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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 29, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-49702
MEDSOURCE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: DELAWARE IRS Employer Identification No: 52-2094496
110 CHESHIRE LANE, SUITE 100, MINNEAPOLIS, MN 55305
(Address and zip code of principal executive office)
(952) 807-1234
(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: |_|
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding as of October 30, 2002 was 27,612,871.
TABLE OF CONTENTS
Part I: Financial Information
-----------------------------
Item 1. Financial Statements.................................................3
Consolidated Balance Sheets..........................................3
Consolidated Statements of Operations................................4
Consolidated Statements of Cash Flows................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................8
Item 3. Quantitative and Qualitative Disclosures About Financial
Market Risk.........................................................12
Item 4. Controls and Procedures.............................................13
Part II: Other Information
--------------------------
Item 1. Legal Proceedings...................................................14
Item 2. Changes in Securities and Use of Proceeds...........................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures ...................................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 29, JUNE 30,
2002 2002
-------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 23,633 $ 38,268
Accounts receivable, net 23,551 24,031
Inventories 23,337 20,503
Prepaid expenses and other current assets 2,182 2,402
--------- ---------
Total current assets 72,703 85,204
Property, plant, and equipment, net 47,230 42,045
Goodwill, net 131,728 113,113
Other identifiable intangible assets, net 4,009 4,092
Deferred financing costs 1,981 1,971
Other assets 1,755 1,404
--------- ---------
Total assets $ 259,406 $ 247,829
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,429 $ 7,924
Accrued compensation and benefits 5,275 5,352
Other accrued expenses 2,028 3,491
Restructuring reserve 2,081 2,381
Current portion of long-term debt 6,323 5,939
--------- ---------
Total current liabilities 23,136 25,087
Long-term debt, less current portion 43,476 35,967
Other long-term liabilities 838 455
Stockholders' equity:
Preferred stock - 1,974
Common stock 277 269
Additional paid-in capital 274,544 268,455
Treasury stock (1,282) (1,282)
Accumulated other comprehensive loss (165) -
Accumulated deficit (81,382) (83,025)
Unearned compensation (36) (71)
--------- ---------
Total stockholders' equity 191,956 186,320
--------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY $ 259,406 $ 247,829
========= =========
See accompanying notes.
-3-
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
---------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
--------------- ---------------
Revenues $ 41,003 $ 33,865
Costs and expenses:
Cost of product sold 30,812 26,107
Selling, general and administrative expense 7,905 6,401
Amortization of other intangibles 83 89
------------ ------------
Operating income 2,203 1,268
Interest expense, net (521) (2,477)
Other expense (1) (14)
------------ ------------
Income (loss) before income taxes 1,681 (1,223)
Income tax expense (2) -
------------ ------------
Net income (loss) 1,679 (1,223)
Preferred stock dividends and accretion of
discount on preferred stock - (2,661)
------------ ------------
Net income (loss) attributed to common
stockholders $ 1,679 ($3,884)
============ ============
Net income (loss) per share attributed to common stockholders
Basic and diluted $ 0.06 ($0.74)
Weighted average common shares outstanding
Basic 27,135,481 5,255,755
Diluted 27,453,441 5,255,755
See accompanying notes.
-4-
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,679 $ (1,223)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 2,033 1,861
Amortization of other intangibles 83 89
Amortization of deferred financing costs and discount
on long-term debt 104 291
Amortization of unearned compensation 35 36
Changes in operating assets and liabilities, net
of effect of business acquired:
Accounts receivable 1,455 1,216
Inventories (2,244) (892)
Prepaid expenses and other current assets 54 (66)
Interest escrow fund - 625
Accounts payable, accrued compensation and benefits, accrued
expenses and other (3,318) (5,163)
Other 6 (77)
-------- --------
Net cash used in operating activities (113) (3,303)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (18,408) -
Other additions to plant and equipment, net (2,090) (1,608)
Proceeds from sale of equipment - (12)
-------- --------
Net cash used in investing activities (20,498) (1,620)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (106) (1,150)
Proceeds of long-term debt 8,000 -
Redemption of Series E preferred stock (2,011) -
Proceeds from sale of common stock, net of costs 93 38
-------- --------
Net cash provided by (used in) financing activities 5,976 (1,112)
-------- --------
Decrease in cash and cash equivalents (14,635) (6,035)
Cash and cash equivalents at beginning of period 38,268 20,289
-------- --------
Cash and cash equivalents at end of period $ 23,633 $ 14,254
======== ========
See accompanying notes.
-5-
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
MedSource Technologies, Inc. (the "Company") has prepared the unaudited
interim consolidated financial statements presented herein in accordance with
accounting principles generally accepted in the United States for interim
financial statements and in accordance with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. The consolidated financial statements are
unaudited but, reflect all adjustments, consisting of normal recurring
adjustments and accruals which, in the opinion of management, are considered
necessary for a fair presentation of our financial position and results of
operations and cash flows for the interim periods presented. The consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's annual report for its fiscal year ended June 30, 2002.
Results of operations for interim periods are not necessarily indicative of the
results that may be expected for the full fiscal year.
2. ACQUISITION
On September 4, 2002, the Company acquired Cycam, Inc., a company located
in Houston, Pennsylvania that manufactures reconstructive implants and
instruments. The total purchase price was approximately $24.4 million, which
included $18.4 million in cash and 667,175 shares of common stock valued at $6.0
million. The acquisition was recorded using the purchase method of accounting.
The preliminary purchase price allocation was $5.8 million to net tangible
assets and $18.6 million to goodwill, and is subject to adjustment pending final
review.
In conjunction with the acquisition, the Company drew $8.0 million from the
acquisition line under the Company's existing credit facility.
The effect of the acquisition on the financial position and results of
operations is not material, and therefore no pro-forma data of this acquisition
is required or presented.
3. INVENTORIES
Inventories consisted of the following (in thousands):
SEPTEMBER 29, JUNE 30,
2002 2002
--------------- -------------
(UNAUDITED)
Raw material $ 11,831 $ 10,638
Work-in-progress 8,238 6,529
Finished goods 3,268 3,336
--------- ----------
Total $ 23,337 $20,503
========= ==========
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) attributed to
common stockholders plus the results of any stockholders' equity changes
relating to the Company's previous interest rate swaps and current interest rate
cap agreements. For the three-months ended September 29, 2002 and September 30,
2001, comprehensive income (loss) was $1.5 million and $(3.9) million,
respectively.
-6-
5. INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share attributed to common
stockholders was computed using the weighted average number of shares of common
stock outstanding during the period. For the period ended September 29, 2002,
the impact of the inclusion of potentially dilutive securities related to the
assumed exercise or conversion of options and warrants were included in
determining the diluted weighted average shares outstanding. For the period
ended September 30, 2001, the impact of the same securities would have been
anti-dilutive, and they were therefore excluded from the computation.
The table below sets forth the computation of basic and diluted net
earnings (loss) per share:
FOR THE THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2002 2001
-------------- ---------------
(UNAUDITED)
Numerator:
Net earnings $ 1,679 ($3,884)
Denominator:
Basic-weighted average shares outstanding 27,135,481 5,255,755
Effect of dilutive securities:
Employee stock options 154,600 -
Restricted shares 163,360 -
- -----------------------------------------------------------------------------------------
Diluted-weighted average shares outstanding 27,453,441 5,255,755
- -----------------------------------------------------------------------------------------
Basic net earnings per share $0.06 ($0.74)
- -----------------------------------------------------------------------------------------
Diluted net earnings per share $0.06 ($0.74)
- -----------------------------------------------------------------------------------------
6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 with early adoption permitted for companies with fiscal years
beginning after March 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. Amounts
previously recorded as separately identifiable intangibles for acquired work
force and customer base were subsumed to goodwill in accordance with FAS 141,
increasing goodwill by $34.6 million as of the date of adoption. Effective with
the July 1, 2001 adoption of FAS 142, goodwill is no longer amortized but is
instead subject to an annual impairment test. The transitional test conducted in
connection with the adoption of FAS 142 and the annual impairment test,
performed as of the beginning of the Company's fiscal 2002 fourth quarter
resulted in no impairment being required.
7. RESTRUCTURING CHARGE
In June 2001, the Company completed a strategic review of its manufacturing
operations and support functions. Based on this review and with approval of the
Board of Directors, management began actions to eliminate redundant facilities
and recorded a restructuring charge of $11.5 million.
-7-
Information relating to the restructuring charges is as follows (in
millions):
INCURRED
THROUGH BALANCE AT
INITIAL SEPTEMBER 29, SEPTEMBER 29,
ACCRUAL RECLASS 2002 2002
========== ========== ============ =============
Impairment of goodwill and other intangibles.......... $ 3.6 $ -- $ (3.6) $ --
Impairment of property, plant and equipment........... 1.9 2.0 (3.9) --
Employee termination benefits......................... 3.8 (1.5) (1.4) 0.9
Other direct costs.................................... 2.2 (0.5) (0.5) 1.2
========== ========== ============ =============
$ 11.5 $ 0.0 $ (9.4) $ 2.1
========== ========== ============ =============
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
financial statements and related notes appearing elsewhere in this Report on
Form 10-Q.
The following discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. In many cases, you can identify
forward-looking statements by terminology such as may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate, " "predict," "intend,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those indicated in these
statements as a result of certain factors, as more fully discussed below and
under the heading "risk factors" contained in our Form 10-K for the period
ending June 30, 2002. Readers should not place undue reliance on any such
forward-looking statements, which are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We
do not assume any obligation to update the forward-looking statements after the
date hereof.
OVERVIEW
We provide product development and design services, precision metal
and plastic part manufacturing, product assembly services and supply chain
management. We provide our products and services to each of the following
primary target markets:
o Surgical instrumentation devices and components;
o Electro-medical devices and components;
o Interventional devices and components; and
o Orthopedic devices and instruments.
COMPANY HISTORY
During 1998, our co-founders, Richard J. Effress and William J. Kidd,
established MedSource to identify business opportunities in the medical
engineering and manufacturing services industry. During March 1999, with
additional equity capital from Whitney & Co., we acquired seven unaffiliated
businesses to begin our operations. The original seven acquisitions were Kelco
Industries, W.N. Rushwood d/b/a Hayden Precision Industries, National Wire and
Stamping, The MicroSpring Company, Portlyn, Texcel and Brimfield Precision.
-8-
Since our initial acquisitions, we had acquired six additional
businesses through September 29, 2002. We acquired Tenax in January 2000, Apex
Engineering in February 2000 and Thermat Precision in May 2000. The acquisition
of Tenax provided injection molding capability, the acquisition of Thermat added
injection molding and precision metal injection manufacturing capabilities to
our operations, enabling us to manufacture low cost precision stainless steel
components, and the acquisition of Apex Engineering provided mold design and
plastic injection molding and mold making capabilities. We acquired ACT Medical
in December 2000. The acquisition of ACT Medical enhanced our product design and
development engineering expertise and provided a low cost assembly operation in
Mexico. We acquired HV Technologies, or HVT, in January 2002. The acquisition of
HVT, a specialized manufacturer of polyimide and composite micro-tubing used in
interventional and minimally invasive catheters, delivery systems and
instruments, enabled us to expand our offering of proprietary manufacturing
capabilities to our customers in the interventional device market. We acquired
Cycam Inc. in September 2002. The acquisition of Cycam, a manufacturer of
reconstructive implants and instruments, enhances our capabilities within
plastic machining, propriety coating technology, clean room knitting and
packaging along with multi axis machining. All of our acquisitions were
accounted for using the purchase method of accounting.
During June 2001, we completed a review of our manufacturing
operations and support functions. Based on our evaluation of the unique and
common characteristics of our various facilities, we determined that we could
achieve over-all cost savings by closing three of the facilities, thus improving
capacity utilization and efficiency of the remaining facilities. We sold our
facilities in Pittsfield and East Longmeadow, Massachusetts during our fiscal
year ended June 30, 2002. We also initiated the shutdown of our facility in
Danbury, Connecticut during our fiscal year ended June 30, 2002 and expect it to
be closed by February 2003.
RESULTS OF OPERATIONS
REVENUES
We recognize product revenues at the time products are shipped.
Product shipments are supported by purchase orders from customers that indicate
the price for each product. For services, we recognize revenues primarily on a
time and materials basis. Service revenues are supported by customer orders or
contracts that indicate the price for the services being rendered. For three
months ended September 29, 2002, service revenues were less than 10% of total
revenues. Revenues for product shipments and services rendered must also have
reasonable assurance of collectability from the customer. Reserves for returns
and allowances are recorded against revenues based on management's estimates and
historical experience.
We target the sale of our products and services to medical device
companies in four target markets. As we have continued to focus on these
markets, our sales to nonmedical customers as a percentage of our total revenues
have been decreasing over time. Sales to nonmedical customers were less than 2%
of our total revenues during the three months ended September 29, 2002.
Historically, most of our revenues were derived from manufacturing
components used in medical devices. However, in order to accelerate revenue
growth and better serve our customers, we aggressively pursued opportunities for
the assembly of completed devices. To support this effort, we have completed a
number of acquisitions to expand our product offerings and enhance our supply
chain services. Over time, we anticipate that revenues from the assembly of
completed devices will likely continue to grow as a percentage of our total
revenues. Nevertheless, we will continue to aggressively pursue component sales
opportunities.
Our top four customers accounted for 54% of our revenues for the three
months ended September 29, 2002, with one customer accounting for 28% of our
revenues and another accounting for 11% of our revenues. We expect revenues from
our largest customers to continue to constitute a significant portion of our
total revenues.
-9-
We primarily derive our revenues from serving leading medical device
companies. These customers are typically large companies with substantial market
share in one or more of our four target markets, and we believe that expanding
our relationships with these customers represents our most important revenue
opportunity. As a result, we devote significant sales efforts to securing
additional business from the business units and product lines of the leading
medical device companies that we currently serve, as well as developing business
with other business units and product lines of these customers. As we
increasingly focus on serving leading medical device companies and expand our
offerings to them by developing or acquiring additional engineering and
manufacturing capabilities, we expect the percentage of revenues we derive from
these customers to increase over time. We also intend to continue to selectively
pursue promising opportunities with emerging medical device companies.
As discussed above, we have acquired six businesses after March 1999.
A substantial portion of our revenue growth to date has been attributable to the
addition of these acquired companies' revenues. In the periods following these
acquisitions, we have grown our revenues by offering our existing customers
access to our newly acquired engineering and manufacturing capabilities, as well
as by offering the customers of the acquired businesses access to our existing
capabilities. We generally have retained the medical device customers of the
companies that we have acquired, but have selectively discontinued business with
customers of the acquired businesses that did not fit our strategic focus of
serving leading and select emerging medical device companies in our four target
markets or related medical fields. We expect to continue to make select
acquisitions of complementary medical engineering and manufacturing services
providers that bring desired capabilities, customers and/or geographic coverage
that either strengthens our position in our target markets or provide us with a
significant presence in a new market.
We generally do not have long-term volume commitments from our
customers, and they may cancel their orders or change or delay volume levels at
any time.
COST AND EXPENSES
Cost of products sold includes expenses for raw materials, purchased
components, outside services, supervisory, engineering and direct production
manpower including benefits, production supplies, depreciation and other related
expenses to support product manufacturing. We purchase most of the raw materials
that are used in our products at prevailing market prices and, as a result, are
subject to fluctuations in the market price of those raw materials. In
particular, the prices of stainless steel, titanium and platinum have
historically fluctuated, and the prices that we pay for these materials, and, in
some cases, their availability, are dependent upon general market conditions.
Our margins are driven by sales mix between devices and components as
well as the respective product mixes within our various product categories.
Historically, our component business produced strong gross margins. When we were
initially formed during March 1999, we were predominately a components supplier.
However, in order to expand the scope of our services and accelerate revenue
growth, we aggressively pursued opportunities for the assembly of completed
devices, which generally have higher material content and a lower value added
content, and can result in slightly lower gross margins but with lower capital
investment.
Selling, general and administrative expense includes support of our
facilities for production and shipments to the customer as well as strategic
investments in our sales and marketing, operations and quality teams, and our
corporate support staff.
-10-
THREE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenues for the three-month period ended September 29, 2002 totaled
$41.0 million compared to $33.9 million for the same period of the prior year,
an increase of 21%, of which 11% was due to acquisitions, mainly HV
Technologies, or HVT, which was acquired during January 2002, and 10% was due to
internal growth. Internal growth was driven by increased shipments of products
in the interventional cardiology and reconstructive orthopedic markets to
several of our established customers, a portion of which resulted from new
interventional product capabilities that we acquired with HVT. In addition,
revenues also benefited from accelerating sales of devices recently released by
our customers, specifically catheter-based drug delivery devices, orthopedic
knee systems, and patient monitoring equipment. Excluding the expected decline
in shipments reported of non-medical revenue and excluding the increased revenue
from the HVT acquisition, our base medical business increased 14% compared to
the prior year.
Cost of products sold for the three-month period ended September 29,
2002 totaled $30.8 million compared to $26.1 million for the three-month period
ended September 30, 2001. The increase in cost of products sold resulted
principally from the increase in volume compared to the prior year period.
Gross margin was 24.9% for the three months ended September 29, 2002,
up 2.0 points compared to 22.9% for the same period of the prior year. The
two-point margin improvement was mainly the result of operating efficiencies
from plant consolidations completed at the end of fiscal 2002, as well as the
favorable impact of HVT.
Selling, general, and administrative expense for the three-month
period ended September 29, 2002 totaled $7.9 million, or 19% of revenues,
compared to $6.4 million, or 19% of revenues, for the same period of the prior
year. The $1.5 million increase, or 23%, resulted mainly from the impact of the
HVT and Cycam acquisitions, higher bonus and profit sharing expenses, and higher
engineering costs to support future growth. In addition, the prior year period
included $0.5 million for the cost of service agreements terminated during March
2002 in conjunction with our initial pubic offering, or IPO.
Amortization of intangibles totaled $0.1 million for the three-month
periods ended September 29, 2002 and September 30, 2001.
Net interest expense totaled $0.5 million for the three-month period
ended September 29, 2002 and $2.5 million for the same prior year period. This
was due to both lower debt and interest rates from prior period as a result of
the March 2002 IPO.
Net income attributed to common shareholders totaled $1.7 million, or
$0.06 per share, compared with a loss of $3.9 million, or $0.74 per share, for
the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and
borrowings under our senior credit facility, which includes a $25 million unused
revolving credit facility. To date, our principal uses of cash have been to
finance capital expenditures, meet debt service requirements and finance
acquisitions. We expect that these uses will continue in the future.
Management believes that current cash balances and cash generated from
operations, combined with available borrowings under our senior credit facility,
will be adequate to fund requirements for working capital, capital expenditures,
and future expansion at least through fiscal 2003.
OPERATING ACTIVITIES
Net cash used in operating activities totaled $0.1 million for the
three months ended September 29, 2002 compared to $3.3 million for the prior
year period. The decrease in cash used in operating activities over the prior
year period was primarily the result of a $2.9 million increase in net income
and a $1.8
-11-
million reduction in the pay down of payables and accrued expenses offset by
$1.4 million of cash used to increase inventory compared to prior year period.
The increase in inventories was mainly due to anticipated product transfers in
conjunction with the previously announced plant consolidations as well as
anticipated product launches.
INVESTING ACTIVITIES
Cash used in investing activities was $20.5 million for the three
months ended September 29, 2002, compared to $1.6 million for the prior year
period. This increase was due to cash of $18.4 million used for the acquisition
of Cycam. Cash paid for capital expenditures increased $0.5 million when
compared to the prior year period. We expect capital expenditures in fiscal 2003
to be approximately $12.5 million. Also, we have entered into an agreement under
which we may acquire specified machinery, equipment and intangibles for $3.8
million. The acquisition is subject to the satisfaction of certain conditions
and may close during our second quarter.
FINANCING ACTIVITIES
Cash provided by financing activities was $6.0 million for the three
months ended September 29, 2002 compared to cash used by financing activities of
$1.1 million for the prior year period. The increase was primarily due to
proceeds of $8.0 million from the acquisition line under our senior credit
facility, in connection with the acquisition of Cycam, offset by $2.0 million
used for the redemption of the remainder of the Series E preferred stock.
CRITICAL ACCOUNTING POLICIES
There has been no material change to the Critical Accounting Policies
we disclosed in our annual report on Form 10-K for our year ended June 30, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Amounts outstanding under our senior credit facility bear interest at
a floating rate. To reduce our exposure to interest rate risk, we entered into
cap agreements to hedge our exposure to interest rate risk under this facility.
Changes in the fair value of the caps will be recorded in Accumulated Other
Comprehensive Loss in Stockholders' Equity. We had entered into a similar swap
agreement in connection with amounts due under our old senior credit facility.
The effect of a 10% increase in interest rates would have resulted in an
immaterial increase in interest expense during our period ended September 29,
2002.
FOREIGN CURRENCY RISK
Most of our sales and purchases are denominated in United States
dollars and as a result, we have relatively little exposure to foreign currency
exchange risk with respect to our sales. Accordingly, we do not use forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instrument for trading or speculative purposes. The
effect of a 10% change in exchange rates as of September 29, 2002 would not have
had a material impact on our operating results for the fiscal year then ended.
-12-
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that we are
required to filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures which, by their nature, can provide
only reasonable assurance regarding management's control objectives.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman of the Board and Chief Executive Officer and our Senior
Vice President -- Finance and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the foregoing, our Chairman of the Board
and Chief Executive Officer and our Senior Vice President -- Finance and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to MedSource
(and its consolidated subsidiaries) required to be included in our Exchange Act
reports.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out the evaluation referred to above.
-13-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During July 2002, we issued an aggregate of 408 shares of our common
stock to each of two directors, who are all "accredited investors," as payment
for their $2,500 quarterly directors' fee. We issued these securities in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering and
Rule 506 thereunder.
During August 2002, we paid cash and issued an aggregate of 667,175
shares of our common stock to one accredited investor in connection with our
acquisition of Cycam. We received assets valued at approximately $24.4 million
in connection with the acquisition and issued these securities in reliance on
the exemption Section 4(2) of the Securities Act as a transaction not involving
any public offering and Rule 506 thereunder.
INITIAL PUBLIC OFFERING AND USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
Our registration statement on Form S-1 (Registration Nos. 333-76842),
which related to the initial public offering of our common stock, was declared
effective by the Securities and Exchange Commission on March 26, 2002 (we filed
an additional registration statement on Form S-1 (Registration no. 333-84978)
under Rule 462(b) under the Securities Act of 1933 on March 27, 2002).
We received net proceeds of approximately $101.4 million in our IPO
and, at the time of our IPO, received $40.0 million under our new credit
facility. During the quarter ended September 29, 2002, we used approximately
$8.0 million of such funds in connection with the acquisition of Cycam and
approximately $2.0 million for the redemption of the remainder of our Series E
preferred stock held by certain of our directors and the family members of one
of our directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
-14-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit
Number Description
10.1 Form of Restricted Stock Award Contract entered into by the
registrant with certain of its executive officers
10.2 Stock and Asset Purchase Agreement dated as of August 31, 2002
among the registrant, MedSource Technologies, LLC, MedSource
Technologies Pittsburgh, Inc., Cycam, Inc., ELX, Inc., Wagner or
ELX and Donald J. Wagner
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
(b) The registrant did not file a current report on Form 8-K during
the period covered by this report.
-15-
SIGNATURES
Pursuant to the requirements 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: November 4, 2002
MEDSOURCE TECHNOLOGIES, INC.
By: /s/ Richard J. Effress
-------------------------------------
Richard J. Effress, Chairman
and Chief Executive Officer
By: /s/ Joseph J. Caffarelli
-------------------------------------
Joseph J. Caffarelli, Senior
Vice President and Chief
Financial Officer
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Richard J. Effress, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MedSource
Technologies, Inc.;
2. Based on my knowledge, this quarterly 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
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 this quarterly
report is 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors 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 officers and I have indicated in this
quarterly 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: November 4, 2002
/s/ Richard J. Effress
-------------------------------------
Richard J. Effress
Chairman of the Board and Chief
Executive Officer
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, Joseph J. Caffarelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MedSource
Technologies, Inc.;
2. Based on my knowledge, this quarterly 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
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 this quarterly
report is 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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors 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 officers and I have indicated in this
quarterly 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: November 4, 2002
/s/ Joseph J. Caffarelli
-------------------------------------
Joseph J. Caffarelli
Senior Vice President -- Finance and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description Page No.
10.1 Form of Restricted Stock Award Contract entered into by
the registrant with certain of its executive officers
10.2 Stock and Asset Purchase Agreement dated as of August
31, 2002 among the registrant, MedSource Technologies,
LLC, MedSource Technologies Pittsburgh, Inc., Cycam,
Inc. ELX, Inc., Wagner-ELX and Donald J. Wagner
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer