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<SEC-DOCUMENT>0000950152-07-004420.txt : 20070823
<SEC-HEADER>0000950152-07-004420.hdr.sgml : 20070823
<ACCEPTANCE-DATETIME>20070514164459
<PRIVATE-TO-PUBLIC>
ACCESSION NUMBER:		0000950152-07-004420
CONFORMED SUBMISSION TYPE:	CORRESP
PUBLIC DOCUMENT COUNT:		1
FILED AS OF DATE:		20070514

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			ULTRALIFE BATTERIES INC
		CENTRAL INDEX KEY:			0000875657
		STANDARD INDUSTRIAL CLASSIFICATION:	MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690]
		IRS NUMBER:				161387013
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		CORRESP

	BUSINESS ADDRESS:	
		STREET 1:		2000 TECHNOLOGY PARKWAY
		CITY:			NEWARK
		STATE:			NY
		ZIP:			14513
		BUSINESS PHONE:		3153327100

	MAIL ADDRESS:	
		STREET 1:		2000 TECHNOLOGY PARKWAY
		CITY:			NEWARK
		STATE:			NY
		ZIP:			14513
</SEC-HEADER>
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.htm
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<TITLE>Ultralife Batteries, Inc.    Correspondence</TITLE>
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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">May&nbsp;14, 2007

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Mr.&nbsp;Kevin L. Vaughn<BR>
Branch Chief<BR>
United States Securities and Exchange Commission<BR>
100 F Street, N.E.<BR>
Washington, DC 20549

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Via: EDGAR Filing

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Re:&nbsp;&nbsp;Comments on Form 10-K for the year ended December&nbsp;31, 2006
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Dear Mr.&nbsp;Vaughn:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Thank you for your letter dated April&nbsp;30, 2007 re: Ultralife Batteries, Inc. Form 10-K for the year
ended December&nbsp;31, 2006 SEC File No.&nbsp;0-20852. In the following paragraphs, we have provided
responses to the comments you raised.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SEC Comment 1:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We note your presentation of multiple non-GAAP financial measures of adjusted cost of products
sold, adjusted gross margin, adjusted operating expenses and adjusted operating income, however, we
do not see where you have provided all of the information required by Item 10(e) of Regulation&nbsp;S-K.
Please revise future filings to address the following for <U>each</U> of the non-GAAP financial
measures presented:</I>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Disclose the reasons why management believes the presentation of each of the non-GAAP
financial measures provides useful information to investors regarding your financial
condition and results of operations.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Disclose, to the extent material, the additional purposes, if any, for which management
uses each of the non-GAAP financial measures.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Describe the specific manner in which management uses the non-GAAP measures to conduct
or evaluate its business.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Explain the economic substance behind management&#146;s decision to use the measures.</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Discuss the material limitations associated with the use of the non-GAAP measures as
compared to the use of the most directly comparable GAAP measures and the manner in which
management compensates for these limitations when using the non-GAAP measures.</I></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>In responding to this comment, please refer to Item 10(e) of Regulation&nbsp;S-K Question 8 of
Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures dated</I>
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>June&nbsp;13, 2003 and SAB Topic 14G. Please provide us with a sample of your proposed revised
disclosure. Please note we may have additional comment upon reviewing your response.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Ultralife Response 1:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We agree to expand this disclosure in future filings to include all of the required elements for
non-GAAP financial measures disclosures. As requested, we are providing the following revised
wording for this disclosure (changes are noted in bold italics):
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">ITEM 7. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Impact of Adoption of FAS 123R, and Amortization Expense Associated with Acquisitions.</I>
Effective January&nbsp;1, 2006, we adopted the provisions of Statement of Financial Accounting Standards
No.&nbsp;123 (revised 2004), &#147;Share-Based Payment&#148; (&#147;FAS 123R&#148;), requiring that compensation cost
relating to share-based payment transactions be recognized in the financial statements. We adopted
the modified prospective method of adoption, resulting in no restatement of our prior period
results. The total amount of non-cash, stock-based compensation expense for the twelve-month
period of 2006 was $1,480. Since we had not adopted this pronouncement in 2005, there was no
expense for share-based compensation in our 2005 reported results. (See Note 8 for additional
information.)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of the acquisitions of ABLE and McDowell, we have begun to record a non-cash
expense related to the identifiable intangible assets of these companies, including technology,
customer and distributor lists, and non-compete agreements, among others. As of December&nbsp;31, 2006,
we had, through preliminary independent appraisals, identified a total of $7,181 in amortizable
intangible assets, which will be amortized over their remaining economic lives. In our internal
evaluation of our performance, we exclude this non-cash expense. In 2006, we recorded amortization
expense of $1,199.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For internal purposes, we use a metric of adjusted Operating Income, or what we refer to as
&#147;operating performance&#148;, to monitor our financial results. The recent addition of two non-cash
expenditures, related to stock-based compensation and intangible asset amortization, caused a
significant change to our Statement of Operations. The internal measurement of our operating
performance adds these two non-cash items back to Operating Income and is, in our view, a more
relevant measure for us in that it ties our results more closely to the operating cash flows of the
business. Additionally, our bonus plans for executive compensation are tied directly to this
operating performance metric.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order for investors to be able to accurately assess the change in our operating performance
from year to year, a reconciliation of our reported results with
<B><I><strike>a</strike> this </I></B>non-GAAP measurement is
being provided. <B><I>We acknowledge that there are inherent limitations on the usage of this metric,
particularly when making comparisons to the performance of other companies. </I></B>The table below
presents a reconciliation of the reported results with
<B><I><strike>a</strike> this </I></B>non-GAAP measurement by adjusting out
the stock-based compensation expense and intangible asset amortization expense included in 2006
results with the comparable period results in 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SEC Comment 2:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We note your disclosure that you are engaging a third party valuation firm to independently value
certain tangible and intangible assets acquired in the ABLE acquisition. Please revise future
filings, beginning with your next 10-Q, to name the independent valuation firm. In addition,
please note that if you intend to incorporate your Form 10-K by reference into any registration
statement, you will be required to</I>
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>identify the appraisal firm in the &#147;Experts&#148; section and include its consent in the registration
statement.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Ultralife Response 2:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">While we have engaged outside, third-party consultants to assist us with the independent valuation
of the acquired assets, we acknowledge full responsibility for the final valuation of the acquired
assets and the incorporation of this in our financial statements. Therefore, we are providing the
following revised wording for this disclosure (changes are noted in bold italics):
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Note 2- Acquisitions
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">ABLE New Energy Co., Ltd.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The results of operations of ABLE and the estimated fair value of assets acquired and
liabilities assumed are included in our consolidated financial statements beginning on the
acquisition date. Pro forma information has not been presented, as it would not be materially
different from amounts reported. The estimated excess of the purchase price over the net tangible
and intangible assets acquired of $2,345 (including $104 in cash) was recorded as goodwill in the
amount of $1,239. We are in the process of completing
<B><I><strike>third party</strike> the </I></B>valuations of certain
tangible and intangible assets acquired with the new business. The final allocation of the excess
of the purchase price over the net assets acquired is subject to revision based upon our final
review of <B><I><strike>the third party&#146;s</strike> </I></B>valuation <B><I>assumptions</I></B>.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SEC Comment 3:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>We see that during fiscal year 2006 you used a combination of historical and implied volatility,
while in 2005 you relied solely on historical volatility. Please explain to us why you concluded
your revised method for determining volatility is a better indicator of expected volatility.
Discuss why you changed your method of determining estimated volatility and why you now use a
combination of historical volatility and implied volatility. Discuss your evaluation of the
factors listed in Questions 2 and 3 of SAB Topic 14.D.1.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Ultralife Response 3:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Our change to a combination of historical and implied volatility was based on a thorough review of
the guidance contained in SFAS 123R and SAB Topic 14.D.1. We believe implied volatility, a
consideration newly introduced in SFAS 123R, provides a more market-driven valuation related to
investors&#146; expectations of the volatility of our business and, as a forward-looking measure,
provides a balance against focusing only on a historical measure. In addition, the information we
obtained from the trading of our common stock and our traded options is consistent with the
considerations listed in Questions 2 and 3 of SAB Topic 14.D.1 and therefore we believe the use of
both factors is appropriate in our determination of expected volatility. Lastly, we considered the
impact of implied volatility on our previously calculated historical volatility. We determined
that implied volatility was not significantly different than historical volatility as evidenced by
our 2006 blended volatility of 60.0% compared to our 2005 volatility of 69.4%.
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We agree to expand this disclosure in future filings to provide a more detailed analysis for our
change in calculating expected volatility. Therefore, we are providing the following revised
wording for this disclosure (changes are noted in bold italics):
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Note 8 &#151; Shareholders&#146; Equity
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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. Prior to 2006, the
computation of expected volatility was based solely on historical volatility. <B><I>The change to a
blended volatility measure was based on a thorough review of assumptions underlying the valuation
of our stock options, in conjunction with additional information and guidance that became more
widely available as we prepared to implement SFAS 123R in 2006. A blended volatility factor was
deemed to be more appropriate as we believe that implied volatility, a forward-looking measure,
provides a more market-driven valuation related to investors&#146; expectations of the volatility of our
business, and provides a balance against focusing only on a historical measure. </I></B>The computation of
expected term was determined based on historical experience of similar awards, giving consideration
to the contractual terms of the stock-based awards and vesting schedules. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury yield in effect at
the time of grant. Forfeiture rates are calculated by dividing unvested shares forfeited by
beginning shares outstanding. The pre-vesting forfeiture rate is calculated yearly and is
determined using a historical twelve-quarter rolling average of the forfeiture rates.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SEC Comment 4:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Further to the above, please revise future filings to provide the disclosures in Question 5 of SAB
Topic 14.D.1. As applicable, please also expand your disclosures in the Critical Accounting
Policies section to address your use of a blended volatility.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Ultralife Response 4:</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We agree to expand this disclosure in future filings to provide a more detailed analysis for our
change in calculating expected volatility. Therefore, we are providing the following revised
wording for this disclosure (changes are noted in bold italics):
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Critical Accounting Policies and Estimates
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Stock-Based Compensation:
</DIV>


<DIV align="left" style="margin-left: 2%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 0pt">Effective January&nbsp;1, 2006, we adopted the provisions of SFAS No.&nbsp;123 (revised 2004),
&#147;Share-Based Payment&#148; (&#147;SFAS 123R&#148;) requiring 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&#146;s requisite service period (generally the vesting period of the
equity award). We adopted SFAS 123R using the modified prospective method and,
accordingly, did not restate prior periods presented in this report to reflect the fair
value method of recognizing compensation cost. Under the modified prospective approach,
SFAS 123R applies to new awards and to awards that were outstanding on January&nbsp;1, 2006 that
are subsequently modified, repurchased or cancelled. 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. Prior to 2006, the computation of expected volatility
was based solely on historical volatility. <B><I>The change to a blended volatility measure was
based on a thorough review of assumptions underlying the valuation of our stock options, in
conjunction with additional information and guidance that became more widely available as
we prepared to implement SFAS 123R in 2006. A blended volatility factor was deemed to be
more appropriate as we believe that implied volatility, a forward-looking measure, provides
a</I></B></DIV>


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<DIV align="left" style="margin-left: 2%; text-indent: 0%; margin-right: 0%; font-size: 10pt; margin-top: 6pt"><B><I>more market-driven valuation related to investors&#146; expectations of the volatility of our
business, and provides a balance against focusing only on a historical measure. </I></B>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.</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We acknowledge that (1)&nbsp;we are responsible for the adequacy and accuracy of the disclosure in
the filing; (2)&nbsp;staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and (3)&nbsp;we may not
assert staff comments as a defense in any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">If you have any questions, I can be reached at (315)&nbsp;359-6614.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Sincerely,

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><U><I>/s/ </I>Robert W. Fishback&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Robert W. Fishback<BR>
VP-Finance and Chief Financial Officer

</DIV>


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