-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxRfk5YrWf2rNCspdigQZ3WN3oCXvohdDjF6g21JWbTvN3vJffV+ygMDZ+LjbAW6 3MI3jeX/SJsNqijuHj9Hrg== 0001157523-05-010886.txt : 20051216 0001157523-05-010886.hdr.sgml : 20051216 20051216161816 ACCESSION NUMBER: 0001157523-05-010886 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050701 FILED AS OF DATE: 20051216 DATE AS OF CHANGE: 20051216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATBATCH, INC. CENTRAL INDEX KEY: 0001114483 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 161531026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-16137 FILM NUMBER: 051269956 BUSINESS ADDRESS: STREET 1: 9645 WEHRLE DRIVE CITY: CLARENCE STATE: NY ZIP: 14031 BUSINESS PHONE: 716-759-5600 MAIL ADDRESS: STREET 1: 9645 WEHRLE DRIVE CITY: CLARENCE STATE: NY ZIP: 14031 FORMER COMPANY: FORMER CONFORMED NAME: WILSON GREATBATCH TECHNOLOGIES INC DATE OF NAME CHANGE: 20000511 10-Q/A 1 a5041143.txt GREATBATCH, INC. 10-Q/A U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended July 1, 2005 Commission File Number 1-16137 GREATBATCH, INC. (Exact name of Registrant as specified in its charter) Delaware (State of incorporation) 16-1531026 (I.R.S. employer identification no.) 9645 Wehrle Drive Clarence, New York 14031 (Address of principal executive offices) (716) 759-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ] The number of shares outstanding of the Company's common stock, $.001 par value per share, as of August 5, 2005 was: 21,613,552 shares. EXPLANATORY NOTE Greatbatch, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-Q/A to amend its Form 10-Q for the three months ended June 30, 2005 as filed with the Securities and Exchange Commission on August 10, 2005 (the "Original Filing") to (i) revise Part I, Item 1, Item 2, and Item 4, and Part II, Item 6 to reflect the restatement of its condensed consolidated balance sheet and condensed consolidated statement of cash flows to correct the classification of auction rate securities which were previously classified as cash and cash equivalents, to restate its consolidated statements of cash flows for the impact of changes in accounts payable related to the acquisition of property, plant and equipment, and to account for a deferred tax asset related to net operating losses acquired in the Company's acquisition of NanoGram Devices Corporation in 2004, and (ii) present revised exhibits 31.1, 31.2 and 32.1. Except for the amendments set forth in this Amendment No. 1, the Original Filing is not being modified or amended in any way, and the disclosures contained in the Original Filing are not being updated herein. GREATBATCH, INC. TABLE OF CONTENTS FOR FORM 10-Q/A AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 Page COVER PAGE 1 TABLE OF CONTENTS 3 PART I - FINANCIAL INFORMATION (unaudited) ITEM 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet (As restated) 4 Condensed Consolidated Statement of Operations and Comprehensive Income 5 Condensed Consolidated Statement of Cash Flows (As restated) 6 Notes to Condensed Consolidated Financial Statements (As restated) 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 ITEM 4. Controls and Procedures 34 PART II - OTHER INFORMATION ITEM 6. Exhibits 36 SIGNATURES 37 EXHIBIT INDEX 38 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS GREATBATCH, INC. CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited (IN THOUSANDS) - -------------------------------------------------------------------------------- ASSETS June 30, December 31, 2005(1) 2004(1) Current assets: Cash and cash equivalents $ 25,721 $ 34,795 Short-term investments 62,422 57,437 Accounts receivable, net 35,515 24,288 Inventories 33,672 34,027 Refundable income taxes 3,783 3,673 Deferred income taxes 3,622 3,622 Prepaid expenses and other current assets 6,094 4,637 ---------- ------------ Total current assets 170,829 162,479 Property, plant, and equipment, net 100,901 92,210 Intangible assets, net 62,058 63,984 Goodwill 155,039 155,039 Other assets 4,496 4,493 ---------- ------------ Total assets $ 493,323 $ 478,205 ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 7,850 8,971 Accrued expenses and other current liabilities 18,703 18,109 Current portion of long-term debt 1,001 1,000 ---------- ------------ Total current liabilities 27,554 28,080 Long-term debt, net of current portion 58 652 Convertible subordinated notes 170,000 170,000 Deferred income taxes 27,222 23,296 ---------- ------------ Total liabilities 224,834 222,028 ---------- ------------ Stockholders' equity: Preferred stock - - Common stock 21 21 Additional paid-in capital 215,912 212,131 Deferred stock-based compensation (1,579) (833) Treasury stock, at cost - (95) Retained earnings 54,254 44,971 Accumulated other comprehensive loss (119) (18) ---------- ------------ Total stockholders' equity 268,489 256,177 ---------- ------------ Total liabilities and stockholders' equity $ 493,323 $ 478,205 ========== ============ (1) As restated, see Note 2. The accompanying notes are an integral part of these condensed consolidated financial statements 4
GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME - Unaudited (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, 2005 2004 2005 2004 Sales $ 63,524 $ 52,942 $ 119,882 $ 108,467 Cost of sales 38,405 29,124 73,976 61,474 --------- --------- ---------- ---------- Gross profit 25,119 23,818 45,906 46,993 Selling, general and administrative expenses 8,481 6,389 15,247 13,314 Research, development and engineering costs, net 3,657 5,688 8,058 10,569 Amortization of intangible assets 958 1,076 1,916 1,851 Other operating expense, net 4,001 2,957 6,389 3,178 --------- --------- ---------- ---------- Operating income 8,022 7,708 14,296 18,081 Interest expense 1,191 1,144 2,322 2,304 Interest income (652) (245) (1,227) (558) Other expense, net (60) (2) (60) - --------- --------- ---------- ---------- Income before provision for income taxes 7,543 6,811 13,261 16,335 Provision for income taxes 2,263 2,078 3,978 4,983 --------- --------- ---------- ---------- Net income $ 5,280 $ 4,733 $ 9,283 $ 11,352 ========= ========= ========== ========== Earnings per share: Basic $ 0.24 $ 0.22 $ 0.43 $ 0.53 Diluted $ 0.23 $ 0.21 $ 0.42 $ 0.50 Weighted average shares outstanding: Basic 21,581 21,366 21,527 21,323 Diluted 26,061 25,715 25,862 25,781 Comprehensive income: Net income $ 5,280 $ 4,733 $ 9,283 $ 11,352 Net unrealized loss on available for sale securities, net of deferred income tax benefits of $21 and $44 in the three and six month periods in 2005, respectively (61) - (101) - --------- --------- ---------- ---------- Comprehensive income $ 5,219 $ 4,733 $ 9,182 $ 11,352 ========= ========= ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements
5 GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - Unaudited (IN THOUSANDS) - -------------------------------------------------------------------------------- Six months ended June 30, 2005(1) 2004(1) Cash flows from operating activities: Net income $ 9,283 $ 11,352 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,744 7,253 Stock-based compensation 1,448 1,511 Deferred income taxes 3,926 3,540 Loss on disposal of assets 1,489 115 Changes in operating assets and liabilities: Accounts receivable (11,227) (5,628) Inventories 355 (4,391) Prepaid expenses and other current assets (2,007) 1,164 Accounts payable 115 725 Accrued expenses and other current liabilities 1,945 (2,915) Income taxes (88) (1,502) ---------- ---------- Net cash provided by operating activities 13,983 11,224 ---------- ---------- Cash flows from investing activities: Short-term investments Purchases (38,990) (67,875) Proceeds from dispositions 34,005 110,584 Acquisition of property, plant and equipment (17,281) (14,475) Proceeds from sale of assets 23 64 (Increase) decrease in other assets (256) 37 Acquisition of subsidiary, net - (45,604) ---------- ---------- Net cash used in investing activities (22,499) (17,269) ---------- ---------- Cash flows from financing activities: Principal payments of long-term debt (593) (663) Payment of debt issue costs (213) - Issuance of common stock 248 1,114 Issuance of treasury stock - 179 ---------- ---------- Net cash (used in) provided by financing activities (558) 630 ---------- ---------- Net decrease in cash and cash equivalents (9,074) (5,415) Cash and cash equivalents, beginning of year 34,795 23,960 ---------- ---------- Cash and cash equivalents, end of period $ 25,721 $ 18,545 ========== ========== (1) As restated, see Note 2. The accompanying notes are an integral part of these condensed consolidated financial statements 6 GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (APB 28, Interim Financial Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. (the "Company") for the periods presented. 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, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004. The Company officially changed its name to Greatbatch, Inc. from Wilson Greatbatch Technologies, Inc. during the second quarter. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. For clarity of presentation, the Company describes all periods as if each quarter end is March 31st, June 30th and September 30th and as if the year-end is December 31st. The second quarter of 2005 and 2004 each contained 13 weeks. 2. RESTATEMENTS Subsequent to the original filing of the Company's Form 10-Q for the three and six months ended June 30, 2005, the Company concluded that its condensed consolidated financial statements should be restated to change the classification of auction rate securities from cash and cash equivalents to short-term investments. Auction rate securities are securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through the auction mechanism that generally resets interest rates every 7 to 35 days. Although management had determined the risk of failure of an auction process to be remote, the definition of a cash equivalent in Statement of Financial Accounting Standards (SFAS) No. 95, Statement of Cash Flows, requires reclassification to short-term investments. The condensed consolidated balance sheets as of June 30, 2005 and December 31, 2004, and condensed consolidated statements of cash flows for the three and six months ended June 30, 2005 and 2004, have been restated in order to conform to this change in classification. Due to the short-term nature of the interest rate resets, the fair market value of the auction rate securities approximates their recorded value. 7 The Company has also restated its condensed consolidated statement of cash flows for the periods ended June 30, 2005 and 2004 to reflect the impact of changes in accounts payable related to the acquisition of property, plant and equipment as a non-cash activity as required under SFAS No. 95. In addition, the Company determined that it had not accounted for a deferred tax asset in purchase accounting related to net operating losses acquired in the Company's acquisition of NanoGram in 2004. The recording of this deferred tax asset decreased long-term deferred income tax liabilities and correspondingly decreased goodwill. The restatements have been made to the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows as follows: Condensed Consolidated Balance Sheet as of - ------------------------------------------ June 30, 2005 - ------------- As previously ------------- reported Adjustment As restated ------------- ---------- ----------- Current assets: Cash and cash equivalents $ 83,036 $ (57,315) $ 25,721 Short-term investments $ 5,107 $ 57,315 $ 62,422 Goodwill $ 156,772 $ (1,733) $ 155,039 Total assets $ 495,056 $ (1,733) $ 493,323 Long term liabilities Deferred income taxes $ 28,955 $ (1,733) $ 27,222 Total liabilities $ 226,567 $ (1,733) $ 224,834 Total liabilities and stockholders' equity $ 495,056 $ (1,733) $ 493,323 Condensed Consolidated Balance Sheet as of - ------------------------------------------ December 31, 2004 - ----------------- As previously ------------- reported Adjustment As restated ------------- ---------- ----------- Current assets: Cash and cash equivalents $ 89,473 $ (54,678) $ 34,795 Short-term investments $ 2,759 $ 54,678 $ 57,437 Goodwill $ 156,772 $ (1,733) $ 155,039 Total assets $ 479,938 $ (1,733) $ 478,205 Long term liabilities Deferred income taxes $ 25,029 $ (1,733) $ 23,296 Total liabilities $ 223,761 $ (1,733) $ 222,028 Total liabilities and stockholders' equity $ 479,938 $ (1,733) $ 478,205 8 Condensed Consolidated Statement of Cash Flows for the three months ended - ------------------------------------------------------------------------- June 30, 2005 - ------------- As previously ------------- reported Adjustment As restated ------------- ---------- ----------- Cash flows from operating activities: Net cash provided by operating activities $ 12,747 $ 1,236 $ 13,983 Cash flows from investing activities: Net cash used in investing activities $ (18,626) $ (3,873) $ (22,499) Net decrease in cash and cash equivalents $ (6,437) $ (2,637) $ (9,074) Cash and cash equivalents, beginning of year $ 89,473 $ (54,678) $ 34,795 Cash and cash equivalents, end of period $ 83,036 $ (57,315) $ 25,721 Condensed Consolidated Statement of Cash Flows for the three months ended - ------------------------------------------------------------------------- June 30, 2004 - ------------- As previously ------------- reported Adjustment As restated ------------- ---------- ----------- Cash flows from operating activities: Net cash provided by operating activities $ 11,932 $ (708) $ 11,224 Cash flows from investing activities: Net cash used in investing activities $ (52,197) $ 34,928 $ (17,269) Net decrease in cash and cash equivalents $ (39,635) $ 34,220 $ (5,415) Cash and cash equivalents, beginning of year $ 119,486 $ (95,526) $ 23,960 Cash and cash equivalents, end of period $ 79,851 $ (61,306) $ 18,545 3. STOCK-BASED COMPENSATION 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 SFAS No. 123, 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. 9 These pro forma calculations assume the common stock is freely tradable for all periods presented and, as such, the impact is not necessarily indicative of the effects on reported net income of future periods. Three months Six months ended ended June 30, June 30, 2005 2004 2005 2004 Risk-free interest rate 3.83% 3.93% 4.03% 3.80% Expected volatility 52% 50% 52% 50% Expected life (in years) 5 5 5 5 Expected dividend yield 0% 0% 0% 0% The Company's net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period is as follows (in thousands except per share data): Three months Six months ended ended June 30, June 30, 2005 2004 2005 2004 Net income as reported $ 5,280 $ 4,733 $ 9,283 $ 11,352 Stock-based employee compensation cost included in net income as reported, net of related tax effects $ 457 $ 438 $ 1,014 $ 1,050 Stock-based employee compensation cost determined using the fair value based method, net of related tax effects $ 976 $ 968 $ 2,019 $ 2,104 Pro forma net income $ 4,761 $ 4,203 $ 8,278 $ 10,298 Earnings per share: Basic - as reported $ 0.24 $ 0.22 $ 0.43 $ 0.53 Basic - pro forma $ 0.22 $ 0.20 $ 0.38 $ 0.48 Diluted - as reported $ 0.23 $ 0.21 $ 0.42 $ 0.52 Diluted - pro forma $ 0.21 $ 0.19 $ 0.38 $ 0.48 10 4. SUPPLEMENTAL CASH FLOW INFORMATION (in thousands): Six months ended June 30, 2005 2004 Noncash investing and financing activities: Acquisition of property utilizing capital leases $ - $ 1,007 Common stock contributed to 401(k) Plan $ 2,729 $ 2,723 Property, plant and equipment purchases included in accounts payable $ 994 $ 1,232 5. SHORT-TERM INVESTMENTS Short-term investments at June 30, 2005 and December 31, 2004 consisted of the following (in thousands):
As of June 30, 2005 Gross Gross Estimated unrealized unrealized fair Cost gains losses value Available-for-sale: Equity Securities $ 276 $ - $ (81) $ 195 Auction Rate Securities 55,546 - - 55,546 --------- ---------- ---------- --------- Total available for sale securities 55,822 - (81) 55,741 Held-to-maturity: Municipal Bonds (1) 6,681 - (13) 6,668 --------- ---------- ---------- --------- Short-term investments $ 62,503 $ - $ (94) $ 62,409 ========= ========== ========== ========= (1) The municipal bonds have maturity dates ranging from July 2005 to November 2005. As of December 31, 2004 Gross Gross Estimated unrealized unrealized fair Cost gains losses value Available-for-sale: Equity Securities $ 276 $ - $ (18) $ 258 Auction Rate Securities 54,678 - - 54,678 --------- ---------- ---------- --------- Total available for sale securities 54,954 - (18) 54,936 Held-to-maturity: Municipal Bonds 2,501 1 - 2,502 --------- ---------- ---------- --------- Short-term investments $ 57,455 $ 1 $ (18) $ 57,438 ========= ========== ========== =========
11 6. INVENTORIES Inventories comprised the following (in thousands): June 30, December 31, 2005 2004 Raw materials $ 16,527 $ 14,053 Work-in-process 10,328 11,275 Finished goods 6,817 8,699 --------- ------------ Total $ 33,672 $ 34,027 ========= ============ 7. INTANGIBLE ASSETS Intangible assets comprised the following (in thousands): As of June 30, 2005 Gross Net carrying Accumulated carrying amount amortization Amount Amortizing intangible assets: Patented technology $ 21,462 $ (10,938) $ 10,524 Unpatented technology 30,886 (7,638) 23,248 Other 1,340 (1,306) 34 --------- ---------- --------- 53,688 (19,882) 33,806 Non-amortizing intangible assets: Trademark and names 31,420 (3,168) 28,252 --------- ---------- --------- Total intangible assets $ 85,108 $ (23,050) $ 62,058 ========= ========== ========= As of December 31, 2004 Gross Net carrying Accumulated carrying amount amortization Amount Amortizing intangible assets: Patented technology $ 21,462 $ (10,137) $ 11,325 Unpatented technology 30,886 (6,525) 24,361 Other 1,340 (1,294) 46 --------- ---------- --------- 53,688 (17,956) 35,732 Non-amortizing intangible assets: Trademark and names 31,420 (3,168) 28,252 --------- ---------- --------- Total intangible assets $ 85,108 $ (21,124) $ 63,984 ========= ========== ========= Aggregate amortization expense for second quarter 2005 and 2004 was $1.0 million and $1.1 million, respectively. Aggregate amortization expense for the six months ended June 30, 2005 and 2004 was $1.9 million. Annual amortization expense is estimated to be $1.9 million for the remainder of 2005, $3.8 million for 2006 to 2008, $3.2 million for 2009, and $2.7 million for 2010. 12 8. DEBT Long-term debt comprised the following (in thousands): June 30, December 31, 2005 2004 2.25% convertible subordinated notes, due 2013 $ 170,000 $ 170,000 Capital lease obligations 1,059 1,652 ---------- ------------ 171,059 171,652 Less current portion (1,001) (1,000) ---------- ------------ Total long-term debt $ 170,058 $ 170,652 ========== ============ Revolving Line of Credit On May 31, 2005, the Company amended its Senior Secured Credit Facility, which included changes to the underlying covenants. The amended three-year facility replaced the old $20.0 million revolving credit facility with a new $50.0 million Revolving Credit Facility ("new revolver"), which contains a $10.0 million sub-limit for the issuance of commercial or standby letters of credit. The new revolver is secured by the Company's non-realty assets including cash, accounts and notes receivable, and inventories. The new revolver requires the Company to comply with two quarterly financial covenants, as defined. The first relates to the ratio of consolidated net earnings or loss before interest, taxes, depreciation, and amortization ("EBITDA") to Fixed Charges. The second is a Leverage ratio, which is calculated based on the ratio of Consolidated Funded Debt less Cash, Cash Equivalent Investments and Short-Term Investments to Consolidated EBITDA. Interest rates under the new Facility vary with the Company's leverage. The Company is required to pay a commitment fee of between .125% and .250% per annum on the unused portion of the revolving line of credit based on the Company's leverage. As of June 30, 2005, the Company had no balance outstanding on its $50.0 million committed revolving line of credit. Debt issue expenses for the new revolver totaled $0.2 million and are being amortized using the straight-line method over a three-year term. The revolver refinancing transaction resulted in the write-off of $0.1 million of existing deferred financing fees associated with the prior revolving line of credit. 13 9. EARNINGS PER SHARE The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Three months ended Six months ended June 30, June 30, 2005 2004 2005 2004 --------- --------- --------- --------- Numerator for basic earnings per share: Income from continuing operations $ 5,280 $ 4,733 $ 9,283 $ 11,352 Effect of dilutive securities: Interest expense on convertible notes and related deferred financing fees, net of tax 783 769 1,565 1,537 --------- --------- --------- --------- Numerator for diluted earnings per share $ 6,063 $ 5,502 $ 10,848 $ 12,889 ========= ========= ========= ========= Denominator for basic earnings per share: Weighted average shares outstanding 21,581 21,366 21,527 21,323 Effect of dilutive securities: Convertible notes 4,219 4,219 4,219 4,219 Stock options and unvested restricted stock 261 130 116 239 --------- --------- --------- --------- Dilutive potential common shares 4,480 4,349 4,335 4,458 --------- --------- --------- --------- Denominator for diluted earnings per share 26,061 25,715 25,862 25,781 ========= ========= ========= ========= Basic earnings per share $ 0.24 $ 0.22 $ 0.43 $ 0.53 ========= ========= ========= ========= Diluted earnings per share $ 0.23 $ 0.21 $ 0.42 $ 0.50 ========= ========= ========= =========
10. COMPREHENSIVE INCOME For the second quarter and six months ended June 30, 2004, the Company's only component of comprehensive income is its net income. For the second quarter and six months ended June 30, 2005, the Company's comprehensive income includes net income and a net unrealized loss on available-for-sale securities. 11. COMMITMENTS AND CONTINGENCIES Litigation - During 2002, a former non-medical customer commenced an action alleging that the Company had used proprietary information of the customer to develop certain products. We have meritorious defenses and are vigorously defending the case. No accrual for an adverse judgment has been made as such outcome is not deemed probable, the potential risk of loss is between $0.0 and $1.75 million. As reported in the Company's 2005 first quarter Form 10-Q, on May 2, 2005, a complaint was filed against the Company by a developer of an implantable drug delivery device in the United States Federal District Court for the Central District of California. On May 20, 2005, the parties entered into a settlement agreement under which the Company undertook certain obligations including the performance of certain additional development tasks for a limited period of time. On June 2, 2005, the Court ordered the complaint dismissed without prejudice. 14 Product Warranties - The change in aggregate product warranty liability for the quarter ended June 30, 2005, is as follows (in thousands): Beginning balance $ 948 Additions to warranty reserve 374 Warranty claims paid (57) -------- Ending balance $ 1,265 ======== Capital Expenditures - During 2004, the Company commenced the build out of its medical battery and capacitor manufacturing facility in Alden, NY and its value-add manufacturing facility in Tijuana, Mexico. These facilities will enable the Company to further consolidate its operations and implement state of the art manufacturing capabilities at both locations. The total contractual obligation for construction of these facilities at June 30, 2005 is $4.4 million and will be financed by existing or internally generated cash. 12. BUSINESS SEGMENT INFORMATION The Company operates its business in two reportable segments: Implantable Medical Components ("IMC") and Electrochem Commercial Power ("ECP"), (formerly "Electrochem Power Solutions"). The IMC segment designs and manufactures critical components used in implantable medical devices. The principal components are batteries, capacitors, filtered feedthroughs, coated components, enclosures and machined and molded precision components. The principal medical devices are pacemakers, defibrillators and neurostimulators. The ECP segment designs and manufactures high performance cells and battery packs; principal markets for these products are for oil and gas exploration, oceanographic equipment, and aerospace. The Company defines segment income from operations as gross profit less costs and expenses attributable to segment-specific selling, general and administrative, research, development and engineering expenses, intangible amortization and other operating expenses. Segment income also includes a portion of non-segment specific selling, general and administrative, and research, development and engineering expenses based on allocations appropriate to the expense categories. The remaining unallocated operating expenses along with other income and expense 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 1. 15 An analysis and reconciliation of the Company's business segment information to the respective information in the condensed consolidated financial statements is as follows (in thousands):
Three months ended Six months ended June 30, June 30, Sales: 2005 2004 2005 2004 IMC ICD batteries $ 12,608 $ 10,119 $ 23,234 $ 19,539 Pacemaker and other batteries 6,315 5,361 11,695 11,050 ICD Capacitors 5,954 6,239 10,251 14,647 Feedthroughs 15,859 12,261 29,541 26,016 Enclosures 6,019 5,142 12,566 10,539 Other 8,031 7,077 15,363 12,686 --------- --------- ---------- ---------- Total IMC 54,786 46,199 102,650 94,477 ECP 8,738 6,743 17,232 13,990 --------- --------- ---------- ---------- Total sales $ 63,524 $ 52,942 $ 119,882 $ 108,467 ========= ========= ========== ========== Segment income from operations: IMC $ 9,481 $ 8,396 $ 17,361 $ 19,218 ECP 2,430 1,608 4,308 3,903 --------- --------- ---------- ---------- Total segment income from operations 11,911 10,004 21,669 23,121 Unallocated operating expenses (3,889) (2,296) (7,373) (5,040) --------- --------- ---------- ---------- Operating income as reported 8,022 7,708 14,296 18,081 Unallocated other income and expense (479) (897) (1,035) (1,746) --------- --------- ---------- ---------- Income before income taxes as reported $ 7,543 $ 6,811 $ 13,261 $ 16,335 ========= ========= ========== ========== The carrying amount of goodwill at December 31, 2004 and June 30, 2005 is as follows (in thousands): IMC ECP Total $ 152,473 $ 2,566 $ 155,039 ========== ======== ==========
16 13. OTHER OPERATING EXPENSE During the second quarter and six months ended June 30, 2005, the following non-recurring charges were recorded in other operating expense in the Company's Condensed Consolidated Statement of Operations. Costs to exit development agreement. There was a $1.15 million charge recorded in other operating expenses for the IMC segment during the second quarter for charges associated with the discontinuation of a drug pump development agreement. Severance charges. During the first quarter, the Company implemented a 4% workforce reduction as a continuation of cost containment efforts initiated mid-year 2004, which resulted in a severance charge of $1.5 million. Accrued liabilities at June 30, 2005 related to the severance charges comprised the following (in thousands): IMC ECP CORPORATE TOTAL Severance charges $ 860 $ 210 $ 430 $ 1,500 Cash payments (794) (128) (367) (1,289) ----- ----- ----- ------- Balance, June 30, 2005 $ 66 $ 82 $ 63 $ 211 The severance charges related to corporate employees are included in unallocated operating expenses. It is expected that the remaining accrued severance as of June 30, 2005, will be paid within the next three months. Alden Facility Consolidation - On February 23, 2005, the Company announced its intent to consolidate the medical capacitor manufacturing operations, currently in Cheektowaga, NY, and the implantable medical battery manufacturing operations, currently in Clarence, NY, into the advanced power source manufacturing facility in Alden, NY ("Alden Facility"). The Company is also consolidating the capacitor research, development and engineering operations from the Cheektowaga, NY, facility into the existing implantable medical battery research, development, and engineering operations in Clarence, NY. The total cost estimated for these consolidation efforts is anticipated to be between $3.5 and $4.0 million. The Company expects to incur the balance of this additional expense over the next two fiscal quarters. The expenses for the Alden Facility consolidation are included in the IMC business segment. The major categories of costs, which will primarily be cash expenditures, include the following: o Production inefficiencies and revalidation - $1.5 to $1.7 million; o Training - $0.6 to $0.7 million; o Moving and facility closures - $0.9 million to $1.0 million; and o Infrastructure - $0.5 to $0.6 million. 17 Accrued liabilities at June 30, 2005 related to the Alden Facility consolidation comprised the following (in thousands):
Production Inefficiencies Moving and and Revalidation Training Facility Closures Infrastructure Total ----------------- --------- ----------------- -------------- ----- Restructuring charges $ 135 $ 15 $ 517 $ 188 $ 855 Cash payments (120) (15) (130) (168) (433) Write-offs -- -- (167) -- (167) ----- ----- ----- ----- ----- Balance, June 30, 2005 $ 15 $ -- $ 220 $ 20 $ 255 ===== ===== ===== ===== =====
Carson City Facility shutdown and Tijuana Facility consolidation - On March 7, 2005, the Company announced its intent to close the Carson City, NV facility ("Carson City Facility") and consolidate the work performed at the Carson City Facility into the Tijuana, Mexico facility ("Tijuana Facility"). The total estimated cost for this facility consolidation plan is anticipated to be between $4.5 million and $5.4 million. The Company expects to incur the remaining cost over the next four fiscal quarters. The major categories of costs include the following: o Costs related to the shutdown of the Carson City Facility: a. Severance and retention - $1.4 to $1.6 million; b. Accelerated depreciation - $0.5 to $0.6 million; and c. Other - $0.6 to $0.7 million. o Costs related to the Tijuana Facility consolidation: a. Production inefficiencies and revalidation - $0.4 to $0.5 million; b. Relocation and moving - $0.3 to $0.5 million; c. Personnel (including travel, training and duplicate wages) - $1.0 to $1.1 million; and d. Other - $0.3 to $0.4 million. All categories of costs are considered to be cash expenditures, except accelerated depreciation. The expenses for the Carson City facility shutdown and the Tijuana Facility consolidation are included in the IMC business segment. Accrued liabilities at June 30, 2005 related to the Carson City Facility shutdown comprised the following (in thousands):
Severance Accelerated and retention Depreciation Other Total ------------- ------------ ----- ----- Restructuring charges $ 620 $ 200 $ 12 $ 832 Cash payments -- -- (12) (12) Write-offs -- (200) -- (200) ----- ----- ----- ----- Balance, June 30, 2005 $ 620 $ -- $ -- $ 620 ===== ===== ===== =====
18 Accrued liabilities at June 30, 2005 related to the Tijuana Facility consolidation comprised the following (in thousands):
Production inefficiencies Relocation and revalidation and moving Personnel Other Total ---------------- ----------- --------- ----- ----- Restructuring charges $ -- $ -- $ 40 $ 40 Cash payments -- -- (40) -- (40) ----- ------ ----- ---- ----- Balance, June 30, 2005 $ -- $ -- $ -- $ -- $ -- ===== ====== ===== ==== =====
14. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2005, the Financial Accounting Standards Board ("FASB") published an Exposure Draft of a proposed Interpretation, Accounting for Uncertain Tax Positions. The Exposure Draft seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It would apply to all tax positions accounted for in accordance with SFAS 109, Accounting for Income Taxes. The Exposure Draft requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in the financial statements. This threshold is to be met assuming that the tax authorities will examine the uncertain tax position. The Exposure Draft contains guidance with respect to the measurement of the benefit that is recognized for an uncertain tax position, when that benefit should be derecognized, and other matters. This proposed Interpretation would clarify the accounting for uncertain tax positions in accordance with SFAS 109. This Interpretation, once approved, is expected to be effective as of the end of the first fiscal year ending after December 15, 2005. The Company outlined its critical accounting policies related to income taxes in its Annual Report on Form 10-K for the year ended December 31, 2004. Certain tax accounting and reporting guidelines may change as a result of new accounting guidance. The Company's accounting and reporting treatment will be determined at the time of issuance of a final standard. In June 2005 the issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections, ("SFAS 154") a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not expect that adoption of SFAS No. 154 will have a material effect on its consolidated financial position, consolidated results of operations, or liquidity. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"). This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. 19 The Company anticipates adopting the provisions of SFAS No. 123(R) on January 1, 2006 using the modified prospective application. Accordingly, compensation expense will be recognized for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation cost for the unvested portion of awards that are outstanding as of January 1, 2006 will be recognized ratably over the remaining vesting period. The compensation cost for the unvested portion of awards will be based on the fair value at date of grant as calculated for the Company's pro forma disclosure under SFAS 123. The Company estimates that the effect on net income and earnings per share in the periods following adoption of SFAS 123(R) will be consistent with the Company's pro forma disclosure under SFAS No. 123, except that estimated forfeitures will be considered in the calculation of compensation expense under SFAS 123(R). Additionally, the actual effect on net income and earnings per share will vary depending upon the number of options granted in subsequent periods compared to prior years. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The company does not expect that adoption of SFAS No. 151 will have a material effect on its consolidated financial position, consolidated results of operations, or liquidity. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The condensed consolidated financial statements in Item 1 have been restated as described in Note 2. -Restatements and the following discussion, analysis and financial information herein have been revised to reflect the effects of the restatements. Introduction We are a leading developer and manufacturer of batteries, capacitors, feedthroughs, enclosures, and other components used in implantable medical devices ("IMDs") through our Implantable Medical Components ("IMC") business. We offer technologically advanced, highly reliable and long lasting products for IMDs and enable our customers to introduce IMDs that are progressively smaller, longer lasting, more efficient and more functional. We also leverage our core competencies in technology and manufacturing through our Electrochem Commercial Power ("ECP") business (formerly "Electrochem Power Solutions") to develop and produce cells and battery packs for commercial applications that demand high performance and reliability, including oil and gas exploration, oceanographic equipment and aerospace. Most of the IMC products that we sell are utilized by customers in cardiac rhythm management ("CRM") devices. The CRM market comprises devices utilizing high-rate batteries and capacitors such as implantable cardioverter defibrillators ("ICDs") and cardiac resynchronization therapy ("CRT") with backup defibrillation devices ("CRT-D") and devices utilizing low or medium rate batteries but no capacitors (pacemakers and CRTs). All CRM devices utilize other components such as enclosures and feedthroughs, and certain CRM devices utilize electromagnetic interference ("EMI") filtering technology. We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. For clarity of presentation, we describe all periods as if each quarter end is March 31st, June 30th and September 30th and as if the year-end is December 31st. The second quarter of 2005 and 2004 each contained 13 weeks. The commentary that follows should be read in conjunction with our condensed consolidated financial statements and related notes and with the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K/A for the fiscal year ended December 31, 2004. Overview During and subsequent to the second quarter 2005, there were several developments affecting our business: o We reported all-time record sales results of $63.5 million, led by strong sales of implantable medical components and commercial power sources. o We changed the name of the Company to Greatbatch, Inc., from the former name of Wilson Greatbatch Technologies, Inc. 21 o We celebrated the grand opening of the world-class manufacturing facility in Tijuana, Mexico. o We appointed Thomas J. Hook as President and Chief Operating Officer. o The installation of the remaining assembly equipment at the Tijuana Facility continued to proceed as planned; completion is expected in the fourth quarter of 2005. The consolidation plan was finalized for the move of the Carson City plant into the Tijuana Facility. The move is expected to be completed by first quarter 2006. o The move of the medical battery manufacturing equipment to Alden, NY, was substantially completed in accordance with plan. The movement of the manufacturing equipment from the existing capacitor plant was initiated and is expected to be complete by the end of the fourth quarter 2005. o We amended our Senior Secured Credit Facility to replace our existing $20.0 million revolving credit with a new three-year, $50 million revolving credit facility. Product Development As mentioned in our annual report (which is available on our website, www.greatbatch.com), our near term focus for growth in the medical battery market is the introduction of our Q-Series batteries. Initially they will be available in two configurations - QHR (High Rate) and QMR (Medium Rate). These batteries hold the promise of unparalleled performance in a wide range of implantable device and neurostimulation applications and allow our customers to incorporate advanced power-hungry features into these devices. While companies typically announce new products that have modest improvements in form and/or function regularly, we believe the Q-Series firmly establishes a new industry standard. It delivers advanced performance criteria to an industry that historically embraces new products. We believe the Q-Series will represent a major breakthrough by combining a smaller size with greater energy density (more power). Based on our limited test results to date, batteries incorporating nanotechnology may demonstrate the potential for generating even further improvements. While nanotechnology is showing some limited benefits in current battery designs, we do not anticipate realizing its full potential until it can be tested in the Q-Series design. As the word implies, "nano" unlocks the promise of smaller size and offers potential for enhanced product performance and manufacturability. Additionally, nano applications are not limited to batteries. The same technology may well be the enabling force behind other new products now in development such as significantly smaller higher voltage capacitors, novel form batteries and capacitors that will be used in new, far less intrusive cardiac therapy applications that represent an entirely new approach to CRM treatment. 22 Cost savings and consolidation efforts During second quarter 2005, we recorded non-recurring charges in other operating expense related to our ongoing cost savings and consolidation efforts. Severance charges. The Company implemented a 4% workforce reduction during the first quarter, which resulted in a severance charge of $1.5 million. Of that amount, $0.8 million and $0.5 million was paid in cash during the first and second quarters, respectively. The remaining $0.2 million balance is anticipated to be paid in cash within the next three months. Alden Facility Consolidation. On February 23, 2005, we announced our intent to consolidate the medical capacitor manufacturing operations, currently in Cheektowaga, NY, and the implantable medical battery manufacturing operations, currently in Clarence, NY, into the advanced power source manufacturing facility in Alden, NY ("Alden Facility"). We are also consolidating the capacitor research, development and engineering operations from the Cheektowaga, NY, facility into the existing implantable medical battery research, development, and engineering operations in Clarence, NY. The total cost estimated for these consolidation efforts is anticipated to be between $3.5 and $4.0 million. Expenses of $0.9 million have been incurred through the second quarter. Of these, $0.4 million were paid in cash, $0.2 million were for written-off assets, and $0.3 million remain to be paid. We expect to incur the remaining expense over the next two fiscal quarters. Carson City Facility shutdown and Tijuana Facility consolidation. On March 7, 2005, we announced our intent to close the Carson City, NV facility ("Carson City Facility") and consolidate the work performed at the Carson City Facility into the Tijuana, Mexico facility ("Tijuana Facility"). The total estimated cost for this facility consolidation plan is anticipated to be between $4.5 million and $5.4 million, comprised of between $2.5 million to $2.9 million for the Carson City Facility shutdown and $2.0 to $2.5 million for the Tijuana Facility consolidation. We expect to incur the remaining costs over the next three fiscal quarters. All categories of costs are considered to be cash expenditures, except accelerated depreciation. Carson City Facility shutdown expenses of $0.8 million have been accrued year to date, of which $0.2 million have been recorded as accelerated depreciation and $0.6 million remain to be paid. Tijuana Facility consolidation expenses of $0.04 million have been incurred and paid year to date. 23
Results of Operation and Financial Condition Three months Six months ended June 30, $ % ended June 30, $ % In thousands, except per share data 2005 2004 Change Change 2005 2004 Change Change - ----------------------------------------------------------------------------------------------------------------------------- IMC ICD batteries $12,608 $ 10,119 2,489 25% $ 23,234 $ 19,539 3,695 19% Pacemaker and other batteries 6,315 5,361 954 18% 11,695 11,050 645 6% ICD Capacitors 5,954 6,239 (285) -5% 10,251 14,647 (4,396) -30% Feedthroughs 15,859 12,261 3,598 29% 29,541 26,016 3,525 14% Enclosures 6,019 5,142 877 17% 12,566 10,539 2,027 19% Other 8,031 7,077 954 13% 15,363 12,686 2,677 21% ------------------------------------------------------------------------------- Total IMC 54,786 46,199 8,587 19% 102,650 94,477 8,173 9% ECP 8,738 6,743 1,995 30% 17,232 13,990 3,242 23% ------------------------------------------------------------------------------- Total sales 63,524 52,942 10,582 20% 119,882 108,467 11,415 11% Cost of sales 38,405 29,124 9,281 32% 73,976 61,474 12,502 20% ------------------------------------------------------------------------------- Gross profit 25,119 23,818 1,301 5% 45,906 46,993 (1,087) -2% Gross margin 39.5% 45.0% -5.5% 38.3% 43.3% -5.0% Selling, general, and administrative expenses (SG&A) 8,481 6,389 2,092 33% 15,247 13,314 1,933 15% SG&A as a % of sales 13.4% 12.1% 1.3% 12.7% 12.3% 0.4% Research, development and engineering costs, net (RD&E) 3,657 5,688 (2,031) -36% 8,058 10,569 (2,511) -24% RD&E as a % of sales 5.8% 10.7% -4.9% 6.7% 9.7% -3.0% Intangible amortization 958 1,076 (118) -11% 1,916 1,851 65 4% Other operating expense, net 4,001 2,957 1,044 35% 6,389 3,178 3,211 101% ------------------------------------------------------------------------------- Operating income 8,022 7,708 314 4% 14,296 18,081 (3,785) -21% Operating margin 12.6% 14.6% -2.0% 11.9% 16.7% -4.8% Interest expense 1,191 1,144 47 4% 2,322 2,304 18 1% Interest income (652) (245) (407) 166% (1,227) (558) (669) 120% Other expense (income), net (60) (2) (58) 2900% (60) - (60) 100% Provision for income taxes 2,263 2,078 185 9% 3,978 4,983 (1,005) -20% Effective tax rate 30.0% 30.5% -0.5% 30.0% 30.5% -0.5% ------------------------------------------------------------------------------- Net income $ 5,280 $ 4,733 $ 547 12% $ 9,283 $ 11,352 $(2,069) -18% =============================================================================== Net margin 8.3% 8.9% -0.6% 7.7% 10.5% -2.8% Diluted earnings per share $ 0.23 $ 0.21 $ 0.02 10% $ 0.42 $ 0.50 $ (0.08) -16%
24 Sales IMC. The nature and extent of our selling relationship with each CRM customer is different in terms of component products purchased, selling prices, product volumes, ordering patterns and inventory management. We have pricing arrangements with our customers that at times do not specify minimum order quantities. Our visibility to customer ordering patterns is over a relatively short period of time. Our customers may have inventory management programs and alternate supply arrangements of which we are unaware. Additionally, the relative market share among the CRM device manufacturers changes periodically. Consequently, these and other factors can significantly impact our sales in any given period. The results for the quarter did receive benefit from the field issues surrounding ICD products. However, it is extremely difficult to identify how much benefit we did receive during the second quarter. We did see a quarterly sequential increase in CRM related sales in the range of $5 million. We do not have granularity into the nature of the orders and can only assume that some percentage of the increase relates to the ICD field actions in the marketplace. It is very conceivable that the impact on our sales will continue to be favorably affected by these field issues into the second half of the year. There are a number of factors, both short-term and long-term related to these field actions that may impact our results. In the short-term, if product has to be replaced, or customer inventory levels have to be restored, this will result in increased component demand. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a positive impact on our sales results in the near-term. These same factors may have longer-term implications as well. Customer inventory levels may ultimately have to be rebalanced to match demand. These dynamics should be become clearer in early 2006 and will have to be carefully considered when we provide our 2006 outlook. Moving beyond the field actions, the increase in demand is not isolated to any one customer. We are seeing strength across all of our products and our entire customer base. We believe that the market continues to exhibit strong underlying growth fundamentals and that we are well positioned to participate in this market growth. The increase in IMC sales of 19% during the second quarter and 9% year to date were primarily due to increased demand for ICD batteries, filtered feedthroughs, coated components and medical enclosures offset by an average 2% reduction in selling prices. Sales of assembly products manufactured in our Tijuana Facility added incremental sales of $0.8 million to the quarter and year to date. ECP. Similar to IMC customers, we have pricing arrangements with our customers that many times do not specify minimum quantities. Our visibility to customer ordering patterns is over a relatively short period of time. We recorded our second consecutive record sales performance in our commercial business segment. The ECP sales increases of 30% in the second quarter and 23% year to date have been driven by volume increases due to a number of factors. 25 First and foremost, we have expanded our commercial sales force. We are aggressively pursuing new business opportunities and have been successful on many of these fronts. Second, we have significantly reduced our manufacturing lead times at our Canton facility, which has allowed us to increase shipments in the current year. We will continue to expand on these efforts from various lean manufacturing initiatives that are underway in our Canton facility and throughout the Company. The third factor that has contributed to our positive commercial results has been favorable market dynamics. The oil and gas exploration market remains robust due to the increased demand for products used in pipeline inspections, pressure monitoring and measurement while drilling applications. In addition, we have seen an increase in demand for power sources used in wave monitoring and seismic recording, due to increased Tsunami related concerns, mainly in the international markets. Gross profit The basis point decreases in gross margin for the quarter and year to date were primarily due to the following factors:
Basis point impact ------------------------ Quarter Year to Date Excess capacity at wet tantalum capacitor and Tijuana facilities 290 230 Lower IMC selling prices 130 170 Profit sharing accruals and incentive compensation 60 30 Higher platinum costs & other items 70 70 --- --- 550 500 === ===
SG&A expenses Expenses for the quarter and year to date increased primarily as a result of $2.0 million of increased incentive compensation accruals recorded during the second quarter. RD&E expenses RD&E expenses, net of development costs reimbursed, decreased by 36% for the quarter and 24% for the year to date compared to last year. Gross RD&E spending declined by 12% for the quarter and 8% for the year to date versus last year. The majority of this decrease is due to the QHR battery product line moving from the development stage into production. We expect that RD&E costs will increase in the second half, due to increased investment in future development programs and the timing of achievement of reimbursement milestones. In terms of the development costs billed, reimbursements for development projects were 360% higher in the current quarter, and 101% higher for the year to date compared to the same period last year. The reimbursements for achieving certain development milestones are netted against gross spending. The timing of the achievement of these milestones was the primary reason for the decline in net RD&E expenses. 26 Amortization expense Amortization expense for the quarter declined as the result of the completion of amortization of a noncompete/employment agreement during 2004. The result is a $0.1 million reduction in amortization expense per quarter in 2005. Amortization expense for the year to date reflects an incremental $0.3 million of intangible amortization resulting from the NanoGram acquisition in March 2004 offset by the $0.2 million reduction of expense due to the completion of the amortization of the noncompete/employment agreement during 2004. Other operating expense Other operating expense for the quarter and year to date is comprised of the following costs (in millions): Quarter Year to Date ------- ------------ Costs to exit development agreement $ 1.2 $ 1.2 Alden facility consolidation * 0.9 0.9 Severance * - 1.5 Asset dispositions 1.0 1.5 Carson City facility shutdown * 0.6 0.8 Tijuana start-up * 0.3 0.5 ----- ----- $ 4.0 $ 6.4 ===== ===== The $1.2 million charge for "costs to exit a development agreement" were recorded in other operating expenses during the second quarter for charges associated with the discontinuation of a drug pump development agreement. Refer to "Cost savings and consolidation efforts" discussion for disclosure related to the timing and level of remaining expenditures for items marked with "*". Interest expense and interest income Interest expense increased during the quarter and year to date due to the incremental deferred financing fees amortization related to the new revolver. Interest income increased during the quarter and year to date due to higher interest rates as well as the movement of investments in mid-2004 from tax deferred to taxable securities, which bear higher rates of return. 27 Provision for income taxes The effective tax rate declined due to various state tax planning initiatives realized in mid-2004. We anticipate the full year effective tax rate will not exceed 30.0%. Our effective tax rate is below the United States statutory rate primarily as a result of federal and state tax credits and the allowable Extraterritorial Income Exclusion ("ETI") for 2005. Liquidity and Capital Resources Revolving Line of Credit On May 31, 2005, we amended our Senior Secured Credit Facility, which included changes to the underlying covenants. The amended three-year facility replaced the old $20.0 million revolving credit facility with a new $50.0 million Revolving Credit Facility ("new revolver"), which contains a $10.0 million sub-limit for the issuance of commercial or standby letters of credit. The new revolver is secured by our non-realty assets including cash, accounts and notes receivable, and inventories. The new revolver requires us to comply with two quarterly financial covenants, as defined. The first relates to the ratio of consolidated net earnings or loss before interest, taxes, depreciation, and amortization ("EBITDA") to Fixed Charges. The second is a Leverage ratio, which is calculated based on the ratio of Consolidated Funded Debt less Cash, Cash Equivalent Investments and Short-Term Investments to Consolidated EBITDA. Interest rates under the new Facility vary with our leverage. We are required to pay a commitment fee of between .125% and .250% per annum on the unused portion of the revolving line of credit based on our leverage. As of June 30, 2005, we had no balance outstanding on our $50.0 million committed revolving line of credit. Our principal sources of liquidity are our operating cash flow combined with our working capital of $143.3 million at June 30, 2005 and availability under our line of credit. Historically we have generated cash from operations sufficient to meet our capital expenditure and debt service needs, other than for acquisitions. At June 30, 2005, our current ratio was 6.2:1. The Company regularly engages in discussions relating to potential acquisitions and may announce an acquisition transaction at any time. Operating activities Positive cash flows from operating activities were achieved in both periods presented. During the second quarter and year to date, increased accounts receivable utilized approximately $6.9 million and $11.2 million dollars of the cash provided from operating activities, respectively. 28 Investing activities The majority of the current year increase in capital spending was for the following: a. New medical power manufacturing plant in Alden, NY - $5.6 million; and b. New assembly plant in Tijuana, Mexico - $6.7 million. In March 2004, we purchased NanoGram for approximately $45.7 million. The most significant elements of the purchase price allocation were to patented and unpatented technology and goodwill. The costs allocated to patented and unpatented technology are being amortized over the remaining estimated useful life of 11.5 years. The residual amount of the allocation of $33.4 million went to goodwill, which is not amortized but rather subject to periodic testing for impairment. NanoGram is now referred to as our Advanced Research Laboratory. Since the primary function of this operation is research and development, all costs are appropriately classified in that category. Approximately $9.5 million of short-term investments were purchased during the quarter, net of dispositions. On a year to date basis, short-term investments of $5.0 million have been purchased, net of dispositions. Financing activities Payments on capital lease obligations and non-qualified stock option exercises are the primary financing activities for both periods presented. Capital Structure At June 30, 2005, our capital structure consisted primarily of $170.0 million of convertible subordinated notes and our 21.6 million shares of common stock outstanding. We have in excess of $88.0 million in cash, cash equivalents and short-term investments and are in a position to facilitate future acquisitions if necessary. We are also 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; accordingly, we believe that if needed we can access public markets to sell additional common or preferred stock assuming conditions are appropriate. Our capital structure allows us to support our internal growth and provides liquidity for corporate development initiatives. The current expectation for 2005 is that capital spending is expected to be in the range of $30.0 million to $35.0 million, primarily due to the build-out of the Alden Facility ($11.0 million), the Tijuana Facility ($10.0 million), and normal maintenance capital expenditures. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K. 29 Inflation We do not believe that inflation has had a significant effect on our operations. Impact of Recently Issued Accounting Standards In July 2005, the Financial Accounting Standards Board ("FASB") published an Exposure Draft of a proposed Interpretation, Accounting for Uncertain Tax Positions. The Exposure Draft seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It would apply to all tax positions accounted for in accordance with SFAS 109, Accounting for Income Taxes. The Exposure Draft requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in the financial statements. This threshold is to be met assuming that the tax authorities will examine the uncertain tax position. The Exposure Draft contains guidance with respect to the measurement of the benefit that is recognized for an uncertain tax position, when that benefit should be derecognized, and other matters. This proposed Interpretation would clarify the accounting for uncertain tax positions in accordance with SFAS 109. This Interpretation, once approved, is expected to be effective as of the end of the first fiscal year ending after December 15, 2005. We outlined our critical accounting policies related to income taxes in our Annual Report on Form 10-K for the year ended December 31, 2004. Certain tax accounting and reporting guidelines may change as a result of new accounting guidance. Our accounting and reporting treatment will be determined at the time of issuance of a final standard. In June 2005 the issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections, ("SFAS 154") a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition by recording a cumulative effect adjustment within net income in the period of change. SFAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not expect that adoption of SFAS No. 154 will have a material effect on our consolidated financial position, consolidated results of operations, or liquidity. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"). This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. 30 We anticipate adopting the provisions of SFAS No. 123(R) on January 1, 2006 using the modified prospective application. Accordingly, compensation expense will be recognized for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation cost for the unvested portion of awards that are outstanding as of January 1, 2006 will be recognized ratably over the remaining vesting period. The compensation cost for the unvested portion of awards will be based on the fair value at date of grant as calculated for our pro forma disclosure under SFAS 123. We estimate that the effect on net income and earnings per share in the periods following adoption of SFAS 123(R) will be consistent with the our pro forma disclosure under SFAS No. 123, except that estimated forfeitures will be considered in the calculation of compensation expense under SFAS 123(R). Additionally, the actual effect on net income and earnings per share will vary depending upon the number of options granted in subsequent periods compared to prior years. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not expect that adoption of SFAS No. 151 will have a material effect on our consolidated financial position, consolidated results of operations, or liquidity. Application of Critical Accounting Estimates Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations are in the areas of inventories, goodwill and other indefinite lived intangible assets, long-lived assets and income taxes. During the three months ended June 30, 2005, we did not change or adopt new accounting policies that had a material effect on our consolidated financial condition and results of operations. Contractual Obligations During 2004, we commenced the build out of our Alden Facility and our Tijuana Facility. These facilities will enable the Company to further consolidate its operations and implement state of the art manufacturing capabilities at both locations. The contractual obligations for construction of these facilities is $4.4 million and will be financed by existing, or internally generated cash. Litigation During 2002, a former non-medical customer commenced an action alleging that we used proprietary information of the customer to develop certain products. We have meritorious defenses and are vigorously defending the case. No accrual for an adverse judgment has been made as such outcome is not deemed probable, the potential risk of loss is between $0.0 and $1.75 million. 31 As reported in our 2005 first quarter Form 10-Q, on May 2, 2005, a complaint was filed against us by a developer of an implantable drug delivery device in the United States Federal District Court for the Central District of California. On May 20, 2005, the parties entered into a settlement agreement under which the Company undertook certain obligations including the performance of certain additional development tasks for a limited period of time. On June 2, 2005, the Court ordered the complaint dismissed without prejudice. 32 Forward-Looking Statements Some of the statements contained in this Quarterly Report on Form 10-Q/A 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: o future sales, expenses and profitability; o the future development and expected growth of our business and the implantable medical device industry; o our ability to successfully execute our business model and our business strategy; o 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; o projected capital expenditures; and o 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 that arise from time to time as described in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission. 33 ITEM 4. Controls and Procedures. a. Evaluation of Disclosure Controls and Procedures. During the second quarter of 2005, our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. As a result of the restatement of the Company's consolidated balance sheet and consolidated statement of cash flows as of December 31, 2004 as described in Amendment 1 to Form 10-K for the year ended December 31, 2004, the Company's management, including the principal executive officer and principal financial officer, have concluded that there was a material weakness in internal control over financial reporting. Specifically, the Company's review of the financial statements utilizing a financial statement presentation and disclosure checklist to ensure that the financial statements were fairly presented in accordance with generally accepted accounting principles did not operate effectively as it relates to the misstatements identified above. Solely as a result of this material weakness, our Management has revised its earlier assessment and has now concluded that our internal control over financial reporting was not effective as of June 30, 2005. b. Changes in Internal Control Over Financial Reporting. Since March 31, 2005, except as disclosed below, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. As of the date of this filing, we have remediated the material weakness in our internal controls over financial reporting. The remedial actions included: 1. Enhancing the financial reporting process to include the formal review of all auction rate securities for proper classification, as well as the appropriate cash flow presentation of liabilities related to the acquisition of property, plant and equipment. 2. Establishing formal quarterly disclosure meetings which will include our third party tax advisors to review significant transactions during the period as well as to review and discuss new accounting presentation and disclosure guidelines. Our outside accountants, although not part of our control structure, will participate in these meetings. 34 3. Enhancing our financial reporting practices to include the use of multiple third-party financial reporting technical alerts that we utilize to evaluate our accounting policies and financial statement disclosures. While we have not completed all of our Sarbanes-Oxley testing for 2005, we believe that after putting into effect the remedial actions described above, our Company's system of internal controls over financial reporting is effective, which should enable us to arrive at the 2005 assessment that our system of internal controls over financial reporting are adequate and operating effectively. 35 PART II - OTHER INFORMATION ITEM 6. Exhibits. See the Exhibit Index for a list of those exhibits filed herewith. 36 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: December 16, 2005 GREATBATCH, INC. By /s/ Edward F. Voboril ------------------------------------------------- Edward F. Voboril Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By /s/ Thomas J. Mazza ------------------------------------------------- Thomas J. Mazza Senior Vice President and Chief Financial Officer (Principal Financial Officer) By /s/ Marco F. Benedetti ------------------------------------------------- Marco F. Benedetti Corporate Controller (Principal Accounting Officer) 37 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 32.1 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. 38 EX-31.1 2 a5041143ex311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Edward F. Voboril, certify that: 1. I have reviewed this report on Form 10-Q/A for the fiscal quarter ended July 1, 2005 of Greatbatch, 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. -1- 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 16, 2005 /s/ Edward F. Voboril -------------------------------------------- Edward F. Voboril Chairman of the Board and Chief Executive Officer -2- EX-31.2 3 a5041143ex312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Thomas J. Mazza, certify that: 1. I have reviewed this report on Form 10-Q/A for the fiscal quarter ended July 1, 2005 of Greatbatch, 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. -1- 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 16, 2005 /s/ Thomas J. Mazza ----------------------------------- Thomas J. Mazza Senior Vice President and Chief Financial Officer -2- EX-32 4 a5041143ex32.txt EXHIBIT 32 Exhibit 32 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 Greatbatch, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q/A for the quarter ended July 1, 2005 (the "Form 10-Q/A") 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-Q/A fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 16, 2005 /s/ Edward F. Voboril -------------------------------------------- Edward F. Voboril Chief Executive Officer and Chairman of the Board Dated: December 16, 2005 /s/ Thomas J. Mazza ----------------------------------- Thomas J. Mazza Senior Vice President and Chief Financial Officer This certification is being furnished solely to accompany this Form 10-Q/A pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise, and is not to be deemed incorporated by reference into any filing of the Company except to the extent the company specifically incorporates it by reference therein. -1- -----END PRIVACY-ENHANCED MESSAGE-----