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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended January 2, 2004
Commission File Number 1-16137
WILSON GREATBATCH TECHNOLOGIES, 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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which
Registered:
Common Stock, Par Value $.001 Per Share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Aggregate market value of common stock of Wilson Greatbatch Technologies,
Inc. held by nonaffiliates as of July 4, 2003, based on the last sale price of
$36.53, as reported on the New York Stock Exchange: $773.1 million. Solely for
the purpose of this calculation, shares held by directors and officers and 10
percent shareholders of the Registrant have been excluded. Such exclusion should
not be deemed a determination by or an admission by the Registrant that these
individuals are, in fact, affiliates of the Registrant.
Shares of common stock outstanding on March 9, 2004: 21,339,885
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's definitive Proxy Statement for its 2004 Annual Meeting
of Stockholders are incorporated by reference into Part III.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("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 Power
Solutions ("EPS") business to develop and produce batteries and battery packs
for commercial applications that demand high performance and reliability,
including oil and gas exploration, oceanographic equipment and aerospace. We
believe that our proprietary technology, close customer relationships, market
leadership and dedication to quality provide us with competitive advantages and
create a barrier to entry for potential market entrants.
Our company was incorporated in 1997 and since that time has completed the
following acquisitions:
Date Acquisition Business at time of acquisition
- ---- ----------- -------------------------------
July 10, 1997 Wilson Greatbatch Ltd. (WGL) Founded in 1970, the company designed and manufactured
batteries for IMDs and commercial applications including
oil and gas, aerospace, and oceanographic.
- ------------------------------------------------------------------------------------------------------------------------------------
August 7, 1998 Hittman Materials and Founded in 1962, the company designed and manufactured
Medical Components, Inc. ceramic and glass feedthroughs and specialized porous
(HMMC) coatings for electrodes used in IMDs.
- ------------------------------------------------------------------------------------------------------------------------------------
August 4, 2000 Battery Engineering, Inc. Founded in 1983, the company designed and manufactured
(BEI) high-energy density batteries for industrial, commercial,
military and medical applications.
- ------------------------------------------------------------------------------------------------------------------------------------
June 18, 2001 Sierra-KD Components Founded in 1986, the company designed and manufactured
division of Maxwell ceramic electromagnetic filtering capacitors and
Technologies, Inc. (Sierra) integrated them with wire feedthroughs for use in IMDs.
Sierra also designed and manufactured ceramic capacitors
for military, aerospace and commercial applications.
- ------------------------------------------------------------------------------------------------------------------------------------
3
Date Acquisition Business at time of acquisition
- ---- ----------- -------------------------------
July 9, 2002 Globe Tool and Founded in 1954, the company designed and manufactured
Manufacturing Company, Inc. precision enclosures used in IMDs and commercial products
(Globe Tool) used within the aerospace, electronic, and automotive
sectors.
SEGMENT INFORMATION
Segment information including sales from external customers, profit or loss, and
assets by segment as well as sales from external customers and long-lived assets
by geographic area are incorporated by reference to Note 15 - Business Segment
Information of the Notes to Consolidated Financial Statements.
IMPLANTABLE MEDICAL DEVICES
An IMD is an instrument that is surgically inserted into the body to provide
diagnosis or therapy. One sector of the IMD market is cardiac rhythm management
("CRM"), which is comprised of devices such as implantable pacemakers,
cardioverter defibrillators ("ICDs"), cardiac resynchronization therapy ("CRT")
devices, and cardiac resynchronization therapy with backup defibrillation
devices ("CRT-D").
The following table sets forth the main categories of battery-powered IMDs and
the principal illness or symptom treated by each device:
Device Principal Illness or Symptom
- ------- ----------------------------
Pacemakers...........................Abnormally slow heartbeat (Bradycardia)
ICDs.................................Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds...........................Congestive heart failure
Left ventricular assist devices
(LVADs)..............................Heart failure
Hearing assist devices...............Hearing loss
Neurostimulators.....................Tremors or chronic pain
Drug pumps...........................Diabetes or chronic pain
The CRM markets are expected to experience double-digit growth for the next
three to five years. Increased demand is being driven by the following factors:
Advances in medical technology - new therapies will allow physicians to use IMDs
as a substitute for, or in conjunction with, prescription drugs, to treat a
wider range of heart diseases, such as atrial fibrillation and congestive heart
failure.
New, more sophisticated implantable devices - device manufacturers are
developing new CRM devices and adding new features to existing products. The
drive is for smaller, uniquely shaped units with increasingly powerful
capabilities that will be easier for physicians to implant and will be less
intrusive to recipients. Cardiac resynchronization devices are being developed
to provide pacing and defibrillation therapy. New generation pacemakers include
enhanced diagnostic and treatment capabilities.
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New indications for CRM devices - the patient groups that are eligible for CRM
devices has increased to include heart attack survivors, patients with
congestive heart failure, and asymptomatic patients who are at risk for sudden
cardiac arrest. Insurance guidelines may allow device reimbursements for these
expanding patient populations.
An aging population - the number of people in the United States that are over
age 65 is expected to double in the next 30 years. People over 85 are the
fastest growing age group and are most likely to have chronic care needs.
New indications for other devices - there is an increased use of recently
developed IMDs, including left ventricular assist devices, hearing assist
devices, neurostimulators and drug pumps.
New performance requirements - government regulators are increasingly requiring
that IMDs be protected from interference from devices like cell phones and
two-way pagers. It is estimated that less than half of all implantable devices
are protected.
Global markets - it is anticipated that there will be increased market
penetration beyond the United States and other developed countries.
COMMERCIAL BATTERY INDUSTRY
Commercial batteries are used in demanding applications such as oil and gas
exploration and production, oceanographic, and aerospace. High performance
batteries and battery packs are used in pipeline inspection systems, lightening
detectors and seismic applications in the oil and gas markets.
High quality, reliable products that can deliver increased performance are the
drivers for demand in the commercial battery industry. It is expected that
applications in new technologies used for reworking existing wells will
increase. Natural gas exploration is increasing at a rapid pace as natural gas
powered power plants increase in number. Pipeline inspection gauge usage is
increasing due to new US legislation. Military and aerospace trends show
increasing demand for reliable power sources, including rechargeable cells.
5
PRODUCTS
The following table provides information about our principal products:
PRINCIPAL PRODUCT
PRODUCT DESCRIPTION USED IN ATTRIBUTES
------- ----------- ------- ----------
IMPLANTABLE MEDICAL COMPONENTS:
- ------------------------------
Batteries Power sources for IMDs - includes Pacemakers, ICDs, CRTs and High reliability and
Lithium Iodine ("Li CRT-Ds, LVADs, predictability
Iodine") neuro-stimulators, drug Long service life
Lithium silver vanadium pumps and hearing assist Customized configuration
oxide ("Li SVO") devices Light weight
Lithium carbon Compact and less
monoflouride ("Li CFx") intrusive
Lithium ion rechargeable
("Li Ion") and
Lithium SVO/CFx ("Quasar")
Capacitors Storage for energy generated by a ICDs and CRT-Ds Stores more energy per
battery before delivery to the unit volume (energy
heart, includes: density) than other
Wet tantalum existing technologies
Customized configuration
EMI Filters Filters electromagnetic Medical Devices High reliability
interference to limit undesirable attenuation of EMI RF
response, malfunctioning or over wide frequency
degradation in the performance of ranges
electronic equipment Customized design
Feedthroughs Allow electrical signals to be Pacemakers, ICDs, LVADs, Ceramic to metal seal is
brought from inside hermetically neuro-stimulators, drug substantially more
sealed IMD to an electrode pumps and hearing assist durable than traditional
devices seals
Multifunctional
Electrodes Deliver electric signal from the Pacemakers and ICDs High quality coated
feedthrough to a body part surface
undergoing stimulation Flexible in utilizing
any combination of
biocompatible coating
surfaces
Customized offering of
surfaces and tips
Precision Machined and molded parts for IMDs. Pacemakers, ICDs and drug High level of
components pumps manufacturing precision
Broad manufacturing
flexibility
Enclosures and Cases and related parts for IMDs. Pacemakers, ICDs, capacitors. Precision manufacturing,
related components flexibility in
configurations and
materials.
ELECTROCHEM POWER SOLUTIONS:
- ---------------------------
Batteries and Batteries and battery packs for Oil and gas exploration, Long-life dependability
battery packs demanding commercial applications oceanographic equipment High energy density
6
RESEARCH, DEVELOPMENT AND ENGINEERING
Our position as a leading developer and manufacturer of components for IMDs is
largely the result of our long history of technological innovation. We invest
substantial resources in research, development and engineering. Our scientists,
engineers and technicians focus on improving existing products, expanding the
use of our products and developing new products. In addition to our internal
technology and product development efforts, we at times engage outside research
institutions for special projects.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
As of December 31, 2003, we have 209 active U.S. patents and 57 active foreign
patents. We also have 221 U.S. and 317 foreign pending patent applications at
various stages of approval. During the past three years, we have received 95 new
U.S. patents, of which 42 were received in 2003. Corresponding foreign patents
have been issued or are expected to be issued in the near future. Often, several
patents covering various aspects of the design protect a single product. We
believe this provides broad protection of the inventions employed.
Our active battery patents relate to process improvements and modifications to
the original technology that was developed either by our Company, or others.
The following table provides a breakdown of our patents as of December 31, 2003
by product type:
TOTAL
PRODUCT ACTIVE PATENTS
Batteries - Li Iodine 19
Batteries - Li SVO 109
Batteries - Li CFx 10
Batteries - Li Ion 23
Batteries - Quasar 7
Batteries - Commercial 26
Capacitors - Wet tantalum 16
Capacitors - Ceramic 15
Feedthroughs 3
Pumps 10
Other products and processes 28
-----
Total 266
=====
We license the basic technology used in our wet tantalum capacitors from Evans
Capacitor Company. The license extends throughout the lives of the related
patents, which expire in 2010, 2013 and 2014. The license can be cancelled if we
default under the license agreement and fail to cure the default. A cancellation
of the license would seriously impair our ability to produce our entire line of
capacitors.
7
The significant patents that we maintain for the capacitor technology relate to
ultrasonically coated substrate for use in a capacitor and method of
manufacture; hermetically sealed wet tantalum capacitor; electrolyte for use in
a capacitor; and the anode for an electrolytic capacitor which expire between
2017 and 2019.
The significant patents that we maintain for filtered feedthrough technology
relate to filtered feedthrough capacitor assemblies such as a feedthrough
capacitor assembly with a capture flange, an EMI feedthrough filter capacitor
and hermetic terminal assembly combination, and a filter capacitor that allows
for helium gas passage.
A significant patent issued to us this past year relates to a lithium
electrochemical cell having a cathode of silver vanadium oxide and fluorinated
carbon contacted to the opposite sides of a current collector. This electrode
construction provides the cell with the high rate capacity of SVO and the high
energy density of fluorinated carbon. The result is an implantable cell for an
ICD that delivers the highest energy density and greatest longevity in the
industry and provides stable charge time throughout its useful life. Our
scientists pioneered this unique technology. We have seven issued patents
relating to this technology as well as an additional 14 patent applications
awaiting approval.
In addition, we are also a party to several license agreements with third
parties pursuant to which we have obtained, on varying terms, the exclusive or
non-exclusive rights to patents held by them. We have also granted rights in our
own patents to others under license agreements.
It is our policy to require our executive and technical employees, consultants
and other parties to execute confidentiality agreements. These agreements
prohibit disclosure of confidential information to third parties except in
specified circumstances. In the case of employees and consultants, the
agreements generally provide that all confidential information relating to our
business is the exclusive property of our company.
MANUFACTURING AND QUALITY CONTROL
We primarily manufacture small lot sizes, as most customer orders range from a
few hundred to thousands of units. As a result, our ability to remain flexible
is an important factor in maintaining high levels of productivity. Each of our
production teams receives assistance from a manufacturing support team, which
typically consists of representatives from our quality control, engineering,
manufacturing, materials and procurement departments.
Our quality system is based upon an ISO documentation system and is driven by a
master validation plan that requires rigorous testing and validation of all new
processes or process changes that directly impact our products. All of our
facilities are ISO-9001-2000 registered, which requires compliance with
regulations regarding quality systems of product design (where applicable),
supplier control, manufacturing processes and management review. This
certification can only be achieved after completion of an audit conducted by an
independent authority. Our facilities are audited by the National Standards
Authority of Ireland, an independent auditing firm and notified body that
specializes in evaluating quality standards. To maintain certification, all
facilities must be reexamined routinely by our certifying body.
8
SALES AND MARKETING
Products from our IMC business are sold directly to our customers. In our EPS
business, we utilize a combination of direct and indirect sales methods,
depending on the particular product. In 2003, approximately 65% of our products
were sold in the United States. Information regarding our sales by geographic
area is set forth at Note 15 of the Notes to the Consolidated Financial
Statements.
The majority of our medical customers contract with us to develop custom
components and assemblies to fit their specific product specifications. As a
result, we have established close working relationships between our internal
program managers and our customers. We market our products and technologies at
industry meetings and trade shows domestically and internationally, including
NASPE - Heart Rhythm Society's Annual Scientific Sessions, CardioStim, and the
American Society for Artificial Internal Organs (ASAIO).
Internal sales managers support all activity, and involve engineers and
technology professionals in the sales process to address customer requests
appropriately.
We sell our commercial batteries and battery packs either directly to the end
user, directly to manufacturers that incorporate our products into other devices
for resale, or to distributors who sell our products to manufacturers and end
users. Our sales managers are trained to assist our customers in selecting
appropriate battery chemistries and configurations. We market our EPS products
at various technical trade meetings. We also place print advertisements in
relevant trade publications.
Firm backlog orders at December 31, 2003 and 2002, were $40.4 million and $45.7
million, respectively. Most of these orders are expected to be shipped within
one year.
CUSTOMERS
Our products are designed to provide reliable, long lasting solutions that meet
the evolving requirements and needs of our customers and the end users of their
products. Our medical customers include leading IMD manufacturers such as
Guidant, St. Jude Medical, Medtronic, Biotronik, Cyberonics and ELA/Sorin. In
2003, Guidant and St. Jude Medical, our two largest customers, collectively
accounted for approximately 66% of our total sales. The nature and extent of our
selling relationships with each CRM customer are different in terms of component
products purchased, selling prices, product volumes, ordering patterns and
inventory management.
Our EPS customers are primarily companies involved in oil and gas exploration,
oceanography and aerospace.
We have entered into a supply agreement with Guidant pursuant to which Guidant
purchases batteries from us for use in its IMDs. The agreement secures pricing
and volumes for Li Iodine, Li SVO and CFx batteries. The contract period for the
agreement is April 1, 2003 to December 31, 2006 and can be renewed for
additional one-year periods upon mutual agreement. Guidant also separately
purchases components from us for use in its IMDs.
9
We have entered into a supply agreement with St. Jude Medical pursuant to which
St. Jude Medical purchases batteries, wet tantalum capacitors, components and
enclosures under specified price and volume terms. The contract period is
January 1, 2004 to December 31, 2006 and can be extended for an additional
two-year period at the option of St. Jude Medical.
SUPPLIERS AND RAW MATERIALS
We purchase certain critical raw materials for our business from a limited
number of suppliers due to the technically challenging requirements of the
supplied product and / or the lengthy process required to qualify these
materials with our customers. We cannot quickly establish additional or
replacement suppliers for these materials because of these requirements. In the
past, we have not experienced any significant interruptions or delays in
obtaining these raw materials. We maintain minimum safety stock levels of
critical raw materials.
For other raw material purchases, we utilize competitive pricing methods to
secure supply such as bulk purchases, precious metal pool buys, blanket orders,
and long term contracts at terms that are favorable to us. We believe that there
are alternative suppliers or substitute products available for each of the
materials we purchase at competitive prices.
COMPETITION
Our existing or potential competitors in our IMC business includes leading IMD
manufacturers, such as Guidant, St. Jude Medical, Medtronic, and Biotronik,
which have vertically integrated operations or may become vertically integrated
in the future, as well as independent suppliers who typically specialize in one
type of component.
We also have the following non-vertically integrated competition in our IMC and
EPS businesses:
Product Line Competitors
Medical batteries Litronik (a subsidiary of Biotronik)
Eagle-Picher
NanoGram Devices Corporation
Quallion
Capacitors Critical Medical Components
Feedthroughs Alberox (subsidiary of The Morgan
Crucible Co. PLC)
EMI filtering AVX (subsidiary of Kyocera)
Components Donatelle
Heraeus
Johnson Matthey
Stellar
Enclosures National Manufacturing
10
Commercial batteries/battery Engineered Power
packs Saft
Tadiran
Tracer Technologies
Ultralife
GOVERNMENT REGULATION
Except as described below, our business is not subject to direct governmental
regulation other than the laws and regulations generally applicable to
businesses in the jurisdictions in which we operate. We are subject to federal,
state and local environmental laws and regulations governing the emission,
discharge, use, storage and disposal of hazardous materials and the remediation
of contamination associated with the release of these materials at our
facilities and at off-site disposal locations. Our manufacturing and research,
development and engineering activities involve the controlled use of, and our
products contain, small amounts of hazardous materials. Liabilities associated
with hazardous material releases arise principally under the Comprehensive
Environmental Response, Compensation and Liability Act and analogous state laws
which impose strict, joint and several liability on owners and operators of
contaminated facilities and parties that arrange for the off-site disposal of
hazardous materials. We are not aware of any material noncompliance with the
environmental laws currently applicable to our business and we are not subject
to any material claim for liability with respect to contamination at any company
facility or any off-site location. We cannot assure you, however, that we will
not be subject to such environmental liabilities in the future as a result of
historic or current operations.
As a component manufacturer, our products are not subject to regulation by the
Food and Drug Administration (FDA). However, the FDA and related state and
foreign governmental agencies regulate many of our customers' products as
medical devices. In many cases, the FDA must approve those products prior to
commercialization. In addition, because some of the products produced by our
engineered components division may be considered finished medical devices, some
of the operations within that division are subject to FDA inspection and must
comply with current good manufacturing practices (CGMP) requirements.
We have four Master Files on record with the FDA. Master Files may be used to
provide confidential detailed information about facilities, processes, or
articles used in the manufacturing, processing, packaging, and storing of one or
more medical device components. These submissions may be used by device
manufacturers to support the premarket notification process required by Section
510(k) of the Federal Food Drug & Cosmetic Act. This notification process is
necessary to obtain clearance from the FDA to market a device for human use in
the United States.
RECRUITING AND TRAINING
We invest substantial resources in our recruiting efforts that focus on
supplying quality personnel to support our business objectives. We have
established a number of programs that are designed to challenge and motivate our
employees. All staff is encouraged to be proactive in contributing ideas.
Feedback surveys are used to collect suggestions on ways that our business and
11
operations can be improved. We further meet our hiring needs through outside
sources as required.
We provide an intensive training program for our new employees that is designed
to educate them on safety, quality, business strategy, corporate culture, and
the methodologies and technical competencies that are required for our business.
Our safety training programs focus on such areas as basic industrial safety
practices and emergency response procedures to deal with any potential fires or
chemical spills. All of our employees are required to participate in a twenty
hour specialized training program that is designed to provide an understanding
of our quality objectives. Supporting our lifelong learning environment, we
offer our employees a tuition reimbursement program and encourage them to
continue their education at accredited colleges and universities. Many of our
professionals attend seminars on topics that are related to our corporate
objectives and strategies. We believe that comprehensive training is necessary
to ensure that our employees have state of the art skills, utilize best
practices, and have a common understanding of work practices.
EMPLOYEES
The following table provides a breakdown of employees by primary function as of
December 31, 2003:
Manufacturing 1,132
Research and development 114
General and administrative 105
Engineering 51
Sales and marketing 29
-----
Total 1,431
=====
We also employ a number of temporary employees to assist us with various
projects and service functions and address peaks in staff requirements. Our
employees are not represented by any union and are retained on an at-will basis.
We believe that we have a good relationship with our employees.
AVAILABLE INFORMATION
The Company makes available free of charge on or through its internet website
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the Securities and Exchange Commission. Our Internet address is
http://www.greatbatch.com. The information contained on the Company's website is
not incorporated by reference in this annual report on Form 10-K and should not
be considered a part of this report.
12
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements contained in this Annual Report on Form 10-K and other
written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the IMD
industry;
o our ability to execute our business model and our business strategy;
o our ability to identify trends within the IMD, medical component, and
commercial power source 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 and are described in the Company's periodic filings with
the Securities and Exchange Commission and in Exhibit 99.1 to this filing.
13
ITEM 2. PROPERTIES
Our executive offices are located in Clarence, New York. The building that
houses our executive offices also contains warehouse operations, a variety of
support services and capacity for light manufacturing or laboratory space.
The following table sets forth information about all of our principal
manufacturing or testing facilities:
Location Sq. Ft. Own/Lease Use
-------- ------ --------- ---
Alden, NY...................... 113,000 Own Future manufacturing
Amherst, NY.................... 81,650 Own Available for sale
Clarence, NY................... 82,766 Own Medical battery manufacturing and research,
development and engineering (RD&E)
Clarence, NY................... 20,800 Own Machining and assembly of components
Clarence, NY................... 18,550 Lease Machining and assembly of components
Clarence, NY................... 45,306 Lease Offices and warehouse
Wheatfield, NY................. 2,772 Lease Battery destructive testing
Cheektowaga, NY................ 35,509 Lease Capacitor manufacturing and RD&E
Canton, MA..................... 32,000 Own Commercial battery manufacturing and RD&E
Columbia, MD................... 30,000 Lease Feedthrough and electrode manufacturing and RD&E
Carson City, NV................ 23,840 Own EMI filtering manufacturing and RD&E
Minneapolis, MN................ 72,000 Own Enclosure manufacturing and engineering
We believe these facilities are suitable and adequate for our current business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various lawsuits and claims incidental to our business. We
believe the ultimate outcome resulting from resolution of these lawsuits and
claims will not materially affect our financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange (NYSE) under
the symbol "GB." The following table sets forth, for the periods indicated, the
high and low closing prices per share for the common stock as reported on the
NYSE Composite Tape.
2002 High Low
------ ------
First Quarter $37.60 $24.18
Second Quarter 28.40 21.20
Third Quarter 28.69 20.10
Fourth Quarter 31.50 24.50
2003
First Quarter $29.77 $23.50
Second Quarter 37.25 26.55
Third Quarter 40.30 35.37
Fourth Quarter 43.05 35.60
As of March 5, 2004 there were 267 record holders of the Company's common stock.
Our Employee Stock Ownership Plan (ESOP) is considered one record holder for the
purposes of this calculation. There are approximately 1,600 participants in the
ESOP including active and former employees.
We have not paid cash dividends and currently intend to retain any earnings to
further develop and grow our business.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table provides selected financial data of our Company for the
periods indicated. You should read the selected consolidated financial data set
forth below in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and with our consolidated
financial statements and related notes appearing elsewhere in this report. The
consolidated statement of operations data and the consolidated balance sheet
data for the periods indicated have been derived from our financial statements
and related notes.
December 31, (4)
Years ended 2003 2002(3) 2001(2)(5) 2000(1)(5) 1999
- -------------------------------------------------------------------------------------
(In thousands, except per share data)
----------------------------------------------------------------
Consolidated
Statement of
Operations Data:
Sales $216,365 $167,296 $135,575 $97,790 $79,235
Income (loss) before
income taxes and
cumulative effect of
accounting change $33,316 $20,965 $13,778 $(876) $(2,314)
Income (loss) per
share from
continuing
operations:
Basic $1.10 $0.69 $0.44 $(0.04) $(0.14)
Diluted $1.08 $0.68 $0.43 $(0.04) $(0.14)
- -------------------------------------------------------------------------------------
Consolidated Balance
Sheet Data:
Working capital $170,455 $40,204 $61,596 $15,079 $17,621
Total assets $438,243 $312,251 $283,520 $181,647 $89,779
Long-term obligations $78,994 $77,040 $61,397 $30,951 $127,623
(1) In August 2000, we acquired the capital stock of Battery Engineering, Inc.
(BEI). These amounts include the results of operations of BEI subsequent to
its acquisition.
(2) In June 2001, we acquired substantially all of the assets and liabilities
of Greatbatch-Sierra. These amounts include the results of operations of
Greatbatch-Sierra subsequent to its acquisition.
(3) In July 2002, we acquired the capital stock of Greatbatch-Globe. These
amounts include the results of operations of Greatbatch-Globe subsequent to
its acquisition.
(4) The Company's fiscal year ends on the Friday closest to December 31. For
clarity of presentation, the Company describes all periods as if the
year-end is December 31. Fiscal 2002 contained 53 weeks.
(5) We adopted Statement of Financial Accounting Standards (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB 13, and
Technical Corrections, at the beginning of fiscal year 2003. Under SFAS No.
145, we are no longer allowed to classify debt extinguishments as
extraordinary items in our consolidated financial statements, subject to
limited exceptions. Accordingly, amounts previously classified as
extraordinary related to debt extinguishments in fiscal 2001and 2000 have
been reclassified as components of income (loss) before income taxes.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
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
also leverage our core competencies in technology and manufacturing through our
Electrochem Power Solutions ("EPS") business to develop and produce batteries
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 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. The nature and extent
of our selling relationships with each CRM customer are different in terms of
component products purchased, selling prices, product volumes, ordering patterns
and inventory management. Consequently, our sales and gross profit can be
significantly affected by our customers' actions. Our EPS sales are derived
primarily from sales of batteries and battery packs for use in oil and gas
exploration. We also supply batteries to NASA for its space shuttle program and
other similarly demanding commercial applications.
A substantial part of our business is conducted with a limited number of
customers. Our two largest customers accounted for approximately 66% of
consolidated sales in 2003. We have entered into long-term supply agreements
with some of our customers. For each of our products, we recognize revenue when
the products are shipped and title passes.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For clarity of presentation, the Company describes all
periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
17
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with United States
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our financial statements.
Management considers an accounting estimate to be critical if:
o It requires assumptions to be made that were uncertain at the time the
estimate was made; and
o Changes in the estimate or different estimates that could have been
selected could have a material impact on our consolidated results of
operations, financial position, or cash flows.
Our most critical accounting estimates are described below. We also have other
policies that we consider key accounting policies, such as our policies for
revenue recognition; however, these policies do not meet the definition of
critical accounting estimates, because they do not generally require us to make
estimates or judgments that are difficult or subjective.
- ---------------------------------- ----------------------------------------------- ----------------------------------
Balance Sheet Caption / Nature Effect of Variations on Key
of Critical Estimate Item Assumptions / Approach Used Assumptions Used
- ---------------------------------- ----------------------------------------------- ----------------------------------
- ---------------------------------- ----------------------------------------------- ----------------------------------
Inventories Inventory standard costing requires complex Variations in methods could have
calculations that include assumptions for a material impact on the
Inventories are stated at the overhead absorption, scrap and sample results. If our demand forecast
lower of cost, determined using calculations and manufacturing yield for specific products is greater
the first-in, first-out method, estimates. The valuation of inventory than actual demand and we fail
or market. requires us to estimate obsolete or excess to reduce manufacturing output
inventory as well as inventory that is not of accordingly, we could be
saleable quality. required to record additional
inventory reserves, which would
have a negative impact on our
gross margins.
- ---------------------------------- ----------------------------------------------- ----------------------------------
- ---------------------------------- ----------------------------------------------- ----------------------------------
Goodwill and other indefinite We perform an annual review, or more We make certain estimates and
lived assets frequently if indicators of potential assumptions that affect the
impairment exist, to determine if the determination of the expected
Goodwill is initially recorded recorded goodwill and other indefinite lived future cash flows from our
when the purchase price paid for assets are impaired. We assess these assets goodwill and indefinite lived
an acquisition exceeds the for impairment by comparing the fair value of assets. These estimates and
estimated fair value of the net the reporting units to their carrying value assumptions include sales growth
identified tangible and to determine if there is potential projections, cost of capital
intangible assets acquired. impairment. If the fair value of a reporting projections, and other key
Other indefinite lived assets unit is less than its carrying value, an indications of future cash
such as trademark & names are impairment loss is recorded to the extent flows. Significant changes in
considered unamortizing that the implied fair value of the goodwill these estimates and assumptions
intangible assets as they are within the reporting unit is less than its could create future impairment
expected to generate cash flows carrying value. Fair values for goodwill are losses in either reporting unit.
indefinitely. determined based on discounted cash flows,
market multiples or appraised values as
appropriate.
- ---------------------------------- ----------------------------------------------- ----------------------------------
18
- ---------------------------------- ----------------------------------------------- ----------------------------------
Long-lived assets We assess the impairment of long-lived Estimation of the useful lives
assets when events or changes in of assets that are long-lived
Property, plant and equipment, circumstances indicate that the carrying requires significant management
definite-lived intangible value of the assets may not be recoverable. judgment. Events could occur,
assets, and other long-lived Factors that we consider in deciding when to including changes in cash flow,
assets are carried at cost. perform an impairment review include that would materially affect our
This cost is charged to significant under-performance of a business estimates and assumptions
depreciation or amortization or product line in relation to expectations, related to depreciation.
expense over the estimated life significant negative industry or economic Unforeseen changes in operations
of the operating assets trends, and significant changes or planned or technology could
primarily using straight-line changes in our use of the assets. substantially alter the
rates. Recoverability potential is measured by assumptions regarding the
comparing the carrying amount of the asset ability to realize the return of
to the related total future undiscounted our investment in operating
cash flows. If an asset's carrying value is assets and therefore the amount
not recoverable through related cash flows, of depreciation expense to
the asset is considered to be impaired. charge against both current and
Impairment is measured by comparing the future sales. Also, as we make
asset's carrying amount to its fair value, manufacturing process
based on the best information available, conversions and other factory
including market prices or discounted cash planning decisions, we must make
flow analysis. When it is determined that subjective judgments regarding
useful lives of assets are shorter than the remaining useful lives of
originally estimated, and there are assets, primarily manufacturing
sufficient cash flows to support the equipment and building
carrying value of the assets, we accelerate improvements.
the rate of depreciation in order to fully
depreciate the assets over their new shorter
useful lives.
- ---------------------------------- ----------------------------------------------- ----------------------------------
19
- ---------------------------------- ----------------------------------------------- ----------------------------------
Provision for Income Taxes In relation to recording the provision for Changes could occur that would
income taxes, management must estimate the materially affect our estimates
In accordance with the liability future tax rates applicable to the reversal and assumptions regarding
method of accounting for income of tax differences, make certain assumptions deferred taxes. Changes in
taxes specified in Statement of regarding whether tax differences are current tax laws and tax rates
Financial Accounting Standards permanent or temporary and the related time could affect the valuation of
No. 109, Accounting for Income of expected reversal. Also, estimates are deferred tax assets and
Taxes, the provision for income made as to whether taxable operating income liabilities, thereby changing
taxes is the sum of income taxes in future periods will be sufficient to fully the income tax provision. Also,
both currently payable and recognize any gross deferred tax assets. If significant declines in taxable
deferred. The changes in recovery is not likely, we must increase our income could materially impact
deferred tax assets and provision for taxes by recording a valuation the realizable value of deferred
liabilities are determined based allowance against the deferred tax assets tax assets. At December 31,
upon the changes in differences that we estimate will not ultimately be 2003 we had $6.1 million of
between the basis of assets and recoverable. As of December 31 2003, we deferred tax assets on our
liabilities for financial believe that all of the deferred tax assets balance sheet. A 1% increase in
reporting purposes and the basis recorded on our balance sheet except for the effective tax rate would
of assets and liabilities as $565,000 will ultimately be recovered. increase the current year
measured by the enacted tax provision by $333,000 , reducing
rates that management estimates In addition, the calculation of our tax fully diluted earnings per share
will be in effect when the liabilities involves dealing with by $0.01 based on shares
differences reverse. uncertainties in the application of complex outstanding at December 31, 2003.
tax regulations. We recognize liabilities
for anticipated tax audit issues in the U.S.
and other tax jurisdictions based on our
estimate of whether, and the extent to which,
additional taxes will be due. If we
ultimately determine that payment of these
amounts is unnecessary, we reverse the
liability and recognize a tax benefit during
the period in which we determine that the
liability is no longer necessary. We record
an additional charge in our provision for
taxes in the period in which we determine
that the recorded tax liability is less than
we expect the ultimate assessment to be.
- ---------------------------------- ----------------------------------------------- ----------------------------------
20
OVERVIEW
During 2003, there were many accomplishments that should further strengthen our
position in the marketplace in 2004 and beyond.
o We achieved record financial results with sales growth of 29% and
earnings per share growth of 59%.
o We successfully completed a $170.0 million convertible subordinated
notes offering.
o We improved our operating leverage as evidenced by the increase in our
operating margins to 17.7% in 2003 up from 15.5% last year.
o We signed our third wet tantalum capacitor customer. Three of the five
worldwide CRM device manufacturers have now adopted our capacitor
technology.
In 2003, we continued to invest in a corporate realignment with the goal being
to present "a single face" to our customers. Whereas in the past we have been
organized as a group of individual operating units developing, manufacturing and
selling discrete components, effective January 1, 2004, we are now comprised of
two business units - IMC and EPS.
On the new technologies front is our first generation Quasar implantable power
source. This product offering further enhances our market position as a leading
developer and manufacturer of implantable batteries for medical devices. Our new
Quasar technology, combined with our wet tantalum capacitor, should provide
performance advantages our customers require. Our filtering inductor slab and
integrated filtered feedthrough technologies provide enhanced protection from
EMI (electro-magnetic interference). This supplies an important added measure of
security in our customer's products.
We have under taken several initiatives to change and improve our
infrastructure. These initiatives, to date, have included additions to our
management team, the commencement of the installation of a company wide
integrated ERP business platform, increased commitment to the expansion of the
Six Sigma program, new lean manufacturing implementation, a philosophy and
practice of continuous improvement and the certification of all company wide
operations to ISO 9001-2000 standards.
As we look forward into next year, we will focus on a number of critical areas.
We will continue to address ways to expand our product offering and customer
penetration. Our production operations will be expanded to meet increased
capacitor demand and we will continue to focus our efforts on signing the
remaining CRM customers to this technology. Significant resources will be spent
on our next generation Quasar battery technology and we expect to begin product
delivery by year-end. We will continue to leverage our infrastructure over a
higher sales base resulting in improved operating margins. The base
implementation of our ERP business platform at all locations is scheduled to be
completed by the end of the year. And finally, we will continue to look for
acquisition opportunities that will strengthen our technological leadership or
broaden our product offering.
Our forecasted sales growth is estimated to be lower than experienced in the
last two years. In 2004 the Company has begun to see downward pricing pressures
on some of its products.
21
However, we expect to expand our operating margins based on increased sales
volume, increased leverage of our infrastructure and manufacturing cost
reductions. Partially offsetting this growth, are increased costs for the
start-up of our new medical production facility, increased cost to comply with
the Sarbanes-Oxley requirements, higher insurance premiums and the establishment
of an internal audit function. We anticipate that in 2004 we will incur
additional capital costs primarily due to the build-out of the medical
production facility and from the continuation of the ERP implementation. We must
continue to invest in research and development in order to maintain our
competitive position.
In summary, our results for the full year reached record levels reflecting the
continued robustness in the CRM market. Our focus for 2004 will be in five
critical areas:
o Increasing our capacitor customer penetration;
o Identifying value-add sales opportunities from our broad product
offering;
o Delivering on our next generation quasar battery technology by year
end;
o Improving our operating margin through leverage of our existing
infrastructure and from manufacturing cost reductions; and
o Completing the implementation of the base ERP system.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The commentary that follows should be read in conjunction with our consolidated
financial statements and related notes.
22
Results of Operations Year ended December 31, 2003 - 2002 2002 - 2001
In thousands, except per share
data 2003 2002 2001 $Change % Change $Change % Change
- ------------------------------------------------------------------------------------------------------
IMC
ICD batteries $41,494 $28,518 $22,215 $12,976 46% $6,303 28%
Pacemaker batteries 22,535 20,354 22,923 2,181 11% (2,569) -11%
Other batteries 3,662 3,035 722 627 21% 2,313 320%
ICD capacitors 31,668 24,678 20,290 6,990 28% 4,388 22%
Other components 90,862 65,316 40,513 25,546 39% 24,803 61%
Royalties - - 991 - 0% (991) -100%
---------------------------------------------------------------------
Total IMC 190,221 141,901 107,654 48,320 34% 34,247 32%
EPS 26,144 25,395 27,921 749 3% (2,526) -9%
---------------------------------------------------------------------
Total Sales 216,365 167,296 135,575 49,069 29% 31,721 23%
Cost of sales 126,537 96,398 74,716 30,139 31% 21,682 29%
---------------------------------------------------------------------
Gross profit 89,828 70,898 60,859 18,930 27% 10,039 16%
Gross margin 41.5% 42.4% 44.9%
Selling, general, and
administrative expenses (SG&A) 30,384 24,369 18,174 6,015 25% 6,195 34%
SG&A as a % of sales 14.0% 14.6% 13.4%
Research, development and
engineering costs, net (RD&E) 16,991 14,440 12,575 2,551 18% 1,865 15%
RD&E as a % of sales 7.9% 8.6% 9.3% -1%
Intangible amortization 3,217 3,702 7,726 (485) -13% (4,024) -52%
Other operating expense 1,036 2,481 132 (1,445) -58% 2,349 1780%
---------------------------------------------------------------------
Operating income 38,200 25,906 22,252 12,294 47% 3,654 16%
Operating margin 17.7% 15.5% 16.4%
Interest expense 4,101 3,752 4,011 349 9% (259) -6%
Interest income (702) (442) (423) (260) 59% (19) 4%
Other (income) expense, net 1,485 1,631 4,886 (146) -9% (3,255) -67%
Provision for income taxes 10,028 6,604 5,181 3,424 52% 1,423 27%
Effective tax rate 30.1% 31.5% 37.6%
---------------------------------------------------------------------
Net income $23,288 $14,361 $8,597 $8,927 62% $5,764 67%
=====================================================================
Net margin 10.8% 8.6% 6.3%
Diluted earnings per share $1.08 $0.68 $0.43 $0.40 59% $0.25 58%
23
FISCAL 2003 COMPARED WITH FISCAL 2002
We achieved record sales performance in 2003. The increase in total sales for
2003 included a full year of sales of Greatbatch-Globe, which we acquired in
July 2002.
Sales
IMC. The sales growth for IMC was led by sales of ICD batteries reflecting the
strength of this market. In addition, capacitor and components sales increased
substantially over last year. Substantially all of the sales changes during 2003
were attributable to volume and sales mix. Looking at our overall sales mix, CRM
product sales increased over last year and now represent 83% of our overall
product mix, up from 80% last year. We remain very positive about the growth
prospects of the CRM market long term.
EPS. Commercial sales increased modestly from a slight rise in volume of orders
from oil and gas customers.
Gross profit
The decrease in gross margin is primarily due to the costs incurred to
consolidate the EPS plants, the start-up costs from the implementation of lean
manufacturing, the inclusion of the lower margin enclosure products for the full
year, the costs for the hiring of new plant management personnel and changes in
selling prices for certain medical components. These factors contributed to a
310 basis point reduction in gross margin on a year over year basis.
SG&A expenses
Expenses increased compared to last year in absolute dollars, but declined as a
percent of sales due to improved operating leverage. The increase in absolute
dollars is partially due to the hiring of additional senior management
employees.
RD&E expenses
Expenses increased compared to last year in absolute dollars, but decreased as a
percent of sales compared to last year as sales growth has outpaced spending. We
expect to maintain our spending on RD&E at a level that will support the new
technologies demanded by the IMD markets.
Amortization expense
The reduction in intangible amortization reflects the impact of the sale of
certain intangible assets of the ceramic capacitor product line that was part of
the Sierra-KD components acquisition in 2003. In addition, one of the patent
licenses for wet tantalum capacitors was fully amortized during 2002.
24
Other operating expense
The 2003 amount is primarily attributable to the write-down of a manufacturing
facility that became available as the result of a decision to purchase an
additional manufacturing facility in New York.
Interest expense and interest income
Interest expense was lower and interest income was higher primarily due to the
issuance of the $170.0 million convertible subordinated notes in May 2003. These
securities allowed for the outstanding line of credit to be fully replaced at a
lower rate of interest and additional funds to be invested on a short-term
basis.
Provision for income taxes
Our effective tax rate declined primarily as a result of increased research and
development credits, as well as the benefits of state tax planning strategies.
The impact of the lower effective tax rate during 2003 was approximately $0.5
million.
The Extraterritorial Income Exclusion (ETI) provided approximately $1.0 million
of tax benefit in 2003. There is currently legislation in Congress to repeal the
ETI provisions of the Internal Revenue Code and to make numerous changes to the
United States international tax regime and other laws affecting domestic
businesses.
FISCAL 2002 COMPARED WITH FISCAL 2001
The increase in total sales for 2002 included sales of Greatbatch-Globe, which
we acquired in July 2002.
IMC. Sales for IMC increased mainly due to our customers' increased demand for
ICD batteries in the CRM market. Partially offsetting this increase was a
decline in royalty revenues from Medtronic on patents that had expired.
Capacitor sales increased as a result of increased demand by the existing
customer for capacitors in 2002. The increase in sales of medical components was
primarily due to the inclusion of sales from our Greatbatch-Sierra acquisition
during the full year of 2002 and our Greatbatch-Globe acquisition for the second
half of 2002. Substantially all of the revenue changes during 2002 were
attributable to volume.
EPS. Commercial battery and pack sales decreased principally due to a decreased
level of exploration in the oil and gas industry in the first six months of 2002
compared to 2001.
Gross profit
Gross profit increased as a result of increased sales. Production yield issues
for filtered feedthroughs, reduced royalty revenues in 2002 compared to 2001,
and the inclusion of lower margin Greatbatch-Globe Tool operations were the
primary contributors to the reduced overall gross margin.
25
SG&A expenses
SG&A expenses increased both in dollars and as a percentage of total sales. The
increase is primarily due to the inclusion of costs associated with the addition
of Greatbatch-Sierra for the last half of 2001 and the full year 2002 and
Greatbatch-Globe for the last half of 2002, costs associated with our Six
Sigma(TM) quality initiatives, the general development of our infrastructure to
support our growth, and expenses related to ongoing patent activity.
RD&E expenses
RD&E expenses increased in dollars, but as a percentage of total sales were at
the same level for both years. The decrease in the percentage of expenses as
related to sales is primarily attributable to the low level of RD&E expenses at
Greatbatch-Globe. We expect to maintain our spending on RD&E at a level that
will support the new technologies demanded by the IMD markets.
Amortization expense
Intangible amortization decreased significantly due to the cessation of the
amortization for goodwill and other intangible assets with indefinite lives
effective the beginning of our fiscal year 2002.
If the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142) had been implemented on
January 1, 2001, income from continuing operations and diluted earnings per
share from continuing operations for 2001 would have been $13.8 million and
$0.69, respectively.
If SFAS No. 142 had been implemented on January 1, 2001, net income and diluted
earnings per share for 2001 would have been $10.8 million and $0.54,
respectively.
Other expenses
In 2002, other operating expense included a non-recurring charge of $1.7 million
representing the write-off of a noncompete agreement after the passing of Mr.
Fred Hittman.
Interest expense declined as a result of reduced interest rates during the year.
The rate reductions arose from reduced market rates as well as contracted rate
reductions due to the reduction in leverage measurements during the year.
Interest income increased slightly as the Company's investable cash was higher
in 2002 than 2001 due to the timing of its follow-on public offering and the
acquisition of Greatbatch-Globe.
In 2002 other expense included a non-recurring charge of $1.5 million
representing the write-off of the investment in an unrelated company based on an
analysis of the financial viability of that company. It was determined that the
Company's investment in the unrelated company had a fair value that is less than
its carrying value.
In 2001 other expense included a charge for the early extinguishment of debt
associated with the restructuring of our long-term debt and the related
write-off of deferred financing fees, a call premium paid, and loan discounts
associated with the previous long-term debt.
26
Provision for income taxes
Our effective tax rate declined primarily as a result of increased research and
development credits, as well as the benefits of state tax planning strategies,
net of anticipated increased state taxes related to the Greatbatch-Globe
acquisition. The impact of the lower effective tax rate during 2003 was
approximately $1.2 million.
Liquidity and Capital Resources
Our principal source of short-term liquidity is our working capital of $170.5
million at December 31, 2003 combined with our unused $20 million credit line
with our lending syndicate. Historically we have generated cash from operations
sufficient to meet our capital expenditure and debt service needs, other than
for acquisitions. At December 31, 2003 our current ratio was 8.1:1, so
short-term liquidity is not an issue.
The Company regularly engages in discussions relating to potential acquisitions
and has identified possible acquisition opportunities and we may announce an
acquisition transaction at any time.
At December 31, 2003, 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 $131.0 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 and the
average daily trading volume of our common stock has also increased;
accordingly, we believe that if needed we can access public markets to sell
additional common or preferred stock assuming conditions are appropriate.
In addition to the improved working capital, capital spending of $12.0 million
in 2003 was lower than historical expenditure levels. The majority of the
current year spending was for maintenance capital. In comparison, we spent $21.0
million in 2002 , which included approximately $8.0 million for new investment
projects in addition to approximately $13.0 million for maintenance capital. In
2003, we significantly enhanced our balance sheet through improved cash flow
from operations and through the convertible note financing we completed in May.
This improved capital structure allows us to support our internal growth and
provides liquidity for corporate development initiatives. We anticipate that in
2004 we will incur additional capital costs primarily due to the build-out of
the medical production facility and from the continuation of the ERP
implementation.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4)
of Regulation S-K.
27
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods.
Payments due by period
----------------------------------------------------
CONTRACTUAL OBLIGATIONS Total Less than 1-3 years 3-5 years More than 5
1 year years
- -----------------------------------------------------------------------------------------
Long-Term Debt Obligations (a):
Convertible Debentures $170,000 $- $- $- $170,000
Capital Lease Obligations 1,816 742 948 126 -
Operating Lease Obligations (b) 4,006 3,810 196 - -
Purchase Obligations (c) 2,750 2,750 - - -
----------------------------------------------------
Total $178,572 $7,302 $1,144 $126 $170,000
====================================================
(a) The current portion of these liabilities is included. Amounts do not
include imputed interest. See Note 8 - Debt of the Notes to the
Consolidated Financial Statements in this Form 10-K for additional
information about our long-term obligations.
(b) See Note 14 of the Notes to the Consolidated Financial Statements in
this Form 10-K for additional information about our operating lease
obligations.
(c) Purchase orders or contracts for the purchase of raw materials and
other goods and services are not included in the table above. For the
purposes of this table, contractual obligations for purchase of goods
or services are defined as agreements that are enforceable and legally
binding on the Company and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum
or variable price provisions; and the approximate timing of the
transaction. Our purchase orders are normally based on our current
manufacturing needs and are fulfilled by our vendors within short time
horizons. We enter into blanket orders with vendors that have
preferred pricing and terms, however these orders are normally
cancelable by us without penalty. We do not have significant
agreements for the purchase of raw materials or other goods specifying
minimum quantities or set prices that exceed our expected requirements
in the short-term. We also enter into contracts for outsourced
services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires disclosures about
variable interest entities for which it is reasonably possible that we will be
required to consolidate or disclose information when the Interpretation becomes
effective. The provisions of FIN 46 are effective for us for the interim period
ending April 2, 2004, or earlier in certain instances. Such instances did not
have an effect on our consolidated financial statements in 2003. We have
28
determined that it is not reasonably possible that we will be required to
consolidate or disclose information about a variable interest entity in 2004. In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, except for mandatorily
redeemable financial instruments subject to the provisions of this Statement.
Subsequent to the issuance of SFAS No. 150, the FASB decided to revise the
effective dates of the application of certain provisions of the statement. For
mandatorily redeemable financial instruments that do not have a fixed redemption
date or are not redeemable for a fixed or determinable amount the Board agreed
to defer application for an indefinite period of time. The adoption of SFAS No.
150 did not have an effect on our consolidated financial statements in 2003.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Under our existing line of credit any borrowings bear interest at fluctuating
market rates. At December 31, 2003, we did not have any borrowings outstanding
under our line of credit and thus no interest rate sensitive financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of our Company and
report of independent auditors thereon are set forth below.
Independent Auditors' Report.
Consolidated Balance Sheet as of December 31, 2003 and 2002.
Consolidated Statement of Operations for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statement of Cash Flows for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
29
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Wilson Greatbatch Technologies, Inc.
Clarence, New York
We have audited the accompanying consolidated balance sheets of Wilson
Greatbatch Technologies, Inc. and subsidiaries (the "Company") as of January 2,
2004 and January 3, 2003, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended January 2, 2004. Our audits also included the financial statement schedule
at Item 15(a)(2). These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wilson Greatbatch Technologies,
Inc. and subsidiaries as of January 2, 2004 and January 3, 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended January 2, 2004 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
Buffalo, New York
March 1, 2004
30
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------
ASSETS December 31,
2003 2002
Current assets:
Cash and cash equivalents $119,486 $4,608
Short-term investments 11,559 -
Accounts receivable, net 23,726 19,310
Inventories 28,598 34,908
Prepaid expenses and other current assets 3,591 3,339
Refundable income taxes 583 3,038
Deferred income taxes 3,163 3,349
Asset available for sale 3,658 -
---------------- ---------------
Total current assets 194,364 68,552
Property, plant, and equipment, net 63,735 64,699
Intangible assets, net 51,441 55,804
Goodwill 119,521 119,407
Deferred income taxes 2,896 -
Other assets 6,286 3,789
---------------- ---------------
Total assets $438,243 $312,251
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,091 $5,726
Accrued expenses and other current liabilities 18,968 13,872
Current portion of long-term debt 850 8,750
---------------- ---------------
Total current liabilities 23,909 28,348
Long-term debt, net of current portion 928 76,250
Convertible subordinated notes 170,000 -
Deferred income taxes 7,251 136
Other long-term liabilities 815 654
---------------- ---------------
Total liabilities 202,903 105,388
---------------- ---------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock - -
Common stock 21 21
Additional paid-in capital 207,969 202,279
Deferred stock-based compensation (1,185) -
Treasury stock, at cost (179) (863)
Retained earnings 28,714 5,426
---------------- ---------------
Total stockholders' equity 235,340 206,863
---------------- ---------------
Total liabilities and stockholders' equity $438,243 $312,251
================ ===============
The accompanying notes are an integral part of these consolidated financial
statements
31
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------
Year Ended December 31,
2003 2002 2001
Sales $216,365 $167,296 $135,575
Cost of sales 126,537 96,398 74,716
--------------------------------------
Gross profit 89,828 70,898 60,859
Selling, general and administrative expenses 30,384 24,369 18,174
Research, development and engineering costs, net 16,991 14,440 12,575
Amortization of intangible assets 3,217 3,702 7,726
Other operating expense, net 1,036 2,481 132
--------------------------------------
Operating income 38,200 25,906 22,252
Interest expense 4,101 3,752 4,011
Interest income (702) (442) (423)
Other expense, net 1,485 1,631 4,886
--------------------------------------
Income before income taxes 33,316 20,965 13,778
Provision for income taxes 10,028 6,604 5,181
--------------------------------------
Net income $23,288 $14,361 $8,597
======================================
Earnings per share:
Basic $1.10 $0.69 $0.44
Diluted $1.08 $0.68 $0.43
Weighted average shares outstanding:
Basic 21,149 20,941 19,563
Diluted 21,534 21,227 19,945
The accompanying notes are an integral part of these consolidated financial
statements
32
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2003 2002 2001
Cash flows from operating activities:
Net income $23,288 $14,361 $8,597
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,179 12,100 14,241
Stock-based compensation 3,306 3,667 3,019
Loss on early extinguishment of debt 1,487 - 3,019
Write-off of noncompete agreement - 1,723 -
Write-off of investment in unrelated company - 1,547 -
Deferred income taxes 4,578 3,765 2,358
Loss on disposal of property, plant, and equipment 1,036 758 132
Changes in operating assets and liabilities:
Accounts receivable (4,416) (379) (4,396)
Inventories 5,822 (2,752) (10,030)
Prepaid expenses and other current assets 2,335 (1,450) (928)
Accounts payable (1,635) (1,685) 3,025
Accrued expenses and other current liabilities 5,797 (2,972) 1,741
Income taxes 24 (873) 677
------------------------------------------
Net cash provided by operating activities 54,801 27,810 21,455
------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments (11,559) - -
Acquisition of property, plant and equipment (11,925) (20,501) (9,715)
Proceeds from sale of property, plant and equipment 2,734 14 5
Increase in intangible assets - - (574)
Decrease (increase) in other assets 107 (1,459) (2,235)
Net cash effect of acquisitions - (47,124) (46,913)
------------------------------------------
Net cash used in investing activities (20,643) (69,070) (59,432)
------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 170,000 32,000 87,000
Principal payments of long-term debt (85,000) (29,880) (48,278)
Principal payments of capital lease obligations (434) - -
Payment of debt issue costs (4,535) - -
Issuance of common stock 868 476 42,511
Purchase of treasury stock (179) - -
------------------------------------------
Net cash provided by financing activities 80,720 2,596 81,233
------------------------------------------
Net increase (decrease) in cash and cash equivalents 114,878 (38,664) 43,256
Cash and cash equivalents, beginning of year 4,608 43,272 16
------------------------------------------
Cash and cash equivalents, end of year $119,486 $4,608 $43,272
==========================================
The accompanying notes are an integral part of these consolidated financial
statements
33
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
Capital Deferred Retained
In Excess Stock Treasury Earnings
Common Stock of Par Based Stock (Accumulated
------------- ----------------
Shares Amount Value Compensation Shares Amount Deficit)
Balance, December 31, 2000 18,972 $19 $157,526 $- 261 $(4,179) $(17,532)
Common stock issued 2,000 2 42,427 - - - -
Shares contributed to ESOP - - 843 - (66) 1,057 -
Exercise of stock options 11 - 84 - - - -
Net income - - - - - - 8,597
------------- --------- ---------------------------- ------------
Balance, December 31, 2001 20,983 21 200,880 - 195 (3,122) (8,935)
Common stock issuance expenses - - (39) - - - -
Shares contributed to ESOP - - 761 - (140) 2,254 -
Reissuance of treasury stock - - 9 - (1) 5 -
Exercise of stock options 67 - 519 - - - -
Tax benefit of non-qualifed stock option exercises - - 149 - - - -
Net income - - - - - - 14,361
------------- --------- ---------------------------- ------------
Balance, December 31, 2002 21,050 21 202,279 - 54 (863) 5,426
Common stock issued - - 1,768 (1,768) - - -
Shares contributed to ESOP 90 - 2,804 - (54) 863 -
Purchase of treasury stock - - - - 5 (179) -
Exercise of stock options 77 - 868 - - - -
Tax benefit of non-qualifed stock option exercises - - 250 - - - -
Stock based compensation 14 - - 583 - - -
Net income - - - - - - 23,288
--------------- --------- ---------------------------- ------------
Balance, December 31, 2003 21,231 $21 $207,969 $(1,185) 5 $(179) $28,714
============= ========= ============================ ============
The accompanying notes are an integral part of these consolidated financial
statements
34
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Company - The consolidated financial statements include the accounts of
Wilson Greatbatch Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Nature of Operations - The Company operates in two reportable
segments-Implantable Medical Components ("IMC") and Electrochem Power
Solutions ("EPS"). The IMC segment designs and manufactures batteries,
capacitors, filtered feedthroughs, engineered components and enclosures
used in IMDs. The EPS segment designs and manufactures high performance
batteries and battery packs for use in oil and gas exploration,
oceanographic equipment and aerospace.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Year End - The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st.
For clarity of presentation, the Company describes all periods as if the
year-end is December 31st. Fiscal 2002 included 53 weeks.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly liquid, short-term investments with maturities at the time of
purchase of three months or less.
Short-term Investments - Short-term investments are those investments
acquired with maturities that exceed three months and are less than one
year at the time of acquisition. Securities that the Company has the
ability and positive intent to hold to maturity are accounted for as
held-to-maturity securities and are carried at amortized cost. The cost of
securities sold is based on the specific identification method.
Inventories - Inventories are stated at the lower of cost, determined using
the first-in, first-out method, or market.
Assets Available for Sale - Assets available for sale are accounted for at
the lower of the carrying amount or each asset's estimated fair value less
costs to sell.
Property, Plant and Equipment - Property, plant and equipment is carried at
cost. Depreciation is computed primarily by the straight-line method over
the estimated useful lives of the assets, which are as follows: buildings
and building improvements 7-40 years; machinery and equipment 3-10 years;
office equipment 3-10 years; and leasehold improvements over the remaining
lives of the improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred;
renewals and betterments are capitalized. Upon retirement or sale of an
35
asset, its cost and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss is recorded in income or
expense.
Goodwill - Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 142 addresses the financial accounting and
reporting for acquired goodwill and other intangible assets with indefinite
lives. At adoption, the Company reassessed the useful lives of trademarks
and names and deemed them to have an indefinite life because they are
expected to generate cash flows indefinitely. Note 14 - Business Segment
information contains an analysis of goodwill by segment.
Goodwill and trademark and names are no longer amortized but are
periodically tested for impairment. An analysis of the proforma effects of
these standards had the adoption occurred as of the beginning of fiscal
2001 is included in Note 6 - Intangible Assets.
SFAS No. 142 requires the Company to assess goodwill for impairment by
comparing the fair value of the reporting units to their carrying amounts
on an annual basis, or more frequently if certain events occur or
circumstances change, to determine if there is potential impairment. If the
fair value of a reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair value of
the goodwill within the reporting unit is less than its carrying value.
Fair values for goodwill are determined based on discounted cash flows,
market multiples or appraised values as appropriate. The Company has
determined that, based on the goodwill impairment test, no impairment of
goodwill and other indefinite-lived intangible assets has occurred.
Intangible Assets - Acquired intangible assets apart from goodwill and
trademark and names consist primarily of patented and unpatented
technology. The Company continues to amortize its definite-lived assets on
a straight-line basis over their estimated useful lives as follows:
patented technology, 8-17 years; unpatented technology, 5-15 years; and
other intangible assets, 3-10 years.
The Company tests long-lived assets, exclusive of goodwill, for
recoverability whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable. An impairment loss is
recognized if the carrying amount of long-lived assets is not recoverable
and exceeds its fair value based on the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
Fair Value of Financial Instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
value of cash and cash equivalents approximates their recorded values due
to the nature of the instruments.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
trade receivables. A significant portion of the Company's sales are to
customers in the medical device industry, and, as such, the Company is
directly affected by the condition of that industry. However, the credit
36
risk associated with trade receivables is minimal due to the Company's
stable customer base. The Company maintains cash deposits with major banks,
which from time to time may exceed federally insured limits.
Allowance for Doubtful Accounts - The Company provides credit, in the
normal course of business, to its customers. The Company also maintains an
allowance for doubtful customer accounts and charges actual losses against
this allowance when incurred.
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 that standard, the Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
The Company has determined the pro forma information as if the Company had
accounted for stock options granted under the fair value method of SFAS No.
123. The Black-Scholes option pricing model was used with the following
weighted average assumptions. These pro forma calculations assume the
common stock is freely tradable for all years presented and, as such, the
impact is not necessarily indicative of the effects on reported net income
of future years.
Year Ended December 31,
2003 2002 2001
Risk-free interest rate 2.75% 3.79% 5.00%
Expected volatility 55% 55% 55%
Expected life (in years) 5 5 7
Expected dividend yield 0% 0% 0%
37
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 year
is as follows (in thousands except per share data):
Year Ended December 31,
2003 2002 2001
Net income as reported $23,288 $14,361 $8,597
Stock based employee compensation cost included in net
income as reported $2,311 $2,512 $1,884
Stock-based employee compensation cost determined using
the fair value based method, net of related tax effects $4,054 $2,972 $2,601
Pro forma net income $21,545 $13,901 $7,880
Net earnings per share:
Basic - as reported $1.10 $0.69 $0.44
Basic - pro forma $1.02 $0.66 $0.40
Diluted - as reported $1.08 $0.68 $0.43
Diluted - pro forma $1.00 $0.65 $0.40
Income Taxes - The Company provides for income taxes using the liability
method whereby deferred tax liabilities and assets are recognized based on
temporary differences between the financial reporting and tax basis of
assets and liabilities using the anticipated tax rate when taxes are
expected to be paid or reversed.
Revenue Recognition - Revenue from the sale of products is recognized at
the time product is shipped to customers. The Company allows customers to
return defective or damaged products for credit, replacement, or exchange.
Revenue is recognized as the net amount to be received after deducting
estimated amounts for product returns and allowances.
Product Warranties - The Company generally warrants that its products will
meet customer specifications and will be free from defects in materials and
workmanship. The Company accrues its estimated exposure to warranty claims
based upon recent historical experience and other specific information as
it becomes available.
Research and Development - Research, development and engineering costs are
expensed as incurred.
Engineering Costs - Engineering expenses are expensed as incurred. Cost
reimbursements for engineering services from customers for whom the Company
designs products are recorded as an offset to engineering costs upon
achieving development milestones.
38
Net research, development and engineering costs are as follows (in
thousands):
Year Ended December 31,
2003 2002 2001
Research and development costs $9,446 $7,156 $6,728
------------------------------
Engineering costs 8,649 8,882 8,323
Less cost reimbursements (1,104) (1,598) (2,476)
------------------------------
Engineering costs, net 7,545 7,284 5,847
------------------------------
Total research and development and engineering
costs, net $16,991 $14,440 $12,575
==============================
Earnings Per Share - Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during the
period. Diluted earnings per share is calculated by adjusting for common
stock equivalents, which consist of stock options and unvested restricted
stock. Holders of our convertible notes may convert them into shares of the
Company's common stock under certain circumstances (see Note 8 - Debt for a
description of our convertible subordinated notes). For computation of
earnings per share under conversion conditions, the number of diluted
shares outstanding will increase by the amount of shares that are
potentially convertible during that period. Also, net income will be
adjusted for the calculation to add back interest expense on the
convertible notes as well as deferred financing fees amortization recorded
during the period.
The following table reflects the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
2003 2002 2001
-------------------------------
Earnings per share - basic
- ------------------------------------------------
Earnings available to common shareholders $23,288 $14,361 $8,597
Weighted average shares outstanding 21,149 20,941 19,563
Earnings per share - basic $1.10 $0.69 $0.44
===============================
Earnings per share - diluted
- ------------------------------------------------
Earnings available to common shareholders $23,288 $14,361 $8,597
Weighted average shares outstanding 21,149 20,941 19,563
Dilutive impact of options outstanding &
unvested restricted stock 385 286 382
-------------------------------
Weighted average shares and potential
dilutive shares outstanding 21,534 21,227 19,945
Earnings per share - diluted $1.08 $0.68 $0.43
===============================
39
Comprehensive Income - Comprehensive income includes all changes in
stockholders' equity during a period except those resulting from
investments by owners and distribution to owners. For all periods
presented, the Company's only component of comprehensive income is its net
income for those periods.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of sales and expenses during the reporting period. Actual results
could differ materially from those estimates.
Supplemental Cash Flow Information (in thousands):
2003 2002 2001
Cash paid during the year for:
Interest $3,740 $3,092 $3,717
Income taxes 5,674 6,055 2,214
Noncash investing and financing activities:
Acquisition of property utilizing capitalized
leases $2,212 $- $-
Common stock contributed to ESOP 3,667 3,019 1,902
Recent Accounting Pronouncements -- In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires disclosures
about variable interest entities for which it is reasonably possible that
we will be required to consolidate or disclose information when the
Interpretation becomes effective. The provisions of FIN 46 are effective
for the Company for the interim period ending April 2, 2004, or earlier in
certain instances. Such instances did not have an effect on the Company's
consolidated financial statements in 2003. The Company has determined that
it is not reasonably possible that it will be required to consolidate or
disclose information about a variable interest entity in 2004.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, except for mandatorily redeemable financial instruments subject to
the provisions of this Statement. Subsequent to the issuance of SFAS No.
150, the FASB decided to revise the effective dates of the application of
certain provisions of the statement. For mandatorily redeemable financial
instruments that do not have a fixed redemption date or are not redeemable
for a fixed or determinable amount the Board agreed to defer application
for an indefinite period of time. The adoption of 150 did not have an
effect on the Company's consolidated financial statements in 2003.
40
Reclassifications - Certain reclassifications were made to the prior years'
financial statements to conform with the current year presentation. None of
the reclassifications affected net income (loss) or stockholders' equity.
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB 13, and Technical Corrections," at the beginning
of fiscal year 2003. Under SFAS No. 145, the Company no longer classifies
debt extinguishments as extraordinary items in the consolidated financial
statements, subject to limited exceptions. Accordingly, amounts previously
classified as extraordinary related to debt extinguishments in fiscal 2001
have been reclassified as components of income before income taxes.
3. SHORT-TERM INVESTMENTS
Short-term investments at December 31, 2003, consist of investments
acquired with maturities that exceed three months and are less than one
year at the time of acquisition. Held-to-maturity securities comprised the
following (in thousands):
As of December 31, 2003
Cost Gross Gross Estimated fair
unrealized unrealized value
gains losses
Municipal Bonds $11,559 $- $(1) $11,558
-------------------------------------------------------
Short-term investments $11,559 $- $(1) $11,558
=======================================================
The municipal bonds have maturity dates ranging from January 2004 to April
2004. There were no short-term investments as of December 31, 2002.
4. INVENTORIES
Inventories comprised the following (in thousands):
December 31,
2003 2002
Raw material $11,688 $15,693
Work-in-process 10,421 13,592
Finished goods 6,489 5,623
-------- --------
Total $28,598 $34,908
======== ========
41
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following (in thousands):
December 31,
2003 2002
Manufacturing machinery and equipment $53,313 $48,384
Buildings and building improvements 15,380 14,752
Information technology hardware and software 7,384 6,621
Leasehold improvements 5,440 4,819
Land and land improvements 4,659 4,659
Furniture and fixtures 2,631 2,496
Construction work in process 8,595 8,778
Other 148 308
-------- --------
97,550 90,817
Less accumulated depreciation (33,815) (26,118)
-------- --------
Total $63,735 $64,699
======== ========
Depreciation expense during 2003, 2002 and 2001 was approximately
$9,390,000, $7,610,000, and $5,917,000, respectively.
6. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
As of December 31, As of December 31, 2002
2003
Gross Accumulated Net Gross Accumulated Net carrying
carrying amortization carrying carrying amortization Amount
amount Amount amount
Amortizing intangible
assets:
Patented technology $21,875 $(8,949) $12,926 $21,875 $(7,015) $14,860
Unpatented technology 15,335 (5,549) 9,786 15,335 (3,615) 11,720
Other 7,740 (7,196) 544 7,740 (6,701) 1,039
--------------------------------------------------------------------
44,950 (21,694) 23,256 44,950 (17,331) 27,619
Unamortizing intangible
assets:
Trademark and names 31,420 (3,235) 28,185 31,420 (3,235) 28,185
--------------------------------------------------------------------
Total intangible assets $76,370 $(24,929) $51,441 $76,370 $(20,566) $55,804
====================================================================
Estimated amortization expense for years subsequent to 2003 are as follows (in
thousands):
2004 $2,843
2005 2,361
2006 2,332
2007 2,314
2008 2,314
42
The following table reflects consolidated results for 2001, with data
adjusted as though the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, had occurred as of the beginning of 2001 (in thousands
except per share amounts):
Year Ended
December 31,
2001
Reported net income $8,597
---------------------
Add back to reported net income:
Goodwill amortization, net of tax 1,339
Assembled workforce amortization, net of tax 397
Trademark and names amortization, net of tax 506
---------------------
2,242
---------------------
Adjusted net income $10,839
=====================
Basic earnings per share:
Reported net income $0.44
Adjusted net income $0.55
Diluted earnings per share:
Reported net income $0.43
Adjusted net income $0.54
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following
(in thousands):
December 31,
2003 2002
Salaries and benefits $5,170 $5,302
Profit sharing and bonuses 9,589 5,164
Other 4,209 3,406
------------- --------------
Total $18,968 $13,872
============= ==============
43
8.
DEBT
Long-term debt comprised the following (in thousands):
December 31,
2003 2002
2.25% convertible subordinated notes, due 2013 $170,000 $-
Capital lease obligations 1,778 -
Term loan - 85,000
------------- -------------
171,778 85,000
Less current portion (850) (8,750)
------------- -------------
Total long-term debt $170,928 $76,250
============= =============
Convertible Subordinated Notes
In May 2003, the Company completed a private placement of contingent
convertible subordinated notes totaling $170.0 million, due 2013. In
November 2003 the Company had a Registration Statement with the Securities
and Exchange Commission declared effective with respect to these notes and
the underlying common stock. The notes bear interest at 2.25 percent per
annum, payable semiannually. Beginning with the six-month interest period
commencing June 15, 2010, the Company will pay additional contingent
interest during any six-month interest period if the trading price of the
notes for each of the five trading days immediately preceding the first day
of the interest period equals or exceeds 120% of the principal amount of
the notes.
Holders may convert the notes into shares of the Company's common stock at
a conversion rate of 24.8219 shares per $1,000 principal amount of notes,
subject to adjustment, before the close of business on June 15, 2013 only
under the following circumstances: (1) during any fiscal quarter commencing
after July 4, 2003, if the closing sale price of the Company's common stock
exceeds 120% of the conversion price for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter; (2) subject to certain exceptions, during the
five business days after any five consecutive trading day period in which
the trading price per $1,000 principal amount of the notes for each day of
such period was less than 98% of the product of the closing sale price of
the Company's common stock and the number of shares issuable upon
conversion of $1,000 principal amount of the notes; (3) if the notes have
been called for redemption; or (4) upon the occurrence of certain corporate
events.
Beginning June 20, 2010, the Company may redeem any of the notes at a
redemption price of 100% of their principal amount, plus accrued interest.
Note holders may require the Company to repurchase their notes on June 15,
2010 or at any time prior to their maturity following a fundamental change
at a repurchase price of 100% of their principal amount, plus accrued
interest. The notes are subordinated in right of payment to all of our
senior indebtedness and effectively subordinated to all debts and other
liabilities of our subsidiaries.
44
Concurrent with the issuance of the notes, the Company used
approximately $72.5 million of the proceeds from this private
placement to pay off the term loan. Debt issuance expenses
totaled $4.5 million and are being amortized using the effective
yield method over a seven-year term.
The fair-value of the convertible subordinated notes as of December 31,
2003 was $212.5 million based on quoted market prices.
Capital Lease Obligations
The Company leases assets under non-cancelable lease arrangements. As of
December 31, 2003, future minimum lease payments under capital leases are
as follows:
(In thousands) Amount
- -------------------------------------------------------- -------------
2004 $742
2005 948
2006 126
-------------
Total minimum lease payments 1,816
Less imputed interest (38)
-------------
Present value of minimum lease payments 1,778
Less current portion (850)
-------------
Long-term capital lease obligations $928
=============
Revolving Line of Credit
As of December 31, 2003 the Company had no balance outstanding on its $20.0
million committed revolving line of credit. The revolving line of credit
continues to be available to the Company for future borrowing and matures
on July 1, 2005. The revolving line of credit is secured by the Company's
accounts receivable and inventories and requires the Company to comply with
various quarterly financial covenants, as defined, related to net earnings
or loss before interest, taxes, depreciation, and amortization ("EBITDA"),
and ratios of leverage, interest, fixed charges, and capitalization as they
relate to EBITDA. Interest rates under the revolving line of credit vary
with the Company's leverage. The Company is required to pay a commitment
fee of between .50% and .125% per annum on the unused portion of the
revolving line of credit based on the Company's leverage.
9. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan - The Company sponsors a non-leveraged
Employee Stock Ownership Plan (``ESOP'') and related trust as a long-term
benefit for substantially all of its employees. Under the terms of the ESOP
plan document there is a defined contribution equal to five percent of each
employee's annual compensation. This contribution is contributed to the
ESOP in the form of Company stock. The ESOP is subject to contribution
limitations as defined in the plan. Compensation cost under the ESOP
45
recognized by the Company for the defined contribution was approximately
$2.7 million, $2.3 million, and $1.8 million in 2003, 2002 and 2001,
respectively.
Savings Plan - The Company sponsors a defined contribution 401(k) plan,
which covers substantially all of its employees. The plan provides for the
deferral of employee compensation under Section 401(k) and a Company match.
Net costs related to this defined contribution plan were approximately
$847,000, $718,000 and $622,000 in 2003, 2002 and 2001, respectively.
Education Assistance Program - The Company reimburses tuition, textbooks
and laboratory fees for college or other lifelong learning programs for all
of its employees. The Company also reimburses college tuition for the
dependent children of its full-time employees. For certain employees, the
dependent children benefit vests on a straight-line basis over ten years.
Minimum academic achievement is required in order to receive reimbursement
under both programs. Aggregate expenses under the programs were
approximately $669,000, $621,000 and $460,000 in 2003, 2002 and 2001,
respectively.
10. STOCK OPTION PLANS
The Company has stock option plans that provide for the issuance of
nonqualified and incentive stock options to employees of the Company. The
Company's 1997 Stock Option Plan (``1997 Plan'') authorizes the issuance of
options to purchase up to 480,000 shares of the Company's common stock. The
stock options generally vest over a five-year period and may vary depending
upon the achievement of earnings targets. The stock options expire 10 years
from the date of the grant. Stock options are granted at exercise prices
equal to or greater than the fair market value of the Company's common
stock at the date of the grant.
The Company's 1998 Stock Option Plan (``1998 Plan'') authorizes the
issuance of nonqualified and incentive stock options to purchase up to
1,220,000 shares the Company's common stock, subject to the terms of the
plan. The stock options vest over a three to five year period and may vary
depending upon the achievement of earnings targets. The stock options
expire 10 years from the date of the grant. Stock options are granted at
exercise prices equal to or greater than the fair value of the Company's
common stock at the date of the grant.
The Company has a stock option plan that provides for the issuance of
nonqualified stock options to Non-Employee Directors (the "Director Plan").
The Director Plan authorizes the issuance of nonqualified stock options to
purchase up to 100,000 shares of the Company's common stock from its
treasury, subject to the terms of the plan. The stock options vest over a
three-year period. The stock options expire 10 years from the date of
grant. Stock options are granted at exercise prices equal to or greater
than the fair value of the Company's common stock at the date of the grant.
As of December 31, 2003, options for 472,211 shares were available for
future grants under the plans. The weighted average remaining contractual
life is seven years.
46
A summary of the transactions under the 1997 Plan, 1998 Plan, and the
Director Plan for 2001, 2002 and 2003 follows:
Weighted Weighted
Average Average
Option Exercise Grant Date
Activity Price Fair Value
------------- -------------- ----------
Options outstanding at December 31, 2000 590,685 $8.70
Options granted 101,934 26.06 $16.02
Options exercised (11,340) 6.06
Options forfeited (14,960) 9.58
-------------
Options outstanding at December 31, 2001 666,319 $11.38
Options granted 344,774 24.97 $12.22
Options exercised (67,783) 7.77
Options forfeited (67,661) 12.78
-------------
Options outstanding at December 31, 2002 875,649 $16.92
Options granted 367,360 33.43 $16.51
Options exercised (77,094) 11.14
Options forfeited (23,015) 25.20
-------------
Options outstanding at December 31, 2003 1,142,900 $22.18
=============
Options exercisable at:
December 31, 2002 451,037 12.09
December 31, 2003 657,452 17.39
The following table provides detail regarding the options outstanding at
December 31, 2003.
Number
Range of Exercise Prices Outstanding
- ----------------------------------------------------------------------
$5.00 226,391
$15.00 - 20.64 178,423
$23.85 - 35.70 691,469
$37.51 - 37.81 46,617
------------
1,142,900
============
47
11. RESTRICTED STOCK PLAN
On November 15, 2002, the Company's Board of Directors approved the
Restricted Stock Plan under which stock awards may be granted to employees.
The Plan received shareholder approval at the Annual Meeting of
Stockholders held on May 9, 2003. The number of shares that are reserved
and may be issued under the plan cannot exceed 200,000. The Compensation
and Organization Committee of the Company's Board of Directors determines
the number of shares that may be granted under the plan. Restricted stock
awards are either time-vested or performance-vested based on the terms of
each individual award agreement. Time-vested restricted stock vests 50% on
the first anniversary of the date of the award and 50% on the second
anniversary of the date of the award. Performance-vested restricted stock
vests upon the achievement of certain annual diluted earnings per share
targets by the company, or the seventh anniversary date of the award.
There were 50,400 shares granted to certain officers and key employees
under the terms of the plan. 13,500 shares of restricted stock fully vested
as of December 31, 2003. Unamortized deferred compensation expense with
respect to the restricted stock grants amounted to $1,185,000 at December
31, 2003 and is being amortized based on the vesting schedules attributable
to the underlying restricted stock grants. Compensation expense of $583,000
was recognized during 2003.
12. INCOME TAXES
The components of the provision for income taxes comprised the following
(in thousands):
Year Ended December 31,
2003 2002 2001
Federal:
Current $4,820 $2,573 $2,081
Deferred 7,363 4,137 2,365
-------------------------------------
12,183 6,710 4,446
-------------------------------------
State: - - -
Current 630 266 742
Deferred (2,785) (372) (7)
-------------------------------------
(2,155) (106) 735
-------------------------------------
Provision for income taxes $10,028 $6,604 $5,181
=====================================
48
The tax effect of major temporary differences that give rise to the
Company's net deferred tax accounts are as follows (in thousands):
December 31,
2003 2002
Depreciation $(4,776) $(4,809)
Contingent interest on convertible notes (2,575) -
Amortization of intangible assets (1,118) 1,969
Tax credits 2,779 2,298
Accrued expenses and deferred compensation 2,226 1,607
Inventory valuation 1,745 2,019
Investments 565 565
Net operating loss carryforwards 433 38
Other 94 91
----------- ------------
Net deferred tax (liability) asset (627) 3,778
Less valuation allowance (565) (565)
----------- ------------
Net deferred tax (liability) asset $(1,192) $3,213
=========== ============
In assessing the realizability of deferred tax assets, management
considers, within each taxing jurisdiction, whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based on the consideration of the weight of both
positive and negative evidence, management has determined that it is more
likely than not that a portion of the deferred tax asset remaining at
December 31, 2003 related to the valuation of an investment will not be
realized.
The provision for income taxes differs in each of the years from the
federal statutory rate due to the following:
Year Ended December 31,
2003 2002 2001
Statutory rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 2.0 3.3 2.9
Permanent items from tax planning (6.8) - -
Federal and state tax credits (2.1) (10.7) -
Valuation allowance - 2.7 -
Other 2.0 1.2 (0.3)
--------------------------------
Effective tax rate 30.1 % 31.5 % 37.6 %
================================
49
13. CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of common stock, $.001 par value per share and 100,000,000 shares of
preferred stock, $.001 par value per share. There are no preferred shares
issued or outstanding. There were 21,231,121 and 21,049,805 shares issued
in 2003 and 2002, respectively. There were 21,226,357 and 20,996,115 shares
outstanding in 2003 and 2002, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal
course of business. The Company does not believe that the ultimate
resolution of any such pending activities will have a material adverse
effect on its consolidated results of operations, financial position, or
cash flows.
The Company is a party to various license agreements through 2018 for
technology that is utilized in certain of its products. The most
significant of these is an agreement to license the basic technology used
for wet tantalum capacitors. The initial payment under the original
agreement was $800,000 and was fully amortized in 2002. The company is
required to pay royalties based on agreed upon terms through August 2014.
The Company is also subject to a license agreement covering the exclusive
use of a patent for a hybrid electrode until December 2016. The initial
payment under this agreement was $100,000 and will be fully amortized in
2004. The Company is required to pay royalties based on the selling price
of products that incorporate such licensed technology.
Expenses related to license agreements were $1,531,000, $1,367,000 and
$317,000 for 2003, 2002, and 2001, respectively.
Product Warranties - The change in aggregate product warranty liability for
the year ended December 31, 2003, is as follows (dollars in thousands):
Beginning balance $402
Additions to warranty reserve 377
Warranty claims paid (466)
----------
Ending balance $313
==========
Operating Leases - The Company is a party to various operating lease
agreements for buildings, equipment and software. The Company incurred
operating lease expense of $1,716,000, $928,000 and $909,000 in 2003, 2002
and 2001, respectively.
If all lease extension options are exercised as expected by the Company,
minimum future annual operating lease payments are $1,815,000 in 2004;
$1,391,000 in 2005; $604,000 in 2006; $196,000 in 2007; and $0 in 2008.
50
15. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: IMC and EPS.
The IMC segment designs and manufactures batteries for devices in the
cardiac rhythm management ("CRM") industry including implantable
cardioverter defibrillators ("ICDs"), pacemakers, cardiac resynchronization
therapy ("CRT") and other medical devices; capacitors for ICDs, filtered
feedthroughs, engineered components and enclosures used in IMDs. The EPS
segment designs and manufactures high performance batteries for use in oil
and gas exploration, oceanographic equipment, and aerospace.
The Company's IMC segment includes multiple business units that have been
aggregated because they share similar economic characteristics and
similarities in the areas of products, production processes, types of
customers, methods of distribution and regulatory environment. The
reportable segments are separately managed, and their performance is
evaluated based on numerous factors, including income from operations.
The Company defines segment income from operations as gross profit less
costs and expenses attributable to segment specific selling, general and
administrative and research, development and engineering expenses, and
intangible amortization. In 2003, segment income also includes a portion of
non-segment specific selling, general and administrative and research,
development and engineering expenses based on allocation bases appropriate
to the expense categories. The remaining unallocated operating expenses
along with other income and expense are not allocated to reportable
segments. This change is not reflected in the 2002 or 2001 calculation of
segment income from operations because it is impractical to do so. The
allocation of expenses to segments in 2003 does not change the composition
of the reportable segments; the change is only a revision to the
calculation of segment income from operations. Transactions between the two
segments are not significant. The accounting policies of the segments are
the same as those described and referenced in Note 2.
51
An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows (dollars in thousands):
Year Ended December 31,
2003 2002 2001
Sales:
IMC
Medical batteries:
ICDs $41,494 $28,518 $22,215
Pacemakers 22,535 20,354 22,923
Other devices 3,662 3,035 722
Royalties - - 991
----------------------------------------------
Total medical batteries 67,691 51,907 46,851
Capacitors 31,668 24,679 20,290
Other components 90,862 65,315 40,513
----------------------------------------------
Total IMC sales 190,221 141,901 107,654
EPS 26,144 25,395 27,921
----------------------------------------------
Total sales $216,365 $167,296 $135,575
==============================================
Segment income from operations:
IMC $43,504 $40,969 $39,008
EPS 4,374 8,262 8,796
----------------------------------------------
Total segment income from operations 47,878 49,231 47,804
Unallocated operating expenses (9,678) (23,325) (25,552)
----------------------------------------------
Operating income as reported 38,200 25,906 22,252
Unallocated other income and expense (4,884) (4,941) (8,474)
----------------------------------------------
Income before income taxes as reported $33,316 $20,965 $13,778
==============================================
Depreciation and amortization:
IMC $10,809 $10,090 $12,440
EPS 854 807 778
----------------------------------------------
Total depreciation included in segment
income from operations 11,663 10,897 13,218
Unallocated depreciation and amortization 1,516 1,203 1,023
----------------------------------------------
Total depreciation and amortization $13,179 $12,100 $14,241
==============================================
52
The changes in the carrying amount of goodwill are as follows (amounts in thousands):
IMC EPS Total
Balance at December 31, 2002 $116,841 $2,566 $119,407
Adjustment recorded during the year 114 - 114
-------------------------------------------
Balance at December 31, 2003 $116,955 $2,566 $119,521
===========================================
Year Ended December 31,
2003 2002 2001
Expenditures for tangible long-lived assets,
excluding acquisitions:
IMC $6,924 $6,616 $7,074
EPS 693 1,119 504
-------------------------------------------
Total reportable segments 7,617 7,735 7,578
Unallocated long-lived tangible assets 4,308 12,766 2,137
-------------------------------------------
Total expenditures $11,925 $20,501 $9,715
===========================================
December 31,
2003 2002
Identifiable assets, net:
IMC $250,642 $256,313
EPS 20,817 22,385
------------------------------
Total reportable segments 271,459 278,698
Unallocated assets 166,784 33,553
------------------------------
Total assets $438,243 $312,251
==============================
Sales by geographic area are presented by attributing sales from external
customers based on where the products are shipped. All dollars are in
thousands.
Year Ended December 31,
2003 2002 2001
Sales by geographic area:
United States $140,578 $127,145 $92,391
Foreign countries 75,787 40,151 43,184
-------------------------------------------
Consolidated sales $216,365 $167,296 $135,575
===========================================
December 31,
2003 2002
Long-lived assets:
United States $243,879 $243,699
Foreign countries - -
----------------------------
Consolidated long-lived assets $243,879 $243,699
============================
53
Two customers accounted for a significant portion of the Company's sales
and accounts receivable as follows:
Sales Accounts Receivable
--------------------------- ---------------------
Year Ended December 31, December 31,
2003 2002 2001 2003 2002
Customer A 46% 41% 39% 31% 34%
Customer B 20% 25% 27% 19% 18%
--------------------------- ---------------------
Total 66% 66% 66% 50% 52%
=========================== =====================
16. ACQUISITIONS
During 2001 and 2002, the Company completed two acquisitions as follows:
o Substantially all of the assets of the Sierra-KD Components division
of Maxwell Technologies, Inc. (Sierra), a developer and manufacturer
of electromagnetic interference filtering capacitors for implantable
medical devices.
o Globe Tool and Manufacturing Company, Inc. (Globe Tool), a
manufacturer of precision titanium enclosures for implantable medical
devices. Globe Tool was acquired to further broaden our product
offering to include enclosures.
These acquisitions have been accounted for using the purchase method of
accounting and accordingly, the results of the operations of these
acquisitions have been included in the consolidated financial statements
from the date of acquisition.
54
Acquisition information (in thousands):
Acquired Company
------------------------------
Sierra Globe Tool
-------------- --------------
Acquisition date June 18, 2001 July 9, 2002
Purchase price:
Cash paid $46,656 $46,637
Transaction costs 257 487
-------------- --------------
Total purchase price $46,913 $47,124
============== ==============
Purchase price allocation:
Property and equipment 4,124 8,490
Assets/(Liabilities) 3,288 (7,079)
Trademark and names - 1,760
Patented Technology 8,445 -
Unpatented Technology 4,743 7,392
Noncompete/Employment Agreements - 1,177
Goodwill 26,313 35,384
-------------- --------------
Total purchase price $46,913 $47,124
============== ==============
The following unaudited pro forma summary presents the Company's
consolidated results of operations for 2002 and 2001 as if the acquisitions
had been consummated at January 1, 2001. The pro forma consolidated results
of operations include certain pro forma adjustments, including the
amortization of intangible assets and interest on a term loan.
December 31,
In thousands except per share amounts: 2002 2001
Revenues $178,159 $162,190
Net income $15,298 $8,482
Net income per diluted share: $0.73 $0.43
The proforma results are not necessarily indicative of those that would
have actually occurred had the acquisitions taken place at the beginning of
the periods presented.
55
17.
QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(In Thousands, except per share data)
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
2003
Sales $49,371 $56,335 $55,802 $54,857
Gross profit 19,838 23,960 23,217 22,813
Net income 4,523 7,776 4,952 6,037
Earnings per share - basic 0.21 0.37 0.23 0.29
Earnings per share - diluted 0.21 0.36 0.23 0.28
2002
Sales $47,315 $45,350 $38,328 $36,303
Gross profit 20,475 18,872 15,599 15,952
Net income 4,959 2,477 3,586 3,339
Earnings per share - basic 0.24 0.12 0.17 0.16
Earnings per share - diluted 0.23 0.12 0.17 0.16
******
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. Controls and Procedures.
a) Evaluation of Disclosure Controls and Procedures. We carried out an
evaluation, under the supervision and with the participation of the
Company's management including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e)). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end
of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms.
b) Changes in Internal Control Over Financial Reporting. There have been no
changes in our internal control over financial reporting during the last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART III
Reference is made to the information responsive to the Items comprising
this Part III that is contained in our definitive proxy statement for our 2004
Annual Meeting of Stockholders, which is incorporated by reference herein.
57
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The following consolidated financial statements of our company and
report of independent auditors thereon are set forth below:
Independent Auditors' Report.
Consolidated Balance Sheet as of December 31, 2003 and 2002.
Consolidated Statement of Operations for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statement of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this report
on Form 10-K: Schedule II - Valuation and Qualifying Accounts.
58
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Col. C
Additions
-------------------------------------------
Col. B
Balance at Charged to Col.D Col.E
Col. A Beginning Charged to Other Accounts- Deductions- Balance at
Description of Period Costs & Expenses Describe Describe (2) End of Period
2003
Allowance for
doubtful accounts $460 $25 $- $(59) $426
Valuation allowance
for income taxes $565 $- $- $- $565
2002
Allowance for
doubtful accounts $447 $13 $- $- $460
Valuation allowance
for income taxes $- $565 (1) $- $- $565
2001
Allowance for
doubtful accounts $319 $136 $- $(8) $447
(1) Allowance recorded in the provision for income taxes.
(2) Accounts written off, net of collections on accounts receivable previously
written off.
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
59
(3) EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
- ------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to our registration statement on Form S-1 (File
No. 333-37554)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
our quarterly report on Form 10-Q for the quarterly period ended March 29,
2002).
4.1 Registration Rights Agreement dated February 14, 2002 among Wilson
Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P.,
DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ
Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ
Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II,
C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners
(incorporated by reference to Exhibit 4.1 to our quarterly report on Form
10-Q for the quarterly period ended June 28, 2002).
4.2 Indenture for 2 1/4% Convertible Subordinated Debentures Due 2013 dated May
28, 2003 (incorporated by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 (File No. 333-107667) filed on August 5, 2003).
4.3 Registration Rights Agreement dated May 28, 2003 by among us and the
initial purchasers of the Debentures described above (incorporated by
reference to Exhibit 4.2 to our Registration Statement on Form S-3 (File
No. 333-107667) filed on August 5, 2003).
10.1# 1997 Stock Option Plan (including form of "standard" option agreement and
form of "special" option agreement) (incorporated by reference to Exhibit
10.1 to our registration statement on Form S-1 (File No. 333-37554)).
10.2# 1998 Stock Option Plan (including form of "standard" option agreement,
form of "special" option agreement and form of "non-standard" option
agreement) (incorporated by reference to Exhibit 10.2 to our registration
statement on Form S-1 (File No. 333-37554)).
10.3# Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan (incorporated
by reference to Exhibit 10.3 to our registration statement on Form S-1
(File No. 333-37554)).
60
10.4# Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan (incorporated by
reference to Exhibit 10.4 to our registration statement on Form S-1 (File
No. 333-37554)).
10.5# Non-Employee Director Stock Incentive Plan (incorporated by reference to
Exhibit A to our definitive proxy statement on Schedule 14-A filed on April
22, 2002).
10.6# Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch
Ltd. and Edward F. Voboril (incorporated by reference to Exhibit 10.5 to
our registration statement on Form S-1 (File No. 333-37554)).
10.7 Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among
Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual
Life Insurance Company and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 10.7 to our registration
statement on Form S-1 (File No. 333-37554)).
10.8 Amended and Restated Credit Agreement dated as of July 9, 2002 by and among
Wilson Greatbatch Ltd., the lenders party thereto and Manufacturers and
Traders Trust Company, as administrative agent (incorporated by reference
to Exhibit 10.2 to our current report on Form 8-K filed on July 24, 2002).
10.9 Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch
Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding
II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified
Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners,
L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB
Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders
of common stock of Wilson Greatbatch Technologies Inc. party thereto
(incorporated by reference to Exhibit 10.12 to our registration statement
on Form S-1 (File No. 333-37554)).
10.10 Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997,
among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners
II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P.,
DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ
Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II,
C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the
other holders of common stock of Wilson Greatbatch Technologies, Inc. party
thereto (incorporated by reference to Exhibit 10.13 to our registration
statement on Form S-1 (File No. 333-37554)). 1 0.11 Management Stockholders
Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies,
Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ
Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC
L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K.
Investment Plan 1997 Partners, and the other holders of common stock of
Wilson Greatbatch Technologies, Inc. party thereto (incorporated by
reference to Exhibit 10.14 to our registration statement on
61
Form S-1 (File No. 333-37554)).
10.12 Subordinated Note Holders Stockholders Agreement, dated as of July 10,
1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking
Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners
II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A,
L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore
Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997
Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The
Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette
Securities Corporation (incorporated by reference to Exhibit 10.15 to our
registration statement on Form S-1 (File No. 333-37554)).
10.13# 2002 Restricted Stock Plan (incorporated by reference to Appendix B to
our definitive proxy statement on Schedule 14A filed on April 9, 2003).
10.14+ Supply Agreement, dated as of February 1, 1999, between Wilson Greatbatch
Ltd. and Guidant/CRM (incorporated by reference to Exhibit 10.20 to our
registration statement on Form S-1 (File No. 333-37554)).
10.15+ Amendment No. 1 to the Supply Agreement, dated as of September 21, 2001,
between Wilson Greatbatch Technologies, Inc. and Guidant/CRM (incorporated
by reference to Exhibit 10.13 to our annual report on Form 10-K for the
fiscal year ended December 28, 2001).
10.16+ Supply Agreement dated April 10, 2003, between Wilson Greatbatch
Technologies, Inc. and Guidant/CRM (incorporated by reference to our Form
10-Q for the quarter ended April 4, 2003, filed May 16, 2003).
10.17 Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and
Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to
Exhibit 10.21 to our registration statement on Form S-1 (File No.
333-37554)).
10.18 License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd.
62
and Evans Capacitor Company (incorporated by reference to Exhibit 10.23 to
our registration statement on Form S-1 (File No. 333-37554)).
10.19+ Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch
Technologies, Ltd. and Evans Capacitor Company.
10.20*+ Supplier Partnering Agreement, dated as of October 23, 2003, between
Wilson Greatbatch Technologies, Inc. and Pacesetter, Inc., a St. Jude
Medical Company.
10.21 License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd.
and Medtronic Inc. (incorporated by reference to Exhibit 10.24 to our
registration statement on Form S-1 (File No. 333-37554)).
10.22 Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson
Greatbatch Ltd. and Medtronic Inc. (incorporated by reference to Exhibit
10.25 to our registration statement on Form S-1 (File No. 333-37554)).
10.23 Stockholders Agreement, dated as of August 23, 1999, among Wilson
Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P.,
DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ
Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ
Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II,
C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and Fred
Hittman (incorporated by reference to Exhibit 10.26 to our registration
statement on Form S-1 (File No. 333-37554)).
10.24 Form of Subscription Agreement, dated on or about July 17, 1997, between
Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry
T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott
and Susan M. Bratton (incorporated by reference to Exhibit 10.27 to our
registration statement on Form S-1 (File No. 333-37554)).
10.25 Form of Management Subscription Agreement, dated November 1, 1997, between
Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry
T. DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott
and Susan M. Bratton (incorporated by reference to Exhibit 10.28 to our
registration statement on Form S-1 (File No. 333-37554)).
10.26 Form of Promissory Note, dated November 1, 1997, payable to Wilson
Greatbatch Technologies, Inc. by each of Edward F. Voboril, Larry T.
DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and
63
Susan M. Bratton (incorporated by reference to Exhibit 10.29 to our
registration statement on Form S-1 (File No. 333-37554)).
10.27 Form of Pledge Agreement, dated November 1, 1997, between Wilson
Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T.
DeAngelo, Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and
Susan M. Bratton (incorporated by reference to Exhibit 10.30 to our
registration statement on Form S-1 (File No. 333-37554)).
10.28# Form of Change of Control Agreement, dated December 17, 2001, between
Wilson Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry
T. DeAngelo, Curtis F. Holms, Ph.D. and Richard W. Mott.
10.29 Stock Purchase Agreement, dated as of July 31, 2000, among Wilson
Greatbatch Technologies, Inc., Battery Engineering, Inc. and Hitachi
Maxell, Ltd. (incorporated by reference to Exhibit 10.31 to our
registration statement on Form S-1 (File No. 333-37554)).
10.30 Stockholders Agreement, dated as of August 7, 2000, among Wilson
Greatbatch Technologies, Inc., Hitachi Maxell, Ltd., DLJ Merchant Banking
Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners
II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A,
L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore
Partners II, C.V., DLJ EAB Partners, L.P. and UK Investment Plan 1997
Partners (incorporated by reference to Exhibit 10.32 to our registration
statement on Form S-1 (File No. 333-37554)).
10.31 Subscription Agreement, dated as of August 7, 2000, between Wilson
Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by
reference to Exhibit 10.33 to our registration statement on Form S-1 (File
No. 333-37554)).
10.32 Non-Compete Agreement, dated as of August 7, 2000, between Wilson
Greatbatch Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by
reference to Exhibit 10.34 to our registration statement on Form S-1 (File
No. 333-37554)).
10.33 Asset Purchase Agreement, dated as of June 18, 2001, among Wilson
Greatbatch Technologies, Inc., GB Acquisition Co., Inc., Maxwell
Technologies, Inc. and Maxwell Electronic Components Group, Inc.
(incorporated by reference to Exhibit 10.1 to our current report on Form
8-K filed June 19, 2001).
10.34 Stock Purchase Agreement, dated as of July 9, 2002, among Wilson
64
Greatbatch Technologies, Inc., Globe Tool and Manufacturing Company, Inc.
("Globe"), Charter Oak Partners of Westport, Connecticut and certain other
shareholders of Globe (incorporated by reference to Exhibit 10.1 to our
current report on Form 8-K filed on July 24, 2002).
12.1* Ratio of Earnings to Fixed Charges.
21.1* List of subsidiaries.
23.1* Consent of Deloitte & Touche LLP.
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.
99.1* Risks Related to our Business.
Portions of those exhibits marked "+" have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
* Filed herewith.
# Indicates exhibits that are management contracts or compensation plans or
arrangements required to be filed pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
On November 5, 2003, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 9 ("Regulation FD Disclosure")
relating to the announcement of earnings for the quarter ended October 3,
2003.
On November 26, 2003, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 5 ("Other events") to correct a
typographical error contained in exhibit 23.1 (Consent of Deloitte & Touche
LLP) to the Company's Registration Statement on Form S-3 filed on November
18, 2003.
65
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 12, 2004 WILSON GREATBATCH TECHNOLOGIES, INC.
By /s/ Edward F. Voboril
---------------------
Edward F. Voboril
President, Chief Executive Officer
And Chairman
(Principal Executive Officer)
By /s/ Lawrence P. Reinhold
-------------------------
Lawrence P. Reinhold
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ Thomas J. Mazza
---------------------
Thomas J. Mazza
Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- -----
/s/ Edward F. Voboril President, Chief Executive Officer, March 12, 2004
- ---------------------
Edward F. Voboril Chairman and Director (Principal
Executive Officer)
/s/ Pamela G. Bailey Director March 12, 2004
- --------------------
Pamela G. Bailey
66
Signature Title Date
- --------- ----- -----
/s/ Joseph A. Miller, Jr. Director March 12, 2004
- -------------------------
Joseph A. Miller, Jr.
/s/ Robert E. Rich, Jr. Director March 12, 2004
- -----------------------
Robert E. Rich, Jr.
/s/ Bill R. Sanford Director March 12, 2004
- --------------------
Bill R. Sanford
/s/ Peter H. Soderberg Director March 12, 2004
- ----------------------
Peter H. Soderberg
/s/ Thomas S. Summer Director March 12, 2004
- -------------------
Thomas S. Summer
/s/ William B. Summers Director March 12, 2004
- -----------------------
William B. Summers, Jr.
/s/ John P. Wareham Director March 12, 2004
- -------------------
John P. Wareham
/s/ Henry Wendt Director March 12, 2004
- ----------------
Henry Wendt
67
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER -----------
------
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to our registration statement on Form S-1 (File No. 333-37554)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our
quarterly report on Form 10-Q for the quarterly period ended March 29, 2002).
4.1 Registration Rights Agreement dated February 14, 2002 among Wilson Greatbatch
Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc.,
DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C.,
DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997
Partners (incorporated by reference to Exhibit 4.1 to our quarterly report on Form
10-Q for the quarterly period ended June 28, 2002).
4.2 Indenture for 21/4% Convertible Subordinated Debentures Due 2013 dated May 28, 2003
(incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-3
(File No. 333-107667) filed on August 5, 2003).
4.3 Registration Rights Agreement dated May 28, 2003 by among us and the initial
purchasers of the Debentures described above (incorporated by reference to Exhibit
4.2 to our Registration Statement on Form S-3 (File No. 333-107667) filed on August
5, 2003).
10.1# 1997 Stock Option Plan (including form of "standard" option agreement and form of
"special" option agreement) (incorporated by reference to Exhibit 10.1 to our
registration statement on Form S-1 (File No. 333-37554)).
10.2# 1998 Stock Option Plan (including form of "standard" option agreement, form of
"special" option agreement and form of "non-standard" option agreement) (incorporated
by reference to Exhibit 10.2 to our registration statement on Form S-1 (File No.
333-37554)).
10.3# Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan (incorporated by
reference to Exhibit 10.3 to our registration statement on Form S-1 (File No.
333-37554)).
10.4# Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan (incorporated by reference
to Exhibit 10.4 to our registration statement on Form S-1 (File No. 333-37554)).
68
10.5# Non-Employee Director Stock Incentive Plan (incorporated by reference to Exhibit A to
our definitive proxy statement on Schedule 14-A filed on April 22, 2002).
10.6# Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch Ltd. and
Edward F. Voboril (incorporated by reference to Exhibit 10.5 to our registration
statement on Form S-1 (File No. 333-37554)).
10.7 Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among Wilson
Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding,
Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and
Donaldson, Lufkin & Jenrette Securities Corporation (incorporated by reference to
Exhibit 10.7 to our registration statement on Form S-1 (File No. 333-37554)).
10.8 Amended and Restated Credit Agreement dated as of July 9, 2002 by and among Wilson
Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust
Company, as administrative agent (incorporated by reference to Exhibit 10.2 to our
current report on Form 8-K filed on July 24, 2002).
10.9 Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch
Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc.,
DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C.,
DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997
Partners, and the other holders of common stock of Wilson Greatbatch Technologies
Inc. party thereto (incorporated by reference to Exhibit 10.12 to our registration
statement on Form S-1 (File No. 333-37554)).
10.10 Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997, among Wilson
Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding
II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P.,
DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC
L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan
1997 Partners, and the other holders of common stock of Wilson Greatbatch
Technologies, Inc. party thereto (incorporated by reference to Exhibit 10.13 to our
registration statement on Form S-1 (File No. 333-37554)).
69
10.11 Management Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch
Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc.,
DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C.,
DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997
Partners, and the other holders of common stock of Wilson Greatbatch Technologies,
Inc. party thereto (incorporated by reference to Exhibit 10.14 to our registration
statement on Form S-1 (File No. 333-37554)).
10.12 Subordinated Note Holders Stockholders Agreement, dated as of July 10, 1997, among
Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB
Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners,
L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC
L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan
1997 Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The
Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette
Securities Corporation (incorporated by reference to Exhibit 10.15 to our
registration statement on Form S-1 (File No. 333-37554)).
10.13# 2002 Restricted Stock Plan (incorporated by reference to Appendix B to our definitive
proxy statement on Schedule 14A filed on April 9, 2003).
10.14+ Supply Agreement, dated as of February 1, 1999, between Wilson Greatbatch Ltd. and
Guidant/CRM (incorporated by reference to Exhibit 10.20 to our registration statement
on Form S-1 (File No. 333-37554)).
10.15+ Amendment No. 1 to the Supply Agreement, dated as of September 21, 2001, between
Wilson Greatbatch Technologies, Inc. and Guidant/CRM (incorporated by reference to
Exhibit 10.13 to our annual report on Form 10-K for the fiscal year ended December
28, 2001).
10.16+ Supply Agreement dated April 10, 2003, between Wilson Greatbatch Technologies, Inc.
and Guidant/CRM (incorporated by reference to our Form 10-Q for the quarter ended
April 4, 2003, filed May 16, 2003).
10.17 Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and Pacesetter,
Inc., a St. Jude Medical Company (incorporated by reference to Exhibit 10.21 to our
registration statement on Form S-1 (File No. 333-37554)).
10.18 License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd. and Evans
Capacitor Company (incorporated by reference to Exhibit 10.23 to our registration
statement on Form S-1 (File No. 333-37554)).
70
10.19+ Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch Technologies, Ltd.
and Evans Capacitor Company.
10.20*+ Supplier Partnering Agreement, dated as of October 23, 2003, between Wilson
Greatbatch Technologies, Inc. and Pacesetter, Inc., a St. Jude Medical Company.
10.21 License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd. and Medtronic
Inc. (incorporated by reference to Exhibit 10.24 to our registration statement on
Form S-1 (File No. 333-37554)).
10.22 Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson Greatbatch
Ltd. and Medtronic Inc. (incorporated by reference to Exhibit 10.25 to our
registration statement on Form S-1 (File No. 333-37554)).
10.23 Stockholders Agreement, dated as of August 23, 1999, among Wilson Greatbatch
Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc.,
DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ
Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners
and Fred Hittman (incorporated by reference to Exhibit 10.26 to our registration
statement on Form S-1 (File No. 333-37554)).
10.24 Form of Subscription Agreement, dated on or about July 17, 1997, between Wilson
Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo,
Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton
(incorporated by reference to Exhibit 10.27 to our registration statement on Form S-1
(File No. 333-37554)).
10.25 Form of Management Subscription Agreement, dated November 1, 1997, between Wilson
Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo,
Curtis F. Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton
(incorporated by reference to Exhibit 10.28 to our registration statement on Form S-1
(File No. 333-37554)).
10.26 Form of Promissory Note, dated November 1, 1997, payable to Wilson Greatbatch
Technologies, Inc. by each of Edward F. Voboril, Larry T. DeAngelo, Curtis F. Holmes,
Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated by
reference to Exhibit 10.29 to our registration statement on Form S-1 (File No.
333-37554)).
71
10.27 Form of Pledge Agreement, dated November 1, 1997, between Wilson Greatbatch
Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo, Curtis F.
Holmes, Ph.D., Arthur J. Lalonde, Richard W. Mott and Susan M. Bratton (incorporated
by reference to Exhibit 10.30 to our registration statement on Form S-1 (File No.
333-37554)).
10.28# Form of Change of Control Agreement, dated December 17, 2001, between Wilson
Greatbatch Technologies, Inc. and each of Edward F. Voboril, Larry T. DeAngelo,
Curtis F. Holms, Ph.D. and Richard W. Mott.
10.29 Stock Purchase Agreement, dated as of July 31, 2000, among Wilson Greatbatch
Technologies, Inc., Battery Engineering, Inc. and Hitachi Maxell, Ltd. (incorporated
by reference to Exhibit 10.31 to our registration statement on Form S-1 (File No.
333-37554)).
10.30 Stockholders Agreement, dated as of August 7, 2000, among Wilson Greatbatch
Technologies, Inc., Hitachi Maxell, Ltd., DLJ Merchant Banking Partners II, L.P.,
DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified
Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ
First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P. and UK
Investment Plan 1997 Partners (incorporated by reference to Exhibit 10.32 to our
registration statement on Form S-1 (File No. 333-37554)).
10.31 Subscription Agreement, dated as of August 7, 2000, between Wilson Greatbatch
Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit
10.33 to our registration statement on Form S-1 (File No. 333-37554)).
10.32 Non-Compete Agreement, dated as of August 7, 2000, between Wilson Greatbatch
Technologies, Inc. and Hitachi Maxell, Ltd. (incorporated by reference to Exhibit
10.34 to our registration statement on Form S-1 (File No. 333-37554)).
10.33 Asset Purchase Agreement, dated as of June 18, 2001, among Wilson Greatbatch
Technologies, Inc., GB Acquisition Co., Inc., Maxwell Technologies, Inc. and Maxwell
Electronic Components Group, Inc. (incorporated by reference to Exhibit 10.1 to our
current report on Form 8-K filed June 19, 2001).
10.34 Stock Purchase Agreement, dated as of July 9, 2002, among Wilson Greatbatch
Technologies, Inc., Globe Tool and Manufacturing Company, Inc. ("Globe"), Charter Oak
Partners of Westport, Connecticut and certain other shareholders of Globe
(incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on
July 24, 2002).
72
12.1* Ratio of Earnings to Fixed Charges.
21.1* List of subsidiaries.
23.1* Consent of Deloitte & Touche LLP.
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.
99.1* Risks Related to our Business.
Portions of those exhibits marked "+" have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
* Filed herewith.
# Indicates exhibits that are management contracts or compensation plans or arrangements required to be
filed pursuant to Item 14(c) of Form 10-K.
73