITF Issue No.
07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to
an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”. EITF Issue No. 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early adoption for an
existing instrument is not permitted. We do not expect the adoption of this pronouncement to have a
significant impact on our financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting principles to be used in the
preparation of financial statements of nongovernmental entities that are presented in conformity
with generally accepted accounting principles in the United States. The FASB does not expect that
SFAS No. 162 will result in a change in current practice. However, transition provisions have been
provided in the unusual circumstance that the application of the provisions of SFAS No. 162 results
in a change in practice. SFAS No. 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” The SEC approved the
amendments on September 15, 2008; therefore, SFAS No. 162 was effective November 15, 2008. The
adoption of this pronouncement did not have a significant impact on our financial statements.
In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“FSP No. APB 14-1”). FSP No. APB
58
14-1 clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph
12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants.” Additionally, FSP No. APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
FSP No. APB 14-1 is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. We do not expect the adoption of this pronouncement to have a
significant impact on our financial statements.
In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the
Useful Life of Intangible Assets.” (“FSP No. SFAS 142-3”). FSP No. SFAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP FAS 142-3 intends to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (Revised 2007), “Business Combinations”, and other U.S.
generally accepted accounting principles. FSP No. SFAS 142-3 is effective for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008. We do not expect
the adoption of this pronouncement to have a significant impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133”. The statement amends and expands the
disclosure requirements of SFAS No. 133 to provide users of financial statements with an enhanced
understanding of (i) how and why an entity uses derivative instruments; (ii) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, results of operations, and cash flows. The statement also requires (i)
qualitative disclosures about objectives for using derivatives by primary underlying risk exposure;
(ii) information about the volume of derivative activity; (iii) tabular disclosures about balance
sheet location and gross fair value amounts of derivative instruments, income statement, and other
comprehensive income location and amounts of gains and losses on derivative instruments by type of
contract; and (iv) disclosures about credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is effective for financial statements issued for fiscal years or interim
periods beginning after November 15, 2008. We do not expect the adoption of this pronouncement to
have a significant impact on our financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141
(revised 2007), “Business Combinations” (“SFAS No. 141R”), which replaces SFAS 141. The statement
retains the purchase method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and development at fair value, and requires the
expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for fiscal years
beginning on or after December 15, 2008 and will apply prospectively to business combinations
completed on or after that date. The impact of adopting SFAS No. 141R will be dependent on the
future business combinations that we may pursue after its effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB 51”, which changes the accounting and reporting for
minority interests. Minority interests will be recharacterized as noncontrolling interests and
will be reported as a component of equity separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained, will be recorded at fair value with
any gain or loss recognized in earnings. SFAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008 and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The impact of adopting SFAS No. 160 will be
dependent on the structure of future business combinations or partnerships that we may pursue after
its effective date.
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the fair value option has
been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for an entity’s first fiscal year beginning after November 15, 2007. The adoption of this
pronouncement had no significant impact on our financial statements.
59
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157
provides enhanced guidance for using fair value to measure assets and liabilities. It does not
require any new fair value measurements, but does require expanded disclosures to provide
information about the extent to which fair value is used to measure assets and liabilities, the
methods and assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, with early adoption encouraged. In February 2008, the
FASB issued FASB Staff Position SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP”).
The FSP delayed, for one year, the effective date of SFAS No. 157 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed in the financial statements on at least
an annual basis. As such, we partially adopted the provisions of SFAS No. 157 effective January 1,
2008. The partial adoption of this statement did not have a material impact on our financial
statements. We adopted the remaining provisions of SFAS No. 157 effective January 1, 2009. We
expect the adoption of the deferred provisions of SFAS No. 157 to impact the way in which we
calculate fair value for assets and liabilities initially measured at fair value in a business
combination, our annual impairment review of goodwill and non-amortizable intangible assets, and
when conditions exist that require us to calculate the fair value of long-lived assets; however, we
do not expect this adoption to have a material impact on our financial statements, except for the
additional disclosures that will be required.
Note 2 — Acquisitions
We accounted for the following acquisitions in accordance with the purchase method of
accounting provisions of 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.
2008 Activity
Ultralife Batteries India Private Limited
In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited
(“India JV”), with our distributor partner in India. The India JV assembles Ultralife power
solution products and manages local sales and marketing activities, serving commercial, government
and defense customers throughout India. We have invested $61 in cash into the India JV, as
consideration for our 51% ownership stake in the India JV.
U.S. Energy Systems, Inc. and U.S. Power Services, Inc.
On November 10, 2008, we acquired certain assets of U.S. Energy Systems, Inc., and its
services affiliate U.S. Power Services, Inc. (“USE” collectively), a nationally recognized standby
power installation and power management services business. USE is located in Riverside,
California. The acquired assets of USE are being incorporated into our Stationary Power
subsidiary.
Under the terms of the asset purchase agreements for USE, the initial purchase price consisted
of $2,865 in cash. In addition, on the achievement of certain post-acquisition financial
milestones over a period of up to four years, we will issue up to an aggregate amount of 200,000
unregistered shares of our common stock. The contingent stock issuances will be recorded as an
addition to the purchase price when the financial milestones are attained. We incurred $62 in
acquisition related costs, which are included in the initial cost of the USE investment of $2,927.
The results of operations of USE and the estimated fair value of assets acquired and
liabilities assumed are included in our 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 $1,816 was recorded as goodwill in the amount of $1,111. We are
in the process of completing the 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 our final review of valuation assumptions. The acquired
goodwill will be assigned to the Design and Installation Services segment and is expected to be fully
deductible for income tax purposes.
The following table represents the preliminary allocation of the purchase price to assets
acquired and liabilities assumed at the acquisition date:
60
| |
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
— |
|
|
|
|
|
Total current assets |
|
|
— |
|
Property, plant and equipment, net |
|
|
276 |
|
Goodwill |
|
|
1,111 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
383 |
|
Patents and Technology |
|
|
130 |
|
Customer Relationships |
|
|
1,354 |
|
|
|
|
|
Total assets acquired |
|
|
3,254 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
|
|
56 |
|
Other current liabilities |
|
|
43 |
|
|
|
|
|
Total current liabilities |
|
|
99 |
|
Long-term liabilities: |
|
|
|
|
Debt |
|
|
228 |
|
|
|
|
|
Total liabilities assumed |
|
|
327 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
2,927 |
|
|
|
|
|
Trademarks have an indefinite life and are not being amortized. The intangible assets related
to patents and technology and customer relationships are being amortized as the economic benefits
of the intangible assets are being utilized over their weighted-average estimated useful life of
nineteen years.
2007 Acquisitions
RedBlack Communications, Inc. (formerly Innovative Solutions Consulting, Inc.)
On September 28, 2007, we finalized the acquisition of all of the issued and outstanding
shares of common stock of Innovative Solutions Consulting, Inc. (“ISC”), a provider of a wide range
of engineering and technical services for communication electronic systems to government agencies
and prime contractors. In January 2008, we renamed ISC to RedBlack Communications, Inc.
(“RedBlack”). RedBlack is located in Hollywood, Maryland.
The initial cash purchase price was $943 (net of $57 in cash acquired), with up to $2,000 in
additional cash consideration contingent on the achievement of certain sales milestones. The
additional cash consideration is payable in up to three annual payments and subject to possible
adjustments as set forth in the stock purchase agreement. The contingent payments will be recorded
as an addition to the purchase price when the performance milestones are attained. The initial
$943 cash payment was financed through a combination of cash on hand and borrowings through the
revolver component of our credit facility with our primary lending banks. During the second
quarter of 2008, we made an election under Section 338(h)(10) of the Internal Revenue Code in
relation to RedBlack, and in accordance with the provisions of the purchase agreement, we have made
payments of $54 to the sellers of RedBlack to make them substantially whole from a tax perspective.
These additional payments are part of the total purchase price, and as such, this adjustment to
the purchase price resulted in an increase to goodwill. During the third quarter of 2008, we
accrued $182 for the first annual payment of the contingent cash consideration, which is included
in the other current liabilities line on our Consolidated Balance Sheet, and resulted in an
increase to goodwill of $182. We have incurred $87 in acquisition related costs, which are
included in the revised cost of the investment of $1,266 (net of $57 in cash acquired), with a
potential total cost of the investment of $3,084 assuming the earn-out of all contingent
consideration.
On February 9, 2009, we entered into Amendment No. 1 to the RedBlack stock purchase agreement,
which eliminated the up to $2,000 in additional cash consideration contingent on the achievement of
certain sales milestones provision, in exchange for a one time final payment of $1,020. The one
time final payment of $1,020 was made in February 2009, and will result in an increase to goodwill
of $838 (net of the $182 amount that was accrued during the third quarter of 2008) in the first
quarter of 2009, and a revised total cost of the investment of $2,104.
The results of operations of RedBlack and the estimated fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on the
acquisition date. The estimated excess of the
61
purchase price over the net tangible and intangible
assets acquired of $136 (including $57 in cash) was recorded as goodwill in the amount of $1,187.
The acquired goodwill has been assigned to the Design and Installation Services segment and is
expected to be fully deductible for income tax purposes.
The following table represents the final allocation of the purchase price to assets acquired
and liabilities assumed at the acquisition date:
| |
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
57 |
|
Trade accounts receivables, net |
|
|
535 |
|
Prepaid expenses and other current assets |
|
|
175 |
|
|
|
|
|
Total current assets |
|
|
767 |
|
Property, plant and equipment, net |
|
|
687 |
|
Goodwill |
|
|
1,187 |
|
Intangible Assets: |
|
|
|
|
Non-compete agreements |
|
|
180 |
|
|
|
|
|
Total assets acquired |
|
|
2,821 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
|
|
720 |
|
Accounts payable |
|
|
431 |
|
Other current liabilities |
|
|
159 |
|
|
|
|
|
Total current liabilities |
|
|
1,310 |
|
Long-term liabilities: |
|
|
|
|
Debt |
|
|
188 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,498 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
1,323 |
|
|
|
|
|
Non-compete agreements are being amortized on a straight-line basis over their estimated
useful lives of two years.
The following table summarizes the unaudited pro forma financial information for the periods
indicated as if the RedBlack acquisition had occurred at the beginning of the period being
presented. The pro forma information contains the actual combined results of RedBlack and us, with
the results prior to the acquisition date including pro forma impact of: the amortization of the
acquired intangible assets; and the impact on interest expense in connection with funding the cash
portion of the acquisition purchase price. These pro forma amounts do not purport to be indicative
of the results that would have actually been obtained if the acquisition had occurred as of the
beginning of each of the periods presented or that may be obtained in the future.
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| (in thousands, except per share data) |
|
2007 |
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
139,698 |
|
|
$ |
97,284 |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
5,107 |
|
|
$ |
(28,987 |
) |
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share — Basic |
|
$ |
0.33 |
|
|
$ |
(1.94 |
) |
Earnings (Loss) per share — Diluted |
|
$ |
0.33 |
|
|
$ |
(1.94 |
) |
Stationary Power Services, Inc. and Reserve Power Systems, Inc.
On November 16, 2007, we completed the acquisition of all of the issued and outstanding shares
of common stock of Stationary Power Services, Inc. (“Stationary Power”), an infrastructure power
management services firm specializing in engineering, installation and preventative maintenance of
standby power systems, uninterruptible power supply systems, DC power systems and
switchgear/control systems for the telecommunications, aerospace, banking and
62
information services industries. Stationary Power is located in Clearwater, Florida. Immediately prior to the closing
of the Stationary Power acquisition, Stationary Power distributed the real estate assets, along
with the corresponding mortgage payable, to the original owner of Stationary Power, as these assets
and corresponding liability were not part of our acquisition of Stationary Power. Also on November
16, 2007, we completed the acquisition of all of the issued and outstanding shares of common stock
of Reserve Power Systems, Inc., a supplier of lead acid batteries primarily for use by Stationary
Power in the design and installation of standby power systems. In June 2008, we renamed Reserve
Power Systems, Inc. to RPS Power Systems, Inc. (“RPS”). Stationary Power and RPS were previously
affiliated companies due to common ownership interests.
Under the terms of the stock purchase agreement for Stationary Power, the initial purchase
price of $10,000 consisted of $5,889 (net of $111 in cash acquired) in cash and a $4,000
subordinated convertible promissory note to be held by the previous owner of Stationary Power. In
addition, on the achievement of certain post-acquisition sales milestones, we will issue up to an
aggregate amount of 100,000 shares of our common stock. The initial purchase price was subject to
a post-closing adjustment based on a final valuation of “Net Worth” on the date of closing, using a
base of $500. The final net value of the “Net Worth”, under the stock purchase agreement, was
$339, resulting in a revised initial purchase price of $9,839. As of December 31, 2008, we have
accrued $161 for this receivable, which is included in the prepaid expenses and other current
assets line on our Consolidated Balance Sheet. In July 2008, William Maher, former owner of
Stationary Power, delivered his promissory note to us in connection with the “Net Worth” adjustment
for $161. The promissory note bears interest at the rate of 5% per year and is payable in full,
including any unpaid interest thereon, no later than December 31, 2008. In January 2009, we
received payment in full for this receivable, including all unpaid accrued interest.
The $6,000 cash payment was financed by a portion of the net proceeds from a limited public
offering that we completed on November 16, 2007, whereby 1,000,000 shares of our common stock were
issued. Total net proceeds from the offering were approximately $12,600, of which $6,000 was used
for the Stationary Power cash payment. The $4,000 subordinated convertible promissory note carries
a three-year term, bears interest at the rate of 5% per year and is convertible at $15.00 per share
into 266,667 shares of our common stock, with a forced conversion feature at $17.00 per share. We
have evaluated the terms of the conversion feature under applicable accounting literature,
including SFAS No. 133 and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), and concluded that this feature
should not be separately accounted for as a derivative. During the third quarter of 2008, we made
an election under Section 338(h)(10) of the Internal Revenue Code in relation to Stationary Power,
and in accordance with the provisions of the purchase agreement, we made payments of $19 and have
accrued for a payment of $35, totaling $54, to the sellers of Stationary Power to make them
substantially whole from a tax perspective. These additional payments are part of the total
purchase price, and as such, this adjustment to the purchase price resulted in an increase to
goodwill of $54. The accrued payment of $35 is included in the other current liabilities line on
our Consolidated Balance Sheet. We incurred $113 in acquisition related costs, which are included
in the cost of the Stationary Power investment of $10,006. During the fourth quarter of 2008, $1 of
additional acquisition costs were incurred, which resulted in an increase to goodwill of $1.
Under the terms of the stock purchase agreement for RPS, the initial purchase price consisted
of 100,000 shares of our common stock, valued at $1,383. In addition, on the achievement of
certain post-acquisition sales milestones, we will pay the sellers, in cash, 5% of sales up to the
operating plan, as such term is defined in the stock purchase agreement, and 10% of sales that
exceed the operating plan, for the remainder of the calendar year 2007 and for calendar years 2008,
2009 and 2010. The additional contingent cash consideration is payable in annual installments, and
excludes sales made to Stationary Power, which historically have comprised substantially all of
RPS’s sales. No contingent cash consideration was recorded for 2007. During 2008, we have accrued
$49 for the 2008 portion of the contingent cash consideration, which is included in the other
current liabilities line on our Consolidated Balance Sheet. During the fourth quarter of 2008,
this accrual was increased by $19, which resulted in an increase to goodwill of $19.
The results of operations of Stationary Power and RPS and the estimated fair value of assets
acquired and liabilities assumed are included in our consolidated financial statements beginning on
the acquisition date. The estimated excess of the purchase price over the net tangible and
intangible assets acquired of $5,940 (including $111 of cash) was recorded as goodwill in the amount of $5,498. The acquired goodwill has
been assigned to the Design and Installation Services and the Rechargeable Products segments and is
expected to be fully deductible for income tax purposes.
The following table represents the final allocation of the purchase price to assets acquired
and liabilities assumed at the acquisition date:
63
| |
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
111 |
|
Trade accounts receivables, net |
|
|
1,594 |
|
Inventories |
|
|
1,687 |
|
Prepaid expenses and other current assets |
|
|
52 |
|
|
|
|
|
Total current assets |
|
|
3,444 |
|
Property, plant and equipment, net |
|
|
324 |
|
Goodwill |
|
|
5,498 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
1,300 |
|
Patents and Technology |
|
|
440 |
|
Customer Relationships |
|
|
4,600 |
|
Other Assets: |
|
|
|
|
Security deposits |
|
|
12 |
|
|
|
|
|
Total assets acquired |
|
|
15,618 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
|
|
1,277 |
|
Accounts payable |
|
|
1,958 |
|
Other current liabilities |
|
|
788 |
|
|
|
|
|
Total current liabilities |
|
|
4,023 |
|
Long-term liabilities: |
|
|
|
|
Debt |
|
|
137 |
|
Other long-term liabilities |
|
|
20 |
|
|
|
|
|
Total liabilities assumed |
|
|
4,180 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
11,438 |
|
|
|
|
|
Trademarks have an indefinite life and are not being amortized. The intangible assets related
to patents and technology and customer relationships are being amortized as the economic benefits
of the intangible assets are being utilized over their weighted-average estimated useful life of
nineteen years.
In connection with the Stationary Power acquisition, we entered into an operating lease
agreement for real property in Clearwater, Florida with a company partially owned by William Maher,
former owner of Stationary Power and who joined the company as an employee following the completion
of the Stationary Power acquisition. The lease term is for three years and expires on November 15,
2010. The lease has a base annual rent of approximately $144, based on current market rates at the
lease inception, payable in monthly installments. In addition to the base annual rate, we are
obligated to pay the real estate and personal property taxes associated with the facility. Under
the terms of the lease, we have the right to extend the lease for one additional three-year term,
with the base annual rent, applicable to the extension, of approximately $147. During the first
quarter of 2009, Mr. Maher resigned from his position.
The following table summarizes the unaudited pro forma financial information for the periods
indicated as if the Stationary Power and RPS acquisitions had occurred at the beginning of the
period being presented. Because Stationary Power and RPS were under common control as of the date
of these acquisitions, the pro forma information contains the actual combined results of Stationary
Power and RPS and us, 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; interest expense
that would not have been incurred for the mortgage payable that was not assumed by us in the
Stationary Power acquisition; the elimination of the sales and purchases between Stationary Power
and RPS and us; and rent expense that would have been incurred for the building that was not
acquired by us in the Stationary Power acquisition, net of the reduction in depreciation expense
for the building. These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisitions had occurred as of the beginning of each of
the periods presented or that may be obtained in the future.
64
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| (in thousands, except per share data) |
|
2007 |
|
2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
144,356 |
|
|
$ |
102,484 |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
5,393 |
|
|
$ |
(26,887 |
) |
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share — Basic |
|
$ |
0.34 |
|
|
$ |
(1.74 |
) |
Earnings (Loss) per share — Diluted |
|
$ |
0.33 |
|
|
$ |
(1.74 |
) |
2006 Acquisitions
ABLE New Energy Co., Ltd.
On May 19, 2006, we acquired 100% of the equity securities of ABLE New Energy Co., Ltd.
(“ABLE”), an established manufacturer of lithium batteries. ABLE is 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 broadened our expanding
portfolio of high-energy power sources, enabling us 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. We expect this acquisition will strengthen our global presence,
facilitate our entry into the rapidly growing Chinese market, and improve our access to lower
material and manufacturing costs.
The total consideration given for ABLE was a combination of cash and equity. The initial cash
purchase price 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. In August 2007, the $5,000 cumulative revenue milestone was attained, and as such,
we recorded the first $250 contingent cash payment, which resulted in an increase in goodwill of
$250. In August 2008, the $10,000 cumulative revenue milestone was attained, and as such, we
recorded the final $250 contingent cash payment, which resulted in an increase in goodwill of $250.
The equity portion of the purchase price consisted of 96,247 shares of our common stock valued at
$1,000, 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 as of May 19, 2006 (the date of acquisition):
| |
|
|
|
|
Risk-free interest rate |
|
|
4.31 |
% |
Volatility factor |
|
|
61.25 |
% |
Dividends |
|
|
0.00 |
% |
Weighted average expected life (years) |
|
|
2.50 |
|
We incurred $59 in acquisition related costs, which is included in the total potential cost of
the investment of $3,981.
The results of operations of ABLE and the estimated fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on the
acquisition date. The estimated excess of the purchase price over the net tangible and intangible
assets acquired of $2,268 (including $104 in cash) was recorded as goodwill in the amount of
$1,817. The acquired goodwill has been assigned to the Non-Rechargeable Products segment and is
not deductible for income tax purposes.
The following table represents the revised, final allocation of the purchase price to assets
acquired and liabilities assumed at the acquisition date:
65
| |
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
104 |
|
Trade accounts receivables, net |
|
|
318 |
|
Inventories |
|
|
737 |
|
Prepaid expenses and other current expenses |
|
|
73 |
|
|
|
|
|
Total current assets |
|
|
1,232 |
|
Property, plant and equipment, net |
|
|
740 |
|
Goodwill |
|
|
1,817 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
90 |
|
Patents and technology |
|
|
390 |
|
Customer relationships |
|
|
820 |
|
Distributor relationships |
|
|
300 |
|
Non-compete agreements |
|
|
40 |
|
|
|
|
|
Total assets acquired |
|
|
5,429 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
84 |
|
|
|
|
|
Total liabilities assumed |
|
|
1,344 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
4,085 |
|
|
|
|
|
Trademarks have an indefinite life and will not be amortized. The intangible assets related
to patents and technology, customer relationships, and distributor relationships are being
amortized as the economic benefits of these intangible assets are being utilized over their
weighted-average estimated useful life of eleven years. The non-compete agreements are being
amortized on a straight-line basis over its estimated useful life of three years.
McDowell Research, Ltd.
On July 3, 2006, we finalized the acquisition of substantially all of the assets of McDowell
Research, Ltd. (“McDowell”), a manufacturer of military communications accessories. McDowell was
located originally in Waco, Texas, with the operations having been relocated to the Newark, New York
facility during the second half of 2007.
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, subordinated convertible promissory
note to be held by the sellers of McDowell. The purchase price was 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 final net value of these assets, under our contractual obligation under the acquisition
agreement, was $6,389, resulting in a revised purchase price of approximately $28,448. A cash
payment of $1,500 was made to the sellers during the first quarter of 2007 and we had accrued
$1,889 for the remaining final post-closing adjustment of $3,389.
The initial $5,000 cash portion was financed through a combination of cash on hand and
borrowing through the revolver component of our credit facility with our primary lending banks,
which was amended to accommodate the acquisition of McDowell. The $20,000 convertible note carried
a five-year term, an annual interest rate of 4% and was convertible at $15 per share into 1.33
million shares of our common stock, with a forced conversion feature, at our option, at any time
after the 30-day average closing price of our common stock exceeded $17.50 per share. We had
evaluated the terms of the conversion feature under applicable accounting literature, including
SFAS No. 133 and EITF 00-19, and concluded that this feature should not be separately accounted for
as a derivative. The conversion price was subject to adjustment as defined in the subordinated
convertible promissory note. Interest was payable
quarterly in arrears, with all unpaid accrued interest and outstanding principal due in full
on July 3, 2011. In April 2007, in connection with its dissolution, McDowell
66
distributed the convertible note to its members in proportion to their membership interests, resulting in six
separate convertible notes aggregating $20,000.
On November 16, 2007, we finalized a settlement agreement with the sellers of McDowell
Research, Ltd. relating to the initial purchase price of that company, which related to various
operational issues that arose during the first several months following the July 2006 acquisition
that significantly reduced our profit margins. The settlement agreement reduced the overall
purchase price by approximately $7,900, by reducing the principal amount on the convertible notes
initially issued in that transaction from $20,000 to $14,000, and eliminating a $1,889 liability
related to a purchase price adjustment. In addition, the interest rate on the convertible notes
was increased from 4% to 5% and we made prepayments totaling $3,500 on the convertible notes. Upon
payment of the $3,500 in November 2007, we reported a one-time, non-operating gain of approximately
$7,550 to account for the purchase price reduction, net of certain adjustments related to the
change in the interest rate on the convertible notes. Based on the facts and circumstances
surrounding the settlement agreement, there was not a clear and direct link to the purchase price;
therefore, we recorded the settlement as an adjustment to income in accordance with SFAS No. 141.
In January 2008, the remaining $10,500 principal balance on the convertible notes was converted in
full into 700,000 shares of our common stock and the remaining $313 that pertained to the change in
the interest rate on the notes was recorded in other income as a gain on debt conversion.
We have incurred $59 in acquisition related costs, which are included in the approximate total
cost of the investment of $28,448.
The results of operations of McDowell and the estimated fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on the
acquisition date. The estimated excess of the purchase price over the net tangible and intangible
assets acquired of $15,373 was recorded as goodwill in the amount of $13,075. The acquired
goodwill has been assigned to the Communications Systems and the Rechargeable Products segments and
is fully deductible for income tax purposes.
The following table represents the final allocation of the purchase price to assets acquired
and liabilities assumed at the acquisition date:
| |
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Trade accounts receivables, net |
|
$ |
3,532 |
|
Inventories |
|
|
5,155 |
|
Prepaid inventory and other current expenses |
|
|
10 |
|
|
|
|
|
Total current assets |
|
|
8,697 |
|
Property, plant and equipment, net |
|
|
397 |
|
Goodwill |
|
|
13,075 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
3,000 |
|
Patents and technology |
|
|
3,201 |
|
Customer relationships |
|
|
1,990 |
|
Non-compete agreements |
|
|
166 |
|
|
|
|
|
Total assets acquired |
|
|
30,526 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Current portion of long-term debt |
|
|
46 |
|
Accounts payable |
|
|
1,787 |
|
Other current liabilities |
|
|
208 |
|
|
|
|
|
Total current liabilities |
|
|
2,041 |
|
Long-term liabilities: |
|
|
|
|
Debt |
|
|
37 |
|
|
|
|
|
Total liabilities assumed |
|
|
2,078 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
28,448 |
|
|
|
|
|
Trademarks have an indefinite life and are not being amortized. The intangible assets related
to patents and technology and customer relationships are being amortized as the economic benefits
of these intangible assets are being utilized over their weighted-average estimated useful life of
thirteen years. The non-compete agreements are being amortized on a straight-line basis over their
estimated useful life of two years.
67
In connection with the McDowell acquisition, we entered into an operating lease agreement for
real property in Waco, Texas with a partnership that is 50% owned by Thomas Hauke, who joined us as
an executive officer following the completion of the McDowell acquisition. The lease term was for
one year, with annual rent of $227, payable in monthly installments. This lease was extended and
on November 1, 2007, we entered into a new operating lease agreement on a month-to-month basis for
$10 per month, due to a reduction in total square feet being utilized. This lease ended during the
second quarter of 2008. During the first quarter of 2007, Mr. Hauke resigned from his position.
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 McDowell and us, 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; the elimination of the sales and
purchases between McDowell and us; 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 acquisition had occurred as of the beginning of each of the periods presented
or that may be obtained in the future.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
| (in thousands, except per share data) |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
105,691 |
|
|
|
|
|
Net Loss |
|
$ |
(26,359 |
) |
|
|
|
|
Loss per share — Basic |
|
$ |
(1.77 |
) |
|
|
|
|
Loss per share — Diluted |
|
$ |
(1.77 |
) |
|
|
|
|
| |
Note 3 — Supplemental Balance Sheet Information
a. Inventory
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:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
29,352 |
|
|
$ |
22,613 |
|
Work in process |
|
|
9,087 |
|
|
|
7,493 |
|
Finished products |
|
|
4,876 |
|
|
|
7,325 |
|
| |
|
|
|
|
|
43,315 |
|
|
|
37,431 |
|
Less: Reserve for obsolescence |
|
|
2,850 |
|
|
|
2,333 |
|
| |
|
|
|
|
$ |
40,465 |
|
|
$ |
35,098 |
|
|
|
|
|
|
|
|
68
b. Property, Plant and Equipment
Major classes of property, plant and equipment consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
123 |
|
|
$ |
123 |
|
Buildings and Leasehold Improvements |
|
|
5,274 |
|
|
|
5,104 |
|
Machinery and Equipment |
|
|
42,172 |
|
|
|
43,252 |
|
Furniture and Fixtures |
|
|
1,669 |
|
|
|
1,229 |
|
Computer Hardware and Software |
|
|
2,808 |
|
|
|
2,359 |
|
Construction in Progress |
|
|
2,023 |
|
|
|
1,090 |
|
| |
|
|
|
|
|
54,069 |
|
|
|
53,157 |
|
Less: Accumulated Depreciation |
|
|
35,604 |
|
|
|
33,792 |
|
| |
|
|
|
|
$ |
18,465 |
|
|
$ |
19,365 |
|
|
|
|
|
|
|
|
Estimated costs to complete construction in progress as of December 31, 2008 and 2007 was
approximately $857 and $876, respectively.
Depreciation expense was $3,752, $3,765, and $3,610 for the years ended December 31, 2008,
2007, and 2006, respectively.
Included in Buildings and Leasehold Improvements is a capital lease. The carrying value for
this asset is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Acquisition Value |
|
$ |
428 |
|
|
$ |
428 |
|
Accumulated Amortization |
|
|
52 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Carrying Value |
|
$ |
376 |
|
|
$ |
409 |
|
|
|
|
|
|
|
|
Included in Machinery and Equipment are various capital leases. The carrying value for these
assets is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Acquisition Value |
|
$ |
204 |
|
|
$ |
172 |
|
Accumulated Amortization |
|
|
47 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Carrying Value |
|
$ |
157 |
|
|
$ |
162 |
|
|
|
|
|
|
|
|
69
c. Goodwill
The following table summarizes the goodwill activity by segment for the years ended December
31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Non- |
|
|
|
|
|
|
|
|
|
Design and |
|
|
| |
|
Rechargeable |
|
Rechargeable |
|
Communications |
|
Installation |
|
|
| |
|
Products |
|
Products |
|
Systems |
|
Services |
|
Total |
| |
|
|
Balance at December 31, 2006 |
|
$ |
1,239 |
|
|
$ |
2,421 |
|
|
$ |
9,684 |
|
|
$ |
— |
|
|
$ |
13,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of RedBlack |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
905 |
|
|
|
905 |
|
Acquisition of SPS |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,825 |
|
|
|
3,825 |
|
Acquisition of RPS |
|
|
— |
|
|
|
1,672 |
|
|
|
— |
|
|
|
— |
|
|
|
1,672 |
|
Adjustments to purchase price
allocation |
|
|
328 |
|
|
|
194 |
|
|
|
776 |
|
|
|
— |
|
|
|
1,298 |
|
Effect of foreign currency translations |
|
|
136 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
136 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
1,703 |
|
|
$ |
4,287 |
|
|
$ |
10,460 |
|
|
$ |
4,730 |
|
|
$ |
21,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to purchase price
allocation |
|
|
250 |
|
|
|
49 |
|
|
|
— |
|
|
|
234 |
|
|
|
533 |
|
Acquistion of US Energy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,111 |
|
|
|
1,111 |
|
Effect of foreign currency translations |
|
|
119 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
119 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
2,072 |
|
|
$ |
4,336 |
|
|
$ |
10,460 |
|
|
$ |
6,075 |
|
|
$ |
22,943 |
|
| |
|
|
d. Other Intangible Assets
The composition of intangible assets was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2008 |
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Gross Assets |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
4,789 |
|
|
$ |
— |
|
|
$ |
4,789 |
|
Patents and technology |
|
|
4,229 |
|
|
|
2,313 |
|
|
|
1,916 |
|
Customer relationships |
|
|
8,906 |
|
|
|
2,934 |
|
|
|
5,972 |
|
Distributor relationships |
|
|
352 |
|
|
|
180 |
|
|
|
172 |
|
Non-compete agreements |
|
|
393 |
|
|
|
317 |
|
|
|
76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
18,669 |
|
|
$ |
5,744 |
|
|
$ |
12,925 |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2007 |
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Gross Assets |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
4,399 |
|
|
$ |
— |
|
|
$ |
4,399 |
|
Patents and technology |
|
|
4,069 |
|
|
|
1,662 |
|
|
|
2,407 |
|
Customer relationships |
|
|
7,489 |
|
|
|
1,608 |
|
|
|
5,881 |
|
Distributor relationships |
|
|
329 |
|
|
|
123 |
|
|
|
206 |
|
Non-compete agreements |
|
|
390 |
|
|
|
170 |
|
|
|
220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
16,676 |
|
|
$ |
3,563 |
|
|
$ |
13,113 |
|
| |
|
|
Amortization expense for intangible assets was $2,119, $2,317, and $1,199 for the years ended
December 31, 2008, 2007, and 2006, respectively.
The change in the cost value of total intangible assets is a result of the 2008 acquisitions,
changes in the final valuation of intangible assets in connection with the 2007 acquisitions and
the effect of foreign currency translations.
70
Note 4 — Operating Leases
We lease various buildings, machinery, land, automobiles and office equipment. Rental
expenses for all operating leases were approximately $1,001, $1,234 and $1,026 for the years ended
December 31, 2008, 2007 and 2006, respectively. Future minimum lease payments under
non-cancelable operating leases as of December 31, 2008 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
| 2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
and beyond |
|
$ |
869 |
|
|
$ |
654 |
|
|
$ |
301 |
|
|
$ |
278 |
|
|
$ |
125 |
|
Note 5 — Debt and Capital Leases
Credit Facilities
As of December 31, 2008, our primary credit facility consisted of both a term loan component
and a revolver component, and the facility is collateralized by essentially all of our assets,
including all of our subsidiaries. The lenders of the credit facility are JP Morgan Chase Bank and
Manufacturers and Traders Trust Company, with JP Morgan Chase Bank acting as the administrative
agent. As of December 31, 2008, the current revolver loan commitment was $22,500. Availability
under the revolving credit component is subject to meeting certain financial covenants, including a
debt to earnings ratio, a fixed charge coverage ratio, and a current assets to total liabilities
ratio. In addition, we are required to meet certain non-financial covenants. The rate of
interest, in general, was based upon either the current prime rate, or a LIBOR rate plus 250 basis
points.
On June 30, 2004, we drew down the full $10,000 term loan. The term loan is being repaid in
equal monthly installments of $167 over five years. On July 1, 2004, we 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. We
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 us is equal to the swap rate of 3.98%
plus the applicable Eurodollar spread associated with the term loan. During the full year of 2006,
the adjusted rate was 6.98%. During the full year of 2007, the adjusted rate ranged from 5.98% to
7.23%. During the full year of 2008, the adjusted rate ranged from 5.73% to 6.48%. 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 December 31, 2008
resulted in a liability of $12, all of which was reflected as a short-term liability.
There have been several amendments to the credit facility during the past few years, including
amendments to authorize acquisitions and modify financial covenants. Effective February 14, 2007,
we entered into Forbearance and Amendment Number Six to the Credit Agreement (“Forbearance and
Amendment”) with the banks. The Forbearance and Amendment provided that the banks would forbear
from exercising their rights under the credit facility arising from our failure to comply with
certain financial covenants in the credit facility with respect to the fiscal quarter ended
December 31, 2006. Specifically, we were not in compliance with the terms of the credit facility
because we failed to maintain the required debt-to-earnings and EBIT-to-interest ratios provided
for in the credit facility at that time. The banks agreed to forbear from exercising their
respective rights and remedies under the credit facility until March 23, 2007 (“Forbearance
Period”), unless we breached the Forbearance and Amendment or unless another event or condition
occurred that constituted a default under the credit facility. Each bank agreed to continue to make
revolving loans available to us during the Forbearance Period. Pursuant to the Forbearance and
Amendment, the aggregate amount of the banks’ revolving loan commitment was reduced from $20,000 to
$15,000. During the Forbearance Period, the applicable revolving interest rate and the applicable
term interest rate, in each case as set forth in the credit agreement, both were increased by 25
basis points. In addition to a number of technical and conforming amendments, the Forbearance and
Amendment revised the definition of “Change in Control” in the credit facility to provide that the
acquisition of equity interests representing more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding equity interests of us shall constitute a “Change in
Control” for purposes of the credit facility. Previously, the equity interests threshold had been
set at 20%.
Effective March 23, 2007, we entered into Extension of Forbearance and Amendment Number Seven
to Credit Agreement (“Extension and Amendment”) with the banks. The Extension and Amendment
provided that the banks agreed to extend the Forbearance Period until May 18, 2007. The Extension
and Amendment also acknowledged that we
71
continued not to be in compliance with the financial
covenants identified above for the fiscal quarter ended December 31, 2006 and did not contemplate
being in compliance for the fiscal quarter ending March 31, 2007.
Effective May 18, 2007, we entered into Extension of Forbearance and Amendment Number Eight to
Credit Agreement (“Second Extension and Amendment”) with the banks. The Second Extension and
Amendment provided that the banks agreed to extend the Forbearance Period until August 15, 2007.
The Second Extension and Amendment also acknowledged that we continued not to be in compliance with
the financial covenants identified above for the fiscal quarter ended March 31, 2007 and did not
contemplate being in compliance for the fiscal quarter ending June 30, 2007.
Effective August 15, 2007, we entered in Amendment Number Nine to Credit Agreement (“Amendment
Nine”) with the banks. Amendment Nine effectively ended the Forbearance Period and extended the
term of the revolving credit component of the facility to January 31, 2009 and the term of the term
loan component of the facility to July 1, 2009. Amendment Nine also added several definitions and
modified or replaced certain covenants.
Effective April 23, 2008, we entered into Amendment Number Ten to Credit Agreement (“Amendment
Ten”) with the banks. Amendment Ten increased the amount of the revolving credit facility from
$15,000 to $22,500, an increase of $7,500. Additionally, Amendment Ten amended the applicable
revolver and term rates under the Credit Agreement from a variable pricing grid based on quarterly
financial ratios to a set interest rate structure based on either the current prime rate, or a
LIBOR rate plus 250 basis points. As of December 31, 2008, we were in compliance with all of the
credit facility covenants, as amended.
As of December 31, 2008, we had $1,167 outstanding under the term loan component of our credit
facility with our primary lending bank and $-0- was outstanding under the revolver component. At
December 31, 2008, the interest rate on the revolver component was 3.25%. As of December 31, 2008,
the revolver arrangement provided for up to $22,500 of borrowing capacity, including outstanding
letters of credit. At December 31, 2008, we had no outstanding letters of credit related to this
facility, as amended April 23, 2008, leaving $22,500 of additional borrowing capacity.
On January 27, 2009, we entered into an Amended and Restated Credit Agreement (the “Restated
Credit Agreement”) with JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company
(together, the “Lenders”). The Restated Credit Agreement reflects the previous ten amendments to
the original Credit Agreement dated June 30, 2004 between us and the Lenders and modifies certain
of those provisions. The Restated Credit Agreement among other things (i) increases the current
revolver loan commitment from $22,500 to $35,000, (ii) extends the maturity date of the revolving
credit component from January 31, 2009 to June 30, 2010, (iii) modifies the interest rate, and (iv)
modifies certain covenants. The rate of interest is based, in general, upon either a LIBOR rate
plus a Eurodollar spread or an Alternate Base Rate plus an ABR spread, as that term is defined in
the Restated Credit Agreement, within a predetermined grid, which is dependent upon whether
Earnings Before Interest and Taxes for the most recently completed fiscal quarter is greater than
or less than zero. Generally, borrowings under the Restated Credit Agreement will bear interest
based primarily on the Prime Rate plus 50 to 200 basis points or LIBOR plus 300 to 500 basis
points. Additionally, among other covenant modifications, the Restated Credit Agreement modifies
the financial covenants by (i) revising the debt to earnings ratio and fixed charge coverage ratio
and (ii) deleting the current assets to liabilities ratio.
Previously, our wholly-owned U.K. subsidiary, Ultralife Batteries (UK) Ltd., had a revolving
credit facility with a commercial bank in the U.K. This credit facility provided our U.K.
operation with additional financing flexibility for its working capital needs. Any borrowings
against this credit facility were collateralized with that company’s outstanding accounts
receivable balances. During the second quarter of 2008, this credit facility was terminated. The
Ultralife UK operations will be funded by operating cash flows and cash advances from Ultralife
Corporation, if necessary
While we believe relations with our lenders are good and we have received waivers as necessary
in the past, there can be no assurance that such waivers can always be obtained. In such case, we
believe we have, in the aggregate, sufficient cash, cash generation capabilities from operations,
working capital, and financing alternatives at our disposal, including but not limited to
alternative borrowing arrangements (e.g. asset secured borrowings)
and other available lenders, to fund operations in the normal course and repay the debt
outstanding under our credit facility.
Continuing volatility in the debt capital markets may affect our ability to access those
markets. Notwithstanding these adverse market conditions, we believe that current cash and cash
equivalent balances and cash generated from operations, together with access to external sources of
funds from the revolving credit facility, will be sufficient to meet our operating and capital
needs in the foreseeable future.
72
Equipment and Vehicle Notes Payable
We have approximately twenty notes payable related to various equipment and vehicles. The
notes payable provide for payments (including principal and interest) of $187 per year,
collectively. The interest rates on the notes payable range from 0.00% to 12.02%. The term on the
notes payable range from 24 to 72 months, with payments on the individual notes payable ending
between April 2009 and December 2013. The respective equipment and vehicles collateralize the
notes payable.
Capital Leases
We have fourteen capital leases. The first capital lease commitment is for a leasehold
improvement that provides for payments (including principal and interest) of $91 per year from May
2007 through April 2012. The remaining thirteen capital lease commitments are for copiers that
provide for payments (including principal and interest) of $61 per year, collectively, from July
2007 through December 2013. Remaining interest payable on all of the capital leases is
approximately $68. At the end of the lease terms, we are required to purchase the assets under the
capital lease commitments for one dollar each.
Payment Schedule
As of December 31, 2008, scheduled principal payments under the current amount outstanding of
debt and capital leases are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Equipment and |
|
|
|
|
|
|
Convertible |
|
|
|
|
| |
|
Credit |
|
|
Vehicle Notes |
|
|
Capital |
|
|
Notes |
|
|
|
|
| |
|
Facility |
|
|
Payable |
|
|
Leases |
|
|
Payable |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
1,167 |
|
|
$ |
138 |
|
|
$ |
120 |
|
|
$ |
— |
|
|
$ |
1,425 |
|
2010 |
|
|
— |
|
|
|
150 |
|
|
|
117 |
|
|
|
4,000 |
|
|
|
4,267 |
|
2011 |
|
|
— |
|
|
|
112 |
|
|
|
126 |
|
|
|
— |
|
|
|
238 |
|
2012 |
|
|
— |
|
|
|
71 |
|
|
|
66 |
|
|
|
— |
|
|
|
137 |
|
2013 and thereafter |
|
|
— |
|
|
|
20 |
|
|
|
8 |
|
|
|
— |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,167 |
|
|
|
491 |
|
|
|
437 |
|
|
|
4,000 |
|
|
|
6,095 |
|
Less: Current portion |
|
|
1,167 |
|
|
|
138 |
|
|
|
120 |
|
|
|
— |
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term |
|
$ |
— |
|
|
$ |
353 |
|
|
$ |
317 |
|
|
$ |
4,000 |
|
|
$ |
4,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
In connection with the $4,000 operating lease line that we initiated in March 2001, we
maintained a letter of credit, which expired in July 2007. At December 31, 2008, we had no
outstanding letters of credit.
Note 6 — Commitments and Contingencies
a. Indemnity
The Delaware General Corporation Law provides that directors or officers will be reimbursed
for all expenses, to the fullest extent permitted by law arising out of their performance as agents
or trustees of ours.
b. Purchase Commitments
As of December 31, 2008, we have made commitments to purchase approximately $629 of production
machinery and equipment.
c. Royalty Agreements
Technology underlying certain of our products is based in part on non-exclusive transfer
agreements. In 2003, we entered into an agreement with Saft, to license certain tooling for
battery cases. The licensing fee associated with this
73
agreement is essentially one dollar per
battery case. The total royalty expense reflected in 2008, 2007 and 2006 was $22, $13 and $39,
respectively. This agreement expires in the year 2017.
d. Government Grants/Loans
We have been able to obtain certain grants/loans from government agencies to assist with
various funding needs. In November 2001, we received approval for a $300 grant/loan from New York
State. The grant/loan was to fund capital expansion plans that we expected would lead to job
creation. In this case, we were to be reimbursed after the full completion of the particular
project. This grant/loan also required us to meet and maintain certain levels of employment.
During 2002, since we did not meet the initial employment threshold, it appeared unlikely at that
time that we would be able to gain access to these funds. However, during 2006, our employment
levels had increased to a level that exceeded the minimum threshold, and we received these funds in
April 2007. This grant/loan required us to not only meet, but maintain our employment levels for a
pre-determined time period. Our employment levels met the specified levels as of December 31, 2007
and 2008. As a result of meeting the employment levels as of December 31, 2008, we had satisfied
all of the requirements for the grant/loan.
In October 2005, we received a contract valued at approximately $3,000 from the U.S. Defense
Department to purchase equipment and enhance processes to reduce lead times and increase
manufacturing efficiency to boost production surge capability of our BA-5390 battery during
contingency operations. Approximately $1,750 of the total contract amount pertains to inventory
that is included in our inventory balance at December 31, 2008, offset by deferred revenues which
are included in other current liabilities. Approximately $775 of the total contract pertains to a
reimbursement for expenses incurred to implement more effective processes and procedures, and the
remaining approximately $525 was allocated to purchase equipment that is owned by the U.S. Defense
Department. In 2006, we received $1,325 relating to this contract. In 2007, we received $1,257
relating to this contract. In 2008, we received $495 relating to this contract. The funding for
this contract was completed during 2008.
In conjunction with the City of West Point, Mississippi, we applied for a Community
Development Block Grant (“CDBG”) from the State of Mississippi for infrastructure improvements to
our leased facility that is owned by the City of West Point, Mississippi. The CDBG was awarded and
as of December 31, 2008, approximately $403 has been distributed under the grant. Under an
agreement with the City of West Point, we have agreed to employ at least 30 full-time employees at
the facility, of which 51% of the jobs must be filled or made available to low or moderate income
families, within three years of completion of the CDBG improvement activities. In addition, we
have agreed to invest at least $1,000 in equipment and working capital into the facility within the
first three years of operation of the facility. In the event we fail to honor these commitments,
we are obligated to reimburse all amounts received under the CDBG to the City of West Point,
Mississippi.
In conjunction with Clay County, Mississippi, we applied for a Mississippi Rural Impact Fund
Grant (“RIFG”) from the State of Mississippi for infrastructure improvements to our leased facility
that is owned by the City of West Point, Mississippi. The RIFG was awarded and as of December 31,
2008, approximately $146 has been distributed under the grant. Under an agreement with Clay
County, we have agreed to employ at least 30 full-time employees at the facility, of which 51% of
the jobs must be filled or made available to low or moderate income families, within three years of
completion of the RIFG improvement activities. In addition, we have agreed to invest at least
$1,000 in equipment and working capital into the facility within the first three years of operation
of the facility. In the event we fail to honor these commitments, we are obligated to reimburse
all amounts received under the RIFG to Clay County, Mississippi.
e. Employment Contracts
We have employment contracts with certain of our key employees with automatic one-year
renewals unless terminated by either party. These agreements provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon attainment of specified
management goals. These agreements also provide for severance payments in the event of specified
termination of employment. In addition, these agreements provide for a lump sum payment in the
event of termination of employment in association with a change in control.
In connection with the ABLE acquisition, we entered into employment contracts with certain key
employees for a term of one to three years. These agreements provide for minimum salaries and may
include incentive bonuses based upon attainment of specified management goals. In addition, these
agreements provide for severance payments in the event of specified termination of employment.
74
In connection with the Stationary Power and RPS acquisitions, we entered into employment
contracts with certain key employees for a term of three years. These agreements provide for
minimum salaries and may include incentive bonuses based upon attainment of specified management
goals. In addition, these agreements provide for severance payments in the event of specified
termination of employment.
In connection with the USE acquisition, we entered into employment contracts with certain key
employees for a term of three years. These agreements provide for minimum salaries and may include
incentive bonuses based upon attainment of specified management goals. In addition, these
agreements provide for severance payments in the event of specified termination of employment.
f. Product Warranties
We estimate future costs associated with expected product failure rates, material usage and
service costs in the development of our 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 our product
warranty liability during the years ended December 31, 2008, 2007 and 2006 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
501 |
|
|
$ |
522 |
|
|
$ |
464 |
|
Accruals for warranties issued |
|
|
921 |
|
|
|
210 |
|
|
|
131 |
|
Settlements made |
|
|
(412 |
) |
|
|
(231 |
) |
|
|
(73 |
) |
| |
|
|
Balance at end of year |
|
$ |
1,010 |
|
|
$ |
501 |
|
|
$ |
522 |
|
| |
|
|
g. Post Audits of Government Contracts
We have had certain “exigent”, non-bid contracts with the U.S. 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 December 31, 2008, 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. We have reviewed these audit reports, have submitted our response to these audits and
believe, taken as a whole, the proposed audit adjustments can be offset with the consideration of
other compensating cost increases that occurred prior to the final negotiation of the contracts.
While we believe that potential exposure exists relating to any final negotiation of these proposed
adjustments, we cannot reasonably estimate what, if any, adjustment may result when finalized. In
addition, in June 2007, we received a request from the Office of Inspector General of the
Department of Defense (“DoD IG”) seeking certain information and documents relating to our business
with the Department of Defense. We are cooperating with the DoD IG inquiry and are furnishing the
requested information and documents. At this time we have no basis for assessing whether we might
face any penalties or liabilities on account of the DoD IG inquiry. The aforementioned
DCAA-related adjustments could reduce margins and, along with the aforementioned DOD IG inquiry,
could have an adverse effect on our business, financial condition and results of operations.
h. Legal Matters
We are subject to legal proceedings and claims that arise in the normal course of business.
We believe that the final disposition of such matters will not have a material adverse effect on
the financial position or results of operations of ours.
In October 2008, we filed a summons and complaint against one of our vendors seeking to
recover at least $3,600 in damages, plus interest resulting from the vendor’s breach of contract
and failure to perform by failing to timely deliver product and delivering product that failed to
conform to the contractual requirements. The vendor filed an answer and counterclaim in November
2008 denying liability to us for breach of contract and asserting various counterclaims for
non-payment, fraud, unjust enrichment, unfair and deceptive trade practices, breach of covenant of
good faith and fair dealing, negligent misrepresentation, and tortuous interference with contract
and prospective
75
economic advantage. In its answer and counterclaims, the vendor claims damages in
excess of $3,500 plus interest and other incidental, consequential and punitive damages. We
strongly dispute the vendor’s allegations and we intend to vigorously pursue our claim and defend
against the vendor’s claims. We have $3,500 reflected in the
accounts payable line on our Consolidated Balance Sheet relating to
this matter. No additional accrual has been made or reflected in the
consolidated financial statement as of December 31, 2008.
In January 2008, we filed a summons and complaint against one of our customers seeking to
recover $162 in unpaid invoices, plus interest for product supplied to the customer under a Master
Purchase Agreement (“MPA”) between the parties. The customer filed an answer and counterclaim in
March 2008 alleging that the product did not conform with a material requirement of the MPA. The
customer claims restitution, cost of cover, and incidental and consequential damages in an
approximate amount of $2,800. We strongly dispute the customer’s allegations and we intend to
vigorously pursue our claim and defend against the customer’s claims. Accordingly, no accrual has
been made or reflected in the consolidated financial statement as of December 31, 2008.
In conjunction with our purchase/lease of our Newark, New York facility in 1998, we entered
into a payment-in-lieu of tax agreement, which provided us 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. We retained an engineering firm, which estimated that
the cost of remediation should be in the range of $230. In February 1998, we entered into an
agreement with a third party which provides that we 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 us for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. We have fully reserved for our 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. We responded by
submitting a work plan to NYSDEC, which was approved in April 2002. We 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 we 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. We 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 our outside environmental consulting firm. In November 2006,
the NYSDEC completed its review of the Final Investigation Report and requested additional
groundwater, soil and sediment sampling. A work plan to address the additional investigation was
submitted to the NYSDEC in January 2007 and was approved in April 2007. Additional investigation
work was performed in May 2007. A preliminary report of results was prepared by our outside
environmental consulting firm in August 2007 and a meeting with the NYSDEC and NYSDOH took place in
September 2007. As a result of this meeting, NYSDEC and NYSDOH have requested additional
investigation work. A work plan to address this additional investigation was submitted to and
approved by the NYSDEC in November 2007. Additional investigation work was performed in December
2007. Our environmental consulting firm has prepared and submitted a Final Investigation Report to
the NYSDEC for review. The results of the additional investigation requested by the NYSDEC may
increase the estimated remediation costs modestly. Through December 31, 2008, total costs incurred
have amounted to approximately $227, none of
which has been capitalized. At December 31, 2008 and December 31, 2007, we have $52 and $85,
respectively, reserved for this matter.
A retail end-user of a product manufactured by one of our customers (the “Customer”) made a
claim against the Customer wherein it asserted that the Customer’s product, which is powered by one
of our batteries, does not operate according to the Customer’s product specification. No claim has
been filed against us. However, in the interest of fostering good customer relations, in September
2002, we agreed to lend technical support to the Customer in defense of its claim. Additionally,
we assured the Customer that we would honor our warranty by replacing any batteries that may be
determined to be defective. Subsequently, we learned that the end-user and the Customer settled
the matter. In February 2005, we entered into a settlement agreement with the Customer. Under the
terms of the agreement, we have agreed to provide replacement batteries for product determined to
be defective, to warrant each replacement battery under our standard warranty terms and conditions,
and to provide the Customer product at a discounted price for shipments made prior to December 31,
2008 in recognition of the Customer’s administrative costs in responding to the claim of the retail
end-user. In consideration of the above, the Customer released us from any and all liability with
respect to this matter. Consequently, we do not anticipate any further expenses with regard to
this matter other than our obligation under the settlement agreement. As of December 31, 2008, we
no longer have an accrual in the warranty reserve related to anticipated replacements under this
agreement, due to lack of actual claims for replacements during the past few years. Further, we do
76
not expect the ongoing terms of the settlement agreement to have a material impact on our
operations or financial condition.
i. Workers’ Compensation Self-Insured Trust
From August 2002 through August 2006, we participated in a self-insured trust to manage our
workers’ compensation activity for our 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
August 2006, we left the self-insured trust and have obtained alternative coverage for our workers’
compensation program through a third-party insurer. In the third quarter of 2006, we 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, we recorded a liability and an associated expense of $350 as an estimate of our
potential future cost related to the trust’s underfunded status
based on our estimated level of participation. On April 28, 2008, we, along with
all other members of the trust, were served by the State of New York Workers’ Compensation Board
(“Compensation Board”) with a Summons with Notice that was filed in Albany County Supreme Court,
wherein the Compensation Board put all members of the trust on notice that it would be seeking
approximately $1,000 in previously billed and unpaid assessments and further assessments estimated
to be not less than $25,000 arising from the accumulated estimated under-funding of the trust. The
Summons with Notice did not contain a complaint or a specified demand. We timely filed a Notice of
Appearance in response to the Summons with Notice. On June 16, 2008, we were served with a
Verified Complaint. The Verified Complaint estimates that the trust was underfunded by $9,700
during the period of December 1, 1997 — November 30, 2003 and an additional $19,400 for the period
December 1, 2003 — August 31, 2006. The Verified Complaint estimates our pro-rata share of the
liability for the period of December 1, 1997 — November 30, 2003 is $195. The Verified Complaint
did not contain a pro-rata share liability estimate for the period of December 1, 2003-August 31,
2006. Further, the Verified Complaint states that all estimates of the underfunded status of the
trust and the pro-rata share liability for the period of December 1, 1997-November 30, 2003 are
subject to adjustment based on a forensic audit of the trust that is currently being conducted on
behalf of the Compensation Board by a third-party audit firm. We timely filed our Verified Answer
with Affirmative Defenses on July 24, 2008. While the potential of joint and several liability
exists, we have paid all assessments that have been levied against us to date during our
participation in the trust. In addition, our liability is limited to the extent that the trust was
underfunded for the years of our participation. As of December 31, 2008, we have determined that
our $350 reserve for this potential liability continues to be reasonable. 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 we were a member. It may take several years before resolution of outstanding
workers’ compensation claims are finally settled. We will continue to review this liability
periodically and make adjustments accordingly as new information is collected.
Note 7 — Shareholders’ Equity
a. Preferred Stock
We have authorized 1,000,000 shares of preferred stock, with a par value of $0.10 per share.
At December 31, 2008, no preferred shares were issued or outstanding.
b. Common Stock
We have authorized 40,000,000 shares of common stock, with a par value of $0.10 per share.
In November 2007, we issued 1,000,000 shares of common stock in a limited public offering at
$13.50 per share. Total net proceeds from the offering were approximately $12,600, of which $6,000
was used for the Stationary Power cash payment, $3,500 was used as a prepayment on the subordinated
convertible notes that were issued as partial consideration for the McDowell acquisition, $1,000
was used as a repayment of borrowings outstanding under our credit facility used to fund the
RedBlack acquisition, and for general working capital purposes.
In August 2008, we issued 7,222 unrestricted shares of common stock to directors, valued at
$78. In November 2008, we issued 5,515 unrestricted shares of common stock to directors, valued at
$46.
c. Treasury Stock
At December 31, 2008 and 2007, we had 942,202 and 728,690 shares, respectively, of treasury
stock outstanding, valued at $4,232 and $2,401, respectively. The increase in treasury shares
related to shares that were repurchased under our share repurchase program and the exercising of
stock options for certain key employees in December 2008, a portion
77
of which were withheld as
treasury shares to cover for estimated individual income taxes, since the exercising of such
options is a taxable event for the individuals.
In October 2008, the Board of Directors authorized a share repurchase program of up to $10,000
to be implemented over the course of a six-month period. Repurchases may be made from time to time
at management’s discretion, either in the open market or through privately negotiated transactions.
The repurchases will be made in compliance with Securities and Exchange Commission guidelines and
will be subject to market conditions, applicable legal requirements, and other factors. We have no
obligation under the program to repurchase shares and the program may be suspended or discontinued
at any time without prior notice. We intend to fund the purchase price for shares acquired
primarily with current cash on hand and cash generated from operations, in addition to borrowing
from our credit facility, if necessary. As of December 31, 2008, approximately $8,185 remained of
the $10,000 approved repurchase amount. Under this repurchase program, we have made the following
share repurchases:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
| Year Ended December 31, |
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
— |
|
|
$ |
— |
|
Second Quarter |
|
|
— |
|
|
|
— |
|
Third Quarter |
|
|
— |
|
|
|
— |
|
Fourth Quarter |
|
|
212,108 |
|
|
|
1,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
212,108 |
|
|
$ |
1,815 |
|
|
|
|
|
|
|
|
Subsequent
to December 31, 2008, we have repurchased approximately 383,000
shares of our common stock for a total cost of approximately $3,000.
d. Stock Options
We have various stock-based employee compensation plans, for which we follow the provisions of
SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires 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 fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally the vesting period
of the equity award).
Our shareholders have approved various equity-based plans that permit the grant of options,
restricted stock and other equity-based awards. In addition, our shareholders have approved the
grant of options outside of these plans.
In December 2000, our shareholders approved a 2000 stock option plan for grants to key
employees, directors and consultants. 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 2004 Long-Term Incentive Plan (“LTIP”) pursuant to
which we were 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. In June
2008, the shareholders approved another amendment to the LTIP, increasing the number of shares of
common stock by an additional 500,000, bringing the total shares authorized under the LTIP to
2,000,000.
Options granted under the amended 2000 stock option plan and the LTIP 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. 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 December 31, 2008, there were 1,553,007 stock options outstanding under
the amended 2000 stock option plan and the LTIP.
On December 19, 2005, we granted the current CEO an option to purchase shares of common stock
at $12.96 per share outside of any of our 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 is exercisable in annual increments of 16,000 shares over a three-year period
commencing December 19, 2006. The option expires on June 8, 2013.
78
On March 7, 2008, we granted an executive officer an option to purchase shares of common stock
at $12.74 per share outside of any of our equity-based compensation plans. The option to purchase
50,000 shares of common stock is exercisable in annual increments of 16,667 shares over a
three-year period commencing March 7, 2009. The option expires on March 7, 2015.
In conjunction with SFAS No. 123R, we recorded compensation cost related to stock options of
$1,700, $1,648 and $1,320 for the years ended December 31, 2008, 2007 and 2006, respectively. As
of December 31, 2008, there was $1,053 of total unrecognized compensation costs related to
outstanding stock options, which is expected to be recognized over a weighted average period of
1.12 years.
We use 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 years
ended December 31, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.33 |
% |
|
|
4.59 |
% |
|
|
4.84 |
% |
Volatility factor |
|
|
59.46 |
% |
|
|
56.72 |
% |
|
|
60.04 |
% |
Dividends |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Weighted average expected life (years) |
|
|
3.55 |
|
|
|
3.75 |
|
|
|
3.66 |
|
Forfeiture rate |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
We calculate expected volatility for stock options by taking an average of historical
volatility over the past five years and a computation of implied 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. Forfeiture rates are calculated by dividing unvested shares forfeited by
beginning shares outstanding. The pre-vesting forfeiture rate is calculated yearly and is
determined using a historical twelve-quarter rolling average of the forfeiture rates.
The following table summarizes data for the stock options issued by us:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2008 |
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
Weighted |
|
Average |
|
|
| |
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
Number |
|
Exercise Price |
|
Contractual |
|
Intrinsic |
| |
|
of Shares |
|
Per Share |
|
Term |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
at beginning of
year |
|
|
1,769,463 |
|
|
$ |
11.51 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
197,000 |
|
|
|
13.19 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(230,840 |
) |
|
|
6.93 |
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(84,616 |
) |
|
|
11.93 |
|
|
|
|
|
|
|
|
|
| |
|
|
Shares under option
at end of year |
|
|
1,651,007 |
|
|
$ |
12.33 |
|
|
3.99 years |
|
$ |
3,061 |
|
| |
|
|
Vested and expected
to vest as end of
year |
|
|
1,565,204 |
|
|
$ |
12.37 |
|
|
3.93 years |
|
$ |
2,895 |
|
Options exercisable
at end of year |
|
|
1,146,645 |
|
|
$ |
12.64 |
|
|
3.41 years |
|
$ |
2,151 |
|
79
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, |
|
2007 |
|
2006 |
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
| |
|
Number |
|
Price |
|
Number |
|
Price |
| |
|
Of Shares |
|
Per Share |
|
Of Shares |
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
at beginning of
year |
|
|
1,815,471 |
|
|
$ |
11.03 |
|
|
|
1,430,271 |
|
|
$ |
10.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
263,000 |
|
|
|
10.49 |
|
|
|
566,300 |
|
|
|
10.54 |
|
Options exercised |
|
|
(204,008 |
) |
|
|
6.43 |
|
|
|
(119,400 |
) |
|
|
6.09 |
|
Options cancelled |
|
|
(105,000 |
) |
|
|
10.58 |
|
|
|
(61,700 |
) |
|
|
14.04 |
|
| |
|
|
Shares under option
at end of year |
|
|
1,769,463 |
|
|
$ |
11.51 |
|
|
|
1,815,471 |
|
|
$ |
11.03 |
|
| |
|
|
Options exercisable
at end of year |
|
|
1,095,735 |
|
|
$ |
12.18 |
|
|
|
1,038,376 |
|
|
$ |
11.96 |
|
The following table represents additional information about stock options outstanding at
December 31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
|
|
Options Exercisable |
| |
|
Number of |
|
Weighted- |
|
Weighted- |
|
|
Number |
|
Weighted- |
| |
|
Outstanding |
|
Average |
|
Average |
|
|
Exercisable |
|
Average |
| Range of |
|
at December |
|
Remaining |
|
Exercise |
|
|
at December |
|
Exercise |
| Exercise Prices |
|
31, 2008 |
|
Contractual Life |
|
Price |
|
|
31, 2008 |
|
Price |
| |
|
|
|
$2.74-$9.70
|
|
|
257,609 |
|
|
|
3.37 |
|
|
$ |
7.49 |
|
|
|
|
154,617 |
|
|
$ |
6.03 |
|
$9.84-$9.95
|
|
|
208,850 |
|
|
|
4.31 |
|
|
$ |
9.90 |
|
|
|
|
130,667 |
|
|
$ |
9.91 |
|
$10.00-$11.42
|
|
|
212,847 |
|
|
|
4.67 |
|
|
$ |
10.66 |
|
|
|
|
142,685 |
|
|
$ |
10.51 |
|
$12.00-$12.92
|
|
|
148.500 |
|
|
|
4.78 |
|
|
$ |
12.62 |
|
|
|
|
89,500 |
|
|
$ |
12.57 |
|
$12.96-$12.96
|
|
|
201,000 |
|
|
|
4.06 |
|
|
$ |
12.96 |
|
|
|
|
139,800 |
|
|
$ |
12.96 |
|
$13.22-$13.43
|
|
|
167,000 |
|
|
|
6.09 |
|
|
$ |
13.35 |
|
|
|
|
34,175 |
|
|
$ |
13.43 |
|
$14.38-$14.75
|
|
|
10,500 |
|
|
|
2.32 |
|
|
$ |
14.56 |
|
|
|
|
10,500 |
|
|
$ |
14.56 |
|
$15.05-$15.05
|
|
|
295,201 |
|
|
|
2.88 |
|
|
$ |
15.05 |
|
|
|
|
295,201 |
|
|
$ |
15.05 |
|
$16.15-$20.89
|
|
|
125,000 |
|
|
|
2.92 |
|
|
$ |
18.04 |
|
|
|
|
125,000 |
|
|
$ |
18.04 |
|
$21.28-$21.28
|
|
|
24,500 |
|
|
|
1.52 |
|
|
$ |
21.28 |
|
|
|
|
24,500 |
|
|
$ |
21.28 |
|
| |
|
|
|
$2.74-$21.28
|
|
|
1,651,007 |
|
|
|
3.99 |
|
|
$ |
12.33 |
|
|
|
|
1,146,645 |
|
|
$ |
12.64 |
|
The weighted average fair value of options granted during the years ended December 31, 2008,
2007 and 2006 was $5.71, $4.84 and $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 years ended December 31, 2008, 2007 and 2006 was $1,651, $1,526 and $604.
SFAS No. 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. We did not record any excess tax benefits in 2008, 2007 or 2006. Cash received
from option exercises under our stock-based compensation plans for the years ended December 31,
2008, 2007 and 2006 was $1,517, $1,314 and $728, respectively.
e. Warrants
In July 2001, we issued warrants to purchase 109,000 shares of our common stock to H.C.
Wainwright & Co., Inc. and other affiliated individuals that participated as investment bankers in
the $6,800 private placement of 1,090,000 shares of common stock that was completed at that time.
The exercise price of the warrants was $6.25 per share and the
80
warrants had a five-year term.
During 2006, 80,545 warrants were exercised. On July 20, 2006, the remaining warrants to purchase
6,090 shares expired unexercised.
On May 19, 2006, in connection with our acquisition of ABLE, we granted warrants to acquire
100,000 shares of common stock. The exercise price of the warrants is $12.30 per share and the
warrants have a five-year term. In January 2008, 82,000 warrants were exercised, for total
proceeds received of $1,009. At December 31, 2008, there were 18,000 warrants outstanding.
f. Restricted Stock Awards
During 2008, there was no restricted stock grants awarded.
During 2007, we issued 28,948 restricted stock awards to directors. The restrictions lapse in
equal installments of 7,237 shares on August 15, 2007, November 15, 2007, February 15, 2008 and May
15, 2008. As of December 31, 2008, all 28,948 of these shares had vested.
During 2007, we issued 22,600 time-vested restricted stock awards to our executive officers.
The restrictions for 10,000 of these restricted stock awards will lapse annually in three equal
installments, commencing on March 1, 2008. The restrictions for the remaining 12,600 restricted
stock awards will lapse annually in three equal installments, commencing on March 1, 2009. As of
December 31, 2008, 3,400 of these shares had vested.
During 2006, we issued 26,668 restricted stock awards to directors. The restrictions lapse in
equal installments of 6,667 shares on August 15, 2006, November 15, 2006, February 15, 2007 and May
15, 2007. As of December 31, 2007, all 26,668 of these shares had vested.
During 2006, we issued 12,500 time-vested restricted stock awards to our executive officers.
The restrictions will lapse over a three-year period in equal installments, commencing on the first
anniversary of the grant date (December 21, 2006). As of December 31, 2008, 8,336 of these shares
had vested.
During 2006, we issued 46,500 performance-vested restricted stock awards to our executive
officers. The restrictions will lapse in three equal installments only if we meet or exceed the
same predetermined target for our operating performance for 2007, 2008 and 2009 as used for
determining cash awards pursuant to the non-equity incentive plan. As of December 31, 2008, none
of these shares had vested. In March 2009, the restrictions on
15,500 shares were removed as a
result of our 2008 performance.
Restricted stock grants awarded during the years ended December 31, 2008, 2007 and 2006 had
the following values:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Number of shares awarded |
|
|
— |
|
|
|
51,548 |
|
|
|
85,668 |
|
Weighted average fair value per share |
|
$ |
— |
|
|
$ |
11.85 |
|
|
$ |
10.47 |
|
Aggregate total value |
|
$ |
— |
|
|
$ |
610,854 |
|
|
$ |
897,237 |
|
The activity of restricted stock grants of common stock for the years ended December 31, 2008,
2007 and 2006 is summarized as follows:
81
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
|
| |
|
Number of Shares |
|
|
Grant Date Fair Value |
|
|
|
|
|
|
|
|
|
|
Unvested as December 31, 2005 |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
85,668 |
|
|
|
10.47 |
|
Vested |
|
|
(13,334 |
) |
|
|
10.30 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Unvested as December 31, 2006 |
|
|
72,334 |
|
|
$ |
10.50 |
|
Granted |
|
|
51,548 |
|
|
|
11.85 |
|
Vested |
|
|
(31,979 |
) |
|
|
10.46 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Unvested at December 31, 2007 |
|
|
91,903 |
|
|
$ |
11.28 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
(22,039 |
) |
|
|
11.02 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
69,864 |
|
|
$ |
11.36 |
|
|
|
|
|
|
|
|
We recorded compensation cost related to restricted stock grants of $442, $501 and $160 for
the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, we had
$406 of total unrecognized compensation expense related to restricted stock grants, which is
expected to be recognized over the remaining weighted average period of approximately 1.33 years.
The total fair value of these grants that vested during the years ended December 31, 2008, 2007 and
2006 was $271, $334 and $141, respectively.
We have reserved 2,183,392, 1,934,598, and 2,191,554 shares of common stock under the various
stock option plans, warrants and restricted stock awards as of December 31, 2008, 2007, and 2006
respectively.
| h. |
|
Accumulated Other Comprehensive Income (Loss) |
Other comprehensive income (loss) is reported on the Consolidated Statement of Changes in
Shareholders’ Equity and accumulated other comprehensive income (loss) is reported on the
Consolidated Balance Sheet.
The components of accumulated other comprehensive income (loss) were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Foreign Currency Exchange Translation Adjustments |
|
$ |
(1,918 |
) |
|
$ |
66 |
|
|
$ |
(371 |
) |
Unrealized Gains (Losses) on Derivative Instruments |
|
|
(12 |
) |
|
|
3 |
|
|
|
50 |
|
| |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
$ |
(1,930 |
) |
|
$ |
69 |
|
|
$ |
(321 |
) |
Note 8 — Income Taxes
The provision for income taxes consists of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
559 |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
82
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,453 |
|
|
|
— |
|
|
|
23,611 |
|
State |
|
|
— |
|
|
|
— |
|
|
|
124 |
|
Foreign |
|
|
(156 |
) |
|
|
77 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,297 |
|
|
|
77 |
|
|
|
23,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,879 |
|
|
$ |
77 |
|
|
$ |
23,735 |
|
|
|
|
|
|
|
|
|
|
|
We reflected a tax provision of $3,879 for the year ended December 31, 2008. The 2008 tax provision included an approximate $3,100 non-cash charge to record a deferred tax
liability for liabilities generated from book/tax differences pertaining to goodwill and certain
intangible assets that cannot be predicted to reverse during our loss carryforward periods.
Substantially all of this adjustment related to book/tax differences that occurred during 2007 and
were identified during the second quarter of 2008. In connection with this adjustment, we reviewed
the illustrative list of qualitative considerations provided in SEC Staff Accounting Bulletin No.
99 and other qualitative factors in our determination that this adjustment was not material to the
2007 consolidated financial statements or this annual report on Form
10-K. The 2008 tax provision was also due to the application of the
limitation of net operating losses in the computation of the alternative minimum tax in the U.S.
Therefore, we are subject to income taxes for the year ended December 31, 2008. In addition, we
recognized a deferred tax benefit for the losses recorded in China. In 2008, we continue to report
a valuation allowance for our deferred tax assets that cannot be offset by reversing temporary
differences in the U.S. and in the U.K. arising from the conclusion that we would not be able to
utilize our U.S. and U.K. NOL’s that had accumulated over time. The recognition of the valuation
allowance on our deferred tax asset resulted from our evaluation of all available evidence, both
positive and negative. The assessment of the realizability of the NOL’s was based on a number of
factors including, our history of net operating losses, the volatility of our earnings, our
historical operating volatility, our historical ability to accurately forecast earnings for future
periods and the increased uncertainty of the general business climate as of the end of 2008. We
concluded that these factors represent sufficient negative evidence and have concluded that we
should record a full valuation allowance under SFAS No. 109. We continually assess the carrying
value of this asset based on relevant accounting standards.
We reflected a tax provision of $77 for the year ended December 31, 2007. This was due to the
adjustment required for deferred taxes outside the United States. In 2007, we continued to report
a full valuation allowance for our deferred tax assets in the U.S.
and in the U.K., based on a consistent evaluation methodology that
was used for 2006, and arising from our
conclusion that it was more likely than not that we would not be able to utilize our U.S. and U.K.
NOL’s that had accumulated over time.
In December 2006, we placed a full valuation allowance on our deferred tax assets arising from
our conclusion that it was more likely than not that we would not be able to utilize our U.S. and
U.K. NOL’s that had accumulated over time. As a result, we reflected a tax provision of $23,735
for the year ended December 31, 2006. The recognition of the full valuation allowance on our
deferred tax asset resulted from our evaluation of all available evidence, both positive and
negative, including: a) recent historical net income/losses, and income/losses on a cumulative
three-year basis; and b) a financial evaluation that modeled the future utilization of anticipated
deferred tax assets under three alternative scenarios.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amount used for income
tax purposes. Significant components of our deferred tax liabilities and assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
1,549 |
|
|
$ |
1,669 |
|
Intangible assets and other |
|
|
2,215 |
|
|
|
1,793 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
3,764 |
|
|
|
3,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
18,510 |
|
|
|
27,081 |
|
Accrued expenses, reserves and other |
|
|
5,064 |
|
|
|
2,242 |
|
Investments |
|
|
342 |
|
|
|
1,142 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
23,916 |
|
|
|
30,465 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
|
(23,605 |
) |
|
|
(27,149 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
311 |
|
|
|
3,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(3,453 |
) |
|
$ |
(146 |
) |
|
|
|
|
|
|
|
The $3,453 net deferred tax liability for the year ended December 31, 2008 is comprised of a
long-term deferred tax liability of $3,894, offset in part by a current deferred tax asset of $441.
The $146 net deferred tax liability for the year ended December 31, 2007 is comprised of a
long-term deferred tax liability of $455, offset in part by a current deferred tax asset of $309.
As
of December 31, 2008, we have foreign and domestic NOL’s
totaling approximately $58,403
available to reduce future taxable income. Foreign loss carryforwards
of approximately $8,963 can
be carried forward indefinitely. The domestic NOL carryforward of $49,440 expires from 2018 through
2027. The domestic NOL includes approximately $2,687 of the NOL carryforward for which a benefit
will be recorded in capital in excess of par value when realized.
We have determined that a change in ownership, as defined under Internal Revenue Code Section
382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to an
annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused
portion of the annual limitation can be carried forward to subsequent periods. We believe such
limitation will not impact our ability to realize the deferred tax asset. In addition, certain of
our 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 2007 and 2006. However, this limitation does have an impact of $559 on
income taxes for 2008. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during
2008 from a manufacturing and assembly center to primarily a distribution and service center.
For financial reporting purposes, income (loss) before income taxes is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
21,361 |
|
|
$ |
3,170 |
|
|
$ |
(2,931 |
) |
Foreign |
|
|
(3,822 |
) |
|
|
2,490 |
|
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,542 |
|
|
$ |
5,660 |
|
|
$ |
(3,753 |
) |
|
|
|
|
|
|
|
|
|
|
There are no undistributed earnings of our foreign subsidiaries, at December 31, 2008 or
December 31, 2007.
We have been granted a tax holiday in China. As a result of new legislation effective for
2008, ABLE’s corporate income rate increased to 9%, which is 50% of the new 2008 tax rate of 18%.
For 2009, ABLE’s corporate income rate will increase to 10%, which is 50% of the normal 20% tax
rate for the jurisdiction in which we operate. Thereafter, our tax rate in China will be phased in
until ultimately reaching a rate of 25% in 2012. During the years
ended December 31, 2008, 2007 and 2006, we realized no tax
benefits from the tax holiday due to taxable losses.
The provision for income taxes differs from the amount of income tax determined by applying
the applicable U.S. statutory federal income tax rate to income before income taxes as follows:
84
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) computed using the
statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
(34.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (reduction) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit |
|
|
(0.1 |
) |
|
|
0.0 |
|
|
|
3.3 |
|
Foreign |
|
|
6.5 |
|
|
|
(14.0 |
) |
|
|
7.4 |
|
Valuation allowance/deferred impact |
|
|
(21.6 |
) |
|
|
(27.3 |
) |
|
|
649.6 |
|
Compensation |
|
|
2.7 |
|
|
|
7.8 |
|
|
|
6.8 |
|
Other |
|
|
0.6 |
|
|
|
0.9 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
22.1 |
% |
|
|
1.4 |
% |
|
|
632.4 |
% |
|
|
|
|
|
|
|
|
|
|
In 2008, the provision for income taxes was lower than what would be expected if the statutory
rate were applied to pretax income. This is due to the continuation of reflecting a full valuation
allowance for our U.S and U.K. deferred tax assets. In 2007, the provision for income taxes was
lower than what would be expected if the statutory rate were applied to pretax income. This is due
to the continuation of reflecting a full valuation allowance for our U.S. and U.K. deferred tax
assets. In addition, there was a lower than expected tax rate on our non-U.S. income due to the
reduction of our valuation allowance on our foreign deferred tax assets. In 2006, the provision
for income taxes is higher than would be expected if the statutory rate were applied to pretax
income. This is due to the establishment of the valuation allowance for our U.S. net deferred tax
asset. In addition, there were no benefits recognized for losses in the foreign jurisdictions.
Accounting for Uncertainty in Income Taxes (“FIN 48”)
On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). As a result of the implementation of FIN 48, there was no cumulative
effect adjustment for unrecognized tax benefits, which would have been accounted for as an
adjustment to the January 1, 2007 balance of retained earnings. We have recorded no liability for
income taxes associated with unrecognized tax benefits at the date of adoption and have not
recorded any liability associated with unrecognized tax benefits during 2007 and 2008, and as such,
have not recorded any interest or penalty in regard to any unrecognized benefit. Our policy
regarding interest and/or penalties related to income tax matters is to recognize such items as a
component of income tax expense (benefit). It is possible that a liability associated with our
unrecognized tax benefits will increase or decrease within the next twelve months.
We file a consolidated income tax return in the U.S. federal jurisdiction and consolidated and
separate income tax returns in many state and foreign jurisdictions. Our U.S. tax matters for the
years 2005 through 2008 remain subject to examination by the Internal Revenue Service (“IRS”).
Our U.S. tax matters for the years 2004 through 2008 remain subject to examination by various state
and local tax jurisdictions. Our tax matters for the years 2004 through 2008 remain subject to
examination by the respective foreign tax jurisdiction authorities.
Note 9 — 401(k) Plan
We maintain a defined contribution 401(k) plan covering substantially all employees. Employees
can contribute a portion of their salary or wages as prescribed under Section 401(k) of the
Internal Revenue Code and, subject to certain limitations, we may, at the Board of Directors
discretion, authorize an employer contribution based on a portion of the employees’ contributions.
Effective February 2004, the Board of Directors approved our matching of employee contributions at
the rate of 50% of the first 4% contributed by an employee, or a maximum of 2% of the employee’s
income. In November 2005, the employer match was suspended in an effort to conserve cash. In
October 2007, the employer match was reinstated at the rate of 50% of the first 4% contributed by
an employee, or a maximum of 2% of the employee’s income. For 2008, 2007, and 2006 we contributed
$363, $63, and $0, respectively.
Note 10 — Business Segment Information
We report our results in four operating segments: Non-Rechargeable Products, Rechargeable
Products, Communications Systems and Design and Installation Services. The Non-Rechargeable
Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable
batteries. The Rechargeable Products segment includes:
85
rechargeable batteries, charging systems,
uninterruptable power supplies and accessories, such as cables. In 2006, as a result of the
acquisition of McDowell, we formed a new segment, Communications Accessories, which was renamed
Communications Systems in 2007. The Communications Systems segment includes: power supplies, cable
and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment and
integrated communication system kits. In the fourth quarter of 2007, as a result of the
acquisitions of RedBlack and Stationary Power, we renamed our Technology Contracts segment to
Design and Installation Services. The Design and Installation Services segment includes: standby
power and communications and electronics systems design, installation and maintenance activities
and revenues and related costs associated with various development contracts. We look at our
segment performance at the gross margin level, and we do 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.
2008
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Non- |
|
|
|
|
|
|
|
|
|
|
Design and |
|
|
|
|
|
|
|
| |
|
Rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Installation |
|
|
|
|
|
|
|
| |
|
Products |
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
| |
|
|
Revenues |
|
$ |
68,076 |
|
|
$ |
34,691 |
|
|
$ |
136,072 |
|
|
$ |
15,861 |
|
|
$ |
— |
|
|
$ |
254,700 |
|
Segment contribution |
|
|
10,791 |
|
|
|
6,818 |
|
|
|
36,805 |
|
|
|
2,529 |
|
|
|
(39,638 |
) |
|
|
17,305 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(930 |
) |
|
|
(930 |
) |
Gain on debt
conversion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313 |
|
|
|
313 |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854 |
|
|
|
854 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(582 |
) |
|
|
(582 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,297 |
) |
|
|
(3,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
42,820 |
|
|
|
26,291 |
|
|
|
33,539 |
|
|
|
20,996 |
|
|
|
5,941 |
|
|
|
129,587 |
|
Capital expenditures |
|
|
2,716 |
|
|
|
66 |
|
|
|
38 |
|
|
|
97 |
|
|
|
870 |
|
|
|
3,787 |
|
Depreciation and
amortization |
|
|
2,697 |
|
|
|
90 |
|
|
|
68 |
|
|
|
89 |
|
|
|
3,026 |
|
|
|
5,970 |
|
Stock-based
compensation |
|
|
148 |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
2,078 |
|
|
|
2,266 |
|
2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Non- |
|
|
|
|
|
|
|
|
|
|
Design and |
|
|
|
|
|
|
|
| |
|
Rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Installation |
|
|
|
|
|
|
|
| |
|
Products |
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
| |
|
|
Revenues |
|
$ |
80,262 |
|
|
$ |
16,756 |
|
|
$ |
37,140 |
|
|
$ |
3,438 |
|
|
$ |
— |
|
|
$ |
137,596 |
|
Segment contribution |
|
|
17,747 |
|
|
|
3,578 |
|
|
|
6,693 |
|
|
|
756 |
|
|
|
(28,973 |
) |
|
|
(199 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,184 |
) |
|
|
(2,184 |
) |
Gain on
McDowell settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,550 |
|
|
|
7,550 |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493 |
|
|
|
493 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
44,921 |
|
|
|
20,733 |
|
|
|
32,706 |
|
|
|
15,713 |
|
|
|
7,975 |
|
|
|
122,048 |
|
Capital expenditures |
|
|
1,671 |
|
|
|
16 |
|
|
|
7 |
|
|
|
41 |
|
|
|
338 |
|
|
|
2,073 |
|
Depreciation and
amortization |
|
|
2,710 |
|
|
|
194 |
|
|
|
58 |
|
|
|
23 |
|
|
|
3,193 |
|
|
|
6,178 |
|
Stock-based
compensation |
|
|
191 |
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1,952 |
|
|
|
2,149 |
|
86
2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Rechargeable |
|
|
Rechargeable |
|
|
Communications |
|
|
Technology |
|
|
|
|
|
|
|
| |
|
Products |
|
|
Products |
|
|
Accessories |
|
|
Contracts |
|
|
Corporate |
|
|
Total |
|
| |
|
|
Revenues |
|
$ |
67,779 |
|
|
$ |
17,745 |
|
|
$ |
7,433 |
|
|
$ |
589 |
|
|
$ |
— |
|
|
$ |
93,546 |
|
Segment contribution |
|
|
11,858 |
|
|
|
3,822 |
|
|
|
1,771 |
|
|
|
(8 |
) |
|
|
(20,400 |
) |
|
|
(2,957 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,298 |
) |
|
|
(1,298 |
) |
Other income
(expense), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
502 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,735 |
) |
|
|
(23,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
50,029 |
|
|
|
17,759 |
|
|
|
24,473 |
|
|
|
— |
|
|
|
5,497 |
|
|
|
97,758 |
|
Capital expenditures |
|
|
1,410 |
|
|
|
3 |
|
|
|
22 |
|
|
|
— |
|
|
|
20 |
|
|
|
1,455 |
|
Depreciation and
amortization |
|
|
2,649 |
|
|
|
204 |
|
|
|
8 |
|
|
|
— |
|
|
|
2,005 |
|
|
|
4,866 |
|
Stock-based
compensation |
|
|
182 |
|
|
|
1 |
|
|
|
1 |
|
|
|
10 |
|
|
|
1,286 |
|
|
|
1,480 |
|
Geographical Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenues |
|
|
Long-Lived Assets |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
United States |
|
$ |
205,372 |
|
|
$ |
79,263 |
|
|
$ |
57,255 |
|
|
$ |
15,521 |
|
|
$ |
15,728 |
|
|
$ |
15,557 |
|
United Kingdom |
|
|
18,098 |
|
|
|
22,140 |
|
|
|
9,509 |
|
|
|
1,085 |
|
|
|
2,356 |
|
|
|
2,880 |
|
China |
|
|
2,357 |
|
|
|
1,566 |
|
|
|
899 |
|
|
|
1,808 |
|
|
|
1,281 |
|
|
|
959 |
|
Hong Kong |
|
|
844 |
|
|
|
1,672 |
|
|
|
2,309 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
India** |
|
|
115 |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
Europe, excluding
United Kingdom |
|
|
8,628 |
|
|
|
8,775 |
|
|
|
5,680 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Japan |
|
|
3,651 |
|
|
|
3,520 |
|
|
|
4,018 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Singapore |
|
|
1,193 |
|
|
|
244 |
|
|
|
169 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canada |
|
|
9,699 |
|
|
|
12,903 |
|
|
|
10,033 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Australia* |
|
|
1,538 |
|
|
|
3,390 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
3,205 |
|
|
|
4,123 |
|
|
|
3,674 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
Total |
|
$ |
254,700 |
|
|
$ |
137,596 |
|
|
$ |
93,546 |
|
|
$ |
18,465 |
|
|
$ |
19,365 |
|
|
$ |
19,396 |
|
|
|
|
| * |
|
Geographical data for 2006 included in “Other” category. |
| |
| ** |
|
Geographical data for 2007 and 2006 included in “Other” category. |
Long-lived assets represent the sum of the net book value of property, plant and equipment.
Note 11 — Fires at Manufacturing Facilities
In May 2004 and June 2004, we experienced two fires that damaged certain inventory and
property at our facilities. The May 2004 fire occurred at our Newark 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 our U.K. location and mainly caused damage
to various inventory and the Ultralife UK’s 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 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
87
to the fire at our Newark facility
was finalized in March 2005. In the first quarter of 2006, we received notice of a final claim
settlement for the U.K. facility. As a result of the final settlement for the fire at the U.K.
facility, we reflected a gain of $148 in the first quarter of 2006 related to equipment and
inventory damage. In April 2006 we received payment in final settlement. In June 2006 we recorded
a gain of $43 for the favorable settlement of fire damage that pertained to our leased facilities
in the U.K.
In November 2006, we experienced a fire that damaged certain inventory and property at our
facility in China, which began in a battery storage area. Certain inventory and portions of
buildings were damaged. We believe we maintain adequate insurance coverage for this operation.
The total amount of the loss pertaining to assets and the related expenses was approximately $849.
The majority of the insurance claim is related to the recovery of damaged inventory. In July 2007,
we received approximately $637 as a partial payment on our insurance claim, which resulted in no
gain or loss being recognized. In March 2008, we received a final settlement payment of $191,
which offset the outstanding receivable of approximately $152 and resulted in a non-operating gain
of approximately $39.
Note 12 — Selected Quarterly Information (unaudited)
The following table presents reported net revenues, gross margin (net sales less cost of
products sold), net income (loss) and net income (loss) per share, basic and diluted, for each
quarter during the past two years:
2008
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter ended |
|
|
|
|
| |
|
March 29, |
|
|
June 28, |
|
|
Sept 27, |
|
|
Dec 31, |
|
|
Full |
|
| |
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
Year |
|
Revenues |
|
$ |
49,587 |
|
|
$ |
87,898 |
|
|
$ |
67,993 |
|
|
$ |
49,222 |
|
|
$ |
254,700 |
|
Gross margin |
|
|
10,875 |
|
|
|
20,628 |
|
|
|
15,686 |
|
|
|
9,754 |
|
|
|
56,943 |
|
Net Income |
|
|
2,434 |
|
|
|
6,395 |
|
|
|
4,657 |
|
|
|
177 |
|
|
|
13,663 |
|
Net Income per share-basic |
|
|
0.14 |
|
|
|
0.37 |
|
|
|
0.27 |
|
|
|
0.01 |
|
|
|
0.79 |
|
Net Income per share- diluted |
|
|
0.14 |
|
|
|
0.36 |
|
|
|
0.27 |
|
|
|
0.01 |
|
|
|
0.78 |
|
2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter ended |
|
|
|
|
| |
|
March 31, |
|
|
June 30, |
|
|
Sept 29, |
|
|
Dec 31, |
|
|
Full |
|
| |
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
Year |
|
Revenues |
|
$ |
32,320 |
|
|
$ |
35,196 |
|
|
$ |
33,291 |
|
|
$ |
36,789 |
|
|
$ |
137,596 |
|
Gross margin |
|
|
7,501 |
|
|
|
8,617 |
|
|
|
6,922 |
|
|
|
5,734 |
|
|
|
28,774 |
|
Net Income (Loss) |
|
|
(36 |
) |
|
|
1,298 |
|
|
|
( 128 |
) |
|
|
4,449 |
|
|
|
5,583 |
|
Net Income (Loss) per share-basic |
|
|
(0.00 |
) |
|
|
0.09 |
|
|
|
(0.01 |
) |
|
|
0.28 |
|
|
|
0.36 |
|
Net Income (Loss) per share- diluted |
|
|
(0.00 |
) |
|
|
0.08 |
|
|
|
(0.01 |
) |
|
|
0.27 |
|
|
|
0.36 |
|
Our 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, we believe that
there are not any material differences when making quarterly comparisons.
Quarterly and year-to-date computations of per share amounts are made independently;
therefore, the sum of per share amounts for the quarters may not equal per share amounts for the
year.
Earnings in the fourth quarter of 2007 were favorably impacted by the recognition of a
one-time, non-operating gain of $7,550 pertaining to a purchase price settlement agreement that was
finalized during the quarter with the sellers of McDowell, which we acquired in July 2006. In
addition, gross margins in the fourth quarter were hampered by inventory adjustment of
approximately $1,000, mainly related to physical inventory valuations at our
McDowell operation.
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures — Our president and chief executive
officer (principal executive officer) and our vice president- finance and chief financial officer
(principal financial officer) have evaluated our disclosure controls and procedures (as defined in
Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report.
Based on this evaluation, our president and chief executive officer and vice president — finance
and chief financial officer concluded that our disclosure controls and procedures were effective as
of such date.
Changes In Internal Controls Over Financial Reporting — In 2008, we formed the India
JV and completed the acquisition of USE. We have worked to integrate these companies into our
business and are assimilating their operations, services, products and personnel with our
management policies, procedures and strategies. As USE was a closely-held private company prior to
our acquisition, the internal controls and processes inherent in this business have typically not
been as sound as we require. We believe that we have taken the necessary steps to implement
adequate controls and procedures to ensure that our financial statements are stated properly in
compliance with U.S. GAAP.
There has been no other change in the internal control over financial reporting that occurred
during the fiscal year covered by this annual report that has materially affected, or is reasonably
likely to materially affect, the internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting — Our management
team is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. Because of the inherent limitations of internal control systems, our internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, we used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment, we concluded that, as of December 31, 2008, our internal
control over financial reporting was effective based on those criteria.
BDO Seidman, LLP, an independent registered public accounting firm that audited the financial
statements included in this report, has issued a report on the operating effectiveness of internal
control over financial reporting. A copy of the report follows:
Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting
Board of Directors and Shareholders
Ultralife Corporation
Newark, New York
We have audited Ultralife Corporation’s internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ultralife
Corporation’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A — Controls and Procedures.” Our
responsibility is to express an opinion on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and
89
testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Ultralife Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Ultralife Corporation as of December 31,
2008 and 2007, and the related consolidated statements of operations, changes in shareholders’
equity and accumulated other comprehensive income (loss), and cash flows for each of the three
years in the period ended December 31, 2008 and our report dated March 12, 2009 expressed an
unqualified opinion thereon.
/s/ BDO Seidman, LLP
Troy, Michigan
March 12, 2009
ITEM 9B. OTHER INFORMATION
None.
90
PART III
The information required by Part III, other than as set forth in Item 12, and each of the
following items is omitted from this report and will be presented in our definitive proxy statement
(“Proxy Statement”) to be filed pursuant to Regulation 14A, not later than 120 days after the end
of the fiscal year covered by this report, in connection with our 2009 Annual Meeting of
Shareholders, which information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled “Election of Directors”, “Executive Officers”, “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance” in the Proxy Statement are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled “Executive Compensation”, “Directors’ Compensation”, “Employment
Arrangements” and “Compensation and Management Committee Report” in the Proxy Statement are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS
The section entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership
of Management” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities |
|
|
|
|
|
|
Number of securities remaining |
|
| |
|
to be issued upon |
|
|
Weighted-average |
|
|
available for future issuance |
|
| |
|
exercise of |
|
|
exercise price of |
|
|
under equity compensation plans |
|
| |
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities reflected in |
|
| |
|
warrants and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
| Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders |
|
|
1,670,871 |
|
|
$ |
12.27 |
|
|
|
514,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
50,000 |
|
|
|
12.74 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,720,871 |
|
|
$ |
12.29 |
|
|
|
514,385 |
|
See Note 7 in Notes to Consolidated Financial Statements for additional information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The section entitled “Corporate Governance — General” in the Proxy Statement is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section entitled “Proposal 2 — Ratify the Selection of Independent Registered Accounting
Firm — Principal Accountant Fees and Services” in the Proxy Statement is incorporated herein by
reference.
91
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) |
|
Documents filed as part of this report: |
The financial statements and schedules required by this Item 15 are set forth in Part
II, Item 8 of this report.
| |
2. |
|
Financial Statement Schedules |
Schedule II — Valuation and Qualifying Accounts See Item 15 (c)
| (b) |
|
Exhibits. The following exhibits are filed as a part of this report: |
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Index |
|
Description of Document |
|
Incorporated By Reference from: |
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation
|
|
Filed herewith |
3.2
|
|
By-laws
|
|
Exhibit 3.2 of Registration
Statement, No 33-54470 (the “1992
Registration Statement”) |
4.1
|
|
Specimen Stock Certificate
|
|
Filed herewith |
10.1*
|
|
Technology Transfer Agreement
relating to Lithium Batteries
|
|
Exhibit 10.19 of our Registration
Statement on Form S-1 filed on
October 7, 1994, File No. 33-84888
(the “1994 Registration
Statement”) |
10.2*
|
|
Technology Transfer Agreement
relating to Lithium Batteries
|
|
Exhibit 10.20 of the 1994
Registration Statement |
10.3*
|
|
Amendment to the Agreement relating
to rechargeable batteries
|
|
Exhibit 10.24 of our Form 10-K for
the fiscal year ended June 30,
1996 (this Exhibit may be found in
SEC File No. 0-20852) |
10.4
|
|
Ultralife Batteries, Inc. 2000 Stock
Option Plan
|
|
Exhibit 99.1 of our Registration
Statement on Form S-8 filed on May
15, 2001, File No. 333-60984 (the
“2001 Registration Statement”) |
10.5
|
|
Credit Agreement dated as of June
30, 2004 with JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended June 26,
2004 (the “June 2004 10-Q”) |
10.6
|
|
General Security Agreement dated as
of June 30, 2004 in favor of
JPMorgan Chase Bank
|
|
Exhibit 10.2 of the June 2004 10-Q |
10.7
|
|
Ultralife Batteries, Inc. Amended
and Restated 2004 Long-Term
Incentive Plan
|
|
Exhibit 99.2 of our Registration
Statement on Form S-8 filed on
July 26, 2004, File No. 333-117662 |
10.8
|
|
Amendment Numbers One and Two to
Credit Agreement dated as of
September 24, 2004 with JPMorgan
Chase Bank as Administrative Agent
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended April 2,
2005 |
10.9
|
|
Amendment Number Three to Credit
Agreement dated as of August 5, 2005
with the Lenders Party Thereto and
JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended July 2,
2005 |
92
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Index |
|
Description of Document |
|
Incorporated By Reference from: |
|
|
|
|
|
10.10
|
|
Amendment Number Four to Credit
Agreement dated as of November 1,
2005 with the Lenders Party Thereto
and JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended October
1, 2005 |
10.11
|
|
Form of Resale Restriction Agreement
between the Registrant and option
holders dated as of December 28,
2005
|
|
Exhibit 10 of Form 8-K filed
December 30, 2005 |
10.12
|
|
Agreement on Transfer of Shares in
ABLE New Energy Co., Limited dated
January 25, 2006
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended April 1,
2006 (the “March 2006 10-Q) |
10.13
|
|
First Amendment to Agreement on
Transfer of Shares in ABLE New
Energy Co., Limited
|
|
Exhibit 10.2 of the March 2006 10-Q |
10.14
|
|
Agreement on Transfer of Equity
Shares in ABLE New Energy Co., Ltd
dated January 25, 2006
|
|
Exhibit 10.3 of the March 2006 10-Q |
10.15
|
|
Amendment Number Five to Credit
Agreement dated as of June 29, 2006
with the Lenders Party Thereto and
JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended July 1,
2006 |
10.16
|
|
Amendment No. 1 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
|
|
Exhibit 99.3 of our Registration
Statement on Form S-8 filed August
18, 2006, File No. 333-136737 |
10.17
|
|
Forbearance and Amendment Number Six
to Credit Agreement dated as of
February 14, 2007 with the Lenders
Party Thereto and JPMorgan Chase
Bank as Administrative Agent
|
|
Exhibit 10.1 of the Form 8-K filed
February 21, 2007 |
10.18
|
|
Extension of Forbearance and
Amendment Number Seven to the Credit
Agreement dated as of March 23,
2007, with the Lenders Party Thereto
and JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 8-K filed
March 27, 2007 |
10.19
|
|
Employment Agreement between the
Registrant and John D. Kavazanjian
|
|
Exhibit 99.1 of our Report on Form
8-K filed April 27, 2007. |
10.20
|
|
Form of Employment Agreement between
the Registrant and each of William
A. Schmitz, Robert W. Fishback and
Peter F. Comerford
|
|
Exhibit 99.2 of our Report on Form
8-K filed April 27, 2007. |
10.21
|
|
Extension of Forbearance and
Amendment Number Eight to the Credit
Agreement dated as of May 18, 2007,
with the Lenders Party Thereto and
JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 8-K filed
May 21, 2007 |
10.22
|
|
Amendment Number Nine to the Credit
Agreement dated as of August 15,
2007, with the Lenders Party Thereto
and JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 8-K filed
on August 16, 2007 |
10.23
|
|
Settlement Agreement dated October
3, 2007, among MRC Chargers, LTD.,
Frank Alexander, James Evans, Thomas
Hauke, Earl Martin, Sr., Gloria
Martin, Lillian Hauke, the
Registrant, and McDowell Research
Co., Inc.
|
|
Exhibit 10.1 of the Form 8-K filed
on October 5, 2007 |
93
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Index |
|
Description of Document |
|
Incorporated By Reference from: |
|
|
|
|
|
10.24
|
|
Form of Amended and Restated
Subordinated Convertible Promissory
Note for Frank Alexander and James
Evans
|
|
Exhibit 10.2(a) of the Form 8-K
filed on October 5, 2007 |
10.25
|
|
Form of Amended and Restated
Subordinated Convertible Promissory
Note for Thomas Hauke, Lillian
Hauke, Earl Martin, Sr., and Gloria
Martin
|
|
Exhibit 10.2(b) of the Form 8-K
filed on October 5, 2007 |
10.26
|
|
Stock Purchase Agreement by and
among Innovative Solutions
Consulting, Inc., Michele A.
Aloisio, Marc DeLaVergne, Thomas R.
Knowlton, Kenneth J. Wood, W.
Michael Cooper, and the Registrant,
dated September 12, 2007
|
|
Exhibit 10.1 of the Form 10-Q for
the fiscal quarter ended September
29, 2007, filed November 7, 2007 |
10.27
|
|
Placement Agency Agreement dated
November 8, 2007 by and between the
Registrant and Stephens, Inc.
|
|
Exhibit 10.1 of the Form 8-K filed
November 9, 2007 |
10.28
|
|
Stock Purchase Agreement by and
among Stationary Power Services,
Inc., William Maher, and the
Registrant dated October 30, 2007
|
|
Exhibit 10.48 of the Form 10-K for
the year ended December 31, 2007,
filed March 19, 2008 |
10.29
|
|
Subordinated Convertible Promissory
Note with William Maher
|
|
Exhibit 10.49 of the Form 10-K for
the year ended December 31, 2007,
filed March 19, 2008
|
10.30
|
|
Stock Purchase Agreement by and
among Reserve Power Systems, Inc.,
William Maher, Edward Bellamy, and
the Registrant dated October 30,
2007
|
|
Exhibit 10.50 of the Form 10-K for
the year ended December 31, 2007,
filed March 19, 2008 |
10.31
|
|
Amendment Number Ten to the Credit
Agreement dated as of April 23,
2008, with the Lenders Party Thereto
and JPMorgan Chase Bank as
Administrative Agent
|
|
Exhibit 10.1 of the Form 8-K filed
on April 25, 2008 |
10.32
|
|
Amendment No. 2 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
|
|
Exhibit 99.4 of our Registration
Statement on Form S-8 filed
November 13, 2008, File No.
333-155349 |
10.33
|
|
Amendment No. 3 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
|
|
Exhibit 99.5 of our Registration
Statement on Form S-8 filed
November 13, 2008, File No.
333-155349 |
10.34
|
|
Asset Purchase Agreement by and
among U.S. Energy Systems, Inc., Ken
Cotton, Shawn O’Connell, Simon
Baitler, and the Registrant and
Stationary Power Services, Inc.
dated October 31, 2008
|
|
Filed herewith |
10.35
|
|
Asset Purchase Agreement by and
among U.S. Power Services, Inc., Ken
Cotton, Shawn O’Connell, Simon
Baitler, and the Registrant and
Stationary Power Services, Inc.
dated October 31, 2008
|
|
Filed herewith |
10.36
|
|
Amendment to Employment Agreement
between the Registrant and John D.
Kavazanjian
|
|
Filed herewith |
10.37
|
|
Amendment to Employment Agreement
between the Registrant and William
A. Schmitz
|
|
Filed herewith |
94
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Index |
|
Description of Document |
|
Incorporated By Reference from: |
|
|
|
|
|
10.38
|
|
Amendment to Employment Agreement
between the Registrant and Robert W.
Fishback
|
|
Filed herewith |
10.39
|
|
Amendment to Employment Agreement
between the Registrant and Peter F.
Comerford
|
|
Filed herewith |
10.40
|
|
Amended and Restated Credit
Agreement dated as of January 27,
2009, with the Lenders Party Hereto
and JPMorgan Chase Bank, N.A. as
Administrative Agent
|
|
Exhibit 99.1 of the Form 8-K filed
on February 2, 2009 |
10.41
|
|
Amendment No.1 to the Stock Purchase
Agreement by and among Innovative
Solutions Consulting, Inc., Michele
A. Aloisio, Marc DeLaVergne, Thomas
R. Knowlton, Kenneth J. Wood, W.
Michael Cooper, and the Registrant,
dated September 12, 2007
|
|
Exhibit 99.1 of the Form 8-K filed
on February 13, 2009 |
21
|
|
Subsidiaries
|
|
Filed herewith |
23.1
|
|
Consent of BDO Seidman, LLP
|
|
Filed herewith |
31.1
|
|
CEO 302 Certifications
|
|
Filed herewith |
31.2
|
|
CFO 302 Certifications
|
|
Filed herewith |
32.1
|
|
906 Certifications
|
|
Filed herewith |
|
|
|
| * |
|
Confidential treatment has been granted as to certain portions of this exhibit. |
| (c) |
|
Financial Statement Schedules. |
| |
| |
|
The following financial statement schedules of the Registrant are filed herewith: |
| |
| |
|
Schedule II — Valuation and Qualifying Accounts |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
| |
|
December 31, |
|
Charged to |
|
Other |
|
|
|
|
|
December 31, |
| |
|
2007 |
|
Expense |
|
Accounts |
|
Deductions |
|
2008 |
Allowance for
doubtful accounts |
|
$ |
485 |
|
|
$ |
675 |
|
|
$ |
(11 |
) |
|
$ |
(63 |
) |
|
$ |
1,086 |
|
Inventory reserves |
|
|
2,333 |
|
|
|
619 |
|
|
|
(65 |
) |
|
|
(37 |
) |
|
|
2,850 |
|
Warranty reserves |
|
|
501 |
|
|
|
921 |
|
|
|
— |
|
|
|
(412 |
) |
|
|
1,010 |
|
Deferred tax
valuation allowance |
|
|
27,149 |
|
|
3,297 |
|
|
— |
|
|
(6,841) |
|
23,605 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
| |
|
December 31, |
|
Charged to |
|
Other |
|
|
|
|
|
December 31, |
| |
|
2006 |
|
Expense |
|
Accounts |
|
Deductions |
|
2007 |
Allowance for
doubtful accounts |
|
$ |
447 |
|
|
$ |
101 |
|
|
$ |
6 |
|
|
$ |
69 |
|
|
$ |
485 |
|
Inventory reserves |
|
|
1,206 |
|
|
|
1,323 |
|
|
|
— |
|
|
|
196 |
|
|
|
2,333 |
|
Warranty reserves |
|
|
522 |
|
|
|
210 |
|
|
|
— |
|
|
|
231 |
|
|
|
501 |
|
Deferred tax
valuation allowance |
|
|
30,526 |
|
|
|
— |
|
|
|
— |
|
|
|
3,377 |
|
|
|
27,149 |
|
95
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additions |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
| |
|
December 31, |
|
Charged to |
|
Other |
|
|
|
|
|
December 31, |
| |
|
2005 |
|
Expense |
|
Accounts |
|
Deductions |
|
2006 |
Allowance for
doubtful accounts |
|
$ |
458 |
|
|
$ |
74 |
|
|
$ |
— |
|
|
$ |
85 |
|
|
$ |
447 |
|
Inventory reserves |
|
|
868 |
|
|
|
90 |
|
|
|
753 |
|
|
|
505 |
|
|
|
1,206 |
|
Warranty reserves |
|
|
464 |
|
|
|
131 |
|
|
|
— |
|
|
|
73 |
|
|
|
522 |
|
Deferred tax
valuation allowance |
|
|
5,721 |
|
|
|
24,805 |
|
|
|
— |
|
|
|
— |
|
|
|
30,526 |
|
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| |
|
|
|
|
| |
ULTRALIFE CORPORATION
|
|
| Date: March 13, 2009 |
By: |
/s/ John D. Kavazanjian
|
|
| |
|
John D. Kavazanjian |
|
| |
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
Date: March 13, 2009
|
|
/s/ John D. Kavazanjian |
|
|
|
|
John D. Kavazanjian
|
|
|
|
|
President, Chief Executive Officer and Director |
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Robert W. Fishback |
|
|
|
|
Robert W. Fishback
|
|
|
|
|
Vice President — Finance and Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Carole Lewis Anderson |
|
|
|
|
Carole Lewis Anderson (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Patricia C. Barron |
|
|
|
|
Patricia C. Barron (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Anthony J. Cavanna |
|
|
|
|
Anthony J. Cavanna (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Paula H. J. Cholmondeley |
|
|
|
|
Paula H. J. Cholmondeley (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Daniel W. Christman |
|
|
|
|
Daniel W. Christman (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Ranjit C. Singh |
|
|
|
|
Ranjit C. Singh (Director)
|
|
|
|
|
|
|
|
Date: March 13, 2009
|
|
/s/ Bradford T. Whitmore |
|
|
|
|
Bradford T. Whitmore (Director)
|
|
|
97