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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 or
 o
    
    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from
 to
 Commission file number 0-20852
 ULTRALIFE BATTERIES, INC.
  Delaware
    
    16-1387013(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 2000 Technology Parkway, Newark, New York 14513
 (315) 332-7100  (Registrants telephone number, including area code)
 
  þ o
 o þ o
 o þ




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##### 



PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets -
March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations -
Three-month periods ended March 31, 2007 and April 1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows -
Three-month periods ended March 31, 2007 and April 1, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Index to Exhibits
    
    
    38EX-31.1EX-31.2EX-32
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March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    952
    
    
    $
    720Trade accounts receivable (less allowance for doubtful accounts
of $429 at March 31, 2007 and $447 at December 31, 2006)
    
    
    22,478
    
    
    
    24,197Inventories
    
    
    34,011
    
    
    
    27,360Due from insurance company
    
    
    941
    
    
    
    780Deferred tax asset  current
    
    
    82
    
    
    
    75Prepaid expenses and other current assets
    
    
    2,507
    
    
    
    2,748Total current assets
    
    
    60,971
    
    
    
    55,880Property, plant and equipment, net
    
    
    19,069
    
    
    
    19,396Other assets:Goodwill
    
    
    13,672
    
    
    
    13,344Intangible assets, net
    
    
    8,317
    
    
    
    9,072Security deposit
    
    
    67
    
    
    
    6622,056
    
    
    
    22,482Total Assets
    
    $
    102,096
    
    
    $
    97,758LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of debt and capital lease obligations
    
    $
    16,241
    
    
    $
    12,246Accounts payable
    
    
    17,573
    
    
    
    15,925Income taxes payable
    
    
    32
    
    
    
    19Other current liabilities
    
    
    7,424
    
    
    
    9,620Total current liabilities
    
    
    41,270
    
    
    
    37,810Long-term liabilities:Debt and capital lease obligations
    
    
    20,035
    
    
    
    20,043Other long-term liabilities
    
    
    359
    
    
    
    316Total long-term liabilities
    
    
    20,394
    
    
    
    20,359Commitments and contingencies (Note 11)Shareholders equity:Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued - 15,899,546 at March 31, 2007 and 15,853,306 at December 31, 2006
    
    
    1,583
    
    
    
    1,578Capital in excess of par value
    
    
    135,495
    
    
    
    134,736Accumulated other comprehensive loss
    
    
    (206
    )
    
    
    (321
    )Accumulated deficit
    
    
    (94,062
    )
    
    
    (94,026
    )42,810
    
    
    
    41,967Less Treasury stock, at cost  727,250 shares outstanding
    
    
    2,378
    
    
    
    2,378Total shareholders equity
    
    
    40,432
    
    
    
    39,589Total Liabilities and Shareholders Equity
    
    $
    102,096
    
    
    $
    97,758
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Three-Month Periods EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Revenues
    
    $
    32,320
    
    
    $
    18,319Cost of products sold
    
    
    24,819
    
    
    
    14,349Gross margin
    
    
    7,501
    
    
    
    3,970Operating expenses:Research and development (including $253 and $0
of amortization of intangible assets, respectively)
    
    
    1,614
    
    
    
    960Selling, general, and administrative (including $278 and $0
of amortization of intangible assets, respectively)
    
    
    5,296
    
    
    
    2,782Total operating expenses
    
    
    6,910
    
    
    
    3,742Operating income
    
    
    591
    
    
    
    228Other income (expense):Interest income
    
    
    14
    
    
    
    45Interest expense
    
    
    (657
    )
    
    
    (205
    )Gain on insurance settlement
    
    
    
    
    
    
    148Miscellaneous
    
    
    16
    
    
    
    8Income (loss) before income taxes
    
    
    (36
    )
    
    
    224Income tax provision-current
    
    
    
    
    
    
    4Income tax provision-deferred
    
    
    
    
    
    
    80Total income taxes
    
    
    
    
    
    
    84Net income (loss)
    
    $
    (36
    )
    
    $
    140Earnings (loss) per share  basic
    
    $
    (0.00
    )
    
    $
    0.01Earnings (loss) per share  diluted
    
    $
    (0.00
    )
    
    $
    0.01Weighted average shares outstanding  basic
    
    
    15,078
    
    
    
    14,756Weighted average shares outstanding  diluted
    
    
    15,078
    
    
    
    15,130
  4




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Three-Month Periods EndedMarch 31,
    
    
    April 1,2007
    
    
    2006OPERATING ACTIVITIESNet income (loss)
    
    $
    (36
    )
    
    $
    140Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization of financing fees
    
    
    963
    
    
    
    835Amortization of intangible assets
    
    
    531
    
    
    
    Loss on asset disposal
    
    
    6
    
    
    
    Gain on insurance settlement
    
    
    
    
    
    
    (148
    )Foreign exchange (gain) loss
    
    
    (18
    )
    
    
    8Non-cash stock-based compensation
    
    
    550
    
    
    
    258Changes in deferred income taxes
    
    
    
    
    
    
    80Changes in operating assets and liabilities, net of effects from
the purchase of ABLE and McDowell:Accounts receivable
    
    
    1,183
    
    
    
    (1,883
    )Inventories
    
    
    (6,694
    )
    
    
    614Prepaid expenses and other current assets
    
    
    180
    
    
    
    1,355Insurance receivable relating to fires
    
    
    (153
    )
    
    
    251Income taxes payable
    
    
    13
    
    
    
    4Accounts payable and other liabilities
    
    
    1,524
    
    
    
    (558
    )Net cash provided by (used in) operating activities
    
    
    (1,951
    )
    
    
    956INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (534
    )
    
    
    (383
    )Payment for purchase of McDowell
    
    
    (1,500
    )
    
    
    Net cash used in investing activities
    
    
    (2,034
    )
    
    
    (383
    )FINANCING ACTIVITIESNet change in revolving credit facilities
    
    
    4,500
    
    
    
    (37
    )Proceeds from issuance of common stock
    
    
    214
    
    
    
    261Principal payments on long-term debt and capital lease obligations
    
    
    (513
    )
    
    
    (500
    )Net cash provided by (used in) in financing activities
    
    
    4,201
    
    
    
    (276
    )Effect of exchange rate changes on cash
    
    
    16
    
    
    
    (20
    )Change in cash and cash equivalents
    
    
    232
    
    
    
    277Cash and cash equivalents at beginning of period
    
    
    720
    
    
    
    3,214Cash and cash equivalents at end of period
    
    $
    952
    
    
    $
    3,491SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    2
    
    
    $
    2Cash paid for interest
    
    $
    568
    
    
    $
    184
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2.
    
    ACQUISITIONS
  ABLE New Energy Co., Ltd.
   6




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Risk-free interest rate
    
    
    4.31
    %Volatility factor
    
    
    61.25
    %Dividends
    
    
    0.00
    %Weighted average expected life (years)
    
    
    2.50
     ASSETSCurrent assets:Cash and cash equivalents
    
    $
    104Trade accounts receivables, net
    
    
    318Inventories
    
    
    737Prepaid expenses and other current expenses
    
    
    73Total current assets
    
    
    1,232Property, plant and equipment, net
    
    
    740Goodwill
    
    
    1,316Intangible assets:Trademarks
    
    
    90Patents and technology
    
    
    390Customer relationships
    
    
    820Distributor relationships
    
    
    300Non-compete agreements
    
    
    40Total assets acquired
    
    
    4,928
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LIABILITIESCurrent liabilities:Accounts payable
    
    
    1,085Other current liabilities
    
    
    110Total current liabilities
    
    
    1,195Long-term liabilities:Other long-term liabilities
    
    
    65Deferred tax liability
    
    
    84Total liabilities assumed
    
    
    1,344Total Purchase Price
    
    $
    3,584
  McDowell Research, Ltd.
    8




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ASSETSCurrent assets:Trade accounts receivables, net
    
    $
    3,294Inventories
    
    
    5,155Prepaid inventory and other current expenses
    
    
    10Total current assets
    
    
    8,459Property, plant and equipment, net
    
    
    397Goodwill
    
    
    12,369Intangible assets:Trademarks
    
    
    3,000Patents and technology
    
    
    3,201Customer relationships
    
    
    1,990Non-compete agreements
    
    
    166Total assets acquired
    
    
    29,582LIABILITIESCurrent liabilities:Current portion of long-term debt
    
    
    46Accounts payable
    
    
    1,783Other current liabilities
    
    
    212Total current liabilities
    
    
    2,041Long-term liabilities:Debt
    
    
    37Total liabilities assumed
    
    
    2,078Total Purchase Price
    
    $
    27,504
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3.
    
    GOODWILL AND OTHER INTANGIBLE ASSETS
  March 31, 2007AccumulatedGross Assets
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    3,093
    
    
    $
    
    
    
    $
    3,093Patents and technology
    
    
    3,605
    
    
    
    875
    
    
    
    2,730Customer relationships
    
    
    2,840
    
    
    
    719
    
    
    
    2,121Distributor relationships
    
    
    311
    
    
    
    71
    
    
    
    240Non-compete agreements
    
    
    207
    
    
    
    74
    
    
    
    133Total intangible assets
    
    $
    10,056
    
    
    $
    1,739
    
    
    $
    8,317
 December 31, 2006AccumulatedGross Assets
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    3,090
    
    
    $
    
    
    
    $
    3,090Patents and technology
    
    
    3,737
    
    
    
    619
    
    
    
    3,118Customer relationships
    
    
    2,940
    
    
    
    476
    
    
    
    2,464Distributor relationships
    
    
    300
    
    
    
    55
    
    
    
    245Non-compete agreements
    
    
    204
    
    
    
    49
    
    
    
    155Total intangible assets
    
    $
    10,271
    
    
    $
    1,199
    
    
    $
    9,072
   Non-Rechargeable
    
    
    Rechargeable
    
    
    CommunicationsProducts
    
    
    Products
    
    
    Accessories
    
    
    TotalBalance at December 31, 2006
    
    $
    1,239
    
    
    $
    2,421
    
    
    $
    9,684
    
    
    $
    13,344Adjustments to purchase price
allocation
    
    
    77
    
    
    
    53
    
    
    
    211
    
    
    
    341Effect of foreign currency
translations
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (13
    )Balance at March 31, 2007
    
    $
    1,303
    
    
    $
    2,474
    
    
    $
    9,895
    
    
    $
    13,672
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4.
    
    EARNINGS (LOSS) PER SHARE
     Three-Month PeriodsEndedMarch 31,
    
    
    April 1,2007
    
    
    2006Net Income (Loss) (a)
    
    $
    (36
    )
    
    $
    140Average Shares Outstanding  Basic (b)
    
    
    15,078
    
    
    
    14,756Effect of Dilutive Securities:Stock Options / Warrants
    
    
    
    
    
    
    374Convertible Note Payable
    
    
    
    
    
    
    Average Shares Outstanding  Diluted (c)
    
    
    15,078
    
    
    
    15,130EPS  Basic (a/b)
    
    $
    (0.00
    )
    
    $
    0.01EPS  Diluted (a/c)
    
    $
    (0.00
    )
    
    $
    0.01
 
 5.
    
    STOCK-BASED COMPENSATION
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Three-MonthPeriod EndedApril 1, 2006Risk-free interest rate
    
    
    4.31
    %Volatility factor
    
    
    61.25
    %Dividends
    
    
    0.00
    %Weighted average expected life (years)
    
    
    3.12
   WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Per Share
    
    
    Term
    
    
    ValueShares under option at January 1, 2007
    
    
    1,815,471
    
    
    $
    11.03Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (46,240
    )
    
    
    4.88Options forfeited
    
    
    (67,850
    )
    
    
    9.82Options expired
    
    
    
    
    
    
    Shares under option at March 31, 2007
    
    
    1,701,381
    
    
    $
    11.25
    
    
    4.49 years
    
    $
    2,774Vested and expected to vest as of
March 31, 2007
    
    
    1,635,683
    
    
    $
    11.26
    
    
    4.43 years
    
    $
    2,726Options exercisable at March 31, 2007
    
    
    999,803
    
    
    $
    12.25
    
    
    3.90 years
    
    $
    1,672
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Weighted AverageNumber of Shares
    
    
    Grant Date Fair ValueUnvested at December 31, 2006
    
    
    72,334
    
    
    $
    10.50Granted
    
    
    
    
    
    
    Vested
    
    
    (6,667
    )
    
    
    10.30Forfeited
    
    
    
    
    
    
    Unvested at March 31, 2007
    
    
    65,667
    
    
    $
    10.53
  6.
    
    COMPREHENSIVE INCOME
  Three-Month
Periods EndedMarch 31, 2007
    
    
    April 1, 2006Net income (loss)
    
    $
    (36
    )
    
    $
    140Foreign currency translation adjustments
    
    
    127
    
    
    
    52Change in fair value of derivatives,
net of tax
    
    
    (12
    )
    
    
    21Total comprehensive income
    
    $
    79
    
    
    $
    213
 7.
    
    INVENTORIES
  March 31, 2007
    
    
    December 31, 2006Raw materials
    
    $
    20,535
    
    
    $
    14,964Work in process
    
    
    7,229
    
    
    
    9,061Finished goods
    
    
    7,562
    
    
    
    4,54135,326
    
    
    
    28,566Less: Reserve for obsolescence
    
    
    1,315
    
    
    
    1,206$
    34,011
    
    
    $
    27,360
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8.
    
    PROPERTY, PLANT AND EQUIPMENT
  March 31, 2007
    
    
    December 31, 2006Land
    
    $
    123
    
    
    $
    123Buildings and leasehold improvements
    
    
    4,355
    
    
    
    4,336Machinery and equipment
    
    
    40,523
    
    
    
    40,485Furniture and fixtures
    
    
    1,126
    
    
    
    982Computer hardware and software
    
    
    2,203
    
    
    
    2,127Construction in progress
    
    
    1,626
    
    
    
    1,30049,956
    
    
    
    49,353Less: Accumulated depreciation
    
    
    30,887
    
    
    
    29,957$
    19,069
    
    
    $
    19,396
  9.
    
    DEBT
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10.
    
    INCOME TAXES
       17




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11.
    
    COMMITMENTS AND CONTINGENCIES
    Balance at December 31, 2006
    
    $
    522Accruals for warranties issued
    
    
    128Settlements made
    
    
    (3
    )Balance at March 31, 2007
    
    $
    647
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12.
    
    BUSINESS SEGMENT INFORMATION
  Three-Month Period Ended March 31, 2007
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    18,158
    
    
    $
    5,529
    
    
    $
    8,491
    
    
    $
    142
    
    
    $
    
    
    
    $
    32,320Segment contribution
    
    
    4,548
    
    
    
    1,362
    
    
    
    1,520
    
    
    
    71
    
    
    
    (6,910
    )
    
    
    591Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (643
    )
    
    
    (643
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (36
    )Total assets
    
    $
    51,627
    
    
    $
    17,517
    
    
    $
    27,239
    
    
    $
    95
    
    
    $
    5,618
    
    
    $
    102,096
 Three-Month Period Ended April 1, 2006
 Non-Rechargeable
    
    
    Rechargeable
    
    
    Communications
    
    
    TechnologyProducts
    
    
    Products
    
    
    Accessories
    
    
    Contracts
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    15,645
    
    
    $
    2,565
    
    
    $
    
    
    
    $
    109
    
    
    $
    
    
    
    $
    18,319Segment contribution
    
    
    3,322
    
    
    
    696
    
    
    
    
    
    
    
    (48
    )
    
    
    (3,742
    )
    
    
    228Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    (160
    )Miscellaneous
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    156Income taxes-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Income taxes-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    140Total assets
    
    $
    46,103
    
    
    $
    3,907
    
    
    $
    
    
    
    $
    
    
    
    $
    30,421
    
    
    $
    80,431
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13.
    
    FIRES AT MANUFACTURING FACILITIES
    14.
    
    RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
  
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General
    24




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Results of Operations
 Three-month periods ended March 31, 2007 and April 1, 2006
 Impact of Non-Cash, Stock-Based Compensation Expense, and Amortization Expense Associated with
Acquisitions.
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Three-Month
    
    
    
    
    
    
    
    
    
    
    Three-MonthPeriod Ended
    
    
    
    
    
    
    
    
    
    
    Period Ended
    
    
    Three-MonthMarch 31,
    
    
    
    
    
    
    Amortization
    
    
    March 31,
    
    
    Period Ended2007
    
    
    FAS 123R
    
    
    of Intangible
    
    
    2007
    
    
    April 1, 2006(as reported)
    
    
    Impact
    
    
    Assets
    
    
    (as adjusted)
    
    
    (as adjusted)Revenues
    
    $
    32,320
    
    
    $
    
    
    
    $
    
    
    
    $
    32,320
    
    
    $
    18,319Cost of Products Sold
    
    
    24,819
    
    
    
    (72
    )
    
    
    
    
    
    
    24,747
    
    
    
    14,315Gross Margin
    
    
    7,501
    
    
    
    72
    
    
    
    
    
    
    
    7,573
    
    
    
    4,004Operating Expenses
    
    
    6,910
    
    
    
    (478
    )
    
    
    (531
    )
    
    
    5,901
    
    
    
    3,518Operating Income
    
    $
    591
    
    
    $
    550
    
    
    $
    531
    
    
    $
    1,672
    
    
    $
    486
  Revenues.
 Cost of Products Sold. 26
    Table of Contents    Operating Expenses.
 Other Income (Expense).
 Income Taxes.
  Net Income (Loss).
 27




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Liquidity and Capital Resources
        28




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29
    Table of Contents           30
    Table of Contents    Outlook
  Recent Accounting Pronouncements and Developments
  
  31




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##### Table of Contents



32




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##### Table of Contents



Critical Accounting Policies
   33




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##### Table of Contents



Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
    
     a)
    
    Ineffective information systems and related control processes
surrounding such systems;b)
    
    Inadequate controls and supporting documentation for inventory
valuations;c)
    
    Lack of routine and complete reconciliations of general ledger
accounts to detailed supporting documentation; andd)
    
    Levels of staffing that would promote sufficient segregation of
duties and assure a sufficient level of expertise in manufacturing accounting
and proper application of generally accepted accounting principles.
 34




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35




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##### Table of Contents



PART II OTHER INFORMATION
 
    
  31.1
    
    Section 302 Certification  CEO31.2
    
    Section 302 Certification  CFO32
    
    Section 906 Certifications
 36




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##### Table of Contents



ULTRALIFE BATTERIES, INC.
(Registrant)Date: May 9, 2007
    By:
    /s/ John D. KavazanjianJohn D. KavazanjianPresident and Chief Executive Officer Date: May 9, 2007
    By:
    /s/ Robert W. FishbackRobert W. FishbackVice President - Finance and Chief Financial Officer 37




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##### Table of Contents



31.1
    
    Section 302 Certification  CEO31.2
    
    Section 302 Certification  CFO32
    
    Section 906 Certifications
 38