SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

/X/   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended June 30, 19971998

Commission file number 0-20852

                            ULTRALIFE BATTERIES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                           16-1387013
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)

1350 Route 88 South, Newark, New York         14513
               (Address of principal executive offices)                         (Zip(Zip Code)

Registrant's telephone number, including area code: (315) 332-7100

Securities registered pursuant to Section 12(b) of the Act:

                                              Name Of Each Exchange
       Title Of Each Class                    On Which Registered
       -------------------                    -------------------
                 None
             None

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.10 par value
                          ----------------------------
                                (Title of Class)

      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 X     No___

      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 Ill of this Form 10-K or any amendment to this
Form 10-K. [ ]

      On September 19, 199724, 1998 the aggregate market value of the voting stock of
Ultralife Batteries, Inc., held by non-affiliates of the Registrant was
approximately $  116,300,000$46,059,563 based upon the average of the high and low prices for
such Common Stock as reported on the NASDAQ National Market System on September
19,1997.24, 1998.

      As of September 19, 1997,24, 1998, the Registrant had 7,963,83610,484,886 shares of Common
Stock outstanding.

                      Documents Incorporated by Reference.

Part II           Ultralife Batteries, Inc. Proxy Statement. With the exception
                  of the items of the Proxy Statement specifically incorporated
                  by reference herein, the Proxy Statement is not deemed to be
                  filed as part of this Report on Form 10-K.



                                       2


PART I

      The discussion and analysis below,  and throughout  this report,  contains
forward-looking  statements  within the meaning of Section 27A of the Securities
and Exchange Act of 1933 and Section 21E of the  Securities  and Exchange Act of
1934.  Actual results could differ  materially from those projected or suggested
in  the   forward-looking   statements   as  a  result  of  the risk  factors  set forth
belowvarious   risks  and
uncertainties, some of which are discussed elsewhere in this report.

ITEM 1.  BUSINESS

General

      Ultralife Batteries,  Inc. ("Ultralife" or the "Company") develops,  manufactures and markets primary and
rechargeable  lithium  batteries  for use in applications  requiring high energy,
reliable and long-lasting  power sources.a wide array of  applications.  The
Company  believes that its batteryproprietary  technologies  allow the Company to offer
performance characteristics,  such as high energy densitybatteries  that  are  ultra-thin,   lightweight  and  stable discharge profile superior togenerally  achieve  longer
operating  time than  competing  batteries  currently  available.  TheTo date,  the
Company currently  marketshas focused on  manufacturing a family of lithium primary  batteries for
consumer  industrial and  militaryindustrial  applications  which  it  believes  is one of the most
comprehensive  lines of lithium primary batteries  commercially  available.  Ultralife  is  also  developingThe
Company has been focusing on the  commercialization of its advanced rechargeable
batteries  which  are  based  on  its  proprietary   lithium-ion   solid-polymer
technology  whichand are being  designed  forintegrated  into consumer  electronic  applications.applications  such as
portable  computers  and  cellular  telephones.  The Company  believes  that its
advanced  rechargeable  batteries are the only  solid-polymer  lithium batteries
currently being manufactured and sold for commercial use.

      The global small cell rechargeable batteries market was approximately $3.7
billion in 1997 and is expected to grow to $6.1 billion by 2001.  The widespread
use of a variety of portable consumer electronics such as notebook computers and
cellular  telephones has resulted in large and growing markets for  rechargeable
batteries.  These electronic products are placing increasing demands on existing
battery  technologies to deliver  greater amounts of energy through  efficiently
designed,  smaller  and  lighter  batteries.  In  some  cases,  current  battery
capabilities  are a major  limitation  in the  development  of  next  generation
electronic  products.  The Company  believes  that its  proprietary  lithium-ion
solid-polymer  technology  provides  substantial  benefits over other  available
rechargeable  battery  technologies.  In  addition,  the  Company's  proprietary
technology,  which  does not  utilize  lithium  metal  or a liquid  electrolyte,
provides  performance  and  safety  characteristics  superior  to other  lithium
rechargeable batteries currently available.

      The Company has obtained  production  orders forbeen  manufacturing  its advanced  rechargeable  batteries
and  is  currently   implementing   scale-up  of  its
manufacturing  operations.   Internationally,  the  Company  has  broadened  its
research  and  development,   manufacturing   and  marketing  base  through  its
acquisition  of  certain  assets and the  related  business  of Dowty  Group PLC
("Dowty"), based in Abingdon, England, which has enabled the Company to become a
technological  leader in high rate  lithium-manganese  dioxide primary batteries
and a producer of sea water batteries.

The Company's objective is to become a leading provider of lithium batteries for
use in  applications  requiring  high energy,  reliable and  long-lasting  power
sources.  To achieve  this  objective,  the  Company is  working  with  Original
Equipment  Manufacturers (OEMs) to identify and develop new applications for the
Company's batteries using its proprietary technology and expertise.  The Company
has established and will continue to seek strategic relationships with OEMs that
utilize  the  Company's   technology,   commit  to   cooperative   research  and
development,  marketing  programs and  recommend  the  Company's  batteries  for
replacement use in their  products.since  March  1997.  The  Company  also  has introduced its primary
battery  products to the broader  consumer market by establishing  relationships
with selected  nationalmanufactures  and regional  retailers.  The Company  continues to seek
strategic  relationships  and joint  ventures with other battery  manufacturers,
suppliers and customers to accelerate  commercialization  of its  technology and
products.

The Company  markets  a family of
lithium-manganese  dioxide  primary  batteries  in 9-volt  and  3-volt  2/3A,sizes to
original equipment manufacturers ("OEM") and consumer markets, high rate lithium
batteries in C, 1 1/4C and D configurations,sizes to  specialized  industrial  markets,  custom
Thin Cell(TM)  batteries and  silver-chloride  sea water batteries. The Company's 9-volt battery
is marketed to the security and safety  equipment,  medical device and specialty
instrument  markets.  The Company's  9-volt battery is currently used in devices
such as smoke  detectors,  home security devices and medical infusion pumps. The
Company's high rate lithium batteries,  based on technology acquired from Dowty,
are sold to OEMs primarily for the industrial and military  markets,  for use in
sea and air safety  products  such as  emergency  positioning  indicating  radio
beacons and search and rescue  transponders.  The Company manufactures sea water
batteries used for specialty marine applications. The Company has been awarded a
production  contract from the U.S. Department of Defense for the production of a
cylindrical 6-volt lithium-manganese  battery (the "BA-5372" battery) for use in
mobile  communication  equipment.  Production under this contract started in the
second  quarter of the Company's  1996 fiscal year and the U.S.  Government  has
exercised  option  quantities that have extended  


                                      -2-


production  through mid fiscal  1998.  The Company
also provides research and development services to government agencies and other
third parties pursuant to technology contracts.

History

      The  Company  is currently focusingwas formed in  December  1990.  In March  1991,  the Company
acquired  certain  technology  and assets from Eastman Kodak  Company  ("Kodak")
relating to the 9-volt lithium-manganese  dioxide battery that was developed and
manufactured by Kodak. During the


                                       3



initial  12 months of  operation,  the  Company  directed  its  efforts  towards
reactivating the Kodak manufacturing  facility and performing extensive tests on
the  Kodak  9-volt  battery.   These  tests   demonstrated  a  need  for  design
modifications  which  were  incorporated  into  the  Company's  9-volt  battery,
resulting in a battery with  improved  performance  and shelf life.  The Company
then expanded its operations by the  acquisition in June 1994 by its subsidiary,
Ultralife  Batteries  (UK) Ltd., of certain assets of Dowty Group PLC ("Dowty").
The  Dowty  acquisition   provided  the  Company  with  a  presence  in  Europe,
manufacturing  facilities  for high rate  lithium  and sea water  batteries  and
highly  skilled  scientists  with  significant   expertise  in  lithium  battery
technology.  The  customer  base of  Ultralife  UK was  further  expanded by the
acquisition  of certain  assets of  Accumulatorenwerke  Hoppecke Carl Zoellner &
Sohn GmbH & Co.  ("Hoppecke")  in July 1994.  The Company  has  developed a wide
array of products  based on  combining  technology  developed  by the  Company's
research and  development  personnel and assets  acquired from Kodak,  Dowty and
Hoppecke as well as various technology licenses.

      Since its inception, the Company has concentrated significant resources on
research  and  development  activities  primarily  related  to advanced
rechargeable  batteries on  lithium-ion  solid-polymer  technology.  The Company
believes that  its  lithium-ion
solid-polymer  technology  provides  substantial
benefits,  including  greater energy  density and longer cycle life,  over other
available  rechargeable  battery technologies.  In addition, the Company believes
that  its  technology,  which  does  not  utilize  lithium  metal  or  a  liquid
electrolyte,  provides performance and safety characteristics  superior to other
lithium-based  rechargeable  batteries  currently  available.battery.  The Company  has
manufactured  advanced  rechargeable  batteries on a pilotcommenced  production  line for
testing by certain  OEMs and has  developed  and  implemented  a  semi-automatic
flexible  production line for initial  production runs and low volume  programs.
High volume manufacturing equipment is currently being installed. The Company is
developing   configurations of its
advanced  rechargeable  batteries in collaboration  with  potentiallimited  quantities  for an OEM purchasers  for  applications  in  portable
electronic  devices  such as cellular  telephonesusing a low
volume   production   line  which  includes   manual   operation.   High  volume
custom-designed  equipment  has been  installed  and portable  computers.  The
Company has a development  and supply  contract with a major cellular  telephone
manufacturer,  which  specifies  that the Company  supply a minimumis being  tested to ramp up
production of 5,000,000 rechargeable batteries after achieving an agreed upon performance specification.
The Company also has a development and supply contract with a major  electronics
manufacturer for rechargeable batteries for a new ultra thin, lightweight laptop
computer.  However,  under these  contracts,  there can be no assurance that the
Company's   rechargeable   batteries  will  be  able  to achieve  the  required
performance levels or that the company will be able to manufacture  commercially
acceptable products on a timely basis at a reasonable cost.

The Company was  incorporated  in Delaware on December 14, 1990,  under the name
Ultralife  Technologies,   Inc.  The  Company  changed  its  name  to  Ultralife
Batteries, Inc. on April 3, 1991. The Company's corporate offices are located at
1350 Route 88 South,  Newark,  New York 14513, and its telephone number is (315)
332-7100.full operation.

      As used in this Report, unless otherwise indicated the terms "Company" and
"Ultralife" include the Company's wholly-owned subsidiary, Ultralife UK Ltd. For
purposes of  presentation in this Report,report except for the  consolidated  financial
statements  herein or data derived  therefrom,  contract  terms or other amounts
expressed  originally  in British  pounds  sterling are set forth herein in U.S.
dollars at the rate of (pound)1.00 to $1.60.$1.65.

Technology Background

      A battery is an electrochemical apparatus used to store energy and release
it in the form of electricity. The main components of a conventional battery are
the anode, the cathode, the separator and an electrolyte,  which can be either a
liquid or a solid.  The separator  acts as an electrical  insulator,  preventing
electrons  from movingelectrical  contact  between  the anode and  cathode  inside the  battery.  Upon
discharge  of the  battery,  the anode  supplies a flow of  electrons,  known as
current,  to a load or device.device  outside of the battery.  After powering the load,
the electron  flow reenters the battery at the cathode.  As electrons  flow from
the anode to the device being powered by the battery, ions are released from the
cathode, cross through the electrolyte and react at the anode.

      There are two types of  batteries,  primary  and  rechargeable.  A primary
battery is used until  discharged and then  discarded.  The principal  competing
primary battery technologies are carbon-zinc, alkaline and lithium. In contrast,
after a rechargeable  battery is discharged,  it can be recharged  close to full
capacity  and used again  (subject  to the memory  effect,  if any).  Generally,
discharge and recharge  cycles can be repeated a number 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, -3-
but measurable, loss in energy with each cycle. The industry
commonly  reports cycle life in 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 and lithium-based  batteries.  Rechargeable  batteries  generally can be
used in all primary battery


                                       4

applications, as well as in additional applications, such as portable computers,
cellular telephones and other consumer products.

      TwoThree important parameters for describing a battery'sthe performance  characteristics
of a rechargeable  battery suited for today's  portable  electronic  devices are
design flexibility,  energy density and voltage  stability.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   changes.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.chemistries and, therefore,  tend
to consume less volume and weight.  Long cycle life is a preferred  feature of a
rechargeable  battery  because it allows the user to charge and  recharge  power
many times before noticing a difference in performance.

Products

Ultralife's Advanced Rechargeable Battery

      The Company's  advanced  rechargeable  battery is based on its proprietary
lithium-ion solid-polymer technology.  The battery is composed of ultra-thin and
flexible  components  including a lithiated  manganese dioxide cathode, a carbon
anode and a  solid-polymer  electrolyte.  The  Company  believes  that  users of
portable consumer  electronic  products such as notebook  computers and cellular
telephones are seeking  smaller and lighter  products that require less frequent
recharges  while  providing  the same  energy.  The  Company  believes  that its
technology is  attractive  to OEMs of such products  since the use of a flexible
solid-polymer  electrolyte,  rather  than  a  liquid  electrolyte,  reduces  the
battery's overall weight and volume, and allows for increased design flexibility
in conforming batteries to the variety of shapes and sizes required for portable
consumer  products.  In addition to its high energy density and long cycle life,
the  Company's  lithium-ion  solid-polymer  battery is not subject to the memory
effect common in certain other rechargeable batteries.  The following table sets
forth  the  performance   characteristics  of  the  three  rechargeable  battery
technologies that the Company believes  represents its most significant  current
competition.

Comparison of Prismatic Rechargeable Battery Technologies

Technology Wh/kg Wh/l Cycle Life(1) Safety Minimum Cell - ---------- ----- ---- ------------- ------ Thickness(mm) Energy Density ------------ -------------- Nickel-cadmium (2) 40-55 100-150 500 Safe 8 Nickel-metal hydride (2) 50-60 155-185 500 Safe 6 Lithium-ion liquid electrolyte(2)(3) 68-110 200-250 >500 Concern 6 Ultralife lithium-ion solid-polymer (4) 100-120 200-250 >500 Safe 1
(1) Cycle life to 80% of rated capacity and 100% depth of discharge, at approximately the 5 C rate (1 hour discharge cycle). Certain batteries may achieve significantly higher cycle life at longer discharge rates. (2) Data compiled from industry sources and sales literature of other battery manufacturers or derived therefrom by the Company. (3) Cycle life data based on C/5 rate (5 hour discharge cycle). (4) Based on the Company's tests. Energy density refers to 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 rechargings, such as cellular telephones and portable computers. In addition to the performance advantages described above, there is a significant difference between the rechargeable batteries which are based on the lithium-ion liquid electrolyte technology and the technology used in the Company's advanced rechargeable batteries. Liquid lithium-ion cells use a flammable liquid electrolyte that is contained within a cylindrical or prismatic metal housing. Under abusive conditions, where external temperatures are extremely high, significant pressure may build within these cells which can cause these cells to vent and release liquid electrolyte into the high-temperature environment. If temperatures are high enough, flames can result. The Company's advanced rechargeable batteries utilize a solid polymer electrolyte that has no liquid and thus cannot leak. Moreover, because the electrolyte is solid, the Company cells do not require a metal housing. Rather, they are packaged within a thin foil laminate. The Company further believes that its cells will perform safely under the same abusive conditions that could cause a flame from liquid lithium-ion cells. The Company's rechargeable cells have passed each of the following safety tests: UL 1950, IEC 950, CSA 950 and the Japan Storage Batteries Association Guideline for Safety Evaluation of Lithium Cells. 6 Ultralife's Primary Batteries The Company's primary battery products, exclusive of its sea water batteries, are also characterizedbased on lithium-manganese dioxide technology. The following table sets forth the performance characteristics of the battery technologies that the Company believes represent its most significant current or potential competition for its 9-volt battery and its high-rate lithium battery. Comparison of Primary Battery Technologies
Technology Energy Density Discharge Shelf Life Operating - ---------- -------------- Profile (years) Temperature ------- ------- Range ((degree)F) ----------------- Wh/kg Wh/l ----- ---- 9-Volt Configurations: Carbon-zinc (1) 22 40 Sloping 1 to 2 23 to 113 Alkaline (1) 65 143 Sloping 4 to 5 -4 to 130 Ultralife lithium-manganese dioxide (2) 262 406 Flat up to 10 -40 to 160 High Rate Cylindrical: (3) Alkaline (1) 59 160 Sloping 4 to 5 -4 to 130 Lithium-sulfur dioxide (1)(4) 260 430 Flat 10 -40 to 160 Lithium thionyl-chloride (2)(4) 250-300 650-700 Flat 10 -40 to 160 Ultralife lithium-manganese dioxide (2) 228 510 Flat 10 -40 to 160
(1) Data compiled from industry sources and sales literature of other battery manufacturers or derived therefrom by the Company. (2) Results of tests conducted by the Company. (3) Data for equivalent D-size cells. (4) The Company believes that these batteries are limited in application due to health, safety and environmental risks associated therewith. 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. Higher energy density translates into longer operating times for a battery of a given weight or volume and, therefore, fewer replacement batteries. Discharge profile refers to the profile of the voltage of the battery during discharge. A flat discharge profile indicatingresults in a more stable releasevoltage during discharge of energy during use as power density decreases, while conventional primarythe battery. High temperatures generally reduce the storage life of batteries, such as carbon-zinc and alkaline, exhibit a declining discharge profile. At a certain time, a battery may have sufficient power but may be unable to deliver the energy to power a device due tolow temperatures reduce the battery's reduced voltage. Benefitsability to operate efficiently. The inherent electrochemical properties of Ultralife's Lithium Technologylithium batteries result in improved low temperature performance and an ability to withstand relatively high temperature storage. The Company's primary battery products are based on lithium-manganese dioxide technology and its advanced rechargeable battery products are based on lithium-ion solid-polymer technology. The materials used in, and the chemical reactions inherent to, lithium-basedthe Company's lithium batteries provide significant advantages over currently available primary and rechargeable battery technologies. The Company believes that its primary battery products and the advanced rechargeable batteries under development offer a number of significant advantages over conventional primary and rechargeable batteries currently in use, including: Longer Operating Time. Length oftechnologies 7 which include lighter weight, longer operating time, islonger shelf life, and a critical performance characteristic for most battery applications.wider operating temperature range. The Company's primary batteries can operate devices between two and four times longer than conventional carbon-zinc and alkalinealso have relatively flat voltage profiles which provide stable power. Conventional primary batteries, depending upon the application and operating environment. The Company's advanced rechargeable battery is capable of operating approximately two to three times longer on a single charge than nickel-cadmiumsuch as alkaline batteries, and approximately two times longer on a single charge than nickel-metal hydride batteries, of comparable weight. Lighter Weight. The Company's primary batteries weigh up to 25% less than conventional primary batteries of comparable size. The Company's advanced rechargeable battery can deliver two to three times as much energy as nickel cadmium batteries of comparable weight. Recharge Characteristics. Certain of the Company's advanced lithium-ion solid-polymer rechargeable batteries are able to deliver more than 500 discharge cycles without appreciable performance degradation and are not subject to the memory effect. The Company's lithium-ion solid-polymer battery does not incorporate lithium metal,have sloping voltage profiles, which is subject to growth of dendritic structures which can significantly limit the number of achievable cycles. Cost Effective. The Company's primary batteries deliver significantly greater energy per unit of weight and volume than other commercially available batteries. It is anticipated that the Company's advanced rechargeable batteries will also exhibit such advantages over existing products.result in decreasing power outage during discharge. While the price for the Company's lithium batteries is generally higher than commercially available alkaline batteries produced by others, the Company believes that the increased energy per unit of weight and volume of its batteries will allow longer operating time and less frequent battery replacements or rechargings for the Company's targeted -4- applications. Therefore, the Company believes that its battery technology isprimary batteries are price competitive with other battery technologies on a costprice per watt hour basis. Longer Shelf Life and Charge Retention. The Company's primary batteries have a shelf life of up to ten years, typically at least twice as long as batteries based on competing technologies. Flat Voltage Profile. The Company's batteries have relatively flat voltage profiles, providing stable power. Conventional primary batteries, such as alkaline batteries, have sloping voltage profiles, which result in decreasing power outage during discharge. Wide Operating Temperature Range. The Company's primary batteries operate in temperatures ranging from -40(degree)F to 160(degree)F. This operating range is greater than that achieved by most competing primary batteries. Ultralife's Primary Batteries 9-Volt Lithium BatteryBattery. The Company's 9-volt lithium battery delivers a unique combination of high energy density and a stable voltage which results in a longer operating life for the battery and, accordingly, fewer battery replacements. While the UltralifeCompany's 9-volt battery's price is generally higher than conventional 9-volt carbon-zinc and alkaline batteries, the Company believes the enhanced operating performance and decreased costs associated with battery replacement make the Ultralife 9-volt battery more cost effective than conventional batteries on a cost per watt-hour basis. The Company currently markets its 9-volt lithium battery to consumer retail and OEM markets, including manufacturers of safety and security systems such as smoke alarms, medical devices radar detectors, portable communication devices, and other electronic instrumentation. The Company believes that approximately 10% of the 230220 million 9-volt batteries sold in the U.S. in 19951997 were sold to OEMs. Applications for which the Company's 9-volt lithium battery are currently sold include: Safety and Security Equipment Medical Devices Specialty Instruments - ----------------------------- --------------- --------------------- Smoke alarms Infusion pumps Radar detectorsBone growth stimulators Garage door openers Wireless alarm systems Telemetry equipment Garage door openers Electronic locks External pacemakers Electronic meters Tracking devices Portable blood analyzers Hand-held scanners Transmitters/receivers TENS units Wireless electronics The Company currently sells its 9-volt battery to Coleman Safety & Security Products,Fyrnetics, Inc., Fyrnetics, Inc.,Maple Chase, and First Alert(R) for long life smoke alarms, to Hewlett Packard, Siemens Medical Systems, Inc. and i-STAT Corp. for medical devices Ademcoand to ADEMCO and Interactive Technologies, Inc. for security devices. Coleman Safety & Security Products,Fyrnetics, Inc. and Fyrnetics, Inc.Maple Chase have recently introduced long life smoke detectorsalarms powered by the Company's 9 volt9-volt lithium battery, offered with a limited 10 year warranty. The Company also manufactures its 9-volt lithium battery under private label for First Alert(R),Eveready, Sonnenschein Lithium GmbH and American Sensors, Inc., SonnenscheinTelenot in Germany and Uniline in Sweden. Additionally, the Company has introduced its 9-volt battery to the broader consumer market by establishing relationships with national and regional retail chains such as Sears, Radio Shack, Target Stores, Servistar,Fred Meyer, Inc., TruServ, Ace Hardware, True Value Hardware and a number of catalogues. -5- The Company believes that its 9-volt lithium battery production facility basedmarket has expanded as a result of a state law recently enacted in Newark,Oregon. The Oregon statute requires that, as of January 1, 1998, all battery-operated smoke alarms sold in that state must include a 10-year battery. Similar legislation has been recently proposed in New York is one ofState that would also require all smoke alarms operated solely by a battery to include a battery warranted to last 10 years. The Company believes 8 that it manufactures the most automated and efficient lithiumonly standard size 9-volt battery production facilities of its kindwarranted to last 10 years when used in the world. The Company's production facility currently has the capacity to produce five million 9-volt lithium batteries per year with its existing equipment.smoke alarms. High Rate Lithium BatteriesBatteries. Ultralife UK, the Company's wholly-owned subsidiary based in Abingdon, England, markets a wide range of high rate primary lithium batteries in various sizes and voltage configurations. The Company currently manufactures C, 1 1/4C and D size high rate lithium batteries which are sold as separate units and packaged into multi-cell battery packs. The Company believes that its high rate lithium C, 1 1/4C and D primary batteries, based on its proprietary lithium-manganese dioxide technology, are the most advanced high rate lithium batteries currently available. The Company also markets high rate lithium batteries under private label in other sizes and voltage configurations in order to offer a more comprehensive line of batteries to its customers. The Company currently markets its line of high rate lithium batteries to the OEM market for industrial applications, and to military organizations forincluding military use. The main OEM applications are SAR (Search & Rescue), oil industry, down hole and pipeline monitoring equipment, utility meters, oceanographic, remote switching and portable equipment. The main military applications are manpack radios, night vision equipment, chemical agent monitors and missile power supplies. The Company estimates the market for high rate lithium batteries was $75 million in 1995.1996. Although this market has been dominated by lithium thionyl chloridethionyl-chloride, lithium-sulfur dioxide and lithium sulfur dioxideliquid cathode batteries, there is an increasing market share taken by the lithium manganeselithium-manganese dioxide and solid cathode due to itstheir improved performance and safety. The Company increased its sales of the high rate lithium manganeselithium-manganese dioxide batteries from $2.3 million in 1995 to $3.1 million in 1996 and was on track forexpected a similar increase in 1997 prior to a fire in December 1996 that severely damaged its UK manufacturing facility. The reinstatementfacility and caused the temporary interruption of the facility is near completion andproduction of these batteries. Repairs of the production facilities capable of producing more than 2,000 cells per shift are expected to be completed December 1997.have been completed. The Company believes that its high rate lithium-manganese dioxide batteries offer a combination of performance, safety and environmental benefits which will enable it to effectively penetrate this market. Sea Water BatteriesBatteries. The Company produces a variety of sea water batteries based on magnesium silver-chloridemagnesium-silver chloride technology. Sea water batteries are custom designed and manufactured to end user specifications. The batteries are activated when placed in salt water, which acts as the electrolyte allowing current to flow. The Company currently manufactures sea water batteries at the Abingdon, England facility and markets them to naval and other specialty OEMs. However, due to the fire which damaged this manufacturing facility, the Company temporarily interrupted its production of sea water batteries in December 1996 and only recently resumed production of sea water batteries. BA-5372 Battery The Company was awarded in 1995 a $1.5 million contract by the U.S. Department of Defense to produce the BA-5372 lithium battery. The production contract has options for two additional years, at the election of the U.S. Government. During 1996 the government exercised its option for the second year adding $1.3 -6- million of BA-5372 batteries to be delivered during the Company's fiscal 1997. In November 1996, the Government exercised its second option for $1.26 million throughout 1997 and into calendar 1998.Battery. The Company's BA-5372 battery is a cylindrical 6-volt lithium-manganese dioxide battery which is used for memory back-up in specialized mobile communication equipment. The Company's BA-5372 battery offers a combination of performance features suitable for military applications including high energy density, light weight, long shelf life and ability to operate in a wide temperature range. The Company was awarded a $1.5 million contract by the U.S. Department of Defense to produce the BA-5372 lithium battery in 1995. Pursuant to the production contract, the U.S. Government exercised options to purchase additional BA-5372 batteries aggregating $2.5 million. 9 The Company completed production under this contract in December 1997. Thin Cell(TM) BatteryCell Battery. The Company has developed a line of lithium-manganese dioxide primary batteries which the Company calls its Thin Cell(TM)Cell batteries. The Thin Cell batteries are flat, light weight, flexible and can be manufactured to conform to the shape of the particular application. The Company is currently offering fivethree configurations of the Thin Cell battery which range in capacity from 30120 milliampere-hours to 3,0001,000 milliampere-hours. The Company is currently marketing these batteries to OEMs for applications such as security badges, smart cards,identification tags, computer access cards and personal communication devices. The Company believes that its Thin Cell batteries offer a number of performance characteristics which makes them attractive to OEMs for introduction in current and future applications including high energy density, light weight and flexibility in the shape and size of the battery. The Company believes that acceptance by OEMs is necessary to create a significant commercial market for its Thin Cell batteries. 3-Volt Lithium BatteryBattery. The Company has developed and is producing a 3-volt lithium-manganese dioxide battery based on the technology and physical configuration of the 9-volt lithium battery. By configuring the three 3-volt cells in parallel, rather than in a series as in the 9-volt battery, the Company is able to produce a 3-volt battery which it believes offers the highest energy density for a commercially available 3-volt battery. The high energy density makes it suitable for applications requiring high current pulses, such as radio transmitters and receivers, and remote utility meter reading systems. The Company currently sells its 3-volt lithium batteries to Dayton-Granger, Inc. for emergency beacons for commercial aircraft, Schlumberger for residential gas meters,aircraft. Sales and OrthoLogic for bone growth stimulators.Marketing The Company producessells its current products directly to OEMs in the 3-volt lithium batteryU.S. and abroad and has contractual arrangements with 22 sales representatives who market the Company's products on a commission basis in particular areas. The Company also distributes its products through 30 distributors in the same automated production equipment as its 9-volt lithium battery. Ultralife's Advanced Rechargeable BatteryU.S. and 29 distributors internationally that purchase batteries from the Company for resale. The Company's advanced rechargeable battery is based on lithium-ion solid-polymer technology. The battery is composedCompany employs a staff of thin componentssales and marketing personnel in the U.S., England and Germany including a lithiated manganese dioxide cathode,vice president of sales, a carbon anodedirector of marketing, a marketing advertising manager, a European sales director, a U.K. sales and marketing manager, a solid-polymer electrolyte, all of whichFar East sales director, an applications engineer, an industrial sales manager for OEM customers and managers who are flexible. The use of a flexible solid-polymer electrolyte, rather than a liquid electrolyte, reduces the battery's overall weight and volume, and allowsresponsible for increased flexibility in conforming batteries to the variety of shapes and sizes required by various OEMs. In addition to its high energy density and long cycle life, the Company's lithium-ion, solid polymer battery is not subject to the memory effect common in nickel-cadmium batteries. Lead-acid, nickel-cadmium and nickel-metal hydride batteries are the predominant commercially available rechargeable batteries. Lithium-ion liquid electrolyte technology, such as lithium-cobalt oxide and lithium-nickel oxide, are battery technologies that are achieving market acceptance. -7- The Company is developing configurations of its advanced rechargeable batteries in consultation with potential OEM purchasers for use in cellular telephones and portable computers. The Company is producing its advanced rechargeable batteries in limited quantities and is currently installing equipment for a commercial-level production facility. There can be no assurance that the Company's rechargeable batteries will achieve those levels of performance required for commercial viability or that such technology will gain market acceptance. See "Competition." In November, 1994, the Company signed an exclusive development and supply agreement with a major communications company for its advanced rechargeable lithium-ion solid-polymer battery. Under the terms of this agreement, the communications company provided a portion of the funds to finalize the development of the battery to meet its particular specifications, and if an acceptable prototype is not delivered, then one-half of the funds provided would be returned by Ultralife. The communications company shall have exclusivity for the battery in the wireless telecommunications market, but the agreement does not preclude sales of these rechargeable batteries in other markets such as retail sales and audio/visual/security/medical sales. These managers are responsible for use in laptop computers.direct sales, supervising the sales representatives and distributors, and other sales and marketing and distribution activities. The agreement was amended on March 28, 1996. Under the amended agreement the major communications company waived their rights to receive reimbursement of half their development funding; agreed to provide $300,000 for development funding and an extension of the period of exclusivity to the end of 1998 (previously it was the end of 1997), and agreed to advance $334,000 towards the shipment of mass-produced batteries. Also, under the new agreement the firm placed an order for a minimum of five (5) million batteries, meeting agreed-to specifications, to be delivered during the period of exclusivity. In April 1997, the Company entered into an $800,000 agreement to develop its lithium-ion, solid polymer, rechargeable battery for a leading electronics manufacturer for use in a new generation of laptop computers. Then, in June 1997, the Company received from this customer a follow-on commitment for tooling, additional battery refinement and initial production orders. There can be no assurance under these contracts with the communications company and the electronics manufacturing company that the Company's rechargeable batteries will be able to achieve the required performance levels or that the Company will be able to manufacture commercially acceptable productsoperates on a timelypurchase order basis at a reasonable cost. At present, the Companyand has at its Newark, New York, facility, a manual production line consisting of assembly and packaging equipment and fixtures for the production of limited quantities of its advanced rechargeable batteries. The Company is spending a significant amount of capital to begin commercial production of its advanced rechargeable batteries. The automated production of the Company's lithium-ion solid-polymer rechargeable battery has required the design and manufacture of a number of items of production equipment by third-party vendors. Much of this equipment has been custom designed and manufactured for the Company and some items require a substantial lead-time for delivery. There can be no assurances however that the equipment designed will properly produce the rechargeable batteries in commercial volume. The company has installed during fiscal 1997, a semi-automatic line for medium quantities production to start delivery to its customers in fiscal 1998. -8- Competition Competition in the battery industry 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,long-term sales manufacturing, distribution and other resources significantly greater than those of the Company. The Company competes against companies producing lithium-based batteries as well as other primary and rechargeable battery technologies. The Company competes on the basis of price, performance and reliability. There can be no assurance that the Company's technology and products will not be rendered obsolete by developments in competing technologies which are currently under development or which may be developed in the future or that the Company's competitors will not market competing products which obtain market acceptance more rapidly than those of the Company. In the 9-volt battery market, the principal competitive technologies currently encountered are alkaline and carbon-zinc. Duracell International, Inc., Eveready Battery Company Inc. and Rayovac Corp., among others, currently manufacture alkaline and carbon-zinc batteries. In the high rate lithium battery market, the principal competitive technologies are lithium sulfur dioxide and lithium-thionylchloride batteries. Saft-Soc des ACC, Blue Star Systems Corporation and Power Conversion, Inc., among others, currently manufacture high rate lithium sulfur dioxide batteries. The Company believes that the lithium-manganese dioxide technology in its high rate batteries offers greater reliability over longer periods without the negative environmental effects of sulfur dioxide and thionylchloride. The Company also manufactures sea water batteries and believes that its competitors for those products are Saft-Soc des ACC and Eagle-Picher Industries. The 2/3A lithium battery supplied to the company by other manufacturers will competecontracts with companies such as Duracell International, Inc., Sanyo Electric Co. Ltd., Panasonic International and Maxell Corp. of America in the 2/3A battery market. The Thin Cell batteries are expected to compete on the basis of their performance characteristics. The Company will compete with major battery producers, such as Gould Electronics, which use competing technologies such as low rate lithium thin cell batteries. The 3-volt battery's primary competitors include Maxell Corp. of America, Tadiran Limited, Saft-Soc des ACC and Power Conversion, Inc., all of which use lithium-thionylchloride technology to produce 3-volt batteries. In the rechargeable battery market, the principal competitive technologies include lead-acid, nickel-cadmium, nickel-metal hydride and lithium-ion liquid electrolyte technology. Major lead-acid manufacturers include Delco Products, Johnson Controls Inc., Exide Corp., and Yuasa Battery Co. Ltd.. Eveready, Inc., Sanyo Electric Co. Ltd., and Gould Electronics, among others, currently manufacture nickel-cadmium batteries. Manufacturers of nickel-metal hydride batteries include Sony Corp., Toshiba Corp. and Matsushita Electric Industrial Co. Ltd. Lithium-ion liquid electrolyte batteries, primarily based on lithium-ion cobalt oxide and lithium-ion nickel oxide technologies, are manufactured by Saft-Soc des ACC, Sony Corp., Toshiba Corp. and Sanyo Electric Co. Ltd., among others. Lithium-ion liquid electrolyte batteries offer significant advantages over lead-acid, nickel-cadmium and nickel-metal hydride batteries currently in use and the Company expects that technology to be the most significant competition for its advanced rechargeable battery. Sony Corp. and other manufacturers -9- currently offer lithium-ion liquid electrolyte batteries to consumers and to OEMs in substantial volumes, and have publicly announced that they are substantially increasing manufacturing capacity. As OEMs frequently require substantial lead times to design new batteries for their products, the availability of lithium-ion liquid electrolyte batteries could materially adversely affect the demand for, and market acceptance of, the Company's advanced rechargeable battery. Lithium-ion liquid electrolyte batteries used in laptop computers and cellular phones have been reported to have had incidences causing user safety concerns. There is a significant difference between these liquid electrolyte cells and the Company's Solid State System, which uses a unique solid polymer electrolyte and is fundamentally safer than lithium-ion batteries containing a liquid electrolyte. Liquid lithium-ion cells, such as those that reportedly caused the flames in the laptops, use a flammable liquid electrolyte contained within a cylindrical metal housing. Under abusive conditions, where external temperatures are extremely high, these cells can build up significant internal pressure. If the pressure reaches a high enough level, the cells can vent, causing the liquid electrolyte to be dispersed into the high-temperature environment. If the temperature is high enough, flames can result. The Company's advanced rechargeable batteries utilize a solid polymer electrolyte that has almost no liquid and thus cannot leak. Moreover, because the electrolyte is solid, the Ultralife cells do not require a cylindrical metal housing. Rather, they are packaged within a foil laminate. Under the same abusive conditions that could cause flame from liquid lithium-ion cells, Ultralife believes that its cells will perform safely. In addition to the currently marketed technologies, a number of companies are currently undertaking research and development of advanced rechargeable lithium batteries, including lithium-metal solid-polymer batteries. Valence Technology, Inc., Lithium Technology Corporation and Battery Engineering, Inc. have developed prototype solid-polymer batteries and are constructing commercial-scale manufacturing facilities. The Company believes that other research and development activities on solid-polymer batteries are underway at other companies in both the U.S. and Japan. No assurance can be given that such companies will not develop batteries similar or superior to the Company's lithium-ion solid-polymer rechargeable batteries. Although other entities may attempt to take advantage of the growth of the lithium 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 its experience in battery manufacturing, the Company has also developed expertise which it believes would be difficult to reproduce without substantial time and expense. Research and Development The Company conducts its research and development in both Newark, New York, and Abingdon, England. The Company is directing its research and development efforts toward design optimization of Thin Cells, 3-volt batteries and advanced rechargeable batteries. Each of those batteries has a broad range of potential applications in consumer, industrial and military markets including cameras, cellular telephones, and portable computers. No assurance can be given that such efforts will be successful or that the products which result will be marketable. -10- During the years ended June 30, 1997, 1996, and 1995, the Company expended approximately $3,940,000, $3,689,000, and $2,685,000, respectively, on Company-sponsored research and development. The Company currently expects that research and development expenditures will continue at a high level as it continues to advance its technology and develop new products. The Company will seek to fund part of its research and development effort on a continuing basis from both government and non-government sources. 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. The Company has successfully completed the initial stages of a government-sponsored program to develop new configurations of the Company's lithium-manganese dioxide battery and has received authorization to proceed with additional stages of this contract. This contract is for the development of "pouch cell" lithium primary batteries. The Company was also awarded an additional cost sharing contract by CECOM under which the development of a BA-5590 primary battery will be produced. The contract is for twenty-four months and began June 30, 1997. This contract is an SBIR-Phase III. The Company has also received production orders from Aberdeen Research Laboratories (U.S. Army) as a follow on product for its Technology Contract, closed in fiscal 1997. This order represents the first order of this type of battery to be actively purchased by the government. Sales and Marketingcustomers. The Company has initially targeted sales of its advanced rechargeable batteries to the OEM marketmanufacturers of portable consumer electronics products. The Company also intends to enter into contractual arrangements with distributors in the U.S., and abroad to purchase rechargeable batteries from the Company for resale to the after-market using distributor channels established with a focus onthe Company's primary batteries. The Company plans to expand its marketing activities as part of its strategic plan to increase sales of its rechargeable batteries to manufacturers of cellular telephones, notebook computers and new electronic portable devices. The Company has targeted sales of its primary batteries to manufacturers of security and safety equipment, medical devices and specialty instruments. The Company's primary strategy for entering the OEM market is to pursuedevelop marketing alliances with OEMs that utilize its batteries in their products, commit to cooperative research and development or marketing programs and recommend the Company's 10 products for replacement use in their products. The Company is addressing these markets through direct contact by its sales and technical personnel, use of sales representatives and stocking distributors, manufacturing under private label and promotional activities. The Company's warranty on its products is limited to replacement of the product. The Company seeks to capture a significant market share for its products within its initially targeted OEM markets, which the Company believes, if successful, will result in increased product awareness and sales at the end-user or consumer level. Ultralife UK targets the military and industrial markets through direct sales and the efforts of its distributors. The Company sells its products directly to OEMs in the U.S. and abroad and has contractual arrangements with 42 sales representatives who market the Company's products on a commission basis in particular areas. The Company also distributes its products through distributors in the U.S., Canada, Europe, Middle East, Australia and Asia that purchase batteries from the Company for resale. The Company employs a staff of marketing personnel in the U.S., Germany, and England including a vice president of sales, a marketing manager, a national sales manager, a European sales director, a technical sales manager, and a number of regional sales managers, who are responsible for direct sales, supervising the sales representatives and distributors, and other marketing and distribution activities. The Company operates on a purchase order basis and has a number of long-term sales contracts with customers, including the U.S. Government. The Company plans to expand its marketing activities as part of its strategic plan to increase sales of its batteries by emphasizing sales to those major OEM customers that account for the largest portion of battery usage in their market segment. The Company is addressing these markets through direct contact by its sales and technical personnel, use of sales representatives and stocking distributors, manufacturing under private label and promotional activities. The Company is also selling the 9-volt battery to the consumer market through limited retail distribution. The Company's warranty onUltralife UK targets the industrial markets through direct sales and the efforts of its products is limiteddistributors. In fiscal 1998, one customer Fyrnetics, Inc. accounted for approximately $2 million of sales, which amounted to replacementapproximately 12% of total revenues of the product. -11- In fiscal 1997, no one customer generated revenuesCompany. The Company believes that the loss of Fyrnetic's business would have a material adverse effect on the Company. The Company believes that sales of its 9-volt batteries for smoke alarms typically increase in excessOctober, because October is "Fire Prevention Month", and at the end of 10%. In fiscal 1996, one customer accounted for $1.9 million in revenues, or 12.5%its third quarter as consumers tend to replace their batteries at the end of total revenues. This customer did not generate revenues in excess of 10% during 1995.winter. The Company has not been marketingmarketed its productsadvanced rechargeable batteries for a sufficient period to determine whether these OEM or consumer sales are seasonal, although the Company has experienced slightly slower sales to OEMs in the Company's third fiscal quarter and slightly higher retail sales during the Company's fourth fiscal quarter.seasonal. The Company's sales are executed primarily through purchase orders with scheduled deliveries on a weekly or monthly basis. Those customers with immediate needs are usually satisfied within onlyPrior to calendar 1998, the Company's backlog was not material. Starting early in calendar 1998, orders for the company's 9-volt battery started increasing more rapidly than anticipated. Although the Company started to increase production of these batteries, it was unable to increase production as rapidly as the orders were received. As a few business days. Atresult, the Company built up a backlog of approximately 1,000,000 9-volt batteries by the end of this fiscal year,1998. The Company expects to fill approximately 70% of the fiscal 1998 backlog is not material.by the end of the first quarter of fiscal 1999. Patents, Trade Secrets and Trademarks The Company holds a number of patents in the U.S. and foreign countries, including a number of patents acquired with the purchase of the Dowty Assets, and has several patent applications pending. The Company also pursues foreign patent protection in certain countries. Certain of the Company's patents make automated production more cost-effective and protect important competitive features of the Company's products. However, the Company does not consider its business to be dependent on patent protection. The Company relies on licenses of technology as well as its unpatented proprietary information, know-how and trade secrets to maintain and develop its commercial position. Although the Company seeks to protect its proprietary information, there can be no assurance that others will not either develop independently the same or similar information or obtain access to the Company's proprietary information. In addition, there can be no assurance that the Company would prevail if any challenges to intellectual property rights are asserted by the Company against third parties or that third parties will not successfully assert infringement claims against the Company in the future. The Company believes, however, that its success is less dependent on the legal protection that its patents and other proprietary rights may or will afford than on the knowledge, ability, experience and technological expertise of its employees. The Company holds patents covering 16 inventions in the U.S. and foreign countries, including a number of patents acquired with the purchase of Dowty, and has five patent applications pending. The Company also pursues foreign patent protection in certain countries. The Company's patents protect technology which makes automated production more cost-effective and protect important competitive features of the Company's products. However, the Company does not consider its business to be dependent on patent protection. The Company's research and development in support of its advanced rechargeable battery technology and products areis currently based, in part, on non-exclusive technology transfer 11 agreements. The Company made an initial payment for such technology and is required to make royalty and other payments for products which incorporate the licensed technology. The license continues for the respective unexpired terms of the patent licenses, which range from 2003 to 2010, and continues in perpetuity with respect to other licensed technical information. TheAll of Company's employees in the U.S. and all the Company's employees involved with the Company's technology in England are required to enter into agreements providing for confidentiality and the assignment of rights to inventions made by them while employed by the Company. These agreements also contain certain noncompetition and nonsolicitation provisions effective during the employment term and for a period of one year thereafter. There can be no assurance that these agreements will be enforceable by the Company. Ultralife(R) is a registered trademark of the Company. -12- The Company has recently settled an opposition in the Trademark Trial and Appeal Board brought by a third party in which the third party claims to produce, distribute and sell vehicle batteries, power supplies and related accessories, products and services using the mark Ultralife. Under the settlement in principle, the Company paid $17,500 to the third party. The papers dismissing the opposition were filed with the U.S. Trademark Office and all rights under the mark were assigned to the Company. Manufacturing and Raw Materials The Company manufactures its products from raw materials and component parts that it purchases. The Company believes thathas obtained ISO 9001 certification for its Newark manufacturing facility is one of the most automated and efficient lithium battery production facilitiesmanufacturing operations in the world. Based on the equipment currently at theboth Newark, New York and Abingdon, England. The Company's Newark facility the Company believes that it has the capability of producingcapacity to produce approximately fivenine million 9-volt batteries per year. The Company's production line of advanced rechargeable batteries consists of an automated coating machine and a manual assembly and packaging line. In December 1997 a custom-made automated assembly machine was delivered which has been installed and is being tested. In February 1998, a custom-made automated packaging and sealing machine was delivered which has been installed and is being tested. Pursuant to the Company's agreement with the manufacturer of this production line, the manufacturer is prohibited from manufacturing another production line that replicates 20% or more of the components comprising the production line delivered to the Company. The Company is in the process of ramping up production of its advanced rechargeable batteries while integrating this new equipment to achieve full operation. The Company intends to further expand its production capacity by installing additional automated equipment at its Newark, New York facility and adding automated assembly equipment at its Abingdon, England facility and by establishing a third production facility which is likely to be located in Asia. The manufacturing facility in Abingdon, England is currently being reinstatedhas been repaired following a fire in December 1996. When completed,The Company expects the plant willto be capable of producing an average of 500,000one million high rate lithium batteries per year. The facility also has research and development laboratories as well as areas for the manufacture of sea water batteries and the packaging of multi-cell battery packs. The Company is currently producing batteries at a rate below its maximum capacity in both facilities. The Company utilizes lithium in foil form andas well as other metals and chemicals in manufacturingto manufacture its batteries. Although the Company knows of only three suppliers that extrude lithium into foil and provide such foil in the form required by the Company, it does not anticipate any shortage of lithium foil or any difficulty in obtaining the quantities it requires. Certain materials used in 12 the Company's products are available only from a single source or a limited number of sources. Additionally, the Company may elect to develop relationships with a single or limited number of sources for materials that are otherwise generally available. Although the Company believes that alternative sources are available for each of theto supply materials that could replace materials it uses and that, if necessary, the Company would be able to redesign its products to make use of an alternative, any interruption in its supply from any supplier that serves currently as the Company's sole source could delay product shipments and adversely affect the Company's financial performance and relationships with its customers. Although the Company has experienced interruptions of product deliveries by sole source suppliers, none of such interruptions has had a material effect on the Company. All other raw materials utilized by the Company are readily available from many sources. Research and Development The Company conducts its research and development in both Newark, New York, and Abingdon, England. The Company is directing its research and development efforts toward design optimization of rechargeable batteries, Thin Cells and 3-volt batteries. Each of those batteries has a broad range of potential applications in consumer, industrial and military markets including cellular telephones, portable computers and cameras. No assurance can be given that such efforts will be successful or that the products which result will be marketable. During the years ended June 30, 1998, 1997, and 1996, the Company expended approximately $6,651,000, $3,413,000, and $2,671,000 respectively, on research and development. The Company currently expects that research and development expenditures will moderate as it continues to advance its technology and develop new products, seeks to fund part of its research and development effort on a continuing basis from both government and non-government sources. 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. The Company has successfully completed the initial and second phase of a government-sponsored program to develop new configurations of the Company's BA 5590 thin cell primary battery. The Company was also awarded an additional cost sharing SBIR Phase III contract for the development of the BA 5590 thin cell primary battery. The contract provides that these batteries will be developed and produced in small quantities. The BA 5590 is the most widely used battery power source for the U.S. Army and NATO communications equipment. Battery Safety; Regulatory Matters; Environmental Considerations Certain of the materials utilized in the Company's batteries may pose safety problems if improperly used. The Company has designed its batteries to minimize safety hazards both in manufacturing and use. The Company's rechargeable cells have passed each of the following safety tests: UL 1950, IEC 950, CSA 950 and the Japan Storage Batteries Association Guideline for Safety Evaluation of Lithium Cells. However, the Company's primary battery products incorporate lithium metal, which reacts with water and may cause fires if not handled properly. Fires occurred in August 1991, and August 1997, at the Company's Newark, New York, facility. In July 1994, September 1995, and December 1996, fires also occurred at the Company's Abingdon, England, facility. TheBased upon information the Company received from the police, the December 1996 fire has been attributed to arson. EachHowever, the Company is not aware of any convictions. With the exception of the December 1996 fire, each of these fires temporarily interrupted certain manufacturing operations in a specific area of the facility. Since the 13 December 1996 fire, the Company has been receiving insurance proceeds compensating the Company for loss of its plant and machinery, leasehold improvements, inventory and business interruption. The Company's insurance policy covers the Company for losses associated with business interruption until May 1998. The December 1996 fire caused an interruption in all manufacturing operations of the Abingdon, England facility. The Company believes that it has adequate fire insurance, including business interruption insurance, to protect against fire hazards in its facilities. Since lithium metal reacts with water and water vapor, certain of the Company's manufacturing processes must be performed in a controlled environment with low relative humidity. Each of the Company's facilities contains dry rooms as well as specialized air drying equipment. The Company's 9-volt battery is designed to conform to the dimensional and electrical standards of the American National Standards Institute and the 9-volt battery, and 3-volt battery are recognized under the Underwriters Laboratories, Inc. Component Recognition Program. The transportation of batteries containing lithium metal is regulated by the International Air Transportation Association ("IATA") and, in the U.S., by the U.S. Department of Transportation, as well as by certain foreign regulatory agencies that consider lithium metal a hazardous material. The Company currently ships -13- its products pursuant to IATA regulations and ships the 9-volt battery in accordance with U.S. Department of Transportation regulations. National, state and local regulations impose various environmental controls on the storage, use and disposal of lithium batteries and of certain chemicals used in the manufacture of lithium batteries. Although the Company believes that its 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 the Company or otherwise subject it to future liabilities. Moreover, state and local governments may enact additional restrictions relating to the disposal of lithium batteries used by customers of the Company which could adversely affect the demand for the Company's products. There can be no assurance that additional or modified regulations relating to the storage, use and disposal of chemicals used to manufacture batteries or restricting disposal of batteries will not be imposed. China Joint Venture Program In July 1992,connection with the Company's purchase/lease of its Newark, New York facility, a consulting firm performed a Phase I and II Environmental Site Assessment which revealed the existence of contaminated soil around one of the Company's buildings. The Company has retained an engineering firm which estimated that the cost of remediation should be in the range of $230,000, however, there can be no assurance that this will be the case. In February 1998, the Company entered into several agreements relatedan agreement with a third party which provides that the Company and the third party will retain an environmental consulting firm to conduct a supplemental Phase II investigation to verify the establishmentexistence of the contaminants and further delineate the nature of the environmental concern. The third party agreed to reimburse the Company for fifty percent of the cost associated with remediating the environmental concern. There can be no assurance that the Company will not face claims resulting in substantial liability which would have a manufacturing facility in Changzhou, China, for the production and distribution in and from China of 2/3A lithium primary batteries basedmaterial adverse effect on the Company's technology. Pursuantbusiness, financial condition and results of operations in the period in which such claims are resolved. 14 Competition Competition in the battery industry 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 those of the China Joint Venture Program, Changzhou Ultra Power Battery Co., Ltd., a company organizedCompany. The Company competes against companies producing lithium batteries as well as other primary and rechargeable battery technologies. The Company competes on the basis of design flexibility, performance and reliability. There can be no assurance that the Company's technology and products will not be rendered obsolete by developments in China ("China Battery"), purchased fromcompeting technologies which are currently under development or which may be developed in the Company certain technology, equipment, training and consulting services relatingfuture or that the Company's competitors will not market competing products which obtain market acceptance more rapidly than those of the Company. Although other entities may attempt to take advantage of the design and operationgrowth of the lithium battery market, the lithium battery industry has certain technological and economic barriers to entry. The development of technology, equipment and manufacturing plant. China Battery is required to pay approximately $6.0 million totechniques 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 its experience in battery manufacturing, the Company over the first two years of the agreement, ofhas also developed expertise which approximately $5.6 million had been paid as of July 31, 1996. The Company is currently attemptingit believes would be difficult to collect the balance due under this contract. The Changzhou Ultra Power Battery Co., Ltd. has indicated that these payments will not be made until certain contractual issues have been resolved. Due to the Chinese partner's questionable willingness to pay, management wrote down in fiscal 1997 the entire balance owed the Company as well as the Company's investment. It is unlikely the Chinese partner will become a viable source of supply for the Company.reproduce without substantial time and expense. Employees As of June 30, 1997, Ultralife Batteries, Inc.September 24, 1998, the Company employed 334 persons; 81401 persons: 76 in research and development, 217275 in production and 3650 in sales, administration and management. Of the total, 279340 are employed in the U.S. and 5561 in England. In addition, U.S. operations uses a temporary agency primarily for entry level production workers, on a regular basis. As of September 24, 1998, the Company was under contract for 74 production workers. None of the Company's employees are represented by a labor union. The Company considers its employee relations to be satisfactory. ITEM 2. PROPERTIES The Company leasesoccupies under a lease/purchase agreement approximately 110,000 square feet in a facility located in Newark, New York. The Company leases approximately 30,000 square feet in a facility based in Abingdon, England. At both locations, the Company maintains administrative offices, manufacturing and production facilities, a research and development laboratory, an engineering department and a machine shop. The Company's corporate headquarters are located in the Newark facility. The Company also maintains a sales office in Montvale, New Jersey. The Company believes that its facilities are adequate and suitable for its current manufacturing needs. The leaseCompany entered into a lease/purchase agreement with the local county authority in March 19911998 with Kodakrespect to its 110,000 square foot factory in Newark, New York which provides more favorable terms and reduces the expense for the Newarklease of the facility. The lease also includes an adjacent building to the Company's current facility expiresestimated to encompass approximately 140,000 square feet and approximately 65 acres of property. Pursuant to the lease, the Company has delivered a down payment in 2003the amount of $400,000 and currently has anis obligated to pay the local governmental authority annual rentinstallments in the amount of $519,000, subject$50,000 until December 2001 decreasing to base rate increasesapproximately $28,000 for the period commencing December 2001 and ending December 2007. Upon expiration of 4% annually during each year. -14- the lease in 2007, the Company is entitled to purchase its facility for the purchase price of $1. In connection with the acquisition by the Company's subsidiary, Ultralife UK, of certain 15 assets and liabilities from Dowty Group, PLC in June 1994, it was provided that Dowty would cause the lease for Dowty's UK facility, located in Abingdon, England, to be assigned to the Company's subsidiary, Ultralife UK. This lease ( the "UK Lease")After some delay, this assignment was originally entered into in May 1979 by Pension Funds Securities Limited ( the "Landlord") with a tenant which assigned the lease to an affiliate of Dowty. Originally, this landlord refused to assign the lease to Ultralife UK and release Dowty's affiliate from liability. The building has recently been sold to a new landlord. The new landlord has agreed, subject to a surety from the Company, that he will allow an assignment of the lease. The Company has agreed to provide the surety, subject to resolving certain disputes with Dowty. Discussions are continuing and the Company believes that this matter will be resolved without material detriment to the Company. However, no assurances can be given that this will be the case.accomplished. The term of the UK Leaselease as recently extended continues until May 10, 2004. It currently has an annual rent of $250,000$200,000 and is subject to review every five years based on current real estate market conditions. A review was to occur in May 1994 and has not yet been requested by the Landlord. Based on the real estate market in the Abingdon area, the Company believes that if such review occurs, it will not result in a substantial increase in rent. ITEM 3. LEGAL PROCEEDINGS (a) Material LitigationIn December 1996, Aerospace Energy System, Inc. ("Aerospace") commenced an action in the United States District Court for the District Court of Utah against the Company alleging that it is owed commissions in excess of $50,000 for sales made on behalf of the Company and $100,000 for the Company's alleged breach of its duty of good faith and fair dealings. The Company believes that Aerospace is not the party that made such sales for which it claims it is owed commissions. Although Aerospace has been deposed it has not articulated any grounds for its claim of $100,000 for the Company's alleged breach of its duty of good faith and fair dealing. In May 1997, William Boyd, the principal of Aerospace, and Leland J. Coleman commenced an action against the Company and Loeb Partners Corporation ("Loeb"), an investment firm, in the U.S. District Court for the Southern District Court of New York alleging that they had entered into a contract with Loeb to arrange for the acquisition of Dowty and that the Company tortiously interfered with their contract and business opportunity. The Company believes the claim against it, for $25 million, is without merit. In September 1997, the Companya legal action was suedcommenced by Eveready Battery Company, Inc. in the Northern District Court of Ohio, Eastern Division, alleging infringement of two patents, U.S. Patent No. 4,246,253 and U.S. Patent No. 4,312,930. The first of these patents has fourhad six months before it expiresexpired and the second approximately one year.ten months. The Company cross-claimed against the corporation that licensed the technology at issue to the Company. Damages, if any, are believed to be de minimis and the possibility of an injunction,The license concerned certain technology incorporated in the opinionCompany's rechargeable batteries. In May of counsel, is extremely remote given1998, the substantial questionaction was settled. Terms of patent validity, infringementthe settlement included purchase of the licensed technology by the Company from Eveready for $350,000 and dismissal of the short period the patents are viable. In July 1997, a former sales representative commenced action against the corporation that licensed the technology at issue to the Company. In August 1998, the Company, its Directors, certain of its officers, and an investment firmcertain underwriters were named as defendants in a complaint filed in the United States District Court for the District of New Jersey by a stockholder, purportedly on behalf of a class of stockholders, alleging tortious interferencethat defendants, during the period April 30, 1998 through June 12, 1998, violated various provisions of contractthe federal securities laws in connection with an offering of 2,500,000 shares of the Company's Dowty acquisition.common stock. The complaint alleges that the Company's offering documents were materially incomplete, and as a result misleading, and that the purported class members purchased the Company's common stock at artificially inflated prices and were damaged thereby. The Company believes that the claim, for $25 Million,litigation is without merit. In March 1997, shortly after the Company obtained a temporary restraining order from the New York State Supreme Court against Valence Technologies (Valence)merit and Richard Thompson (a former Company employee, now employed by Valance), Valence served the Company with a complaint that it had filed in January 1997, in the District Court of Clark County, Nevada. Valence's complaint seeks a declaratory judgment that the Invention, Trade Secret and Covenant Not to Compete Agreement executed by Thompson and the Company in March 1994, is unenforceable. Valence's complaint also alleges causes of action for misappropriation of trade secrets, unfair competition and tortious interference with contractual relations arising out of the Company's hiring more than two years before of a former employee of Valence. The complaint seeks compensatory and punitive damages in unspecified amounts, attorneys' fees, costs and a permanent injunction. In April 1997, the Company moved to dismiss the complaint on the grounds of lack of personal jurisdiction. The motion was fully briefed, and the parties are awaiting an argument date before the Nevada court. No discovery or any other activity has taken place in the case. The Company intends to defend it vigorously. This litigation has just been commenced and the case vigorously. -15-amount of alleged damages, if any, cannot be quantified, nor can the outcome of this litigation be predicted. Accordingly, management cannot determine whether the ultimate resolution of this litigation could have a material adverse effect on the Company's financial position and results of operations. 16 (b) Terminated Legal Proceedings No legal proceedings were terminated during the fiscal quarter ended June 30, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYSECURITIES HOLDERS DuringOn June 25, 1998 the fourth quarterCompany held a special shareholder's meeting to increase the number of shares of common stock authorized from 12,000,000 shares to 20,000,000. Shareholders approved the fiscal year covered by this Report, no matters were submitted to a vote of security holders through the solicitation of proxies or otherwise. -16-proposed increase 8,722,405 for, 28,954 against, and 187,938 abstained. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's Common Stock is included for quotation on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "ULBI." The following table sets forth the quarterly high and low sales prices of the Company's Common Stock during the Company's last two fiscal years: Sales Prices High Low ---- --- Fiscal Year 1996 Quarter ended September 30, 1995..................... $24.75 $14.75 Quarter ended December 31, 1995...................... 24.50 16.75 Quarter ended March 31, 1996......................... 24.00 10.50 Quarter ended June 30, 1996.......................... 16.25 12.38 Fiscal Year 1997 Quarter ended September 30, 1996..................... $15.25 $10.75 Quarter ended December 31, 1996...................... 13.75 7.50 Quarter ended March 31, 1997......................... 12.25 7.88 Quarter ended June 30, 1997..........................1997 ......................... 13.00 7.38 OnFiscal Year 1998 Quarter ended September 19, 1997, the Company's common stock closing price was $ 19.25 per share.30, 1997..................... $20.38 $10.38 Quarter ended December 31, 1997...................... 20.38 13.13 Quarter ended March 31, 1998......................... 16.88 14.00 Quarter ended June 30, 1998.......................... 15.25 7.50 Holders As of September 19, 1997,24, 1998, there were 177153 holders of record of the Company's Common Stock. Based upon conversations with brokers, management of the Company believes that there are significantly more than 177300 beneficial holders of the Company's Common Stock. Dividends The Company has never declared or paid any cash dividend on its capital stock. The Company intends to retain earnings, if any, to finance future operations and expansion and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future payment of dividends will depend upon the financial condition, capital requirements and earnings of the Company, as well as upon other factors that the Board of Directors may deem relevant. -17- ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (Dollars in Thousands, Except Per Share Amounts) Statement of Operations Data:
Year Ended June 30, ------------------------------------------------------------------------------------------------------------------------------------ 1994 1995 1996 1997 1996 1995 1994 1993 ---- ---- ---- ---- ----1998 -------- -------- -------- -------- -------- Revenue:Revenues: Battery sales $ 14,765,3642,890 $ 12,623,64611,213 $ 11,212,64312,623 $ 2,889,19314,765 $ 1,816,69614,063 Technology contracts 1,175,754 2,477,887 3,430,640 2,424,356 2,073,097 ----------------------------------------------------------------------------2,424 3,430 2,478 1,176 2,328 -------------------------------------------------------- Total Revenue 15,941,118 15,101,533 14,643,283 5,313,549 3,889,793Revenues 5,314 14,643 15,101 15,941 16,391 Cost of products sold: Battery costs 13,880,321 12,317,486 10,900,049 3,167,653 2,511,8593,168 10,900 12,317 13,880 12,558 Technology contracts 710,937 936,053 1,873,892 1,781,043 593,518 ----------------------------------------------------------------------------1,781 3,017 1,954 1,238 1,964 -------------------------------------------------------- Total cost of products sold 14,591,258 13,253,539 12,773,941 4,948,696 3,105,3774,949 13,917 14,271 15,118 14,522 -------------------------------------------------------- Gross profit 1,349,860 1,847,994 1,869,342 364,853 784,416365 726 830 823 1,869 Research and development expenses 1,481 1,542 2,671 3,413 6,651 Selling, general and administrative expenses 5,217,441 4,993,644 4,262,545 2,879,085 1,527,646 Research and development expenses 3,939,786 3,688,687 2,685,313 1,481,211 658,1392,879 4,263 4,993 5,218 5,790 Loss (gain) on fires (55,835) 351,902-- -- 352 (56) (2,697) Loss on China development program 805,296 ---------------------------------------------------------------------------- Loss before interest income, other and taxes (8,556,828) (7,186,239) (5,078,516) (3,995,443) (1,401,369)-- -- -- 805 -- Interest income 1,351,646 2,016,831 1,721,682 835,585 350,085836 1,722 2,017 1,352 888 Gain on sale of securities 1,930,056 Other income(expense), net (41,172) (34,844) 22,498 237,648 ------------------------------------------------------------------------------ -- 1,930 -- -- Miscellaneous 22 (35) -- (41) (33) --------------------------------------------------------- Loss before income taxes (7,246,354) (3,239,352) (3,391,678) (3,137,360) (813,636)(3,137) (3,392) (3,239) (7,246) (7,020) Income taxes ------------------------------------------------------------------------------ -- -- -- -- --------------------------------------------------------- Net loss $ (7,246,354)(3,137) $ (3,239,352)(3,392) $ (3,391,678)(3,239) $ (3,137,360)(7,246) $ (813,636) ============================================================================(7,020) ========================================================= Net loss per common share $ (0.91)(0.57) $ (0.50) $ (0.41) $ (0.50)(0.91) $ (0.57) $ (0.20) ============================================================================(0.84) ========================================================= Weighted average number of shares outstanding 5,498,749 6,747,374 7,814,302 7,923,022 7,814,302 6,747,374 5,498,749 4,032,040 ============================================================================8,338,374 ========================================================= Balance Sheet Data: As of June 30, -------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Cash and available-for-sale securities $ 21,928 $ 27,398 $ 35,069 $ 22,158 $ 35,688 Working capital 23,020 32,705 44,666 27,206 37,745 Total assets 30,078 6,259 60,633 51,395 75,827 Total long-term debt -- -- -- -- 197 Stockholders' equity 27,554 57,957 56,435 46,763 68,586
Balance Sheet Data: June 30, --------------------------------- 1997 1996 ---- ---- Cash and available-for-sale securities $ 22,157,926 $ 35,069,028 Working capital 27,205,839 44,666,186 Total assets 51,395,103 60,632,929 Stockholders' equity $ 46,762,881 $ 56,434,766 -18-18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS. The discussion and analysis below, and throughout this report, contains forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Actual results could differ materially from those projected or suggested in the forward-looking statements. This Management's DiscussionThe following discussions and Analysis of Financial Condition and Results of Operationsanalysis should be read in conjunction with the financial statementsFinancial Statements and notesNotes thereto appearing elsewhere in this report. General The Company develops, manufactures and markets primary and rechargeable lithium batteries for use in a wide array of applications. Recently, the Company has been focusing on the commercialization of its advanced rechargeable batteries which are based on its proprietary lithium-ion solid-polymer technology and are integrated into consumer electronic applications such as portable computers and cellular telephones. The Company believes that its advanced rechargeable batteries are the only solid-polymer lithium batteries that have been manufactured and sold for commercial use. The Company intends to increase its production capacity of advanced rechargeable batteries in order to supply OEMs and the after-market for consumer replacement of batteries in electronic devices. The Company was formed in December 1990. OnIn March 12, 1991, the Company acquired certain technology and assets from Kodak relating to the 9-volt lithium-manganese dioxide battery. The Company is currently producing 9, 6 and 3-volt lithium batteriesthen expanded its operation by its acquisition by its subsidiary, Ultralife Batteries (UK) Ltd., in commercial quantities at its Newark, New York facility. The Company also produces and markets high rate lithium batteries and seawater batteries at its U.K. subsidiaryJune 1994 of certain assets of Dowty in Abingdon, England. The customer base of Ultralife UK was further expanded by the acquisition of assets of Hoppecke in July 1994. Since its inception,revenues and expenses of Ultralife UK are paid in British pounds sterling, the Company's results of operations are not materially affected by changes in currency fluctuations. In December 1996, a fire occurred at the Company's Abingdon, England facility, which caused extensive damage to the manufacturing facilities. Since the December 1996 fire, the Company has concentrated significant resources towardbeen receiving insurance proceeds compensating the Company for loss of its plant and machinery, leasehold improvements, inventory and business interruption. Sales of high rate and sea water batteries have been significantly reduced over the past 18 months, however, the Company's insurance policy covers losses associated with business interruption until May 1998. If insurance proceeds relate to reimbursement for destroyed assets, the proceeds are reflected as "gain on fire" on the statement of operations. If the insurance proceeds relate to reimbursement of excess costs of working (such as rental of temporary space, telephones, vehicles/transportation to move to the temporary site, et cetera), such proceeds are recorded as a reduction to selling, general and administrative expenses. If the insurance proceeds relate to reimbursement for normal overhead costs related to lower production volumes resulting from the fires, such proceeds are recorded as an offset to cost of sales. Insurance proceeds received by the Company may exceed recorded losses. The Company has incurred net operating losses primarily as a result of funding research and development activities, primarily relatedand to its solid state lithium-ion rechargeable battery in recent years. The Company has shipped prototypes of its rechargeable batteries for testing to original equipment manufacturersa lesser extent manufacturing and others. In addition to the Company's preliminary manual production line,general and administrative costs. To date, the Company has developeddevoted a substantial portion of its resources to the research and implemented a semi-automatic flexible production line for initial production runsdevelopment of its products and medium volume programs. High volume rechargeable battery manufacturing equipment is currently being tested and installed in Newark, NY.technology, particularly its proprietary lithium-ion solid-polymer technology. The Company believes thatexpects its operating expenses to increase as it expands production activities. The Company's results of operations in prior periods may not be indicative of results in future periods. Future operating results may be affected by a wide range of factors and may fluctuatevary significantly from periodquarter to period. The Company reportsquarter depending upon the resultsnumber of two business segments, battery sales and technology contracts. Technology contracts include technological and research and development services to government agencies and other third parties. In fiscal 1997, 1996 and 1995, revenue fromorders received, technology contracts represented approximately 7%, 16%entered into and 23%, respectively,the pace of the total revenues. The Company expects revenues from technology contracts as a percentage of total revenues to continue to decrease as battery sales increase. Certain of its technology contracts, including those with the U.S. government absorb certain of19 the Company's research and development costs. The Company, while segmenting revenues for technology contracts, does not allocate its' general research and development costs to specific technology contracts. Accordingly, operating income related to the technology contracts does not reflect the allocation of these expenses. The Company believes that the relatively moderate rate of inflation in recent years has not had a significant impact on the Company's revenues or profitability. -19- Net Salesactivities. Year Ended June 30, (in thousands) Total Revenues by Business Segment: 1996 1997 1996 1995 Business Segment ---- ---- ---- - ----------------1998 -------- -------- -------- Battery sales $ 14,765,00012,623 $ 12,624,00014,765 $ 11,213,00014,063 Technology contracts 1,176,000 2,478,000 3,430,000 ------------ ------------ ------------2,478 1,176 2,328 Total revenuerevenues $ 15,941,00015,101 $ 15,102,00015,941 $ 14,643,00016,391 Net Income (Loss) by Business Segment - ----------------Segment: Batteries $ (5,261,000) $ (5,010,000) $ (3,347,000)($ 5,010) ($ 5,261) ($ 4,602) Technology contracts (62,000) 524,000 413,000524 (62) 220 All Other (1,923,000) 1,247,000 (458,000) ------------ ------------ ------------1,247 (1,923) (2,638) Net loss $ (7,246,000) $ (3,239,000) $ (3,392,000)($ 3,239) ($ 7,246) ($ 7,020) Results of Operations Fiscal YearsYear Ended June 30, 1998 Compared With the Fiscal Year Ended June 30, 1997 and 1996Revenues Total revenues of the company increased by $839,000 or 6% during$450,000 from $15,941,000 for the year ended June 30, 1997 (fiscal 1997) to $15,941,000$16,391,000 for the year ended June 30, 1998. Battery sales decreased $702,000, or approximately 5% from $15,102,000$14,765,000 for the year ended June 30, 1997 to $14,063,000 for the year ended June 30, 1998. The decline in battery sales was primarily due to lower sales of high rate batteries by Ultralife UK as a result of suspended operations at the Company's Abingdon, England facility due to a fire which occurred in December 1996. The completion of the U. S. Army Contract in December 1997 for BA-5372 primary batteries also contributed to the lower sales in fiscal 1998. Substantially offsetting these declines were greater sales of 9-Volt lithium batteries which increased 32% over the prior year. Technology contract revenues increased $1,152,000, or approximately 98%, from $1,176,000 for the year ended June 30, 1997 to $2,328,000 for the year ended June 30, 1998. The increase in technology contract revenues resulted principally from development funds arising from the Company's agreement with Mitsubishi for the development of rechargeable batteries for a new generation notebook computer. In addition, work on the Company's Phase III Small Business Innovation Research (SBIR) Department of Defense contract for enhanced BA-5590 batteries further contributed to higher technology contract revenues. Cost of Products Sold Cost of products sold decreased $596,000 from $15,118,000 for the year ended June 30, 1997 to $14,522,000 for the year ended June 30, 1998. Cost of products sold as a percentage of revenue decreased from approximately 95% to 89% for the year ended June 30, 1998. Cost of batteries sold decreased $1,322,000 from $13,880,000 for the year ended June 30, 1997 to $12,558,000 for the year ended June 30, 1998. The cost of batteries sold as a percentage of revenues was principally the result of increased production volumes of 9-volt batteries. During the fourth 20 quarter the Company attempted to further increase its production rates for 9-volt batteries to respond to an increase in customer orders. While the Company was successful in achieving a moderate increase over the previous quarter, the Company experienced higher production costs along with lower yields. Corrective actions are being implemented to improve efficiencies at higher production rates, which the Company believes will improve yields, raise production levels and lower costs as a percentage of sales over the next several quarters. Cost of products sold includes $2,011,000 of insurance proceeds received by Ultralife UK that offset unabsorbed overhead expenses resulting from lower production volumes associated with suspended manufacturing operations following the December 1996 fire. Technology contracts cost of sales increased $726,000 from $1,238,000 for the year ended June 30, 1997 to $1,964,000 for the year ended June 30, 1998. Technology contracts cost of sales as a percentage of revenue decreased from 105% to 84% for the year ended June 30, 1998. The decrease in technology contract cost of sales as a percentage of revenue reflects a greater number of contracts to absorb overhead expenses. Operating and Other Expenses Operating and other expenses increased $364,000 from $9,380,000 for the year ended June 30, 1997 to $9,744,000 for the year ended June 30, 1998. Of the Company's operating and other expenses, research and development expenses increased $3,238,000, or 95%, from $3,413,000 for the year ended June 30, 1997 to $6,651,000 for the year ended June 30, 1998. Research and development expenses increased as a result of the Company's efforts to improve its production processes and performance of its advanced rechargeable batteries. Selling, general and administration expenses increased $572,000 from $5,218,000 for the year ended June 30, 1997 to $5,790,000 for the year ended June 30, 1998. The increase in selling, general and administration expenses are primarily attributable to increased personnel to support the Company's expansion plans, legal costs to resolve various claims, higher compensation, and associated personnel expenses. Selling and administrative expenses also include insurance proceeds of a $663,000 offsetting incremental costs of operations corresponding to replacement facility rental, transportation costs and other such costs relating to the December 1996 fire at Ultralife UK. Total operating and other expenses also decreased by $2,697,000 as a result of the receipt of insurance proceeds to replace assets previously written off due to fires at Ultralife UK. Interest Income Interest income decreased $464,000 from $1,352,000 for the year ended June 30, 1997 to $888,000 for the year ended June 30, 1998. The decrease of interest income is the result of lower average balances invested since the Company used cash and investments to fund operations and capital additions primarily for high volume production equipment for rechargeable batteries. Net Losses Net losses decreased $226,000 from $7,246,000, or $0.91 per share, for the year ended June 30, 1997 to $7,020,000, or $0.84 per share, for the year ended June 30, 1998, primarily as a result of the reasons described above. 21 Year Ended June 30, 1997 Compared with the Year Ended June 30, 1996 Revenues Total revenues increased by $840,000, or approximately 6%, from $15,101,000 for the year ended June 30, 1996 (fiscal 1996).to $15,941,000 for the year ended June 30, 1997. This was principally due to an increase of battery sales in the amount of $2,141,000$2,142,000, or approximately 17%, from $12,623,000 for the year ended June 30, 1996 to $14,765,000 during fiscal 1997 from $12,624,000 for fiscal 1996.the year ended June 30, 1997. This increase in battery revenues was generated by both the U.S. and the U.K. operations. In the U.S., revenues from the Company's BA-5372 battery increased $2,061,000 as contract extensions were received from the U.S. Army which supported increasing production rates throughout the year. This was partially offset by reduced levels of 9-volt battery sales towhich declined $1,351,000 primarily in the smoke detector market. In the U.K., additional sales to the Ministry of Defense wereincreased $1,431,000 reflecting increased orders for high energy batteries. This increase was partially offset by decreased revenues from the high rate lithium and seawater batteries. These reduced revenuesbatteries in the U.K. were primarily caused by limitationssecond half of the manufacturing facilityyear due to a fire in December 1996.1996 at the Abingdon, England facility. Revenues generated from technology contracts decreased $1,302,000 from $2,478,000 infor the year ended June 30, 1996 to $1,176,000 for the year ended June 30, 1997. The decrease in 1997. Thisrevenues from technology contracts is primarily attributable to the result of completion of certain contracts and delays in receipt of new development programs as the Company concentrates its'focused its efforts on the implementation of the Company's production line of advanced rechargeable battery manufacturing line. The costbatteries. Cost of Products Sold Cost of products sold increased $847,000, from $14,271,000 for the year ended June 30, 1996 to $14,591,000$15,118,000 for fiscal 1997 from $13,254,000 for fiscal 1996. As a ratio to revenues, the cost of products sold was 92% for fiscal 1997 and 88% for fiscal 1996.year ended June 30, 1997. Cost of products sold related to battery salesas a percentage of revenues remained at approximately 95% during the fiscal year ended June 30, 1996 and June 30, 1997. Cost of batteries sold increased $1,563,000 from $12,317,000 for the year ended June 30, 1996 to $13,880,000 or 94%for the year ended June 30, 1997. Cost of batteries sold as a percentage of revenues decreased from approximately 98% for fiscal 1997 comparedthe year ended June 30, 1996 to $12,317,000 or 98%approximately 94% for the year ended June 30, 1997. The decrease in cost of batteries sold as a percentage of revenues for fiscal 1996. Net costreflects the receipt of products sold$906,000 from insurance proceeds as a result of fires in September 1995 and December 1996 at the U.S.Company's Abingdon, England facility. Partially offsetting this recovery of costs associated with fires were increased slightly. Higher operating efficiencies were realized in manufacturingcosts of batteries attributable to the BA-5372 battery. However, during fiscal 1997, the Company reducedCompany's decision to temporarily reduce manufacturing levels of the 9-volt batteries to align inventory with sales volume which resulted in increased unabsorbed overhead expenses. Thevolume. Technology cost of sales decreased $716,000 from $1,954,000 for the year ended June 30, 1996 to $1,238,000 for the year ended June 30, 1997 reflecting lower production volume during fiscal 1997 reduced net inventory by more than $3,135,000 or 37% compared to 1996. During fiscal 1997, the Company received funds from the insurance carriers which were reimbursement for excess costs generatedcontract volumes. Cost of technology contracts as a resultpercentage of revenues increased from approximately 79% for the fire in December, 1996. The funds received were applied primarilyyear ended June 30, 1996 to approximately 105% for the costyear ended June 30, 1997. This increase reflects greater direct costs of products sold infulfilling contracts performed during the U.K. Technology contracts cost of products sold experienced a decrease of $225,000 or 24% duringyear ended June 30, 1997 compared to 1996. -20- than for the prior year. Operating and Other Expenses Operating and other expenses increased $1,364,000, from $8,016,000 for the year ended June 30, 1996 to $9,907,000$9,380,000 for fiscal 1997 compared to $9,034,000 for fiscal 1996.the year ended June 30, 1997. Selling, general and administrationadministrative expenses increased $225,000, from $4,993,000 in the year ended June 30, 1996 to $5,217,000$5,218,000 in the year ended June 30, 1997 attributable to increased support provided for fiscal 1997 from $4,994,000 for fiscal 1996; an increase of $223,000 or 4%. The Company anticipates that selling expenses will continue to increase in order to support new products planned to be introduced during fiscal 1998introduced. The year ended June 30, 1997 included the receipt of insurance proceeds amounting to $138,000 to offset costs relating to the September 1995 and afterwards.December 1996 fires. Research and 22 development expenses increased by $251,000 or 7%$742,000, from $2,671,000 for the year ended June 30, 1996 to $3,940,000$3,413,000 for fiscal 1997 compared to $3,689,000 for fiscal 1996.the year ended June 30, 1997. This increase is due primarily to increasingincreased expenditures incurredrelated to supportthe development of the rechargeable battery program. Also included in total operating and other expenses was $56,000 of payments received in excess of the loss provision related to the fires which occurred in the U.K.Abingdon, England factory. During the three months ended March 31, 1997, a reserve of $137,000 was established for the December 1996 fire and during the year ended June 30, 1996 the Company provided a reserve of $352,000 for losses related to fires.the September 1995 fire. Generally, the Company records expenses related to the fires as they are incurred and records the offsetting insurance proceeds only when received. Additionally, the Company wrote-off its investment in theOperating and other expenses also increased as a result of a write-off of a China development project and related receivables due under provisions of various agreements during the third quarter of fiscalyear ended June 30, 1997. The total cost of these write-offs was $805,000. The original purpose of the Company's participation in thea China development program was to make available thea 2/3A size lithium battery at a competitive cost. Other sources for this battery have since been identified and are supplying the Company's requirements.identified. Interest Income Interest income declined bydecreased $665,000, or 33% to $1,352,000 for fiscal 1997 from $2,017,000 for fiscalthe year ended June 30, 1996 to $1,352,000 the year ended June 30, 1997, due to a lower average balance invested as the Company has used cash and investments to fund the capital equipment improvements and operations during the year ended June 30, 1997. Net Loss Net loss increased $4,007,000, or $0.50 per common share, increased to $0.91 in fiscal 1997, based on 7,923,022 weighted average number of shares outstanding, from a net loss of $3,239,000, or $0.41 per share, for fiscalin the year ended June 30, 1996 with 7,814,302 weighted average numberto $7,246,000, or $0.91 per share, in the year ended June 30, 1997, primarily as a result of shares outstanding. Net revenue increased 6% in 1997 compared to 1996. However, an unfavorable mix with less revenue generated from technology contracts decreased the gross profit by $498,000. Selling, general and administrative expenses combined with research and development increased by 5% in order to continue support forreasons described above. During the Company's new solid polymer lithium-ion rechargeable battery. Also, during fiscalyear ended June 30, 1996, the Company recordedrealized a gain of $1,930,000, or $0.25 per share, as the result of a sale of 123,200 shares of common stock of Intermagnetics General Corporation ("IGC"). If the Company would not have realized a gain from the sale of securities in the amountshares of $1,931,000. Fiscal Year Ended June 30, 1996 and 1995 Total revenuesIGC, net loss would have increased by $459,000$2,077,000, or 3% to $15,102,000 during$0.25 per share, from $5,169,000 for the year ended June 30, 1996 (fiscal 1996) from $14,643,000 for fiscal 1995. Sales of batteries increased to $12,624,000 during fiscal 1996 from $11,213,000 during fiscal 1995, an increase of 13% or $1,411,000. Revenues from technology contracts decreased by $953,000 or 28% to $2,478,000 for fiscal 1996 from $3,431,000 for fiscal 1995. The increased battery revenues were generated by the U.S. operations where sales of primary batteries rose 69% reflecting a substantial increase in the number of batteries sold to both existing and new customers. In the U.K. operations, battery sales declined 36% primarily as a result of a fire that occurred during the year. Technology contract revenues declined as the Company's contract relating to the establishment of a battery manufacturing facility in The Peoples Republic of China was in its final stage. -21- The cost of products sold increased to $13,254,000 for fiscal 1996 from $12,774,000, an increase of $480,000 or 4%. As a ratio to revenues, the cost of products sold was 88% for fiscal 1996 and 87% for fiscal 1995. Cost of products sold related to battery sales increased to $12,317,000 or 98% of revenues for fiscal 1996 compared to $10,900,000 or 97% for fiscal 1995. Manufacturing operations in the U.S. improved slightly in fiscal 1996 compared to the prior year. This net improvement occurred despite a production slowdown in the fourth fiscal quarter caused by reduced levels of battery sales. In the U.K., the cost of batteries sold increased substantially during fiscal 1996 when compared to 1995 primarily due to a fire during the year. Technology contract cost of products sold decreased to $936,000 or 38% of revenues during fiscal 1996 from $1,873,892 or 55% of revenues$7,246,000 for the same period of the prior year. The increased gross margin during fiscal 1996 reflects payments received for development fundingyear ended June 30, 1997. Liquidity and extension of the period of exclusivity until the end of calendar 1998 from one of the world's leading cellular telephone manufacturers. These payments had no associated cost of products sold. Total operating expenses increased to $9,034,000 for fiscal 1996 from $6,948,000 for the same period of the prior year, an increase of $2,086,000 or 30%. Of this total, selling, general and administrative expenses increased $731,000 or 17% due to additional costs to promote battery sales. Research and development increased to $3,689,000 during fiscal 1996 from $2,685,000 for fiscal 1995, an increase of $1,004,000 or 37%. This increased cost is associated with continuing support of the Company's rechargeable battery program. The Company has expended funds to continue development of the lithium-ion solid-state rechargeable battery in anticipation of market introduction during fiscal 1997. Net interest income increased to $2,017,000 during fiscal 1996 from $1,722,000 for fiscal 1995 due to increasing interest rates during the twelve-month period. The Company realized a gain on the sale of 123,000 shares of Intermagnetics General Corporation (IMG) common stock it sold during the year.Capital Resources As of SeptemberJune 30, 1996,1998, cash equivalents and available for sale securities totalled $35,688,000. On May 6, 1998 the Company owns 339,016completed a secondary public offering for 2,500,000 shares of common stock at a price of IMG. This includes a 2% stock dividend declared to IMG shareholders of record as of August 1, 1996.$12.50 per share. Net proceeds were $28,900,000 after deducting underwriting discounts and commissions and offering expenses. During fiscal 1996, the Company provided a reserve against possible uninsured expenses related to the fire that occurred at the U.K. operations during fiscal 1996. Net loss per common share decreased during fiscal 1996 to $0.41 based on 7,814,301 weighted average number of shares outstanding from $0.50 per share based on 6,747,374 weighted average number of shares outstanding during fiscal 1995. The modest increase in revenues, 3%, was offset by additional cost of products sold so that gross profit for fiscal 1996 was unchanged from 1995. Additional operating expenses, primarily research and development to support the Company's developmental lithium-ion solid-state rechargeable battery resulted in an increased loss from operations during fiscal 1996 when compared to 1995. This increased loss from operations was more than offset by the realized gain from the sale of securities and additional interest income. As a result, net loss for fiscal 1996 was $3,239,000 compared to $3,392,000 for fiscal 1995. -22- Liquidity and Capital Resources During fiscal 1997,year ended June 30, 1998, the Company used $1,572,000$2,716,000 of cash in operating activities as compared to $6,723,000$1,572,000 for the year ended June 30, 1997. The increase in fiscal 1996. The substantial decrease in the cash used in operations wasis the net result of the net loss for the year, reduced provisions for doubtful accounts and inventory obsolescence, and increased trade receivables and prepaid and other current assets offset by lower inventories, higher accounts payables and increased depreciation and authorization expenses. The increase in trade receivables primarily reflects higher fourth quarter sales as days sales in trade receivables were 70 days at June 30, 1998 as compared to 69 days at June 30, 1997. The decrease in inventories at June 30, 1998 is the result of decreasescontinued improvement in inventories, accounts receivable and earned contracts receivable offset by increased net loss for fiscal 1996 and decreased accounts payable and accrued liabilities.the turnover of battery inventories. Months cost of sales in inventory at June 30, 1998 was 3.7 months as compared to 4.6 months at June 30, 1997. In fiscal 1997,the year ended June 30, 1998, the Company used $8,913,000$12,596,000 to purchase plant, property and equipment. Of this amount $4,266,000 related to the 23 acquisition of assets for the reinstatement of Ultralife UK's manufacturing facility following the fire in December 1996, $676,000 relates to the acquisition of the Company's Newark, New York facilities and the balance is substantially machinery and equipment primarily for the Company's rechargeable battery production line. The Company has long term debt of $197,000 relating to the capital lease obligation for the Company's Newark, New York offices and manufacturing facilities. A continuationline of substantialcredit in the amount of $330,000 is maintained by Ultralife UK for short term working capital expenditures as well as researchrequirements. However, with sales growth and development expenses is anticipated asexpansion, the Company moves toward mass productionwill explore normal working capital lines of credit. The Company believes that its present cash position and continued improvement of rechargeable batteries. As ofcash flows from operations will be sufficient to satisfy the Company's estimated cash requirements for at least 12 months. Newly Issued Accounting Standards In June 30, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of "comprehensive income" and its components in a set of financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt SFAS No. 130 in its 1999 financial statements. The Company has not yet determined the impact of this standard on its financial statements. Also in excessJune 1997, Statement of $22 millionFinancial Accounting Standards No. 131, "Disclosures about Segments of cash, cash equivalentsan Enterprise and available-for-sale securities.Related Information," was issued. SFAS No. 131 is effective for periods beginning after December 15, 1997. SFAS No. 131 requires that a public entity report financial and descriptive information about its reportable segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's currentCompany will adopt SFAS No. 130 in its 1999 financial statements. The Company has not yet determined the impact of this standard on its financial statements. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not yet determined the impact of this standard on its financial statements. Year 2000 Compliance Many existing computer programs utilized globally use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the year 2000. This year 2000 issue is adequatebelieved to maintainaffect virtually all companies and organizations, including the Company. The Company has undertaken a program to address its operations through fiscal 1998. -23-exposure to year 2000 issues. The Company plans to install new year 2000 compliant manufacturing and accounting software and believes that its implementation plan will be 24 successful. Although there can be no assurance with respect thereto, the Company does not expect that the year 2000 issues (including the cost of the Company's compliance program as currently estimated) will have material adverse effect on the Company's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and filed as part of this Report are theThe financial statements and supplementary dataschedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Item 14.page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On and effective as of April 16,1996, Ultralife Batteries, Inc. (the "Company") informed Ernst & Young LLP ("Ernst & Young"), independent certified public accountants, that the Board of Directors of the Company (including the Audit Committee thereof) had decided not to continue the engagement of Ernst & Young, and had approved the engagement of Arthur Andersen LLP ("Arthur Andersen") as the Company's new independent certified public accountants to audit the Company's financial statements (beginning with the fiscal year ending June 30, 1996) and to assist the Company in the preparation of its annual and other reports under the Securities Exchange Act of 1934, as amended. Ernst & Young's reports on the financial statements for the fiscal year of the Company ended June 30, 1995 ("Applicable Fiscal Year"), did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the Applicable Fiscal Year and during the interim period from June 30, 1995 through April 16, 1996 (the "Interim Period"), there were no disagreements between the Company and Ernst & Young on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to the matter in their report. There were no reportable events, as that term is described in Item 304(a)(1)(iv) of Regulation S-K. In connection with the filing by the Company of a Report on Form 8-K, dated April 16, 1996, Ernst & Young submitted a letter addressed to the Securities and Exchange Commission in which it agreed with the Company's foregoing statements. As stated above, the Company has engaged, effective as of April 16, 1996, Arthur Andersen as its new principal independent certified public accountant to audit the Company's financial statements (beginning with the fiscal year ending June 30, 1996) and to assist in the preparation of annual, quarterly and other reports. Prior to such engagement, the Company (including any of its representatives or agents) did not consult with representatives of Arthur Andersen regarding the application of accounting principles to a specified transaction (either completed or proposed); or the type of audit opinion that might be rendered on the Company's financial statements. -24- None ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section entitled "Directors and Executive Officers of the Registrant" in the Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. -25-Incorporated by reference from the information captioned "Certain Transactions" included in the Proxy Statement. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. Financial Statements Attached hereto and filed as part of this report are the financial statements and schedules listed below: Ultralife Batteries, Inc. and Subsidiary Page - ---------------------------------------- ---- Report of Independent Auditors,Public Accountants, Arthur Andersen LLP.......................LLP............. F-1 Report of Independent Auditors, Ernst & Young LLP......................... F-2 Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1997 and 1996.......................................................... F-31998.......................................................... F-2 Consolidated Statements of Operations for the years ended June 30, 1996, 1997 1996 and 1995............................... F-51998............................... F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1996, 1997 1996 and 1995............................................................... F-61998............................................................... F-4 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 1996 and 1995............................... F-71998............................... F-5 Notes to Consolidated Financial Statements................................ F-8F-6 26 2. Financial Statement Schedules Schedule II, Valuation and Qualifying Accounts Schedules other than those listed above have been omitted as they are either not required, are not applicable, or the information called for is shown in the financial statements or notes thereto. (b) Reports on Form 8-K None.Effective June 11, 1998, the Company filed form 8-K reporting that the Company issued a press release reporting that the Company's fourth quarter financial results would not meet the Company' expectations. (c) Exhibits. The following Exhibits are filed as a part of this Report:
Exhibit Filed Index Description of Document Herewith Incorporated By Reference to: ----- ----------------------- -------- ----------------------------- 3.1 Restated Certificate of Incorporation Exhibit 3.1 of Registration Incorporation Statement, File No. 33-54470 ("the 1992 Registration Statement") 3.2 By-laws Exhibit 3.2 of the 1992 Registration Statement
-26-4.1 Specimen Copy of Stock Exhibit 4.1 of the 1992 Certificate Registration Statement 4.2 Share Purchase Agreement Exhibit 4.2 of the 1992 between the Registrant and Registration Statement Intermagnetics General Corporation 10.1 Asset Purchase Agreement Exhibit 10.1 of the 1992 between the Registrant, Eastman Registration Statement Technology, Inc. and Eastman Kodak Company 10.2 Lease Agreement, as amended, Exhibit 10.2 of the 1992 between Kodak and the Registrant Registration Statement 10.3 Joint Venture Agreement between Exhibit 10.3 of the 1992 Changzhou Battery Factory, the Registration Statement Company and H&A Company and related agreements 10.4 Employment Agreement between Exhibit 10.4 of the 1992 the Registrant and Joseph N. Registration Statement Barrella 10.5 Employment Agreement between Exhibit 10.5 of the 1992 the Registrant, Bruce Jagid and Registration Statement Martin G. Rosansky 10.6 1991 Stock Option Plan Exhibit 10.6 of the 1992 Registration Statement 10.7 1992 Stock Option Plan, as Exhibit 10.7 of the 1992 amended Registration Statement 27
Exhibit Filed Index Description of Document Herewith Incorporated By Reference to: ----- ----------------------- -------- ----------------------------- 4.1 Specimen Copy of Stock Certificate Exhibit 4.110.8 Representative's Warrant Exhibit 10.8 of the 1992 exercisable for purchase of Registration Statement 4.2 Share Purchase Agreement between the Exhibit 4.2 of the 1992 Registration Registrant and Intermagnetics General Statement Corporation 10.1 Asset Purchase Agreement between the Exhibit 10.1 of the 1992 Registration Registrant, Eastman Technology, Inc. and Statement Eastman Kodak Company 10.2 Lease Agreement, as amended, between Exhibit 10.2 of the 1992 Registration Kodak and the Registrant Statement 10.3 Joint Venture Agreement between Changzhou Exhibit 10.3 of the 1992 Registration Battery Factory, the Company and H&A Statement Company and related agreements 10.4 Employment Agreement between the Exhibit 10.4 of the 1992 Registration Registrant and Joseph N. Barrella Statement 10.5 Employment Agreement between the Exhibit 10.5 of the 1992 Registration Registrant, Bruce Jagid and Martin G. Statement Rosansky 10.6 1991 Stock Option Plan Exhibit 10.6 of the 1992 Registration Statement 10.7 1992 Stock Option Plan, as amended Exhibit 10.7 of the 1992 Registration Statement 10.8 Representative's Warrant exercisable for Exhibit 10.8 of the 1992 Registration purchase of Common Stock Statement 10.9 Stock Option Agreement under the Exhibit 10.9 on the Company's Company's 1991 Stock Option Plan Report on Form 10-Q for the Plan fiscal quarter ended December 31, 1993, File No. 0-20852 ("the 1993 10-Q"). 10.10 Stock Option Agreement under the Exhibit 10.10 of the 1993 10-Q Company's 1992 Stock Option Plan 10.11 Stock Option Agreement under the Exhibit 10.11 of the 1993 10-Q Company's 1992 Stock Option Plan for non-qualified options 10.12 Stock Option Agreement between the Exhibit 10.12 of the 1993 10-Q the Company and Stanley Lewin 10.13 Stock Option Agreement between the Exhibit 10.13 of the 1993 10-Q the Company and Joseph Abeles
-27-10.14 Stock Option Agreement between Exhibit 10.14 of the 1993 10-Q the Company and Stuart Shikiar 10.15 Stock Option Agreement between Exhibit 10.15 of the 1993 10-Q the Company and Stuart Shikiar 10.16 Stock Option Agreement between Exhibit 10.16 of the 1993 10-Q the Company and Bruce Jagid 10.17 Various amendments, dated Exhibit 10.17 of the 1993 10-Q January 4, 1993 through January 18, 1993 to the joint venture agreement with the Changzhou Battery Company 10.18 Sale of Business Agreement, by Exhibit 10.18 on the Company's and between Dowty Group PLC Current Report on Form 8-K and Ultralife (UK) dated June 10, 1994, File No. 0-20852 10.19 Technology Transfer Agreement Exhibit 10.19 of the Company's relating to Lithium Batteries Registration Statement of Form (Confidential treatment has been S-1 filed on October 7, 1994, granted as to certain portions of File No. 33-84888 ( "the 1994 this agreement) Registration Statement") 10.20 Technology Transfer Agreement Exhibit 10.20 of the 1994 relating to Lithium Batteries Registration Statement Confidential treatment has been granted as to certain portions of this agreements) 28
Exhibit Filed Index Description of Document Herewith Incorporated By Reference to: ----- ----------------------- -------- ----------------------------- 10.14 Stock Option10.21 Employment Agreement between Exhibit 10.21 of the Company's the Exhibit 10.14 of the 1993 10-Q Company and Stuart Shikiar 10.15 Stock Option Agreement between the Exhibit 10.15 of the 1993 10-Q Company and Stuart Shikiar 10.16 Stock Option Agreement between the Exhibit 10.16 of the 1993 10-Q Company and Bruce Jagid 10.17 Various amendments, dated January 4, 1993 Exhibit 10.17 of the 1993 10-Q through January 18, 1993 to the joint venture agreement with the Changzhou Battery Company 10.18 Sale of Business Agreement, by and Exhibit 10.18 on the Company's Current between Dowty Group PLC and Ultralife (UK) Report on Form 8-K dated June 10, 1994, File No. 0-20852 10.19 Technology Transfer Agreement relating to Exhibit 10.19 of the Company's Lithium Batteries (Confidential treatment Registration Statement of Form S-1 filed has been granted as to certain portions on October 7, 1994, File No. 33-84888 ( of this agreement) "the 1994 Registration Statement") 10.20 Technology Transfer Agreement relating to Exhibit 10.20 of the 1994 Registration Lithium Batteries (Confidential Statement treatment has been granted as to certain portions of this agreement) 10.21 Employment Agreement between the Exhibit 10.21 of the Company's form 10-K Registrant and Bruce Jagid. form 10-K for the fiscal year ended June 30, 1995 ("the 1995 10-K") 10.22 Amendment to the Employment Agreement Exhibit 10.22 of the 1995 10-K between the Registrant and Bruce Jagid 10.23 Amendment to the Employment Agreement Exhibit 10.23 of the Company's form 10-K between the Registrant and Bruce Jagid for the fiscal year ended June 30, 1996 ("the 1996 10-K") 10.24 Amendment to the Agreement relating to Exhibit 10.24 of the 1996 10-K rechargeable batteries. (Confidential treatment has been granted as to certain portions of this agreement.)
-28-
Exhibit Filed Index Description of Document Herewith Incorporated By Reference to: ----- ----------------------- -------- ----------------------------- 10.25 Ultralife Batteries, Inc. Chief Executive Exhibit 10.25 of the 1996 10-K Officer's Stock Option Plan. 10.26 Agreement with Mitsubishi Electronics X America, Inc. relating to sample batteries for lap-top computer use. (Confidential treatment has been requested as to certain portions of this exhibit) 10.27 Purchase orders from Mitsubishi X Electronics America, Inc. (Confidential treatment has been requested as to certain portions of this exhibit)10.22 Amendment to the Employment Exhibit 10.22 of the 1995 10-K Agreement between the Registrant and Bruce Jagid 10.23 Amendment to the Employment Exhibit 10.23 of the Company's Agreement between the Registrant form 10-K for the fiscal year and Bruce Jagid ended June 30, 1996 ("the 1996 10-K") 10.24 Amendment to the Agreement Exhibit 10.24 of the 1996 10-K relating to rechargeable batteries. (Confidential treatment has been granted as to certain portions of this agreement) 10.25 Ultralife Batteries, Inc. Chief Exhibit 10.25 of the 1996 10-K Executive Officer's Stock Option Plan. 10.26 Agreement with Mitsubishi Exhibit 10.26 to the Company's Electronics America, Inc. relating Report on Form 10-K for the to sample batteries for lap-top year ended June 30, 1998 computer use. 10.27 Purchase orders from Mitsubishi Exhibit 10.27 to the Company's Electronics America, Inc. Report on Form 10-K for the year ended June 30, 1998 10.28 Lease agreement between Wayne Exhibit 10.1 to Registration County Industrial Development Statement File No. 333-47087 Agency and the Company, dated as of February 1, 1998. 23.1 Consent of Arthur Andersen LLP X 23.2 Consent of Ernst & Young LLP X
27 Financial Data Schedule X (d) Financial Statement Schedules. The following financial statement schedules of the of the registrant are filed herewith: Schedule Page - -------- ---- II Valuation and Qualifying Accounts S-1 -29-None. Ultralife Batteries, Inc. EXHIBIT INDEX Exhibit Index Description of Document ----- ----------------------- 10.26 Agreement with Mitsubishi Electronics America, Inc. relating to sample batteries for lap-top computer use. 10.27 Purchase orders from Mitsubishi Electronics America, Inc. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Ernst & Young LLP ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Ultralife Batteries, Inc.: We have audited the accompanying consolidated balance sheets of Ultralife Batteries, Inc. (a Delaware corporation) and subsidiary as of June 30, 1997 and 1996,1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ultralife Batteries, Inc. and subsidiarysubsidiaries as of June 30, 1997 and 1996,1998, and the results of theirits operations and theirits cash flows for the three years then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements as of June 30, 1997 and 1996, and for the years then ended is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSENArthur Andersen LLP Rochester, New York, September 5, 199715, 1998 F-1 Report of Independent Auditors The Board of Directors and Stockholders Ultralife Batteries, Inc. and Subsidiary We have audited the consolidated statements of operations, stockholders' equity and cash flows of Ultralife Batteries, Inc. and Subsidiary for the year endedULTRALIFE BATTERIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) - -------------------------------------------------------------------------------- June 30, 1995. Our audit also included the financial statement schedule listed in the Index at Item 14(a) as it pertains to fiscal 1995. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements of Ultralife Batteries, Inc. and Subsidiary referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended June 30, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Syracuse, New York August 31, 1995 F-2 Ultralife Batteries, Inc. and Subsidiary Consolidated Balance Sheets June 30, ---------------------------------------------- 1997 1996 ---- ---- Assets1998 -------- -------- ASSETS Current Assets:assets: Cash and cash equivalents $ 2,310,7252,311 $ 1,212,743872 Available-for-sale securities 19,847,201 33,856,28519,847 34,816 Trade accounts receivable, net (less allowance for doubtful accounts of $278,000 in$278, and $158 at June 30, 1997 and $190,000 in 1996) 2,715,728 3,485,044 Earned contract revenues receivable -- 521,6961998, respectively) 2,716 3,046 Inventories net 5,302,752 8,437,7915,303 3,911 Prepaid expenses and other current assets 1,661,655 1,350,790 -------------------------1,661 2,144 -------- -------- Total current assets 31,838,061 48,864,349 -------------------------31,838 44,789 -------- -------- Property and equipment: Machinery and equipment 21,267,756 12,419,92821,268 33,113 Leasehold improvements 216,111 150,716 ------------------------- 21,483,867 12,570,644216 863 -------- -------- 21,484 33,976 Less -- accumulated depreciation 2,610,172 1,882,106 ------------------------- 18,873,695 10,688,538 -------------------------and amortization 2,610 3,828 -------- -------- 18,874 30,148 -------- -------- Other assets and deferred charges: Technology licenselicensee agreements (net of accumulated 683 890 amortization of $416,653$417 and $303,458$561, at June 30, 1997 -------- -------- and 1998 respectively) 683 890 -------- -------- Total Assets $ 51,395 $ 75,827 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Capital lease $ -- $ 50 Accounts payable 2,659 4,785 Accrued compensation 235 335 Customer advances 1,636 334 Other current liabilities 102 1,540 -------- -------- Total current liabilities 4,632 7,044 -------- -------- Long term liabilities: Capital lease obligation -- 197 -------- -------- Total long term liabilities -- 197 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $0.10 per share, authorized 1,000,000 shares- none outstanding -- -- Common stock, par value $0.10 per share, authorized 12,000,000 shares in 1997 and 1996, respectively) 683,347 796,542 China development program -- 283,500 ------------------------- 683,347 1,080,042 =========================20,000,000 in 1998; outstanding - 7,926,086 in 1997 and 10,485,136 in 1998 796 1,051 Capital in excess of par value 64,786 93,605 Unrealized net gain on securities 1,311 1,010 Accumulated deficit (20,115) (27,135) Foreign currency translation adjustment 291 358 -------- -------- 47,069 68,889 Less --Treasury stock, at cost (27,500 shares in 1997 and 27,250 in 1998 (306) (303) -------- -------- Total assets $51,395,103 $60,632,929 =========================Stockholders' Equity 46,763 68,586 -------- -------- Total Liabilities and Stockholders' Equity $ 51,395 $ 75,827 ======== ======== The accompanying notes to the consolidated financial statements are an integral part of these balance sheets. F-3F-2 Ultralife Batteries, Inc. and Subsidiary Consolidated Balance Sheets June 30, ---------------------------- Liabilities and stockholders' equity 1997 1996 ---- ---- Current liabilities: Accounts payable $ 2,659,547 $ 3,434,473 Accrued compensation 234,501 276,668 Other accrued liabilities 101,741 153,022 Customer advances 1,636,433 334,000 ---------------------------- Total current liabilities 4,632,222 4,198,163 ---------------------------- Commitments and contingencies Stockholders' equity: Common stock, par value $0.10 per share, authorized 12,000,000 shares; outstandingULTRALIFE BATTERIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) - 7,926,086 shares in 1997 and 7,923,211 in 1996 795,360 792,322 Preferred stock, authorized 1,000,000 shares, $0.10 par value - none outstanding -- -- Capital in excess of par value 64,785,814 64,630,638 Unrealized net gain on securities 1,311,343 3,842,878 Accumulated deficit (20,115,175) (12,868,821) Foreign currency translation adjustment 291,041 37,749 ---------------------------- 47,068,383 56,434,766 Less: Treasury stock, at cost (27,500 shares in 1997) (305,502) -- ---------------------------- Total stockholders' equity 46,762,881 56,434,766 ---------------------------- Total liabilities and stockholders' equity $ 51,395,103 $ 60,632,929 ============================--------------------------------------------------------------------------------
Year ended June 30, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Revenues: Battery sales $ 12,623 $ 14,765 $ 14,063 Technology contracts 2,478 1,176 2,328 ----------- ----------- ----------- Total revenues 15,101 15,941 16,391 Cost of products sold: Battery costs 12,317 13,880 12,558 Technology contracts 1,954 1,238 1,964 ----------- ----------- ----------- Total cost of products sold 14,271 15,118 14,522 ----------- ----------- ----------- Gross profit 830 823 1,869 Operating and other expenses: Research and development 2,671 3,413 6,651 Selling, general, and administrative 4,993 5,218 5,790 Loss on China battery development program -- 805 -- Loss (gain) on fires 352 (56) (2,697) ----------- ----------- ----------- Total operating and other expenses 8,016 9,380 9,744 Other income (expense): Interest income 2,017 1,352 888 Gain on sale of securities 1,930 -- -- Miscellaneous -- (41) (33) ----------- ----------- ----------- Loss before income taxes (3,239) (7,246) (7,020) ----------- ----------- ----------- Income taxes -- -- -- ----------- ----------- ----------- Net loss $ (3,239) $ (7,246) $ (7,020) =========== =========== =========== Net loss per common share $ (0.41) $ (0.91) $ (0.84) =========== =========== =========== Weighted average number of shares outstanding 7,814,302 7,923,022 8,338,374 =========== =========== ===========
The accompanying notes to the consolidated financial statements are an integral part of these balance sheets. F-4statements. F-3 Ultralife Batteries, Inc. and Subsidiary Consolidated Statements of OperationsULTRALIFE BATTERIES, INC AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended June 30, -------------------------------------------- 1997 1996 1995 ---- ---- ----Common Stock Foreign -------------------------- Capital in Unrealized Currency Excess in Par Net Gain on Accumulated Translation Treasury Number of Shares Amount Value Securities Deficit Adjustment Stock Total ---------------- ------ ----- ---------- ------- ---------- ----- ----- Revenue: Battery sales $ 14,765,364 $ 12,623,646 $ 11,212,643 Technology contracts 1,175,754 2,477,887 3,430,640 -------------------------------------------- Total revenue 15,941,118 15,101,533 14,643,283 Cost Balance as of products sold: BatteryJune 30, 1995 7,656,111 $766 $63,222 $3,516 ($9,630) $82 -- $57,956 Shares issued under stock option plan and other stock options 267,100 27 1,409 1,436 Foreign currency translation adjustments (45) (45) Change in unrealized net gain on securities 327 327 Net Loss (3,239) (3,239) ---------- ------ ------- ------ -------- ---- ----- ------- Balance as of June 30, 1996 7,923,211 793 64,631 3,843 (12,869) 37 -- $56,435 Shares issued under stock option plan and other stock options 30,125 3 152 155 Purchase of treasury stock (27,500) (306) (306) Other 250 3 3 Foreign currency translation adjustments 254 254 Change in unrealized net gain on (2,532) (2,532) securities Net Loss (7,246) (7,246) ---------- ------ ------- ------ -------- ---- ----- ------- Balance as of June 30, 1997 7,926,086 796 64,786 1,311 (20,115) 291 (306) 46,763 Shares issued under public offering, less offering costs 13,880,321 12,317,486 10,900,049 Technology contracts 710,937 936,053 1,873,892 -------------------------------------------- Total cost of products sold 14,591,258 13,253,539 12,773,941 -------------------------------------------- Gross profit 1,349,860 1,847,994 1,869,342 Other operating expenses: Selling, generalapproximately $2,699 2,500,000 250 28,301 28,551 Shares issued under stock option plan and administrative 5,217,441 4,993,644 4,262,545 Research and development 3,939,786 3,688,687 2,685,313 Loss(gain)other stock options 58,800 5 518 523 Foreign currency translation adjustments 67 67 Change in unrealized net gain on fires (55,835) 351,902 --securities (301) (301) Issuance of common stock from 250 3 3 treasury Net Loss on China development program 805,296 -- -- -------------------------------------------- Total other operating expenses 9,906,688 9,034,233 6,947,858 -------------------------------------------- Loss from operations (8,556,828) (7,186,239) (5,078,516) Other income (expense): Interest income 1,351,646 2,016,831 1,721,682 Gain on sale(7,020) (7,020) ---------- ------ ------- ------ -------- ---- ----- ------- Balance as of securities -- 1,930,056 -- Miscellaneous expense (41,172) -- (34,844) -------------------------------------------- Loss before income taxes (7,246,354) (3,239,352) (3,391,678) Income taxes -- -- -- -------------------------------------------- Net loss $ (7,246,354) $ (3,239,352) $ (3,391,678) ============================================ Net loss per common share $ (0.91) $ (0.41) $ (0.50) ============================================ Weighted average number of shares outstanding 7,923,022 7,814,302 6,747,374 ============================================June 30, 1998 10,485,136 $1,051 $93,605 $1,010 ($27,135) $358 ($303) $68,586 ========== ====== ======= ====== ======== ==== ===== =======
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5F-4 Ultralife Batteries, Inc. and Subsidiary Consolidated Statements of ChangesULTRALIFE BATTERIES, INC.AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Stockholders' Equity
Common Stock ---------------------- Foreign Capital in Unrealized Currency Number Excess of Net Gain Accumulated Translation Treasury of Shares Amount Par Value on Securities Deficit Adjustment Stock Total ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 5,543,586 $ 554,359 $30,259,237 $ 2,958,751 $ (6,237,791) $ 19,857 $ -- $ 27,554,413 Shares issued under public offering 2,000,000 200,000 35,300,000 35,500,000 Public offering expenses (2,902,927) (2,902,927) Shares issued under stock option plans and other stock options 112,525 11,253 565,721 576,974 Foreign currency translation adjustment 62,634 62,634 Change in unrealized net gain on securities 557,618 557,618 Net loss (3,391,678) (3,391,678) ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 7,656,111 765,612 63,222,031 3,516,369 (9,629,469) 82,491 -- 57,957,034 Shares issued under stock option plans and other stock options 267,100 26,710 1,408,607 1,435,317 Foreign currency translation adjustment (44,742) (44,742) Change in unrealized net gain on securities 326,509 326,509 Net loss (3,239,352) (3,239,352) ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 7,923,211 792,322 64,630,638 3,842,878 (12,868,821) 37,749 -- 56,434,766 Shares issued under stock option plans and other stock options 30,125 3,013 152,112 155,125 Purchase of treasury stock (27,500) (305,502) (305,502) Other 250 25 3,064 3,089 Foreign currency translation adjustment 253,292 253,292 Change in unrealized net gain on securities (2,531,535) (2,531,535) Net loss (7,246,354) (7,246,354) ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 7,926,086 $ 795,360 $64,785,814 $ 1,311,343 $(20,115,175) $ 291,041 $ (305,502) $ 46,762,881 ==========================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 Ultralife Batteries, Inc. and Subsidiary Consolidated Statements of Cash FlowsThousands) - --------------------------------------------------------------------------------
Year ended June 30, --------------------------------------------------------------------------------- 1996 1997 1996 1995 ---- ---- ----1998 --------- --------- --------- Operating activities:OPERATING ACTIVITIES Net loss $ (7,246,354)(3,239) $ (3,239,352)(7,246) $ (3,391,678)(7,020) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 841,261 806,664 613,246807 841 1,364 Loss on China battery development program 283,500 -- 284 -- Provision for loss on accounts receivable 88,000 102,153 64,311102 88 (120) Provision for inventory obsolescence 93,178 (403,789) 474,050 Foreign currency loss -- -- (24,274)(404) 93 (659) Changes in operating assets and liabilities: Decrease (increase) in trade accounts receivable 681,316 (727,615) (1,575,053)63 1,203 (210) Decrease (increase) in earned contract revenues receivable 521,696 790,246 (1,195,142) Decrease (increase) in inventories 3,041,861 (2,797,373) (3,979,424) Decrease(2,797) 3,042 2,051 Increase in prepaid expenses and other current assets (310,865) (815,742) (59,844)(816) (311) (483) Increase (decrease) in accounts payable and accruedother current liabilities (868,374) (319,951) 1,987,001(320) (868) 3,664 Increase (decrease)(Decrease) in customer advances 1,302,433 (118,000) 100,493 ---------------------------------------------(118) 1,302 (1,302) --------- --------- --------- Net cash used in operating activities (1,572,348) (6,722,759) (6,986,314) Investing activities(6,722) (1,572) (2,715) --------- --------- --------- INVESTING ACTIVITIES Purchase of property and equipment (8,913,223) (6,661,725) (1,839,558) China development program payments(6,662) (8,913) (12,245) Purchase of technology license -- -- (121,500) Purchases(350) Purchase of availableforsale securities (139,484,737) (71,151,177) (122,875,062)(71,151) (139,485) (164,438) Sales of availableforsale securities 64,969,005 19,260,164 24,969,84319,260 64,969 137,104 Maturities of availableforsale securities 85,993,281 63,363,519 74,398,379 ---------------------------------------------63,364 85,993 12,064 --------- --------- --------- Net cash provided by (used in) investing activities 2,564,326 4,810,781 (25,467,898) Financing activities4,811 2,564 (27,865) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of common stock 158,214 1,435,317 33,174,0471,435 159 29,074 Purchase of treasury stock (305,502) -- (306) -- ------------------------------------------------------ --------- --------- Net cash provided by (used in) financing activities (147,288) 1,435,317 33,174,0471,435 (147) 29,074 --------- --------- --------- Effect of exchange rate changes on cash 253,292 (44,742) 24,179(45) 253 67 --------- --------- --------- Increase (Decrease) increase in cash and cash equivalents 1,097,982 (521,403) 744,014(521) 1,098 (1,439) Cash and cash equivalents at beginning of year 1,212,743 1,734,146 990,132 ---------------------------------------------period 1,734 1,213 2,311 --------- --------- --------- Cash and cash equivalents at end of yearperiod $ 2,310,7251,213 $ 1,212,7432,311 $ 1,734,146 =============================================872 ========= ========= ========= Supplemental schedule of noncash investing and financing activities: Capital lease obligation related to building $ -- $ -- $ 247 Unrealized net gain (loss) in securities $ 327 $ (2,532) $ 301 ========= ========= =========
The accompanying notes to the consolidated financial statements are an integral part of these statements. F-7F-5 Ultralife Batteries, Inc. and Subsidiary Notes to Consolidated Financial Statements June 30, 1997 1.ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 1 - Summary of Operations and Significant Accounting Policies a. Description of Business Ultralife Batteries, Inc. (the "Company") develops, manufactures, and markets primary lithium batteries and is developing advanced rechargeable lithium-ion solid-polymerlithium batteries for use in applications requiring high energy, reliable and long-lasting power sources.a wide array of applications. The Company generally does not distribute its product to a concentrated geographical area nor is there a significant concentration of credit risks arising from individual or groups of customers engaged in similar activities, or who have similar economic characteristics. To date, the Company has depended upon one customer for all of its rechargeable batteries orders. Termination of this relationship or failure to obtain additional customers may have a material adverse effect upon the Company. In fiscal 1996, battery sales to one customer totaled approximately $ 1,920,000.$1,920 (13% of total revenues). By the end of the year, this customer had paid their trade account in full. ThereIn fiscal 1997, battery sales to one customer totaled approximately $2,391 (15% of total revenues) and account balances were no concentrationscurrent. In fiscal 1998, battery sales to this one customer totaled approximately $1,993 (12% of credit risks in 1997 or 1995.total revenues) and account balances were current. The Company does not normally obtain collateral on trade accounts receivable. b. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Ultralife Batteries UK, Ltd.(" ("Ultralife UK"). All material intercompany accounts and transactions have been eliminated in consolidation. 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 the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenues from salesd. Cash and Cash Equivalents The Company considers all demand deposits with financial institutions and financial instruments with original maturities of batteries are recognized when products are shipped. Revenue on Technology Contracts For a majority of its technology contracts, the Company recognizes revenue using the percentage of completion method based on the relationship of costs incurredthree months or less to date to the total estimated cost to complete the contract. When a loss on a contract is estimated, the full amount of the loss is recognized immediately. Costs related to performance under various technology contracts are classified as research and development expenses if expenditures are consistent with the ongoing research and development efforts of the Company. Under certain research and development arrangements with the U.S. F-8 Government, the Company may be required to transfer any technology developed to the U.S. Government.cash equivalents. e. Available-for-Sale Securities Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable equity securities and debt securities are classified as available-for-sale. These securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in available-for-sale securities gains (losses). The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in available-for-sale securities gains (losses). F-6 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 1 - Summary of Operations and Significant Accounting Policies f. Inventories Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. g. Property and Equipment Property and equipment is stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of three to ten years. Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed. When sold, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in income. During 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such events or changes in circumstances are present, a loss is recognized to the extent the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The Company did not record any impairments of long lived assets in 1998. h. Stock-Based Compensation In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsSFAS No. 123, "Accounting for Stock-Based Compensation," which permits either recording the estimated value of stock-based compensation over the applicable vesting period or disclosing the unrecorded cost and the related effect on earnings per share in the notes to the financial statements. In the current year, theThe Company has elected to comply with the disclosure provisions of the statement. The effect of SFAS No. 123 in the pro forma disclosures areis not indicative of future amounts. The statement does not apply to awards prior to 1995, and additional awards are anticipated. F-9 i. Technology License Agreements Technology license agreements consist of the rights to patented technology and related technical information. The Company acquired two technology license agreements for an initial payment of $1 million and $100 respectively. Royalties are payable at a rate of 8 percent and an initial rate of 4 percent, respectively, of the fair market value of each battery using the technology if the battery is sold or otherwise put into use by the Company for a 10-year period. The royalties can be reduced under certain circumstances based on the terms of these agreements. The agreements are amortized using the straight-line method over three to ten years. Additionally, the Company will be required to make royalty payments at stated rates based on the terms of each agreement. No royalty expense has been recognized to date.During 1998, in connection with the settlement of a lawsuit (Sec Note 5(f)) the company acquired an additional technology license agreement for $350, which expires in January 1999. j. Translation of Foreign Currency The financial statements of the Company's foreign subsidiary are translated into U.S. dollar equivalent in accordance with Statement of Financial Accounting StandardsSFAS No. 52.52 "Foreign Currency Translation". There was no exchange gain or loss included in net incomeloss for the years ended June 30, 1996, 1997 1996 and 1995.1998. F-7 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 1 - Summary of Operations and Significant Accounting Policies k. Income Taxes The liability method, prescribed by SFAS No. 109, "Accounting for Income Taxes", is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse. l. Research and Development Research and development expenditures are charged to operations as incurred. Cashm. Revenue Recognition Revenues from sales of batteries are recognized when products are shipped. A provision is made at that time for warranty costs expected to be incurred. n. Revenue on Technology Contracts For a majority of its technology contracts, the Company recognizes revenue using the percentage of completion 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 Cash Equivalentsoverhead. When a loss on a contract is estimated, the full amount of the loss is recognized immediately. The Company considersallocates costs to all demand depositstechnology contracts based upon actual costs incurred including an allocation of certain research and development costs incurred. Under certain research and development arrangements with financial institutionsthe U.S. Government, the Company may be required to transfer technology developed to the U.S. Government. The Company has accounted for the contracts in accordance with Statement of Financial Accounting Standards No. 68. "Research and financial instruments with original maturitiesDevelopment Arrangements". The Company, where appropriate, has recognized a liability for amounts that may be repaid to third parties. Costs totaling $1,018 and $527, during the years ended June 30, 1996 and June 30, 1997, respectively, previously included in operating and other expenses as part of three months or lessresearch and development have been reclassified to be cash equivalents.cost of products sold-technology contracts as these costs were directly related to revenues classified as technology contracts. This reclassification had no impact on the net loss for the years presented. o. Derivative Financial Instruments and Fair Value of Financial Instruments Statement of Financial Accounting StandardsSFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments,"Instruments", requires disclosure of any significant derivative or other financial instruments. The Company does not have any derivative financial instruments at June 30, 1997 and 1996. Statement of Financial Accounting Standards1998. 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 June 30, 1997 and 1996.1998. Fair values have been determined through information obtained from market sources. Net Loss Per Commonp. Earnings per Share Net loss per common share is computed on the basis of the weighted average of common and common equivalent shares outstanding during the period. F-10 New Accounting Pronouncements The Company accounts for net incomeloss per common and common equivalent share in accordance with the provisions of Accounting Principles Board Opinion No. 15 (APB No. 15). In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share" was issued. SFAS No. 128, replaces primary Earnings"Earnings Per ShareShare". SFAS No. 128 requires the reporting of basic and diluted earnings per share (EPS) with basic EPS.. Basic EPS is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding.outstanding for the period. No dilution for common share equivalents is included. Fully dilutedDiluted EPS now called diluted EPS, is still required.includes the dilutive effect of securities calculated using the treasury stock method. The Company is required to adoptadopted SFAS No. 128 retroactivelyin 1998. The accompanying financial statements have been restated for periods endingthis adoption. F-8 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note-1 Summary of Operations and Significant Accounting Policies q. New Accounting Pronouncements SFAS No. 130 "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components. The standard is applicable for fiscal years beginning after December 15, 1997. On a pro forma basis, basic EPSThe Company will adopt this standard in its 1999 financial statements. The Company has not yet determined the impact of this standard on its financial statements. SFAS No. 131 "Disclosures about Segments of an Enterprise and diluted EPSRelated Information" establishes standards for reporting information about operating segments in the financial statements. The standard is required to be adopted for fiscal years endedbeginning after December 15, 1997. The Company will adopt this standard in its 1999 financial statements. The Company has not yet determined the impact of this standard on its financial statements. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" established accounting and reporting for derivative instruments and hedging activities. The statement is effective for all fiscal years beginning after June 30, 1997, 1996 and 1995 were $(0.91), $(0.41) and $(0.50), respectively,15, 1999. The Company has not yet determined the same as reported EPS.impact of this standard on its financial statements. r. Legal Matters The Company is subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of management, such liability will not have a material adverse effect on the Company's financial condition or results of operations. s. Reclassifications Certain amounts in the 1996 and 1997 financial statements have been reclassified to conform to the 19971998 presentation. 2.Note 2 - Leases The Company leasesleased its principal facility under the terms of an operating lease with an initial term of seven years.years at an annual interest rate of 9%. In 1995, the Company entered into an agreement to amend the initial lease to reflect rental of an additional 40,333 square feet, or a total of 110,000 square feet. The amendment extended the term of the lease to March 12, 2003. The base rent is subject to a 4% annual increase. Under the terms of the lease the Company hashad the right to lease additional space and also has the right to first refusal of any offer made to the lessor to purchase the facility. Additionally, the Company is liable for any environmental contamination that it creates during the term of the lease. In March, 1998, the Company entered into an approximate 10-year purchase/lease agreement to acquire the building it now occupies and an adjacent building of approximately 140,000 square feet, together with approximately 65 acres of undeveloped land. Payments under the capital lease agreement total $769 of the total payments, $400 was paid upon execution and the remainder is due over the term of the lease. The capital lease agreement also required the Company to establish a letter of credit in the amount of $200 which expires in 2001. In connection with this agreement the Company entered into a payment-in-lieu of tax agreement which provides the Company with certain real estate tax concessions upon certain conditions. In connection with this agreement, the Company received an environmental assessment which revealed contaminated soil. The assessment indicated potential actions that the Company may be required to undertake upon notification by the environmental authorities. The assessment also F-9 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 2-Leases proposed that a second assessment be completed and provided an estimate of total potential costs to remediate the soil of $230. However, there can be no assurance that this will be the maximum cost. The Company entered into an agreement whereby a third party has agreed to reimburse the Company for fifty percent of the costs associated with this matter. The matter is in its preliminary stages and the total costs of remediation cannot be estimated at this time. 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. In addition, Ultralife UK leases its principal facility under the terms of an operating lease with an initial lease term of twenty-five years. Rental expenses for all operating leases were $745.332, $773,000,approximately $773, $745, and $760,091$713 for the years ended June 30, 1996, 1997 1996, and 1995,1998, respectively. FutureAfter taking effect of the purchase/lease agreement for the Newark, NY property, future minimum lease payments under noncancelable operating leases as of June 30, 19971998 are approximately as follows: 1998--$874,825; 1999--$846,901; 2000--$807,803; 2001--$808,657; 2002--$828,152;1999 - $357, 2000 - $320, 2001 - $251, 2002 - $231, and thereafter--$1,720,399.thereafter - $2,029. The above amounts do not include contingent or additional rent. F-11 3.Note 3 - Investments The following is a summary of available-for-sale securities:
Unrealized ---------------------------------------------------- Estimated June 30, 1997 Cost Gains Losses Fair Value ------------------------------------------------------------------------ ------------- ---- ----- ------ ---------- June 30, 1997 U.S. Treasury securities and obligations of U.S. Government agencies $2,352,880 $1,293 $4,186 $2,349,987$ 2,353 $ 1 $ 4 $ 2,350 Mortgage backed securities 2,829,058 11,288 261 2,840,0852,829 11 -- 2,840 U.S. corporate securities 11,200,004 32,077 127,146 11,104,935 -----------------------------------------------------------------------11,200 32 127 11,105 ------- ------- ------- ------- Total debt securities 16,381,942 44,658 131,593 16,295,00716,382 44 131 16,295 Intermagnetics General Corporation (equity securities) 2,153,916 1,398,2782,154 1,398 -- 3,552,194 ----------------------------------------------------------------------- $18,535,858 $1,442,936 $131,593 $19,847,201 =======================================================================3,552 ------- ------- ------- ------- $18,536 $ 1,442 $ 131 $19,847 ======= ======= ======= ======= Unrealized ---------------------------------------------------- Estimated June 30, 1998 Cost Gains Losses Fair Value ------------------------------------------------------------------------ ------------- ---- ----- ------ ---------- June 30, 1996 U.S. Treasury securities and obligations of U.S. Government agencies $8,508,124 $24,445 $14,671 $8,517,898 Mortgage backed securities 1,008,153 2,007................. $28,337 $ -- 1,010,160$ -- $28,337 U.S. corporate securities 18,343,214 14,585 12,214 18,345,585 -----------------------------------------------------------------------securities.................... 3,315 9 -- 3,324 ------- ------- ------- ------- Total debt securities 27,859,491 41,037 26,885 27,873,643securities........................ 31,652 9 -- 32,661 Intermagnetics General Corporation (equity securities) 2,153,916 3,828,726...................... 2,154 1,001 -- 5,982,642 ----------------------------------------------------------------------- $30,013,407 $3,869,763 $26,885 $33,856,285 =======================================================================3,155 ------- ------- ------- ------- $33,806 $1,010 $ -- $34,816 ======= ======= ======= =======
F-10 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 3-Investments The Company has instructed its investment fund managers to invest in conservative, investment grade securities with average maturities of less than three years. TheIn fiscal 1996, the Company realized gross realized gains on sales of available-for-sale securities totaled $-0-, $1,930,056, and $-0- and the gross realized losses totaled $-0-, $-0- and $77,699 for the years ended June 30, 1997, 1996, and 1995, respectively.of $1,930. The amortized cost and estimated fair value of debt and marketable equity securities at June 30, 1997,1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties or the Company may sell the securities to meet their ongoing and potential future cash needs. F-12 Estimated Available-for-Sale Cost Estimated - ------------------ ---- Fair Value - ---------------------------------- ------------------------------------- Due in one year or less $16,031,651 $15,945,638 Due after one year through three years 350,291 349,369 --------------------------- 16,381,942 16,295,007.................... $31,653 $31,661 Equity securities 2,153,916 3,552,194 --------------------------- $18,535,858 $19,847,201 =========================== 4. Income.......................... $ 2,154 $ 3,155 Note 4-Income Taxes Foreign and domestic loss carryforwards totaling approximately $22,020,000$31,200 are available to reduce future taxable income. Foreign loss carryforwards of $2,834,000$1,204 can be carried forward indefinitely. The domestic net operating loss carryforward of $19,186,000$29,996 expires in 2006 through 2012.2013. Due to a change in ownership defined under Internal Revenue Code Section 382, $2,738,000 of the net operating loss carryforward will be subject to an annual limitation of $1,507,000.limitation. 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. The Company increased its valuation allowance by approximately $3,273,000, $1,843,000$1,843, $3,273 and $496,000$2,843 for the years ended June 30, 1996, 1997 1996 and 1995,1998, respectively, to offset the deferred tax assets due to uncertainty of realizations. F-11 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 4-Income Taxes Significant components of the Company's deferred tax liabilities and assets as of June 30 are as follows: 1997 1996 ---- ----1998 -------- -------- Deferred tax liabilities: Unrealized gain on securities ................. $ 514,737515 $ 1,306,579341 Tax over book depreciation 666,016 497,797 ----------------------------................. 666 888 -------- -------- Total deferred tax liabilities 1,180,753 1,804,376 ----------------------------................... 1,181 1,229 Deferred tax assets: Net operating loss carryforward 7,486,716 4,925,559............... 7,487 10,604 Other 464,827 377,030 ----------------------------......................................... 465 238 -------- -------- Total deferred tax assets 7,951,543 5,302,589........................ 7,952 10,842 Valuation allowance for deferred assets (6,770,790) (3,498,213) ----------------------------.......... (6,771) (9,613) Net deferred tax assets 1,180,753 1,804,376 ----------------------------.......................... 1,181 1,229 -------- -------- Net deferred income taxes ........................ $ -- $ -- ==================================== ======== There were no income taxes paid for the years ended June 30, 1996, 1997 1996 and 1995.1998. For financial reporting purposes, loss from continuing operations before income taxes included the following: F-13 June 30, -----------------------------------------1996 1997 1996 1995 ---- ---- ----1998 ------- ------- ------- United States $(6,916,312) $(1,605,015) $(2,743,611)............... $(1,605) $(6,916) $(9,053) Foreign (330,042) (1,634,337) (648,067) -----------------------------------------..................... (1,634) (330) 2,033 ------- ------- ------- Total $(7,246,354) $(3,239,352) $(3,391,678) =========================================....................... $(3,239) $(7,246) $(7,020) ======= ======= ======= There are no undistributed earnings of Ultralife UK, the Company's foreign subsidiary, at June 30, 1997. 5. Commitments1998. Note 5-Commitments and Contingencies a. China Program In July 1992, the Company entered into a series ofseveral agreements with the Changzhou Battery Factory ("agreements") in the Peoples Republic of China ("PRC"). These agreements provide forrelated to the establishment of a manufacturing facility in China for the production and distribution of batteries. The Company made an investment of $284 of a total anticipated investment of $405 which would represent a 15% interest in the China Program and accounted for this investment using the cost method. Changzhou Ultra Power Battery Co., Ltd., a company organized in China ("China Battery"), purchased from the Company certain technology, equipment training and consulting services relating to the design and operation of a lithium battery plantmanufacturing plant. F-12 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in the PRC and purchase by the Company of approximately 80% of the joint venture's annual production. The Company isthousands, except per share amounts) China Battery was required to pay $675,000approximately $6,000 to the programCompany over the first two years of the agreement, of which $472,500approximately $5,600 has been paid to date.paid. The Company has been attempting to collect the balance due under this contract. China Battery has indicated that these payments will not provided forbe made until certain contractual issues have been resolved. Due to the remaining $202,500 as it has no intention of payingChinese partner's questionable willingness to pay, the Changzhou Battery Factory. Despite continuous discussions, The Changzhou Battery Factory has not paidCompany wrote off in fiscal 1997 the remaining amounts dueentire balance owed to the Company in accordance withas well as the terms of the agreements. During the third quarter of fiscalCompany's investment. In December 1997, China Battery sent to the Company wrote-off its investment ina letter demanding reimbursement of losses they have incurred plus a refund for certain equipment that the Company sold to China development programBattery. Although China Battery has not taken any additional steps, there can be no assurance that China Battery will not further pursue such a claim, which, if successful, would have a material adverse effect on the Company's business, financial condition and the related receivables due under the provisionsresults of the agreements.operations. The Company believes that such a claim is without merit. b. Letters of Credit During 1996, the Company opened an irrevocable letter of credit up to a maximum of $334,000$334 with an interest rate of 3.75% a year and an expiration date of December 31, 1998. It is collateralizedThe Company has an agreement with a customer that provides an exclusive right to that customer to purchase all such rechargeable batteries for telecommunication applications produced by $334,000the Company until the earlier of the Company's investments.shipment of 5 million batteries or December 31, 1998. If the Company fails to fulfill its obligationsobligation under anthis agreement, the customer may draw up to the maximum amount due.available under the letter of credit. As of June 30, 1997,1998, there has been no draw on the irrevocable letter of credit. In conjunction with the purchase/lease agreement to acquire the Company's Newark, NY facilities, the Company established a letter of credit in the amount of $200 which expires in 2001. All letters of credit are collateralized by the Company's investments. c. Indemnity Agreement The Company entered into an Indemnity Agreement with each member of its Board of Directors and corporate officers in June 1993. The agreement provides that the Company will reimburse directors or officers for all expenses, to the fullest extent permitted by law and the Company by-laws, arising out of their performance as agents or trustees of the Company. d. Purchase Commitments As of June 30, 19971998 the Company is committed to purchase approximately $3,242,000$1,939 of production machinery and equipment. 6.e. Royalty Agreement Technology underlying certain products of the Company are based in part as non-exclusive transfer agreements. The Company made an original payment for such technology and is required to make royalty and other payments in the future which incorporate the licensed technology. The license expires in 2007. F-13 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) f. Legal Matters A company has filed a claim against the Company seeking amounts related to commissions and breach of good faith and fair dealings. The Company's counsel believes that an unfavorable outcome is unlikely in this matter. An individual has filed suit claiming the Company interfered with his opportunity to purchase Dowty Group, PLC (now the Company's U.K. subsidiary). The claim amounts to $25,000. The Company believes that the claim is without merit and the Company intends to vigorously defend its position. At this time, the outcome of this suit is uncertain. An unfavorable outcome of this suit may have a material adverse impact on the Company's financial position and results of operations. A company had alleged infringement of two patents concerning technology incorporated into the Company's rechargeable batteries. In May of 1998, the Company settled this suit. In the settlement the Company acquired a technology license agreement in exchange for $350. In August 1998, the Company, its Directors, certain of its officers, and certain underwriters were named as defendants in a complaint filed by certain shareholders who claim to represent a class of shareholders alleging that the defendants, during the period of April 30, 1998 through June 12, 1998, violated various provisions of the federal securities laws in connection with an offering of 2,500,000 shares of the Company's common stock. The complaint alleges that the Company's offering documents were materially incomplete, and as a result, misleading, and that the class members purchased the Company's common stock at artificially inflated prices in reliance thereon and were thereby damaged. The Company believes that the litigation is without merit and intends to defend it vigorously. This litigation has just been commenced and the amount of alleged damages, if any, cannot be quantified, nor can the outcome or this litigation be predicted. Accordingly, management cannot determine whether the ultimate resolution of this litigation could have a material adverse effect on the Company's financial position and results of operations. Note 6-Stockholders' Equity a. Preferred Stock OptionsDuring fiscal 1996, the shareholders of the Company ratified an amendment to the Company's Certificate of Incorporation to change the authorized but unissued preferred stock from no par to $0.10 par value per share. The Board of Directors has the authority to fix by resolution the voting power, if any, designations, preferences, privileges or other special rights of any series of preferred stock. No shares of preferred stock have been issued. b. Common Stock In May of 1998, the Company sold 2,500,000 shares of common stock at $12.50 per share, resulting in gross proceeds of $31,250 and Warrantsnet proceeds of $28,551 to the Company. In June of 1998 the stockholders approved an increase in the number of authorized shares of common stock from 12,000,000 to 20,000,000. c. Stock Options The Company sponsors several stock-based compensation plans, all of which are accounted for under the provisions of APBAccounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized for the Company's plans. Had compensation expense for all of the Company's stock-based compensation been determined consistent with SFAS No. 123, the Company's net loss would have been $8,294,904$4,249, $8,295, and $4,249,214 in$8,232 for the years ended June 30, 1996, 1997 and 1996, respectively,1998, compared F-14 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 6-Stockholders Equity (Continued) with the reported losses of $7,246,354$3,239, $7,246, and $3,239,352.$7,020. Loss per share would have been $0.54, $1.05, and $0.54$0.99 in the years ended June 30, 1996, 1997 and 1996,1998, respectively, as compared to reported loss per share of $0.41, $0.91, and $0.41. F-14 $0.84 respectively. For purposes of this disclosure, the fair value of each fixed option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grantgrants in fiscal 1996, 1997 and 1996, respectively:1998 respectively; expected option terms of three years for bothall periods; expected stock volatility of approximately 46.6% for both periods;1996 and 1997, and 53.1% for 1998 expected dividend yields of 0% for bothall periods and risk free interest rates of 5.7%, 5.8%, and 5.7%5.8%. The weighted average fair value of options granted was $7.22 in fiscal 1996, $4.18 in fiscal 1997 and $7.22 in 1996.$5.48 for 1998. The stockholders of the Company have approved three stock option plans that permit the grant of options. In addition, the stockholders of the Company have approved the grant of options outside of any of these plans. Under the 1991 stock option plan, 100,000 shares of common stock are reserved for grant to key employees and consultants of the Company through September 13, 2001. There are currently 11,250 shares remaining to be granted under the 1991 plan. The exercise price per share shall be determined by the Board of Directors as follows: (i) Incentive Stock Options (ISOs) shall not be less than 100% of the fair market value at the date of grant; (ii) ISOs granted to holders of more than 10% shall not be less than 110% of the fair market value at the date of grant; and (iii) non-qualified stock options ("NQSOs") shall not be less than 85% of the fair market value of a share at the date of grant. The exercise period is to be determined at the time of grant but cannot exceed ten years (five years from the time of grant if issued to a holder of more than 10%). All options granted under the 1991 plan are NQSOs. The stockholders of the Company have also approved a 1992 stock option plan that is substantially the same as the 1991 stock option plan. The shareholders have approved reservation of 1,150,000 shares of common stock for grant under the plan. During 1997, the Boardboard of Directorsdirectors approved an amendment to the plan increasing the number of common shares reserved by 500,000 to 1,650,000. The Company will seek shareholder ratification of this amendment at the December, 1997 annual shareholders' meeting. Options granted under the 1992 plan are either ISO's or NQSO's; key employees are eligible to receive ISO's and NQSO's; directors and consultants are eligible to receive only NQSO's. Effective March 1, 1995, the Company established the 1995 stock option plan and granted the Chief Executive Officer ("CEO") options to purchase 100,000 shares at $14.25 per share.share under this plan. The options are exercisable in annual increments of 20,000 shares over a five-year period commencing March 1, 1996 until March 1, 2001. There were no other grants under the 1995 stock option plan. In October 1992, the Company granted, to the CEO, options to purchase 225,000 shares of common stock at $9.75 per share outside of any of the stock option plans. The options vested through June 1997 and expire on October 2002. In addition, on March 1, 1994, the Company granted options to the CEO under the terms of an employment agreement. Options to purchase 150,000 shares at $11.00 per share have been granted.under the terms of an employment agreement and outside of any of the stock option plans. These options are exercisable in annual increments of 30,000 shares over a five-year period commencing March 1, 1995 until March 1, 2000. The options to purchase 150,000 shares of common stock granted to the CEO pursuant to the 1994 Agreement were ratified by the Company's shareholders at the December 5, 1996 annual meeting of the shareholders. F-15 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 6-Stockholders Equity (Continued) This table summarizes data for the stock options issued by the Company:
1997 1996 1995 -------------------------------------------------------------------------------------------Number Weighted Number Weighted Number Weighted of Shares Average of Shares Average of Shares Average Number--------- Exercise --------- Exercise --------- Exercise Price Number Exercise Price Number Exercise Price of Shares Per Share of Shares Per Share of Shares Per Share --------------------------------------------------------------------------------------------------- --------- --------- 1996 1997 1998 ---- ---- ---- Shares under option at beginning of year 1,259,975 $ 10.67 1,194,425 $12.67 1,259,975 $10.67 1,130,000 $ 8.7612.67 1,337,300 $ 11.51 Options granted ........................ 190,000 $ 19.33 503,150 $10.12 190,000 $19.33 314,500 $15.08$ 10.12 736,200 $ 10.42 Options exercised ...................... (218,800) $ 6.56 (30,125) $ 5.15 (218,800)(58,800) $ 6.56 (112,525) $ 5.139.33 Options canceled ....................... (36,750) $ 14.98 (330,150) $14.30 (36,750) $14.98 (72,000) $ 8.49 ------------------------------------------------------------------------------------------14.30 (280,100) $ 12.17 --------- -------- --------- -------- --------- -------- Shares under option at end of year ..... 1,194,425 $ 12.67 1,337,300 $11.51 1,194,425 $12.67 1,259,975 $10.67 ------------------------------------------------------------------------------------------$ 11.51 1,734,600 $ 11.03 --------- -------- --------- -------- --------- -------- Options exercisable at end of year ..... 570,125 $ 13.88 826,300 $11.43 570,125 $13.88 531,100 $12.26$ 11.43 946,900 $ 11.29
The following table represents additional information about stock optionoptions outstanding at June 30. 1997:30, 1998 :
Options Outstanding Options ExercisableRange of Number Weighted- Weighted- Number Average Weighted- NumberExercise Prices Outstanding Average Range of Outstanding Remaining Average Exercisable At Exercise Price Exercise PricesAverage - --------------- At June 30, 1997 Contractual Life1998 Remaining Exercise Price At June 30, 1997 - ---------------------------------------------------------------------------------------------------------------------1998 Exercise ---------------- Contractual -------------- ---------------- Price Life -------- Options Outstanding ----------- Options Exercisable ------------------- ------------------- $8.00 - 12.00 942,900$8.00-11.75 1,327,450 4.4 Years $9.75 617,400 $ 9.81 12.13 - 17.50 314,400 3.7$9.56 708,900 $9.66 12.00-17.50 330,400 3.5 Years 14.33 163,950 14.68 18.25 - 24.50 80,000 3.814.59 187,700 14.67 18.25-24.50 76,750 2.9 Years 21.11 44,950 21.84 - --------------------------------------------------------------------------------------------------------------------- $8.00 - 24.50 1,337,30021.00 50,300 21.64 ----------- --------- --------- ------ ------- ------ $8.00-24.50 1,734,600 4.2 Years $11.51 826,300 $11.43 - ---------------------------------------------------------------------------------------------------------------------$11.03 946,900 $11.29 ----------- --------- --------- ------ ------- ------
b. Warrants The Company had issued warrants to purchase 100,625 shares of its common stock. Those warrants were exercised on September 21, 1995. The Company has issued additional warrants to purchase 100,000 shares of its common stock. Those warrants were issued on April 22, 1997 and expired on April 22, 1998. The exercise price is $12.00 per share. The Company has committed to grant warrants to purchase 12,500 shares of its common stock to the Empire State Development Corporation in connection with a $500 grant that was finalized in March, 1998. Proceeds of the grant are to be used to fund certain equipment purchases and are contingent upon the Company achieving and maintaining minimum employment levels. The warrants may be exercised through December 31, 2002 at an exercise price equal to 60% of the average closing price for the 10 F-16 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 6-Stockholders Equity (Continued) trading days preceding the exercise date, but not less than the average closing price during the 20 trading days prior to the grant. d. Reserved Shares The Company has reserved 2,159,125, 2,159,125 and 1,409,1252,137,500 shares of common stock under the various stock option plans and warrants as of June 30, 1996, 1997, 1996, and 1995,1998 respectively. 7. 401(K)Note 7-401(K) Plan On April 23, 1992, theThe Company establishedmaintains 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, the Company may, at the Board of Directors discretion, authorize an employer contribution based on a portion of the employees' contribution.contributions. Effective January 1, 1997, the Board of Directors approved Company matching of employee contributions up to a maximum of 3% of the employee's income. For the year ended June 30, 1997 and 1998, the Company contributed $74,760. There were no employer contributions for the fiscal years ended June 30, 1996 or 1995. F-16 8. Inventories$75 and $124 respectively. Note 8-Inventories The year-end composition of inventories were: June 30, 1997 1996 ------------------------------1998 ------ ------ Raw materials $2,993,858 $3,311,440.................................... $2,994 $2,613 Work in process 547,468 4,329,111.................................. 548 1,333 Finished products 2,647,345 1,589,981 ------------------------------ 6,188,671 9,230,532................................ 2,647 192 ------ ------ 6,189 4,138 Less: Reserve for obsolescence 885,919 792,741 ------------------------------ $5,302,752 $8,437,791 ============================== 9. Stockholders' Equity and Related................... 886 227 ------ ------ $5,303 $3,911 ====== ====== Note 9-Related Party Transactions During fiscal 1996, the shareholders of the Company ratified an amendment to the Company's Certificate of Incorporation to change the authorized but unissued preferred stock from no par to $0.10 par value per share. The Board of Directors has the authority to fix by resolution the voting power, if any, designations, preferences, privileges or other special rights of any series of preferred stock. No shares of preferred stock have been issued. The Company holdsheld approximately 339,016 shares (market value of $3,552,194)$3,552) and 332,369 shares345,795 (market value of $5,982,642)$3,155) of Intermagnetics General Corporation ("IMG"IGC") at June 30, 1997 and 1996,1998, respectively. IMGIGC is considered to be a related party since certain directors of the Company also serve as officers or directors of IMG. 10. BusinessIGC. Note 10-Business Segment Information The Company's operations are classified into two business segments: batteries and technology contracts. Operations within the battery segment include the manufacture and sale of lithium batteries. The technology contract segment includes revenue associated with the series of agreements with ChangzhouChina Battery as F-17 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 10-Business Segment Information (Continued) well as various research and development contracts with other companies and the U.S. Government and other companies.Government. There are no inter-segment sales. U.S. sales to foreign customers during1996 1997 1996, and 1995 were $2,124,709, $1,381,352, and $608,427, respectively. F-17 Year ended June 30, 1997 1996 1995 ------------------------------------------1998 -------- -------- -------- Business Segment Results Net Sales: Batteries $14,765,364 $12,623,646 $11,212,643............................. $ 12,623 $ 14,765 $ 14,063 Technology contracts 1,175,754 2,477,887 3,430,640 ------------------------------------------ $15,941,118 $15,101,533 $14,643,283 ==========================================.................. 2,478 1,176 2,328 -------- -------- -------- $ 15,101 $ 15,941 $ 16,391 -------- -------- -------- Income (loss) before income taxes: Batteries $(5,261,013) $(5,010,631) $(3,346,856)............................. $ (5,010) $ (5,261) $ (4,602) Technology contracts (62,295) 524,180 413,523.................. 524 (62) 220 Corporate administration (1,923,046) 1,247,099 (458,345) ------------------------------------------ $(7,246,354) $(3,239,352) $(3,391,678) ==========================================.............. 1,247 (1,923) (2,638) -------- -------- -------- $ (3,239) $ (7,246) $ (7,020) -------- -------- -------- Depreciation and amortization: Batteries ............................. $ 841,261807 $ 806,664841 $ 613,2461,364 Technology contracts .................. -- -- -- Corporate administration .............. -- -- -- -------------------------------------------------- -------- -------- $ 841,261807 $ 806,664841 $ 613,246 ==========================================1,364 -------- -------- -------- Identifiable assets: Batteries $25,833,503 $21,808,067 $12,796,090............................. $ 21,808 $ 25,833 $ 36,478 Technology contracts 1,742,019 2,121,544 2,525,582.................. 2,122 1,742 1,517 Corporate administration 23,819,581 36,703,318 47,271,476 ------------------------------------------ $51,395,103 $60,632,929 $62,593,148 ==========================================.............. 36,703 23,820 37,832 -------- -------- -------- $ 60,633 $ 51,395 $ 75,827 -------- -------- -------- Capital expenditures: Batteries ............................. $ 8,913,2236,662 $ 6,661,7258,913 $ 1,839,55812,245 Technology contracts .................. -- -- -- Corporate administration .............. -- -- -- -------------------------------------------------- -------- -------- $ 8,913,2236,662 $ 6,661,7258,913 $ 1,839,558 ==========================================12,245 -------- -------- -------- F-18 ULTRALIFE BATTERIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) Note 10-Business Segment Information (Continued) Information concerning geographic area is as follows: Year ended June 30,1996 1997 1996 1995 ------------------------------------------1998 -------- -------- -------- Revenue: North AmericaUnited States ........................ $ 10,611,60210,967 $ 10,967,54610,612 $ 8,202,047 Europe 5,329,516 4,133,987 6,441,236 ------------------------------------------12,754 United Kingdom 4,134 5,329 3,637 -------- -------- -------- $ 15,941,11815,101 $ 15,101,533 $14,643,283 ==========================================15,941 $ 16,391 -------- -------- -------- (Income) Loss before income taxes: North AmericaUnited States ........................ $ (6,916,312) $(1,605,015) $(2,743,611) Europe (330,042) (1,634,337) (648,067) ------------------------------------------(1,605) $ (7,246,354) $(3,239,352) $(3,391,678) ==========================================(6,916) $ (9,053) United Kingdom (1,634) (330) 2,033 -------- -------- -------- $ (3,239) $ (7,246) $ (7,020) -------- -------- -------- Identifiable assets: North AmericaUnited States ........................ $ 46,327,93956,367 $ 56,367,177 $57,602,33446,328 $ 67,312 United Kingdom 4,265 5,067 8,515 -------- -------- -------- $ 60,632 $ 51,395 $ 75,827 -------- -------- -------- United States revenues in fiscal 1996, 1997 and 1998 include export sales to non-affiliated customers of $2.4 million of which $1.4 million was primarily in Europe; $2.1 million of which $1.4 million was primarily in Europe; $3.5 million of which $2.5 million was primarily in Europe, 5,067,164 4,265,752 4,990,814 ------------------------------------------ $ 51,395,103 $ 60,632,929 $62,593,148 ========================================== F-18 Ultralife Batteries, Inc.respectively. United Kingdom revenues in fiscal 1996, 1997 and Subsidiary Schedule II Valuation1998 include export sales to non-affiliated customers of $2.4 million of which $1.6 million was primarily in Europe; $1.7 million of which $.7 million was primarily in the United States; and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E Col. F Additions ------------------------------ Balance at Charged to Balance at Beginning Costs and Charged to End of Classification of Period Expenses Other Accounts Deductions Period - ------------------------------------------------------------------------------------------------------------------------------------ Year ended June 30, 1997 Deducted from asset accounts: Allowance for doubtful accounts $190,430 $238,964 $151,212 (D) $278,182 Product warranty reserve $139,504 $ 88,810 (B) $ 50,694 Year ended June 30, 1996 Deducted from asset accounts: Allowance for doubtful accounts $ 88,277 $103,568 $ 1,415 (D) $190,430 Product warranty reserve $ 63,786 $ 89,504 (C) $ 13,786 (B) $139,504 Year ended June 30, 1995 Deducted from asset accounts: Allowance for doubtful accounts $ 53,631 $ 64,311 $ 29,665 (A) $ 88,277 Product warranty reserve $111,491 $ 47,705 (B) $ 63,786
(A) Recovery$1.9 million of accounts receivable balances previously reserved for. (B) Reductionwhich $.4 million was primarily in reserve based on Company's experience (C) Reduction to battery revenues. (D) Writeoff of accounts receivable balance. S-1the United States and $.9 million was primarily in Europe, respectively. F-19 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 BATTERIES, INC. By:/s/ BRUCE JAGID ------------------------------- /s/ Bruce Jagid -------------------------------- Bruce Jagid Chairman and Chief Executive Officer Dated: October 14, 1997Date: September 28, 1998 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: October 14, 1997September 28, 1998 /s/URI SOUDAK ------------------------------- Uri Soudak Roger D. O"Brien -------------------------------- Roger D. O"Brien Chief Operating Officer (Principal Executive Officer) Date: October 14, 1997September 28, 1998 /s/ ROBERT COOK ------------------------------- Robert CookFrederick F. Drulard -------------------------------- Frederick F. Drulard Vice President Finance and Chief Financial Officer and Controller (Principal Financial and Accounting Officer) Date: October 14, 1997September 28, 1998 /s/ JOSEPHJoseph C. ABELES -------------------------------Abeles -------------------------------- Joseph C. Abeles (Director) Date: October 14, 1997 /s/ JOSEPH N. BARRELLA --------------------------------------------------------------- Joseph N. Barrella (Director) Date: October 14, 1997September 28, 1998 /s/ RICHARD HANSEN -------------------------------Richard Hansen -------------------------------- Richard Hansen (Director) Date: October 14, 1997September 28, 1998 /s/ BRUCE JAGID -------------------------------Bruce Jagid -------------------------------- Bruce Jagid (Director) Date: October 14, 1997September 28, 1998 /s/ ARTHUR LIEBERMAN -------------------------------Arthur Lieberman -------------------------------- Arthur Lieberman (Director) Date: October 14, 1997September 28, 1998 /s/ MARTIN ROSANSKY -------------------------------Martin Rosansky -------------------------------- Martin Rosansky (Director) Date: October 14, 1997September 28, 1998 /s/ CARL ROSNER -------------------------------Carl Rosner -------------------------------- Carl Rosner (Director) Date: October 14, 1997 /s/ STUART SHIKIAR ------------------------------- Stuart Shikiar (Director) EX-10.26 2 AGREEMENT TO PURCHASE SAMPLE BATTERIES AGREEMENT TO PURCHASE SAMPLE BATTERIES THIS AGREEMENT TO PURCHASE SAMPLE BATTERIES is made and entered into as of the 9th day of April, 1997, by and between the Purchasing Department of MITSUBISHI ELECTRONICS AMERICA, INC., a Delaware corporation located at One Penn Plaza, 250 West 34th Street, Suite 4303, New York, NY 10119 and ULTRALIFE BATTERIES, INC., a New York corporation located at 1350 Route 88 South, Newark, NY 14513 ("Ultralife"). WITNESSETH: WHEREAS, Ultralife is in the process of developing for manufacture and sale solid polymer lithium ion rechargeable batteries; and WHEREAS, MELA wishes to acquire from Ultralife advanced technology rechargeable batteries for slim notebook application No UBB114 (each, a "Battery"), consisting of three cells No. UBC114 (each, a "Cell"), which comply with specifications provided to Ultralife by parent (the "Specifications"); and WHEREAS, Ultralife wishes to produce for MELA and MELA wishes to obtain from Ultralife, the Batteries and the Samples (as defined) upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties hereby agree as follows: 1. SALE AND PURCHASE OF CELLS (a) Ultralife shall manufacture and deliver to MELA 1800 evaluation units of the Cells for testing and evaluation (the "Samples"). Ultralife shall deliver 150 Samples on or before April 15, 1997 (collectively, "Batch I"), 150 Samples on or before May 30, 1997 (collectively, "Batch II") and 1500 Samples on or before July 30, 1997 (collectively, "Batch III") to 1-1, Tsukaguchi-Honmachi 8-Chome, Amagasaki City Hyogo 661, Japan ("Delivery Point"). Notwithstanding the foregoing, Ultralife acknowledges and agrees that Batch III will be installed into slim notebooks and sold to end-users. For purposes of this section, delivery shall be deemed to occur upon delivery of the Samples to the common carrier at the shipment point. (b) The terms and conditions of this Agreement shall apply to all Samples delivered under this Agreement. No other terms or conditions shall apply, even if Ultralife submits any document containing different terms and conditions. Any such terms and conditions proposed or stated by Ultralife are hereby expressly rejected by MELA. 2. SHIPMENT; DELIVERY (a) All shipments pursuant to this Agreement shall be F.O.B. shipment point. Ultralife shall comply with all shipping restrictions specified on an Order or otherwise specified by MELA. 1 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) Ultralife shall use its best efforts to provide the Samples in accordance with the delivery date(s) specified in this Agreement. (b) Title and risk of loss to the Samples shall pass to MELA upon delivery of the Samples by Ultralife to the common carrier. In the event of any loss of Samples following delivery to the carrier, Ultralife shall, upon request, cooperate with MELA in connection with the proof of loss claims presented by MELA to the carrier and/or insurer. Notwithstanding the foregoing, Ultralife shall be responsible for all damage to goods due to failure to pack or, when performed by Ultralife, to load properly and securely. (c) No additional charge shall be made to MELA for containers, packing or drayage unless expressly agreed to by MELA Goods shipped by freight or express classifications shall be packed, marked and described as specified by MELA and, consistent with such specifications, the agreed upon quantity of goods to be shipped and delivery date(s), shall be shipped in such a manner as to obtain the lowest possible rate under the freight or express classification. 3. PRICES AND PAYMENT (a) Batch I and Batch II are being provided to MELA for evaluation purposes only. There shall be no charge for Batch I or Batch II. Upon completion of its evaluation and testing, MELA shall return all of the Samples included in Batch I and Batch II to Ultralife at MELA's expense, within six months after MELA's receipt thereof unless otherwise agreed by the parties. (b) The aggregate price for the Samples included in Batch III shall be US $800,000. The price shall be paid in two equal installments, payable on April 16, 1997 and June 30, 1997. Separate invoices shall be issued by Ultralife for each payment. The first invoice shall not be issued prior to April 2, 1997 and the second invoice shall not be issued prior to June 30, 1997. (c) Terms of payment are net 30 days from the date of invoice. Payment will not be due prior to receipt of a correct invoice. MELA obligation to make any payments under this Agreement to Ultralife shall be subject to deduction for any setoff or counterclaim arising from this Agreement of any amount due to MELA or any affiliate of MELA. 4. WARRANTIES (a) Ultralife warrants that: (1) The Samples furnished pursuant to this Agreement shall be free from defects in material, workmanship and/or packaging and shall comply with these terms and conditions contained in this Agreement. (2) Batch I and Batch II shall reasonably comply with the Specifications and the performance criteria set forth the Exhibit A. (3) Batch III shall strictly conform with the performance criteria set forth in Exhibit B. 2 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) (4) The Samples shall be free from defects in design. These warranties shall remain in effect for Ultralife's normal warranty period or for 12 months following receipt of the Samples, whichever is longer, and shall extend to MELA's affiliates, successors and assigns and to the customers of each thereof. (b) In the event of any breach of the foregoing warranties with respect to Batch I and Batch II, MELA shall have the right to return the non-conforming Samples at Ultralife's risk and expense and require Ultralife, at MELA's option, to replace such defective Samples within 15 days after notice of breach by MELA unless otherwise agreed by a duly authorized representative of MELA. (c) In the event that Batch III does not meet the performance criteria set forth at Exhibit B, MELA shall notify Ultralife of such non-conformity within one week of delivery of Batch III to the Delivery Point and MELA shall, at its sole option, either accept Batch III with such non-conformity or return Batch III to Ultralife at Ultralife's sole risk and expense and require Ultralife to replace Batch III in its entirety within 30 days from the date of notice of such non-conformity. If Ultralife is not able to remedy such non-conformity within such period, Ultralife shall promptly refund to MELA US$100,000. (d) Ultralife further represents and warrants that it has complied with and shall comply with all federal, state and local laws and ordinances and all lawful orders, rules and regulations applicable to Ultralife's performance of its obligations pursuant to this Agreement. 5. TERMINATION (a) MELA may terminate this Agreement, in whole or in part, without any liability whatsoever, except for its obligation to pay for goods previously delivered and accepted, by notice to Ultralife if: (1) Ultralife shall become insolvent or be unable to pay its debts as they mature. (2) A petition in bankruptcy is filed by or against Ultralife, an assignment for the benefit of creditors is made by Ultralife or a receiver of Ultralife's assets is appointed. (3) Ultralife fails to perform any of its material obligations pursuant to this Agreement, including failure to deliver the Samples by the required delivery date as provided in this Agreement. (4) Ultralife fails to make material progress with respect to its obligations so as to endanger performance of this Agreement in accordance with its terms. (5) Ultralife furnishes any goods which fail to comply with all warranties contained in this Agreement. 3 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) (b) MELA may terminate this Agreement for convenience as to all goods not yet delivered and not scheduled for delivery within 90 days (or such longer period as is agreed in writing by a duly authorized representative of MELA) from the date of cancellation without obligation whatsoever to Ultralife for such termination. (6) FORCE MAJEURE. MELA reserves the right at its option and without liability either to direct suspension of shipment or to terminate this Agreement, in whole or in part, at any time that MELA's compliance with this Agreement or the utilization by MELA or an affiliate of MELA of the goods covered by this Agreement is prevented or delayed by any cause beyond its reasonable control, including, without limitation, fire, flood, strike or other labor difficulty, war, insurrection, act of God, act of governmental authority, act of the other party, riot, embargo, fuel or energy shortage, delay in obtaining or inability to obtain necessary labor or materials from usual sources or any other cause beyond its reasonable control. 7. CONFIDENTIALITY. (a) Ultralife and MELA agree that neither party shall provide to the other information or materials which it deems to be "confidential" or "proprietary" and neither party shall be obligated to treat confidentially any information or materials provided by the other party. (b) Unless the other party's prior consent is obtained, the parties shall not advertise, publish or cause to be published in any manner any statement mentioning the other party or any of its affiliates, referring to the existence or subject matter of this Agreement or quote the opinion of any employee of the other party or any of its affiliates. (c) Each party further agrees that neither it nor its affiliates shall reverse engineer or disassemble the Samples or any products provided by MELA or its affiliates to determine or analyze the functional composition or structure of the Samples or such products. (d) Notwithstanding the foregoing, MELA agrees that all reports containing test data regarding the Samples shall not be disclosed to the joint venture between MELA's indirect parent, Mitsubishi Electric Corporation and Japan Storage Battery, unless such disclosure is required to be made by law. In the event disclosure is required by law, prior notification of such disclosure shall be provided to Ultralife. 8. ARBITRATION. (a) Except as hereinafter provided, all disputes arising out of or in any manner relating to this Agreement which the parties do not resolve in good faith within ten days after either party notifies the other of its desire to arbitrate such dispute or controversy shall be settled by arbitration by a single arbitrator in accordance with the then standard prevailing commercial rules, as modified or supplemented by this section, of the American Arbitration Association ("AAA"). The arbitration shall be held in New York, New York. The arbitration award shall be in writing and shall specify the factual and legal bases of such award. The arbitration award shall be final and binding, and a judgment consistent therewith may be entered by any court of competent ju- 4 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) risdiction. The parties agree that the arbitration award shall be treated confidentially, and the parties shall not, except as otherwise required by law or court order, disclose the arbitration award to any third party, excluding personnel in their affiliated companies and their attorneys and accountants with a need to know, provided that such recipients agree to be bound by the same restrictions as are contained in this Agreement. The arbitrator shall not have the power to render an award of punitive damages. To the extent of any conflict, this section shall supersede and control AAA rules. (b) Nothing in this section shall be construed to preclude or in any way prohibit either party from seeking any provisional remedy, such as injunction or a temporary restraining order, to enforce Section 7 of this Agreement. (c) Except as provided in this section, neither MELA nor Ultralife shall have the right to take depositions or obtain discovery of documents or other information which is relevant to the subject matter of any arbitration which is required under Section 8(a) of this Agreement. After the appointment of the arbitrator, MELA and Ultralife shall agree on (1) a reasonable number of and schedule for depositions which the parties may take and (2) a reasonable scope or schedule for production of documents or other information which is relevant to the subject matter of the arbitration. If MELA and Ultralife cannot reach agreement on the number of depositions, the scope of production of documents or other information and the schedule therefor, the arbitrator shall make such determination(s). All discovery shall be completed no later than 30 days prior to the arbitration hearing. The arbitrator shall have the power to enforce any discovery agreed upon by the parties or otherwise required to be taken pursuant to this section by imposing the same terms, conditions, sanctions and penalties as can be or may be imposed in like circumstances in a civil action before the New York Supreme Court, except the power to order the arrest or imprisonment of a person. (d) No later than 30 days prior to the arbitration hearing, each party shall produce to the other party and the arbitrator lists of the witnesses, documents and other information which such party intends to use at the arbitration hearing. 9. GOVERNING LAW AND JURISDICTION. (a) This Agreement and the rights and obligations of the parties to and under this Agreement shall be construed and interpreted in all respects in accordance with the laws of the State of New York, without regard to the principles of conflicts of law; provided that the questions regarding the arbitrability of any claims and defenses shall be determined in accordance with the Federal Arbitration Act and that any questions regarding copyright, trademark, patent or intellectual property matters shall be determined in accordance with federal law. (b) Except as otherwise provided in Section 8 of this Agreement, any legal action or proceeding arising out of or relating to this Agreement shall be maintained in any courts in New York, New York or in any Untied States Federal Court seated in New York, New York. By execution and delivery of this Agreement, Ultralife irrevocably submits to the jurisdiction of each such federal or state court in any such action or proceeding. 5 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) 10. NO ASSIGNMENT. Neither Ultralife nor MELA shall delegate any duties or assign any rights or duties under this Agreement without the other party's prior consent, and any such attempted delegation or assignment shall be void. Notwithstanding the foregoing, MELA may delegate it duties or assign its rights or duties under this Agreement to its direct or indirect parent, an affiliate or subsidiary. Ultralife shall not subcontract for the procurement of the goods covered by this Agreement without MELA prior approval. Subject to the provisions of this section, this Agreement shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties. 11. NOTICES. Whenever under the terms of or in connection with this Agreement any notice, consent, approval, authorization or other information is proper or required to be given by either party, such notice, consent, approval, authorization or other information shall be in writing and shall be given or made by facsimile, by reputable overnight courier with documentation of receipt to the intended recipient thereof or by registered or certified mail, return receipt requested, and with all postage prepaid, addressed a s follows: If to MELA to: Mitsubishi Electronics America, Inc. One Penn Plaza, 250 West 34th Street Suite 4303 New York, NY 10119 Attention: Scott Lancey Purchasing Manager Facsimile: (212) 629-3811 with a copy to: Mitsubishi Electric America, Inc. 800 Cottontail Lane Somerset, NJ 08873 Attention: Assistant General Counsel Facsimile (908) 302-2781 If to Ultralife, to: Ultralife Batteries, Inc. 1350 Route 88 South Newark, NY 14513 Attention: Bruce Jagid Chairman & CEO Facsimile: 201-930-1144 6 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) with a copy to: Paul Share, Esq. 317 Madison Avenue, Suite 1421 New York, NY 10017 Facsimile: (212) 378-1299 or to such other address for either party as may be supplied by notice given in accordance herewith. Notice shall be deemed received on the date of receipt or the date on which receipt is refused. In the event notice is given by facsimile, a copy of such facsimile shall be sent to the recipient thereof in accordance with the provisions hereof (other than by facsimile) within two days after such facsimile was transmitted. 12. REMEDIES. In addition to any rights or remedies stated herein, the parties may exercise all rights and remedies available to them at law, in equity or under the Uniform Commercial Code of New York. Such rights and remedies shall be cumulative. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES UNDER ANY CIRCUMSTANCES WHOSOEVER. 13. ENTIRE AGREEMENT. This Agreement and the exhibits to this Agreement contains all of the covenants, agreements and understanding between the parties with respect to the subject matter of this Agreement and may not be changed, modified, altered or terminated, except by a written agreement duly executed by the parties. This Agreement and the exhibits to this Agreement supersedes any and all other agreements and understandings, whether written or oral, between the parties with respect to the subject matter of this Agreement, including any prior course of dealing or usage of trade, all prior or contemporaneous oral agreements between the parties and all prior written agreements between the parties with respect to the subject matter of this Agreement. 14. RELATIONSHIP OF PARTIES. The relationship between MELA and Ultralife is that of independent contractors. This Agreement does not establish a joint venture, agency or partnership between the parties, nor does it create an employer-employee relationship. Unless specifically provided in this Agreement or authorized in writing by an officer or other authorized employee of MELA. Ultralife shall have no authority or power to bind MELA to create a liability against MELA to incur any obligations on behalf of MELA or to represent that MELA is in any way responsible for Ultralife and Ultralife shall not held itself out as having any such authority. 15. NO WAIVER. No waiver of, or the failure of either party to require strict compliance with, any provision of this Agreement in any respect shall be deemed to be a waiver of such party's right to insist upon strict compliance with such provision or with all other provisions of this Agreement. No waiver by either party of any breach or default of this Agreement shall constitute a waiver of any other or subsequent breach or default. No waiver shall be binding unless executed in writing by the party against whom the waiver is sought to be enforced. 16. SEVERABLILITY. If any provision or part of any provision of this Agreement shall be determined to be illegal, invalid or unenforceable in any respect, such determination of illegality, 7 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) invalidity or unenforceability shall not affect any other provision of this Agreement. If part of a provision is deemed illegal, invalid or unenforceable, the balance of that provision shall not be so affected. All surviving provisions shall remain in full force and effect as if this Agreement had been executed without such illegal, invalid or unenforceable provision or part thereof. 17. HEADINGS. All headings are included for convenience only and shall not be considered in any question of interpretation or construction of this Agreement. 18. AUTHORIZATION. Each party represents that the individual executing this Agreement on its behalf is duly authorized to bind such party to this Agreement according to its terms. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the day and year first above written. MITSUBISHI ELECTRONICS ULTRALIFE BATTERIES, INC. AMERICA, INC. By: /s/Scott J. Lancey By: /s/Bruce Jagid ---------------------------- ----------------------------- Name: Scott J. Lancey Name: Bruce Jagid -------------------------- --------------------------- Title: Purchasing Manager Title: CEO and Chairman ------------------------- -------------------------- (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) 8 Exhibit List Exhibit A - Batch I and II Performance Criteria Exhibit B - Batch III Performance Criteria (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) 9 Exhibit A Batch I and II Performance Criteria of each cell BATCH I BATCH II Dimensions: (TOLERANCE: +0/-0.5mm) Length * * Width * * Height * * Capacity per cell (at 1C rate) * * Energy per cell (average voltage: 3.7V) * * Minimum Cycle Life (at C/3 rate) * * (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) Exhibit B Batch III Performance Criteria of each cell BATCH IIII Dimensions: (TOLERANCE: +0/-0.5mm) Length * Width * Height * Capacity per cell (at 1C rate) * Energy per cell (average voltage: 3.7V) * Minimum Cycle Life (at C/3 rate) * (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.) [DRAWING OMITTED] SIDE SEAL AREA BENDED SEAL AREA at EACH CORNER SHALL BE HOLDED WITHIN EACH DIMENSIONS UBC114-01 (*Confidential information has been deleted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.)