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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012
OR
/ / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
16-1387013
(I.R.S. Employer
Identification No.)
2000 Technology Parkway, Newark, New York
(Address of principal executive offices)
14513
(Zip Code)
Registrant's telephone number, including area code: (315) 332-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.10 per share
Name of each exchange on which registered
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes…. No..X...
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes…. No..X...
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 whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes..X… No….
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer …. Accelerated filer ...… Non-accelerated filer …. Smaller reporting company ..X...
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes…. No..X...
On July 1, 2012, the aggregate market value of the common stock held by non-affiliates of the registrant was
approximately $45,000,000 (in whole dollars) based upon the closing price for such common stock as reported on the
NASDAQ Global Market on July 1, 2012.
As of February 28, 2013, the registrant had 17,455,977 shares of common stock outstanding, net of 1,372,757
treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement relating to the June 4, 2013 Annual Meeting of Shareholders
are specifically incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K,
except for the equity plan information required by Item 12 as set forth therein.
TABLE OF CONTENTS
ITEM
PAGE
PART I
1 Business ..................................................................................................................3
1A Risk Factors ............................................................................................................15
1B Unresolved Staff Comments ..................................................................................22
2 Properties ................................................................................................................23
3 Legal Proceedings ...................................................................................................23
4 Mine Safety Disclosures .........................................................................................24
PART II
5 Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities ..............................................25
6 Selected Financial Data ..........................................................................................26
7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations ............................................................................................27
7A Quantitative and Qualitative Disclosures About Market Risk ............................38
8 Financial Statements and Supplementary Data ......................................................39
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................................................70
9A Controls and Procedures.........................................................................................70
9B Other Information ...................................................................................................71
PART III
10 Directors, Executive Officers and Corporate Governance ....................................72
11 Executive Compensation ........................................................................................72
12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ................................................................................72
13 Certain Relationships and Related Transactions, and Director Independence ......72
14 Principal Accountant Fees and Services ................................................................72
PART IV
15 Exhibits, Financial Statement Schedules ...............................................................73
Signatures .....................................................................................................................76
Index to Exhibits...........................................................................................................77
PART I
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This
report contains certain forward-looking statements and information that are based on the beliefs of management as well as
assumptions made by and information currently available to management. The statements contained in this report relating to
matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not
limited to, our reliance on certain key customers, reduced U.S. defense spending, including the uncertainty with government
budget approvals, general domestic and global economic conditions, future demand for our products and services, the
successful commercialization of our products, our resources being overwhelmed by our growth prospects, residual effects of
negative news related to our industries, government and environmental regulations, business disruptions, including those
caused by fires, the impairment of our intangible assets, the unique risks associated with our Chinese operations, loss of top
management, the process of U.S. defense procurement, finalization of non-bid government contracts, raw material supplies,
competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries,
changes in our business strategy or development plans, capital deployment, and other risks and uncertainties, certain of
which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein.
When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to
identify forward-looking statements. For further discussion of certain of the matters described above and other risks and
uncertainties, see “Risk Factors” in Item 1A of this annual report.
As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us” refer to Ultralife
Corporation and include our wholly-owned subsidiaries, Ultralife Batteries (UK) Ltd., ABLE New Energy Co., Limited and
its wholly-owned subsidiary ABLE New Energy Co., Ltd, and our majority-owned joint venture Ultralife Batteries India
Private Limited.
Operations of RedBlack Communications, Inc. (“RedBlack”), our divested company, Ultralife Energy Services
Corporation (“UES”), our wholly owned subsidiary, and certain components of UK operations are reported as discontinued
operations.
Dollar amounts throughout this Form 10-K Annual Report are presented in thousands of dollars, except for per
share amounts.
ITEM 1. BUSINESS
General
We offer products and services ranging from portable power solutions to communications and electronics
systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and
commercial customers across the globe. We design, manufacture, install and maintain power and communications
systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics
systems and accessories and custom engineered systems. We continually evaluate ways to grow, including the design,
development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as
seeking opportunities to expand through acquisitions.
We sell our products worldwide through a variety of trade channels, including original equipment manufacturers
(“OEMs”), industrial and defense supply distributors and directly to U.S. and international defense departments. We
enjoy strong name recognition in our markets under our Ultralife® Batteries, McDowell Research®, AMTITM, and
ABLETM brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The
Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in
to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The
addition
Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified
speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or
vehicle applications and communications and electronics systems design. We believe that reporting performance at the
gross profit level is the best indicator of segment performance. As such we report segment performance at the gross profit
level and operating expenses as Corporate charges. (See Note 10 in the Notes to Consolidated Financial Statements.)
Our website address is www.ultralifecorp.com. We make available free of charge via a hyperlink on our website
(see Investor Relations link) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
3
K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written
request to the attention of Peter F. Comerford, Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New
York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
Battery & Energy Products
We manufacture and/or market a family of lithium manganese dioxide (Li-MnO2) and lithium manganese dioxide
carbon monofluoride hybrid non-rechargeable batteries including 9-volt, HiRate® cylindrical, ThinCell®, and other form
factors. We also manufacture and market a family of lithium thionyl chloride (Li-SOCl2) non-rechargeable batteries
produced at our Chinese operations. Applications for our 9-volt batteries include: smoke alarms, wireless security systems
and intensive care monitors, among many other devices. Our HiRate® and ThinCell® lithium non-rechargeable batteries are
sold primarily to the military and to OEMs in industrial markets for use in a variety of applications including radios,
emergency radio beacons, search and rescue transponders, pipeline inspection gauges, portable medical devices and other
specialty instruments and applications. Military applications for our non-rechargeable HiRate® batteries include: man-pack
and survival radios, night vision devices, targeting devices, chemical agent monitors and thermal imaging equipment.
Our lithium thionyl chloride batteries, sold under our ABLE and Ultralife brands as well as various private label brands, are
used in a variety of applications including utility meters, wireless security devices, electronic meters, automotive electronics
and geothermal devices. We believe that the chemistry of lithium batteries provides significant advantages over other
currently available non-rechargeable battery technologies. These advantages include: higher energy density, lighter weight,
longer operating time, longer shelf life and a wider operating temperature range. Our non-rechargeable batteries also have
relatively flat voltage profiles, which provide stable power. Conventional non-rechargeable batteries, such as alkaline
batteries, have sloping voltage profiles that result in decreasing power output during discharge. While the price for our
lithium batteries is generally higher than alkaline batteries, the increased energy per unit of weight and volume of our lithium
batteries allow for longer operating times and less frequent battery replacements for our targeted applications.
We believe that our range of lithium ion rechargeable batteries and charging systems offer substantial benefits,
including the ability to design and produce lightweight, high-energy batteries in a variety of custom sizes, shapes, and
thickness. We market lithium ion rechargeable batteries comprising cells manufactured by qualified cell manufacturers.
Our rechargeable products can be used in a wide variety of applications including communications, medical and other
portable electronic devices. Our GenSet Eliminator provides energy storage capabilities to generators and renewable energy
sources, thereby promoting optimum efficiencies through the continuous charging and discharging of our lithium ion
batteries incorporated into the system. Our Multi-Kilowatt Module lithium ion battery system is a large format battery
utilizable for energy storage, battery back-up, and remote power applications. We believe that the chemistry of our lithium
ion batteries provides significant advantages over other currently available rechargeable batteries. These advantages
include: higher energy density, lighter weight, longer operating time, longer time between charges and a wider operating
temperature range. Conventional rechargeable batteries such as nickel metal hydride and nickel cadmium are heavier,
have lower energy and require more frequent charging.
Within this segment, we also seek to fund the development of new products to advance our technologies through
contracts with both government agencies and third parties. We have been successful in obtaining awards for such programs
for power-system technologies.
We continue to obtain contracts that are in parallel with our efforts to ultimately commercialize products that we
develop. Revenues in this segment that pertain to technology contracts may vary widely each year, depending upon the
quantity and size of contracts obtained.
Revenues for this segment for the year ended December 31, 2012 were $71,084 and segment contribution (gross
profit) was $17,562.
Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems
and accessories to support military communications systems, including RF amplifiers, power supplies, power cables,
connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated
communication systems for fixed or vehicle applications such as tactical repeaters and SATCOM systems. All systems
are packaged to meet specific customer needs in rugged enclosures to allow for their use in severe environments. We
market these products to all branches of the U.S. military and approved foreign defense organizations, as well as, U.S. and
international prime defense contractors.
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Revenues for this segment for the year ended December 31, 2012 were $30,573 and segment contribution (gross
profit) was $11,168.
Corporate
We allocate revenues and cost of sales across the above operating segments. The balance of income and expense,
including but not limited to research and development expenses, and selling, general and administrative expenses, are
reported as Corporate expenses.
There were no revenues for this category for the year ended December 31, 2012 and our corporate expenses were
$28,844.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the 2012
Consolidated Financial Statements and Notes thereto for additional information. For information relating to total assets by
segment, revenues for the last two years by segment, and contribution by segment for the last two years, see Note 10 in the
Notes to Consolidated Financial Statements.
History
We were formed as a Delaware corporation in December 1990. In March 1991, we acquired certain
technology and assets from Eastman Kodak Company ("Kodak") relating to its 9-volt lithium manganese dioxide non-
rechargeable battery. In December 1992, we completed our initial public offering and became listed on NASDAQ. In
June 1994, we formed a subsidiary, Ultralife Batteries (UK) Ltd. (“Ultralife UK”), which acquired certain assets of Dowty
Group PLC (“Dowty”) and provided us with a presence in Europe. In 2012, certain of our Ultralife UK operations were
discontinued. See Note 2 to our Consolidated Financial Statements for more information.
In May 2006, we acquired ABLE New Energy Co., Ltd. (“ABLE”), an established manufacturer of lithium
batteries located in Shenzhen, China, which broadened our product offering and provided additional exposure to new
markets.
In July 2006, we finalized the acquisition of substantially all the assets of McDowell Research, Ltd.
(“McDowell”), a manufacturer of military communications accessories located originally in Waco, Texas, whose
operations were relocated to our Newark, New York facility during the second half of 2007, which enhanced our channels
into the military communications area and strengthened our presence in global defense markets. In January 2012, we
relocated these operations to our Virginia Beach, Virginia facility in order to gain operational efficiencies.
In September 2007, we acquired RedBlack Communications, Inc. (“RedBlack”), located in Hollywood,
Maryland, an engineering and technical services firm specializing in the design, integration, and fielding of mobile,
modular and fixed-site communication and electronic systems. On September 28, 2012, we entered into and closed a
stock purchase agreement to sell 100% of our capital stock in RedBlack to BCF Solutions, Inc. See Note 2 to our
Consolidated Financial Statements for more information.
In November 2007, we acquired Stationary Power Services, Inc. (“Stationary Power”) and RPS Power Systems,
Inc. (“RPS”), affiliated companies both located in Clearwater, Florida. Stationary Power was an infrastructure power
management services firm specializing in the engineering, installation and preventive maintenance of standby power
systems, uninterruptible power supply systems, DC power systems and switchgear/control systems for the
telecommunications, aerospace, banking and information services industries. RPS supplied lead acid batteries for use in
the design and installation of standby power systems. The Stationary Power acquisition furthered our transformation to a
value-added power solutions, accessories and engineering services company serving a broad spectrum of government,
defense and commercial markets. As described in greater detail below, we have ceased our Stationary Power business.
In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited (“India JV”), with our
distributor partner in India. The India JV assembles Ultralife power solution products and manages local sales and
marketing activities, serving commercial, government and defense customers throughout India. We have invested cash
into the India JV, as consideration for our 51% ownership stake in the India JV.
In November 2008, we acquired certain assets of U.S. Energy Systems, Inc. and its services affiliate, U.S. Power
Services, Inc. (“USE” collectively), a nationally recognized standby power installation and power management services
business located in Riverside, California. The acquisition was made to advance our goal of becoming the leading
5
provider of engineering, installation, integration and maintenance services to the growing standby power industry. As
described in greater detail below, we have ceased our USE business.
In March 2009, we acquired the tactical communications products business of Science Applications International
Corporation. The tactical communications products business (“AMTI”) designs, develops and manufactures tactical
communications products including: amplifiers, man-portable systems, cables, power solutions and ancillary
communications equipment, which are sold by Ultralife under the brand name AMTI. The acquisition strengthened our
communications systems business and provided us with direct entry into the handheld radio/amplifier market,
complementing Ultralife’s communications systems offerings.
In January 2010, Stationary Power and RPS formally merged, with Stationary Power being the surviving
corporation. Subsequent to the merger, we changed the name of Stationary Power to Ultralife Energy Services
Corporation (“UES”).
On March 8, 2011, we decided to exit our Energy Services business. We completed all exit activities with
respect to our Energy Services segment by the end of the second quarter of 2011, and have reclassified our Energy
Services segment as a discontinued operation.
Products, Services and Technology
Battery & Energy Products
A non-rechargeable battery is used until discharged and then discarded. The principal competing non-
rechargeable battery technologies are carbon zinc, alkaline and lithium. We manufacture a range of non-rechargeable
battery products based on lithium manganese dioxide, lithium manganese carbon mono-fluoride hybrid, and lithium
thionyl chloride technologies.
We believe that the chemistry of lithium batteries provides significant advantages over currently available non-
rechargeable battery technologies, which include: lighter weight, longer operating time, longer shelf life, and a wider
operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stable
power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in
decreasing power during discharge. While the prices for our lithium batteries are generally higher than commercially
available alkaline batteries produced by others, we believe that the increased energy per unit of weight and volume of our
batteries will allow longer operating time and less frequent battery replacements for our targeted applications. As a result,
we believe that our non-rechargeable batteries are price competitive with other battery technologies on a price per unit of
energy or volume basis.
Our non-rechargeable products include the following product configurations:
9-Volt Lithium Battery. Our 9-volt lithium battery delivers a unique combination of high energy and stable voltage,
which results in a longer operating life for the battery and, accordingly, fewer battery replacements. While our 9-volt battery
price is generally higher than conventional 9-volt carbon zinc and alkaline batteries, we believe the enhanced operating
performance and decreased costs associated with battery replacement make our 9-volt battery more cost effective than
conventional batteries on a cost per unit of energy or volume basis when used in a variety of applications.
We market our 9-volt lithium batteries to OEM, distributor and retail markets including industrial electronics,
safety and security and medical. Typical applications include: smoke alarms, wireless alarm systems, bone growth
stimulators, telemetry devices, blood analyzers, ambulatory infusion pumps and parking meters. A significant portion of
the sales of our 9-volt battery is to major U.S. and international smoke alarm OEMs for use in their long-life smoke
alarms. We also manufacture our 9-volt lithium battery under private label for a variety of companies. Additionally, we sell
our 9-volt battery to the broader consumer market through national and regional retail chains and Internet retailers.
We believe that we manufacture the only standard size 9-volt battery designed to last 10 years when used in
ionization-type smoke alarms. Although designs exist using other battery configurations, such as three 2/3 A or 1/2 AA-type
battery cells, we believe that our 9-volt solution is superior to these alternatives. Our current 9-volt battery manufacturing
capacity is adequate to meet forecasted customer demand over the next three years.
Cylindrical Batteries. Featuring high energy, wide temperature range, long shelf life and operating life, our
cylindrical cells and batteries, based on both lithium manganese dioxide and lithium thionyl chloride technologies, represent
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some of the most advanced lithium power sources currently available. We market a wide range of cylindrical non-
rechargeable lithium cells and batteries in various sizes under both the Ultralife HiRate and ABLE brands. These include:
D, C, 5/4 C, 1/2 AA, 2/3 A and other sizes, which are sold individually as well as packaged into multi-cell battery packs,
including our leading BA-5390 military battery, an alternative to the competing Li-SO2 BA-5590 battery, and one of the
most widely used battery types in the U.S. armed forces for portable applications. Our BA-5390 battery provides 50% to
100% more energy (mission time) than the BA-5590, and it is used in approximately 60 military applications.
We market our line of lithium cells and batteries to the OEM market for commercial, defense, medical, asset
tracking and search and rescue applications, among others. Significant commercial applications include pipeline
inspection equipment, automatic reclosers and oceanographic devices. Asset tracking applications include RFID (Radio
Frequency Identification) systems. Among the defense uses are manpack radios, night vision goggles, chemical agent
monitors and thermal imaging equipment. Medical applications include: AED’s (Automated External Defibrillators),
infusion pumps and telemetry systems. Search and rescue applications include: ELT’s (Emergency Locator Transmitters)
for aircraft and EPIRB’s (Emergency Position Indicating Radio Beacons) for ships.
Thin Cell Batteries. We manufacture a range of thin lithium manganese dioxide batteries under the Thin Cell®
brand. Thin Cell batteries are flat, lightweight batteries providing a unique combination of high energy, long shelf life,
wide operating temperature range and very low profile. With their thin prismatic form and a high ratio of active materials
to packaging, Thin Cell batteries can efficiently fill most battery cavities. We are currently marketing these batteries to
OEMs for applications such as displays, wearable medical devices, theft detection systems, and RFID devices.
In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can be recharged and reused
many times. Generally, discharge and recharge cycles can be repeated hundreds of times in rechargeable batteries, but the
achievable number of cycles (cycle life) varies among technologies and is an important competitive factor. All rechargeable
batteries experience a small, but measurable, loss in energy with each cycle. The industry commonly reports cycle life in the
number of cycles a battery can achieve until 80% of the battery's initial energy capacity remains. In the rechargeable battery
market, the principal competing technologies are nickel cadmium, nickel metal hydride and lithium ion (including lithium
polymer) batteries. Rechargeable batteries are used in many applications, such as military radios, laptop computers, mobile
telephones, portable medical devices, wearable devices and many other commercial, defense and consumer products.
Three important performance characteristics of a rechargeable battery are design flexibility, energy density and
cycle life. Design flexibility refers to the ability of rechargeable batteries to be designed to fit a variety of shapes and sizes of
battery compartments. Thin profile batteries with prismatic geometry provide the design flexibility to fit the battery
compartments of today's electronic devices. Energy density refers to the total 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 batteries generally are longer lasting power sources providing longer operating time and necessitating
fewer battery recharges. 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. Lithium ion batteries, by the nature of their electrochemical properties, are capable
of providing higher energy density than comparably sized batteries that utilize other chemistries and, therefore, tend to
consume less volume and weight for a given energy content. Long achievable cycle life, particularly in combination with
high energy density, is suitable for applications requiring frequent battery recharges, such as cellular telephones and laptop
computers, and allows the user to charge and recharge many times before noticing a difference in performance. We believe
that our lithium ion batteries generally have some of the highest energy density and longest cycle life available.
Lithium Ion Cells and Batteries. We market a variety of lithium ion cells and rechargeable batteries comprising
cells manufactured by qualified cell manufacturers. These products are used in a wide variety of applications including
communications, medical and other portable electronic devices.
Battery Charging Systems and Accessories. To provide our customers with complete power system solutions, we
offer a wide range of rugged military and commercial battery charging systems and accessories including smart chargers,
multi-bay charging systems and a variety of cables.
GenSet Eliminator. Our GenSet Eliminator provides energy storage capabilities to generators and renewable
energy sources, thereby promoting optimum efficiencies through the continuous charging and discharging of our lithium ion
batteries incorporated into the system. The system is mobile, flexible and scalable from 10 to 50 kWh of battery storage and
will significantly reduce fuel consumption while enabling the primary generator or power source to be operated at 85% -
95% of its rated load capacity. The switch between the primary energy source and battery power is seamless to the user and
allows for silent and clean (zero emission) operation when the batteries are in use. Our lithium ion batteries allow for
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continuous monitoring, reduce battery weight by a factor of four to five if comparable lead acid batteries are used, and allow
much higher operating temperatures of up to 140°F (60°C) without degradation. The resulting benefits of lower fuel
consumption, extended life expectancy, less maintenance to the primary power source, and silent watch capability make the
GenSet Eliminator ideal for military bases that generate their own electricity.
Multi-Kilowatt Module. Our Multi-Kilowatt Module lithium ion battery system is a large format battery utilizable
for energy storage, battery back-up, and remote power applications. This product is a direct replacement of 2.5 kWh and
greater lead acid batteries in 24V or 48V applications. It can be connected in multiples to obtain higher-voltages and is
capable of over 3,000 cycles while maintaining 80% of its capacity.
Technology Contracts. Our technology contract activities involve the development of new products or the
advancement of existing products through contracts with both government agencies and third parties.
Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems
and accessories to support military communications systems, including RF amplifiers, power supplies, power cables,
connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated
communication systems for fixed or vehicle applications such as tactical repeaters and SATCOM systems. We package
all systems to meet specific customer needs in rugged enclosures to allow their use in severe environments.
We offer a wide range of military communications systems and accessories designed to enhance and extend the
operation of communications equipment such as vehicle-mounted, manpack and handheld transceivers. Our communications
products include the following product configurations:
RF Amplifiers. Our RF amplifiers include: 20, 50 and 75-watt amplifiers and 20-watt accessories and kits. These
amplifiers are used to extend the range of manpack and handheld tactical transceivers and can be used on mobile or fixed site
applications.
Integrated Systems. Our integrated systems include: SATCOM systems; rugged, deployable case systems;
multiband transceiver kits; briefcase power systems; dual transceiver cases; enroute communications cases; radio cases;
and tactical repeater systems. These systems give communications operators everything that is needed to provide reliable
links to support C4I (Command, Control, Communications, Computers and Information systems).
Power Systems. Our power systems include: universal AC/DC power supplies with battery backup for tactical
manpack and handheld transceivers; Rover power supplies; interoperable power adapters and chargers; portable power
systems; tactical combat and AC to DC power supplies for encryption units, among many others. We can provide power
supplies for virtually all tactical communications devices.
Communications and Electronics. Our communications and electronics services include the design, integration,
fielding and life cycle management of portable, mobile and fixed-site communications systems. Capabilities include
engineering, rapid prototyping, systems integration and logistics support.
Sales and Marketing
We employ a staff of sales and marketing personnel in North America, Europe and Asia. We sell our products and
services directly to commercial customers, including OEMs, as well as government and defense agencies in the U.S. and
abroad and have contractual arrangements with sales agents who market our products on a commission basis in particular
areas. While OEM agreements and contracts contain volume-based pricing based on expected volumes, industry practices
dictate that pricing is rarely adjusted retroactively when contract volumes are not achieved. Every effort is made to adjust
future prices accordingly, but the ability to adjust prices is generally based on market conditions.
We also distribute some of our products through domestic and international distributors and retailers. Our sales are
generated primarily from customer purchase orders. We have several long-term contracts with the U.S. government and
other customers. These contracts do not commit the customers to specific purchase volumes, nor to specific timing of
purchase order releases, and they include fixed price agreements over various periods of time. In general we do not
believe our sales are seasonal, although we may sometimes experience seasonality for some of our military products based
on the timing of government fiscal budget expenditures.
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A significant portion of our business comes from sales of products and services to the U.S. and foreign
governments through various contracts. These contracts are subject to procurement laws and regulations that lay out policies
and procedures for acquiring goods and services. The regulations also contain guidelines for managing contracts after they
are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’s
convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or
administrative proceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government
contracting or subcontracting for a period of time.
During the years ended December 31, 2012 and 2011, we had one major customer, a large defense prime, which
comprised 21% of our revenues in each year. There were no other customers that comprised greater than 10% of our total
revenues during these years.
In 2012, sales to U.S. and non-U.S. customers were approximately $59,486 and $42,171, respectively. For
information relating to revenues by country for the last two fiscal years and long-lived assets for the last two fiscal years by
country of origin, see Note 10 in the Notes to Consolidated Financial Statements.
Battery & Energy Products
We target sales of our non-rechargeable products to manufacturers of security and safety equipment, medical
devices, search and rescue equipment, specialty instruments, point of sale equipment and metering applications, as well as
users of military equipment. Our strategy is to develop sales and marketing alliances with OEMs and governmental agencies
that utilize our batteries in their products, commit to cooperative research and development or marketing programs, and
recommend our products for design-in or replacement use in their products. We are addressing these markets through direct
contact by our sales and technical personnel, use of sales agents and stocking distributors, manufacturing under private label
and promotional activities.
We seek to capture a significant market share for our products within our targeted OEM markets, which we believe,
if successful will result in increased product awareness and sales at the end-user or consumer level. We are also selling our
9-volt battery to the consumer market through limited retail distribution through a number of national retailers. Most
military procurements are done directly by the specific government organizations requiring products, based on a competitive
bidding process. For those military procurements that are not bid, the procurements are typically subject to an audit of the
product’s underlying cost structure and associated profitability. Additionally, we are typically required to successfully meet
contractual specifications and to pass various qualification testing for the products under contract by the military. An
inability by us to pass these tests in a timely fashion could have a material adverse effect on our business, financial condition
and results of operations. When a government contract is awarded, there is a government procedure that allows for
unsuccessful companies to formally protest the award if they believe they were unjustly treated in the government’s bid
evaluation process. A prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a protest
could have a material adverse effect on our business, financial condition and results of operations.
We market our products to defense organizations in the U.S. and other countries. These efforts have resulted in
us winning significant contracts. In September 2010, we were awarded a production contract by the Defense Logistics
Agency for up to five years, with a maximum total potential of $42,100, to provide our BA-5390 non-rechargeable
lithium manganese dioxide batteries to the U.S. military. Production deliveries began in the first quarter of 2011.
Through December 31, 2012, we have received orders for deliveries under this contract totaling $6,500. This contract is
set to expire in 2015.
We target sales of our lithium ion rechargeable batteries and charging systems to OEM customers, as well as
distributors and resellers focused on our target markets. We seek design wins with OEMs, and believe that our design
capabilities, product characteristics and solution integration will drive OEMs to incorporate our batteries into their product
offerings, resulting in revenue growth opportunities for us.
We continue to expand our marketing activities as part of our strategic plan to increase sales of our rechargeable
products for commercial, standby, defense and communications applications, as well as hand-held devices, wearable devices
and other electronic portable equipment. A key part of this expansion includes increasing our design and assembly
capabilities as well as building our network of distributors and value added distributors throughout the world.
At December 31, 2012 and 2011, our backlog related to Battery & Energy Products was $8,932 and $22,555,
respectively. The decrease in our backlog related to Battery & Energy Products is mainly due to continued delays in U.S.
government and defense orders. The majority of the 2012 backlog is related to orders that are expected to ship throughout
2013.
9
Communications Systems
We target sales of our communications systems, which include power solutions and accessories to support
communications systems such as RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers,
equipment mounts, case equipment and integrated communication systems, to military OEMs and U.S. and international
government organizations. We sell our products directly and through authorized distributors to OEMs and to defense
organizations in the U.S. and internationally.
We market our products to defense organizations and OEMs in the U.S. and internationally. These efforts
resulted in a number of significant contracts for us. For example, in January 2012, we received a significant order from
an international customer for RF amplifiers and accessories in support of force modernization.
At December 31, 2012 and 2011, our backlog related to Communications Systems orders was approximately
$3,667 and $1,555, respectively. The increase in our backlog related to Communications Systems orders is mainly due to a
large multi-year order for RF amplifiers and accessories in support of force modernization in a foreign country. The majority
of the 2012 backlog was related to orders that are expected to ship throughout 2013 and 2014.
Patents, Trade Secrets and Trademarks
We rely on licenses of technology as well as our patented and unpatented proprietary information, know-how and
trade secrets to maintain and develop our competitive position. Despite our efforts to protect our proprietary information,
there can be no assurance that others will neither develop the same or similar information independently nor obtain access to
our proprietary information. In addition, there can be no assurance that we would prevail if we asserted our intellectual
property rights against third parties, or that third parties will not successfully assert infringement claims against us in the
future. We believe, however, that our success depends more on the knowledge, ability, experience and technological
expertise of our employees, than on the legal protection that our patents and other proprietary rights may or will afford.
We hold seventeen patents in the U.S. and foreign countries. Our patents protect technology that makes automated
production more cost-effective and protects important competitive features of our products. However, we do not consider our
business to be dependent on patent protection.
In 2003, we entered into an agreement with Saft Groupe S.A. to license certain tooling for battery cases. The
licensing fee associated with this agreement is based on a percentage of the sales price of the individual battery case, up to a
maximum of one dollar per battery case. The total royalty expense reflected in 2012 was $1. This agreement expires in the
year 2017.
Select key employees are required to enter into agreements providing for confidentiality and the assignment of
rights to inventions made by them while employed by us. These agreements also contain certain noncompetition and
nonsolicitation provisions effective during the employment term and for varying periods thereafter depending on position
and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to
abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the
course of their employment.
Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which
we own or use under license. The following are registered trademarks or trademarks of ours: Ultralife®, Ultralife Thin
Cell®, Ultralife HiRate®, The New Power Generation®, LithiumPower®, SmartCircuit®, We Are Power®, AMTI®,
ABLE™, McDowell Research®, and Max Juice For More Gigs®.
Manufacturing and Raw Materials
We manufacture our products from raw materials and component parts that we purchase. We have ISO 9001:2008
certification for our manufacturing facilities in Newark, New York, Virginia Beach, Virginia and Shenzhen, China. In
addition, our manufacturing facilities in Newark, New York and Shenzhen, China are ISO 14001 certified.
We expect that in the future, raw material purchases will fluctuate based on the timing of customer orders, the
related need to build inventory in anticipation of orders and actual shipment dates.
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Battery & Energy Products
Our Newark, New York and Shenzhen, China facilities have the capacity to produce cylindrical cells, 9-volt
batteries, and thin cells. Capacity, however, is also related to individual operations, and product mix changes can produce
bottlenecks in an individual operation, constraining overall capacity. We have acquired new machinery and equipment in
areas where production bottlenecks have resulted in the past and we believe that we have sufficient capacity in these areas.
We continually evaluate our requirements for additional capital equipment, and we believe that the planned increases will be
adequate to meet foreseeable customer demand.
We utilize lithium foil as well as other metals and chemicals to manufacture our batteries. Although we know of
only three major suppliers that extrude lithium into foil and provide such foil in the form required by us, we do not anticipate
any shortage of lithium foil or any difficulty in obtaining the quantities we require. Certain materials used in our products are
available only from a single source or a limited number of sources. Additionally, we may elect to develop relationships with
a single or limited number of sources for materials that are otherwise generally available. Although we believe that
alternative sources are available to supply materials that could replace materials we use and that, if necessary, we would be
able to redesign our products to make use of an alternative product, any interruption in our supply from any supplier that
serves currently as our sole source could delay product shipments and adversely affect our financial performance and
relationships with our customers. Although we have experienced interruptions of product deliveries by sole source suppliers,
none of such interruptions has had a material adverse effect on us. All other raw materials utilized by us are readily available
from many sources.
We use various utilities to provide heat, light and power to our facilities. As energy costs rise, we continue to seek
ways to reduce these costs and will initiate energy-saving projects at times to assist in this effort. It is possible, however, that
rising energy costs may have an adverse effect on our financial results.
We believe that the raw materials and components utilized for our rechargeable batteries are readily available from
many sources. Although we believe that alternative sources are available to supply materials that could replace materials we
use, any interruption in our supply from any supplier that serves currently as our sole source could delay product shipments
and adversely affect our financial performance and relationships with our customers.
Our Newark, New York facility has the capacity to produce significant volumes of rechargeable batteries, as this
operation generally assembles battery packs and chargers and is limited only by physical space and is not constrained by
manufacturing equipment capacity.
The total carrying value of our Battery & Energy Products inventory, including raw materials, work in process and
finished goods, amounted to approximately $22,871 and $20,700 as of December 31, 2012 and 2011, respectively.
Communications Systems
In general, we believe that the raw materials and components utilized by us for our communications accessories and
systems, including RF amplifiers, power supplies, cables, repeaters and integration kits, are available from many sources.
Although we believe that alternative sources are available to supply materials that could replace materials we use, any
interruption in our supply from any supplier that serves currently as our sole source could delay product shipments and
adversely affect our financial performance and relationships with our customers.
Our Virginia Beach, Virginia facility has the capacity to produce communications products and systems. This
operation generally assembles products and is limited only by physical space and is not constrained by manufacturing
equipment capacity.
The total carrying value of our Communications Systems inventory, including raw materials, work in process and
finished goods, amounted to approximately $7,499 and $14,147 as of December 31, 2012 and 2011, respectively.
Research and Development
We concentrate significant resources on research and development activities to improve upon our technological
capabilities and to design new products for customers’ applications. We conduct our research and development in Newark,
New York, Virginia Beach, Virginia, Tallahassee, Florida and Shenzhen, China. During 2012 and 2011 we expended
approximately $7,200 and $8,600, respectively, on research and development, including $1,200 and $3,200, respectively, on
customer sponsored research and development activities. We expect that research and development expenditures in the
future will be modestly higher than those in 2012, as new product development initiatives will drive our growth. As in the
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past, we will continue to make funding decisions for our research and development efforts based upon strategic demand for
customer applications.
Battery & Energy Products
We continue to internally develop non-rechargeable cells and batteries that broaden our product offering to our
customers.
We continue to internally develop our rechargeable product portfolio, including batteries, cables and charging
systems, as our customers’ needs for portable power continue to grow.
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.
Communications Systems
We continue to internally develop a variety of communications accessories and systems for the global defense
market to meet the ever-changing demands of our customers.
Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in our batteries may pose safety problems if improperly used. We have designed
our batteries to minimize safety hazards both in manufacturing and use.
The transportation of non-rechargeable and rechargeable lithium batteries is regulated in the U.S. by the
Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”), and internationally by
the International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport Association
(“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (“IMDG”), and other
country specific regulations. These regulations are based on the United Nations Recommendations on the Transport of
Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship our products
pursuant to PHMSA, ICAO, IATA, IMDG and other country specific hazardous goods regulations. The regulations require
companies to meet certain testing, packaging, labeling, marking and shipping paper specifications for safety reasons. We
have not incurred, and do not expect to incur, any significant costs in order to comply with these regulations. We believe
we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect to
comply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply
with these regulations. If we are unable to comply with the new regulations, however, or if regulations are introduced that
limit our or our customers’ ability to transport our products in a cost-effective manner, this could have a material adverse
effect on our business, financial condition and results of operations.
The European Union’s Restriction of Hazardous Substances (”RoHS”) Directive places restrictions on the use of
certain hazardous substances in electrical and electronic equipment. All applicable products sold in the European Union
market must pass RoHS compliance. While this directive does not apply to batteries and does not currently affect our
defense products, should any changes occur in the directive that would affect our products, we intend and expect to
comply with any new regulations that are imposed. Our commercial chargers are in compliance with this directive.
Additional European Union Directives, entitled the Waste Electrical and Electronic Equipment (“WEEE”) Directive and
the Directive "on batteries and accumulators and waste batteries and accumulators", impose regulations affecting our non-
defense products. These directives require that producers or importers of particular classes of electrical goods are
financially responsible for specified collection, recycling, treatment and disposal of past and future covered products.
These directives assign levels of responsibility to companies doing business in European Union markets based on their
relative market share. These directives call on each European Union member state to enact enabling legislation to
implement the directive. As additional European Union member states pass enabling legislation our compliance system
should be sufficient to meet such requirements. Our current estimated costs associated with our compliance with these
directives based on our current market share are not significant. However, we continue to evaluate the impact of these
directives as European Union member states implement guidance, and actual costs could differ from our current
estimates.
The European Union’s Battery Directive "on batteries and accumulators and waste batteries and accumulators" is
intended to cover all types of batteries regardless of their shape, volume, weight, material composition or use. It is aimed
at reducing mercury, cadmium, lead and other metals in the environment by minimizing the use of these substances in
batteries and by treating and re-using old batteries. The Directive applies to all types of batteries except those used to
12
protect European Member States' security, for military purposes, or sent into space. To achieve these objectives, the
Directive prohibits the marketing of some batteries containing hazardous substances. It establishes schemes aimed at high
level of collection and recycling of batteries with quantified collection and recycling targets. The Directive sets out
minimum rules for producer responsibility and provisions with regard to labeling of batteries and their removability from
equipment. Product markings are required for batteries and accumulators to provide information on capacity and to
facilitate reuse and safe disposal. We currently ship our products pursuant to the requirements of the Directive.
China’s “Management Methods for Controlling Pollution Caused by Electronic Information Products
Regulation” (“China RoHS”) provides a two-step, broad regulatory framework including similar hazardous substance
restrictions as are imposed by the European Union’s RoHS Directive, and applies to methods for the control and reduction
of pollution and other public hazards to the environment caused during the production, sale, and import of electronic
information products (“EIP”) in China affecting a broad range of electronic products and parts. Currently, only the first
step of the regulatory framework of China RoHS, which details marking and labeling requirements under Standard
SJT11364-2006 (“Marking Standard”), is in effect. However, the methods under China RoHS only apply to EIP placed
in the marketplace in China. Additionally, the Marking Standard does not apply to components sold to OEM’s for use in
other EIPs. Our sales in China are limited to sales to OEM’s and to distributors who supply to OEM’s. Should our sales
strategy change to include direct sales to end-users, our compliance system is sufficient to meet our requirements under
China RoHS. Our current estimated costs associated with our compliance with this regulation based on our current market
share are not significant. However, we continue to evaluate the impact of this regulation, and actual costs could differ
from our current estimates.
National, state and local laws impose various environmental controls on the manufacture, transportation, storage,
use and disposal of batteries and of certain chemicals used in the manufacture of batteries. Although we believe that our
operations are in substantial compliance with current environmental regulations, there can be no assurance that changes in
such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities.
There can be no assurance that additional or modified regulations relating to the manufacture, transportation, storage, use and
disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be imposed or how these
regulations will affect us or our customers, that could have a material adverse effect on our business, financial condition and
results of operations. In 2012 and 2011, we spent approximately $190 and $421, respectively, on environmental controls,
including costs to properly dispose of potentially hazardous waste.
Since non-rechargeable and rechargeable lithium battery chemistries react adversely with water and water vapor,
certain of our manufacturing processes must be performed in a controlled environment with low relative humidity. Our
Newark, New York and Shenzhen, China facilities contain dry rooms or glove box equipment, as well as specialized air-
drying equipment.
Battery & Energy Products
Our non-rechargeable battery products incorporate lithium metal, which reacts with water and may cause fires if not
handled properly. In the past, we have experienced fires that have temporarily interrupted certain manufacturing operations.
We believe that we have adequate fire suppression systems and insurance, including business interruption insurance, to
protect against the occurrence of fires and fire losses in our facilities.
Our 9-volt battery, among other sizes, is designed to conform to the dimensional and electrical standards of the
American National Standards Institute, and the 9-volt battery and a range of 3-volt cells are recognized under the
Underwriters Laboratories, Inc. Component Recognition Program.
Communications Systems
We are not currently aware of any other regulatory requirements regarding the disposal of communications
products.
Corporate
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 1502 (the “Dodd-Frank
Act”) requires public companies to disclose whether certain minerals (such as tantalum, tin, gold and tungsten),
commonly known as “conflict minerals,” are necessary to the functionality or production of a product manufactured by a
public company and if those minerals originated in the Democratic Republic of Congo or an adjoining country. To
comply with the Dodd-Frank Act, as determined by the SEC, we will be required to perform due diligence and disclose
whether or not our products contain such minerals and from which countries and source (smelter) the minerals were
13
obtained. The first report is due by May 31, 2014 for the 2013 calendar year and we are implementing appropriate
measures to comply with such requirements.
Competition
Competition in both the battery and communications systems markets is, and is expected to remain, intense. The
competition ranges from development stage companies to major domestic and international companies, many of which have
financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. We
compete against companies producing batteries as well as those companies producing communications systems. We compete
on the basis of design flexibility, performance, price, reliability and customer support. There can be no assurance that our
technologies and products will not be rendered obsolete by developments in competing technologies or services that are
currently under development or that may be developed in the future or that our competitors will not market competing
products and services that obtain market acceptance more rapidly than ours.
Historically, although other entities may attempt to take advantage of the growth of the battery market, the lithium
battery cell 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 battery cells require
large capital expenditures, which may deter new entrants from commencing production. Through our experience in battery
cell manufacturing, we have also developed expertise, which we believe would be difficult to reproduce without substantial
time and expense in the non-rechargeable battery market.
Employees
As of December 31, 2012, we employed a total of 841 permanent and temporary employees: 40 in research and
development, 692 in production and 109 in sales and administration. None of our employees are represented by a labor
union.
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ITEM 1A. RISK FACTORS
A significant portion of our revenues is derived from a certain key customer.
During the years ended December 31, 2012 and 2011, we had one major customer, a large defense prime, which
comprised 21% of our revenues in each year. There were no other customers that comprised greater than 10% of our total
revenues during these years. The reduction, delay or cancellation of orders from this customer for any reason could
materially and adversely affect our business, operating results and financial condition.
Reductions in U.S. and foreign military spending could have a material adverse effect on our business, financial
condition and results of operations.
A significant portion of our revenues is derived from contracts with the U.S. and foreign militaries or OEMs that
supply the U.S. and foreign militaries. In the years ended December 31, 2012 and 2011, approximately $66,200 or 65% and
$72,100 or 53%, respectively, of our revenues were comprised of sales made directly or indirectly to the U.S. and foreign
militaries.
We are highly dependent on sales to U.S. Government customers. The percentage of our net revenue that was
derived from sales to U.S. Government customers, including the DoD, whether directly or through prime contractors, was
approximately $43,700 or 43% in 2012 and $58,400 or 43% in 2011. Therefore, any significant disruption or
deterioration of our relationship with the U.S. Government would significantly reduce our revenue. Our competitors
continuously engage in efforts to expand their business relationships with the U.S. Government and will continue these
efforts in the future, and the U.S. Government may choose to use other contractors.
Budget and appropriations decisions made by the U.S. Government are outside of our control and have long-term
consequences for our business. U.S. Government spending priorities and DoD spending levels are becoming increasingly
uncertain and difficult to predict and will be affected by numerous factors. The most recent example of this is
sequestration (automatic, across-the-board U.S. Government budgetary spending cuts) that became effective on March 1,
2013 as required under the Budget Control Act of 2011. The actual impact of sequestration on the DoD budget and other
programs is uncertain as sequestration becomes implemented over the remaining fiscal year as the timing and impact on
spending levels is determined and as new spending bills, such as a proposed continuing resolution to be negotiated and
effective at the end of March 2013, alter the current spending levels. A decline in U.S. military expenditures could result in
a reduction in the military’s demand for our products, which could have a material adverse effect on our business, financial
condition and results of operations.
We face risks related to general domestic and global economic conditions.
In general, our operating results can be significantly affected by negative economic conditions, high labor, material
and commodity costs and unforeseen changes in demand for our products and services. These risks are heightened as
economic conditions globally have deteriorated significantly and may not fully recover to historical levels in the short-term.
The current economic conditions could continue to have a negative impact on demand for our products and services, which
may have a direct negative impact on our sales and profitability, as well as our ability to generate sufficient internal cash
flows or access credit at reasonable rates to meet future operating expenses, service debt and fund capital expenditures.
A decline in demand for products or services using our batteries or communications systems could reduce demand for our
products or services and/or our products could become obsolete.
A substantial portion of our business depends on the continued demand for products or services using our batteries
and communications systems sold by our customers, including OEM’s. Our success depends significantly upon the success
of those customers’ products or services in the marketplace. We are subject to many risks beyond our control that influence
the success or failure of a particular product or service offered by a customer, including:
competition faced by the customer in its particular industry,
•
• market acceptance of the customer’s product or service,
•
•
the engineering, sales, marketing and management capabilities of the customer,
technical challenges unrelated to our technology or products faced by the customer in developing its products
or services, and
the financial and other resources of the customer.
•
15
For instance, in the years ended December 31, 2012 and 2011, 14% and 12% of our revenues, respectively, were
comprised of sales of our 9-volt batteries, and of this, approximately 26% and 34%, respectively, pertained to sales to smoke
alarm OEMs. If the retail demand for long-life smoke alarms decreases significantly or if innovation leads to alternative
sources of power for long-life smoke alarms, this could have a material adverse effect on our business, financial condition
and results of operations.
The market for our products is characterized by changing technology and evolving industry standards, often
resulting in product obsolescence or short product lifecycles. Although we believe that our products are comprised of state-
of-the-art technology, there can be no assurance that competitors will not develop technologies or products that would render
our technologies and products obsolete or less marketable. Many of the companies with which we compete have
substantially greater resources than we do, and some have the capacity and volume of business to be able to produce their
products more efficiently than we can at the present time. In addition, these companies are developing or have developed
products using a variety of technologies that are expected to compete with our technologies. If these companies successfully
market their products in a manner that renders our technologies obsolete, this could have a material adverse effect on our
business, financial condition and results of operations.
Our efforts to develop new commercial applications for our products could fail.
Although we are involved with developing certain products for new commercial applications, we cannot provide
assurance that acceptance of our products will occur due to the highly competitive nature of the business. There are many
new product and technology entrants into the marketplace, and we must continually reassess the market segments in which
our products can be successful and seek to engage customers in these segments that will adopt our products for use in their
products. In addition, these companies must be successful with their products in their markets for us to gain increased
business. Increased competition, failure to gain customer acceptance of products, the introduction of competitive
technologies or failure of our customers in their markets could have a further adverse effect on our business.
Our growth and expansion strategy could strain or overwhelm our resources.
Rapid growth of our business could significantly strain management, operations and technical resources. If we are
successful in obtaining rapid market growth of our products and services, we will be required to deliver large volumes of
quality products and increased levels of services to customers on a timely basis at a reasonable cost to those customers. For
example, demand for our new or existing products combined with our ability to penetrate new markets and geographies,
could strain the current capacity capabilities of our manufacturing facilities and require additional equipment and time to
build a sufficient support infrastructure. This demand could also create working capital issues for us, as we may need
increased liquidity to fund purchases of raw materials and supplies. We cannot assure, however, that our business will grow
rapidly or that our efforts to expand manufacturing and quality control activities will be successful or that we will be able to
satisfy commercial scale production requirements on a timely and cost-effective basis.
We also may be required to continue to improve our operations, management and financial systems and controls in
order to remain competitive. The failure to manage growth and expansion effectively could have an adverse effect on our
business, financial condition, and results of operations.
Negative publicity of lithium-ion batteries may negatively impact the industries or markets we operate in.
We are unable to predict the impact, severity and duration of negative publicity and how it may impact the
industries or markets we serve. Ongoing negative attention being given to lithium ion batteries that are integrated into the
power systems of new commercial aircraft and electric motor vehicles may have an impact on the lithium ion battery
industry as a whole, regardless of the designed usage of those batteries. The residual effects of such events could have an
adverse effect on our business, financial condition, and results of operations.
Any inability to comply with changes to the regulations for the shipment of our products could limit our ability to transport
our products to customers in a cost-effective manner.
The transportation of lithium batteries is regulated by the International Civil Aviation Organization (“ICAO”) and
corresponding International Air Transport Association (“IATA”) Dangerous Goods Regulations and the International
Maritime Dangerous Goods Code (“IMDG”) and in the U.S. by the Department of Transportation’s Pipeline and Hazardous
Materials Safety Administration (“PHMSA”). These regulations are based on the United Nations Recommendations on the
Transport of Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship
our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. The regulations require companies to
meet certain testing, packaging, labeling and shipping specifications for safety reasons. We have not incurred, and do not
16
expect to incur, any significant costs in order to comply with these regulations. We believe we comply with all current
U.S. and international regulations for the shipment of our products, and we intend and expect to comply with any new
regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations.
If we are unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to
transport our products to customers in a cost-effective manner, this could have a material adverse effect on our business,
financial condition and results of operations.
We are subject to certain safety risks, including the risk of fire, inherent in the manufacture, use and transportation of
lithium batteries.
Due to the high energy inherent in lithium batteries, our lithium batteries can pose certain safety risks, including the
risk of fire. We incorporate procedures in research, development, product design, manufacturing processes and the
transportation of lithium batteries that are intended to minimize safety risks, but we cannot assure that accidents will not
occur or that our products will not be subject to recall for safety concerns. Although we currently carry insurance policies
which cover loss of the plant and machinery, leasehold improvements, inventory and business interruption, any accident,
whether at the manufacturing facilities or from the use of the products, may result in significant production delays or claims
for damages resulting from injuries. While we maintain what we believe to be sufficient casualty liability coverage to
protect against such occurrences, these types of losses could have a material adverse effect on our business, financial
condition and results of operation.
Any impairment of goodwill and indefinite-lived intangible assets, and other intangible assets, could negatively impact
our results of operations.
Our goodwill and indefinite-lived intangible assets are subject to an impairment test on an annual basis and are
also tested whenever events and circumstances indicate that goodwill and/or indefinite-lived intangible assets may be
impaired. Any excess goodwill and/or indefinite-lived intangible assets value resulting from the impairment test must be
written off in the period of determination. Intangible assets (other than goodwill and indefinite-lived intangible assets)
are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an
investment in a business which will require us to record goodwill based on the purchase price and the value of the
acquired tangible and intangible assets. We may subsequently experience unforeseen issues with such business which
adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the
recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant
write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other
intangible assets could have a negative impact on our results of operations and financial condition. We are constantly
reviewing the costs and the benefits of retiring several of our current brands, the retirement of which could result in a non-
cash impairment charge of the associated indefinite-lived intangible asset, reducing operating earnings by the associated
amount or amounts on the balance sheet. We have completed our annual impairment analysis for goodwill and indefinite-
lived intangible assets, in accordance with the applicable accounting guidance, and have concluded that we do not have
any impairment of goodwill and indefinite-lived intangible assets for the year ended December 31, 2012. For 2012, we
identified four trademarks for testing and, as a result of that testing, no impairment was indicated. However, due to the
narrow margin of passing the testing in 2012, there is potential that the McDowell - Communications Systems trademark
may become partially or fully impaired in 2013 if the projected revenue targets are not met. As of December 31, 2012, the
McDowell - Communications Systems trademark had a carrying value of $2,400.
Our operations in China are subject to unique risks and uncertainties.
Our operating facility in China presents risks including, but not limited to, changes in local regulatory
requirements, including changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses,
compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to local laws
and enforcement of contract and intellectual property rights, currency restrictions, currency exchange controls,
fluctuations of currency, and currency revaluations, civil unrest, power outages, water shortages, labor shortages, labor
disputes, increase in labor costs, rapid changes in government, economic and political policies, political or civil unrest,
acts of terrorism, or the threat of boycotts, and other civil disturbances that are outside of our control. Any such
disruptions could have a material adverse effect on our business, financial condition and results of operations. In the first
half of 2012, we completed the transition of 9-volt batteries production from the U.S. to China. While we do not foresee any
potential disruption to the manufacturing of this product, unexpected circumstances could arise, which may negatively
impact our production.
The loss of top management and key personnel could significantly harm our business, and the ability to put in place a
succession plan and recruit experienced, competent management is critical to the success of the business.
17
The loss of top management and key personnel could significantly harm our business, and the ability to put in place
a succession plan and recruit experienced, competent management is critical to the success of our business. The continuity
of our officers and executive team are vital to the successful implementation of a new business model and growth strategy
designed to deliver sustainable, consistent profitability. This need is accentuated by the reduction in management to right
size the business during the course of 2012 and 2011. A top management priority has been the development of a succession
plan to mitigate the risks associated with the loss of senior executives. There is no guarantee that we will be successful in our
efforts to effectively implement our succession plan.
Because of the specialized, technical nature of our business, we are highly dependent on certain members of our
management, sales, engineering and technical staffs. The loss of these employees could have a material adverse effect on
our business, financial condition and results of operations. Our ability to effectively pursue our business strategy will depend
upon, among other factors, the successful retention of our key personnel, recruitment of additional highly skilled and
experienced managerial, sales, engineering and technical personnel, and the integration of such personnel obtained through
business acquisitions. We cannot assure that we will be able to retain or recruit this type of personnel. An inability to hire
sufficient numbers of people or to find people with the desired skills could result in greater demands being placed on limited
management resources which could have a material adverse effect on our business, financial condition and results of
operations.
We are subject to the contract rules and procedures of the U.S. and foreign governments. These rules and procedures create
significant risks and uncertainties for us that are not usually present in contracts with private parties.
We will continue to develop battery products, communications systems and services to meet the needs of the U.S.
and foreign governments. We compete in solicitations for awards of contracts. The receipt of an award, however, does not
always result in the immediate release of an order and does not guarantee in any way any given volume of orders. Any delay
of solicitations or anticipated purchase orders by, or future failure of, the U.S. or foreign governments to purchase products
manufactured by us could have a material adverse effect on our business, financial condition and results of operations.
Additionally, in these scenarios we are typically required to successfully meet contractual specifications and to pass various
qualification-testing for the products under contract. Our inability to pass these tests in a timely fashion, as well as meet
delivery schedules for orders released under contract, could have a material adverse effect on our business, financial
condition and results of operations.
When a government contract is awarded, there is a government procedure that permits unsuccessful companies to
formally protest such award if they believe they were unjustly treated in the evaluation process. As a result of these protests,
the government is precluded from proceeding under these contracts until the protests are resolved. A prolonged delay in the
resolution of a protest, or a reversal of an award resulting from such a protest could have a material adverse effect on our
business, financial condition and results of operations.
We could be adversely affected by violations of the US Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act or
other anti-corruption laws.
The FCPA, U.K. Bribery Act and other anti-corruption laws generally prohibit companies and their
intermediaries from making improper payments (to foreign officials and otherwise) and require companies to keep
accurate books and records and maintain appropriate internal controls. Our training program and policies mandate
compliance with such laws. We operate in some parts of the world that have experienced governmental corruption to
some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and
practices. If we are found to be liable for violations of anti-corruption laws (either due to our own acts or our
inadvertence, or due to the acts or inadvertence of others, including employees of our third party partners or agents), we
could suffer from civil and criminal penalties or other sanctions, incur significant internal investigation costs and suffer
reputational harm.
The U.S. and foreign governments can audit our contracts with their respective defense and government agencies and, under
certain circumstances, can adjust the economic terms of those contracts.
A significant portion of our business comes from sales of products and services to the U.S. and foreign
governments through various contracts. These contracts are subject to procurement laws and regulations that lay out policies
and procedures for acquiring goods and services. The regulations also contain guidelines for managing contracts after they
are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’s
convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or
administrative proceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government
contracting or subcontracting for a period of time.
18
We had certain “exigent”, non-bid contracts with the U.S. government, which were subject to audit and final price
adjustment, which resulted in decreased margins compared with the original terms of the contracts. As of December 31,
2012, there were no outstanding exigent contracts with the U.S. government. As part of its due diligence, the U.S.
government has conducted post-audits of the completed exigent contracts to ensure that information used in supporting the
pricing of exigent contracts did not differ materially from actual results. In September 2005, the Defense Contracting Audit
Agency (“DCAA”) presented its findings related to the audits of three of the exigent contracts, suggesting a potential pricing
adjustment of approximately $1,400 related to reductions in the cost of materials that occurred prior to the final negotiation
of these contracts. In addition, in June 2007, we received a request from the Office of Inspector General of the Department
of Defense (“DoD IG”) seeking certain information and documents relating to our business with the Department of Defense.
We cooperated with the DCAA audit and DoD IG inquiry by making available to government auditors and investigators
our personnel and furnishing the requested information and documents. The DCAA Audit and DoD IG inquiry were
consolidated and the U.S. Attorney’s Office represented the government in connection with these matters. Under
applicable federal law, we may have been subject up to treble damages and penalties associated with the potential pricing
adjustment. To resolve these matters, we entered into a settlement agreement with the United States of America and under
such agreement agreed to pay the U.S. government $2,730 plus accrued interest in four semi-annual payments. These
payments were fully completed in 2012.
Our supply of raw materials and components could be disrupted.
Certain materials and components used in our products are available only from a single or a limited number of
suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or
increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for
materials and components that are otherwise generally available. Due to our involvement with supplying defense products to
the government, we could receive a government preference to continue to obtain critical supplies to meet military production
needs. However, if the government did not provide us with a government preference in such circumstances, the difficulty in
obtaining supplies could have a material adverse effect on our business, financial condition and results of operations.
Although we believe that alternative suppliers are available to supply materials and components that could replace materials
and components currently used and that, if necessary, we would be able to redesign our products to make use of such
alternatives, any interruption in the supply from any supplier that serves as a sole source could delay product shipments and
have a material adverse effect on our business, financial condition and results of operations. We have experienced
interruptions of product deliveries by sole source suppliers in the past, and we cannot guarantee that we will not experience a
material interruption of product deliveries from sole source suppliers in the future. Additionally, we could face increasing
pricing pressure from our suppliers dependent upon volume due to rising costs by these suppliers that could be passed on to
us in higher prices for our raw materials, which could have a material effect on our business, financial condition and results
of operations.
Our customers may not meet the volume expectations in our supply agreements.
We sell most of our products and services through supply agreements and contracts. While supply agreements and
contracts contain volume-based pricing based on expected volumes, industry practices dictate that pricing is rarely adjusted
retroactively when contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but our
ability to adjust prices is generally based on market conditions.
Any inability to protect our proprietary and intellectual property could allow our competitors and others to produce
competing products based on our proprietary and intellectual property.
Our success depends more on the knowledge, ability, experience and technological expertise of our employees than
on the legal protection of patents and other proprietary rights. We claim proprietary rights in various unpatented
technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We cannot
guarantee the degree of protection these various claims may or will afford, or that competitors will not independently
develop or patent technologies that are substantially equivalent or superior to our technology. We protect our proprietary
rights in our products and operations through contractual obligations, including nondisclosure agreements with certain
employees, customers, consultants and strategic partners. There can be no assurance as to the degree of protection these
contractual measures may or will afford. We have had patents issued and have patent applications pending in the U.S. and
elsewhere. We cannot assure (1) that patents will be issued from any pending applications, or that the claims allowed under
any patents will be sufficiently broad to protect our technology, (2) that any patents issued to us will not be challenged,
invalidated or circumvented, or (3) as to the degree or adequacy of protection any patents or patent applications may or will
afford. If we are found to be infringing third party patents, there can be no assurance that we will be able to obtain licenses
with respect to such patents on acceptable terms, if at all. The failure to obtain necessary licenses could delay product
19
shipments or the introduction of new products, and costly attempts to design around such patents could foreclose the
development, manufacture or sale of products.
Over the last several years Arista Power, Inc. (“Arista”) has hired a member of our senior management team,
several members of our sales and engineering teams and other of our employees. Many of these employees had access to
our proprietary property such as our technology and know-how and took such knowledge with them. During the summer
of 2011, Arista recruited David Modeen, a former senior sales and engineering employee, in violation of his Employee
Confidentiality, Non-Disclosure, Non-Compete, Non-Disparagement and Assignment Agreement (the “Non-Compete
Agreement”) with us. We believe that Mr. Modeen has provided certain of our trade secrets and confidential proprietary
information to Arista. Such disclosure could result in loss of sales and customers. On September 23, 2011, we initiated
an action against Arista and Mr. Modeen, in the State of New York Supreme Court, County of Wayne seeking to enforce
the terms of the Non-Compete Agreement. Arista responded by filing a complaint against us in the State of New York
Supreme Court, County of Monroe. Both of these lawsuits are currently outstanding. There can be no assurances that our
lawsuit against Arista will be successful or, even if successful, that any remedy will make us whole for the damage caused
by Mr. Modeen’s breach of our Non-Compete Agreement.
Our business could be negatively impacted by breaches in security and other disruptions, affecting our ability to generate
revenues or contain costs.
We face certain security threats, including threats to our information technology infrastructure, attempts to gain
access to our proprietary or classified information, and threats to physical security. Our information technology networks
and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-
day operations. The risks of a security breach or disruption, particularly through cyber attack or cyber intrusion,
including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. Although we have developed
systems and processes that are designed to protect our proprietary or classified information, failure to prevent these types
of events could disrupt our operations, require significant management attention and resources, and could negatively
impact our reputation among our customers and the public, which could have a negative impact on our financial
condition, results of operations and liquidity.
We may incur significant costs because of the warranties we supply with our products and services.
With respect to our battery products, we typically offer warranties against any defects due to product malfunction or
workmanship for a period up to one year from the date of purchase. With respect to our communications systems products,
we now offer up to a three-year warranty. Previously, we had offered up to a four-year warranty. We provide for a reserve
for these potential warranty expenses, which is based on an analysis of historical warranty issues. There is no assurance that
future warranty claims will be consistent with past history, and in the event we experience a significant increase in warranty
claims, there is no assurance that our reserves will be sufficient. This could have a material adverse effect on our business,
financial condition and results of operations.
Our quarterly and annual results and the price of our common stock could fluctuate significantly.
Our future operating results may vary significantly from quarter to quarter and from year to year depending on
factors such as the timing and shipment of significant orders, new product introductions, delays in customer releases of
purchase orders, delays in receiving raw materials from vendors, the mix of distribution channels through which we sell our
products and services and general economic conditions. Frequently, a substantial portion of our revenue in each quarter is
generated from orders booked and fulfilled during that quarter. As a result, revenue levels are difficult to predict for each
quarter. If revenue results are below expectations, operating results will be adversely affected as we have a sizeable base of
fixed overhead costs that do not fluctuate much with the changes in revenue. Due to such variances in operating results, we
have sometimes failed to meet, and in the future may not meet, market expectations or even our own guidance regarding our
future operating results.
In addition to the uncertainties of quarterly and annual operating results, future announcements concerning us or our
competitors, including technological innovations or commercial products, litigation or public concerns as to the safety or
commercial value of one or more of our products may cause the market price of our common stock to fluctuate substantially
for reasons which may be unrelated to our operating results. These fluctuations, as well as general economic, political and
market conditions, may have a material adverse effect on the market price of our common stock.
We may not generate a sufficient amount of cash or generate sufficient funds from operations to fund our operations or
we may be unable to obtain financing to fund ongoing operations and future growth.
20
Our ability to draw funds and make payments on our asset-based credit facility will depend on our ability to
consistently generate cash flow from operations in the future. This ability, to a certain extent, is subject to general
economic, financial, competitive, regulatory and other factors beyond our control. Our future cash flows from operations,
combined with our accessibility to cash and credit, may not be sufficient to allow us to finance ongoing operations or to
make required investments for future growth. We may need to seek additional credit or access capital markets for additional
funds. There is no assurance, given our historical operating performance, that we would be successful in this regard.
We are seeking to replace our 2010 Credit Facility that expired on February 17, 2013 and was extended through May 15,
2013; however, there can be no assurance that we will be able to replace our present Credit Facility on terms acceptable
to us or at all.
We are currently exploring options for replacing our 2010 Credit Facility that expired on February 17, 2013, and
was extended through May 15, 2013, with RBS or another lender. During the course of 2012, we have solidified our
liquidity position and ended the year with cash, including restricted cash, of $10,078 and no outstanding debt. While at
December 31, 2012, we had no borrowings outstanding under our Credit Facility and have no reason to believe that we
will not be able obtain satisfactory financing, there can be no assurances that we will be able to replace the Credit Facility
on terms acceptable to us or at all. Our financial flexibility may be limited if we are unable to replace our 2010 Credit
Facility.
We are subject to foreign currency fluctuations.
We maintain manufacturing operations in North America, Europe and Asia, and we export products to various
countries. We purchase materials and sell our products in foreign currencies, and therefore currency fluctuations may impact
our pricing of products sold and materials purchased. In addition, our foreign subsidiaries maintain their books in local
currency, and the translation of those subsidiary financial statements into U.S. dollars for our consolidated financial
statements could have an adverse effect on our consolidated financial results, due to changes in local currency relative to the
U.S. dollar. Accordingly, currency fluctuations could have a material adverse effect on our business, financial condition and
results of operations.
Our ability to use our Net Operating Loss Carryforwards in the future may be limited, which could have an adverse impact
on our tax liabilities.
At December 31, 2012, we had approximately $58,030 of net operating loss carryforwards (“NOL’s”) available to
offset future taxable income. We continually assess the carrying value of this asset based on the relevant accounting
standards. As of December 31, 2012, we reflected a full valuation allowance against our deferred tax asset to the extent the
asset is not able to be offset by future reversing temporary differences. As a result, we have reflected a net deferred tax
liability of $4,040 in the U.S. We have reflected a net deferred tax asset of $-0- in the U. K. due to our current assessment
that it is more likely than not to not be realized. As we continue to assess the realizability of our deferred tax assets, the
amount of the valuation allowance could be reduced. In addition, certain of our NOL carryforwards are subject to U.S.
alternative minimum tax such that carryforwards can offset only 90% of alternative minimum taxable income. Achieving
our business plan targets, particularly those relating to revenue and profitability, is integral to our assessment regarding the
recoverability of our net deferred tax asset.
We have determined that a change in ownership, as defined under Internal Revenue Code Section 382, occurred in
2005 and 2006. As such, our domestic NOL carryforward will be subject to an annual limitation estimated to be in the range
of approximately $12,000 to $14,500. This limitation did not have an impact on income taxes determined for 2012. Such a
limitation could result in the possibility of a cash outlay for income taxes in a future year when earnings exceed the amount
of NOL carryforwards that can be used by us. The use of our U.K. NOL carryforwards may be limited due to the change
in the U.K. operation during 2008 from a manufacturing and assembly center to primarily a distribution and service
center.
We may incur significant costs because of known and unknown environmental matters.
National, state and local laws impose various environmental controls on the manufacture, transportation, storage,
use and disposal of batteries and of certain chemicals used in the manufacture of batteries. Although we believe that our
operations are in substantial compliance with current environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at our present or former facilities or at facilities
to which we have sent waste for disposal, there can be no assurance that changes in such laws and regulations will not
impose costly compliance requirements on us or otherwise subject us to future liabilities. There can be no assurance that
additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to
21
manufacture our batteries or restricting disposal of batteries will not be imposed or how these regulations will affect us or our
customers. Such changes in regulations could have a material adverse effect on our business, financial condition and results
of operations.
The European Union’s Restriction of Hazardous Substances (”RoHS”) Directive places restrictions on the use of
certain hazardous substances in electrical and electronic equipment. All applicable products sold in the European Union
market after July 1, 2006 must pass RoHS compliance. While this directive does not apply to batteries and does not
currently affect our defense products, should any changes occur in the directive that would affect our products, we intend
and expect to comply with any new regulations that are imposed. Our commercial chargers are in compliance with this
directive. Additional European Union Directives, entitled the Waste Electrical and Electronic Equipment (“WEEE”)
Directive and the Directive "on batteries and accumulators and waste batteries and accumulators", impose regulations
affecting our non-defense products. These directives require that producers or importers of particular classes of electrical
goods are financially responsible for specified collection, recycling, treatment and disposal of past and future covered
products. These directives assign levels of responsibility to companies doing business in European Union markets based
on their relative market share. These directives call on each European Union member state to enact enabling legislation to
implement the directive. As additional European Union member states pass enabling legislation our compliance system
should be sufficient to meet such requirements. Our current estimated costs associated with our compliance with these
directives based on our current market share are not significant. However, we continue to evaluate the impact of these
directives as European Union member states implement guidance, and actual costs could differ from our current
estimates.
The European Union’s Battery Directive "on batteries and accumulators and waste batteries and accumulators" is
intended to cover all types of batteries regardless of their shape, volume, weight, material composition or use. It is aimed
at reducing mercury, cadmium, lead and other metals in the environment by minimizing the use of these substances in
batteries and by treating and re-using old batteries. The Directive applies to all types of batteries except those used to
protect European Member States' security, for military purposes, or sent into space. To achieve these objectives, the
Directive prohibits the marketing of some batteries containing hazardous substances. It establishes schemes aimed at high
level of collection and recycling of batteries with quantified collection and recycling targets. The Directive sets out
minimum rules for producer responsibility and provisions with regard to labeling of batteries and their removability from
equipment. Product markings are required for batteries and accumulators to provide information on capacity and to
facilitate reuse and safe disposal. We currently ship our products pursuant to the requirements of the Directive.
China’s “Management Methods for Controlling Pollution Caused by Electronic Information Products
Regulation” (“China RoHS”) provides a two-step, broad regulatory framework, including similar hazardous substance
restrictions as are imposed by the European Union’s RoHS Directive, and applies to methods for the control and reduction
of pollution and other public hazards to the environment caused during the production, sale, and import of electronic
information products (“EIP”) in China affecting a broad range of electronic products and parts. Currently, only the first
step of the regulatory framework of China RoHS, which details marking and labeling requirements under Standard
SJT11364-2006 (“Marking Standard”), is in effect. However, the methods under China RoHS only apply to EIP placed
in the marketplace in China. Additionally, the Marking Standard does not apply to components sold to OEMs for use in
other EIPs. Our sales in China are limited to sales to OEMs and to distributors who supply to OEMs. Should our sales
strategy change to include direct sales to end-users, our compliance system is sufficient to meet our requirements under
China RoHS. Our current estimated costs associated with our compliance with this regulation based on our current
market share are not significant. However, we continue to evaluate the impact of this regulation, and actual costs could
differ from our current estimates.
A number of domestic and international communities are prohibiting the landfill disposal of batteries and
requiring companies to make provisions for product recycling. Of particular note are the European Union’s Batteries
Directive and the New York State Rechargeable Battery Recycling law. We are committed to responsible product
stewardship and ongoing compliance with these and future regulations. The compliance costs associated with current
recycling regulations are not expected to be significant at this time. However, we continue to evaluate the impact of this
regulation, and actual costs could differ from our current estimates.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
As of December 31, 2012, we own two buildings in Newark, New York comprising approximately 250,000 square
feet, which serves operations primarily in the Battery & Energy Products operating segment. Our corporate headquarters are
located in our Newark, New York facility. In addition, we leased approximately 46,000 square feet in a facility based in
Abingdon, England, which we have decided to not renew. As such, subsequent to year end, we have relocated our Abingdon,
England operations to a smaller facility nearby that is better suited to our sales and service needs going forward, reducing to
the usable space to approximately 3,500 square feet. Both facilities serve the operations in the Battery and Energy Services
Products operating segment. We also lease approximately 130,000 square feet in four buildings on one campus in Shenzhen,
China, which serves operations in the Battery & Energy Products operating segment. The Shenzhen, China campus location
includes dormitory facilities. We lease approximately 32,500 square feet in a facility based in Virginia Beach, Virginia,
which serves operations in the Communications Systems operating segment. We also lease sales and administrative offices,
as well as manufacturing and production facilities, in India, which serves operations in the Battery & Energy Products
operating segment. Our research and development efforts for our Battery & Energy Products are conducted at our Newark,
New York and Shenzhen, China facilities, while our research and development efforts for our Communications Systems
products are conducted in Tallahassee, Florida and at our facility in Virginia Beach, Virginia. On occasion, we rent
additional warehouse space to store inventory and non-operational equipment. We believe that our facilities are adequate
and suitable for our current needs. However, we may require additional manufacturing and administrative space if demand
for our products and services continues to grow.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the normal course of business. We believe that the
final disposition of such matters will not have a material adverse effect on our financial position, results of operations or cash
flows.
Arista Power Litigation
On September 23, 2011, we initiated an action against Arista Power, Inc. (“Arista”) and our former senior sales
and engineering employee, David Modeen, in the State of New York Supreme Court, County of Wayne (Index No.
73379). In our initial Complaint, we alleged that Arista recruited all but one of the members of its executive team from
us, subsequently changed its business to compete directly with us by using our confidential information, and during the
summer of 2011, recruited Modeen to become an Arista employee. We alleged that, as a result of actions by Arista and
Modeen: (i) Modeen has breached the terms of his Employee Confidentiality, Non-Disclosure, Non-Compete, Non-
Disparagement and Assignment Agreement with us; (ii) Modeen has breached certain agreements, duties and obligations
he owed us, including to protect and refrain from disclosing our trade secrets and confidential and proprietary
information; (iii) Arista’s employment of Modeen will inevitably lead to the disclosure and use of our trade secrets by
Arista, in violation of Modeen’s duties and obligations to us; (iv) Arista unlawfully induced Modeen to breach his
agreements with and duties and obligations to us; and (v) Arista’s recruitment and employment of Modeen has breached a
subcontract between Arista and us. We seek damages as determined at trial and preliminary and permanent injunctive
relief. The defendants answered the allegations set forth in the Complaint, without asserting any counterclaims.
On December 5, 2011, Arista served us with a Complaint it filed on November 29, 2011, in the State of New
York Supreme Court, County of Monroe (Index No. 11-13896) against us, our officers, several of our directors, and an
employee. In its Complaint, Arista alleges that we and our named defendants have violated the terms of a Confidentiality
Agreement with Arista and have unfairly competed against Arista by unlawfully appropriating Arista’s trade secrets and
that as a result of such activity, Arista has incurred damages in excess of $60,000. Arista seeks damages, an accounting,
and preliminary and permanent injunctive relief.
On December 21, 2011, we and our officers, directors and employee named in Arista’s Complaint filed a motion
to dismiss Arista’s Complaint against our officers, directors and employee as Arista’s Complaint fails to state any cause
of action against any of them and to dismiss the claim of fraud against our officers, directors and employee.
Subsequently, Arista filed an Amended Complaint alleging essentially the same causes of action but adding additional
factual allegations against us and our officers, directors and employee. In addition, Arista filed a motion to disqualify our
outside legal counsel representing us and our officers, directors and employee in both Arista’s Complaint and our
Complaint against Arista. In response, we and our officers, directors and employee filed a new motion to dismiss Arista’s
Complaint against us in its entirety and seeking dismissal of the fraud claim against us. Arista’s motion to disqualify our
outside legal counsel was denied on February 10, 2012. On March 9, 2012, the Court issued its decision on our motion to
dismiss, granting the motion to the extent of dismissing some claims against us, but denying the motion to dismiss the
23
individuals from the lawsuit at this preliminary stage. On April 19, 2012, an Answer was filed on behalf of us, our
officers, directors and employee.
On February 16, 2012, we filed an Amended Complaint in the action in Supreme Court, Wayne County, adding
claims in that action against Modeen and Arista for misappropriation of our trade secrets and unfair competition, based on
Arista’s strategy to hire Modeen and other former Ultralife employees, and thereby obtain improper access to information
that is confidential and proprietary to us for Arista’s own benefit. We seek damages and injunctive relief limiting Arista’s
employment of Modeen, and precluding Arista from using or disclosing information and trade secrets it acquired from us.
Arista and Modeen answered the Amended Complaint on March 19, 2012, and discovery has commenced and is ongoing
in both cases.
We initiated the September 23, 2011, Complaint against Arista to protect our customers, employees and
shareholders from the unauthorized use and theft of our investments in intellectual property, trade secrets and confidential
information by Arista and its employees. Protecting our collective intellectual property and know-how, developed at
great cost to us to form our competitive position in the marketplace and create value for our shareholders, is a
fundamental responsibility of all our employees.
We believe the action Arista filed on November 29, 2011, is retaliatory and without merit. Our development of
the foundation for the new product concept for which Arista claims we allegedly used its trade secrets commenced in
2008, long prior to the departure of those individuals who now constitute the executive team of Arista. Furthermore, we
believe the purported damage of $60,000 being claimed by Arista is based solely on the reduction in its market
capitalization between November 2009 and the filing date of the Complaint. This market value loss is totally unrelated to
any actions attributable to us, and claims for recovery of this or any other amount are legally and factually baseless.
Accordingly, we are vigorously pursuing our complaint against Arista and defending what we believe to be a
meritless action on the part of Arista.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NASDAQ Global Market under the symbol “ULBI.”
The following table sets forth the quarterly high and low closing sales prices of our common stock during 2011 and
2012:
2011:
Quarter ended April 3, 2011
Quarter ended July 3, 2011
Quarter ended October 2, 2011
Quarter ended December 31, 2011
2012:
Quarter ended April 1, 2012
Quarter ended July 1, 2012
Quarter ended September 30, 2012
Quarter ended December 31, 2012
Closing Sales Prices
High
Low
$ 7.38
5.20
5.04
4.89
$ 5.45
5.17
3.94
3.53
$ 4.81
3.94
4.57
3.96
$ 4.02
3.60
2.67
2.58
Holders
As of February 28, 2013, there were 356 registered holders of record of our common stock.
Recent Issuances of Unregistered Securities
Recently we discovered that we had inadvertently issued stock awards to our independent directors in excess of
the 200,000 share limitation under our Amended and Restated 2004 Long-Term Incentive Plan, as amended (the “LTIP”),
on the number of shares of our common stock that may be used for awards other than stock options or stock appreciation
rights (the “Limitation”). The issuances of our common stock in excess of the Limitation (the “Excess Shares”) occurred
during 2010 and after and were disclosed and were properly accounted for in our periodic reports and proxy statements
filed with the Securities and Exchange Commission. We issued a total of 179,512 Excess Shares to our independent
directors in the form of outright stock grants or restricted stock awards as part of their annual retainers as described in
detail in the table below:
Date
Number of Shares Issued
May 15, 2010
August 16, 2010
November 15, 2010
February 15, 2011
May 16, 2011
August 15, 2011
November 15, 2011
February 15, 2012
May 15, 2012
August 15, 2012
November 15, 2012
8,534
16,616
11,811
8,371
17,036
15,981
17,350
16,271
17,473
24,311
25,758
Number of Directors
Receiving Awards
8
7
7
7
7
7
7
7
7
7
7
Since the Excess Shares were issued in excess of the Limitation, they were not issued pursuant to the LTIP and
hence the issuances of the Excess Shares were not registered under the Securities Act of 1933, as amended (the
“Securities Act”) by our Form S-8 registration statement for the LTIP. Although the Excess Shares were not issued under
the LTIP, we plan to treat the Excess Shares as being issued under the LTIP and we will therefore count the Excess
25
Shares against the 2.9 million shares of our common stock authorized for grant under the LTIP. As a result, the issuance
of the Excess Shares will not result in us granting more than 2.9 million shares of our common stock to our directors,
executive officers, employees, or consultants. The issuances of the Excess Shares qualify for an exemption under Section
4(2) of the Securities Act. The Excess Shares are exempt from registration under Section 4(2) of the Securities Act
because the issuances of the Excess Shares did not involve a “public offering,” as defined in Section 4(2) of the Securities
Act due to the small number of persons involved in the transaction, the size of the offering, the manner of the offering, the
number of Excess Shares offered, the financial sophistication of our directors and their access to our financial
information. To address this issue, we plan to have our shareholders consider a proposal at the 2013 Annual Meeting to
increase the Limitation from 200,000 to 800,000 shares and to ratify the grant of the Excess Shares.
Purchases of Equity Securities by the Issuer
None.
Dividends
We have never declared or paid any cash dividends on our capital stock. We intend to retain earnings, if any, to
finance future operations and expansion and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
Any future payment of dividends will depend upon our financial condition, capital requirements and earnings, as well as
upon other factors that our Board of Directors may deem relevant. Pursuant to our current credit facility, we are precluded
from paying any dividends.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide this information.
26
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This
report contains certain forward-looking statements and information that are based on the beliefs of management as well as
assumptions made by and information currently available to management. The statements contained in this report relating to
matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not
limited to, our reliance on certain key customers, reduced U.S. defense spending, including the uncertainty with government
budget approvals, general domestic and global economic conditions, future demand for our products and services, the
successful commercialization of our products, our resources being overwhelmed by our growth prospects, residual effects of
negative news related to our industries, government and environmental regulations, business disruptions, including those
caused by fires, the impairment of our intangible assets, the unique risks associated with our Chinese operations, loss of top
management, the process of U.S. defense procurement, finalization of non-bid government contracts, raw material supplies,
competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries,
changes in our business strategy or development plans, capital deployment, and other risks and uncertainties, certain of
which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein.
When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to
identify forward-looking statements. For further discussion of certain of the matters described above and other risks and
uncertainties, see “Risk Factors” in Item 1A of this annual report.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim
any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking
statements contained in this annual report on Form 10-K to reflect new information, future events or other developments.
The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-K.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of
Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below
represent results from continuing operations, unless otherwise specified.
General
We offer products and services ranging from portable power solutions to communications and electronics systems.
Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial
customers across the globe. We design, manufacture, install and maintain power and communications systems including:
rechargeable and non-rechargeable batteries, communications and electronics systems and accessories and custom
engineered systems. We sell our products worldwide through a variety of trade channels, including original equipment
manufacturers (“OEMs”), industrial and defense supply distributors and directly to U.S. and international defense
departments.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The
Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in
addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables. The
Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified
speakers, equipment mounts, case equipment, integrated communication system kits and communications and electronics
systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance.
As such we report segment performance at the gross profit level and operating expenses as Corporate charges.
We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint
ventures, which can broaden the scope of our products and services, expand operating and market opportunities and
provide the ability to enter new lines of business synergistic with our portfolio of offerings.
On March 8, 2011, we decided to exit our Energy Services business. As a result of management’s review of our
business segments and products, and taking into account the lack of growth and profitability potential of the Energy
Services segment as well as its sizeable operating losses, we determined it was appropriate to refocus our operations on
profitable growth opportunities presented in our other segments, Battery & Energy Products and Communications
Systems. In the fourth quarter of 2010, we recorded a non-cash impairment charge of $13,793 to write-off the goodwill
and intangible assets and certain fixed assets associated with the standby power portion of our Energy Services business.
27
The actions taken to exit our Energy Services business resulted in the elimination of approximately 40 jobs and the
closing of five facilities, primarily in California, Florida and Texas. We completed all exit activities with respect to our
Energy Services segment by the end of the second quarter of 2011, and have reclassified our Energy Services segment as
a discontinued operation.
In connection with the exit activities described above, we recorded total restructuring charges of approximately
$2,924 in 2011. The restructuring charges include approximately $703 of employee-related costs, including termination
benefits, approximately $250 of lease termination costs, approximately $941 of inventory and fixed asset write-downs and
approximately $1,030 of other associated costs. The cash component of the aggregate total restructuring charges was
approximately $1,984. Subsequent to the completion of our exit activities, adjustments have been made to estimates of
certain reserves and accruals that existed at that time. These adjustments amount to $241 and were due to the difference
in our actual experience compared to our expectations as of the completion of our exit activities.
On February 16, 2012, we announced our intention to divest our RedBlack Communications, Inc.
(“RedBlack”) business in 2012. As a result of management’s ongoing review of our business portfolio, management had
determined that RedBlack offered limited opportunities to achieve the operating thresholds of our new business model.
On September 28, 2012, we entered into and closed a Stock Purchase Agreement to sell 100% of our capital
stock in RedBlack to BCF Solutions, Inc (the “Agreement”). In exchange for the sale of RedBlack, we received $2,533
as a purchase price, comprised of cash at closing in the amount of $2,133, funds held in escrow for up to one year in the
amount of $250, as well as $150 to be available for RedBlack employee retention programs. In addition, there will be a
customary post-closing working capital adjustment to the purchase price. The Agreement contains customary
representations and warranties that will survive for a period of two or three years. The Agreement also contains
customary indemnification for breaches of the representations and warranties identified in the Agreement. Pursuant to the
Agreement, we are prohibited from engaging or participating with any current customer of RedBlack in any business,
directly or indirectly, that competes with the business conducted by RedBlack for two years. We are also prohibited from
hiring, soliciting, or recruiting any current employee, independent contractor, or consultant of BCF Solutions, Inc. or
RedBlack for two years.
Commencing with the first quarter of 2012, the results of the RedBlack operations and related divestiture costs
have been reported as a discontinued operation. Certain items included within income from discontinued operations are
based upon management’s best estimates as of the date of sale and may change should our estimates be different from our
actual experience.
During the fourth quarter of 2012, management elected not to renew the lease for its U.K. manufacturing facility
which expires on March 24, 2013, and to relocate its sales and services operations to a smaller facility. As a result of this
decision, Ultralife is required to restore the facility back to its original condition per a previous contractual commitment.
The estimated costs associated with the restoration total approximately $950 of which $200 was recorded in fourth quarter
of 2012 as general & administrative expenses and $750 has been recorded as discontinued operations. In addition, we
expect to realize net savings of approximately $500 on an annualized basis beginning in the second quarter of 2013.
In 2011, we implemented a series of Lean initiatives throughout our entire organization. Lean is a disciplined
management philosophy which is 100% focused on using resources more effectively and the elimination of non-value
added functions to any process. The expected result is a reduction in costs and increased efficiency.
Currently, we do not experience significant seasonal sales trends in any of our operating segments, although
sales to the U.S. Defense Department and other international defense organizations can be sporadic based on the needs of
those particular customers.
Overview
Consolidated revenues decreased by $34,080 or 25.1% to $101,657 for the year-ended December 31, 2012
compared to $135,737 during the year ended December 31, 2011. This decrease was caused by declining revenues in our
Battery & Energy Products segment in 2012 when compared to 2011, as a result of lower government and defense sales,
the completion of a long-running telematics contract in 2011 that was not continued, and lower sales of rechargeable
batteries to commercial customers, partially offset by the impact of the $2,730 non-recurring charge related to the DCAA
settlement during the first quarter of 2011 and increased shipments of 20-Watt amplifier sales in our Communications
Systems segment. Gross margin increased to 28.3% for the year ended December 31, 2012, as opposed to 25.2% for the
year ended December 31, 2011, due to favorable product mix, increased pricing for some of our products and Lean
28
manufacturing improvements, as well as, last year’s non-recurring $2,730 DCAA settlement charge and $1,100 charge to
write-off components associated with a discontinued amplifier line.
Operating expenses decreased by $2,935 or 9.2% to $28,844 during the year ended December 31, 2012,
compared to $31,779 during the year ended December 31, 2011, reflecting continued Lean initiatives, actions to reduce
general and administrative expenses, as well as more focused spending on the development of new products, while
investing a portion of our savings in the expansion of the sales force to increase our geographic coverage and penetrate
new markets. Operating expenses as a percentage of revenues increased to 28.4% in 2012 from 23.4% reported in 2011
due to the impact of lower revenues in 2012.
Net loss from continuing operations was $1,128, or $0.06 per share, for the year ended December 31, 2012,
compared to net income of $1,549, or $0.09 per share, for the year ended December 31, 2011. Net loss from discontinued
operations, net of tax, was $501, or $0.03 per share, for the year ended December 31, 2012, compared to a net loss, net of
tax of $3,687, or $0.21 per share, for the year ended December 31, 2011.
Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision
(benefit) for income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective
of our ongoing operations, amounted to $5,054 for the year ended December 31, 2012 compared to $7,913 for the year
ended December 31, 2011. See the section “Adjusted EBITDA” beginning on page 32 for a reconciliation of Adjusted
EBITDA to net loss attributable to Ultralife.
As a result of careful working capital management and cash generated from operations, our liquidity remains
solid with cash of $10,078, a $4,592 improvement over the cash position of $5,486 as of December 31, 2011. The
company had no debt as of December 31, 2012. Our inventory levels decreased by $4,597, or 13.1%, to $30,370 at the
end of 2012 from $34,967 at the end of 2011 due to more focused inventory management and planning.
Outlook
For 2013, management expects low- to mid-single digit organic revenue growth reflecting strong growth in
Communications Systems sales and modest gains in the Battery & Energy Products business, despite continued
constraints on U.S. government spending. Based on this outlook for revenue growth, ongoing productivity improvements
and plans to continue prudently investing in new product development, management expects to increase operating
profitability for the year and to generate a mid-single digit operating margin.
Management cautions that the timing of orders and shipments may cause variability in quarterly results.
29
Results of Operations
Twelve Months Ended December 31, 2012 Compared With the Twelve Months Ended December 31, 2011
12 Months Ended
12/31/2012
12/31/2011
Increase /
(Decrease)
Revenues
Cost of products sold
Gross margin
Operating expenses
Operating income (loss)
Other expense, net
Income (loss) from continuing operations before taxes
Income tax provision
Net income (loss) from continuing operations
Loss from discontinued operations, net of tax
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to Ultralife
$
$
101,657
72,927
28,730
28,844
(114)
(460)
(574)
554
(1,128)
(501)
(1,629)
31
(1,598)
135,737
101,546
34,191
31,779
2,412
(383)
2,029
480
1,549
(3,687)
(2,138)
58
(2,080)
$
(34,080)
(28,619)
(5,461)
(2,935)
(2,526)
(77)
(2,603)
74
(2,677)
3,186
509
(27)
482
$
$
Net income (loss) attributable to Ultralife common shares - basic
Continuing operations
Discontinued operations
Net income (loss) attributable to Ultralife common shares - diluted
Continuing operations
Discontinued operations
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
$
$
(0.06)
(0.03)
$
$
0.09
(0.21)
$
$
(0.15)
0.18
$
$
(0.06)
(0.03)
$
$
0.09
(0.21)
$
$
(0.15)
0.18
17,403,000
17,403,000
17,304,000
17,336,000
99,000
67,000
Revenues. Total revenues for the twelve months ended December 31, 2012 amounted to $101,657, a decrease of
$34,080, or 25.1% from the $135,737 reported for the twelve months ended December 31, 2011.
Battery & Energy Products revenues decreased $37,119, or 34.3%, to $71,084 for the twelve months ended
December 31, 2012 from the $108,203 reported for the twelve months ended December 31, 2011 as a result of lower
government and defense sales, the completion of a long-running telematics contract in 2011, as well as lower sales of
rechargeable batteries to commercial customers, partially offset by last year’s $2,730 non-recurring DCAA settlement
charge. The decline in government and defense sales and lower sales of rechargeable batteries was primarily caused by
reductions in government spending that negatively impacted our entire industry.
Communications Systems revenues increased $3,039, or 11.0%, from $27,534 for the twelve months ended
December 31, 2011 to $30,573 for the twelve months ended December 31, 2012, as a result of the ongoing successful
international business development efforts leading to increased shipments of 20-Watt amplifiers in our Communications
Systems segment.
Cost of Products Sold. Cost of products sold decreased $28,619, or 28.2%, from $101,546 for the year ended
December 31, 2011 to $72,927 for the year ended December 31, 2012. Consolidated cost of products sold as a percentage
of total revenue decreased from 74.8% for the year ended December 31, 2011 to 71.7% for the year ended December 31,
2012. Correspondingly, consolidated gross margin was 28.3% for the year ended December 31, 2012, compared with a
gross margin of 25.2% for the year ended December 31, 2011. The increase is primarily attributable to favorable product
mix, increased pricing for some of our products and Lean manufacturing improvements, as well as, last year’s $2,730
non-recurring DCAA settlement charge and $1,100 charge to write-off components associated with a discontinued
amplifier line.
In our Battery & Energy Products segment, the cost of products sold decreased $29,512, from $83,034 for the
year ended December 31, 2011 to $53,522 for the year ended December 31, 2012. Battery & Energy Products gross
margin for 2012 was $17,562 or 24.7%, a decrease of $7,607 from 2011’s gross margin of $25,169, or 23.3%. Battery &
30
Energy Products’ gross margin increased by 140 basis points for the twelve-month period ended December 31, 2012,
primarily as a result of last year’s non-recurring DCAA settlement charge.
In our Communications Systems segment, the cost of products sold increased $893 from $18,512 for the year
ended December 31, 2011 to $19,405 for the year ended December 31, 2012. Communications Systems gross margin for
2012 was $11,168, or 36.5%, an increase of $2,146 from 2011’s gross margin of $9,022, or 32.8%. The year-over-year
comparison was impacted by the $1,100 non-cash charge recorded in the third quarter of 2011 to write-off discontinued
legacy amplifiers. Excluding this adjustment, the gross margin for 2011 would have been 36.8%. The slight decrease in
gross margin after excluding the non-cash amplifier charge from 2011 was attributable to sales mix, as well as, reduced
volume pricing for certain large projects earlier in the year.
Operating Expenses. Operating expenses decreased by $2,935, or 9.2%, to $28,844 for the year ended
December 31, 2012 compared to $31,779 for the year ended December 31, 2011, reflecting continued Lean initiatives,
actions to reduce general and administrative expenses and focused spending in the development of new products while
investing a portion of our savings in the expansion of the sales force to increase our geographic coverage and penetrate
new markets. Overall, operating expenses as a percentage of revenues increased to 28.4% in 2012 from 23.4% reported
for the prior year, due to the impact of lower revenues in 2012. Amortization expense associated with intangible assets
related to our acquisitions was $497 for 2012 ($237 in selling, general and administrative expenses and $260 in research
and development costs), compared with $627 for 2011 ($314 in selling, general, and administrative expenses and $313 in
research and development costs). Research and development costs were $7,216 in 2012, a decrease of $1,377 or 16.0%,
over the $8,593 reported in 2011. Selling, general, and administrative expenses decreased $1,558, or 6.7%, to $21,628 for
the year ended December 31, 2012 from $23,186 for the year ended December 31, 2011, reflecting on-going actions to
reduce general and administrative expenses, while investing a portion of our savings in the expansion of our sales force to
increase our geographic coverage and penetrate new markets.
Other Income (Expense). Other income (expense) totaled ($460) for the year ended December 31, 2012,
compared to ($383) for the year ended December 31, 2011. Interest expense, net of interest income, decreased $118,
from $554 during 2011 to $436 during 2012, as a result of lower average borrowings under our revolving credit facilities
during the course of 2012. Miscellaneous expense amounted to $24 for 2012 compared with income of $171 for 2011,
primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.
Income Taxes. We recorded a tax provision of $554 for the year ended December 31, 2012 compared with a tax
provision of $480 for the same period of 2011. The expense is primarily due to (a) the income reported for our China
operations during the periods, and (b) the recognition of deferred tax liabilities generated from goodwill and certain
intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. The
effective consolidated tax rate for the years ended December 31, 2012 and 2011 was:
Years Ended December 31,
2012
2011
Income (Loss) before Incomes Taxes (a)
$ (574)
$ 2,029
Total Income Tax Provision (Benefit) (b)
$ 554
$ 480
Effective Tax Rate (b/a)
96.5%
23.7%
In 2012 and 2011, in the U.S. and the U.K., we continue to report a valuation allowance for our deferred tax
assets that cannot be offset by reversing temporary differences. This results from the conclusion that it is more likely than
not that we would not utilize our U.S. and U.K. NOL’s that had accumulated over time. The recognition of a valuation
allowance on our deferred tax assets resulted from our evaluation of all available evidence, both positive and negative.
The assessment of the realizability of the NOL’s was based on a number of factors including, our history of net operating
losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast
earnings for future periods and the continued uncertainty of the general business climate as of the end of 2012. We
concluded that these factors represent sufficient negative evidence and have concluded that we should record a full
valuation allowance under Financial Accounting Standards Board’s (“FASB”) guidance on the accounting for income
taxes. (See Notes 1 and 8 in the Notes to Consolidated Financial Statements for additional information.)
We have determined that a change in ownership, as defined under Internal Revenue Code Section 382, occurred
in 2005 and 2006. As such, the domestic net operating loss (“NOL”) carryforward will be subject to an annual limitation
estimated to be in the range of approximately $12,000 to $14,500. The unused portion of the annual limitation can be
carried forward to subsequent periods. Our ability to utilize NOL carryforwards due to successive ownership changes is
31
currently limited to a minimum of approximately $12,000 annually, plus the carryover from unused portions of the annual
limitations. We believe such limitation will not impact our ability to realize the deferred tax asset.
In addition, certain of our NOL carryforwards are subject to U.S. alternative minimum tax such that
carryforwards can offset only 90% of alternative minimum taxable income. This limitation did not have an impact on
income taxes determined for the second quarters of 2012 and 2011. The use of our U.K. NOL carryforwards may be
limited due to the change in the U.K. operation during 2008 from a manufacturing and assembly center to primarily a
distribution and service center.
Discontinued Operations. Loss from discontinued operations, net of tax, totaled $501 for the year ended
December 31, 2012, compared to a loss of $3,687 in the same period of 2011. The 2012 charge is primarily due to
restoration costs related to our decision to not renew the lease of our present UK manufacturing facility and to relocate
our UK sales and services operations to a small facility. Discontinued operations for 2011 include the operating results of
the RedBlack business, which was sold in the third quarter of 2012, as well as, the costs associated with exiting the
Energy Services business. For more information, see Note 2 to the Condensed Consolidated Financial Statements.
Net Loss Attributable to Ultralife. Net loss attributable to Ultralife and net loss attributable to Ultralife common
shareholders per diluted share were $1,598 and $0.09, respectively, for the year ended December 31, 2012, compared to
net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per diluted share of $2,080 and
$0.12, respectively, for the year ended December 31, 2011, primarily as a result of the reasons described above. Average
common shares outstanding used to compute diluted earnings per share increased from 17,336,000 in 2011 to 17,403,000
in 2012, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.
Adjusted EBITDA from continuing operations
In evaluating our business, we consider and use Adjusted EBITDA from continuing operations, a non-GAAP
financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA from
continuing operations as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for
income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective of our
ongoing continuing operations. We use Adjusted EBITDA from continuing operations as a supplemental measure to
review and assess our operating performance and to enhance comparability between periods. We also believe the use of
Adjusted EBITDA from continuing operations facilitates investors’ use of operating performance comparisons from
period to period and company to company by backing out potential differences caused by variations in such items as
capital structures (affecting relative interest expense and stock-based compensation expense), the book amortization of
intangible assets (affecting relative amortization expense), the age and book value of facilities and equipment (affecting
relative depreciation expense) and other significant non-operating expenses or income. We also present Adjusted
EBITDA from continuing operations because we believe it is frequently used by securities analysts, investors and other
interested parties as a measure of financial performance. We reconcile Adjusted EBITDA from continuing operations to
net income (loss) attributable to Ultralife, the most comparable financial measure under U.S. generally accepted
accounting principles (“U.S. GAAP”).
We use Adjusted EBITDA from continuing operations in our decision-making processes relating to the operation of
our business together with U.S. GAAP financial measures such as income (loss) from operations. We believe that
Adjusted EBITDA from continuing operations permits a comparative assessment of our operating performance, relative
to our performance based on our U.S. GAAP results, while isolating the effects of depreciation and amortization, which
may vary from period to period without any correlation to underlying operating performance, and of non-cash stock-based
compensation, which is a non-cash expense that varies widely among companies. We believe that by limiting Adjusted
EBITDA to continuing operations, we assist investors in gaining a better understanding of our business on a going
forward basis. We provide information relating to our Adjusted EBITDA from continuing operations so that securities
analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We
believe that trends in our Adjusted EBITDA from continuing operations are a valuable indicator of our operating
performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to
service debt obligations and to fund capital expenditures.
The term Adjusted EBITDA from continuing operations is not defined under U.S. GAAP, and is not a measure of
operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA
from continuing operations has limitations as an analytical tool, and when assessing our operating performance, Adjusted
EBITDA from continuing operations should not be considered in isolation or as a substitute for net income (loss)
attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some
of these limitations include, but are not limited to, the following:
32
a. Adjusted EBITDA from continuing operations does not reflect (1) our cash expenditures or future
requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements
for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service
interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax
payments; and (5) all of the costs associated with operating our business;
b. although depreciation and amortization are non-cash charges, the assets being depreciated and amortized
often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not
reflect any cash requirements for such replacements;
c. while stock-based compensation is a component of cost of products sold and operating expenses, the
impact on our consolidated financial statements compared to other companies can vary significantly due to
such factors as assumed life of the stock-based awards and assumed volatility of our common stock;
d. although discontinued operations does not reflect our current business operations, discontinued operations
includes the costs we incurred by exiting our Energy Services business and divesting our RedBlack
Communications business; and
e. other companies may calculate Adjusted EBITDA from continuing operations differently than we do,
limiting its usefulness as a comparative measure.
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA
from continuing operations only supplementally. Adjusted EBITDA from continuing operations is calculated as follows
for the periods presented:
Years ended December 31,
2012
2011
Net loss attributable to Ultralife
Add: interest expense, net
Add: income tax provision
Add: depreciation
Add: amortization of intangible assets
Add: stock-based compensation expense
Add: loss from discontinued operations, net of tax
$ (1,598)
$ (2,080)
436
554
3,285
497
1,379
501
554
480
3,420
627
1,225
3,687
Adjusted EBITDA
$ 5,054
$ 7,913
Liquidity and Capital Resources
Cash Flows and General Business Matters
The following cash flow information is being presented net of continuing and discontinued operations.
As of December 31, 2012, cash and cash equivalents totaled $9,656, an increase of $4,336 from the beginning of
the year. During the twelve months ended December 31, 2012, we generated $4,768 of cash from operating activities as
compared to generating $10,962 of cash for the twelve months ended December 31, 2011. The generation of cash from
operating activities was caused primarily to a decline in the cash generated by accounts receivable year over year offset by
the generation of cash from the reductions in inventory. The cash from operating activities provided in 2012 was mainly
attributable to our net loss of $1,629, plus an add back of $5,343 for non-cash expenses of depreciation, amortization and
stock-based compensation and a loss from discontinued operations, net of tax of $501. Approximately $823 of cash was
generated from working capital due mainly to decreases in our inventory due to the continued focus on improving inventory
management, a decrease in our insurance receivable relating to fires and a decrease in accounts receivable. These cash
generations were offset partially by a decrease in our accounts payable. For 2011, the cash generated from operating
activities of $10,962 was mainly attributable to a net loss of $2,138, plus an add back of $5,452 for non-cash expenses of
depreciation, amortization and stock-based compensation and a loss from discontinued operations of $3,687. Approximately
33
$1,345 of cash was generated from working capital due mainly to a decrease in accounts receivable, offset by an increase in
inventories and a decrease in accounts payable.
We used $812 in cash for investing activities during 2012 compared with $1,999 in cash used for investing
activities in 2011. In 2012, we spent $2,685 to purchase plant, property, and equipment and increased our restricted cash
by $260. Offsetting these outlays was a cash inflow for our divestiture of RedBlack Communications of $2,133. In 2011,
we spent $2,362 to purchase plant, property and equipment and $50 was used in connection with the contingent purchase
price payout related to RPS Power Systems, Inc. (“RPS”). In addition, we received $13 in cash proceeds from
dispositions of property, plant and equipment and $298 relating to the reduction of the UK restricted cash.
During 2012, we received $115 in funds from financing activities compared to the use of $8,604 in funds from
financing activities in 2011. The financing activities in 2012 were solely due to the proceeds of the issuance of our
common stock. The financing activities in 2011 included outflows of $8,541 for repayments on the revolver portion of
our primary credit facility, $8 for principal payments on debt and capital lease obligations, $128 relating to discontinued
operations and an inflow of cash from stock option exercises of $73.
Although we booked a full reserve for our deferred tax asset during the fourth quarter of 2006 and continued to
carry this reserve as of December 31, 2012 and 2011, we continue to have significant U.S. NOL’s available to us to utilize
as an offset to taxable income. As of December 31, 2012, none of our U.S. NOL’s have expired. (See Note 8 in the
Notes to the Consolidated Financial Statements for additional information.)
Inventory turnover for the year ended December 31, 2012 averaged 2.2 turns compared to 3.0 turns for 2011. The
decrease in this metric is due mainly to lower sales year over year offset slightly by a reduction in average inventory over
that same period.
Our order backlog at December 31, 2012 was approximately $12,599, lower than in prior years, mostly due to
continued delays in government orders. The majority of the backlog was related to orders that are expected to ship
throughout 2013 and 2014.
As of December 31, 2012, we had made commitments to purchase approximately $457 of production machinery
and equipment, which we expect to fund through operating cash flows or the use of debt.
Debt and Lease Commitments
On February 17, 2010, we entered into a senior secured asset based revolving credit facility (“Credit Facility”) of
up to $35,000, which was subsequently reduced to $20,000 as described in greater detail below, with RBS Business
Capital, a division of RBS Asset Finance, Inc. (“RBS”). The proceeds from the Credit Facility can be used for general
working capital purposes, general corporate purposes, and letter of credit foreign exchange support. The Credit Facility
had a maturity date of February 17, 2013, that was subsequently extended to May 15, 2013, as discussed in greater detail
below (“Maturity Date”). The Credit Facility is secured by substantially all of our assets. At closing, we paid RBS a
facility fee of $263.
On February 18, 2010, we drew down $9,870 from the Credit Facility to repay all outstanding amounts due
under our previous credit facility with JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company. Our
available borrowing under the Credit Facility fluctuates from time to time based upon the amounts of eligible accounts
receivable and eligible inventory. Available borrowings under the Credit Facility, as amended, equals the lesser of (1)
$20,000 or (2) 85% of eligible accounts receivable plus the lesser of (a) up to 70% of the book value of our eligible
inventory or (b) 85% of the appraised net orderly liquidation value of our eligible inventory. The borrowing base under
the Credit Facility is further reduced by (1) the face amount of any letters of credit outstanding, (2) any liabilities of ours
under hedging contracts with RBS and (3) the value of any reserves as deemed appropriate by RBS. We are required to
have at least $3,000 available under the Credit Facility at all times.
On January 19, 2011, we entered in a First Amendment to Credit Agreement (“First Amendment”) with RBS.
The First Amendment amended the Credit Facility as follows:
(i) Eligible accounts receivable under the Credit Facility (for the determination of available borrowings) now
include foreign (non-U.S.) accounts subject to credit insurance payable to RBS (formerly, such accounts
were not eligible without arranging letter of credit facilities satisfactory to RBS).
(ii) Decreased the interest rate that will accrue on outstanding indebtedness, as set forth in the following table:
34
Excess Availability
Greater than $10,000
LIBOR Rate Plus
3.00%
Greater than $6,000 but less than or equal to $10,000
3.25%
Greater than $3,000 but less than or equal to $6,000
3.50%
On September 28, 2012, we entered into a Second Amendment to the Credit Facility (“Second Amendment”)
with RBS. The Second Amendment amended the Credit Facility to consent to the sale of the stock of RedBlack and to
release any and all liens on RedBlack.
On February 15, 2013, we entered into a Third Amendment to the Credit Facility (“Third Amendment”) with
RBS. The Third Amendment amended the Credit Facility to extend the Maturity Date from February 17, 2013 to May 15,
2013, reduced the maximum amount available under the Credit Facility to $20,000, and reduced the unused line fee to
0.40% per year.
Interest currently accrues on outstanding indebtedness under the Credit Facility at LIBOR plus 3.00%. We have
the ability, in certain circumstances, to fix the interest rate for up to 90 days from the date of borrowing.
As of December 31, 2012, in addition to paying interest on the outstanding principal under the Credit Facility,
we were required to pay an unused line fee of 0.50% on the unused portion of the $35,000 Credit Facility. As of the
Third Amendment, we now pay an unused line fee of 0.40% on the unused portion of the lowered $20,000 Credit Facility.
In both instances, we must also pay customary letter of credit fees equal to the LIBOR rate and the applicable margin and
any other customary fees or expenses of the issuing bank. Interest that accrues under the Credit Facility is to be paid
monthly with all outstanding principal, interest and applicable fees due on the Maturity Date.
We are required to maintain a fixed charge ratio of 1.20 to 1.00 or greater at all times as of and after March 28,
2010. As of December 31, 2012, our fixed charge ratio was 2.15 to 1.00. Accordingly, we were in compliance with the
financial covenants of the Credit Facility. All borrowings under the Credit Facility are subject to the satisfaction of
customary conditions, including the absence of an event of default and accuracy of our representations and
warranties. The Credit Facility also includes customary representations and warranties, affirmative covenants and events
of default. If an event of default occurs, RBS would be entitled to take various actions, including accelerating the amount
due under the Credit Facility, and all actions permitted to be taken by a secured creditor.
As of December 31, 2012, we had $-0- outstanding under the Credit Facility. At December 31, 2012, the interest
rate on the asset based revolver component of the Credit Facility was 3.21%. As of December 31, 2012, the revolver
arrangement had approximately $13,157 of borrowing capacity, including outstanding letters of credit. At December 31,
2012, we had $413 of outstanding letters of credit related to this facility.
See Note 5 in the Notes to Consolidated Financial Statements for additional information.
Other Matters
Our Credit Facility, including the recently enacted extension, expires in May of 2013. We are currently seeking to
enter into a new credit facility with RBS or another lender that will become effective when the Credit Facility matures. We
anticipate seeking a new credit facility with availability comparable to our current Credit Facility, but on terms reflecting our
improved liquidity position. While we can provide no assurances that we will be able to execute a new credit agreement on
terms acceptable to us or at all, we believe that that we will be able to enter into a new credit agreement on favorable terms
due primarily to our improved liquidity position.
With respect to our battery products, we typically offer warranties against any defects due to product
malfunction or workmanship for a period up to one year from the date of purchase. With respect to our communications
accessory products, we typically offer a three-year warranty. Previously, we had offered up to a four-year warranty. We
provide for a reserve for these potential warranty expenses, which is based on an analysis of historical warranty issues.
There is no assurance that future warranty claims will be consistent with past history, and in the event we experience a
significant increase in warranty claims, there is no assurance that our reserves would be sufficient. This could have a
material adverse effect on our business, financial condition and results of operations.
35
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in
the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect
amounts reported therein. The estimates and assumptions that require management’s most difficult, subjective or complex
judgments are described below.
Revenue recognition:
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When
products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are
recognized on date of delivery. A provision is made at the time the revenue is recognized for warranty costs
expected to be incurred. Customers, including distributors, do not have a general right of return on products
shipped.
Technology Contracts – We recognize revenue using the proportional method, measured by the percentage of
actual costs incurred to date to the total estimated costs to complete the contract. Elements of cost include direct
material, labor and overhead. If a loss on a contract is estimated, the full amount of the loss is recognized
immediately. We allocate costs to all technology contracts based upon actual costs incurred including an allocation
of certain research and development costs incurred.
Deferred Revenue - For each source of revenues, we defer recognition if: i) evidence of an agreement does not
exist, ii) delivery or service has not occurred, iii) the selling price is not fixed or determinable, or iv)
collectability is not reasonably assured.
Valuation of Inventory:
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO)
method. Our inventory includes raw materials, work in process and finished goods. We record provisions for
excess, obsolete or slow moving inventory based on changes in customer demand, technology developments or
other economic factors. The factors that contribute to inventory valuation risks are our purchasing practices,
material and product obsolescence, accuracy of sales and production forecasts, introduction of new products,
product lifecycles, product support and foreign regulations governing hazardous materials (see Item 1A – Risk
Factors for further information on foreign regulations). We manage our exposure to inventory valuation risks by
maintaining safety stocks, minimum purchase lots, managing product end-of-life issues brought on by aging
components or new product introductions, and by utilizing certain inventory minimization strategies such as
vendor-managed inventories. We believe that the accounting estimate related to valuation of inventories is a
"critical accounting estimate" because it is susceptible to changes from period-to-period due to the requirement for
management to make estimates relative to each of the underlying factors ranging from purchasing, to sales, to
production, to after-sale support. If actual demand, market conditions or product lifecycles are adversely different
from those estimated by management, inventory adjustments to lower market values would result in a reduction to
the carrying value of inventory, an increase in inventory write-offs and a decrease to gross margins.
Warranties:
We maintain provisions related to normal warranty claims by customers. We evaluate these reserves quarterly
based on actual experience with warranty claims to date and our assessment of additional claims in the future. There
is no assurance that future warranty claims will be consistent with past history, and in the event we experience a
significant increase in warranty claims, there is no assurance that our reserves would be sufficient.
Impairment of Long-Lived Assets:
We regularly assess all of our long-lived assets for impairment when events or circumstances indicate their carrying
amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows
of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows
be less than the carrying value, a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through the assistance of an independent
valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our
36
evaluation approximates our weighted average cost of capital. If the expected undiscounted future cash flows
exceed the respective carrying amount as of the date of assessment, no impairment is recognized.
Environmental Issues:
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate, in
accordance with FASB’s guidance on environmental remediation liabilities. Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable that these costs will be incurred and
can be reasonably estimated.
Goodwill and Other Intangible Assets:
In accordance with the revised FASB guidance for business combinations, the purchase price paid to effect an
acquisition is allocated to the acquired tangible and intangible assets and liabilities at fair value. In accordance with
FASB’s guidance for the accounting of goodwill and other intangible assets, we do not amortize goodwill and
intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually, or when
events indicate that impairment exists. We amortize intangible assets that have definite lives so that the
economic benefits of the intangible assets are being utilized over their weighted-average estimated useful life.
The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified
reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its
carrying amount, including goodwill. This review includes, but is not limited to, an evaluation of the
macroeconomic, industry or market, and cost factors relevant to the reporting unit as well as financial
performance and entity or reporting unit events that may affect the value of the reporting unit. If this review
leads to the determination that it is more likely than not that the fair value of the reporting unit is greater than its
carrying amount, further impairment testing is not required. However, if this review cannot support a conclusion
that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, or at our
discretion, quantitative impairment steps are performed. Similarly, the analysis for indefinite-lived intangible
assets consists of review of various qualitative factors to determine if it is more likely than not that the indefinite-
lived intangible asset is not impaired. If a conclusion that it is more likely than not that the indefinite-lived asset
is nor impaired cannot be supported, or at our discretion, quantitative impairment steps are performed.
The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with
the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting
unit exceeds its fair value, a second step of the goodwill impairment test shall be performed to measure the
amount of impairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a
comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the
intangible assets exceeds the fair value, an impairment loss shall be recognized in an amount equal to that
excess. We determine the fair value of the reporting unit for goodwill impairment testing based on a discounted
cash flow model. We determine the fair value of our intangibles assets with indefinite lives (trademarks)
through the royalty relief income valuation approach.
We conduct our annual impairment analysis for goodwill and intangible assets with indefinite lives in October of
each fiscal year. For 2012, we have identified three goodwill reporting units for analysis. We performed a
qualitative analysis for two reporting units and determined it was more likely than not that the fair value of each
reporting unit was greater than its respective carrying amount. We performed a quantitative analysis on our
Communications Systems reporting unit as of September 30, 2012 as we determined that a triggering event, as
defined within relevant accounting guidance, occurred in the third quarter as a result of the decrease in our market
valuation in relation to our shareholder’s equity. This testing indicated no impairment.
For 2012, we identified four trademarks for analysis. We performed a qualitative analysis for two trademarks and
determined it was more likely than not that the fair value of each trademark was greater than its respective carrying
amount. We performed an early impairment test on the two trademarks associate with Communications Systems in
conjunction with the goodwill testing referenced above. No impairment of either trademark tested was indicated.
However, due to the narrow margin of passing the testing in 2012, there is potential that the McDowell -
Communications Systems trademark may become partially or fully impaired in 2013 if the projected revenue
targets are not met. As of December 31, 2012, the McDowell - Communications Systems trademark had a carrying
value of $2,400.
37
Stock-Based Compensation:
We follow the provisions of FASB’s guidance on share-based payments, which requires that compensation cost
relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the
grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite
service period (generally the vesting period of the equity award). We calculate expected volatility for stock options
by taking an average of historical volatility over the past five years and a computation of implied volatility. The
computation of expected term was determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods
within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant.
Income Taxes:
We apply FASB’s guidance in accounting for income taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse.
In 2012 and 2011, in the U.S. and the U.K., we continued to report a valuation allowance for our deferred tax assets
that cannot be offset by reversing temporary differences. This results from the conclusion that it is more likely than
not that we would not be able to utilize our U.S. and U.K. NOL’s that had accumulated over time. The recognition
of a valuation allowance on our deferred tax assets resulted from our evaluation of all available evidence, both
positive and negative. The assessment of the realizability of the NOL’s was based on a number of factors
including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our
historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general
business climate as of the end of 2012. We concluded that these factors represent sufficient negative evidence and
have concluded that we should record a full valuation allowance under FASB‘s guidance on the accounting for
income taxes. We currently carry a deferred tax asset in China that we have determined does not require a
valuation allowance as we are more likely than not to fully utilize the NOL in China. We continually assess the
carrying value of this asset based on relevant accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide this information.
38
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) are included in this Report beginning on page 41.
Report of Independent Registered Public Accounting Firm,
BDO USA, LLP
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended December 31, 2012 and 2011
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012,
and 2011
Notes to Consolidated Financial Statements
Page
40
41
42
43
44
45
39
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Ultralife Corporation
Newark, New York
We have audited the accompanying consolidated balance sheets of Ultralife Corporation as of December 31, 2012 and
2011 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and
cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the
responsibility of Ultralife Corporation’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Ultralife Corporation at December 31, 2012 and 2011, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Troy, Michigan
March 15, 2013
40
ULTRALIFE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
AS S ETS
Current assets:
Cash and cash equivalents
Restricted cash
Trade accounts receivable, net of allowance for
doubtful accounts of $322 and $683, respectively
Inventories
Due from insurance company
Deferred tax asset - current
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other assets:
Goodwill
Intangible assets, net
Security deposits and other long-term assets
December 31,
2012
2011
$
9,656
422
$
5,320
166
20,913
30,370
723
120
28
1,590
63,822
12,415
16,344
5,039
98
21,481
19,903
34,967
1,730
161
220
1,766
64,233
12,588
18,356
5,533
105
23,994
Total Assets
$
97,718
$
100,815
LIABILITIES AND S HAREHOLDERS ' EQUITY
Current liabilities:
Current portion of debt and capital lease obligations
Accounts payable
Income taxes payable
Accrued compensation
Accrued vacation
Deferred revenue
Deferred tax liability - current
Other current liabilities
Total current liabilities
Long-term liabilities:
Debt and capital lease obligations
Deferred tax liability - long-term
Other long-term liabilities
Total long-term liabilities
Commitments and contingencies (Note 6)
S hareholders' equity:
Ultralife equity:
Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none issued and outstanding
Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 18,828,734 and 18,716,921, respectively
Capital in excess of par value
Accumulated other comprehensive income (loss)
Accumulated deficit
Less --Treasury stock, at cost - 1,372,757 shares outstanding in each year
Total Ultralife equity
Noncontrolling interest
Total shareholders' equity
$
-
11,357
2
2,049
603
1,851
-
4,030
19,892
$
-
13,766
11
2,015
784
1,786
187
4,609
23,158
-
4,160
210
4,370
-
4,170
261
4,431
-
-
1,886
173,791
(620)
(93,878)
81,179
7,658
73,521
(65)
73,456
1,874
172,309
(985)
(92,280)
80,918
7,658
73,260
(34)
73,226
Total Liabilities and Shareholders' Equity
$
97,718
$
100,815
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
41
ULTRALIFE CORPORATION
CONSOLIDATED STATEM ENTS OF OPERATIONS AND COM PREHENSIVE INCOM E (LOSS)
(In Thousands, Except Per Share Amounts)
Revenues
Cost of products sold
Gross profit
Operating expenses:
Research and development (including $ 260 and $313 of
amortization of intangible assets, respectively)
Selling, general, and administrative (including $237 and $314 of
amortization of intangible assets, respectively)
Total operating expenses
Operating income (loss)
Other income (expense):
Interest income
Interest expense
M iscellaneous
Income (loss) from continuing operations before income taxes
Income tax provision (benefit) - current
Income tax provision - deferred
Total income taxes provision (benefit)
Years Ended December 31,
2012
2011
$
101,657
72,927
$
135,737
101,546
28,730
34,191
7,216
21,628
28,844
(114)
4
(440)
(24)
(574)
539
15
554
8,593
23,186
31,779
2,412
5
(559)
171
2,029
32
448
480
Net income (loss) from continuing operations
(1,128)
1,549
Discontinued operations:
Loss from discontinued operations, net of tax
Net income (loss)
Net (income) loss attributable to noncontrolling interest
(501)
(1,629)
31
(3,687)
(2,138)
58
Net income (loss) attributable to Ultralife
$
(1,598)
$
(2,080)
Other comprehensive income (loss):
Foreign currency translation adjustments
365
277
Comprehensive income (loss) attributable to Ultralife
$
(1,233)
$
(1,803)
Net income (loss) attributable to Ultralife common shareholders - basic
Continuing operations
Discontinued operations
Total
$
$
$
(0.06)
(0.03)
(0.09)
$
$
$
0.09
(0.21)
(0.12)
Net income (loss) attributable to Ultralife common shareholders - diluted
Continuing operations
Discontinued operations
$
$
(0.06)
(0.03)
$
$
0.09
(0.21)
Total
$
(0.09)
$
(0.12)
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
17,403
17,403
17,304
17,336
42
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ULTRALIFE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
Common Stock
Number
of Shares
Amount
Capital in
excess of
Par Value
Accumulated Other
Comprehensive Income (Loss)
Foreign
Currency
Translation
Adjustment
Other
Unrealized
Net Gain (Loss)
Accumulated
Deficit
Treasury
Stock
Noncontrolling
Interest
Total
Balance as of December 31, 2010
18,639,683
$
1,865
$
171,020
$
(1,262)
$
-
$
(90,200)
$
(7,652)
$
24
$
73,795
Net loss
Foreign currency translation adjustments
Stock-based compensation related to stock options
Shares issued (cancelled) and compensation under restricted stock grants
Shares issued to directors
Shares issued under stock option exercises
(2,905)
61,643
18,500
-
7
2
946
(27)
299
71
277
(2,080)
(58)
-
(6)
(2,138)
277
946
(33)
306
73
Balance as of December 31, 2011
18,716,921
$
1,874
$
172,309
$
(985)
$
-
$
(92,280)
$
(7,658)
$
(34)
$
73,226
Net loss
Foreign currency translation adjustments
Stock-based compensation related to stock options
Shares issued to directors
Shares issued under stock option exercises
83,813
28,000
9
3
1,073
298
111
365
(1,598)
(31)
-
(1,629)
365
1,073
307
114
Balance as of December 31, 2012
18,828,734
$
1,886
$
173,791
$
(620)
$
-
$
(93,878)
$
(7,658)
$
(65)
$
73,456
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
43
ULTRALIFE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
OPERATING ACTIVITIES
Net loss
Loss from discontinued operations, net of tax
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation and amortization of financing fees
Amortization of intangible assets
(Gain) loss on long-lived asset disposal and write-offs
Foreign exchange (gain) loss
Non-cash stock-based compensation
Changes in deferred income taxes
Provision for loss on accounts receivable
Provision for inventory obsolescence
Provision for warranty charges
Provision for workers' compenstion obligation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Income taxes receivable
Prepaid expenses and other current assets
Insurance receivable relating to fires
Income taxes payable
Accounts payable and other liabilities
Net cash provided by operating activities from continuing operations
Net cash provided by operating activities from discontinued operations
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchase of property and equipment
Proceeds from asset disposal
Change in restricted cash
Payment for acquired companies, net of cash acquired
Net cash used in investing activities from continuing operations
Net cash provided from (used in) investing activities from discontinued operations
Net cash used in investing activities
FINANCING ACTIVITIES
Net change in revolving credit facilities
Proceeds from issuance of common stock
Proceeds from issuance of debt
Principal payments on debt and capital lease obligations
Purchase of treasury stock
Short-swing profit recovery
Net cash provided from (used in) financing activities from continuing operations
Net cash used in financing activities from discontinued operations
Net cash provided from (used in) financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Year Ended December 31,
2012
2011
$
(1,629)
501
$
(2,138)
3,687
3,467
497
13
43
1,379
15
9
375
370
-
1,183
4,122
194
(75)
1,019
(9)
(5,611)
5,863
(1,095)
4,768
(2,685)
-
(260)
-
(2,945)
2,133
(812)
-
115
-
-
-
-
115
-
115
265
4,336
5,320
3,600
627
91
(95)
1,225
448
237
1,537
591
(217)
15,035
(5,738)
(220)
266
(1,730)
(43)
(6,225)
10,938
24
10,962
(2,362)
13
298
(50)
(2,101)
102
(1,999)
(8,541)
73
-
(8)
-
-
(8,476)
(128)
(8,604)
320
679
4,641
Cash and cash equivalents at end of period
$
9,656
$
5,320
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest
Cash paid for income taxes
$
237
$
353
$
357
$
158
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
44
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a.
Description of Business
We offer products and services ranging from portable power solutions to communications and electronics
systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and
commercial customers across the globe. We design, manufacture, install and maintain power and communications
systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics
systems and accessories, and custom engineered systems. We sell our products worldwide through a variety of trade
channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly
to U.S. and international defense departments.
b.
Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States and include the accounts of Ultralife Corporation, our wholly-owned subsidiaries, Ultralife Batteries (UK)
Ltd. (“Ultralife UK”), ABLE New Energy Co., Limited, and its wholly-owned subsidiary ABLE New Energy Co., Ltd.
(“ABLE” collectively), and our majority-owned subsidiary Ultralife Batteries India Private Limited (“India JV”).
Intercompany accounts and transactions have been eliminated in consolidation.
Operations of RedBlack Communications, Inc. (“RedBlack”), our divested company, and Ultralife Energy Services
Corporation (“UES”), our wholly owned subsidiary, are reported as discontinued operations.
c.
Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period.
Key areas affected by estimates include: (a) reserves for deferred tax assets, excess and obsolete inventory, warranties, and
bad debts; (b) profitability on development contracts; (c) various expense accruals; (d) stock-based compensation; and, (e)
carrying value of goodwill and intangible assets. Our actual results could differ from these estimates.
d.
Reclassifications
Certain items previously reported in specific financial statement captions have been reclassified to conform to the
current presentation.
e.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, we consider all demand deposits with financial
institutions and financial instruments with original maturities of three months or less to be cash equivalents. For purposes
of the Consolidated Balance Sheet, the carrying value approximates fair value because of the short maturity of these
instruments.
f.
Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and
generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for
doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding
longer than contractual payment terms are considered past due and are reviewed individually for collectability. We
maintain reserves for potential credit losses based upon our loss history and specific receivables aging analysis.
Receivable balances are written off when collection is deemed unlikely.
45
Changes in our allowance for doubtful accounts during the years ended December 31, 2012 and 2011 were as
follows:
Balance at beginning of year
Amounts charged (credited) to expense
Amounts credited to other accounts
Uncollectible accounts written-off, net of recovery
Balance at end of year
2012
2011
$ 683
9
-
(370)
$ 322
$ 490
237
(2)
(42)
$ 683
The significant uncollectible accounts written off in the current year relate to previously recorded bad debts of
our now discontinued Energy Services business.
g.
Inventories
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method.
We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology
developments or other economic factors.
h.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Estimated useful lives are as follows:
Buildings
Machinery and Equipment
Furniture and Fixtures
Computer Hardware and Software
Leasehold Improvements
10 – 20 years
5 – 10 years
3 – 10 years
3 – 5 years
Lesser of useful life or lease term
Depreciation and amortization are computed using the straight-line method. Betterments, renewals and
extraordinary repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed
when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in operating income (expense).
i.
Long-Lived Assets, Goodwill and Intangibles
We regularly assess all of our long-lived assets for impairment when events or circumstances indicate that their
carrying amounts may not be recoverable. For property, plant and equipment and amortizable intangible assets, this is
accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as
of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be
required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either
through the assistance of an independent valuation or as the present value of expected discounted future cash flows. The
discount rate used by us in our evaluation approximates our weighted average cost of capital. If the expected undiscounted
future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. We did
not record any material impairments of long-lived assets in the years ended December 31, 2012 or 2011.
In accordance with the Financial Accounting Standards Board’s (“FASB”) guidance for goodwill and other
intangible assets, we do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets
for impairment at least annually, or when events indicate that impairment exists. We amortize intangible assets that have
definite lives so that the economic benefits of the intangible assets are being utilized over their weighted-average
estimated useful life.
The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified
reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying
amount, including goodwill. This review includes, but is not limited to, an evaluation of the macroeconomic, industry or
market, and cost factors relevant to the reporting unit as well as financial performance and entity or reporting unit events
that may affect the value of the reporting unit. If this review leads to the determination that it is more likely than not that
the fair value of the reporting unit is greater than its carrying amount, further impairment testing is not required. However,
46
if this review cannot support a conclusion that it is more likely than not that the fair value of the reporting unit is greater
than its carrying amount, or at our discretion, quantitative impairment steps are performed. Similarly, the analysis for
indefinite-lived intangible assets consists of review of various qualitative factors to determine if it is more likely than not
that the indefinite-lived intangible asset is not impaired. If a conclusion that it is more likely than not that the indefinite-
lived asset is nor impaired cannot be supported, or at our discretion, quantitative impairment steps are performed.
The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with
the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its
fair value, a second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if
any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the
intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an
impairment loss shall be recognized in an amount equal to that excess. We determine the fair value of the reporting unit
for goodwill impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles
assets with indefinite lives (trademarks) through the royalty relief income valuation approach.
There were no impairments of goodwill and intangible assets with indefinite lives in the years ended December 31,
2012 and 2011.
Based on the final valuations for amortizable intangible assets acquired in the AMTI acquisition during 2009,
and the ABLE and McDowell acquisitions during 2006, we project our amortization expense will be approximately $401,
$308, $229, $167 and $122 for the fiscal years ending December 31, 2013 through 2017, respectively.
j.
Translation of Foreign Currency
The financial statements of our foreign affiliates are translated into U.S. dollar equivalents in accordance with
FASB’s guidance for foreign currency translation, with translation adjustments recorded as a component of accumulated
other comprehensive income. Exchange gains (losses) relate to foreign currency transactions included in net loss for the
years ended December 31, 2012 and 2011 were $(43) and $95.
k.
Revenue Recognition
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When
products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are
recognized on the date of delivery. A provision is made at the time the revenue is recognized for warranty costs expected
to be incurred. Customers, including distributors, do not have a general right of return on products shipped.
Technology Contracts – We recognize revenue using the proportional effort method based on the relationship of
costs incurred to date to the total estimated cost to complete the contract. Elements of cost include direct material, labor and
overhead. If a loss on a contract is estimated, the full amount of the loss is recognized immediately. We allocate costs to all
technology contracts based upon actual costs incurred including an allocation of certain research and development costs
incurred.
Deferred Revenue – For each source of revenues, we defer recognition if: i) evidence of an agreement does not
exist, ii) delivery or service has not occurred, iii) the selling price is not fixed or determinable, or iv) collectability is not
reasonably assured.
l.
Warranty Reserves
We estimate future costs associated with expected product failure rates, material usage and service costs in the
development of our warranty obligations. Warranty reserves, included in other current liabilities and other long-term
liabilities as applicable on our Consolidated Balance Sheets, are based on historical experience of warranty claims. In the
event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded.
m.
Shipping and Handling Costs
Costs incurred by us related to shipping and handling are included in cost of products sold. Amounts charged to
customers pertaining to these costs are reflected as revenue.
47
n.
Advertising Expenses
Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations. Such expenses amounted to $538 and $792 for the years ended
December 31, 2012 and 2011.
o.
Research and Development
Research and development expenditures are charged to operations as incurred. The majority of research and
development expenses pertain to salaries and benefits, developmental supplies, depreciation and other contracted services.
In 2011, we in entered into a collaboration agreement with The New York State Energy Research and
Development Authority (“NYSERDA”), to develop and demonstrate a large hybrid grid-connected energy storage
system. Pursuant to the terms of the agreement, NYSERDA will reimburse us for certain construction and project
research and development costs. During the year ended December 31, 2012, recoveries from NYSERDA for construction
costs and project research and development costs were $91 and $11, respectively. Construction costs and are reflected in
the property, plant and equipment, net line on our Consolidated Balance Sheets as of December 31, 2012 and project
research and development costs are reflected in the research and development line on our Consolidated Statements of
Comprehensive Income for the year ended December 31, 2012, respectively. During the year ended December 31, 2011,
recoveries from NYSERDA for construction costs and project research and development costs were $254 and $56,
respectively, and were reflected in the property, plant and equipment, net line on our Consolidated Balance Sheets as of
December 31, 2011 and the research and development line on our Consolidated Statements of Comprehensive Income for
the year ended December 31, 2011, respectively.
p.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate, in
accordance with FASB’s guidance on environmental remediation liabilities. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably
estimated.
q.
Income Taxes
The asset and liability method, prescribed by FASB’s guidance for the Accounting for Income Taxes, is used in
accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to reverse.
A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will
not be realized. As of December 31, 2012, we continued to recognize a valuation allowance on our net deferred tax asset to
the extent they are not able to be offset by future reversing temporary differences, based on a consistent evaluation
methodology that was used for 2011. The assessment of the realizability of the U.S. NOL was based on a number of factors
including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical
inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of
the end of 2012. We concluded that these factors represent sufficient negative evidence and have concluded that we should
record a full valuation allowance under FASB‘s guidance on the accounting for income taxes. We also recorded a valuation
allowance on our net deferred tax asset for the year ended December 31, 2011. A valuation allowance was required for the
years ended December 31, 2012 and 2011 related to our U.K. subsidiary due to the history of losses at that facility. A
valuation allowance was not required for the years ended December 31, 2012 and 2011 related to our ABLE subsidiary as
we have determined that it is more likely than not that we will fully utilize the related NOL.
We have adopted the provisions of FASB’s guidance for the Accounting for Uncertainty in Income Taxes. In 2011
and 2012, we had unrecognized tax benefits related to uncertain tax positions which have been recorded as a decrease in
our NOL. We have not recorded any interest or penalty in regard to any unrecognized benefit. Interest and penalties
would begin to accrue in the period in which the NOL’s related to the uncertain tax positions are utilized. Our policy
regarding interest and/or penalties related to income tax matters is to recognize such items as a component of income tax
expense (benefit).
48
r.
Concentration Related to Customers and Suppliers
During the years ended December 31, 2012 and 2011, we had one major customer, a large defense prime, which
comprised 21% of our revenues in each year. There were no other customers that comprised greater than 10% of our total
revenues during these years.
We have two customers who comprised 22% and 12%, respectively, of our trade accounts receivable as of
December 31, 2012. We had no customers that comprised greater than 10% of our trade accounts receivables as of
December 31, 2011.
Currently, we do not experience significant seasonal trends in our revenues. Since a significant portion of our
revenues are based on purchases from U.S. and allied country defense departments, the timing of our sales could be
impacted by delays in the government budget process and the decisions to deploy resources to support military purchases
of our products.
We generally do not distribute our products to a concentrated geographical area nor is there a significant
concentration of credit risks arising from individuals or groups of customers engaged in similar activities, or who have
similar economic characteristics. While sales to the U.S. Department of Defense have been substantial during 2012 and
2011, we do not consider this customer to be a significant credit risk. We do not normally obtain collateral on trade
accounts receivable.
Certain materials and components used in our products are available only from a single or a limited number of
suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or
increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for
materials and components that are otherwise generally available. Although we believe that alternative suppliers are available
to supply materials and components that could replace materials and components currently used and that, if necessary, we
would be able to redesign our products to make use of such alternatives, any interruption in the supply from any supplier that
serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition
and results of operations. We have experienced interruptions of product deliveries by sole source suppliers in the past.
s.
Fair Value Measurements and Disclosures
The FASB guidance for fair value measurements provides a framework for measuring fair value and requires
expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an
asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. This accounting standard established a fair value
hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes
the three levels of inputs required.
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or that we corroborate with observable market
data for substantially the full term of the related assets or liabilities.
Level 3: Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or
liabilities.
FASB’s guidance for the disclosure regarding 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 FASB’s guidance for the
disclosure regarding fair value of financial instruments approximated their carrying values at December 31, 2012 and 2011.
The fair value of cash, trade accounts receivable, trade accounts payable, accrued liabilities, and our revolving credit
facility approximates carrying value due to the short-term nature of these instruments. The estimated fair value of other
long-term debt and capital lease obligations approximates carrying value due to the variable nature of the interest rates or
the stated interest rates approximating current interest rates that are available for debt with similar terms.
49
t.
Earnings (Loss) Per Share
We have adopted the provisions of FASB’s guidance for determining whether instruments granted in share-based
payment transactions are participating securities. The guidance requires that all outstanding unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (such as restricted stock awards granted by us)
be considered participating securities. Because the restricted stock awards are participating securities, we are required to
apply the two-class method of computing basic and diluted earnings per share (the “Two-Class Method”).
Basic EPS is determined using the Two-Class Method and is computed by dividing earnings attributable to Ultralife
common shareholders by the weighted-average shares outstanding during the period. The Two-Class Method is an earnings
allocation formula that determines earnings per share for each class of common stock and participating security according to
dividends declared and participation rights in undistributed earnings. Diluted EPS includes the dilutive effect of securities, if
any, and reflects the more dilutive EPS amount calculated using the treasury stock method or the Two-Class Method. For
the years ended December 31, 2012 and 2011, both the Two-Class Method and the treasury stock method calculations for
diluted EPS yielded the same result.
The computation of basic and diluted earnings per share is summarized as follows:
Net Income (Loss) from continuing operations
attributable to Ultralife
Net Income (Loss) from continuing operations
attributable to participating securities (unvested
restricted stock awards) (-0- and 3,000
shares, respectively)
Net Income (Loss) from continuing operations
attributable to Ultralife common shareholders (a)
Years Ended December 31,
2012
2011
$ (1,097)
$ 1,607
-
-
(1,097)
1,607
Net Income (Loss) from discontinued operations
attributable to Ultralife common shareholders (c)
$ (501)
$ (3,687)
Average Common Shares Outstanding – Basic (e)
Effect of Dilutive Securities:
Stock Options / Warrants
Average Common Shares Outstanding – Diluted (f)
EPS – Basic (a/e) – continuing operations
EPS – Basic (c/e) – discontinued operations
EPS – Diluted (b/f) – continuing operations
EPS – Diluted (d/f) – discontinued operations
17,403
-
17,403
$ (0.06)
$ (0.03)
$ (0.06)
$ (0.03)
17,304
32
17,336
$ 0.09
$ (0.21)
$ 0.09
$ (0.21)
There were 2,211,488 outstanding stock options, warrants and restricted stock awards as of December 31, 2012,
that were not included in EPS as the effect would have been anti-dilutive. No outstanding stock options, warrants and
restricted stock awards were included in the dilution computation for the year ended December 31, 2012. There were
2,105,228 outstanding stock options, warrants and restricted stock awards as of December 31, 2011, that were not included
in EPS as the effect would have been anti-dilutive. The dilutive effect of 252,218 outstanding stock options, warrants and
restricted stock awards were included in the dilution computation for the year ended December 31, 2011.
u.
Stock-Based Compensation
We have various stock-based employee compensation plans, which are described more fully in Note 7. We follow
the provisions of FASB’s guidance on share-based payments, which requires that compensation cost relating to share-based
payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the fair
value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting
period of the equity award).
50
v.
Segment Reporting
We report segment information in accordance with FASB’s guidance on Disclosures about Segments of an
Enterprise and Related Information. We have two operating segments. The basis for determining our operating segments is
the manner in which financial information is used by us in our operations. Management operates and organizes itself
according to business units that comprise unique products and services across geographic locations.
On March 8, 2011, we decided to exit our Energy Services business, which previously was a stand alone
business segment. See Note 2 in these Notes to Consolidated Financial Statements for additional information.
On February 15, 2012, we decided to divest our RedBlack Communications business, which previously was
reported in the Communications Systems segment. See Note 2 in these Notes to Consolidated Financial Statements for
additional information.
w.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-03, “Intangibles – Goodwill and Other (Topic 350): Testing
Indefinitely-Lived Intangible Assets for Impairment.” ASU No. 2012-03 permits entities to first assess qualitative factors
to determine whether it is more likely than not that the fair value of an indefinitely-lived intangible asset is less than its
carrying amount as a basis for determining whether it is necessary to perform a detailed quantitative analysis. An entity
would not be required to calculate the fair value of the indefinite-lived intangible asset unless the entity determines that it
is more likely than not that it is more likely that its fair value is less than its carrying amount. ASU 2012-03 is effective
for annual and interim indefinite-lived intangible assets for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012, with early adoption permitted. We adopted this standard during our annual
impairment review process in the fourth quarter of 2012. Adoption of this standard did not have a material impact on our
consolidated results of operations and financial condition.
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles –
Goodwill and Other (Topic 350): Testing Goodwill for Impairment”. ASU No. 2011-08 permits entities to first assess
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An
entity would not be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely
than not that its fair value is less than its carrying amount. ASU No. 2011-08 is effective for annual and interim goodwill
impairment tests performed for years beginning after December 15, 2011, with early adoption permitted. We adopted this
standard during our annual impairment review process in the fourth quarter of 2011. Adoption of this standard did not
have a material impact on our consolidated results of operations and financial condition.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of
Comprehensive Income”. ASU No. 2011-05 requires entities to present the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net
income and other comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other
comprehensive income as part of the statement of changes in shareholders’ equity. Further, in December 2011, the FASB
issued ASU No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05.” This update defers the effective date of ASU No. 2011-05’s requirement to present on the face of
the financial statements reclassification adjustments for each component of accumulated other comprehensive income in
both net income and other comprehensive income so that the FASB can reconsider those requirements during calendar
2012. These standards became effective retrospectively for annual and interim reporting periods beginning after
December 15, 2011, with early adoption permitted. In February 2013 the FASB issued ASU 2013-02, “Reporting of
Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to cross-
reference to other required disclosures that provide additional detail about amounts reclassified out of accumulated other
comprehensive income and to present significant amounts reclassified out of accumulated other comprehensive income
by line item of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same
reporting period. This standard is effective for periods beginning after December 15, 2013, with early adoption permitted.
We have elected to adopt the standard effective for this reporting period. The adoption of the standards has only impacted
the presentation of our consolidated financial statements and did not result in a material impact on our consolidated
results of operations and financial condition.
In December 2010, the FASB issued ASU No. 2010-29, “Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations - a consensus of the FASB Emerging Issues Task
Force (“EITF”)”. ASU No. 2010-29 amends accounting guidance concerning disclosure of supplemental pro forma
51
information for business combinations. If an entity presents comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business combination that occurred in the current year had
occurred as of the beginning of the comparable prior annual reporting period only. The accounting guidance also requires
additional disclosures to describe the nature and amount of material, nonrecurring pro forma adjustments. ASU No.
2010-29 became effective for fiscal years beginning on or after December 15, 2010 and applies to business combinations
completed on or after that date. The adoption of this pronouncement did not have a significant impact on our financial
statements. The future impact of adopting this pronouncement will depend on the future business combinations that we
may pursue.
Note 2- Dispositions & Exit Activities
2012 Activity
Ultralife Batteries UK, Ltd.
During the fourth quarter of 2012, we elected not to renew the lease for our U.K. manufacturing facility which
expires on March 24, 2013, and to relocate our sales and services operations to a smaller facility. As a result of this
decision, we are required to restore the facility back to its original condition per a previous contractual commitment.
The costs associated with the lease exit did not become determinable until late in the fourth quarter of 2012.
Accordingly, we recorded a liability as of the end of 2012 for our current estimate of the costs to return the facility to its
original condition as well as other related expenses that resulted in $228 being charged to selling, general, and
administrative costs related to operations transferred to our facilities in Newark, NY, and an additional $815 being
recorded as discontinued operations for those operations that were not transferred to our facilities in Newark, NY. The
termination of the lease has led to no employee reductions or other termination costs, with the exception of the
aforementioned restoration costs.
As a result, the Consolidated Statements of Comprehensive Income (Loss) herein exclude the discontinued
Ultralife Batteries UK, Ltd. operations from the results of continuing operations. The following amounts have been
reported as discontinued operations for years ended December 31, 2012 and 2011:
Net sales
Loss from discontinued operations
Provision Benefit for income taxes
Loss from discontinued operations, net of tax
Years Ended December 31,
2012
$ -
(815)
-
$(815)
2011
$-
-
-
$-
RedBlack Communications, Inc.
On February 16, 2012, we announced our intention to divest our RedBlack Communications, Inc. (“RedBlack”)
business in 2012. RedBlack was a wholly owned subsidiary of ours based in Hollywood, Maryland, that designed,
integrated and fielded mobile, modular and fixed site communication and electronic systems. We determined that
RedBlack offered limited opportunities to achieve the operating thresholds of our new business model.
On September 28, 2012, we entered into and closed a Stock Purchase Agreement (the “Agreement”) to sell 100% of
our capital stock in RedBlack to BCF Solutions, Inc. In exchange for the sale of RedBlack, we received $2,533 as a
purchase price, comprised of cash at closing in the amount of $2,133, funds held in escrow for up to one year in the
amount of $250, as well as $150 to be available for RedBlack employee retention programs. In addition, there will be a
customary post-closing working capital adjustment to the purchase price that is expected to be finalized in the first quarter
of 2013.
The Agreement contains customary representations and warranties that will survive for a period of two or three years.
The Agreement also contains customary indemnification for breaches of the representations and warranties identified in
the Agreement.
Pursuant to the Agreement, we are prohibited from engaging or participating with any current customer of RedBlack
in any business, directly or indirectly, that competes with the business conducted by RedBlack for two years. We are also
52
prohibited from hiring, soliciting, or recruiting any current employee, independent contractor, or consultant of BCF
Solutions, Inc. or RedBlack for two years.
Commencing with the first quarter of 2012, the results of the RedBlack operations and related divestiture costs have
been reported as a discontinued operation.
As a result, the Consolidated Statements of Comprehensive Income (Loss) herein exclude the RedBlack operations
from the results of continuing operations. The following amounts have been reported as discontinued operations for years
ended December 31, 2012 and 2011:
Net sales
Income (loss) from discontinued operations
(Provision) benefit for income taxes
Income (Loss) from discontinued operations,
net of tax
Year Ended December 31,
2012
$ 3,404
(7)
174
167
2011
$ 3,649
63
(48)
15
2011 Activity
Ultralife Energy Services Corporation
On March 8, 2011, we decided to exit our Energy Services business, which included standby power and systems
design, installation and maintenance activities because we determined it was appropriate to refocus our operations on
profitable growth opportunities presented in our other segments, Battery & Energy Products and Communications
Systems.
The actions taken to exit our Energy Services segment resulted in the elimination of approximately 40 jobs and the
closing of five facilities, primarily in California, Florida and Texas, over several months. As of the end of the second quarter
of 2011, all exit activities with respect to our Energy Services segment were completed. As a result, the presentation of
results herein excludes the Energy Services segment from the results of continuing operations. The following amounts have
been reported as discontinued operations for the years ended December 31, 2012 and 2011:
Net sales
Income (loss) from discontinued operations
(Provision) Benefit for income taxes
Income (loss) from discontinued operations, net of tax
Years Ended December 31,
2012
$ -
147
-
147
2011
$ 3,891
(3,702)
-
(3,702)
The income noted in 2012 is due entirely to adjustments to reserves that were established as of the closure of the
business as our actual experience has differed from our expectations at that time.
Included in the Loss from discontinued operations described above, we recorded the following exit charges in 2011:
Inventory and fixed asset write-downs
Employee related, including termination benefits
Lease termination costs
Other costs
Total Exit Costs
Cash Component
53
Year Ended
December 31, 2011
$ 941
703
250
1,030
$ 2,924
$ 1,984
Note 3 - Supplemental Balance Sheet Information
a.
Inventory
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method.
The composition of inventories was:
Raw materials .....................................................................................
Work in process ..................................................................................
Finished products ...............................................................................
December 31,
2012
2011
$15,023
4,863
10,484
30,370
$20,097
4,770
10,100
$34,967
b.
Property, Plant and Equipment
Major classes of property, plant and equipment consisted of the following:
Land ...................................................................................................
Buildings and Leasehold Improvements ...........................................
Machinery and Equipment ................................................................
Furniture and Fixtures .......................................................................
Computer Hardware and Software ....................................................
Construction in Progress ...................................................................
Less: Accumulated Depreciation .....................................................
December 31,
2012
2011
$123
7,381
46,606
1,810
4,103
1,275
61,298
48,883
$12,415
$123
7,000
44,770
1,894
3,815
641
58,243
45,655
$ 12,588
Estimated costs to complete construction in progress as of December 31, 2012 and 2011 was approximately $1,154
and $1,032, respectively.
Depreciation expense was $3,306 and $3,629 for the years ended December 31, 2012 and 2011, respectively.
c.
Impairment of Goodwill, Intangible Assets and Long-Lived Assets
We applied the provisions of FASB ASC Topics 350-20 and 820 during the annual goodwill impairment
analysis performed in September and October 2012. The first, optional, step of the goodwill analysis is to determine if it
is more likely than not that the fair value of the identified reporting units exceeds the respective carrying value. This
qualitative analysis includes but is not limited to, an evaluation of the macroeconomic, industry or market, and cost
factors relevant to the reporting unit as well as financial performance and entity or reporting unit events that may affect
the value of the reporting unit. We performed the qualitative assessment on two out of three of the identified reporting
units noting that no further testing was indicated. If the conclusion that it is more likely than not that the fair value of the
reporting unit exceeds its carrying value cannot be supported, or if the reporting unit is not subjected to the qualitative
assessment, the fair value of the reporting unit is determined using a quantitative assessment. The fair value for our one
reporting unit subjected to this quantitative test could not be determined using readily available quoted Level 1 inputs or
Level 2 inputs that were observable in active markets. Therefore, we used an income approach, to estimate the fair value
of the reporting unit, using Level 3 inputs. To estimate the fair value of the reporting unit, we used significant estimates
and judgmental factors. The key estimates and factors used in the valuation model included revenue growth rates and
profit margins based on internal forecasts, as well as industry and market based terminal growth rates, inputs to the
weighted-average cost of capital used to discount future cash flows, and earnings multiples. As a result of the goodwill
impairment test performed during 2012 and 2011, no impairment was indicated.
Similar to goodwill, we applied the provisions of FASB Topics 350-30 and 820, including the early adopted
ASU 2012-03, during the annual indefinite-lived intangible asset analysis performed in September and October 2012. The
first, optional, step of the analysis is to determine if it is more likely than not that the fair value of the indentified
54
indefinite-lived intangible assets exceeds the respective carrying values. This qualitative analysis includes but is not
limited to, an evaluation of the macroeconomic, industry or market, and other factors relevant to the indefinite-lived
intangible asset. We performed the qualitative assessment on two of the four identified indefinite-lived intangible assets
noting that no further testing was indicated. If a conclusion that it is more likely than not that the fair value of the
indefinite-lived intangible asset cannot be supported or if this optional step is not applied to the indefinite-lived intangible
asset, the fair value of the indefinite-lived intangible asset is determined using a quantitative assessment. The fair value
for our two indefinite-lived intangible assets subjected to this quantitative test could not be determined using readily
available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we used a royalty
relief approach, to estimate the fair value of the reporting unit, using Level 3 inputs. To estimate the fair value of the
reporting unit, we used significant estimates and judgmental factors. The key estimates and factors used in the valuation
model included revenue growth rates, as well as industry and market based terminal growth rates, inputs to the weighted-
average cost of capital used to discount future cash flows, and determined royalty rates. As a result of the impairment test
performed during 2012 and 2011, no impairment was indicated.
During 2012 and 2011, we also evaluated certain fixed assets for impairment utilizing valuation methods that are
classified as Level 3 inputs. Based upon the results of this evaluation, no material impairment was indicated.
d.
Goodwill
The following table summarizes the goodwill activity by segment for the years ended December 31, 2012 and
2011:
Battery &
Energy Products
Communications
Systems
Discontinued
Operations
Total
Balance at December 31, 2010
$ 4,758
$ 11,493
$ 2,025
$ 18,276
Effect of foreign currency
translations
Balance at December 31, 2011
Sale of RedBlack
Communications
Effect of foreign currency
translations
80
4,838
-
-
80
11,493
2,025
18,356
(2,025)
(2,025)
13
-
-
13
Balance at December 31, 2012
$ 4,851
$ 11,493
$ -
$ 16,344
e.
Other Intangible Assets
The composition of intangible assets was:
Trademarks
Patents and technology
Customer relationships
Distributor relationships
Non-compete agreements
Total intangible assets
December 31, 2012
Accumulated
Amortization
Net
Gross Assets
$ 3,564
4,495
3,998
380
217
$ -
3,702
3,366
330
217
$ 12,654
$ 7,615
$ 3,564
793
632
50
-
$ 5,039
55
Trademarks
Patents and technology
Customer relationships
Distributor relationships
Non-compete agreements
Total intangible assets
December 31, 2011
Accumulated
Amortization
Net
Gross Assets
$ 3,563
4,492
3,993
378
396
$ 12,822
$ -
3,440
3,143
310
396
$ 7,289
$ 3,563
1,052
850
68
-
$ 5,533
Amortization expense for intangible assets was $497 and $627 for the years ended December 31, 2012 and 2011,
respectively.
The change in the cost value of total intangible assets is a result of the effect of foreign currency translations and
our 2012 disposition of RedBlack which included a fully amortized non-compete agreement.
Note 4 - Operating Leases
We lease various buildings, machinery, land, automobiles and office equipment. Rental expenses for all operating
leases were approximately $1,011 and $1,494 for the years ended December 31, 2012 and 2011, respectively. Future
minimum lease payments under non-cancelable operating leases as of December 31, 2012 are as follows:
2013
$ 828
2014
$ 695
2015
$ 390
2016
$ 197
2017
and beyond
$ 71
Note 5 - Debt
Credit Facilities
On February 17, 2010, we entered into a senior secured asset based revolving credit facility (“Credit Facility”) of
up to $35,000, which was subsequently reduced to $20,000 as described in greater detail below, with RBS Business
Capital, a division of RBS Asset Finance, Inc. (“RBS”). The proceeds from the Credit Facility can be used for general
working capital purposes, general corporate purposes, and letter of credit foreign exchange support. The Credit Facility
had a maturity date of February 17, 2013, that was subsequently extended to May 15, 2013, as discussed in greater detail
below (“Maturity Date”). The Credit Facility is secured by substantially all of our assets. At closing, we paid RBS a
facility fee of $263.
On February 18, 2010, we drew down $9,870 from the Credit Facility to repay all outstanding amounts due
under our previous credit facility with JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company. Our
available borrowing under the Credit Facility fluctuates from time to time based upon the amounts of eligible accounts
receivable and eligible inventory. Available borrowings under the Credit Facility, as amended, equals the lesser of (1)
$20,000 or (2) 85% of eligible accounts receivable plus the lesser of (a) up to 70% of the book value of our eligible
inventory or (b) 85% of the appraised net orderly liquidation value of our eligible inventory. The borrowing base under
the Credit Facility is further reduced by (1) the face amount of any letters of credit outstanding, (2) any liabilities of ours
under hedging contracts with RBS and (3) the value of any reserves as deemed appropriate by RBS. We are required to
have at least $3,000 available under the Credit Facility at all times.
On January 19, 2011, we entered in a First Amendment to Credit Agreement (“First Amendment”) with RBS.
The First Amendment amended the Credit Facility as follows:
(i) Eligible accounts receivable under the Credit Facility (for the determination of available borrowings) now
include foreign (non-U.S.) accounts subject to credit insurance payable to RBS (formerly, such accounts
were not eligible without arranging letter of credit facilities satisfactory to RBS).
56
(ii) Decreased the interest rate that will accrue on outstanding indebtedness, as set forth in the following table:
Excess Availability
Greater than $10,000
LIBOR Rate Plus
3.00%
Greater than $6,000 but less than or equal to $10,000
3.25%
Greater than $3,000 but less than or equal to $6,000
3.50%
On September 28, 2012, we entered into a Second Amendment to the Credit Facility (“Second Amendment”)
with RBS. The Second Amendment amended the Credit Facility to consent to the sale of the stock of RedBlack and to
release any and all liens on RedBlack.
On February 15, 2013, we entered into a Third Amendment to the Credit Facility (“Third Amendment”) with
RBS. The Third Amendment amended the Credit Facility to extend the Maturity Date from February 17, 2013, to May
15, 2013, reduced the maximum amount available under the Credit Facility to $20,000, and reduced the unused line fee to
0.40% per year.
Interest currently accrues on outstanding indebtedness under the Credit Facility at LIBOR plus 3.00%. We have
the ability, in certain circumstances, to fix the interest rate for up to 90 days from the date of borrowing.
As of December 31, 2012, in addition to paying interest on the outstanding principal under the Credit Facility,
we were required to pay an unused line fee of 0.50% on the unused portion of the $35,000 Credit Facility. As of the
Third Amendment, we now pay an unused line fee of 0.40% on the unused portion of the lowered $20,000 Credit Facility.
In both instances, we must also pay customary letter of credit fees equal to the LIBOR rate and the applicable margin and
any other customary fees or expenses of the issuing bank. Interest that accrues under the Credit Facility is to be paid
monthly with all outstanding principal, interest and applicable fees due on the Maturity Date.
We are required to maintain a fixed charge ratio of 1.20 to 1.00 or greater at all times as of and after March 28,
2010. As of December 31, 2012, our fixed charge ratio was 2.15 to 1.00. Accordingly, we were in compliance with the
financial covenants of the Credit Facility. All borrowings under the Credit Facility are subject to the satisfaction of
customary conditions, including the absence of an event of default and accuracy of our representations and
warranties. The Credit Facility also includes customary representations and warranties, affirmative covenants and events
of default. If an event of default occurs, RBS would be entitled to take various actions, including accelerating the amount
due under the Credit Facility, and all actions permitted to be taken by a secured creditor.
As of December 31, 2012, we had $-0- outstanding under the Credit Facility. At December 31, 2012, the interest
rate on the asset based revolver component of the Credit Facility was 3.21%. As of December 31, 2012, the revolver
arrangement had approximately $13,157 of borrowing capacity, including outstanding letters of credit. At December 31,
2012, we had $413 of outstanding letters of credit related to this facility.
Note 6 - Commitments and Contingencies
a.
Indemnity
The Delaware General Corporation Law provides that our directors or officers will be reimbursed for all expenses,
to the fullest extent permitted by law arising out of their performance.
b.
Purchase Commitments
As of December 31, 2012, we have made commitments to purchase approximately $457 of production machinery
and equipment.
c.
Royalty Agreements
Technology underlying certain of our products is based in part on non-exclusive transfer agreements. In 2003, we
entered into an agreement with Saft Groupe S.A., to license certain tooling for battery cases. The licensing fee associated
with this agreement is based on a percentage of the sales price of the individual battery case, up to a maximum of one dollar
57
per battery case. The total royalty expense reflected in 2012 and 2011 was $1 and $5, respectively. This agreement expires
in the year 2017.
d.
Government Grants/Loans
In conjunction with the City of West Point, Mississippi, we applied for a Community Development Block Grant
(“CDBG”) from the State of Mississippi for infrastructure improvements to our leased facility that is owned by the City
of West Point, Mississippi. The CDBG was awarded and as of December 31, 2011, approximately $480 has been
distributed under the grant. Under an agreement with the City of West Point, we agreed to employ at least 30 full-time
employees at the facility, of which 51% of the jobs had to be filled or made available to low or moderate income families,
within three years of completion of the CDBG improvement activities. In addition, we agreed to invest at least $1,000 in
equipment and working capital into the facility within the first three years of operation of the facility. While we have yet
to receive formal notice from the applicable government agency confirming the closure of the grant, we believe that both
of these commitments were satisfied as of March 2011 and, therefore, have not recorded an accrual with respect to any
potential liability for the grant amounts received under the CDBG.
In conjunction with Clay County, Mississippi, we applied for a Mississippi Rural Impact Fund Grant (“RIFG”)
from the State of Mississippi for infrastructure improvements to our leased facility that is owned by the City of West
Point, Mississippi. The RIFG was awarded and as of December 31, 2011, approximately $150 has been distributed under
the grant. Under an agreement with Clay County, we agreed to employ at least 30 full-time employees at the facility, of
which 51% of the jobs had to be filled or made available to low or moderate income families, within two years of
completion of the RIFG improvement activities. In September 2010, we received an extension for this commitment to
March 31, 2011. In addition, we agreed to invest at least $1,000 in equipment and working capital into the facility within
the first three years of operation of the facility. While we have yet to receive formal notice from the applicable
government agency confirming the closure of the grant, we believe that both of these commitments were satisfied as of
March 2011 and, therefore, have not recorded an accrual with respect to any potential liability for the grant amounts
received under the RIFG.
e.
Employment Contracts
We have an employment contract with Michael D. Popielec, our President and Chief Executive Officer, which
stays in effect until terminated by either party. This agreement provides for a base salary, as adjusted for increases at the
discretion of our Board of Directors, and includes incentive bonuses based upon attainment of specified quantitative and
qualitative performance goals. This agreement also provides for severance payments in the event of specified events of
termination of employment. In addition, this agreement provides for a lump sum payment in the event of termination of
employment in association with a change in control.
We have an employment contract with Peter F. Comerford, our Vice-President of Administration & General
Counsel and Secretary, with automatic one-year renewals unless terminated by either party. This agreement provides for a
minimum salary, as adjusted for annual increases, and may include incentive bonuses based upon attainment of specified
management goals. This agreement also provides for severance payments in the event of specified termination of
employment. In addition, this agreement provides for a lump sum payment in the event of termination of employment in
association with a change in control.
Select key employees are required to enter into agreements providing for confidentiality and the assignment of
rights to inventions made by them while employed by us. These agreements also contain certain noncompetition and
nonsolicitation provisions effective during the employment term and for varying periods thereafter depending on position
and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to
abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the
course of their employment.
f.
Product Warranties
We estimate future costs associated with expected product failure rates, material usage and service costs in the
development of our warranty obligations. Warranty reserves are based on historical experience of warranty claims and
generally will be estimated as a percentage of sales over the warranty period. In the event the actual results of these items
differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes in our product warranty
liability during the years ended December 31, 2012 and 2011 were as follows:
58
Balance at beginning of year
Accruals for warranties issued
Settlements made
Balance at end of year
g.
Post Audits of Government Contracts
2012
2011
$ 839
370
(602)
$ 607
$1,314
591
(1,066)
$ 839
We had certain “exigent”, non-bid contracts with the U.S. government, which were subject to audit and final
price adjustment, which resulted in decreased margins compared with the original terms of the contracts. As of December
31, 2012, there were no outstanding exigent contracts with the U.S. government. As part of its due diligence, the U.S.
government has conducted post-audits of the completed exigent contracts to ensure that information used in supporting
the pricing of exigent contracts did not differ materially from actual results. In September 2005, the Defense Contracting
Audit Agency (“DCAA”) presented its findings related to the audits of three of the exigent contracts, suggesting a
potential pricing adjustment of approximately $1,400 related to reductions in the cost of materials that occurred prior to
the final negotiation of these contracts. In addition, in June 2007, we received a request from the Office of Inspector
General of the Department of Defense (“DoD IG”) seeking certain information and documents relating to our business
with the Department of Defense. We cooperated with the DCAA audit and DoD IG inquiry by making available to
government auditors and investigators our personnel and furnishing the requested information and documents. The
DCAA Audit and DoD IG inquiry were consolidated and the US Attorney’s Office represented the government in
connection with these matters. Under applicable federal law, we may have been subject up to treble damages and
penalties associated with the potential pricing adjustment. In light of the uncertainty, we decided to enter into discussions
with the U.S. Attorney’s Office in April 2011 to negotiate a settlement that would be in the best interests of our
customers, employees and shareholders. On April 21, 2011, we were advised by the government that there was a $2,730
settlement-in-principle to resolve all claims related to the contracts, subject to final approval by the Department of Justice.
As a result, we recorded a $2,730 charge as a reduction in revenues for the first quarter of 2011. On June 1, 2011, we
entered into a Settlement Agreement with the United States of America, acting through the United States Department of
Justice and on behalf of the Department of Defense that required us to pay a total of $2,700 plus accrued interest thereon
at the rate of 2.625% per annum. Under the Settlement Agreement, we were required to make principal payments of
$1,000, $567, $567 and $566 being due on June 8, 2011, December 1, 2011, June 1, 2012 and December 1, 2012,
respectively. Each principal payment was accompanied by a payment of accrued interest. As of December 31, 2012, we
have made all required payments.
h.
Legal Matters
We are subject to legal proceedings and claims that arise in the normal course of business. We believe that the
final disposition of such matters will not have a material adverse effect on our financial position, results of operations or cash
flows.
Arista Power Litigation
On September 23, 2011, we initiated an action against Arista Power, Inc. (“Arista”) and our former senior sales
and engineering employee, David Modeen, in the State of New York Supreme Court, County of Wayne (Index No.
73379). In our initial Complaint, we alleged that Arista recruited all but one of the members of its executive team from
us, subsequently changed its business to compete directly with us by using our confidential information, and during the
summer of 2011, recruited Modeen to become an Arista employee. We alleged that, as a result of actions by Arista and
Modeen: (i) Modeen has breached the terms of his Employee Confidentiality, Non-Disclosure, Non-Compete, Non-
Disparagement and Assignment Agreement with us; (ii) Modeen has breached certain agreements, duties and obligations
he owed us, including to protect and refrain from disclosing our trade secrets and confidential and proprietary
information; (iii) Arista’s employment of Modeen will inevitably lead to the disclosure and use of our trade secrets by
Arista, in violation of Modeen’s duties and obligations to us; (iv) Arista unlawfully induced Modeen to breach his
agreements with and duties and obligations to us; and (v) Arista’s recruitment and employment of Modeen has breached a
subcontract between Arista and us. We seek damages as determined at trial and preliminary and permanent injunctive
relief. The defendants answered the allegations set forth in the Complaint, without asserting any counterclaims.
On December 5, 2011, Arista served us with a Complaint it filed on November 29, 2011, in the State of New
York Supreme Court, County of Monroe (Index No. 11-13896) against us, our officers, several of our directors, and an
59
employee. In its Complaint, Arista alleges that we and our named defendants have violated the terms of a Confidentiality
Agreement with Arista and have unfairly competed against Arista by unlawfully appropriating Arista’s trade secrets and
that as a result of such activity, Arista has incurred damages in excess of $60,000. Arista seeks damages, an accounting,
and preliminary and permanent injunctive relief.
On December 21, 2011, we and our officers, directors and employee named in Arista’s Complaint filed a motion
to dismiss Arista’s Complaint against our officers, directors and employee as Arista’s Complaint fails to state any cause
of action against any of them and to dismiss the claim of fraud against our officers, directors and employee.
Subsequently, Arista filed an Amended Complaint alleging essentially the same causes of action but adding additional
factual allegations against us and our officers, directors and employee. In addition, Arista filed a motion to disqualify our
outside legal counsel representing us and our officers, directors and employee in both Arista’s Complaint and our
Complaint against Arista. In response, we and our officers, directors and employee filed a new motion to dismiss Arista’s
Complaint against us in its entirety and seeking dismissal of the fraud claim against us. Arista’s motion to disqualify our
outside legal counsel was denied on February 10, 2012. On March 9, 2012, the Court issued its decision on our motion to
dismiss, granting the motion to the extent of dismissing some claims against us, but denying the motion to dismiss the
individuals from the lawsuit at this preliminary stage. On April 19, 2012, an Answer was filed on behalf of us, our
officers, directors and employee.
On February 16, 2012, we filed an Amended Complaint in the action in Supreme Court, Wayne County, adding
claims in that action against Modeen and Arista for misappropriation of our trade secrets and unfair competition, based on
Arista’s strategy to hire Modeen and other former Ultralife employees, and thereby obtain improper access to information
that is confidential and proprietary to us for Arista’s own benefit. We seek damages and injunctive relief limiting Arista’s
employment of Modeen, and precluding Arista from using or disclosing information and trade secrets it acquired from us.
Arista and Modeen answered the Amended Complaint on March 19, 2012, and discovery has commenced and is ongoing
in both cases.
We initiated the September 23, 2011, Complaint against Arista to protect our customers, employees and
shareholders from the unauthorized use and theft of our investments in intellectual property, trade secrets and confidential
information by Arista and its employees. Protecting our collective intellectual property and know-how, developed at
great cost to us to form our competitive position in the marketplace and create value for our shareholders, is a
fundamental responsibility of all our employees.
We believe the action Arista filed on November 29, 2011, is retaliatory and without merit. Our development of
the foundation for the new product concept for which Arista claims we allegedly used its trade secrets commenced in
2008, long prior to the departure of those individuals who now constitute the executive team of Arista. Furthermore, we
believe the purported damage of $60,000 being claimed by Arista is based solely on the reduction in its market
capitalization between November 2009 and the filing date of the Complaint. This market value loss is totally unrelated to
any actions attributable to us, and claims for recovery of this or any other amount are legally and factually baseless.
Accordingly, we are vigorously pursuing our complaint against Arista and defending what we believe to be a
meritless action on the part of Arista.
Energy Services Litigation
In May 2010, we were served with a summons and complaint by a customer of one of our subsidiaries that
performed energy services. The complaint sought damages in an amount of at least $1,500 and included claims of breach
of contract, negligent installation, and breach of warranty against us and breach of warranty against the manufacturer of
the installed batteries. In January 2011, we settled all claims related to the litigation. Pursuant to the settlement, we
agreed to pay the customer $1,100, of which, $1,075 was paid by our insurance providers.
9-Volt Battery Litigation
In July 2010, we were served with a summons and complaint filed in Japan by one of our 9-volt battery
customers. The complaint alleged damages associated with claims of breach of warranty in an amount of approximately
$1,100. A trial was held on May 25, 2012, in Japan before a panel of three judges, after which the parties agreed to settle
the matter for approximately $125, which has been reflected in our cost of products sold in 2012. The terms of the
settlement agreement include no legal liability on our part and the plaintiff abandoning all other claims against us.
60
i.
Workers’ Compensation Self-Insured Trust
From August 2002 through August 2006, we participated in a self-insured trust to manage our workers’
compensation activity for our employees in New York State. All members of this trust had, by design, joint and several
liability during the time they participated in the trust. The New York Attorney General’s office notified the members of
the trust of a funding deficit in 2008 and, in November 2009, the New York Attorney General’s office presented the
results of the deficit reconstruction of the trust. As a result of the deficit reconstruction, the State of New York has
determined that the trust was underfunded by $19,100 during the period December 1, 1997 to August 31, 2006. Our pro-
rata share of the liability was determined to be $452. The Attorney General’s office proposed a settlement by which we
could avoid joint and several liability in exchange for a settlement payment of $520, which we paid in 12 monthly
installments of $43 each following the execution of the settlement agreement starting in June 2010 and ending in 2011.
On October 11, 2011, an order was filed with the Albany County Clerk wherein this lawsuit was discontinued against us.
Note 7 - Shareholders' Equity
a.
Preferred Stock
We have authorized 1,000,000 shares of preferred stock, with a par value of $0.10 per share. At December 31,
2012, no preferred shares were issued or outstanding.
b.
Common Stock
We have authorized 40,000,000 shares of common stock, with a par value of $0.10 per share.
In February 2012, we issued 16,271 shares of our common stock to our non-employee directors, valued at $77.
In May 2012, we issued 17,473 shares of our common stock to our non-employee directors, valued at $77. In August
2012, we issued 24,311 shares of our common stock to our non-employee directors, valued at $77. In November 2012,
we issued 25,758 shares of our common stock to our non-employee directors, valued at $77.
In February 2011, we issued 11,276 shares of our common stock to our non-employee directors, valued at $77.
In May 2011, we issued 17,036 shares of our common stock to our non-employee directors, valued at $76. In August
2011, we issued 15,981 shares of our common stock to our non-employee directors, valued at $77. In November 2011,
we issued 17,350 shares of our common stock to our non-employee directors, valued at $76.
c.
Treasury Stock
At December 31, 2012 and 2011, we had 1,372,757 shares of treasury stock outstanding, valued at $7,658.
d.
Stock Options
We have various stock-based employee compensation plans, for which we follow the provisions of FASB’s
guidance on share-based payments, which requires that compensation cost relating to share-based payment transactions be
recognized in the financial statements. The cost is measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
Our shareholders have approved various equity-based plans that permit the grant of stock options, restricted stock
and other equity-based awards. In addition, our shareholders have approved the grant of stock options outside of these plans.
In June 2004, shareholders adopted the 2004 Long-Term Incentive Plan (“LTIP”) pursuant to which we were
authorized to issue up to 750,000 shares of common stock and grant stock options, restricted stock awards, stock
appreciation rights and other stock-based awards. Through shareholder approved amendments to the LTIP in 2006, 2008
and 2011, the total number of authorized under the LTIP increased to 2,900,000.
Stock options granted under the LTIP are either Incentive Stock Options (“ISOs”) or Non-Qualified Stock Options
(“NQSOs”). Key employees are eligible to receive ISOs and NQSOs; however, directors and consultants are eligible to
receive only NQSOs. Most ISOs vest over a three- or five-year period and expire on the sixth or seventh anniversary of the
grant date. All NQSOs issued to non-employee directors vest immediately and expire on either the sixth or seventh
anniversary of the grant date. Some NQSOs issued to non-employees vest immediately and expire within three years; others
61
have the same vesting characteristics as options given to employees. As of December 31, 2012, there were 2,113,488 stock
options outstanding under the LTIP.
On December 19, 2005, we granted our former President and Chief Executive Officer, John, D. Kavazanjian, an
option to purchase 48,000 shares of common stock at $12.96 per share outside of any of our equity-based compensation
plans, subject to shareholder approval. Shareholder approval was obtained on June 8, 2006. The stock option is fully vested
and expires on June 8, 2013.
On March 7, 2008, in connection with his becoming employed by us, we granted our Chief Financial Officer and
Treasurer, Philip A. Fain, an option to purchase 50,000 shares of common stock at $12.74 per share outside of any of our
equity-based compensation plans. The option is fully vested and expires on March 7, 2015.
On December 30, 2010, pursuant to the terms of his employment agreement, we granted our President and Chief
Executive Officer, Michael D. Popielec, options to purchase shares of common stock under the LTIP as follows: (i) 50,000
shares at $6.42, vesting in annual increments of 12,500 shares over a four-year period commencing December 30, 2011; (ii)
250,000 shares at $6.42, vesting in annual increments of 62,500 shares over a four-year period commencing December 30,
2011; (iii) 200,000 shares at $10.00, with vesting to begin on the date the stock reaches a closing price of $10.00 per share
for 15 trading days within a 30-day trading period, with such vesting in annual increments of 50,000 shares over the four
anniversary dates of that date; and (iv) 200,000 shares at $15.00, with vesting to begin on the date the stock reaches a closing
price of $15.00 per share for 15 trading days within a 30-day trading period, with such vesting in annual increments of
50,000 shares over the four anniversary dates of that date. All such options in items (i) and (ii) shall expire on December 30,
2017. All such options in items (iii) and (iv) shall expire as of the later of December 30, 2017 and five years after the initial
vesting commences, but in no event later than December 30, 2020. The options set forth in items (ii), (iii) and (iv) were
subject to shareholder approval of an amendment to the LTIP, which approval was obtained on June 7, 2011.
On January 3, 2011, pursuant to the terms of his employment agreement, we granted our President and Chief
Executive Officer, Michael D. Popielec, an option to purchase 50,000 shares of common stock at $6.58 under the LTIP. The
option vests in annual increments of 12,500 shares over a four-year period commencing December 30, 2011. The option
expires on December 30, 2017.
In conjunction with FASB’s guidance for share-based payments, we recorded compensation cost related to stock
options of $1,073 and $946 for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, there
was $817 of total unrecognized compensation costs related to outstanding stock options, which is expected to be recognized
over a weighted average period of 1.88 years.
We use the Black-Scholes option-pricing model to estimate fair value of stock-based awards. The following
weighted average assumptions were used to value options granted during the years ended December 31, 2012 and 2011:
Risk-free interest rate
Volatility factor
Dividends
Weighted average expected life (years)
Forfeiture rate
Years Ended
December 31,
2012
2011
0.56%
63.53%
0.00%
3.91
15.00%
0.97%
61.62%
0.00%
3.78
15.00%
We use a Monte Carlo simulation option-pricing model to estimate the fair value of market performance stock-
based awards. The following weighted average assumptions were used to value market performance stock options granted
during the year ended December 31, 2011. There were no market performance stock options granted during the years ended
December 31, 2012.
62
Risk-free interest rate
Volatility factor
Dividends
Weighted average expected life (years)
Forfeiture rate
Year Ended
December 31,
2011
2.74%
63.78%
0.00%
5.51
0.00%
We calculate expected volatility for stock options by taking an average of historical volatility over the past five
years and a computation of implied volatility. The computation of expected term was determined based on historical
experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.
The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of
grant. Forfeiture rates are calculated by dividing unvested shares forfeited by beginning shares outstanding. The pre-vesting
forfeiture rate is calculated yearly and is determined using a historical twelve-quarter rolling average of the forfeiture rates.
The following table summarizes data for the stock options issued by us:
Year Ended December 31, 2012
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number
of Shares
2,356,228
303,150
(28,000)
(419,890)
2,211,488
Shares under option at
beginning of year .............
Options granted .....................
Options exercised .................
Options cancelled .................
Shares under option at end
of year
$ 8.34
3.63
4.09
9.88
$ 7.47
Vested and expected to vest
1,969,185
$ 7.78
as end of year
Options exercisable at end
1,013,098
$ 7.64
of year
Year Ended December 31, 2011
4.85
4.74
3.45
$ 3
$ 2
$ 0
Weighted
Average
Exercise
Price
Per Share
$ 9.71
7.96
3.94
12.30
Number
of Shares
1,794,694
1,113,900
(18,500)
(533,866)
Shares under option at
beginning of year ................
Options granted .......................
Options exercised ....................
Options cancelled ....................
Shares under option at end
of year
2,356,228
$ 8.34
Options exercisable at end of
year
989,972
$9.62
The following table represents additional information about stock options outstanding at December 31, 2012:
63
Options Outstanding
Options Exercisable
Number of
Outstanding
at December 31,
2012
Weighted-
Average
Remaining
Contractual
Life
Range of
Exercise Prices
$ 3.22-$ 3.91
$ 3.92-$ 4.41
$ 4.42-$ 4.42
$ 4.43-$ 6.37
$ 6.38-$ 6.42
$ 6.43-$ 9.70
$ 9.71-$12.00
$12.85-$12.96
$12.97-$13.48
$13.49-$15.00
310,750
262,750
310,000
93,600
300,000
184,166
419,722
69,000
61,500
200,000
$ 3.22-$15.00
2,211,488
Weighted-
Average
Exercise Price
$ 3.59
$ 4.18
$ 4.42
$ 5.24
$ 6.42
$ 7.29
$10.62
$12.93
$13.34
$15.00
Number
Exercisable
at December 31,
2012
170,000
70,502
103,336
44,203
150,000
124,835
219,722
69,000
61,500
-
Weighted-
Average
Exercise Price
$ 3.91
$ 4.41
$ 4.42
$ 5.17
$ 6.42
$ 7.54
$11.19
$12.93
$13.34
$ 0.00
$ 7.47
1,013,098
$ 7.64
5.17
5.50
5.94
4.75
5.00
4.30
3.63
0.38
2.15
7.04
4.85
The weighted average fair value of options granted during the years ended December 31, 2012 and 2011 was $1.67
and $2.04, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the
exercise price of the options on the date of exercise) exercised during the years ended December 31, 2012 and 2011 was $29
and $45, respectively.
FASB’s guidance for share-based payments requires cash flows from excess tax benefits to be classified as a part of
cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options
in excess of the deferred tax asset attributable to stock compensation costs for such options. We did not record any excess
tax benefits in 2012 or 2011. Cash received from option exercises under our stock-based compensation plans for the years
ended December 31, 2012 and 2011 was $114 and $73, respectively.
e.
Warrants
On May 19, 2006, in connection with our acquisition of ABLE New Energy Co., Ltd., we granted warrants to
acquire 100,000 shares of common stock. The exercise price of the warrants was $12.30 per share and the warrants had a
five-year term. In January 2008, 82,000 warrants were exercised, for total proceeds received of $1,009. In January 2009,
10,000 warrants were exercised, for total proceeds received of $123. In May 2011, the remaining outstanding warrants to
acquire 8,000 shares of common stock expired without being exercised.
f.
Restricted Stock Awards
No restricted stock was awarded during the years ended December 31, 2012 and 2011.
During 2009, we issued 16,286 time-vested restricted stock awards to our executive officers. The restrictions
lapsed over a three-year period in equal installments, commencing on the first anniversary of the grant date (January 14,
2009). As of December 31, 2012, 8,582 of these shares had vested, and 7,704 of these shares were forfeited.
The activity of restricted stock grants of common stock for the years ended December 31, 2012 and 2011 is
summarized as follows:
Unvested at December 31, 2010
Granted
Vested
Forfeited
Unvested at December 31, 2011
Number of Shares
Weighted Average
Grant Date Fair Value
9,048
-
(4,925)
(2,905)
1,218
$ 11.94
0.00
12.01
12.07
$ 11.33
64
Granted
Vested
Forfeited
Unvested at December 31, 2012
-
(1,218)
-
-
0.00
11.33
0.00
$ 0.00
We recorded compensation cost related to restricted stock grants of $8 and $(27) for the years ended December 31,
2012 and 2011, respectively. As of December 31, 2011, we had $0 of total unrecognized compensation expense related to
restricted stock grants. The total fair value of these grants that vested during the years ended December 31, 2012 and 2011
was $5 and $32, respectively.
g.
Reserved Shares
We have reserved 2,911,723 and 2,939,723 shares of common stock under the various stock option plans, warrants
and restricted stock awards as of December 31, 2012 and 2011, respectively.
Note 8 - Income Taxes
The provision for income taxes expense (benefit) consists of:
December 31,
2012
December 31,
2011
Current – Continuing Operations:
Federal
State
Foreign
Current – Discontinued Operations:
Federal
State
$
$
Deferred – Continuing Operations:
Federal
State
Foreign
Deferred – Discontinued Operations:
Federal
State
$
$
-
-
539
539
-
-
-
220
-
(205)
15
(174)
-
(174)
-
32
-
32
-
-
-
229
-
219
448
48
-
48
Total
$
380
$
528
We reflected a tax expense of $380 for the year ended December 31, 2012. The 2012 tax provision is principally a
result of the increase in the net deferred tax liability related to liabilities generated from goodwill and certain intangible
assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. In addition, we incurred
foreign income taxes in 2012.
65
We reflected a tax expense of $528 for the year ended December 31, 2011. The 2011 tax provision is principally a
result of the increase in the net deferred tax liability related to liabilities generated from goodwill and certain intangible
assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. In addition, we incurred
state and foreign income taxes in 2011.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of our
deferred tax liabilities and assets are as follows:
Deferred tax liabilities:
Property, plant and equipment
Intangible assets and other
Total deferred tax liabilities
Deferred tax assets:
Net operating loss carryforwards
Intangible assets
Accrued expenses, reserves and other
Investments
Total deferred tax assets
December 31,
2012
December 31,
2011
$ 450
4,272
4,722
$ 763
4,437
5,200
18,505
4,664
3,764
-
26,933
17,578
5,079
4,531
342
27,530
Valuation allowance for deferred tax assets
Net deferred tax assets
(26,251)
682
(26,526)
1,004
Net deferred tax liability
$ (4,040)
$ (4,196)
The $4,040 net deferred tax liability for the year ended December 31, 2012 is comprised of a long-term deferred
tax liability of $4,160, offset partially by current deferred tax asset of $120. The $4,196 net deferred tax liability for the year
ended December 31, 2011 is comprised of a current deferred tax liability of $187 and a long-term deferred tax liability of
$4,170, offset in part by a current deferred tax asset of $161.
In 2012 and 2011, in the U.S. and the U.K., we continue to report a valuation allowance for our deferred tax assets
that cannot be offset by reversing temporary differences. This results from the conclusion that it is more likely than not that
we would not utilize our U.S. and U.K. NOL’s that had accumulated over time. The recognition of a valuation allowance on
our deferred tax assets resulted from our evaluation of all available evidence, both positive and negative. The assessment of
the realizability of the NOL’s was based on a number of factors including, our history of net operating losses, the volatility of
our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and
the continued uncertainty of the general business climate as of the end of 2012. We concluded that these factors represent
sufficient negative evidence and have concluded that we should record a full valuation allowance under FASB‘s guidance on
the accounting for income taxes. In 2011, we did not record a valuation allowance for the Chinese deferred tax assets as we
determined that it was more likely than not that they would be realized. We continually assess the carrying value of this
asset based on relevant accounting standards.
As of December 31, 2012, we have foreign and domestic NOL’s totaling approximately $58,030 available to reduce
future taxable income. Foreign loss carryforwards of approximately $12,390 can be carried forward indefinitely. The
domestic NOL carryforward of $48,589 expires from 2019 through 2032. The domestic NOL carryforward includes
approximately $2,949 for which a benefit will be recorded in capital in excess of par value when realized.
We have determined that a change in ownership, as defined under Internal Revenue Code Section 382, occurred
during 2005 and 2006. As such, the domestic NOL carryforward will be subject to an annual limitation estimated to be in the
range of approximately $12,000 to $14,500. The unused portion of the annual limitation can be carried forward to
subsequent periods. We believe such limitation will not impact our ability to realize the deferred tax asset. In addition,
certain of our NOL carryforwards are subject to U.S. alternative minimum tax such that carryforwards can offset only 90%
of alternative minimum taxable income. This limitation did not have an impact on income taxes determined for 2012 or
2011. The use of our U.K. NOL carryforwards may be limited due to the change in the U.K. operation during 2008 from
a manufacturing and assembly center to primarily a distribution and service center.
66
For financial reporting purposes, income (loss) from continuing operations before income taxes is as follows:
United States
Foreign
Total
December 31,
2012
December 31,
2011
$ 829
(1,403)
$ 3,684
(1,655)
$ (574)
$ 2,029
There are no undistributed earnings of our foreign subsidiaries, at December 31, 2012 or 2011.
We were granted a tax holiday in China. Our tax rate in China was phased in until ultimately reaching a rate of
25% in 2012.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S.
statutory federal income tax rate to income (loss) from continuing operations before income taxes as follows:
December 31,
2012
December 31,
2011
Provision/(benefit) computed using the statutory rate
(34.0%)
34.0%
Increase (reduction) in taxes resulting from:
State tax, net of federal benefit
Foreign
Valuation allowance/deferred impact
Compensation
Expiration of capital loss carryforward
Other
Provision (benefit) for income taxes
-
127.6
(119.3)
55.4
59.6
7.2
96.5%
1.0
27.6
(49.1)
9.0
-
1.2
23.7%
In 2012 and 2011, the provision for income taxes was higher than what would be expected if the statutory rate were
applied to pretax income. This is due to the continuation of reflecting a full valuation allowance for our U.S. and U.K.
deferred tax assets, and as a result of the mix of earnings in foreign jurisdictions.
Accounting for Uncertainty in Income Taxes
Our unrecognized tax benefits related to uncertain tax positions at December 31, 2012 relate to Federal and
various state jurisdictions. The following table summarizes the activity related to our unrecognized tax benefits:
Balance at beginning of the year
Increases related to the current year tax positions
Increases related to prior year tax positions
Decreases related to prior year tax positions
Expiration of statute of limitations for assessment of taxes
Settlements
Balance at the end of the year
Years ended December 31,
2012
2011
$ 6,779
729
-
-
-
-
-
$ 7,508
$ -
6,779
-
-
-
-
-
$ 6,779
The total unrecognized tax benefit balances at December 31, 2012 and 2011 are comprised of tax benefits that, if
recognized, would result in a deferred tax asset and a corresponding increase in our valuation allowance. As a result,
because the benefit would be offset by an increase in the valuation allowance, there would be no effect on our effective
tax rate.
67
We are not required to accrue interest and penalties as the unrecognized tax benefits have been recorded as a
decrease in our NOL. Interest and penalties would begin to accrue in the period in which the NOL’s related to the
uncertain tax positions are utilized. We do not expect our unrecognized tax benefits to change significantly over the next
twelve months.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. State
and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions.
Our U.S. tax matters for the years 2000 through 2012 remain subject to examination by the Internal Revenue Service
(“IRS”) due to our NOL carryforwards. Our U.S. tax matters for the years 2000 through 2012 remain subject to
examination by various state and local tax jurisdictions due to our NOL carryforwards. Our tax matters for the years 2006
through 2012 remain subject to examination by the respective foreign tax jurisdiction authorities. The IRS has completed
the examination of our 2009 US Federal income tax return, with no resulting material effect to our financial position or
results of operations.
Note 9 - 401(k) Retirement Benefit Plan
We maintain a defined contribution 401(k) plan covering substantially all employees. Employees can contribute a
portion of their salary or wages as prescribed under Section 401(k) of the Internal Revenue Code and, subject to certain
limitations, we may, at the discretion of our Board of Directors, authorize an employer contribution based on a portion of the
employees' contributions. Since January 2010, we have matched 50% on the first 4% contributed by an employee, or a
maximum of 2% of the employee’s income. For 2012 and 2011, we contributed $243 and $381, respectively, to the 401(k)
plan.
Note 10 - Business Segment Information
On March 8, 2011, we decided to exit our Energy Services business, which previously was a stand alone
business segment. Results of this business have been classified as discontinued since the second quarter of 2011. See
Note 2 in these Notes to Consolidated Financial Statements for additional information.
On February 15, 2012, we decided to divest our RedBlack Communications business, which previously was
reported in the Communications Systems segment. These results have been classified as discontinued since the first
quarter of 2012. See Note 2 in these Notes to Consolidated Financial Statements for additional information.
During the fourth quarter of 2012, we elected not to renew the lease for our U.K. manufacturing facility which
expires on March 24, 2013, and to relocate our sales and services operations to a smaller facility. As a result of this
decision, we are required to restore the facility back to its original condition per a previous contractual commitment. This
facility previously served our Battery and Energy Segments business. A portion of these costs were classified as a
discontinued operation in the fourth quarter of 2012. See Note 2 in these Notes to Consolidated Financial Statements for
additional information.
Segment information previously reported has been reclassified to conform to the current year presentation.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The
Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in
addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories.
The
Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified
speakers, equipment mounts, case equipment, integrated communication system kits and communications and electronics
systems design. We believe that reporting performance at the gross profit level is the best indicator of segment
performance. As such we report segment performance at the gross profit level and operating expenses as Corporate charges.
68
2012
Revenues
Segment contribution
Interest expense, net
Miscellaneous
Income taxes-current
Income taxes-deferred
Loss from discontinued operations
Noncontrolling interest
Net income attributable to Ultralife
Total assets
Capital expenditures
Depreciation and amortization
Stock-based compensation
2011
Revenues
Segment contribution
Interest expense, net
Miscellaneous
Income taxes-current
Income taxes-deferred
Loss from discontinued operations
Noncontrolling interest
Net income attributable to Ultralife
Total assets
Capital expenditures
Depreciation and amortization
Stock-based compensation
Geographical Information
Battery &
Energy
Products
$71,084
$17,562
54,605
2,812
2,471
22
Battery &
Energy
Products
$ 108,203
25,169
Systems
Communications Discontinued
Operations
$ -
-
$30,573
$11,168
(501)
-
-
20
(8)
29,586
320
363
13
Systems
Communications Discontinued
Operations
$ -
-
$ 27,534
9,022
51,351
1,209
2,471
70
35,382
1,026
191
6
(3,687)
3,473
-
185
12
Corporate
$ -
(28,844)
(436)
(24)
(539)
(15)
31
13,527
-
1,132
1,352
Total
$101,657
(114)
(436)
(24)
(539)
(15)
(501)
31
(1,598)
97,718
3,132
3,986
1,379
Corporate
$ -
(31,779)
(554)
171
(32)
(448)
58
10,608
127
1,565
1,137
Total
$ 135,737
2,412
(554)
171
(32)
(448)
(3,687)
58
(2,080)
100,815
2,362
4,412
1,225
Revenues
Long-Lived Assets
United Kingdom
China
Hong Kong
India
Europe,
excluding United
Kingdom
Japan
Singapore
Canada
Australia
Other
Total Non-U.S.
2012
11,855
4,206
1,499
351
9,419
1,011
89
776
10,567
2,398
42,171
2011
$11,727
8,748
484
104
8,091
1,440
567
5,245
1,815
5,357
43,578
2011
2012
$ 71 $ 334
1,370
2,243
-
-
52
49
-
-
-
-
-
-
2,363
-
-
-
-
-
-
1,756
United States
59,486
92,159
10,052 10,832
Total
$101,657 $135,737
$12,415
$12,588
69
Long-lived assets represent the sum of the net book value of property, plant and equipment.
Note 11 - Fire at Manufacturing Facility
In June 2011, we experienced a fire that damaged certain inventory and machinery and equipment at our facility in
China. The fire occurred after business hours and was fully extinguished quickly with no injuries, and the plant was back in
full operation shortly thereafter with no significant disruption in supply or service to customers. We maintain adequate
insurance coverage for this operation.
The total amount of the loss pertaining to assets and the related expenses was approximately $1,589. The majority
of our insurance claim is related to the recovery of damaged inventory. In June 2012, we received approximately $1,017 as a
partial payment on our insurance claim, which resulted in no gain or loss being recognized. As of December 31, 2012, we
reflect a receivable from the insurance company relating to this claim of $433, which is net of our deductible of
approximately $132, and represents additional proceeds to be received. The deductible charge was expensed in the second
quarter of 2011 and reflected as a component of cost of products sold in the Consolidated Statements of Comprehensive
Income.
Note 12 – Subsequent Events
On February 15, 2013, we entered into a Third Amendment to the Credit Facility (“Third Amendment”) with
RBS. The Third Amendment amended the Credit Facility to extend the Maturity Date from February 17, 2013 to May 15,
2013, reduced the maximum amount available to $20,000, and reduced the unused line fee to 0.40% per year. See Note 5
for more information regarding our debt facility.
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures – Our president and chief executive officer (principal
executive officer) and our chief financial officer and treasurer (principal financial officer) have evaluated our disclosure
controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
annual report. Based on this evaluation, our president and chief executive officer and chief financial officer and treasurer
concluded that our disclosure controls and procedures were effective as of such date.
Changes In Internal Controls Over Financial Reporting –There has been no change in our internal control
over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fourth quarter of
the fiscal year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting – Our management team is responsible
for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations of internal control systems, our internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on our assessment, we concluded that,
as of December 31, 2012, our internal control over financial reporting was effective based on those criteria.
70
ITEM 9B. OTHER INFORMATION
None.
71
PART III
The information required by Part III, other than as set forth in Item 12, and each of the following items is omitted
from this report and will be presented in our definitive proxy statement (“Proxy Statement”) to be filed pursuant to
Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report, in connection with our 2012
Annual Meeting of Shareholders, which information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled "Election of Directors", "Executive Officers", "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Corporate Governance" in the Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation", “Directors’ Compensation”, “Employment Arrangements” and
"Compensation and Management Committee Report" in the Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The section entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of
Management” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
(c)
2,161,488
$ 7.35
700,235
50,000
2,211,488
12.74
$ 7.47
-
700,235
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
See Note 7 in Notes to Consolidated Financial Statements for additional information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The section entitled "Corporate Governance - General" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section entitled "Proposal to Ratify the Selection of Independent Registered Accounting Firm - Principal
Accountant Fees and Services" in the Proxy Statement is incorporated herein by reference.
72
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
Documents filed as part of this report:
1. Financial Statements
The financial statements and schedules required by this Item 15 are set forth in Part II, Item 8 of this
report.
(b)
Exhibits. The following exhibits are filed as a part of this report:
Description of Document
Incorporated By Reference from:
Exhibit
Index
2.1
3.1
3.2
4.1
Stock Purchase Agreement by and
between BCF Solutions, Inc. and
Ultralife Corporation
Restated Certificate of Incorporation
Amended and Restated By-laws
Specimen Stock Certificate
10.1*
Technology Transfer Agreement
relating to Lithium Batteries
10.2*
10.3*
Technology Transfer Agreement
relating to Lithium Batteries
Amendment to the Agreement relating
to rechargeable batteries
10.4†
Ultralife Batteries, Inc. 2000 Stock
Option Plan
10.5†
10.9†
10.15†
10.16†
10.21†
Ultralife Batteries, Inc. Amended and
Restated 2004 Long-Term Incentive
Plan
Amendment No. 1 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 2 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Amendment No. 3 to Ultralife
Batteries, Inc. Amended and Restated
2004 Long-Term Incentive Plan
Employment Agreement between the
Registrant and Peter F. Comerford
10.22
Credit Agreement with RBS Business
73
Exhibit 2.1 of the Form 10-Q for the
quarter ended September 30, 2012, filed
November 8, 2012
Exhibit 3.1 of the Form 10-K for the year
ended December 31, 2008, filed March 13,
2009
Exhibit 3.2 of the Form 8-K filed
December 9, 2011
Exhibit 4.1 of the Form 10-K for the year
ended December 31, 2008, filed March 13,
2009
Exhibit 10.19 of our Registration Statement
on Form S-1 filed on October 7, 1994, File
No. 33-84888 (the “1994 Registration
Statement”)
Exhibit 10.20 of the 1994 Registration
Statement
Exhibit 10.24 of our Form 10-K for the
fiscal year ended June 30, 1996 (this
Exhibit may be found in SEC File No. 0-
20852)
Exhibit 99.1 of our Registration Statement
on Form S-8 filed on May 15, 2001, File
No. 333-60984 (the “2001 Registration
Statement”)
Exhibit 99.2 of our Registration Statement
on Form S-8 filed on July 26, 2004, File
No. 333-117662
Exhibit 99.3 of our Registration Statement
on Form S-8 filed August 18, 2006, File
No. 333-136737
Exhibit 99.4 of our Registration Statement
on Form S-8 filed November 13, 2008, File
No. 333-155349
Exhibit 99.5 of our Registration Statement
on Form S-8 filed November 13, 2008, File
No. 333-155349
Exhibit 10.30 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.33 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.34 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.35 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.36 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.37 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.38 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.39 of the Form 10-K for the
year ended December 31, 2009, filed
March 16, 2010
Exhibit 10.40 of the Form 10-K for the
year ended December 31, 2010, filed
March 15, 2011
Exhibit 10.1 of the Form 8-K filed on
January 21, 2011
Exhibit 10.1 of the Form 8-K filed on May
26, 2011
Exhibit 10.1 of the Form 8-K filed on June
2, 2011
Exhibit 10.35 of the Form 10-K for the
year ended December 31, 2011, filed
March 3, 2013
Exhibit 4.5 of the Registration Statement
on Form S-8 filed on January 30, 2012,
File No. 333-179235
Exhibit 10.37 of the Form 10-Q for the
quarter ended September 30, 2012, filed
November 8, 2012
10.23
10.24
10.25
10.26
10.27
10.28
10.31†
10.32
10.33†
10.34
10.35†
10.36†
10.37
Capital, a division of RBS Asset
Finance, Inc. dated as of February 17,
2010
Revolving Credit Note with RBS
Business Capital, a division of RBS
Asset Finance, Inc. dated as of
February 17, 2010
Form of Security Agreement between
RBS Business Capital, a division of
RBS Asset Finance, Inc. and each of
Ultralife Corporation, McDowell
Research Co., Inc., RedBlack
Communications, Inc. and Stationary
Power Services, Inc. dated as of
February 17, 2010
Pledge and Security Agreement in
favor of RBS Business Capital, a
division of RBS Asset Finance, Inc.
dated as of February 17, 2010
Negative Pledge – Real Property with
RBS Business Capital, a division of
RBS Asset Finance, Inc. dated as of
February 17, 2010
Patents Security Agreement with RBS
Business Capital, a division of RBS
Asset Finance, Inc. dated as of
February 17, 2010
Trademark Security Agreement with
RBS Business Capital, a division of
RBS Asset Finance, Inc. dated as of
February 17, 2010
Employment Agreement between the
Registrant and Michael D. Popielec
dated December 6, 2010
First Amendment to Credit Agreement
with RBS Business Capital, a division
of RBS Asset Finance, Inc. dated as of
February 17, 2010
Revised definition of “Change in
Control” for Ultralife Corporation
Amended and Restated 2004 Long-
Term Incentive Plan
Settlement Agreement between the
Registrant and the United States of
America dated June 1, 2011
Agreement, Release and Waiver of all
Claims with Patrick R. Hanna, Jr. dated
July 15, 2011
Amendment No. 4 to Ultralife
Corporation Amended and Restated
Long-Term Incentive Plan
Second Amendment to Credit Facility,
dated as of September 28, 2012, by and
among Ultralife Corporation, RedBlack
Communications, Inc., Ultralife Energy
Services Corporation, and RBS Asset
Finance, Inc.
74
10.38
21
23.1
31.1
31.2
Third Amendment to Credit Facility
dated as of February 15, 2013 by and
among Ultralife Corporation, Ultralife
Energy Services Corporation, and RBS
Asset Finance, Inc.
Subsidiaries
Consent of BDO USA, LLP
CEO 302 Certifications
CFO 302 Certifications
906 Certifications
XBRL Instance Document
32
100.INS
100.SCH XBRL Taxonomoy Extension
Schema Document
100.CAL XBRL Taxonomoy Calculation
Linkbase Document
100.LAB XBRL Taxonomoy Label Linkbase
Document
100.PRE XBRL Taxonomoy Presentation
Linkbase Document
100.DEF XBRL Taxonomoy Definition
Document
Exhibit 10.1 of the Form 8-K, filed
February 22, 2013
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
* Confidential treatment has been granted as to certain portions of this exhibit.
† Management contract or compensatory plan or arrangement.
75
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.
SIGNATURES
Date: March 15, 2013
ULTRALIFE CORPORATION
By:/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
Date: March 15, 2013
/s/ Michael D. Popielec
Michael D. Popielec
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/Steven M. Anderson
Steven M. Anderson (Director)
/s/ Patricia C. Barron
Patricia C. Barron (Director)
/s/ James A. Croce
James A. Croce (Director)
/s/ Thomas L. Saeli
Thomas L. Saeli (Director)
/s/ Robert W. Shaw II
Robert W. Shaw II (Director)
/s/ Ranjit C. Singh
Ranjit C. Singh (Director)
/s/ Bradford T. Whitmore
Bradford T. Whitmore (Director)
76
Index to Exhibits
21
23.1
31.1
31.2
32
Subsidiaries
Consent of BDO USA, LLP
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
101.INS
101.SCH
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE
101.DEF
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Definition Document
77
SUBSIDIARIES
Exhibit 21
We have a 100% ownership interest in Ultralife Batteries (UK) Ltd., incorporated in the United Kingdom.
We have a 100% ownership interest in ABLE New Energy Co., Limited, incorporated in Hong Kong, which has a 100%
ownership interest in ABLE New Energy Co., Ltd, incorporated in the People’s Republic of China.
We have a 100% ownership interest in Ultralife Energy Services Corporation, incorporated in Florida.
We have a 51% ownership interest in Ultralife Batteries India Private Limited, incorporated in India.
78
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-60984,
333-114271, 333-117662, 333-136737, 333-136738, 333-155347, 333-155349 and 333-179235) of Ultralife
Corporation of our reports dated March 15, 2013 relating to the consolidated financial statements, which appear in this
Form 10-K.
/s/ BDO USA, LLP
Troy, Michigan
March 15, 2013
79
I, Michael D. Popielec, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Ultralife Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2013
/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
80
I, Philip A. Fain, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Ultralife Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2013
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
81
Section 1350 Certification
Exhibit 32
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”),
Michael D. Popielec and Philip A. Fain, the President and Chief Executive Officer and Chief Financial Officer and
Treasurer, respectively, of Ultralife Corporation, certify that (i) the Annual Report on Form 10-K for the year ended
December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of
operations of Ultralife Corporation.
A signed original of this written statement required by Section 906 has been provided to Ultralife Corporation and will be
retained by Ultralife Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Date: March 15, 2013
Date: March 15, 2013
/s/ Michael D. Popielec
Michael D. Popielec
President and Chief Executive Officer
/s/ Philip A. Fain
Philip A. Fain
Chief Financial Officer and Treasurer
82
CORPORATE & SHAREHOLDER INFORMATION
Board of Directors
Bradford T. Whitmore
Board Chair, Managing Partner, Grace Brothers, Ltd.
Steven M. Anderson
Brigadier General (Ret.) U.S. Army; Senior Vice President,
Relyant LLC
Patricia C. Barron
Retired Clinical Associate Professor at the Leonard N. Stern School
of Business of New York University
James A. Croce
President, Greenlark Energy Partners, LLC
Michael D. Popielec
President and Chief Executive Officer, Ultralife Corporation
Thomas L. Saeli
Chief Executive Officer, JRB Enterprises, Inc.
Robert W. Shaw II
President, Hornblower Yachts, Inc.
Ranjit C. Singh
Chief Executive Officer, CSR Consulting Group
Corporate Officers
Michael D. Popielec
President and Chief Executive Officer
Peter F. Comerford
Vice President of Administration, Secretary and General Counsel
Philip A. Fain
Chief Financial Officer and Treasurer
Stock Exchange Listing
NASDAQ
Stock Symbol
ULBI
Stock Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038-4502
Annual Meeting
June 4, 2013
9:00 AM Eastern Time
Westin Virginia Beach Town Center
4535 Commerce Street
Virginia Beach, VA 23462
Form 10-K
Shareholders may obtain a copy of our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2012 by going to the Investor
Info page at www.ultralifecorp.com or by
calling us at 1-315-332-7100. This information
is also available at no charge by sending a
request to Shareholder Services at the
following address:
Ultralife Corporation
2000 Technology Parkway
Newark, NY 14513
Attn: Philip A. Fain