UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

  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 000-20852

ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)

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

2000 Technology Parkway, Newark, New York 14513
(Address of principal executive offices)
(Zip Code)

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

__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes..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 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 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...

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.10 par value – 17,458,977 shares of common stock outstanding, net of 1,372,757 treasury shares, as of August 2, 2013.

 
1

 
ULTRALIFE CORPORATION
INDEX

 
 
 
Page
PART I    FINANCIAL INFORMATION
 
     
 
     
 
     
 
     
 
     
  6
     
Item 2.
     
     
     
     
PART II    OTHER INFORMATION
 
     
     
     
     
     

 
2

 
PART I     FINANCIAL INFORMATION
Item 1.      Financial Statements
 
ULTRALIFE CORPORATION
  CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
 
ASSETS
 
(Unaudited)
June 30,
2013
   
December 31,
2012
 
             
Current assets:
           
   Cash and cash equivalents
  $ 11,158     $ 9,656  
   Restricted cash
    414       422  
   Trade accounts receivable (less allowance for doubtful accounts of $305 at June 30, 2013 and $322 at December 31, 2012)
    12,401       20,913  
   Inventories
    31,021       30,370  
   Due from insurance company
    438       723  
   Deferred tax asset - current
    157       120  
   Income taxes receivable
    120       28  
   Prepaid expenses and other current assets
    1,468       1,590  
                 
       Total current assets
    57,177       63,822  
                 
Property, plant and equipment, net
    11,249       12,415  
                 
Other assets:
               
  Goodwill
    16,391       16,344  
  Intangible assets, net
    4,844       5,039  
  Security deposits and other long-term assets
    1,474       98  
      22,709       21,481  
                 
Total Assets
  $ 91,135     $ 97,718  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current liabilities:
               
   Current portion of debt
  $ -     $ -  
   Accounts payable
    9,400       11,357  
   Income taxes payable
    2       2  
   Deferred tax liability - current
    74       -  
   Other current liabilities
    4,900       8,533  
       Total current liabilities
    14,376       19,892  
                 
Long-term liabilities:
               
   Deferred tax liability - long-term
    4,298       4,160  
   Other long-term liabilities
    195       210  
       Total long-term liabilities
    4,493       4,370  
                 
Commitments and contingencies (Note 10)
               
                 
Shareholders' 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 - 18,831,734 at June 30, 2013 and 18,828,734 at December 31, 2012
    1,886       1,886  
    Capital in excess of par value
    174,233       173,791  
    Accumulated other comprehensive loss
    (599 )     (620 )
    Accumulated deficit
    (95,522 )     (93,878 )
 
    79,998       81,179  
    Less --Treasury stock, at cost -- 1,372,757 shares at June 30, 2013 and 1,372,757 shares at December 31, 2012
    7,658       7,658  
       Total Ultralife equity
    72,340       73,521  
                 
  Noncontrolling interest
    (74 )     (65 )
       Total shareholders' equity
    72,266       73,456  
                 
Total Liabilities and Shareholders' Equity
  $ 91,135     $ 97,718  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
3

 
ULTRALIFE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except Per Share Amounts)
(unaudited)
 
   
Three-Month Periods Ended
   
Six-Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
   
June 30,
2013
   
July 1,
2012
 
                         
                         
Revenues
  $ 17,279     $ 18,706     $ 38,298     $ 46,207  
                                 
Cost of products sold
    12,757       14,239       27,397       35,147  
                                 
Gross profit
    4,522       4,467       10,901       11,060  
                                 
Operating expenses:
                               
Research and development (including $55, $65, $111 and $130, respectively, of amortization of intangible assets)
    1,669       1,970       3,038       4,109  
Selling, general, and administrative (including $43, $60, $88 and $120, respectively, of amortization of intangible assets)
    4,727       5,429       9,362       11,172  
Total operating expenses
    6,396       7,399       12,400       15,281  
 
                               
Operating loss
    (1,874 )     (2,932 )     (1,499 )     (4,221 )
                                 
Other income (expense):
                               
Interest income
    12       2       14       3  
Interest expense
    (43 )     (115 )     (133 )     (219 )
Miscellaneous
    2       (20 )     (23 )     32  
Loss from continuing operations before income taxes
    (1,903 )     (3,065 )     (1,641 )     (4,405 )
 
                               
Income tax provision-current
    23       188       61       267  
Income tax provision (benefit)-deferred
    30       (17 )     90       (5 )
Total income taxes provision
    53       171       151       262  
                                 
Net loss from continuing operations
    (1,956 )     (3,236 )     (1,792 )     (4,667 )
                                 
Discontinued operations:
                               
Income (loss) from discontinued operations, net of tax
    (120 )     49       144       (22 )
                                 
Net loss
    (2,076 )     (3,187 )     (1,648 )     (4,689 )
                                 
Net loss attributable to noncontrolling interest
    3       20       9       20  
                                 
Net loss attributable to Ultralife
  $ (2,073 )   $ (3,167 )   $ (1,639 )   $ (4,669 )
                                 
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    148       (25 )     21       123  
                                 
Comprehensive loss attributable to Ultralife
  $ (1,925 )   $ (3,192 )   $ (1,618 )   $ (4,546 )
                                 
                                 
Net income (loss) attributable to Ultralife common shareholders - basic
                 
Continuing operations
  $ (0.11 )   $ (0.18 )   $ (0.10 )   $ (0.27 )
Discontinued operations
  $ (0.01 )   $ 0.00     $ 0.01     $ (0.00 )
Total
  $ (0.12 )   $ (0.18 )   $ (0.09 )   $ (0.27 )
                                 
Net income (loss) attributable to Ultralife common shareholders - diluted
                 
Continuing operations
  $ (0.11 )   $ (0.18 )   $ (0.10 )   $ (0.27 )
Discontinued operations
  $ (0.01 )   $ 0.00     $ 0.01     $ (0.00 )
Total
  $ (0.12 )   $ (0.18 )   $ (0.09 )   $ (0.27 )
                                 
                                 
Weighted average shares outstanding - basic
    17,459       17,396       17,458       17,376  
Weighted average shares outstanding - diluted
    17,459       17,396       17,458       17,376  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
4

 
ULTRALIFE CORPORATION
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
 
 
   
Six-Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
 
             
OPERATING ACTIVITIES
           
Net loss
  $ (1,648 )   $ (4,689 )
Loss (income) from discontinued operations, net of tax
    (144 )     22  
Adjustments to reconcile net income (loss) from continuing operations to net cash provided from operating activities:
               
Depreciation and amortization of financing fees
    1,637       1,717  
Amortization of intangible assets
    199       250  
Loss on long-lived asset impairment
    56       -  
Loss on long-lived asset disposal and write-offs
    -       5  
Foreign exchange loss (gain)
    22       (22 )
Non-cash stock-based compensation
    430       670  
Changes in deferred income taxes
    172       (5 )
Changes in operating assets and liabilities:
               
   Accounts receivable
    8,543       5,190  
   Inventories
    (592 )     1,273  
   Income taxes receivable
    (91 )     104  
   Prepaid expenses and other assets
    (1,456 )     (284 )
   Due from Insurance Company
    299       1,022  
   Income taxes payable
    -       (9 )
   Accounts payable and other liabilities
    (4,384 )     (5,536 )
Net cash provided from (used in) operating activities from continuing operations
    3,043       (292 )
Net cash used in operating activities from discontinued operations
    (998 )     -  
Net cash provided from (used in) operating activities
    2,045       (292 )
                 
INVESTING ACTIVITIES
               
Purchase of property and equipment
    (444 )     (1,546 )
Change in restricted cash
    4       -  
Net cash used in investing activities from continuing operations
    (440 )     (1,546 )
Net cash provided from investing activities from discontinued operations
    -       -  
Net cash used in investing activities
    (440 )     (1,546 )
                 
FINANCING ACTIVITIES
               
Net change in revolving credit facility
    -       357  
Proceeds from issuance of common stock
    12       115  
Net cash provided from financing activities from continuing operations
    12       472  
Net cash used in financing activities from discontinued operations
    -       -  
Net cash provided from financing activities
    12       472  
                 
Effect of exchange rate changes on cash
    (115 )     62  
                 
Change in cash and cash equivalents
    1,502       (1,304 )
                 
Cash and cash equivalents at beginning of period
    9,656       5,320  
                 
Cash and cash equivalents at end of period
  $ 11,158     $ 4,016  
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
Cash paid for income taxes
  $ 74     $ 174  
Cash paid for interest
  $ 67     $ 146  
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
5

 
ULTRALIFE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands – Except Share and Per Share Amounts)
(unaudited)


1.  
BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Ultralife Corporation and subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included.  Results for interim periods should not be considered indicative of results to be expected for a full year.  Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K for the twelve month period ended December 31, 2012.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

Our monthly closing schedule is a 4/4/5 weekly-based cycle for each fiscal quarter, as opposed to a calendar month-based cycle for each fiscal quarter.  While the actual dates for the quarter-ends will change slightly each year, we believe that there are not any material differences when making quarterly comparisons.
 
2.  
DISPOSITIONS AND EXIT ACTIVITIES

Ultralife Batteries UK, Ltd.

During the fourth quarter of 2012, we elected not to renew the lease for our U.K. manufacturing facility which expired on March 24, 2013 (the “U.K. Facility Lease”), and instead relocated our sales and services operations to a smaller facility. As a result of this decision, we were required to restore the facility back to its original condition pursuant to the terms of the U.K. Facility Lease.
 
The costs associated with the lease exit were not determinable until late in the fourth quarter of 2012. Accordingly, we recorded a liability as of the end of 2012 for our estimate of the costs to return the facility to its original condition as well as other related expenses. A total of $228 was charged to selling, general, and administrative costs related to operations transferred to our facilities in Newark, NY, and an additional $815 was recorded as discontinued operations for those operations that were not transferred to our facilities in Newark, NY. The termination of the U.K. Facility Lease did not result in any employee reductions or other termination costs, with the exception of the aforementioned restoration costs.
 
As a result, the results of presentation 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 the three and six month periods ending June 30, 2013 and July 1, 2012:

 
6

 
   
Three Month Periods Ended
   
Six Month Periods Ended
 
   
June 30,
2013
   
July1,
2012
   
June 30,
2013
   
July1,
2012
 
Net sales
  $ -     $ -     $ -     $ -  
Gain from discontinued operations
    -       -       241       -  
Provision for income taxes
    -       -       -       -  
Gain from discontinued operations, net of tax
    -       -       241       -  

The cost of returning our former UK facility back to its original condition was less than our estimate of the cost made during the fourth quarter of 2012. As a result, we recognized the difference as a gain from discontinued operations during the first quarter of 2013.

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 business model.

On September 28, 2012 (the “Closing Date”), 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 was a customary post-closing working capital adjustment to the purchase price of $125, partially offset by other adjustments, that resulted in a loss of $118 that was recorded in the second quarter of 2013.

The Agreement contains customary representations and warranties that will survive the Closing Date for a period of two or three years.  The Agreement also contains customary indemnification for breaches of the representations and warranties contained in the Agreement.

The Agreement contains restrictive covenants that continue for two years from the Closing Date, under which 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.

As a result, the presentation of results herein excludes the RedBlack operations from the results of continuing operations.  The following amounts have been reported as discontinued operations for the three and six month periods ended June 30, 2013 and July 1, 2012:

 
7

 
   
Three Month Periods Ended
   
Six Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
   
June 30,
2013
   
July 1,
2012
 
Net sales
  $ -     $ 951     $ -     $ 2,137  
Gain (loss) from discontinued operations
    (118 )     68       (111 )     56  
Provision for income taxes
    -       12       -       23  
Gain (loss) from discontinued operations, net of tax
    (118 )     56       (111 )     33  
 
3.  
INVENTORIES

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:
 
   
June 30, 2013
   
December 31, 2012
 
Raw materials
  $ 16,346     $ 15,023  
Work in process
    3,470       4,863  
Finished goods
    11,205       10,484  
    $ 31,021     $ 30,370  

4.  
PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment consisted of the following:

   
June 30, 2013
   
December 31, 2012
 
Land
  $ 123     $ 123  
Buildings and leasehold improvements
    7,402       7,381  
Machinery and equipment
    46,552       46,606  
Furniture and fixtures
    1,928       1,810  
Computer hardware and software
    4,198       4,103  
Construction in progress
    1,138       1,275  
      61,341       61,298  
Less:  Accumulated depreciation
    50,092       48,883  
    $ 11,249     $ 12,415  

Depreciation expense for property, plant and equipment was $729 and $1,559 for the three and six month periods ended June 30, 2013, respectively, and $824 and $1,660 for the three and six month periods ended July 1, 2012, respectively.

In the second quarter of 2013, we received a termination notice from the New York State Energy Research and Development Authority (“NYSERDA”) regarding our collaborative agreement 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 incurred through the date of termination. Construction costs are reflected in the property, plant and equipment, net line on our Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012. Project research and development costs are reflected in the research and development line on our Condensed Consolidated Statements of Comprehensive Income (Loss) the three and six month periods ended June 30, 2013 and July 1, 2012.

 
8

 
We plan to continue this project internally with smaller form batteries which provide greater opportunity and applicability in the markets we serve. However, due to the termination letter and the change in scope of the project, we performed a review of the details of costs capitalized in connection with this project to determine their future use. Those costs without an identifiable future use were written off in the second quarter of 2013 and totaled $56. The remaining capitalized costs were subjected to an impairment test based upon forecasted future cash flows, in accordance with current accounting guidance. No impairment was taken on the remaining capitalized costs.

5.  
GOODWILL, INTANGIBLE ASSETS AND LONG TERM ASSETS

a. Goodwill

The following table summarizes the goodwill activity by segment for the three month periods ended June 30, 2013 and July 1, 2012:

   
Battery &
Energy Products
   
Communications
Systems
   
Discontinued
Operations
   
Total
 
                         
Balance at December 31, 2011
  $ 4,838     $ 11,493     $ 2,025     $ 18,356  
                                 
Effect of foreign currency Translations
    23       -       -       23  
                                 
Balance at July 1, 2012
    4,861       11,493       2,025       18,379  
                                 
Sale of RedBlack Communications
                    (2,025 )     (2,025 )
Effect of foreign currency Translations
    (10 )     -       -       (10 )
                                 
Balance at December 31, 2012
    4,851       11,493       -       16,344  
                                 
Effect of foreign currency translations
    47       -       -       47  
                                 
Balance at June 30, 2013
  $ 4,898     $ 11,493     $ -     $ 16,391  

b. Intangible Assets

The composition of intangible assets was:

   
June 30, 2013
 
   
Gross
Assets
   
Accumulated
Amortization
   
Net
 
                   
Trademarks
  $ 3,566     $ -     $ 3,566  
Patents and technology
    4,505       3,822       683  
Customer relationships
    4,020       3,469       551  
Distributor relationships
    388       344       44  
Non-compete agreements
    218       218       -  
                         
Total intangible assets
  $ 12,697     $ 7,853     $ 4,844  

 
9

 
   
December 31, 2012
 
   
Gross
Assets
   
Accumulated
Amortization
   
Net
 
                   
Trademarks
  $ 3,564     $ -     $ 3,564  
Patents and technology
    4,495       3,702       793  
Customer relationships
    3,998       3,366       632  
Distributor relationships
    380       330       50  
Non-compete agreements
    217       217       -  
                         
Total intangible assets
  $ 12,654     $ 7,615     $ 5,039  

Amortization expense for intangible assets was $98 and $199 for the three and six month periods ended June 30, 2013, respectively, and $125 and $250 for the three and six month periods ended July 1, 2012, respectively.
 
The change in the cost value of total intangible assets from December 31, 2012 to June 30, 2013 is a result of the effect of foreign currency translations.
 
c. Long-Term Assets
 
In the first quarter of this year, we had a sale to a customer of our Communications Systems segment of which $2,031, net of interest, had a payment term of greater than one year. This sale was in order to facilitate this customer’s ability to support a soldier modernization initiative. We expect this receivable to be fully collected within two years. Currently $1,174 is classified as long-term.

6.  
DEBT

On May 24, 2013, we entered into a Revolving Credit, Guaranty and Security Agreement (the “Credit Agreement”) and related security agreements with PNC Bank, National Association (“PNC”) to establish a $20 million secured asset-based revolving credit facility that includes a $1 million letter of credit subfacility (the “Credit Facility”).  The Credit Agreement provides that the Credit Facility may be increased with the PNC’s concurrence to $35 million prior to the last six months of the term and expires on May 24, 2017.  The Credit Facility replaces the our  prior credit facility with RBS Business Capital, a division of RBS Asset Finance, Inc., which expired in accordance with its terms on May 15, 2013, with no debt outstanding.

Our available borrowing under the Credit Facility fluctuates from time to time based on a borrowing base formula equal to the sum of up to 85% of eligible accounts receivable plus the least of (a) up to 65% of the eligible inventory and eligible foreign in-transit inventory, (b) up to 85% of the appraised net orderly liquidation value of eligible inventory and eligible foreign in-transit inventory, and (c) $7.5 million, in each case subject to the definitions in the Credit Agreement and reserves required by PNC.
 
Interest will accrue on outstanding indebtedness under the Credit Agreement at the alternate base rate , as defined within the Credit Agreement, plus the applicable margin or at the one, two or three month LIBOR rate plus the applicable margin as selected by the Company and listed below.
 
 
10

 
Quarterly Average Undrawn
Borrowing Availability
Applicable Margin for
Alternate Base Rate Loans
Applicable Margin for
LIBOR Rate Loans
Greater than $8,000,000
1.00%
2.00%
$5,000,000 up to $8,000,000
1.25%
2.25%
Less than $5,000,000
1.50%
2.50%
 
We must pay a fee on its unused availability of 0.375% per annum and customary letter of credit fees in addition to various collateral monitoring and related fees and expenses.
 
In addition to customary affirmative and negative covenants, we must maintain a fixed charge coverage ratio as defined in the Credit Agreement of 1:15 to 1:00 tested quarterly for the four-quarters then ended.  As of June 30, 2013, we were in compliance with all covenants. The Credit Facility is secured by substantially all our assets.
 
Any outstanding advances must be repaid upon expiration of the term of the Credit Facility.  Payments must be made during the term to the extent outstanding advances exceed the maximum amount then permitted to be drawn as advances under the Credit Facility and from the proceeds of certain transactions.  Upon the occurrence of an event of default, the outstanding obligations may be accelerated and PNC will have other customary remedies.
 
As of June 30, 2013, we had $-0- outstanding under the Credit Facility, an applicable interest rate of 2.20%, approximately $13,227 of borrowing capacity in addition to our unrestricted cash on hand of $11,158, and no outstanding letters of credit related to this facility.

7.  
SHAREHOLDERS’ EQUITY

a. Treasury Stock

At June 30, 2013 and December 31, 2012, we had 1,372,757 shares of treasury stock valued at $7,658.

b. Stock Options

We have various stock-based employee compensation plans, for which we follow the provisions of the Financial Accounting Standards Board’s (“FASB”) 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 certain grants 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 shares under the LTIP increased to 2,900,000.

 
11

 
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 have the same vesting characteristics as options issued to employees. As of June 30, 2013, there were 2,119,538 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 expired 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 stock 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 or 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 $200 and $390 for the three and six month periods ended June 30, 2013 and $252 and $516 for the three and six month periods ended July 1, 2012, respectively.  As of June 30, 2013, there was $917 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.65 years.

We use the Black-Scholes option-pricing model to estimate the fair value of non-market performance stock-based awards.  The following weighted average assumptions were used to value non-market performance stock options granted during the six month periods ended June 30, 2013 and July 1, 2012.

 
12

 
   
Six Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
 
             
Risk-free interest rate
    0.68 %     0.59 %
Volatility factor
    62.60 %     62.88 %
Dividends
    0.00 %     0.00 %
Weighted average expected life (years)
    4.06       3.91  

We use a Monte Carlo simulation option-pricing model to estimate the fair value of market performance stock-based awards.  There were no market performance stock options granted during the six months ended June 30, 2013 and July 1, 2012.

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.

Stock option activity for the first six months of 2013 is summarized as:

   
 
 
Number
of Shares
   
Weighted
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
 
Aggregate
Intrinsic Value
 
                     
Shares under option at January 1, 2013
    2,211,488     $ 7.47          
Options granted
    153,000       3.49          
Options exercised
    (3,000 )     3.91          
Options forfeited
    (29,882 )     4.26          
Options expired
    (162,068 )     10.87          
Shares under option at June 30, 2013
    2,169,538     $ 6.98  
4.58
  $ 74  
                           
Vested and expected to vest as of June 30, 2013
    1,958,735     $ 7.22  
4.53
  $ 56  
Options exercisable at June 30, 2013
    960,662     $ 6.72  
3.59
  $ 0  

The total intrinsic value of stock 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 three month period ended June 30, 2013 was $1.

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 stock options in excess of the deferred tax asset attributable to stock compensation costs for such stock options.  We did not record any excess tax benefits in the first six months of 2013 and 2012.  Cash received from stock option exercises under our stock-based compensation plans for the six month periods ended June 30, 2013 and July 1, 2012 was $12 and $115, respectively.

 
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c. Restricted Stock Units
 
On January 29, 2013, we granted 120,000 contingent restricted stock units to our President and Chief Executive Officer, Michael D. Popielec, subject to shareholder approval, which was obtained on June 4, 2013, which vest as follows: (i) 30,000 shares of our common stock will vest on the later of January 1, 2014 or the date when our common stock first reaches a closing price of $4.00 per share for 15 trading days in a 30 trading day period; (ii) 30,000 shares of our common stock will vest on the later of January 1, 2014 or the date when our common stock first reaches a closing price of $5.00 per share for 15 trading days in a 30 trading day period; (iii) 30,000 shares of our common stock will vest on the later of January 1, 2015 or the date when our common stock first reaches a closing price of $4.00 per share for 15 trading days in a 30 trading day period; and (iv) 30,000 shares of our common stock will vest on the later of January 1, 2015 or the date when our common stock first reaches a closing price of $5.00 per share for 15 trading days in a 30 trading day period.
 
The restricted stock units described in (i) and (iii) had achieved their closing price condition prior to shareholder approval and were valued at the closing price on the date of grant. The restricted stock units described in (ii) and (iv) had not yet achieved their closing price conditions and were valued utilizing a Monte Carlo simulation to determine fair value and the derived service period. The weighted average inputs utilized were:
 
   
Six Month Period Ended
 
   
June 30,
2013
 
       
Risk-free interest rate
    0.21 %
Volatility factor
    59.08 %
Dividends
    0.00 %

The restricted stock units had the following values:
 
   
Three Month
 Period Ended
June 30, 2013
 
       
Number of shares award
    120,000  
Weighted average fair value per share
  $ 3.62  
Aggregate total value
  $ 434  
 
The activity of restricted stock units for the first six months of 2013 is summarized below:
 
   
Number of
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Unvested at January 1, 2013
    0     $ 0  
Granted
    120,000     $ 3.62  
Vested
    0       0  
Forfeited
    0       0  
Unvested at June 30, 2013
    120,000     $ 3.62  
 
No restricted stock was awarded during the six month period ended July 1, 2012.
 
 
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Compensation cost recorded in our financial statements related to our restricted stock units and restricted stock awards was $40 and $40 during the three and six month periods ended June 30, 2013, respectively, and $0 and $1 during the three and six month periods ended July 1, 2012, respectively. There is $394 of unrecognized compensation cost related to restricted stock units as of June 30, 2013.
 
8.  
INCOME TAXES

The asset and liability method, prescribed by FASB’s guidance on 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.

For the three and six month periods ended June 30, 2013, we recorded $53 and $151, respectively, in income tax expense.  For the three and six month periods ended July 1, 2012, we recorded $171 and $262, respectively, for income tax expense. The expense is primarily due to 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 remaining expense in 2013 was primarily due to the income reported for our China operations during the period.

Our effective consolidated tax rates for the three and six month periods ended June 30, 2013 and July 1, 2012 were:

   
Three Month Periods Ended
   
Six Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
   
June 30,
2013
   
July 1,
2012
 
Loss from continuing operations before Incomes Taxes (a)
  $ (1,903 )   $ (3,065 )   $ (1,641 )   $ (4,405 )
                                 
Total Income Tax Provision (b)
  $ 53     $ 171     $ 151     $ 262  
                                 
Effective Tax Rate (b/a)
    2.8 %     5.6 %     9.2 %     5.9 %

The overall effective tax rate is the result of the combination of income and losses in each of our tax jurisdictions, which is particularly influenced by the fact that we have not recognized a deferred tax asset pertaining to cumulative historical losses for our U.S. operations and our U.K. subsidiary, as management does not believe, at this time, it is more likely than not that we will realize the benefit of these losses.  We have substantial net operating loss carryforwards which offset taxable income in the United States.  However, we remain subject to the alternative minimum tax in the United States.  The alternative minimum tax limits the amount of net operating loss available to offset taxable income to 90% of the current year income.  We incurred $0 and $12 in alternative minimum tax for the three and six months ended June 30, 2013, respectively. The alternative minimum tax did not have an impact on income taxes determined for the three and six month periods ended July 1, 2012.  The payment of the alternative minimum tax normally results in the establishment of a deferred tax asset; however, we have established a valuation allowance for our net U.S. deferred tax asset.  Therefore, the expected payment of the alternative minimum tax does not result in a net deferred tax asset.

As of December 31, 2012, we had foreign and domestic net operating loss carryforwards totaling approximately $58,030 available to reduce future taxable income. Foreign loss carryforwards of approximately $12,390 can be carried forward indefinitely. The domestic net operating loss carryforwards of $48,549 expire from 2019 through 2032.  The domestic net operating loss carryforwards include approximately $2,949 for which a benefit will be recorded in capital in excess of par value when realized.

 
15

 
We have adopted FASB’s guidance for the accounting for uncertainty in income taxes.  As a result of the implementation of this guidance, there was no cumulative effect adjustment for unrecognized tax benefits, which would have been accounted for as an adjustment to retained earnings.

Our unrecognized tax benefits related to uncertain tax positions at June 30, 2013 relate to Federal and various state jurisdictions.  The following table summarizes the activity related to our unrecognized tax benefits:
 
   
Six Month Periods Ended
 
   
June 30,
2013
   
July 1,
2012
 
             
Balance at beginning of the period
  $ 7,508     $ 6,779  
Increases related to 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 end of the period
  $ 7,508     $ 6,779  

The total unrecognized tax benefit balance at June 30, 2013 is 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 the effective tax rate.

We are not required to accrue interest and penalties as the unrecognized tax benefits have been recorded as a decrease in our net operating loss carryforward.  Interest and penalties would begin to accrue in the period in which the net operating loss carryforwards 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 net operating loss 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 net operating loss carryforwards.  Our tax matters for the years 2007 through 2012 remain subject to examination by the respective foreign tax jurisdiction authorities.  The IRS has completed the examination of our 2009 U.S. federal income tax return, with no resulting material effect to our financial position or results of operations.

We have determined that changes in ownership, as defined under Internal Revenue Code Section 382, occurred during 2005 and 2006. As such, the domestic net operating loss carryforwards 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.  The use of our U.K. net operating loss carryforwards may be limited due to the change in our U.K. operation during 2008 from a manufacturing and assembly center to primarily a distribution and service center.
 
 
16

 
9.  
EARNINGS 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 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 earnings per share (“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 three and six month periods ended June 30, 2013 and July 1, 2012, 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:

   
Three Month Period Ended
   
Six Month Period Ended
 
   
June 30,
 2013
   
July 1,
 2012
   
June 30,
 2013
   
July 1,
 2012
 
Net Loss from continuing operations attributable to Ultralife
  $ (1,953 )   $ (3,216 )   $ (1,783 )   $ (4,647 )
Net Loss from continuing operations attributable to participating securities (unvested restricted stock awards) (-0-, -0-, -0- and -0- shares, respectively)
    -       -       -       -  
Net Loss from continuing operations attributable to Ultralife common shareholders (a)
    (1,953 )     (3,216 )     (1,783 )     (4,647 )
Effect of Dilutive Securities
    -       -       -       -  
Net Loss from continuing operations attributable to Ultralife common shareholders - Adjusted (b)
  $ (1,953 )   $ (3,216 )   $ (1,783 )   $ (4,647 )
                                 
Net Income (Loss) from discontinued operations attributable to Ultralife common shareholders (c)
  $ (120 )   $ 49     $ 144     $ (22 )
Effect of Dilutive Securities
    -       -       -       -  
Net Income (Loss) from discontinued operations attributable to Ultralife common shareholders - Adjusted (d)
  $ (120 )   $ 49     $ 144     $ (22 )
                         
Average Common Shares Outstanding – Basic (e)
    17,459,000       17,396,000       17,458,000       17,376,000  
Effect of Dilutive Securities: Stock Options / Warrants
    -       -       -       -  
Average Common Shares Outstanding – Diluted (f)
    17,459,000       17,396,000       17,458,000       17,376,000  
                                 
EPS – Basic (a/e) - continuing operations
  $ (0.11 )   $ (0.18 )   $ (0.10 )   $ (0.27 )
EPS – Basic (c/e) - discontinued operations
  $ (0.01 )   $ 0.00     $ 0.01     $ (0.00 )
EPS – Diluted (b/f) - continuing operations
  $ (0.11 )   $ (0.18 )   $ (0.10 )   $ (0.27 )
EPS – Diluted (d/f) - discontinued operations
  $ (0.01 )   $ 0.00     $ 0.01     $ (0.00 )
 
 
17

 
There were 2,289,538 and 2,363,928 outstanding stock options and awards at June 30, 2013 and July 1, 2012, respectively, that were not included in the three month EPS calculation as the effect would be anti-dilutive.

There were 2,289,538 and 2,363,928 outstanding stock options and awards at June 30, 2013 and July 1, 2012, respectively, that were not included in the six month EPS calculation as the effect would be anti-dilutive.
 
10.  
COMMITMENTS AND CONTINGENCIES

a. Purchase Commitments

As of June 30, 2013, we have made commitments to purchase approximately $461 of production machinery and equipment.

b. 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 first three months of 2013 were as follows:

Balance at December 31, 2012
  $ 607  
Accruals for warranties issued
    120  
Settlements made
    (46 )
Balance at June 30, 2013
  $ 681  

c. Contingencies and Legal Matters

We are subject to legal proceedings and claims that arise from time to time in the normal course of business.  We believe that the final disposition of such matters, other than the matters described below, will not have a material adverse effect on our financial position, results of operations or cash flows.

 
18

 
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.

Post Audits of Government Contracts

                 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.

 
19

 
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 the second quarter of 2012.  The terms of the settlement agreement include no legal liability on our part and the plaintiff abandoning all other claims against us.

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 (“Modeen”) in the State of New York Supreme Court, County of Wayne (Index No. 73379).  In our Complaint, we allege that Arista recruited all but one of the members of its executive team from us, subsequently changed and redirected 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 allege 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 have 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 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. Discovery has commenced with respect to the Arista litigation and is ongoing.
 
 
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We initiated the September 23, 2011 Complaint against Arista Power 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 November 29, 2011 Arista Complaint 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 on account of us, and claims for recovery of this or any other amount are legally and factually baseless.

Accordingly, we will vigorously pursue our complaint against Arista and defend what we believe to be a meritless action on the part of Arista Power.

11.  
BUSINESS SEGMENT INFORMATION

On February 16, 2012, our senior management, as authorized by our Board of Directors, decided to divest our RedBlack Communications business, which previously was reported in the Communications Systems segment.  See Note 2 in these Notes to Condensed 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 expired on March 24, 2013, and to relocate our sales and services operations to a smaller facility.   As a result of this decision, we were 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.

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: power supplies, cable and connector assemblies, RF amplifiers, 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.

 
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The components of segment performance were as follows:

Three Month Period Ended June 30, 2013
 
   
Battery &
Energy
Products
   
Communications
Systems
   
Discontinued
Operations
   
Corporate
   
Total
 
Revenues
  $ 14,656     $ 2,623     $ -     $ -     $ 17,279  
Segment contribution
    3,490       1,032       -       (6,396 )     (1,874 )
Interest expense, net
                            (31 )     (31 )
Miscellaneous
                            2       2  
Income taxes-current
                            (23 )     (23 )
Income taxes-deferred
                            (30 )     (30 )
Loss from discontinued operations
                    (120 )             (120 )
Noncontrolling interest
                            3       3  
Net loss attributable to Ultralife
                                  $ (2,073 )
Total assets
  $ 44,357     $ 31,711     $ -     $ 15,067     $ 91,135  
 
 
Three Month Period Ended July 1, 2012
                   
   
Battery &
Energy
Products
   
Communications
Systems
   
Discontinued
Operations
   
Corporate
   
Total
 
Revenues
  $ 15,523     $ 3,183     $ -     $ -     $ 18,706  
Segment contribution
    3,763       704       -       (7,399 )     (2,932 )
Interest expense, net
                            (113 )     (113 )
Miscellaneous
                            (20 )     (20 )
Income taxes-current
                            (188 )     (188 )
Income taxes-deferred
                            17       17  
Income from discontinued operations
                    49               49  
Noncontrolling interest
                            20       20  
Net loss attributable to Ultralife
                                  $ (3,167 )
Total assets
  $ 51,477     $ 30,548     $ 2,759     $ 8,207     $ 92,991  


Six Month Period Ended June 30, 2013
 
   
Battery &
Energy
Products
   
Communications
Systems
   
Discontinued
Operations
   
Corporate
   
Total
 
Revenues
  $ 27,709     $ 10,589     $ -     $ -     $ 38,298  
Segment contribution
    6,590       4,311       -       (12,400 )     (1,499 )
Interest expense, net
                            (119 )     (119 )
Miscellaneous
                            (23 )     (23 )
Income taxes-current
                            (61 )     (61 )
Income taxes-deferred
                            (90 )     (90 )
Gain from discontinued operations
                    144               144  
Noncontrolling interest
                            9       9  
Net loss attributable to Ultralife
                                  $ (1,639 )
Total assets
  $ 44,357     $ 31,711     $ -     $ 15,067     $ 91,135  
 
 
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Six Month Period Ended July 1, 2012
 
   
Battery &
Energy
Products
   
Communications
Systems
   
Discontinued
Operations
   
Corporate
   
Total
 
Revenues
  $ 35,605     $ 10,602     $ -     $ -     $ 46,207  
Segment contribution
    7,706       3,354       -       (15,281 )     (4,221 )
Interest expense, net
                            (216 )     (216 )
Miscellaneous
                            32       32  
Income taxes-current
                            (267 )     (267 )
Income taxes-deferred
                            5       5  
Loss from discontinued operations
                    (22 )             (22 )
Noncontrolling interest
                            20       20  
Net loss attributable to Ultralife
                                  $ (4,669 )
Total assets
  $ 51,477     $ 30,548     $ 2,759     $ 8,207     $ 92,991  
 
12.  
FAIR VALUE OF FINANCIAL INSTRUMENTS

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 June 30, 2013 and December 31, 2012.  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.
 
13.  
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.

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.  In April 2013, we have received $269 as a further payment on this claim, with no gain or loss recognized.  As of June, 2013, we reflect a receivable from the insurance company relating to this claim of $165, 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.
 
14.  
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU 2013-05 states that the cumulative translation adjustment is released into net income when a reporting entity ceases to have a controlling interest in a subsidiary that is controlled by a consolidated foreign entity. Further, this update states that the sale of an investment in a foreign entity includes both events that result in the loss of a controlling financial interest in a foreign entity, regardless of any retained investment, and events that result in an acquirer obtaining control through a step acquisition. ASU 2013-05 is effective prospectively for fiscal years beginning after December 15, 2013, with early adoption permitted. We do not believe that adoption of this standard will have a material impact on our consolidated results of operations and financial condition.

 
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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 provide information about the amounts reclassified out of accumulated other comprehensive income by component as well as presentation, either on the face of the financial statement or in the notes, of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. ASU 2013-02 is effective for fiscal years beginning after December 15, 2012. Adoption of this standard did not have a material impact on our consolidated results of operations and financial condition.
 
 

 
 
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Item 2.  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, timing delays in receiving orders relating to funded government projects, 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, product liability risks, 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 Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.

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 Quarterly Report on Form 10-Q to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2012.

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, 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.

 
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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, 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 11 in the Notes to Consolidated Financial Statements)

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, in the second quarter of 2013 we recorded $125 for a customary post-closing working capital adjustment, which is reflected as a loss from discontinued operations.  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.

During the fourth quarter of 2012, we elected not to renew the lease for our U.K. manufacturing facility which expired on March 24, 2013, and relocated our sales and services operations to a smaller facility.   As a result of this decision, we were required to restore the facility back to its original condition pursuant to the terms of the U.K. Facility Lease.  In the fourth quarter of 2012, we recorded approximately $950 related to this requirement of which $200 was recorded as general & administrative expenses and $750 was recorded as discontinued operations. This liability was settled in the first quarter of 2013 resulting in a gain from discontinued operations of $241.  We expect to realize net savings of approximately $500 on an annualized basis beginning in the second quarter of 2013 due to this election.

Despite these dispositions, 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.

In the second quarter of 2013, we received a termination notice from the New York State Energy Research and Development Authority (“NYSERDA”) regarding our collaborative agreement 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 incurred through the date of termination. We plan to continue this project internally with smaller form batteries which provide greater opportunity and applicability in the markets we serve. However, due to the termination letter and the change in scope of the project, we performed a review of the details of costs capitalized in connection with this project to determine their future use. Those costs without an identifiable future use were written off in the second quarter of 2013 and totaled $56. The remaining capitalized costs were subjected to an impairment test based upon forecasted future cash flows, in accordance with current accounting guidance. No impairment was taken on the remaining capitalized costs.

 
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Overview

Consolidated revenues of $17,279 for the three month period ended June 30, 2013, decreased by $1,427, or 7.6%, from $18,706 during the three month period ended July 1, 2012, primarily due to lower sales of rechargeable batteries in the Battery & Energy Products segment reflecting the timing of orders from non-US defense and commercial customers, as well as lower sales of Communications Systems products caused by timing delays in the final sign-off and issuance of contracts for large projects now expected to close in the third quarter of 2013.

Gross profit for the three month period ended June 30, 2013 was $4,522, or 26.2% of revenues, compared to $4,467, or 23.9% of revenues for the three month period ended July 1, 2012.  The improvement in gross margin as a percentage of revenue is due primarily to strong product mix and continued productivity improvements in the Communications Systems segment, as well as, the impact in the second quarter of 2012 of a warranty reserve related to the request by a strategically important customer to rework and upgrade certain products.

Operating expenses decreased to $6,396 during the three month period ended June 30, 2013, compared to $7,399 during the three month period ended July 1, 2012, resulting primarily from continued actions to reduce general and administrative expenses and more focused spending in the development of new products.

Despite lower sales, higher gross margin and lower operating expenses resulted in a $1,058 year-over-year improvement to an operating loss of $1,874 for the three month period ended June 30, 2013, compared to an operating loss of $2,932 for the three month period ended July 1, 2012.

Net loss from continuing operations was $1,956, or $0.11 per share, for the three month period ended June 30, 2013, compared to a net loss of $3,236, or $0.18 per share, for the three month period ended July 1, 2012.  Net loss from discontinued operations was $120, or $0.01 per share, for the three month period ended June 30, 2013 versus net income of $49, or $0.00 per share, for the three month period ended July 1, 2012.

Adjusted EBITDA from continuing operations, 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 continuing operations, amounted to $(802) in the second quarter of 2013 compared to $(1,682) for the second quarter of 2012.  See the section “Adjusted EBITDA from continuing operations” beginning on page 32 for a reconciliation of Adjusted EBITDA from continuing operations to net income (loss) attributable to Ultralife.

As a result of careful working capital management and cash generated from operations, our liquidity remains solid with no debt, and cash and cash equivalents, including restricted cash, of $11,572, a $7,394 improvement over the cash position of $4,178 as of the second quarter of 2012.  The increase in cash and cash equivalents from the second quarter of 2012 is primarily attributable to our financial cost reductions and cash generated from our Lean initiatives, including reductions in inventory.

Outlook

For 2013, although our pending funded project pipelines remain strong, given the slower than expected contracting rate for current U.S. government and defense opportunities, we now expect an overall year-over-year revenue decline in the range of 10% to 12%. Driven by the potential for continued softness in government spending and contracting delays for funded projects, we expect Battery & Energy Products’ revenues to decline in the range of 15% to 20% and Communication Systems’ revenues to be in the flat to low-single digit growth range for the full year. However, with additional second half discretionary spending reductions and ongoing productivity improvements, we still expect to be profitable for the year and to generate a low-single digit operating margin.

 
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Results of Operations

Three month periods ended June 30, 2013 and July 1, 2012

Revenues.   Consolidated revenues for the three month period ended June 30, 2013 amounted to $17,279, a decrease of $1,427, or 7.6%, from the $18,706 reported for the three month period ended July 1, 2012.

Battery & Energy Products sales decreased $867, or 5.6%, from $15,523 for the three month period ended July 1, 2012 to $14,656 for the three month period ended June 30, 2013.  Revenues for Battery & Energy Products decreased primarily due to the timing of orders for rechargeable batteries from non-US defense and commercial customers.  This was partially offset by a 12% increase in 9 Volt battery shipments over the prior year.

Communications Systems revenues decreased $560, or 17.6%, from $3,183 during the three month period ended July 1, 2012 to $2,623 for the three month period ended June 30, 2013, reflecting the timing of the final sign-off and issuance of several funded, high margin contracts for large projects totaling approximately $5,000.  During July, we subsequently received Communications Systems orders approximating $3,000.

Cost of Products Sold.   Cost of products sold totaled $12,757 for the quarter ended June 30, 2013, a decrease of $1,482, or 10.4%, from the $14,239 reported for the same three month period a year ago.  Consolidated cost of products sold as a percentage of total revenue decreased from 76.1% for the three month period ended July 1, 2012 to 73.8% for the three month period ended June 30, 2013.  Correspondingly, consolidated gross margin was 26.2% for the three month period ended June 30, 2013, compared with 23.9% for the three month period ended July 1, 2012, primarily reflecting strong product mix, continued productivity improvements in the Communications Systems segment, as well as, the impact in the second quarter of 2012 of a reserve related to the request by a strategically important customer to rework and upgrade certain products.

In our Battery & Energy Products segment, the cost of products sold decreased $594, from $11,760 during the three month period ended July 1, 2012 to $11,166 during the three month period ended June 30, 2013.  Battery & Energy Products’ gross profit for the second quarter of 2013 was $3,490, or 23.8% of revenues, a decrease of $273 from gross profit of $3,763, or 24.2% of revenues, for the second quarter of 2012.  Battery & Energy Products’ gross margin as a percentage of revenues decreased by 40 basis points for the three month period ended June 30, 2013, reflecting the lower fixed overhead cost absorption associated with lower sales volume.

In our Communications Systems segment, the cost of products sold decreased by $888 from $2,479 during the three month period ended July 1, 2012 to $1,591 during the three month period ended June 30, 2013.  Communications Systems’ gross profit for the second quarter of 2013 was $1,032, or 39.3% of revenues, an increase of $328 from gross profit of $704, or 22.1% of revenues, for the second quarter of 2012.  The increase in gross margin as a percentage of revenue during the second quarter of 2013 by 1,720 basis points is due primarily to strong product mix and continued productivity improvements, as well as, the impact in the second quarter of 2012 of a warranty reserve for approximately $200 related to the request by a strategically important customer to rework and upgrade certain products.

Operating Expenses.   Total operating expenses for the three month period ended June 30, 2013 totaled $6,396, a decrease of $1,003 or 13.6% from $7,399 recorded during the three month period ended July 1, 2012, resulting primarily from continued actions to reduce general and administrative expenses and more focused spending in the development of new products.

 
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Operating expenses as a percentage of revenues were 37.0% during the three month period ended June 30, 2013 as compared to 39.6% in the three month period ended July 1, 2012.  Amortization expense associated with intangible assets related to our acquisitions was $98 for the second quarter of 2013 ($43 in selling, general and administrative expenses and $55 in research and development costs), compared with $125 for the second quarter of 2012 ($60 in selling, general, and administrative expenses and $65 in research and development costs).  Research and development costs were $1,669 for the three month period ended June 30, 2013, a decrease of $301, or 15.3%, from $1,970 for the three month ended July 1, 2012, as we focused our spending on the development of new products with the highest estimated return on investment.  The importance of new products is reflected in the fact that almost 42% of our Battery & Energy Products sales and 32% of our Communications Systems sales during the first six months of 2013 resulted from products introduced over the last three years.  Selling, general, and administrative expenses decreased $702, or 12.9%, to $4,727 during the three month period ending June 30, 2013 from $5,429 during the three month period ended July 1, 2012, reflecting continued actions to reduce discretionary general and administrative expenses to help fund additional revenue producing resources.

Other Income (Expense).   Other income (expense) totaled $(29) for the three month period ended June 30, 2013 compared to $(133) for the three month period ended July 1, 2012.  Interest expense, net of interest income, decreased $82, to $31 for the second quarter of 2013 from $113 for the comparable period in 2012, as a result of lower average borrowings under our revolving credit facilities along with a lower unused line fine associated with our new asset based lending facility with PNC Bank.  Miscellaneous income (expense) amounted to $2 for the second quarter of 2013 compared with expense of $(20) for the second quarter of 2012, primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes.   We recorded a tax provision of $53 for the three month period ended June 30, 2013 compared with a tax provision of $171 for the three month period ended July 1, 2012.  The effective consolidated tax rate for the three month periods ended June 30, 2013 and July 1, 2012 was:

   
Three Month Periods Ended
 
   
June 30, 2013
   
July 1, 2012
 
Loss before Incomes Taxes (a)
  $ (1,903 )   $ (3,065 )
                 
Total Income Tax Provision (b)
  $ 53     $ 171  
                 
Effective Tax Rate (b/a)
    2.8 %     5.6 %

See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional information regarding our income taxes.

We have determined that changes 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 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 quarter 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.

 
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Discontinued Operations.   Loss from discontinued operations, net of tax was $120 for the three month period ended June 30, 2013, compared to income of $49 for the three month period ended July 1, 2012.  The second quarter of 2013 loss resulted mainly from the final post-closing working capital adjustment to the RedBlack Communications business purchase price.  For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Loss Attributable to Ultralife.   Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $2,073 and $0.12, respectively, for the three months ended June 30, 2013, compared to a net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share of $3,167 and $0.18, respectively, for the three months ended July 1, 2012.  Average common shares outstanding used to compute diluted earnings per share increased from 17,396,000 in the second quarter of 2012 to 17,459,000 in the second quarter of 2013, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Six month periods ended June 30, 2013 and July 1, 2012

Revenues.   Consolidated revenues for the six month period ended June 30, 2013 amounted to $38,298, a decrease of $7,909, or 17.1%, from $46,207 for the six month period ended July 1, 2012.

Battery & Energy Products sales decreased $7,896, or 22.2%, from $35,605 during the six month period ended July 1, 2012 to $27,709 for the six month period ended June 30, 2013.   Revenues for Battery & Energy Products decreased primarily due to the continued slowdown in U.S. government and defense order rate for rechargeable and non-rechargeable batteries and charger systems and lower sales of 9 Volt batteries resulting from the selloff of the remaining legacy products in the first quarter of 2012 with the introduction of the new battery design.

Communications Systems revenues decreased $13, or 0.1%, from $10,602 during the six month period ended July 1, 2012 to $10,589 during the six month period ended June 30, 2013.  The year-over-year comparison reflects the fulfillment of large orders for amplifiers from international defense customers and continued demand for amplifiers from the U.S. government in 2013, offset by timing delays in the second quarter of 2013 of the final sign-off and issuance of several contracts for large, funded, high margin projects.

Cost of Products Sold.   Cost of products sold totaled $27,397 for the six month period ended June 30, 2013, a decrease of $7,750, or 22.1%, from the $35,147 reported for the same six month period a year ago.  Consolidated cost of products sold as a percentage of total revenue decreased from 76.1% for the six month period ended July 1, 2012 to 71.5% for the six month period ended June 30, 2013.  Correspondingly, consolidated gross margin was 28.5% for the six month period ended June 30, 2013, compared with 23.9% for the six month period ended July 1, 2012, primarily reflecting productivity gains in both businesses, a higher mix of Communications Systems sales and certain property tax credits related to prior years.

In our Battery & Energy Products segment, the cost of products sold decreased $6,780, or 24.3%, from $27,899 during the six month period ended July 1, 2012 to $21,119 during the six month period ended June 30, 2012.  Battery & Energy Products’ gross profit for the first six months of 2013 was $6,590, or 23.8% of revenues, as compared to gross profit of $7,706, or 21.6% of revenues, for the first six months of 2012.  Battery & Energy Products’ gross margin increased by 220 basis points for the six month period ended June 30, 2013, reflecting significant improvements in the overall productivity resulting from the elimination of most labor and material manufacturing variances, and, to a lesser extent, the receipt of certain property tax refunds relating to prior years.
 
 
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In our Communications Systems segment, the cost of products sold decreased $970 from $7,248 during the six month period ended July 1, 2012 to $6,278 during the six month period ended June 30, 2013.  Communications Systems’ gross profit for the first six months of 2013 was $4,311, or 40.7% of revenues, an increase of $957 from gross profit of $3,354, or 31.6% of revenues, for the first six months of 2012.  The increase in gross margin as a percentage of revenue during 2013 by 910 basis points is the result of stronger product mix, continued productivity improvements in line with our Lean initiatives, and the impact in the second quarter of 2012 of a reserve for approximately $200 related to the request by a strategically important customer to rework and upgrade certain products.

Operating Expenses.   Total operating expenses for the six month period ended June 30, 2013 totaled $12,400, a decrease of $2,881 or 18.9%, from $15,281 for the six month period ended July 1, 2012, resulting from continued actions to reduce general and administrative expenses, lower sales commissions and focused spending in the development of new products.

Overall, operating expenses as a percentage of revenues decreased to 32.4% during the first six months of 2013 from 33.1% reported in the first six months of 2012.  Amortization expense associated with intangible assets related to our acquisitions was $199 for the first six months of 2013 ($88 in selling, general and administrative expenses and $111 in research and development costs), compared with $250 for the first six months of 2012 ($120 in selling, general, and administrative expenses and $130 in research and development costs).  Research and development costs were $3,038 in the first six months of 2013, a decrease of $1,071 or 26.1%, from $4,109 reported in the first six months of 2012, as we focused our spending on the development of new products with the highest estimated return on investment.  Selling, general, and administrative expenses decreased $1,810, or 16.2%, to $9,362 during the six month period ended June 30, 2013 from $11,172 reported during the six month period ended July 1, 2012, primarily reflecting on-going actions to reduce discretionary general and administrative expenses.

Other Income (Expense).   Other income (expense) totaled $(142) for the first six months of 2013, compared to $(184) for the first six months of 2012.  Interest expense, net of interest income, decreased $97, to $119 for the first six months of 2013 from $216 for the comparable period in 2012, as a result of lower average borrowings under our revolving credit facilities.  Miscellaneous income/expense amounted to expense of $23 for the first six months of 2013 compared with income of $32 for the first six months of 2012, primarily driven by transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes.   We reflected a tax provision of $151 for the six month period ended June 30, 2013 compared with $262 for the six month period ended July 1, 2012.  The expense is primarily due to (a) 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, and (b) the income reported for our China operations during the periods.  The effective consolidated tax rate for the six month periods ended June 30, 2013 and July 1, 2012 was:

   
Six Month Periods Ended
 
   
June 30, 2013
   
July 1, 2012
 
Loss before Incomes Taxes (a)
  $ (1,641 )   $ (4,405 )
                 
Total Income Tax Provision (b)
  $ 151     $ 262  
                 
Effective Tax Rate (b/a)
    9.2 %     5.9 %
 
See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional information regarding our income taxes.

 
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We have determined that changes 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 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 first six months of 2013 and 2012.  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.   Income from discontinued operations, net of tax, totaled $144 for the six month period ended June 30, 2013, as compared to a loss of $22 for the six month period ended July 1, 2012.  The income realized in the first half of 2013 was primarily related to the final settlement of the obligation to return the company’s former UK facility back to its original condition per a previous contractual commitment, partially offset by the final post-closing working capital adjustment to the RedBlack Communications business purchase price.  The loss in the first half of 2012 includes operating results and costs related to our previously announced divestiture of our RedBlack Communication business.  For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Loss Attributable to Ultralife.   Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $1,639 and $0.09, respectively, for the six month period ended June 30, 2013, compared to a net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share of $4,669 and $0.27, respectively, for the six month period ended July 1, 2012.  Average common shares outstanding used to compute diluted earnings per share increased from 17,376,000 in the first six months of 2012 to 17,458,000 in the first six months of 2013, 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 asses