================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 29, 2000
Commission File Number 1-16137
WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 16-1531026
(State of Incorporation) (I.R.S. Employer
Identification No.)
10,000 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(Zip Code)
(716) 759-6901
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [__] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
As of October 31, 2000 Common stock, $.001 par value per share 18,840,447 shares
</TABLE>
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 29, 2000
<TABLE>
<CAPTION>
PAGE
<S> <C>
COVER PAGE..............................................................................................1
TABLE OF CONTENTS.......................................................................................2
PART I - FINANCIAL INFORMATION..........................................................................3
ITEM 1. Financial Statements...........................................................................3
Condensed Consolidated Balance Sheets..........................................................3
Condensed Consolidated Statements of Operations................................................4
Condensed Consolidated Statements of Cash Flows................................................5
Notes to Condensed Consolidated Financial Statements...........................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........9
ITEM 3. Quantitative and Qualitative Disclosures About Financial Market Risk..........................17
PART II - OTHER INFORMATION............................................................................17
ITEM 1. Legal Proceedings.............................................................................17
ITEM 2. Changes in Securities and Use of Proceeds.....................................................17
ITEM 3. Defaults Upon Senior Securities...............................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................18
ITEM 5. Other Information.............................................................................18
ITEM 6. Exhibits and Reports on Form 8-K..............................................................18
SIGNATURE..............................................................................................20
EXHIBIT INDEX..........................................................................................21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 29, December 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 3,220 $ 3,863
Accounts receivable, net of allowance for doubtful accounts of $317 and $219 as of
September 29, 2000 and December 31, 1999, respectively ......................... 15,757 11,016
Inventories ...................................................................... 14,369 13,583
Other current assets ............................................................. 5,018 4,908
--------- ---------
Total Current Assets ....................................... 38,364 33,370
Property, plant & equipment, net ................................................. 36,987 33,557
Intangible assets, net ........................................................... 107,842 112,902
Deferred tax asset ............................................................... 7,828 7,828
Other assets ..................................................................... 1,865 2,122
--------- ---------
Total Assets ............................................... $ 192,886 $ 189,779
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 2,093 $ 2,385
Accrued liabilities .............................................................. 10,432 7,139
Current maturities of long-term obligations ...................................... 4,063 6,225
--------- ---------
Total Current Liabilities ................................... 16,588 15,749
Long-term obligations ............................................................ 121,891 126,988
Deferred compensation ............................................................ 630 635
--------- ---------
Total Liabilities .......................................... 139,109 143,372
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock ..................................................................... 13 12
Subscribed common stock .......................................................... 1,684 1,684
Capital in excess of par value ................................................... 72,441 63,488
Retained deficit ................................................................. (18,620) (16,984)
--------- ---------
Subtotal ..................................................................... 55,518 48,200
Less treasury stock, at cost ..................................................... (57) (109)
Less subscribed common stock receivable .......................................... (1,684) (1,684)
--------- ---------
Total Stockholders' Equity ................................. 53,777 46,407
--------- ---------
Total Liabilities and Stockholders' Equity ................. $ 192,886 $ 189,779
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
--------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
REVENUES....................................... $ 23,256 $ 19,621 $ 69,840 $ 57,939
Cost of goods sold............................. 13,530 9,862 39,915 29,247
--------------- --------------- -------------- ----------------
Gross profit................................... 9,726 9,759 29,925 28,692
Gross profit as a percentage of revenues ...... 42% 50% 43% 50%
Selling, general and administrative expenses... 3,061 2,334 8,193 7,458
Research, development and engineering costs,
net....................................... 2,456 2,347 7,502 7,477
Intangible amortization........................ 1,628 1,639 4,895 4,905
--------------- --------------- -------------- ----------------
2,581 3,439 9,335 8,852
Interest expense............................... 3,879 3,458 11,666 9,977
Other (income) expense......................... (70) 55 1 184
--------------- --------------- -------------- ----------------
Loss before income tax (1,228) (74) (2,332) (1,309)
Income tax benefit............................. (368) (22) (696) (343)
--------------- --------------- -------------- ----------------
Loss before cumulative effect of accounting
change.................................... (860) (52) (1,636) (966)
Cumulative effect of accounting change, net of
tax....................................... 0 0 0 (563)
--------------- --------------- -------------- ----------------
NET LOSS....................................... $ (860) $ (52) $ (1,636) $ (1,529)
=============== =============== ============== ================
Basic loss per share before cumulative effect
of accounting change...................... $ (.07) $ .00 $ (.13) $ (.08)
Basic loss per share........................... $ (.07) $ .00 $ (.13) $ (.12)
Diluted loss per share before cumulative
effect of accounting change............... $ (.07) $ .00 $ (.13) $ (.08)
Diluted loss per share......................... $ (.07) $ .00 $ (.13) $ (.12)
Weighted average shares outstanding
Basic..................................... 12,971 12,511 12,705 12,465
Diluted................................... 12,971 12,511 12,705 12,465
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Nine Months
Ended Ended
Sept. 29, 2000 Oct. 1, 1999
------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (1,636) $ (1,529)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization...................................... 9,678 8,941
Deferred financing costs........................................... 696 693
Deferred compensation.............................................. (354) (316)
Deferred income taxes.............................................. 0 111
Loss on disposal of assets......................................... 0 4
Cumulative effect of accounting change............................. 0 563
Changes in operating assets and liabilities:
Accounts receivable................................................ (3,798) 1,293
Inventories........................................................ 188 (160)
Prepaid expenses and other assets.................................. 1,072 (897)
Accounts payable................................................... (400) (677)
Accrued liabilities................................................ 4,230 (3,219)
Income taxes....................................................... (668) 81
------------------- -----------------------
Net cash provided by operating activities........................ 9,008 4,888
------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment......................... (3,865) (5,649)
Proceeds from sale of property, plant and equipment.................. 0 5
Increase in intangible assets........................................ (267) (304)
Decrease in other long term assets................................... 0 170
Cash provided in acquisition of subsidiary........................... 1,583 0
------------------- -----------------------
Net cash used in investing activities............................ (2,549) (5,778)
------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit, net.................... (3,500) 2,000
Scheduled payments of long-term debt................................. (4,450) 0
Prepayments of long-term debt........................................ (2,025) (2,950)
Acquisition earnout payment.......................................... 0 (2,764)
(Purchase) Reissue of treasury stock................................. (127) 0
Issuance of capital stock............................................ 3,000 2,934
------------------- -----------------------
Net cash used in financing activities............................ (7,102) (780)
------------------- -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................. (643) (1,670)
Cash and cash equivalents, beginning of period....................... 3,863 4,140
------------------- -----------------------
Cash and cash equivalents, end of period............................. $ 3,220 $ 2,470
=================== =======================
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for interest ............................ $ 9,521 $ 9,064
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 29, 2000
1. BASIS OF PRESENTATION
The accounting policies used in preparing these statements are the same
as those used in preparing the consolidated financial statements of
Wilson Greatbatch Technologies, Inc., a holding company, and its
wholly-owned subsidiary Wilson Greatbatch Ltd. (collectively, the
"Company") for the year ended December 31, 1999. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's prospectus dated September 29, 2000.
The foregoing balance sheet as of September 29, 2000, statements of
operations for the three-months and nine-months ended September 29,
2000 and October 1, 1999 and statements of cash flows for the nine
months ended September 29, 2000 and October 1, 1999 are unaudited but,
in the opinion of management, include all adjustments (consisting of
normal, recurring adjustments) necessary for a fair presentation of
results for these interim periods. The results of operations for the
three-months and nine-months ended September 29, 2000 are not
necessarily indicative of results to be expected for the entire year or
for any other period.
2. INITIAL PUBLIC OFFERING
On September 29, 2000, the Company commenced its initial public
offering ("IPO") in which it initially sold 5,000,000 shares of common
stock at a price of $16.00 per share. The net proceeds of the IPO,
which the Company received on October 4, 2000, after deducting
underwriting discounts and other expenses, were approximately $72.8
million. As the offering had not closed at the quarter-end, no entry
for this stock sale has been recorded in the accompanying condensed
consolidated balance sheet. The Company used the proceeds to pay down
existing senior debt. In October 2000, the Company's underwriters
exercised their option to purchase an additional 750,000 shares of
common stock at $16.00 per share. This resulted in additional net
proceeds, which the Company received on October 11, 2000, of $11.2
million after deducting underwriting discounts. The Company also used
these proceeds to pay down senior debt.
3. ACQUISITION
As noted in the Company's prospectus, on August 7, 2000, all of the
capital stock of Battery Engineering, Inc. ("BEI"), a manufacturer of
specialty batteries, was acquired in exchange for 339,856 shares of
Company stock and the assumption of $2.7 million of indebtedness. The
acquisition was recorded using the purchase method of accounting.
Due to the insignificant effect on financial position and results of
operations, no pro-forma data of this acquisition is required or
presented.
On October 20, 2000, we retired the $2.7 million in assumed
indebtedness using a portion of the proceeds from the sale of Company
stock to the former parent of BEI. This portion of the proceeds had
been held in escrow for the purpose of retiring this indebtedness.
6
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 29, December 31,
2000 1999
---------------------- ---------------------
(unaudited)
<S> <C> <C>
Raw material $7,373 $7,099
Work-in-progress 5,476 5,089
Finished goods 1,520 1,395
---------------------- ---------------------
Total $14,369 $13,583
====================== =====================
</TABLE>
5. INTANGIBLE ASSETS, NET
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 29, December 31,
2000 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Goodwill, net of accumulated amortization of $3,294 and $2,229 $ 53,615 $ 53,944
Trademark and names, net of accumulated amortization of $2,241 and
$1,685 27,419 27,975
Other Intangible Assets 26,808 30,983
---------------- ----------------
Total $ 107,842 $ 112,902
================ ================
</TABLE>
6. COMPREHENSIVE INCOME
For all periods presented, the Company's only component of
comprehensive income is its net loss for those periods.
7. LOSS PER SHARE
Basic loss per share is calculated by dividing the net loss for the
period by weighted average number of shares outstanding during the
period. Diluted loss per share is calculated by dividing the net loss
for the period by the weighted average number of shares and potential
common stock equivalents outstanding during the period, if dilutive, as
computed under the "Treasury Stock" method. Potential common stock
equivalents consist of shares of common stock issuable upon the
exercise of stock options.
During the three-month period and the nine-month period ended September
29, 2000, fully diluted weighted average shares exceeded basic weighted
average shares by approximately 236,000 and 261,000 shares. During the
three-month period and the nine-month period ended October 1, 1999,
fully diluted weighted average shares exceeded basic weighted average
shares by approximately 253,000 and 252,000 shares. The dilutive stock
options were not included in the calculation of diluted loss per share
for all periods presented because to do so would have been
antidilutive.
7
<PAGE>
8. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: medical
and commercial power sources. The medical segment designs and
manufactures power sources, capacitors and components used in
implantable medical devices, which are instruments that are surgically
inserted into the body to provide diagnosis or therapy. The commercial
power sources segment designs and manufactures non-medical power
sources for use in aerospace, oil and gas exploration and oceanographic
equipment.
The Company's medical segment includes three product lines 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
three product lines are implantable power sources, capacitors and
medical components.
The reportable segments are separately managed, and their performance
is evaluated based on income from operations. Management defines
segment income from operations as gross profit less costs and expenses
attributable to segment specific selling, general and administrative
and research, development and engineering expenses. Non-segment
specific selling, general and administrative, research, development and
engineering expenses, interest expense, intangible amortization and
non-recurring items are not allocated to reportable segments. Revenues
from transactions between the two segments are not significant. The
accounting policies of the segments are the same as those described and
referenced in Note 1. All dollars are in thousands.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
------------------ ------------------ -------------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Medical $19,224 $17,295 $60,970 $50,649
Commercial power sources 4,032 2,326 8,870 7,290
------------------ ------------------ -------------------- ------------------
Total revenues $23,256 $19,621 $69,840 $57,939
================== ================== ==================== ==================
Segment income from operations:
Medical $6,546 $7,677 $21,243 $21,935
Commercial power sources 839 537 2,090 1,786
------------------ ------------------ -------------------- ------------------
Total segment income from
operations 7,385 8,214 23,333 23,721
Unallocated (8,613) (8,288) (25,665) (25,030)
------------------ ------------------ -------------------- ------------------
Loss before income taxes $(1,228) $(74) $(2,332) $(1,309)
================== ================== ==================== ==================
</TABLE>
9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of 2001, the Company plans to adopt Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This standard as amended will
8
<PAGE>
require the Company to recognize all derivative financial instruments
on the balance sheet at fair value with changes in fair value recorded
to the statement of operations or comprehensive income, depending on
the nature of the investment. The Company does not expect the adoption
of the standard to have a material effect on the financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed
with the SEC. SAB 101, as amended, is required to be adopted by the
Company no later than the fourth quarter of fiscal year 2000. Although
the Company has not fully assessed the implications of SAB 101,
management does not believe the adoption of SAB 101 will have a
significant impact on the Company's consolidated financial position,
results of operations or cash flows.
10. SUBSEQUENT EVENT
On October 26, 2000, the Company purchased $5.0 million face amount of
its senior subordinated notes at 102, plus accrued interest. In
addition, the Company purchased 127,532 shares of Company stock owned
by the holder of the notes, at the initial public offering price of
$16.00 per share. The stock had been issued in conjunction with the
senior subordinated notes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
Condensed Consolidated Financial Statements (including the Notes thereto)
included elsewhere herein.
INTRODUCTION
We are a leading developer and manufacturer of power sources,
feedthroughs and wet tantalum capacitors used in implantable medical devices. We
also develop and manufacture other components used in implantable medical
devices. We leverage our core competencies in technology and manufacturing to
develop and produce power sources for commercial applications that demand high
performance and reliability.
INITIAL PUBLIC OFFERING
In October 2000 we completed our initial public offering. In that
offering, we sold 5,750,000 shares of common stock and received net proceeds of
approximately $84.0 million. All net proceeds were used to prepay senior debt.
BEI ACQUISITION
During the quarter ended September 29, 2000, we acquired all of the
capital stock of Battery Engineering, Inc., or BEI, a small specialty battery
manufacturer. We issued $5.1 million (339,856 shares) of our common stock and
assumed $2.7 million in BEI indebtedness in exchange for the capital stock of
BEI. We recorded the acquisition using the purchase method of accounting. The
acquisition will allow us to expand our presence in the downhole and seismic
surveying segments of the oil and gas market.
9
<PAGE>
REVENUE AND EXPENSE COMPONENTS
Revenues
We derive revenues from the sale of medical and commercial products.
Our medical revenues consist of sales of implantable power sources, capacitors
and components. Our commercial revenues consist of sales of commercial power
sources. A substantial part of our business is conducted with a limited number
of customers. Guidant Corporation accounted for approximately 34% of our
revenues and St. Jude Medical, Inc. accounted for approximately 32% of our
revenues in the nine month period ended September 29, 2000. We have entered into
long term supply agreements ranging from two to four years with most of our
large customers.
Our implantable power source revenues are derived from sales of
batteries for pacemakers, implantable cardioverter defibrillators, or ICD's, and
other implantable medical devices. The majority of our implantable power source
customers contract with us to develop custom batteries to fit their product
specifications. We are the sole provider of these products to many of our
customers. We also record royalties as implantable power source revenues. These
revenues are recognized based on the reported number of units sold. Since
January 2, 1998, royalties have accounted for approximately 2.7% to 3.3% of our
aggregate annual revenues. Currently, Medtronic, Inc. is our sole source of
royalty fees. Although our license agreement with Medtronic, Inc. itself has no
termination date, the patents from which we receive royalty payments from
Medtronic, Inc. expire in all material respects in 2000. Thereafter, in the
absence of new patents, we do not expect to receive any royalties to record as
implantable power source revenues.
Our capacitor revenues are derived from sales of our wet tantalum
capacitors, which we developed for use in ICDs. In 1999 and the first nine
months of 2000, we incurred start-up costs related to our capacitor operations
of $5.7 million. We believe that this amount will represent substantially all of
our start-up costs. We began selling our new wet tantalum capacitors
commercially in the fourth quarter of 1999. We expect to enter into long term
agreements of more than one year with our capacitor customers and add new
customers in an effort to increase our capacitor revenues. Although there can be
no assurance, we believe that our revenues in 2000 and 2001 from capacitor sales
will grow at a higher rate than sales of our other medical products and that our
capacitor program will become increasingly profitable in 2001.
Our components revenues are derived from sales of feedthroughs,
electrodes and other precision components principally used in pacemakers and
ICDs. We also sell our components for use in other implantable medical devices,
such as left ventricular assist devices, hearing assist devices, drug pumps,
neurostimulators and other medical applications.
Our commercial power source revenues are primarily derived from sales
of batteries for use in oil and gas exploration, including recovery equipment,
pipeline inspection gauges, down-hole pressure measurement systems and seismic
surveying equipment. We also supply batteries to NASA for its space shuttle
program and other demanding commercial applications.
For each of our products, we recognize revenue when the products are
shipped. We do not give warranties to our customers for our products and to
date, returns have been immaterial. Although approximately 30% of our sales are
outside the United States, all of our invoices are United States dollar
denominated. Accordingly, we are not impacted by foreign currency fluctuations.
In addition to product revenues, we also receive cash flows from royalty
revenues and cost reimbursements for research, development and engineering
conducted on behalf of some of our customers.
10
<PAGE>
Expenses
Cost of goods sold includes materials, labor and other manufacturing
costs associated with the products we sell. We have included start-up costs
associated with the production of our capacitors in cost of goods sold. As a
result, costs associated with capacitors prior to the fourth quarter of 1999,
when we began to commercially offer these products, were substantially in excess
of revenue generated from capacitor sales.
Selling, general and administrative expenses include salaries,
non-manufacturing facility costs and patent-related expenses.
Research, development and engineering expenses include costs associated
with the design, development, testing, deployment and enhancement of our
products. We record cost reimbursements from customers as an offset to research,
development and engineering expenses.
Other expenses primarily include amortization of intangible assets and
interest expense. Interest expense is primarily related to indebtedness that we
assumed in connection with (i) a July 1997 leveraged buyout transaction in which
DLJ Merchant Banking Partners II, L.P. and some of its affiliates, collectively
referred to herein as DLJ Merchant Banking, and members of our management formed
our Company to acquire Wilson Greatbatch Ltd. and (ii) our August 1998
acquisition of Hittman Materials and Medical Components, Inc. referred to herein
as the Hittman Acquisition. Interest expense will decrease significantly in
future quarters based on our application of the net proceeds from our initial
public offering to the assumed indebtedness.
RESULTS OF OPERATIONS
Revenues
Revenues for the quarter ended September 29, 2000 were $23.3 million, a
$3.7 million, or 19%, increase from $19.6 million for the third quarter of 1999.
This increase was primarily due to revenues from our line of capacitors,
launched commercially in the fourth quarter of 1999, and the inclusion of
revenues of the former BEI, acquired in August 2000.
Revenues for the first nine months of 2000 were $69.8 million, an $11.9
million, or 21%, increase from $57.9 million for the first nine months of 1999.
This increase was primarily due to capacitor revenues of $9.7 million for the
first nine months of 2000, an increase of $8.2 million, or 536%, from $1.5
million for the first nine months of 1999.
Implantable power source revenues for the quarter ended September 29,
2000 were $9.5 million, a decrease of $0.6 million, or 7%, from $10.1 million
for the third quarter of 1999. Sales of cells for pacemakers were $5.0 million
for the quarter ended September 29, 2000, an increase of $0.4 million, or 9.5%,
from $4.6 million for the third quarter of 1999. Sales of cells for ICDs for the
three months ended September 29, 2000 were $3.7 million, a $1.1 million, or 24%,
decrease from $4.8 million for the third quarter of 1999. This decrease was
primarily due to an industry-wide design change that resulted in ICDs using one
battery instead of two. Management believes that the effects of this design
change on sales subsequent to the quarter ended September 29, 2000 will be
minimal because virtually all new ICDs use one cell.
Implantable power source revenues for the first nine months of 2000
were $30.0 million, an increase of $0.4 million, or 1%, from $29.6 million for
the first nine months of 1999. Sales of cells for pacemakers were $16.8 million
for the nine months ended September 29, 2000, an increase of $2.2 million, or
14.9%, from $14.6 million for the first nine months of 1999. This increase was
primarily due to an order from a European device manufacturer in response to a
11
<PAGE>
large order from a national health agency partially offset by the third party
acquisition of one of our customers and the ensuing termination of that
customer's pacemaker sales operations. ICD sales for the nine months ended
September 29, 2000 were $10.3 million, a decrease of $2.1 million, or 17%, from
$12.4 million for the first nine months of 1999. This decrease was primarily due
to the industry-wide design change in ICD devices referred to above.
Capacitor revenues for the quarter ended September 29, 2000 were $2.8
million, an increase of $2.3 million, or 412%, from $0.5 million for the third
quarter of 1999. Capacitor revenues were $9.7 for the first nine months of 2000,
an $8.2 million, or 536% increase from $1.5 million for the first nine months of
1999. The increases for the three and nine month periods were primarily due to
the commercial sales of our new wet tantalum capacitors beginning in the fourth
quarter of 1999.
Sales of medical components were $7.0 million for the quarter ended
September 29, 2000, an increase of $0.4 million, or 5%, from $6.6 million for
the third quarter of 1999. Medical components revenues for the first nine months
of 2000 were $21.3 million, an increase of $1.8 million, or 9%, from $19.5
million for the first nine months of 1999. The increases for the three and nine
month periods were primarily due to the sale of a greater number of implantable
medical devices by our customers, as well as our sales of a broader range of
components.
Commercial power source revenues for the quarter ended September 29,
2000 were $4.0 million, an increase of $1.7 million, or 73%, from $2.3 million
for the third quarter of 1999. For the first nine months of 2000, commercial
power source revenues were $8.9 million, an increase of $1.6 million, or 22%,
from $7.3 million for the first nine months of 1999. The increases for the three
and nine periods were primarily due to the inclusion of sales from the former
BEI. The BEI acquisition was completed in August 2000 and added $1.4 million in
revenues for both the three and nine month periods.
Gross profit
Gross profit for the quarter ended September 29, 2000 was $9.7 million,
a decrease of $0.1 million, or 1%, from $9.8 million for the third quarter of
1999. As a percentage of total revenues, gross profit for the third quarter of
2000 declined to 42% from 50% for the third quarter of 1999. The decrease in
gross profit as a percentage of total revenues is primarily due to a lower
percentage of total revenues from established product lines with no accompanying
start-up costs, such as power sources, versus a higher percentage of total
revenues from newer products, with accompanying start-up costs, primarily
capacitors. In addition, sales of lower margin products, such as medical
components and commercial power sources, have increased at a faster rate than
sales of historically higher margin implantable power source products.
For the first nine months of 2000, gross profit was $29.9 million, an
increase of $1.2 million, or 4%, from $28.7 million for the first nine months of
1999. As a percentage of total revenues, gross profit for the first nine months
of 2000 was 43%, a decline from 50% for the first nine months of 1999. For the
first nine months of 2000 as compared with the first nine months of 1999, start
up costs related to $8.2 million in capacitor sales decreased gross profit by
$0.1 million. In addition, sales of lower margin products, such as medical
components and commercial power sources, have increased at a faster rate than
sales of historically higher margin implantable power source products.
Selling, general and administrative expenses
Selling, general and administrative expenses for the quarter ended
September 29, 2000 were $3.1 million, an increase of $0.8 million, or 31%, from
$2.3 million for the third quarter of 1999. This increase was primarily due to:
12
<PAGE>
the cessation of a series of temporary cost containment measures initiated in
1999, such as salary reductions, shortened work weeks and reductions in
discretionary spending; and the inclusion of the selling, general and
administrative expenses of the former BEI. Severance costs for certain
administrative personnel at the former BEI were approximately $0.2 million for
the quarter ended September 29, 2000. As a percentage of revenues, selling,
general and administrative expenses (after excluding the effects of the BEI
acquisition) were 12% for both the third quarter of 2000 and 1999.
For the first nine months of 2000, selling, general and administrative
expenses were $8.2 million, an increase of $0.7 million, or 10%, from $7.5
million for the first nine months of 1999. Excluding the effects of the former
BEI acquisition, selling, general and administrative expenses as a percentage of
revenues declined to 11% for the first nine months of 2000 as compared to 13%
for the first nine months of 1999. The decline was primarily due to the sharp
increase in capacitor sales for the first nine months of 2000 compared to more
constant period to period selling, general and administrative expenses .
Research, development and engineering expenses
Research, development and engineering expenses for the quarter ended
September 29, 2000 were $2.5 million, an increase of $0.2 million, or 5%, from
$2.3 million for the third quarter of 1999. Research, development and
engineering expenses were $7.5 million for both the first nine months of 2000
and 1999. As a percentage of revenues, research, development and engineering
expenses declined to 11% for the nine months of 2000 from 13% for the first nine
months of 1999. The decline was primarily due the sharp increase in capacitor
sales for the first nine months of 2000 compared to more constant period to
period research, development and engineering expenses. Research, development and
engineering spending to date in 2000 included: the development of several
proprietary cells for implantable medical applications; research on future
generations of implantable cells; and the development of our new line of
rechargeable lithium ion cells.
Other expenses
Intangible amortization was $1.6 million for both the third quarter of
2000 and 1999 and was $4.9 million for both the first nine months of 2000 and
1999.
Interest expense was $3.9 million for the quarter ended September 29,
2000, an increase of $0.4 million, or 12%, from $3.5 million for the third
quarter of 1999. For the first nine months of 2000, interest expense was $11.7
million, an increase of $1.7 million, or 17%, from $10.0 million for the first
nine months of 1999. For both the three and nine month periods, the increases
were primarily due to higher interest rates. Management believes interest
expense will decrease significantly going forward due to the application of
approximately $84.0 million, in net proceeds from our recent initial public
offering, to our outstanding debt.
For the quarter ended September 29, 2000, there was other income of
$0.1 million as compared to other expense of $0.1 million for the third quarter
of 1999. For the first nine months of 2000, other expense was $0 as compared to
$0.2 million for the first nine months of 1999. The difference in the amounts
for the periods in 2000 and 1999 were primarily due to our receipt of a grant
from a state economic development authority in the amount of $0.3 million in
2000, partially off-set by expenses associated with the acquisition of the
former BEI.
For the first nine months of 1999, the cumulative effect of the
adoption of SOP 98-5, net of taxes, was a $0.6 million expense.
13
<PAGE>
Provision for income taxes
Our effective tax rate was 30% for the quarters ended September 29,
2000 and October 1, 1999. Our effective tax rate increased to 30% for the first
nine months of 2000 from 26% for the first nine months of 1999. This increase
was primarily due to the decrease in state tax credits available to us for the
first nine months of 2000 compared to the first nine months of 1999. Our
effective tax rate of 30% differs from the federal statutory rate of 35% due to
the effect of state taxes, and federal and state tax credits. Management
currently estimates that the year 2000 effective tax rate will remain at 30%.
Net loss
As a result of the start-up costs related to capacitors, severance
costs and higher interest costs, the net loss for the quarter ended September
29, 2000 increased to $(0.9) million from a net loss of $(0.1) million in the
third quarter of 1999. Net loss per share was $(.07) for the quarter ended
September 29, 2000 as compared to $.00 for the third quarter of 1999. For the
first nine months of 2000, the net loss and loss per share were $(1.7) million
and $(.13), respectively, as compared to $(1.5) million and $(.12),
respectively, for the first nine months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily from cash
generated by our operations. We financed the July 1997 leveraged buyout
transaction and the Hittman Acquisition through a combination of borrowings and
private sales of our common stock. Net proceeds from financing activities from
January 1, 1997 through September 29, 2000 included:
o In connection with the July 1997 leveraged buyout transaction
we issued $25.0 million principal amount of 13% senior
subordinated notes, entered into a $10.0 million revolving
line of credit and incurred $50.0 million of debt in senior
Term A and Term B loans. Net proceeds from these borrowings
totaled $71.8 million. We also received a $45.3 million equity
investment from DLJ Merchant Banking, various members of our
senior management and other investors.
o In connection with the Hittman Acquisition, we incurred an
additional $60.0 million of debt in Term A and Term B loans
and increased our revolving line of credit up to a maximum of
$20.0 million. We also received a $16.5 million equity
investment from DLJ Merchant Banking, various members of our
senior management and other investors.
o In August 2000, we purchased all of the capital stock of BEI,
a manufacturer of specialty batteries, by issuing $5.1 million
in Company stock and assuming $2.7 million in BEI
indebtedness. At the same time, the former parent of BEI
purchased an additional $3.0 million in Company stock.
We applied the net proceeds from our initial public offering to the
Term A loan and Term B loans. As of October 20, 2000, there was $25.0 million
principal amount outstanding under our 13% senior subordinated notes, $6.2
million outstanding under the Term A loan facility and $9.0 million outstanding
under the Term B loan facility. As of November 1, 2000, the weighted average
interest rate for our Term A loans was 10.2% and the weighted average interest
rate for our Term B loans was 10.5%.
14
<PAGE>
Our revolving line of credit is with the same lending syndicate that
provided financing for the Hittman Acquisition and allows us to borrow up to
$13.0 million. If we meet our financial targets, including the debt to EBITDA
ratio set forth in our credit agreement, the maximum availability will increase
after December 31, 2000 to $20.0 million. The line of credit bears interest at
prime plus 2.25% or LIBOR plus 3.5%, at our option, and expires on September 30,
2004. As of September 29, 2000, $0.8 million was outstanding under this line of
credit and the effective rate was 11.75%. The line of credit is secured by our
accounts receivable and inventories and requires us to comply with various
quarterly financial covenants, including covenants related to EBITDA and ratios
of leverage, interest and fixed charges as they relate to EBITDA. In 1999, we
failed to fully comply with the financial covenants required by our line of
credit. In November 1999, we entered into a waiver and amendment with our
lenders which, among other things, waived our non-compliance with financial
covenants contained in the credit agreement. In February 2000, our credit
agreement was again amended to change provisions governing the applicable
interest rates and financial covenants. At September 29, 2000, we were in full
compliance with the financial covenants under the line of credit.
As of September 29, 2000, we had cash and cash equivalents of $3.2
million. We have historically generated positive cash flow from operations. Cash
generated by operating activities for the nine months ended September 29, 2000
was $9.0 million as compared to $4.9 million for the nine months ended September
30, 1999. Cash was positively impacted in the first nine months of 2000 by the
receipt of state tax credits and lower incentive compensation payments relative
to the first nine months of 1999. Additionally, cash was positively impacted in
the first nine months of 2000 by a restructuring of LIBOR contracts to avoid an
increase in interest rates brought on by Year 2000 concerns. This had the effect
of increasing cash interest payments in the fourth quarter of 1999 and lowering
cash interest payments in the first quarter of 2000. Cash was negatively
impacted in the first nine months of 2000 by an increase in receivables of $3.8
million in the nine months ended September 29, 2000. This was primarily the
result of a $2.8 million escrow receivable for the purchase of stock by the
former parent of BEI.
Cash used in investing activities was $2.5 million and $5.8 million for
the nine months ended September 29, 2000 and October 1, 1999, respectively.
Capital expenditures were $3.9 million and $5.6 million for the nine months
ended September 29, 2000 and October 1, 1999, respectively. The acquired assets
of the former BEI included approximately $1.6 million in cash and cash
equivalents.
Cash used in financing activities was $7.1 million and $0.8 million for
the nine months ended September 29, 2000 and October 1, 1999, respectively. In
the nine months ended October 1, 1999, we made a payment of $2.8 million as a
result of the achievement of certain 1998 earnings targets in connection with
the Hittman acquisition. No such payments were due in 2000. Repayments of
borrowings under our line of credit and prepayments or repayments of
regularly-scheduled long-term debt payments were $10.0 million and $1.0 million
for the nine months ended September 29, 2000 and October 1, 1999, respectively.
The increase in prepayments and repayments of our regularly-scheduled long-term
debt payments and paydown in our revolving line of credit in the first nine
months of 2000 is due to the increase in cash from operating activities in 2000
over 1999, lower capital expenditures in 2000 relative to 1999 and the cash
acquired in the BEI acquisition.
We expect to incur capital expenditures of approximately $5.3 million
in 2000, $3.2 million of which we anticipate will be used for continued
development of our capacitor product line and $2.1 million of which we
anticipate will be used for routine recurring capital expense obligations. As of
September 29, 2000, we had incurred $3.9 million of capital expenditures in
2000.
15
<PAGE>
Although it is difficult for us to predict future liquidity
requirements, we believe that our existing cash balances and cash equivalents,
cash from operations and funding sources for working capital purposes will be
sufficient to finance our operations and planned capital expenditures for the
next two years. Thereafter, we may require additional funds to support our
working capital requirements or for other purposes and may seek additional funds
through public or private equity or debt financing or from other sources. There
can be no assurance that additional financing will be available to us or, if
available, that it can be obtained on a timely basis or on terms acceptable to
us.
INFLATION
We do not believe that inflation has had a significant effect on our
operations to date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 2001, we plan to adopt Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives Instruments and Hedging Activities." This
standard will require us to recognize all derivative financial instruments on
our balance sheet at fair value with changes in fair value recorded to the
statement of operations or comprehensive income, depending on the nature of the
investment. Because we believe our interest rate cap agreements are our only
derivative financial instruments, we do not expect the adoption of the standard
to have a material effect on our financial statements.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference
from time to time by us or our representatives are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, performance or achievements, and may
contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Statements by us in this report that contain forward-looking
statements include, but are not limited to, discussions regarding future market
conditions and the effect of such conditions on our future results of
operations, and future uses of, and requirements for, financial resources. Such
statements inherently are subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those projected. Such risks
and uncertainties include, among others, dependence upon a limited number of
customers, product obsolescence, inability to market current or future products,
pricing pressures from customers, harm to our reputation for quality,
fluctuating operating results, failure to protect our intellectual property
rights, intellectual property claims, product liability claims, inability to
integrate acquisitions, unsuccessful expansion into new markets, inability to
obtain licenses to key technology, regulatory changes or consolidation in the
healthcare industry, costly environmental regulations, volatility in the oil and
gas industry and various other matters many of which are beyond our control. The
risks included here are not exhaustive. Other sections of this report and our
filings with the Securities and Exchange Commission include additional factors
that could adversely impact our business and financial performance. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
to reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any forward-looking statement is
based.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL MARKET RISK.
Our major financial market risk exposure is to changing interest rates.
Our policy is to use a combination of variable rate debt and interest rate cap
agreements to manage our exposure to fluctuations in interest rates. As of
October 1, 2000, 81% of our long-term debt consisted of variable rate
instruments that accrue interest at floating rates. As of October 1, 2000,
through interest rate cap agreements, we had capped our interest rate exposure
at 7.0% on $24.1 million of floating rate debt through December 2000 and at 6.0%
on $55.0 million of floating rate debt through January 2002. We do not use
foreign currency forward contracts and do not have any material foreign currency
exposure. In order to minimize our foreign exchange risk, all of our sales are
made in United States dollars. We do not hedge against price fluctuation in the
commodities used in the manufacturing of our products. We will reevaluate this
policy as needed commensurate with the risks inherent in our business.
On October 27, 2000, we sold the interest rate cap agreements in
connection with the retirement of largely all of the debt underlying the capped
interest rates through the net proceeds of our initial public offering. The
proceeds from the sales of the interest rate cap agreements were $0.3 million.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
In connection with our acquisition of all of the capital stock of
Battery Engineering, Inc., or BEI, on August 7, 2000 we issued: (i) 339,856
shares of our common stock to Hitachi Maxell, Ltd., or Hitachi, in exchange for
all of the capital stock of BEI and (ii) 200,000 shares of our common stock to
Hitachi, for an aggregate purchase price of $3,000,006. On August 25, 2000, we
made an irrevocable contribution of 57,038 shares of our common stock to the
Wilson Greatbatch Ltd. Equity Plus Plan.
The offering and sales of our shares of common stock to Hitachi were
not registered under the Securities Act of 1933 because the offering and sales
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act and Rule 506 thereunder for transactions by an issuer not
involving a public offering (with Hitachi representing its intention to acquire
the securities for its own account and not with a view to the distribution
thereof and acknowledging that the securities were issued in a transaction not
registered under the Securities Act of 1933). The foregoing contribution of our
common stock to the Wilson Greatbatch Ltd. Equity Plus Plan was not registered
under the Securities Act of 1933 because the contribution was made in a
transaction exempt from Section 5 of the Securities Act of 1933 pursuant to Rule
701 thereunder.
Use of Proceeds
The effective date of our first registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-37554) and the related
registration statement, filed on Form S-1 under the Securities Act of 1933 (File
No. 333-46896), collectively referred to herein as our Registration Statement,
relating to the initial public offering of our common stock, was September 28,
17
<PAGE>
2000. We sold a total of 5,750,000 shares of our common stock in the offering.
The managing underwriters for the offering were Donaldson, Lufkin & Jenrette
Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc
of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., and DLJdirect Inc.
The offering commenced on September 29, 2000 and was completed on
October 11, 2000. All of the 5,750,000 registered shares of common stock were
offered and sold by us for an aggregate offering price of $92.0 million. We
incurred an estimated $8.0 million in total expenses for our account in
connection with the issuance and distribution of the securities registered for
underwriting discounts and commissions and other expenses and received
approximately $84.0 million in total net proceeds. We will pay approximately
$2.6 million of the total expenses to affiliates of (i) DLJ Merchant Banking,
which is comprised of persons beneficially owning more than ten percent of our
common stock, and (ii) David L. Jaffe, Douglas E. Rogers, Henry Wendt and David
M. Wittels, each of whom are directors of our Company. We will pay the remaining
approximately $5.4 million to others including other underwriters, our legal
counsel, accountants and other professionals. The estimated $8.0 million in
total expenses consists of approximately $6.4 million of underwriting discounts
and approximately $1.6 million of other expenses. The amounts disclosed above as
estimated expenses incurred in connection with the issuance and distribution of
the securities reflect total amounts incurred in connection with the
registration of the securities rather than amounts incurred for the one-day
period from the effective date of the Registration Statement, September 28,
2000, through the end of the quarterly reporting period. Additionally, because
the offering was consummated subsequent to the end of the reporting period, the
related payments were or will be made during the fourth quarter of 2000.
From the time of receipt through November 13, 2000, all net proceeds
were applied towards reduction of indebtedness. We paid approximately $1.2
million of the net proceeds applied towards reduction of indebtedness to
affiliates of (i) DLJ Merchant Banking, which is comprised of persons
beneficially owning more than ten percent of our common stock, and (ii) David L.
Jaffe, Douglas E. Rogers, Henry Wendt and David M. Wittels, each of whom are
directors of our Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Holders of 10,228,214 shares of our common stock executed a Written
Consent of Stockholders of WGL Holdings, Inc. dated August 15, 2000. The holders
of the remaining 2,924,530 outstanding shares of our common stock did not
execute the consent. The consent was executed in lieu of a special meeting. The
consent approved the proposal that we amend and restate our Certificate of
Incorporation to effect a three-for-five reverse stock split of the outstanding
shares of our common stock.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed
herewith.
18
<PAGE>
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WILSON GREATBATCH TECHNOLOGIES, INC.
(Registrant)
Date 13-Nov-2000 BY: /s/ Arthur J. Lalonde
----------- -----------------------------------------
Arthur J. Lalonde
Vice President, Finance and Treasurer
20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1* The Underwriting Agreement dated September 28, 2000,
among Donaldson, Lufkin & Jenrette Securities
Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC, U.S.
Bancorp Piper Jaffray Inc. and DLJdirect Inc. and
Wilson Greatbatch Technologies, Inc. is attached
hereto and filed herewith.
3.1 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to our
Registration Statement)
3.2 Amended and Restated Bylaws (Incorporated by
reference to Exhibit 3.2 to our Registration
Statement)
10.31 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)
10.32 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)
10.33 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)
10.34 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)
27.1* Financial Data Schedule
--------------
*Filed herewith.
21
