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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) For The Fiscal Year Ended January 3, 2003 Commission File Number 1-16137 WILSON GREATBATCH TECHNOLOGIES, INC. Delaware 16-1531026 9645 Wehrle Drive (716) 759-6901 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on Which Registered: New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No
[ ] Aggregate market value of voting stock of Wilson Greatbatch Technologies,
Inc. held by nonaffiliates as of June 28, 2002, based on the last sale price of
$25.48, as reported on the New York Stock Exchange: $534.7 million. Solely
for the purpose of this calculation, shares held by directors and officers and
10 percent shareholders of the Registrant have been excluded. Such exclusion
should not be deemed a determination by or an admission by the Registrant that
these individuals are, in fact, affiliates of the Registrant. Shares of common stock outstanding on March 11, 2003: 21,001,363 DOCUMENTS INCORPORATED BY REFERENCE Portions of the company's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS OVERVIEW We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices. We offer technologically advanced, highly reliable and long lasting
products for implantable medical devices and enable our customers to introduce
implantable medical devices that are progressively smaller, longer lasting, more
efficient and more functional. We also leverage our core competencies in
technology and manufacturing to develop and produce power sources for commercial
applications that demand high performance and reliability, including oil and gas
exploration, oceanographic equipment and aerospace. We believe that our
proprietary technology, close customer relationships, market leadership and
dedication to quality provide us with competitive advantages and create a
barrier to entry for potential market entrants. In 1970, Mr. Wilson Greatbatch, the inventor of the implantable pacemaker,
founded Wilson Greatbatch Ltd., our predecessor. Our company was incorporated in
connection with the 1997 leveraged buyout to acquire Wilson Greatbatch Ltd.,
which is now our wholly-owned subsidiary. We acquired Hittman Materials and
Medical Components, Inc., now Greatbatch-Hittman, Inc., in August 1998 to expand
and complement our product lines. Greatbatch-Hittman produces feedthroughs and
electrodes. We acquired the Sierra-KD Components Division of Maxwell
Technologies, Inc., now Greatbatch-Sierra, in June 2001 to broaden the product
line we offer to include electromagnetic interference filters and capacitors. In
July 2002, we acquired Globe Tool and Manufacturing Company, Inc., now
Greatbatch-Globe, to further broaden our product offering to include enclosures. SEGMENT INFORMATION Segment information including revenues from external customers, profit or
loss, and assets by segment as well as revenues from external customers and
long-lived assets by geographic area are incorporated by reference to Note 14 -
Business Segment Information of the Notes to Consolidated Financial Statements. IMPLANTABLE MEDICAL DEVICE INDUSTRY An implantable medical device is an instrument that is surgically inserted
into the body to provide diagnosis or therapy. The largest and fastest growing
segment of the implantable medical device market is cardiac rhythm management
(CRM), which includes devices such as pacemakers and implantable cardioverter
defibrillators (ICDs). Pacemakers treat bradycardia, a condition that occurs
when a patient has an abnormally slow heartbeat, by stimulating the heart with
regular electrical pulses. ICDs treat tachycardia, a condition that occurs when
a patient has a rapid and irregular heartbeat, by delivering concentrated and
time electrical energy to the heart to restore a normal heart rate. The following table sets forth the main categories of battery-powered
implantable medical devices and the principal illness or symptom treated by each
device: Pacemakers Abnormally slow heartbeat ICDs Rapid and irregular heartbeat Left ventricular assist devices (LVADs) Heart failure Hearing assist devices Hearing loss Neurostimulators Tremors or chronic pain Drug pumps Diabetes or chronic pain The implantable medical device industry is expected to grow primarily as a
result of: Advances in medical technology that will allow physicians to
use implantable medical devices as a substitute for, or in conjunction
with, prescription drugs, to treat a wider range of heart diseases, such
as atrial fibrillation and congestive heart failure; Increased use of recently developed implantable medical
devices, including left ventricular assist devices, hearing assist
devices, neurostimulators and drug pumps; Expansion of indications, or uses, for implantable medical
devices; The aging population, which is expected to require an
increasing number of pacemakers, ICDs and other implantable medical
devices; A combination of smaller, lighter, more efficient and more
functional devices and longer-lasting power sources which will be easier
for physicians to implant and will be less intrusive to recipients; and Increased market penetration beyond the United States and
other developed countries. Cardiovascular Device Update has predicted that ICD implants will grow at a
faster rate than pacemaker implants in the next three to five years. The faster
growth predicted for the ICD market is based on continued penetration of
existing clinical indications and anticipated expansion into new indications. We
believe that our company will continue to be well positioned to meet the
requirements of manufacturers of these products. PRODUCTS We design and manufacture a variety of batteries, capacitors, feedthroughs,
enclosures, and other components used in implantable medical devices. Our
commercial power sources are used in oil and gas exploration, oceanographic
equipment and aerospace. The following table provides information about our
principal products: PRINCIPAL PRODUCT ATTRIBUTES MEDICAL BATTERIES A battery is an electrochemical device that stores energy and releases it in
the form of electricity. To generate an electrical current, electrons are first
released from one part of the battery, called the anode or negative electrode.
This flow of electrons, known as a current, travels to a load or device outside
the battery. After powering the device, the electron flow reenters another part
of the battery, called the cathode or positive electrode. As electrons flow from
the anode to the device being powered by the battery, ions released from the
anode cross through an electrolyte, which consists of one or more chemical
compounds that facilitate the flow of ions to the cathode. The ions react with
the cathode in order to complete the circuit. Separators are typically used
inside the battery as electrical insulators to divide the anode and the cathode
to prevent mechanical contact between them, which would result in the rapid
depletion of the battery cell. From the late 1950s to the early 1970s, zinc/mercuric oxide batteries powered
implantable pacemakers. These batteries typically lasted two to three years,
often failed without warning, were large and bulky and generated hydrogen gas,
making it impossible to seal the battery. In the early 1970s, we introduced
lithium/iodine batteries to power implantable pacemakers. Lithium batteries
manufactured by us and manufactured by others under license from us are now the
principal power source for pacemakers. Pacemaker batteries utilizing our
technology last up to 12 years under certain conditions and provide high
reliability and predictability. In the mid 1980s, we introduced lithium/silver
vanadium oxide (SVO) batteries for powering ICDs. These batteries provide the
higher power levels required by an ICD with a high degree of reliability and
have demonstrated a five-year battery life in certain device designs. Lithium/SVO
batteries manufactured by us and manufactured by others under license from us
are now the principal power source for ICDs. In 1996, we introduced a lighter weight titanium-encased lithium/carbon
monofluoride battery as a next generation battery for pacemakers and other types
of implantable devices. These batteries offer improved pacemaker performance in
several areas, including weight reduction, improved electrical performance and
longer life. In 1996, we introduced a new process for cathode manufacturing that enabled
the production of significantly thinner cathodes than previously possible. As a
result of this new cathode manufacturing process and other design improvements,
our newest generation of ICD batteries is the thinnest commercially available.
Over the past few years, the decrease in battery size has contributed
significantly to decreases in the size of ICDs, making these devices easier to
implant. CAPACITORS Capacitors, which are used in ICDs, perform the critical function of storing
electrical current before delivery to the heart. Historically, ICDs utilized two
aluminum-based capacitors. In the fourth quarter of 1999, we introduced wet
tantalum hybrid capacitors commercially for use in ICDs, which provide a number
of advantages over aluminum-based capacitors. Our wet tantalum hybrid
capacitors, which combine liquid electrolytes and ruthenium oxide cathode
material with a tantalum anode, provide a unique combination of high voltage and
high energy storage capacity. This combination enables energy density not
achievable with competing technologies. Our capacitors can be manufactured in
many sizes and shapes to meet the specific needs of our customers. To produce our capacitors, we have licensed a key patent for the basic
technology used in our defibrillator capacitors from the Evans Capacitor
Company. We have also developed our own portfolio of patents and patent
applications covering improvements that we have made to Evans' capacitor
technology. We believe that we are the only supplier of wet tantalum capacitors
for the implantable medical device industry. In 1997, we entered into an
agreement with a major ICD manufacturer to use our capacitor technology in its
generation of ICDs that was launched in the first quarter of 2000. In 2002, we
received purchase orders for our capacitors from two additional major ICD
manufacturers. EMI FILTERS Electromagnetic interference filters and capacitors for implantable medical
devices limit or eliminate electromagnetic interference, or EMI, which is any
undesirable emission or disturbance generated by products such as cell phones
and two-way pagers. EMI may cause an undesirable response, malfunctioning or
degradation in the performance of electronic equipment including medical
devices. We offer EMI filtering products and technology to our customers through
Greatbatch-Sierra, which holds several key patents relative to its
differentiated EMI filtering technology. Prior to our acquisition of Greatbatch-Sierra
in June 2001, they were a component customer, who shared a similar customer base
for medical devices. The vertical integration of Greatbatch-Sierra represented
an opportunity to increase our importance to these customers and to position us
to participate in the growing demand for EMI protection on medical devices. The
U.S. Food and Drug Administration, or FDA, is focusing on issues created by EMI.
Currently, labels for new pacemakers and ICDs must disclose the level of EMI
protection. We expect that over time the majority of implantable electronic
medical devices will incorporate EMI protection. Greatbatch-Sierra has leveraged its technology and manufacturing expertise to
provide high quality, precision components for commercial applications that
demand high performance and reliability, including aerospace, oil and gas
exploration and telecommunications equipment. FEEDTHROUGHS Feedthroughs are components that transmit electrical signals from inside an
implantable medical device to the electrodes that transmit the signals to the
body. Feedthroughs consist of an outer metallic structure called a flange, an
electrical insulator made of ceramic or glass material, and wire connectors
called lead wires that carry electrical signals to and from the device. Our
feedthroughs use a ceramic to metal seal that is substantially more durable than
a traditional glass to metal seal. We design and manufacture approximately 45 types of feedthroughs. Each of our
feedthroughs is designed specifically for a particular customer device. We are
often the sole source of feedthroughs for our customers. In 2002, approximately
89% of our feedthroughs were used in pacemakers and ICDs, with the balance used
primarily in LVADs, hearing assist devices, drug pumps and neurostimulators. We
are currently working with a number of medical device manufacturers to develop
hermetic feedthroughs for the next generation of implantable medical devices and
applications, including neurostimulators, middle ear devices, and muscle
stimulation devices. ELECTRODES Electrodes are components used in pacemakers and ICDs that are attached to
the heart tissue to deliver the electrical signal from the device. By coating
the electrode with chemical compounds, we can enhance its electrical properties
and therefore improve the delivery of energy to the heart. Some electrode tips
are designed to contain medication, such as steroids, to prevent scarring of the
heart tissue following electrode implantation. We design and manufacture a variety of coated electrodes, some of which have
tips that can contain medication. We believe that our experience with physical
deposition processes, such as sputtering and powder metallurgic techniques, has
enabled us to produce high quality coated surfaces utilizing almost any
combination of biocompatible coating surfaces. PRECISION COMPONENTS We design and manufacture miniature precision components and subassemblies
primarily for pacemaker and ICD manufacturers. Our precision components are
machined or molded to adhere to tolerances up to one ten-thousandth of an inch.
To manufacture precision components, we typically use various alloys of
stainless steel, platinum, titanium, aluminum and brass, as well as plastics and
composites. Although our primary focus is to develop and manufacture precision
components for implantable medical devices, we also serve the general medical
equipment market and the aerospace industry. ENCLOSURES AND RELATED COMPONENTS We design and manufacture highly engineered metal enclosures for the medical
device industry. The manufacturing process to make implantable grade enclosures
involves drawing and forming thin metals such as titanium, stainless steel, and
aluminum. We have developed and refined a trimming process that can hold thin
metals to close profile tolerances. We also design tooling and processes to
precise customer specifications. Our principal focus is to develop and
manufacture high precision products for use in implantable medical devices
including pacemakers and ICDs. COMMERCIAL BATTERIES AND BATTERY PACKS We have developed specialized power source technologies that are functional
in high temperatures or under high shock and vibration. The majority of the
commercial power sources that we sell are used in oil and gas exploration,
including recovery equipment, pipeline inspection gauges, down-hole pressure
measurement systems and seismic surveying equipment. We also supply power
sources to NASA for its space shuttle program. In addition, our commercial power
sources have been used for emergency position locating beacons and locator
transmitters, classified governmental uses, electronic circuit breakers for
industrial applications, weather balloon instrumentation, electricity
transmission cable lighting detectors, wear monitors for train cables and
scientific equipment used in Antarctica. RECHARGEABLE LITHIUM ION BATTERIES We have developed a line of rechargeable lithium ion batteries that is
expected to broaden and complement our current lines of lithium primary
batteries. A number of new medical devices require rechargeable batteries,
including: IMPLANTABLE PUMP TECHNOLOGY We have developed proprietary technology that has applications in implantable
devices designed to deliver small quantities of drugs or other fluids to a
patient. Several of our technologies are critical to these devices, including
the power source, the feedthroughs and the pumping mechanism that moves the
fluid. Currently, one of our customers has regulatory approval in Europe for a
device that utilizes our implantable pump technology and intends to file with
the FDA for regulatory approval in the United States in 2003. RESEARCH, DEVELOPMENT AND ENGINEERING Our position as a leading developer and manufacturer of components for
implantable medical devices is largely the result of our long history of
technological innovation. We invest substantial resources in research,
development and engineering. Our scientists, engineers and technicians focus on
improving existing products, expanding the use of our products and developing
new products. In addition to our internal technology and product development
efforts, we maintain close relationships with leading research organizations,
including Alfred University, Clarkson University, the Jet Propulsion Laboratory,
the applied physics department of Johns Hopkins University, NASA, Sandia-National
Laboratories, the State University of New York at Buffalo and Villanova
University. These relationships include funding research efforts, licensing
researchers' technology and assisting in building prototypes. Our research,
development and engineering team is responsible for a number of pioneering
developments in the implantable medical device industry including: YEAR COMMERCIAL INDUSTRY IMPACT 1972 1974 1980 1981 1987 1996 1999 PATENTS AND PROPRIETARY TECHNOLOGY We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
To date, we have been granted 212 U.S. patents and 214 foreign patents. We also
have 143 U.S. and 303 foreign pending patent applications at various stages of
approval. During the past three years, we have received 78 new U.S. patents, of
which 28 were received in 2002. Corresponding foreign patents have been issued
or are expected to be issued in the near future. Often, several patents covering
various aspects of the design protect a single product. We believe this provides
broad protection of the concepts employed. The following table provides a
breakdown of our patents as of December 31, 2002 by product type: NUMBER OF NUMBER OF 181 21 Batteries - Lithium/SVO 106 94 Batteries - Lithium/carbon monofluoride 9 9 Capacitors 33 33 Feedthroughs 3 3 Pumps 12 11 Batteries - Commercial 28 22 Batteries - Rechargeable 14 14 Other products 40 15 Total 426 222 Our active battery patents relate to process improvements and modifications
to the original technology that was developed either by our Company, or others,
the original technology is currently not patent protected. We license the basic technology used in our wet tantalum capacitors from
Evans Capacitor Company. The license extends throughout the lives of the related
patents, which expire in 2010, 2013 and 2014. The license can be cancelled if we
default under the license agreement and fail to cure the default. A cancellation
of the license would seriously impair our ability to produce our entire line of
capacitors. The significant patents that we maintain for the Capacitor technology relate
to ultrasonically coated substrate for use in a capacitor and method of
manufacture; hermetically sealed wet tantalum capacitor; Electrolyte for use in
a capacitor; and the anode for an electrolytic capacitor and they expire between
2017 and 2019. The Company is currently developing its next generation battery technology to
power implantable cardiac defibrillators. This technology has the potential to
deliver the highest energy density and greatest longevity in the industry and
provide stable charge time throughout its useful life. Company scientists
pioneered this unique technology. The Company has over 20 patent applications
that have been applied for relating to this technology. In addition, we are also a party to several license agreements with third
parties pursuant to which we have obtained, on varying terms, the exclusive or
non-exclusive rights to patents held by them. We have also granted rights in our
own patents to others under license agreements. It is our policy to require our executive and technical employees,
consultants and other parties to execute confidentiality agreements. These
agreements prohibit disclosure of confidential information to third parties
except in specified circumstances. In the case of employees and consultants, the
agreements generally provide that all confidential information relating to our
business is the exclusive property of our company. MANUFACTURING AND QUALITY CONTROL Our manufacturing facilities are in Clarence, Cheektowaga, Wheatfield, and
Amherst, New York; Carson City, Nevada; Canton, Massachusetts; Columbia,
Maryland; and Minneapolis, Minnesota. Our New York facilities manufacture and
test medical batteries, capacitors, precision components and a portion of our
commercial batteries. Our Carson City, Nevada facility primarily manufactures
EMI filtering capacitors. Our Canton, Massachusetts facility manufactures the
remaining portion of our commercial batteries and battery packs. Our Columbia,
Maryland facility manufactures feedthroughs, electrodes and other components.
Our Minneapolis, Minnesota facility manufactures enclosures and related
components. In 2000 and 2001, we modernized our facilities and a number of our
manufacturing lines, processes and equipment. These manufacturing improvements
have enabled us to increase the quality and service life of our power sources
and other components and increase our manufacturing capacity. Key resources that
allow us to manufacture subassemblies include a full model shop, a precious
metals machining area, injection molding equipment and a Class 10,000 clean
room. We primarily manufacture small lot sizes, as most customer orders range from
a few hundred to thousands of units. As a result, our ability to remain flexible
is an important factor in maintaining high levels of productivity. Each of our
production teams receives assistance from a manufacturing support team, which
typically consists of representatives from our quality control, engineering,
manufacturing, materials and procurement departments. Our quality system is based upon an ISO documentation system and is driven by
a master validation plan that requires rigorous testing and validation of all
new processes or process changes that directly impact our products. Our New
York, Massachusetts and Nevada facilities are ISO-9001 certified, which requires
compliance with regulations regarding quality systems of product design,
supplier control, manufacturing processes and management review. Our Columbia,
Maryland facility is ISO-9002 certified. In 2003, our Minnesota facility will be
registered to ISO 9001. This certification can only be achieved after completion
of an audit conducted by an independent authority. Our facilities are audited by
the National Standards Authority of Ireland, an independent auditing firm and
notified body that specializes in evaluating quality standards. To maintain
certification, all facilities must be reexamined every six months by our
certifying body. SALES AND MARKETING We utilize a combination of direct and indirect sales methods, depending on
the particular product. In 2002, approximately 75% of our products were sold in
the United States. We market and sell our medical components directly to manufacturers of
implantable medical devices. The majority of our customers contract with us to
develop custom components to fit their specific product specifications. As a
result, we have established close working relationships between our internal
program managers and our customers. We market our products and technologies at
industry meetings and trade shows domestically and internationally, including
North American Society of Pacing and Electrophysiology (NASPE), and CardioStim. Internal sales managers support all activity, and involve engineers and
materials professionals in the sales process to address customer requests
appropriately. We sell our commercial batteries and battery packs either directly to the end
user, directly to manufacturers that incorporate our products into other devices
for resale, or to distributors who sell our products to manufacturers and end
users. Our sales managers are trained to assist our customers in selecting
appropriate battery chemistries and configurations. We market our commercial
power sources at various technical trade meetings. We also place print
advertisements in relevant trade publications. Firm backlog orders at December 31, 2002 and 2001, were $45.7 million and
$46.3 million, respectively. Most of these orders are expected to be shipped
within one year. CUSTOMERS Our products are designed to provide reliable, long lasting solutions that
meet the evolving requirements and needs of our customers and the end users of
their products. Our medical customers include leading implantable medical device
manufacturers such as Guidant, St. Jude Medical, Medtronic, Biotronik, and ELA/Sorin.
In 2002, Guidant and St. Jude Medical, our two largest customers, collectively
accounted for approximately 66% of our medical technology revenues. Our
commercial customers are primarily companies involved in the oil and gas
exploration, oceanographic and aerospace industries and include Halliburton and
Baker-Hughes. In February 1999, we entered into a supply agreement with Guidant pursuant to
which Guidant purchases batteries from us for use in its implantable medical
devices. Guidant also separately purchases components from us for use in its
implantable medical devices. Our supply agreement with Guidant expires on
December 31, 2004 and can be renewed for additional one-year periods upon mutual
agreement. In April 1997, we entered into a supply agreement with St. Jude Medical. In
accordance with this agreement, we are the primary supplier of many components
used in their pacemakers and ICDs, except for microprocessors and capacitors. We
will also be the exclusive supplier of batteries to St. Jude Medical through the
expiration of the supply agreement on December 28, 2003, with the ability of St.
Jude to extend the agreement for two (2) one-year extensions. SUPPLIERS AND RAW MATERIALS We purchase certain critical raw materials for our business from a limited
number of suppliers due to the lengthy process needed to qualify these materials
with our customers before use in the products we produce. We cannot quickly
establish additional or replacement suppliers for these materials because of
these requirements. In the past, we have not experienced any significant
interruptions or delays in obtaining these raw materials. We maintain minimum
safety stock levels of critical raw materials. For other raw material purchases, we utilize competitive pricing methods to
secure supply such as bulk purchases, precious metal pool buys, blanket orders,
and long term contracts at terms that are favorable to us. We believe that there
are alternative suppliers or substitute products available for each of the
materials we purchase at competitive prices. COMPETITION Our existing or potential competitors in our medical components business
include: Leading implantable medical device manufacturers, such as
Guidant, St. Jude Medical, Medtronic, and Biotronik, which have vertically
integrated operations or may become vertically integrated in the future; Companies that produce and market feedthroughs, filters and
other medical components, including Alberox, AVX, Medsource and RMS, among
others; and Smaller companies that concentrate on niche markets. Medtronic produces batteries for use in implantable medical devices that it
manufactures. However, to our knowledge Medtronic does not market or sell
batteries to third parties. Biotronik produces batteries for use in implantable
medical devices that it manufactures and has attempted to market those batteries
to other device manufacturers. The Company, Medtronic and Biotronik are the
major manufacturers of power sources for implantable medical devices. We also
compete in the intensely competitive commercial battery market. Our principal
competitors in this market are Eagle-Picher Industries and ECO-Tracer. While we
believe that the industry perceives our products to be of the highest quality,
there are suppliers whose products are perceived to be of comparable quality.
Moreover, the commercial battery market is subject to volatility in oil and gas
exploration activity. When oil and gas exploration activity has slowed, a number
of our competitors have historically reduced battery prices to maintain or gain
market share. Quality and technology are the principal bases upon which we
compete in both the implantable medical devices market and the commercial power
sources market. GOVERNMENT REGULATION Except as described below, our business is not subject to direct governmental
regulation other than the laws and regulations generally applicable to
businesses in the jurisdictions in which we operate, including those federal,
state and local environmental laws and regulations governing the emission,
discharge, use, storage and disposal of hazardous materials and the remediation
of contamination associated with the release of these materials at our
facilities and at off-site disposal locations. Our research, development and
engineering activities involve the controlled use of, and our products contain,
small amounts of hazardous materials. Liabilities associated with hazardous
material releases arise principally under the Comprehensive Environmental
Response, Compensation and Liability Act and analogous state laws which impose
strict, joint and several liability on owners and operators of contaminated
facilities and parties that arrange for the off-site disposal of hazardous
materials. We are not aware of any material noncompliance with the environmental
laws currently applicable to our business and we are not subject to any material
claim for liability with respect to contamination at any company facility or any
off-site location. We cannot assure you, however, that we will not be subject to
such environmental liabilities in the future as a result of historic or current
operations. As a component manufacturer, our products are not subject to FDA pre-market
approval. However, the FDA and related state and foreign governmental agencies
regulate many of our customers' products as medical devices. In many cases, the
FDA must approve those products prior to commercialization. In addition, because
some of the products produced by our engineered components division may be
considered finished medical devices, some of the operations within that division
are subject to FDA inspection and must comply with current good manufacturing
practices (CGMP) requirements. RECRUITING AND TRAINING We invest substantial resources to our recruiting efforts. Our internal
recruiting efforts primarily focus on supplying quality personnel to our
business. We have established a number of programs that are designed to
challenge and motivate our employees and we encourage our employees to be
proactive in contributing ideas and regularly survey them to collect feedback on
ways that our business and operations can be improved. We also seek to meet our
hiring needs through outside sources. We provide an intensive training program to our new employees that is
designed to educate them on safety, quality, our business strategy and the
methodologies and technical competencies that are required for our business and
our corporate culture. Our safety training programs focus on such areas as basic
industrial safety practices and emergency response procedures to deal with fires
or chemical spills. All of our employees are required to participate in a
specialized training program that is designed to provide an understanding of our
quality objectives. We offer our employees a tuition reimbursement program and
encourage them to continue their education at local colleges. Many of our
professionals attend seminars on topics that are related to our corporate
objectives and strategies. We believe that comprehensive training is necessary
to ensure that our employees work in a uniform and consistent manner and that
best practices are effectively utilized. EMPLOYEES As of December 31, 2002, we had 1,378 employees, including 237 research,
development and engineering personnel, 936 manufacturing personnel and 213
support personnel. We also employ a number of temporary employees to assist us
with various projects and service functions. Our employees are not represented
by any union and, except for certain executive officers of our company and our
subsidiaries, are retained on an at-will basis. We believe that we have a good
relationship with our employees. AVAILABLE INFORMATION The Company makes available free of charge on or through its internet website
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the Securities and Exchange Commission. Our Internet address is
http://www.greatbatch.com. The information contained on the Company's website is
not incorporated by reference in this annual report on Form 10-K and should not
be considered a part of this report. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Some of the statements contained in this Annual Report on Form 10-K and other
written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to: future revenues, expenses and profitability; the future development and expected growth of our business and the
implantable medical device industry; our ability to successfully execute our business model and our
business strategy; our ability to identify trends within the for implantable medical
devices, medical components, and commercial power sources industries and
to offer products and services that meet the changing needs of those
markets; projected capital expenditures; and trends in government regulation. You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results. Although it is not possible to create a comprehensive list of all factors
that may cause actual results to differ from the results expressed or implied by
our forward-looking statements or that may affect our future results, some of
these factors include the following: dependence upon a limited number of
customers, product obsolescence, inability to market current or future products,
pricing pressure from customers, reliance on third party suppliers for raw
materials, products and subcomponents, fluctuating operating results, inability
to maintain high quality standards for our products, challenges to our
intellectual property rights, product liability claims, inability to
successfully consummate and integrate acquisitions, unsuccessful expansion into
new markets, competition, inability to obtain licenses to key technology,
regulatory changes or consolidation in the healthcare industry, and other risks
and uncertainties set forth in Exhibit 99.2 to this Annual Report on Form 10-K
and those that arise from time to time and are described in the
Company's periodic filings with the Securities and Exchange Commission. We incorporate by reference the "Factors Possibly Affecting Future
Operating Results" from
Exhibit 99.2 into this filing. ITEM 2. PROPERTIES Our executive offices are located in Clarence, New York. The building that
houses our executive offices also contains warehouse operations, a variety of
support services and capacity for light manufacturing or laboratory space. The following table sets forth information about all of our principal
manufacturing or testing facilities: Sq. Ft. Own/Lease Newly acquired facility will be developed for
battery manufacturing. Commercial power source revenues
are currently generated from these facilities. Consolidation of operations
to Canton, MA facility in process, to be completed in 2003. We own and rent space in part of
the same facility. We believe these facilities are adequate for our current and foreseeable
purposes and that additional space will be available when needed. ITEM 3. LEGAL PROCEEDINGS We are involved in various lawsuits and claims incidental to our business. We
believe the ultimate outcome resulting from resolution of these lawsuits and
claims will not materially affect our financial position, results of operations
or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of Registrant as specified in its charter)
(State of incorporation)
(I.R.S. employer identification no.)
Clarence, New York
14031
(Address of principal executive offices)
(Registrant's telephone number, including area code)
Common Stock, Par Value $.001 Per Share
Preferred Stock Purchase Rights
New York Stock Exchange
None
Device
Principal Illness or Symptom
PRODUCT
DESCRIPTION
USED IN
MEDICAL:
Batteries
Batteries for implantable
medical devices
Pacemakers, ICDs, LVADs, neuro-stimulators,
drug pumps and hearing assist devices
High reliability and
predictability
Long service life
Customized configuration
Light weight
Compact and less intrusive
Capacitors
Store energy generated by a
battery before delivery to the heart
ICDs
Stores more energy per unit
volume (energy density) than other existing technologies
Customized configuration
EMI Filters
Filters electromagnetic
interference to limit undesirable response, malfunctioning or degradation in
the performance of electronic equipment
Medical Devices
High reliability Attenuation of
EMI RF over wide frequency ranges
Customized design
Feedthroughs
Allow electrical signals to be
brought from inside an implantable medical device to an electrode
Pacemakers, ICDs, LVADs, neuro-stimulators,
drug pumps and hearing assist devices
Ceramic to metal seal is
substantially more durable than traditional seals
Multifunctional
Electrodes
Deliver electric signal from the
feedthrough to a body part undergoing stimulation
Pacemakers and ICDs
High quality coated surface
Flexible in utilizing any combination of biocompatible coating surfaces
Customized offering of surfaces and tips
Precision components
Machined and molded parts for
implantable medical devices.
Pacemakers, ICDs and drug pumps
High level of manufacturing
precision
Broad manufacturing flexibility
Enclosures and related
components
Cases and related parts for
implantable medical devices.
Pacemakers, ICDs, capacitors.
Precision manufacturing,
flexibility in configurations and materials.
COMMERCIAL:
Batteries and battery packs
Batteries and battery packs for
demanding commercial applications
Oil and gas exploration,
oceanographic equipment
Long-life dependability
High energy density
LVADs that are being developed to treat heart
failure. Devices use external and internal batteries as power sources and
both must be rechargeable. Lithium ion rechargeable technology is being
developed to produce lighter batteries with increased power and longer life.
Implantable hearing assist devices that are
used to treat patients who cannot use conventional hearing aids. These
batteries are compact and capable of providing low levels of current with
infrequent recharging.
Neurostimulators and drug pumps that are used
for indications such as tremors, diabetes and chronic pain. Since these
devices can be implanted in young patients, the combination of our
rechargeable battery technology and extended device life may reduce the
number of replacement implants needed throughout a patient's life.
INTRODUCTION
First lithium/iodine battery
Industry standard for pacemakers
First ceramic-to-metal seal for
implantable devices
Industry standard for hermetic
sealing of devices
First oxhyalide/interhalogen
batteries
Enabled commercial batteries to
perform at lower temperatures with very high energy density
First implantable pump capable of
passing bubbles
Enabled implantable drug delivery
system
First implantable lithium/SVO
battery
Industry standard for ICDs
First titanium-encased
lithium/carbon monofluoride pacemaker batteries
Enabled weight reduction and
improved electrical performance for advanced microelectronics
First wet tantalum capacitors
Enabled smaller sizes of ICDs and increased
design flexibility
PRODUCT
PATENTS GRANTED
ACTIVE PATENTS
Batteries - Lithium/iodine
Location
Use
Amherst, NY(1)
81,000
Own
Battery manufacturing
Clarence, NY(2)
83,475
Own
Battery manufacturing; research, development
and engineering
Clarence, NY(3)
20,800
Own
Machining and assembly of components
Clarence, NY(3)
18,550
Lease
Machining and assembly of components
Clarence, NY
45,306
Lease
Offices and warehouse
Wheatfield, NY
2,772
Lease
Battery testing
Cheektowaga, NY
29,370
Lease
Capacitor manufacturing
Canton, MA
32,000
Own
Battery manufacturing, development
Columbia, MD
30,000
Lease
Feedthroughs, electrodes and components
manufacturing
Carson City, NV
23,840
Own
EMI filtering manufacturing
Minneapolis, MN
73,730
Own
Enclosure manufacturing
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on the New York Stock Exchange (NYSE), under the symbol "GB" since its initial public offering on September 29, 2000. The following table sets forth, for the periods indicated, the high and low closing prices per share for the common stock as reported on the NYSE Composite Tape.
2000 |
High |
Low |
Third Quarter (from September 29, 2000) Fourth Quarter |
$22.88 29.88 |
$22.88 21.75 |
2001 | ||
First Quarter Second Quarter Third Quarter Fourth Quarter |
$28.00 33.38 29.30 38.85 |
$18.50 17.26 23.00 25.50 |
2002 | ||
First Quarter Second Quarter Third Quarter Fourth Quarter |
$37.60 28.40 28.69 31.50 |
$24.18 21.20 20.10 24.50 |
As of March 7, 2003, there were 275 record holders of the Company's common stock. Our Employee Stock Ownership Plan (ESOP) is considered one record holder for the purposes of this calculation. There are approximately 1,500 participants in the ESOP.
The Company has not paid cash dividends since its initial public offering. We currently intend to retain any earnings to further develop and grow our business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table provides selected financial data of our Company for the periods indicated. You should read the selected consolidated financial data set forth below in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and with our consolidated financial statements and related notes appearing elsewhere in this report. The consolidated statement of operations data and the consolidated balance sheet data for the periods indicated have been derived from our financial statements and related notes.
December 31,(5) |
|||||||||||
Years/periods ended |
2002(4) |
2001(3) |
2000(2) |
1999 |
1998(1) |
||||||
(In thousands, except per share data) |
|||||||||||
Consolidated Income Statement Data: | |||||||||||
Revenues | $ |
167,296 |
$ |
135,575 |
$ |
97,790 |
$ |
79,235 |
$ |
77,361 |
|
Income (loss) before income taxes, extraordinary loss and cumulative effect of accounting change | $ |
20,965 |
$ |
18,530 |
$ |
1,631 |
$ |
(2,314 |
) | $ |
1,100 |
Income (loss) per share from continuing operations | |||||||||||
Basic | $ |
0.69 |
$ |
0.59 |
$ |
0.07 |
$ |
(0.14 |
) | $ |
0.07 |
Diluted | $ |
0.68 |
$ |
0.58 |
$ |
0.07 |
$ |
(0.14 |
) | $ |
0.06 |
Consolidated Balance Sheet Data: | |||||||||||
Working capital | $ |
40,204 |
$ |
61,596 |
$ |
15,079 |
$ |
17,621 |
$ |
12,756 |
|
Total assets | $ |
312,251 |
$ |
283,520 |
$ |
181,647 |
$ |
89,779 |
$ |
194,390 |
|
Long-term obligations | $ |
77,040 |
$ |
61,397 |
$ |
30,951 |
$ |
127,623 |
$ |
129,563 |
(1) | In August 1998, we acquired the assets and liabilities of Greatbatch-Hittman. These figures include the results of operations of Greatbatch-Hittman subsequent to its acquisition. |
(2) | In August 2000, we acquired the capital stock of Battery Engineering, Inc. (BEI). These figures include the results of operations of BEI subsequent to its acquisition. |
(3) | In June 2001, we acquired substantially all of the assets and liabilities of Greatbatch-Sierra. These figures include the results of operations of Greatbatch-Sierra subsequent to its acquisition. |
(4) | In July 2002, we acquired the capital stock of Greatbatch-Globe. These figures include the results of operations of Greatbatch-Globe subsequent to its acquisition. |
(5) | The Company's fiscal year ends on the Friday closest to December 31. For clarity of presentation, the Company describes all periods as if the year-end is December 31. Fiscal 2002 contained 53 weeks. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We are a leading developer and manufacturer of batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in implantable medical devices. We also develop and manufacture high performance batteries and battery packs used in other demanding non-medical applications.
Our medical battery revenues are derived from sales of batteries for pacemakers, implantable cardioverter defibrillators (ICDs) and other implantable medical devices. Our capacitor revenues are derived from sales of our wet tantalum capacitors, which we developed for use in ICDs. Our component revenues are derived from sales of feedthroughs, electrodes, electromagnetic interference (EMI) filters, enclosures, and other precision components principally used in pacemakers and ICDs. Our commercial power sources revenues are derived primarily from sales of batteries and battery packs for use in oil and gas exploration. We also supply batteries to NASA for its space shuttle program and other similarly demanding commercial applications.
A substantial part of our business is conducted with a limited number of customers. Our two largest customers accounted for approximately 66% of revenues in 2002. We have entered into long-term supply agreements with most of our large customers. For each of our products, we recognize revenue when the products are shipped and title passes.
Cost of revenues includes materials, labor and other manufacturing costs associated with the products we sell. Selling, general, and administrative expenses include salaries, facility costs, professional service fees, and patent- related and other legal expenses. Research, development, and engineering costs include expenses associated with the design, development, testing, deployment and enhancement of our products. We record cost reimbursements received for research, development and engineering conducted on behalf of customers as an offset to research, development and engineering expenses.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For clarity of presentation, the Company describes all periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
The commentary that follows should be read in conjunction with our consolidated financial statements and related notes.
Results of Operations
In thousands, except per share data |
Year ended Dec. 31, |
Year ended Dec. 31, | ||||||||||||||
2002 | 2001 | Change | % Change | 2001 | 2000 | Change | % Change | |||||||||
Revenues | $ | 167,296 | $ | 135,575 | $ | 31,721 | 23% | $ | 135,575 | $ | 97,790 | $ 37,785 | 39% | |||
Cost of revenues | 96,398 | 74,716 | 21,682 | 29% | 74,716 | 55,446 | 19,270 | 35% | ||||||||
Gross profit | 70,898 | 60,859 | 10,039 | 16% | 60,859 | 42,344 | 18,515 | 44% | ||||||||
Gross profit as a % of revenues | 42% | 45% | 45% | 43% | ||||||||||||
Selling, general, and administrative expenses (SG&A) | 24,369 | 18,174 | 6,195 | 34% | 18,174 | 11,473 | 6,701 | 58% | ||||||||
SG&A as a % of revenues | 15% | 13% | 13% | 12% | ||||||||||||
Research, development and engineering costs, net (RD&E) | 14,440 | 12,575 | 1,865 | 15% | 12,575 | 9,941 | 2,634 | 26% | ||||||||
RD&E as a % of revenues | 9% | 9% | 9% | 10% | ||||||||||||
Intangible amortization | 3,702 | 7,726 | (4,024 | ) | -52% | 7,726 | 6,530 | 1,196 | 18% | |||||||
Writeoff of noncompete agreement | 1,723 | - | - | - | ||||||||||||
Interest expense | 3,752 | 4,011 | (259 | ) | -6% | 4,011 | 13,212 | (9,201 | ) | -70% | ||||||
Interest income | (442 | ) | (423 |
) |
(19 | ) | 4% | (423 | ) | (254 | ) | (169 | ) | 67% | ||
Writeoff of investment in unrelated company | 1,547 | - | - | - | ||||||||||||
Other expense (income), net | 842 | 266 | 576 | 217% | 266 | (189 | ) | 455 | -241% | |||||||
Provision for income taxes | 6,604 | 6,939 | (335 |
) |
-5% | 6,939 | 611 | 6,328 | 1036% | |||||||
Effective tax rate | 32% | 37% | 37% | 38% | ||||||||||||
Income before extraordinary loss | 14,631 | 11,591 | 3,040 | 26% | 11,591 | 1,020 | 10,571 | 1036% | ||||||||
Extraordinary loss | - | (2,994 |
) |
(2,994 | ) | (1,568 | ) | |||||||||
Net income | $ | 14,631 | $ | 8,597 | $ | 6,034 | 70% | $ | 8,597 | $ | (548 | ) | $ 9,145 | -1669% | ||
Diluted earnings per share from continuing operations | $ 0.68 | $ 0.58 | $ 0.10 | 17% | $ 0.58 | $ 0.07 | $ 0.51 | 729% | ||||||||
Extraordinary loss per diluted share | - | (0.15 |
) |
(0.15 | ) | (0.11 | ) | |||||||||
Diluted net earnings per share | $ 0.68 | $ 0.43 | $ 0.25 | 58% | $ 0.43 | $ (0.04 | ) | $ 0.47 | -1175% | |||||||
Revenues
Year ended Dec. 31, |
Year ended Dec. 31, |
||||||||||||||
In thousands | 2002 | 2001 | Change | % Change | 2001 | 2000 | Change | % Change | |||||||
Medical Technology | |||||||||||||||
Medical Batteries: | |||||||||||||||
ICDs | $ 28,518 | $ | 22,215 | $ | 6,303 | 28% | $ | 22,215 | $ | 14,171 | $ | 8,044 | 57% | ||
Pacemakers | 20,354 | 22,923 | (2,569 | ) | -11% | 22,923 | 22,516 | 407 | 2% | ||||||
Other Devices | 3,035 | 722 | 2,313 | 320% | 722 | 1,664 | (942 | ) | -57% | ||||||
Royalties | - | 991 | (991 | ) | -100% | 991 | 2,937 | (1,946 | ) | -66% | |||||
Total Medical Batteries | 51,907 | 46,851 | 5,056 | 11% | 46,851 | 41,288 | 5,563 | 13% | |||||||
Capacitors | 24,679 | 20,290 | 4,389 | 22% | 20,290 | 12,611 | 7,679 | 61% | |||||||
Components | 65,315 | 40,513 | 24,802 | 61% | 40,513 | 29,890 | 10,623 | 36% | |||||||
Total Medical Technology | 141,901 | 107,654 | 34,247 | 32% | 107,654 | 83,789 | 23,865 | 28% | |||||||
Commercial Power Sources | 25,395 | 27,921 | (2,526 | ) | -9% | 27,921 | 14,001 | 13,920 | 99% | ||||||
Total Revenues | $ 167,296 | $ | 135,575 | $ | 31,721 | 23% | $ | 135,575 | $ | 97,790 | $ | 37,785 | 39% | ||
FISCAL 2002 COMPARED WITH FISCAL 2001
The increase in total revenues for 2002 included revenues of Greatbatch-Globe, which we acquired in July 2002.
Medical. Medical battery revenues increased mainly due to our customers' increased demand for ICD batteries. Partially offsetting this increase was a decline in royalty revenues from Medtronic on patents that have expired. Capacitor revenues increased as a result of increased demand by our existing customer for capacitors. The increase in sales of medical components was primarily due to the inclusion of revenues from Greatbatch-Sierra during the full year of 2002 and Greatbatch-Globe for the second half of 2002. Substantially all of the revenue changes during 2002 were attributable to volume.
Commercial. Commercial power sources revenues decreased principally due to a decreased level of exploration in the oil and gas industry in the first six months of 2002 compared to 2001.
Gross profit
Gross profit increased as a result of increased revenues. Production yield issues at Greatbatch-Sierra, reduced royalty revenues in 2002 compared to 2001, and the inclusion of lower margin Greatbatch-Globe operations were the primary contributors to the reduced overall gross margin.
SG&A expenses
SG&A expenses increased both in dollars and as a percentage of total revenues. The increase is primarily due to the inclusion of costs associated with Greatbatch-Sierra and Greatbatch-Globe, costs associated with our Six SigmaTM quality initiatives, the general development of our infrastructure to support the Company growth, and expenses related to ongoing patent activity.
RD&E expenses
RD&E expenses increased in dollars, but as a percentage of total revenues were at the same level for both years. The decrease in the percentage of expenses as related to sales is primarily attributable to the low level of RD&E expenses at Greatbatch-Globe. We expect to maintain our spending on RD&E at a level that will support the new technologies demanded by the implantable medical device markets.
Amortization expense
Intangible amortization decreased significantly due to the cessation of the amortization for goodwill and other intangible assets with indefinite lives effective the beginning of our fiscal year 2002.
If the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) had been implemented on January 1, 2001, income from continuing operations and diluted earnings per share from continuing operations for 2001 would have been $13.8 million and $0.69, respectively.
If SFAS No. 142 had been implemented on January 1, 2001, net income and diluted earnings per share for 2001 would have been $10.8 million and $0.54, respectively.
Other expenses
The non-recurring charge of $1.7 million represents the write-off of the noncompete agreement after the passing of Mr. Fred Hittman in September 2002.
Interest expense declined as a result of reduced interest rates during the year. The rate reductions arose from reduced market rates as well as contracted rate reductions due to the reduction in leverage measurements during the year. Interest income increased slightly as the Company's investable cash was higher in 2002 than 2001 due to the timing of its follow-on public offering and the acquisition of Greatbatch-Globe.
The non-recurring charge of $1.5 million represents the write-off of the investment in an unrelated company based on an analysis of the financial viability of that company. It was determined that the Company's investment in the unrelated company had a fair value that is less than its carrying value.
Provision for income taxes
Our effective tax rate declined primarily as a result of increased research and development credits, as well as the benefits of state tax planning strategies, net of anticipated increased state taxes related to the Greatbatch-Globe acquisition.
Extraordinary loss
The extraordinary loss in 2001 was associated with the restructuring of our long-term debt and the related write-off of deferred financing fees, a call premium paid, and loan discounts associated with the previous long-term debt.
FISCAL 2001 COMPARED WITH FISCAL 2000
Medical. Medical battery revenues increased primarily due to higher demand for our ICD batteries from our customers, both foreign and domestic. This increase was partially offset due to the expiration of implantable power source patents on which we had been receiving royalty fees. Capacitor revenues increased primarily due to market acceptance and demand for the ICDs using our capacitor, which was first introduced in the fourth quarter of 1999. Medical component revenues increased mainly due to the acquisition of Greatbatch-Sierra in June 2001, whose primary product line of EMI filters for implantable devices complements our other component lines well. Substantially all of the revenue changes during 2001 were attributable to volume.
Commercial. The higher commercial power sources revenues were primarily related to the inclusion of revenues for a full year from our Battery Engineering, Inc. (BEI) acquisition that was completed in August 2000. This acquisition, combined with our pre-existing commercial business, allowed us to participate strongly in the increased demand for products used in oil and gas exploration activity, which was up sharply in 2001.
Gross profit
The increase in gross margin was primarily due to increased efficiencies and cost leveraging based on the higher production volumes in 2001 over 2000. In addition, in 2000 there were substantial start-up costs that accompanied the ramp-up of capacitors to production volumes.
SG&A expenses
The increase in SG&A expenses was due to the inclusion of such expenses from Greatbatch-Sierra since its acquisition in June 2001, a full year of expenses from BEI in 2001 versus only five months in 2000, a full year of "public company" expenses (annual stock listing and registrar fees, investor relation expenses, etc), and increased training costs in support of our adoption of a Six SigmaTM quality initiative.
RD&E expenses
RD&E increased in dollars, but declined as a percentage of total revenues. This decrease was primarily due to the rapid growth in capacitor and commercial revenues and not to a decrease in our research and development initiatives.
Other expenses
The increase in intangible amortization primarily reflects the amortization of intangible assets that arose from our acquisition of Greatbatch-Sierra.
Interest expense declined as the result of the prepayment of $84.0 million of senior debt using proceeds from our fall 2000 initial public offering. The favorable terms of the refinanced debt in the first quarter of 2001 also reduced interest rates. These favorable conditions were tempered by the additional borrowing of $47 million during the last half of 2001 to finance the Greatbatch-Sierra acquisition.
Interest income increased as the result of the investment of proceeds from our follow-on public offering in the last half of 2001.
Other expense for 2001 increased from 2000 levels. Losses on disposition of assets comprised the majority of the balance in 2001. These recurring items were offset in 2000, when we sold, for a gain, interest rate cap agreements that were no longer needed due to the prepayment of our senior debt.
Provision for income taxes
Our effective tax rate decreased slightly due to the effect of state taxes and available credits.
Extraordinary loss
Senior and subordinated debt that remained outstanding at year-end 2000 was refinanced in the first quarter 2001. The extraordinary charge related to the call premium and write-off of fees and other expenses incurred to establish the original debt financing. The extraordinary charge, net of tax, recorded in 2000 resulted from that year's prepayment of debt with proceeds from our initial public offering.
Liquidity and Capital Resources
Our principal source of short-term liquidity is our working capital of $40.2 million at December 31, 2002 combined with our unused $20 million credit line with our lending syndicate. Over the past three years the cash we have generated from operations has been sufficient to meet our capital expenditure and debt service needs, other than for acquisitions, and we anticipate that this will continue for 2003. We believe our relationship with our lending syndicate is good and that additional short-term financing would be available to us from the syndicate on reasonable terms if needed.
We anticipate higher than historical capital spending during 2003 as we build out our new medical battery manufacturing factory that we purchased during the fourth quarter of 2002 and invest in information technology and other infrastructure to support the current business level and anticipated organic growth.
The Company regularly engages in discussions relating to potential acquisitions and has identified several possible acquisition opportunities. The Company currently does not have any commitments, understandings, or agreements to acquire any other business; however, the Company may announce an acquisition transaction at any time.
At December 31, 2002 our capital structure consisted of our $120 million credit facility and our 21.1 million shares of common stock outstanding. We have historically financed our acquisitions with proceeds from our debt arrangements and public stock offerings. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a primary measure of our ability to utilize debt financing. We believe that our historical growth in EBITDA and our expectation that it will continue to grow in the future positions us well to access increased debt from commercial lenders if needed. We are authorized to issue 100 million shares of common stock and 100 million shares of preferred stock. The market value of our outstanding common stock since our IPO has exceeded our book value and the average daily trading volume of our common stock has also increased; accordingly, we believe that if needed we can access public markets to sell additional common stock, preferred stock, debt or convertible securities if conditions are appropriate in the public markets.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets (SFAS No. 143). SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. We plan to adopt SFAS No. 143 effective January 1, 2003.
In July 2002, the FASB also issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit and Disposal Activities (SFAS No. 146). SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Under the Company's existing credit facility both the term loan and any borrowings under the line of credit bear interest at fluctuating market rates. An analysis of the impact on our interest rate sensitive financial instruments of a hypothetical 10% change in short-term interest rates shows an impact on expected 2003 earnings of approximately $0.3 million of higher or lower earnings, depending on whether short-term rates rise or fall by 10%. The discussion and the estimated amounts referred to above include forward-looking statements of market risk that involve certain assumptions as to market interest rates. Actual future market conditions may differ materially from such assumptions. Accordingly, the forward-looking statements should not be considered projections of future events by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of our company and report of independent auditors thereon are set forth below.
Independent Auditors' Report.
Consolidated Balance Sheet as of December 31, 2002 and 2001.
Consolidated Statement of Operations for the years ended December 31, 2002, 2001 and 2000.
Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000.
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wilson Greatbatch Technologies, Inc.
Clarence, New York
We have audited the accompanying consolidated balance sheets of Wilson Greatbatch Technologies, Inc. and subsidiaries (the "Company") as of January 3, 2003 and December 28, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 3, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Wilson Greatbatch Technologies, Inc. and subsidiaries as of January 3, 2003 and December 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Deloitte & Touche LLP
Buffalo, New York
January 24, 2003
WILSON GREATBATCH
TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET (IN THOUSANDS) |
|||||
ASSETS | December 31, | ||||
2002 | 2001 | ||||
Current assets: | |||||
Cash and cash equivalents | $ | 4,608 | $ | 43,272 | |
Accounts receivable, net | 19,310 | 17,373 | |||
Inventories | 34,908 | 29,026 | |||
Prepaid expenses and other current assets | 3,339 | 1,977 | |||
Refundable income taxes | 3,038 | 339 | |||
Deferred income taxes |
3,349
|
2,888
|
|||
Total current assets | 68,552 | 94,875 | |||
Property, plant, and equipment, net | 64,699 | 44,149 | |||
Intangible assets, net | 55,804 | 58,328 | |||
Goodwill | 119,407 | 76,883 | |||
Deferred income taxes | - | 5,417 | |||
Other assets |
3,789
|
3,868
|
|||
Total assets | $ |
312,251
|
$ |
283,520
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
Current liabilities: | |||||
Accounts payable | $ | 5,726 | $ | 6,553 | |
Accrued expenses and other current liabilities | 13,872 | 13,721 | |||
Current portion of long-term debt |
8,750
|
13,005
|
|||
Total current liabilities | 28,348 | 33,279 | |||
Long-term debt, net of current portion | 76,250 | 61,000 | |||
Other long-term liabilities |
790
|
397
|
|||
Total liabilities |
105,388
|
94,676
|
|||
Commitments and contingencies (Note 13) | |||||
Stockholders' equity: | |||||
Preferred stock | - | - | |||
Common stock | 21 | 21 | |||
Capital in excess of par value | 202,279 | 200,880 | |||
Retained earnings (accumulated deficit) | 5,426 | (8,935 | ) | ||
Treasury stock, at cost |
(863
|
) |
(3,122
|
) | |
Total stockholders' equity |
206,863
|
188,844
|
|||
Total liabilities and stockholders' equity |
$ 312,251
|
$ 283,520
|
|||
The accompanying notes are an integral part of these consolidated financial statements |
WILSON GREATBATCH TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) |
|||||||
Year Ended December 31, |
|||||||
2002 |
2001 |
2000 |
|||||
Revenues | $ | 167,296 | $ | 135,575 | $ | 97,790 | |
Cost of revenues |
96,398
|
74,716
|
55,446
|
||||
Gross profit | 70,898 | 60,859 | 42,344 | ||||
Selling, general and administrative expenses | 24,369 | 18,174 | 11,473 | ||||
Research, development and engineering costs, net | 14,440 | 12,575 | 9,941 | ||||
Amortization of intangible assets |
3,702 |
7,726 |
6,530 |
||||
Write-off of noncompete agreement |
1,723
|
-
|
-
|
||||
Operating income | 26,664 | 22,384 | 14,400 | ||||
Interest expense | 3,752 | 4,011 | 13,212 | ||||
Interest income | (442 | ) | (423 | ) | (254 | ) | |
Write-off of investment in unrelated company | 1,547 | - | - | ||||
Other expense (income), net |
842
|
266
|
(189
|
) | |||
Income before income taxes and extraordinary loss | 20,965 | 18,530 | 1,631 | ||||
Provision for income taxes |
6,604
|
6,939
|
611
|
||||
Income before extraordinary loss | 14,361 | 11,591 | 1,020 | ||||
Extraordinary loss on retirement of debt, net of tax |
-
|
(2,994
|
) |
(1,568
|
) | ||
Net income (loss) | $ |
14,361
|
$ |
8,597
|
$ |
(548
|
) |
Basic earnings (loss) per share: | |||||||
Income before extraordinary loss | $ | 0.69 | $ | 0.59 | $ | 0.07 | |
Extraordinary loss on retirement of debt |
-
|
(0.15
|
) |
(0.11
|
) | ||
Net earnings (loss) | $ |
0.69
|
$ |
0.44
|
$ |
(0.04
|
) |
Diluted earnings (loss) per share: | |||||||
Income before extraordinary loss | $ | 0.68 | $ | 0.58 | $ | 0.07 | |
Extraordinary loss on retirement of debt |
-
|
(0.15
|
) |
(0.11
|
) | ||
Net earnings (loss) | $ |
0.68
|
$ |
0.43
|
$ |
(0.04
|
) |
Weighted average shares outstanding | |||||||
Basic | 20,941 | 19,563 | 14,167 | ||||
Diluted | 21,227 | 19,945 | 14,434 | ||||
The accompanying notes are an integral part of these consolidated financial statements |
|||||||
WILSON GREATBATCH TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) |
|||||||
Year Ended December 31, |
|||||||
2002 |
2001 |
2000 |
|||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 14,361 | $ | 8,597 | $ | (548 | ) |
Adjustments to reconcile net income (loss) to | |||||||
net cash provided by operating activities: | |||||||
Depreciation and amortization | 12,100 | 14,241 | 13,009 | ||||
Write-off of noncompete agreement | 1,723 | - | - | ||||
Write-off of investment in unrelated company | 1,547 | - | - | ||||
Extraordinary loss on retirement of debt | - | 3,019 | 2,407 | ||||
Deferred income taxes | 3,765 | 2,358 | (369 | ) | |||
Loss on disposal of property, plant, and equipment | 762 | 132 | 68 | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (379 | ) | (4,396 | ) | (1,018 | ) | |
Inventories | (2,752 | ) | (10,030 | ) | 914 | ||
Prepaid expenses and other current assets | (1,450 | ) | (928 | ) | 2,144 | ||
Accounts payable | (1,685 | ) | 3,025 | (128 | ) | ||
Accrued expenses and other current liabilities | 691 | 4,760 | 1,536 | ||||
Income taxes |
(873
|
) |
677
|
145
|
|||
Net cash provided by operating activities |
27,810
|
21,455
|
18,160
|
||||
Cash flows from investing activities: | |||||||
Acquisition of property, plant and equipment | (20,501 | ) | (9,715 | ) | (4,528 | ) | |
Proceeds from sale of property, plant and equipment | 14 | 5 | 4 | ||||
Increase in intangible assets | - | (574 | ) | (417 | ) | ||
Increase in other assets | (1,459 | ) | (2,235 | ) | - | ||
Net cash effect of acquisitions |
(47,124
|
) |
(46,913
|
) |
1,583
|
||
Net cash used in investing activities |
(69,070
|
) |
(59,432
|
) |
(3,358
|
) | |
Cash flows from financing activities: | |||||||
Borrowings (repayments) under line of credit, net | - | - | (4,300 | ) | |||
Proceeds from issuance of long-term debt | 32,000 | 87,000 | - | ||||
Principal payments of long-term debt | (29,880 | ) | (48,278 | ) | (98,191 | ) | |
Issuance of common stock | 476 | 42,511 | 86,407 | ||||
Purchase of treasury stock |
-
|
-
|
(2,565
|
) | |||
Net cash provided by (used in) financing activities |
2,596
|
81,233
|
(18,649
|
) | |||
Net increase (decrease) in cash and cash equivalents | (38,664 | ) | 43,256 | (3,847 | ) | ||
Cash and cash equivalents, beginning of year |
43,272
|
16
|
3,863
|
||||
Cash and cash equivalents, end of year | $ |
4,608
|
$ |
43,272
|
$ 16
|
||
The accompanying notes are an integral part of these consolidated financial statements | |||||||
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) |
|||||||||||||||||||
Common Stock |
Subscribed |
Capital |
Retained |
Treasury |
Subscribed |
||||||||||||||
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||
Balance, December 31, 1999 | 12,288 | $ | 12 | 337 | $ | 1,684 | $ | 63,488 | $ | (16,984 | ) | 7 | $ | (109 | ) | $ | 1,684 | ||
Common stock issued | 5,950 | 6 | - | - | 86,401 | - | - | - | - | ||||||||||
Common stock acquired for treasury | - | - | - | - | - | - | 266 | (4,250 | ) | - | |||||||||
Shares contributed to ESOP | 57 | - | - | - | 855 | - | (12 | ) | 180 | - | |||||||||
Shares issued to acquire Battery Engineering, Inc. | 340 | 1 | - | - | 5,097 | - | - | - | - | ||||||||||
Settlement of common stock subscriptions | 337 | - | (337 | ) | (1,684 | ) | 1,684 | - | - | - | (1,684 | ) | |||||||
Exercise of stock options | - | - | - | - | 1 | - | - | - | - | ||||||||||
Net loss |
-
|
-
|
-
|
-
|
-
|
(548
|
) |
-
|
-
|
-
|
|||||||||
Balance, December 31, 2000 | 18,972 | 19 | - | - | 157,526 | (17,532 | ) | 261 | (4,179 | ) | - | ||||||||
Common stock issued | 2,000 | 2 | - | - | 42,427 | - | - | - | - | ||||||||||
Shares contributed to ESOP | - | - | - | - | 843 | - | (66 | ) | 1,057 | - | |||||||||
Exercise of stock options | 11 | - | - | - | 84 | - | - | - | - | ||||||||||
Net income |
-
|
-
|
-
|
-
|
-
|
8,597
|
-
|
-
|
-
|
||||||||||
Balance, December 31, 2001 | 20,983 | 21 | - |
|
- | 200,880 | (8,935 | ) | 195 | (3,122 | ) | - | |||||||
Common stock issuance expenses | - | - | - | - | (39 | ) | - | - | - | - | |||||||||
Shares contributed to ESOP | - | - | - | - | 761 | - | (140 | ) | 2,254 | - | |||||||||
Reissuance of treasury stock | - | - | - | - | 9 | - | (1 | ) | 5 | - | |||||||||
Exercise of stock options | 67 | - | - | - | 668 | - | - | - | - | ||||||||||
Net income |
-
|
-
|
|
-
|
-
|
-
|
14,361
|
-
|
-
|
-
|
|||||||||
Balance, December 31, 2002 |
21,050
|
$ |
21
|
-
|
$ |
-
|
$ |
202,279
|
$ |
5,426
|
54
|
$ |
(863
|
) | $ |
-
|
|||
The accompanying notes are an integral part of these consolidated financial statements |
|||||||||||||||||||
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. DESCRIPTION OF BUSINESS
The Company - The consolidated financial statements include the accounts of Wilson Greatbatch Technologies, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations - The Company operates in two reportable segments-medical technology and commercial power sources. The medical technology segment designs and manufactures batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in implantable medical devices. The commercial power sources segment designs and manufactures high performance batteries and battery packs for use in oil and gas exploration, oceanographic equipment and aerospace.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Year End - The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For clarity of presentation, the Company describes all periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less.
Inventories - Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market.
Property, Plant and Equipment - Property, plant and equipment is carried at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets, which are as follows: buildings and building improvements 7-40 years; machinery and equipment 3-10 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recorded in income or expense.
Goodwill - Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets with indefinite lives. Under the new rules, the Company reassessed the useful lives of trademarks and names and deemed them to have an indefinite life because they are expected to generate cash flows indefinitely. Note 14 - Business Segment information contains an analysis of goodwill by segment.
Also, in accordance with the transition provisions under Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141), the carrying amount of assembled workforce totaling $4,642,000 has been reclassified as goodwill effective January 1, 2002.
As a result of the adoption of SFAS No. 141 and the transition provisions of SFAS No. 142, goodwill and trademark and names will no longer be amortized but will be periodically tested for impairment. An analysis of the proforma effects of these standards had the adoption occurred as of the beginning of fiscal 2000 is included in Note 6 - Intangible Assets.
SFAS No. 142 requires the Company to assess goodwill for impairment by comparing the fair value of the reporting units to their carrying amounts on an annual basis to determine if there is potential impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for goodwill are determined based on discounted cash flows, market multiples or appraised values as appropriate. The Company has determined that, based on the transitional goodwill impairment test, no impairment of goodwill and other indefinite-lived intangible assets has occurred.
Intangible Assets - Acquired intangible assets apart from goodwill consist primarily of patented technology, trademark and names and unpatented technology. The Company continues to amortize its definite-lived assets on a straight-line basis over their estimated useful lives as follows: patented technology, 8-17 years; unpatented technology, 5-15 years; and other intangible assets, 3-10 years.
The Company tests long-lived assets, exclusive of goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of long-lived assets is not recoverable and exceeds its fair value based on the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair value of cash and cash equivalents approximates their recorded values due to the nature of the instruments. The floating rate debt carrying value approximates the fair value based on the floating interest rate resetting on a regular basis.
Concentration of Credit Risk - Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade receivables. A significant portion of the Company's sales are to customers in the medical device industry, and, as such, the Company is directly affected by the condition of that industry. However, the credit risk associated with trade receivables is minimal due to the Company's stable customer base. The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits.
Derivative Financial Instruments - The Company has only limited involvement with derivative financial instruments and does not enter into financial instruments for trading purposes. Interest rate cap agreements have historically been used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At December 31, 2002 and 2001, the Company was not a party to any interest rate cap agreements.
Stock-Based Compensation - In 2002, the Company adopted Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the standard also requires prominent disclosures in the Company's financial statements about the method of accounting used for stock-based employee compensation, and the effect of the method used when reporting financial results.
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). As permitted in that standard, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, and related interpretations.
The Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS No. 123. The Black-Scholes option pricing model was used with the following weighted average assumptions. These pro forma calculations assume the common stock is freely tradable for all years presented and, as such, the impact is not necessarily indicative of the effects on reported net income of future years.
Year Ended December 31, |
|||||||
2002 |
2001 |
2000 |
|||||
Risk-free interest rate |
3.79 |
% |
5.00 |
% |
6.37 |
% |
|
Expected volatility |
55 |
% |
55 |
% |
48 |
% |
|
Expected life (in years) |
5 |
7 |
7 |
||||
Expected dividend yield |
0 |
% |
0 |
% |
0 |
% |
The Company's net income (loss) and earnings (loss) per share as if the fair value based method had been applied to all outstanding and unvested awards in each year is as follows (in thousands except per share data):
Year Ended December 31, |
||||||||
2002 |
2001 |
2000 |
||||||
Net income (loss) as reported |
$ |
$ 14,361 |
$ 8,597 |
$ (548 |
) | |||
Stock based employee compensation cost included in net income as reported |
$ |
- |
$ |
- |
$ |
- |
||
Stock-based employee compensation cost determined using the fair value based method, net of related tax effects |
$ |
460 |
$ |
717 |
$ |
817 |
||
Pro forma net income (loss) |
$ |
13,901 |
$ |
7,880 |
$ |
(1,365 |
) | |
Net earnings (loss) per share: |
||||||||
Basic - as reported |
$ |
0.69 |
$ |
0.44 |
$ |
(0.04 |
) | |
Basic - pro forma |
$ |
0.66 |
$ |
0.40 |
$ |
(0.10 |
) | |
Diluted - as reported |
$ |
0.68 |
$ |
0.43 |
$ |
(0.04 |
) | |
Diluted - pro forma |
$ |
0.65 |
$ |
0.40 |
$ |
(0.10 |
) |
Income Taxes - The Company provides for income taxes using the liability method whereby deferred tax liabilities and assets are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using the anticipated tax rate when taxes are expected to be paid or reversed.
Revenue Recognition - Revenue from the sale of products is primarily recognized at the time product is shipped to customers. The Company allows customers to return defective or damaged products for credit, replacement, or exchange. Revenue is recognized as the net amount to be received after deducting estimated amounts for product returns and allowances. The Company provides credit, in the normal course of business, to its customers. The Company also maintains an allowance for doubtful customer accounts and charges actual losses against this allowance when incurred.
Warranties - The Company generally warrants that it products will meet customer specifications and will be free from defects in materials and workmanship. The Company's sole obligation under the warranties is repair or replacement of a product that is defective without charge. Returns have been minimal on a historical basis.
Research, Development and Engineering Costs - Research, development and engineering costs are expensed as incurred. The Company recognizes cost reimbursements from customers for whom the Company designs products upon achieving development milestones. The cost reimbursements charged to customers represent actual costs incurred by the Company in the design and testing of prototypes built to customer specifications and are recorded as an offset to research, development and engineering costs.
Net research, development and engineering costs are as follows (in thousands):
|
Year Ended December 31, |
||||||
|
2002 |
|
2001 |
|
2000 |
||
Research and development costs |
$ |
7,156 |
$ |
6,728 |
$ |
5,716 |
|
Engineering costs |
|
8,882 |
|
8,323 |
|
7,384 |
|
Total gross research, development, and engineering costs |
|
16,038 |
|
15,051 |
|
13,100 |
|
Less cost reimbursements |
|
(1,598 |
) |
(2,476 |
) |
(3,159 |
) |
Research, development and engineering costs, net |
$ |
14,440 |
$ |
12,575 |
$ |
9,941 |
|
|
|
|
Earnings (Loss) Per Share - Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is calculated by adjusting for common stock equivalents, which consist of stock options. All shares held in the Employee Stock Ownership Plan ("ESOP") are considered outstanding for both basic and diluted earnings (loss) per share calculations.
Comprehensive Income - Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by owners and distribution to owners. For all periods presented, the Company's only component of comprehensive income is its net income (loss) for those periods.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Supplemental Cash Flow Information (in thousands):
Year Ended December 31, |
||||||
2002 |
2001 |
2000 |
||||
Cash paid during the year for: |
||||||
Interest |
$ |
3,092 |
$ |
3,717 |
$ |
12,833 |
Income taxes |
6,055 |
2,214 |
122 |
|||
Noncash investing and financing activities: |
||||||
Common stock issued for acquisition |
$ |
- |
$ |
- |
$ |
5,098 |
Common stock contributed to ESOP |
3,019 |
1,902 |
1,036 |
|||
Settlement of subscribed common stock receivable |
- |
- |
1,684 |
Recent Accounting Pronouncements - In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets (SFAS No. 143). SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The Company plans to adopt SFAS No. 143 effective January 1, 2003, the beginning of fiscal year 2003.
In July 2002, the FASB also issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit and Disposal Activities (SFAS No. 146). SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002.
Reclassifications - Certain reclassifications were made to the prior years' financial statements to conform with the current year presentation. None of the reclassifications affected net income (loss) or stockholders' equity.
3. ACQUISITIONS
During 2000, 2001 and 2002, the Company completed three acquisitions as follows:
Battery Engineering, Inc. (BEI), a specialty battery manufacturer.
Substantially all of the assets of the Sierra-KD Components division of Maxwell Technologies, Inc. (Sierra), a developer and manufacturer of electromagnetic interference filtering capacitors for implantable medical devices.
These acquisitions have been accounted for using the purchase method of accounting and accordingly, the results of the operations of these acquisitions have been included in the consolidated financial statements from the date of acquisition.
Acquisition information (in thousands):
Acquired Company
|
|||||||
BEI
|
Sierra
|
Globe Tool
|
|||||
Acquisition date |
August 4, 2000 |
June 18, 2001 |
July 9, 2002 |
||||
Shares issued |
340 |
- |
- |
||||
Purchase price: |
|||||||
Value of shares issued |
$ |
5,098 |
$ |
- |
$ |
- |
|
Cash paid |
- |
46,656 |
46,637 |
||||
Transaction costs |
100
|
257
|
487
|
||||
Total purchase price |
$ |
5,198
|
$ |
46,913
|
$ |
47,124
|
|
Purchase price allocation: |
|||||||
Property and equipment |
$ |
3,554 |
$ |
4,124 |
$ |
8,490 |
|
Assets/(Liabilities) |
808 |
3,288 |
(7,079 |
) | |||
Trademark and names |
- |
- |
1,760 |
||||
Patented Technology |
- |
8,445 |
- |
||||
Unpatented Technology |
- |
4,743 |
7,392 |
||||
Noncompete/Employment Agreements |
- |
- |
1,177 |
||||
Goodwill |
836
|
26,313
|
35,384
|
||||
Total purchase price |
$ |
5,198
|
$ |
46,913
|
$ |
47,124
|
|
The allocation of purchase price to intangible assets, goodwill, and identifiable assets acquired in the Globe-Tool acquisition has not been finalized, and any required adjustments will be recorded as necessary. Amounts reported above for 2002 include the Globe Tool intangible assets based on the most recent information available.
Proforma results (Unaudited)
The following unaudited pro forma summary presents the Company's consolidated results of operations for 2002 and 2001 as if the acquisitions had been consummated at January 1, 2001. The pro forma consolidated results of operations include certain pro forma adjustments, including the amortization of intangible assets and interest on a term loan.
December 31, |
||||
In thousands except per share amounts: |
2002 |
2001 |
||
Revenues |
$ |
178,159 |
$ |
162,190 |
Income before extraordinary item |
$ |
23,249 |
$ |
11,476 |
Net income |
$ |
15,298 |
$ |
8,482 |
Diluted earnings per share: |
||||
Income before extraordinary item |
$ |
0.73 |
$ |
0.58 |
Net income |
$ |
0.73 |
$ |
0.43 |
The proforma results are not necessarily indicative of those that would have actually occurred had the acquisitions taken place at the beginning of the periods presented.
4. INVENTORIES
Inventories comprised the following (in thousands):
December 31, |
||||
2002 |
2001 |
|||
Raw material |
$ |
15,693 |
$ |
13,894 |
Work-in-process |
13,592 |
9,955 |
||
Finished goods |
5,623
|
5,177
|
||
Total |
$ |
34,908
|
$ |
29,026
|
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following (in thousands):
December 31, |
|||||
2002 |
2001 |
||||
Machinery and equipment |
$ |
48,384 |
$ |
37,000 |
|
Buildings and building improvements |
14,752 |
8,632 |
|||
Computers and information technology |
6,621 |
4,630 |
|||
Leasehold improvements |
4,819 |
3,742 |
|||
Land and land improvements |
4,659 |
3,749 |
|||
Furniture and fixtures |
2,496 |
1,991 |
|||
Construction work in process |
8,778 |
3,771 |
|||
Other |
308
|
270
|
|||
90,817 |
63,785 |
||||
Less accumulated depreciation |
(26,118
|
) |
(19,636
|
) | |
Total |
$ 64,699
|
$ 44,149
|
Depreciation expense during 2002, 2001 and 2000 was approximately $7,610,000, $5,917,000, and $4,943,000, respectively.
6. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
As of December 31, 2002 |
As of December 31, 2001 | |||||||||||
Gross carrying amount |
Accumulated Amortization |
Net Carrying Amount |
Gross carrying amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
Amortizing intangible assets: |
||||||||||||
Patented technology |
$ |
21,875 |
$ |
(7,015 |
) |
$ 14,860 |
$ |
21,875 |
$ |
(5,363 |
) |
$ 16,512 |
Unpatented technology |
15,335 |
(3,615 |
) |
11,720 |
7,943 |
(2,417 |
) |
5,526 |
||||
Other |
7,740
|
(6,701
|
) |
1,039
|
18,389
|
(11,022
|
) |
7,367
|
||||
44,950 | (17,331 | ) | 27,619 | 48,207 | (18,802 | ) | 29,405 | |||||
Unamortizing intangible assets: |
||||||||||||
Trademark and names |
31,420
|
(3,235
|
) |
28,185
|
32,158
|
(3,235
|
) |
28,923
|
||||
Total intangible assets |
$ |
76,370
|
$ |
(20,566
|
) |
$ 55,804
|
$ |
80,365
|
$ |
(22,037
|
) |
$ 58,328
|
Aggregate amortization expense for 2002, 2001 and 2000 was: $4,278,000, $5,855,000, and $5,242,000, respectively. |
||||||||||||
Estimated amortization expense for years subsequent to 2002 are as follows (in thousands): |
||||||||||||
2003 |
$ 3,276 |
|||||||||||
2004 |
2,958 |
|||||||||||
2005 |
2,476 |
|||||||||||
2006 |
2,447 |
|||||||||||
2007 |
2,429 |
During September 2002, the remaining $1.7 million net book value attributable to the Greatbatch-Hittman Noncompete/Employment Agreement was written off upon Mr. Fred Hittman's death.
Deferred financing fees have been reclassed from intangible assets to other assets on the consolidated balance sheet. These fees are being amortized over the term of the credit facility. The net book value of $1,781,000 and $1,924,000 for 2002 and 2001 respectively has been removed from the "Other" caption of the above table.
The following table reflects consolidated results for the years ended 2002 and 2001, with data adjusted as though the adoption of SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets, had occurred as of the beginning of 2000 (in thousands except per share amounts):
Year Ended December 31, |
|||||||
2002 |
2001 |
2000 |
|||||
Reported income before extraordinary item |
$ |
14,361
|
$ |
11,591
|
$ |
1,020
|
|
Reported net income (loss) |
$ |
14,361
|
$ |
8,597
|
$ |
(548
|
) |
Add back to reported net income before extraordinary item and to net income (loss): |
|||||||
Goodwill amortization, net of tax |
$ |
- |
$ |
1,339 |
$ |
984 |
|
Assembled workforce amortization, net of tax |
- |
397 |
397 |
||||
Trademark and names amortization, net of tax |
-
|
506
|
463
|
||||
$ |
-
|
$ |
2,242
|
$ |
1,844
|
||
Adjusted income before extraordinary item |
$ |
14,361
|
$ |
13,833
|
$ |
2,864
|
|
Adjusted net income |
$ |
14,361
|
$ |
10,839
|
$ |
1,296
|
|
Basic earnings per share: |
|||||||
Reported income before extraordinary item |
$ |
0.69 |
$ |
0.59 |
$ |
0.07 |
|
Reported net income (loss) |
$ |
0.69 |
$ |
0.44 |
$ |
(0.04 |
) |
Adjusted income before extraordinary item |
$ |
0.69 |
$ |
0.71 |
$ |
0.20 |
|
Adjusted net income |
$ |
0.69 |
$ |
0.55 |
$ |
0.09 |
|
Diluted earnings per share: |
|||||||
Reported income before extraordinary item |
$ |
0.68 |
$ |
0.58 |
$ |
0.07 |
|
Reported net income (loss) |
$ |
0.68 |
$ |
0.43 |
$ |
(0.04 |
) |
Adjusted income before extraordinary item |
$ |
0.68 |
$ |
0.69 |
$ |
0.20 |
|
Adjusted net income |
$ |
0.68 |
$ |
0.54 |
$ |
0.09 |
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following (in thousands):
December 31, |
|||||
2002 |
2001 |
||||
Salaries and benefits |
$ |
5,302 |
$ |
3,979 |
|
Profit sharing and bonuses |
5,164 |
5,196 |
|||
Other |
3,406
|
4,546
|
|||
Total |
$ |
13,872
|
$ |
13,721
|
8. LONG-TERM DEBT
In July 2002, in conjunction with the acquisition of Globe Tool, the Company amended its existing $100.0 million credit facility with a consortium of banks by increasing the total size of the facility to $120.0 million. The amended facility consists of a $100.0 million term loan and a $20.0 million revolving line of credit. As of December 31, 2002 the balance outstanding under the term loan was $85.0 million, and there was no amount outstanding under the revolving line of credit. Both the term loan and the revolving line of credit mature in July 2007. The credit agreement is secured by the Company's accounts receivable and inventories and requires the Company to comply with various quarterly financial covenants, as defined, related to net earnings or loss before interest, taxes, depreciation, and amortization ("EBITDA"), and ratios of leverage, interest, fixed charges, and capitalization as they relate to EBITDA. Both the term loan and the revolving line of credit bear interest at a rate that varies with the Company's level of leverage. At current leverage levels, the applicable interest rates for both the term loan and revolving line of credit are prime plus 0.00% or LIBOR (London InterBank Offered Rate), plus 2.000%, at the Company's option. At December 31, 2002, the weighted average interest rate for the term loan was 3.4%.
Maturities of long-term debt outstanding at December 31, 2002 are as follows: $8.75 million in 2003; $18.75 million in 2004; $21.25 million in 2005; $23.75 million in 2006; and $12.5 million in 2007.
9. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan - The Company sponsors a non-leveraged Employee Stock Ownership Plan (''ESOP'') and related trust as a long-term benefit for substantially all of its employees. Under the terms of the ESOP plan documents there are two components to ESOP contributions. The first component is a defined contribution equal to five percent of each employee's annual compensation. The second component is two-thirds of a discretionary profit sharing contribution as determined by the Board of Directors. Both the defined contribution and two-thirds component of the profit sharing contribution are contributed to the ESOP in the form of Company stock. The ESOP is subject to contribution limitations and vesting requirements as defined in the plan. The remaining one-third of the discretionary profit sharing is paid to employees in cash.
Compensation cost under the two components of the ESOP recognized by the Company was approximately $3.7 million, $3.0 million, and $1.9 million in 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company had contributed 445,342 shares under the ESOP and approximately 127,774 committed-to-be released shares under the ESOP, which equals the estimated number of shares to settle the liability based on the closing market price of the shares at December 31, 2002. The final number of shares contributed to the plan was 143,609, computed based on the closing market price of the shares on the actual contribution date of February 18, 2003, with an adjustment for forfeitures remaining in the plan.
Savings Plan - The Company sponsors a defined contribution 401(k) plan, which covers substantially all of its employees. The plan provides for the deferral of employee compensation under Section 401(k) and a Company match. Net pension costs related to this defined contribution pension plan were approximately $718,000, $622,000 and $468,000 in 2002, 2001 and 2000, respectively.
Total costs to the Company for all of the above plans were approximately $5,774,000, $5,470,000 and $3,367,000 in 2002, 2001 and 2000, respectively.
Education Assistance Program - The Company reimburses tuition, textbooks and laboratory fees for college or other lifelong learning programs for all of its employees. The Company also reimburses college tuition for the dependent children of its full-time employees. The dependent children benefit generally vests on a straight-line basis over ten years. Minimum academic achievement is required in order to receive reimbursement under both programs. Aggregate expenses under the programs were approximately $621,000, $460,000 and $409,000 during 2002, 2001 and 2000, respectively.
10. STOCK OPTION PLANS
The Company has stock option plans that provide for the issuance of nonqualified and incentive stock options to employees of the Company. The Company's 1997 Stock Option Plan (''1997 Plan'') authorizes the issuance of options to purchase up to 480,000 shares of the Company's common stock. The stock options generally vest over a five year period and may vary depending upon the achievement of earnings targets. The stock options expire 10 years from the date of the grant. Stock options are granted at exercise prices equal to or greater than the fair market value of the Company's common stock at the date of the grant.
The Company's 1998 Stock Option Plan (''1998 Plan'') authorizes the issuance of nonqualified and incentive stock options to purchase up to 1,220,000 shares the Company's common stock, subject to the terms of the plan. The stock options vest over a three to five year period and may vary depending upon the achievement of earnings targets. The stock options expire 10 years from the date of the grant. Stock options are granted at exercise prices equal to or greater than the fair value of the Company's common stock at the date of the grant.
On November 16, 2001, the Company adopted and approved the Non-Employee Director Stock Incentive Plan (the "Director Plan"). The Director Plan authorizes the issuance of nonqualified stock options to purchase up to 100,000 shares of the Company's common stock from its treasury, subject to the terms of the plan. The stock options vest over a three-year period. The stock options expire 10 years from the date of grant. Stock options are granted at exercise prices equal to or greater than the fair value of the Company's common stock at the date of the grant.
On November 15, 2002, the Company approved a Restricted Stock Plan for key management members. The Restricted Stock Plan authorizes the issuance of up to 200,000 shares of restricted stock, subject to the terms of the plan. Stock may not be issued under the Restricted Stock Plan until shareholder approval has been received.
As of December 31, 2002, options for 816,569 shares were available for future grants under the plans. The weighted average remaining contractual life is seven years.
A summary of the transactions under the 1997 Plan, 1998 Plan, and the Director Plan for 2000, 2001 and 2002 follows:
Option |
Weighted |
||
Balance at December 31, 1999 |
510,257 |
$ |
7.60 |
Options granted |
83,472 |
15.49 |
|
Options exercised |
(47 |
) |
15.00 |
Options forfeited |
(2,997
|
) |
15.00 |
Balance at December 31, 2000 |
590,685 |
$ |
8.70 |
Options granted |
101,934 |
26.06 |
|
Options exercised |
(11,340 |
) |
6.06 |
Options forfeited |
(14,960
|
) |
9.58 |
Balance at December 31, 2001 |
666,319 |
$ |
11.38 |
Options granted |
344,774 |
24.97 |
|
Options exercised |
(67,783 |
) |
7.77 |
Options forfeited |
(67,661
|
) |
12.78 |
Balance at December 31, 2002 |
875,649
|
$ |
16.92 |
Options exercisable at: |
|||
December 31, 2001 |
442,526 |
$ |
8.38 |
December 31, 2002 |
451,037 |
$ |
12.09 |
Of the options outstanding as of December 31, 2002, 271,934 options were at an exercise price of $5.00, 192,874 options were at a range of exercise prices of $15.00 to $20.64, and 410,841 options were at a range of exercise prices of $23.85 to $32.48. The weighted average grant date fair value of options granted was $12.22, $16.02, and $9.06 for 2002, 2001, and 2000, respectively.
11. INCOME TAXES
The components of the provision for income taxes before extraordinary loss comprised the following (in thousands):
Year Ended December 31, |
||||||
2002 |
2001 |
2000 |
||||
Federal: |
||||||
Current |
$ |
2,574 |
$ |
3,839 |
$ |
- |
Deferred |
4,136
|
2,365
|
411
|
|||
6,710
|
6,204
|
411
|
||||
State: |
||||||
Current |
266 |
742 |
41 |
|||
Deferred |
(372
|
) |
(7
|
) |
159
|
|
(106
|
) |
735
|
200
|
|||
Provision for income taxes |
$ |
6,604
|
$ |
6,939
|
$ |
611
|
The tax effect of major temporary differences that give rise to the Company's net deferred tax accounts are as follows (in thousands):
December 31, |
||||
2002 |
2001 |
|||
Inventory valuation |
$ 2,019 |
$ 1,546 |
||
Tax credits |
2,298 |
2,614 |
||
Amortization of intangible assets |
1,969 |
4,501 |
||
Investments |
565 |
- |
||
Accrued expenses and deferred compensation |
1,607 |
1,661 |
||
Other |
129 |
152 |
||
Depreciation |
(4,809
|
) |
(2,169
|
) |
Net deferred tax asset |
3,778 |
8,305 |
||
Less valuation allowance |
(565
|
) |
-
|
|
Net deferred tax asset |
3,213
|
8,305
|
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management has determined that it is more likely than not that a portion of the deferred tax asset remaining at December 31, 2002 related to the valuation of an investment will not be realized.
The provision for income taxes differs in each of the years from the federal statutory rate due to the following:
Year Ended December 31, |
||||||
2002 |
2001 |
2000 |
||||
Statutory rate |
35.0 % |
35.0 % |
35.0 % |
|||
State taxes, net of federal benefit |
3.3 |
2.9 |
(1.7 |
) | ||
Valuation allowance |
2.7 |
- |
- |
|||
Federal and state tax credits |
(10.7 |
) |
- |
- |
||
Other |
1.2
|
(0.5
|
) |
4.2
|
||
Effective tax rate |
31.5 %
|
37.4 %
|
37.5 %
|
12. CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares of common stock, $.001 par value per share and 100,000,000 shares of preferred stock, $.001 par value per share. There are no preferred shares issued or outstanding. Under the terms of the credit facility, the Company's ability to pay dividends is restricted to an amount up to 50% of net income. Holders of common stock have one vote per share.
13. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal course of business. The Company does not believe that the ultimate resolution of any such pending activities will have a material adverse effect on its consolidated results of operations, financial position, or cash flows.
The Company is a party to various license agreements through 2018 to manufacture and sell components for use in medical implants and various commercial applications. The most significant of these is an agreement with Evans Capacitor Company to license the basic technology used for wet tantalum capacitor development. The original agreement covered the years 2000, 2001, and 2002 at a cost of $800,000. Various amendments to this agreement require the Company to pay royalties annually based on agreed upon terms during each consecutive three year period beginning December 6, 2002 and ending on the expiration date of the last patent subject to the agreement, or August, 2014. At December 31, 2002, amounts due to be paid under this agreement were $1.1 million.
In addition, the Company is subject to a license agreement with Motorola, Inc. covering the exclusive use of a patent for a hybrid electrode until December 2016 when the patent expires. The initial cost of this agreement was $100,000 paid in 2000 and 2001. If the Company develops a product embodying the technology covered by the licensed patent, amounts reflecting 6% of the selling price of the product are due to Motorola, Inc. There are no plans at this time to develop products using the licensed technology.
Operating Leases - The Company is a party to various operating lease agreements for office and manufacturing space. The Company incurred operating lease expense of $928,000, $909,000 and $834,000 for 2002, 2001 and 2000, respectively.
If all lease extension options are exercised as expected by Company management, minimum future annual operating lease payments are $355,000 in 2003; $285,000 in 2004; $290,000 in 2005; $259,000 in 2006; and $261,000 in 2007.
BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: medical technology and commercial power sources. The medical technology segment designs and manufactures batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in implantable medical devices. The commercial power sources segment designs and manufactures high performance batteries for use in oil and gas exploration, oceanographic equipment, and aerospace.
The Company's medical technology segment includes multiple business units that have been aggregated because they share similar economic characteristics and similarities in the areas of products, production processes, types of customers, methods of distribution and regulatory environment. The reportable segments are separately managed, and their performance is evaluated based on numerous factors, including income from operations. Management defines segment income from operations as gross profit less costs and expenses attributable to segment specific selling, general and administrative and research, development and engineering expenses. Non-segment specific selling, general and administrative, research, development and engineering expenses, interest expense, intangible amortization and non-recurring items are not allocated to reportable segments. Transactions between the two segments are not significant. The accounting policies of the segments are the same as those described and referenced in Note 2. All dollars are in thousands.
An analysis and reconciliation of the Company's business segment information to the respective information in the consolidated financial statements is as follows (dollars in thousands):
Year Ended December 31, |
|||||||
2002 |
2001 |
2000 |
|||||
Revenues: | |||||||
Medical technology | |||||||
Medical Batteries: | |||||||
ICD's | $ | 28,518 | $ | 22,215 | $ | 14,171 | |
Pacemakers | 20,354 | 22,923 | 22,516 | ||||
Other Devices | 3,035 | 722 | 1,664 | ||||
Royalties |
-
|
991
|
2,937
|
||||
Total Medical Batteries | 51,907 | 46,851 | 41,288 | ||||
Capacitors | 24,679 | 20,290 | 12,611 | ||||
Components |
65,315
|
40,513
|
29,890
|
||||
Total Medical Technology | 141,901 | 107,654 | 83,789 | ||||
Commercial power sources |
25,395
|
27,921
|
14,001
|
||||
Total revenues | $ |
167,296
|
$ |
135,575
|
$ |
97,790
|
|
Segment income from operations: | |||||||
Medical technology | $ | 40,969 | $ | 39,008 | $ | 30,005 | |
Commercial power sources |
8,262
|
8,796
|
3,494
|
||||
Total segment income from operations | 49,231 | 47,804 | 33,499 | ||||
Unallocated |
(28,266
|
) |
(29,274
|
) |
(31,868
|
) | |
Income (loss) before income taxes | $ |
20,965
|
$ |
18,530
|
$ |
1,631
|
|
Depreciation and amortization: | |||||||
Medical technology | $ | 10,090 | $ | 12,440 | $ | 10,860 | |
Commercial power sources |
807
|
778
|
874
|
||||
Total depreciation included in segment | |||||||
income from operations | 10,897 | 13,218 | 11,734 | ||||
Unallocated depreciation and amortization |
1,203
|
1,023
|
1,275
|
||||
Total depreciation and amortization | $ |
12,100
|
$ |
14,241
|
$ |
13,009
|
|
Expenditures for tangible long-lived assets, | |||||||
excluding acquisitions: | |||||||
Medical technology | $ | 6,616 | $ | 7,074 | $ | 4,061 | |
Commercial power sources |
1,119
|
504
|
82
|
||||
Total reportable segments | 7,735 | 7,578 | 4,143 | ||||
Unallocated long-lived tangible assets |
12,766
|
2,137
|
385
|
||||
Total expenditures | $ |
20,501
|
$ |
9,715
|
$ |
4,528
|
|
December 31, |
|||||||
2002 |
2001 |
||||||
Identifiable assets, net: | |||||||
Medical technology | $ | 256,313 | $ | 188,813 | |||
Commercial power sources |
22,385
|
24,971
|
|||||
Total reportable segments | 278,698 | 213,784 | |||||
Unallocated assets |
33,553
|
69,736
|
|||||
Total assets | $ |
312,251
|
$ |
283,520
|
|||
The changes in the carrying amount of goodwill are as follows (amounts
in thousands): |
|||||||
Medical Technology |
Commercial Power Sources |
Total |
|||||
Balance at December 31, 2001 | $ | 74,703 | $ | 2,180 | $ | 76,883 | |
Reclass of intangible assets | 6,754 | 386 | 7,140 | ||||
Goodwill recorded during the year |
35,384
|
0
|
35,384
|
||||
Balance at December 31, 2002 | $ |
116,841
|
$ |
2,566
|
$ |
119,407
|
Net revenues by geographic area are presented by attributing revenues from external customers based on where the products are shipped. All dollars are in thousands.
|
Year Ended December 31, |
|||||
|
2002 |
2001 |
2000 |
|||
Revenues by geographic area: |
|
|
|
|||
United States |
$ |
127,145 |
$ |
92,391 |
$ |
68,179 |
Foreign countries |
40,151 |
43,184 |
29,611 |
|||
Consolidated revenues |
$ |
167,296 |
$ |
135,575 |
$ |
97,790 |
|
|
|
|
|||
|
December 31, |
|||||
|
2002 |
2001 |
|
|||
Long-lived assets: |
|
|
|
|||
United States |
$ |
243,699 |
$ |
188,645 |
|
|
Foreign countries |
- |
- |
|
|||
Consolidated long-lived assets |
$ |
243,699 |
$ |
188,645 |
|
Two customers accounted for a significant portion of the Company's revenues and accounts receivable as follows:
Revenues
|
Accounts Receivable
|
|||||
Year Ended December 31, |
December 31, |
|||||
2002 |
2001 |
2000 |
2002 |
2001 |
||
Customer A |
41% |
39% |
34% |
34% |
35% |
|
Customer B |
25% |
27% |
31% |
18% |
17% |
|
Total |
66% |
66% |
65% |
52% |
52% |
15. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(In Thousands, except per share data) | |||||||||
4th Qtr. | 3rd Qtr. | 2nd Qtr. | 1st Qtr. | ||||||
2002 | |||||||||
Revenues | $ | 47,315 | $ | 45,350 | $ | 38,328 | $ | 36,303 | |
Gross profit | 20,475 | 18,872 | 15,599 | 15,952 | |||||
Net income | 4,959 | 2,477 | 3,586 | 3,339 | |||||
Earnings per share - basic | 0.24 | 0.12 | 0.17 | 0.16 | |||||
Earnings per share - diluted | 0.23 | 0.12 | 0.17 | 0.16 | |||||
2001 | |||||||||
Revenues | $ | 34,692 | $ | 38,325 | $ | 32,987 | $ | 29,571 | |
Gross profit | 15,591 | 16,648 | 14,609 | 14,011 | |||||
Income before extraordinary loss | 2,711 | 3,312 | 2,649 | 2,919 | |||||
Net income (loss) | 2,711 | 3,312 | 2,649 | (75 | ) (a) | ||||
Earnings per share before | |||||||||
extraordinary loss - basic | 0.13 | 0.17 | 0.14 | 0.16 | |||||
Earnings per share before | |||||||||
extraordinary loss - diluted | 0.13 | 0.16 | 0.14 | 0.15 | |||||
Earnings per share - basic | 0.13 | 0.17 | 0.14 | 0.00 | |||||
Earnings per share - diluted | 0.13 | 0.16 | 0.14 | 0.00 |
Amount includes an extraordinary loss for the extinguishment of debt in the amount of $2,994,000, net of tax.
******
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Reference is made to the information responsive to the Items comprising this
Part III that is contained
in our definitive proxy statement for our 2003 Annual
Meeting of Stockholders, which is incorporated by reference herein.
ITEM 14. Controls and Procedures.
a) | Evaluation of Disclosure Controls and Procedures. Within 90 days before the filing date of this annual report (the "Evaluation Date") we carried out an evaluation, under the supervision and with the participation of the Company's management, including, our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner. |
b) | Changes in Internal Controls. We have reviewed our internal controls, and there have been no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect such controls, subsequent to the Evaluation Date. |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) | LIST OF DOCUMENTS FILED AS PART OF THIS REPORT |
(1) | FINANCIAL STATEMENTS | |
The following consolidated financial statements of our company and report of independent auditors thereon are set forth below: | ||
Independent Auditors' Report. | |
Consolidated Balance Sheet as of December 31, 2002 and 2001. | |
Consolidated Statement of Operations for the years ended December 31, 2002, 2001 and 2000. | |
Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000. | |
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000. | |
Notes to Consolidated Financial Statements. |
(2) | FINANCIAL STATEMENT SCHEDULES | |
The following consolidated financial statement schedule is included in this report on Form 10-K: Schedule II - Valuation and Qualifying Accounts. | |
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Col. C.
Additions
Col. A. Description
|
Col. B. Balance at Beginning of Period | Charged to Costs & Expenses | Charged to other Accounts - Describe | Col. D. Deductions - Describe (2) | Col. E. Balance at End of Period | |||||||
2002 | ||||||||||||
Allowance for doubtful accounts |
$ |
447 |
$ |
13 |
$ |
- |
$ |
- |
$ |
460 |
||
Valuation allowance for income taxes |
$ |
- |
$ |
565 |
(1) |
$ |
- |
$ |
- |
$ |
565 |
|
2001 | ||||||||||||
Allowance for doubtful accounts |
$ |
319 |
$ |
136 |
$ |
- |
$ |
(8) |
$ |
447 |
||
2000 | ||||||||||||
Allowance for doubtful accounts |
$ |
219 |
$ |
106 |
$ |
- |
$ |
(6) |
$ |
319 |
(1) Allowance recorded in the provision for income taxes.
(2) Accounts written off, net of collections on accounts receivable previously written off.
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
(3) | EXHIBITS |
EXHIBIT NUMBER |
DESCRIPTION |
3.1 |
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our registration statement on Form S-1 (File No. 333-37554)). |
3.2 |
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our quarterly report on Form 10-Q for the quarterly period ended March 29, 2002). |
4.1 |
Registration Rights Agreement dated February 14, 2002 among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners (incorporated by reference to Exhibit 4.1 to our quarterly report on Form 10-Q for the quarterly period ended June 28, 2002). |
10.1# |
1997 Stock Option Plan (including form of "standard" option agreement and form of "special"option agreement) (incorporated by reference to Exhibit 10.1 to our registration statement on Form S-1 (File No. 333-37554)). |
10.2# |
1998 Stock Option Plan (including form of "standard" option agreement, form of "special" option agreement and form of "non-standard" option agreement) (incorporated by reference to Exhibit 10.2 to our registration statement on Form S-1 (File No. 333-37554)). |
10.3# |
Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan (incorporated by reference to Exhibit 10.3 to our registration statement on Form S-1 (File No. 333-37554)). |
10.4# |
Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan (incorporated by reference to Exhibit 10.4 to our registration statement on Form S-1 (File No. 333-37554)). |
10.5# |
Non-Employee Director Stock Incentive Plan (incorporated by reference to Exhibit A to our definitive proxy statement on Schedule 14-A filed on April 22, 2002). |
10.6# |
Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch Ltd. and Edward F. Voboril (incorporated by reference to Exhibit 10.5 to our registration statement on Form S-1 (File No. 333-37554)). |
10.7 |
Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.7 to our registration statement on Form S-1 (File No. 333-37554)). |
10.8 |
Amended and Restated Credit Agreement dated as of June 15, 2001 by and among Wilson Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust Company, as administrative agent (incorporated by reference to Exhibit 10.26 to our registration statement on Form S-1 (File No. 333-63386)). |
10.9 |
Amended and Restated Credit Agreement dated as of July 9, 2002 by and among Wilson Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust Company, as administrative agent (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed on July 24, 2002). |
10.10 |
Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies Inc. party thereto (incorporated by reference to Exhibit 10.12 to our registration statement on Form S-1 (File No. 333-37554)). |
10.11 |
Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto (incorporated by reference to Exhibit 10.13 to our registration statement on Form S-1 (File No. 333-37554)). |
10.12 |
Management Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto (incorporated by reference to Exhibit 10.14 to our registration statement on Form S-1 (File No. 333-37554)). |
10.13 |
Subordinated Note Holders Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.15 to our registration statement on Form S-1 (File No. 333-37554)). |
10.14 |
Supply Agreement, dated as of February 1, 1999, between Wilson Greatbatch Ltd. and Guidant/CRM (incorporated by reference to Exhibit 10.20 to our registration statement on Form S-1 (File No. 333-37554)). |
10.15 |
Amendment No. 1 to the Supply Agreement, dated as of September 21, 2001, between Wilson Greatbatch Technologies, Inc. and Guidant/CRM (incorporated by reference to Exhibit 10.13 to our annual report on Form 10-K for the fiscal year ended December 28, 2001). |
10.16 |
Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to Exhibit 10.21 to our registration statement on Form S-1 (File No. 333-37554)). |
10.17 |
License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd. and Evans Capacitor Company (incorporated by reference to Exhibit 10.23 to our registration statement on Form S-1 (File No. 333-37554)). |
10.18*+ |
Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch Technologies, Ltd. and Evans Capacitor Company. |
10.19 |
Supplier Partnering Agreement, dated as of June 1, 2000, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to Exhibit 10.23 to our registration statement on Form S-1 (File No. 333-37554)). |
10.20 |
License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc. (incorporated by reference to Exhibit 10.24 to our registration statement on Form S-1 (File No. 333-37554)). |
10.21 |
Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc. (incorporated by reference to Exhibit 10.25 to our registration statement on Form S-1 (File No. 333-37554)). |
10.22 |
Stockholders Agreement, dated as of August 23, 1999, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and Fred Hittman (incorporated by reference to Exhibit 10.26 to our registration statement on Form S-1 (File No. 333-37554)). |
10.23 |
Form of Subscription Agreement, dated on or about July 17, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.27 to our registration statement on Form S-1 (File No. 333-37554)). |
10.24 |
Form of Management Subscription Agreement, dated November 1, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.28 to our registration statement on Form S-1 (File No. 333-37554)). |
10.25 |
Form of Promissory Note, dated November 1, 1997, payable to Wilson Greatbatch Technologies, Inc. by each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.29 to our registration statement on Form S-1 (File No. 333-37554)). |
10.26 |
Form of Pledge Agreement, dated November 1, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.30 to our registration statement on Form S-1 (File No. 333-37554)). |
10.27 |
Form of Change of Control Agreement, dated December 17, 2001, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holms, Ph.D. and Richard W. Mott. |
10.28 |
Stock Purchase Agreement, dated as of July 31, 2000, among Wilson Greatbatch Technologies, Inc., Battery Engineering, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.31 to our registration statement on Form S-1 (File No. 333-37554)). |
10.29 |
Stockholders Agreement, dated as of August 7, 2000, among Wilson Greatbatch Technologies, Inc., Hitachi Maxell, Ltd., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P. and UK Investment Plan 1997 Partners (incorporated by reference to Exhibit 10.32 to our registration statement on Form S-1 (File No. 333-37554)). |
10.30 |
Subscription Agreement, dated as of August 7, 2000, between Wilson Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.33 to our registration statement on Form S-1 (File No. 333-37554)). |
10.31 |
Non-Compete Agreement, dated as of August 7, 2000, between Wilson Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.34 to our registration statement on Form S-1 (File No. 333-37554)). |
10.32 |
Asset Purchase Agreement, dated as of June 18, 2001, among Wilson Greatbatch Technologies, Inc., GB Acquisition Co., Inc., Maxwell Technologies, Inc. and Maxwell Electronic Components Group, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 19, 2001). |
10.33 |
Stock Purchase Agreement, dated as of July 9, 2002, among Wilson Greatbatch Technologies, Inc., Globe Tool and Manufacturing Company, Inc. ("Globe"), Charter Oak Partners of Westport, Connecticut and certain other shareholders of Globe (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on July 24, 2002). |
21.1* |
List of Subsidiaries. |
23.1* |
Consent of Deloitte & Touche LLP. |
99.1* |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.2* |
Factors Possibly Affecting Future Operating Results. |
Portions of those exhibits marked "+" have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. |
|
* |
Filed herewith. |
# |
Indicates exhibits that are management contracts or compensation plans or arrangements required to be filed pursuant to Item 14(c) of Form 10-K. |
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934,
the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 2003 | WILSON GREATBATCH TECHNOLOGIES, INC.
|
||
By: /s/ Edward F. Voboril
|
|||
Edward F. Voboril President, Chief Executive Officer And Chairman
|
|||
By: /s/ Lawrence P. Reinhold
|
|||
Lawrence P. Reinhold Executive Vice President and Chief Financial Officer (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed
below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature | Title | Date | ||
/s/ Edward F. Voboril
|
President, Chief Executive Officer, Chairman and Director (Principal Executive Officer) | March 18, 2003 | ||
Edward F. Voboril | ||||
/s/ Pamela G. Bailey
|
Director | March 18, 2003 | ||
Pamela G. Bailey | ||||
/s/ Robert E. Rich, Jr.
|
Director | March 18, 2003 | ||
Robert E. Rich, Jr. | ||||
/s/ William B. Summers, Jr.
|
Director | March 18, 2003 | ||
William B. Summers, Jr. | ||||
/s/ Bill R. Sanford
|
Director | March 18, 2003 | ||
Bill R. Sanford | ||||
/s/ Henry Wendt
|
Director | March 18, 2003 | ||
Henry Wendt | ||||
/s/ Peter H. Soderberg
|
Director | March 18, 2003 | ||
Peter H. Soderberg |
CERTIFICATIONS
I, Edward F. Voboril, certify that:
1. |
I have reviewed this annual report on Form 10-K for the fiscal year ended January 3, 2003 of Wilson Greatbatch Technologies, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which periodic reports are being prepared; |
|
b. |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and |
|
c | presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a. |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
|
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and | |
6. |
The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 18, 2003
/s/Edward F. Voboril
|
|
Edward F. Voboril | |
Chairman of the Board, President and | |
Chief Executive Officer |
CERTIFICATIONS
I, Lawrence P. Reinhold, certify that:
1. |
I have reviewed this annual report on Form 10-K for the fiscal year ended January 3, 2003 of Wilson Greatbatch Technologies, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. |
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which periodic reports are being prepared; |
|
b. |
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and |
|
c |
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
a. |
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and |
|
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
6. |
The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 18, 2003
/s/ Lawrence P. Reinhold
|
|
Lawrence P. Reinhold | |
Executive Vice President and | |
Chief Financial Officer |
EXHIBIT INDEX
EXHIBIT NUMBER |
DESCRIPTION |
3.1 |
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our registration statement on Form S-1 (File No. 333-37554)). |
3.2 |
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our quarterly report on Form 10-Q for the quarterly period ended March 29, 2002). |
4.1 |
Registration Rights Agreement dated February 14, 2002 among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners (incorporated by reference to Exhibit 4.1 to our quarterly report on Form 10-Q for the quarterly period ended June 28, 2002). |
10.1# |
1997 Stock Option Plan (including form of "standard" option agreement and form of "special" option agreement) (incorporated by reference to Exhibit 10.1 to our registration statement on Form S-1 (File No. 333-37554)). |
10.2# |
1998 Stock Option Plan (including form of "standard" option agreement, form of "special" option agreement and form of "non-standard" option agreement) (incorporated by reference to Exhibit 10.2 to our registration statement on Form S-1 (File No. 333-37554)). |
10.3# |
Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan (incorporated by reference to Exhibit 10.3 to our registration statement on Form S-1 (File No. 333-37554)). |
10.4# |
Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan (incorporated by reference to Exhibit 10.4 to our registration statement on Form S-1 (File No. 333-37554)). |
10.5# |
Non-Employee Director Stock Incentive Plan (incorporated by reference to Exhibit A to our definitive proxy statement on Schedule 14-A filed on April 22, 2002). |
10.6# |
Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch Ltd. and Edward F. Voboril (incorporated by reference to Exhibit 10.5 to our registration statement on Form S-1 (File No. 333-37554)). |
10.7 |
Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.7 to our registration statement on Form S-1 (File No. 333-37554)). |
10.8 |
Amended and Restated Credit Agreement dated as of June 15, 2001 by and among Wilson Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust Company, as administrative agent (incorporated by reference to Exhibit 10.26 to our registration statement on Form S-1 (File No. 333-63386)). |
10.9 |
Amended and Restated Credit Agreement dated as of July 9, 2002 by and among Wilson Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust Company, as administrative agent (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K filed on July 24, 2002). |
10.10 |
Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies Inc. party thereto (incorporated by reference to Exhibit 10.12 to our registration statement on Form S-1 (File No. 333-37554)). |
10.11 |
Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto (incorporated by reference to Exhibit 10.13 to our registration statement on Form S-1 (File No. 333-37554)). |
10.12 |
Management Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto (incorporated by reference to Exhibit 10.14 to our registration statement on Form S-1 (File No. 333-37554)). |
10.13 |
Subordinated Note Holders Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to Exhibit 10.15 to our registration statement on Form S-1 (File No. 333-37554)). |
10.14 |
Supply Agreement, dated as of February 1, 1999, between Wilson Greatbatch Ltd. and Guidant/CRM (incorporated by reference to Exhibit 10.20 to our registration statement on Form S-1 (File No. 333-37554)). |
10.15 |
Amendment No. 1 to the Supply Agreement, dated as of September 21, 2001, between Wilson Greatbatch Technologies, Inc. and Guidant/CRM (incorporated by reference to Exhibit 10.13 to our annual report on Form 10-K for the fiscal year ended December 28, 2001). |
10.16 |
Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to Exhibit 10.21 to our registration statement on Form S-1 (File No. 333-37554)). |
10.17 |
License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd. and Evans Capacitor Company (incorporated by reference to Exhibit 10.23 to our registration statement on Form S-1 (File No. 333-37554)). |
10.18*+ |
Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch Technologies, Ltd. and Evans Capacitor Company. |
10.19 |
Supplier Partnering Agreement, dated as of June 1, 2000, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to Exhibit 10.23 to our registration statement on Form S-1 (File No. 333-37554)). |
10.20 |
License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc. (incorporated by reference to Exhibit 10.24 to our registration statement on Form S-1 (File No. 333-37554)). |
10.21 |
Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc. (incorporated by reference to Exhibit 10.25 to our registration statement on Form S-1 (File No. 333-37554)). |
10.22 |
Stockholders Agreement, dated as of August 23, 1999, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and Fred Hittman (incorporated by reference to Exhibit 10.26 to our registration statement on Form S-1 (File No. 333-37554)). |
10.23 |
Form of Subscription Agreement, dated on or about July 17, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.27 to our registration statement on Form S-1 (File No. 333-37554)). |
10.24 |
Form of Management Subscription Agreement, dated November 1, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.28 to our registration statement on Form S-1 (File No. 333-37554)). |
10.25 |
Form of Promissory Note, dated November 1, 1997, payable to Wilson Greatbatch Technologies, Inc. by each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.29 to our registration statement on Form S-1 (File No. 333-37554)). |
10.26 |
Form of Pledge Agreement, dated November 1, 1997, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by reference to Exhibit 10.30 to our registration statement on Form S-1 (File No. 333-37554)). |
10.27 |
Form of Change of Control Agreement, dated December 17, 2001, between Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holms, Ph.D. and Richard W. Mott. |
10.28 |
Stock Purchase Agreement, dated as of July 31, 2000, among Wilson Greatbatch Technologies, Inc., Battery Engineering, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.31 to our registration statement on Form S-1 (File No. 333-37554)). |
10.29 |
Stockholders Agreement, dated as of August 7, 2000, among Wilson Greatbatch Technologies, Inc., Hitachi Maxell, Ltd., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P. and UK Investment Plan 1997 Partners (incorporated by reference to Exhibit 10.32 to our registration statement on Form S-1 (File No. 333-37554)). |
10.30 |
Subscription Agreement, dated as of August 7, 2000, between Wilson Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.33 to our registration statement on Form S-1 (File No. 333-37554)). |
10.31 |
Non-Compete Agreement, dated as of August 7, 2000, between Wilson Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit 10.34 to our registration statement on Form S-1 (File No. 333-37554)). |
10.32 |
Asset Purchase Agreement, dated as of June 18, 2001, among Wilson Greatbatch Technologies, Inc., GB Acquisition Co., Inc., Maxwell Technologies, Inc. and Maxwell Electronic Components Group, Inc. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 19, 2001).
|
10.33 |
Stock Purchase Agreement, dated as of July 9, 2002, among Wilson Greatbatch Technologies, Inc., Globe Tool and Manufacturing Company, Inc. ("Globe"), Charter Oak Partners of Westport, Connecticut and certain other shareholders of Globe (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on July 24, 2002). |
21.1* |
List of Subsidiaries. |
23.1* |
Consent of Deloitte & Touche LLP. |
99.1* |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.2* |
Factors Possibly Affecting Future Operating Results. |
Portions of those exhibits marked "+" have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. | |
* | Filed herewith. |
# | Indicates exhibits that are management contracts or compensation plans or arrangements required to be filed pursuant to Item 14(c) of Form 10-K. |
Exhibit 10.18
The confidential portions of this exhibit, which have been removed and replaced with an asterisk, have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 and Rule 24b-2.
SECOND AMENDMENT
TO
LICENSE AGREEMENT
This agreement (the "Amendment") is made as of the 6th day of December, 2002 by and between EVANS CAPACITOR COMPANY ("ECC") and WILSON GREATBATCH LTD. ("WGL").
In consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt of which is hereby acknowledged, ECC and WGL agree as follows:
1. Reference is made to a License Agreement effective August 8, 1996 by and between ECC and WGL (the "Original Agreement") and to a First Amendment to License Agreement dated as of December 29, 1999 (the "First Amendment"). As used herein,
(a) | The terms "Period," "purchased rights" and "Original Royalties" shall each have the meaning set forth in the First Amendment. |
(b) | The term "Agreement" shall mean the Original Agreement as amended by the First Amendment and as further amended by this Amendment. |
2. ECC and WGL acknowledge that they have mutually agreed not to continue the purchased rights arrangement for royalties that was provided for in the First Amendment after the expiration of the Period (i.e., after December 31, 2002). ECC and WGL further agree that WGL shall pay ECC a sum (the "Make Up Sum") equal to the Original Royalties for the Period reduced by $800,000, in accordance with the following schedule:
(a) | $1,000,000 on December 15, 2002; and |
(b) | The balance of the Make Up Sum by no later than February 3, 2003. |
WGL shall provide ECC, contemporaneously with the payment due on February 3, 2002, a written report showing its Net Sales for the Period and its calculation of the Original Royalties and Make Up Sum, taking into account WGL's actual fourth quarter 2002 sales of Licensed Product.
3. Paragraph 1.g. of the Agreement is hereby amended to read in its entirety as follows:
"8. Licensed Year" shall mean each calendar year."
4. Paragraph 3.a. of the Agreement is hereby (a) amended to delete the text of paragraph 3.a. that was provided for in the First Amendment and (b) further amended so that paragraph 3.a. shall read in its entirety as follows:
CONFIDENTIAL TREATMENT
"3.a. For the license rights granted to WGL and its affiliates under paragraph 2 of the Agreement, for each Licensed Year during the Term of this Agreement commencing on or after January 1, 2003, WGL shall pay ECC, as earned royalties, an amount equal to the sum of the following (the "Earned Royalties"): | |
(a) * of the first * of Net Sales of all Licensed Products sold by WGL and its affiliates during such Licensed Year; and | |
(b) * of any Net Sales of Licensed Products sold by WGL and its affiliates during such Licensed Year in excess of * . | |
Such Earned Royalties shall be paid to ECC as follows: WGL shall make a preliminary payment of the Earned Royalties on December 15 of each Licensed Year beginning on December 15, 2003 based on WGL actual sales of Licensed Products for the first three (3) calendar quarters of the applicable Licensed Year and on WGL's good faith estimate of WGL's sales of Licensed Products during the fourth quarter of the applicable Licensed Year (the "December Payment"). After WGL shall have received and reviewed sales information for its actual sales of Licensed Products during the applicable Licensed Year, WGL shall calculate whether the Preliminary Payment was greater or less than the Earned Royalties (the amount of any such underpayment or overpayment of royalties hereunder being defined as the "Adjustment"). The report provided for in paragraph 4.b. of the Agreement shall be delivered within forty five (45) days after the end of each Licensed Year (unless paragraph 4.b permits an extension) in order to reflect the foregoing procedure and calculation. | |
The Adjustment shall be taken into account in connection with the next succeeding December Payment (either increasing or decreasing it, as equitable); provided, however, that if in any Licensed Year there will not be a next succeeding December Payment due to termination of the Agreement, the Adjustment shall be paid by WGL to ECC together with the delivery of such report, or by ECC to WGL, within 30 days after delivery of such report." |
5. Paragraph 4.b. which was deleted by the First Amendment is hereby reinstated into this Agreement but amended to read in its entirety as follows:
"4.b. WGL and its Affiliates shall keep true and complete books of account of sales of Licensed Products, sufficient for calculation of the amount of royalty due under paragraph 3 above and to determine the accuracy of such calculation. Within forty-five (45) days after the end of each calendar quarter, WGL shall furnish ECC a written report of the sales of Licensed Products by WGL and its Affiliates for the period being reported; |
CONFIDENTIAL TREATMENT
provided, however, that the report for the last calendar quarter of each Licensed Year shall be delivered by WGL not later than forty-five (45) days after the end of such Licensed Year unless the release of WGL's financial statements have been delayed, in which case the report shall be delivered as soon as reasonably possible, but no later than 90 days after the end of such Licensed Year. ECC shall have the right to have such books of account examined by an independent CPA during normal business hours, but not more than once in any Licensed Year, as may be necessary to determine the correctness of any of the reports rendered by WGL hereunder; provided, however, that any examination with respect to such books of account for any Licensed Year shall be made within three years after the end of such Licensed Year and further provided that such CPA shall maintain confidential all information obtained from such examination." |
6. A new paragraph 3.d. is hereby added to the Agreement as follows:
"3.d. In the event that the Earned Royalties payable to ECC in any December Payment do not equal or exceed $100,000, then ECC shall have the right to amend the Agreement, by written notice to WGL, to provide that the license rights granted to WGL in paragraph 2.b. which are exclusive (i.e., for implantable applications) shall be non-exclusive beginning effective with the Licensed Year immediately following the applicable December Payment; provided, however, that WGL shall have ten (10) business days after receipt of such notice to pay ECC an amount which, when combined with the Earned Royalties paid in such December Payment, equal $100,000, in which case the license rights shall remain exclusive." |
7. Paragraph 6 of the Agreement is hereby amended to read in its entirety as follows:
"6. WGL shall have the right to assign its rights under this License Agreement to the successor to substantially the entire business of WGL to which this Agreement relates. WGL may not otherwise assign any or all of its rights under this Agreement without the prior written approval of ECC. WGL may sublicense some or all of its rights under this Agreement provided that (a) WGL notifies ECC in writing as to the proposed royalty and other terms of any such sublicense agreement, (b) WGL consults with ECC with respect to such sublicense and (c) ECC gives its written approval to such sublicense which approval may not be unreasonably withheld or delayed more than ten (10) days after notice of a proposed sublicense." |
8. Except as expressly provided for in the Amendment or unless they are consistent herewith, all of the terms and conditions of the Agreement shall remain in full force and effect.
EVANS CAPACITOR COUNTY |
WILSON GREATBATCH LTD. |
|
|
By: /s/ Charles E. Dewey |
By: /s/ V.W. Brinkerhoff III |
Charles E. Dewey | V.W. Brinkerhoff III |
Chief Executive Officer | Group Vice President |
EXHIBIT 21.1
SUBSIDIARIES OF WILSON GREATBATCH TECHNOLOGIES, INC.
Incorporated | |
WGL Intermediate Holdings, Inc. (direct subsidiary of Wilson Greatbatch Techologies, Inc.) |
Delaware |
Wilson Greatbatch Ltd. (direct subsidiary of WGL Intermediate Holdings, Inc.) |
New York |
Greatbatch-Hittman, Inc. (direct subsidiary of Wilson Greatbatch Ltd.) |
Delaware |
Battery Engineering, Inc. (direct subsidiary of Wilson Greatbatch Ltd.) |
Massachusetts |
Wilson Greatbatch Foreign Sales Corporation (direct subsidiary of Wilson Greatbatch Ltd.) |
Barbados |
Greatbatch-Sierra, Inc. (direct subsidiary of Greatbatch-Hittman, Inc.) |
Delaware |
Greatbatch-Globe Tool, Inc. (direct subsidiary of Wilson Greatbatch Technologies, Inc.) |
Minnesota |
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No's. 333-61476 and 333-97209 of Wilson Greatbatch Technologies, Inc. on Form S-8 of our report dated January 24, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to an accounting change in 2002), appearing in this Annual Report on Form 10-K of Wilson Greatbatch Technologies, Inc. for the year ended January 3, 2003.
Deloitte & Touche LLP
Buffalo, New York
March 17, 2003
Exhibit 99.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Wilson Greatbatch Technologies, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended January 3, 2003 (the "Form 10-K") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 18, 2003 |
/s/ Edward F. Voboril
|
Edward F. Voboril | |
Chief Executive Officer | |
Dated: March 18, 2003 |
/s/ Lawrence P. Reinhold
|
Lawrence P. Reinhold | |
Chief Financial Officer |
EXHIBIT 99.2
FACTORS POSSIBLY AFFECTING FUTURE OPERATING RESULTS
From time to time, Wilson Greatbatch Technologies, Inc. (the company) publishes forward-looking statements relating to anticipated financial performance, business development (including mergers, acquisitions, and other commercial arrangements), product development and regulatory approval timelines, intellectual property matters, market developments and similar matters. A variety of factors could cause the company's actual results and experience to differ materially from those projected, including the following:
RISKS RELATED TO OUR BUSINESS
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES.
A substantial portion of our business in 2002 was conducted with a limited number of customers, including Guidant, St. Jude Medical, Medtronic and Biotronik. In 2002, Guidant and St. Jude Medical collectively accounted for approximately 66% of our revenues. As a result, we depend heavily on revenues from Guidant and St. Jude Medical. Our supply agreements, particularly with our large customers, might not be renewed after they expire, including our power source supply agreement with Guidant, which expires on December 31, 2004, and our supply agreement with St. Jude Medical, which expires on December 28, 2003. Our supply agreements with St. Jude Medical, Medtronic, Biotronik and Guidant do not require any minimum purchase levels. The loss of any large customer for any reason could harm the business, financial condition and results of operations of our company.
IF WE DO NOT RESPOND TO CHANGES IN TECHNOLOGY, OUR PRODUCTS MAY BECOME OBSOLETE AND WE MAY EXPERIENCE REDUCED SALES AND A LOSS OF CUSTOMERS, WHICH WOULD NEGATIVELY AFFECT OUR REVENUES.
We sell our products to customers in several industries that are characterized by rapid technological changes, frequent new product introductions and evolving industry standards. For example, in 1998, an industry-wide design change in ICDs occurred, resulting in new ICDs using one battery instead of two. Primarily as a result of this design change, our implantable power source revenues decreased 19% in 1999 compared to 1998. Without the timely introduction of new products and enhancements, our products and services will likely become technologically obsolete over time and we may lose a number of our customers. In addition, other new products introduced by our customers may require fewer of our power sources or components. We dedicate a significant amount of resources to the development of our power sources and other products and technologies and we would be harmed if we did not meet customer requirements and expectations. Our inability, for technological or other reasons, to successfully develop and introduce new and innovative power sources and other products could cause our business to suffer. If this occurs, our revenues and operating results would suffer.
IF WE ARE UNABLE TO SUCCESSFULLY MARKET OUR CURRENT OR FUTURE PRODUCTS, OUR BUSINESS WILL BE HARMED.
The market for our power sources, components and other products has been growing in recent years. If the market for our products does not grow as rapidly as forecasted by industry experts, our revenues could be less than expected. In addition, it is difficult to predict the rate at which the market for our products will grow or at which new and increased competition will result in market saturation. Slower growth in the pacemaker and ICD markets in particular would negatively impact our revenues. In addition, we face the risk that our products will lose widespread market acceptance. We cannot assure you that our customers will continue to utilize the products we offer or that a market will develop for our future products. We may at times determine that it is not technically or economically feasible for us to continue to manufacture certain products and we may not be successful in developing or marketing them. Additionally, new technologies that we develop may not be rapidly accepted because of industry-specific factors, including the need for regulatory clearance, entrenched patterns of clinical practice and uncertainty over third party reimbursement. If this occurs, our business will be harmed.
WE ARE SUBJECT TO PRICING PRESSURES FROM CUSTOMERS, WHICH COULD HARM OUR OPERATING RESULTS.
We have made price concessions to some of our large customers in recent years and we expect customer pressure for pricing concessions will continue. Further, price concessions or reductions may cause our operating results to suffer. In addition, any delay or failure by a large customer to make payments due to us also could harm our operating results or financial condition.
WE RELY ON THIRD PARTY SUPPLIERS FOR RAW MATERIALS, KEY PRODUCTS AND SUBCOMPONENTS AND IF WE ARE UNABLE TO OBTAIN THESE MATERIALS, PRODUCTS AND SUBCOMPONENTS ON A TIMELY BASIS OR ON TERMS ACCEPTABLE TO US, OUR ABILITY TO MANUFACTURE PRODUCTS WILL SUFFER.
Our business depends on a continuous supply of raw materials. The principal raw materials used in our business include lithium, iodine, plastics, cases, lids, glass, screens, tantalum, platinum, ruthenium, gallium trichloride, tantalum pellets and vanadium pentoxide. Raw materials needed for our business are susceptible to fluctuations due to transportation, government regulations, price controls, economic climate or other unforeseen circumstances. In recent months, increasing global demand for some of the raw materials we need for our business, including platinum, gallium trichloride and tantalum, has caused the prices of these materials to increase significantly. In addition, there are a limited number of worldwide suppliers of the lithium needed to manufacture our products. We cannot assure you that we will be able to continue to procure raw materials critical to our business or to procure them at acceptable price levels.
We rely on third party manufacturers to supply many of our raw materials. For example, we rely on FMC to supply us with lithium for our power sources and HC Starck to supply us with tantalum powder and wire for capacitors. Manufacturing problems may occur with these and other outside sources, as a supplier may fail to develop and supply products and subcomponents to us on a timely basis, or may supply us with products and subcomponents that do not meet our quality, quantity and cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these products and subcomponents on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or on time. In addition, to the extent the processes that our suppliers use to manufacture products and subcomponents are proprietary, we may be unable to obtain comparable subcomponents from alternative suppliers.
QUALITY PROBLEMS WITH OUR POWER SOURCES AND OTHER PRODUCTS COULD HARM OUR REPUTATION FOR PRODUCING HIGH QUALITY PRODUCTS AND ERODE OUR COMPETITIVE ADVANTAGE.
Our power sources and other products are held to high quality standards. In the event that our power sources and other products fail to meet these standards, our reputation for producing high quality power sources and other products could be harmed, which would damage our competitive advantage.
OUR OPERATING RESULTS MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO FORECAST OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN OUR STOCK PRICE.
Our operating results have fluctuated in the past and are likely to fluctuate significantly from quarter to quarter due to a variety of factors, including:
· |
the fixed nature of a substantial percentage of our costs, which results in our operations being particularly sensitive to fluctuations in revenue; |
· |
changes in the relative portion of our revenue represented by our various products and customers, which could result in reductions in our profits if the relative portion of our revenue represented by lower margin products increases; |
· |
timing of orders placed by our principal customers who account for a significant portion of our revenues; and |
· |
increased costs of raw materials or supplies. |
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our proprietary rights to our technologies and products. As of December 31, 2002, we held 143 active U.S. patents. We cannot guarantee that the steps we have taken or will take to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. In addition to seeking formal patent protection whenever possible, we attempt to protect our proprietary rights and trade secrets by entering into confidentiality and non-compete agreements with employees, consultants and third parties with which we do business. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us and we may be unable to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures. If our trade secrets become known, we may lose our competitive advantages.
In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our patents or other proprietary rights, our business could be seriously harmed. We may be required to spend significant resources to monitor our intellectual property rights, we may not be able to detect infringement of these rights and may lose our competitive advantages associated with our intellectual property rights before we do so. In addition, competitors may design around our technology or develop competing technologies that do not infringe on our proprietary rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS, WHICH COULD BE COSTLY AND TIME CONSUMING AND COULD DIVERT OUR MANAGEMENT AND KEY PERSONNEL FROM OUR BUSINESS OPERATIONS.
In producing our power sources and other components for implantable medical devices, third parties may claim that we are infringing their intellectual property rights, and we may be found to have infringed those intellectual property rights. While we do not believe that any of our products infringe the intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may be used in our technology and products. In addition, third parties may claim that our patents have been improperly granted and may seek to invalidate our existing or future patents. Although we do not believe that any of our active patents should be subject to invalidation, if any claim for invalidation prevailed, the result could be greatly expanded opportunities for third parties to manufacture and sell products which compete with our products. We also typically do not receive significant indemnification from parties which license technology to us against third party claims of intellectual property infringement. Any litigation or other challenges regarding our patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved in producing our power sources and other components for implantable medical devices, and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products. Infringement claims, even if not substantiated, could result in significant legal and other costs and may be a distraction to management.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, OUR EARNINGS AND FINANCIAL CONDITION COULD SUFFER.
The manufacture and sale of our products expose us to potential product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, our products or use of our products with components or systems not manufactured or sold by us. Provisions contained in our agreements with key customers attempting to limit our damages, including provisions to limit damages to liability for gross negligence, may not be enforceable in all instances or may otherwise fail to protect us from liability for damages. Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or require us to pay significant damages. The occurrence of product liability claims or product recalls could cause our earnings and financial condition to suffer.
We carry product liability insurance coverage which is limited in scope and amount. Our management believes that our insurance coverage is adequate given the risks we face. We cannot assure you that we will be able to maintain this insurance or to do so at reasonable cost and on reasonable terms. We also cannot assure you that this insurance will be adequate to protect us against a product liability claim that arises in the future.
WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM AND KEY PERSONNEL AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY HARM US.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. Our products are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop our power sources and other products. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face intense competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms.
WE MAY NOT BE ABLE TO ATTRACT, TRAIN AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED PROFESSIONALS TO MAINTAIN AND GROW OUR BUSINESS.
Our success will depend in large part upon our ability to attract, train, retain and motivate highly-skilled employees and management. There is currently aggressive competition for employees who have experience in technology and engineering that is used in manufacturing and producing power sources and other components for implantable medical devices. We compete intensely with other companies to recruit and hire from this limited pool. The industries in which we compete for employees are characterized by high levels of employee attrition. Although we believe we offer competitive salaries and benefits, we may have to increase spending in order to retain personnel.
WE MAY MAKE ACQUISITIONS THAT COULD SUBJECT US TO A NUMBER OF OPERATIONAL RISKS AND WE MAY NOT BE SUCCESSFUL IN INTEGRATING COMPANIES WE ACQUIRE INTO OUR EXISTING OPERATIONS.
We have made and in the future expect to make selective acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. However, implementation of our acquisition strategy entails a number of risks, including:
· |
inaccurate assessments of undisclosed liabilities; |
· |
diversion of our management's attention from our core businesses; |
· |
potential loss of key employees or customers of the acquired businesses; |
· |
difficulties in integrating the operations and products of an acquired business or in realizing projected efficiencies and cost savings; and |
· |
increases in our indebtedness and a limitation in our ability to access additional capital when needed. |
IF WE ARE NOT SUCCESSFUL IN MAKING ACQUISITIONS TO EXPAND AND DEVELOP OUR BUSINESS, OUR FINANCIAL RESULTS MAY SUFFER.
A component of our strategy is to make selective acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. For example, in August 1998, we acquired Hittman, now Greatbatch-Hittman, a medical components manufacturer, in August 2000, we acquired Battery Engineering, Inc., or BEI, a small specialty battery manufacturer, in June 2001 we acquired Sierra, now Greatbatch-Sierra, a leading developer and manufacturer of EMI filters and capacitors for implantable medical devices, and in July 2002 we acquired Globe Tool and Manufacturing Company, Inc., now Greatbatch-Globe, a leading manufacturer of high-precision titanium cases for implantable medical devices, including pacemakers and cardioverter defibrillators. Our continued growth will depend on our ability to identify and acquire companies that complement or enhance our business on acceptable terms. We may not be able to identify or complete future acquisitions. Some of the risks that we may encounter include expenses associated with, and difficulties in identifying, potential targets, the costs associated with incomplete acquisitions and higher prices for acquired companies because of competition for attractive acquisition targets. Our failure to acquire additional companies could cause our financial results to suffer.
WE MAY FACE COMPETITION FROM ONE OF OUR PRINCIPAL CUSTOMERS THAT COULD HARM OUR BUSINESS AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES WITH GREATER RESOURCES.
Competition in connection with the manufacturing of power sources for implantable medical devices may intensify in the future. One or more of our customers that manufactures implantable medical devices may undertake additional vertical integration initiatives and begin to manufacture some or all of their power source needs. Although Medtronic manufactures its own lithium batteries for its pacemakers and ICDs, to date, to our knowledge, Medtronic has not sold batteries to third parties. If Medtronic were to begin selling power sources for implantable medical devices to third parties, our revenues could be harmed. Biotronik produces batteries for use in implantable medical devices that it manufactures and has attempted to market those batteries to other device manufacturers. As the implantable medical device industry continues to consolidate, this risk will intensify. Many of our potential implantable power source and component competitors, which include some of our customers, have greater name recognition, longer operating histories, larger customer bases, longer customer relationships and greater financial, technical, personnel and marketing resources than our company.
The market for commercial power sources is competitive, fragmented and subject to rapid technological change. Many other commercial power source suppliers are larger and have greater financial, operational, personnel, sales, technical and marketing resources than our company. These and other companies may develop products that are superior to ours, which could cause our results of operations to suffer.
ACCIDENTS AT ONE OF OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT OUR OPERATIONS.
Our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities and we have not experienced any serious accidents or deaths, there is a risk that an accident or death could occur in one of our facilities. Any accident, such as a chemical spill, could result in significant manufacturing delays or claims for damages resulting from injuries, which would harm our operations and financial condition. The potential liability resulting from any such accident or death, to the extent not covered by insurance, could cause our business to suffer. Any disruption of operations at any of our facilities could harm our business.
WE INTEND TO EXPAND INTO NEW MARKETS AND OUR PROPOSED EXPANSION PLANS MAY NOT BE SUCCESSFUL.
We intend to expand into new markets through the development of new product applications based on our existing component technologies. These efforts have required, and will continue to require us to make substantial investments, including significant research, development and engineering expenditures and capital expenditures for new, expanded or improved manufacturing facilities. We cannot assure you that we will be able to successfully manage expansion into new markets and products or that these efforts will not have an adverse impact on our business. Specific risks in connection with expanding into new markets include the inability to transfer our quality standards into new products, the failure of customers in new markets to accept our products and price competition.
OUR FAILURE TO OBTAIN LICENSES FROM THIRD PARTIES FOR NEW TECHNOLOGIES OR THE LOSS OF THESE LICENSES COULD IMPAIR OUR ABILITY TO DESIGN AND MANUFACTURE NEW PRODUCTS.
We occasionally license technologies from third parties rather than depending exclusively on our own proprietary technology and developments. For example, we license a capacitor patent from the Evans Capacitor Company. Our ability to license new technologies from third parties is and will continue to be critical to our ability to offer new and improved products. We cannot assure you that we will be able to continue to identify new technologies developed by others and even if we are able to identify new technologies, we may not be able to negotiate licenses on favorable terms, or at all. Additionally, we could lose rights granted under licenses for reasons beyond our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent.
RISKS RELATED TO OUR INDUSTRY
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS POLITICAL, ECONOMIC AND REGULATORY CHANGES IN THE HEALTHCARE INDUSTRY WHICH COULD FORCE US TO MAKE MODIFICATIONS TO HOW WE DEVELOP AND PRICE OUR PRODUCTS.
The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Several of our product lines are subject to international, federal, state and local health and safety, packaging and product content regulations. In addition, implantable medical device products produced by our healthcare customers are subject to regulation by the FDA and similar international agencies. These regulations govern a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution. Compliance with these regulations may be time consuming, burdensome and expensive and could negatively affect our customers' abilities to sell their products, which in turn would adversely affect our ability to sell our products. This may result in higher than anticipated costs or lower than anticipated revenues.
These regulations are also complex, change frequently and have tended to become more stringent over time. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state levels. In addition, these regulations may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. We may be required to incur significant expenses to comply with these regulations or remedy past violations of these regulations. Any failure by our company to comply with applicable government regulations could also result in cessation of portions or all of our operations, impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are sold into regulated industries, we must comply with additional regulations in marketing our products.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS THAT COULD BE COSTLY FOR OUR COMPANY TO COMPLY WITH.
Federal, state and local regulations impose various environmental controls on the manufacturing, transportation, storage, use and disposal of power sources and hazardous chemicals and other materials used in and hazardous waste produced by the manufacturing of power sources and components. We cannot assure you that conditions relating to our historical operations which may require expenditures for clean-up will not arise in the future or that changes in environmental laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. We also cannot assure you that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our power sources and components or restricting disposal of power sources will not be imposed. In addition, we cannot predict the effect that additional or modified regulations may have on us or our customers.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR REVENUES AND RESULTS OF OPERATIONS.
Many healthcare industry companies are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for our products. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our results of operations would suffer.
OUR BUSINESS IS INDIRECTLY SUBJECT TO HEALTHCARE INDUSTRY COST CONTAINMENT MEASURES THAT COULD RESULT IN REDUCED SALES OF OUR PRODUCTS.
Our healthcare customers rely on third party payors, such as government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which our products are used. The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain approval for payment from these third party payors. If that occurred, sales of implantable medical devices may decline significantly, and our customers may reduce or eliminate purchases of our products. The cost containment measures that healthcare providers are instituting, both in the United States and internationally, could harm our ability to operate profitably.
OUR COMMERCIAL POWER SOURCE REVENUES ARE DEPENDENT ON CONDITIONS IN THE OIL AND NATURAL GAS INDUSTRY, WHICH HISTORICALLY HAS BEEN VOLATILE.
Sales of our commercial power sources depend to a great extent upon the condition of the oil and gas industry and, specifically, the exploration and production expenditures of oil and gas companies. In the past, oil and natural gas prices have been volatile and the oil and gas exploration and production industry has been cyclical, and it is likely that oil and natural gas prices will continue to fluctuate in the future. The current and anticipated prices of oil and natural gas influence the oil and gas exploration and production business and are affected by a variety of political and economic factors beyond our control, including worldwide demand for oil and natural gas, worldwide and domestic supplies of oil and natural gas, the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels and pricing, the level of production of non-OPEC countries, the price and availability of alternative fuels, political stability in oil producing regions and the policies of the various governments regarding exploration and development of their oil and natural gas reserves. An adverse change in the oil and gas exploration and production industry or a reduction in the exploration and production expenditures of oil and gas companies could cause our revenues from commercial power sources to suffer.